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 October 31, 20202021
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.
Yes ☒ No ☐
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).
Yes ☒ No ☐
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. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” (as defined in Rule 12b-2 of the Exchange Act.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.
Yes ☐ No ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
Yes ☐ No ☒
As of December 1, 2020,2021, the Registrant had 47,895,05048,471,771 shares of common stock outstanding.outstanding
ENZO BIOCHEM, INC.
FORM 10-Q
October 31, 20202021
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 |
October 31, 2020 (unaudited) | July 31, 2020 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 45,914 | $ | 47,865 | ||||
Accounts receivable, net | 12,051 | 9,141 | ||||||
Inventories | 8,185 | 7,784 | ||||||
Prepaid expenses | 4,152 | 3,975 | ||||||
Total current assets | 70,302 | 68,765 | ||||||
Property, plant, and equipment, net | 14,506 | 14,482 | ||||||
Right-of-use assets | 19,316 | 19,916 | ||||||
Goodwill | 7,452 | 7,452 | ||||||
Intangible assets, net | 460 | 538 | ||||||
Other, including restricted cash of $750 | 1,467 | 1,385 | ||||||
Total assets | $ | 113,503 | $ | 112,538 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable - trade | 7,842 | 8,503 | ||||||
Accrued liabilities | 14,513 | 12,833 | ||||||
Current portion of operating lease liabilities | 3,966 | 4,121 | ||||||
Other current liabilities and finance leases short term | 287 | 344 | ||||||
Other short term debt | 7,000 | 7,000 | ||||||
Total current liabilities | 33,608 | 32,801 | ||||||
Other liabilities and finance leases long term | 173 | 192 | ||||||
Operating lease liabilities, non-current | 16,257 | 16,679 | ||||||
Long term debt - net | 4,447 | 4,485 | ||||||
Total liabilities | $ | 54,485 | $ | 54,157 | ||||
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: 47,895,050 at October 31, 2020 and July 31, 2020 | 479 | 479 | ||||||
Additional paid-in capital | 334,640 | 334,473 | ||||||
Accumulated deficit | (277,953 | ) | (278,252 | ) | ||||
Accumulated other comprehensive income | 1,852 | 1,681 | ||||||
Total stockholders’ equity | 59,018 | 58,381 | ||||||
Total liabilities and stockholders’ equity | $ | 113,503 | $ | 112,538 |
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 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 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 STATEMENTS OF STOCKHOLDERS’ EQUITY
Three Months Ended October 31, 2021 and 2020
(unaudited)
(in thousands, except share data)
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 OPERATIONS
CASH FLOWS
(UNAUDITED)
(in thousands, except per share data)thousands)
Three Months Ended October 31, | ||||||||
2020 | 2019 | |||||||
Revenues | $ | 28,655 | $ | 20,207 | ||||
Operating costs and expenses: | ||||||||
Cost of revenues | 16,758 | 14,521 | ||||||
Research and development | 746 | 1,054 | ||||||
Selling, general and administrative | 10,014 | 11,139 | ||||||
Legal and related expense | 640 | 1,696 | ||||||
Total operating costs and expenses | 28,158 | 28,410 | ||||||
Operating income (loss) | 497 | (8,203 | ) | |||||
Other income (expense): | ||||||||
Interest, net | (51 | ) | 237 | |||||
Other | 17 | 127 | ||||||
Foreign exchange (loss) gain | (164 | ) | 191 | |||||
Total other income (expense) | (198 | ) | (7,648 | ) | ||||
Net income (loss) | $ | 299 | $ | (7,648 | ) | |||
Net income (loss) per common share: | ||||||||
Basic | $ | 0.01 | $ | (0.16 | ) | |||
Diluted | $ | 0.01 | $ | (0.16 | ) | |||
Weighted average common shares outstanding: | ||||||||
Basic | 47,895 | 47,557 | ||||||
Diluted | 47,905 | 47,557 |
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.
ENZO BIOCHEM, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(UNAUDITED)(in thousands)
Three Months Ended October 31, | ||||||||
2020 | 2019 | |||||||
Net income (loss) | $ | 299 | $ | (7,648 | ) | |||
Other comprehensive gain (loss): | ||||||||
Foreign currency translation adjustments | 171 | (271 | ) | |||||
Comprehensive income (loss) | $ | 470 | $ | (7,919 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
ENZO BIOCHEM, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYThree Months Ended October 31, 2020 and 2019(unaudited)(in thousands, except share data)
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 |
Common Stock Shares Issued | Common Stock Amount | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Total Stockholders’ Equity | |||||||||||||||||||
Balance at July 31, 2019 | 47,556,807 | $ | 476 | $ | 332,704 | $ | (249,732 | ) | $ | 2,580 | $ | 86,028 | ||||||||||||
Net (loss) for the period ended October 31, 2019 | — | — | — | (7,648 | ) | — | (7,648 | ) | ||||||||||||||||
Share-based compensation charges | — | — | 219 | — | — | 219 | ||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | (271 | ) | (271 | ) | ||||||||||||||||
Balance at October 31, 2019 | 47,556,807 | $ | 476 | $ | 332,923 | $ | (257,380 | ) | $ | 2,309 | $ | 78,328 |
The accompanying notes are an integral part of these consolidated financial statements
ENZO BIOCHEM, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)(in thousands)
Three Months Ended October 31, | ||||||||
2020 | 2019 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | 299 | $ | (7,648 | ) | |||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
Depreciation and amortization of property, plant and equipment | 585 | 579 | ||||||
Amortization of intangible assets | 75 | 146 | ||||||
Share-based compensation charges | 167 | 219 | ||||||
Accrual for share-based 401(k) employer match expense | 211 | 207 | ||||||
Foreign exchange loss (gain) | 152 | (217 | ) | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (2,865 | ) | 890 | |||||
Inventories | (340 | ) | 310 | |||||
Prepaid expenses and other assets | (314 | ) | 517 | |||||
Accounts payable – trade | (658 | ) | 1,325 | |||||
Accrued liabilities, other current liabilities and other liabilities | 1,480 | 1,606 | ||||||
Total adjustments | (1,507 | ) | 5,582 | |||||
Net cash used in operating activities | (1,208 | ) | (2,066 | ) | ||||
Cash flows from investing activities: | ||||||||
Capital expenditures | (617 | ) | (274 | ) | ||||
Net cash used in investing activities | (617 | ) | (274 | ) | ||||
Cash flows from financing activities: | ||||||||
Repayments under mortgage agreement and finance leases | (113 | ) | (105 | ) | ||||
Cost to obtain loan | — | (66 | ) | |||||
Net cash used in financing activities | (113 | ) | (171 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | (13 | ) | 8 | |||||
Decrease in cash and cash equivalents and restricted cash | (1,951 | ) | (2,503 | ) | ||||
Cash and cash equivalents and restricted cash - beginning of period | 48,615 | 60,146 | ||||||
Total cash and cash equivalents and restricted cash - end of period | $ | 46,664 | $ | 57,643 | ||||
The composition of total cash and cash equivalents and restricted cash is as follows: | ||||||||
Cash and cash equivalents | 45,914 | 56,893 | ||||||
Restricted cash included in other assets | 750 | 750 | ||||||
Total cash and cash equivalents and restricted cash | $ | 46,664 | $ | 57,643 |
The accompanying notes are an integral part of these consolidated financial statements.
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of October 31, 2020
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 October 31, 2020,2021, the consolidated statements of operations, comprehensive (loss) income (loss) and stockholders’ equity for the three months ended October 31, 2021 and 2020, and the consolidated statements of cash flows for the three months ended October 31, 2021 and 2020 (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, 20202021 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, 20202021 has been derived from the audited financial statements at that date. The results of operations for the three months ended October 31, 20202021 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2021.2022.
A novel strainWhile the rate of coronavirus (“COVID-19”)transmission of COVID-19 and its variants fluctuates in the US and Europe, it continues to spread in other parts of the world and severelynegatively impact the economy of the United States and other countries around the world.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 closingremaining closed or continuing to severely curtailingcurtail their operations (voluntarily or in response to government orders), and the adoptioncontinuation 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 andof variants, its treatment includingwith authorized vaccines and vaccines in various stages of development and federal approval, and relatedvaccination 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 productionthe manufacturing of products within the life science divisionsegment 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 resultsposition 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, 20202021 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 Issued but Not Yet Adopted
In June 2016, FASB issued ASU No. 2016-13 Financial Instruments – Credit Losses (Topic 326). This standard, as amended, 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, 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.
In 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. TheWe adopted 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 isdid not expected to have a material impact on our consolidated results of operations, financial position or cash flows
Pronouncements Issued but Not Yet Adopted
In 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.
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.
Concentration Risk
Other than the Medicare program, two providers whose programs are included in the “Third-party payers” and “Health Maintenance Organizations” (“HMO’s”) categories represent approximately 33%36% and 28%33% of Clinical Services net revenue for the three months ended October 31, 2021 and 2020 respectively.
Other than the Medicare program, two providers whose programs are included in the “Third-party payers” and 2019 respectively. As“Health Maintenance Organizations” (“HMO’s”) categories represent 32% of the Clinical Services net accounts receivable as of October 31, 2020, the Medicare program represents approximately 18% of Clinical Services net receivables.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 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.
We maintain a full valuation allowance on all tax assets and, as a consequence, do not provide any tax benefit for the fiscal 20202022 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: Quoted prices in active markets1 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 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.the three months ended October 31, 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. For the three months ended October 31, 2020, approximately 10,000 weighted average stock options were included in the calculation of diluted weighted average shares outstanding. As a result of the net loss for the three months ended October 31, 2019,2021, 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 or unearned performance stock units and unvested restricted stock because to do so would be antidilutive. For the three months ended October 31, 2019,2021, approximately 127,000541,000 of potential common shares (“in the money options”) and unvested restrictedperformance stock units were excluded from the calculation of diluted earnings(loss) per share.
For the three months ended October 31, 2020, approximately 10,000 weighted average stock options and 2019,unvested performance stock units were included in the calculation of diluted weighted average shares outstanding.
For the three months ended October 31, 2021 and 2020, the effect of approximately 2,146,000793,000 and 1,319,0002,146,000 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 approximately 73%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, 2020 | Three months ended October 31, 2019 | |||||||||||||||
Revenue category | ||||||||||||||||
Third-party payer | $ | 13,539 | 64 | % | $ | 6,392 | 50 | % | ||||||||
Medicare | 3,257 | 15 | 3,153 | 25 | ||||||||||||
Patient self-pay | 2,559 | 12 | 1,519 | 12 | ||||||||||||
HMO’s | 1,868 | 9 | 1,716 | 13 | ||||||||||||
Total | $ | 21,223 | 100 | % | $ | 12,780 | 100 | % |
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, 20202021 and 2019,2020, 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 | ||||||||
2020 | 2019 | |||||||
United States | $ | 3,878 | $ | 4,447 | ||||
Europe | 2,382 | 1,865 | ||||||
Rest of the world | 1,172 | 1,115 | ||||||
Products revenue | $ | 7,432 | $ | 7,427 |
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 4 - Supplemental disclosure for statement of cash flows
In the three months ended October 31, 20202021 and 2019,2020, interest paid by the Company was $63$56 and $69,$63, respectively.
For the three months ended October 31, 20202021 and 2019,2020, the net reductions in the measurement of right of use assets and liabilities included in cash flows from operating activities was $24$11 and $45,$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, 20202021 and 2019,2020, tax on capital paid by the Company was $29 and $22, and $43, respectively.
Note 5 – Inventories
Inventories consist of the following at October 31:following:
October 31, 2020 | July 31, 2020 | |||||||
Raw materials | $ | 1,320 | $ | 1,019 | ||||
Work in process | 2,603 | 2,587 | ||||||
Finished products | 4,262 | 4,178 | ||||||
$ | 8,185 | $ | 7,784 |
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 6 – Goodwill and intangible assets
Goodwill
The Company’s net carrying amount of goodwill is in the Clinical Laboratory Services segment and is $7,452 as of October 31, 20202021 and 2019.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, 2020 | $ | 27,686 | $ | (27,148 | ) | $ | 538 | |||||
Amortization expense | — | (75 | ) | (75 | ) | |||||||
Foreign currency translation | (64 | ) | 61 | (3 | ) | |||||||
October 31, 2020 | $ | 27,622 | $ | (27,162 | ) | $ | 460 |
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, consist of the following:
October 31, 2020 | July 31, 2020 | |||||||||||||||||||||||
Gross | Accumulated Amortization | Net | Gross | Accumulated Amortization | Net | |||||||||||||||||||
Patents | $ | 11,027 | $ | (11,019 | ) | $ | 8 | $ | 11,027 | (11,014 | ) | $ | 13 | |||||||||||
Customer relationships | 11,968 | (11,516 | ) | 452 | 12,003 | (11,478 | ) | 525 | ||||||||||||||||
Website and acquired content | 1,020 | (1,020 | ) | — | 1,022 | (1,022 | ) | — | ||||||||||||||||
Licensed technology and other | 481 | (481 | ) | — | 483 | (483 | ) | — | ||||||||||||||||
Trademarks | 3,126 | (3,126 | ) | — | 3,151 | (3,151 | ) | — | ||||||||||||||||
Total | $ | 27,622 | $ | (27,162 | ) | $ | 460 | $ | 27,686 | (27,148 | ) | $ | 538 |
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 October 31, 2020,
At October 31, 2021, information with respect to acquired intangibles is as follows:
At October 31,
Note 7 – Long term debt
In connection with the purchase of our new facility in November 2018, a wholly-owned subsidiary (the “mortgagor subsidiary”) of the Company entered into a Fee Mortgage and Security Agreement (the “mortgage agreement”) with Citibank, N.A. (the “mortgagee”). The mortgage agreement provides for a loan of $4,500 for a term of 10 years, bears a fixed interest rate of 5.09% per annum and requires monthly mortgage payments of principal and interest of $30. Debt issuance costs of $72 are being amortized over the life of the mortgage agreement. The balance of unamortized debt issuance cost was
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
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,
Minimum future annual principal payments under these agreements as of October 31,
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 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. The Company’s leases have remaining terms of less than 1 year to Certain of the Company’s lease agreements include rental payments adjusted periodically for inflation or a market rate which are included in the lease liabilities.
The maturity of the Company’s lease liabilities as of October 31,
Lease term and discount rate for the three months ended October 31
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 9 – Accrued Liabilities
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 recoupment process was to be repaid such that 210 days after receiving the advance it would be entirely repaid. In October 2020, the Continuing Appropriations Act, 2021 and Other Extensions Act amended the repayment terms of the Advance Payment Program. The recoupment period was extended and the automatic recoupment
Self-Insured Medical Plan
The Company self-funds medical insurance coverage for certain of its U.S. based employees. The risk to the Company is believed to be limited through the use of individual and aggregate stop loss insurance. As of October 31,
Note 10 – Stockholders’ Equity
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.
In September 2017, the Company filed with the SEC a Form S-3 “shelf” registration and sales agreement prospectus covering the offering, issuance and sale of our Common Stock that may be issued and sold under the existing Sales Agreement in an aggregate amount of up to $19.2 million. A total of $150 million of securities The Form S-3 expired in October 2020 but may be refiled at any time at the discretion of the Company. During the three months ended October 31, 2020,
Share-based compensation
In January 2011, the Company’s stockholders approved the adoption of the 2011 Incentive Plan (the “2011 Plan”) for the issuance of equity awards, including, among others, options, restricted stock, restricted stock units and
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,
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 three month periods ended October 31,
Stock Option Plans
The following table summarizes stock option activity during the three month period ended October 31,
As of October 31,
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.
Performance Stock Units
To better align the long-term interest of executives with growing U.S. practices, beginning in fiscal 2018, the Company granted long-term incentive awards in the form of time based stock options and performance-based restricted stock units (“Performance Stock Units” or “PSUs”). The PSUs earned will be determined over a three-year performance period. The primary performance metrics will be revenue and Adjusted EBITDA growth. Payouts based on revenue and adjusted EBITDA goals will be modified based on Total Shareholder Return (“TSR”) performance relative to Enzo’s peer group.
During the fiscal years ended 2020
The following table summarizes PSU’s granted and outstanding as of October 31,
Note 11 – Segment reporting
The Company has
Legal and related expenses incurred to defend the Company’s intellectual property, which may result in settlements recognized in another segment and other general corporate matters are considered a component of the Other segment. Legal and related expenses specific to other segments’ activities are allocated to those segments.
The following financial information represents the operating results of the reportable segments of the Company:
Note 12 Contingencies
The Company has brought cases in the United States District Court for the District of Delaware (“the Court”), alleging patent infringement against various companies. In 2017, the Court ruled that the asserted claims of the
In separate inter partes review proceedings before the U.S. Patent and Trademark Office (PTO) involving, among others, Becton Dickinson, certain claims of the
In April 2019, the Company entered into an agreement with Hologic and Grifols, resolving litigation resulting from four cases originally brought by the Company in the Court. As a result, Enzo dismissed (1) a stayed patent litigation regarding the
On September 2, 2021, the PTO issued a non-final office action in an ex parte reexamination concerning the ’197 Patent. In the office action, the PTO rejected certain claims of the ’197 Patent under 35 U.S.C. § 102 and for nonstatutory double-patenting. Enzo’s response to the office action is forthcoming. On February 5, 2020, Harbert Discovery Fund, LP and Harbert Discovery Co-Investment Fund I, LP (“
On November 27, 2020, the Company brought an action in the United States District Court for the Southern District of New York against Harbert Discovery Fund, LP, Harbert Discovery Co-Investment Fund I, LP, Harbert Fund Advisors, Inc., Harbert Management Corp. and Kenan
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 operations.
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
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
Enzo was granted FDA Emergency Use
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
Overview
Enzo Biochem, Inc. (the “Company” “we”, “our” or “Enzo”) is an integrated diagnostics, clinical lab, and life sciences company focused on delivering and applying advanced technology capabilities to produce affordable reliable products and services that enable our customers to meet their clinical needs. Through a connection with the market, we provide advanced biotechnology solutions to the global community as affordable and flexible quality products and services. We develop, manufacture and sell our proprietary technology solutions and platforms to clinical laboratories, specialty clinics, researchers and physicians globally. Enzo’s structure and business strategy represent the culmination of years of extensive planning and work. The Company has the unique ability to offer low cost, high performance products and services for diagnostic testing, which ideally positions us to capitalize on the reimbursement pressures facing diagnostic labs. Our pioneering work in genomic analysis coupled with our extensive patent estate and enabling platforms have positioned the Company to continue to play an important role in the rapidly growing molecular medicine marketplaces.
Enzo develops low cost diagnostic platform products and related services. Our platform development includes automation-compatible reagent systems and associated products for sample collection and processing through analysis. We develop affordable products and services to improve healthcare, one of the greatest challenges today. Enzo combines over 40 years of expertise in technology development with assay development capabilities and diagnostic testing services to create high performance, cost-effective, and open assay solutions. The ability to combine these assets in one company is unique. With our strong intellectual property portfolio integrated with assay development know-how, production, distribution, validation and services capabilities, we have enabled sustainable products and services for a market that is facing increasing pressure in costs and reimbursement
Enzo technology solutions and platforms and unique operational structure are designed to reduce overall healthcare costs for both government and private insurers. Our proprietary technology platforms reduces our customers’ need for multiple, specialized instruments, and offer a variety of high throughput capabilities together with a demonstrated high level of accuracy and reproducibility. Our genetic test panels are focused on large and growing markets primarily in the areas of personalized medicine, women’s health, infectious diseases and genetic disorders.
In the course of our research and development activities, we have built a substantial portfolio of intellectual property assets, comprised of
Below are brief descriptions of each of our operating segments (See Note 11 in the Notes to Consolidated Financial Statements):
Enzo Clinical Services is a clinical reference laboratory providing a wide range of clinical services to physicians, medical centers, other clinical labs and pharmaceutical companies. The Company believes having a Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) certified and College of American Pathologists (“CAP”) accredited medical laboratory located in New York provides us the opportunity to more rapidly introduce cutting edge products and services to the clinical marketplace. Enzo Clinical Labs offers an extensive menu of molecular and other clinical laboratory tests and procedures used in patient care by physicians to establish or support a diagnosis, monitor treatment or medication, and search for an otherwise undiagnosed condition. Our laboratory is equipped with state-of-the-art communication and connectivity solutions enabling the rapid transmission, analysis and interpretation of generated data. We operate a full service clinical laboratory in Farmingdale, New York, a network of over 30 patient service centers throughout New York, New Jersey and Connecticut, two free standing “STAT” or rapid response laboratories in New York City and Connecticut, an in-house logistics department, and an information technology department. Under our license in New York State, we are able to offer testing services to clinical laboratories and physicians nationwide.
The Clinical Laboratory Services reporting unit is impacted by various risk factors, including among others, reduced reimbursements from third party payers for testing performed and from recent health care legislation. Despite the growth we have experienced in previous years, there can be no assurance future growth can be achieved. The introduction of new molecular and esoteric tests is expected to increase our revenue per test and could offset impacts from the above factors. The Company anticipates improved profitability with increased service volume.
Enzo Products manufactures, develops and markets products and tools for clinical research, drug development and bioscience research customers worldwide. Underpinned by broad technological capabilities, Enzo Life Sciences has developed proprietary products used in the identification of genomic information by laboratories around the world. Information regarding our technologies can be found in the “Core Technologies”
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 October 31,
Comparative Financial Data for the Three Months Ended October 31,
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 At this time, the long term significance of the positive impact from
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 detection of COVID-19. Clinical 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.
Product revenues were $6.8 million in the 2022 period and $7.4 million in
The cost of Clinical Services was $11.2 million in the 2022 period and $13.0 million in the 2021 period,
The cost of Product revenues was $4.1 million in the 2022 period and $3.8 million in the 2021
Research and development expenses were $0.7 million in both the 2022 and 2021
Selling, general and administrative expenses were $11.0 million during the 2022 period versus $10.0 million during the 2021 period,
Legal and related expenses were $1.2 million on a net basis during the 2022 period compared to $0.6 million Interest income, net was less than $0.1 million in the
Other (expense) income in the 2022 and 2021 period was ($0.1) million and less than $0.1 million respectively, an unfavorable variance of approximately $0.1 million. During the 2022 period, the primary component of the expense was unrealized losses of $0.2 million on our marketable securities. The foreign currency revaluation loss recognized by the Life Sciences Products segment during the
Liquidity and Capital Resources
At October 31, The Company had working capital of
Net cash used in operating activities during the
Net cash used in investing activities Cash used in financing activities in
As of October 31,
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
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,
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, certain information and footnote disclosure, normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States, have been condensed or omitted, as permitted under rules promulgated by the Security and Exchange Commission. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and judgments also affect related disclosure of contingent assets and liabilities.
On an on-going basis, we evaluate our estimates, including those related to contractual expense, allowance for uncollectible accounts, inventory, operating lease liabilities, goodwill and income taxes. The Company bases its estimates on experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Revenues – Clinical Services
Contractual Adjustment
The Company’s estimate of contractual adjustment is based on significant assumptions and judgments, such as its interpretation of payer reimbursement policies, and bears the risk of change. The estimation process is based on the experience of amounts approved as reimbursable and ultimately settled by payers, versus the corresponding gross amount billed to the respective payers. The contractual adjustment is an estimate that reduces gross revenue, based on gross billing rates, to amounts expected to be approved and reimbursed.
Gross billings are based on a standard fee schedule we set for all third party payers, including Medicare, HMO’s and managed care. The Company adjusts the contractual adjustment estimate quarterly, based on its evaluation of current and historical settlement experience with payers, industry reimbursement trends, and other relevant factors. The other relevant factors that affect our contractual adjustment include the monthly and quarterly review of: 1) current gross billings and receivables and reimbursement by payer, 2) current changes in third party arrangements and 3) the growth of in-network provider arrangements and managed care plans specific to our Company.
Our clinical business is primarily dependent upon reimbursement from third-party payers, such as Medicare (which principally serves patients 65 and older) and insurers. We are subject to variances in reimbursement rates among different third-party payers, as well as constant changes of reimbursement rates. Changes that decrease reimbursement rates or coverage would negatively impact our revenues. The number of individuals covered under managed care contracts or other similar arrangements has grown over the past several years and may continue to grow in the future. In addition, Medicare and other government healthcare programs continue to shift to managed care. These trends will continue to reduce our revenues from these programs.
During both the three months ended October 31,
The Company estimates (by using a sensitivity analysis) that each 1% point change in the contractual adjustment percentage could result in a change in clinical services revenues of approximately
Our clinical services financial billing system records gross billings using a standard fee schedule for all payers and does not record contractual adjustment by payer at the time of billing. Therefore, we are unable to quantify the effect contractual adjustments recorded during the current period have on revenue recorded in a previous period. However, we can reasonably estimate our monthly contractual adjustment to revenue on a timely basis based on our quarterly review process, which includes:
Accounts Receivable
Accounts receivable are reported at realizable value, net of allowances for doubtful accounts, which is estimated and recorded in the period of the related revenue.
The following is a table of the Company’s net accounts receivable by services and by products. Net receivables for Clinical Services are detailed by billing category and as a percent to its total net receivables. At October 31,
The accounts receivable balance for Life Science products includes foreign receivables of
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,
Billing for clinical services is complicated because of many factors, especially: the differences between our standard gross fee schedule for all payers and the reimbursement rates of the various payers we deal with, disparity of coverage and information requirements among the various payers, and disputes with payers as to which party is responsible for reimbursement.
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 long lived assets
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Intangible assets (exclusive of patents), arose primarily from acquisitions, and primarily consist of customer relationships, trademarks, licenses, and website and database content. These finite-lived intangible assets are amortized according to their estimated useful lives, which range from 4 to 15 years. The Company tests goodwill
The Company reviews the recoverability of the carrying value of long-lived assets (including finite lived intangible assets) of an 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,
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 October 31,
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 October 31,
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 were no changes in our internal control over financial reporting that occurred during the quarter ended October 31,
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 has been no material changes from the risk factors disclosed in Part 1, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 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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