UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

Mark one

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended April 30, 2016January 31, 2017

 

or

 

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________________ to ___________________

 

Commission File Number 001-09974

 

 ENZO BIOCHEM, INC. 
 (Exact name of registrant as specified in its charter) 
   
New York 13-2866202
(State or Other Jurisdiction (IRS. Employer
of Incorporation or Organization) Identification No.)
   
527 Madison Ave, New York, New York 10022
(Address of Principal Executive office) (Zip Code)
   
212-583-0100  
(Registrant’s telephone number, including area code)  

 

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.

 

Yesx Noo

 

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).

 

Yesx Noo

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Large accelerated fileroAccelerated filerxNon-accelerated fileroSmaller reporting companyo

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)

 

Yeso Nox

 

As of June 2, 2016,March 1, 2017, the Registrant had approximately 46,265,00046,292,216 shares of common stock outstanding.

 

ENZO BIOCHEM, INC.
FORM 10-Q
April 30, 2016January 31, 2017

 

INDEX

 

PART I - FINANCIAL INFORMATION
 
Item 1.Condensed Financial Statements3
   
 Consolidated Balance Sheets – April 30, 2016January 31, 2017 (unaudited) and July 31, 20152016 (audited)3
   
 Consolidated Statements of Operations for the three and ninesix months ended April 30,January 31, 2017 and 2016 and 2015 (unaudited)4
   
 Consolidated Statements of Comprehensive Income (Loss) for the three and ninesix months ended April 30,January 31, 2017 and 2016 and 2015 (unaudited)5
   
 Consolidated Statement of Stockholders’ Equity for the ninesix months ended April 30, 2016January 31, 2017 (unaudited)6
   
 Consolidated Statements of Cash Flows for the ninesix months ended April 30,January 31, 2017 and 2016 and 2015 (unaudited)7
   
 Notes to the Consolidated Financial Statements8
   
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations20
   
Item 3.Quantitative and Qualitative Disclosures About Market Risk3234
   
Item 4.Controls and Procedures3234
   
Part II – OTHER INFORMATION
 
Item 1.Legal Proceedings3335
   
Item 1A.Risk Factors3335
   
Item 6.Exhibits3335
   
Signatures3335
2

Part 1 Financial Information

Item 1 Financial Statements

 

ENZO BIOCHEM, INC.

CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

 

  April 30,
2016
(unaudited)		  July 31,
2015		 
ASSETS        
Current assets:        
Cash and cash equivalents $32,360  $18,109 
Accounts receivable, net of allowances  14,000   12,109 
Other receivables  —   6,650 
Inventories  6,978   7,396 
Prepaid expenses and other  1,819   2,222 
Total current assets  55,157   46,486 
         
Property, plant and equipment, net  8,638   7,948 
Goodwill  7,452   7,452 
Intangible assets, net  4,884   6,155 
Other assets  357   353 
Total assets $76,488  $68,394 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Current liabilities:        
Loan payable $2,000  $3,013 
Accounts payable – trade  9,152   8,762 
Accrued liabilities  8,056   11,297 
Other current liabilities  2,464   886 
Total current liabilities  21,672   23,958 
         
Deferred taxes  28   37 
Other liabilities  1,820   1,793 
Total liabilities $23,520  $25,788 
         
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: 46,254,870 at April 30, 2016 and46,062,065 at July 31, 2015  463   461 
Additional paid-in capital  326,109   324,966 
Accumulated deficit  (275,531)  (284,682)
Accumulated other comprehensive income  1,927   1,861 
Total stockholders’ equity  52,968   42,606 
Total liabilities and stockholders’ equity $76,488  $68,394 

  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.

3

ENZO BIOCHEM, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)

 

 Three Months Ended
April 30,		 Nine Months Ended
April 30,		  Three Months Ended
January 31,		 Six Months Ended
January 31,		 
 2016  2015  2016  2015  2017  2016  2017  2016 
Revenues:                                
Clinical laboratory services $18,162  $15,657  $52,775  $46,204  $18,837  $17,523  $37,395  $34,613 
Product revenues  8,001   7,906   22,266   23,631   6,983   6,578   14,409   14,265 
Royalty and license fee income  270   423   1,129   2,067   440   459   740   859 
Total revenues  26,433   23,986   76,170   71,902   26,260   24,560   52,544   49,737 
                                
Operating expenses:                
Operating costs, expenses and legal settlements, net:                
Cost of clinical laboratory services  11,142   9,724   32,009   29,100   11,052   10,535   21,948   20,867 
Cost of product revenues  3,846   3,779   10,663   11,292   3,520   3,206   6,829   6,817 
Research and development  882   809   2,610   2,434   483   861   1,305   1,728 
Selling, general, and administrative  10,869   10,146   32,374   30,101 
Selling, general and administrative  11,165   11,280   22,639   21,505 
Provision for uncollectible accounts receivable  576   589   1,739   1,731   679   459   1,348   1,163 
Legal fee expense  1,632   1,955   5,644   7,225   370   2,411   742   4,012 
Legal settlements, net  —   (170)  (18,450)  (170)  —   (11,650)  —   (18,450)
Total operating expenses  28,947   26,832   66,589   81,713 
Total operating costs, expenses and legal settlements, net  27,269   17,102   54,811   37,642 
                                
Operating Income (loss)  (2,514)  (2,846)  9,581   (9,811)
Operating income (loss)  (1,009)  7,458   (2,267)  12,095 
                                
Other income (expense):                                
Interest  (40)  (58)  (122)  (176)  79   (42)  125   (82)
Other  22   26   87   28   24   11   143   65 
Foreign exchange gain (loss)  419   (125)  (99)  (856)
Foreign exchange loss  (94)  (388)  (455)  (518)
Income (loss) before income taxes  (2,113)  (3,003)  9,447   (10,815)  (1,000)  7,039   (2,454)  11,560 
(Provision) benefit for income taxes  (2)  96   (296)  88 
Provision for income taxes  (53)  (207)  (73)  (294)
Net income (loss) $(2,115) $(2,907) $9,151  $(10,727) $(1,053) $6,832  $(2,527) $11,266 
                                
Net income (loss) per common share:                                
Basic $(0.05) $(0.06) $0.20  $(0.24) $(0.02) $0.15  $(0.05) $0.24 
Diluted $(0.05) $(0.06) $0.20  $(0.24) $(0.02) $0.15  $(0.05) $0.24 
                                
Weighted average common shares outstanding:                                
Basic  46,201   45,797   46,115   45,120   46,292   46,077   46,282   46,070 
Diluted  46,201   45,797   46,450   45,120   46,292   46,518   46,282   46,353 

 

The accompanying notes are an integral part of these consolidated financial statements.

4

ENZO BIOCHEM, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(in thousands)

 

 Three Months Ended
April 30,		 Nine Months Ended
April 30,		  Three Months Ended
January 31,		 Six Months Ended
January 31,		 
 2016  2015  2016  2015  2017  2016  2017  2016 
Net income (loss) $(2,115) $(2,907) $9,151  $(10,727) $(1,053) $6,832  $(2,527) $11,266 
Other comprehensive income (loss):                                
Foreign currency translation adjustments  (222)  (20)  66   123   (16)  226   238   288 
Comprehensive income (loss) $(2,337) $(2,927) $9,217  $(10,604) $(1,069) $7,058  $(2,289) $11,554 

 

The accompanying notes are an integral part of these consolidated financial statements.

5

ENZO BIOCHEM, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Nine months ended April 30, 2016Six 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		  Common
Stock
Shares		  Common
Stock
Amount		 Additional
Paid-in
Capital		 Accumulated
Deficit		 Accumulated
Other
Comprehensive
Income		 Total
Stockholders’
Equity		 
Balance at July 31, 2015  46,062,065  $461  $324,966  $(284,682) $1,861  $42,606 
Net income for the period ended April 30, 2016  —   —   —   9,151   —   9,151 
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  8,751   —   —   —   —   —   1,501   —   —   —   —   — 
Exercise of stock options  23,702   —   66   —   —   66   23,096   —   71   —   —   71 
Share-based compensation charges  —   —   370   —   —   370   —   —   392   —   —   392 
Issuance of common stock 401(K) plan match  160,352   2   707           709 
Foreign currency translation adjustments  —   —   —   —   66   66   —   —   —   —   238   238 
Balance at April 30, 2016  46,254,870  $463  $326,109  $(275,531) $1,927  $52,968 
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 statementsstatements.

6

ENZO BIOCHEM, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)

 

 Nine Months Ended
April 30,		  Six Months Ended
January 31,		 
 2016  2015  2017  2016 
Cash flows from operating activities:                
Net income (loss) $9,151  $(10,727) $(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  1,602   1,513   1,023   1,059 
Amortization of intangible assets  1,260   1,284   819   843 
Provision for uncollectible accounts receivable  1,170   1,731   1,348   1,170 
Deferred income tax benefit  (8)  (71)  —   (5)
Share-based compensation charges  370   319   392   221 
Accrual for share-based 401(k) employer match expense  560   511   354   439 
Foreign exchange loss  14   640   420   333 
                
Changes in operating assets and liabilities:                
Accounts receivable  (3,040)  (940)  (2,170)  (1,952)
Other receivables  6,650   —   —   6,650 
Inventories  447   597   (238)  (20)
Prepaid expenses and other  402   16   67   350 
Accounts payable – trade  396   (957)  238   693 
Accrued liabilities, other current liabilities and other liabilities  (1,970)  (2,086)  (2,558)  (983)
Total adjustments  7,853   2,557   (305)  8,798 
                
Net cash provided by (used in) operating activities  17,004   (8,170)  (2,832)  20,064 
                
Cash flows from investing activities:                
Capital expenditures  (1,389)  (1,168)  (689)  (943)
Security deposits and other  (1)  (1)  2   2 
Net cash used in investing activities  (1,390)  (1,169)  (687)  (941)
                
Cash flows from financing activities:                
Net proceeds from issuance of common stock  —   6,687 
Proceeds from borrowings under Credit Agreement  67,343   65,389   40,694   44,378 
Repayments under Credit Agreement  (68,356)  (65,389)  (42,251)  (44,378)
Installment loan and capital lease obligation payments  (424)  (316)  (323)  (258)
Proceeds from the exercise of stock options  66   —   71   66 
Net cash (used in) provided by financing activities  (1,371)  6,371 
Net cash used in financing activities  (1,809)  (192)
                
Effect of exchange rate changes on cash and cash equivalents  8   (112)  (22)  (24)
                
Increase (decrease) in cash and cash equivalents  14,251   (3,080)  (5,350)  18,907 
Cash and cash equivalents - beginning of period  18,109   17,455   67,777   18,109 
Cash and cash equivalents - end of period $32,360  $14,375  $62,427  $37,016 

 

The accompanying notes are an integral part of these consolidated financial statements.

7

ENZO BIOCHEM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of April 30, 2016January 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 April 30, 2016,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 three and ninesix months ended April 30, 2016 (the “interim statements”)January 31, 2017 and 2015, and the consolidated statement of stockholders’ equity for the nine months ended April 30, 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, 20152016 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, 20152016 has been derived from the audited financial statements at that date. The results of operations for the three and ninesix months ended April 30, 2016January 31, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2016.2017.

 

Effect of New Accounting Pronouncements

 

Leases - 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 yearsyear beginning after December 15, 2018,August 1, 2019 including interim periods within thosethat fiscal years.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. While we are evaluatingWe believe the impactadoption of adopting the newthis standard onwill materially impact our consolidated financial statements we expect that upon adoption we will recognize ROUby significantly increasing our non-current assets and leasenon-current liabilities in amounts that could be material.

Revenue recognition - In May 2014, the FASB issued Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, which supersedes ASC 605, Revenue Recognition. The new standard requires companies to recognize revenues upon transfer of goods or services to customers in amounts that reflect the consideration which the company expects to receive in exchange for those goods or services. In July 2015, the FASB delayed the effective date of the standard by one year. The new guidance is effective for financial statements issued for annual reporting periods beginning after December 15, 2017 and early application is not permitted before the original effective date of annual reporting periods beginning after December 15, 2016. We are currently evaluating the impact of this standard on our consolidated financial statements.balance sheets in order to record the right of use assets and related lease liabilities for our existing operating leases.

 

Inventory – In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” which is intended to simplify the subsequent measurement of inventories by replacing the current lower of cost or market test with a lower of cost and net realizable value test. Application of the standard, which should be applied prospectively, is required for the annual and interim periods beginning after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact of this new standard on our consolidated financial statements.

Stock Compensation – In March 2016, the FASB issued ASU 2016-09, “Improvements“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 theour annual and interim periods beginning after December 15, 2016. Early adoption is permitted.August 1, 2017. We do not expect to early adopt the standard. We are currently evaluatingin 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.

8

In April 2015, the FASB issued ASU No. 2015-03Interest – 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 ninesix months ended April 30, 2015, and the three months ended April 30, 2016January 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 ninethree and six months ended April 30, 2016, approximately 337,000 weighted average stock options were included in the calculation of diluted weighted average shares outstanding. For the three and nine months ended April 30, 2015 and the three months ended April 30, 2016,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 1,384,000, 1,139,000 and 444,000, respectively.included in the calculation of diluted weighted average shares outstanding.

 

For the three and ninesix months ended April 30, 2016,January 31, 2017, the effect of approximately 235,000494,000 and 282,000 respectively,247,000 of outstanding “out of the money” options to purchase common shares were excluded from the calculation of diluted net income (loss) per share because their effect would be anti-dilutive. For the three and ninesix months ended April 30, 2015,January 31, 2016, the effect of approximately 384,000235,000 and 192,000 respectively,305,000 of outstanding “out of the money” options to purchase common shares were excluded from the calculation of diluted net income (loss) per share because their effect would be anti-dilutive.

 

Note 3 - Supplemental disclosure for statement of cash flows

 

For the ninesix months ended April 30,January 31, 2017 and 2016, and 2015, income taxes paid by the Company were $207$996 and $103,$53, respectively. 

 

For the ninesix months ended April 30,January 31, 2017 and 2016, and 2015, interest paid by the Company was $112 and $153, respectively.$77. 

 

For the ninesix months ended April 30,January 31, 2017 and 2016, and 2015, the Company financed $76$69 and $388$76 respectively, in machinery and transportation equipment under installment loans. 

 

During the ninesix months ended April 30,January 31, 2017, the Company did not enter into any capital lease agreements. During the six months ended January 31, 2016, and 2015, there was a total of $1,186 and $147$1,141 in new capital lease agreements.

During the nine months ended April 30, 2016 and 2015, the Company issued shares of common stock in connection with its share-based 401(k) employer match in the amount of $709 and $663.

9

Note 4 - Inventories

 

Inventories consist of the following:

 

 April 30,
2016		  July 31,
2015		  January 31,
2017		  July 31,
2016		 
Raw materials $920  $1,013  $912  $951 
Work in process  1,811   2,002   1,893   1,755 
Finished products  4,247   4,381   4,310   4,265 
 $6,978  $7,396  $7,115  $6,971 

Note 5 – Goodwill and intangible assets

 

At April 30, 2016January 31, 2017 and July 31, 2015,2016, 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, 2015 $27,838  $(21,683) $6,155 
Amortization expense  —   (1,260)  (1,260)
Foreign currency translation  4   (15)  (11)
April 30, 2016 $27,842  $(22,958) $4,884 
9
  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:

 

  April 30, 2016  July 31, 2015 
  Gross  Accumulated
Amortization		  Net  Gross  Accumulated
Amortization		  Net 
Patents $11,027  $(10,896) $131  $11,028  $(10,871) $157 
Customer relationships  12,238   (8,158)  4,080   12,243   (7,398)  4,845 
Website and acquired content  1,018   (1,018)  —   1,020   (1,020)  — 
Licensed technology and other  504   (447)  57   518   (441)  77 
Trademarks  3,055   (2,439)  616   3,029   (1,953)  1,076 
Total $27,842  $(22,958) $4,884  $27,838  $(21,683) $6,155 

  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 April 30, 2016,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 4.53.5 years
Trademarks 5 years 1.5 years0.5 year
Other intangibles 10 years 3.52.5 years

 

At April 30, 2016,January 31, 2017, the weighted average useful life of amortizable intangible assets is approximately fourthree 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 “Lender).The Credit Agreement, which expires in December 2016, provides for borrowings against eligible US receivables, as defined, of the Clinical Lab and Life Science segments up to $8.0 million at defined eligibility percentages and provides for additional borrowings of $4.0 million for increased eligible assets. Debt issuance costs of $281 are being amortized over the life of the Credit Agreement. If the amount of borrowings outstanding under the revolving credit facility exceeds the borrowing base then in effect, or the Lender requires a reserve, the Company will be required to repay such borrowings in an amount sufficient to eliminate such excess. Interest on advances, payable monthly, is based on the three month LIBOR rate, with a floor of 1.25% plus an applicable margin of 4.0%LLC). In the event of any default, theThe nominal interest rate may be increased 3.0% overfor the current rate. The facility also carries a non-utilization fee of 0.50% per annum, payable monthly, on the unused portion of the Credit Agreement. At each of April 30, 2016six months ended January 31, 2017 and year ended July 31, 2015,2016 was 5.25%. The effective interest rate for the borrowings undercredit agreement was 14.3% for the Credit Agreement related tosix months ended January 31, 2017 and 11.4% for the Clinical Labs and Life Sciences receivables aggregated $2.0 million and $3.0 million, respectively.

The Company’s obligations under the Credit Agreement are secured by primarily all the unencumbered U.S. assets of the Company, excluding buildings and intellectual property which the Lender has a negative pledge, and the capital stock of subsidiaries.fiscal year ended July 31, 2016. The Credit Agreement includes customary affirmativeexpired and negative covenants and events of default and requires maximum levels of cash usage and minimum levels of liquidity, as defined, and provides for increased liquidity levels if operating results are not achieved. Negative covenants include among others, limitationswas repaid in full on additional debt, liens, loans or investments, distributions, asset sales and affiliate transactions. Events of default include non-payment of principal and interest on debt outstanding, non-performance of covenants, material change in business, breach of representations, bankruptcy and insolvency, material judgments and changes in control. In July 31, 2013, the lender modified various financial covenants relating to fiscal 2014. As of April 30, 2016, the Company is in compliance with the financial covenants.

The Credit Agreement includes customary affirmative and negative covenants and events of default. The terms of the debt covenants include:

The minimum balance the Company must borrow at any time is $2.0 million. At April 30 2016, the loan balance was approximately $2.0 million, with an additional availability of $4.8 million.

The Company must maintain a Minimum Liquidity, as defined in the Credit Agreement, of not less than $3.0 million. At April 30, 2016, the Company’s Minimum Liquidity was $10.9 million.December 7, 2016.

10

The quarterly Cash Burn, as defined in the Credit Agreement, must be greater than zero. During the nine months ended April 30, 2016, the Cash Burn was positive in the amount of $1.0 million.

As of October 31, 2015, the Credit Agreement was amended to redefine Cash Burn and add a definition for Liquidity (the “amendment”). Under the amendment, the determination of Cash Burn during a fiscal quarter excludes capital expenditures provided that Liquidity exceeds $7 million as of the last day of the fiscal quarter. As of April 30, 2016, Liquidity as defined was $37.2 million.

Based on its current level of Minimum Liquidity and Cash Burn, the Company believes it will continue to be in compliance with the financial covenants in future periods; however there are no assurances of such compliance. Based on our ability to comply with financial covenants in the past, our ability to obtain covenant waivers previously, and our expected future performance, we believe we would be able to cure a non-compliance event and obtain a Lender waiver. The Company currently believes that the Lender would be willing to negotiate and provide waivers to the Company in the event of non-compliance with covenants, although there can be no assurances. In addition, the Company believes the effects of non-compliance with the covenants would not have a material effect on our financial condition and liquidity due to cash provided by operating cash flows and funds available under the Company’s Controlled Equity Offering program.

Note 7 – Accrued Liabilities and Other Current Liabilities

 

Accrued liabilities consist of the following:

 

  April 30,
2016		  July 31,
2015		 
Payroll, benefits, and commissions $3,636  $3,907 
Legal fee expense  1,770   4,183 
Professional fees  576   678 
Research and development  300   300 
Other  1,774   2,229 
  $8,056  $11,297 
         

Other current liabilities consist of the following:

  April 30,
2016		  July 31,
2015		 
Accrued legal settlement $1,909  $406 
Capital lease obligations  298   149 
Installment loans  257   331 
  $2,464  $886 
  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:

 

 April 30,
2016		  July 31,
2015		  January 31,
2017		  July 31,
2016		 
Capital lease obligations, net of short term $635  $794 
Accrued legal settlement $803  $1,220   400   800 
Capital lease obligations, net of short term  869   210 
Installment loans, net of short term  148   363   63   105 
 $1,820  $1,793  $1,098  $1,699 

 

As of April 30, 2016,January 31, 2017, future minimum payments under the capital leases, net of interest of $229$252 aggregates $1,167$771 including a short term debt portion of $298$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 $2.7$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 1312 - Contingencies.

11

Note 9 – Stockholders’ Equity

 

Controlled Equity Offering

 

On March 28, 2013, the Company entered into a Controlled Equity OfferingSM Sales Agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co., as sales agent (“Cantor”). Under the Sales Agreement, the Company may offer and sell, from time to time, through Cantor, shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), having an aggregate offering price of up to $20.0 million (the “Shares”). The Company will pay Cantor a commission of 3.0% of the aggregate gross proceeds received under the 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. The Shares were initially issued pursuant to the Company’s Registration Statement on Form S-3 which was declared effective on August 5, 2010 and a prospectus supplement, dated March 28, 2013, and more recently under the Company’s current Registration Statement on Form S-3 which was declared effective on August 13, 2013 and a prospectus supplement dated August 1, 2013, filed by the Company with the Securities and Exchange Commission (the “SEC”).

 

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 SECSecurity 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 ninesix months ended April 30,January 31, 2017 and 2016, the Company did not sell any shares of Common Stock under the Sales Agreement. For the nine months ended April 30, 2015, the Company sold an aggregate of 1,588,480 shares of Common Stock under the Sales Agreement at an average price of $4.34 per share and received proceeds of approximately $6.7 million, net of expenses of $207.

 

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

11

financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2015.2016. 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
April 30,		 Nine months ended
April 30,		  Three months ended
January 31,		 Six months ended
January 31,		 
 2016 2015 2016 2015  2017  2016  2017  2016 
Stock options $143  $104  $351  $283  $236  $104  $382  $208 
Restricted stock  6   9   19   36   5   6   10   13 
 $149  $113  $370  $319  $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
April 30,		 Nine months ended
April 30,		  Three months ended
January 31,		 Six months ended
January 31,		 
 2016 2015 2016 2015  2017  2016  2017  2016 
Cost of clinical laboratory services $2  $3  $5  $9  $1  $2  $3  $3 
Research and development  —   —   —   2 
Selling, general and administrative  147   110   365   308   240   108   389   218 
 $149  $113  $370  $319  $241  $110  $392  $221 

 

No excess tax benefits were recognized during the threesix month periods ended April 30, 2016January 31, 2017 and 2015.2016.

12

Stock Option Plans

The following table summarizes stock option activity during the threesix month period ended April 30, 2016:January 31, 2017:

 

 Options  Weighted
Average
Exercise
Price		  Weighted
Average
Remaining
Contractual
Term		  Aggregate
Intrinsic
Value (000s)		  Options  Weighted
Average
Exercise
Price		  Weighted
Average
Remaining
Contractual
Term		 Aggregate
Intrinsic
Value (000s)		 
Outstanding at July 31, 2015  1,358,104  $3.04         
Outstanding at July 31, 2016  1,808,875  $3.43       
Awarded  488,473  $4.47           493,996  $7.07     
Exercised  (23,702) $2.79           (23,096) $2.89  $149 
Cancelled or expired  (6,000) $3.61           (5,000) $4.47     
Outstanding at end of period  1,816,875  $3.43   1.9 years  $2,386   2,274,775  $4.23  1.4 years $5,797 
Exercisable at end of period  1,104,974  $2.95   1.1 years  $1,976   1,379,555  $3.18          0.5 years $4,853 

 

As of April 30, 2016,January 31, 2017, the total future compensation cost related to non-vested options, not yet recognized in the statements of operations, was $0.9$1.6 million and the weighted average period over which the remaining expense of these awards is expected to be recognized is nineteentwenty-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.

12

Restricted Stock Awards

A summary of the activity pursuant to the Company’s unvested restricted stock awards for the six months ended April 30, 2016January 31, 2017 is as follows:

 

 Awards  Weighted
Average
Award Price		  Awards  Weighted
Average
Award Price		 
Outstanding at July 31, 2015  21,501  $8.84 
Outstanding at July 31, 2016  8,501  $4.13 
Awarded  —  $—   —   — 
Vested  (8,751) $(2.32)  (1,501) $(3.89)
Forfeited  (1,500) $(2.86)  —   — 
Unvested at end of period  11,250  $4.21   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 April 30, 2016,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 seventeenten months.

 

The fair value of the awards that vested during the ninesix months ended April 30,January 31, 2017 and 2016 was $8 and 2015 was $30 and $67,$21, respectively.

 

The total number of shares available for grant as equity awards from the 2011 Incentive Plan is approximately 820,000329,000 shares as of April 30, 2016.January 31, 2017.

 

During the nine months ended April 30, 2016, the Company contributed $709 to match its employees’ 401(k) contributions by issuing 160,352 shares, representing the fair value of the shares at the date of issuance, and adjusted common stock and additional paid in capital by the same amount.

During the nine months ended April 30, 2015, the Company contributed $663 to match its employees’ 401(k) contributions by issuing 214,984 shares, representing the fair value of the shares at the date of issuance, and adjusted common stock and additional paid in capital by the same amount.

13

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)provision for the three months ended April 30, 2016January 31, 2017 was deminimus5.3% compared to a benefit of 3.2%2.9% for the three months ended April 30, 2015.January 31, 2016. The Company’s effective tax rate (provision)provision for the ninesix months ended April 30,January 31, 2017 and 2016 was 3.0% and 2015 was (3.1%) and deminimus,2.5%, respectively. The tax provision for the periods was based on state, local and foreign taxes, net of the benefit for amortization of foreign intangibles.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 California, Michigan and New York State and City for certain subsidiaries. Other subsidiaries file separate state and foreign tax returns.

Note 11 – Royalty and licensing income

The Company’s Life Science segment has a license agreement with Qiagen that began in 2005, whereby the Company earns quarterly royalties on the net sales of Qiagen products subject to the license until the expiration of the patent on April 24, 2018. During the nine months ended April 30, 2016 and 2015, the Company recorded royalty income under the agreement of approximately $1.1 million and $2.1 million respectively, which is included in the Life Sciences segment.

 

Note 1211 – 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 Company’s Life Sciences segment develops, manufactures, and markets products to research and pharmaceutical customers. The Company’s 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.

13

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, 2015.2016.

14

The following financial information represents the operating results of the reportable segments of the Company:

 

Three months ended April 30, 2016January 31, 2017

 

 Clinical
Labs		  Life
Sciences		  Therapeutics  Other  Consolidated  Clinical
Labs		  Life
Sciences		  Therapeutics  Other  Consolidated 
Revenues:                                        
Clinical laboratory services $18,162   —   —   —  $18,162  $18,837   —   —   —  $18,837 
Product revenues  —  $8,001   —   —   8,001   —  $6,983   —   —   6,983 
Royalty and license fee income  —   270   —   —   270   —   440   —   —   440 
  18,162   8,271   —   —   26,433   18,837   7,423   —   —   26,260 
Operating expenses:                    
Operating costs, expenses and legal settlements, net:                    
Cost of clinical laboratory services  11,142   —   —   —   11,142   11,052   —   —   —   11,052 
Cost of product revenues  —   3,846   —   —   3,846   —   3,520   —   —   3,520 
Research and development  —   674  $208   —   882   —   516  $(33)  —   483 
Selling, general and administrative  6,008   2,877   —  $1,984   10,869   5,897   2,905   —  $2,363   11,165 
Provision for uncollectible accounts receivable  612   (36)  —   —   576   594   85   —   —   679 
Legal fee expense  54   11   —   1,567   1,632   49   16   —   305   370 
Legal settlements, net  —   —   —   —   — 
Total operating expenses  17,816   7,372   208   3,551   28,947 
Total operating costs, expenses and legal settlements, net  17,592   7,042   (33)  2,668   27,269 
                                        
Operating income (loss)  346   899   (208)  (3,551)  (2,514)  1,245   381   33   (2,668)  (1,009)
                                        
Other income (expense):                                        
Interest  (33)  7   —   (14)  (40)  (28)  12   —   95   79 
Other  2   4   —   16   22   17   —   —   7   24 
Foreign exchange gain  —   419   —   —   419 
Foreign exchange loss  —   (94)  —   —   (94)
Income (loss) before income taxes $315  $1,329  $(208) $(3,549) $(2,113) $1,234  $299  $33  $(2,566) $(1,000)
                                        
Depreciation and amortization included above $418  $514  $—  $28  $960  $394  $501  $—  $20  $915 
                                        
Share-based compensation included in above:                                        
Cost of clinical laboratory services $2   —   —   —  $2  $1   —   —   —  $1 
Research and development  —   —   —   —   — 
Selling, general and administrative  14  $9   —  $124   147   23  $15   —  $202   240 
Total $16  $9  $—  $124  $149  $24  $15  $—  $202  $241 
                                        
Capital expenditures $331  $115  $—  $—  $446  $175  $—  $—  $—  $175 
1514

Three months ended April 30, 2015January 31, 2016

 

 Clinical
Labs		  Life
Sciences		  Therapeutics  Other  Consolidated  Clinical
Labs		  Life
Sciences		  Therapeutics  Other  Consolidated 
Revenues:                                        
Clinical laboratory services $15,657   —   —   —  $15,657  $17,523   —   —   —  $17,523 
Product revenues  —  $7,906   —   —   7,906   —  $6,578   —   —   6,578 
Royalty and license fee income  —   423   —   —   423   —   459   —   —   459 
  15,657   8,329   —   —   23,986   17,523   7,037   —   —   24,560 
Operating expenses:                    
Operating costs, expenses and legal settlements, net:                    
Cost of clinical laboratory services  9,724   —   —   —   9,724   10,535   —   —   —   10,535 
Cost of product revenues  —   3,779   —   —   3,779   —   3,206   —   —   3,206 
Research and development  —   704  $105   —   809   —   661  $200   —   861 
Selling, general and administrative  4,935   3,031   —  $2,180   10,146   5,649   2,773   —  $2,858   11,280 
Provision for uncollectible accounts receivable  631   (42)  —   —   589   467   (8)  —   —   459 
Legal fee expense  42   (22)  —   1,935   1,955   57   5   —   2,349   2,411 
Legal settlement, net  —   (170)  —   —   (170)
Total operating expenses  15,332   7,280   105   4,115   26,832 
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)  325   1,049   (105)  (4,115)  (2,846)  (685)  13,550   (200)  (5,207)  7,458 
                                        
Other income (expense):                    
Other income (expense)                    
Interest  (23)  6   —   (41)  (58)  (23)  17   —   (36)  (42)
Other  11   2   —   13   26   (1)  —   —   12   11 
Foreign exchange loss  —   (125)  —   —   (125)  —   (388)  —   —   (388)
Income (loss) before income taxes $313  $932  $(105) $(4,143) $(3,003) $(709) $13,179  $(200) $(5,231) $7,039 
                                        
Depreciation and amortization included above $358  $543  $—  $22  $923  $411  $524  $—  $17  $952 
                                        
Share-based compensation included in above:                                        
Cost of clinical laboratory services $3   —   —   —  $3  $2   —   —   —  $2 
Research and development  —  $—   —   —   — 
Selling, general and administrative  9   6   —  $95   110   9  $5   —  $94   108 
Total $12  $6  $—  $95  $113  $11  $5  $—  $94  $110 
                                        
Capital expenditures $453  $58  $—  $4  $515  $354  $84  $—  $—  $438 
15

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 
16

NineSix months ended April 30,January 31, 2016

 

 Clinical
Labs		  Life
Sciences		  Therapeutics  Other  Consolidated  Clinical
Labs		  Life
Sciences		  Therapeutics  Other  Consolidated 
Revenues:                                        
Clinical laboratory services $52,775   —   —   —  $52,775  $34,613   —   —   —  $34,613 
Product revenues  —  $22,266   —   —   22,266   —  $14,265   —   —   14,265 
Royalty and license fee income  —   1,129   —   —   1,129   —   859   —   —   859 
  52,775   23,395   —   —   76,170   34,613   15,124   —   —   49,737 
Operating expenses:                    
Operating costs, expenses and legal settlements, net:                    
Cost of clinical laboratory services  32,009   —   —   —   32,009   20,867   —   —   —   20,867 
Cost of product revenues  —   10,663   —   —   10,663   —   6,817   —   —   6,817 
Research and development  —   2,002  $608   —   2,610   —   1,328  $400   —   1,728 
Selling, general and administrative  16,943   8,709   —  $6,722   32,374   10,935   5,832   —  $4,738   21,505 
Provision for uncollectible accounts receivable  1,787   (48)  —   —   1,739   1,175   (12)  —   —   1,163 
Legal fee expense  120   (6)  —   5,530   5,644   66   (17)  —   3,963   4,012 
Legal settlements, net  1,500   (19,950)  —   —   (18,450)  1,500   (19,950)  —   —   (18,450)
Total operating expenses  52,359   1,370   608   12,252   66,589 
Total operating costs, expenses and legal settlements, net  34,543   (6,002)  400   8,701   37,642 
                                        
Operating income (loss)  416   22,025   (608)  (12,252)  9,581   70   21,126   (400)  (8,701)  12,095 
                                        
Other income (expense):                    
Other income (expense)                    
Interest  (75)  38   —   (85)  (122)  (42)  31   —   (71)  (82)
Other  5   35   —   47   87   3   39   —   23   65 
Foreign exchange loss  —   (99)  —   —   (99)  —   (518)  —   —   (518)
Income (loss) before income taxes $346  $21,999  $(608) $(12,290) $9,447  $31  $20,678  $(400) $(8,749) $11,560 
                                        
Depreciation and amortization included above $1,226  $1,568  $—  $68  $2,862  $808  $1,054  $—  $40  $1,902 
                                        
Share-based compensation included in above:                                        
Cost of clinical laboratory services $5   —   —   —  $5  $3   —   —   —  $3 
Research and development  —   —   —   —   — 
Selling, general and administrative  33  $19   —  $313   365   19  $10   —  $189   218 
Total $38  $19  $—  $313  $370  $22  $10  $—  $189  $221 
                                        
Capital expenditures $1,122  $267  $—  $—  $1,389  $791  $152  $—  $—  $943 
17

Nine months ended April 30, 2015

  Clinical
Labs		  Life
Sciences		  Therapeutics  Other  Consolidated 
Revenues:                    
Clinical laboratory services $46,204   —   —   —  $46,204 
Product revenues  —  $23,631   —   —   23,631 
Royalty and license fee income  —   2,067   —   —   2,067 
   46,204   25,698   —   —   71,902 
Operating expenses:                    
Cost of clinical laboratory services  29,100   —   —   —   29,100 
Cost of product revenues  —   11,292   —   —   11,292 
Research and development  —   1,887  $547   —   2,434 
Selling, general and administrative  15,090   8,886   —  $6,125   30,101 
Provision for uncollectible accounts receivable  1,820   (89)  —   —   1,731 
Legal fee expense  174   (74)  —   7,125   7,225 
Legal settlement, net  —   (170)  —   —   (170)
Total operating expenses  46,184   21,732   547   13,250   81,713 
                     
Operating income (loss)  20   3,966   (547)  (13,250)  (9,811)
                     
Other income (expense):                    
Interest  (63)  13   —   (126)  (176)
Other  18   (34)  —   44   28 
Foreign exchange loss  —   (856)  —   —   (856)
Income (loss) before income taxes $(25) $3,089  $(547) $(13,332) $(10,815)
                     
Depreciation and amortization included above $1,072  $1,656  $2  $67  $2,797 
                     
Share-based compensation included in above:                    
Cost of clinical laboratory services $9   —   —   —  $9 
Research and development  —  $2   —   —   2 
Selling, general and administrative  30   9   —  $269   308 
Total $39  $11  $—  $269  $319 
                     
Capital expenditures $1,042  $122  $—  $4  $1,168 
18

Note 1312 – 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 willwas also be awarded starting November 7, 2012 until the total award is satisfied.  The final award to the Company could behave been reduced or be 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.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 litigation in the United States District Courtparties are waiting for the Southern District of New York betweenCourts’ 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 Molecular Probes, Inc. terminated on May 11, 2015, withthe U.S. Department of Justice reached a settlement upon the parties’ joint stipulation for dismissal.

In 2012, the Company received a Subpoena Duces Tecum (the “Subpoena”) from the Department of Health and Human Services, Office of Inspector General (“OIG”). The Subpoena was issued as part ofagreement to resolve an investigation being conducted by the US Attorney’s Office for the Eastern District of New York in conjunction with the OIG. While a number of potential issues were raised initially by the government, the investigation came to focusfocused primarily on an alleged failure to collect diagnosis codes from physicians who ordered tests through Enzo Clinical Labs. The time period initially covered by the investigation was from 2004 through 2011. In response to the Subpoena, the Company cooperated with the government. On September 22, 2014, the Company and the U.S. Department of Justice reached a settlement agreement to resolve this matter, in substantive form as disclosed in the Company’sDuring fiscal quarter ended April 30, 2014. During the quarter ended April, 30,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 will beis being paid with interest over a five-year period. Under certain circumstances, the Company was required to accelerate payments and/or pay up to an additional $1.5 million based upon (i) a favorable recovery and collection related to the judgment in the Life Technologies matter discussed above, (ii) receipt of additional capital greater than $10.0 million in aDuring fiscal year (in that case, the Company is required to pay 20% of any amount over $10.0 million plus interest, or (iii) sale of the Company. The final settlement covers the time period 2004-2014. During the three months ended January 31, 2016, the Company accrued an additional $1.5 million, due to the Company’s achievement of certain financial milestones. As of April 30, 2016,January 31, 2017, the total liability for this settlement is $2.7$0.8 million, of which $1.9$0.4 million is included in other current liabilities and $0.8$0.4 million included in other liabilities.

 

On July 2, 2015,June 20, 2014, the Company, as Plaintiffplaintiff finalized and executed a settlement agreement with Luminex CorporationPerkinElmer, Inc., and PerkinElmer Health Sciences, Inc. (formerly known as PerkinElmer Life Sciences, Inc.) (together, “PerkinElmer”), with respect to an action between the Company and Abbott Laboratories and Abbott Molecular, Inc (Defendants) and Luminex Corporation (Intervening Defendant) before the United States District Court for the District of Delaware for alleged patent infringement. Luminex paid the Company a total of $7.1 million as consideration for this agreement and the dismissal of the litigation against Luminex.

19

On July 20, 2015, the Company as a Plaintiff finalized and executed a settlement agreement with Siemens Healthcare Diagnostics Inc. (“Siemens”) to settle a patent litigation lawsuitPerkinElmer before the U.S. District Court, for theSouthern District of DelawareNew York, Case No 03-CV-3817. PerkinElmer paid $7.0 million in escrow pursuant to the amountagreement because of $6.7a 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 net. Underfrom the escrow referred to above in accordance with the terms of the agreement, Siemens will also pay the Company additional royalties of $1.0 million per annum on sales of its molecular products manufactured and/or sold in the United States during the its fiscal years 2015 through 2019 if sales of such products exceed a contractual amount. The net settlement amountSettlement Agreement which was included in other receivablesthe statement of operations under Legal settlements, net within the Life Science segment in the consolidated balance sheet as of July 31, 2015 and was received in August 2015.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.

18

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.segment for the fiscal year ended July 31, 2016.

 

On May 16, 2016, the Company reached and finalized a settlement with Life Technologies Corporation in the amountAs of $35.0 million in an infringement action brought by the Company regarding its US Patents no. 6,992,180 and 7,064,197. The case wasJanuary 31, 2017, there are seven pending cases originally brought by the Company in the United States District Court for the District of Delaware. This settlementDelaware 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 recordedsuccessful in these litigations. Even if the fourth quarter of fiscal year 2016.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 operationsoperations.

 

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, 20152016 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.

2019

Overview

 

Enzo Biochem, Inc. (the “Company” “we”, “our” or “Enzo”) is a vertically integrated growth-oriented biotechnologybioscience 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™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. In November 2015, New York State approved our first assay based on the AmpiProbe platform aimed at providing affordable molecular diagnostics in light of reimbursement pressure. 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.

 

We are comprised of three interconnected operating segments which have evolved outIn the course of our core competencies involving the useresearch and development activities, we have built a substantial portfolio of nucleic acids as informational moleculesintellectual property assets, comprising 314 issued patents worldwide, and the use of compounds for immune modulation. Information concerning sales by geographic areaover 146 pending patent applications, along with extensive enabling technologies and business segments for fiscal year ended July 31, 2015 can be found in our Form 10-K Note 15 in the Notes to Consolidated Financial Statements.platforms.

 

Below are brief descriptions of each of our operating segments (See Note 1211 in the Notes to Consolidated Financial Statements):

 

Enzo Clinical Labs is a clinical reference laboratory providing a wide range of clinical services to a 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 to 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 orand 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.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 111115 patents and patent applications.

2120

Results of Operations

Three months ended April 30, 2016January 31, 2017 compared to April 30, 2015

January 31, 2016
(in 000s)

 

Comparative Financial Data for the Three Months Ended April 30,January 31,

             

  2016  2015  Increase
(Decrease)		  % Change 
Revenues:                
Clinical laboratory services $18,162  $15,657  $2,505   16%
Product revenues  8,001   7,906   95   1 
Royalty and license fee income  270   423   (153)  (36)
Total revenues  26,433   23,986   2,447   10 
                 
Operating expenses:                
Cost of clinical laboratory services  11,142   9,724   1,418   15 
Cost of product revenues  3,846   3,779   67   2 
Research and development  882   809   73   9 
Selling, general, and administrative  10,869   10,146   723   7 
Provision for uncollectible accounts receivable  576   589   (13)  (2)
Legal fee expense  1,632   1,955   (323)  (17)
Legal settlements, net  —   (170)  170   ** 
Total operating expenses  28,947   26,832   2,115   8 
                 
Operating loss  (2,514)  (2,846)  332   12 
                 
Other income (expense):                
Interest  (40)  (58)  18   31 
Other  22   26   (4)  (15)
Foreign exchange gain (loss)  419   (125)  544   ** 
Income (loss) before income taxes $(2,113) $(3,003) $890   30 

  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 “2016“2017 period” and the “2015“2016 period” refer to the three months ended April 30,January 31, 2017 and 2016, and 2015, respectively.

 

Clinical laboratory services revenues for the 20162017 period were $18.2$18.8 million compared to $15.7$17.5 million in the 20152016 period, anincrease of $2.5$1.3 million or 16%7%.The increase is attributed to increased molecular testing volume in women’s health markets and higher value account acquisitions, which were offset in part by attrition and a slight decline in routine test volume.the addition of new accounts versus the 2016 period.

 

Product revenues for the 20162017 period were $8.0$7.0 million compared to $7.9$6.6 million in the 20152016 period, an increase of $0.1$0.4 million or 1%6%. Revenues increased $0.2 millionThe increase was due to higher product order volume in both the United States and decreased $0.1foreign markets of $0.5 million in European markets inand offset by the 2016 period versus the 2015 period.

Royalty and license fee income during the 2016 period was $0.3 million compared to $0.4 million in the 2015 period a decreasenegative impact of foreign currency translation of $0.1 million or 36%. Royalties are primarily earned from the reported sales of Qiagen products subject to a license agreement. Qiagen is experiencing declines in its US sales of HPV products which in turn reduced our royalty income. There are no direct expenses relating to royalty and licensing income.million.

 

The cost of clinical laboratory services during the 20162017 period was $11.1$11.0 million as compared to $9.7$10.5 million in the 20152016 period, an increase of $1.4$0.5 million or 15%5% primarily due to the volume increase in Clinicalclinical laboratory services revenue forfrom molecular testing of 16%.testing.

21

The cost of product revenues during the 2017 period was $3.5 million compared to $3.2 million in the 2016 period, was approximately $3.8an increase of $0.3 million in both the 2016 and 2015 periods.Theor 10% due to higher sales.The gross profit margin was 52%50% in both periods.the 2017 period and 51% in the 2016 period due to the mix of products sold.

 

Research and development expenses were approximately$0.5 million versus $0.9 million and $0.8 million during the 2016 and 2015 periods, respectively.

22

Selling, general and administrative expenses were approximately $10.9 million duringin the 2016 period, versus $10.2 million during the 2015 period, an increasea decrease of $0.7$0.4 million or 7%44%. The Clinical Labexpense in the Therapeutics segment selling, general and administrative increased $1.1 million primarily due to increases in sales commission, payroll and related costs and billing and collection expenses in support of greater molecular testing. The Life Sciences segment selling, general and administrative decreased $0.2 million due to a decrease is compensation related expenses. Other segment selling, general and administrative decreased $0.2 million due to lower salary related expenses and professional fees.

the impact of an adjustment decreasing an obligation for clinical trial activity. The provision for uncollectible accounts receivable, primarily related to the Clinical Labs segment, was $0.6 million for both the 2016 and 2015 periods. As a percent of Clinical laboratory services, the provision for uncollectible accounts receivable relating to the Clinical Labs segment in the 2016 and 2015 periods was 3.4% and 4.0%, respectively. The decrease is primarily due to enhanced collection procedures for self-pay patient receivables.

Legal fee expense was $1.6 million during the 2016 period compared to $1.9 million in the 2015 period, a decrease of $0.3 million or 17% due to the timing of legal activity and fees and related costs associated with ongoing patent litigation.

Legal settlements, net were $(0.2) million in the 2015 period from a small settlement which occurred in that period.

Interest expense was $0.1 million during the 2016 and 2015 periods due to interest incurred and fees relating to the credit agreement entered into in 2013.

During the 2016 period, the foreign currency exchange gain was $0.4 million versus a loss of $0.1 million, a favorable change of $0.5 million. The Company has loans and receivables with its foreign subsidiaries which may be denominated in US dollars or a foreign currency. When re-measuring these amounts into the respective entities’ functional currency, the Company recognizes a loss if those foreign currencies, including the Swiss Franc, British pound and Euro depreciate relative to the US dollar during the period and a gain if those foreign currencies appreciate relative to the US dollar. During the 2016 period, the British pound, Swiss franc, and Euro appreciated approximately 3%, 7% and 6%, respectively versus the US dollar. During the 2015 period, the Euro and Swiss franc each depreciated 3% versus the US dollar, and the British pound appreciated 2% versus the US dollar.

Segment Results:

Clinical Labs

The Clinical Labs segment’s operating income before taxes was $0.3 million for the 2016 and 2015 periods. Revenue from laboratory services for the 2016 period were $18.2 million compared to $15.7 in the 2015 period. The increase of $2.5 million is attributed to increased molecular testing volume and higher value account acquisitions, which were offset in part by attrition and a slight decline in routine test volume. Cost of sales during the 2016 period was $11.1 million as compared to $9.7 million in the 2015 period, an increase of $1.4 million due to higher molecular testing. Clinical Lab gross profit margin was approximately 39% in the 2016 period and approximately 38% in the 2015 period. As a percentage of revenues, the provision for uncollectable accounts declined to 3.4% versus 4.0% in the 2015 period and is due to enhanced collection procedures for self-pay patient receivables.

Life Sciences

The Life Sciences segment’s operating income before taxes was $1.3 million for the 2016 period as compared to $0.9 million for the 2015 period, an improvement of $0.4 million. The 2015 period includes a $0.2 million benefit for a minor litigation settlement. Product revenues increased $0.1 million or 1% in the 2016 period. The segment’s gross profit was $4.4 million in the 2016 period, as compared $4.5 million in the 2015 period, a decrease of $0.1 million due to a decrease in royalty and license fee income. The segment’s other operating expenses, excluding legal and legal settlements, net, in the 2016 periodsegment decreased $0.1 million due to decreased selling expenses. Due to appreciation of foreign currencies versus the US dollar, including the Swiss Franc, British pound and Euro during the 2016 period, the foreign currency gain was $0.4 million compared to a loss of $0.1 million in the 2015 period, resulting in a favorable change of $0.5 million in the 2016 period.

Therapeutics

Therapeutics segment’s operating loss before income taxes was approximately $0.2 million and $0.1 million in the 2016 and 2015 periods.

23

Other

The Other segment’s operating loss before taxes for the 2016 period was approximately $3.5 million as compared to $4.1 million for the 2015 period, a decrease of $0.6 million due to lower legal fee and compensation related expenses.

Results of Operations
Nine months ended April 30, 2016 as compared to April 30, 2015

(in 000s)

  2016  2015  Increase
(Decrease)		  % Change 
Revenues:                
Clinical laboratory services $52,775  $46,204  $6,571   14%
Product revenues  22,266   23,631   (1,365)  (6)
Royalty and license fee income  1,129   2,067   (938)  (45)
Total revenues  76,170   71,902   4,268   6 
                 
Operating expenses:                
Cost of clinical laboratory services  32,009   29,100   2,909   10 
Cost of product revenues  10,663   11,292   (629)  (6)
Research and development  2,610   2,434   176   7 
Selling, general, and administrative  32,374   30,101   2,273   8 
Provision for uncollectible accounts receivable  1,739   1,731   8   — 
Legal fee expense  5,644   7,225   (1,581)  (22)
Legal settlements, net  (18,450)  (170)  (18,280)  ** 
Total operating expenses  66,589   81,713   (15,124)  (9)
                 
Operating income (loss)  9,581   (9,811)  19,392   ** 
                 
Other income (expense):                
Interest  (122)  (176)  54   31 
Other  87   28   59   ** 
Foreign exchange loss  (99)  (856)  757   88 
Income (loss) before income taxes $9,447  $(10,815) $20,262   ** 

** not meaningful

Consolidated Results:

The “2016 period” and the “2015 period” refer to the nine months ended April 30, 2016 and 2015, respectively.

Clinical laboratory services revenues for the 2016 period were $52.8 million compared to $46.2 million in the 2015 period, anincrease of $6.6 million or 14%.The increase is attributed to increased molecular testing volume and higher value account acquisitions which were offset in part by attrition and a decline in routine test volume.

Product revenues for the 2016 period were $22.3 million compared to $23.6 million in the 2015 period, a decrease of $1.4 million or 6%. The decrease was due to declines in sales of products ($1.0 million) in both the United States and foreign markets and the negative impact of translating revenues denominated in the euro, pound sterling and Swiss franc which depreciated versus the US dollar in the 2016 period compared to the 2015 period ($0.4 million). Revenues decreased due to lower order volume and were also negatively impacted by pricing due to competition and lower research funding, especially in academia.

Royalty and license fee income during the 2016 period was $1.1 million compared to $2.0 million in the 2015 period a decrease of $0.9 million or 45%. Royalties are primarily earned from the reported sales of Qiagen products subject to a license agreement. Qiagen is experiencing declines in its US sales of HPV products which in turn reduced our royalty income. There are no direct expenses relating to royalty and licensing income.

The cost of clinical laboratory services during the 2016 period was $32.0 million as compared to $29.1 million in the 2015 period, an increase of $2.9 million or 10% due to the increase in Clinical laboratory services revenue for molecular testing of 14%.

24

The cost of product revenues during the 2016 period was $10.7 million compared to $11.3 million in the 2015 period, a decrease of $0.6 million or 6% due to lower sales.The gross profit margin was 52% in the 2016 and 2015 periods.

Research and development expenses were approximately $2.6 million and $2.4 million during the 2016 and 2015 periods, respectively.expense.

 

Selling, general and administrative expenses were approximately $32.4$11.2 million during the 2017 period versus $11.3 million during the 2016 period, versus $30.1 million during the 2015 period, an increasea decrease of $2.3$0.1 million or 8%1%. The Clinical Lab segment selling, general and administrativeexpense increased $1.9 million primarily due to increases in sales commissions and compensation related expenses in support of greater molecular testing volume. The Life Sciences segment selling, general and administrative declined approximately $0.2$0.3 million due to declines in payroll and facilities expense.compensation related costs. The Other segment selling, general and administrative increased $0.6expense decreased $0.5 million net, due to an increasea decrease of $1.1$1.0 million for contestedin proxy expenses relating to our annual stockholders’ meeting which took placein January 2017 as compared to the meeting in January 2016, partially offset by decreasesan increase of $0.3$0.5 million for professional fees and $0.2 million of payrollsalary related expenses.

 

The provision for uncollectible accounts receivable, primarily related to the Clinical Labs segment, was approximately $1.7$0.7 million for bothin the 2017 period and $0.5 million in the 2016 and 2015 periods.period, an increase of $0.2 million. As a percentpercentage 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 and 2015 periods was 3.4% and 3.9%, respectively.period. The decreaseincrease is primarily due to enhanced collection procedures forthe increase in genetic testing volume and the related higher self-pay patient receivables.responsibility balances.

 

Legal fee expense was $5.6$0.4 million during the 20162017 period compared to $7.2$2.4 million in the 20152016 period, a decrease of $1.6$2.0 million or 22% due to the timing of legal activity fees and related costs associated with ongoingon-going patent litigation.litigation where the Company is plaintiff. Legal fee expense in the 2016 period includesalso included $0.4 million for contested proxy costs relating to our annual stockholdersstockholders’ 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.

22

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.

23

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, anincrease 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.

24

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 waswere $(18.5) million in the 2016 period versus $(0.2) million in the 2015 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. See Note 13 Contingencies.

 

Interest expense was $0.1 million during the 2016 versus $0.2 million in the 2015 periods. During the 2015 period there were some additional fees relating to the credit agreement, which was entered into in 2013.

During the 2016 and the 2015 periods, the foreign currency loss was $0.1 million and $0.9 million, respectively, a favorable change of $0.8 million. The Company has loans and receivables with its foreign subsidiaries which may be denominated in US dollars or a foreign currency. When re-measuring these amounts into the respective entities’ functional currency, the Company recognizes a loss if those foreign currencies, including the Swiss Franc, British pound and Euro depreciate relative to the US dollar during the period and a gain if those foreign currencies appreciate relative to the US dollar. During the 2016 period, the Swiss franc and Euro appreciated approximately 1%, and 4.5% respectively, versus the US dollar. The British pound depreciated 6.4%.

 

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 Clinical Labs segment’s operating incomeincrease 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 $0.4$2.3 million for 20162017 period as compared to breakeven in the 2015 period.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. Revenue from laboratory services for the 2016 period were $52.8 million compared to $46.2 million in the 2015 period. The increase of $6.6 million is attributed to increased molecular testing volume and higher value account acquisitions, which were offset in part by attrition and a decline in routine test volume. Cost of sales during the 2016 period was $32.0 million as compared to $29.1 million in the 2015 period, an increase of $2.9 million due to higher molecular testing service revenues. Clinical Lab gross profit margin was 39% in the 2016 period and 37% in the 2015 period. As a percentage of revenues, the provision for uncollectable accounts declined to 3.4% versus 3.9% in the 2015 period and is due to enhanced collection procedures for self-pay patient receivables.

25

Life Sciences

The Life Sciences segment’s operating income before taxes was $22.0 millionProduct revenues for the 20162017 period aswere $14.4 million compared to $3.1$14.3 million for the 2015 period, an improvement of $18.9 million. The 2016 period includes $20.0 million for patent and other litigation settlements previously described and $0.2 million in the 2015 period. Product revenues decreased $1.4 million or 6% in the 2016 period, an increase of $0.1 million or 1%. The increase is due to declines inhigher product sales of products ($1.0 million)$0.3 million in both the United States and foreign markets and the negative impact of translating revenues denominated in the euro, pound sterling and Swiss franc which depreciated versus the US dollar in the 2016 period compared to the 2015 period ($0.4 million). Revenues decreased due to lower order volume and were negatively impacted by pricing due to competition and lower research funding, especially in academia.foreign currency translation. The segment’s gross profit was $12.7$8.3 million in both the 2017 and 2016 period, as compared $14.4 million in the 2015 period, a decrease of $1.7 million primarily dueperiods. Due to lower royalty and license fee income of $0.9 million and a gross margin decrease of $0.8 million on lower product revenues. Due to significantly smaller depreciation of foreign currencies versus the US dollar, includingin particular the Swiss Franc, British pound and Euro duringin the 2017 period versus the 2016 period, the foreign currency loss was $0.1$0.4 million compared to a loss of $0.9$0.5 million in the 20152016 period, resulting in a favorable change of $0.8$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.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 $0.6$0.2 million and $0.5$0.4 million in the 2017 and 2016 and 2015 periods, respectively.respectively, a decrease of $0.2 million due to the impact of an adjustment decreasing an obligation for clinical trial activity.

25

Other

 

The Other segment’s operating loss before taxes for the 20162017 period was approximately $12.3$5.4 million as compared to $13.3$8.7 million for the 20152016 period, a decreasean improvement of $1.0$3.3 million. During the 20162017 period, legal fee expense associated with ongoingon-going patent litigation declined $2.0$2.9 million professional fees declined $0.3and interest income increased $0.2 million, andpartially offset by an increase in salary related expenses declined $0.2$1.2 million. These declines were partially offset byThe 2016 period also included $1.5 million of consulting and legal fee expenses relating to contested proxy costs for ourthe 2016 period’s annual stockholders’ meeting which took place in January 2016.meeting.

Liquidity and Capital Resources

At April 30, 2016,January 31, 2017, the Company had cash and cash equivalents of $32.4$62.4 million of which $0.5$0.6 million was in foreign accounts, as compared to cash and cash equivalents of $18.1$67.8 million, of which $0.5 million was in foreign accounts at July 31, 2015.2016. 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 $33.5$69.3 million at April 30, 2016January 31, 2017 compared to $22.5$70.8 million at July 31, 2015.2016. The increasedecrease in working capital of $11.0$1.5 million was primarily due to net income of $9.2 million, which includes the recognition of $18.5 million in income from Legal settlements, net from patent litigation settlement agreements, offset byperiod loss and net changes in operating assets and liabilities.

 

Net cash provided byused in operating activities as of April 30, 2016January 31, 2017 was approximately $17.0$2.8 million as compared to cash used inprovided by operating activities of $8.2$20.1 million in fiscal 2015, an increase2016, a decrease of approximately $25.2$22.9 million. The increasedecrease is largely due to $18.5 million in net legal settlements included in the 2016 period was primarily due to the changeand net changes in net income of $19.9 million, and the net change in operating assets and liabilities of $6.3 million, which includes the collection of other receivables of $6.7 million from the settlement agreement with Siemens Healthcare Diagnostics Inc. in the first quarter of fiscal 2016.liabilities.

 

Net cash used in investing activities in fiscal 2017 and 2016 was approximately $1.4$0.7 million as compared to $1.2and $0.9 million, in the 2015 period, an increaserespectively, which consists of $0.2 million. The increase in the 2016 period is primarily due to increased capital expenditures.

 

Net cash used in financing activities in fiscal 20162017 was approximately $1.4$1.8 million as compared to cash provided by financing activities of $6.4$0.2 million in fiscal 2015.2016. The decreasechange of $7.7$1.6 million was primarilyis mainly due to proceeds from the issuanceexpiration and repayment of common stock under the Controlled Equity Offering program in the 2015 period and a $1.0 million reduction in the loan payable under the Credit Agreement in the 2016 period.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 (formerlyHealthcare Finance Group, LLC). The Credit Agreement which expiresexpired and was repaid in full on December 2016, provides for borrowings against eligible US receivables, as defined, of the Clinical Labs and Life Sciences segments up to $8.0 million at defined eligibility percentages and provides for additional borrowings of $4.0 million for increased eligible assets.

26

At April 30, 2016 and July 31, 2015 borrowings under the Credit Agreement related to the Clinical Labs and Life Sciences receivables aggregated $2.0 million and $3.0 million, respectively, with an additional availability of $4.8 million as of April 30,7, 2016. As of October 31, 2015, the Credit Agreement was amended to add and redefine certain terms used in the Cash Burn covenant calculation, principally the elimination of capital expenditures from the calculation when Liquidity exceeds $7.0 million.

As of April 30, 2016, the Company is in compliance with the modified financial covenants. See Note 6 to the Consolidated Financial Statements herein for a further description of the Credit Agreement’s terms, the amendment and financial covenants.

 

The Company continued to review all operating units to further reduce annual operating expenditures in fiscal 2016. While revenues2017. Revenues and operating results at the Clinical Labs segment improved, and revenues for the Life Sciences segment declinedincreased slightly versus fiscal 2015.2016. If Life Sciences segment revenues were to significantly decline, the segmentit 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 which resulted in net proceeds of $6.7 million during the fiscal year ended July 31, 2015, and available borrowings under the aforementioned Revolving Loan and Security Agreement disclosed in Note 6 to the financial statements herein 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 of funds.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, 2015,2016, 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, 20152016 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, 2015.2016.

 

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 1312 to the Consolidated Financial Statement.

26

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.

27

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
April 30, 2016		  Three months ended
April 30, 2015		  Three months ended
January 31, 2017		  Three months ended
January 31, 2016		 
Revenue category                                
Third-party payer $10,250   57% $9,172   59% $10,773   57% $10,105   58%
Patient self-pay  4,357   24   2,667   17   2,772   15   3,524   20 
Medicare  2,421   13   2,543   16   2,796   15   2,756   16 
HMO’s  1,134   6   1,275   8   2,496   13   1,138   6 
Total $18,162   100% $15,657   100% $18,837   100% $17,523   100%

 

 Nine months ended
April 30, 2016		  Nine months ended
April 30, 2015		  Six months ended
January 31, 2017		  Six months ended
January 31, 2016		 
Revenue category                                
Third-party payer $30,049   57% $25,937   56% $20,966   56% $19,798   57%
Patient self-pay  11,120   21   8,910   19   5,875   16   6,763   20 
Medicare  8,174   15   7,763   17   5,631   15   5,753   17 
HMO’s  3,432   7   3,594   8   4,923   13   2,299   6 
Total $52,775   100% $46,204   100% $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 1312 in the Notes to Consolidated Financial Statements.

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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 31%39% and 30%31% of the Clinical Labs segment net revenue for the three months ended April 30,January 31, 2017 and 2016 and 2015 respectively, and 30%37% and 27%30% for the ninesix months ended April 30,January 31, 2017 and 2016, and 2015, 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.

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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.revenues from these programs.

 

During the three months ended April 30,January 31, 2017 and 2016, and 2015, the contractual adjustment percentages, determined using current and historical reimbursement statistics, were 84.6%82.8% and 85.5%84.2%, respectively, of gross billings. During the ninesix months ended April 30,January 31, 2017 and 2016, and 2015, the contractual adjustment percentages, determined using current and historical reimbursements statistics, were 84.4%83.4% and 85.4%84.3%, respectively,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 $3.4$2.3 million and $3.2$2.2 million for the ninesix months ended April 30,January 31, 2017 and 2016, and 2015, respectively, and a change in the net accounts receivable of approximately $0.6 million as of April 30, 2016.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 of contractual adjustmentadjustments recorded during the current period that relate tohave 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.
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an evaluation of third-party reimbursement rates changes and changes in reimbursement arrangements with third-party payers;

a rolling monthly analysis of current and historical claim settlement and reimbursement experience statistics with payers;

an analysis of current gross billings and receivables by payer.

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are reported at realizable value, net of allowances for doubtful accounts, which is estimated and recorded in the period of the related revenue.

 

The following is a table of the Company’s net accounts receivable by segment. The Clinical Labs segment’s net receivables are detailed by billing category and as a percent to its total net receivables. At April 30, 2016,January 31, 2017, and July 31, 2015,2016, approximately 73% and 68%71%, respectively, of the Company’s net accounts receivable relates to its Clinical Labs business, which operates in the New York and New Jersey and Eastern Pennsylvania medical communities.

 

The Life Sciences segment’s accounts receivable, of which $0.9 million or 22% and $1.2 million or 32% and $1.1 million or 28%29% represents foreign receivables as of April 30, 2016January 31, 2017 and July 31, 2015,2016, includes royalty receivables of $0.1$0.5 million, as of April 30, 2016January 31, 2017 and July 31, 2015,2016, from Qiagen Corporation.

 

Net accounts receivable

 

Billing category As of
April 30, 2016		  As of
July 31, 2015		 
Clinical Labs                
Third party payers $6,882   67% $3,595   44%
Patient self-pay  1,835   18   3,213   39 
Medicare  1,205   12   1,081   13 
HMO’s  334   3   305   4 
Total Clinical Labs  10,256   100%  8,194   100%
Total Life Sciences  3,744       3,915     
Total accounts receivable $14,000      $12,109     
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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:

 

 April 30, 2016  July 31, 2015  January 31, 2017  July 31, 2016 
      
Beginning balance $1,786  $2,142  $3,517  $1,786 
Provision for doubtful accounts  1,739   2,284   1,348   2,336 
Write-offs, net  (603)  (2,640)  (1,184)  (605)
Ending balance $2,922  $1,786  $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 April 30,January 31, 2017 and 2016, and 2015, 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.

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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 April 30,January 31, 2016 and July 31, 20152016 was 17.3%19.3% and 12.9%19.4%, respectively. During fiscal 2015, the contractual2017 period a higher allowance appliedwas required due to the Clinical Labs segment’s patient self-pay revenues was increased based on collections trends, which has the effect of reducing the allowance for doubtful patient pay accounts receivable. We continue to improve our patient pay collection process by billing patients sooner and by giving past due accounts to collection agencies sooner.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 April 30, 2016 Total  %  Third
Party
Payers		  %  Self Pay  %  Medicare  %  HMO’s  % 
1-30 days $31,705   52  $19,340   44  $4,525   66  $4,761   71  $3,079   97 
31-60 days  9,926   16   7,777   18   1,457   21   595   9   97   3 
61-90 days  6,696   11   5,281   12   910   13   501   7   4   — 
91-120 days  4,002   7   3,775   9   (2)  —   227   4   2   — 
121-150 days  2,667   5   2,507   5   (4)  —   160   2   4   — 
Greater than 150 days*  5,509   9   5,125   12   (62)  —   438   7   8   — 
Totals $60,505   100% $43,805   100% $6,824   100% $6,682   100% $3,194   100%
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As of July 31, 2015 Total  %  Third
Party
Payers		  %  Medicare Payers  %  Self Pay  %  HMO’s  % 
1-30 days $28,157   53  $17,527   50  $4,048   52  $2,991   47  $3,591   95 
31-60 days  6,650   13   4,109   12   802   10   1,718   27   21   1 
61-90 days  4,191   8   2,313   7   578   7   1,276   20   24   1 
91-120 days  3,651   7   2,534   7   604   8   474   7   39   1 
121-150 days  2,856   4   2,426   7   399   5   (3)  0   34   1 
Greater than 150 days**  7,187   14   5,878   17   1,329   18   (40)  -1   20   1 
Totals $52,692   100% $34,787   100% $7,760   100% $6,416   100% $3,729   100%

 

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 $2,432$5,016 fully reserved over 210 days as of April 30, 2016.January 31, 2017.
**Total includes $4,072$3,115 fully reserved over 210 days as of July 31, 2015.2016.

 

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.

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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 marketnet 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.

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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

 

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, 2015)2016) 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 April 30, 2016,January 31, 2017, our assets and liabilities would decrease by $0.5 million and $0.1 million, respectively, and our net sales and net earnings (loss) would decrease by $0.8 million and $0.2$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 $1.0$1.2 million on an annual basis.

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Interest Rate Risk

 

We are exposed to interest rate risk with our variable rate Credit Agreement which bears interest at the three month LIBOR with a floor of 1.25% plus 4% per annum. A 3% change in the LIBOR rate would impact our interest expense by $0.1 million.

As of April 30, 2016,January 31, 2017, we have fixed interest rate financing on transportation and equipment leases.

 

Item 4. Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this report, the Company’s management conducted an evaluation (as required under Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) of the Company’s “disclosure controls and procedures” (as such term is defined under the Exchange Act), under the supervision and with the participation of the principal executive officer and the principal financial officer. Based on this evaluation, the principal executive officer and the principal financial officer concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this report. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.

 

(b) Changes in Internal Controls over Financial Reporting

 

There was no change in the Company’s internal controls over financial reporting during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

 

Item 1.Legal Proceedings

 

There have been no other material developments with respect to previously reported legal proceedings discussed in the annual report on Form 10-K for the fiscal year ended July 31, 20152016 filed with the Securities and Exchange Commission, other than as noted in Note 1312 to the Consolidated Financial Statements as of April 30, 2016.January 31, 2017.

 

Item 1A.Risk Factors

 

There have been no material changes from the risk factors disclosed in Part 1, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2015.2016.

 

Item 6.Exhibits

 

Exhibit No. Exhibit
10.1Settlement and Release Agreement between the Company and Agilent Technologies, Inc.
10.2Settlement and Release Agreement between the Company and Life Technologies Corporation
31.1 Certification of Elazar Rabbani, Ph.D. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2 Certification of Barry Weiner pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1 Certification of Elazar Rabbani, Ph.D. pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2 Certification of Barry Weiner pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101. INS* XBRL Instance Document
   
101. SCH* XBRL Taxonomy Extension Schema Document
   
101. CAL* XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF* XBRL Taxonomy Extension Definitions Linkbase Document
   
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document

 

*XBRL (Extensible Business Reporting Language) information is being furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 ENZO BIOCHEM, INC. 
(Registrant) 
  ENZO BIOCHEM, INC.        

(Registrant)
Date: June 8, 2016March 13, 2017 by:/s/ Barry Weiner
  President, Chief Financial Officer, Principal Accounting Officer, Treasurer and Director

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