Item 1
Financial Statements
ENZO BIOCHEM, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
January 31,
2017
(unaudited)
|
|
|
July 31,
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
62,427
|
|
|
$
|
67,777
|
|
Accounts receivable, net of allowances
|
|
|
15,355
|
|
|
|
14,592
|
|
Inventories
|
|
|
7,115
|
|
|
|
6,971
|
|
Prepaid expenses and other
|
|
|
1,982
|
|
|
|
2,057
|
|
Total current assets
|
|
|
86,879
|
|
|
|
91,397
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
8,168
|
|
|
|
8,214
|
|
Goodwill
|
|
|
7,452
|
|
|
|
7,452
|
|
Intangible assets, net
|
|
|
3,560
|
|
|
|
4,422
|
|
Other assets
|
|
|
332
|
|
|
|
336
|
|
Total assets
|
|
$
|
106,391
|
|
|
$
|
111,821
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable – trade
|
|
$
|
10,285
|
|
|
$
|
9,857
|
|
Accrued liabilities
|
|
|
6,421
|
|
|
|
8,211
|
|
Loan payable
|
|
|
—
|
|
|
|
1,557
|
|
Other current liabilities
|
|
|
859
|
|
|
|
943
|
|
Total current liabilities
|
|
|
17,565
|
|
|
|
20,568
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
1,098
|
|
|
|
1,699
|
|
Total liabilities
|
|
$
|
18,663
|
|
|
$
|
22,267
|
|
|
|
|
|
|
|
|
|
|
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 and outstanding: 46,292,216 at January 31, 2017 and 46,267,619 at July 31, 2016
|
|
|
463
|
|
|
|
463
|
|
Additional paid-in capital
|
|
|
326,751
|
|
|
|
326,288
|
|
Accumulated deficit
|
|
|
(241,923
|
)
|
|
|
(239,396
|
)
|
Accumulated other comprehensive income
|
|
|
2,437
|
|
|
|
2,199
|
|
Total stockholders’ equity
|
|
|
87,728
|
|
|
|
89,554
|
|
Total liabilities and stockholders’ equity
|
|
$
|
106,391
|
|
|
$
|
111,821
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
|
|
Three Months Ended
January 31,
|
|
|
Six Months Ended
January 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical laboratory services
|
|
$
|
18,837
|
|
|
$
|
17,523
|
|
|
$
|
37,395
|
|
|
$
|
34,613
|
|
Product revenues
|
|
|
6,983
|
|
|
|
6,578
|
|
|
|
14,409
|
|
|
|
14,265
|
|
Royalty and license fee income
|
|
|
440
|
|
|
|
459
|
|
|
|
740
|
|
|
|
859
|
|
Total revenues
|
|
|
26,260
|
|
|
|
24,560
|
|
|
|
52,544
|
|
|
|
49,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs, expenses and legal settlements, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of clinical laboratory services
|
|
|
11,052
|
|
|
|
10,535
|
|
|
|
21,948
|
|
|
|
20,867
|
|
Cost of product revenues
|
|
|
3,520
|
|
|
|
3,206
|
|
|
|
6,829
|
|
|
|
6,817
|
|
Research and development
|
|
|
483
|
|
|
|
861
|
|
|
|
1,305
|
|
|
|
1,728
|
|
Selling, general and administrative
|
|
|
11,165
|
|
|
|
11,280
|
|
|
|
22,639
|
|
|
|
21,505
|
|
Provision for uncollectible accounts receivable
|
|
|
679
|
|
|
|
459
|
|
|
|
1,348
|
|
|
|
1,163
|
|
Legal fee expense
|
|
|
370
|
|
|
|
2,411
|
|
|
|
742
|
|
|
|
4,012
|
|
Legal settlements, net
|
|
|
—
|
|
|
|
(11,650
|
)
|
|
|
—
|
|
|
|
(18,450
|
)
|
Total operating costs, expenses and legal settlements, net
|
|
|
27,269
|
|
|
|
17,102
|
|
|
|
54,811
|
|
|
|
37,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(1,009
|
)
|
|
|
7,458
|
|
|
|
(2,267
|
)
|
|
|
12,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
79
|
|
|
|
(42
|
)
|
|
|
125
|
|
|
|
(82
|
)
|
Other
|
|
|
24
|
|
|
|
11
|
|
|
|
143
|
|
|
|
65
|
|
Foreign exchange loss
|
|
|
(94
|
)
|
|
|
(388
|
)
|
|
|
(455
|
)
|
|
|
(518
|
)
|
Income (loss) before income taxes
|
|
|
(1,000
|
)
|
|
|
7,039
|
|
|
|
(2,454
|
)
|
|
|
11,560
|
|
Provision for income taxes
|
|
|
(53
|
)
|
|
|
(207
|
)
|
|
|
(73
|
)
|
|
|
(294
|
)
|
Net income (loss)
|
|
$
|
(1,053
|
)
|
|
$
|
6,832
|
|
|
$
|
(2,527
|
)
|
|
$
|
11,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.02
|
)
|
|
$
|
0.15
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.24
|
|
Diluted
|
|
$
|
(0.02
|
)
|
|
$
|
0.15
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
46,292
|
|
|
|
46,077
|
|
|
|
46,282
|
|
|
|
46,070
|
|
Diluted
|
|
|
46,292
|
|
|
|
46,518
|
|
|
|
46,282
|
|
|
|
46,353
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(in thousands)
|
|
Three Months Ended
January 31,
|
|
|
Six Months Ended
January 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net income (loss)
|
|
$
|
(1,053
|
)
|
|
$
|
6,832
|
|
|
$
|
(2,527
|
)
|
|
$
|
11,266
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(16
|
)
|
|
|
226
|
|
|
|
238
|
|
|
|
288
|
|
Comprehensive income (loss)
|
|
$
|
(1,069
|
)
|
|
$
|
7,058
|
|
|
$
|
(2,289
|
)
|
|
$
|
11,554
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Six Months Ended January 31, 2017
(UNAUDITED)
(in thousands, except share data)
|
|
Common
Stock
Shares
|
|
|
Common
Stock
Amount
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Deficit
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
Total
Stockholders’
Equity
|
|
Balance at July 31, 2016
|
|
|
46,267,619
|
|
|
$
|
463
|
|
|
$
|
326,288
|
|
|
$
|
(239,396
|
)
|
|
$
|
2,199
|
|
|
$
|
89,554
|
|
Net loss for the period
ended January 31, 2017
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,527
|
)
|
|
|
—
|
|
|
|
(2,527
|
)
|
Vesting of restricted stock
|
|
|
1,501
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercise of stock options
|
|
|
23,096
|
|
|
|
—
|
|
|
|
71
|
|
|
|
—
|
|
|
|
—
|
|
|
|
71
|
|
Share-based compensation charges
|
|
|
—
|
|
|
|
—
|
|
|
|
392
|
|
|
|
—
|
|
|
|
—
|
|
|
|
392
|
|
Foreign currency translation adjustments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
238
|
|
|
|
238
|
|
Balance at January 31, 2017
|
|
|
46,292,216
|
|
|
$
|
463
|
|
|
$
|
326,751
|
|
|
$
|
(241,923
|
)
|
|
$
|
2,437
|
|
|
$
|
87,728
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
|
|
Six Months Ended
January 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,527
|
)
|
|
$
|
11,266
|
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property, plant and equipment
|
|
|
1,023
|
|
|
|
1,059
|
|
Amortization of intangible assets
|
|
|
819
|
|
|
|
843
|
|
Provision for uncollectible accounts receivable
|
|
|
1,348
|
|
|
|
1,170
|
|
Deferred income tax benefit
|
|
|
—
|
|
|
|
(5
|
)
|
Share-based compensation charges
|
|
|
392
|
|
|
|
221
|
|
Accrual for share-based 401(k) employer match expense
|
|
|
354
|
|
|
|
439
|
|
Foreign exchange loss
|
|
|
420
|
|
|
|
333
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(2,170
|
)
|
|
|
(1,952
|
)
|
Other receivables
|
|
|
—
|
|
|
|
6,650
|
|
Inventories
|
|
|
(238
|
)
|
|
|
(20
|
)
|
Prepaid expenses and other
|
|
|
67
|
|
|
|
350
|
|
Accounts payable – trade
|
|
|
238
|
|
|
|
693
|
|
Accrued liabilities, other current liabilities and other liabilities
|
|
|
(2,558
|
)
|
|
|
(983
|
)
|
Total adjustments
|
|
|
(305
|
)
|
|
|
8,798
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(2,832
|
)
|
|
|
20,064
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(689
|
)
|
|
|
(943
|
)
|
Security deposits and other
|
|
|
2
|
|
|
|
2
|
|
Net cash used in investing activities
|
|
|
(687
|
)
|
|
|
(941
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from borrowings under Credit Agreement
|
|
|
40,694
|
|
|
|
44,378
|
|
Repayments under Credit Agreement
|
|
|
(42,251
|
)
|
|
|
(44,378
|
)
|
Installment loan and capital lease obligation payments
|
|
|
(323
|
)
|
|
|
(258
|
)
|
Proceeds from the exercise of stock options
|
|
|
71
|
|
|
|
66
|
|
Net cash used in financing activities
|
|
|
(1,809
|
)
|
|
|
(192
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(22
|
)
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(5,350
|
)
|
|
|
18,907
|
|
Cash and cash equivalents - beginning of period
|
|
|
67,777
|
|
|
|
18,109
|
|
Cash and cash equivalents - end of period
|
|
$
|
62,427
|
|
|
$
|
37,016
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of January 31, 2017
(Unaudited)
(Dollars in thousands, except share data)
Note 1 – Basis of Presentation
The accompanying consolidated financial statements include
the accounts of Enzo Biochem, Inc. and its wholly-owned subsidiaries, Enzo Life Sciences, Enzo Clinical Labs, Enzo
Therapeutics and Enzo Realty LLC, collectively or with one or more of its subsidiaries referred to as the
“Company” or “Companies”. The consolidated balance sheet as of January 31, 2017, the consolidated
statements of operations and comprehensive income (loss) for the three and six months ended January 31, 2017 and 2016, and
the consolidated statements of stockholders’ equity and cash flows for the six months ended January 31, 2017 and 2016
are unaudited. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to
present fairly the financial position and operating results for the interim periods have been made. Certain information and
footnote disclosure, normally included in annual financial statements prepared in accordance with accounting principles
generally accepted in the United States, have been condensed or omitted. The consolidated interim financial statements should
be read in conjunction with the consolidated financial statements for the year ended July 31, 2016 and notes thereto
contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. The
consolidated balance sheet at July 31, 2016 has been derived from the audited financial statements at that date. The
results of operations for the three and six months ended January 31, 2017 are not necessarily indicative of the results that
may be expected for the fiscal year ending July 31, 2017.
Effect of New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standard Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers: Topic 606
. ASU
2014-09 supersedes the current revenue recognition guidance, including industry-specific guidance. The new standard introduces
a five-step model to achieve its core principle of the entity recognizing revenue to depict the transfer of goods or services to
customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or
services, and on transfer of control, as opposed to transfer of risk and rewards. The standard also expands the required financial
statement disclosures regarding revenue recognition. ASU 2014-09 will be effective for our interim periods and the fiscal year
beginning August 1, 2018, and we do not expect to early adopt for reporting periods beginning after December 15, 2016. We expect
to use retrospective application upon adoption. We are currently assessing the impact the adoption of ASU 2014-09 will have on
the Company’s combined consolidated financial statements. We continue to evaluate the impact of this standard on our Clinical
Labs segment.
In February 2016, the FASB issued Accounting Standards Update
(“ASU”) No. 2016-02 –
Leases (Topic 842)
. The new standard establishes a right-of-use (ROU) model that
requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.
Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the
income statement. The new standard is effective for our fiscal year beginning August 1, 2019 including interim periods within that
fiscal year. A modified retrospective transition approach is required for lessees for capital and operating leases existing at,
or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical
expedients available. We believe the adoption of this standard will materially impact our consolidated financial statements by
significantly increasing our non-current assets and non-current liabilities on our consolidated balance sheets in order to record
the right of use assets and related lease liabilities for our existing operating leases.
In March 2016, the FASB issued ASU 2016-09,
“Improvements
to Employee Share-Based Payment Accounting,”
which requires all excess tax benefits or deficiencies to be recognized
as income tax expense or benefit in the income statement. In addition, excess tax benefits should be classified along with other
income tax cash flows as an operating activity in the statement of cash flows. Application of the standard is required for our
annual and interim periods beginning August 1, 2017. We do not expect to early adopt the standard. We are in the process of determining
the financial statement impact of this new standard on our consolidated financial statements and are currently unable to estimate
the impact on our consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03
Interest –
Imputation of Interest.
The ASU was issued as part of the Simplification Initiatives, to simplify presentation of debt issuance
costs. The amendments in the update require that debt issuance costs related to a recognized debt liability be presented in the
balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition
and measurement guidance for debt issuance costs are not affected by the amendments in this update. We adopted this standard at
the start of our fiscal year ending July 31, 2017. The adoption of this update had no material impact on our consolidated financial
statements.
In July 2015, the FASB issued ASU No. 2015-11,
Simplifying
the Measurement of Inventory (Topic 330).
ASU 2015-11 changes the measurement principle for inventory from the lower of
cost or market to lower of cost or net realizable value. We adopted this standard for the fiscal year ending in July 31, 2017.
The adoption of this update did not have any impact on our consolidated financial statements for the period ended January 31, 2017.
In January 2017, the FASB issued ASU 2017-04 Intangibles –
Goodwill and Other – Simplifying the Test for Goodwill Impairment. The ASU eliminates step two in the current two-step process
so that any goodwill impairment is measured as the amount by which the reporting unit’s carrying amount exceeds its fair
value. The ASU is effective for the Company in the first quarter of 2020 with early adoption permitted. The Company does not expect
the adoption of this ASU to have a material impact on our consolidated financial statements.
We reviewed all other recently issued accounting pronouncements
and have concluded they are not applicable or not expected to be significant to the accounting for our operations.
Note 2 – 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. As a result of the net loss for the three
and six months ended January 31, 2017 diluted weighted average shares outstanding are the same as basic weighted average shares
outstanding, and do not include the potential common shares from stock options and unvested restricted stock because to do so would
be antidilutive.
For the three and six months ended January 31, 2017, the number
of potential common shares (“in the money options”) and unvested restricted stock excluded from the calculation of
diluted earnings per share was 888,000 and 804,000, respectively. For the three and six months ended January 31, 2016, approximately
440,000 and 281,000 weighted average stock options were included in the calculation of diluted weighted average shares outstanding.
For the three and six months ended January 31, 2017, the effect
of approximately 494,000 and 247,000 of outstanding “out of the money” options to purchase common shares were excluded
from the calculation of diluted net income per share because their effect would be anti-dilutive. For the three and six months
ended January 31, 2016, the effect of approximately 235,000 and 305,000 of outstanding “out of the money” options to
purchase common shares were excluded from the calculation of diluted net income per share because their effect would be anti-dilutive.
Note 3 - Supplemental disclosure for statement of cash flows
For the six months ended January 31, 2017 and 2016, income taxes
paid by the Company were $996 and $53, respectively
.
For the six months ended January 31, 2017 and 2016, interest paid
by the Company was $77.
For the six months ended January 31, 2017 and 2016, the Company
financed $69 and $76 respectively, in machinery and transportation equipment under installment loans.
During the six months ended January 31, 2017, the Company did
not enter into any capital lease agreements. During the six months ended January 31, 2016, there was a total of $1,141 in capital
lease agreements.
Note 4 - Inventories
Inventories consist of the following:
|
|
January 31,
2017
|
|
|
July 31,
2016
|
|
Raw materials
|
|
$
|
912
|
|
|
$
|
951
|
|
Work in process
|
|
|
1,893
|
|
|
|
1,755
|
|
Finished products
|
|
|
4,310
|
|
|
|
4,265
|
|
|
|
$
|
7,115
|
|
|
$
|
6,971
|
|
Note 5 – Goodwill and intangible assets
At January 31, 2017 and July 31, 2016, the Company’s net
carrying amount of goodwill, related to the Clinical Labs segment, is $7,452.
The Company’s change in the net carrying amount of intangible
assets, all in the Life Sciences segment is as follows:
|
|
Gross
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
July 31, 2016
|
|
$
|
27,650
|
|
|
$
|
(23,228
|
)
|
|
$
|
4,422
|
|
Amortization expense
|
|
|
—
|
|
|
|
(819
|
)
|
|
|
(819
|
)
|
Foreign currency translation
|
|
|
(203
|
)
|
|
|
160
|
|
|
|
(43
|
)
|
January 31, 2017
|
|
$
|
27,447
|
|
|
$
|
(23,887
|
)
|
|
$
|
3,560
|
|
Intangible assets, all finite lived, consist of the following:
|
|
January 31, 2017
|
|
|
July 31, 2016
|
|
|
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Patents
|
|
$
|
11,026
|
|
|
$
|
(10,922
|
)
|
|
$
|
104
|
|
|
$
|
11,027
|
|
|
$
|
(10,905
|
)
|
|
$
|
122
|
|
Customer relationships
|
|
|
12,007
|
|
|
|
(8,739
|
)
|
|
|
3,268
|
|
|
|
12,122
|
|
|
|
(8,331
|
)
|
|
|
3,791
|
|
Website and acquired content
|
|
|
1,005
|
|
|
|
(1,005
|
)
|
|
|
—
|
|
|
|
1,011
|
|
|
|
(1,011
|
)
|
|
|
—
|
|
Licensed technology and other
|
|
|
475
|
|
|
|
(440
|
)
|
|
|
35
|
|
|
|
485
|
|
|
|
(437
|
)
|
|
|
48
|
|
Trademarks
|
|
|
2,934
|
|
|
|
(2,781
|
)
|
|
|
153
|
|
|
|
3,005
|
|
|
|
(2,544
|
)
|
|
|
461
|
|
Total
|
|
$
|
27,447
|
|
|
$
|
(23,887
|
)
|
|
$
|
3,560
|
|
|
$
|
27,650
|
|
|
$
|
(23,228
|
)
|
|
$
|
4,422
|
|
At January 31, 2017, information with respect to intangibles assets
acquired is as follows:
|
|
Useful life assigned
|
|
Weighted average
remaining useful life
|
Customer relationships
|
|
8-15 years
|
|
3.5 years
|
Trademarks
|
|
5 years
|
|
0.5 year
|
Other intangibles
|
|
10 years
|
|
2.5 years
|
At January 31, 2017, the weighted average useful life of intangible
assets is approximately three years.
Note 6 - 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 MidCap Financial LLC. (formerly Healthcare Finance Group, LLC). The nominal interest rate for the six months
ended January 31, 2017 and year ended July 31, 2016 was 5.25%. The effective interest rate for the credit agreement was 14.3% for
the six months ended January 31, 2017 and 11.4% for the fiscal year ended July 31, 2016. The Credit Agreement expired and was repaid
in full on December 7, 2016.
Note 7 – Accrued Liabilities and Other Current Liabilities
Accrued liabilities consist of the following:
|
|
January 31,
2017
|
|
|
July 31,
2016
|
|
Payroll, benefits, and commissions
|
|
$
|
3,737
|
|
|
$
|
3,956
|
|
Legal fee expense
|
|
|
308
|
|
|
|
954
|
|
Professional fees
|
|
|
531
|
|
|
|
503
|
|
Research and development
|
|
|
72
|
|
|
|
300
|
|
Other
|
|
|
1,773
|
|
|
|
2,498
|
|
|
|
$
|
6,421
|
|
|
$
|
8,211
|
|
Note 8 – Other Liabilities
Other liabilities consist of the following:
|
|
January 31,
2017
|
|
|
July 31,
2016
|
|
Capital lease obligations, net of short term
|
|
$
|
635
|
|
|
$
|
794
|
|
Accrued legal settlement
|
|
|
400
|
|
|
|
800
|
|
Installment loans, net of short term
|
|
|
63
|
|
|
|
105
|
|
|
|
$
|
1,098
|
|
|
$
|
1,699
|
|
As of January 31, 2017, future minimum payments under the capital
leases, net of interest of $252 aggregates $771 including a short term debt portion of $136 included in other current liabilities.
Future minimum payments under the installment loans aggregate $382, including a short term portion of $319 included in other current
liabilities. A total of $0.4 million is included in other current liabilities and $0.4 million in other liabilities as accrued
legal settlement which is further discussed in Note 12 - Contingencies.
Note 9 – Stockholders’ Equity
Controlled Equity Offering
On March 28, 2013, the Company entered into a Controlled Equity
Offering
SM
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 Sales
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.
On December 31, 2014, the Sales Agreement was amended in order
for the Company to offer and sell, through Cantor, acting as agent, additional shares of Common Stock having an aggregate offering
price of $20.0 million. In connection with the amendment to the Sales Agreement, the Company also filed with the Security
and Exchange Commission (“SEC”) a prospectus supplement dated December 31, 2014.
Most recently with respect to the Sales Agreement, the Company
filed a “shelf” registration and prospectus supplement dated September 1, 2016 which was declared effective by the
SEC on November 3, 2016.
During the six months ended January 31, 2017 and 2016, the Company
did not sell any shares of Common Stock under the Sales Agreement.
Share-based compensation
The Company has an incentive stock option and restricted stock
award plan (the “2005 Plan”), and a long term incentive share award plan, (the “2011 Incentive Plan”),
which are more fully described in Note 10 to the consolidated
financial statements included in the Company’s Annual Report
on Form 10-K for the fiscal year ended July 31, 2016. The 2011 Plan, which is the only plan from which awards may now be granted,
provides for the award to eligible employees, officers, directors, consultants and other persons of stock options, stock appreciation
rights (SARs), restricted stock, restricted stock units, performance awards, and other stock-based awards.
The amounts of share-based compensation expense recognized in
the periods presented are as follows:
|
|
Three months ended
January 31,
|
|
|
Six months ended
January 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Stock options
|
|
$
|
236
|
|
|
$
|
104
|
|
|
$
|
382
|
|
|
$
|
208
|
|
Restricted stock
|
|
|
5
|
|
|
|
6
|
|
|
|
10
|
|
|
|
13
|
|
|
|
$
|
241
|
|
|
$
|
110
|
|
|
$
|
392
|
|
|
$
|
221
|
|
The following table sets forth the amount of expense related to
share-based payment arrangements included in specific line items in the accompanying statements of operations:
|
|
Three months ended
January 31,
|
|
|
Six months ended
January 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Cost of clinical laboratory services
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
3
|
|
Selling, general and administrative
|
|
|
240
|
|
|
|
108
|
|
|
|
389
|
|
|
|
218
|
|
|
|
$
|
241
|
|
|
$
|
110
|
|
|
$
|
392
|
|
|
$
|
221
|
|
No excess tax benefits were recognized during the six month periods
ended January 31, 2017 and 2016.
Stock Option Plans
The following table summarizes stock option activity during the
six month period ended January 31, 2017:
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value (000s)
|
|
Outstanding at July 31, 2016
|
|
|
1,808,875
|
|
|
$
|
3.43
|
|
|
|
|
|
|
|
Awarded
|
|
|
493,996
|
|
|
$
|
7.07
|
|
|
|
|
|
|
|
Exercised
|
|
|
(23,096
|
)
|
|
$
|
2.89
|
|
|
|
|
$
|
149
|
|
Cancelled or expired
|
|
|
(5,000
|
)
|
|
$
|
4.47
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
2,274,775
|
|
|
$
|
4.23
|
|
|
1.4 years
|
|
$
|
5,797
|
|
Exercisable at end of period
|
|
|
1,379,555
|
|
|
$
|
3.18
|
|
|
0.5 years
|
|
$
|
4,853
|
|
As of January 31, 2017, the total future compensation cost related
to non-vested options, not yet recognized in the statements of operations, was $1.6 million and the weighted average period over
which the remaining expense of these awards is expected to be recognized is twenty-three months.
The intrinsic value of in the money stock option awards that are
vested at the end of the period represents the Company’s closing stock price on the last trading day of the period in excess
of the exercise price multiplied by the number of options that vested.
Restricted Stock Awards
A summary of the activity pursuant to the Company’s unvested
restricted stock awards for the six months ended January 31, 2017 is as follows:
|
|
Awards
|
|
|
Weighted
Average
Award Price
|
|
Outstanding at July 31, 2016
|
|
|
8,501
|
|
|
$
|
4.13
|
|
Awarded
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(1,501
|
)
|
|
$
|
(3.89
|
)
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Unvested at end of period
|
|
|
7,000
|
|
|
$
|
2.30
|
|
The fair value of a restricted stock award is determined based
on the closing stock price on the award date. As of January 31, 2017, there was approximately $0.1 million of unrecognized compensation
cost related to unvested restricted stock-based compensation to be recognized over a weighted average remaining period of approximately
ten months.
The fair value of the awards that vested during the six months
ended January 31, 2017 and 2016 was $8 and $21, respectively.
The total number of shares available for grant as equity awards
from the 2011 Incentive Plan is approximately 329,000 shares as of January 31, 2017.
Note 10 - Income taxes
At the end of each interim reporting period, the Company estimates
its effective income tax rate expected to be applicable for the full year. This estimate is used to determine the income tax provision
or benefit on a year-to-date basis and may change in subsequent interim periods.
The Company’s effective tax rate provision for the three
months ended January 31, 2017 was 5.3% compared to 2.9% for the three months ended January 31, 2016. The Company’s effective
tax rate provision for the six months ended January 31, 2017 and 2016 was 3.0% and 2.5%, respectively. The tax provision for the
periods was based on state, local and foreign taxes. The Company’s effective tax rate for both periods differed from the
expected net operating loss carryforward benefit at the U.S. federal statutory rate of 34% primarily due to the inability to recognize
such benefit. The carryforward benefit cannot be recognized because of uncertainties relating to future taxable income in terms
of both its timing and its sufficiency, which would enable the Company to realize the federal carryforward benefit.
The Company files a consolidated Federal income tax return. The
Company files combined returns with Michigan and New York State and City for certain subsidiaries. Other subsidiaries file separate
state and foreign tax returns.
Note 11 – Segment reporting
The Company has three reportable segments: Clinical Labs, Life
Sciences, and Therapeutics. The Clinical Labs segment provides diagnostic services to the health care community. The Life Sciences
segment develops, manufactures, and markets products to research and pharmaceutical customers. The Therapeutic segment conducts
research and development activities for therapeutic drug candidates.
The Company evaluates segment performance based on segment income
(loss) before taxes. Costs excluded from segment income (loss) before taxes and reported as “Other” consist of corporate
general and administrative costs which are not allocable to the three reportable segments. Legal fee expense incurred to defend
the Company’s intellectual property and other general corporate matters is considered a component of the Other segment. Legal
fee expense specific to other segments’ activities has been allocated to those segments. Legal settlements, net represent
activities for which royalties would have been received by the Company’s Life Sciences segment had the Company had agreements
in place with plaintiffs for the patents or products covered by the settlements.
Management of the Company assesses assets on a consolidated basis
only and, therefore, assets by reportable segment have not been included in the reportable segments below. The accounting policies
of the reportable segments are the same as those described in the summary of significant accounting policies contained in the Company’s
Annual Report on Form 10-K for the year ended July 31, 2016.
The following financial information represents the operating results
of the reportable segments of the Company:
Three months ended January 31, 2017
|
|
Clinical
Labs
|
|
|
Life
Sciences
|
|
|
Therapeutics
|
|
|
Other
|
|
|
Consolidated
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical laboratory services
|
|
$
|
18,837
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
18,837
|
|
Product revenues
|
|
|
—
|
|
|
$
|
6,983
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,983
|
|
Royalty and license fee income
|
|
|
—
|
|
|
|
440
|
|
|
|
—
|
|
|
|
—
|
|
|
|
440
|
|
|
|
|
18,837
|
|
|
|
7,423
|
|
|
|
—
|
|
|
|
—
|
|
|
|
26,260
|
|
Operating costs, expenses and legal settlements, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of clinical laboratory services
|
|
|
11,052
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,052
|
|
Cost of product revenues
|
|
|
—
|
|
|
|
3,520
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,520
|
|
Research and development
|
|
|
—
|
|
|
|
516
|
|
|
$
|
(33
|
)
|
|
|
—
|
|
|
|
483
|
|
Selling, general and administrative
|
|
|
5,897
|
|
|
|
2,905
|
|
|
|
—
|
|
|
$
|
2,363
|
|
|
|
11,165
|
|
Provision for uncollectible accounts receivable
|
|
|
594
|
|
|
|
85
|
|
|
|
—
|
|
|
|
—
|
|
|
|
679
|
|
Legal fee expense
|
|
|
49
|
|
|
|
16
|
|
|
|
—
|
|
|
|
305
|
|
|
|
370
|
|
Total operating costs, expenses and legal settlements, net
|
|
|
17,592
|
|
|
|
7,042
|
|
|
|
(33
|
)
|
|
|
2,668
|
|
|
|
27,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
1,245
|
|
|
|
381
|
|
|
|
33
|
|
|
|
(2,668
|
)
|
|
|
(1,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
(28
|
)
|
|
|
12
|
|
|
|
—
|
|
|
|
95
|
|
|
|
79
|
|
Other
|
|
|
17
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7
|
|
|
|
24
|
|
Foreign exchange loss
|
|
|
—
|
|
|
|
(94
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(94
|
)
|
Income (loss) before income taxes
|
|
$
|
1,234
|
|
|
$
|
299
|
|
|
$
|
33
|
|
|
$
|
(2,566
|
)
|
|
$
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization included above
|
|
$
|
394
|
|
|
$
|
501
|
|
|
$
|
—
|
|
|
$
|
20
|
|
|
$
|
915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation included in above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of clinical laboratory services
|
|
$
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
1
|
|
Selling, general and administrative
|
|
|
23
|
|
|
$
|
15
|
|
|
|
—
|
|
|
$
|
202
|
|
|
|
240
|
|
Total
|
|
$
|
24
|
|
|
$
|
15
|
|
|
$
|
—
|
|
|
$
|
202
|
|
|
$
|
241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
175
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
175
|
|
Three months ended January 31, 2016
|
|
Clinical
Labs
|
|
|
Life
Sciences
|
|
|
Therapeutics
|
|
|
Other
|
|
|
Consolidated
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical laboratory services
|
|
$
|
17,523
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
17,523
|
|
Product revenues
|
|
|
—
|
|
|
$
|
6,578
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,578
|
|
Royalty and license fee income
|
|
|
—
|
|
|
|
459
|
|
|
|
—
|
|
|
|
—
|
|
|
|
459
|
|
|
|
|
17,523
|
|
|
|
7,037
|
|
|
|
—
|
|
|
|
—
|
|
|
|
24,560
|
|
Operating costs, expenses and legal settlements, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of clinical laboratory services
|
|
|
10,535
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,535
|
|
Cost of product revenues
|
|
|
—
|
|
|
|
3,206
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,206
|
|
Research and development
|
|
|
—
|
|
|
|
661
|
|
|
$
|
200
|
|
|
|
—
|
|
|
|
861
|
|
Selling, general and administrative
|
|
|
5,649
|
|
|
|
2,773
|
|
|
|
—
|
|
|
$
|
2,858
|
|
|
|
11,280
|
|
Provision for uncollectible accounts receivable
|
|
|
467
|
|
|
|
(8
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
459
|
|
Legal fee expense
|
|
|
57
|
|
|
|
5
|
|
|
|
—
|
|
|
|
2,349
|
|
|
|
2,411
|
|
Legal settlements, net
|
|
|
1,500
|
|
|
|
(13,150
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(11,650
|
)
|
Total operating costs, expenses and legal settlements, net
|
|
|
18,208
|
|
|
|
(6,513
|
)
|
|
|
200
|
|
|
|
5,207
|
|
|
|
17,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(685
|
)
|
|
|
13,550
|
|
|
|
(200
|
)
|
|
|
(5,207
|
)
|
|
|
7,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
(23
|
)
|
|
|
17
|
|
|
|
—
|
|
|
|
(36
|
)
|
|
|
(42
|
)
|
Other
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
12
|
|
|
|
11
|
|
Foreign exchange loss
|
|
|
—
|
|
|
|
(388
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(388
|
)
|
Income (loss) before income taxes
|
|
$
|
(709
|
)
|
|
$
|
13,179
|
|
|
$
|
(200
|
)
|
|
$
|
(5,231
|
)
|
|
$
|
7,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization included above
|
|
$
|
411
|
|
|
$
|
524
|
|
|
$
|
—
|
|
|
$
|
17
|
|
|
$
|
952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation included in above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of clinical laboratory services
|
|
$
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
2
|
|
Selling, general and administrative
|
|
|
9
|
|
|
$
|
5
|
|
|
|
—
|
|
|
$
|
94
|
|
|
|
108
|
|
Total
|
|
$
|
11
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
94
|
|
|
$
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
354
|
|
|
$
|
84
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
438
|
|
Six months ended January 31, 2017
|
|
Clinical
Labs
|
|
|
Life
Sciences
|
|
|
Therapeutics
|
|
|
Other
|
|
|
Consolidated
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical laboratory services
|
|
$
|
37,395
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
37,395
|
|
Product revenues
|
|
|
—
|
|
|
$
|
14,409
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,409
|
|
Royalty and license fee income
|
|
|
—
|
|
|
|
740
|
|
|
|
—
|
|
|
|
—
|
|
|
|
740
|
|
|
|
|
37,395
|
|
|
|
15,149
|
|
|
|
—
|
|
|
|
—
|
|
|
|
52,544
|
|
Operating costs, expenses and legal settlements, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of clinical laboratory services
|
|
|
21,948
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21,948
|
|
Cost of product revenues
|
|
|
—
|
|
|
|
6,829
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,829
|
|
Research and development
|
|
|
—
|
|
|
|
1,143
|
|
|
$
|
162
|
|
|
|
—
|
|
|
|
1,305
|
|
Selling, general and administrative
|
|
|
11,849
|
|
|
|
5,851
|
|
|
|
—
|
|
|
$
|
4,939
|
|
|
|
22,639
|
|
Provision for uncollectible accounts receivable
|
|
|
1,260
|
|
|
|
88
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,348
|
|
Legal fee expense
|
|
|
101
|
|
|
|
28
|
|
|
|
—
|
|
|
|
613
|
|
|
|
742
|
|
Total operating costs, expenses and legal settlements, net
|
|
|
35,158
|
|
|
|
13,939
|
|
|
|
162
|
|
|
|
5,552
|
|
|
|
54,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
2,237
|
|
|
|
1,210
|
|
|
|
(162
|
)
|
|
|
(5,552
|
)
|
|
|
(2,267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
(57
|
)
|
|
|
22
|
|
|
|
—
|
|
|
|
160
|
|
|
|
125
|
|
Other
|
|
|
119
|
|
|
|
—
|
|
|
|
—
|
|
|
|
24
|
|
|
|
143
|
|
Foreign exchange loss
|
|
|
—
|
|
|
|
(455
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(455
|
)
|
Income (loss) before income taxes
|
|
$
|
2,299
|
|
|
$
|
777
|
|
|
$
|
(162
|
)
|
|
$
|
(5,368
|
)
|
|
$
|
(2,454
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization included above
|
|
$
|
795
|
|
|
$
|
1,009
|
|
|
$
|
—
|
|
|
$
|
38
|
|
|
$
|
1,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation included in above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of clinical laboratory services
|
|
$
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
3
|
|
Selling, general and administrative
|
|
|
40
|
|
|
$
|
26
|
|
|
|
—
|
|
|
$
|
323
|
|
|
|
389
|
|
Total
|
|
$
|
43
|
|
|
$
|
26
|
|
|
$
|
—
|
|
|
$
|
323
|
|
|
$
|
392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
587
|
|
|
$
|
102
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
689
|
|
Six months ended January 31, 2016
|
|
Clinical
Labs
|
|
|
Life
Sciences
|
|
|
Therapeutics
|
|
|
Other
|
|
|
Consolidated
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical laboratory services
|
|
$
|
34,613
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
34,613
|
|
Product revenues
|
|
|
—
|
|
|
$
|
14,265
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,265
|
|
Royalty and license fee income
|
|
|
—
|
|
|
|
859
|
|
|
|
—
|
|
|
|
—
|
|
|
|
859
|
|
|
|
|
34,613
|
|
|
|
15,124
|
|
|
|
—
|
|
|
|
—
|
|
|
|
49,737
|
|
Operating costs, expenses and legal settlements, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of clinical laboratory services
|
|
|
20,867
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,867
|
|
Cost of product revenues
|
|
|
—
|
|
|
|
6,817
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,817
|
|
Research and development
|
|
|
—
|
|
|
|
1,328
|
|
|
$
|
400
|
|
|
|
—
|
|
|
|
1,728
|
|
Selling, general and administrative
|
|
|
10,935
|
|
|
|
5,832
|
|
|
|
—
|
|
|
$
|
4,738
|
|
|
|
21,505
|
|
Provision for uncollectible accounts receivable
|
|
|
1,175
|
|
|
|
(12
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
1,163
|
|
Legal fee expense
|
|
|
66
|
|
|
|
(17
|
)
|
|
|
—
|
|
|
|
3,963
|
|
|
|
4,012
|
|
Legal settlements, net
|
|
|
1,500
|
|
|
|
(19,950
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(18,450
|
)
|
Total operating costs, expenses and legal settlements, net
|
|
|
34,543
|
|
|
|
(6,002
|
)
|
|
|
400
|
|
|
|
8,701
|
|
|
|
37,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
70
|
|
|
|
21,126
|
|
|
|
(400
|
)
|
|
|
(8,701
|
)
|
|
|
12,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
(42
|
)
|
|
|
31
|
|
|
|
—
|
|
|
|
(71
|
)
|
|
|
(82
|
)
|
Other
|
|
|
3
|
|
|
|
39
|
|
|
|
—
|
|
|
|
23
|
|
|
|
65
|
|
Foreign exchange loss
|
|
|
—
|
|
|
|
(518
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(518
|
)
|
Income (loss) before income taxes
|
|
$
|
31
|
|
|
$
|
20,678
|
|
|
$
|
(400
|
)
|
|
$
|
(8,749
|
)
|
|
$
|
11,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization included above
|
|
$
|
808
|
|
|
$
|
1,054
|
|
|
$
|
—
|
|
|
$
|
40
|
|
|
$
|
1,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation included in above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of clinical laboratory services
|
|
$
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
3
|
|
Selling, general and administrative
|
|
|
19
|
|
|
$
|
10
|
|
|
|
—
|
|
|
$
|
189
|
|
|
|
218
|
|
Total
|
|
$
|
22
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
189
|
|
|
$
|
221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
791
|
|
|
$
|
152
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
943
|
|
Note 12 – 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. 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 was also be awarded starting November 7, 2012 until the total award is satisfied. The final award to the Company
could have been reduced or subject to possible claims from third parties. On March 16, 2015, the Court of Appeals for the Federal
Circuit vacated that judgment in a decision remanding the matter to the district court for further proceedings. On February
22, 2016, the Connecticut District Court granted Applera’s motion for summary judgment of non-infringement. The Company
appealed that decision to the Court of Appeals in the Federal Circuit. 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, 2014 the Company was engaged in litigation in the
United States District Court for the Southern District of New York against Roche Diagnostic GmbH and its related company Roche
Molecular Systems, Inc. (“Roche”), as declaratory judgment defendant. This case was commenced in May 2004. Roche seeks
a declaratory judgment of non-breach of contract and patent invalidity against the Company. Roche has also asserted tort claims
against the Company. The Company has asserted breach of contract and patent infringement causes of action against Roche. There
has been extensive discovery in the case. In 2011, Roche moved for summary judgment of non-infringement regarding the Company’s
patent claims. In 2012, the motion was granted in part and denied in part. In December 2012, Roche 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
December 6, 2013, the Court granted in part and denied in part Roche’s summary judgment motion. On October 22, 2014, the
Court ordered that damages discovery concerning the Company’s remaining contract and patent claims and Roche’s claims
should be completed by January 30, 2015, and expert discovery should be completed following the Court’s not-yet-issued claim
construction ruling concerning the Company’s patent infringement claim against Roche. Roche dropped its tort claims during
damages discovery. On April 28, 2015, the Court heard oral argument on claim construction issues. On May 8, 2015, Roche and the
Company jointly moved the Court to extend the schedule for damages discovery until May 29, 2015, and the Court granted that motion.
The parties are waiting for the Courts’ ruling on claim construction. The Company and Enzo Life Sciences intend to vigorously
press their remaining claims and contest the claims against them.
On September 22, 2014, the Company and the U.S. Department of Justice
reached a settlement agreement to resolve an investigation focused primarily on an alleged failure to collect diagnosis codes from
physicians who ordered tests through Enzo Clinical Labs. During fiscal year 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 is being paid
with interest over a five-year period. During fiscal year 2016, the Company accrued an additional $1.5 million, due to the Company’s
achievement of certain financial milestones. As of January 31, 2017, the total liability for this settlement is $0.8 million, of
which $0.4 million is included in other current liabilities and $0.4 million included in other liabilities.
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 charging lien for fees allegedly owed for past services rendered to the Company. On December 3, 2015,
the Company entered into a Settlement Agreement with the former attorney pursuant to which the Company and the former attorney
resolved their respective claims against each other. During the three months ended January 31, 2016, the Company received a total
of approximately $7.0 million from the escrow referred to above in accordance with the terms of the Settlement Agreement which
was included in the statement of operations under Legal settlements, net within the Life Science segment in that period.
On October 9, 2015, the Company reached and finalized a settlement
with Affymetrix, Inc. in the amount of $6.8 million, net in a patent infringement action brought by the Company. On January 4,
2016, the Company reached and finalized a settlement agreement with Agilent Technologies, Inc. in the amount of $6.1 million, net
in a patent infringement action brought by the Company.
Both cases were originally brought by the Company in the United States
District Court for the District of Delaware. The settlements were included in the statement of operations during the applicable
fiscal period under Legal settlements, net within the Life Science segment.
On May 16, 2016, the Company reached and finalized a settlement with
Life Technologies Corporation in the amount of $24.3 million, net in an infringement action brought by the Company regarding its
US Patents No. 6,992,180 and 7,064,197. On July 1, 2016, the Company reached and finalized a settlement with Illumina, Inc., in
the amount of $14.5 million, net in an infringement action brought by the Company regarding US Patent No. 7,064,197. These cases
were originally brought by the Company in the United States District Court for the District of Delaware. The settlements are included
in the statement of operations under Legal settlements, net within the Life Science segment for the fiscal year ended July 31,
2016.
As of January 31, 2017, there
are seven pending cases originally brought by the Company in the United States District Court for the District of Delaware alleging
patent infringements against various companies.
For the cases involving Gen-Probe/Hologic, Roche, and Becton Dickinson,
the court has set a summary judgment argument hearing in April 2017, and trial dates in October, November and December 2017.
For the case involving Abbott, the court has set summary judgment briefing deadlines through August 2017 but has not set
a trial date. In another case involving Hologic, the court entered a scheduling order with fact and expert discovery deadlines
through September 2018, a summary judgment hearing date in February 2019 and a trial date in May 2019. There can be no assurance
that the Company will be successful in these litigations. Even if the Company is not successful, management does not believe that
there will be a significant adverse monetary impact on the Company.
The Company is party to other claims, legal actions, complaints, and
contractual disputes that arise in the ordinary course of business. The Company believes that any liability that may ultimately
result from the resolution of these matters will not, individually or in the aggregate, have a material adverse effect on its financial
position or results of operations.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion of our financial condition and results of
operations should be read in conjunction with our consolidated financial statements and related notes and other information included
elsewhere in this Quarterly Report on Form 10-Q.
Forward-Looking Statements
Our disclosure and analysis in this report, including but not limited
to the information discussed in this Item 2, contain forward-looking information about our Company’s financial results and
estimates, business prospects and products in research and development that involve substantial risks and uncertainties. From time
to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Forward-looking
statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they
do not relate strictly to historic or current facts. They use words such as “anticipate”, “estimate”, “expect”,
“project”, “intend”, “plan”, “believe”, “will”, and other words and
terms of similar meaning in connection with any discussion of future operations or financial performance.
In particular, these include statements relating to future actions,
prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses,
interest rates, foreign currency rates, intellectual property matters, the outcome of contingencies, such as legal proceedings,
and financial results.
We cannot guarantee that any forward-looking statement will be realized,
although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties
and inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove
inaccurate, actual results could vary materially from past results and those anticipated, estimated or projected. As a result,
investors are cautioned not to place undue reliance on any of our forward-looking statements. Investors should bear this in mind
as they consider forward-looking statements. We do not assume any obligation to update or revise any forward-looking statement
that we make, even if new information becomes available or other events occur in the future. We are also affected by other factors
that may be identified from time to time in our filings with the Securities and Exchange Commission, some of which are set forth
in Item 1A - Risk Factors in our Form 10-K filing for the July 31, 2016 fiscal year. You are advised to consult any further disclosures
we make on related subjects in our Forms 10-Q, 8-K and 10-K reports to the Securities and Exchange Commission. Although we have
attempted to provide a list of important factors which may affect our business, investors are cautioned that other factors may
prove to be important in the future and could affect our operating results. You should understand that it is not possible to predict
or identify all such factors or to assess the impact of each factor or combination of factors on our business. Consequently, you
should not consider any such list to be a complete set of all potential risks or uncertainties.
Overview
Enzo Biochem, Inc. (the “Company” “we”, “our”
or “Enzo”) is a vertically integrated growth-oriented bioscience company focusing on delivering and applying advanced
technology capabilities to produce affordable reliable products and services to allow our customers to meet their clinical needs.
We develop, manufacture and sell our proprietary technology solutions and platforms to clinical laboratories, specialty clinics
and researchers and physicians globally. Enzo’s structure and business strategy represents the culmination of years
of extensive planning and work. The Company now has the unique ability to offer low cost, high performance products and services
in molecular diagnostics, which ideally positions it to capitalize on the reimbursement pressures facing diagnostic labs.
Our pioneering work in genomic analysis coupled with our extensive patent estate and enabling platforms have positioned the Company
to continue to play an important role in the rapidly growing molecular medicine marketplaces.
Enzo technology solutions and platforms and unique operational structure
is designed to reduce overall healthcare costs to both government and private insurers.
Our proprietary
technology platforms reduces our customers’ need for multiple, specialized instruments, and offer a variety of throughput capabilities
together with a demonstrated high level of accuracy and reproducibility. Our genetic test panels are focused on large and growing
markets primarily in the areas of personalized medicine, women’s health, infectious diseases and genetic disorders.
For example, our AMPIPROBE® technology platform can lead to the
development of an entire line of nucleic acid clinical products that can allow laboratories to offer a complete menu of services
at a cost that allows them to enjoy an acceptable margin. Our technology solutions provide tools to physicians, clinicians and
other health care providers to improve detection, treatment and monitoring of a broad spectrum of diseases and conditions.
In addition, reduced patient to physician office visits translates into lower healthcare processing costs and greater patient
services.
In the course of our research and development activities, we have
built a substantial portfolio of intellectual property assets, comprising 314 issued patents worldwide, and over 146 pending patent
applications, along with extensive enabling technologies and platforms.
Below are brief descriptions of each of our operating segments (See
Note 11 in the Notes to Consolidated Financial Statements):
Enzo Clinical Labs
is a clinical reference laboratory
providing a wide range of clinical services to physicians, medical centers, other clinical labs and pharmaceutical companies. The
Company believes having a College of American Pathologists (“CAP”) certified medical laboratory located in New York
provides us the opportunity to more rapidly introduce cutting edge products and services to the clinical marketplace. Enzo Clinical
Labs offers an extensive menu of molecular and other clinical laboratory tests and procedures used in patient care by physicians
to establish or support a diagnosis, monitor treatment or medication, and search for an otherwise undiagnosed condition. Our laboratory
is equipped with state of the art communication and connectivity solutions enabling the rapid transmission, analysis and interpretation
of generated data. We operate a full service clinical laboratory in Farmingdale, New York, a network of over 30 patient service
centers throughout New York and New Jersey, a free standing “STAT” or rapid response laboratory in New York City and
a full service phlebotomy, in-house logistics department, and information technology department. Given our license in New York
State, we are able to offer testing services to clinical laboratories and physicians in the majority of states nationwide.
Enzo Life Sciences
manufactures, develops and markets
products and tools to clinical research, drug development and bioscience research customers worldwide. Underpinned by broad technological
capabilities, Enzo Life Sciences has developed proprietary products used in the identification of genomic information by laboratories
around the world. Information regarding our technologies can be found in the “Core Technologies” section of our Form
10-K filing for the July 31, 2016 fiscal year. We are internationally recognized and acknowledged as a leader in the development,
manufacturing validation and commercialization of numerous products serving not only the clinical research market but life sciences
researchers in the fields of cellular analysis and drug discovery, among others. Our operations are supported by global operations
allowing for the efficient marketing and delivery of our products around the world.
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 115 patents and patent applications.
Results of Operations
Three months ended January 31, 2017 compared
to January 31, 2016
(in 000s)
Comparative Financial Data for the Three Months Ended January 31,
|
|
2017
|
|
|
2016
|
|
|
Increase
(Decrease)
|
|
|
%
Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical laboratory services
|
|
$
|
18,837
|
|
|
$
|
17,523
|
|
|
$
|
1,314
|
|
|
|
7
|
|
Product revenues
|
|
|
6,983
|
|
|
|
6,578
|
|
|
|
405
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty and license fee income
|
|
|
440
|
|
|
|
459
|
|
|
|
(19
|
)
|
|
|
(4
|
)
|
Total revenues
|
|
|
26,260
|
|
|
|
24,560
|
|
|
|
1,700
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs, expenses and legal settlements, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of clinical laboratory services
|
|
|
11,052
|
|
|
|
10,535
|
|
|
|
517
|
|
|
|
5
|
|
Cost of product revenues
|
|
|
3,520
|
|
|
|
3,206
|
|
|
|
314
|
|
|
|
10
|
|
Research and development
|
|
|
483
|
|
|
|
861
|
|
|
|
(378
|
)
|
|
|
(44
|
)
|
Selling, general and administrative
|
|
|
11,165
|
|
|
|
11,280
|
|
|
|
(115
|
)
|
|
|
(1
|
)
|
Provision for uncollectible accounts receivable
|
|
|
679
|
|
|
|
459
|
|
|
|
220
|
|
|
|
48
|
|
Legal fee expense
|
|
|
370
|
|
|
|
2,411
|
|
|
|
(2,041
|
)
|
|
|
(85
|
)
|
Legal settlements, net
|
|
|
—
|
|
|
|
(11,650
|
)
|
|
|
11,650
|
|
|
|
**
|
|
Total costs, expenses and legal settlements, net
|
|
|
27,269
|
|
|
|
17,102
|
|
|
|
10,167
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(1,009
|
)
|
|
|
7,458
|
|
|
|
(8,467
|
)
|
|
|
**
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
79
|
|
|
|
(42
|
)
|
|
|
121
|
|
|
|
**
|
|
Other
|
|
|
24
|
|
|
|
11
|
|
|
|
13
|
|
|
|
118
|
|
Foreign currency loss
|
|
|
(94
|
)
|
|
|
(388
|
)
|
|
|
294
|
|
|
|
76
|
|
(Loss) income before income taxes
|
|
$
|
(1,000
|
)
|
|
$
|
7,039
|
|
|
$
|
(8,039
|
)
|
|
|
**
|
|
** not meaningful
Consolidated Results:
The “2017 period” and the “2016 period” refer
to the three months ended January 31, 2017 and 2016, respectively.
Clinical laboratory services revenues for the 2017 period were $18.8
million compared to $17.5 million in the 2016 period, an
increase of $1.3 million or 7%.
The
increase is attributed to molecular testing volume in women’s health markets and the addition of new accounts versus the
2016 period.
Product revenues for the 2017 period were $7.0 million compared to
$6.6 million in the 2016 period, an increase of $0.4 million or 6%. The increase was due to higher product order volume in both
the United States and foreign markets of $0.5 million and offset by the negative impact of foreign currency translation of $0.1
million.
The cost of clinical laboratory services during the 2017 period was
$11.0 million as compared to $10.5 million in the 2016 period, an increase of $0.5 million or 5% primarily due to the volume increase
in clinical laboratory services revenue from molecular testing.
The cost of product revenues during the 2017 period was $3.5 million
compared to $3.2 million in the 2016 period, an increase of $0.3 million or 10% due to higher sales
.
The gross profit margin was 50% in the 2017 period and 51% in the 2016 period due to the mix of products sold.
Research and development expenses were $0.5 million versus $0.9 million
in the 2016 period, a decrease of $0.4 million or 44%. The expense in the Therapeutics segment decreased $0.2 million due to the
impact of an adjustment decreasing an obligation for clinical trial activity. The expense for the Life Sciences segment decreased
$0.1 million due to lower compensation expense.
Selling, general and administrative expenses were approximately $11.2
million during the 2017 period versus $11.3 million during the 2016 period, a decrease of $0.1 million or 1%. The Clinical Lab
segment expense increased $0.3 million due to compensation related costs. The Other segment expense decreased $0.5 million net,
due to a decrease of $1.0 million in proxy expenses relating to our annual stockholders’ meeting in January 2017 as compared
to the meeting in January 2016, partially offset by an increase of $0.5 million for salary related expenses.
The provision for uncollectible accounts receivable, primarily related
to the Clinical Labs segment, was approximately $0.7 million in the 2017 period and $0.5 million in the 2016 period, an increase
of $0.2 million. As a percentage of Clinical laboratory services, the provision for uncollectible accounts receivable relating
to the Clinical Labs segment was 3.2% in the 2017 period and 2.7% in the 2016 period. The increase is due to the increase in genetic
testing volume and the related higher self-pay patient responsibility balances.
Legal fee expense was $0.4 million during the 2017 period compared
to $2.4 million in the 2016 period, a decrease of $2.0 million due to the timing of legal activity and related costs associated
with on-going patent litigation where the Company is plaintiff. Legal fee expense in the 2016 period also included $0.4 million
for contested proxy costs relating to our annual stockholders’ meeting in January 2016.
There were no legal settlements during the 2017 period. Legal settlements,
net was $(11.7) million in the 2016 period. During the 2016 period the Company as plaintiff finalized and executed a settlement
agreement with Agilent Technologies, Inc. relating to a patent infringement claim and collected proceeds held in escrow relating
to the PerkinElmer, Inc. and Molecular Probes, Inc. settlements, totaling $13.2 million. The Company also recorded an additional
charge of $1.5 million relating to the 2014 settlement with the U.S. Department of Justice, due to the achievement of certain financial
milestones.
Segment Results:
Clinical Labs
Revenue from laboratory services for the 2017 period were $18.8 million
compared to $17.5 million in the 2016 period. The increase of $1.3 million or 7% is attributed to increased molecular testing volume
and the addition of new accounts. Cost of sales during the 2017 period was $11.0 million as compared to $10.5 million in the 2016
period, an increase of $0.5 million due to higher testing volume. Gross profit margin was 41% in the 2017 period and 40% in the
2016 period. As a percentage of revenues, the provision for uncollectable accounts increased to 3.2% as compared to 2.7% in the
2016 period and is due to the increase in genetic testing volume and the related higher self-pay patient responsibility balances.
Income before taxes was $1.2 million for 2017 period as compared to loss before income taxes of $(0.7) million, a favorable change
of $1.9 million. The 2016 period included a $1.5 million charge for the legal settlement with the U.S. Department of Justice, due
to the achievement of certain financial milestones.
Life Sciences
Product revenues for the 2017 period was $7.0 million compared to
$6.6 million in 2016, an increase of $0.4 million or 6% in the 2017 period due to increases in product sales of $0.5 million in
both the United States and foreign markets and offset by the negative impact of foreign currency translation. The segment’s
gross profit increased to $3.9 million in the 2017 period compared to $3.8 million in the 2016 period, due to the impact of higher
product revenues. Income before taxes was $0.3 million for the 2017 period as compared to $13.2 million for the 2016 period, a
decrease of $12.9 million. The 2016 period includes $13.2 million for patent litigation settlements previously described.
Therapeutics
The Therapeutics segment was breakeven in the 2017 period due to the
impact of an adjustment decreasing an obligation for clinical trial activity, versus a loss before income taxes of approximately
$0.2 million in the 2016 period.
Other
The Other segment’s loss before taxes for the 2017 period was
approximately $2.6 million as compared to $5.2 million for the 2016 period, an improvement of $2.6 million. During the 2017 period,
legal fee expense associated with on-going patent litigation declined $1.6 million partially offset by an increase of $0.5 million
for salary related expenses. The 2016 period also included $1.5 million of consulting and legal fee expenses relating to contested
proxy costs for our annual stockholders’ meeting which took place in January 2016.
Results of Operations
Six months ended January 31, 2017 compared
to January 31, 2016
(in 000s)
Comparative Financial Data for the Six Months Ended January 31,
|
|
2017
|
|
|
2016
|
|
|
Increase
(Decrease)
|
|
|
%
Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical laboratory services
|
|
$
|
37,395
|
|
|
$
|
34,613
|
|
|
$
|
2,782
|
|
|
|
8
|
|
Product revenues
|
|
|
14,409
|
|
|
|
14,265
|
|
|
|
144
|
|
|
|
1
|
|
Royalty and license fee income
|
|
|
740
|
|
|
|
859
|
|
|
|
(119
|
)
|
|
|
(14
|
)
|
Total revenues
|
|
|
52,544
|
|
|
|
49,737
|
|
|
|
2,807
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs, expenses and legal settlements, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of clinical laboratory services
|
|
|
21,948
|
|
|
|
20,867
|
|
|
|
1,081
|
|
|
|
5
|
|
Cost of product revenues
|
|
|
6,829
|
|
|
|
6,817
|
|
|
|
12
|
|
|
|
—
|
|
Research and development
|
|
|
1,305
|
|
|
|
1,728
|
|
|
|
(423
|
)
|
|
|
(24
|
)
|
Selling, general and administrative
|
|
|
22,639
|
|
|
|
21,505
|
|
|
|
1,134
|
|
|
|
5
|
|
Provision for uncollectible accounts receivable
|
|
|
1,348
|
|
|
|
1,163
|
|
|
|
185
|
|
|
|
16
|
|
Legal fee expense
|
|
|
742
|
|
|
|
4,012
|
|
|
|
(3,270
|
)
|
|
|
(82
|
)
|
Legal settlements, net
|
|
|
—
|
|
|
|
(18,450
|
)
|
|
|
18,450
|
|
|
|
**
|
|
Total costs, expenses and legal settlements, net
|
|
|
54,811
|
|
|
|
37,642
|
|
|
|
17,169
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(2,267
|
)
|
|
|
12,095
|
|
|
|
(14,362
|
)
|
|
|
**
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
125
|
|
|
|
(82
|
)
|
|
|
207
|
|
|
|
**
|
|
Other
|
|
|
143
|
|
|
|
65
|
|
|
|
78
|
|
|
|
120
|
|
Foreign currency loss
|
|
|
(455
|
)
|
|
|
(518
|
)
|
|
|
63
|
|
|
|
12
|
|
(Loss) income before income taxes
|
|
$
|
(2,454
|
)
|
|
$
|
11,560
|
|
|
$
|
(14,014
|
)
|
|
|
**
|
|
** not meaningful
Consolidated Results:
The “2017 period” and the “2016 period” refer
to the six months ended January 31, 2017 and 2016, respectively.
Clinical laboratory services revenues for the 2017 period were $37.4
million compared to $34.6 million in the 2016 period, an
increase of $2.8 million or 8%.
The
increase is attributed to molecular testing volume in women’s health markets and the addition of new accounts versus the
2016 period.
Product revenues for the 2017 period were $14.4 million compared to
$14.3 million in the 2016 period, an increase of $0.1 million or 1%. The increase was due to higher product order volume in both
the United States and in foreign markets of $0.3 million and offset by the negative impact of foreign currency translation.
The cost of clinical laboratory services during the 2017 period was
$22.0 million as compared to $20.9 million in the 2016 period, an increase of $1.1 million or 5% primarily due to the volume increase
in clinical laboratory services.
The cost of product revenues was $6.8 million in both the 2017 and
2016 periods
.
The Life Sciences segment gross profit margin including royalty income was 55%
in both the 2017 and 2016 periods.
Research and development expenses were $1.3 million versus $1.7 million
in the 2016 period, a decrease of $0.4 million or 24%. The expense for the Therapeutics segment decreased $0.2 million due to the
impact of an adjustment decreasing an obligation for clinical trial activity. The expense for the Life Sciences segment decreased
$0.2 million due to lower compensation expense.
Selling, general and administrative expenses were approximately $22.6
million during the 2017 period versus $21.5 million during the 2016 period, an increase of $1.1 million or 5%. The Clinical Lab
segment expense increased $0.9 million due to compensation related costs of $0.6 million, an increase in collection expenses for
self-pay patient receivables of $0.2 million, and an increase of $0.1 million in miscellaneous administrative costs. The Other
segment expense increased $0.2 million net due to increases for salary related expenses of $1.2 million, partially offset by a
decrease of $1.0 million in proxy expenses relating to our annual stockholders’ meeting in January 2017 as compared to the
meeting in January 2016.
The provision for uncollectible accounts receivable, primarily related
to the Clinical Labs segment, was approximately $1.3 million in the 2017 period and $1.1 million in the 2016 period, an increase
of $0.2 million. As a percentage of Clinical laboratory services, the provision for uncollectible accounts receivable relating
to the Clinical Labs segment was 3.4% in both the 2017 and 2016 periods.
Legal fee expense was $0.7 million during the 2017 period compared
to $4.0 million in the 2016 period, a decrease of $3.3 million due to the timing of legal activity and related costs associated
with on-going patent litigation where the Company is plaintiff. Legal fee expense in the 2016 period also included $0.4 million
for contested proxy costs relating to our January 2016 annual stockholders’ meeting.
There were no legal settlements during the 2017 period. Legal settlements,
net were $(18.5) million in the 2016 period. During the 2016 period the Company as plaintiff finalized and executed settlement
agreements with Affymetrix and Agilent Technologies, Inc. relating to patent infringement claims and collected proceeds held in
escrow relating to the PerkinElmer, Inc. and Molecular Probes, Inc. settlements, totaling $20.0 million. The Company also recorded
an additional charge of $1.5 million relating to the 2014 settlement with the U.S. Department of Justice, due to the achievement
of certain financial milestones.
Segment Results:
Clinical Labs
Revenue from laboratory services for the 2017 period were $37.4 million
compared to $34.6 million in the 2016 period. The increase of $2.8 million is attributed to increased molecular testing volume
and the addition of new accounts. Cost of sales during the 2017 period was $22.0 million as compared to $20.9 million in the 2016
period, an increase of $1.1 million due to higher testing volume. Gross profit margin was 41% in the 2017 period and 40% in the
2016 period. As a percentage of revenues, the provision for uncollectable accounts was 3.4% for the 2017 and 2016 period. Income
before taxes was $2.3 million for 2017 period as compared to breakeven in the 2016 period, an increase of $2.3 million. The 2016
period includes an additional $1.5 million charge for the legal settlement with the U.S. Department of Justice, due to the achievement
of certain financial milestones.
Life Sciences
Product revenues for the 2017 period were $14.4 million compared to
$14.3 million in the 2016 period, an increase of $0.1 million or 1%. The increase is due to higher product sales of $0.3 million
in the United States and foreign markets and the negative impact of foreign currency translation. The segment’s gross profit
was $8.3 million in both the 2017 and 2016 periods. Due to lower depreciation of foreign currencies versus the US dollar, in particular
the British pound in the 2017 period versus the 2016 period, the foreign currency loss was $0.4 million compared to a loss of $0.5
million in the 2016 period, a favorable change of $0.1 million in the 2017 period. Income before taxes was $0.8 million for the
2017 period as compared to $20.7 million for the 2016 period, a decrease of $19.9 million. The 2016 period includes $20.0 million
for patent litigation settlements previously described.
Therapeutics
The Therapeutics segment’s operating loss before income taxes
was approximately $0.2 million and $0.4 million in the 2017 and 2016 periods, respectively, a decrease of $0.2 million due to the
impact of an adjustment decreasing an obligation for clinical trial activity.
Other
The Other segment’s operating loss before taxes for the 2017
period was approximately $5.4 million as compared to $8.7 million for the 2016 period, an improvement of $3.3 million. During the
2017 period, legal fee expense associated with on-going patent litigation declined $2.9 million and interest income increased $0.2
million, partially offset by an increase in salary related expenses $1.2 million. The 2016 period also included $1.5 million of
consulting and legal fee expenses relating to contested proxy costs for the 2016 period’s annual stockholders’ meeting.
Liquidity and Capital Resources
At January 31, 2017, the Company had cash and cash equivalents of
$62.4 million of which $0.6 million was in foreign accounts, as compared to cash and cash equivalents of $67.8 million, of which
$0.5 million was in foreign accounts at July 31, 2016. 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 $69.3 million at January 31, 2017 compared to $70.8 million at July 31, 2016. The decrease in
working capital of $1.5 million was primarily due to the period loss and net changes in operating assets and liabilities.
Net cash used in operating activities as of January 31, 2017 was approximately
$2.8 million as compared to cash provided by operating activities of $20.1 million in fiscal 2016, a decrease of approximately
$22.9 million. The decrease is largely due to $18.5 million in net legal settlements included in the 2016 period and net changes
in assets and liabilities.
Net cash used in investing activities in fiscal 2017 and 2016 was
approximately $0.7 million and $0.9 million, respectively, which consists of capital expenditures.
Net cash used in financing activities in fiscal 2017 was approximately
$1.8 million as compared to $0.2 million in fiscal 2016. The change of $1.6 million is mainly due to the expiration and repayment
of our credit agreement of $1.6 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 MidCap Financial Services, LLC (formerly
Healthcare Finance Group, LLC).
The Credit Agreement expired and was repaid in full on December 7, 2016.
The Company continued to review all operating units to further reduce
annual operating expenditures in fiscal 2017. Revenues and operating results at the Clinical Labs segment improved, and revenues
for the Life Sciences segment increased slightly versus fiscal 2016. If Life Sciences segment revenues were to significantly decline,
it could be required to record impairments of its intangible assets, which last occurred in fiscal 2012. The Company believes that
its current cash and cash equivalents level, and utilization of the Controlled Equity Offering program if necessary, as disclosed
in Form 10-K Note 10 to the financial statements are sufficient for its foreseeable liquidity and capital resource needs over at
least 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. Our liquidity plans are subject to a number of risks and uncertainties, including
those described in the Item 1A. “Risk Factors” section of our Form 10-K for the year ended July 31, 2016, some of which
are outside our control. Macroeconomic conditions could limit our ability to successfully execute our business plans and therefore
adversely affect our liquidity plans.
See our Form 10-K for the fiscal year ended July 31, 2016 for Forward
Looking Cautionary Statements.
Contractual Obligations
There have been no material changes to our Contractual Obligations
as reported in our Form 10-K for the fiscal year ended July 31, 2016.
Management is not aware of any material claims, disputes or settled
matters concerning third party reimbursement that would have a material effect on our financial statements, except as disclosed
in Note 12 to the Consolidated Financial Statement.
Off-Balance Sheet Arrangements
The Company does not have any “off-balance sheet arrangements”
as such term is defined in Item 303(a)(4) of Regulation S-K.
Critical Accounting Policies
The Company’s discussion and analysis of its financial condition
and results of operations are based upon Enzo Biochem, Inc.’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 Clinical Labs are recognized upon completion of the
testing process for a specific patient and reported to the ordering physician. These revenues and the associated accounts receivable
are based on gross amounts billed or billable for services rendered, net of a contractual adjustment, which is the difference between
amounts billed to payers and the expected approved reimbursable settlements from such payers.
The following table represents the clinical laboratory segment’s
net revenues and percentages by revenue category:
|
|
Three months ended
January 31, 2017
|
|
|
Three months ended
January 31, 2016
|
|
Revenue category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party payer
|
|
$
|
10,773
|
|
|
|
57
|
%
|
|
$
|
10,105
|
|
|
|
58
|
%
|
Patient self-pay
|
|
|
2,772
|
|
|
|
15
|
|
|
|
3,524
|
|
|
|
20
|
|
Medicare
|
|
|
2,796
|
|
|
|
15
|
|
|
|
2,756
|
|
|
|
16
|
|
HMO’s
|
|
|
2,496
|
|
|
|
13
|
|
|
|
1,138
|
|
|
|
6
|
|
Total
|
|
$
|
18,837
|
|
|
|
100
|
%
|
|
$
|
17,523
|
|
|
|
100
|
%
|
|
|
Six months ended
January 31, 2017
|
|
|
Six months ended
January 31, 2016
|
|
Revenue category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party payer
|
|
$
|
20,966
|
|
|
|
56
|
%
|
|
$
|
19,798
|
|
|
|
57
|
%
|
Patient self-pay
|
|
|
5,875
|
|
|
|
16
|
|
|
|
6,763
|
|
|
|
20
|
|
Medicare
|
|
|
5,631
|
|
|
|
15
|
|
|
|
5,753
|
|
|
|
17
|
|
HMO’s
|
|
|
4,923
|
|
|
|
13
|
|
|
|
2,299
|
|
|
|
6
|
|
Total
|
|
$
|
37,395
|
|
|
|
100
|
%
|
|
$
|
34,613
|
|
|
|
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
12 in the Notes to Consolidated Financial Statements.
Other than the Medicare program, one provider whose programs
are included in the “Third-party payers” and “Health Maintenance Organizations” (“HMO’s”)
categories represents approximately 39% and 31% of the Clinical Labs segment net revenue for the three months ended January 31,
2017 and 2016 respectively, and 37% and 30% for the six months ended January 31, 2017 and 2016, respectively.
Contractual Adjustment
The Company’s estimate of contractual adjustment is based on
significant assumptions and judgments, such as its interpretation of payer reimbursement policies, and bears the risk of change.
The estimation process is based on the experience of amounts approved as reimbursable and ultimately settled by payers, versus
the corresponding gross amount billed to the respective payers. The contractual adjustment is an estimate that reduces gross revenue,
based on gross billing rates, to amounts expected to be approved and reimbursed. Gross billings are based on a standard fee schedule
we set for all third party payers, including Medicare, HMO’s and managed care. The Company adjusts the contractual adjustment
estimate quarterly, based on its evaluation of current and historical settlement experience with payers, industry reimbursement
trends, and other relevant factors.
The other relevant factors that affect our contractual adjustment
include the monthly and quarterly review of: 1) current gross billings and receivables and reimbursement by payer, 2) current changes
in third party arrangements and 3) the growth of in-network provider arrangements and managed care plans specific to our Company.
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 from
these programs.
During the three months ended January 31, 2017 and 2016, the contractual
adjustment percentages, determined using current and historical reimbursement statistics, were 82.8% and 84.2%, respectively, of
gross billings. During the six months ended January 31, 2017 and 2016, the contractual adjustment percentages, determined using
current and historical reimbursements statistics, were 83.4% and 84.3%, respectively; the decrease is due to the increase in molecular
testing performed. In general, 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 molecular tests we perform. However, there can be no assurance
that we can increase the number of tests we perform or that if we do increase the number of tests we perform, that we can maintain
that higher number of tests performed, or that an increase in the number of tests we perform would result in increased revenue.
The Company estimates (by using a sensitivity analysis) that each
1% point change in the contractual adjustment percentage could result in a change in clinical laboratory services revenues of approximately
$2.3 million and $2.2 million for the six months ended January 31, 2017 and 2016, and a change in the net accounts receivable of
approximately $0.6 million as of January 31, 2017.
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 contractual adjustments recorded during the current period have on 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;
and
|
|
|
|
|
•
|
an analysis of current gross billings and receivables by payer.
|
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are reported at realizable value, net of allowances
for doubtful accounts, which is estimated and recorded in the period of the related revenue.
The following is a table of the Company’s net accounts receivable
by segment. The Clinical Labs segment’s net receivables are detailed by billing category and as a percent to its total net
receivables. At January 31, 2017, and July 31, 2016, approximately 73% and 71%, respectively, of the Company’s net accounts
receivable relates to its Clinical Labs business, which operates in the New York and New Jersey medical communities.
The Life Sciences segment’s accounts receivable, of which $0.9
million or 22% and $1.2 million or 29% represents foreign receivables as of January 31, 2017 and July 31, 2016, includes royalty
receivables of $0.5 million, as of January 31, 2017 and July 31, 2016, from Qiagen Corporation.
Net accounts receivable
Billing category
|
|
As of
January 31, 2017
|
|
|
As of
July 31, 2016
|
|
Clinical Labs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third party payers
|
|
$
|
6,574
|
|
|
|
59
|
%
|
|
$
|
5,738
|
|
|
|
55
|
%
|
Patient self-pay
|
|
|
1,928
|
|
|
|
17
|
|
|
|
1,676
|
|
|
|
16
|
|
Medicare
|
|
|
1,492
|
|
|
|
13
|
|
|
|
1,609
|
|
|
|
16
|
|
HMO’s
|
|
|
1,202
|
|
|
|
11
|
|
|
|
1,341
|
|
|
|
13
|
|
Total Clinical Labs
|
|
|
11,196
|
|
|
|
100
|
%
|
|
|
10,364
|
|
|
|
100
|
%
|
Total Life Sciences
|
|
|
4,159
|
|
|
|
|
|
|
|
4,228
|
|
|
|
|
|
Total accounts receivable
|
|
$
|
15,355
|
|
|
|
|
|
|
$
|
14,592
|
|
|
|
|
|
Changes in the Company’s allowance for doubtful accounts are
as follows:
|
|
January 31, 2017
|
|
|
July 31, 2016
|
|
|
|
|
|
Beginning balance
|
|
$
|
3,517
|
|
|
$
|
1,786
|
|
Provision for doubtful accounts
|
|
|
1,348
|
|
|
|
2,336
|
|
Write-offs, net
|
|
|
(1,184
|
)
|
|
|
(605
|
)
|
Ending balance
|
|
$
|
3,681
|
|
|
$
|
3,517
|
|
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 reduces the allowance in future
accounting periods based on write-offs during those periods. It bases the estimate for the allowance on the evaluation of historical
experience of accounts going to collections and the net amounts not received. Accounts going to collection include 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 our estimate of the uncollected portion of receivables from self-payers,
including deductibles and copayments, which are subject to credit risk and patients’ ability to pay.
As at January 31, 2017 and 2016, the Company recategorized to collections
customers whose accounts receivable had been outstanding more than 210 days. The Company fully reserves through its contractual
allowances amounts that 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.
The allowance for doubtful accounts as a percentage of total accounts
receivable at January 31, 2016 and July 31, 2016 was 19.3% and 19.4%, respectively. During the 2017 period a higher allowance was
required due to the volume increase in genetic testing.
The following table indicates the Clinical Labs aged gross receivables
by payer group which is prior to adjustment to gross receivables for: 1) contractual adjustment, 2) fully reserved balances not
yet written off, and 3) other revenue adjustments.
As of January 31, 2017
|
|
Total
|
|
|
%
|
|
|
Third Party Payers
|
|
|
%
|
|
|
Self-Pay
|
|
|
%
|
|
|
Medicare
|
|
|
%
|
|
|
HMO’s
|
|
|
%
|
|
1-30 days
|
|
$
|
29,895
|
|
|
|
51
|
|
|
$
|
18,712
|
|
|
|
47
|
|
|
$
|
3,907
|
|
|
|
47
|
|
|
$
|
3,951
|
|
|
|
59
|
|
|
$
|
3,325
|
|
|
|
92
|
|
31-60 days
|
|
|
8,701
|
|
|
|
15
|
|
|
|
5,492
|
|
|
|
14
|
|
|
|
2,278
|
|
|
|
27
|
|
|
|
766
|
|
|
|
11
|
|
|
|
165
|
|
|
|
5
|
|
61-90 days
|
|
|
5,082
|
|
|
|
9
|
|
|
|
3,248
|
|
|
|
8
|
|
|
|
1,212
|
|
|
|
15
|
|
|
|
530
|
|
|
|
8
|
|
|
|
92
|
|
|
|
2
|
|
91-120 days
|
|
|
3,868
|
|
|
|
7
|
|
|
|
2,768
|
|
|
|
7
|
|
|
|
629
|
|
|
|
8
|
|
|
|
452
|
|
|
|
7
|
|
|
|
19
|
|
|
|
1
|
|
121-150 days
|
|
|
2,616
|
|
|
|
4
|
|
|
|
2,018
|
|
|
|
5
|
|
|
|
192
|
|
|
|
2
|
|
|
|
403
|
|
|
|
6
|
|
|
|
3
|
|
|
|
—
|
|
Greater than 150 days*
|
|
|
8,117
|
|
|
|
14
|
|
|
|
7,371
|
|
|
|
19
|
|
|
|
138
|
|
|
|
1
|
|
|
|
599
|
|
|
|
9
|
|
|
|
9
|
|
|
|
—
|
|
Totals
|
|
$
|
58,279
|
|
|
|
100
|
%
|
|
$
|
39,609
|
|
|
|
100
|
%
|
|
$
|
8,356
|
|
|
|
100
|
%
|
|
$
|
6,701
|
|
|
|
100
|
%
|
|
$
|
3,613
|
|
|
|
100
|
%
|
As of July 31, 2016
|
|
Total
|
|
|
%
|
|
|
Third Party Payers
|
|
|
%
|
|
|
Self-Pay
|
|
|
%
|
|
|
Medicare
|
|
|
%
|
|
|
HMO’s
|
|
|
%
|
|
1-30 days
|
|
$
|
29,091
|
|
|
|
49
|
|
|
$
|
18,020
|
|
|
|
43
|
|
|
$
|
3,138
|
|
|
|
41
|
|
|
$
|
4,945
|
|
|
|
72
|
|
|
$
|
2,988
|
|
|
|
98
|
|
31-60 days
|
|
|
9,081
|
|
|
|
15
|
|
|
|
6,176
|
|
|
|
15
|
|
|
|
2,253
|
|
|
|
29
|
|
|
|
625
|
|
|
|
9
|
|
|
|
27
|
|
|
|
1
|
|
61-90 days
|
|
|
6,364
|
|
|
|
11
|
|
|
|
3,947
|
|
|
|
9
|
|
|
|
1,987
|
|
|
|
26
|
|
|
|
402
|
|
|
|
6
|
|
|
|
28
|
|
|
|
1
|
|
91-120 days
|
|
|
4,025
|
|
|
|
7
|
|
|
|
3,339
|
|
|
|
8
|
|
|
|
325
|
|
|
|
4
|
|
|
|
354
|
|
|
|
5
|
|
|
|
7
|
|
|
|
—
|
|
121-150 days
|
|
|
3,546
|
|
|
|
5
|
|
|
|
3,279
|
|
|
|
7
|
|
|
|
1
|
|
|
|
—
|
|
|
|
261
|
|
|
|
4
|
|
|
|
5
|
|
|
|
—
|
|
Greater than 150 days**
|
|
|
7,666
|
|
|
|
13
|
|
|
|
7,427
|
|
|
|
18
|
|
|
|
(57
|
)
|
|
|
—
|
|
|
|
292
|
|
|
|
4
|
|
|
|
4
|
|
|
|
—
|
|
Totals
|
|
$
|
59,773
|
|
|
|
100
|
%
|
|
$
|
42,188
|
|
|
|
100
|
%
|
|
$
|
7,647
|
|
|
|
100
|
%
|
|
$
|
6,879
|
|
|
|
100
|
%
|
|
$
|
3,059
|
|
|
|
100
|
%
|
|
|
*
|
Total includes $5,016 fully reserved over 210 days as of January 31, 2017.
|
**
|
Total includes $3,115 fully reserved over 210 days as of July 31, 2016.
|
Income Taxes
The Company accounts for income taxes under the liability method of
accounting for income taxes. Under the liability method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. The liability method requires that any tax benefits recognized for net operating loss carry forwards
and other items be reduced by a valuation allowance where it is not more likely than not the benefits will be realized in the foreseeable
future. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. Under the liability method, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
It is the Company’s policy to provide for uncertain tax positions
and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not
to be sustained upon examination by tax authorities. To the extent the Company prevails in matters for which a liability for an
unrecognized tax benefit is established or is required to pay amounts in excess of the liability, the Company’s effective
tax rate in a given financial statement period may be affected.
Inventory
The Company values inventory at the lower of cost (first-in, first-out)
or net realizable value, which approximates market. Work-in-process and finished goods inventories consist of material, labor,
and manufacturing overhead. Write downs of inventories to net realizable 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 than 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