ENZO BIOCHEM: Management report and analysis of the financial situation and operating results (form 10-K)
See in this Form 10-K for the closed fiscal year
The Company's Enzo Clinical Laboratory Services and Enzo Life Sciences Products reporting units, as described below, are affected by different US and global economic conditions which are included in Item 1A, Risk Factors. 52 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,
Enzo was granted FDA Emergency Use Authorizations (EUAs) and EUA extensions for our molecular diagnostic and serological testing for COVID-19 and related antibody testing options, for our sample collection kit, an innovative virus-inactivating specimen collection media that lessens transmission risks for healthcare providers and clinical laboratory personnel, for our use of pooled samples, and for our rapid extraction method. Other innovations include the development of more relevant positive controls for the tests, and improved sensitivity. During fiscal 2021, we experienced growing demand for COVID-19 testing and we made significant investments to expand our capacity throughout the period in order to satisfy the demand, which substantially increased our testing volumes. 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 approved and authorized vaccines, mask and vaccine mandates, 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 expect COVID-19 volume to decline in the quarters ahead as the percentage of Americans who are vaccinated increases, although the emergence and spread of variants may cause our COVID-19 testing volume to increase again. Global supply chain issues due to the pandemic continue to hamper both the manufacturing of products within the life science segment 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 CARES Act Relief Payment 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
being paid back.
? 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. 53
We are comprised of three operating companies that have evolved out of our core competence: the use of nucleic acids as informational molecules and the use of compounds for immune modulation. These wholly-owned operating companies and the foreign subsidiaries of
Enzo Life Sciencesconduct their operations through three reportable segments. Below are brief descriptions of each of the three operating segments (see Note 17 in the Notes to Consolidated Financial Statements): Enzo Clinical Laboratory Services is a regional clinical laboratory serving the greater New Yorkand New Jerseymedical communities and expanding into Connecticut. The Company believes having clinical diagnostic services allows us to capitalize first hand on our extensive advanced molecular and cytogenetic capabilities and the broader trends in predictive and personalized diagnostics. We offer a menu of routine and esoteric clinical laboratory tests or procedures used in general patient care by physicians to establish or support a diagnosis, monitor treatment or medication, or search for an otherwise undiagnosed condition. We operate a full-service clinical laboratory in Farmingdale, New York, a network of over 30 patient service centers throughout greater New Yorkand New Jersey, a free-standing "STAT" or rapid response laboratories in New York Cityand Connecticut, and a full-service phlebotomy center and an in-house logistics department. Payments for clinical laboratory testing services are made by the Medicare program, healthcare insurers and patients. 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.
Enzo Life Sciences Products manufactures, develops and markets products and tools to life sciences, drug development and clinical research customers world-wide and has amassed a large patent and technology portfolio.
Enzo Life Sciences, Inc.is a recognized leader in labeling and detection technologies across research and diagnostic markets. Our strong portfolio of proteins, antibodies, peptides, small molecules, labeling probes, dyes and kits provides life science researchers tools for target identification/validation, high content analysis, gene expression analysis, nucleic acid detection, protein biochemistry and detection, and cellular analysis. We are globally recognized and acknowledged as a leader in manufacturing, in-licensing, and commercialization of over 40,000 products. Our strategic focus is directed to innovative high quality research reagents and kits in the primary key research areas of genomics, immunohistochemistry, immunoassays, cellular analysis, and small molecule chemistry. The segment is an established source for a comprehensive panel of products to scientific experts in the fields of cancer, cardiovascular disease, neurological disorders, diabetes and obesity, endocrine disorders, infectious and autoimmune disease, hepatotoxicity and renal injury. 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. The Company has focused its efforts on developing treatment regimens for diseases and conditions in 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.
The following table summarizes the sources of income for the completed years.
Clinical laboratory services
$ 51,11563 % Product revenues 30,747 26 26,561 35 30,055 37 Grant income - - 1,496 2 - - Total $ 117,731100 % $ 76,021100 % $ 81,170100 % 54 Results of Operations Fiscal year ending July 31, 2021compared to July 31, 2020(in 000s)
Comparative financial data for the years ended
Favorable 2021 2020 (Unfavorable) % Change Revenues
$ 117,731 $ 76,021$ 41,710 55 Operating costs and expenses: Cost of revenues 64,154 52,251 (11,903 ) (23 ) Research and development 3,252 4,448 1,196 27 Selling, general and administrative 44,905 42,960 (1,945 ) (5 ) Legal and related expenses 4,728 6,729 2,001 30 Total operating costs and expenses 117,039 106,388
(10,651 ) (10 ) Operating income (loss) 692 (30,367 ) 31,059 ** Other income (expense): Interest 8 454 (446 ) (98 ) Other 6,905 488 6,417 ** Foreign currency gain 270 905 (635 ) (70 )
Income (loss) before income taxes
$ 7,875 $ (28,520 )$
36,395 ** ** not meaningful Consolidated Results:
The “2021 period” and the “2020 period” refer to the financial year ended
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. In January 2021, Enzo received an expansion of its Emergency Use Authorization (EUA) from the U.S. Food and Drug Administration(FDA) authorizing the use of pooled samples containing up to five individual swab specimens with the Company's AMPIPROBE® SARS-Cov-2 Test System utilizing tests on three different platforms including Enzo's proprietary GENFLEX® automated high-throughput platform. In July 2021, Enzo received an expansion of its FDA Emergency Use Authorization (EUA) for the Company's rapid extraction method
on its proprietary test system. Due to the effects of the pandemic and COVID-19 testing, accession volume in the 2021 period exceeded accession volume in the 2020 period by 65%, offsetting reductions in non-COVID-19 accessions due to the continuing 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 experienced a decline in COVID-19 accession volume in the fourth quarter of the 2021 period and fully expect COVID-19 volume to decline in the quarters ahead as the percentage of Americans who are vaccinated increases. However, the emergence and spread of variants have caused our COVID-19 testing volume to increase again subsequent to the end of the fiscal year period. We expect continued COVID-19 testing opportunities based on testing for entertainment and travel as well as for school and workplace reopenings. 55
Clinical services revenues for the 2021 period were
$87.0 millioncompared to $49.5 millionin the 2020 period, an increase of $37.5 millionor 76%. Revenues from COVID-19 testing represented 48% and 8% of Clinical revenues in the 2021 and 2020 periods, respectively. Revenues for the 2020 period include two CARES Act Relief Payment grants totaling $1.5 million; there were no grants in the 2021 period. Diagnostic testing volume measured by the total number of accessions for all our testing services increased approximately 65% 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 and specialty testing resulting in an improvement in our overall liquidation rate for collections and revenue per accession. Excluding the impact of COVID-19 testing and the CARES Act grant, revenues for the 2021 period were $1.1 millionhigher than the 2020 period, and non COVID-19 testing volume was 1% higher. 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 $1.4 millionand $1.2 million, respectively.
Product revenues were
$30.7 millionin the 2021 period and $26.6 millionin the 2020 period, an increase of $4.2 millionor 16%. During the 2020 period, 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. A greater portion of the 2021 period increase came from markets outside the U.S., though the U.S. market also increased, especially in the fourth quarter of the 2021 period. The worldwide growth is due to the improvement in infection rates and a rebound in demand as academia returned from complete shutdown, though some industrial customers still have not returned to full operations. The cost of Clinical Services was $48.2 millionin the 2021 period and $38.9 millionin the 2020 period, an increase of $9.3 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 45% versus 19% in the 2020 period, excluding the 2020 period grants. In the 2021 period, the high margin on COVID-19 testing and liquidation rate improvements offset the effect of reduced volumes of certain specialty testing services,
such as genetics testing.
The cost of Product revenues was
$16.0 millionin the 2021 period and $13.4 millionin the 2020 period, an increase of $2.6 millionor 19%. The gross profit margin on Products was 48.0% in the 2021 period and 49.6% in the 2020 period, negatively impacted by an increase in headcount, overhead and the cost of production materials. Research and development expenses were $3.3 millionin the 2021 period and $4.4 millionin the 2020 period, a decrease of $1.2 millionor 27%. The decrease is attributable to the Clinical Services segment, where with the increased commercialization of COVID-19 testing, certain research and development resources transitioned to testing services in the current period. During the 2020 period, the segment's efforts were directed toward lab developed tests (LDTs) for the detection of COVID-19 and antibodies. Research and development expenses also declined for the Therapeutics segment, due to the timing of activities. Selling, general and administrative expenses were $44.9 millionduring the 2021 period versus $43.0 millionduring the 2020 period, an increase of $1.9 millionor 5%. The Clinical Services expense increased $2.5 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 Life Sciences Products expense increased $0.5 milliondue to higher information technologies expenses and accrual of plant closure costs. The Other segment decreased $1.1 millionprimarily due to lower self-insured healthcare benefit costs. Legal and related expenses were $4.7 millionduring the 2021 period compared to $6.7 millionin the 2020 period, a decrease of $2.0 millionor 30%. There were contested proxy activities in both periods, but we incurred legal expenses relating to the contested proxy through more of the 2020 period compared to
the 2021 period. Interest income, net was zero in the 2021 period versus interest income, net of
$0.5 millionin the 2020 period, an unfavorable variance of $0.5 million, and in both periods represents interest on cash and cash equivalents and marketable securities net of interest expense, primarily on a mortgage. During the latter half of the 2021 period, we invested in and began to earn interest on marketable securities in bond funds since no interest was being earned on cash in money market funds because the Federal Reservecut 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.
The other products for the period 2021 and 2020 were
respectively, an increase of
The foreign currency revaluation gain recognized by the Life Sciences Products segment during the 2021 period was
$0.3 millioncompared to a revaluation gain of $0.9 millionin the 2020 period, an unfavorable variance of $0.6 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 revaluation gain in the 2020 period was larger due to significant appreciation of the British pound, Swiss franc and Euro versus the U.S.dollar as of the end of that period compared to its start. 56 Results of Operations Fiscal year ending July 31, 2020compared to July 31, 2019(in 000s)
Comparative financial data for the years ended
Favorable 2020 2019 (Unfavorable) % Change Revenues
$ 76,021 $ 81,170$ (5,149 ) (6 ) Operating costs and expenses: Cost of revenues 52,251 57,922 5,671 10 Research and development 4,448 3,175 (1,273 ) (40 ) Selling, general and administrative 42,960 44,265
1,305 3 Legal and related expenses 6,729 3,000 (3,729 ) (124 ) Legal settlements, net - (28,925 ) (28,925 ) (100 ) Total operating costs, expenses and legal settlements, net 106,388 79,437 (26,951 ) (34 ) Operating (loss) income (30,367 ) 1,733 (32,100 ) ** Other income (expense): Interest 454 1,056 (602 ) (57 ) Other 488 382 106 28 Foreign currency gain (loss) 905 (682 ) 1,587 **
(Loss) income before income taxes
$ (28,520 ) $ 2,489$
(31,009 ) ** ** not meaningful Consolidated Results:
The “2020 period” and the “2019 period” refer to the financial year ended
Clinical services revenues for the 2020 period were
$49.5 millioncompared to $51.1 millionin the 2019 period, a decrease of $1.6 millionor 3%. Revenues for the 2020 period include two CARES Act Relief Payment grants totaling $1.5 million. Due to COVID-19, diagnostic testing volume measured by the total number of accessions for all our testing services decreased 7% period over period, resulting in the 2020 period's revenue decrease. COVID-19 testing services provided in the four months of the 2020 period partially offset the impact of the decline in total testing volume and also contributed to liquidation rate improvement. In the latter part of our third quarter, while accessions had not returned to prior year levels, we started to see accession volume rebound. Due to the addition of COVID-19 testing, accession volume in the month of July 2020exceeded July 2019volume. In the normal course of business, 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 impact from the Protecting Access to Medicare Act ("PAMA") continues to negatively impact reimbursements from Medicare and third party payers. Product revenues for the 2020 and 2019 periods were $26.6 millionand $30.1 million, respectively. The decrease of $3.5 millionor 12% is the result of the policies and initiatives ordered by national and local governments designed to reduce the transmission of COVID-19. The negative effect of these government policies on our products revenues was greater in the U.S. market than markets in the rest of the world, and began in the latter half of the third quarter of
the 2020 period. 57 The cost of Clinical Services was
$38.9 millionin the 2020 period and $44.2 millionin the 2019 period, a decrease of $5.3 million, attributable to the overall decline in testing volume, resulting in reduction in reagent usage and outside reference testing expense. The gross profit margin on Clinical Services revenues, excluding the grants in the 2020 period, was 19.0% in the 2020 period and 13.4% in the 2019 period. In the 2020 period, liquidation rate improvements and the higher margin on COVID-19 testing helped to offset the effect of reduced volumes of our genetics and core testing services. The cost of product revenues was $13.4 millionin the 2020 period and $13.7 millionin the 2019 period, a decrease of $0.3 millionor 2% due to the decrease in revenues. The gross profit margin on products was 49.6% in the 2020 period and 54.4% in the 2019 period, negatively impacted by the decline of higher margin sales in the U.S. market from COVID-19. Research and development expenses were $4.4 millionin the 2020 period and $3.2 millionin the 2019 period, an increase of $1.2 millionor 38%. The increase is entirely attributed to the Clinical Services segment for lab developed tests (LDTs) including those based on our proprietary GENFLEX® platform. During the 2020 period, our research was focused on lab developed tests for the detection of COVID-19 and for the detection of COVID-19 antibodies. Our lab developed test for the detection of COVID-19 was approved under the FDA'sEmergency Use Authorization (EUA) authority. Other tests based on GENFLEX®were approved by The New York State Department of Health. Selling, general and administrative expenses were $43.0 millionduring the 2020 period versus $44.3 millionduring the 2019 period, a decrease of $1.3 millionor 3%. The Clinical Services expense decreased $0.7 milliondue to cost savings initiatives and lower commissions. The Life Sciences Products expense decreased $1.4 milliondue to reductions in sales, marketing and administrative salaries and related costs, travel expenses, and intangibles amortization. The other segment increased $0.8 millionprimarily for higher self-insured healthcare benefit costs and occupancy costs. Legal and related expenses were $6.7 millionduring the 2020 period compared to $3.0 millionin the 2019 period, an increase of $3.7 million. During the 2020 period, we incurred $4.1 millionfor contested proxy costs relating to our February 2020annual shareholders meeting. Third-party payers, including government programs, may decide to deny payment or recoup payments for testing that they contend was improperly billed or not medically necessary, against their coverage determinations, or for which they believe they have otherwise overpaid (including as a result of their own error), and we may be required to refund payments already received. During the third fiscal quarter of 2019, a significant third-party payer informed us outside of their typical business practice that they believed it overpaid us during certain periods of fiscal 2018. We disputed these claims and sent legal appeal letters to the payer. In the 2020 period, we recorded $0.8 millionin legal and related expenses as a result of reduced reimbursements this payer made to us. In the third quarter of the 2020 period, we and the payer entered into a settlement agreement and release whereby the parties agrees that the $0.8 millionpreviously withheld by the payer fully and completely satisfied the dispute. Legal expense associated with other legal activity including costs associated with on-going litigation and contract disputes decreased $1.2 milliondue to the timing of activities. Legal settlements, net were $28.9 millionin the 2019 period versus none in the 2020 period. During the 2019 period the Company as plaintiff finalized and executed settlement agreements with Roche ( $19.4 million, net), and Hologic
$9.5 million, net). Interest income, net was $0.5 millionin the 2020 period and $1.1 millionin the 2019 period and represents interest on cash and cash equivalents net of interest expense. During the 2020 period, the amount of investable cash was lower as were interest rates earned on deposits. Due to the actions by the Federal Reserveto cut its target interest rates near zero in response to COVID-19, we expect there will be substantially no interest earned on our cash and cash equivalents for the foreseeable future. The foreign currency revaluation gain recognized by the Life Sciences Products segment during the 2020 period was $0.9 millioncompared to a loss of $0.7 millionin the 2019 period, a favorable variance of $1.6 million. The gain was due to year over year appreciation of the British pound and Swiss franc versus the U.S.dollar as of the end of the 2020 period, compared to their year over year depreciation as of the end of the 2019 period. 58
Liquidity and capital resources
July 31, 2021, the Company had cash and cash equivalents and marketable securities totaling $43.5 millionof which $0.9 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 $44.5 millionat July 31, 2021, compared to $36.0 millionat July 31, 2020, an increase of $8.5 million. The increase in working capital was primarily due to a decrease in current liabilities, particularly the Paycheck Protection Program (PPP) loan of $7.0 million, which was forgiven during the fourth quarter of the year ended July 31, 2021.
Net cash provided by operating activities during the fiscal 2021 period was approximately
$0.4 million, compared to cash used in operations of $17.2 millionduring the fiscal 2020 period, an improvement of approximately $17.6 million. The net cash provided in the 2021 period was due primarily to net income of $7.9 millionwhich was offset by net non-cash adjustments of $2.7 millionand by a net increase of $4.8 millionin operating assets and liabilities including, but not limited to inventories and other assets. Net cash used in operating activities in fiscal 2020 was approximately $17.2 millionas compared to net cash provided by operating activities of $4.8 millionin fiscal 2019, an increase in net cash used in operations of approximately $22.0 million. This increase in net cash used in operating activities in the 2020 period versus 2019 was due to the year over year increase of $31.0 millionin net loss, partially offset by a positive net change in adjustments and operating assets and liabilities of $9.0 million. Net cash used in investing activities during the fiscal 2021 period was approximately $34.5 millionas compared to $2.2 millionin the 2020 period, an increase of $32.3 million. During the 2021 period, we purchased marketable securities totaling $30.1 million. Capital expenditures during the 2021 period increased $2.2 millioncompared to the 2020 period to support and grow our existing operations, related to investments in information technology, laboratory equipment and the buildout of our Farmingdalecampus. Net cash used in investing activities in fiscal 2020 was approximately $2.2 millionas compared to $8.1 millionin the 2019 period, a decrease of $5.9 million. The decrease in the 2020 period is primarily due to the purchase of a facility
in the 2019 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 $7.0 millionnet, due to the PPP and Corona Krise loans of $7.0 millionand $0.4 million, respectively. During fiscal 2021 we applied for and received loan forgiveness for the full amount of the PPP loan, which is included in Other Income. The Corona Krise loan is still outstanding as of July 31, 2021and has a remaining term of four years. As of July 31, 2021we have a mortgage principal balance of $4.1 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 facility and by a $750cash collateral deposit with the mortgagee as additional security, which is included in other assets as of July 31, 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 required 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 July 31, 2021, the Company was in compliance with the financial and liquidity covenants related to this mortgage. Effective September 29, 2021the Company and the mortgagee agreed to further covenant restructuring whereby (a) the liquidity covenant was reduced to 150% of the loan principal (or approximately $6 millionat July 31, 2021) from $25 millionpreviously, and (b) the collateral requirement was increased from $0.75 millionto $1.0 million. 59
Effect of new accounting statements
Recently adopted accounting position papers
August 1, 2019, the Company adopted a new accounting standard issued by the Financial Accounting Standards Board("FASB") on accounting for leases using the modified retrospective method. This new accounting standard requires a lessee to recognize an asset and liability for most leases on its balance sheet. The Company elected the optional transition method that allowed for a cumulative-effect adjustment to the opening balance of retained earnings recorded on August 1, 2019and did not restate previously reported results in the comparative periods. The Company also elected the package of practical expedients, which among other things, allowed it to carry forward its historical lease classification. As a result of adoption of the new standard, the Company recorded right-of-use assets and operating lease liabilities of approximately $24.4 millionand $25.1 million, respectively as of August 1, 2019. The operating lease liability was determined based on the present value of the remaining minimum rental payments and the right-of-use asset was determined based on the value of the lease liability, adjusted for deferred rent balances of approximately $0.7 million, which were previously included in accrued expenses. There was no cumulative effect adjustment to the opening balance of accumulated deficit. Accounting for the Company's finance leases remains substantially unchanged. The adoption of the new standard did not materially impact the Company's consolidated results of operations or cash flows. The adoption of this new accounting standard resulted in increased qualitative and quantitative disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases. The Company elected the package of three practical expedients. As such, the Company did not reassess whether expired or existing contracts are or contain a lease and did not need to reassess the lease classifications or reassess the initial direct costs associated with expired or existing leases. The Company did not elect the hindsight practical expedient. Further, the land easement practical expedient was not elected as the practical expedient is not applicable to the Company. The Company elected to take the practical expedient to not separate lease and non-lease components of all asset classes entered into or modified after the effective date. For further details, see Note 9.
Statements published but not yet adopted
June 2016, FASB issued ASU No. 2016-13 Financial Instruments - Credit Losses (Topic 326). This standard changes the impairment model for most financial instruments, including trade receivables, from an incurred loss method to a new forward-looking approach, based on expected losses. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. Adoption of this standard is required for our annual and interim periods beginning August 1, 2023, provided we qualify as a smaller reporting company at the end of fiscal 2022 and must be adopted using a modified retrospective transition approach. We are currently assessing the impact of the adoption of this standard on our results of operations, financial position
and cash flows.
December 2019, the FASB issued ASU No. 2019-12 Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. The amendments in the ASU simplify the accounting for income taxes by removing certain exceptions to the general principles of Topic 740. The amendments also improve consistent application of and simplify U.S.GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this ASU are required for our annual and interim periods beginning August 1, 2021. The adoption of the amendments in this ASU is not expected to have a material impact on our consolidated results of operations, financial position or cash flows
We have reviewed all other recently issued accounting pronouncements and have concluded that they are not applicable or should not be material in accounting for our business.
60 Contractual Obligations The Company has entered into various real estate and equipment operating leases, reagent rental agreements, and employment agreements with certain executive officers. The real estate lease for the Company's
Farmingdale Clinical Laband Research facility is with a related party. See Item 2, Properties, and Note 9 and Note 15 in the Notes to the Consolidated Financial Statements for a further description of these leases and obligations.
Management is not aware of any claims, disputes or settled matters relating to third party reimbursements that would have a material effect on our financial statements.
Off-balance sheet provisions
The Company does not have “off-balance sheet arrangements” as such term is defined in Article 303 (a) (4) of the SK Regulation.
Critical accounting conventions and estimates
General The Company's discussion and analysis of its financial condition and results of operations are based upon
Enzo Biochem, Inc.'sconsolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and judgments also affect related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to contractual expense, allowance for uncollectible accounts, inventory, intangible assets and income taxes. The Company bases its estimates on experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Contingencies
Contingencies are assessed and a liability recognized when the matter is both probable and reasonably estimable. Contingencies of gains are assessed and are not recognized until the gain is realizable or realized.
Product revenues Products revenues consist of the sale of single-use products used in the identification of genomic information and are recognized at a point in time following the transfer of control of such products to the customer, which generally occurs upon shipment. Payment terms for shipments to end-user and distributor customers may range from 30 to 90 days. Any claims for credit or return of goods may be made generally within 30 days of receipt. Revenues are reduced to reflect estimated credits and returns, although historically these adjustments have not been material. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenue. Amounts billed to customers for shipping and handling are included in revenue, while the related shipping and handling costs are reflected in cost of products.
Revenue – Clinical Laboratory Services
Net revenues in the Company's clinical services business are primarily comprised of a high volume of relatively low-dollar transactions. The services business, which provides clinical testing services, satisfies its performance obligation and recognizes revenues upon completion of the testing process for a specific patient and reporting to the ordering physician. The Company may also perform clinical testing services for other laboratories and will recognize revenue from those services when reported to the ordering laboratory. The Company estimates the amount of consideration it expects to receive from customer groups using the portfolio approach. These estimates of the expected consideration include the impact of contractual allowances and price concessions on our customer group portfolios consisting of healthcare insurers, government payers, client payers and patients. Contracts with customers in our laboratory services business do not contain a financing component, based on the typically limited period of time between performance of services and collection of consideration. The transaction price includes variable consideration in the form of the contractual allowance and price concessions as well as the collectability of the transaction based on patient intent and ability to pay. The Company uses the expected value method in estimating the amount of the variability included in the transaction price.
61 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, health maintenance organizations ("HMO's") and managed care. The Company adjusts the contractual adjustment estimate quarterly, based on its evaluation of current and historical settlement experience with payers, industry reimbursement trends, and other relevant factors. The other relevant factors that affect our contractual adjustment include the monthly and quarterly review of: 1) current gross billings and receivables and reimbursement by payer, 2) current changes in third party arrangements and 3) the growth of in-network provider arrangements and managed care plans specific to our Company. Our clinical laboratory services business is primarily dependent upon reimbursement from third-party payers, such as Medicare (which principally serves patients 65 and older) and insurers. We are subject to variances in reimbursement rates among different third-party payers, as well as constant changes of reimbursement rates. Changes that decrease reimbursement rates or coverage would negatively impact our revenues. The number of individuals covered under managed care contracts or other similar arrangements has grown over the past several years and may continue to grow in the future. In addition, Medicare and other government healthcare programs continue to shift to managed care. These trends will continue to reduce our revenues. During the years ended
July 31, 2021, 2020 and 2019, the contractual adjustment percentages, determined using current and historical reimbursement statistics, were approximately 83%, 88% and 88%, respectively, of gross billings. 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 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 (using sensitivity analysis) that each 1% change in the contractual adjustment percentage could result in a change in clinical laboratory services revenue of approximately
Our clinical laboratory financial billing system records gross billings using a standard fee schedule for all payers and does not record contractual adjustment by payer at the time of billing. Therefore, we are unable to quantify the effect of contractual adjustment recorded during the current period that relate to 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; ? an analysis of current gross billings and receivables by payer. 62 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 segment. The Clinical Laboratory Services segment's net receivables are detailed by billing category and as a percent to its total net receivables. As of
July 31, 2021and 2020, approximately 56% and 68% respectively, of the Company's net accounts receivable relates to its Clinical Laboratory Services business, which operates in the New York, New Jerseyand Connecticutmedical communities. The Life Sciences products segment's accounts receivable includes approximately $1.4 millionor 33% and $1.0 millionor 34% of foreign receivables as of July 31, 2021and 2020, respectively.
Net accounts receivable (in thousands)
July 31, 2021 July 31, 2020 Total Total Clinical Labs (by billing category) Amount % Amount % Third party payers
$ 2,19536 $ 2,45540 Patient self-pay 2,007 33 2,044 33 Medicare 1,122 19 884 14 HMO's 692 12 797 13 Total Clinical Labs6,016 100 % 6,180 100 % Total Life Sciences 4,182 2,961 Total accounts receivable - net $ 10,198 $ 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 assesses the current state of its billing functions in order to identify any known collection or reimbursement issues. The Company assesses the impact, if any, on the allowance estimates, which involves Company's management judgment. It is important to note that the collection of these receivables is not guaranteed from Third Party Payers. 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 to effectively bill 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. As of July 31, 2021, approximately 27% of Clinical Labsreceivables are from two payers other than Medicare. Billing for laboratory services is complicated due to several factors, including, but not limited to, 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. 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, if any, 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. 63 Inventory
The Company values inventory at the lower of cost (first-in, first-out) or net realizable value. 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.
Goodwillrepresents the excess of the cost of an acquisition over the fair value of the net assets acquired. Intangible assets (exclusive of patents), arose primarily from acquisitions, and primarily consist of customer relationships, trademarks, licenses, and website and database content. Finite-lived intangible assets are amortized according to their estimated useful lives, which range from 4 to 15 years. Patents represent capitalized legal costs incurred in pursuing patent applications. When such applications result in an issued patent, the related capitalized costs, if any, are amortized over a ten year period or the life of the patent, whichever is shorter, using the straight-line method. The Company reviews its issued patents and pending patent applications, and if it determines to abandon a patent application or that an issued patent no longer has economic value, the unamortized balance in deferred patent costs relating to that patent is immediately expensed. The Company tests goodwill annually as of the first day of the fourth quarter, or more frequently if indicators of potential impairment exist. In assessing goodwill for impairment, the Company has the option to first perform a qualitative assessment to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company is not required to perform any additional tests in assessing goodwill 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 allocated to the reporting unit. The Company reviews the recoverability of the carrying value of long-lived assets (including intangible assets with finite lives) of an asset or asset group for impairment annually as of the end of the fiscal year, or more frequently if indicators of potential impairment exist. Should indicators of impairment exist, the carrying values of the assets are evaluated in relation to the operating performance and future undiscounted cash flows of an asset or asset group. The net book value of the long lived asset is adjusted to fair value if its expected future undiscounted cash flow is less than its book value.
During fiscal years 2021, 2020 and 2019, there was no impairment of goodwill or long-lived assets.
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