UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark one
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JanuaryOctober 31, 20182021
or
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission File Number 001-09974
| ENZO BIOCHEM, INC. | ||
| (Exact name of registrant as specified in its charter) |
| New York | 13-2866202 | |
| (State or Other Jurisdiction of | (IRS. Employer | |
| Incorporation or Organization) | Identification No.) | |
| 527 Madison Ave, New York, New York | 10022 | |
| (Address of Principal Executive office) | (Zip Code) |
| 212-583-0100 | ||
| (Registrant’s telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant has required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesx ☒ Noo ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 45 of Regulation S-T (§232.405 of that chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).
Yesx ☒ Noo ☐
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
| Common stock $0.01 par | ENZ | New York Stock Exchange |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer a smaller reporting company, or an emerging growth company (as defined in Rule 12b-2 of the Exchange Act).
| Large accelerated filer ☐ | Accelerated filer | ||
| Non-accelerated filer ☒ | Smaller reporting company | ||
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Yeso ☐ Noo ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
Yeso ☐ Nox ☒
As of MarchDecember 1, 2018,2021, the Registrant had 47,000,92948,471,771 shares of common stock outstanding.outstanding
ENZO BIOCHEM, INC.
FORM 10-QJanuary
October 31, 20182021
INDEX
i
Part 1 Financial Information
ENZO BIOCHEM, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
October 31, | July 31, | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 6,356 | $ | 13,524 | ||||
| Marketable securities | 29,810 | 29,978 | ||||||
| Accounts receivable, net | 11,332 | 10,198 | ||||||
| Inventories | 13,957 | 12,652 | ||||||
| Prepaid expenses | 4,457 | 4,230 | ||||||
| Total current assets | 65,912 | 70,582 | ||||||
| Property, plant, and equipment, net | 16,953 | 16,585 | ||||||
| Right-of-use assets | 16,259 | 17,020 | ||||||
| Goodwill | 7,452 | 7,452 | ||||||
| Intangible assets, net | 171 | 244 | ||||||
| Other, including restricted cash of $750 | 1,392 | 1,808 | ||||||
| Total assets | $ | 108,139 | $ | 113,691 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable - trade | 5,929 | 8,123 | ||||||
| Accrued liabilities | 13,577 | 14,301 | ||||||
| Current portion of operating lease liabilities | 3,365 | 3,419 | ||||||
| Other current liabilities and finance leases short term | 235 | 233 | ||||||
| Total current liabilities | 23,106 | 26,076 | ||||||
| Finance leases long term and other liabilities | 96 | 115 | ||||||
| Operating lease liabilities, non-current | 13,863 | 14,558 | ||||||
| Long term debt - net | 4,314 | 4,356 | ||||||
| Total liabilities | $ | 41,379 | $ | 45,105 | ||||
| Commitments and contingencies – see Note 12 | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred Stock, $.01 par value; authorized 25,000,000 shares; no shares issued or outstanding | — | — | ||||||
| Common Stock, $.01 par value; authorized 75,000,000 shares; shares issued and outstanding: 48,471,771 at October 31, 2021 and July 31, 2021 | 485 | 485 | ||||||
| Additional paid-in capital | 337,342 | 337,126 | ||||||
| Accumulated deficit | (272,696 | ) | (270,377 | ) | ||||
| Accumulated other comprehensive income | 1,629 | 1,352 | ||||||
| Total stockholders’ equity | 66,760 | 68,586 | ||||||
| Total liabilities and stockholders’ equity | $ | 108,139 | $ | 113,691 | ||||
| January 31, 2018 (unaudited) | July 31, 2017 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 64,468 | $ | 64,167 | ||||
| Accounts receivable, net of allowances | 14,977 | 15,180 | ||||||
| Inventories | 7,481 | 7,047 | ||||||
| Prepaid expenses and other | 2,613 | 2,690 | ||||||
| Total current assets | 89,539 | 89,084 | ||||||
| Property, plant and equipment, net | 7,945 | 7,901 | ||||||
| Goodwill | 7,452 | 7,452 | ||||||
| Intangible assets, net | 2,449 | 2,895 | ||||||
| Other assets | 940 | 333 | ||||||
| Total assets | $ | 108,325 | $ | 107,665 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable – trade | $ | 9,564 | $ | 10,350 | ||||
| Accrued liabilities | 9,665 | 6,720 | ||||||
| Other current liabilities | 642 | 740 | ||||||
| Total current liabilities | 19,871 | 17,810 | ||||||
| Other liabilities | 495 | 983 | ||||||
| Total liabilities | $ | 20,366 | $ | 18,793 | ||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred Stock, $.01 par value; authorized 25,000,000 shares; no shares issued or outstanding | — | — | ||||||
| Common Stock, $.01 par value; authorized 75,000,000 shares; shares issued: 47,077,840 and outstanding: 46,970,929 at January 31, 2018 and shares issued and outstanding: 46,506,176 at July 31, 2017 | 471 | 465 | ||||||
| Additional paid-in capital | 330,425 | 328,294 | ||||||
| Less: Treasury stock at cost 106,911 shares at January 31, 2018 and none at July 31, 2017 | (1,014 | ) | — | |||||
| Accumulated deficit | (243,441 | ) | (241,900 | ) | ||||
| Accumulated other comprehensive income | 1,518 | 2,013 | ||||||
| Total stockholders’ equity | 87,959 | 88,872 | ||||||
| Total liabilities and stockholders’ equity | $ | 108,325 | $ | 107,665 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
| Three Months Ended January 31, | Six Months Ended January 31, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Revenues: | ||||||||||||||||
| Clinical laboratory services | $ | 19,530 | $ | 18,837 | $ | 39,864 | $ | 37,395 | ||||||||
| Product revenues | 7,122 | 6,983 | 14,203 | 14,409 | ||||||||||||
| Royalty and license fee income | 300 | 440 | 561 | 740 | ||||||||||||
| Total revenues | 26,952 | 26,260 | 54,628 | 52,544 | ||||||||||||
| Operating costs and expenses: | ||||||||||||||||
| Cost of clinical laboratory services | 11,730 | 11,052 | 23,772 | 21,948 | ||||||||||||
| Cost of product revenues | 3,877 | 3,520 | 7,266 | 6,829 | ||||||||||||
| Research and development | 812 | 483 | 1,559 | 1,305 | ||||||||||||
| Selling, general and administrative | 11,070 | 11,218 | 21,961 | 22,712 | ||||||||||||
| Provision for uncollectible accounts receivable | 779 | 679 | 1,593 | 1,348 | ||||||||||||
| Legal fee expense | 1,700 | 370 | 2,131 | 742 | ||||||||||||
| Total operating costs and expenses | 29,968 | 27,322 | 58,282 | 54,811 | ||||||||||||
| Operating loss | (3,016 | ) | (1,062 | ) | (3,654 | ) | (2,340 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest | 185 | 79 | 342 | 125 | ||||||||||||
| Other | 33 | 24 | 69 | 143 | ||||||||||||
| Foreign exchange gain (loss) | 800 | (94 | ) | 605 | (455 | ) | ||||||||||
| Loss before income taxes | (1,998 | ) | (1,053 | ) | (2,638 | ) | (2,527 | ) | ||||||||
| Benefit for income taxes | 1,097 | — | 1,097 | — | ||||||||||||
| Net loss | $ | (901 | ) | $ | (1,053 | ) | $ | (1,541 | ) | $ | (2,527 | ) | ||||
| Net loss per common share: | ||||||||||||||||
| Basic and diluted | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.03 | ) | $ | (0.05 | ) | ||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic and diluted | 46,941 | 46,292 | 46,806 | 46,282 | ||||||||||||
| Three Months Ended October 31, | ||||||||
| 2021 | 2020 | |||||||
| Revenues | $ | 26,519 | $ | 28,655 | ||||
| Operating costs and expenses: | ||||||||
| Cost of revenues | 15,273 | 16,758 | ||||||
| Research and development | 744 | 746 | ||||||
| Selling, general and administrative | 11,052 | 10,014 | ||||||
| Legal and related expenses | 1,282 | 640 | ||||||
| Total operating costs and expenses | 28,351 | 28,158 | ||||||
| Operating (loss) income | (1,832 | ) | 497 | |||||
| Other income (expense): | ||||||||
| Interest, net | 39 | (51 | ) | |||||
| Other | (145 | ) | 17 | |||||
| Foreign exchange loss | (381 | ) | (164 | ) | ||||
| Total other expense | (487 | ) | (198 | ) | ||||
| Net (loss) income | $ | (2,319 | ) | $ | 299 | |||
| Net (loss) income per common share: | ||||||||
| Basic | $ | (0.05 | ) | $ | 0.01 | |||
| Diluted | $ | (0.05 | ) | $ | 0.01 | |||
| Weighted average common shares outstanding: | ||||||||
| Basic | 48,472 | 47,895 | ||||||
| Diluted | 48,472 | 47,905 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(in thousands)
| Three Months Ended January 31, | Six Months Ended January 31, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Net loss | $ | (901 | ) | $ | (1,053 | ) | $ | (1,541 | ) | $ | (2,527 | ) | ||||
| Other comprehensive loss: | ||||||||||||||||
| Foreign currency translation adjustments | (578 | ) | (16 | ) | (495 | ) | 238 | |||||||||
| Comprehensive loss | $ | (1,479 | ) | $ | (1,069 | ) | $ | (2,036 | ) | $ | (2,289 | ) | ||||
| Three Months Ended October 31, | ||||||||
| 2021 | 2020 | |||||||
| Net (loss) income | $ | (2,319 | ) | $ | 299 | |||
| Other comprehensive gain: | ||||||||
| Foreign currency translation adjustments | 277 | 171 | ||||||
| Comprehensive (loss) income | $ | (2,042 | ) | $ | 470 | |||
The accompanying notes are an integral part of these consolidated financial statements.
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTSTATEMENTS OF STOCKHOLDERS’ EQUITYSix
Three Months Ended JanuaryOctober 31, 2018(UNAUDITED)
2021 and 2020
(unaudited)
(in thousands, except share data)
| Common Stock Shares Issued | Treasury Stock Shares | Common Stock Amount | Additional Paid-in Capital | Treasury Stock Amount | Accumulated Deficit | Accumulated Other Comprehensive Income | Total Stockholders’ Equity | |||||||||||||||||||||||||
| Balance at July 31, 2017 | 46,506,176 | — | $ | 465 | $ | 328,294 | $ | — | $ | (241,900 | ) | $ | 2,013 | $ | 88,872 | |||||||||||||||||
| Net loss for the period ended January 31, 2018 | — | — | — | — | — | (1,541 | ) | — | (1,541 | ) | ||||||||||||||||||||||
| Cashless option exercise | 340,898 | 106,911 | — | 1,014 | (1,014 | ) | — | — | — | |||||||||||||||||||||||
| Vesting of restricted stock | 2,062 | — | — | — | — | — | — | |||||||||||||||||||||||||
| Exercise of stock options | 228,704 | — | 6 | 704 | — | — | — | 710 | ||||||||||||||||||||||||
| Share-based compensation charges | — | — | — | 413 | — | — | — | 413 | ||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | (495 | ) | (495 | ) | ||||||||||||||||||||||
| Balance at January 31, 2018 | 47,077,840 | 106,911 | $ | 471 | $ | 330,425 | $ | (1,014 | ) | $ | (243,441 | ) | $ | 1,518 | $ | 87,959 | ||||||||||||||||
| Common Stock Shares Issued | Common Stock Amount | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Total Stockholders’ Equity | |||||||||||||||||||
| Balance at July 31, 2021 | 48,471,771 | $ | 485 | $ | 337,126 | $ | (270,377 | ) | $ | 1,352 | $ | 68,586 | ||||||||||||
| Net loss for the period ended October 31, 2021 | — | — | — | (2,319 | ) | — | (2,319 | ) | ||||||||||||||||
| Share-based compensation charges | — | — | 216 | — | — | 216 | ||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | 277 | 277 | ||||||||||||||||||
| Balance at October 31, 2021 | 48,471,771 | $ | 485 | $ | 337,342 | $ | (272,696 | ) | $ | 1,629 | $ | 66,760 | ||||||||||||
| Common Stock Shares Issued | Common Stock Amount | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Total Stockholders’ Equity | |||||||||||||||||||
| Balance at July 31, 2020 | 47,895,050 | $ | 479 | $ | 334,473 | $ | (278,252 | ) | $ | 1,681 | $ | 58,381 | ||||||||||||
| Net income for the period ended October 31, 2020 | — | — | — | 299 | — | 299 | ||||||||||||||||||
| Share-based compensation charges | — | — | 167 | — | — | 167 | ||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | 171 | 171 | ||||||||||||||||||
| Balance at October 31, 2020 | 47,895,050 | $ | 479 | $ | 334,640 | $ | (277,953 | ) | $ | 1,852 | $ | 59,018 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
| Six Months Ended January 31, | ||||||||
| 2018 | 2017 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (1,541 | ) | $ | (2,527 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization of property, plant and equipment | 1,051 | 1,023 | ||||||
| Amortization of intangible assets | 484 | 819 | ||||||
| Provision for uncollectible accounts receivable | 1,593 | 1,348 | ||||||
| Share-based compensation charges | 413 | 392 | ||||||
| Accrual for share-based 401(k) employer match expense | 358 | 354 | ||||||
| Foreign exchange (gain) loss | (595 | ) | 420 | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (1,387 | ) | (2,170 | ) | ||||
| Inventories | (430 | ) | (238 | ) | ||||
| Prepaid expenses | 27 | 67 | ||||||
| Accounts payable – trade | (809 | ) | 238 | |||||
| Accrued liabilities, other current liabilities and other liabilities | 2,220 | (2,558 | ) | |||||
| Other assets | (549 | ) | — | |||||
| Total adjustments | 2,376 | (305 | ) | |||||
| Net cash provided by (used in) operating activities | 835 | (2,832 | ) | |||||
| Cash flows from investing activities: | ||||||||
| Capital expenditures | (1,066 | ) | (689 | ) | ||||
| Security deposits and other | (10 | ) | 2 | |||||
| Net cash used in investing activities | (1,076 | ) | (687 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from borrowings under Credit Agreement | — | 40,694 | ||||||
| Repayments under Credit Agreement | — | (42,251 | ) | |||||
| Installment loan and capital lease obligation payments | (190 | ) | (323 | ) | ||||
| Proceeds from exercise of stock options | 710 | 71 | ||||||
| Net cash provided by (used in) financing activities | 520 | (1,809 | ) | |||||
| Effect of exchange rate changes on cash and cash equivalents | 22 | (22 | ) | |||||
| Increase (decrease) in cash and cash equivalents | 301 | (5,350 | ) | |||||
| Cash and cash equivalents - beginning of period | 64,167 | 67,777 | ||||||
| Cash and cash equivalents - end of period | $ | 64,468 | $ | 67,427 | ||||
| Three Months Ended October 31, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net (loss) income | $ | (2,319 | ) | $ | 299 | |||
| Adjustments to reconcile net (loss) income to net cash used in operating activities: | ||||||||
| Depreciation and amortization of property, plant and equipment | 611 | 585 | ||||||
| Amortization of intangible assets | 90 | 75 | ||||||
| Share-based compensation charges | 216 | 167 | ||||||
| Share-based 401(k) employer match expense | 167 | 211 | ||||||
| Foreign exchange loss | 342 | 152 | ||||||
| Unrealized loss on marketable securities | 196 | — | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (1,120 | ) | (2,865 | ) | ||||
| Inventories | (1,289 | ) | (340 | ) | ||||
| Prepaid expenses and other assets | 171 | (314 | ) | |||||
| Accounts payable – trade | (2,198 | ) | (658 | ) | ||||
| Accrued liabilities, other current liabilities and other liabilities | (910 | ) | 1,480 | |||||
| Total adjustments | (3,724 | ) | (1,507 | ) | ||||
| Net cash used in operating activities | (6,043 | ) | (1,208 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchases of marketable securities | (28 | ) | — | |||||
| Capital expenditures | (1,033 | ) | (617 | ) | ||||
| Net cash used in investing activities | (1,061 | ) | (617 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Repayments under mortgage agreement and finance leases | (57 | ) | (113 | ) | ||||
| Net cash used in financing activities | (57 | ) | (113 | ) | ||||
| Effect of exchange rate changes on cash and cash equivalents | (7 | ) | (13 | ) | ||||
| Decrease in cash and cash equivalents and restricted cash | (7,168 | ) | (1,951 | ) | ||||
| Cash and cash equivalents and restricted cash - beginning of period | 14,274 | 48,615 | ||||||
| Total cash and cash equivalents and restricted cash - end of period | $ | 7,106 | $ | 46,664 | ||||
| The composition of total cash and cash equivalents and restricted cash is as follows: | ||||||||
| Cash and cash equivalents | 6,356 | 45,914 | ||||||
| Restricted cash included in other assets | 750 | 750 | ||||||
| Total cash and cash equivalents and restricted cash | $ | 7,106 | $ | 46,664 | ||||
The accompanying notes are an integral part of these consolidated financial statements.statements.
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of JanuaryOctober 31, 2018
2021
(Unaudited)
(Dollars in thousands, except share data)
Note 1 – Basis of Presentation
The accompanying consolidated financial statements include the accounts of Enzo Biochem, Inc. and its wholly-owned subsidiaries, Enzo Life Sciences, Enzo Clinical Labs, Enzo Therapeutics, Enzo Realty LLC and Enzo Realty II LLC, collectively or with one or more of its subsidiaries referred to as the “Company” or “Companies”. The Company has three reportable segments: Clinical Services, Products, and Therapeutics. The consolidated balance sheet as of JanuaryOctober 31, 2018,2021, the consolidated statements of operations, comprehensive (loss) income and comprehensive income (loss)stockholders’ equity for the three months ended October 31, 2021 and six month ended January 31, 2018 and 20172020, and the consolidated statementstatements of stockholders’ equity and cash flows for the sixthree months ended JanuaryOctober 31, 20182021 and 20172020 (the “interim statements”) are unaudited. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present fairly the financial position and operating results for the interim periods have been made. Certain information and footnote disclosure, normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States, have been condensed or omitted. The interim statements should be read in conjunction with the consolidated financial statements for the year ended July 31, 20172021 and notes thereto contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. The consolidated balance sheet at July 31, 20172021 has been derived from the audited financial statements at that date. The results of operations for the three and six months ended JanuaryOctober 31, 20182021 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2018.2022.
While the rate of transmission of COVID-19 and its variants fluctuates in the US and Europe, it continues to spread in other parts of the world and negatively impact the world economy. 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 remaining closed or continuing to severely curtail their operations (voluntarily or in response to government orders), and the continuation 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.
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, the emergence and spread of variants, its treatment with authorized vaccines and vaccines in various stages of development and federal approval, vaccination 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. 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.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
COVID-19
The extent to which the COVID-19 pandemic impacts the Company’s business and consolidated results of operations, financial position and cash flows will depend on numerous evolving factors including, but not limited to: the magnitude and duration of the COVID-19 pandemic, the extent to which it will impact worldwide macroeconomic conditions including, but not limited to, employment rates and health insurance coverage, the speed of the anticipated recovery, and governmental and business reactions to the pandemic. These factors are beyond the Company’s knowledge and control, and as a result, at this time the Company cannot reasonably estimate the adverse impact the COVID-19 pandemic will have on its businesses but the adverse impact could be material. The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts of COVID-19 as of October 31, 2021 and through the date of this report. The accounting matters assessed included, but were not limited to, the Company’s patient self-pay revenue concessions and credit losses in the Clinical Services segment, accounts receivable, inventories and the carrying value of goodwill and other long-lived assets. The Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in additional material impacts to the Company’s consolidated financial statements in future reporting periods. We believe COVID-19 volume could decline in the quarters ahead as the percentage of Americans who are vaccinated increases. However, the emergence and spread of variants may cause our COVID-19 testing volume to increase again. Even after the COVID-19 pandemic has moderated and the business and social distancing restrictions have eased, we may continue to experience similar adverse effects to our businesses, consolidated results of operations, financial position and cash flows resulting from a recessionary economic environment that may persist.
Effect of New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In March 2016,December 2019, the FinancialFASB issued ASU No. 2019-12 Income Taxes (Topic 740) Simplifying the Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09,Improvements to Employee Share-Based Payment Accountingfor Income Taxes. , which requires all excess tax benefits or deficiencies to be recognized as income tax expense or benefitThe amendments in the ASU simplify the accounting for income statement. In addition, excess tax benefits should be classified along withtaxes 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 income tax cash flows as an operating activityareas of Topic 740 by clarifying and amending existing guidance. We adopted the amendments in the statement of cash flows.this ASU beginning August 1, 2021. The adoption of the amendments in this new standardASU did not have a material impact on our consolidated results of operations, financial statements. We adopted this standard as of August 1, 2017.position or cash flows
Pronouncements Issued but Not Yet Adopted
In May 2014, FASB issued ASU No. 2014-09,Revenue from Contracts with Customers: Topic 606. ASU 2014-09 and its amendments supersede the current revenue recognition guidance, including industry-specific guidance. The new standard introduces a five-step model to achieve its core principle of the entity recognizing revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services, and on transfer of control, as opposed to transfer of risk and rewards. The standard also expands the required financial statement disclosures regarding revenue recognition. ASU 2014-09 will be effective for our interim periods and the fiscal year beginning August 1, 2018, and we are not early adopting. An entity can apply the revenue standard retrospectively to each prior reporting period presented (full retrospective method) or retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application in retained earnings. We expect to use the full retrospective method upon adoption. Based on our preliminary assessment, the adoption of this ASU may result in partially or substantially all of the amounts that have historically been classified as bad debt expense, primarily related to patient responsibility, could be considered an implicit price concession in determining net revenues. Accordingly, we may report the estimate of uncollectible balances associated with patient responsibility as a reduction of the transaction price and therefore as a reduction in net revenues when historically these amounts were classified as bad debt expense within operating costs and expenses. In addition, the adoption of this ASU will result in increased disclosure, including qualitative and quantitative disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts from customers. However, the adoption of this ASU is not expected to have a material impact on our financial position or cash flows.
In FebruaryJune 2016, FASB issued ASU No. 2016-022016-13 Financial Instruments –Leases Credit Losses (Topic 842)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 new standard establishes a right-of-use (ROU) model that requires a lesseeestimate of expected credit losses will require entities to record a ROU assetincorporate considerations of historical information, current information and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for our fiscal year beginning August 1, 2019 including interim periods within that fiscal year. A modified retrospective transition approach is required for lessees for capitalreasonable and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We
believe the adoptionsupportable forecasts. Adoption of this standard will materially impact our consolidated financial statements by significantly increasing our non-current assets and non-current liabilities on our consolidated balance sheets in order to record the right of use assets and related lease liabilities for our existing operating leases.
We will recognize expense in the consolidated statement of operations similar to current lease accounting, in the cost of sales and selling, general and administrative.
In May 2017, the FASB issued ASU 2017-09,Compensation – Stock Compensation (Topic 708) Scope of Modification Accounting which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Adoption of the Standard is required for our annual and interim periods beginning August 1, 2018 with2023, provided we qualify as a smaller reporting company at the amendments in the update applied prospectively to an awardend of fiscal 2022 and must be adopted using a modified on or after the adoption date. Early adoption is permitted.retrospective transition approach. We are currently evaluatingassessing the impact of the adoption of this new standard will have on the consolidatedour results of operations, financial statements.position and cash flows.
We reviewed all other recently issued accounting pronouncements and have concluded they are not applicable or not expected to be significant to the accounting for our operations.
Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no effect on the reported results of operations.
Concentration Risk
One providerOther than the Medicare program, two providers whose programs are included in the “Third-party payer”payers” and “Health Maintenance Organizations” (“HMO’s”) categories representsrepresent approximately 38%36% and 39%33% of the Clinical Labs segment laboratory servicesServices net revenue for the three months ended JanuaryOctober 31, 20182021 and 2017, respectively,2020 respectively.
Other than the Medicare program, two providers whose programs are included in the “Third-party payers” and 39%“Health Maintenance Organizations” (“HMO’s”) categories represent 32% of the Clinical Services net accounts receivable as of October 31, 2021.
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 37%liabilities are recognized for the sixfuture 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.
We maintain a full valuation allowance on all tax assets and, as a consequence, do not provide any tax benefit for the fiscal 2022 period loss or any tax provision for the fiscal 2021 period pre-tax income.
Fair Value Measurements
The Company determines fair value measurements used in its consolidated financial statements based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive of any transaction costs, as determined by either the principal market or the most advantageous market.
Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy. The basis for fair value measurements for each level within the hierarchy is described below with Level 1 having the highest priority and Level 3 having the lowest.
| Level 1: | Quoted prices in active markets for identical assets or liabilities. | ||
| Level 2: | Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets. | ||
| Level 3: | Valuations derived from valuation techniques in which one or more significant inputs are unobservable. |
Marketable securities
The Company limits its credit risk associated with investments by investing in a mutual fund and an exchange traded fund (ETF) which hold highly rated corporate bonds, asset backed securities, municipal bonds, mortgage obligations and government obligations. These investments are classified as trading securities and are Level 1 fair value investments. As of October 31, 2021, the fair value of these investments was $29,810 and the cost basis was $30,089. We recognized unrealized losses of $196 for the three months ended JanuaryOctober 31, 2018 and 2017, respectively.2021.
Note 2 – Net income (loss) per share
Basic net income (loss) per share represents net income (loss) divided by the weighted average number of common shares outstanding during the period. As a result of the net loss for the three and six months ended JanuaryOctober 31, 2018 and 20172021, diluted weighted average shares outstanding are the same as basic weighted average shares outstanding, and do not include the potential common shares from stock options and unvested restrictedor unearned performance stock units because to do so would be antidilutive.
For the three and six months ended JanuaryOctober 31, 2018, the number2021, approximately 541,000 of potential common shares (“in the money options”) and unvested restrictedperformance stock units were excluded from the calculation of diluted earnings(loss) per share was 719,000, and 825,000, respectively.share. For the three and six months ended JanuaryOctober 31, 2017,2020, approximately 888,000 and 804,00010,000 weighted average stock options and unvested performance stock units were excluded fromincluded in the calculation of diluted weighted average shares outstanding.
For the three and six months ended JanuaryOctober 31, 2018 there were no outstanding “out of the money” options to purchase common shares. For the three2021 and six months ended January 31, 2017,2020, the effect of approximately 494,000793,000 and 247,0002,146,000 of outstanding “out of the money” options to purchase common shares were excluded from the calculation of diluted net (loss) income per share because their effect would be anti-dilutive.
Note 3 – Revenue Recognition
Clinical Services Revenue
Service revenues in the Company’s clinical services business accounted for 74% of the Company’s total revenues for both the three months ended October 31, 2021 and 2020 and are primarily comprised of a high volume of relatively low-dollar transactions. The services business, which provides clinical testing services, satisfies its performance obligation and recognizes revenues upon completion of the testing process for a specific patient and reporting to the ordering physician. The Company may also perform clinical testing services for other laboratories and will recognize revenue from those services when reported to the ordering laboratory. The Company estimates the amount of consideration it expects to receive from customer groups using the portfolio approach. These estimates of the expected consideration include the impact of contractual allowances and price concessions on our customer group portfolios consisting of healthcare insurers, government payers, client payers and patients as described below. Contracts with customers in our laboratory services business do not contain a financing component, based on the typically limited period of time between performance of services and collection of consideration. The transaction price includes variable consideration in the form of the contractual allowance and price concessions as well as the collectability of the transaction based on patient intent and ability to pay. The Company uses the expected value method in estimating the amount of the variability included in the transaction price.
The following are descriptions of our laboratory services business portfolios:
Third party payers and Health Maintenance Organizations (HMO’s)
Reimbursements from third party payers, primarily healthcare insurers and HMO’s are based on negotiated fee-for-service schedules and on capitated payment rates. Revenues consist of amounts billed net of contractual allowances for differences between amounts billed and the estimated consideration the Company expects to receive from such payers, which considers historical collection and denial experience and the terms of the Company’s contractual arrangements. Adjustments to the allowances, based on actual receipts from the third-party payers, are recorded upon settlement.
Collection of the consideration the Company expects to receive is normally a function of providing complete and correct billing information to these third party payers within the various filing deadlines, and typically occurs within 30 to 90 days of billing. Provided the Company has billed healthcare insurers accurately with complete information prior to the established filing deadline, there has historically been little to no collection risk. If there has been a delay in billing, the Company determines if the amounts in question will likely go past the filing deadline, and if so, will reserve accordingly for the billing.
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. Our revenues may be subject to adjustment as a result of these factors among others, including without limitation, differing interpretations of billing and coding guidance and changes by government agencies and payers in interpretations, requirements, and “conditions of participation” in various programs.
Government Payer - Medicare
Reimbursements from Medicare are based on fee-for-service schedules set by Medicare, which is funded by the government. Revenues consist of amounts billed net of contractual allowances for differences between amounts billed and the estimated consideration the Company expects to receive from Medicare, which considers historical collection and denial experience and other factors. Adjustments to the allowances, based on actual receipts from the government payers, are recorded upon settlement.
Collection of consideration the Company expects to receive is normally a function of providing the complete and correct billing information within the various filing deadlines and typically occurs within 60 days of billing. Provided the Company has billed the government payer accurately with complete information prior to the established filing deadline, there has historically been little to no collection risk. If there has been a delay in billing, the Company determines if the amounts in question will likely go past the filing deadline, and, if so, it will reserve accordingly for the billing.
Patient self pay
Uninsured patients are billed based on established patient fee schedules or fees negotiated with physicians on behalf of their patients. Coinsurance and deductible responsibilities based on fees negotiated with healthcare insurers are also billed to insured patients and included in this portfolio. Collection of billings from patients is subject to credit risk and ability of the patients to pay. Revenues consist of amounts billed net of discounts provided to uninsured patients in accordance with the Company’s policies and implicit price concessions. Implicit price concessions represent differences between amounts billed and the estimated consideration the Company expects to receive from patients, which considers historical collection experience and other factors including current market conditions. Adjustments to the estimated allowances, based on actual receipts from the patients, are recorded upon settlement. Patient responsibility is invoiced and if it reaches 91 days outstanding, the account is sent to a collection agency for further processing. After the account has been with the collection agency for at least 105 days, and is determined to be uncollectable it is written off.
The following table represents clinical services net revenues and percentages by type of customer:
| Three months ended October 31, 2021 | Three months ended October 31, 2020 | |||||||||||||||
| Revenue category | ||||||||||||||||
| Third-party payer | $ | 11,397 | 58 | % | $ | 13,539 | 64 | % | ||||||||
| Medicare | 2,880 | 14 | 3,257 | 15 | ||||||||||||
| Patient self-pay | 1,945 | 10 | 2,559 | 12 | ||||||||||||
| HMO’s | 3,519 | 18 | 1,868 | 9 | ||||||||||||
| Total | $ | 19,741 | 100 | % | $ | 21,223 | 100 | % | ||||||||
For three months ended October 31, 2021 and 2020, all of the Company’s clinical services revenues were generated within the United States.
Products Revenue
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.
Products revenue by geography is as follows:
Three Months Ended October 31 | ||||||||
| 2021 | 2020 | |||||||
| United States | $ | 3,864 | $ | 3,945 | ||||
| Europe | 2,006 | 2,431 | ||||||
| Asia Pacific | 908 | 1,056 | ||||||
| Products revenue | $ | 6,778 | $ | 7,432 | ||||
Note 34 - Supplemental disclosure for statement of cash flows
ForIn the sixthree months ended JanuaryOctober 31, 20182021 and 2017, income taxes paid by the Company were $15 and $996, respectively.
For the six months ended January 31, 2018 and 2017,2020, interest paid by the Company was $45$56 and $77,$63, respectively.
For the sixthree months ended JanuaryOctober 31, 20182021 and 2017,2020, the net reductions in the measurement of right of use assets and liabilities included in cash flows from operating activities was $11 and $24, respectively. The changes are included in changes in accrued liabilities, other current liabilities, and other liabilities in the statement of cash flows.
For the three months ended October 31, 2021 and 2020, tax on capital paid by the Company financed $0was $29 and $69 respectively, in machinery and transportation equipment under installment loans. $22, respectively.
Note 5 – Inventories
During the six months ended January 31, 2018 and 2017, the Company did not enter into any capital lease agreements.
During the six months ended January 31, 2018 certain officers of the Company exercised 340,898 stock options in non-cash transactions. The officers surrendered 106,911 shares of the Company’s common stock to exercise the stock options. The Company recorded approximately $1,014, the market value of the surrendered shares, as treasury stock.
Note 4 – Inventories
Inventories consist of the following:
| January 31, 2018 | July 31, 2017 | |||||||
| Raw materials | $ | 809 | $ | 852 | ||||
| Work in process | 1,951 | 1,905 | ||||||
| Finished products | 4,721 | 4,290 | ||||||
| $ | 7,481 | $ | 7,047 | |||||
| October 31, 2021 | July 31, 2021 | |||||||
| Raw materials | $ | 1,947 | $ | 1,062 | ||||
| Work in process | 2,678 | 2,534 | ||||||
| Finished products | 9,332 | 9,056 | ||||||
| $ | 13,957 | $ | 12,652 | |||||
Note 56 – Goodwill and intangible assets
At January 31, 2018 and July 31, 2017, theGoodwill
The Company’s net carrying amount of goodwill related tois in the Clinical LabsLaboratory Services segment and is $7,452.$7,452 as of October 31, 2021 and July 31, 2021.
Intangible assets
The Company’s change in the net carrying amount of intangible assets, all in the Life Sciences Products segment is as follows:
| Gross | Accumulated Amortization | Net | ||||||||||
| July 31, 2017 | $ | 27,436 | $ | (24,541 | ) | $ | 2,895 | |||||
| Amortization expense | — | (484 | ) | (484 | ) | |||||||
| Foreign currency translation | 302 | (264 | ) | 38 | ||||||||
| January 31, 2018 | $ | 27,738 | $ | (25,289 | ) | $ | 2,449 | |||||
| Gross | Accumulated Amortization | Net | ||||||||||
| July 31, 2021 | $ | 27,775 | $ | (27,531 | ) | $ | 244 | |||||
| Amortization expense | — | (70 | ) | (70 | ) | |||||||
| Foreign currency translation | (96 | ) | 93 | (3 | ) | |||||||
| October 31, 2021 | $ | 27,679 | $ | (27,508 | ) | $ | 171 | |||||
Intangible assets, all finite lived,finite-lived, consist of the following:
| January 31, 2018 | July 31, 2017 | |||||||||||||||||||||||
| Gross | Accumulated Amortization | Net | Gross | Accumulated Amortization | Net | |||||||||||||||||||
| Patents | $ | 11,027 | $ | (10,964 | ) | $ | 63 | $ | 11,027 | $ | (10,951 | ) | $ | 76 | ||||||||||
| Customer relationships | 12,046 | (9,667 | ) | 2,379 | 11,881 | (9,083 | ) | 2,798 | ||||||||||||||||
| Website and acquired content | 1,022 | (1,022 | ) | — | 1,011 | (1,011 | ) | — | ||||||||||||||||
| Licensed technology and other | 498 | (491 | ) | 7 | 484 | (463 | ) | 21 | ||||||||||||||||
| Trademarks | 3,145 | (3,145 | ) | — | 3,033 | (3,033 | ) | — | ||||||||||||||||
| Total | $ | 27,738 | $ | (25,289 | ) | $ | 2,449 | $ | 27,436 | $ | (24,541 | ) | $ | 2,895 | ||||||||||
| October 31, 2021 | July 31, 2021 | |||||||||||||||||||||||
| Gross | Accumulated Amortization | Net | Gross | Accumulated Amortization | Net | |||||||||||||||||||
| Patents | $ | 11,027 | $ | (11,027 | ) | $ | — | $ | 11,027 | (11,027 | ) | $ | — | |||||||||||
| Customer relationships | 12,005 | (11,834 | ) | 171 | 12,059 | (11,815 | ) | 244 | ||||||||||||||||
| Website and acquired content | 1,023 | (1,023 | ) | — | 1,025 | (1,025 | ) | — | ||||||||||||||||
| Licensed technology and other | 491 | (491 | ) | — | 494 | (494 | ) | — | ||||||||||||||||
| Trademarks | 3,133 | (3,133 | ) | — | 3,170 | (3,170 | ) | — | ||||||||||||||||
| Total | $ | 27,679 | $ | (27,508 | ) | $ | 171 | $ | 27,775 | (27,531 | ) | $ | 244 | |||||||||||
At January 31, 2018,
At October 31, 2021, information with respect to acquired intangibles
At Note 7 – Long term debt
In The mortgage agreement includes affirmative and negative covenants and events of default, as defined. Events of default include non-payment of principal and interest on debt outstanding, non-performance of covenants, material changes in business, breach of representations, bankruptcy or insolvency, and changes in control. The mortgage includes certain financial covenants. 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, 2020 and modified the mortgage to replace a financial ratio 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 $25,000 of liquid assets, defined as time deposits, money market accounts 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. Effective September 29, 2021, the Company and the mortgagee agreed to further covenant restructuring whereby (a) the liquidity covenant was reduced to 150% (or approximately $6 million at October 31, 2021) of the loan principal from $25 million previously, and (b) the collateral requirement would be increased from $0.75 million to $1.0 million. The Company was in compliance as to the liquidity covenant as of October 31, 2021 and increased the collateral deposit to $1.0 million in November. In April 2020, our subsidiary in Switzerland received a loan of CHF 0.4 million ($0.4 million, based on the foreign exchange rate as of October 31, 2021) from the Swiss government under the “Corona Krise” emergency loan program in response to the pandemic. This loan is uncollateralized, bears 0% interest, is due in 5 years, and may be repaid at any time. This loan is included in Minimum future annual principal payments under these agreements as of October 31, 2021 are as follows:
Note 8 - Leases 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 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. The Company’s leases have remaining terms of less than 1 year to 7
For the three months ended October 31, components of lease cost were as follows:
The maturity of the Company’s lease liabilities as of October 31, 2021 is as follows:
Lease term and discount rate for the three months ended October 31 were as follows:
See Note 4 for cash flow information on cash paid for amounts included in the measurement of lease liabilities for the three months ended October 31, 2021 and 2020. Note
Accrued liabilities consist of:
Deferred revenue In order to increase cash flow to providers of services and suppliers impacted by the pandemic, the Centers for Medicare and Medicaid Services (CMS) expanded its Accelerated and Advance Payment Program to a broader group of Medicare providers. We applied for and received a $2,526 payment advance from this program in April 2020. The recoupment by CMS of our advance payment had been scheduled to begin 120 days after the date of receipt, at which time every claim we submit from that point would be automatically offset to repay the advance payment. Any unrecouped advance balance remaining after 90 days of the Self-Insured Medical Plan
Note Controlled Equity Offering The Company has a Controlled Equity OfferingSM Sales Agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co., as sales agent (“Cantor”). Under the Sales Agreement, the Company may offer and sell, from time to time, through Cantor, shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”). The Company pays Cantor a commission of In December 2014, the Sales Agreement was amended in order for the Company to offer and sell additional shares of Common Stock having an aggregate offering price of $20.0 million.
The Form S-3 expired in October 2020 but may be refiled at any time at the discretion of the Company. During the
Share-based compensation
The exercise price of options granted under the Amended and Restated 2011 Plan, as amended and restated, is equal to or greater than fair market value of the common stock on the date of grant. The Amended and Restated 2011 Plan, as amended and restated, will terminate at the earliest of (a) such time as no shares of common stock remain available for issuance under the plan, (b) termination of the plan by the Company’s Board of Directors, or (c) October 7, 2030. Awards outstanding upon expiration of the Amended and Restated 2011 Plan, as amended and restated, will remain in effect until they have been exercised or terminated, or have expired. As of October 31, 2021, there were approximately 5,067,000 shares of common stock available for grant under the Amended and Restated 2011 Plan, as amended and restated. The amounts of share-based compensation expense recognized in the periods presented are as follows:
The following table sets forth the amount of expense related to share-based payment arrangements included in specific line items in the accompanying statements of operations:
No excess tax benefits were recognized during the
Stock Option Plans The following table summarizes stock option activity during the
As of
The intrinsic value of in the money stock option awards at the end of the period represents the Company’s closing stock price on the last trading day of the period in excess of the exercise price multiplied by the number of outstanding options.
During the fiscal years ended 2020 and 2019, the Company awarded PSUs to its executive officers. These awards provide for the
Note 11 – Segment reporting
The Company has The Company evaluates segment performance based on segment income (loss) before taxes. Costs excluded from segment income (loss) before taxes and reported as “Other” consist of corporate general and administrative costs which are not allocable to the three reportable segments. All intersegment activities are eliminated. Legal
Management of the Company assesses assets on a consolidated basis only and therefore, assets by reportable segment have not been included in the reportable segments below. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting
The following financial information represents the operating results of the reportable segments of the Company:
Note 12 Contingencies
On November 27, 2020, the Company
There can be no assurance that the Company will be successful in any of these litigations. Even if the Company is not successful, management does not believe that there will be a significant adverse monetary impact on the Company. The Company is party to other claims, legal actions, complaints, and contractual disputes that arise in the ordinary course of business. The Company believes that any liability that may ultimately result from the resolution of these matters will not, individually or in the aggregate, have a material adverse effect on its financial position or results of As described in Note 3, 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. Note 13 - Subsequent Events Effective November 8, 2021, Enzo appointed Hamid Erfanian as Chief Executive Officer. Mr. Erfanian brings over 28 years of experience as a healthcare executive specializing in the diagnostic, medical devices, and life sciences industry. On November 8, 2021, Enzo granted equity awards to Hamid Erfanian. Consistent with the disclosures contained in the Company’s Form 8-K filed with the U.S. Securities and Exchange Commission on October 18, 2021, the Company agreed to grant these equity awards to induce Mr. Erfanian to commence employment as its chief executive officer. These equity awards were made in reliance on the employment inducement exemption under the New York Stock Exchange’s Listed Company Manual Rule 303A.08, which requires that the Compensation Committee of the Board of Directors approve the inducement awards, which approval was obtained on October 29, 2021, and that the Company make a public announcement of the grant of the inducement awards. The approved equity awards are restricted stock units (RSUs) for 260,000 shares of the common stock of the Company and options to purchase 700,000 shares of common stock of the Company. The RSUs and options are scheduled to vest over three years, with one-third of the units vesting on each of the first three anniversaries of the grant date, subject to certain requirements, including Mr. Erfanian’s continued service as an employee of the Company through the applicable vesting dates. The exercise price of the options is $3.39, the closing price of the Company’s common stock on November 8, 2021, the grant date. The equity awards were granted outside of the Company’s Amended and Restated 2011 Incentive Plan but generally have terms and conditions consistent with those set forth in that plan. The Company filed a Form S-8 covering these equity awards. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes and other information included elsewhere in this Quarterly Report on Form 10-Q. Forward-Looking Statements
Our disclosure and analysis in this report, including but not limited to the information discussed in this Item 2, contain forward-looking information about our Company’s financial results and estimates, business prospects and products in research and development that involve substantial risks and uncertainties. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historic or current facts. They use words such as “anticipate”, “estimate”, “expect”, “project”, “intend”, “plan”, “believe”, “will”, and other words and terms of similar meaning in connection with any discussion of future operations or financial performance.
In particular, these include statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, interest rates, foreign currency rates, intellectual property matters, the outcome of contingencies, such as legal proceedings, impacts of the COVID-19 pandemic and measures we have taken in response, and financial results. We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from past results and those anticipated, estimated or projected. As a result, investors are cautioned not to place undue reliance on any of our forward-looking statements. Investors should bear this in mind as they consider forward-looking statements. We do not assume any obligation to update or revise any forward-looking statement that we make, even if new information becomes available or other events occur in the future. We are also affected by other factors that may be identified from time to time in our filings with the Securities and Exchange Commission, some of which are set forth in Item 1A - Risk Factors in our Form 10-K filing for the July 31,
You should understand that it is not possible to predict or identify all such factors or to assess the impact of each factor or combination of factors on our business. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.
Impact of COVID-19 pandemic COVID-19 has severely impacted the economy of the United States and other countries around the world. Federal, state and local governmental policies and initiatives designed to reduce the transmission of COVID-19 and its variants 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 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 the fiscal year ended July 31, 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 believe COVID-19 volume may 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. Overview
Enzo Biochem, Inc. (the “Company” “we”, “our” or “Enzo”) is an integrated
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
Below are brief descriptions of each of our operating segments (See Note Enzo Clinical
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
Enzo Therapeutics is a biopharmaceutical venture that has developed multiple novel approaches in the areas of gastrointestinal, infectious, ophthalmic and metabolic diseases, many of which are derived from the pioneering work of Enzo Life Sciences. Enzo Therapeutics has focused its efforts on developing treatment regimens for diseases and conditions for which current treatment options are ineffective, costly, and/or cause unwanted side effects. This focus has generated a clinical and preclinical pipeline, as well as Results of Operations Three months ended
Comparative Financial Data for the Three Months Ended
Consolidated Results:
The
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. At this time, 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 is still uncertain. We experienced a sequential quarter increase in Clinical laboratory services revenues of $3.0 million in the 2022 period compared to the fourth quarter of the fiscal year ended July 31, 2021 based on increased COVID-19 testing for school and workplace reopenings, as academic institutions went back into session as well as increased testing related to entertainment and travel. It continues to be challenging to forecast the impact of COVID-19 on our operations in the quarters ahead as the percentage of Americans who are vaccinated increases, which impact may be offset by the emergence and spread of variants, some of which may render vaccines less effective. That is, it is difficult to forecast the effects, duration, and severity of the ongoing COVID-19 pandemic, including the impact on our personnel, supplies, liquidity, collections, and the impact of past or future actions or omissions by the Company or governments in response to the COVID-19 pandemic including, but not limited to, emerging government vaccine and testing mandates, and the availability, accuracy and timeliness of delivery of any tests that the Company develops, collaborates on or provides for the Clinical services revenues for the 2022 period were
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. In 2014, Congress passed the U.S. Protecting Access to Medicare Act of 2014 (PAMA), which included substantial changes to the way in which clinical laboratory services are paid under Medicare. Beginning in 2018, Medicare payments for clinical laboratory services are paid based upon the volume-weighted median of private payer rates as reported by certain clinical laboratories across the US, replacing the previous system which was based upon fee schedules derived from historical charges for clinical laboratory tests. We estimate that the effect of PAMA directly negatively impacted reimbursements from Medicare and Medicaid in the 2022 and 2021 periods by $0.3 million and $0.4 million, respectively. Product revenues
The cost of
The cost of Product revenues was
Research and development expenses were $0.7 million in both the 2022 and 2021 periods, incurred primarily in the Life Sciences
Selling, general and administrative expenses were
Other (expense) income in the The foreign currency revaluation loss recognized by the
Liquidity and Capital Resources
At The Company had working capital of
Net
Net cash used in investing activities
Cash used in financing activities in both the 2022 and 2021 periods was $0.1 million for payments related to a mortgage and finance leases. As of
Effective September 29, 2021, the 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 million at October 31, 2021) from $25 million previously, and (b) the collateral requirement would be increased from $0.75 million to $1.0 million. The Company was in compliance as to the liquidity covenant as of October 31, 2021 and increased the collateral deposit to $1.0 million in November. Contractual Obligations
There have been no material changes to our Contractual Obligations as reported in our Form 10-K for the fiscal year ended July 31, 2021. 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
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
General and estimates The Company’s discussion and analysis of its financial condition and results of operations are based upon Enzo Biochem, Inc.’s consolidated financial statements,
On an on-going basis, we evaluate our estimates, including those related to contractual expense, allowance for uncollectible accounts, inventory, 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
The Company’s estimate of contractual adjustment is based on significant assumptions and judgments, such as its interpretation of payer reimbursement policies, and bears the risk of change. The estimation process is based on the experience of amounts approved as reimbursable and ultimately settled by payers, versus the corresponding gross amount billed to the respective payers. The contractual adjustment is an estimate that reduces gross revenue, based on gross billing rates, to amounts expected to be approved and reimbursed. Gross billings are based on a standard fee schedule we set for all third party payers, including Medicare, HMO’s and managed care. The Company adjusts the contractual adjustment estimate quarterly, based on its evaluation of current and historical settlement experience with payers, industry reimbursement trends, and other relevant factors. The other relevant factors that affect our contractual adjustment include the monthly and quarterly review of: 1) current gross billings and receivables and reimbursement by payer, 2) current changes in third party arrangements and 3) the growth of in-network provider arrangements and managed care plans specific to our Company.
Our clinical
During both the three months ended
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
Our clinical
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
The Net accounts receivable
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 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 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. As of October 31, 2021, approximately 32% of Clinical Labs receivables are from two providers whose programs are included in the “Third-party payers” and “Health Maintenance Organizations” (“HMO’s”) categories.
Billing for
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.
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. Goodwill, Intangible and
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Intangible assets (exclusive of patents), arose primarily from acquisitions, and primarily consist of customer relationships, trademarks, licenses, and website and database content.
The Company tests goodwill The Company reviews the recoverability of the carrying value of long-lived assets (including finite lived intangible assets) 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from changes in foreign currency exchange rates resulting from acquisitions with foreign locations (See Item 1A. Risk Factors section of the Form 10-K for the fiscal year ended July 31, could impact our results of operations and financial position. We do not currently engage in any hedging or market risk management tools. Foreign Currency Exchange Rate Risk
The financial reporting of our non-U.S. subsidiaries is denominated in currencies other than the U.S. dollar. Since the functional currency of our non-U.S. subsidiaries is the local currency, foreign currency translation adjustments are accumulated as a component of accumulated other comprehensive income in stockholders’ equity. Assuming a hypothetical increase of 10% in the value of the U.S. dollar versus foreign currencies at
We also maintain intercompany balances and loans with subsidiaries in different local currencies. These amounts are at risk of foreign exchange losses if exchange rates fluctuate. Assuming a hypothetical increase of 10% in the value of the U.S. dollar versus foreign currencies, our pre-tax earnings (loss) would be unfavorably impacted by approximately Interest Rate Risk
As of Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company’s management conducted an evaluation (as required under Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) of the Company’s “disclosure controls and procedures” (as such term is defined under the Exchange Act), under the supervision and with the participation of the principal executive officer and the principal financial officer. Based on this evaluation, the principal executive officer and the principal financial officer concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this report. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.
(b) Changes in Internal Controls over Financial Reporting
There PART II – OTHER INFORMATION
Item 1. Legal Proceedings
There have been no other material developments with respect to previously reported legal proceedings discussed in the annual report on Form 10-K, as amended for the fiscal year ended July 31,
Item 1A. Risk Factors
There
Item 6. Exhibits
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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