Washington, D.C. 20549
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant has required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 45 of Regulation S-T (§232.405 of that chapter) during the preceding 12 months (or such shorter
period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer a smaller reporting company, or an emerging growth
company (as defined in Rule 12b-2 of the Exchange Act).
If an emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act.)
As of December 1, 2018, the Registrant had 47,192,429 shares of common
stock outstanding.
Part 1
Financial Information
Item 1
Financial Statements
ENZO BIOCHEM, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
October 31,
2018
(unaudited)
|
|
|
July 31,
2018
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
52,777
|
|
|
$
|
60,041
|
|
Accounts receivable, net of allowances
|
|
|
12,836
|
|
|
|
13,147
|
|
Inventories
|
|
|
7,588
|
|
|
|
7,278
|
|
Prepaid expenses and other
|
|
|
2,307
|
|
|
|
2,734
|
|
Total current assets
|
|
|
75,508
|
|
|
|
83,200
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
7,503
|
|
|
|
7,636
|
|
Goodwill
|
|
|
7,452
|
|
|
|
7,452
|
|
Intangible assets, net
|
|
|
1,625
|
|
|
|
1,886
|
|
Other assets
|
|
|
2,095
|
|
|
|
1,486
|
|
Total assets
|
|
$
|
94,183
|
|
|
$
|
101,660
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable – trade
|
|
$
|
7,155
|
|
|
$
|
9,516
|
|
Accrued liabilities
|
|
|
10,848
|
|
|
|
10,054
|
|
Other current liabilities
|
|
|
190
|
|
|
|
616
|
|
Total current liabilities
|
|
|
18,193
|
|
|
|
20,186
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
320
|
|
|
|
353
|
|
Total liabilities
|
|
$
|
18,513
|
|
|
$
|
20,539
|
|
|
|
|
|
|
|
|
|
|
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: 47,192,429 at October 31, 2018 and 47,182,254 at July 31, 2018
|
|
|
472
|
|
|
|
472
|
|
Additional paid-in capital
|
|
|
331,030
|
|
|
|
330,770
|
|
Accumulated deficit
|
|
|
(258,202
|
)
|
|
|
(252,221
|
)
|
Accumulated other comprehensive income
|
|
|
2,370
|
|
|
|
2,100
|
|
Total stockholders’ equity
|
|
|
75,670
|
|
|
|
81,121
|
|
Total liabilities and stockholders’ equity
|
|
$
|
94,183
|
|
|
$
|
101,660
|
|
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
October 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
|
21,260
|
|
|
|
26,876
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
14,239
|
|
|
|
15,431
|
|
Research and development
|
|
|
728
|
|
|
|
747
|
|
Selling, general and administrative
|
|
|
10,970
|
|
|
|
10,905
|
|
Legal fee expense
|
|
|
1,301
|
|
|
|
431
|
|
Total operating costs and expenses
|
|
|
27,238
|
|
|
|
27,514
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(5,978
|
)
|
|
|
(638
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest
|
|
|
274
|
|
|
|
157
|
|
Other
|
|
|
47
|
|
|
|
36
|
|
Foreign exchange loss
|
|
|
(324
|
)
|
|
|
(195
|
)
|
Loss before income taxes
|
|
|
(5,981
|
)
|
|
|
(640
|
)
|
|
|
|
|
|
|
|
|
|
Benefit for income taxes
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
$
|
(5,981
|
)
|
|
$
|
(640
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.13
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
47,186
|
|
|
|
46,914
|
|
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
October 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net loss
|
|
$
|
(5,981
|
)
|
|
$
|
(640
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
270
|
|
|
|
83
|
|
Comprehensive loss
|
|
$
|
(5,711
|
)
|
|
$
|
(557
|
)
|
The accompanying notes are an integral part of
these consolidated financial statements.
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Three Months Ended October 31, 2018 and 2017
(UNAUDITED)
(in thousands, except share data)
|
|
Common
Stock
Shares Issued
|
|
|
Common Stock Amount
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Deficit
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
Total
Stockholders’
Equity
|
|
Balance at July 31, 2018
|
|
|
47,182,254
|
|
|
$
|
472
|
|
|
$
|
330,770
|
|
|
$
|
(252,221
|
)
|
|
$
|
2,100
|
|
|
$
|
81,121
|
|
Net loss for the period ended October 31, 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,981
|
)
|
|
|
—
|
|
|
|
(5,981
|
)
|
Vesting of restricted stock
|
|
|
175
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercise of stock options
|
|
|
10,000
|
|
|
|
—
|
|
|
|
25
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25
|
|
Share-based compensation charges
|
|
|
—
|
|
|
|
—
|
|
|
|
235
|
|
|
|
—
|
|
|
|
—
|
|
|
|
235
|
|
Foreign currency translation adjustments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
270
|
|
|
|
270
|
|
Balance at October 31, 2018
|
|
|
47,192,429
|
|
|
$
|
472
|
|
|
$
|
331,030
|
|
|
$
|
(258,202
|
)
|
|
$
|
2,370
|
|
|
$
|
75,670
|
|
|
|
Common
Stock
Shares
Issued
|
|
|
Treasury
Stock
Shares
|
|
|
Common
Stock
Amount
|
|
|
Additional
Paid-in
Capital
|
|
|
Treasury
Stock
Amount
|
|
|
Accumulated
Deficit
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
Total
Stockholders’
Equity
|
|
Balance at July 31, 2017
|
|
|
46,506,176
|
|
|
|
—
|
|
|
$
|
465
|
|
|
$
|
328,294
|
|
|
$
|
—
|
|
|
$
|
(241,900
|
)
|
|
$
|
2,013
|
|
|
$
|
88,872
|
|
Net loss for the period ended October 31, 2017
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(640
|
)
|
|
|
—
|
|
|
|
(640
|
)
|
Purchase of treasury stock
|
|
|
—
|
|
|
|
80,751
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(815
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(815
|
)
|
Vesting of restricted stock
|
|
|
1,001
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercise of stock options
|
|
|
487,106
|
|
|
|
—
|
|
|
|
5
|
|
|
|
1,472
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,477
|
|
Share-based compensation charges
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
205
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
205
|
|
Foreign currency translation adjustments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
83
|
|
|
|
83
|
|
Balance at October 31, 2017
|
|
|
46,994,283
|
|
|
|
80,751
|
|
|
$
|
470
|
|
|
$
|
329,971
|
|
|
$
|
(815
|
)
|
|
$
|
(242,540
|
)
|
|
$
|
2,096
|
|
|
$
|
89,182
|
|
The accompanying notes are an integral part of
these consolidated financial statements
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
|
|
Three Months Ended
October 31,
|
|
|
|
2018
|
|
|
2017
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,981
|
)
|
|
$
|
(640
|
)
|
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property, plant and equipment
|
|
|
519
|
|
|
|
521
|
|
Amortization of intangible assets
|
|
|
247
|
|
|
|
228
|
|
Share-based compensation charges
|
|
|
235
|
|
|
|
205
|
|
Accrual for share-based 401(k) employer match expense
|
|
|
196
|
|
|
|
177
|
|
Foreign exchange loss
|
|
|
302
|
|
|
|
198
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
312
|
|
|
|
713
|
|
Inventories
|
|
|
(309
|
)
|
|
|
(198
|
)
|
Prepaid expenses and other assets
|
|
|
449
|
|
|
|
207
|
|
Accounts payable – trade
|
|
|
(2,361
|
)
|
|
|
(819
|
)
|
Accrued liabilities, other current liabilities and other liabilities
|
|
|
187
|
|
|
|
2,003
|
|
Total adjustments
|
|
|
(223
|
)
|
|
|
3,235
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(6,204
|
)
|
|
|
2,595
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(406
|
)
|
|
|
(461
|
)
|
Security deposits and other
|
|
|
(609
|
)
|
|
|
—
|
|
Net cash used in investing activities
|
|
|
(1,015
|
)
|
|
|
(461
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Installment loan and capital lease obligation payments
|
|
|
(59
|
)
|
|
|
(101
|
)
|
Proceeds from exercise of stock options
|
|
|
25
|
|
|
|
658
|
|
Net cash (used in) provided by financing activities
|
|
|
(34
|
)
|
|
|
557
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(11
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(7,264
|
)
|
|
|
2,682
|
|
Cash and cash equivalents - beginning of period
|
|
|
60,041
|
|
|
|
64,167
|
|
Cash and cash equivalents - end of period
|
|
$
|
52,777
|
|
|
$
|
66,849
|
|
The accompanying notes are an integral part of
these consolidated financial statements
.
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of October 31, 2018
(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 October 31, 2018, the consolidated
statements of operations and comprehensive income (loss) for the three months ended October 31, 2018 and 2017, the
consolidated statements of cash flows for the three months ended October 31, 2018 and 2017 and the consolidated statement of
stockholders’ equity for the three months ended October 31, 2018 (the “interim statements”) 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 interim statements should be read in conjunction with the consolidated
financial statements for the year ended July 31, 2018 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, 2018 has been derived
from the audited financial statements at that date. The results of operations for the three months ended October 31, 2018 are
not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2019.
Effect of New Accounting Pronouncements
Adoption of New Accounting Standards
On August 1, 2018, the Company adopted a new accounting standard
issued by the Financial Accounting Standards Board (“FASB”) on revenue recognition using the full retrospective method.
This new accounting standard outlines a single comprehensive model to use in accounting for revenue arising from contracts with
customers. This standard supersedes existing revenue recognition requirements and eliminates most industry-specific revenue recognition
guidance from GAAP. The core principle of the revenue recognition standard is to require an entity to recognize as revenue the
amount that reflects the consideration which it expects to be entitled to when control of goods or services are transferred to
its customers.
As a result of the Company’s adoption of this standard, the majority
of the amounts that were historically classified as bad debt expense, primarily related to patient responsibility, are now considered
an implicit price concession in determining net revenues from clinical services. Accordingly, the Company reports estimated uncollectible
balances associated with patient responsibility as a reduction of the transaction price and therefore as a reduction in net revenues,
when historically these amounts were classified and separately reported as a provision for uncollectible accounts receivable. The
adoption of this standard has no impact on revenues reported for life sciences products. The adoption of this new accounting standard
resulted in increased disclosure, including qualitative and quantitative disclosures about the nature, amount, timing and uncertainty
of revenue and cash flows arising from contracts with customers. For further details, see Note 3. The impact of the adoption of
the standard on consolidated operations and cash flows is presented in the table below:
Adoption of the standard impacted the Company’s reported
results for the three months ended October 31, 2017 as follows:
|
As Previously Reported
|
Adjustment for New
Accounting Standard on Revenue Recognition
|
Reclassification of
Residual
|
As Restated
|
Consolidated Statements of Operations:
|
|
|
|
|
Total Revenues
|
$27,676
|
$(800)
|
—
|
$26,876
|
Provision for uncollectible accounts receivable
|
814
|
(800)
|
$(14)
|
—
|
|
|
|
|
|
Selling, general and administrative expenses
|
10,891
|
—
|
14
|
10,905
|
Net loss
|
(640)
|
—
|
—
|
$(640)
|
|
|
|
|
|
Consolidated Statements of Cash Flows:
|
|
|
|
|
Provision for uncollectible accounts receivable
|
814
|
(814)
|
—
|
—
|
Changes in operating assets and liabilities: Accounts receivable
|
(101)
|
814
|
—
|
713
|
|
|
|
|
|
Balance, July 31, 2018
|
|
|
|
|
Consolidated balance sheet:
|
|
|
|
|
Accounts receivable
|
15,815
|
(2,523)
|
—
|
13,292
|
Less: Allowance for doubtful accounts
|
2,668
|
(2,523)
|
—
|
145
|
Accounts receivable, net of allowance for doubtful accounts
|
13,147
|
—
|
—
|
13,147
|
On August 1, 2018, the Company adopted a new accounting standard
issued by FASB which provides guidance about which changes to the terms or conditions of a share-based payment award require an
entity to apply modification accounting in Topic 718. Adoption of this standard requires amendments in the update applied prospectively
to an award modified on or after the adoption date. For the foreseeable future, any excess income tax benefits or deficiencies
from stock-based compensation, which would be recognized as discrete items within income tax expense rather than additional paid
in capital, will be offset by an equivalent adjustment to the deferred tax valuation allowance. Accordingly, adoption of this standard
had no impact on our reported operations.
Pronouncements Issued but Not Yet Adopted
In February 2016, FASB issued ASU No. 2016-02 –
Leases
(Topic 842),
as amended. 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. As amended
in July 2018, an additional and optional transition method to adopt the new leases standard was established. Under this new transition
method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment
to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative
periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with
current GAAP (Topic 840, Leases).
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 when we record the right of use assets and related lease liabilities for our existing operating leases.
We will recognize expense in the consolidated statement of operations
similar to current lease accounting, in the cost of sales and selling, general and administrative.
In June 2016, FASB issued ASU No. 2016-13
Financial Instruments
– Credit Losses (Topic 326)
. This standard changes the impairment model for most financial instruments, including trade
receivables, from an incurred loss method to a new forward-looking approach, based on expected losses. The estimate of expected
credit losses will require entities to incorporate considerations of historical information, current information and reasonable
and supportable forecasts. Adoption of this standard is required for our annual and interim periods beginning August 1, 2020 and
must be adopted using a modified retrospective transition approach. We are currently assessing the impact of the adoption of this
standard on our results of operations, financial position and cash flows.
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.
Concentration Risk
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 41% and 40% of Clinical Services net revenue for the three
months ended October 31, 2018 and 2017 respectively. Other than the Medicare program, three providers whose programs are
included in either “Third-party payers” and/or “Health Maintenance
Organizations” (“HMO’s”) categories represent approximately 37% and 47% of Clinical Services net
receivables for the three months ended October 31, 2018 and 2017 respectively.
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
months ended October 31, 2018 and 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 months ended October 31, 2018 and 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 135,000 and 931,000, respectively, because their effect would be antidilutive. For the three months
ended October 31, 2018, the effect of approximately 1,330,000 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 months ended October 31, 2017, there were no outstanding “out of the money” options to purchase common shares.
Note 3 – Revenue Recognition
Clinical Services Revenue
Net revenues in the Company’s clinical services business
accounted for 67% and 73% of the Company’s total net revenues for the three months ended October 31, 2018 and 2017, respectively
and are primarily comprised of a high volume of relatively low-dollar transactions. The services business, which provides clinical
testing services, satisfies its performance obligation and recognizes revenues upon completion of the testing process for a specific
patient and reporting to the ordering physician. The Company may also perform clinical testing services for other laboratories
and will recognize revenue from those services when reported to the ordering laboratory. The Company estimates the amount of consideration
it expects to receive from customer groups using the portfolio approach. These estimates of the expected consideration include
the impact of contractual allowances and price concessions on our customer group portfolios consisting of healthcare insurers,
government payers, client payers and patients as described below. Contracts with customers in our laboratory services business
do not contain a financing component, based on the typically limited period of time between performance of services and collection
of consideration. The transaction price includes variable consideration in the form of the contractual allowance and price concessions
as well as the collectability of the transaction based on the patient intent and ability to pay. The Company uses the expected
value method in estimating the amount of the variability included in the transaction price.
The following are descriptions of our laboratory services business
portfolios:
Third party payers and Health Maintenance Organizations (HMO’s)
Reimbursements from third party payers, primarily healthcare
insurers, and HMO’s are based on negotiated fee-for-service schedules and on capitated payment rates. Revenues consist of
amounts billed net of contractual allowances for differences between amounts billed and the estimated consideration the Company
expects to receive from such payers, which considers historical collection and denial experience and the terms of the Company’s
contractual arrangements. Adjustments to the allowances, based on actual receipts from the third-party payers, are recorded upon
settlement.
Collection of the consideration the Company expects to receive
is normally a function of providing complete and correct billing information to these third party payers within the various filing
deadlines, and typically occurs within 60 to 90 days of billing. Provided the Company has billed healthcare insurers accurately
with complete information prior to the established filing deadline, there has historically been little to no collection risk. If
there has been a delay in billing, the Company determines if the amounts in question will likely go past the filing deadline, and
if so, will reserve accordingly for the billing.
Government Payer - Medicare
Reimbursements from Medicare are based on fee-for-service schedules
set by Medicare, which is funded by the government. Revenues consist of amounts billed net of contractual allowances for differences
between amounts billed and the estimated consideration the Company expects to receive from Medicare, which considers historical
collection and denial experience and other factors. Adjustments to the allowances, based on actual receipts from the government
payers, are recorded upon settlement.
Collection of consideration the Company expects to receive is
normally a function of providing the complete and correct billing information within the various filing deadlines and typically
occurs within 60 days of billing. Provided the Company has billed the government payer accurately with complete information prior
to the established filing deadline, there has historically been little to no collection risk. If there has been a delay in billing,
the Company determines if the amounts in question will likely go past the filing deadline, and, if so, it will reserve accordingly
for the billing.
Patient self pay
Uninsured patients are billed based on established patient fee
schedules or fees negotiated with physicians on behalf of their patients. Coinsurance and deductible responsibilities based on
fees negotiated with healthcare insurers are also billed to insured patients and included in this portfolio. Collection of billings
from patients is subject to credit risk and ability of the patients to pay. Revenues consist of amounts billed net of discounts
provided to uninsured patients in accordance with the Company’s policies and implicit price concessions. Implicit price concessions
represent differences between amounts billed and the estimated consideration the Company expects to receive from patients, which
considers historical collection experience and other factors including current market conditions. Adjustments to the estimated
allowances, based on actual receipts from the patients, are recorded upon settlement. Patient billings are generally fully reserved
for when the related billing reaches 210 days outstanding. Balances are automatically written off when they are sent to collection
agencies. Allowances are further adjusted for estimated recoveries of amounts sent to collection agencies based on historical collection
experience, which is regularly monitored. Collection of consideration the Company expects to receive typically occurs within 180
days of billing.
The following table represents clinical services net revenues
and percentages by type of customer:
|
|
Three months ended
October 31, 2018
|
|
|
Three months ended
October 31, 2017
|
|
Revenue category
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party payer
|
|
$
|
7,907
|
|
|
|
55
|
%
|
|
$
|
10,860
|
|
|
|
56
|
%
|
Patient self-pay
|
|
|
1,974
|
|
|
|
14
|
|
|
|
2,859
|
|
|
|
14
|
|
Medicare
|
|
|
2,751
|
|
|
|
19
|
|
|
|
2,985
|
|
|
|
15
|
|
HMO’s
|
|
|
1,665
|
|
|
|
12
|
|
|
|
2,830
|
|
|
|
15
|
|
Total
|
|
$
|
14,297
|
|
|
|
100
|
%
|
|
$
|
19,534
|
|
|
|
100
|
%
|
For the three months ended October 31, 2018 and 2017, all of
the Company’s services were provided within the United States.
Products Revenue and royalty income
Products revenues consist of the sale of single-use products
used in the identification of genomic information and are recognized at a point in time following the transfer of control of such
products to the customer, which generally occurs upon shipment. Payment terms for shipments to end-user and distributor customers
may range from 30 to 90 days. Any claims for credit or return of goods may be made generally within 30 days of receipt. Revenues
are reduced to reflect estimated credits and returns, although historically these adjustments have not been material. Taxes collected
from customers relating to product sales and remitted to governmental authorities are excluded from revenue. Amounts billed to
customers for shipping and handling are included in revenue, while the related shipping and handling costs are reflected in cost
of products.
Royalty income is based on net sales of the Company’s licensed
products by a third party. We recognize royalty income in the period the sales occur based on third party evidence received. During
the three months ended October 31, 2018 and 2017, royalty income was zero and $261, respectively.
Product revenue by geography is as follows:
|
|
October 31,
2018
|
|
|
October 31,
2017
|
|
United States
|
|
$
|
3,879
|
|
|
$
|
3,736
|
|
Europe
|
|
|
1,342
|
|
|
|
1,632
|
|
Rest of world
|
|
|
1,742
|
|
|
|
1,713
|
|
Net product revenues
|
|
$
|
6,963
|
|
|
$
|
7,081
|
|
Note 4 - Supplemental disclosure for statement of cash flows
For the three months ended October 31, 2018 and 2017, income
taxes paid by the Company were $0 and $15, respectively
.
For the three months ended October 31, 2018 and 2017, interest
paid by the Company was $12 and $25, respectively.
For the three months ended October 31, 2018 and 2017, the Company
did not finance any machinery or transportation equipment under installment loans.
Note 5 – Inventories
Inventories consist of the following:
|
|
October 31,
2018
|
|
|
July 31,
2018
|
|
Raw materials
|
|
$
|
797
|
|
|
$
|
754
|
|
Work in process
|
|
|
2,338
|
|
|
|
2,174
|
|
Finished products
|
|
|
4,453
|
|
|
|
4,350
|
|
|
|
$
|
7,588
|
|
|
$
|
7,278
|
|
Note 6 – Goodwill and intangible assets
At October 31, 2018 and July 31, 2018, the Company’s carrying
amount of goodwill, related to Clinical Services is $7,452.
The Company’s change in the carrying amount of intangible
assets, all in the Products segment is as follows:
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
|
July 31, 2018
|
|
$
|
27,347
|
|
|
$
|
(25,461
|
)
|
|
$
|
1,886
|
|
Amortization expense
|
|
|
—
|
|
|
|
(247
|
)
|
|
|
(247
|
)
|
Foreign currency translation
|
|
|
(137
|
)
|
|
|
123
|
|
|
|
(14
|
)
|
October 31, 2018
|
|
$
|
27,210
|
|
|
$
|
(25,585
|
)
|
|
$
|
1,625
|
|
Intangible assets, all finite lived, consist of the following:
|
|
October 31, 2018
|
|
|
July 31, 2018
|
|
|
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Patents
|
|
$
|
11,027
|
|
|
$
|
(10,983
|
)
|
|
$
|
44
|
|
|
$
|
11,027
|
|
|
$
|
(10,980
|
)
|
|
$
|
47
|
|
Customer relationships
|
|
|
11,699
|
|
|
|
(10,118
|
)
|
|
|
1,581
|
|
|
|
11,836
|
|
|
|
(9,997
|
)
|
|
|
1,839
|
|
Total
|
|
$
|
27,210
|
|
|
$
|
(25,585
|
)
|
|
$
|
1,625
|
|
|
$
|
27,347
|
|
|
$
|
(25,461
|
)
|
|
$
|
1,886
|
|
At October 31, 2018, information with respect to intangibles
assets acquired is as follows:
|
|
Useful life assigned
|
|
Weighted average
remaining useful life
|
|
Customer relationships
|
|
8 -15 years
|
|
2 years
|
|
Other intangibles
|
|
10 years
|
|
4 years
|
|
At October 31, 2018, the weighted average remaining useful life
of intangible assets is approximately two years.
Note 7 – Accrued Liabilities
Accrued liabilities consist of the following:
|
|
October 31,
2018
|
|
|
July 31,
2018
|
|
Payroll, benefits, and commissions
|
|
$
|
5,919
|
|
|
$
|
4,870
|
|
Legal fee expense
|
|
|
1,475
|
|
|
|
2,121
|
|
Professional fees
|
|
|
807
|
|
|
|
811
|
|
Other
|
|
|
2,647
|
|
|
|
2,252
|
|
|
|
$
|
10,848
|
|
|
$
|
10,054
|
|
Note 8 – Stockholders’ Equity
Controlled Equity Offering
The Company has 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”). The Company pays Cantor a commission of 3.0% of the aggregate gross
proceeds received under the Sale Agreement. The Company is not obligated to make any sales of the shares under the Sales Agreement.
The offering of shares pursuant to the Sales Agreement will terminate upon the earlier of (a) the sale of all of the shares subject
to the Sales Agreement or (b) the termination of the Sales Agreement by Cantor or the Company, as permitted therein. The initial
agreement contemplated the sale of shares of the Company’s common stock having an aggregate offering price of up to $20.0
million. In December 2014, the Sales Agreement was amended in order for the Company to offer and sell additional shares of Common
Stock having an aggregate offering price of $20.0 million.
On September 1, 2017, the Company filed with the SEC a “shelf”
registration and sales agreement prospectus covering the offering, issuance and sale of our Common Stock that may be issued and
sold under the existing Sales Agreement in an aggregate amount of up to $19.15 million. A total of $150 million of securities may
be sold under this shelf registration, which was declared effective September 15, 2017.
During the three months ended October 31, 2018 and 2017, the
Company did not sell any shares of Common Stock under the Sales Agreement.
Share-based compensation
On January 14, 2011, the Company’s stockholders approved the
adoption of the 2011 Incentive Plan (the “2011 Plan”) which provides for the issuance of equity awards, including among
others, options, restricted stock and restricted stock units for up to 3,000,000 Common Shares. The exercise price of options granted
under the 2011 Plan, and consistent with other Plans, is equal to or greater than fair market value of the Common Stock on the
date of grant. Unless terminated earlier by the Board of Directors, the 2011 Plan will terminate at the earliest of; (a) such time
as no shares of Common Stock remain available for issuance under the 2011 Plan or (b) tenth anniversary of the effective date of
the 2011 Plan. On January 5, 2018, the Company’s stockholders approved the amendment and restatement of the 2011 Plan to
increase the number of shares available for issuance by 2,000,000 bringing the total number of shares available for award under
the 2011 Plan to 5,000,000. Awards outstanding upon expiration of the 2011 Plan shall remain in effect until they have been exercised,
terminated, or have expired.
The amounts of share-based compensation expense recognized in the
periods presented are as follows:
|
|
|
Three months ended
October 31,
|
|
|
|
|
|
2018
|
|
|
|
2017
|
|
|
Stock options
|
|
$
|
232
|
|
|
$
|
202
|
|
|
Restricted stock
|
|
|
3
|
|
|
|
3
|
|
|
|
|
$
|
235
|
|
|
$
|
205
|
|
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
October 31,
|
|
|
|
|
2018
|
|
|
|
2017
|
|
Selling, general and administrative
|
|
|
235
|
|
|
|
205
|
|
|
|
$
|
235
|
|
|
$
|
205
|
|
No excess tax benefits were recognized during the three month periods
ended October 31, 2018 and 2017.
Stock Option Plans
The following table summarizes stock option activity during the three
month period ended October 31, 2018:
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value (000s)
|
|
Outstanding at July 31, 2018
|
|
|
1,882,116
|
|
|
$
|
4.96
|
|
|
|
|
|
|
|
|
|
Awarded
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(10,000
|
)
|
|
$
|
2.53
|
|
|
|
|
|
|
$
|
41
|
|
Cancelled or expired
|
|
|
(2,000
|
)
|
|
$
|
4.51
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
1,870,116
|
|
|
$
|
4.97
|
|
|
|
2.6 years
|
|
|
$
|
412
|
|
Exercisable at end of period
|
|
|
1,139,156
|
|
|
$
|
4.29
|
|
|
|
1.6 years
|
|
|
$
|
142
|
|
As of October 31, 2018, the total future compensation cost related
to non-vested options, not yet recognized in the statements of operations, was $0.9 million and the weighted average period over
which the remaining expense of these awards is expected to be recognized is twelve months.
The intrinsic value of in the money stock option awards 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.
Restricted Stock Awards
A summary of the activity pursuant to the Company’s unvested
restricted stock awards for the three months ended October 31, 2018 is as follows:
|
|
Awards
|
|
|
Weighted
Average
Award Price
|
|
Outstanding at July 31, 2018
|
|
|
2,613
|
|
|
$
|
1.74
|
|
Awarded
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(175
|
)
|
|
$
|
(5.62
|
)
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Unvested at end of period
|
|
|
2,438
|
|
|
$
|
1.47
|
|
The fair value of a restricted stock award is determined based on
the closing stock price on the award date. As of October 31, 2018, 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
twenty-seven months.
The fair value of the awards that vested during the three months
ended October 31, 2018 and 2017 was $1 and $10, respectively.
The total number of shares available for grant as equity awards from
the 2011 Incentive Plan is approximately 1,933,000 shares as of October 31, 2018.
Performance Stock Units
To better align the long-term interest of executives with growing
U.S. practices, beginning in fiscal 2018, the Company granted long-term incentive awards in the form of time based stock options
and performance-based restricted stock units (“Performance Stock Units” or “PSUs”). The PSUs earned will
be determined over a three-year performance period. The primary performance metrics will be revenue and Adjusted EBITDA growth.
Payouts based on revenue and adjusted EBITDA goals will be modified based on Total Shareholder Return (“TSR”) performance
relative to Enzo’s peer group.
During fiscal year 2018, the Company awarded a total of 32,000 PSUs
to its executive officers, this award provides for the grant of shares of our common stock at the end of a three–year period
based on the achievement of average revenue growth and adjusted EBITDA growth over that period. As of October 31, 2018, the Company
did not accrue any compensation expense for these PSU’s as the three-year performance period has just begun and achievement of
the growth goals is currently not probable. At the grant date, the fair value of this award was $141.
Note 9 – Segment reporting
The Company has three reportable segments: Products, Clinical Services
and Therapeutics. The Company’s Products segment develops, manufactures, and markets products to research and pharmaceutical
customers. The Clinical Services segment provides diagnostic services to the health care community. The Company’s Therapeutics
segment conducts research and development activities for therapeutic drug candidates. The Company evaluates segment performance
based on segment income (loss) before taxes. Costs excluded from segment income (loss) before taxes and reported as “Other”
consist of corporate general and administrative costs which are not allocable to the three reportable segments.
Legal fee expense incurred to defend the Company’s intellectual
property, which may result in settlements recognized in another segment and other general corporate matters are considered a component
of the Other segment. Legal fee expense specific to other segments’ activities have been allocated to those segments.
Legal settlements, net, represent activities for which royalties
would have been received in the Company’s Products segment and expenses related to an investigation within the Clinical Services
segment. Management of the Company assesses assets on a consolidated basis only and therefore, assets by reportable segment have
not been included in the reportable segments below. The accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies.
The following financial information represents the operating results
of the reportable segments of the Company:
Three months ended October 31, 2018
|
|
Clinical
Services
|
|
|
Products
|
|
|
Therapeutics
|
|
|
Other
|
|
|
Consolidated
|
|
Revenues
|
|
|
14,297
|
|
|
|
6,963
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
10,968
|
|
|
|
3,271
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,239
|
|
Research and development
|
|
|
—
|
|
|
|
507
|
|
|
$
|
221
|
|
|
|
—
|
|
|
|
728
|
|
Selling, general and administrative
|
|
|
6,060
|
|
|
|
2,924
|
|
|
|
—
|
|
|
$
|
1,986
|
|
|
|
10,970
|
|
Legal fee expense
|
|
|
36
|
|
|
|
7
|
|
|
|
—
|
|
|
|
1,258
|
|
|
|
1,301
|
|
Total operating costs and expenses
|
|
|
17,064
|
|
|
|
6,709
|
|
|
|
221
|
|
|
|
3,244
|
|
|
|
27,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(2,767
|
)
|
|
|
254
|
|
|
|
(221
|
)
|
|
|
(3,244
|
)
|
|
|
(5,978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
(18
|
)
|
|
|
16
|
|
|
|
—
|
|
|
|
276
|
|
|
|
274
|
|
Other
|
|
|
40
|
|
|
|
4
|
|
|
|
—
|
|
|
|
3
|
|
|
|
47
|
|
Foreign exchange loss
|
|
|
—
|
|
|
|
(324
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(324
|
)
|
Loss before income taxes
|
|
$
|
(2,745
|
)
|
|
$
|
(50
|
)
|
|
$
|
(221
|
)
|
|
$
|
(2,965
|
)
|
|
$
|
(5,981
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization included
above
|
|
$
|
403
|
|
|
$
|
342
|
|
|
$
|
—
|
|
|
$
|
21
|
|
|
$
|
766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation included in above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
38
|
|
|
$
|
24
|
|
|
|
—
|
|
|
$
|
173
|
|
|
|
235
|
|
Total
|
|
$
|
38
|
|
|
$
|
24
|
|
|
$
|
—
|
|
|
$
|
173
|
|
|
$
|
235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
354
|
|
|
$
|
52
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
406
|
|
Three months ended October 31, 2017
|
|
Clinical
Services
|
|
|
Products
|
|
|
Therapeutics
|
|
|
Other
|
|
|
Consolidated
|
|
Revenues
|
|
|
19,534
|
|
|
|
7,342
|
|
|
|
—
|
|
|
|
—
|
|
|
|
26,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenues
|
|
|
12,042
|
|
|
|
3,389
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15,431
|
|
Research and development
|
|
|
—
|
|
|
|
523
|
|
|
$
|
224
|
|
|
|
—
|
|
|
|
747
|
|
Selling, general and administrative
|
|
|
6,095
|
|
|
|
2,628
|
|
|
|
—
|
|
|
$
|
2,182
|
|
|
|
10,905
|
|
Legal fee expense
|
|
|
13
|
|
|
|
3
|
|
|
|
—
|
|
|
|
415
|
|
|
|
431
|
|
Total operating costs and expenses
|
|
|
18,150
|
|
|
|
6,543
|
|
|
|
224
|
|
|
|
2,597
|
|
|
|
27,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
1,384
|
|
|
|
799
|
|
|
|
(224
|
)
|
|
|
(2,597
|
)
|
|
|
(638
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
(25
|
)
|
|
|
12
|
|
|
|
—
|
|
|
|
170
|
|
|
|
157
|
|
Other
|
|
|
14
|
|
|
|
7
|
|
|
|
—
|
|
|
|
15
|
|
|
|
36
|
|
Foreign exchange gain
|
|
|
—
|
|
|
|
(195
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(195
|
)
|
Income (loss) before income taxes
|
|
$
|
1,373
|
|
|
$
|
623
|
|
|
$
|
(224
|
)
|
|
$
|
(2,412
|
)
|
|
$
|
(640
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization included above
|
|
$
|
404
|
|
|
$
|
326
|
|
|
$
|
—
|
|
|
$
|
19
|
|
|
$
|
749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation included in above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
32
|
|
|
$
|
23
|
|
|
|
—
|
|
|
$
|
150
|
|
|
|
205
|
|
Total
|
|
$
|
32
|
|
|
$
|
23
|
|
|
$
|
—
|
|
|
$
|
150
|
|
|
$
|
205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
418
|
|
|
$
|
43
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
461
|
|
Note 11 – Contingencies
There are seven cases that are either pending
or on appeal, which were originally brought by the Company in the United States District Court for the District of Delaware (“the
Court”), alleging patent infringement against various companies. On June 28, 2017, the Court issued an opinion in the Gen-Probe
case, granting Gen-Probe’s motion for summary judgment that the asserted claims of the ’180 patent are invalid for
nonenablement. The Court entered final judgment of invalidity of the asserted claims of the ‘180 patent on July 19, 2017
in the Gen-Probe and Hologic cases. The Court entered partial final judgment of invalidity of the asserted claims of the ‘180
patent and stayed the remainder of the cases in the Becton Dickinson and Roche cases on July 31, 2017 and August 2, 2017, respectively.
The Company filed notices of appeal in each of the Gen-Probe, Hologic, Becton Dickinson, and Roche cases, which were docketed by
the United States Court of Appeals for the Federal Circuit (“Federal Circuit”). In the Abbott case, the parties agreed
that the Court’s summary judgment ruling in the Gen-Probe case invalidated all of the ’180 patent claims asserted against
the Abbott Defendants. On August 15, 2017, the Court granted Abbott’s motion for summary judgment that the asserted claims
of the ’405 patent are invalid for nonenablement. On September 1, 2017, the Court entered final judgment of invalidity of
the asserted claims of the ‘180 and ‘405 patents for nonenablement in the Abbott case. Enzo subsequently filed a notice
of appeal in the Abbott case on September 14, 2017. The Federal Circuit docketed the appeal on September 15, 2017. The Federal
Circuit consolidated the appeals from the Abbott, Becton Dickinson, Gen-Probe, Hologic, and Roche litigations (“Consolidated
Appeals”). We disagree with the Court’s invalidity decisions regarding the ‘180 and ‘405 patents in the
pending cases as set forth in our opening brief in the Consolidated Appeals pending in the Federal Circuit filed on November 28,
2017. In the Consolidated Appeals, we have asked the Federal Circuit to reverse the Court’s grants of final and summary judgment
of invalidity of the asserted claims of the ‘180 and ‘405 patents and to remand the cases against Abbott, Becton Dickinson,
Gen-Probe, Hologic, and Roche to the Court. Briefing is now complete in the Consolidated Appeals. The Federal Circuit has scheduled
an oral argument in the Consolidated Appeals for January 7, 2019. In the other two cases involving Hologic, one of the cases is
stayed (Hologic II), while the other case (Hologic III) that involves U.S. Patent No. 6,221,581 (“the ‘581 patent”)
is on appeal to the Federal Circuit. The Court issued a claim construction order on October 15, 2018. On October 31, 2018, Enzo
and Hologic entered a stipulation that the asserted claims of the ‘581 Patent are not infringed under the Court’s claim
construction for certain of the claim terms. The Court entered final judgment of non-infringement on November 5, 2018. Enzo filed
a notice of appeal on November 28, 2018. The Federal Circuit docketed the appeal and issued a schedule on December 3, 2018. The
schedule is as follows: (1) Entry of Appearance is due on 12/17/2018; (2) Certificate of Service is due on 12/17/2018; (3) Docketing
Statement is due on 12/17/2018; and (4) Enzo’s opening brief is due on 2/1/2019. Regarding Hologic’s petition requesting
institution of an inter partes review proceeding of the ‘581 patent filed with the United States Patent and Trademark Office
(“PTO”), the Patent Trial and Appeals Board (“the Board”) denied institution of Hologic’s petition
on April 18, 2018. On May 18, 2018, Hologic filed with the Board, a request for rehearing of the order denying institution of inter
partes review of the ‘581 patent. The Board denied Hologic’s request for rehearing on November 28, 2018.
The Company and Enzo Life Sciences are 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 defendants. This case was commenced in May 2004.
Roche seeks a declaratory judgment of non-breach of contract and patent invalidity against the Company and Enzo Life Sciences.
Roche has also asserted tort claims against the Company and Enzo Life Sciences. The Company and Enzo Life Sciences have asserted
breach of contract and patent infringement causes of action against Roche. There has been extensive discovery. 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. In December 2013, the Court granted in part and denied in part Roche’s summary
judgment motion. In October 2014, the Court ordered that damages discovery concerning the Company’s remaining contract and patent
claims and Roche’s claims should be completed by the end of January 2015, and expert discovery should be completed following the
Court’s claim construction ruling concerning the Company’s patent infringement claim against Roche. Roche dropped its tort claims
during damages discovery. On October 2, 2017, the Court issued its claim construction ruling. On September 8, 2018, the Court issued
an order (i) directing that motions for summary judgment should be filed on October 10, 2018 and a proposed pretrial order by February
22, 2019, and (ii) scheduling an April 8, 2019 trial. On October 10, 2018, the parties filed their motions for summary judgment
and also filed motions to preclude. Those motions are now fully briefed. The Company and Enzo Life Sciences intend to vigorously
press their remaining claims and contest the claims against them.
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
Note 12 – Subsequent Event
As part of implementing our growth strategy, on November 27, 2018,
we closed on the $6 million purchase of a new facility with nearly 36,000 square feet adjacent to our current campus in Farmingdale,
NY to be used for manufacturing and distributing our low cost, diagnostic platform products and related services. This facility
extends Enzo’s New York campus to nearly 101,000 square feet, complementing our existing sites in Michigan, Switzerland,
France and Belgium.
In connection with the purchase, we entered into a fee mortgage security
agreement with Citibank, N.A., the mortgagee in the amount of $4.5 million. The mortgage is for a term of 10 years, bears a fixed
interest rate of 5.09% per annum, and requires monthly principal and interest payments of $30,106. The mortgage includes financial
covenants requiring adherence to certain financial ratios. We have Town of Babylon Industrial Development Agency (IDA) commitments
that will provide significant multi-year tax abatements and additional incentives with respect to our entire Farmingdale campus
We assumed an operating lease for the facility from the seller. The
current tenant may occupy the facility until December 2019, unless it is given or gives notice to vacate prior to that date.
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, 2018
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 an integrated diagnostic 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 are leading the convergence
of clinical laboratories, life sciences, and intellectual property through the development of unique diagnostic platform technologies
that provide numerous advantages over previous standards. Utilizing cross-functional teams, 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 represent 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
us 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
are designed to reduce overall healthcare costs for both government and private insurers. Our proprietary technology platforms
reduces our customers’ need for multiple, specialized instruments, and offer a variety of high 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 healthcare 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, comprised of 343 issued patents worldwide and over 157 pending patent
applications, along with extensive enabling technologies and platforms.
Below are brief descriptions of each of our operating segments (See
Note 10 in the Notes to Consolidated Financial Statements):
Clinical Services
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 CLIA-certified and a College of American Pathologists (“CAP”) accredited 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 Services 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, New Jersey and expanding into Connecticut, a free standing “STAT”
or rapid response laboratory in New York City and a full service phlebotomy, in-house logistics department, and an 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.
Products
manufactures, develops and markets products
and tools for 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. 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 also the life sciences markets 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.
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 154 patents and patent applications.
Results of Operations
Three months ended October 31, 2018
compared to October 31, 2017
(in 000s)
Comparative Financial Data for the Three Months Ended October 31,
|
|
2018
|
|
|
2017
|
|
|
Increase
(Decrease)
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
21,260
|
|
|
$
|
26,876
|
|
|
$
|
(5,616
|
)
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
14,239
|
|
|
|
15,431
|
|
|
|
(1,192
|
)
|
|
|
(8
|
)
|
Research and development
|
|
|
728
|
|
|
|
747
|
|
|
|
(19
|
)
|
|
|
(3
|
)
|
Selling, general and administrative
|
|
|
10,970
|
|
|
|
10,905
|
|
|
|
65
|
|
|
|
1
|
|
Legal fee expense
|
|
|
1,301
|
|
|
|
431
|
|
|
|
870
|
|
|
|
**
|
|
Total operating costs and expenses
|
|
|
27,238
|
|
|
|
27,514
|
|
|
|
(276
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(5,978
|
)
|
|
|
(638
|
)
|
|
|
(5,340
|
)
|
|
|
**
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
274
|
|
|
|
157
|
|
|
|
117
|
|
|
|
75
|
|
Other
|
|
|
47
|
|
|
|
36
|
|
|
|
11
|
|
|
|
31
|
|
Foreign currency loss
|
|
|
(324
|
)
|
|
|
(195
|
)
|
|
|
(129
|
)
|
|
|
66
|
|
Loss before income taxes
|
|
$
|
(5,981
|
)
|
|
$
|
(640
|
)
|
|
$
|
5,341
|
|
|
|
**
|
|
** not meaningful
Consolidated Results:
The “2019 period” and the “2018 period”
refer to the three months ended October 31, 2018 and 2017, respectively.
Clinical services revenues for the 2019 period were $14.3 million
compared to $19.5 million in the 2018 period, a decrease of $5.2 million or 27% largely due to reduced insurance reimbursement payments
and mix of testing, which were reimbursed at higher than average rates in the prior year. Total diagnostic testing volume, measured
by the number of accessions, decreased 5% year over year, again due to lower high–value testing, partially offset by an increase
in esoteric testing.
Product revenues for the 2019 period was $7.0 million compared
to $7.1 million in the 2018 period, a decrease of $0.1 million or 2% due to slightly lower product order volume. There was no
royalty income in the 2019 period because the license agreement has expired. Royalty income in 2018 was $0.3 million.
The cost of clinical services during the 2019 period was $11.0
million as compared to $12.1 million in the 2018 period, a decrease of $1.1 million or 9% primarily due to test mix. The components
of the decrease are $1.2 million for outside reference lab testing costs, internalizing the use of our AMPIPROBE® technology
platform, and $0.1 million of testing supplies, partially offset by an increase in compensation related expenses of $0.2 million.
Gross profit margin was 23% in the 2019 period and 38% in the 2018 period, impacted by the mix of tests and decreased payer reimbursement
rates.
The cost of product revenues was $3.3 million in the 2019 period
and $3.4 million in the 2018 period, a decrease of $0.1 million or 3% due to lower product sales. The gross profit margin on products
was 53% in the 2019 period and 52% in the 2018 period due to mix of products sold.
Research and development expenses were $0.7 million in the 2019
and 2018 periods. The expense for Life Sciences Products was $0.5 million in both periods and the expense for the Enzo Therapeutics
was $0.2 million in both periods.
Selling, general and administrative expenses were approximately
$11.0 million during the 2019 period versus $10.9 million during the 2018 period, an increase of $0.1 million or 1%. Clinical
Services expense was unchanged, as the cost of increased headcount to market our new molecular diagnostic products for use by
other reference labs was offset by lower sales commissions. The Products expense increased $0.3 million due to increased headcount
focused on sales, marketing and business development of our diagnostic platform technologies. The Other segment expense decreased
$0.2 million, due to a decrease in compensation related expenses.
Legal fee expense was $1.3 million during the 2019 period compared
to $0.4 million in the 2018 period, an increase of $0.9 million due to the timing of legal activity and related costs associated
with on-going litigation and contract dispute where the Company is the plaintiff.
Interest income increased $0.1 million in the 2019 period from
rising interest rates earned on cash and cash equivalents.
Liquidity and Capital Resources
At October 31, 2018, the Company had cash and cash equivalents
of $52.8 million of which $0.4 million was in foreign accounts, as compared to cash and cash equivalents of $60.0 million, of
which $0.4 million was in foreign accounts at July 31, 2018. 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 $57.3 million at October 31, 2018 compared to $63.0 million at July 31,
2018. The decrease in working capital of $5.7 million was primarily due to the period loss and net changes in operating assets
and liabilities.
Net cash used in operating activities during the 2019 period
was approximately $6.2 million as compared to cash provided by operating activities of $2.6 million during the 2018 period, a
decrease of approximately $8.8 million. The decrease is mainly due to net loss of $5.3 million and net change in assets and liabilities
of $3.6 million.
Net cash used in investing activities in fiscal 2019 and 2018
was approximately $1.0 million and $0.5 million, respectively. The increase in the 2019 period is mainly due to security deposits.
Net cash used in financing activities in fiscal 2019 was less
than $0.1 million as compared to cash provided by financing activities of $0.6 million in fiscal 2018. The change of $0.6 million
is mainly due to a decrease in proceeds from the exercise of stock options.
The Company believes that its current cash and cash equivalents
level, and utilization of the Controlled Equity Offering program if necessary, 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, 2018, 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.
Contractual Obligations
Subsequent to the end of the period covered by this report, the
Company completed the $6 million purchase of a 36,000 square foot commercial facility and as part of the purchase entered into
a mortgage of $4.5 million with a 10 year term and bearing a fixed interest rate of 5.09%. We assumed an operating lease for the
facility from the seller that runs to December 2019. See Note 12. There have been no other material changes to our Contractual
Obligations as reported in our Form 10-K for the fiscal year ended July 31, 2018.
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 10 to the Consolidated Financial Statements.
Off-Balance Sheet Arrangements
The Company does not have any “off-balance sheet arrangements”
as such term is defined in Item 303(a)(4) of Regulation S-K.
Critical Accounting Policies
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.
Revenues – Clinical Services
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 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 October 31, 2018 and 2017, the
contractual adjustment percentages, determined using current and historical reimbursement statistics, were 87.5% and 85.0%, respectively,
of gross billings. 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 services revenues of approximately
$1.1 million and $1.4 million for the three months ended October 31, 2018 and 2017, respectively, and a change in the net accounts
receivable of approximately $0.5 million as of October 31, 2018.
Our clinical services 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 services and by products. Net receivables for Clinical Services are detailed by billing category and as a percent
to its total net receivables. At October 31, 2018, and July 31, 2018, approximately 74% and 75%, respectively, of the Company’s
net accounts receivable relates to its services business, which operates in the New York, New Jersey and Connecticut medical communities.
The accounts receivable balance for Products includes $1.1 million
or 32% of foreign receivables as of October 31, 2018 and July 31, 2018.
Net accounts receivable
Billing category
|
|
As of
October 31, 2018
|
|
|
As of
July 31, 2018
|
|
Clinical Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third party payers
|
|
$
|
4,792
|
|
|
|
51
|
%
|
|
$
|
4,692
|
|
|
|
48
|
%
|
Patient self-pay
|
|
|
2,268
|
|
|
|
23
|
|
|
|
2,010
|
|
|
|
20
|
|
Medicare
|
|
|
1,682
|
|
|
|
18
|
|
|
|
1,740
|
|
|
|
18
|
|
HMO’s
|
|
|
731
|
|
|
|
8
|
|
|
|
1,329
|
|
|
|
14
|
|
Total Clinical Services
|
|
|
9,473
|
|
|
|
100
|
%
|
|
|
9,771
|
|
|
|
100
|
%
|
Total Products
|
|
|
3,363
|
|
|
|
|
|
|
|
3,376
|
|
|
|
|
|
Total accounts receivable
|
|
$
|
12,836
|
|
|
|
|
|
|
$
|
13,147
|
|
|
|
|
|
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 clinical services is complicated because of many
factors, especially: the differences between our standard gross fee schedule for all payers and the reimbursement rates of the
various payers we deal with, disparity of coverage and information requirements among the various payers, and disputes with payers
as to which party is responsible for reimbursement.
The following table indicates the Clinical Services 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 October 31, 2018
|
|
Total
|
|
|
%
|
|
|
Third Party Payers
|
|
|
%
|
|
|
Medicare
|
|
|
%
|
|
|
Self-Pay
|
|
|
%
|
|
|
HMO’s
|
|
|
%
|
|
1-30 days
|
|
$
|
24,365
|
|
|
|
53
|
|
|
$
|
15,486
|
|
|
|
55
|
|
|
$
|
4,136
|
|
|
|
50
|
|
|
$
|
1,695
|
|
|
|
27
|
|
|
$
|
3,048
|
|
|
|
93
|
|
31-60 days
|
|
|
5,764
|
|
|
|
13
|
|
|
|
3,473
|
|
|
|
12
|
|
|
|
891
|
|
|
|
11
|
|
|
|
1,278
|
|
|
|
20
|
|
|
|
122
|
|
|
|
4
|
|
61-90 days
|
|
|
4,173
|
|
|
|
9
|
|
|
|
2,779
|
|
|
|
10
|
|
|
|
653
|
|
|
|
8
|
|
|
|
707
|
|
|
|
11
|
|
|
|
34
|
|
|
|
1
|
|
91-120 days
|
|
|
2,716
|
|
|
|
6
|
|
|
|
1,605
|
|
|
|
6
|
|
|
|
485
|
|
|
|
6
|
|
|
|
604
|
|
|
|
9
|
|
|
|
22
|
|
|
|
1
|
|
121-150 days
|
|
|
2,341
|
|
|
|
5
|
|
|
|
1,303
|
|
|
|
5
|
|
|
|
504
|
|
|
|
6
|
|
|
|
529
|
|
|
|
8
|
|
|
|
5
|
|
|
|
—
|
|
Greater than 150 days
|
|
|
6,654
|
|
|
|
14
|
|
|
|
3,435
|
|
|
|
12
|
|
|
|
1,550
|
|
|
|
19
|
|
|
|
1,617
|
|
|
|
25
|
|
|
|
52
|
|
|
|
1
|
|
Totals
|
|
$
|
46,013
|
|
|
|
100
|
%
|
|
$
|
28,081
|
|
|
|
100
|
%
|
|
$
|
8,219
|
|
|
|
100
|
%
|
|
$
|
6,430
|
|
|
|
100
|
%
|
|
$
|
3,283
|
|
|
|
100
|
%
|
As of July 31, 2018
|
|
Total
|
|
|
%
|
|
|
Third Party Payers
|
|
|
%
|
|
|
Medicare
|
|
|
%
|
|
|
Self-Pay
|
|
|
%
|
|
|
HMO’s
|
|
|
%
|
|
1-30 days
|
|
$
|
22,788
|
|
|
|
47
|
|
|
$
|
14,886
|
|
|
|
48
|
|
|
$
|
4,102
|
|
|
|
46
|
|
|
$
|
864
|
|
|
|
15
|
|
|
$
|
2,936
|
|
|
|
90
|
|
31-60 days
|
|
|
6,821
|
|
|
|
14
|
|
|
|
4,540
|
|
|
|
15
|
|
|
|
1,069
|
|
|
|
12
|
|
|
|
995
|
|
|
|
17
|
|
|
|
217
|
|
|
|
7
|
|
61-90 days
|
|
|
4,526
|
|
|
|
9
|
|
|
|
2,877
|
|
|
|
9
|
|
|
|
784
|
|
|
|
9
|
|
|
|
843
|
|
|
|
15
|
|
|
|
22
|
|
|
|
1
|
|
91-120 days
|
|
|
3,460
|
|
|
|
7
|
|
|
|
2,307
|
|
|
|
8
|
|
|
|
463
|
|
|
|
5
|
|
|
|
666
|
|
|
|
11
|
|
|
|
24
|
|
|
|
1
|
|
121-150 days
|
|
|
2,705
|
|
|
|
6
|
|
|
|
1,602
|
|
|
|
5
|
|
|
|
490
|
|
|
|
6
|
|
|
|
601
|
|
|
|
10
|
|
|
|
12
|
|
|
|
—
|
|
Greater than 150 days
|
|
|
8,357
|
|
|
|
17
|
|
|
|
4,481
|
|
|
|
15
|
|
|
|
1,976
|
|
|
|
22
|
|
|
|
1,862
|
|
|
|
32
|
|
|
|
38
|
|
|
|
1
|
|
Totals
|
|
$
|
48,657
|
|
|
|
100
|
%
|
|
$
|
30,693
|
|
|
|
100
|
%
|
|
$
|
8,884
|
|
|
|
100
|
%
|
|
$
|
5,831
|
|
|
|
100
|
%
|
|
$
|
3,249
|
|
|
|
100
|
%
|
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, 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.
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 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 a quantitative test 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 identifies the reporting units and compares the fair value of each of these reporting units to their respective carrying
amount. If the carrying amount of the reporting unit is less than its fair value, no impairment exists. If the carrying amount
of the reporting unit is higher than its fair value, the impairment charge is the amount by which the carrying amount exceeds
its fair value, not to exceed the total amount of goodwill and intangibles allocated to the reporting unit.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
We are exposed to market risk from changes in foreign currency
exchange rates resulting from acquisitions with foreign locations (See Item 1A. Risk Factors section of the Form 10-K for the
fiscal year ended July 31, 2018) that could impact our results of operations and financial position. We do not currently engage
in any hedging or market risk management tools.
Foreign Currency Exchange Rate Risk
The financial reporting of our non-U.S. subsidiaries is denominated
in currencies other than the U.S. dollar. Since the functional currency of our non-U.S. subsidiaries is the local currency, foreign
currency translation adjustments are accumulated as a component of accumulated other comprehensive income in stockholders’
equity. Assuming a hypothetical increase of 10% in the value of the U.S. dollar versus foreign currencies at October 31, 2018,
our assets and liabilities would decrease by $0.4 million and $0.1 million, respectively, and our net sales and net earnings (loss)
would decrease by $0.8 million and $0.3 million, respectively, on an annual basis.
We also maintain intercompany balances and loans with subsidiaries
in different local currencies. These amounts are at risk of foreign exchange losses if exchange rates fluctuate. Assuming a hypothetical
increase of 10% in the value of the U.S. dollar versus foreign currencies, our pre-tax earnings (loss) would be unfavorably impacted
by approximately $1.4 million on an annual basis.
Interest Rate Risk
As of October 31, 2018, we have fixed interest rate financing
on transportation and equipment leases.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedure
As of the end of the period covered by this report, the Company’s
management conducted an evaluation (as required under Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934,
as amended (the “Exchange Act”)) of the Company’s “disclosure controls and procedures” (as such term
is defined under the Exchange Act), under the supervision and with the participation of the principal executive officer and the
principal financial officer. Based on this evaluation, the principal executive officer and the principal financial officer concluded
that the Company’s disclosure controls and procedures are not effective as of the end of the period covered by this report
as management identified deficiencies in internal control over financial reporting that were determined to be material weaknesses.
Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute,
assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be
set forth in the Company’s periodic reports.
(b) Changes in Internal Controls over Financial
Reporting
There were no changes in our internal control over financial
reporting that occurred during the quarter ended October 31, 2018 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Plan to Remediate Material Weaknesses
As of October 31, 2018, we are in the process of remediating
the material weaknesses over financial reporting identified and reported in our Form 10-K for the fiscal year ended July 31, 2018
related to (1) insufficient controls to fully and timely take into account changes in the business environment and experience with
ultimate collection from third-party payers in the determination of contractual adjustment amounts and collectability of accounts
receivable and (2) inadequate information technology controls intended to control change management, program access and monitoring;
however, the material weaknesses cannot be considered remediated until the procedures designed to address the deficient controls
have been tested for effectiveness.