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 reference 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 an extensive 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, many of
which are proprietary, 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 9,000 of our own products and in addition distribute over 40,000 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 95 patents and patent applications.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark one)
(cid:54)
For the fiscal year ended July 31, 2014
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
or
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(cid:133)
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)
(Title of Each Class)
Common Stock, $.01 par value
(Name of Each Exchange on Which Registered)
The New York Stock Exchange
Securities registered pursuant to Section 12(b) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes (cid:133) No (cid:54)
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 (cid:133) No (cid:54)
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 (cid:54) No (cid:133)
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 (cid:54) No (cid:133)
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 (cid:54) No (cid:133)
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(cid:3)(cid:133)
Accelerated filer(cid:3)(cid:54)
Non-accelerated filer(cid:3)(cid:133)
Smaller Reporting Company(cid:3)(cid:133)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act of 1934). Yes(cid:3)(cid:133) No(cid:3)(cid:54)
The aggregate market value of the registrant’s voting stock held by non-affiliates of the registrant was approximately $107,702,000 as
of January 31, 2014.
The number of shares of the Company’s common stock, $.01 par value, outstanding at October 1, 2014 was 44,504,000.
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 16, 2015 are incorporated by reference into Part III of this annual report.
DOCUMENTS INCORPORATED BY REFERENCE
Part I
TABLE OF CONTENTS
Description
Page
2
23
35
35
36
37
38
40
41
54
55
55
55
58
58
58
58
58
58
58
F-1
F-2
F-3
F-4
F-5
F-6
F-7
F-8
F-9
S-1
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.
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Part III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
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
Part IV
Item 15.
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
1
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
focusing on harnessing biological processes to develop research tools, diagnostics and therapeutics and serving as a provider of
esoteric and other state-of-the-art test services to the medical community. Since our founding in 1976, our strategy has been based on
the development of enabling technologies based on molecular and cellular technologies in research, development, manufacture,
licensing and marketing of innovative health care products, platforms and services. Our pioneering work in genomic analysis coupled
with our extensive patent estate and enabling platforms have 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 149 key issued patents worldwide, and over 230 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 involving 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, 2014, 2013 and 2012 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 reference 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 an extensive
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, many of which are proprietary, 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 9,000 of our own products and in addition distribute over 40,000 products made by over 40 other original
manufacturers. Our strategic focus is directed to innovative diagnostic platforms and high quality research reagents and kits in the
primary key research areas of genomics, cellular analysis, small molecule chemistry, protein homeostasis epigenetics immunoassays
and assay development.
The segment is an established source for a comprehensive panel of products to scientific experts in the fields of cancer, cardiovascular
disease, neurological disorders, diabetes and obesity, endocrine disorders, infectious and autoimmune disease, hepatotoxicity and renal
injury.
Enzo Therapeutics is a biopharmaceutical venture that has developed multiple novel approaches in the areas of gastrointestinal,
infectious, ophthalmic and metabolic diseases, many of which are derived from the pioneering work of Enzo Life Sciences. Enzo
Therapeutics has focused its efforts on developing treatment regimens for diseases and conditions for which current treatment options
are ineffective, costly, and/or cause unwanted side effects. This focus has generated a clinical and preclinical pipeline, as well as more
than 95 patents and patent applications.
2
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, 2014, 2013 and 2012 (in thousands and percentages):
Fiscal year ended July 31,
2014
2013
2012
Clinical laboratory services .................
Product revenues .................................
Royalty and license fee income ..........
Total ....................................................
$
$
58,689
32,850
4,408
95,947
61%
34
5
100%
$ 55,889
32,526
5,292
$ 93,707
59%
35
6
100%
$
59,403
37,722
5,958
$ 103,083
58 %
37
5
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, and growing 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 they can 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.
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 $23 billion annually domestically and over
$46 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 its
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.
3
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.
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.
4
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.
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:
Using our core technology, Launch New Platform for Molecular Diagnostics
We have developed several enabling platform technologies that may have utility in the development of a new generation of molecular
diagnostic products designed to meet the needs of the current clinical marketplace. Our lead platform is AmpiProbe which is a
proprietary target amplification and detection technology that has been shown to require substantially less starting material than
conventional methods such as polymerase chain reaction ( PCR) based products. With AmpiProbe it may be possible to increase the
number of analytes that can be assayed for from a single clinical specimen, which in turn may reduce the need for physicians to recall
patients to obtain additional clinical material for testing. In addition by increasing the number of analyes tested in a single clinical
preparation, AmpiProbe may be able to produce diagnostic tests at a significantly lower cost than conventional assays. Moreover, the
need for less starting material may also lead to diagnostic tests with improved sensitivity, thus allowing detection of certain analytes
present in minute quantities that are below the limit of detection of conventional assays
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.
5
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. Our comprehensive product
portfolio allows us to deliver integrated solutions to basic researchers, drug developers and clinical researchers around the globe. Our
research allows us to provide solutions in all key research areas including: Genomics, Cell Biology Immunoassays and in a multitude
of applied research markets including: Bioprocess, Personal Care, Cancer Research, and Neuroscience to name a few.
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 2014, we were issued 34 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.
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:
•
•
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;
6
•
•
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. These proprietary technologies become the building blocks
of our Molecular Diagnostic platforms.
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:
•
•
•
•
•
•
•
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;
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.
7
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:
•
•
•
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:
•
•
•
•
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.
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.
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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 over 9,000 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 40,000 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
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.
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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 Program
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.
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. Under the
terms of the CRADA, the NEI and Enzo 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. 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.
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, diagnosis, evaluation, monitoring and treatment of
diseases and other medical conditions. Clinical laboratory testing is generally categorized as clinical testing or 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. Many 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.
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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 and in most instances are transmitted to us via 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 uploaded primarily through an interface from the laboratory testing instrumentation or in
some instances, manually entered 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, 2014, 2013 and 2012, respectively, approximately 61%, 59% and 58% of the Company’s revenues
were derived from the clinical laboratory. At July 31, 2014 and 2013, approximately 60% for each year 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.
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,
2014, 2013 and 2012 were approximately 22%, 22% and 21% 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 and Oxford Health Plan represented approximately 25%, 22% and
21% of the Clinical Labs segment’s net revenue for the fiscal year ended July 31, 2014, 2013 and 2012, 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:
•
•
•
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.
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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.
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 increased in calendar year 2012 by 0.65%, decreased in calendar year 2013 by 2.95%,
and decreased in calendar year 2014 by 0.75%. 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. Under
the Patient Protection and Affordable Care Act, expansion in the pool of covered lives may expand the market for clinical diagnostic
testing while at the same time various policies aimed at reducing cost or bundling care may reduce the rates paid for such services the
net impact of these factors on the market for our tests is not clear. In April 2014, Congress passed the Protecting Access to Medicare
Act of 2014, which included substantial changes to the way in which clinical laboratory services will be paid under Medicare.
Beginning in 2017, Medicare payments for clinical laboratory services will be paid based upon private payer rates as reported by
clinical laboratories across the US replacing the current system which is based upon fee schedules derived from historical charges for
tests from approximately 30 years ago. The impact of the new payment system on rates for tests we perform or our customers’ tests
that may use our products is not clear at this time.
The Patient Protection and Affordable Care Act also 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 and establishes the Independent Payment
Advisory Board (“IPAB”). 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 projected average
of the increases in the Consumer Price Index and the medical care expenditure category of the Consumer Price Index; for 2020 and
thereafter, the target growth rate is the rate of increase in gross domestic product per capita plus one percentage 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 these pieces of
legislation, which could have a material adverse effect on us. The IPAB current has no appointees and it is unclear whether when and
if it will become operational.
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, 2014, 2013 and 2012, the Company incurred costs of approximately $3.1 million, $3.9 million and,
$6.3 million, respectively, for research and development activities. During fiscal 2014, the Company’s research and development
program was refocused to areas that had greater opportunity to maximize revenues.
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Internal Research Programs
Our professional staff, including 56 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.
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.
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.
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At the end of fiscal 2014 we owned or licensed over 145 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.
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 certificate and/or license 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 as
required by law.
CLIA (The Clinical Laboratory Improvement Act of 1967, and the Clinical Laboratory Improvement Amendments of 1988) regulates
virtually all clinical laboratories in the United States. Among other things, CLIA requires laboratories to earn certification from the
federal government and comply 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. As such, certain clinical laboratories must meet state specific standards and undergo proficiency testing and inspections. Clinical
laboratory certificates or licenses are also required by various state and local laws.
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CLIA assigns test into one of three categories on the basis 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 that if granted, would exempt the laboratory 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 a licensure program that is CLIA-exempt, 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 or state license, 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.
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 Clinical Laboratory Fee Schedule. Under the Patient Protection and Affordable Act, expansion
in the pool of covered lives may expand the market for clinical diagnosis testing while at the same time, various policies aimed at
reducing costs or bundling care may reduce the rates paid for such services; the net impact of these factors on the market for our tests
is not clear. In April 2014, Congress passed the Protecting Access to Medicare Act of 2014, which included substantial changes to the
way in which clinical laboratory services will be paid under Medicare. Beginning in 2017, Medicare payments for clinical laboratory
services will be paid based upon private payer rates as reported by clinical laboratories across the US replacing the current system,
which is based upon fee schedules derived from historical charges for tests from approximately 30 years ago. The impact of the new
payment system on rates for test perform or our customers’ tests that may use our products is not clear at this time.
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. During fiscal 2014 reimbursement rates have remained constant
with 2013 levels.
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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. A laboratory that claims payment for business generated 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 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 Medicare beneficiaries to that entity for laboratory tests 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. The
Company has adopted its own Corporate Compliance Program based upon the OIG model program guidance and in accordance with
New York State’s requirements.
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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 security and breach notification standards and include the requirement to use a National Provider Identifier in
electronic health care transactions. The National Provider Identifier is an identifier that replaced all other identifiers that are currently
used or healthcare transactions (e.g., UPIN, Medicaid provider numbers, identifiers assigned by commercial insurers). The regulations
promulgated under HIPAA have very broad applicability, including by specifically applying to health care providers, which include
physicians and clinical laboratories that conduct an electronic transaction for which HIPAA has articulated standards. Together, health
plans, health care clearinghouses and health care providers that conduct standard transactions subject to HIPAA are referred to as
“Covered Entities”.
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 health care provider, health
care 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.
Privacy, security and breach notification requirements regarding protected health information (“PHI”).
We are required to maintain numerous policies and procedures in order to comply with the HIPAA privacy security and breach
notification requirements. Furthermore, we need to continuously ensure that there are mechanisms in place to safeguard the privacy of
PHI that is transmitted or maintained in any format (e.g. oral, written, or electronic). Failure to comply with these requirements can
result in criminal and civil penalties.
To comply with the HIPAA security regulations in particular, we must ensure the confidentiality, integrity and availability of all
electronic PHI (“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 periodically 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, security and breach notification regulations were last modified in 2013 as a result of final 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 PHI, enter into 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, security and breach notification regulations. As implemented in
regulations, a downstream subcontractor of a business associate that creates, receives, maintains, or transmits PHI on behalf of the
business associate is also itself considered a business associate. Under the regulations issued in 2013, health care providers, such as
laboratories, that are subject to HIPAA as a Covered Entity are vicariously liable for violations of HIPAA based on acts or omissions
of their agents, including business associates, when the agent is acting within the scope of the agency.
Complying with the electronic transaction, privacy, security and breach notification rules requires significant effort and expense for
virtually all entities that conduct health care transactions electronically and handle PHI.
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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.
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. Both the 510(k) clearance and PMA processes may be costly and time consuming, but the
process of obtaining PMA approval is much more costly, lengthy and uncertain. 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. In a pre-market notification, the applicant 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.
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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 provide sufficient valid scientific evidence of the safety and effectiveness of the device. A PMA application
typically requires the collection of 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 certain in vitro diagnostic (“IVDs”) tests are exempt from the IDE requirement 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.
In addition, the IVD must be for use in the laboratory research phase of development and not represented as an effective IVD (i.e.
labeled for Research Use Only (RUO)) or for use in product testing prior to full commercial marketing (i.e. for Investigational Use
Only (IUO)). Because RUO and IUO-labeled products are exempt from most regulatory requirements it is important that they are not
distributed for clinical diagnostics use. Mere placement of an RUO or IUO label on an IVD product does not render the device exempt
from otherwise applicable regulatory requirements; indeed, FDA may determine that the device is intended for use in clinical
diagnosis on the basis of other evidence, including how the device is marketed. FDA recommends that manufacturers assess the
totality of the circumstances surrounding the distribution of their RUO and IUO labeled products to ensure that they are not engaging
in practices that conflict with their labeling. 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 sale and distribution of RUO devices could result in
enforcement action by the FDA, including the imposition of restrictions on our distribution of these products.
Although FDA has long asserted it has jurisdiction over laboratory-developed tests, the agency has historically exercised discretion
enforcement with respect to most such test and not required laboratories that furnish these tests to comply with FDA’s regulatory
requirements for medical devices. However, on July 31, 2014, the FDA issued a 60-day notice to Congress indicating that the FDA
intends to issue Draft Guidance on the regulation of laboratory-developed test. In the notice, FDA indicates that it intends to end its
policy of general enforcement discretion towards laboratory-developed test, and proposes the implementation of a risk-based
regulatory framework. Under the proposed framework, many laboratory-developed tests would be subject to FDA’s requirements for
medical devices, including registration and listing premarket review, medical device reports and quality systems regulations. The
implementation of this framework would not begin until after a Final Guidance is issued and would occur over a nine year period with
those tests that FDA considers to be highest risk falling under FDA’s review requirements first. It is unclear at this time whether the
Draft Guidance will be released officially in late September 2014, and if it is released officially at that time, it is unclear whether or if
such Guidance will be finalized.
In so far as the devices that we manufacture or distribute are subject to the premarket notification or premarket approval requirements
a host of additional regulatory requirements may apply, including registration and listing 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 may also be subject to 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 with applicable requirements, 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, 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.
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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 certain 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.
Any therapeutics products that we develop will require regulatory review before clinical trials, and additional regulatory approval
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 review and approve 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 our pharmaceutical products, we (as the sponsor) file an Investigational New Drug (“IND”) application with
FDA 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 also reviewed approved and overseen by an Institutional Review Board (IRB). In considering an application to
perform a clinical trial, IRB will consider, among other things, ethical factors and the safety of human subjects participating in the
trial. 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 may take several years to complete, 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 efficacy, safety, purity and/or 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.
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, 2014, we employed 433 full-time and 42 part-time employees. Of the full-time employees, 101 were engaged in
research, development, manufacturing, and marketing of research products, 3 in therapeutics research, 294 in performing testing,
marketing and billing our clinical laboratories services and 35 in finance, legal, administrative and executive functions. Our scientific
staff, including 56 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.
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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.
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
22
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 $10.0 million, $18.2 million, and $39.3 million, inclusive of a non-cash impairment charge of $22.4 million
net of tax of $2.1 million (See Note 2,to the Consolidated Financial Statements) for the fiscal years ended July 31, 2014, 2013 and
2012, 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:
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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.
23
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.
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.
24
These competitive conditions could, among other things:
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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.
Ethical, legal and social concerns surrounding the use of genetic information could reduce demand for our products.
Genetic testing has raised ethical issues regarding privacy and the appropriate uses of the resulting information. For these reasons,
governmental authorities may call for limits on or regulation of the use of genetic testing or prohibit testing for genetic predisposition
to certain conditions, particularly for those that have no known cure. Similarly, such concerns may lead individuals to refuse to use
genetics tests even if permissible. Any of these scenarios could reduce the potential markets for our molecular diagnostic products,
which could have a material adverse effect on our business, financial condition and results of operations.
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.
25
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, 2014 and 2013, goodwill and intangible assets represented approximately 24% and 30%, 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 in our Life Science segment. 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. The Company has no intangible assets with indefinite lives.
26
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 our 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:
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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.
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.
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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. Under the Patient
Protections and affordable Care Act, expansion in the pool of covered lives may expand the market for clinical diagnostic testing
while at the same time, various policies aimed at reducing costs or bundling care may reduce the rates paid for such services’ the net
impact of these factors on the market for our tests is not clear. In April 2014, Congress passed the Protecting Access to Medicare Act
of 2014, which include substantial changes to the way in which clinical laboratory services will be paid under Medicare. Beginning in
2017, Medicare payments for clinical laboratory services will be paid based upon private payer rates reported by clinical laboratories
across the US replacing the current system, which is based upon fee schedules derived from historical charges for test from
approximately 30 years ago. The impact of the new payment system on rates for tests we perform or our customers’ tests that may use
our products is not clear at this time.
The Patient Protection and Affordable Care Act also 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 also 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. 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
projected average of the increases in the Consumer Price Index and the medical care expenditure category of the Consumer Price
Index; for 2020 and thereafter, the target growth rate is the rate of increase in gross domestic product per capita plus one percentage
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.
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.
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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.
The development of new, more cost-effective tests that can be performed by our customers or by patients, and the continued
internalization of testing by hospitals or physicians, could negatively impact our testing volume and revenues.
The diagnostic industry is faced with changing technology and new product introductions, including technology that enables more
convenient or cost-effective testing. Some of our competitors also may offer testing to be performed outside of a commercial clinical
laboratory, such as point-of-care testing that can be performed by physicians in their offices; complex testing that can be performed by
hospitals in their own laboratories; and home testing that can be carried out without requiring the services of outside providers.
Advances in technology also may lead to the need for less frequent testing. Further, diagnostic tests approved or cleared by the FDA
for home use are automatically deemed to be “waived” tests under CLIA and may be performed by patients in their homes; test kit
manufacturers could seek to increase sales to patients of such test kits. Development of such technology and its use by our customers
would reduce the demand for our laboratory-based testing services and negatively impact our revenues.
Our business could be harmed from the loss or suspension of a license or imposition of a fine or penalties under, or future
changes in, or changing interpretations of, CLIA or state laboratory licensing laws to which we are subject.
The clinical laboratory testing industry is subject to extensive federal and state regulation, and many of these statutes and regulations
have not been interpreted by the courts. The Clinical Laboratory Improvement Amendments of 1988, or CLIA, are federal regulatory
standards that apply to virtually all clinical laboratories (regardless of the location, size or type of laboratory), including those operated
by physicians in their offices, by requiring that they be certified by the federal government or by a federally approved accreditation
agency. CLIA does not preempt state law, which in some cases may be more stringent than federal law and require additional
personnel qualifications, quality control, record maintenance and proficiency testing. The sanction for failure to comply with CLIA
and state requirements may be suspension, revocation or limitation of a laboratory’s CLIA certificate, which is necessary to conduct
business, as well as significant fines and/or criminal penalties. Several states have similar laws and we may be subject to similar
penalties.
We cannot assure that applicable statutes and regulations will not be interpreted or applied by a prosecutorial, regulatory or judicial
authority in a manner that would adversely affect our business. Potential sanctions for violation of these statutes and regulations
include significant fines and the suspension or loss of various licenses, certificates and authorizations, which could have a material
adverse effect on our business. In addition, compliance with future legislation could impose additional requirements on us, which may
be costly.
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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, privacy and breach notification regulations and privacy regulations may increase our
costs.
The HIPAA privacy and security and breach notification regulations establish comprehensive federal standards with respect to the
uses and disclosures PHI by Covered Entities. These regulations were recently amended by the Health Information Technology for
Economic and Clinical Health Act and its implementing regulations, or HITECH, to, among other things directly apply to business
associates (i.e., individuals or entities who create, receive, maintain or transmit PHI on behalf of a Covered Entity in performing
functions or activities regulated by HIPAA or who perform certain services, other than treatment, on behalf of Covered Entities and
receive PHI in order to perform such services) with regard to certain requirements. The regulations also specify that business
associates include subcontractors that create, receive, maintain or transmit PHI on behalf of a business associate. The regulations
establish a complex regulatory framework on a variety of subjects, including:
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
the circumstances under which uses and disclosures of PHI 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 PHI;
requirements to notify individuals if there is a breach of their PHI;
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 PHI.
We have implemented practices to meet the requirements of the HIPAA privacy, security and breach notification regulations, and
updated these practices to comply with HITECH. HIPAA establishes a “floor” and does not supersede state laws that are more
stringent. Therefore, we are required to comply with both federal privacy, security and breach notification regulations and varying
state privacy, security and breach notification laws and regulations. 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, security and breach notification regulations provide for significant fines and other penalties for wrongful
use or disclosure of PHI, 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 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.
30
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. However, on July 31, 2014,
the FDA issued a 60-day notice to Congress indicating that the FDA intends to issue Draft Guidance on the regulation of laboratory-
developed tests. In the notice, FDA indicates that it intends to end its policy of general enforcement discretion towards laboratory-
developed tests, and proposes the implementation of a risk-based regulatory framework. Under the proposed framework many
laboratory-developed tests would be subject to FDA’s regulations for medical devices, including registrations and listing premarket
review, medical device reports, and quality systems regulations. The implementation of this framework would not begin until after a
Final Guidance is issued and would occur over a nine year period with those tests that FDA considers to be highest risk falling under
FDA’s review requirements first. On September 30, 2014, the FDA issued draft guidelines and announced a 120 day public comment
period on its proposal.
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. We cannot predict whether FDA regulation – including premarket review
requirements – will apply to the laboratory-developed tests that we perform or the tests in which our customers may use our products.
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 increased regulatory burdens and increased costs and delays in introducing new tests,
including genetic tests and decreased demand for our products.
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.
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.
31
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 12% of total revenues in fiscal 2014. 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.
As we expand our commercialization activities outside of the United States, we will be subject to an increased risk of
inadvertently conducting activities in a manner that violates the U.S. Foreign Corrupt Practices Act and similar laws. If that
occurs, we may be subject to civil or criminal penalties which could have a material adverse effect on our business, financial
condition, results of operations and growth prospects.
We are subject to the U.S. Foreign Corrupt Practices Act (“FCPA”), which prohibits corporations and individuals from paying,
offering to pay, or authorizing the payment of anything of value to any foreign government official, government staff member,
political party, or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official
capacity. We are also subject to the UK Anti-Bribery Act, which prohibits both domestic and international bribery, as well as bribery
across both public and private sectors.
32
In the course of establishing and expanding our commercial operations and seeking regulatory approvals outside of the United States,
we will need to establish and expand business relationships with various third parties and we will interact more frequently with foreign
officials, including regulatory authorities. Expanded programs to maintain compliance with such laws will be costly and may not be
effective. Any interactions with any such parties or individuals where compensation is provided that are found to be in violation of
such laws could result in substantial fines and penalties and could materially harm our business. Furthermore, any finding of a
violation under one country’s laws may increase the likelihood that we will be prosecuted and be found to have violated another
country’s laws. If our business practices outside the United States are found to be in violation of the FCPA, UK Anti-Bribery Act or
other similar law, we may be subject to significant civil and criminal penalties which could have a material adverse effect on our
financial condition and results of operations.
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.
33
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, 2014 and 2013, we had $3.0 and $3.3 million, respectively 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.
34
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
The following are the principal facilities of the Company:
(cid:3)
Location
Primary use
Segments
Leased /
owned
Farmingdale, NY
Clinical laboratory and research
Clinical Labs
Leased
(Note1)
Square
footage
43,000
Farmingdale, NY
Manufacturing, research, sales and
Life Sciences, Therapeutics Owned
22,000
administrative office
New York, NY
(Note 2)
Corporate headquarters
Other
Leased
11,300
Lausen, Switzerland
(Note 3)
Operational headquarters in Europe,
including sales and distribution
Life Sciences
Leased
9,626
Ann Arbor, Michigan
Manufacturing, research, and distribution Life Sciences
Leased
26,820
(Note 4)
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, 2015,
was extended through May 2020.
Note 3 - The lease for this property was acquired in connection with the Axxora acquisition in May 2007. In July 2014, the Company
amended and extended the lease 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.
35
Item 3. Legal Proceedings
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., which became Life Technologies, Inc.
(NASDAQ:LIFE) and was acquired by Thermo Fisher Scientific, Inc. (NYSE:TMO) on February 3, 2014. The complaint alleged
infringement of six patents relating to DNA sequencing systems, labeled nucleotide products, and other technology. Yale University is
the owner of four of the patents and the Company is the exclusive licensee. These four patents are commonly referred to as the
“Ward” patents. On November 12, 2012, a jury in New Haven found that one of these patents (United States Patent No. 5,449,667)
was infringed and not proven invalid. The jury awarded $48.5 million for this infringement. On January 6, 2014, the judge awarded
prejudgment interest of approximately $12.5 million and additional post-interest on the full amount will also be awarded starting
November 7, 2012 until the total award is satisfied. The final award to Enzo could be reduced or be subject to possible claims from
third parties. On February 3, 2014, Life Technologies filed a notice of appeal and there can be no assurance that the Company will be
successful in this litigation. Even if the Company is not successful, management does not believe that there will be a significant
adverse monetary impact on the Company.
As of August 1, 2013, the Company, as plaintiff, was engaged in litigation in the United States District Court for the Southern District
of New York against six parties (and certain of their related companies): Amersham plc, PerkinElmer, Inc., Molecular Probes, Inc.,
Orchid Biosciences, Inc., Affymetrix, Inc., and Roche Diagnostic GmbH (“Roche”). These cases were commenced at various times
from October 2002 to June 2004. In each of the six cases, the Company had asserted similar (with some differences) causes of action
against the defendants which can be generally described as contract, tort, fraud, and patent claims, except that no patent claims are
asserted against Affymetrix. In the Roche case, Roche seeks a declaratory judgment of non-breach and patent invalidity against the
Company. The cases were consolidated for pre-trial purposes in 2004 and there has been extensive discovery among the parties. In
2011, the defendants moved for summary judgment of non-infringement regarding the Company’s patent claims. In 2012, those
motions were granted in part and denied in part. In December 2012, all six defendants moved for summary judgment on the
Company’s non-patent claims. Additional discovery was taken and the Company responded to the motions in May 2013. On October
22, 2013, the Court granted Amersham’s motion for summary judgment. Thereafter, on November 26, 2013, the parties settled and
dismissed the Amersham case. On October 28, 2013, the Court granted in part and denied in part PerkinElmer’s motion for summary
judgment. By decisions dated December 6, 2013, the Court granted in part and denied in part the summary judgment by Roche and
Affymetrix. A jury trial was been ordered in Roche’s case on a date to be determined. On the same date, the Court granted the
summary judgment for the remaining two motions by Molecular Probes and Orchid.
On April 22, 2014, the Company as plaintiff finalized and executed a settlement agreement with Affymetrix, Inc. to settle a patent
litigation lawsuit (the “Agreement”) in the amount of $5.1 million. Under terms of the Agreement, Affymetrix paid to the Company
$4.3 million and paid to the Company’s attorneys $0.8 million, which is included in legal fees in the statements of operations for the
year ended July 31, 2014. The amount of the settlement is included in the statement of operations under Legal settlements, net within
the Life Science segment.
On June 20, 2014 the Company, as plaintiff finalized and executed a settlement agreement with PerkinElmer, Inc., and PerkinElmer
Health Sciences, Inc. (formerly known as PerkinElmer Life Sciences, Inc.) (together, “PerkinElmer”), with respect to an action
between the Company and PerkinElmer before the U.S. District Court, Southern District of New York, Case No 03-CV-3817.
PerkinElmer paid $7.0 million in escrow pursuant to the agreement because of a former attorney’s motion requesting a charging lien
for fees allegedly owed for past services rendered to the Company. Because the settlement proceeds are held in escrow, the Company
did not include the settlement or any additional amounts which may be payable to the attorney in the financial statements as of and for
the fiscal year ended July 31, 2014.
As previously disclosed, in 2012, the Company received a Subpoena Duces Tecum (the “Subpoena”) from the Department of Health
and Human Services, Office of Inspector General (“OIG”). The Subpoena was issued as part of an investigation being conducted by
the US Attorney’s Office for the Eastern District of New York in conjunction with the OIG. While a number of potential issues were
raised initially by the government, the investigation came to focus primarily on an alleged failure to collect diagnosis codes from
physicians who ordered tests through Enzo Clinical Labs. The time period initially covered by the investigation was from 2004
through 2011. In response to the Subpoena, the Company cooperated with the government. On September 22, 2014, the Company and
the U.S. Department of Justice reached a settlement agreement to resolve this matter, in substantive form as disclosed in the
Company’s fiscal quarter ended April 30, 2014. During the quarter ended April 30, 2014, the Company recorded a charge of $2.0
million in the statement of operations under legal settlements, net within the Clinical Labs segment. The settlement amount will be
paid with interest over a five-year period and as a result the Company recorded $0.4 million as other current liabilities and $1.6
million as a non-current liability at July 31, 2014. Under certain circumstances, the Company may be required to accelerate payments
and/or pay up to an additional $1.5 million based upon (i) a favorable recovery and collection related to the judgment in the Life
Technologies matter discussed above, (ii) receipt of additional capital greater than $10.0 million in a fiscal year (in that case, the
Company is required to pay 20% of any amount over $10.0 million plus interest, or (iii) sale of the Company. The final settlement
covers the time period 2004-2014.
36
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
37
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.
2014 Fiscal Year (August 1, 2013 to July 31, 2014):
1st Quarter ............................................................................................................ $
2nd Quarter ........................................................................................................... $
3rd Quarter ............................................................................................................ $
4th Quarter ............................................................................................................ $
2013 Fiscal Year (August 1, 2012 to July 31, 2013):
1st Quarter ............................................................................................................ $
2nd Quarter ........................................................................................................... $
3rd Quarter ............................................................................................................ $
4th Quarter ............................................................................................................ $
High
2.62 $
2.92 $
4.55 $
5.41 $
High
2.17 $
3.16 $
3.13 $
2.43 $
Low
2.21
2.34
2.75
3.44
Low
1.33
1.86
1.83
1.96
As of September 30, 2014, the Company had approximately 877 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.
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) 147
biotechnology companies engaged in the research and development of diagnostics substances and (ii) 18 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 Security 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 incorporated by reference in any filing by the Company under the Securities Act of 1933 of the
Securities Act of 1934, except to the extent that the Company specifically incorporates the graph and such disclosure by reference.
38
COMAPRISON OF 5-YEAR CUMULATIVE TOTAL
RETURN AMONG ENZO BIOCHEM, INC.,
NYSE MARKET INDEX, MORNINGSTAR DIAGNOSTIC AND RESEARCH
INDEX AND MEDICAL LABORATORIES INDEX
ASSUMES $100 INVESTED ON AUGUST 1, 2009
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 ...............
SIC 8071 - Medical Laboratories ....................
Medical Laboratories + Enzo Biochem Inc. ...
7/31/2009
7/31/2010
7/31/2011
7/31/2012
7/31/2013
7/31/2014
100.00
100.00
100.00
100.00
100.00
90.20
111.88
99.14
101.20
101.10
75.30
132.46
127.51
119.62
119.18
29.41
132.69
122.35
121.58
120.62
42.75
165.82
163.95
135.84
134.87
94.12
190.85
197.29
139.15
138.75
39
Item 6. Selected Financial Data
The following table, which is derived from the audited consolidated financial statements of the Company for the fiscal years 2010
through 2014 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)
Operating Results
Revenues ......................................................... $
2014
95,947 $
2013
93,707 $
2012
103,083 $
2011
102,029 $
2010
97,082
Impairment charges (1) ................................... $
—
—
(24,540)
—
—
Operating loss ................................................. $
(10,180) $
(18,980) $
(40,479) $
(12,928) $
(22,058)
Net loss ........................................................... $
(9,977) $
(18,237) $
(39,269) $
(12,960) $
(22,233)
Basic and diluted net loss per common
share: ........................................................... $
(0.23) $
(0.46) $
(1.01) $
(0.34) $
(0.59)
Financial Position
Working capital ............................................... $
2014
15,771 $
July 31,
(in thousands)
2012
21,412 $
2013
8,704 $
2011
33,670 $
2010
42,181
Total assets (1) ................................................ $
64,411 $
58,958 $
69,123 $
109,474 $
115,245
Stockholders’ equity (1) .................................. $
36,950 $
34,132 $
49,101 $
88,715 $
97,016
Notes to Selected Financial Data:
(1)
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).
40
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
See in this Form 10-K for the fiscal year ended July 31, 2014 Part 1. Item 1. Business, for Forward Looking Cautionary Statements.
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.
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 35 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.
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 2014 of 5% but experienced contraction in fiscal 2013 of 6%.
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 9,000 of our
own products and in addition distribute over 40,000 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 95 patents and patent applications.
The following table summarizes the sources of revenues for the fiscal years ended July 31, 2014, 2013 and 2012 (in $000’s and
percentages):
Fiscal year ended July 31,
2014
Clinical laboratory services ...................... $ 58,689
Product revenues....................................... 32,850
Royalty and license fee Income ................
4,408
Total .......................................................... $ 95,947
2013
61% $ 55,889
34 32,526
5,292
100% $ 93,707
5
2012
59% $ 59,403
35 37,722
5,958
100% $ 103,083
6
58%
37
5
100%
41
Results of Operations
Fiscal year ended July 31, 2014 compared to July 31, 2013
(in 000s)
Comparative Financial Data for the Fiscal Years Ended July 31,
2014
2013
Increase
(Decrease) % Change
Revenues:
Clinical laboratory services .........................................
Product revenues .........................................................
Royalty and license fee income ..................................
Total revenues .............................................................
$
$
58,689
32,850
4,408
95,947
$
55,889
32,526
5,292
93,707
Operating expenses:
Cost of clinical laboratory services .............................
Cost of product revenues ............................................
Research and development .........................................
Selling, general, and administrative ............................
Provision for uncollectible accounts receivable ..........
Legal fee expense ........................................................
Legal settlements, net..................................................
Total operating expenses .............................................
38,948
15,320
3,141
41,801
3,063
6,954
(3,100)
106,127
38,251
16,584
3,889
43,654
4,496
5,813
—
112,687
2,800
324
(884)
2,240
697
(1,264)
(748)
(1,853)
(1,433)
1,141
(3,100)
(6,560)
Operating loss .............................................................
(10,180)
(18,980 )
(8,800)
Other income (expense):
Interest ........................................................................
Other ...........................................................................
Foreign currency gain (loss) .......................................
Loss before income taxes ............................................
$
(208)
194
289
(9,905)
$
(54 )
5
80
(18,949 )
$
(154)
189
209
(9,044)
5%
1
(17)
2
2
(8)
(19)
(4)
(32)
20
**
(6)
(46)
**
**
**
(48)
** not meaningful
Consolidated Results:
The “2014 period” and the “2013 period” refer to the fiscal year ended July 31, 2014 and 2013, respectively.
Clinical laboratory services revenues for the 2014 period were $58.7 million compared to $55.9 million, an increase of $2.8 million or
5%. The increase was driven by growth in high value molecular testing of $6.1 million, which was partially offset by lower test
volume versus 2013.
Product revenues for the 2014 period were $32.9 million compared to $32.5 million in the 2013 period, an increase of $0.4 million or
1% due to a continued increase in sales of our manufactured products which yield higher margins.
Royalty and license fee income during the 2014 period was $4.4 million compared to $5.3 million in the 2013 period a decrease of
$0.9 million or 17%. Royalties are primarily earned from the reported sales of Qiagen products subject to a license agreement. There
are no direct expenses relating to royalty and licensing income.
The cost of clinical laboratory services during the 2014 period was $38.9 million as compared to $38.3 million in the 2013 period, an
increase of $0.6 million or 2%. The increase is the result of higher cost of reference testing, which includes the cost of molecular
testing of $1.7 million, partially offset by lower reagent cost of $0.7 million and a reduction in royalty expense of $0.3 million.
The cost of product revenues during the 2014 period was $15.3 million compared to $16.6 million in the 2013 period, a decrease of
$1.3 million or 8% and was positively impacted by an increase in sales of manufactured products, and the impact of reduced payroll,
facility and other costs resulting from realignments which occurred during fiscal 2013.
42
Research and development expenses were approximately $3.2 million during the 2014 period, compared to $3.9 million in the 2013
period, a decrease of $0.7 million or 19%. The decrease was attributed to declines in payroll and other related costs, adjustment to
obligations relating to clinical trial activity and lower material costs.
Selling, general and administrative expenses were approximately $41.8 million during the 2014 period and $43.7 million during the
2013 period, a decrease of $1.9 million or 4%. In Enzo Life Sciences segment, selling, general and administrative decreased $2.2
million due to the positive effects from the business realignments occurring in fiscal 2013 resulting in lower payroll and related costs,
lower depreciation and amortization, and lower marketing costs. Other segment selling, general and administrative decreased $0.2
million, primarily due to lower salary and related costs and lower professional and other fees. The Clinical Lab segment selling,
general and administrative increased $0.5 million primarily due to increases in payroll costs.
The provision for uncollectible accounts receivable, primarily related to the Clinical Labs segment, was $3.1 million for the 2014
period as compared to $4.5 million in the 2013 period, a decrease of $1.4 million or 32%. The decrease is primarily due to improved
collection procedures and changes in the mix of payers at the Clinical Labs.
Legal fee expense was $6.9 million during the 2014 period compared to $5.8 million in the 2013 period, an increase of $1.1 million or
20% primarily due to fees incurred for legal settlements recorded in 2014.
Legal settlements, net was $(3.1) million in the 2014 period. The Company as plaintiff finalized and executed a settlement agreement
with Affymetrix, Inc. to settle a patent litigation lawsuit in the amount of $5.1 million. Also during the 2014 period, the Company
reached a final agreement on the principal terms of a settlement with the U.S. Department of Justice relating to their investigation of
an alleged failure to collect diagnosis codes from physicians who ordered tests through Enzo Clinical Labs. As a result, the Company
recorded a charge of $2.0 million. Both settlements are more fully described in Note 14 in the Notes to Consolidated Financial
Statements.
Interest expense was $0.2 million during the 2014 compared to $0.1 million in the 2013 period due to interest incurred on the credit
agreement entered into in the fourth quarter of 2013.
During the 2014 and the 2013 periods, the gain on foreign currency transactions was $0.3 million and $0.1 million, respectively. The
Company has loans and receivables with its foreign subsidiaries denominated in US dollars and recognizes a gain if foreign currencies
including the Swiss Franc, Euro and British pound strengthen relative to the US dollar during the period and recognizes a loss if those
foreign currencies weaken relative to the US dollar. The gain in both periods was due to the strengthening of these foreign currencies
relative to the US dollar.
Segment Results:
Clinical Labs
The Clinical Labs segment’s loss before taxes was $6.6 million for 2014 period as compared to a loss of $7.1 million in the 2013
period, an improvement year over year of $0.5 million. The 2014 period loss includes a $2.0 million charge for a legal settlement with
the U.S. Department of Justice. Revenue from laboratory services increased $2.8 million driven by growth in high value molecular
testing of $6.1 million, which was partially offset by lower test volume versus 2013. Cost of sales increased $0.7 million as a result
of higher cost of reference testing, which includes the cost of molecular testing of $1.7 million, partially offset by lower reagent cost
of $0.7 million and a reduction in royalty expense of $0.3 million. Year over year selling and general administrative expense in
support of the lab increased $0.5 million due to increases in payroll costs. The provision for uncollectible accounts receivable
decreased $1.1 million due to improved collection procedures and changes in the mix of payers. Legal fees increased $0.4 million in
support of the previously discussed legal settlement.
Life Sciences
The Life Sciences segment’s income before taxes was $10.8 million for the 2014 period as compared to $3.1 million for the 2013
period, an improvement of $7.7 million over fiscal 2013. The 2014 period includes $5.1 million for a patent litigation settlement
agreement with Affymetrix, Inc. Product revenues increased $0.3 million or 1% in the 2014 period due to a continued increase in sales
of our manufactured products which yield high margins. Royalty and license fee income of $4.4 million represented a decrease of $0.9
million compared to the 2013 period and is primarily from royalties earned from sales of Qiagen products subject to a license
agreement. The segment’s gross profit was $21.9 million in the 2014 period, compared to $21.2 million in the 2013 period. Gross
profit was positively impacted by the increase in manufactured product revenues, and the impact of reduced payroll, facility and other
costs resulting from realignments which occurred during fiscal 2013. The segment’s other operating expenses, excluding legal
settlements, net, decreased approximately $1.6 million during the 2014 period due to cost reductions from headcount realignments and
continued centralization of activities, particularly relating to selling, general and administrative. Due to the greater strengthening of
foreign currencies versus the US dollar during the 2014 period compared to the 2013 period, the foreign currency gain was $0.3
million as compared to $0.1 million in the 2013 period.
43
Therapeutics
Therapeutics loss before income taxes was approximately $0.8 million for the 2014 period as compared to $1.2 million in 2013 period
due to lower personnel costs and an adjustment to prior estimated amounts.
Other
The Other loss before taxes for the 2014 period was approximately $13.4 million as compared to $13.6 million for the 2013 period, a
decrease of $0.2 million due to lower payroll expenses incurred during the second half of the 2014 period and lower legal fees,
partially offset by higher interest expense.
44
Results of Operations
Fiscal year ended July 31, 2013 compared to July 31, 2012
(in 000’s)
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 exchange gain (loss) ......................................
Loss before income taxes ............................................
$
(54)
5
80
(18,949)
$
21
77
(540)
(40,921)
$
(75)
(72)
620
(21,972)
Consolidated Results:
(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.
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.
46
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.
Liquidity and Capital Resources
At July 31, 2014, the Company had cash and cash equivalents of $17.5 million of which $1.1 million was in foreign accounts, as
compared to cash and cash equivalents of $9.0 million, of which $1.5 million was in foreign accounts at July 31, 2013. It is the
Company’s current intent to permanently reinvest these funds outside of the United States, and its current plans do not demonstrate a
need to repatriate them to fund its United States operations. The Company had working capital of $15.8 million at July 31, 2014
compared to $8.7 million at July 31, 2013. The increase in working capital of $7.1 million was primarily due to the increase in cash
and cash equivalents as a result of the settlement agreement with Affymetrix, Inc. in the amount of $5.1 million and from proceeds
from issuance of common stock under the Controlled Equity Offering program of $11.5 million, offset by the net loss and changes in
net operating assets and liabilities.
Net cash used in operating activities for the year ended July 31, 2014 was approximately $1.7 million as compared to $10.0 million for
the year ended July 31, 2013. The decrease in net cash used in operating activities in the 2014 period versus the 2013 period of
approximately $8.3 million was primarily due to a decrease in the net loss of $8.3 million; the decrease in non-cash charges of $1.5
million was offset by an increase in operating assets and liabilities of $1.5 million.
Net cash used in investing activities was approximately $0.8 million as compared to $1.0 million in the year ago period. The decrease
in the 2014 period of $0.2 million is primarily due to lower capital expenditures.
Net cash provided by financing activities for the year ended July 31, 2014 was approximately $10.9 million as compared to $4.8
million for the year ended July 31, 2013. The increase of $6.1 million was due to the increase in proceeds from the issuance of
common stock of $9.7 million offset by a decrease in net borrowings of $3.5 million under the Credit Agreement and an increase in
payments of installment loans and capital leases of $0.1 million.
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 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, 2014, the borrowings under the Credit Agreement related to the Clinical Labs and Life
Sciences receivables aggregated $3.0 million a decrease of $0.3 million from July 31, 2013, with an additional availability of $2.7
million. 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. As of July 31, 2014, the Company is in compliance with the
modified financial covenants.
47
The Company continued to review all operating units to further reduce annual operating expenditures in fiscal 2014. While revenues
and operating results at the Life Sciences segment have improved, there can be no assurance that Life Sciences will be able to sustain
these results and if not, it may be required to record additional impairments of its intangible assets. The Company believes that its
current cash and cash equivalents level, utilization of the Controlled Equity Offering program disclosed in Note 10 to the financial
statements, which has resulted in net proceeds of $11.5 million and $1.8 million during the fiscal year ended July 31, 2014 and 2013,
respectively, and available borrowings under the aforementioned Revolving Loan and Security Agreement disclosed in Note 7 to the
financial statements 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, 2014, 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.
Effect of New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic
606, or ASU 2014-09. ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific
requirements and converges areas under this topic with those of the International Financial Reporting Standards. ASU 2014-09
implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of
risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues
and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract
costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be
recognized before contingencies are resolved in certain circumstances. The amendments in ASU 2014-09 are effective for reporting
periods beginning after December 15, 2016, and early adoption is prohibited. Entities can transition to the standard either
retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are currently assessing the impact the adoption of
ASU 2014-09 will have on the Company’s combined consolidated financial statements.
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of Unrecognized Tax Benefit When a Net
Operating Loss Carryforward, A Similar Tax Loss, or a Tax Credit Carryforward Exists (A Consensus the FASB Emerging Issues
Task Force). ASU 2013-11 requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for a net
operating loss carryforward, or similar tax loss or tax credit carryforward, rather than as a liability when the uncertain tax position
would reduce the net operating loss or other carryforward under the tax law of the applicable jurisdiction and the entity intends to use
the deferred tax asset for that purpose. This amendment is effective prospectively but allows optional retrospective adoption (for all
periods presented). We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
In August 2014, the FABS issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going
Concern. ASU 2014-15 will explicitly require management to assess an entity’s ability to continue as a going concern, and to provide
related footnote disclosure in certain circumstances. The new standard will be effective for all entities in the first annual period ending
after December 15, 2016. Earlier adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2014-15.
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.
48
The following is a summary of future payments under the Company’s contractual obligations as of July 31, 2014:
(In thousands)
Total
1 year
1-3 years
4-5 years
Payments Due by Period
Less than
More than 5
years
Operating lease obligations ............................... $
Current and long term debt obligations .............
Employment agreements ...................................
Capital lease obligations ...................................
Total .................................................................. $
19,502 $
5,623
2,271
540
27,936 $
5,627 $
1,620
1,048
176
8,471 $
8,730 $
3,194
1,223
352
13,499 $
4,039 $
809
—
12
4,860 $
1,106
—
—
—
1,106
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.’s
consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses. These estimates and judgments also affect related disclosure of
contingent assets and liabilities.
On an on-going basis, we evaluate our estimates, including those related to contractual expense, allowance for uncollectible accounts,
inventory, intangible assets and income taxes. The Company bases its estimates on experience and on various other assumptions that
are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
Product revenues
Revenues from product sales are recognized when the products are shipped and title transfers, the sales price is fixed or determinable
and collectability is reasonably assured.
Royalties
Royalty revenues are recorded in the period earned. Royalties received in advance of being earned are recorded as deferred revenues.
Revenues - Clinical laboratory services
Revenues from 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.(cid:3)
49
The following table represents the Clinical Labs segment’s net revenues and percentages by revenue category (in thousands):
Year ended July 31,
2014
Year ended July 31,
2013
Year ended July 31,
2012
Revenue
%
Revenue
%
Revenue
%
Category
Third-party payers ............................ $
Medicare ..........................................
Patient self-pay ................................
HMO’s .............................................
Total ................................................. $
29,509
12,815
11,204
5,161
58,689
50 $
22
19
9
100% $
26,014
12,497
12,172
5,206
55,889
47 $
22
22
9
100% $
29,616
12,658
11,895
5,234
59,403
50
21
20
9
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 25%, 22% and 21% of the Clinical Labs segment net revenue for the
years ended July 31, 2014, 2013 and 2012 respectively.
Contractual Adjustment
The Company’s estimate of contractual adjustment is based on significant assumptions and judgments, such as its interpretation of
payer reimbursement policies, and bears the risk of change. The estimation process is based on the experience of amounts approved as
reimbursable and ultimately settled by payers, versus the corresponding gross amount billed to the respective payers. The contractual
adjustment is an estimate that reduces gross revenue based on gross billing rates to amounts expected to be approved and reimbursed.
Gross billings are based on a standard fee schedule we set for all third party payers, including Medicare, 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.
During the years ended July 31, 2014, 2013 and 2012, the contractual adjustment percentages, determined using current and historical
reimbursement statistics, were approximately 86%, 85% and 85%, 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 $4.1 million, $3.8 million, and $3.8 million, for the years
ended July 31, 2014, 2013, and 2012, respectively, and a change in the net accounts receivable of approximately $0.5 million as of
each of July 31, 2014 and 2013.
50
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, 2014 and 2013, approximately 60%, 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 $1.2 million or 23% and $1.7 million
or 35% represents foreign receivables as of July 31, 2014 and 2013 respectively, includes royalty receivables of $1.0 million and $1.2
million, respectively, from Qiagen Corporation.
Net accounts receivable
July 31, 2014
Total
July 31, 2013
Total
(in thousands)
%
(in thousands)
Clinical Labs (by billing category)
Third party payers ...............................................
Patient self-pay ...................................................
Medicare .............................................................
HMO’s ................................................................
Total Clinical Labs ..............................................
Total Life Sciences .............................................
Total accounts receivable – net ...........................
$
$
3,499
2,193
1,558
280
7,530
4,940
12,470
Changes in the Company’s allowance for doubtful accounts are as follows:
46
29
21
4
100%
$
$
3,395
2,696
930
300
7,321
4,967
12,288
%
46
37
13
4
100%
July 31, 2014
July 31, 2013
Beginning balance ...............................................................................................................
Provision for doubtful accounts ..........................................................................................
Write-offs, net .....................................................................................................................
Ending balance ....................................................................................................................
$
$
$
(in thousands)
2,707
3,063
(3,628)
2,142
$
3,273
4,496
(5,062)
2,707
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.
51
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, 2014 and 2013, the Company determined an allowance for doubtful accounts for customers
whose accounts receivable have been outstanding 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.
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.
52
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,
2014
Total
Amount %
Medicare
Amount %
Self-pay
Amount %
HMO’s
Amount %
Third
Party
Payers
Amount %
1-30 days ..................................... $ 29,762 58% $ 17,786 55% $
5,475 57% $ 2,871 48% $ 3,630 96%
31-60 days ................................... 5,689 11% 3,210 10%
819
9% 1,624 27%
36
1%
61-90 days ................................... 4,541
9% 2,519
8%
826
9% 1,172 20%
24
1%
91-120 days ................................. 3,669
7% 2,140
7%
1,093 11%
409
7%
27
1%
121-150 days ............................... 2,218
4% 1,690
5%
514
5%
(3)
0%
17
0%
Greater than 150 days* ............... 5,672 11%
4841 15%
Totals .......................................... $ 51,551 100% $ 32,186 100% $
888
1%
9,615 100% $ 5,964 100% $ 3,786 100%
(2)%
(109)
9%
52
As of July 31,
2013
Total
Amount %
Medicare
Amount %
Self-pay
Amount %
HMO’s
Amount %
Third
Party
Payers
Amount %
1-30 days ..................................... $ 25,565 50% $ 14,915 44% $
3,741 62% $ 3,341 48% $ 3,568 96%
31-60 days ................................... 6,238 12% 4,254 12%
452
7% 1,492 21%
40
1%
61-90 days ................................... 5,923 12% 3,845 11%
357
6% 1,686 24%
35
1%
91-120 days ................................. 4,287
8% 3,484 10%
216
4%
546
8%
41
1%
121-150 days ............................... 2,319
5% 2,140
6%
166
3%
—
0%
13
0%
Greater than 150 days** ............. 6,847 13% 5,824 17%
Totals .......................................... $ 51,179 100% $ 34,462 100% $
* Total includes $2,788 fully reserved over 210 days as of July 31, 2014.
** Total includes $3,775 fully reserved over 210 days as of July 31, 2013.
Income Taxes
1,058 18%
1%
5,990 100% $ 6,992 100% $ 3,735 100%
-1%
(73)
38
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.
53
Inventory
The Company values inventory at the lower of cost (first-in, first-out) or market. Work-in-process and finished goods inventories
consist of material, labor, and manufacturing overhead. Write downs of inventories to market value are based on a review of inventory
quantities on hand and estimated sales forecasts based on sales history and anticipated future demand. Unanticipated changes in
demand could have a significant impact on the value of our inventory and require additional write downs of inventory which would
impact our results of operations.
Goodwill and Intangible Assets
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. 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.
Patents represent capitalized legal costs incurred in pursuing patent applications. When such applications result in an issued patent, the
related capitalized 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.
The Company tests goodwill and long-lived assets annually as of the first day of the fourth quarter, or more frequently if indicators of
potential impairment exist. In assessing goodwill and long-lived assets for impairment, the Company has the option to first perform a
qualitative assessment to determine whether the existence of events or circumstances leads to a determination that it is more likely
than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it is not more likely that
not that the fair value of a reporting unit is less than its carrying amount, the Company is not required to perform any additional tests
in assessing goodwill and long-lived assets for impairment. However, if the Company concludes otherwise or elects not to perform the
qualitative assessment, then it is required to perform the first step of a two-step quantitative impairment review process. The first step
of the quantitative 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
During fiscal years 2014 and 2013, there was no impairment of Goodwill and there was no Indefinite-Lived Intangible assets. 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 determined necessary 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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from changes in foreign currency exchange rates resulting from activities in 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, 2014, our assets and liabilities would decrease by $0.7 million and $0.1 million,
respectively, and our net sales and net earnings (loss) would decrease by $1.2 million and $0.3 million, respectively, on an annual
basis.
54
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, 2014, our pre-tax earnings (loss) would be unfavorably impacted by approximately $0.9
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 300 basis point change in the LIBOR rate would impact our interest expense by $0.1 million.
As of July 31, 2014, we have fixed interest rate financing on transportation and equipment leases.
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, 2014. 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, 2014, 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.
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, 2014 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
55
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, 2014.
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, 2014, as stated in their report, which is included herein.
56
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, 2014,
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, 2014, 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 sheets of Enzo Biochem, Inc. and subsidiaries as of July 31, 2014 and 2013, and the related consolidated
statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the two-year
period ended July 31, 2014, and our report dated October 9, 2014 expressed an unqualified opinion thereon.
/s/ EisnerAmper LLP
New York, New York
October 9, 2014
57
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 28, 2014 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 28, 2014 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 28, 2014 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 28, 2014 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 28, 2014 and is incorporated herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a)
(1) Consolidated Financial Statements
Consolidated Balance Sheets - July 31, 2014 and 2013
Consolidated Statements of Operations - Years ended July 31, 2014, 2013 and 2012
Consolidated Statements of Comprehensive Income (Loss) - Years ended July 31, 2014, 2013 and 2012
Consolidated Statements of Stockholders’ Equity - Years ended July 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows - Years ended July 31, 2014, 2013 and 2012
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.
(3) Exhibits
58
The following documents are filed as Exhibits to this Annual Report on Form 10-K:
Exhibit
No.
3(a)
3(b)
3(c)
3(d)
3(e)
10(a)
10 (b)
10 (c)
10 (d)
Description
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)
1994 Stock Option Plan. (5)
1999 Stock Option Plan. (6)
2005 Equity Compensation Incentive Plan (7)
2011 Incentive Plan (8)
10 (e)
Lease agreement with Pari Management (9)
10 (f)
10 (g)
10 (h)
Settlement and Release Agreement between the Company and Sigma Aldrich (10)
Stock Purchase Agreement By and Among Enzo Life Sciences, Inc., Axxora Life Sciences Inc., and the Stock holders,
Option holders and Warrant holders (12)
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)
10 (n)
10 (o)
Settlement and Release Agreement between the Company and Affymetrix (18)
Settlement and Release Agreement between the Company and PerkinElmer (19)
10 (p)*
Settlement and Release Agreement between the Company and U.S. Department of Justice (20)
14 (a)
Code of Ethics (11)
21*
List of subsidiaries of the Company
23.1*
Consent of Independent Registered Public Accounting Firm
23.2*
Consent of Independent Registered Public Accounting Firm
31 (a)*
Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
59
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
60
*
**
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 Annual Report on 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 Annual Report on Form 10-K for the year ended July 31, 2010 and is
incorporated herein by reference.
(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 was filed with the Company’s Current Report on Form 10-K for the year ended July 31, 2013 and
incorporated herein by reference.
61
(18)
This exhibit was filed with the Company’s Current Report on Form 8-K on April 24, 2014 and incorporated herein by
reference
(19)
This exhibit was filed with the Company’s Current Report on Form 8-K on June 23, 2014 and incorporated herein by
reference.
(20)
This exhibit is being filed with the Company’s Current Report on Form 10-K for the year ended July 31, 2014.
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 9, 2014
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
(cid:3)
October 9, 2014
October 9, 2014
October 9, 2014
October 9, 2014
October 9, 2014
62
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, 2014 and 2013
Consolidated Statements of Operations - Years ended July 31, 2014, 2013 and 2012
Consolidated Statements of Comprehensive Income (Loss) - Years ended July 31, 2014, 2013 and 2012
Consolidated Statements of Stockholders’ Equity - Years ended July 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows - Years ended July 31, 2014, 2013 and 2012
Notes to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts - Years ended July 31, 2014, 2013 and 2012
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
The Board of Directors and Stockholders of Enzo Biochem, Inc.
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of Enzo Biochem, Inc. and subsidiaries (the “Company”) as of July
31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash
flows for each of the years in the two-year period ended July 31, 2014. 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 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 audits 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. and subsidiaries as of July 31, 2014 and 2013, and the consolidated results of their operations and their cash flows
for each of the years in the two-year period ended July 31, 2014 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, 2014, 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 9, 2014 expressed an unqualified opinion thereon.
In connection with our audits of the consolidated financial statements referred to above, we also audited Schedule II - Valuation and
Qualifying Accounts for each of the years in the two-year period ended July 31, 2014. 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 9, 2014
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 statements of operations, comprehensive income (loss), stockholders’ equity, and
cash flows of Enzo Biochem, Inc. (the “Company”) for the year ended July 31, 2012. Our audit 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 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 results of the
operations and the cash flows of Enzo Biochem, Inc. for the year ended July 31, 2012, 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.
/s/ Ernst & Young LLP
Jericho, New York
October 15, 2012
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 $2,142 in 2014
July 31,
2014
July 31,
2013
17,455 $
9,007
and $2,707 in 2013 ...........................................................................................................................
Inventories ...........................................................................................................................................
Prepaid expenses ..................................................................................................................................
12,470
8,690
2,121
12,288
8,805
2,456
Total current assets ..............................................................................................................................
40,736
32,556
Property, plant, and equipment, net .....................................................................................................
Goodwill ..............................................................................................................................................
Intangible assets, net ............................................................................................................................
Other ....................................................................................................................................................
7,730
7,452
8,108
385
8,617
7,452
9,943
390
Total assets ........................................................................................................................................... $
64,411 $
58,958
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Loan payable ........................................................................................................................................ $
Accounts payable - trade ......................................................................................................................
Accrued liabilities ................................................................................................................................
Other current liabilities ........................................................................................................................
3,013 $
8,245
12,917
790
3,264
8,481
11,776
331
Total current liabilities .........................................................................................................................
24,965
23,852
Deferred taxes ......................................................................................................................................
Other liabilities ....................................................................................................................................
183
2,313
200
774
Total liabilities ..................................................................................................................................... $
27,461 $
24,826
Commitments and contingencies
Stockholders’ equity:
Preferred Stock, $.01 par value; authorized 25,000,000 shares; no shares issued or outstanding ........
Common Stock, $.01 par value; authorized 75,000,000 shares; shares issued: 44,239,183
at July 31, 2014 and 40,569,393 at July 31, 2013 ............................................................................
Additional paid-in capital ....................................................................................................................
Accumulated deficit .............................................................................................................................
Accumulated other comprehensive income .........................................................................................
—
—
443
317,160
(282,397)
1,744
406
304,288
(272,420)
1,858
Total stockholders’ equity ....................................................................................................................
36,950
34,132
Total liabilities and stockholders’ equity ............................................................................................. $
64,411 $
58,958
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 fee expense .............................................................................................
Legal settlements, net.......................................................................................
Impairment charges ..........................................................................................
Total operating expenses ..................................................................................
Years ended July 31,
2014
2013
2012
58,689 $
32,850
4,408
95,947
55,889 $
32,526
5,292
93,707
59,403
37,722
5,958
103,083
38,948
15,320
3,141
41,801
3,063
6,954
(3,100)
—
106,127
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
Operating loss ..................................................................................................
(10,180)
(18,980)
(40,479)
Other income (expense):
Interest .............................................................................................................
Other ................................................................................................................
Foreign exchange gain (loss) ...........................................................................
Loss before income taxes .................................................................................
(Provision) benefit for income taxes ................................................................
(208)
194
289
(9,905)
(72)
(54)
5
80
21
77
(540)
(18,949)
712
(40,921)
1,652
Net loss ............................................................................................................ $
(9,977) $
(18,237) $
(39,269)
Net loss per common share:
Basic and diluted .............................................................................................. $
(0.23) $
(0.46) $
(1.01)
Weighted average common shares outstanding:
Basic and diluted ..............................................................................................
42,561
39,607
38,798
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,
2014
2013
(9,977) $
(18,237) $
2012
(39,269)
(114)
(10,091) $
253
(17,984) $
(2,188)
(41,457)
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, 2014, 2013, and 2012
(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, 2011 ...... 39,045,837 450,014
Net (loss) for the year
390
305,833
(6,387)
(214,914)
3,793
88,715
ended July 31, 2012 ...........
Vesting of restricted stock .....
Share-based compensation
charges ..............................
Issuance of treasury
stock for employee
401(k) plan match .............
Issuance of common stock
—
174,638
—
—
—
—
—
2
—
—
—
719
—
—
—
— (233,458)
—
(2,664)
3,313
(39,269)
—
—
—
for services ........................
275,000
3
470
Foreign currency translation
adjustments........................
—
Balance at July 31, 2012 ...... 39,495,475 216,556
Net (loss) for the year ended
—
—
395
—
304,358
—
(3,074)
—
(254,183)
—
157,784
—
—
—
—
—
2
—
—
—
—
—
(18,237)
—
545
—
—
July 31, 2013 .....................
Vesting of restricted stock .....
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
906,715
—
9
1,816
—
— (216,556)
—
(2,458)
3,074
9,419
translation adjustments ......
—
Balance at July 31, 2013 ...... 40,569,393
Net (loss) for the year
ended July 31, 2014 ...........
Vesting of restricted stock .....
Share-based compensation
charges ..............................
—
82,968
—
Net proceeds from Issuance
of common stock (net of
expenses of $357) .............. 3,421,176
—
—
—
—
—
—
—
—
406
—
1
—
27
—
304,288
—
—
594
—
—
—
—
—
—
—
34
11,508
—
—
—
—
136
—
Issuance of options in lieu
of payment of cash
bonuses .............................
Issuance of common stock
for employee 401(k)
plan match .........................
Foreign currency
translation adjustments ......
Balance at July 31, 2014 ......
—
—
—
—
(272,420)
(9,977)
—
—
—
—
—
—
—
—
—
(2,188 )
1,605
—
—
—
(39,269)
2
719
649
473
(2,188)
49,101
(18,237)
2
545
—
1,825
—
616
—
27
253
1,858
—
—
—
253
34,132
(9,977)
1
594
—
11,542
—
136
—
636
165,646
—
634
—
2
—
—
44,239,183
—
— $
443 $ 317,160 $
—
— $
—
(282,397)
$
(114 )
1,744 $
(114)
36,950
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 ............................................................................................................ $
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) ..........................................................................
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 .............................................................................................
Years ended July 31,
2014
2013
2012
(9,977) $
(18,237) $
(39,269)
2,131
1,840
3,063
(18)
594
636
—
(304)
—
(3,224)
159
336
(226)
3,293
8,280
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
Net cash used in operating activities ................................................................
(1,697)
(10,016)
(5,972)
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 by (used in) financing activities .........................................
(838)
—
—
5
—
(833 )
11,542
78,814
(79,065)
(374)
10,917
(988)
—
—
17
—
(971)
1,825
13,360
(10,096)
(274)
4,815
Effect of exchange rate changes on cash and cash equivalents ........................
61
103
(1,364)
58,497
(48,497)
(25)
(1,150)
7,461
—
—
—
(154)
(154)
(420)
Increase (decrease) in cash and cash equivalents .............................................
Cash and cash equivalents - beginning of year ................................................
Cash and cash equivalents - end of year .......................................................... $
8,448
9,007
17,455 $
(6,069)
15,076
9,007 $
915
14,161
15,076
The accompanying notes are an integral part of these consolidated financial statements
F-8
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2014 and 2013
(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.
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 and highly liquid money market funds.. At July 31, 2014 and 2013,
the Company had cash and cash equivalents in foreign bank accounts of $1.1 million and $1.5 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.
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.
F-9
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2014 and 2013
(Dollars in thousands except share data)
The Company believes that the concentration of credit risk with respect to the Clinical Labs accounts receivable is mitigated by the
diversity of 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.
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
Third-party payers ................................................. $ 29,509
12,815
Medicare ...............................................................
11,204
Patient self-pay .....................................................
5,161
HMO’s ..................................................................
Total ...................................................................... $ 58,689
Amount
2014
Years Ended July 31,
2013
Amount
%
50 $ 26,014
12,497
22
12,172
19
5,206
9
100% $ 55,889
2012
Amount
%
47 $ 29,616
12,658
22
11,895
22
5,234
9
100% $ 59,403
%
50
21
20
9
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 25%, 22% and 21% of the Clinical Labs segment net revenue for the
years ended July 31, 2014, 2013 and 2012 respectively.
F-10
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2014 and 2013
(Dollars in thousands except share data)
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, 2014, 2013 and 2012, the contractual adjustment percentages, determined using current and historical
reimbursement statistics, were approximately 86%, 85% and 85%, respectively, of gross billings.
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, 2014 and 2013, 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.
F-11
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2014 and 2013
(Dollars in thousands except share data)
The Clinical Labs segment’s net receivables are detailed by billing category and as a percent to its total net receivables. At July 31,
2014 and 2013, approximately 60% 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 $1.0 million and $1.2 million, as of July 31, 2014
and 2013, 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)
Third party payers ....................................................................... $
Patient self-pay ...........................................................................
Medicare .....................................................................................
HMO’s ........................................................................................
Total Clinical Labs ......................................................................
July 31, 2014
July 31, 2013
Amount
%
Amount
3,499
2,193
1,558
280
7,530
46 $
29
21
4
100%
3,395
2,696
930
300
7,321
%
46
37
13
4
100%
Total Life Sciences .....................................................................
Total accounts receivable – net ................................................... $
4,940
12,470
$
4,967
12,288
Changes in the Company’s allowance for doubtful accounts are as follows:
Beginning balance ................................................................................................................... $
Provision for doubtful accounts ..............................................................................................
Write-offs ................................................................................................................................
Ending balance ........................................................................................................................ $
2,707 $
3,063
(3,628)
2,142 $
July 31, 2014
July 31, 2013
3,273
4,496
(5,062)
2,707
Inventories
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.
F-12
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2014 and 2013
(Dollars in thousands except share data)
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.
Goodwill and Intangible Assets
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired.
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. Indefinite-lived intangibles are not amortized and are evaluated each reporting period to determine whether
events and circumstances continue to support their having an indefinite life. Indefinite-lived intangibles found to no longer have an
indefinite life are evaluated for impairment and are then amortized over their remaining useful life as finite-lived intangible assets.
Patents represent capitalized legal costs incurred in pursuing patent applications. When such applications result in an issued patent, the
related capitalized 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.
Impairment testing for Goodwill and Long-Lived Assets
The Company tests goodwill and indefinite-lived intangible assets annually as of the first day of the fourth quarter, or more frequently
if indicators of potential impairment exist. In assessing goodwill and indefinite-lived intangible assets for impairment, the Company
has the option to first perform a qualitative assessment to determine whether the existence of events or circumstances leads to a
determination that it is more likely than not that the fair value of a reporting unit or intangible asset is less than its carrying amount. If
the Company determines that it is not more likely that not that the fair value of a reporting unit or intangible asset is less than its
carrying amount, the Company is not required to perform any additional tests in assessing goodwill and indefinite-lived intangible
assets for impairment. For goodwill, if the Company concludes otherwise or elects not to perform the qualitative assessment, then it is
required to perform the first step of a two-step quantitative impairment review process. The first step of the quantitative 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. For indefinite-lived intangible assets, if the
Company concludes otherwise or elects not to perform the qualitative assessment, then the fair value of the intangible asset is
compared to its carrying value, and impairment is recognized for the excess of the carrying value over the fair value, if any.
The Company performed a qualitative assessment in 2014 and a quantitative assessment in 2013 and concluded there were no
impairments. The Company performed a quantitative assessment in fiscal 2012 and concluded goodwill and indefinite-lived intangible
assets had been impaired (see Note 2).
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. There were no impairments in 2014, 2013 or 2012, exclusive of goodwill and
indefinite-lived intangibles in 2012.
F-13
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2014 and 2013
(Dollars in thousands except share data)
Comprehensive loss
Comprehensive loss consists of the Company’s consolidated 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 the cumulative
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 $440, $302 and $237 for the years ended July 31, 2014, 2013 and 2012, 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, 2014, 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.
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 2014, 2013 and 2012 do
not include the potential common shares from stock options and unvested restricted stock because to do so would have been
antidilutive and as such is the same as basic weighted average shares outstanding. 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,
2014, 2013, and 2012 was 159,000, 32,000, and 0, respectively.
F-14
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2014 and 2013
(Dollars in thousands except share data)
For the years ended July 31, 2014, 2013 and 2012, the effect of approximately 604,000, 727,000 and 736,000 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:
Net loss .......................................................................................................
$
2014
(9,977)
$
2013
(18,237)
$
2012
(39,269)
Weighted-average common shares outstanding - Basic ..............................
Add: effect of dilutive stock options and restricted stock ...........................
Weighted-average common shares outstanding - Diluted ...........................
42,561
—
42,561
39,607
—
39,607
38,798
—
38,798
Net loss per share:
Basic and diluted .........................................................................................
$
(0.23)
$
(0.46)
$
(1.01)
Share-Based Compensation
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, 2014, 2013 and 2012, share-based compensation expense relating to the fair value of stock options,
restricted shares and restricted stock units was approximately $594, $545, and $719, respectively (see Note 10). No excess tax benefits
were recognized for the year ended July 31, 2014, 2013 and 2012.
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 .............................................................
$
$
2014
9
1
584
594
$
$
2013
10
2
533
545
$
$
2012
10
4
705
719
As of July 31, 2014, there was $462 of total unrecognized compensation cost related to non-vested share-based payment arrangements
granted under the Company’s incentive stock plans, which will be recognized over a weighted average remaining life of
approximately fourteen months.
F-15
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2014 and 2013
(Dollars in thousands except share data)
Effect of new accounting pronouncements
In May 2014, the Financial Accounting Standards Board issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic
606, or ASU 2014-09. ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific
requirements and converges areas under this topic with those of the International Financial Reporting Standards. ASU 2014-09
implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of
risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues
and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract
costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be
recognized before contingencies are resolved in certain circumstances. The amendments in ASU 2014-09 are effective for reporting
periods beginning after December 15, 2016, and early adoption is prohibited. Entities can transition to the standard either
retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are currently assessing the impact the adoption of
ASU 2014-09 will have on the Company’s combined consolidated financial statements.
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of Unrecognized Tax Benefit When a Net
Operating Loss Carryforward, A Similar Tax Loss, or a Tax Credit Carryforward Exists (A Consensus the FASB Emerging Issues
Task Force). ASU 2013-11 requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for a net
operating loss carryforward, or similar tax loss or tax credit carryforward, rather than as a liability when the uncertain tax position
would reduce the net operating loss or other carryforward under the tax law of the applicable jurisdiction and the entity intends to use
the deferred tax asset for that purpose. This amendment is effective prospectively but allows optional retrospective adoption (for all
periods presented). We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
In August 2014, the FABS issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going
Concern. ASU 2014-15 will explicitly require management to assess an entity’s ability to continue as a going concern, and to provide
related footnote disclosure in certain circumstances. The new standard will be effective for all entities in the first annual period ending
after December 15, 2016. Earlier adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2014-15.
F-16
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2014 and 2013
(Dollars in thousands except share data)
Note 2 - Goodwill and intangible assets
Goodwill
The Company’s net carrying amount of goodwill is in the Clinical Labs segment as of July 31, 2014 and 2013 and is $7,452.
As a result of a 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:
July 31, 2012 ...............................................................................................
Amortization expense .................................................................................
Foreign currency translation .......................................................................
July 31, 2013 ...............................................................................................
Amortization expense .................................................................................
Foreign currency translation .......................................................................
July 31, 2014 ...............................................................................................
$
$
$
Intangible assets, all finite-lived, consist of the following:
July 31, 2014
Accumulated
Amortization
Gross
Patents ........................................................... $ 11,027 $
12,602
Customer relationships..................................
1,037
Website and acquired content .......................
Licensed technology and other .....................
537
Trademarks, gives effect for impairment
charge and reclassification to finite-lived
as of May 1, 2012......................................
3,275
Total .............................................................. $ 28,478 $
Gross
27,904
—
310
28,214
—
264
28,478
Accumulated
Amortization
(16,124)
(1,990)
(157)
(18,271)
(1,840)
(259)
(20,370)
Net
11,780
(1,990)
153
9,943
(1,840)
5
8,108
Net
440
6,998
46
131
(10,775 ) $
(6,565 )
(1,037 )
(434 )
Gross
Net
252 $ 11,027 $
12,446
1,026
513
6,037
—
103
July 31, 2013
Accumulated
Amortization
(10,587) $
(5,448)
(980)
(382)
(1,559 )
3,202
1,716
(20,370 ) $ 8,108 $ 28,214 $
(874)
2,328
(18,271) $ 9,943
F-17
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2014 and 2013
(Dollars in thousands except share data)
At July 31, 2014 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
6 years
3 years
1 years
At July 31, 2014, the weighted average useful life of intangible assets was approximately five years.
Estimated amortization expense related to these finite-lived intangible assets for the five succeeding fiscal years ending July 31 is as
follows:
2015 ..............................................................................................................................................
2016 ..............................................................................................................................................
2017 ..............................................................................................................................................
2018 ..............................................................................................................................................
2019 ..............................................................................................................................................
1,630
1,620
1,508
1,141
827
Amortization expense for the years ended July 31, 2014, 2013, and 2012 was $1,840, $1,990, and $1,660, respectively.
In connection with the annual assessment of the then 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 was 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, 2014 or 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, 2014, 2013, and 2012, income taxes paid by the Company approximated $44, $46, and $70 respectively.
In the years ended July 31, 2014, 2013, and 2012, interest paid by the Company approximated $208, $69, and $5 respectively.
During fiscal 2014 and 2013, the Company financed $392 and $365, respectively, in machinery and transportation equipment under
installment loans.
During fiscal 2014, the Company did not enter into any capital lease agreements. During fiscal 2013, the Company entered into a
capital lease for machinery and equipment with a cost basis of $765.
During fiscal 2014, the Company recorded $136 in additional paid in capital and reduced accrued liabilities by the same amount for
options issued in lieu of cash payment of certain incentive compensation awards.
F-18
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2014 and 2013
(Dollars in thousands except share data)
Note 4 - Inventories
Inventories consisted of the following at July 31:
Raw materials ..................................................................................................................................... $
Work in process ..................................................................................................................................
Finished products ................................................................................................................................
$
2014
1,092 $
2,460
5,138
8,690 $
2013
922
2,628
5,255
8,805
Note 5 - Property, plant, and equipment
At July 31, 2014 and 2013 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 ..............................................................................................................
$
2014
4,834 $
7,125
16,834
4,835
33,628
(26,610)
7,018
712
7,730 $
2013
4,751
6,922
16,390
4,759
32,822
(24,917)
7,905
712
8,617
F-19
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2014 and 2013
(Dollars in thousands except share data)
Note 6 - Income taxes
The (provision) benefit for income taxes for fiscal years ended July 31 is as follows:
Current (provision) benefit:
Federal ..................................................................................................................... $
State and local ..........................................................................................................
Foreign .....................................................................................................................
Deferred benefit .......................................................................................................
(Provision) benefit for income taxes ........................................................................ $
2014
2013
2012
— $
(68)
(22)
18
(72) $
— $
(46)
(1)
759
712 $
—
(49)
(61)
1,762
1,652
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:
2014
2013
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 .............................................................................................
35,352 $
753
2,604
144
190
618
1,085
1,207
2,970
2,194
3,103
15
50,235
34,836
920
3,791
143
317
625
1,013
772
2,980
1,249
1,622
19
48,287
Deferred tax liabilities:
Deferred patent costs ........................................................................................
Prepaid expenses ..............................................................................................
Unrealized foreign exchange ............................................................................
Other, net ..........................................................................................................
Deferred tax liabilities ........................................................................................
(135)
(671)
(118)
(29)
(953)
(132)
(695)
—
(37)
(864)
Net deferred tax assets (liabilities) before valuation allowance .........................
Less: valuation allowance ..................................................................................
Net deferred tax liabilities .................................................................................. $
49,282
(49,465)
(183) $
47,423
(47,623)
(200)
F-20
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2014 and 2013
(Dollars in thousands except share data)
At July 31, 2014, 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 ..........................................................................................................................................
$
2014
— $
183
183 $
2013
—
200
200
The Company recorded a valuation allowance during the year ended July 31, 2014 and 2013 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. The change in the valuation allowance was $1.8 million and $6.4 million for fiscal
years 2014 and 2013, respectively.
As of July 31, 2014, the Company had U.S. federal net operating loss carryforwards of approximately $103.2 million. The U.S. federal
tax loss carryforwards, if not fully utilized, expire between 2018 and 2034. 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 $1.0 million which expire between 2025 and 2034. As of July 31, 2014, the Company had foreign loss
carryforwards of approximately $6.0 million.
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 ...................................................................................................... $
2014
(8,702) $
(1,203)
(9,905) $
2013
(15,419) $
(3,530)
(18,949) $
2012
(31,817)
(9,104)
(40,921)
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..............................................................................................
Penalties and other 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 .........................................................................................
State tax law change...............................................................................................
Other ......................................................................................................................
2014
34%
(6.6)
0.2
(16.5)
—
(12.3)
0.5
(0.7)%
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 %
U.S. federal income taxes have not been provided on approximately $304 of undistributed earnings at the Company’s foreign
subsidiaries at July 31, 2014, because it is the Company’s intent to keep the earnings reinvested. As of July 31, 2014, 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, 2011 through 2013.
F-21
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2014 and 2013
(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 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, 2014 and 2013, the borrowings under the Credit Agreement related to the Clinical Labs and Life Sciences
receivables aggregated $3.0 million and $3.3 million, respectively, with an additional availability of $2.7 million at July 31, 2014.
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. As of July 31, 2014, the Company is in compliance with the 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:
Accrued legal settlement – see Note 14 ............................................................................................... $
Installment loans - see Note 9 ..............................................................................................................
Capital lease obligations - see Note 9 ..................................................................................................
$
Self-Insured Medical Plan
2014
4,721 $
4,959
400
638
2,199
12,917 $
2013
3,104
4,794
721
863
2,294
11,776
2014
400 $
241
149 $
790 $
2013
—
182
149
331
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, 2014 and 2013, the Company has established a reserve
of $0.2 million, 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-22
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2014 and 2013
(Dollars in thousands except share data)
Note 9 - Other liabilities
At July 31 Other liabilities consist of:
Accrued legal settlement – see Note 14 ............................................................................................... $
Capital lease obligation ........................................................................................................................ $
Installment loans ..................................................................................................................................
$
2014
1,600
344 $
369
2,313 $
2013
—
505
269
774
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, 2014, the accumulated amortization on the
capital lease was $330.
Future minimum lease and loan payments are as follows:
2015 .............................................................................................................................................
2016 .............................................................................................................................................
2017 .............................................................................................................................................
2018 .............................................................................................................................................
Total payments .............................................................................................................................
Less: imputed interest ..................................................................................................................
Payments net of interest ...............................................................................................................
Less: current portion ....................................................................................................................
Other liabilities - net .................................................................................................................... $
149
200
191
—
540
(47)
493
(149)
344 $
Capital lease
Installment
loans
241
200
160
9
610
—
610
(241)
369
The weighted average interest rate on our short term borrowings during fiscal 2014 was 2.87%. The weighted average interest rate on
our short term borrowings during fiscal 2013 was 4.5%.
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. For the year ended July 31,
2014, the Company sold an aggregate of 3,421,176 shares of common stock under the Sales Agreement at an average price of $3.48
per share and received proceeds of approximately $11.5 million, net of expenses of $357.
F-23
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2014 and 2013
(Dollars in thousands except share data)
Common stock
In fiscal 2014, the Company issued 165,646 shares of common for its employees’ 401(k) matching contributions obligation. The
Company recorded an expense of $636 for the match, representing the fair value of the shares at the date of issuance.
In fiscal 2013, the Company issued 9,419 shares of common stock for its employees’ 401(k) matching contributions obligation. The
Company recorded an expense of $27 for the match representing the fair value of the shares at the date of issuance.
In June 2012, the Company issued 275,000 shares of common stock at a fair value of $0.5 million for services performed.
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 $616 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.
Incentive stock plans
The Company has an incentive stock option and restricted (non-vested) stock award plan (the “2005 Plan”), under which the Company
may grant options and restricted stock (non-vested) awards for up to 1,000,000 common shares under the 2005 Plan. No additional
awards may be granted under the 2005 Plan. 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, 2014,
there were approximately 1,656,000 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 awards 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.
F-24
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2014 and 2013
(Dollars in thousands except share data)
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 activity pursuant to the Company’s stock option plans for the years ended July 31, 2014, 2013, and 2012 is as follows:
2014
2013
2012
Options
726,645 $
Outstanding at beginning of year .........
665,117 $
New Grants .........................................
Expired ................................................
(236,852) $
Outstanding at end of year .................. 1,155,910 $
Exercisable at end of year ...................
399,262 $
Weighted average fair value of
Weighted -
Average
Exercise
Price
10.39
2.77
15.80
5.03
7.66
Options
736,490 $
336,817 $
(346,662) $
726,645 $
389,828 $
Weighted -
Average
Exercise
Price
14.50
2.88
11.82
10.39
16.88
Weighted -
Average
Exercise
Price
14.53
—
15.05
14.50
14.50
Options
785,124 $
— $
(48,634) $
736,490 $
736,490 $
options granted during year ............
$
0.90
$
1.22
—
The intrinsic value of stock option awards that vested during the fiscal year represents the value of the Company’s closing stock price
on the last trading day of the fiscal year in excess of the exercise price multiplied by the number of options that vested. Total intrinsic
value of options that vested and were exercisable during the fiscal years ended July 31, 2014, 2013, and 2012 was $425, $0 and $0,
respectively. The intrinsic value of options outstanding at July 31, 2014, 2013, and 2012 was $1,915, $0 and $0, respectively.
On January 17, 2014, the Company awarded 267,797 options to two senior officers and the board of directors with an exercise price of
$2.70 and a five year term, which vest annually over two years. The fair value of the options granted was $1.05 per share. The
assumptions used to fair value this option award were as follows: expected life of 3.25 years, expected volatility 54.78%, a risk free
interest rate of 0.90% and no dividend yield. As of July 31, 2014, none of these options were vested. Further on January 17, 2014, the
Company awarded 95,729 options to executive officers with an exercise price of $2.70 and a five year term, which vest annually over
three years. The fair value of the options granted was $1.10 per share. The assumptions used to fair value this option award were as
follows: expected life of 3.5 years, expected volatility 55.45%, a risk free interest rate of 1.00% and no dividend yield. As of July 31,
2014, none of these options were vested.
On February 3, 2014, the Company awarded 20,000 options to an executive officer with an exercise price of $2.75 and a five year
term, which vest annually over three years. The fair value of the options granted was $1.11 per share. The assumptions used to fair
value this option award were as follows: expected life of 3.5 years, expected volatility 55.07%, risk free interest rate of 0.84% and no
dividend yield. As of July 31, 2014, none of these options were vested.
F-25
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2014 and 2013
(Dollars in thousands except share data)
The following table summarizes information for stock options outstanding at July 31, 2014:
Options outstanding and exercisable
Range of Exercise prices
$ 2.53 – 3.00 ..............................................................................
$12.99-17.66 .............................................................................
Shares
217,362
181,900
399,262
Restricted Stock Awards
Weighted- Average
Remaining
Contractual Life in
years
Weighted-
Average Exercise
Price
3.81
0.41
$
$
2.84
16.82
During fiscal 2014, 2013 and 2012, the compensation committee of the Company’s board of directors approved grants of restricted
stock and restricted stock unit awards (the “Awards”) to the Company’s directors, certain officers and certain employees under the
2011 or 2005 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.
The following table summarizes the activity pursuant to restricted stock awards for the years ended July 31,
2012
Weighted -
Average
Award Price
4.84
2.51
(4.85)
(4.30)
2014
Weighted -
Average
2013
Weighted -
Average
Outstanding at beginning of year ......
Awarded ............................................
Vested ...............................................
Forfeited ............................................
Outstanding (non-vested) at end of
Awards
125,133 $
11,500 $
(82,971) $
(11,160) $
Award Price Awards
3.45
4.77
(2.70)
(1.70)
257,583 $
39,000 $
(157,783) $
(13,667) $
Award Price Awards
3.58
1.77
(3.23)
(3.59)
311,952 $
144,143 $
(174,638) $
(23,874) $
year ................................................
42,502 $
5.74
125,133 $
3.45
257,583 $
3.58
Weighted average market value of
awards granted during year ...........
$
4.77
$
1.77
$
2.51
The fair value of the awards that vested during the years ended July 31, 2014, 2013 and 2012 was $253, $411 and $283, respectively.
F-26
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2014 and 2013
(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, 2014, 2013, and 2012, 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 $636, $643, and $649 in fiscal years
2014, 2013, and 2012, 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 saving contribution
is 13% for employees over age 25 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, 2013, the latest plan year end, is as follows:
As of December 31,
Total Assets..............................................................................................................
Accumulated Benefit Obligation .............................................................................
Funded status ...........................................................................................................
$
$
2013
2,531
2,697
94%
$
$
2012
2,965
3,064
97%
$
$
2011
3,247
3,224
99%
Fiscal Year ended July 31,
2013
2012
2011
Contributions ...........................................................................................................
$
467
$
521
$
483
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,
2014, 2013 and 2012, the Company recorded royalty income under the agreement of approximately $4,408, $5,144 and $5,900,
respectively, which is included in the Life Sciences segment.
F-27
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2014 and 2013
(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 2014 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 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 for this lease, inclusive of real estate taxes, approximated $1,649, $1,605 and $1,556 during
fiscal years 2014, 2013 and 2012, respectively. Total rent expense incurred by the Company during fiscal 2014, 2013 and 2012 for all
its facilities was approximately $4,488, $4,354 and $4,378, respectively.
Minimum future annual rentals under all non-cancelable operating leases, net of sublease rental income of $322, as of July 31, 2014,
are as follows:
Years ended July 31,
2015
2016
2017
2018
2019
Thereafter
5,627
4,999
3,731
2,306
1,733
1,106
19,502
$
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, 2014 is $2,271.
Note 14 - Contingencies
On June 7, 2004, the Company and Enzo Life Sciences, Inc., filed suit in the United States District Court for the District of
Connecticut against Applera Corporation and its wholly-owned subsidiary Tropix, Inc., which became Life Technologies, Inc.
(NASDAQ:LIFE) and was acquired by Thermo Fisher Scientific, Inc. (NYSE:TMO) on February 3, 2014. The complaint alleged
infringement of six patents relating to DNA sequencing systems, labeled nucleotide products, and other technology. Yale University is
the owner of four of the patents and the Company is the exclusive licensee. These four patents are commonly referred to as the
“Ward” patents. On November 12, 2012, a jury in New Haven found that one of these patents (United States Patent No. 5,449,667)
was infringed and not proven invalid. The jury awarded $48.5 million for this infringement. On January 6, 2014, the judge awarded
prejudgment interest of approximately $12.5 million and additional post-interest on the full amount will also be awarded starting
November 7, 2012 until the total award is satisfied. The final award to Enzo could be reduced or be subject to possible claims from
third parties. On February 3, 2014, Life Technologies filed a notice of appeal and there can be no assurance that the Company will be
successful in this litigation. Even if the Company is not successful, management does not believe that there will be a significant
adverse monetary impact on the Company.
F-28
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2013 and 2012
(Dollars in thousands except share data)
As of August 1, 2013, the Company, as plaintiff, was engaged in litigation in the United States District Court for the Southern District
of New York against six parties (and certain of their related companies): Amersham plc, PerkinElmer, Inc., Molecular Probes, Inc.,
Orchid Biosciences, Inc., Affymetrix, Inc., and Roche Diagnostic GmbH (“Roche”). These cases were commenced at various times
from October 2002 to June 2004. In each of the six cases, the Company had asserted similar (with some differences) causes of action
against the defendants which can be generally described as contract, tort, fraud, and patent claims, except that no patent claims are
asserted against Affymetrix. In the Roche case, Roche seeks a declaratory judgment of non-breach and patent invalidity against the
Company. The cases were consolidated for pre-trial purposes in 2004 and there has been extensive discovery among the parties. In
2011, the defendants moved for summary judgment of non-infringement regarding the Company’s patent claims. In 2012, those
motions were granted in part and denied in part. In December 2012, all six defendants moved for summary judgment on the
Company’s non-patent claims. Additional discovery was taken and the Company responded to the motions in May 2013. On October
22, 2013, the Court granted Amersham’s motion for summary judgment. Thereafter, on November 26, 2013, the parties settled and
dismissed the Amersham case. On October 28, 2013, the Court granted in part and denied in part PerkinElmer’s motion for summary
judgment. By decisions dated December 6, 2013, the Court granted in part and denied in part the summary judgment by Roche and
Affymetrix. A jury trial was been ordered in Roche’s case on a date to be determined. On the same date, the Court granted the
summary judgment for the remaining two motions by Molecular Probes and Orchid.
On April 22, 2014, the Company as plaintiff finalized and executed a settlement agreement with Affymetrix, Inc. to settle a patent
litigation lawsuit (the “Agreement”) in the amount of $5.1 million. Under terms of the Agreement, Affymetrix paid to the Company
$4.3 million and paid to the Company’s attorneys $0.8 million, which is included in legal fees in the statements of operations for the
year ended July 31, 2014. The amount of the settlement is included in the statement of operations under Legal settlements, net within
the Life Science segment.
On June 20, 2014 the Company, as plaintiff finalized and executed a settlement agreement with PerkinElmer, Inc., and PerkinElmer
Health Sciences, Inc. (formerly known as PerkinElmer Life Sciences, Inc.) (together, “PerkinElmer”), with respect to an action
between the Company and PerkinElmer before the U.S. District Court, Southern District of New York, Case No 03-CV-3817.
PerkinElmer paid $7.0 million in escrow pursuant to the agreement because of a former attorney’s motion requesting a charging lien
for fees allegedly owed for past services rendered to the Company. Because the settlement proceeds are held in escrow, the Company
did not include the settlement or any additional amounts which may be payable to the attorney in the financial statements as of and for
the fiscal year ended July 31, 2014.
As previously disclosed, in 2012, the Company received a Subpoena Duces Tecum (the “Subpoena”) from the Department of Health
and Human Services, Office of Inspector General (“OIG”). The Subpoena was issued as part of an investigation being conducted by
the US Attorney’s Office for the Eastern District of New York in conjunction with the OIG. While a number of potential issues were
raised initially by the government, the investigation came to focus primarily on an alleged failure to collect diagnosis codes from
physicians who ordered tests through Enzo Clinical Labs. The time period initially covered by the investigation was from 2004
through 2011. In response to the Subpoena, the Company cooperated with the government. On September 22, 2014, the Company and
the U.S. Department of Justice reached a settlement agreement to resolve this matter, in substantive form as disclosed in the
Company’s fiscal quarter ended April 30, 2014. During the quarter ended April, 30, 2014, the Company recorded a charge of $2.0
million in the statement of operations under legal settlements, net within the Clinical Labs segment. The settlement amount will be
paid with interest over a five-year period and as a result the Company recorded $0.4 million as other current liabilities and $1.6
million as a non-current liability at July 31, 2014. Under certain circumstances, the Company may be required to accelerate payments
and/or pay up to an additional $1.5 million based upon (i) a favorable recovery and collection related to the judgment in the Life
Technologies matter discussed above, (ii) receipt of additional capital greater than $10.0 million in a fiscal year (in that case, the
Company is required to pay 20% of any amount over $10.0 million plus interest, or (iii) sale of the Company. The final settlement
covers the time period 2004-2014.
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.
F-29
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.
Legal fee expense incurred to defend the Company’s intellectual property and other general corporate matters are considered a
component of the Other segment. Legal fee expense specific to other segments’ activities have been allocated to those segments.
Legal settlements, net, represent activities for which royalties would have been received in the Company’s Life Sciences segment and
expenses related to an investigation within the Clinical Labs segment.
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-30
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2014 and 2013
(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, 2014
Clinical
Labs
Life
Sciences
Therapeutics
Other
Consolidated
Revenues:
Clinical laboratory services .........
Product revenues .........................
Royalty and license fee income ..
Total revenues .............................
$
58,689
—
—
58,689
$
—
32,850
4,408
37,258
—
—
—
—
—
—
777
—
—
—
—
—
—
—
38,948
—
14
—
15,320
2,350
$
20,460
13,374
—
$
7,967
3,115
736
2,000
65,273
(52)
940
(5,100)
26,832
—
—
—
5,278
777
13,245
$
58,689
32,850
4,408
95,947
38,948
15,320
3,141
41,801
3,063
6,954
(3,100)
106,127
Operating expenses:
Cost of clinical laboratory
services ...................................
Cost of product revenues ............
Research and development .........
Selling, general and
administrative .........................
Provision for uncollectible
accounts receivable .................
Legal fee expense ........................
Legal settlements, net..................
Total operating expenses .............
Operating (loss) income ..............
(6,584)
10,426
(777)
(13,245)
(10,180)
Other income (expense)
Interest ........................................
Other ...........................................
Foreign exchange gain ................
(Loss) income before income
(43)
56
—
9
95
289
—
—
—
(174)
43
—
(208)
194
289
taxes ........................................
$
(6,571)
$
10,819
$
(777)
$
(13,376)
$
(9,905)
Depreciation and amortization
included above ........................
$
1,415
$
2,455
$
7
$
94
$
3,971
Share-based compensation
included in above:
Cost of clinical laboratory
services ...................................
Research and development .........
Selling, general and
administrative .........................
Total ............................................
$
$
8
—
36
44
$
$
1
1
6
8
—
—
—
—
$
$
—
—
542
542
$
$
Capital expenditures....................
$
643
$
195
—
—
$
9
1
584
594
838
F-31
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2014 and 2013
(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
Clinical
Labs
Life
Sciences
Therapeutics
Other
Consolidated
Revenues:
Clinical laboratory services .........
Product revenues .........................
Royalty and license fee income ..
Total revenues .............................
$
55,889
—
—
55,889
$
—
32,526
5,292
37,818
—
—
—
—
Operating expenses:
Cost of clinical laboratory
services ...................................
Cost of product revenues ............
Research and development .........
Selling, general and
administrative .........................
Provision for uncollectible
accounts receivable .................
Legal fee expense ........................
Total operating expenses .............
38,251
—
294
—
16,584
2,356
$
—
—
1,239
19,942
15,511
—
$
8,201
4,232
316
63,035
264
57
34,772
—
—
1,239
—
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 (loss) income ..............
(7,146)
3,046
(1,239)
(13,641)
(18,980)
Other income (expense)
Interest ........................................
Other ...........................................
Foreign exchange gain ................
(Loss) income before income
(46)
49
—
13
(71)
80
—
—
—
(21)
27
—
(54)
5
80
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 ............................................
$
$
9
—
36
45
$
$
1
2
10
13
—
—
—
—
$
$
—
—
487
487
$
$
Capital expenditures....................
$
757
$
231
—
—
$
10
2
533
545
988
F-32
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2013 and 2012
(Dollars in thousands except share data)
Year ended July 31, 2012
Clinical
Labs
Life
Sciences
Therapeutics
Other
Consolidated
Revenues:
Clinical laboratory services .........
Product revenues .........................
Royalty and license fee income ..
Total revenues .............................
$
59,403
—
—
59,403
$
—
37,722
5,958
43,680
—
—
—
—
Operating expenses:
Cost of clinical laboratory
services ...................................
Cost of product revenues ............
Research and development .........
Selling, general and
administrative .........................
Provision for uncollectible
accounts receivable .................
Legal fee expense ........................
Impairment charges .....................
Total operating expenses .............
36,305
—
299
—
19,668
4,308
$
—
—
1,686
20,856
18,305
—
$
8,767
4,987
262
—
62,709
117
536
24,540
67,474
—
—
—
1,686
—
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 ............................................
$
$
10
—
49
59
$
$
4
59
63
—
—
—
—
$
$
—
—
597
597
$
$
10
4
705
719
Capital expenditures....................
$
921
$
443
—
—
$
1,364
F-33
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 ............................................................................................................
2014
84,389
4,130
2,023
5,405
95,947
2014
20,854
1,629
462
345
23,290
$
$
$
$
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
$
$
$
$
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 .........................................................................................
2014
25,700
11,558
37,258
$
$
2013
24,669
13,149
37,818
$
$
2012
28,372
15,308
43,680
$
$
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, 2014 and 2013. 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 2014 and 2013 is summarized as follows:
Fiscal 2014
Total revenues ..............................................................
Gross profit ..................................................................
Loss before income taxes .............................................
Net loss ........................................................................
Basic and diluted loss per common share ....................
Fiscal 2013
Total revenues .............................................................
Gross profit .................................................................
Loss before income taxes ............................................
Net loss .......................................................................
Basic and diluted loss per common share ...................
October 31,
January 31,
April 30,
July 31,
Quarter Ended
2013
24,134
10,579
(2,725)
(2,787)
(0.07)
$
$
2014
22,928
9,771
(3,570)
(3,566)
(0.09)
$
$
2014
23,978
10,394
(448)
(455)
(0.01)
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)
$
$
2013
22,598
9,048
(5,808)
(5,770)
(0.15)
$
$
$
$
2014
24,907
10,935
(3,162)
(3,169)
(0.07)
July 31,
2013
23,269
9,446
(3,532)
(3,102)
(0.08)
$
$
$
$
F-34
ENZO BIOCHEM, INC
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years ended July 31, 2014, 2013 and 2012
(in thousands)
Year ended
July 31,
Description
2014
Allowance for doubtful accounts
Balance at
Beginning
of period
Charged
to
costs
and expenses
Charged
to other
accounts Deductions
Balance at
end of period
receivable .................................................
2,707
3,063
3,628(1)
2,142
2013
Allowance for doubtful accounts
receivable .................................................
3,273
4,496
5,062(1)
2,707
2012
Allowance for doubtful accounts
receivable .................................................
3,488
5,104
5,319(1)
3,273
2014
Deferred tax valuation allowance................
47,623
1,842
2013
Deferred tax valuation allowance................
41,261
6,362
2012
Deferred tax valuation allowance................
32,920
8,341
49,465
47,623
41,261
(1) Write-off of uncollectible accounts receivable.
(cid:3)
S-1
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, 2014
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 9, 2014
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, 2014
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 9, 2014
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, 2014 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 9, 2014
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, 2014 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 9, 2014
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.
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
Former Executive Chairman and CEO,
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
James M. O’Brien
Senior Vice President, Finance
Dieter Schapfel, MD
Chief Medical Director
Enzo Clinical Labs, Inc.
Kara Cannon
Global Head of Sales and Marketing
Enzo Life Sciences, Inc.
David C. Goldberg
Vice President,
Corporate Development
Mark Welch
Senior Director, Finance
Enzo Clinical Labs, Inc.
Anna DiGabriele Petti
Corporate Patent Counsel
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
6201 15th Avenue
Brooklyn, NY 11219
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.
2014 Fiscal Year
(August 1, 2013 to July 31, 2014):
High
Low
2013 Fiscal Year
(August 1, 2012 to July 31, 2013):
High
Low
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
$2.62
$2.21
$2.92 $2.34
$2.75
$4.55
$3.44
$5.41
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
$2.17
$1.33
$3.16 $1.86
$1.83
$3.13
$1.96
$2.43
As of September 30, 2014, the Company had approximately 877 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.
Enzo Biochem, Inc.
527 Madison Ave.
New York, NY 10022
(212) 583-0100
www.enzo.com