ENZO BIOCHEM INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)

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See in this Form 10-K for the fiscal year ended July 31, 2022 Part 1. Point 1. Company, for forward-looking caveats.



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 States and other
countries around the world. Federal, state and local governmental policies and
initiatives designed to reduce the transmission of COVID-19 have resulted in,
among other things, a significant reduction in physician office visits, the
cancellation of elective medical procedures, customers of our products closing
or severely curtailing their operations (voluntarily or in response to
government orders), and the adoption of work-from-home or shelter-in-place
policies. The COVID-19 impact on the Company's operations is consistent with the
overall industry and publicly issued statements from competitors, partners,
and
vendors.



Enzo was granted 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)



In 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 Centers for

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

January 1, 2021. New Revisions to Medicare Clinical Laboratory Fees

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 $1.7 million based on our health insurance for the financial year 2022

income. In this regard, the American Association of Clinical Laboratories (CLAA)

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 Congress on the potential

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 $100 billion to health care providers for related expenses or

revenue losses due to the COVID-19 pandemic. In April 2020we

received from Medicare a CARES Act relief payment grant of approximately $750

of the initial tranche and July 2020 we received a second grant from

approximately $750. ? Allocated $349 billion to small businesses as a Payment Protection Program (PPP)

loans through the Small Business Administration (SBA). In April 2020we

received approximately $7.0 million of the initial phase of this program.

In June 2021 the SBA completely waived our PPP loan. ? Provide an advance on payments for testing services that can be either reimbursed

at any time or recovered from one year from receipt. In April 2020 we

applied for and received a Medicare advance of $2.5 millionwho has

  been paid back.
? Suspended Medicare sequestration from May 2020 to 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 April 14, 2021extended the suspension

period to December 31, 2021. We believe that the suspension of Medicare

sequestration has resulted in a small benefit to us in the form of greater

reimbursement rates for diagnostic testing services performed on behalf of

  Medicare beneficiaries.



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 Sciences conduct 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 York and New Jersey medical 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 York
and New Jersey, a free-standing "STAT" or rapid response laboratories in New
York City and 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 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 more than 109 patents
and patent applications.


The following table summarizes the sources of revenue for the years ended July 31, 20222021 and 2020 (in $000‘s and percentages):

Fiscal year ended July 31,            2022                    2021         

2020

Clinical laboratory services   $  74,428        70 %   $  86,984        74 %   $ 47,964        63 %
Product revenues                  32,643        30        30,747        26       26,561        35
Grant income                           -         -             -         -        1,496         2
Total                          $ 107,071       100 %   $ 117,731       100 %   $ 76,021       100 %




                                       45





                             Results of Operations

           Fiscal year ended July 31, 2022 compared to July 31, 2021
                                   (in 000s)



Comparative financial data for the years ended July 31,


                                                                          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 July 31, 2022 and 2021, respectively.


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, 2022 and 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 million compared to
$87.0 million in the 2021 period, a decrease of $12.6 million or 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, Congress passed the U.S. Protecting Access to Medicare Act of 2014
(PAMA), which included substantial changes to the way in which clinical
laboratory services are paid under Medicare. Beginning in 2018, Medicare
payments for clinical laboratory services are paid based upon the
volume-weighted median of private payer rates as reported by certain clinical
laboratories across the US, replacing the previous system which was based upon
fee schedules derived from historical charges for clinical laboratory tests. We
estimate that the effect of PAMA directly negatively impacted reimbursements
from Medicare and Medicaid in the 2022 and 2021 periods by $1.1 million and
$1.4
million, respectively.


Product revenues were $32.6 million in the 2022 period and $30.7 million in the
2021 period, an increase of $1.9 million or 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 Pacific market. During the first
quarter of the 2022 period, we completed the winding down and closure of our
manufacturing and distribution center in Ann Arbor, MI and moved the operations
to our Farmingdale, NY campus. 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 million in the 2022 period and $48.2
million in the 2021 period, a decrease of $2.3 million or 5%. During the 2022
period, we reduced our outside reference testing costs for COVID-19 by
approximately $2.8 million by 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 million in
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 million in the 2022 period and $16.0
million in the 2021 period, an increase of $3.2 million or 20%. Approximately
$2.5 million of the increase is due to increased revenues and the impact of
inflation on component materials and $0.7 million due to reorganization of
structure and market adjustment salary increases at our Farmingdale, NY campus
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, MI
and moved the operations to our Farmingdale, NY campus. 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 million in the 2022 period and $3.3
million in the 2021 period, an increase of $0.5 million or 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 Labs and Life Sciences
segments.



Selling, general and administrative expenses were $48.0 million during the 2022
period versus $44.9 million during the 2021 period, an increase of $3.1 million
or 7%. The Life Sciences Products segment expense increased $0.6 million during
the 2022 period, which includes $0.4 million for employee severance expenses
associated with the completion of the winding down and closure of our
manufacturing and distribution center in Ann Arbor, MI and the cost of moving
its operations to our Farmingdale, NY campus 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 million during the 2022
period and includes compensation expense (on a net basis) of $1.3 million for a
former executive's severance. The expense also increased in the 2022 period by
$1.3 million for salary increases, bonus accruals and share based compensation
and $0.1 million for facility costs. The Clinical Services expense increased
$0.1 million period over period. Increases in facility costs of $1.2 million and
market adjustment salary increases of $0.3 million were almost offset by lower
commissions earned in the 2022 period of $1.4 million.



Legal and related expenses were $5.7 million on a net basis during the 2022
period compared to $4.7 million in the 2021 period, an increase of $1.0 million
or 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 million associated with
a fee settlement and release agreement with a former legal services provider.



The income from the legal settlement was $0.5 million in the period 2022. The Company, as plaintiff, has finalized and signed a settlement agreement with Roche.



Interest income, net was $0.2 million in the 2022 period versus interest income,
net of less than $0.1 million in 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) million and $6.9 million in
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 million and $0.1 million respectively, which amounts are
included in interest income, net. In June 2021, our $7.0 million PPP loan was
fully forgiven by the Small Business Administration and 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) million compared to a gain of
$0.3 million in 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, 2021 compared to July 31, 2020
                                   (in 000s)


Comparative financial data for the years ended July 31,


                                                                          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 July 31, 2021 and 2020, respectively.


Impacts of COVID-19


In 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 million compared to
$49.5 million in the 2020 period, an increase of $37.5 million or 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 million higher 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 million and $1.2
million, respectively.


Product revenues were $30.7 million in the 2021 period and $26.6 million in the
2020 period, an increase of $4.2 million or 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 million in the 2021 period and $38.9
million in the 2020 period, an increase of $9.3 million from increased COVID-19
testing volume. Utilizing our internal manufacturing capabilities we reduced
some of our reliance on reagents sourced from third parties. The gross profit
margin on Clinical Services revenues in the 2021 period was approximately 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 million in the 2021 period and $13.4
million in the 2020 period, an increase of $2.6 million or 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 million in the 2021 period and $4.4
million in the 2020 period, a decrease of $1.2 million or 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 million during the 2021
period versus $43.0 million during the 2020 period, an increase of $1.9 million
or 5%. The Clinical Services expense increased $2.5 million primarily due to
higher sales commissions and support services compensation resulting from higher
revenues and activity from COVID-19, partially offset by the impact of cost
savings initiatives undertaken throughout our fiscal year that ended July 31,
2020. The Life Sciences Products expense increased $0.5 million due to higher
information technologies expenses and accrual of plant closure costs. The Other
segment decreased $1.1 million primarily due to lower self-insured healthcare
benefit costs.



Legal and related expenses were $4.7 million during the 2021 period compared to
$6.7 million in the 2020 period, a decrease of $2.0 million or 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 million in 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 Reserve cut its target interest rates to near
zero in response to COVID-19. During most of the 2020 period, we earned interest
in money market funds, which earned a significant yield prior to the Federal
Reserve's interest rate cuts as it targeted near zero interest rates.



Other income for the 2021 and 2020 period was $7.0 million and $0.5 million
respectively an increase of $6.4 million. In June 2021our $7.0 million The PPP loan was fully canceled by the Small Business Administration and the loan liability was reversed into income.


                                       50





The foreign currency revaluation gain recognized by the Life Sciences Products
segment during the 2021 period was $0.3 million compared to a revaluation gain
of $0.9 million in 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

At July 31, 2022, the Company had cash and cash equivalents totaling $21.6
million of which $0.6 million was in foreign accounts, as compared to cash and
cash equivalents and marketable securities of $43.5 million, of which $0.9
million was 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
its
United States operations.


The Company had working capital of $29.8 million at July 31, 2022, compared to
$44.5 million at 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 million during 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
million in operating assets, primarily accounts receivable and inventories, and
a net decrease of $1.6 million in 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 million was due to net income of $7.9 million which was offset by
net non-cash adjustments of $2.7 million and by a net increase of $4.8 million
in 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 million as compared to cash used in investing activities of
$34.5 million in 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 million and $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 Farmingdale campus.



Cash flows used in financing activities during the periods 2022 and 2021 approximate $0.2 million for payments related to a mortgage and finance leases.



As of July 31, 2022 we had a mortgage principal balance of $3.8 million entered
into for the purchase of a building facility at our Farmingdale campus, which
bears a fixed interest rate of 5.09% per annum. It requires monthly mortgage
payments totaling $0.4 million annually. Our obligations under the mortgage
agreement are secured by the facility and by a $1.0 million cash 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, 2020 and modified the mortgage to replace a
financial ratio covenant with a liquidity covenant. The liquidity covenant
required that we own and maintain at all times, and throughout the remaining
term of the loan, at least $25 million of 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 million at July 31, 2022) from $25 million previously, and
(b) the collateral requirement would be increased from $0.75 million to $1.0
million. The Company increased the collateral deposit to $1.0 million in
November 2021 and 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

In 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



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 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 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 Lab and
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.'s consolidated 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 $4.5 million, $5.1 million and $3.9 million for the years ended July 31, 20222021 and 2020, respectively, and a change in net debtors of approximately $0.4 million and $0.6 million of the July 31, 2022 and 2021, respectively.



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


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,
2022 and 2021, approximately 59% of the Company's net accounts receivable
relates to its Clinical Laboratory Services business, which operates in the New
York, New Jersey and Connecticut medical communities. The Life Sciences products
segment's accounts receivable includes approximately $1.1 million or 24% and
$1.4 million or 33% of foreign receivables as of July 31, 2022 and 2021,
respectively.



Net claims (in thousands)



                                        July 31, 2022          July 31, 

2021

Net accounts receivable by segment     Amount        %        Amount        %
Clinical Labs (by billing category)
Third party payers                    $  2,647        40     $  2,195        36
Patient self-pay                         2,779        41        2,007        33
Medicare                                   768        11        1,122        19
HMO's                                      560         8          692        12
Total Clinical Labs                      6,754       100 %      6,016       100 %
Total Life Sciences                      4,762                  4,182
Total accounts receivable - net       $ 11,516               $ 10,198




                                       54





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, 2022 and 2021, approximately 23% and 27%, respectively of
Clinical Labs receivables 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.


Good will and intangible 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. 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 Labs reporting 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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