ENZO BIOCHEM: Management report and analysis of the financial situation and operating results (form 10-Q)
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, impacts of the COVID-19 pandemic and measures we have taken in response, 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, 2020fiscal 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. Impact of COVID-19 pandemic COVID-19 has severely impacted the economy of the United Statesand other countries around the world. Federal, state and local governmental policies and initiatives designed to reduce the transmission of COVID-19 have resulted in, among other things, a significant reduction in physician office visits, the cancellation of elective medical procedures, customers of our products closing or severely curtailing their operations (voluntarily or in response to government orders), and the adoption of work-from-home or shelter-in-place policies. The COVID-19 impact on the Company's operations is consistent with the overall industry and publicly issued statements from competitors, partners,
and vendors. Enzo was granted FDA Emergency Use Authorization (EUA) for our molecular diagnostic and serological testing for COVID-19 and related antibody testing options. We have also been granted an EUA for our sample collection kit, an innovative virus-inactivating specimen collection media that lessens transmission risks for healthcare providers and clinical laboratory personnel. Other innovations include the development of more relevant positive controls for the tests, and improved sensitivity. 23 In the third quarter of our current fiscal year ending
July 31, 2021, our non-COVID-19 accessions returned to and slightly exceeded prior year period levels. With the addition of COVID-19 testing, total accession volume for the fiscal third quarter ended April 30, 2021exceeded accession volume in both the sequential or second fiscal quarter ended January 31, 2021and the prior year fiscal third quarter ended April 30, 2020. However, it is too early to determine the long term significance of the positive impact from increased testing and the Company's proprietary product offerings on revenue, profitability and cash flow. The extent to which our businesses may continue to be affected by the COVID-19 pandemic will largely depend on both current and future developments, including its duration, spread and emergence of variants, its treatment with authorized vaccines and vaccines in various stages of development and federal approval, and work and travel advisories and restrictions, and the timing of their easing, all of which are highly uncertain and cannot be reasonably predicted at this time. We fully expect COVID-19 volume to decline in the quarters ahead as the percentage of Americans who are vaccinated increases. Global supply chain issues due to the pandemic continue to hamper both the manufacturing of products within the life science division as well as testing capabilities in the clinical laboratory.
The Coronavirus Aid, Relief and Economic Security Act (CARES Act)
March 2020, in response to the COVID-19 pandemic, the CARES Act was signed into law. The CARES Act provides numerous tax provisions and other stimulus measures. The CARES Act also includes a number of benefits that are applicable to us and other healthcare providers including, but not limited to:
? Offer clinical laboratories a one-year reprieve
Medicare and Medicaid Services (CMS) Private Payor Price Reports
requirements under the Medicare Access Protection Act (“PAMA”) as well as a
one year delay in reducing the reimbursement rate by 15% for the clinical laboratory
services provided within the framework of health insurance which were to take place from
The schedule (CLFS) for calendar years after 2021 will be based on future surveys
market rates of private payers. Reduced Medicare and Medicaid Reimbursement
for the calendar years 2022-2024 is capped by the PAMA at 15% per year, which we
estimate could then have a negative impact on our annualized Medicare and Medicaid programs
income of about
legal basis for the CMS private payer data collection methodology used to
derive the data from which the median prices were calculated. ACLA continues to
could reduce the negative impact of PAMA as currently implemented by CMS. the
the long-term effect of these efforts on CLFS health insurance rates is not determinable
lost income due to the COVID-19 pandemic. In
Received from Medicare a grant of approximately
of the initial tranche and in
loans by the
? Provide an advance on payments for testing services which may be either reimbursed
at any time or recovered from one year from receipt. In
requested and received a Medicare advance of
? Suspend Medicare sequestration of
The 2021 consolidated finance law extended the suspension period until March
December 31, 2021. Law to prevent general cuts in direct spending, and to
Other purposes, signed into law on
sequestration gave us a small advantage in the form of
reimbursement rates for diagnostic testing services performed on behalf of Medicare beneficiaries. 24 Overview
Enzo Biochem, Inc.(the "Company" "we", "our" or "Enzo") is an integrated diagnostics, clinical lab, and life sciences company focused on delivering and applying advanced technology capabilities to produce affordable reliable products and services that enable our customers to meet their clinical needs. Through a connection with the market, we provide advanced biotechnology solutions to the global community as affordable and flexible quality products and services. We develop, manufacture and sell our proprietary technology solutions and platforms to clinical laboratories, specialty clinics, researchers and physicians globally. Enzo's structure and business strategy represent the culmination of years of extensive planning and work. The Company has the unique ability to offer low cost, high performance products and services for diagnostic testing, which ideally positions us to capitalize on the reimbursement pressures facing diagnostic labs. Our pioneering work in genomic analysis coupled with our extensive patent estate and enabling platforms have positioned the Company to continue to play an important role in the rapidly growing molecular medicine marketplaces. Enzo develops low cost diagnostic platform products and related services. Our platform development includes automation-compatible reagent systems and associated products for sample collection and processing through analysis. We develop affordable products and services to improve healthcare, one of the greatest challenges today. Enzo combines over 40 years of expertise in technology development with assay development capabilities and diagnostic testing services to create high performance, cost-effective, and open assay solutions. The ability to combine these assets in one company is unique. With our strong intellectual property portfolio integrated with assay development know-how, production, distribution, validation and services capabilities, we have enabled sustainable products and services for a market that is facing increasing pressure in costs and reimbursement Enzo technology solutions and platforms and unique operational structure are designed to reduce overall healthcare costs for both government and private insurers. Our proprietary technology platforms reduces our customers' need for multiple, specialized instruments, and offer a variety of high throughput capabilities together with a demonstrated high level of accuracy and reproducibility. Our genetic test panels are focused on large and growing markets primarily in the areas of personalized medicine, women's health, infectious diseases and genetic disorders. In the course of our research and development activities, we have built a substantial portfolio of intellectual property assets, comprised of over 495 issued patents worldwide and over 70 pending patent applications, along with extensive enabling technologies and platforms.
Below is a brief description of each of our operating segments (see note 11 of the notes to the consolidated financial statements):
Enzo Clinical Services is a clinical reference laboratory providing a wide range of clinical services to physicians, medical centers, other clinical labs and pharmaceutical companies. The Company believes having a
Clinical LaboratoryImprovement Amendments of 1988 ("CLIA") certified and College of American Pathologists("CAP") accredited medical laboratory located in New Yorkprovides us the opportunity to more rapidly introduce cutting edge products and services to the clinical marketplace. Enzo Clinical Labsoffers an extensive menu of molecular and other clinical laboratory tests and procedures used in patient care by physicians to establish or support a diagnosis, monitor treatment or medication, and search for an otherwise undiagnosed condition. Our laboratory is equipped with state-of-the-art communication and connectivity solutions enabling the rapid transmission, analysis and interpretation of generated data. We operate a full service clinical laboratory in Farmingdale, New York, a network of over 30 patient service centers throughout New York, New Jerseyand Connecticut, two free standing "STAT" or rapid response laboratories in New York Cityand Connecticut, an in-house logistics department, and an information technology department. Under our license in New York State, we are able to offer testing services to clinical laboratories and physicians nationwide. The Clinical Laboratory Services reporting unit is impacted by various risk factors, including among others, reduced reimbursements from third party payers for testing performed and from recent health care legislation. Despite the growth we have experienced in previous years, there can be no assurance future growth can be achieved. The introduction of new molecular and esoteric tests is expected to increase our revenue per test and could offset impacts from the above factors. The Company anticipates improved profitability with increased service volume. 25 Enzo Products manufactures, develops and markets products and tools for clinical research, drug development and bioscience research customers worldwide. Underpinned by broad technological capabilities, Enzo Life Scienceshas 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. We are internationally recognized and acknowledged as a leader in the development, manufacturing validation and commercialization of numerous products serving not only the clinical research market, but also the life sciences markets in the fields of cellular analysis and drug discovery, among others. Our operations are supported by global operations allowing for the efficient marketing and delivery of our products around the world. Enzo Therapeuticsis 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 Therapeuticshas 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 100 patents and patent applications. In December 2020, Enzo announced it will consider various avenues to unlock value in Enzo Therapeutics. Alternatives under consideration include a possible spin-off, sale, joint venture or licensing of its intellectual property. Results of Operations Three months ended April 30, 2021compared to April 30, 2020(in 000s)
Comparative financial data for the three months ended
Favorable 2021 2020 (Unfavorable) % Change Revenues
$ 32,797 $ 16,903$ 15,894 94 Operating costs and expenses: Cost of revenues 16,751 12,478 (4,273 ) (34 ) Research and development 836 1,163 327 28 Selling, general and administrative 12,082 11,061 (1,021 ) (9 ) Legal and related expenses 1,061 1,925 864 45 Total operating costs and expenses 30,730 26,627
(4,103 ) (15 ) Operating income (loss) 2,067 (9,724 ) 11,791 ** Other income (expense): Interest 60 87 (27 ) (31 ) Other (88 ) 135 (223 ) ** Foreign currency loss (33 ) (358 ) 325 91
Total other income (expense) (61 ) (136 )
75 55 Net income (loss)
$ 2,006 $ (9,860 )$ 11,866 ** Net income (loss) per common share: Basic $ 0.04 $ (0.21 )Diluted $ 0.04 $ (0.21 )Weighted average common shares outstanding: Basic 48,391 47,780 Diluted 48,788 47,780 ** not meaningful 26 Consolidated Results: The "2021 period" and the "2020 period" refer to the three months ended April 30, 2021and April 30, 2020, respectively, which represent the third quarters of the Company's fiscal year ending July 31. Impacts of COVID-19 In July 2020, Enzo was granted FDA Emergency Use Authorization (EUA) for its molecular diagnostic and serological testing for COVID-19 and related antibody testing options. Enzo's innovations include virus-inactivating specimen collection media to lessen transmission risks for healthcare providers and clinical laboratory personnel, the development of more relevant positive controls for the tests, and improved sensitivity. Due to the effects of the pandemic, accession volume in the April 30, 2021period exceeded accession volume in the sequential second fiscal quarter ended January 31, 2021and the prior year third quarter ended April 30, 2020period due to COVID-19 testing, offsetting reductions in non-COVID-19 accessions due to the restrictive effects of COVID-19. At this time, it is too early to determine the long term significance of the positive impact from COVID-19 testing and the Company's proprietary product offerings on revenue, profitability and cash flow. We fully expect COVID-19 volume to decline in the quarters ahead as the percentage of Americans who are vaccinated increases. Clinical Services revenues for the 2021 period were $25.0 millioncompared to $10.5 millionin the 2020 period, an increase of $14.5 millionor 139% year-over-year. The 2020 period revenues include a CARES Act Relief Payment grant of $0.7 million. Diagnostic testing volume measured by the total number of accessions for all our testing services increased 140% period over period due to the positive impact from COVID-19 testing, resulting in the 2021 period's revenue increase. COVID-19 testing services have higher reimbursement rates than our core testing resulting in an improvement in our overall liquidation rate for collections. Excluding the impact of COVID-19 testing and the CARES Act grant, revenues for the 2021 period were $0.7 millionhigher than the 2020 period. Estimated collection amounts are subject to the complexities and ambiguities of third party payer billing, reimbursement regulations and claims processing, as well as issues unique to Medicare and Medicaid programs, and require us to consider the potential for adjustments when estimating variable consideration in the recognition of revenue in the period that the related services are rendered. The effect of PAMA directly negatively impacted reimbursements from Medicare and Medicaid in the 2021 and 2020 periods by approximately $0.3 millionand $0.2 million, respectively. Product revenues were $7.8 millionin the 2021 period and $6.4 millionin the 2020 period, an increase of $1.4 millionor 21%. The 2020 period was negatively affected by COVID-19 related government policies throughout the world intended to reduce the spread of the pandemic. In the 2021 period, we saw a rebound in all our geographic markets due to their improvement in infection rates resulting in a rebound in demand.
The cost of Clinical Services was
$12.7 millionin the 2021 period and $9.1 millionin the 2020 period, an increase of $3.6 millionfrom increased COVID-19 testing volume. Utilizing our internal manufacturing capabilities, we reduced some of our reliance on reagents sourced from third parties. The gross profit margin on Clinical Services revenues in the 2021 period improved to 49% versus 12.9% in the 2020 period due to the high margin on COVID-19 testing and liquidation rate improvements The 2020 period was negatively impacted by the lower testing volumes because of the pandemic and its impact on fixed costs coverage.
The cost of product revenue has been
Research and development expenses were
$0.8 millionin the 2021 period and $1.1 millionin the 2020 period, a decrease of $0.3 millionor 28%. The decrease is attributable primarily to the Clinical Services division, where with the increased commercialization of COVID-19 testing, certain research and development resources transitioned to testing services in the current period. 27
Selling, general and administrative expenses were
$12.1 millionduring the 2021 period versus $11.1 millionduring the 2020 period, an increase of $1.0 millionor 9%. The Clinical Services expense increased $1.1 millionprimarily due to higher sales commissions and support services compensation resulting from higher revenues and activity from COVID-19, partially offset by the impact of cost savings initiatives undertaken throughout our fiscal year that ended July 31, 2020. The Life Sciences Products expense increased $0.1 milliondue to an increase in information technology costs. The Other segment decreased $0.3 millionprimarily due to lower self-insured healthcare benefit costs, partially offset by higher consulting fees.
Legal and related costs were
Interest income, net was
$0.1 millionin both the 2021 and 2020 periods. In the 2021 period we earned interest on marketable securities in bond funds made at the beginning of the 2021 period. In the 2020 period we earned interest in money market funds, which earned a significant yield prior to the Federal Reserve'sinterest rate cuts as it targeted near zero interest rates in response to COVID-19. Interest income, net is net of interest paid on a mortgage in both periods. The foreign currency revaluation loss recognized by the Life Sciences Products segment during the 2021 period was $0.1 millioncompared to $0.4 millionin the 2020 period, an improvement of $0.3 million. The larger revaluation loss in the 2020 period was due to significant depreciation of the British pound versus the U.S.dollar at the end of that period compared to the start if the period. The change in the exchange rates of our functional currencies versus the U.S.dollar was less significant at the end of the 2021 period compared to the start. Results of Operations Nine months ended April 30, 2021compared to April 30, 2020(in 000s)
Comparative financial data for the nine months ended
Favorable 2021 2020 (Unfavorable) % Change Revenues
$ 92,918 $ 56,494$ 36,424 64 Operating costs and expenses: Cost of revenues 49,154 40,574 (8,580 ) (21 ) Research and development 2,388 3,282 894 27 Selling, general and administrative 33,109 32,893 (216 ) (1 ) Legal and related expenses 3,993 5,681 1,688 30 Total operating costs and expenses 88,644 82,430
(6,214 ) (8 ) Operating income (loss) 4,274 (25,936 ) 30,210 ** Other income (expense): Interest (40 ) 495 (535 ) ** Other (55 ) 334 (389 ) ** Foreign currency gain 428 (88 ) 516 ** Total other income 333 741 (408 ) (55 ) Net income (loss)
$ 4,607 $ (25,195 )$ 29,802 ** Net income (loss) per common share: Basic $ 0.10 $ (0.53 )Diluted $ 0.10 $ (0.53 )Weighted average common shares outstanding: Basic 48,097 47,668 Diluted 48,201 47,668 ** not meaningful 28 Consolidated Results: The "2021 period" and the "2020 period" refer to the nine months ended April 30, 2021and April 30, 2020, respectively, which represent the first three quarters of the Company's fiscal year ending July 31. Clinical Services revenues for the 2021 period were $70.2 millioncompared to $35.8 millionin the 2020 period, an increase of $34.4 millionor 96% year-over-year. The 2020 period revenues include a CARES Act Relief Payment grant of $0.7 million. Due to COVID-19, diagnostic testing volume measured by the total number of accessions for all our testing services increased approximately 80% period over period, resulting in the 2021 period's revenue increase. COVID-19 testing services have higher reimbursement rates than our core testing resulting in an improvement in our overall liquidation rate for collections. COVID-19 testing offset the impact of the period over period decline in core testing volume as a result of the restrictive effects of COVID-19. Estimated collection amounts are subject to the complexities and ambiguities of third party payer billing, reimbursement regulations and claims processing, as well as issues unique to Medicare and Medicaid programs, and require us to consider the potential for adjustments when estimating variable consideration in the recognition of revenue in the period that the related services are rendered. The effect of PAMA directly negatively impacted reimbursements from Medicare and Medicaid in the 2021 and 2020 periods by approximately $1.1 millionand $0.9 million, respectively.
Product revenues were
$22.7 millionin the 2021 period and $20.7 millionin the 2020 period, an increase of $2.0 millionor 10%. The negative effect of COVID-19 related government policies intended to reduce the spread of the pandemic impacted our Products revenues in the U.S.markets more than in markets in the rest of the world during the 2020 period. The 2021 period increase came mainly from markets outside the U.S., due to their improvement in infection rates and a rebound in demand. The U.S. market also increased slightly. The cost of Clinical Services was $37.4 millionin the 2021 period and $30.4 millionin the 2020 period, an increase of $7.0 millionfrom increased COVID-19 testing volume. Utilizing our internal manufacturing capabilities we reduced some of our reliance on reagents sourced from third parties. The gross profit margin on Clinical Services revenues in the 2021 period was approximately 47% versus 15% in the 2020 period. In the 2021 period, the high margin on COVID-19 testing and liquidation rate improvements offset the effect of reduced volumes of our core testing services.
The cost of product revenue has been
Research and development expenses were
$2.4 millionin the 2021 period and $3.3 millionin the 2020 period, a decrease of $0.9 millionor 27%. The decrease is attributable primarily to the Clinical Services division, where with the increased commercialization of COVID-19 testing, certain research and development resources transitioned to testing services in the current period. Selling, general and administrative expenses were $33.1 millionduring the 2021 period versus $32.9 millionduring the 2020 period, an increase of $0.2 millionor 1%. The Clinical Services expense increased $1.5 millionprimarily due to higher sales commissions and support services compensation resulting from higher revenues and activity from COVID-19, partially offset by the impact of cost savings initiatives undertaken throughout our fiscal year that ended July 31, 2020. The Other segment decreased $1.3 millionprimarily due to lower self-insured healthcare benefit costs. The Life Sciences Products expense decreased $0.1 milliondue to lower travel and other in person marketing expenses. Legal and related expenses were $4.0 millionduring the 2021 period compared to $5.7 millionin the 2020 period, a decrease of $1.7 millionor 30%. There were contested proxy activities in both periods, but we incurred legal expenses relating to the contested proxy throughout the 2020 period compared to only during the latter half of the 2021 period. Interest expense, net was $0.1 millionin the 2021 period versus interest income, net of $0.5 millionin the 2020 period, an unfavorable variance of $0.6 million, and represents interest on cash and cash equivalents and marketable securities net of interest expense, primarily on a mortgage. During the latter three months of the 2021 period, we began to earn interest on marketable securities in bond funds as no interest was being earned on cash in money market funds due to the actions by the Federal Reserveto cut its target interest rates to near zero in response to COVID-19. During most of the 2020 period, we earned interest in money market funds, which earned a significant yield prior to the Federal Reserve'sinterest rate cuts as it targeted near zero interest rates. 29 The foreign currency revaluation gain recognized by the Life Sciences Products segment during the 2021 period was $0.4 millioncompared to a revaluation loss $0.1 millionin the 2020 period, a favorable variance of $0.5 million. The 2021 period revaluation gain was due to significant appreciation of the British pound versus the U.S.dollar as of the end of the period compared to its start. The change in the exchange rates of our functional currencies versus the U.S.dollar was less significant at the end of the 2020 period compared to the start.
Liquidity and capital resources
April 30, 2021, the Company had cash and cash equivalents and marketable securities totaling $45.0 millionof which $1.5 millionwas in foreign accounts, as compared to cash and cash equivalents of $47.9 million, of which $0.9 millionwas in foreign accounts at July 31, 2020. It is the Company's current intent to permanently reinvest these foreign funds outside of the United States, and its current plans do not demonstrate a need to repatriate them to fund its United Statesoperations. The Company had working capital of $42.1 millionat April 30, 2021, an increase of $6.1 million, compared to $36.0 millionat July 31, 2020. The increase in working capital during the nine months ended April 30, 2021was primarily due to increases in current assets such as accounts receivable and inventories, partially offset by a decrease in cash, and a decrease in accounts payable.
Net cash provided by operating activities during the fiscal 2021 period was approximately
$0.3 million, compared to cash used in operations of $12.1 millionduring the fiscal 2020 period, an improvement of approximately $12.4 million. The net cash provided in the 2021 period was due primarily to net income of $4.6 millionand non-cash expenses of approximately $2.8 millionwhich were offset by a net increase of $7.1 millionin operating assets and liabilities including, but not limited to, accounts receivable and inventories. The net cash used in the 2020 period was due to a net loss of $25.2 millionpartially offset by non-cash expenses of $3.5 millionand a net decrease of $9.6 millionin operating assets and liabilities. Net cash used in investing activities during the fiscal 2021 period was approximately $32.9 millionas compared to $0.7 millionin the 2020 period, an increase of $32.2 million. During the 2021 period, we purchased marketable securities totaling $30.0 million. Capital expenditures during the 2021 period also increased $2.2 millioncompared to the 2020 period. Cash used in financing activities in fiscal 2021 was $0.2 millionfor payments related to a mortgage and finance leases. Cash provided by financing activities in fiscal 2020 was $7.1 millionnet, and was due to the PPP and Corona Krise loans. As of April 30, 2021, we have a $7.0 millionloan from the Small Business Administration Paycheck Protection Program (PPP) received during the fiscal year ended July 31, 2020. The PPP loan bears interest of 1% per annum. All or a portion of the PPP Loan, including interest, could be forgiven by the SBA by applying for forgiveness and providing acceptable documentation that demonstrates the funds were used as required by the terms of forgiveness and in accordance with the SBA's requirements. In April 2021we submitted our PPP loan forgiveness application and the loan necessity questionnaire to the SBA through Citibank N.A. our intermediary lending bank. According to the SBA, its review may take up to 90 calendar days from the receipt of the loan forgiveness application and loan necessity questionnaire. Due to complexities with respect to loan forgiveness calculations and government pronouncements with respect to expenditure eligibility, we did not recognize any loan forgiveness as of April 30, 2021and have classified the loan as other short term debt as we expect to earn loan forgiveness on most, if not all of the loan during the current fiscal year. See Note 7 in the notes to consolidated financial statements. No assurance can be given that we will obtain forgiveness of the PPP loan in whole or in
July 31, 2021As of April 30, 2021we have a mortgage principal balance of $4.2 millionentered into for the purchase of a building facility, which bears a fixed interest rate of 5.09% per annum. It requires monthly mortgage payments of $30. Our obligations under the mortgage agreement are secured by the new facility and by a $750cash collateral deposit with the mortgagee as additional security, which is included in other assets as of April 30 2021. Effective October 19, 2020, the Company and the mortgagee agreed to a covenant restructure whereby the mortgagee waived the Company's financial ratio covenant for the fiscal period ended July 31, 2020and modified the mortgage to replace that covenant with a liquidity covenant. The liquidity covenant requires that we own and maintain at all times, and throughout the remaining term of the loan, at least $25 millionof liquid assets, defined as time deposits, money market accounts and commercial paper, and obligations issued by the U.S.government or any of its agencies. The cash collateral agreement was also modified to require compliance with the liquidity covenant for two consecutive fiscal years before the collateral is released back to us. As of April 30, 2021, the Company was in compliance with financial and liquidity covenants related to this mortgage. 30 We believe that our current cash and cash equivalents level, marketable securities, and utilization of the Controlled Equity Offering program if necessary, as disclosed in Note 10 in the Notes to Consolidated Financial Statements are sufficient for its foreseeable liquidity and capital resource needs over at least the next twelve (12) months, although there can be no assurance that future events will not alter such view. Although there can be no assurances, in the event additional capital is required, we believe we have the ability to raise additional funds through equity offerings or other sources. Our liquidity plans are subject to a number of risks and uncertainties, including those described in the Item 1A. "Risk Factors" section of our Form 10-K for the year ended July 31, 2020, some of which are outside our control. Macroeconomic conditions could limit our ability to successfully execute our business plans and therefore adversely affect our liquidity plans. Contractual Obligations There have been no material changes to our Contractual Obligations as reported in our Form 10-K for the fiscal year ended July 31, 2020. Management is not aware of any material claims, disputes or settled matters concerning third party reimbursement that would have a material effect on our financial statements, except as disclosed in Note 12 to the Consolidated Financial Statements.
Off-balance sheet provisions
The Company does not have “off-balance sheet arrangements” as such term is defined in Section 303 (a) (4) of Regulation SK.
Critical Accounting Policies The Company's discussion and analysis of its financial condition and results of operations are based upon
Enzo Biochem, Inc.'sconsolidated financial statements, 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, as permitted under rules promulgated by the Security and Exchange Commission. 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. Estimates
On an ongoing basis, we review our estimates, including those related to contractual charges, allowance for bad debt, inventory, operating lease obligations, goodwill and income taxes. profits.
The Company bases its estimates on experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Revenues - Clinical Services Contractual Adjustment The Company's estimate of contractual adjustment is based on significant assumptions and judgments, such as its interpretation of payer reimbursement policies, and bears the risk of change. The estimation process is based on the experience of amounts approved as reimbursable and ultimately settled by payers, versus the corresponding gross amount billed to the respective payers. The contractual adjustment is an estimate that reduces gross revenue, based on gross billing rates, to amounts expected to be approved and reimbursed. Gross billings are based on a standard fee schedule we set for all third party payers, including Medicare, HMO's and managed care. The Company adjusts the contractual adjustment estimate quarterly, based on its evaluation of current and historical settlement experience with payers, industry reimbursement trends, and other relevant factors. The other relevant factors that affect our contractual adjustment include the monthly and quarterly review of: 1) current gross billings and receivables and reimbursement by payer, 2) current changes in third party arrangements and 3) the growth of in-network provider arrangements and managed care plans specific to our Company. 31 Our clinical business is primarily dependent upon reimbursement from third-party payers, such as Medicare (which principally serves patients 65 and older) and insurers. We are subject to variances in reimbursement rates among different third-party payers, as well as constant changes of reimbursement rates. We expect the efforts to impose reduced reimbursement, more stringent payment policies, and utilization and cost controls by government and other payers to continue. Changes that decrease reimbursement rates or coverage would negatively impact our revenues. The number of individuals covered under managed care contracts or other similar arrangements has grown over the past several years and may continue to grow in the future. In addition, Medicare and other government healthcare programs continue to shift to managed care. These trends will continue to reduce our revenues from these programs. During the three months ended
April 30, 2021and 2020, the contractual adjustment percentages, determined using current and historical reimbursement statistics, were 81.2% and 87.1%, respectively, of gross billings, respectively. During the nine months ended April 30, 2021and 2020, the contractual adjustment percentages, determined using current and historical reimbursement statistics, were 82.2% and 88.2%, respectively, of gross billings, respectively. The improvement in both periods is the result of COVID-19 testing reimbursements more closely matching our gross billing charges and fewer payer denials than what we experience for our core testing services. In general, the Company believes a decline in reimbursement rates or a shift to managed care or similar arrangements may be offset by the positive impact of an increase in the number of molecular tests we perform. However, there can be no assurance that we can increase the number of tests we perform or that if we do increase the number of tests we perform, that we can maintain that higher number of tests performed, or that an increase in the number of tests we perform would result in increased revenue.
The Company estimates (by using a sensitivity analysis) that each 1% point change in the contractual adjustment percentage could result in a change in clinical services revenues of approximately
$3.9 millionand $3.0 millionfor the nine months periods ended April 30, 2021and 2020 respectively, and a change in the net accounts receivable of approximately $0.6 millionas of April 30, 2021.
Our clinical services financial billing system records gross billings using a standard fee schedule for all payers and does not record contractual adjustment by payer at the time of billing. Therefore, we are unable to quantify the effect contractual adjustments recorded during the current period have on revenue recorded in a previous period. However, we can reasonably estimate our monthly contractual adjustment to revenue on a timely basis based on our quarterly review process, which includes: ? an analysis of industry reimbursement trends; ? an evaluation of third-party reimbursement rates changes and changes in reimbursement arrangements with third-party payers;
? ongoing monthly analysis of current and historical claims settlement and
reimbursement experience statistics with payers; and ? an analysis of current gross billings and receivables by payer.
Government assistance grant income
Government assistance grants which are unconditional when received and intended to compensate for expenses incurred or replace lost revenues are recognized when those expenses are incurred or during the period that the lost revenues is experienced, and are included in revenues. Accounts Receivable
Trade receivables are recognized at their realizable value, net of provisions for doubtful debts, which is estimated and recognized in the corresponding turnover period.
The following is a table of the Company's net accounts receivable by services and by products. Net receivables for Clinical Services are detailed by billing category and as a percent to its total net receivables. At
April 30, 2021and July 31, 2020, approximately 69% of the Company's net accounts receivable relates to its Clinical Laboratory Services business, which operates in the New York, New Jerseyand Connecticutmedical communities. 32
The balance of accounts receivable for life sciences products includes foreign receivables of
Net accounts receivable As of As of Billing category April 30, 2021 July 31, 2020 Clinical Services Third party payers
$ 4,23653 % $ 2,45540 % Patient self-pay 1,800 23 2,044 33 Medicare 1,200 15 884 14 HMO's 679 9 797 13 Total Clinical Services 7,915 100 % 6,180 100 % Total Life Sciences 3,560 2,961 Total accounts receivable - net $ 11,475 $ 9,141The Company's ability to collect outstanding receivables from third party payers is critical to its operating performance and cash flows. The primary collection risk lies with uninsured patients or patients for whom primary insurance has paid but a patient portion remains outstanding. The Company also assesses the current state of its billing functions in order to identify any known collection or reimbursement issues in order to assess the impact, if any, on the allowance estimates, which involves judgment. The Company believes that the collectability of its receivables is directly linked to the quality of its billing processes, most notably, those related to obtaining the accurate patient information in order to bill effectively for the services provided. Should circumstances change (e.g. shift in payer mix, decline in economic conditions or deterioration in aging of receivables), our estimates of net realizable value of receivables could be reduced by a material amount. Billing for clinical services is complicated because of many factors, especially: the differences between our standard gross fee schedule for all payers and the reimbursement rates of the various payers we deal with, disparity of coverage and information requirements among the various payers, and disputes with payers as to which party is responsible for reimbursement. The following table indicates the Clinical Services aged gross receivables by payer group which is prior to adjustment to gross receivables for: 1) contractual adjustment, 2) fully reserved balances not yet written off, and 3) other revenue adjustments. Third Party As of April 30, 2021 Total % Payers % Medicare % Self-Pay % HMO's % 1-30 days $ 20,75132 $ 10,45828 $ 2,52236 $ 1,48119 $ 6,28952 31-60 days 7,422 12 3,913 10 731 10 1,538 20 1,240 10 61-90 days 5,457 8 3,114 8 555 8 1,057 13 731 6 91-120 days 5,159 8 3,050 8 712 10 907 12 490 4 121-150 days 4,181 6 2,678 7 346 5 740 9 417 3 Greater than 150 days 21,437 34 14,213 39 2,142 31 2,131 27 2,950 25 Totals $ 64,408100 % $ 37,426100 % $ 7,008100 % $ 7,854100 % $ 12,117100 % Third Party As of July 31, 2020 Total % Payers % Medicare % Self-Pay % HMO's % 1-30 days $ 21,07444 $ 13,62046 $ 3,89742 $ 1,76927 $ 1,78894 31-60 days 7,080 15 4,588 15 1,081 12 1,307 20 104 5 61-90 days 3,616 8 2,358 9 618 7 632 10 8 1 91-120 days 1,474 3 940 3 243 3 284 4 7 - 121-150 days 2,614 6 1,594 5 367 4 649 10 4 - Greater than 150 days 11,506 24 6,518 22 3,051 32 1,936 29 1 - Totals $ 47,364100 % $ 29,618100 % $ 9,257100 % $ 6,577100 % $ 1,912100 % 33 Income Taxes The Company accounts for income taxes under the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The liability method requires that any tax benefits recognized for net operating loss carry forwards and other items be reduced by a valuation allowance where it is not more likely than not the benefits will be realized in the foreseeable future. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under the liability method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. It is the Company's policy to provide for uncertain tax positions and the related interest and penalties based upon management's assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. To the extent the Company prevails in matters for which a liability for an unrecognized tax benefit is established or is required to pay amounts in excess of the liability, the Company's effective tax rate in a given financial statement period may be affected. Inventory
The Company values inventory at the lower of cost (first-in, first-out) or net realizable value, which approximates market. Work-in-process and finished goods inventories consist of material, labor, and manufacturing overhead. Write downs of inventories to net realizable value are based on a review of inventory quantities on hand and estimated sales forecasts based on sales history and anticipated future demand. Unanticipated changes in demand could have a significant impact on the value of our inventory and require additional write downs of inventory which would impact our results of operations.
Leases – asset rights of use and operating lease debts
The Company determines if an arrangement is or contains a lease at contract inception. The Company leases buildings, office space, patient service centers, and equipment primarily through operating leases, and equipment through a limited number of finance leases. Generally, a right-of-use asset, representing the right to use the underlying asset during the lease term, and a lease liability, representing the payment obligation arising from the lease, are recognized on the balance sheet at lease commencement based on the present value of the payment obligation. For operating leases, expense is recognized on a straight-line basis over the lease term. For finance leases, interest expense on the lease liability is recognized using the effective interest method and amortization of the right-of-use asset is recognized on a straight-line basis over the shorter of the estimated useful life of the asset or the lease term. Short-term leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company primarily uses its incremental borrowing rate in determining the present value of lease payments as the Company's leases generally do not provide an implicit rate. The Company has lease agreements with (i) right-of-use asset payments and (ii) non-lease components (i.e. payments related to maintenance fees, utilities, etc.,) which have generally been combined and accounted for as a single lease component. On at least an annual basis, we perform a review of our business to determine if events or changes in circumstances have occurred that indicate that it is more likely than not that the carrying amount of an asset group, including long lived assets such as right of use assets, is not recoverable. If such events or changes in circumstances were deemed to have occurred, we would perform an impairment test of such long lived assets and record any noted impairment loss. Should the impact of the COVID-19 pandemic become significantly worse than currently expected, it is possible that we could incur impairment charges on long lived assets in the future. 34
Goodwillrepresents the excess of the cost of an acquisition over the fair value of the net assets acquired. The Company tests goodwill and long-lived assets annually as of the first day of the fourth quarter, or more frequently if indicators of potential impairment exist. In assessing goodwill and long-lived assets for impairment, the Company has the option to perform a qualitative assessment to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company is not required to perform a quantitative test in assessing goodwill and long-lived assets for impairment. However, if the Company concludes otherwise or elects not to perform the qualitative assessment, then it identifies the reporting units and compares the fair value of each of these reporting units to their respective carrying amount. If the carrying amount of the reporting unit is less than its fair value, no impairment exists. If the carrying amount of the reporting unit is higher than its fair value, the impairment charge is the amount by which the carrying amount exceeds its fair value, not to exceed the total amount of goodwill and intangibles allocated
to the reporting unit. On at least an annual basis, we perform a review of our business to determine if events or changes in circumstances have occurred that indicate that it is more likely than not that the fair value of a reporting unit with goodwill is less than its carrying value. If such events or changes in circumstances were deemed to have occurred, we would perform an impairment test of goodwill and record any noted impairment loss. Should the impact of the COVID-19 pandemic become significantly worse than currently expected, it is possible that we could incur impairment charges in the future.
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