See in this Form 10-K for the fiscal year ended
The Company's Enzo Clinical Laboratory Services and Enzo Life Sciences Products reporting units, as described below, are affected by different US and global economic conditions which are included in Item 1A, Risk Factors. Impact of COVID-19 pandemic COVID-19 has severely impacted the economy of
the United Statesand other countries around the world. Federal, state and local governmental policies and initiatives designed to reduce the transmission of COVID-19 have resulted in, among other things, a significant reduction in physician office visits, the cancellation of elective medical procedures, customers of our products closing or severely curtailing their operations (voluntarily or in response to government orders), and the adoption of work-from-home or shelter-in-place policies. The COVID-19 impact on the Company's operations is consistent with the overall industry and publicly issued statements from competitors, partners,
and vendors. Enzo was granted EUAs and EUA extensions for our molecular diagnostic and serological testing for COVID-19 and related antibody testing options, for our sample collection kit, an innovative virus-inactivating specimen collection media that lessens transmission risks for healthcare providers and clinical laboratory personnel, for our use of pooled samples, and for our rapid extraction method. Other innovations include the development of more relevant positive controls for the tests, and improved sensitivity. During fiscal 2021, we experienced growing demand for COVID-19 testing and we made significant investments to expand our capacity throughout the period in order to satisfy the demand, which substantially increased our testing volumes. The demand for COVID-19 testing continued into fiscal 2022 but declined during the latter
half of that fiscal period. 43 The extent to which our businesses may continue to be affected by the COVID-19 pandemic will largely depend on both current and future developments, including its duration, spread and emergence of variants, its treatment with approved and authorized vaccines, mask and vaccine mandates, work and travel advisories and restrictions, and the timing of their easing, all of which are highly uncertain and cannot be reasonably predicted at this time. We expect COVID-19 volume to decline in the quarters ahead as the percentage of Americans who are vaccinated increases, although the emergence and spread of variants may cause our COVID-19 testing volume to increase again. Global supply chain issues due to the pandemic continue to hamper both the manufacturing of products within the life science segment as well as testing capabilities in the clinical laboratory.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act)
March 2020, in response to the COVID-19 pandemic, the CARES Act was signed into law. The CARES Act provides numerous tax provisions and other stimulus measures. The CARES Act also includes a number of benefits that are applicable to us and other healthcare providers including, but not limited to:
? Give clinical laboratories a one-year reprieve
Medicare and Medicaid Services (CMS) Private Payer Price Reports
requirements under the Protection of Access to Health Insurance Act (“PAMA”) as well as a
postponement for one year of a reduction in the reimbursement rate of 15% for the clinical laboratory
services provided under the health insurance which was to take place from
The calendar (CLFS) for calendar years after 2021 will be based on future surveys
private payer market rates. Reduced Medicare and Medicaid reimbursements
for calendar years 2022-2024 is capped by PAMA at 15% per annum, which we
estimate could then have a negative impact on our annualized Medicare and Medicaid
turnover of approximately
income. In this regard, the
filed a federal civil action challenging the legal basis of the
payer CMS data collection methodology used to derive the data from which the median
prices have been calculated. CAWA continues to work with
legislative reform of the PAMA, which, if adopted, could reduce the negative impact
of PAMA as currently implemented by CMS. The long-term effect of these efforts
on Medicare CLFS rates not determinable? Appropriate
revenue losses due to the COVID-19 pandemic. In
received from Medicare a CARES Act relief payment grant of approximately
of the initial tranche and
loans through the
at any time or recovered from one year from receipt. In
applied for and received a Medicare advance of
been paid back. ? Suspended Medicare sequestration from
May 2020to December 2020. The
The Consolidated Appropriations Act of 2021 extended the suspension period until March
31, 2021. An Act to prevent general reductions in direct and
Other purposes, enacted on
sequestration has resulted in a small benefit to us in the form of greater
reimbursement rates for diagnostic testing services performed on behalf of
We are comprised of three operating companies that have evolved out of our core competence: the use of nucleic acids as informational molecules and the use of compounds for immune modulation. These wholly-owned operating companies and the foreign subsidiaries of
Enzo Life Sciencesconduct their operations through three reportable segments. Below are brief descriptions of each of the three operating segments (see Note 16 in the Notes to Consolidated Financial Statements). 44
Enzo Clinical Laboratory Services is a regional clinical laboratory serving the greater
New Yorkand New Jerseymedical communities and expanding into Connecticut. The Company believes having clinical diagnostic services allows us to capitalize first hand on our extensive advanced molecular and cytogenetic capabilities and the broader trends in predictive and personalized diagnostics. We offer a menu of routine and esoteric clinical laboratory tests or procedures used in general patient care by physicians to establish or support a diagnosis, monitor treatment or medication, or search for an otherwise undiagnosed condition. We operate a full-service clinical laboratory in Farmingdale, New York, a network of over 30 patient service centers throughout greater New Yorkand New Jersey, a free-standing "STAT" or rapid response laboratories in New York Cityand Connecticut, and a full-service phlebotomy center and an in-house logistics department. Payments for clinical laboratory testing services are made by the Medicare program, healthcare insurers and patients. The Clinical Laboratory Services reporting unit is impacted by various risk factors, including among others, reduced reimbursements from third party payers for testing performed and from recent health care legislation. Despite the growth we have experienced in previous years, there can be no assurance future growth can be achieved. The introduction of new molecular and esoteric tests is expected to increase our revenue per test and could offset impacts from the above factors. The Company anticipates improved profitability with increased service volume.
Enzo Life Sciences Products manufactures, develops and markets products and tools to life sciences, drug development and clinical research customers world-wide and has amassed a large patent and technology portfolio.
Enzo Life Sciences, Inc.is a recognized leader in labeling and detection technologies across research and diagnostic markets. Our strong portfolio of proteins, antibodies, peptides, small molecules, labeling probes, dyes and kits provides life science researchers tools for target identification/validation, high content analysis, gene expression analysis, nucleic acid detection, protein biochemistry and detection, and cellular analysis. We are globally recognized and acknowledged as a leader in manufacturing, in-licensing, and commercialization of over 20,000 products. Our strategic focus is directed to innovative high quality research reagents and kits in the primary key research areas of genomics, immunohistochemistry, immunoassays, cellular analysis, and small molecule chemistry. The segment is an established source for a comprehensive panel of products to scientific experts in the fields of cancer, cardiovascular disease, neurological disorders, diabetes and obesity, endocrine disorders, infectious and autoimmune disease, hepatotoxicity and renal injury. Enzo Therapeuticsis a biopharmaceutical venture that has developed multiple novel approaches in the areas of gastrointestinal, infectious, ophthalmic and metabolic diseases, many of which are derived from the pioneering work of Enzo Life Sciences. Enzo Therapeuticshas focused its efforts on developing treatment regimens for diseases and conditions for which current treatment options are ineffective, costly, and/or cause unwanted side effects. This focus has generated a clinical and preclinical pipeline, as well as more than 109 patents and patent applications.
The following table summarizes the sources of revenue for the years ended
Fiscal year ended July 31, 2022 2021
Clinical laboratory services
$ 74,42870 % $ 86,98474 % $ 47,96463 % Product revenues 32,643 30 30,747 26 26,561 35 Grant income - - - - 1,496 2 Total $ 107,071100 % $ 117,731100 % $ 76,021100 % 45 Results of Operations Fiscal year ended July 31, 2022compared to July 31, 2021(in 000s)
Comparative financial data for the years ended
Favorable 2022 2021 (Unfavorable) % Change Revenues
$ 107,071 $ 117,731 $ (10,660 )(9 ) Operating costs and expenses: Cost of revenues 65,104 64,154 (950 ) (1 ) Research and development 3,767 3,252 (515 ) (16 ) Selling, general and administrative 48,018 44,905
(3,113 ) (7 ) Legal and related expenses 5,689 4,728 (961 ) (20 ) Legal settlement (500 ) - 500 **
Total operating costs and expenses 122,078 117,039
(5,039 ) (4 ) Operating (loss) income (15,007 ) 692 (15,699 ) ** Other income (expense): Interest 159 8 151 ** Other (1,191 ) 6,905 (8,096 ) ** Foreign currency gain (2,222 ) 270 (2,492 ) **
(Loss) income before income taxes
$ (18,261 ) $ 7,875$
(26,136 ) ** ** not meaningful Consolidated Results:
The “period 2022” and the “period 2021” refer to the financial year ended
Impacts of Covid-19 We made substantial investments to expand and maintain the amount of COVID-19 testing available in the communities we serve. During the fiscal years ended
July 31, 2022and 2021, the Company generated substantial increases in COVID-19 related products and services. Enzo applied its technical expertise in molecular diagnostics to develop next generation COVID-19 diagnostic and antibody testing options which were approved under the FDA Emergency Use Authorization (EUA). This testing had a significantly positive impact on revenue, profitability and cash flow throughout fiscal 2021 and most of fiscal 2022. Revenues from COVID-19 testing represented 44%, 48%, and 8% of Clinical services revenues in the fiscal 2022, 2021 and 2020 periods, respectively. In March 2022, the U.S. Health Resources and Services Administration("HRSA") informed providers that, after March 22, 2022, it would stop accepting claims for testing and treatment for uninsured individuals under the HRSA COVID-19 Uninsured Program and that claims submitted prior to that date would be subject to eligibility and availability of funds. Although we believe that our estimates for contractual allowances and patient price concessions are appropriate, actual results could differ from those estimates. If the HRSA receives additional funding, it might again accept claims under the Uninsured Program. The rate of transmission of COVID-19 and its variants is on the decline in the US and the economy has reopened. However, federal, state and local governmental policies and initiatives designed to reduce the transmission of COVID-19 resulted in, among other things, a significant reduction in physician office visits, the cancellation of elective medical procedures, and the continuation of work-from-home policies. The COVID-19 impact on the Company's operations is consistent with the overall industry and our competitors, partners, and vendors. While we anticipate that COVID-19 will continue to impact our business into the future, increases in vaccination rates and booster shots, the development of new therapeutics and greater availability of rapid COVID-19 tests has resulted in a continued, significant decline in demand for our COVID-19 testing. As a result, COVID-19 testing volume, revenues, profitability, and cash flow in fiscal year 2022 did not match 2021 levels. 46 We expect COVID-19 testing volume will continue to decline in the periods ahead as the percentage of Americans who are vaccinated increases, the severity of its variants declines, and the general use of at home testing. However, the emergence and spread of more serious 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. Clinical services revenues for the 2022 period were $74.4 millioncompared to $87.0 millionin the 2021 period, a decrease of $12.6 millionor 14%. Revenues from COVID-19 testing represented 44% and 48% of Clinical revenues in the 2022 and 2021 periods, respectively. The period over period decline was due to lower testing volume and lower reimbursement rates. Diagnostic testing volume measured by the total number of accessions for all our testing services decreased approximately 14% period over period, which resulted in the 2022 period's revenue decrease. 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, Congresspassed 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 $1.1 millionand
$1.4 million, respectively.
Product revenues were
$32.6 millionin the 2022 period and $30.7 millionin the 2021 period, an increase of $1.9 millionor 6%. During the 2022 period, we completed a bulk sale of a GMP reagent to a large industrial customer in the US in the amount of $2.8 million. It is not known at this time if there will be repeat sales to this customer. Excluding this bulk sale, an increase in sales in the US market was not enough to offset larger declines, primarily in the European market and to a lesser extent the Asia Pacificmarket. During the first quarter of the 2022 period, we completed the winding down and closure of our manufacturing and distribution center in Ann Arbor, MIand moved the operations to our Farmingdale, NYcampus. As a result of the winding down, we experienced some disruption in the manufacture and distribution of our products, and experienced delays in product availability and fulfillment, which particularly impacted our customers in Europe. These disruptions were resolved during latter part of the 2022 period. The cost of Clinical Services was $45.9 millionin the 2022 period and $48.2 millionin the 2021 period, a decrease of $2.3 millionor 5%. During the 2022 period, we reduced our outside reference testing costs for COVID-19 by approximately $2.8 millionby utilizing our internal manufacturing capabilities, thereby reducing some of our reliance on testing and reagents sourced from third parties, as compared to the 2021 period. Due to lower accessions for testing other than COVID-19, reagent and other supplies costs declined $1.5 millionin the 2022 period. These cost reductions were partially offset by higher personnel costs related to COVID-19 testing, totaling $2.1 million. The gross profit margin on Clinical Services revenues in the 2022 and 2021 periods was approximately 38% and 45% respectively. The lower margin in the 2022 period was due to the decline in the volume of COVID-19 testing, which has higher margins than non-specialty testing. The reimbursements for COVID-19 testing also decreased in the 2022 period versus the 2021 period. The cost of Product revenues was $19.2 millionin the 2022 period and $16.0 millionin the 2021 period, an increase of $3.2 millionor 20%. Approximately $2.5 millionof the increase is due to increased revenues and the impact of inflation on component materials and $0.7 milliondue to reorganization of structure and market adjustment salary increases at our Farmingdale, NYcampus for manufacturing. The gross profit margin on Products was 41% in the 2022 period and 48% in the 2021 period. In the 2022 period, we completed the winding down and closure of our manufacturing and distribution center in Ann Arbor, MIand moved the operations to our Farmingdale, NYcampus. As a result of the operational transition, there was a temporary increase and overlap in manufacturing headcount and overhead costs during the first half of the period, which negatively affected the 2022 period gross profit margin. 47
Research and development expenses were
$3.8 millionin the 2022 period and $3.3 millionin the 2021 period, an increase of $0.5 millionor 16%. Research activities include lab developed tests (LDTs) for sexually transmitted infection (STI) panels and the detection of COVID-19. Research expenses declined for the Therapeutics segment, due to a focus on the Clinical Labsand Life Sciences segments. Selling, general and administrative expenses were $48.0 millionduring the 2022 period versus $44.9 millionduring the 2021 period, an increase of $3.1 millionor 7%. The Life Sciences Products segment expense increased $0.6 millionduring the 2022 period, which includes $0.4 millionfor employee severance expenses associated with the completion of the winding down and closure of our manufacturing and distribution center in Ann Arbor, MIand the cost of moving its operations to our Farmingdale, NYcampus at the beginning of the period. The segment also experienced increases in marketing expenses such as website ads, promotions and campaigns, trade shows, an increase in sales and marketing headcount, and an increase in facility expenses such as maintenance and utilities. The Other segment expense increased $2.4 millionduring the 2022 period and includes compensation expense (on a net basis) of $1.3 millionfor a former executive's severance. The expense also increased in the 2022 period by $1.3 millionfor salary increases, bonus accruals and share based compensation and $0.1 millionfor facility costs. The Clinical Services expense increased $0.1 millionperiod over period. Increases in facility costs of $1.2 millionand market adjustment salary increases of $0.3 millionwere almost offset by lower commissions earned in the 2022 period of $1.4 million. Legal and related expenses were $5.7 millionon a net basis during the 2022 period compared to $4.7 millionin the 2021 period, an increase of $1.0 millionor 20%. In the 2022 period, we incurred higher legal expense for activities associated with strategic initiatives and other corporate matters, which were partially offset by the recognition of a credit of $1.0 millionassociated with a fee settlement and release agreement with a former legal services provider.
The income from the legal settlement was
Interest income, net was
$0.2 millionin the 2022 period versus interest income, net of less than $0.1 millionin the 2021 period, a favorable variance of $0.2 million. During the 2022 period, we earned interest on marketable securities in bond funds, net of interest expense primarily on a mortgage. During the 2021 period, we were not invested in interest earning marketable securities until the latter part of that period, earned insignificant interest on cash and cash equivalents, and incurred interest expense on the mortgage. Other (expense) income in the 2022 period was ($1.2) millionand $6.9 millionin the 2021 period, an unfavorable variance of $8.1 million. During the 2022 period, the primary component of the expense was realized losses, net on marketable securities in bond funds of $1.3 million. As of the end of the third quarter of the 2022 period, we had sold all our holdings in these bond funds. During the 2022 and 2021 periods, we earned interest from these investments approximating $0.3 millionand $0.1 millionrespectively, which amounts are included in interest income, net. In June 2021, our $7.0 millionPPP loan was fully forgiven by the Small Business Administrationand the loan liability
was reversed into income. The foreign currency revaluation (loss) gain recognized by the Life Sciences Products segment during the 2022 period was
$(2.2) millioncompared to a gain of $0.3 millionin the 2021 period, an unfavorable variance of $2.5 million. The 2022 period revaluation loss was due to the substantial depreciation of the Euro, British pound and Swiss franc versus the U.S.dollar as of the end of the period compared to its start, ranging from 4.9% to 13.8%. The revaluation gain in the 2021 period was due to appreciation of the Euro, British pound and Swiss franc versus the U.S.dollar as of the end of that period compared to its start, ranging from 0.3% to 5.9%. 48 Results of Operations Fiscal year ending July 31, 2021compared to July 31, 2020(in 000s)
Comparative financial data for the years ended
Favorable 2021 2020 (Unfavorable) % Change Revenues
$ 117,731 $ 76,021$ 41,710 55 Operating costs and expenses: Cost of revenues 64,154 52,251 (11,903 ) (23 ) Research and development 3,252 4,448 1,196 27 Selling, general and administrative 44,905 42,960 (1,945 ) (5 ) Legal and related expenses 4,728 6,729 2,001 30 Total operating costs and expenses 117,039 106,388
(10,651 ) (10 ) Operating income (loss) 692 (30,367 ) 31,059 ** Other income (expense): Interest 8 454 (446 ) (98 ) Other 6,905 488 6,417 ** Foreign currency gain 270 905 (635 ) (70 )
Income (loss) before income taxes
$ 7,875 $ (28,520 )$
36,395 ** ** not meaningful Consolidated Results:
The “2021 period” and the “2020 period” refer to the financial year ended
Impacts of COVID-19
July 2020, Enzo was granted an FDA 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 EUA from the 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 EUA for the Company's rapid extraction method on its proprietary test system. Due to the effects of the pandemic and COVID-19 testing, accession volume in the 2021 period exceeded accession volume in the 2020 period by 65%, offsetting reductions in non-COVID-19 accessions due to the continuing restrictive effects of COVID-19. At this time, it is too early to determine the long term significance of the positive impact from COVID-19 testing and the Company's proprietary product offerings on revenue, profitability and cash flow. We experienced a decline in COVID-19 accession volume in the fourth quarter of the 2021 period and fully expect COVID-19 volume to decline in the quarters ahead as the percentage of Americans who are vaccinated increases. However, the emergence and spread of variants have caused our COVID-19 testing volume to increase again subsequent to the end of the fiscal year period. We expect continued COVID-19 testing opportunities based on testing for entertainment and travel as well as for school and workplace reopenings. Clinical services revenues for the 2021 period were $87.0 millioncompared to $49.5 millionin the 2020 period, an increase of $37.5 millionor 76%. Revenues from COVID-19 testing represented 48% and 8% of Clinical revenues in the 2021 and 2020 periods, respectively. Revenues for the 2020 period include two CARES Act Relief Payment grants totaling $1.5 million; there were no grants in the 2021 period. Diagnostic testing volume measured by the total number of accessions for all our testing services increased approximately 65% period over period due to the positive impact from COVID-19 testing, resulting in the 2021 period's revenue increase. COVID-19 testing services have higher reimbursement rates than our core and specialty testing resulting in an improvement in our overall liquidation rate for collections and revenue per accession. Excluding the impact of COVID-19 testing and the CARES Act grant, revenues for the 2021 period were $1.1 millionhigher than the 2020 period, and non COVID-19 testing volume was 1% higher. 49 Estimated collection amounts are subject to the complexities and ambiguities of third party payer billing, reimbursement regulations and claims processing, as well as issues unique to Medicare and Medicaid programs, and require us to consider the potential for adjustments when estimating variable consideration in the recognition of revenue in the period that the related services are rendered. The effect of PAMA directly negatively impacted reimbursements from Medicare and Medicaid in the 2021 and 2020 periods by approximately $1.4 millionand $1.2 million, respectively.
Product revenues were
$30.7 millionin the 2021 period and $26.6 millionin the 2020 period, an increase of $4.2 millionor 16%. During the 2020 period, the negative effect of COVID-19 related government policies intended to reduce the spread of the pandemic impacted our Products revenues in the U.S.markets more than in markets in the rest of the world. A greater portion of the 2021 period increase came from markets outside the U.S., though the U.S. market also increased, especially in the fourth quarter of the 2021 period. The worldwide growth is due to the improvement in infection rates and a rebound in demand as academia returned from complete shutdown, though some industrial customers still have not returned to full operations. The cost of Clinical Services was $48.2 millionin the 2021 period and $38.9 millionin the 2020 period, an increase of $9.3 millionfrom increased COVID-19 testing volume. Utilizing our internal manufacturing capabilities we reduced some of our reliance on reagents sourced from third parties. The gross profit margin on Clinical Services revenues in the 2021 period was approximately 45% versus 19% in the 2020 period, excluding the 2020 period grants. In the 2021 period, the high margin on COVID-19 testing and liquidation rate improvements offset the effect of reduced volumes of certain specialty testing services,
such as genetics testing.
The cost of Product revenues was
$16.0 millionin the 2021 period and $13.4 millionin the 2020 period, an increase of $2.6 millionor 19%. The gross profit margin on Products was 48.0% in the 2021 period and 49.6% in the 2020 period, negatively impacted by an increase in headcount, overhead and the cost of production materials. Research and development expenses were $3.3 millionin the 2021 period and $4.4 millionin the 2020 period, a decrease of $1.2 millionor 27%. The decrease is attributable to the Clinical Services segment, where with the increased commercialization of COVID-19 testing, certain research and development resources transitioned to testing services in the current period. During the 2020 period, the segment's efforts were directed toward lab developed tests (LDTs) for the detection of COVID-19 and antibodies. Research and development expenses also declined for the Therapeutics segment, due to the timing of activities. Selling, general and administrative expenses were $44.9 millionduring the 2021 period versus $43.0 millionduring the 2020 period, an increase of $1.9 millionor 5%. The Clinical Services expense increased $2.5 millionprimarily due to higher sales commissions and support services compensation resulting from higher revenues and activity from COVID-19, partially offset by the impact of cost savings initiatives undertaken throughout our fiscal year that ended July 31, 2020. The Life Sciences Products expense increased $0.5 milliondue to higher information technologies expenses and accrual of plant closure costs. The Other segment decreased $1.1 millionprimarily due to lower self-insured healthcare benefit costs. Legal and related expenses were $4.7 millionduring the 2021 period compared to $6.7 millionin the 2020 period, a decrease of $2.0 millionor 30%. There were contested proxy activities in both periods, but we incurred legal expenses relating to the contested proxy through more of the 2020 period compared to
the 2021 period. Interest income, net was zero in the 2021 period versus interest income, net of
$0.5 millionin the 2020 period, an unfavorable variance of $0.5 million, and in both periods represents interest on cash and cash equivalents and marketable securities net of interest expense, primarily on a mortgage. During the latter half of the 2021 period, we invested in and began to earn interest on marketable securities in bond funds since no interest was being earned on cash in money market funds because the Federal Reservecut its target interest rates to near zero in response to COVID-19. During most of the 2020 period, we earned interest in money market funds, which earned a significant yield prior to the Federal Reserve'sinterest rate cuts as it targeted near zero interest rates.
Other income for the 2021 and 2020 period was
respectively an increase of
50 The foreign currency revaluation gain recognized by the Life Sciences Products segment during the 2021 period was
$0.3 millioncompared to a revaluation gain of $0.9 millionin the 2020 period, an unfavorable variance of $0.6 million. The 2021 period revaluation gain was due to significant appreciation of the British pound versus the U.S.dollar as of the end of the period compared to its start. The revaluation gain in the 2020 period was larger due to significant appreciation of the British pound, Swiss franc and Euro versus the U.S.dollar as of the end of that period compared to its start.
Cash and capital resources
July 31, 2022, the Company had cash and cash equivalents totaling $21.6 millionof which $0.6 millionwas in foreign accounts, as compared to cash and cash equivalents and marketable securities of $43.5 million, of which $0.9 millionwas in foreign accounts at July 31, 2021. It is the Company's current intent to permanently reinvest these foreign funds outside of the United States, and its current plans do not demonstrate a need to repatriate them to fund
The Company had working capital of
$29.8 millionat July 31, 2022, compared to $44.5 millionat July 31, 2021, a decrease of $14.7 million. The decrease in working capital was due to the use of cash and cash equivalents to fund operations and capital expenditures. Net cash used in operating activities during the 2022 period was $16.6 million, compared to net cash provided by operating activities of $0.4 millionduring the 2021 period, an unfavorable variance of $17.0 million. The net cash used in the 2022 period was due to the net loss of $18.3 million, a net increase of $5.2 millionin operating assets, primarily accounts receivable and inventories, and a net decrease of $1.6 millionin operating liabilities, primarily accrued liabilities. These uses were partially offset by non-cash expense adjustments of $8.5 million. Net cash provided by operating activities during the fiscal 2021 period of $0.4 millionwas due to net income of $7.9 millionwhich was offset by net non-cash adjustments of $2.7 millionand by a net increase of $4.8 millionin operating assets and liabilities including, but not limited to inventories and accounts receivable. Net cash provided by investing activities during the 2022 period was approximately $25.2 millionas compared to cash used in investing activities of $34.5 millionin the 2021 period. During the 2022 period, we sold all of the marketable securities we had purchased in the 2021 period. Capital expenditures in the 2022 and 2021 periods were $3.5 millionand $4.4 million, respectively and represent expenditures to support and grow our existing operations, including investments in laboratory equipment, information technology, and the buildout of our Farmingdalecampus.
Cash flows used in financing activities during the periods 2022 and 2021 approximate
July 31, 2022we had a mortgage principal balance of $3.8 millionentered into for the purchase of a building facility at our Farmingdalecampus, which bears a fixed interest rate of 5.09% per annum. It requires monthly mortgage payments totaling $0.4 millionannually. Our obligations under the mortgage agreement are secured by the facility and by a $1.0 millioncash collateral deposit with the mortgagee as additional security, which is included in other assets as of July 31, 2022. Effective October 19, 2020, the Company and the mortgagee agreed to a covenant restructure whereby the mortgagee waived the Company's financial ratio covenant for the fiscal period ended July 31, 2020and modified the mortgage to replace 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 millionof liquid assets, defined as time deposits, money market accounts and commercial paper, and obligations issued by the U.S.government or any of its agencies. The cash collateral agreement was also modified to require compliance with the liquidity covenant for two consecutive fiscal years before the collateral is released back to us. As of July 31, 2021, the Company was in compliance with the financial and liquidity covenants in effect at that time related to this mortgage. 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 $5.7 millionat July 31, 2022) from $25 millionpreviously, and (b) the collateral requirement would be increased from $0.75 millionto $1.0 million. The Company increased the collateral deposit to $1.0 millionin November 2021and was in compliance with the liquidity covenant as of July
31, 2022. 51 The Company believes based on our fiscal 2023 forecast that its current cash and cash equivalents level are sufficient for its foreseeable liquidity and capital resource needs over at least the next twelve (12) months, although there can be no assurance that future events will not alter such view. Although there can be no assurances, in the event additional capital is required, the Company believes it has the ability to raise additional funds through the utilization of the Controlled Equity Offering Program as disclosed in Note 12 in the Notes to the Consolidated Financial Statements, or other sources. Our liquidity plans are subject to a number of risks and uncertainties, including those described in the Item 1A. "Risk Factors" section of this Form 10-K for the year ended
July 31, 2022, some of which are outside our control. Macroeconomic conditions could limit our ability to successfully execute our business plans and therefore adversely affect our liquidity plans.
Effect of new accounting pronouncements
Recently Adopted Accounting Pronouncements
December 2019, the Financial Accounting Standards Board("FASB") issued Accounting Standards Update ("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. We adopted the amendments in this ASU beginning August 1, 2021. The adoption of the amendments in this ASU did not have a material impact on our consolidated results of operations, financial position or cash flows.
Declarations issued but not yet adopted
June 2016, FASB issued ASU No. 2016-13 Financial Instruments - Credit Losses (Topic 326). This standard changes the impairment model for most financial instruments, including trade receivables, from an incurred loss method to a new forward-looking approach, based on expected losses. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. Adoption of this standard is required for our annual and interim periods beginning August 1, 2023and 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 have reviewed all other recently issued accounting pronouncements and have concluded that they do not apply or should not be material to the accounting for our operations.
Contractual Obligations The Company has entered into various real estate and equipment operating leases, reagent rental agreements, and employment agreements with certain executive officers. The real estate lease for the Company's
Farmingdale Clinical Laband Research facility is with a related party. See Item 2, Properties, and Note 9 and Note 14 in the Notes to the Consolidated Financial Statements for a further description of these leases and obligations.
Management is not aware of any material claims, litigation or settled matters relating to third-party reimbursements that would materially affect our financial statements.
Off-balance sheet arrangements
The Company has no “off-balance sheet arrangements” as that term is defined in Section 303(a)(4) of Regulation SK.
Significant Accounting Policies and Estimates
General The Company's discussion and analysis of its financial condition and results of operations are based upon
Enzo Biochem, Inc.'sconsolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and judgments also affect related disclosure of contingent assets and liabilities. 52
On an on-going basis, we evaluate our estimates, including those related to contractual expense, allowance for uncollectible accounts, inventory, intangible assets and income taxes. The Company bases its estimates on experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Contingencies
Contingencies are assessed and a liability is recognized when the event is both probable and reasonably estimable. Gain contingencies are assessed and not recognized until the gain is realizable or realized.
Product revenues Products revenues consist of the sale of single-use products used in the identification of genomic information and are recognized at a point in time following the transfer of control of such products to the customer, which generally occurs upon shipment. Payment terms for shipments to end-user and distributor customers may range from 30 to 90 days. Any claims for credit or return of goods may be made generally within 30 days of receipt. Revenues are reduced to reflect estimated credits and returns, although historically these adjustments have not been material. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenue. Amounts billed to customers for shipping and handling are included in revenue, while the related shipping and handling costs are reflected in cost of products.
Revenue – Clinical Laboratory Services
Net revenues in the Company's clinical services business are primarily comprised of a high volume of relatively low-dollar transactions. The services business, which provides clinical testing services, satisfies its performance obligation and recognizes revenues upon completion of the testing process for a specific patient and reporting to the ordering physician. The Company may also perform clinical testing services for other laboratories and will recognize revenue from those services when reported to the ordering laboratory. The Company estimates the amount of consideration it expects to receive from customer groups using the portfolio approach. These estimates of the expected consideration include the impact of contractual allowances and price concessions on our customer group portfolios consisting of healthcare insurers, government payers, client payers and patients. Contracts with customers in our laboratory services business do not contain a financing component, based on the typically limited period of time between performance of services and collection of consideration. The transaction price includes variable consideration in the form of the contractual allowance and price concessions as well as the collectability of the transaction based on patient intent and ability to pay. The Company uses the expected value method in estimating the amount of the variability included in the transaction price.
Contractual Adjustment The Company's estimate of contractual adjustment is based on significant assumptions and judgments, such as its interpretation of payer reimbursement policies, and bears the risk of change. The estimation process is based on the experience of amounts approved as reimbursable and ultimately settled by payers, versus the corresponding gross amount billed to the respective payers. The contractual adjustment is an estimate that reduces gross revenue based on gross billing rates to amounts expected to be approved and reimbursed. Gross billings are based on a standard fee schedule we set for all third party payers, including Medicare, health maintenance organizations ("HMO's") and managed care. The Company adjusts the contractual adjustment estimate quarterly, based on its evaluation of current and historical settlement experience with payers, industry reimbursement trends, and other relevant factors. The other relevant factors that affect our contractual adjustment include the monthly and quarterly review of: 1) current gross billings and receivables and reimbursement by payer, 2) current changes in third party arrangements and 3) the growth of in-network provider arrangements and managed care plans specific to our Company. Our clinical laboratory services business is primarily dependent upon reimbursement from third-party payers, such as Medicare (which principally serves patients 65 and older) and insurers. We are subject to variances in reimbursement rates among different third-party payers, as well as constant changes of reimbursement rates. Changes that decrease reimbursement rates or coverage would negatively impact our revenues. The number of individuals covered under managed care contracts or other similar arrangements has grown over the past several years and may continue to grow in the future. In addition, Medicare and other government healthcare programs continue to shift to managed care. These trends will continue to reduce our revenues. 53 During the years ended
July 31, 2022, 2021 and 2020, the contractual adjustment percentages, determined using current and historical reimbursement statistics, were approximately 83%, 83%, and 88%, respectively, of gross billings. The Company believes a decline in reimbursement rates or a shift to managed care, or similar arrangements may be offset by the positive impact of an increase in the number of tests we perform. However, there can be no assurance that we can increase the number of tests we perform or that if we do increase the number of tests we perform, that we can maintain that higher number of tests performed, or that an increase in the number of tests we perform would result in increased revenue.
The Company estimates (using a sensitivity analysis) that each 1 point change in contractual adjustment percentage could result in a change in Clinical Laboratory Services revenue of approximately
Our clinical laboratory financial billing system records gross billings using a standard fee schedule for all payers and does not record contractual adjustment by payer at the time of billing. Therefore, we are unable to quantify the effect of contractual adjustment recorded during the current period that relate to revenue recorded in a previous period. However, we can reasonably estimate our monthly contractual adjustment to revenue on a timely basis based on our quarterly review process, which includes: ? an analysis of industry reimbursement trends; ? an evaluation of third-party reimbursement rates changes and changes in
reimbursement terms with third-party payers; ? ongoing monthly analysis of current and historical claims settlement and
statistics on reimbursement experience with payers; ? an analysis of current gross billings and receivables by payer.
Accounts receivable are recorded at their realizable value, net of allowances for doubtful accounts, which are estimated and recorded in the related revenue period.
The following is a table of the Company's net accounts receivable by segment. The Clinical Laboratory Services segment's net receivables are detailed by billing category and as a percent to its total net receivables. As of
July 31, 2022and 2021, approximately 59% of the Company's net accounts receivable relates to its Clinical Laboratory Services business, which operates in the New York, New Jerseyand Connecticutmedical communities. The Life Sciences products segment's accounts receivable includes approximately $1.1 millionor 24% and $1.4 millionor 33% of foreign receivables as of July 31, 2022and 2021, respectively.
Net claims (in thousands)
July 31, 2022 July 31,
Net accounts receivable by segment Amount % Amount %
Clinical Labs(by billing category) Third party payers $ 2,64740 $ 2,19536 Patient self-pay 2,779 41 2,007 33 Medicare 768 11 1,122 19 HMO's 560 8 692 12 Total Clinical Labs6,754 100 % 6,016 100 % Total Life Sciences 4,762 4,182 Total accounts receivable - net $ 11,516 $ 10,19854 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 assesses the current state of its billing functions in order to identify any known collection or reimbursement issues. The Company assesses the impact, if any, on the allowance estimates, which involves Company's management judgment. It is important to note that the collection of these receivables is not guaranteed from Third Party Payers. The Company believes that the collectability of its receivables is directly linked to the quality of its billing processes, most notably, those related to obtaining the accurate patient information to effectively bill for the services provided. Should circumstances change (e.g. shift in payer mix, decline in economic conditions or deterioration in aging of receivables), our estimates of net realizable value of receivables could be reduced by a material amount. As of July 31, 2022and 2021, approximately 23% and 27%, respectively of Clinical Labsreceivables are from two payers other than Medicare. Billing for laboratory services is complicated due to several factors, including, but not limited to, the differences between our standard gross fee schedule for all payers and the reimbursement rates of the various payers we deal with, disparity of coverage and information requirements among the various payers, and disputes with payers as to which party is responsible for reimbursement. Income Taxes The Company accounts for income taxes under the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The liability method requires that any tax benefits recognized for net operating loss carry forwards and other items be reduced by a valuation allowance where it is not more likely than not the benefits will be realized in the foreseeable future. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under the liability method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. It is the Company's policy to provide for uncertain tax positions, if any, and the related interest and penalties based upon management's assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. To the extent the Company prevails in matters for which a liability for an unrecognized tax benefit is established or is required to pay amounts in excess of the liability, the Company's effective tax rate in a given financial statement period may
be affected. Inventory
The Company values inventory at the lower of cost (first-in, first-out) or net realizable value. Work-in-process and finished goods inventories consist of material, labor, and manufacturing overhead. Write downs of inventories to net realizable value are based on a review of inventory quantities on hand and estimated sales forecasts based on sales history and anticipated future demand. Unanticipated changes in demand could have a significant impact on the value of our inventory and require additional write downs of inventory which would impact our results of operations.
Goodwillrepresents the excess of the cost of an acquisition over the fair value of the net assets acquired. Intangible assets (exclusive of patents), arose primarily from acquisitions, and primarily consist of customer relationships, trademarks, licenses, and website and database content. Finite-lived intangible assets are amortized according to their estimated useful lives, which range
from 4 to 15 years. The Company tests goodwill annually as of the first day of the fourth quarter, or more frequently if indicators of potential impairment exist. In assessing goodwill for impairment, the Company has the option to first perform a qualitative assessment to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company is not required to perform any additional tests in assessing goodwill for impairment. However, if the Company concludes otherwise or elects not to perform the qualitative assessment, then it identifies the reporting units and compares the fair value of each of these reporting units to their respective carrying amount. If the carrying amount of the reporting unit is less than its fair value, no impairment exists. If the carrying amount of the reporting unit is higher than its fair value, the impairment charge is the amount by which the carrying amount exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The Company performed a quantitative assessment in 2022, 2021 and 2020, and concluded there were no goodwill impairments. The goodwill is held in the
Clinical Labsreporting unit, which in 2022 had income before taxes of $839. In 2022, we estimated the fair value of this reporting unit by determining the multiple of enterprise value to revenues for a peer group of clinical reference labs, discounted that multiple, and applied it to our reporting unit's annualized revenues. The resulting estimate of the fair value of the reporting unit exceeded the carrying amount of the reporting unit by approximately $55,000, well in excess of the unit's goodwill. 55
The Company reviews the recoverability of the carrying value of long-lived assets (including intangible assets with finite lives) of an asset or asset group for impairment annually as of the end of the fiscal year, or more frequently if indicators of potential impairment exist. Should indicators of impairment exist, the carrying values of the assets are evaluated in relation to the operating performance and future undiscounted cash flows of an asset or asset group. The net book value of the long lived asset is adjusted to fair value if its expected future undiscounted cash flow is less than its book value. During fiscal years 2022, 2021 and 2020, there was no impairment of goodwill or long-lived assets. During the fiscal year ended
July 31, 2022, all intangible assets, which were finite lived, became fully amortized.
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