ENZO BIOCHEM, INC. 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 theSecurities and Exchange Commission , some of which are set forth in Item 1A - Risk Factors in our Form 10-K filing for theJuly 31, 2020 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 theSecurities 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 ofthe United States and 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, 2021 exceeded accession volume in both the
sequential or second fiscal quarter ended January 31, 2021 and 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)
InMarch 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:
? Providing clinical laboratories a one-year reprieve from the
Medicare and Medicaid Services (CMS) private payer prices reporting
requirements under the Protecting Access to Medicare Act ("PAMA") as well as a
one-year delay of a reimbursement rate reduction of 15% for clinical laboratory
services provided under Medicare that was scheduled to take place starting
Schedule (CLFS) for calendar years after 2021 will be based on future surveys
of private payer market rates. Medicare and Medicaid reimbursement reduction
for calendar years 2022-2024 is capped by PAMA at 15% annually, which we
estimate could then negatively impact our annualized Medicare and Medicaid
revenues by approximately
legal basis for the private payer data collection methodology CMS used to
derive the data from which median prices were calculated. ACLA continues to
work with
could reduce the negative impact of PAMA as currently implemented by CMS. The
long-term effect of these efforts on Medicare CLFS rates is not determinable
? Appropriating
lost revenues that are attributable to the COVID-19 pandemic. In
received from Medicare a CARES Act Relief Payment grant of approximately
from the initial tranche and in
approximately$750 .
? Allocated
loans through the
received approximately
? Providing an advance on testing services payments which can be either paid back
at any time or earned back starting one year from receipt. In
applied for and received a Medicare advance payment of
? Suspended Medicare sequestration from
Consolidated Appropriations Act of 2021 extended the suspension period to March
31, 2021. An Act to Prevent Across-the-Board Direct Spending Cuts, and for
Other Purposes, signed into law on
period to
sequestration resulted in a small benefit to us in the form of higher
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 are brief descriptions of each of our operating segments (See Note 11 in the Notes to 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 aClinical Laboratory Improvement Amendments of 1988 ("CLIA") certified andCollege of American Pathologists ("CAP") accredited medical laboratory located inNew York provides us the opportunity to more rapidly introduce cutting edge products and services to the clinical marketplace.Enzo Clinical Labs offers an extensive menu of molecular and other clinical laboratory tests and procedures used in patient care by physicians to establish or support a diagnosis, monitor treatment or medication, and search for an otherwise undiagnosed condition. Our laboratory is equipped with state-of-the-art communication and connectivity solutions enabling the rapid transmission, analysis and interpretation of generated data. We operate a full service clinical laboratory inFarmingdale, New York , a network of over 30 patient service centers throughoutNew York ,New Jersey andConnecticut , two free standing "STAT" or rapid response laboratories inNew York City andConnecticut , an in-house logistics department, and an information technology department. Under our license inNew 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 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. 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 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 ofEnzo 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 100 patents and patent applications. InDecember 2020 , Enzo announced it will consider various avenues to unlock value inEnzo Therapeutics . Alternatives under consideration include a possible spin-off, sale, joint venture or licensing of its intellectual property. Results of Operations Three months endedApril 30, 2021 compared toApril 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 91Total 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, 2021 and 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, 2021 period exceeded accession
volume in the sequential second fiscal quarter ended January 31, 2021 and the
prior year third quarter ended April 30, 2020 period 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 million compared to
$10.5 million in the 2020 period, an increase of $14.5 million or 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 million higher 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 million and $0.2
million , respectively.
Product revenues were $7.8 million in the 2021 period and $6.4 million in the
2020 period, an increase of $1.4 million or 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 million in the 2021 period and$9.1 million in the 2020 period, an increase of$3.6 million from 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 revenues was
Research and development expenses were$0.8 million in the 2021 period and$1.1 million in the 2020 period, a decrease of$0.3 million or 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 million during the 2021 period versus$11.1 million during the 2020 period, an increase of$1.0 million or 9%. The Clinical Services expense increased$1.1 million primarily 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 endedJuly 31, 2020 . The Life Sciences Products expense increased$0.1 million due to an increase in information technology costs. The Other segment decreased$0.3 million primarily due to lower self-insured healthcare benefit costs, partially offset by higher consulting fees.
Legal and related expenses were
Interest income, net was$0.1 million in 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 theFederal Reserve's interest 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 million compared to$0.4 million in 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 theU.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 theU.S. dollar was less significant at the end of the 2021 period compared to the start. Results of Operations Nine months endedApril 30, 2021 compared toApril 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,
2021 and 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 million compared to
$35.8 million in the 2020 period, an increase of $34.4 million or 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 million and $0.9
million , respectively.
Product revenues were$22.7 million in the 2021 period and$20.7 million in the 2020 period, an increase of$2.0 million or 10%. The negative effect of COVID-19 related government policies intended to reduce the spread of the pandemic impacted our Products revenues in theU.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 theU.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 million in the 2021 period and$30.4 million in the 2020 period, an increase of$7.0 million from 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 revenues was
Research and development expenses were$2.4 million in the 2021 period and$3.3 million in the 2020 period, a decrease of$0.9 million or 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 million during the 2021 period versus$32.9 million during the 2020 period, an increase of$0.2 million or 1%. The Clinical Services expense increased$1.5 million primarily 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 endedJuly 31, 2020 . The Other segment decreased$1.3 million primarily due to lower self-insured healthcare benefit costs. The Life Sciences Products expense decreased$0.1 million due to lower travel and other in person marketing expenses. Legal and related expenses were$4.0 million during the 2021 period compared to$5.7 million in the 2020 period, a decrease of$1.7 million or 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 million in the 2021 period versus interest income, net of$0.5 million in 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 theFederal Reserve to 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 theFederal Reserve's interest 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 million compared to a revaluation loss$0.1 million in 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 theU.S. dollar as of the end of the period compared to its start. The change in the exchange rates of our functional currencies versus theU.S. dollar was less significant at the end of the 2020 period compared to the start.
Liquidity and Capital Resources
AtApril 30, 2021 , the Company had cash and cash equivalents and marketable securities totaling$45.0 million of which$1.5 million was in foreign accounts, as compared to cash and cash equivalents of$47.9 million , of which$0.9 million was in foreign accounts atJuly 31, 2020 . It is the Company's current intent to permanently reinvest these foreign funds outside ofthe United States , and its current plans do not demonstrate a need to repatriate them to fund itsUnited States operations. The Company had working capital of$42.1 million atApril 30, 2021 , an increase of$6.1 million , compared to$36.0 million atJuly 31, 2020 . The increase in working capital during the nine months endedApril 30, 2021 was 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 million during 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 million and non-cash expenses of approximately$2.8 million which were offset by a net increase of$7.1 million in 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 million partially offset by non-cash expenses of$3.5 million and a net decrease of$9.6 million in operating assets and liabilities. Net cash used in investing activities during the fiscal 2021 period was approximately$32.9 million as compared to$0.7 million in 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 million compared to the 2020 period. Cash used in financing activities in fiscal 2021 was$0.2 million for payments related to a mortgage and finance leases. Cash provided by financing activities in fiscal 2020 was$7.1 million net, and was due to the PPP and Corona Krise loans. As ofApril 30, 2021 , we have a$7.0 million loan from the Small Business Administration Paycheck Protection Program (PPP) received during the fiscal year endedJuly 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. InApril 2021 we submitted our PPP loan forgiveness application and the loan necessity questionnaire to the SBA throughCitibank 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 ofApril 30, 2021 and 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
part byJuly 31, 2021 As ofApril 30, 2021 we have a mortgage principal balance of$4.2 million entered 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$750 cash collateral deposit with the mortgagee as additional security, which is included in other assets as ofApril 30 2021 . EffectiveOctober 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 endedJuly 31, 2020 and 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 million of liquid assets, defined as time deposits, money market accounts and commercial paper, and obligations issued by theU.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 ofApril 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 endedJuly 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 endedJuly 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 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 uponEnzo Biochem, Inc.'s consolidated financial statements, certain information and footnote disclosure, normally included in annual financial statements prepared in accordance with accounting principles generally accepted inthe United States , have been condensed or omitted, as permitted under rules promulgated by theSecurity 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 on-going basis, we evaluate our estimates, including those related to contractual expense, allowance for uncollectible accounts, inventory, operating lease liabilities, goodwill and income taxes.
The Company bases its estimates on experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
Revenues - Clinical Services
Contractual Adjustment
The Company's estimate of contractual adjustment is based on significant
assumptions and judgments, such as its interpretation of payer reimbursement
policies, and bears the risk of change. The estimation process is based on the
experience of amounts approved as reimbursable and ultimately settled by payers,
versus the corresponding gross amount billed to the respective payers. The
contractual adjustment is an estimate that reduces gross revenue, based on gross
billing rates, to amounts expected to be approved and reimbursed.
Gross billings are based on a standard fee schedule we set for all third party
payers, including Medicare, HMO's and managed care. The Company adjusts the
contractual adjustment estimate quarterly, based on its evaluation of current
and historical settlement experience with payers, industry reimbursement trends,
and other relevant factors. The other relevant factors that affect our
contractual adjustment include the monthly and quarterly review of: 1) current
gross billings and receivables and reimbursement by payer, 2) current changes in
third party arrangements and 3) the growth of in-network provider arrangements
and managed care plans specific to our Company.
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, 2021 and 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, 2021 and 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 million and$3.0 million for the nine months periods endedApril 30, 2021 and 2020 respectively, and a change in the net accounts receivable of approximately$0.6 million as ofApril 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;
? 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.
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
Accounts receivable are reported at realizable value, net of allowances for doubtful accounts, which is estimated and recorded in the period of the related revenue.
The following is a table of the Company's net accounts receivable by services and by products. Net receivables for Clinical Services are detailed by billing category and as a percent to its total net receivables. AtApril 30, 2021 andJuly 31, 2020 , approximately 69% of the Company's net accounts receivable relates to its Clinical Laboratory Services business, which operates in theNew York ,New Jersey andConnecticut medical communities. 32
The accounts receivable balance for Life Science 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 $ 4,236 53 % $ 2,455 40 %
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 $ 9,141
The Company's ability to collect outstanding receivables from third party payers
is critical to its operating performance and cash flows. The primary collection
risk lies with uninsured patients or patients for whom primary insurance has
paid but a patient portion remains outstanding. The Company also assesses the
current state of its billing functions in order to identify any known collection
or reimbursement issues in order to assess the impact, if any, on the allowance
estimates, which involves judgment.
The Company believes that the collectability of its receivables is directly
linked to the quality of its billing processes, most notably, those related to
obtaining the accurate patient information in order to bill effectively for the
services provided. Should circumstances change (e.g. shift in payer mix, decline
in economic conditions or deterioration in aging of receivables), our estimates
of net realizable value of receivables could be reduced by a material amount.
Billing for clinical services is complicated because of many factors,
especially: the differences between our standard gross fee schedule for all
payers and the reimbursement rates of the various payers we deal with, disparity
of coverage and information requirements among the various payers, and disputes
with payers as to which party is responsible for reimbursement.
The following table indicates the Clinical Services aged gross receivables by
payer group which is prior to adjustment to gross receivables for: 1)
contractual adjustment, 2) fully reserved balances not yet written off, and 3)
other revenue adjustments.
Third
Party
As of April 30, 2021 Total % Payers % Medicare % Self-Pay % HMO's %
1-30 days $ 20,751 32 $ 10,458 28 $ 2,522 36 $ 1,481 19 $ 6,289 52
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 $ 64,408 100 % $ 37,426 100 % $ 7,008 100 % $ 7,854 100 % $ 12,117 100 %
Third
Party
As of July 31, 2020 Total % Payers % Medicare % Self-Pay % HMO's %
1-30 days $ 21,074 44 $ 13,620 46 $ 3,897 42 $ 1,769 27 $ 1,788 94
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 $ 47,364 100 % $ 29,618 100 % $ 9,257 100 % $ 6,577 100 % $ 1,912 100 %
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 - right of use assets and operating lease liabilities
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
Goodwill Goodwill represents 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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