UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark one
FORM 10-Q
Mark one
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 20222023
or
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission File Number 001-09974
ENZO BIOCHEM, INC. |
(Exact name of registrant as specified in its charter) |
New York | 13-2866202 | |
(State or Other Jurisdiction of | (IRS. Employer | |
Incorporation or Organization) | Identification No.) | |
81 Executive Blvd. Suite 3 Farmingdale, New York | 11735 | |
(Address of Principal Executive office) | (Zip Code) |
(Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | ||
Common stock $0.01 par value | ENZ | The New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant has required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 45 of Regulation S-T (§232.405 of that chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).
Yes ☒ No ☐
Securities registered pursuant to Section 12(b) of the Act:
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer a smaller reporting company, or an emerging growth company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer | ☐ | Accelerated filer | ||
Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Yes ☐ No ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
Yes ☐ No ☒
As of December 5, 2022,8, 2023, the Registrant had 48,720,45450,489,771 shares of common stock outstanding.
ENZO BIOCHEM, INC.
FORM 10-Q
October 31, 2022
INDEXFORM 10-Q
October 31, 2023
INDEX
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PART I FINANCIAL INFORMATIOINFORMATION
ITEM 1 FINANCIAL STATEMENTS
ENZO BIOCHEM, INC.
ENZO BIOCHEM, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
October 31, 2022 (unaudited) | July 31, 2022 | October 31 2023 (unaudited) | July 31, 2023 | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 12,135 | $ | 21,603 | $ | 69,207 | $ | 82,373 | ||||||||
Accounts receivable, net | 11,515 | 11,516 | 4,181 | 4,808 | ||||||||||||
Inventories, net | 15,787 | 15,411 | 7,595 | 7,939 | ||||||||||||
Prepaid expenses and other current assets | 5,142 | 5,824 | ||||||||||||||
Prepaid expenses and other current assets, including $5,000 escrow at October 31, 2023 and $1,000 restricted cash at July 31, 2023 | 7,029 | 3,336 | ||||||||||||||
Total current assets | 44,579 | 54,354 | 88,012 | 98,456 | ||||||||||||
Property, plant, and equipment, net | 17,140 | 17,259 | 13,075 | 13,086 | ||||||||||||
Right-of-use assets | 14,419 | 15,174 | 3,405 | 3,626 | ||||||||||||
Goodwill | 7,452 | 7,452 | ||||||||||||||
Other, including restricted cash of $1,000 at October 31, 2022 and July 21, 2022 | 1,609 | 1,618 | ||||||||||||||
Other assets, including $5,000 escrow at July 31, 2023 | 726 | 5,745 | ||||||||||||||
Non-current assets of discontinued operations, net | 1,090 | 967 | ||||||||||||||
Total assets | $ | 85,199 | $ | 95,857 | $ | 106,308 | $ | 121,880 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable – trade | $ | 8,109 | $ | 8,508 | $ | 1,962 | $ | 3,575 | ||||||||
Accrued liabilities | 12,377 | 12,300 | 10,042 | 11,743 | ||||||||||||
Current portion of operating lease liabilities | 3,455 | 3,432 | 920 | 980 | ||||||||||||
Other current liabilities and finance leases short term | 312 | 310 | ||||||||||||||
Other current liabilities | 75 | 75 | ||||||||||||||
Convertible debentures | 2,842 | 2,514 | ||||||||||||||
Current liabilities of discontinued operations, net | 13,001 | 21,102 | ||||||||||||||
Total current liabilities | 24,253 | 24,550 | 28,842 | 39,989 | ||||||||||||
Other liabilities and finance leases long term | 18 | 39 | ||||||||||||||
Operating lease liabilities, non-current, net | 11,952 | 12,729 | ||||||||||||||
Operating lease liabilities, non-current | 2,972 | 3,160 | ||||||||||||||
Long term debt, net | 3,986 | 4,077 | 219 | 269 | ||||||||||||
Total liabilities | $ | 40,209 | $ | 41,395 | $ | 32,033 | $ | 43,418 | ||||||||
Contingencies – see Note 12 | ||||||||||||||||
Contingencies – see Note 13 | ||||||||||||||||
Stockholders’ equity: | ||||||||||||||||
Preferred Stock, $.01 par value; authorized 25,000,000 shares; no shares issued or outstanding | — | — | — | — | ||||||||||||
Common Stock, $.01 par value; authorized 75,000,000 shares; shares issued and outstanding: 48,720,454 at October 31, 2022 and at July 31, 2022 | 487 | 487 | ||||||||||||||
Common Stock, $.01 par value; authorized 75,000,000 shares; shares issued and outstanding: 50,489,771 at October 31, 2023 and 49,997,631 at July 31, 2023 | 504 | 499 | ||||||||||||||
Additional paid-in capital | 339,892 | 339,462 | 345,991 | 344,435 | ||||||||||||
Accumulated deficit | (299,273 | ) | (288,638 | ) | (274,966 | ) | (268,350 | ) | ||||||||
Accumulated other comprehensive income | 3,884 | 3,151 | 2,746 | 1,878 | ||||||||||||
Total stockholders’ equity | 44,990 | 54,462 | 74,275 | 78,462 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 85,199 | $ | 95,857 | $ | 106,308 | $ | 121,880 |
The accompanying notes are an integral part of these consolidated financial statements.
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ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(unaudited)
(in thousands, except per share data)
Three Months Ended October 31, | Three Months Ended October 31, | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Revenues | $ | 18,276 | $ | 26,519 | $ | 7,806 | $ | 7,103 | ||||||||
Operating costs and expenses: | ||||||||||||||||
Operating costs and expenses, net: | ||||||||||||||||
Cost of revenues | 14,671 | 15,273 | 4,351 | 4,589 | ||||||||||||
Research and development | 996 | 744 | 849 | 699 | ||||||||||||
Selling, general and administrative | 11,451 | 11,052 | ||||||||||||||
Selling, general, and administrative | 7,007 | 5,437 | ||||||||||||||
Legal and related expenses | 1,071 | 1,282 | 1,075 | 1,007 | ||||||||||||
Total operating costs and expenses | 28,189 | 28,351 | 13,282 | 11,732 | ||||||||||||
Operating loss | (9,913 | ) | (1,832 | ) | (5,476 | ) | (4,629 | ) | ||||||||
Other income (expense): | ||||||||||||||||
Interest, net | 70 | 39 | 977 | 72 | ||||||||||||
Change in fair value of convertible debentures | (328 | ) | — | |||||||||||||
Other | 5 | (145 | ) | 158 | — | |||||||||||
Foreign exchange loss | (797 | ) | (381 | ) | (1,006 | ) | (797 | ) | ||||||||
Total other expense | (722 | ) | (487 | ) | ||||||||||||
Loss before income taxes | (5,675 | ) | (5,354 | ) | ||||||||||||
Income taxes | — | — | ||||||||||||||
Net loss from continuing operations | $ | (5,675 | ) | $ | (5,354 | ) | ||||||||||
Net loss from discontinued operations | (941 | ) | (5,281 | ) | ||||||||||||
Net loss | $ | (10,635 | ) | $ | (2,319 | ) | (6,616 | ) | (10,635 | ) | ||||||
Net loss per common share: | ||||||||||||||||
Basic | $ | (0.22 | ) | $ | (0.05 | ) | ||||||||||
Diluted | $ | (0.22 | ) | $ | (0.05 | ) | ||||||||||
Net loss per common share – basic and diluted: | ||||||||||||||||
Continuing operations | $ | (0.11 | ) | $ | (0.11 | ) | ||||||||||
Discontinued operations | (0.02 | ) | (0.11 | ) | ||||||||||||
Total net loss per basic and diluted common share | $ | (0.13 | ) | $ | (0.22 | ) | ||||||||||
Weighted average common shares outstanding: | ||||||||||||||||
Basic | 48,720 | 48,472 | 50,184 | 48,720 | ||||||||||||
Diluted | 48,720 | 48,472 | 50,184 | 48,720 |
The accompanying notes are an integral part of these consolidated financial statements.
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ENZO BIOCHEM, INC.
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(unaudited)
(in thousands)
Three Months Ended October 31, | Three Months Ended October 31, | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Net loss | $ | (10,635 | ) | $ | (2,319 | ) | $ | (6,616 | ) | $ | (10,635 | ) | ||||
Other comprehensive gain: | ||||||||||||||||
Other comprehensive income: | ||||||||||||||||
Foreign currency translation adjustments | 733 | 277 | 868 | 733 | ||||||||||||
Comprehensive loss | $ | (9,902 | ) | $ | (2,042 | ) | $ | (5,748 | ) | $ | (9,902 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
3 |
ENZO BIOCHEM, INC.
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Three Months Ended October 31, 20222023 and 20212022
(unaudited)
(in thousands, except share data)
Common Stock Shares Issued | Common Stock Amount | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Total Stockholders’ Equity | |||||||||||||||||||
Balance at July 31, 2023 | 49,997,631 | $ | 499 | $ | 344,435 | $ | (268,350 | ) | $ | 1,878 | $ | 78,462 | ||||||||||||
Net loss for the three months ended October 31, 2023 | — | — | — | (6,616 | ) | — | (6,616 | ) | ||||||||||||||||
Vested restricted stock unit issuances | 144,530 | 1 | — | — | — | 1 | ||||||||||||||||||
Common stock issued for Asset Purchase Agreement bonus payment | 347,610 | 4 | 481 | — | — | 485 | ||||||||||||||||||
Share-based compensation charges | — | — | 1,075 | — | — | 1,075 | ||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | 868 | 868 | ||||||||||||||||||
Balance at October 31, 2023 | 50,489,771 | $ | 504 | $ | 345,991 | $ | (274,966 | ) | $ | 2,746 | $ | 74,275 |
Common Stock Shares Issued | Common Stock Amount | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Total Stockholders’ Equity | |||||||||||||||||||
Balance at July 31, 2022 | 48,720,454 | $ | 487 | $ | 339,462 | $ | (288,638 | ) | $ | 3,151 | $ | 54,462 | ||||||||||||
Net loss for the period ended October 31, 2022 | — | — | — | (10,635 | ) | — | (10,635 | ) | ||||||||||||||||
Share-based compensation charges | — | — | 430 | — | — | 430 | ||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | 733 | 733 | ||||||||||||||||||
Balance at October 31, 2022 | 48,720,454 | $ | 487 | $ | 339,892 | $ | (299,273 | ) | $ | 3,884 | $ | 44,990 |
Common Stock Shares Issued | Common Stock Amount | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Total Stockholders’ Equity | |||||||||||||||||||
Balance at July 31, 2021 | 48,471,771 | $ | 485 | $ | 337,126 | $ | (270,377 | ) | $ | 1,352 | $ | 68,586 | ||||||||||||
Net loss for the period ended October 31, 2021 | — | — | — | (2,319 | ) | — | (2,319 | ) | ||||||||||||||||
Share-based compensation charges | — | — | 216 | — | — | 216 | ||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | 277 | 277 | ||||||||||||||||||
Balance at October 31, 2021 | 48,471,771 | $ | 485 | $ | 337,342 | $ | (272,696 | ) | $ | 1,629 | $ | 66,760 |
The accompanying notes are an integral part of these consolidated financial statements.
4 |
ENZO BIOCHEM, INC.
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Three Months Ended October 31, | Three Months Ended October 31, | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net loss | $ | (10,635 | ) | $ | (2,319 | ) | $ | (6,616 | ) | $ | (10,635 | ) | ||||
Adjustments to reconcile net (loss) income to net cash used in operating activities: | ||||||||||||||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
Change in fair value of convertible debentures | 328 | — | ||||||||||||||
Depreciation and amortization of property, plant and equipment | 780 | 611 | 270 | 780 | ||||||||||||
Amortization of intangible, prepaid and other assets | 22 | 90 | — | 22 | ||||||||||||
Share-based compensation charges | 430 | 216 | 1,075 | 430 | ||||||||||||
Share-based 401(k) employer match expense | 198 | 167 | 109 | 198 | ||||||||||||
Foreign exchange loss | 783 | 342 | ||||||||||||||
Unrealized loss on marketable securities | — | 196 | ||||||||||||||
Unrealized foreign exchange loss | 970 | 783 | ||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (11 | ) | (1,120 | ) | 2,019 | (11 | ) | |||||||||
Inventories | (393 | ) | (1,289 | ) | 428 | (393 | ) | |||||||||
Prepaid expenses and other assets | 666 | 171 | 346 | 666 | ||||||||||||
Accounts payable – trade | (407 | ) | (2,198 | ) | (5,601 | ) | (407 | ) | ||||||||
Accrued liabilities, other current liabilities and other liabilities | (126 | ) | (910 | ) | (6,702 | ) | (126 | ) | ||||||||
Total adjustments | 1,942 | (3,724 | ) | (6,758 | ) | 1,942 | ||||||||||
Net cash used in operating activities | (8,693 | ) | (6,043 | ) | (13,374 | ) | (8,693 | ) | ||||||||
Cash flows from investing activities: | ||||||||||||||||
Purchases of marketable securities | — | (28 | ) | |||||||||||||
Capital expenditures | (652 | ) | (1,033 | ) | (254 | ) | (652 | ) | ||||||||
Net cash used in investing activities | (652 | ) | (1,061 | ) | (254 | ) | (652 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||||||
Repayments under long term debt agreements and finance leases | (95 | ) | (57 | ) | ||||||||||||
Repayments under mortgage agreement and capital leases | (51 | ) | (95 | ) | ||||||||||||
Cash payments for taxes related to net share settlements of equity awards | (467 | ) | — | |||||||||||||
Net cash used in financing activities | (95 | ) | (57 | ) | (518 | ) | (95 | ) | ||||||||
Effect of exchange rate changes on cash and cash equivalents | (28 | ) | (7 | ) | (20 | ) | (28 | ) | ||||||||
Decrease in cash and cash equivalents and restricted cash | (9,468 | ) | (7,168 | ) | (14,166 | ) | (9,468 | ) | ||||||||
Cash and cash equivalents and restricted cash - beginning of period | 22,603 | 14,274 | 83,373 | 22,603 | ||||||||||||
Total cash and cash equivalents and restricted cash - end of period | $ | 13,135 | $ | 7,106 | ||||||||||||
Cash and cash equivalents and restricted cash - end of period | $ | 69,207 | $ | 13,135 | ||||||||||||
The composition of total cash and cash equivalents and restricted cash is as follows: | ||||||||||||||||
Composition of cash and cash equivalents and restricted cash is as follows: | ||||||||||||||||
Cash and cash equivalents | 12,135 | 6,356 | 69,207 | 12,135 | ||||||||||||
Restricted cash included in other assets | 1,000 | 750 | ||||||||||||||
Restricted cash | — | 1,000 | ||||||||||||||
Total cash and cash equivalents and restricted cash | $ | 13,135 | $ | 7,106 | $ | 69,207 | $ | 13,135 |
The accompanying notes are an integral part of these consolidated financial statements.
5 |
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of October 31, 20222023
(Unaudited)
(unaudited)
(Dollars in thousands except share data)
Note 1 – Basis of Presentation
Enzo Biochem, Inc. (the “Company,” “we,” “our” or “Enzo”), is a manufacturer and supplier of a comprehensive portfolio of thousands of high-quality products, including antibodies, genomic probes, assays, biochemicals, and proteins. The Company’s proprietary products and technologies play central roles in translational research and drug development areas, including cell biology, genomics, assays, immunohistochemistry, and small molecule chemistry. Enzo Biochem, Inc.’s Life Science division supports the work of research centers and industry partners. Enzo Biochem, Inc. has a broad and deep intellectual property portfolio, with patent coverage across many vital enabling technologies.
The accompanying consolidated financial statements include the accounts of Enzo Biochem, Inc. and its wholly-owned subsidiaries, Enzo Life Sciences, Inc. (“Enzo Clinical Labs,Life Sciences”), Enzo Therapeutics, Inc. (“Enzo Therapeutics”), Enzo Realty LLC (“Enzo Realty”), and Enzo Realty II LLC (“Enzo Realty II”), collectively or with one or more of its subsidiaries referred to as the “Company” or “Companies”“Companies.” The financial statements also include as discontinued operations the accounts of its wholly owned subsidiary Enzo Clinical Labs, Inc. (“Enzo Clinical Labs”). Effective July 24, 2023 we completed the sale of certain assets used in its clinical services operations to Laboratory Corporation of America Holdings, a Delaware corporation (“Labcorp”) and exited the clinical services business. See Note 2.
The Company has twoone reportable segments: Clinical Services andsegment, Products. The consolidated balance sheet as of October 31, 2022,2023, the consolidated statements of operations, comprehensive (loss) incomeloss and stockholders’ equity for the three months ended October 31, 20222023 and 2021,2022, and the consolidated statements of cash flows for the three months ended October 31, 20222023 and 20212022 (the “interim statements”) are unaudited. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present fairly the financial position and operating results for the interim periods have been made. Certain information and footnote disclosure, normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), have been condensed or omitted. The interim statements should be read in conjunction with the consolidated financial statements for the fiscal year ended July 31, 20222023 and notes thereto contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. The consolidated balance sheet at July 31, 20222023 has been derived from the audited financial statements at that date. The results of operations for the three months ended October 31, 20222023 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2023.2024.
Principles of consolidation
Change
The accompanying consolidated financial statements have been prepared in segment reporting
Historically, we engaged inconformity with U.S. GAAP and include the researchaccounts of the Company and development of therapeutic candidates throughits wholly-owned subsidiaries, Enzo Life Sciences (and its wholly-owned foreign subsidiaries), Enzo Therapeutics, a biopharmaceutical venture that was developing multiple novel approaches in the areas of gastrointestinal, infectious, ophthalmic and metabolic diseases, many of which were derived from the pioneering work of Enzo Life Sciences.Realty , Enzo Therapeutics focused its efforts on researching treatment regimens for diseases and conditions for which treatment options were ineffective, costly, and/or caused unwanted side effects. This focus generated a clinical and preclinical pipeline, as well as numerous patents and patent applications with Enzo Therapeutics as the assignee. At the beginning of fiscal 2023, we determined we would redirect our research resources and efforts to our two operating segments, Enzo Life SciencesRealty II,, and Enzo Clinical Labs (a corporate entity with discontinued operations). All intercompany transactions and no longer consider Enzo Therapeutics a segment. The operating results of Enzo Therapeutics are now included in the “Other” segment. The prior period segment information for the three months ended October 31, 2021 reported in Note 11 hasbalances have been restated to be included in the “Other” segment. The operating expenses of Enzo Therapeutics for the three months ended October 31, 2022 and 2021 now included in the “Other” segment were $9 and $5, respectively.eliminated.
Liquidity
During the three months ended October 31, 2022, the Company incurred a net loss of $10,635 and used cash in operating activities of $8,693. The Company believes that based on its fiscal 2023 forecast, its current cash and cash equivalents level is sufficient for its foreseeable liquidity and capital resource needs over at least the next twelve (12) months. However, should these net loss and use of cash trends continue, the Company may need to raise additional capital during the current fiscal year. Although there can be no assurances, in the event additional capital is required, the Company believes it has the ability to raise additional funds, either through securing debt or the reactivation and utilization of the Controlled Equity Offering Program, or other sources. That program’s Form S-3 expired in October 2020 but may be refiled at any time at the discretion of the Company, as disclosed in Note 10 in the Notes to the Consolidated Financial Statements. Our liquidity plans are subject to a number of risks and uncertainties, 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.
Impact of COVID-19
We made substantial investments to expand and maintain the amount of COVID-19 testing available in the communities we serve since the start of the pandemic in March 2020. 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). During the fiscal year ended July 31, 2022, the Company generated substantial COVID-19 related services revenues, representing 44% of all services revenues. This testing had a significantly positive impact on the profitability and cash flow of our Clinical services segment for most of fiscal 2022. Revenues from COVID-19 testing during the three months ended October 31, 2022 represented 7% of all services revenues.
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 the severity of its variants have dramatically declined in the US. 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, volume, revenues, profitability, and cash flow from COVID-19 testing during the current period were all substantially and materially lower than the prior year period levels. At this time, COVID-19 testing is no longer a material part of our Services business.
We expect volume and revenues from COVID-19 testing will remain less significant in the periods ahead as the percentage of Americans who are vaccinated increases, the severity of its variants declines, and the general increase in the use of “at home” testing. However, the emergence and spread of potentially more serious variants may cause our COVID-19 testing volume to increase again. With respect to our non-COVID-19 operations, even after the COVID-19 pandemic impact has greatly moderated, 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, including inflation and actions by the Federal Reserve to increase interest rates.
The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts of COVID-19 and the recessionary economic environment, including inflation and actions by the Federal Reserve to increase interest rates as of October 31, 2022 and through the date of this Quarterly Report. The accounting matters assessed included, but were not limited to, the Company’s patient self-pay revenue concessions and credit losses in the Clinical Services segment, accounts receivable, inventories and the carrying value of goodwill and other long-lived assets. The Company’s future assessment of the magnitude and duration of COVID-19, as well as other economic factors, could result in additional material adverse impacts to the Company’s consolidated financial statements in future reporting periods.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
6 |
EffectContingencies
Contingencies are evaluated and a liability is recorded when the matter is both probable and reasonably estimable. Gain contingencies are evaluated and not recognized until the gain is realizable or realized.
Fair Value Measurements
The Company determines fair value measurements used in its consolidated financial statements based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive of New Accounting Pronouncementsany transaction costs, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy. The basis for fair value measurements for each level within the hierarchy is described below with Level 1 having the highest priority and Level 3 having the lowest.
Pronouncements Issued but Not Yet Adopted
Level 1 Quoted prices in active markets for identical assets or liabilities.
In June 2016, FASB issued ASU No. 2016-13
Level 2 Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.
Level 3 Valuations derived from valuation techniques in which one or more significant inputs are unobservable.
Cash and cash equivalents
Cash and cash equivalents consist of demand deposits with banks and highly liquid money market funds. At October 31, 2023 and July 31, 2023, the Company had cash and cash equivalents in foreign bank accounts of $512 and $419, respectively.
Concentration of Credit Risk
Financial Instruments – Credit Losses (Topic 326). This standard changesinstruments that potentially subject the impairment model for mostCompany to concentrations of credit risk primarily consist of cash and cash equivalents and accounts receivable. The Company believes the fair value of the aforementioned financial instruments including trade receivables, from an incurred loss methodapproximates the cost due to a new forward-looking approach, based on expected losses.the immediate or short-term nature of these items. At October 31, 2023 and July 31, 2023, the Company had cash deposited in certain financial institutions in excess of federally insured levels. The Company regularly monitors the financial stability of these financial institutions and believes that it is not exposed to any significant credit risk in cash and cash equivalents or restricted cash.
The estimateConcentration of expected credit losses will require entitiesrisk with respect to incorporate considerations of historical information, current information and reasonable and supportable forecasts. Adoption of this standardthe Company’s Products segment is required for our annual and interim periods beginning August 1, 2023, as we qualify as a smaller reporting company atmitigated by the end of fiscal 2022 and must be adopted using a modified retrospective transition approach. We are currently assessing the impactdiversity of the adoptionCompany’s customers and their dispersion across many different geographic regions. To reduce risk, the Company routinely assesses the financial strength of this standard on our results of operations, financial positionthese customers and, cash flows.
We reviewed all other recently issued accounting pronouncements and have concluded they are not applicable or not expected to be significant to the accounting for our operations.
Concentration Risk
Other than the Medicare program, one provider whose programs are included in the “Third-party payers” and “Health Maintenance Organizations” (“HMO’s”) categories represents approximately 15% of Clinical Services net revenue for the three months ended October 31, 2022 and 16% of the Clinical Services netconsequently, believes that its accounts receivable as of October 31, 2022. Other than the Medicare program, two providers whose programs are included in the “Third-party payers” and “Health Maintenance Organizations” (“HMO’s”) categories represent approximately 36% of Clinical Services net revenue for the three months ended October 31, 2021.credit exposure with respect to these customers is limited.
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 when it is more likely than not that the benefits may not be realized. 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.
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Effect of New Accounting Pronouncements - Recently Adopted Accounting Pronouncements
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. We adopted this standard for our interim period beginning August 1, 2023 using a modified retrospective transition approach. The impact of the adoption of this standard on our results of operations, financial position and cash flows is not material.
We reviewed all other recently issued accounting pronouncements and have concluded they are not applicable or not expected to be significant to the accounting for our operations.
Note 2 - Discontinued operations
Prior to July 24, 2023, we operated a clinical laboratory, doing business as Enzo Clinical Labs, which provided reference, molecular and esoteric diagnostic medical testing services in the New York, New Jersey, and Connecticut medical communities. Effective July 24, 2023, we completed the sale of certain assets used in the operation of Enzo Clinical Labs and the assignment of certain clinical lab liabilities to Labcorp for an aggregate purchase price of $113.25 million in cash, subject to customary closing adjustments. Excluded from the sale of the clinical services assets were its cash and accounts receivable. In accordance with the sale, we ceased our clinical services operations but continue winding down activities. As a consequence of the sale, for the three months ended October 31, 2023 and 2022 we have classified as discontinued operations all income and expenses attributable to the clinical services business.
The following table sets forth the condensed operating results of the discontinued operations for the three months ended October 31,
2023 | 2022 | |||||||
Net revenues | — | $ | 11,173 | |||||
Cost of revenues | $ | (175 | ) | 10,082 | ||||
Selling, general and administrative | 1,437 | 6,014 | ||||||
Research and development | — | 297 | ||||||
Legal and related expenses | 41 | 64 | ||||||
Other income | (362 | ) | (3 | ) | ||||
Loss from discontinued operations | $ | (941 | ) | $ | (5,281 | ) |
The following table sets forth the condensed carrying amounts of major classes of assets and liabilities of the discontinued operations as of the dates indicated:
October 31, 2023 | July 31, 2023 | |||||||
Carrying amounts of major current assets included as part of discontinued operations: | ||||||||
Trade receivables | $ | 378 | $ | 1,675 | ||||
Prepaid and other current | 41 | 54 | ||||||
Total current assets | 419 | 1,729 | ||||||
Carrying amounts of major current liabilities included as part of discontinued operations: | ||||||||
Trade payables and accrued liabilities | 11,214 | 20,616 | ||||||
Operating lease liabilities and other | 2,206 | 2,215 | ||||||
Total current liabilities | 13,420 | 22,831 | ||||||
Current liabilities of discontinued operations, net | 13,001 | 21,102 | ||||||
Carrying amount of major non-current assets included as part of discontinued operations: | ||||||||
Right of use assets | $ | 6,564 | $ | 7,001 | ||||
Other | 62 | 62 | ||||||
Total non-current assets | 6,626 | 7,063 | ||||||
Carrying amount of major non-current liabilities included as part of discontinued operations: | ||||||||
Operating lease liabilities and other | 5,536 | 6,096 | ||||||
Non-current assets of discontinued operations, net | $ | 1,090 | $ | 967 |
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During the three months ended October 31, 2023, the cash used in operating activities of the discontinued operations was $8,082, primarily for reductions of trade payables and accrued liabilities. During the three months ended October 31, 2022, the cash used in operating activities and investing activities of the discontinued operations was $5,623 and $156, respectively.
Note 2 –3 - Net income (loss) per share
Basic net income (loss) per share represents net income (loss) divided by the weighted average number of common shares outstanding during the period. As a resultThe dilutive effect of potential common shares, consisting of outstanding stock options, and unvested restricted stock units and performance stock units, is determined using the net loss fortreasury stock method.
For the three months ended October 31, 20222023, the effect of approximately 3,320,000 of outstanding “out of the money” options to purchase common shares and 2021,the effect of approximately 54,000 of outstanding restricted stock units were excluded from the calculation of diluted net (loss) income per share because their effect would be anti-dilutive. During the three months ended October 31, 2023, the effect of approximately 593,000 warrants and the effect of approximately 1,199,000 shares related to the assumed conversion of debentures were excluded from the calculation of diluted weighted average shares outstanding are the same as basic weighted average shares outstanding, and do not include the potential common shares from stock options, restricted stock units, or unearned performance stock units because to do sotheir effect would be antidilutive.anti-dilutive.
For the three months ended October 31, 2022, approximately 106,000 potential common shares from “in the money options” and unearned performance stock units were excluded from the calculation of diluted (loss) per share. For the three months ended October 31, 2021, approximately 541,000 of potential common shares from “in the money options” and unvested performance stock units were excluded from the calculation of diluted (loss) per share.
For the three months ended October 31, 2022, and 2021, the effect of approximately 2,595,000 and 793,000 of outstanding “out of the money” options to purchase common shares respectively, were excluded from the calculation of diluted net (loss) income per share because their effect would be anti-dilutive.
Note 34 – Revenue Recognition
Clinical Services Revenue
The Company accounts for revenue pursuant to ASC Update No. 2014-09, Revenue from Contracts with Customers (ASC 606). Service revenues in the Company’s clinical services business accounted for 61% and 74% of the Company’s total revenues for three months ended October 31, 2022 and 2021, respectively and are primarily comprised of a high volume of relatively low-dollar transactions. The services business, which provides clinical testing services, satisfies its performance obligation and recognizes revenues upon completion of the testing process for a specific patient and reporting to the ordering physician. The Company may also perform clinical testing services for other laboratories and will recognize revenue from those services when reported to the ordering laboratory. The Company estimates the amount of consideration it expects to receive from customer groups using the portfolio approach. These estimates of the expected consideration include the impact of contractual allowances and price concessions on our customer group portfolios consisting of healthcare insurers, government payers, client payers and patients as described below. Contracts with customers in our laboratory services business do not contain a financing component, based on the typically limited period of time between performance of services and collection of consideration. The transaction price includes variable consideration in the form of the contractual allowance and price concessions as well as the collectability of the transaction based on patient intent and ability to pay. The Company uses the expected value method in estimating the amount of the variability included in the transaction price.
The following are descriptions of our laboratory services business portfolios:
Third party payers and Health Maintenance Organizations (HMO’s)
Reimbursements from third party payers, primarily healthcare insurers and HMO’s are based on negotiated fee-for-service schedules and on capitated payment rates. Revenues consist of amounts billed net of contractual allowances for differences between amounts billed and the estimated consideration the Company expects to receive from such payers, which considers historical collection and denial experience and the terms of the Company’s contractual arrangements. Adjustments to the allowances, based on actual receipts from the third-party payers, are recorded upon settlement.
Collection of the consideration the Company expects to receive is normally a function of providing complete and correct billing information to these third party payers within the various filing deadlines, and typically occurs within 30 to 90 days of billing. Provided the Company has billed healthcare insurers accurately with complete information prior to the established filing deadline, there has historically been little to no collection risk. If there has been a delay in billing, the Company determines if the amounts in question will likely go past the filing deadline, and if so, will reserve accordingly for the billing.
Third-party payers, including government programs, may decide to deny payment or recoup payments for testing that they contend was improperly billed or not medically necessary, against their coverage determinations, or for which they believe they have otherwise overpaid (including as a result of their own error), and we may be required to refund payments already received. Our revenues may be subject to adjustment as a result of these factors among others, including without limitation, differing interpretations of billing and coding guidance and changes by government agencies and payers in interpretations, requirements, and “conditions of participation” in various programs.
Government Payer - Medicare
Reimbursements from Medicare are based on fee-for-service schedules set by Medicare, which is funded by the government. Revenues consist of amounts billed net of contractual allowances for differences between amounts billed and the estimated consideration the Company expects to receive from Medicare, which considers historical collection and denial experience and other factors. Adjustments to the allowances, based on actual receipts from the government payers, are recorded upon settlement.
Collection of consideration the Company expects to receive is normally a function of providing the complete and correct billing information within the various filing deadlines and typically occurs within 60 days of billing. Provided the Company has billed the government payer accurately with complete information prior to the established filing deadline, there has historically been little to no collection risk. If there has been a delay in billing, the Company determines if the amounts in question will likely go past the filing deadline, and, if so, it will reserve accordingly for the billing.
Patient self-pay
Uninsured patients are billed based on established patient fee schedules or fees negotiated with physicians on behalf of their patients. Coinsurance and deductible responsibilities based on fees negotiated with healthcare insurers are also billed to insured patients and included in this portfolio. Collection of billings from patients is subject to credit risk and ability of the patients to pay. Revenues consist of amounts billed net of discounts provided to uninsured patients in accordance with the Company’s policies and implicit price concessions. Implicit price concessions represent differences between amounts billed and the estimated consideration the Company expects to receive from patients, which considers historical collection experience and other factors including current market conditions. Adjustments to the estimated allowances, based on actual receipts from the patients, are recorded upon settlement. Patient responsibility is invoiced and if it reaches 91 days outstanding, the account is sent to a collection agency for further processing. After the account has been with the collection agency for at least 105 days, it is written off.
The following table represents clinical services net revenues and percentages by type of customer:
Three months ended October 31, 2022 | Three months ended October 31, 2021 | |||||||||||||||
Revenue category | ||||||||||||||||
Third-party payer | $ | 6,022 | 54 | % | $ | 11,397 | 58 | % | ||||||||
Medicare | 2,296 | 21 | 2,880 | 14 | ||||||||||||
Patient self-pay | 1,239 | 11 | 1,945 | 10 | ||||||||||||
HMO’s | 1,616 | 14 | 3,519 | 18 | ||||||||||||
Total | $ | 11,173 | 100 | % | $ | 19,741 | 100 | % |
For three months ended October 31, 2022 and 2021, all of the Company’s clinical services revenues were generated within the United States.
Products Revenue
In accordance with ASC 606, theThe Company generates product revenue from the sale of our single-use products used in the identification of genomic information. Revenue is recorded net of sales tax. The Company considers revenue to be earned when all of the following criteria are met: the Company has a contract with a customer that creates enforceable rights and obligations; promised products are identified; the transaction price is determinable; and the Company has transferred control of the promised items to the customer. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in the contract. The transaction price for the contract is measured as the amount of consideration the Company expects to receive in exchange for the goods expected to be transferred. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, control of the distinct good or service is transferred. Transfer of control for the Company’s products is generally at shipment or delivery, depending on contractual terms, but occurs when title and risk of loss transfers to the customer which represents the point in time when the customer obtains the use of and substantially all of the remaining benefit of the product. As such, the Company’s performance obligation related to product sales is satisfied at a point in time. The Company recognizes a receivable when it has an unconditional right to payment, which represents the amount the Company expects to collect in a transaction and is most often equal to the transaction price in the contract. Payment terms for shipments to end-user and distributor customers may range from 30 to 90 days. 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. revenues.
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Products revenue by geography is as follows:
Three Months Ended October 31 | ||||||||
2023 | 2022 | |||||||
United States | $ | 4,635 | $ | 4,095 | ||||
Europe | 2,138 | 1,904 | ||||||
Asia Pacific | 1,033 | 1,104 | ||||||
Products revenue | $ | 7,806 | $ | 7,103 |
As of August 1, 2023 and 2022, accounts receivable from continuing operations was $4,808 and $4,762, respectively.
Three Months Ended October 31 | ||||||||
2022 | 2021 | |||||||
United States | $ | 4,095 | $ | 3,864 | ||||
Europe | 1,904 | 2,006 | ||||||
Asia Pacific | 1,104 | 908 | ||||||
Products revenue | $ | 7,103 | $ | 6,778 |
Note 45 - Supplemental disclosure for statement of cash flows
In the three months ended October 31, 20222023 and 2021,2022, interest paid by the Company was $53approximated $92 and $56,$53, respectively.
For the three months ended October 31, 20222023 and 2021,2022, the net reductions in the measurement of right of use assets and liabilities included in cash flows from operating activities was $1approximately $148 and $11,$1, respectively. The changes are included in changes in accrued liabilities, other current liabilities, and other liabilities in the statementstatements of cash flows.
ForIn connection with the completed sale of certain assets used in the operation of Enzo Clinical Labs, $5,000 of escrowed proceeds were included in prepaid and other assets as of October 31, 2023 and in other assets as of July 31, 2023. In connection with the full payment of a mortgage in July 2023, the restricted cash collateral deposit of $1,000 was released during the three months ended October 31, 2022 and 2021, tax on capital paid by2023.
During the three months ended October 31, 2023, the Company was $0 and $29, respectively.disbursed $467 for taxes related to net share settlement of bonuses paid in stock to two senior executives.
Note 5 –6 - Inventories
Inventories, consistnet consisted of the following:following as at:
October 31, 2022 | July 31, 2022 | October 31, 2023 | July 31, 2023 | |||||||||||||
Raw materials | $ | 1,958 | $ | 1,524 | $ | 2,081 | $ | 2,206 | ||||||||
Work in process | 2,644 | 2,459 | 2,587 | 2,599 | ||||||||||||
Finished products | 11,185 | 11,428 | 2,927 | 3,134 | ||||||||||||
$ | 15,787 | $ | 15,411 | $ | 7,595 | $ | 7,939 |
Note 6 – Goodwill
The Company’s net carrying amount of goodwill is in the Clinical Laboratory Services segment and is $7,452 as of October 31, 2022 and July 31, 2022.
Note 7 – Long termConvertible debentures and other current debt
In connection with the purchase of a building in Farmingdale, NY in November 2018, a wholly-owned subsidiary (the “mortgagor subsidiary”) ofOn May 19, 2023, the Company entered into a Fee Mortgage and SecuritySecurities Purchase Agreement (the “mortgage agreement”“Purchase Agreement”) with Citibank, N.A.each of the purchasers that are parties thereto (each, including its successors and assigns, a “Purchaser” and collectively, the “Purchasers”) and JGB Collateral, LLC, a Delaware limited liability company, as collateral agent for the Purchasers (the “mortgagee”“Agent”). The mortgage agreement providesPursuant to the Purchase Agreement, the Company agreed to sell to the Purchasers (i) 10% Original Issue Discount Secured Convertible Debentures (the “Debentures”) with an aggregate principal amount of $7,608 and (ii) warrants to purchase up to 1,000,000 shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), for an exercise price of $2.31 per share, the average of the three (3) daily volume weighted average prices of the Common Stock as defined in the Purchase Agreement (“VWAP”) prior to the closing date (the “Warrants”), subject to adjustments as set forth in the Warrants, for a loantotal purchase price of $4,500 for a term of 10 years, bears a fixed interest rate of 5.09% per annum$7,000. The Purchase Agreement contains customary representations, warranties and requires monthly mortgage payments of principal and interest of $30. Debt issuance costs of $72 are being amortized over the life of the mortgage agreement.covenants. The balance of unamortized debt issuance cost was $44 at October 31, 2022. At October 31, 2022, the balance owedtransactions contemplated by the subsidiary underPurchase Agreement were consummated on May 19, 2023. Pursuant to ASC 825, Fair Value Option, the mortgage agreement was $3,941. The Company’s obligations underCompany made an irrevocable election at the mortgage agreement are secured bytime of issuance to report the building and by a $1,000 cash collateral depositDebentures at fair value with the mortgagee as additional security. This restricted cash is included in other assets as of October 31, 2022.
The mortgage agreement includes affirmative and negative covenants and events of default, as defined. Events of default include non-payment of principal and interest on debt outstanding, non-performance of covenants, material changes in business, breach of representations, bankruptcy or insolvency, and changes in control. The mortgage includes certain financial covenants. Effective October 2020, the Company and the mortgagee agreed to a covenant restructure whereby the mortgagee waivedfair value recorded through the Company’s financial ratio covenant for the fiscal period ended July 31, 2020 and modified the mortgage to replace that covenant with a liquidity covenant. The liquidity covenant requires that we own and maintain at all times and throughout the remaining termconsolidated statements of the loan at least $25,000 of liquid assets, definedoperations as time deposits, money market accounts and obligations issued by the U.S. government or any of its agencies. The cash collateral agreement was also modified to require compliance with the liquidity covenant for two consecutive fiscal years before the collateral is released back to us. Effective September 29, 2021, the Company and the mortgagee agreed to further covenant restructuring whereby (a) the liquidity covenant was reduced to 150% of the loan principal (or approximately $5,911 as of October 31, 2022) from $25,000 previously, and (b) the collateral requirement was increased from $750 to $1,000. As of October 31, 2022, the Company wasother income (expense) in compliance with all the financial and liquidity covenants related to this mortgage.each reporting period.
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Debentures
The Debentures bear interest at a rate of 10% per annum (which interest rate is increased to 18% per annum five days after the occurrence and continuance of an Event of Default (as defined in the Debentures)), have a maturity date of May 20, 2024 and are convertible, at any time after their issuance date at the option of the Purchasers, into shares of Common Stock at a conversion price equal to $3.01 per share (the “Conversion Price”), subject to adjustment as set forth in the Debentures. Following the July 24, 2023 consummation of the Company’s sale of certain assets and assignment of certain liabilities of Enzo Clinical Labs to Labcorp pursuant to the Asset Purchase Agreement, dated March 16, 2023, the Company prepaid $4,000 of the outstanding principal amount prior to July 31, 2023.
The Company’s obligations under the Debentures may be accelerated, at the Purchasers’ election, upon the occurrence of certain customary events of default. As of October 31, 2023 and July 31, 2023, there were no events of default. The Debentures contain customary representations, warranties and covenants including among other things and subject to certain exceptions, covenants that restrict the Company from incurring additional indebtedness, creating or permitting liens on assets, amending its charter documents and bylaws, repurchasing or otherwise acquiring more than a de minimis number of its Common Stock or equivalents thereof, repaying outstanding indebtedness, paying dividends or distributions, assigning or selling certain assets, making or holding any investments, and entering into transactions with affiliates.
The following table presents a reconciliation of the beginning and ending balances of the convertible debentures measured at fair value on a recurring basis that use significant unobservable inputs (Level 3) and the related unrealized losses recorded in the consolidated statement of operations during the three months ended October 31, 2023:
Fair value, July 31, 2023 | $ | 2,514 | ||
Change in fair value of convertible debentures | 328 | |||
Fair value, October 31, 2023 | $ | 2,842 |
Security Agreement and Subsidiary Guarantees
In connection with the Purchase Agreement, on May 19, 2023, the Company, certain of the Company’s domestic subsidiaries (“Guarantors”), the Purchasers and the Agent entered into a Security Agreement (the “Security Agreement”), pursuant to which the Company and the Guarantors granted, for the benefit of the Purchasers, to secure the Company’s obligations under the Purchase Agreement and the Debentures.
Warrants
The Warrants are exercisable for five years from May 19, 2023, at an exercise price of $2.31 per share, which is the average of three (3) daily VWAPs prior to the closing date, subject, with certain exceptions, to adjustments in the event of stock splits, dividends, subsequent dilutive offerings and certain fundamental transactions, as more fully described in the Warrant.
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Registration Rights Agreement
In connection with the Purchase Agreement, on May 19, 2023, the Company and the Purchasers entered into a Registration Rights Agreement, pursuant to which the Company is obligated to register the shares of Company Common Stock issuable upon exercise of the Debentures and the Warrants. The Company has registered the shares.
Note 8 – Long term debt
In April 2020, ourthe Company’s subsidiary in Switzerland received a loan of CHF 400 (or $400, based on the foreign exchange rate at that time)as of July 31, 2020) from the Swiss government under the “Corona Krise” emergency loan program in response to the COVID-19 pandemic. This loan is uncollateralized and bears 0% interest. In January 2022, the bank agent of the Swiss government informed our subsidiary that the loan had to be fully amortized within a maximum of eight years and that the first of semiannual amortization payments of CHF 33 would begin in March 2022. In SeptemberMarch 2022, the subsidiary made its secondfirst semi-annual principal repayment of CHF 33 (or $35 based on exchange rates). Based on this amortization schedule, the loan will be repaid by September 2027. The current portion of this loan is included in other current liabilities and the long term portion in long term debt – net as of October 31, 2022.2023 and July 31, 2023.
The CARES Act expanded the U.S. Small Business Administration’s (SBA) business loan program to create the Paycheck Protection Program (PPP), which provided employers with uncollateralized loans whose primary purpose was to retain or maintain workforce and salaries for a twenty-four week period (“covered period”) following receipt of the loan. We applied for the PPP loan based on the eligibility and need requirements established when the program was announced and in April 2020 received $7,000 through Citibank N.A., the Company’s existing lender, pursuant to the PPP (the “PPP Loan”). In June 2021, the SBA approved in full our request for loan forgiveness and in the fiscal year 2021 the Company recognized the forgiveness of the $7,000 loan in Other income. The SBA announced its intention to audit loans in excess of $2,000 and in June 2022 requested through Citibank N.A. the production of documents and information related to our loan and our request for forgiveness. We provided that information to the SBA via Citibank N.A. In October 2022 the SBA requested through Citibank N.A. that we complete a new version of their loan necessity questionnaire with respect our forgiven loan, which we provided. The SBA subsequently requested additional information with respect to wages paid which has been provided.
Minimum future annual principal payments under these agreementsthis agreement as of October 31, 20222023 are as follows:
July 31, | Total | Total | |||||||
2023 | $ | 154 | |||||||
2024 | 234 | $ | 37 | ||||||
2025 | 244 | 74 | |||||||
2026 | 253 | 74 | |||||||
2027 | 263 | 74 | |||||||
Thereafter | 3,110 | ||||||||
2028 | 35 | ||||||||
Total principal payments | 4,258 | 294 | |||||||
Less: current portion, included in other current liabilities and finance leases short term | (228 | ) | |||||||
unamortized mortgage cost | (44 | ) | |||||||
Long term debt - net | $ | 3,986 | |||||||
Less: current portion, included in other current liabilities | (75 | ) | |||||||
Long term debt – net | $ | 219 |
Note 89 - Leases
The Company determines if an arrangement is or contains a lease at contract inception. The Company leases buildings, office space, patient service centers, and equipment primarily through operating leases, and equipment through a limited number of financeoperating leases. Generally, a right-of-use asset, representing the right to use the underlying asset during the lease term, and a lease liability, representing the payment obligation arising from the lease, are recognized on the balance sheet at lease commencement based on the present value of the payment obligation. For operating leases, expense is recognized on a straight-line basis over the lease term. For finance leases, interest expense on the lease liability is recognized using the effective interest method and amortization of the right-of-use asset is recognized on a straight-line basis over the shorter of the estimated useful life of the asset or the lease term. Short-term leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company primarily uses its incremental borrowing rate in determining the present value of lease payments as the Company’s leases generally do not provide an implicit rate.
The Company has lease agreements with (i) right-of-use asset payments and (ii) non-lease components (i.e.(e.g. payments related to maintenance fees, utilities, etc.,) which have generally been combined and accounted for as a single lease component. The Company’s leases have remaining terms of less than 1 year to 64 years, some of which include options to extend the leases for up to 53 years. The Company’s lease terms may include renewal options that are reasonably certain to be exercised and termination options that are reasonably certain not to be exercised.
Certain of the Company’s lease agreements include rental payments adjusted periodically for inflation or a market rate which are included in the lease liabilities.
Leases | Balance Sheet Classification | October 31, 2022 | July 31, 2022 | |||||||
Assets | ||||||||||
Operating | Right-of-use assets | $ | 14,419 | $ | 15,174 | |||||
Finance | Property, plant and equipment, net (a) | 153 | 172 | |||||||
Total lease assets | $ | 14,572 | $ | 15,346 | ||||||
Liabilities | ||||||||||
Current: | ||||||||||
Operating | Current portion of operating lease liabilities | $ | 3,455 | $ | 3,432 | |||||
Finance | Finance leases short term | 81 | 81 | |||||||
Non-current: | ||||||||||
Operating | Operating lease liabilities, non-current | 11,952 | 12,729 | |||||||
Finance | Other liabilities and finance leases long term | 18 | 39 | |||||||
Total lease liabilities | $ | 15,506 | $ | 16,281 |
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Leases | Balance Sheet Classification | October 31, 2023 | July 31, 2023 | |||||||
Assets | ||||||||||
Operating | Right-of-use assets | $ | 3,405 | $ | 3,626 | |||||
Total lease assets | $ | 3,405 | $ | 3,626 | ||||||
Liabilities | ||||||||||
Current: | ||||||||||
Operating | Current portion of operating lease liabilities | $ | 920 | $ | 980 | |||||
Non-current: | ||||||||||
Operating | Operating lease liabilities, non-current | 2,972 | 3,160 | |||||||
Total lease liabilities | $ | 3,892 | $ | 4,140 |
For the three months ended October 31, components of lease cost were as follows:
Lease Cost | 2022 | 2021 | ||||||
Operating lease cost | $ | 1,048 | $ | 1,158 | ||||
Finance lease cost: | ||||||||
Amortization of leased assets | 19 | 19 | ||||||
Interest on lease liabilities | 2 | 3 | ||||||
Total lease cost | $ | 1,069 | $ | 1,180 |
Lease Cost | 2023 | 2022 | ||||||
Operating lease cost – net (a) | $ | 141 | $ | 262 |
(a) | Net of $126 sublease income for the three months ended October 31, 2023. |
The maturity of the Company’s lease liabilities as of October 31, 20222023 is as follows:
Maturity of lease liabilities, years ending July 31, | Operating leases | Finance leases | Total | Operating leases | |||||||||||||
2023 | $ | 3,118 | $ | 66 | $ | 3,184 | |||||||||||
2024 | 3,874 | 37 | 3,911 | $ | 863 | ||||||||||||
2025 | 3,541 | — | 3,541 | 896 | |||||||||||||
2026 | 3,351 | — | 3,351 | 886 | |||||||||||||
2027 | 2,507 | — | 2,507 | 881 | |||||||||||||
Thereafter | 808 | — | 808 | ||||||||||||||
2028 | 808 | ||||||||||||||||
Total lease payments | 17,199 | 103 | 17,302 | 4,334 | |||||||||||||
Less: Interest (a) | (1,792 | ) | (4 | ) | (1,796 | ) | (442 | ) | |||||||||
Present value of lease liabilities | $ | 15,407 | $ | 99 | $ | 15,506 | $ | 3,892 |
(a) | Primarily calculated using the Company’s incremental borrowing rate. |
Lease term and discount rate for the for the three months ended October 31 were as follows:
Lease term and discount rate | 2022 | 2021 | 2023 | 2022 | ||||||||||||
Weighted-average remaining lease term (years): | ||||||||||||||||
Operating leases | 4.5 years | 5.4 years | 4.5 years | 5.5 years | ||||||||||||
Finance leases | 1.2 years | 2.0 years | ||||||||||||||
Weighted-average discount rate: | ||||||||||||||||
Operating leases | 4.95 | % | 5.0 | % | 5.1 | % | 5.1 | % | ||||||||
Finance leases | 3.70 | % | 6.72 | % |
See Note 45 for cash flow information on cash paid for amounts included in the measurement of lease liabilities for the three months ended October 31, 20222023 and 2021.2022.
Note 9 – Accrued Liabilities
Accrued liabilities consist of: | October 31, 2022 | July 31, 2022 | ||||||
Payroll, benefits, and commissions | $ | 4,616 | $ | 4,912 | ||||
Professional fees | 788 | 801 | ||||||
Legal | 4,616 | 4,523 | ||||||
Other | 2,357 | 2,064 | ||||||
$ | 12,377 | $ | 12,300 |
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Note 10 - Accrued Liabilities and other current liabilities
Accrued liabilities consist of:
October 31, 2023 | July 31, 2022 | |||||||
Payroll, benefits and commissions | $ | 7,715 | $ | 7,421 | ||||
Professional fees | 543 | 610 | ||||||
Legal | 1,095 | 2,248 | ||||||
Other | 689 | 1,464 | ||||||
$ | 10,042 | $ | 11,743 |
Self-Insured Medical Plan
The Company self-funds medical insurance coverage for certain of its U.S. based employees. The risk to the Company is believed to be limited through the use of individual and aggregate stop loss insurance. As of October 31, 20222023 and July 31, 2022,2023, the Company hashad established a reservereserves of $235$252 and $260,$631, respectively, which isare included in accrued liabilities for payroll, benefits and commissions, for claims that have been reported but not paid and for claims that have been incurred but not reported. The reserve is based upon the Company’s historical payment trends, claim history and current estimates.
At October 31, 2023 and July 31, 2023 other current liabilities consist of the current portion of the Swiss government loan.
Note 1011 - Stockholders’ equity
Controlled Equity Offering
TheIn May 2023, the Company hasentered into a Controlled Equity OfferingSM Sales Agreementsales agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co.,B. Riley Securities, Inc. as sales agent (“Cantor”Riley”). Under the Sales Agreement, the Company may offer and sell, from time to time, through Cantor,Riley, shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”(“Shares”). having an aggregate offering price of up to $30 million. The Company pays CantorRiley a commission of 3.0% of the aggregate gross proceeds received under the Sale Agreement. The Company is not obligated to make any sales of the Shares under the Sales Agreement. The offering of Shares pursuant to the Sales Agreement will terminate upon the earlier of (a) the sale of all of the Shares subject to the Sales Agreement or (b) the termination of the Sales Agreement by CantorRiley or the Company, as permitted therein.
In September 2017,May 2023, the Company filed with the SEC a Form S-3 “shelf” registration and sales agreement prospectus covering the offering, issuance and saleSales Agreement. A total of our Common Stock that could have been issued and$150 million of securities, including those covered by the Sales Agreement, may be sold under the existing Sales Agreementshelf registration which was declared effective in an aggregate amount of up to $19.2 million. The Form S-3 expired in October 2020 but may be refiled at any time atJuly 2023. During the discretionfourth quarter of the Company.fiscal year ended July 31, 2023, the Company sold 276,479 shares for net proceeds of $386. There was no activity during the three months ended October 31, 2023.
Share based awards and share based compensation
Incentive stock plans
In January 2011, the Company’s stockholders approved the adoption of the 2011 Incentive Plan (the “2011 Plan”) for the issuance of equity awards, including, among others, options, restricted stock, restricted stock units and performance stock units for up to 3,000,000 shares of common stock. In January 2018, the Company’s stockholders approved the amendment and restatement of the 2011 Plan (the “Amended and Restated 2011 Plan”) to increase the number of shares of common stock available for grant under the 2011 Plan by 2,000,000 shares of common stock bringing the total number of shares available for grant to 5,000,000 shares of common stock. On October 7, 2020, the Company’s Board of Directors approved the amendment and restatement of the Amended and Restated 2011 Plan, with an effective date of October 7, 2020 and subject to approval by the Company’s stockholders at the 2020 annual meeting of stockholders of the Company. The amendment and restatement of the Amended and Restated 2011 Plan was for purposes of, among other things, (i) increasing the shares of common stock available for grant under the Amended and Restated 2011 Plan by an additional 4,000,000 shares of common stock bringing the total number of shares available for grant to 9,000,000 shares of common stock and (ii) extending the term of the Amended and Restated 2011 Plan until October 7, 2030. In January 2021, the Company’s stockholders approved the amendment and restatement of the Amended and Restated 2011 Plan.
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The exercise price of options granted under the Amended and Restated 2011 Plan, as amended and restated, is equal to or greater than fair market value of the common stock on the date of grant. The Amended and Restated 2011 Plan, as amended and restated, will terminate at the earliest of (a) such time as no shares of common stock remain available for issuance under the plan, (b) termination of the plan by the Company’s Board of Directors, or (c) October 7, 2030. Awards outstanding upon expiration of the Amended and Restated 2011 Plan, as amended and restated, will remain in effect until they have been exercised or terminated, or have expired. As of October 31, 2022,2023, there were approximately 4,357,0004,623,000 shares of common stock available for grant under the Amended and Restated 2011 Plan, as amended and restated.
The Company estimates the fair value of each stock option award on the measurement date using a Black-Scholes option pricing model.model or the fair value of our stock at the date of grant. The fair value of awards is amortized to expense on a straight-line basis over the requisite service period. The Company expenses restricted stock awards based on vesting requirements, primarily time elapsed. Performance stock awards are not recognized until it is probable they will be earned. At such time, their expense is then recognized over the requisite service period, including that portion of the service period already elapsed.
Options granted pursuant to the plans may be either incentive stock options or non-statutory options. The 2011 Plan provides for the issuance of stock options, restricted stock and restricted stock unit awards which generally vest over a two or three year period.
During the three months ended October 31, 2023, the Company recognized $519 of share based compensation with respect to stock options and $367 of share based compensation with respect to restricted stock units as a result of the termination of the former CEO during the quarter then ended. See Note 14.
The amounts of share-based compensation expense recognized in the periods presented are as follows:
Three months ended October 31, | Three months ended October 31, | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Stock options and performance stock units | $ | 244 | 216 | $ | 646 | 180 | ||||||||||
Restricted stock units | 186 | — | 429 | 186 | ||||||||||||
$ | 430 | 216 | $ | 1,075 | 366 |
The following table sets forth the amount of expense related to share-based payment arrangements included in specific line items in the accompanying statements of operations:
Three months ended October 31, | Three months ended October 31, | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Selling, general and administrative | $ | 408 | 212 | $ | 1,069 | 360 | ||||||||||
Cost of revenues | 22 | 4 | 6 | 6 | ||||||||||||
$ | 430 | 216 | $ | 1,075 | 366 |
No excess tax benefits were recognized during the three month periods ended October 31, 20222023 and 2021.2022.
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Stock Option Plans
The following table summarizes stock option activity during the three month period ended October 31, 2022:2023:
Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value (000s) | Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value (000s) | |||||||||||||||||||||||||
Outstanding at July 31, 2022 | 3,941,783 | $ | 3.00 | |||||||||||||||||||||||||||||
Awarded | 15,000 | $ | 2.42 | |||||||||||||||||||||||||||||
Outstanding at July 31, 2023 | 3,829,500 | $ | 2.61 | — | ||||||||||||||||||||||||||||
Granted | — | — | ||||||||||||||||||||||||||||||
Exercised | — | $ | — | — | $ | |||||||||||||||||||||||||||
Cancelled or expired | (251,066 | ) | $ | 2.94 | (508,916 | ) | $ | 1.58 | ||||||||||||||||||||||||
Outstanding at end of period | 3,705,717 | $ | 3.00 | 2.4 years | $ | — | 3,320,584 | $ | 2.64 | 2.5 years | $ | — | ||||||||||||||||||||
Exercisable at end of period | 1,794,399 | $ | 0.6 years | $ | 2,313,784 | $ | 2.83 | 1.9 years | $ | — |
As of October 31, 2022,2023, the total future compensation cost related to non-vested options, not yet recognized in the statements of operations, was $1,997$839 and the weighted average period over which the remaining expense of these awards is expected to be recognized is approximately twoone and one half years.
The intrinsic value of in the money stock option awards atrepresents the endvalue of the period represents the Company’s closing stock price on the last trading day of the period in excess of the exercise price multiplied by the number of outstanding options.options that are outstanding.
PerformanceRestricted Stock Units
Beginning in fiscal 2018, the Company granted long-term incentive awards in the form of time based stock options and performance-based restricted stock units (“Performance Stock Units” or “PSUs”). The PSUs earned is determined over a three-year performance period. The primary performance metrics will be revenue and Adjusted EBITDA growth, as defined. Payouts are based on revenue and adjusted EBITDA goals met at threshold, target or maximum levels and are modified based on Total Shareholder Return (“TSR”) performance relative to Enzo’s peer group. The PSUs awarded to executive officers in fiscal 2018, net of forfeitures, expired in fiscal 2021 as the 3 year growth goals were not achieved.
During the fiscal years ended 2020 and 2019, the Company awarded additional PSUs to its executive officers. These awards providefollowing table summarizes RSU activity for the grant ofthree months ended October 31, 2023:
Number of RSUs outstanding | Weighted Average Fair Value per Unit at Date of Grant | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value (000s) | |||||||||||||
Outstanding at beginning of fiscal year | 557,490 | $ | 2.21 | 1.1 years | 825 | |||||||||||
Granted | — | $ | — | — | ||||||||||||
Vested | (173,333 | ) | $ | 3.39 | ||||||||||||
Cancelled | (100,000 | ) | $ | 1.97 | ||||||||||||
Outstanding at end of period | 284,157 | $ | 1.75 | 0.4 years | $ | 381 | ||||||||||
Expected to vest at end of period | 284,157 | $ | 1.75 | 0.4 years | $ | 381 |
Certain directors had not exercised their vested RSU shares, of our common stock at the end of a three-year period based on the achievement of revenue growth and adjusted EBITDA growth goals met at threshold, target or maximum levels over the respective period. The PSUs awarded to executive officers in fiscal 2019, net of forfeitures, were earnedtotaling 144,530, as of the three-year period ending July 31, 2022 as2023. These shares were issued during the growth goals at the maximum level were achieved. After TSR modification, a total of 25,200 PSUs were earned equally by two officers. The shares will be issued in the second quarter of fiscalthree months ended October 31, 2023.
During the three months ended October 31, 20222023, 173,333 RSUs vested and 100,000 were cancelled as a result of the termination of the former officer forfeited 15,000 PSUs awarded in fiscal 2020, and the Company reversed PSU accrualsCEO. The vested shares had not been issued as of $55 related to the fiscal 2020 awards. October 31, 2023.
During the three months ended October 31, 2021 the Company accrued PSU compensation expense of $66.
The following table summarizes PSU’s granted2023 and outstanding through October 31, 2022:
Grant Date | Total Grant | Forfeitures | Outstanding | Fair Market Value At Grant Date (000s) | ||||||||||||
10/19/2020 | 98,600 | (40,300 | ) | 58,300 | $ | 122 |
Restricted Stock Units
The following table summarizes Restricted Stock Unit (“RSU”) activity for the three month period ended October 31, 2022:
Number of RSUs outstanding | Weighted Average Fair Value per Unit at Date of Grant or Vesting | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value (000s) | |||||||||||
Outstanding at July 31, 2022 | 502,187 | $ | 2.95 | |||||||||||
Granted | — | |||||||||||||
Vested | — | |||||||||||||
Cancelled | — | $ | ||||||||||||
Outstanding at end of period | 502,187 | $ | 2.95 | 1.6 years | $ | 1,075 | ||||||||
Expected to vest at end of period | 502,187 | $ | 1.6 years | $ |
During the three months ended October 31, 2022, and 2021, the Company recognized shared based compensation expense for RSU’s of $429 and $186, and $0, respectively for these RSUs.
respectively. As of October 31, 2022,2023, the total future compensation cost related to non-vested RSUs, not yet recognized in the statements of operations, was $1,295$138 and the weighted average period over which the remaining expense of these awards is expected to be recognized is approximately one and a half years.
Performance Stock Units
During the three months ended October 31, 2023 and 2022, the Company recognized $0 and $66 of share based compensation for Performance Stock Units (“PSUs”). During the three months ended, one senior executive vested in 10,640 shares of stock which were not yet issued as of October 31, 2023. As of October 31, 2023 there were no PSUs outstanding.
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Note 1112 - Segment reporting
The Company has twoone reportable segments: Clinical Services and Products. The Clinical Services segment, provides diagnostic services to the health care community. The Company’s Products, segmentwhich develops, manufactures, and markets products to research and pharmaceutical customers. The Company evaluates segment performance based on segment income (loss) before taxes. Costs excluded from segment income (loss) before taxes and reported as “Other”“Corporate & Other” consist of corporate general and administrative costs which are not allocable to the two reportable segments.Products segment.
Legal and related expenses incurred to defend the Company’s intellectual property, which may result in settlements recognized in another segment and other general corporate matters are considered a component of the Corporate & Other segment. Legal and related expenses specific to other segments’the Products’ segment’s activities are allocated to those segments.that segment.
Management of the Company assesses assets on a consolidated basis only and therefore, assets by reportable segment have not been included in the reportable segments below. The accounting policies of the reportable segmentssegment are the same as those described in the summary of significant accounting policies.
At the beginning of fiscal 2023, we determined we would redirect our research resources and efforts to our two operating segments, Enzo Life Sciences and Enzo Clinical Labs, and as a result, Enzo Therapeutics no longer meets the criteria for being a reportable segment. The operating expenses of Enzo Therapeutics are included in the “Other” segment for all periods presented.
The following financial information represents the operating results of the reportable segments of the Company:
Three months ended October 31, 2022 | Clinical Services | Products | Other | Consolidated | ||||||||||||
Revenues | $ | 11,173 | $ | 7,103 | — | $ | 18,276 | |||||||||
Operating costs and expenses: | ||||||||||||||||
Cost of revenues | 10,082 | 4,589 | — | 14,671 | ||||||||||||
Research and development | 297 | 690 | 9 | 996 | ||||||||||||
Selling, general and administrative | 6,550 | 2,430 | 2,471 | 11,451 | ||||||||||||
Legal fee expense | 64 | 25 | 982 | 1,071 | ||||||||||||
Total operating costs and expenses | 16,993 | 7,734 | 3,462 | 28,189 | ||||||||||||
Operating loss | (5,820 | ) | (631 | ) | (3,462 | ) | (9,913 | ) | ||||||||
Other income (expense): | ||||||||||||||||
Interest, net | (2 | ) | 25 | 47 | 70 | |||||||||||
Other | 5 | 2 | (2 | ) | 5 | |||||||||||
Foreign exchange loss | — | (797 | ) | — | (797 | ) | ||||||||||
Net loss | $ | (5,817 | ) | $ | (1,401 | ) | $ | (3,417 | ) | $ | (10,635 | ) | ||||
Depreciation and amortization included above | $ | 532 | 165 | 83 | 780 | |||||||||||
Share-based compensation included in above: | ||||||||||||||||
Selling, general and administrative | 48 | 20 | 340 | 408 | ||||||||||||
Cost of revenues | 16 | 6 | — | 22 | ||||||||||||
Total | $ | 64 | 26 | 340 | 430 | |||||||||||
Capital expenditures | $ | 163 | 306 | 183 | 652 |
Three months ended October 31, 2023
Products | Corporate & Other | Consolidated | ||||||||||
Revenues | $ | 7,806 | — | $ | 7,806 | |||||||
Operating costs and expenses: | ||||||||||||
Cost of revenues | 4,351 | — | 4,351 | |||||||||
Research and development | 838 | $ | 11 | 849 | ||||||||
Selling, general and administrative | 3,104 | 3,903 | 7,007 | |||||||||
Legal and related expenses | 30 | 1,045 | 1,075 | |||||||||
Total operating costs and expenses | 8,323 | 4,959 | 13,282 | |||||||||
Operating loss | (517 | ) | (4,959 | ) | (5,476 | ) | ||||||
Other income (expense) | ||||||||||||
Interest | 34 | 943 | 977 | |||||||||
Change in fair value of convertible debentures | — | (328 | ) | (328 | ) | |||||||
Other | 2 | 156 | 158 | |||||||||
Foreign exchange loss | (1,006 | ) | — | (1,006 | ) | |||||||
Loss before taxes | $ | (1,487 | ) | $ | (4,188 | ) | $ | (5,675 | ) | |||
Depreciation and amortization included above | $ | 166 | $ | 104 | $ | 270 | ||||||
Share-based compensation included above: | ||||||||||||
Selling, general and administrative | 22 | 1,047 | 1,069 | |||||||||
Cost of sales | 6 | — | 6 | |||||||||
Total | $ | 28 | $ | 1,047 | $ | 1,075 | ||||||
Capital expenditures | $ | 248 | $ | 6 | $ | 254 |
17 |
Three months ended October 31, 2021 | Clinical Services | Products | Other | Consolidated | ||||||||||||
Revenues | $ | 19,741 | $ | 6,778 | — | $ | 26,519 | |||||||||
Operating costs and expenses: | ||||||||||||||||
Cost of revenues | 11,203 | 4,070 | — | 15,273 | ||||||||||||
Research and development | 7 | 732 | 5 | 744 | ||||||||||||
Selling, general and administrative | 6,001 | 3,095 | 1,956 | 11,052 | ||||||||||||
Legal fee expense | 57 | 13 | 1,212 | 1,282 | ||||||||||||
Total operating costs and expenses | 17,268 | 7,910 | 3,173 | 28,351 | ||||||||||||
Operating income (loss) | 2,473 | (1,132 | ) | (3,173 | ) | (1,832 | ) | |||||||||
Other income (expense): | ||||||||||||||||
Interest, net | (2 | ) | 9 | 32 | 39 | |||||||||||
Other | 49 | 2 | (196 | ) | (145 | ) | ||||||||||
Foreign exchange loss | — | (381 | ) | — | (381 | ) | ||||||||||
Net income (loss) | $ | 2,520 | $ | (1,502 | ) | $ | (3,337 | ) | $ | (2,319 | ) | |||||
Depreciation and amortization included above | $ | 418 | 212 | 71 | 701 | |||||||||||
Share-based compensation included in above: | ||||||||||||||||
Selling, general and administrative | 20 | 19 | 173 | 212 | ||||||||||||
Cost of revenues | 4 | — | — | 4 | ||||||||||||
Total | $ | 24 | 19 | 173 | 216 | |||||||||||
Capital expenditures | $ | 310 | 486 | 237 | 1,033 |
Three months ended October 31, 2022
Products | Corporate & Other | Consolidated | ||||||||||
Revenues | $ | 7,103 | — | $ | 7,103 | |||||||
Operating costs and expenses: | ||||||||||||
Cost of revenues | 4,589 | — | 4,589 | |||||||||
Research and development | 690 | $ | 9 | 699 | ||||||||
Selling, general and administrative | 2,885 | 2,552 | 5,437 | |||||||||
Legal and related expenses | 25 | 982 | 1,007 | |||||||||
Total operating costs and expenses | 8,189 | 3,543 | 11,732 | |||||||||
Operating loss | (1,086 | ) | (3,543 | ) | (4,629 | ) | ||||||
Other income (expense) | ||||||||||||
Interest | 25 | 47 | 72 | |||||||||
Other | 2 | (2 | ) | — | ||||||||
Foreign exchange loss | (797 | ) | — | (797 | ) | |||||||
Loss before taxes | $ | (1,856 | ) | $ | (3,498 | ) | $ | (5,354 | ) | |||
Depreciation and amortization included above | $ | 165 | $ | 83 | $ | 248 | ||||||
Share-based compensation included above: | ||||||||||||
Selling, general and administrative | 20 | 340 | 360 | |||||||||
Cost of sales | 6 | — | 6 | |||||||||
Total | $ | 26 | $ | 340 | $ | 366 | ||||||
Capital expenditures | $ | 306 | $ | 183 | $ | 489 |
Note 1213 – Contingencies
In April 2023, the Company experienced a ransomware attack that impacted certain critical information technology systems. In response, we promptly deployed containment measures, including disconnecting our systems from the internet, launching an investigation with assistance from third-party cybersecurity experts, and notifying law enforcement. We adhered to our disaster recovery plan, which enabled us to maintain operations throughout the incident response process. We are in the process of evaluating the full scope of the costs and related impacts of this incident. The Company’s facilities remained open, and we continued to provide services to patients and partners. We later became aware that certain data, including names, test information, and Social Security numbers, was accessed, and in some instances, exfiltrated from the Company’s information technology systems as part of this incident. The investigation identified unauthorized access to or acquisition of clinical test information of approximately 2,470,000 individuals. The Social Security numbers of approximately 600,000 of these individuals may also have been involved. Additionally, the Company has determined that some employees’ information may have been involved. The Company has provided notice to the individuals whose information may have been involved, as well as to regulatory authorities, in accordance with applicable law.
Enzo Biochem is currently subject to regulatory inquiry from the New York Attorney General, a joint inquiry from the Connecticut and New Jersey Attorneys General and an inquiry from the Utah Attorney General. All inquiries ask questions about the ransomware incident, as well as the corrective actions taken in response. It is not known at this time whether the Attorneys General will seek penalty against the Company. We are unable to evaluate the likelihood of an outcome, favorable or unfavorable, to the Company or to estimate the amount or range of any potential liability, if any, at this time.
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There is also pending Class Action litigation:
In re Enzo Biochem Data Breach Litigation, No. 2:23-cv-04282 (EDNY)
In the Eastern District of New York twenty putative class actions have been consolidated alleging various harms stemming from the April 2023 data incident. Interim lead counsel has been appointed and filed a Consolidated Amended Complaint on November 13, 2023. The complaint seeks to certify a federal class as well as several state subclasses. The Consolidated Amended Complaint brings various statutory and common law claims including negligence, negligence per se, breach of fiduciary duty, breach of implied contract, breach of the implied covenant of good faith and fair dealing, violation of the New York’s General Business Law § 349, Invasion of Privacy, violations of the Connecticut Unfair Trade Practices Act, violations of the New Jersey Consumer Fraud Act.
Maria Sgambati et al., v. Enzo Biochem, Inc., et al., Index No. 619511/2023 (N.Y. Sup. Ct.)
This is a putative class action pending in state court alleging various harms stemming from the April 2023 data incident. The complaint seeks to certify a class of New York residents. The complaint brings claims of negligence; negligence per se; breach of implied covenant and good faith and fair dealing; breach of duty; breach of implied contract; and violations of New York’s Deceptive Acts and Practices § 349. This court granted our motion to stay the case pending the outcome of the federal action.
Louis v. Enzo Biochem, Inc. et al., Index No. 653281/2023 (N.Y. Sup. Ct.)
This is a putative class action pending in state court alleging various harms stemming from the April 2023 data incident. The complaint seeks to certify a class of New York citizens. The complaint brings claims of for negligence; negligence per se; breach of duty, breach of implied contract; breach of implied covenant of good faith and fair dealing; and violations of New York’s Deceptive Acts and Practices § 349. We have filed a motion to stay this action pending the resolution of the Federal Action and the motion remains pending.
A provision was made in the financial statements as of July 31, 2023 for the above matters based on a reasonable estimate; however, the actual exposure may differ.
On or about March 2, 2023, a verified complaint was filed in the Supreme Court of the State of New York, New York County captioned Elazar Rabbani v. Mary Tagliaferri, et al., Index No. 651120/2023. The verified complaint purports to assert causes of action for breach of fiduciary duty and corporate waste under N.Y.B.C.L. § 720, and seeks an accounting and certain injunctive relief. Plaintiff served a copy of the verified complaint on Enzo’s agent for service in New York on or about March 13, 2023. On August 4, 2023, defendants moved to dismiss all the causes of action asserted in the verified complaint. Plaintiff filed an amended complaint on or about October 4, 2023, adding, among other things, an additional cause of action for violation of N.Y.B.C.L. § 626. On October 23, 2023, Defendants filed a reply in further support of their motion to dismiss. On October 24, 2023, Plaintiff sought leave to file an opposition brief. Defendants filed an opposition to that request on October 26, 2023. On October 31, 2023, in response to a question from the Court’s law clerk, Defendants reiterated that they had elected to apply their original motion to dismiss to the amended pleading. On November 6, 2023, Plaintiff filed an opposition to Defendants’ motion to dismiss. On November 17, 2023, Defendants filed a reply brief in further support of their motion to dismiss the Amended Complaint. The Company cannot predict the outcome of this matter.
The Company has brought cases in the United States District Court for the District of Delaware (“the Court”), alleging patent infringement against various companies. In 2017, the Court ruled that the asserted claims of the ’180 and ’405 Patents are invalid for nonenablement in cases involving Abbott, Becton Dickinson, Gen-Probe, Hologic, and Roche. That ruling was affirmed by the United States Court of Appeals for the Federal Circuit (“Federal Circuit”) in June 2019. Enzo subsequently filed a petition for certiorari regarding the invalidity ruling for the ’180 and ’405 Patents in February 2020; the Supreme Court denied Enzo’s petition on March 30, 2020.
The Company, along with its subsidiary Enzo Life Sciences, Inc., resolved its claims against Roche regarding the ‘197’197 Patent before the Court (civil action No. 12 cv-00106) in July 2022. There is currently one case that was originally brought by the Company that is still pending in the Court. In that case, Enzo alleges patent infringement of the ‘197’197 patent against Becton Dickinson Defendants. The claims in that case are stayed.
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In separate inter partes review proceedings before the U.S. Patent and Trademark Office (PTO) involving, among others, Becton Dickinson, certain claims of the ’197 Patent were found unpatentable as anticipated or obvious and cancelled by the Patent Trial and Appeals Board (“Board”). Enzo appealed that decision to the Federal Circuit. On August 16, 2019, the Federal Circuit affirmed the Board’s decision, finding that each of the challenged claims is unpatentable. The Company filed a petition for rehearing and rehearing en banc on October 30, 2019, which the Federal Circuit denied on December 4, 2019. The Company filed a petition for certiorari with the Supreme Court on March 3, 2020, which was denied.
In April 2019, the Company entered into an agreement with Hologic and Grifols, resolving litigation resulting from four cases originally brought by the Company in the Court. As a result, Enzo dismissed (1) a stayed patent litigation regarding the ’180 and ’197 Patent against Hologic in the Court; (2) the Consolidated Appeals against Gen-Probe and Hologic resulting from two cases filed in the Court, and (3) the Company’s appeal in the litigation involving the ’581 Patent that involved both Hologic and Grifols. As a result of the agreement with Hologic, Hologic withdrew from Enzo’s Federal Circuit appeal of the Board’s adverse rulings in the inter partes review proceedings regarding the ’197 Patent filed by Hologic and joined by Becton Dickinson mentioned above.
On September 2, 2021, the PTO issued a non-final office action in an ex parte reexamination concerning the ’197 Patent. In the office action, the PTO rejected certain claims of the ’197 Patent under 35 U.S.C. §§ 102 and 103, and for nonstatutory double-patenting. Enzo responded to the office action on January 3, 2022, and the proceeding remains pending. Becton Dickinson requested another ex parte reexamination concerning the ’197 patent on July 26, 2022. On September 16, 2022, the PTO ordered that ex parte reexamination as to certain claims of the ’197 patent and has not yet issued an office action. Enzo filed a petition to terminate that second reexamination proceeding on November 16, 2022.
On February 5, 2020, Harbert Discovery Fund, LPor about September 26, 2023, James G. Wolf, Individually and Harbert Discovery Co-Investment Fund I, LP (“HDF”) broughtas the Trustee of the Wolf Family Charitable Foundation, Barbaranne R. Wolf, Stephen Paul Wolf, and Preston M. Wolf initiated an appraisal action against Enzo Biochem, Inc. in the United States DistrictNew York Supreme Court for the Southern District of New York against the Company and five of its present or former Directors, Dr. Elazar Rabbani, Barry W. Weiner, Dr. Bruce A. Hanna, Dov Perlysky and Rebecca Fischer. On March 26, 2020, HDF filedSuffolk County. Petitioners seek an amended complaint against the same defendants. Count I asserted the Company violated Section 14(a)appraisal of the Securities and Exchange Actvalue of 1934 and Rule 14a-9 thereunder by disseminating proxy materials that made purportedly false statements. Count II asserted a claim against the individual defendants under Section 20(a) of the Exchange Act premised on Enzo’s purported violation of Section 14(a) and Rule 14a-9. Count III asserted the individual defendants breached their fiduciary duty, based on the same conduct and by seeking to entrench themselves. Finally, Count IV purported to assert a derivative claim for a declaration that any amendment to Article II, Section 2 requires the approval of 80% of Enzo’s shareholders. On July 16, 2020, the day before the defendants’ motion to dismiss was due, HDF asked the Court to dismiss their claims without prejudice. Defendants asked HDF to dismiss the claims with prejudice, but they refused. On July 17, 2020, the Court dismissed the claims without prejudice.
On November 27, 2020, the Company brought an actionshares in the United States District Court for the Southern District of New York against Harbert Discovery Fund, LP, Harbert Discovery Co-Investment Fund I, LP, Harbert Fund Advisors, Inc., Harbert Management Corp. and Kenan Lucas (together, “Harbert”). The Company alleges Harbert made false and misleading representations, or omitted to state material facts necessary to make their statements not misleading, in proxy materials they disseminated seeking the election to the Company’s Board of Directors at its 2019 Annual Meeting of two candidates they nominated, in violation of Section 14(a) of the 1934 Exchange Act and Rule 14a-9 thereunder. The Company seeks damages and injunctive relief. On October 12, 2021, HDF filed nine counterclaims against the Company and present and former directors Dr. Elazar Rabbani, Barry W. Weiner, Dr. Bruce A. Hanna, Dov Perlysky, Rebeca Fischer, Dr. Mary Tagliaferri and Dr. Ian B. Walters. HDF claims the Company made false and misleading representations in proxy materials it disseminated in connection with its 2019 Annual Meeting, in violation of Section 14(a) of the 1934 Exchange Act and Rule 14a-9 thereunder, and that the Company’s directors at that time are liable under Section 20(a) of the Exchange Act for the Company’s purported misstatements. HDF also claims that current and former Company directors breached their fiduciary duties by taking four corporate actions: (a) adjourning the 2019 meeting for 25 days; (b) purportedly causing the two Harbert candidates for director, who were elected at the 2019 Meeting, to resign in November 2020; (c) authorizing the November 27, 2020 Lawsuit; and (d) not accepting Dr. Rabbani’s resignation as a director in March 2021. On November 10, 2021, the Company and the other counterclaim defendants moved to dismiss HDF’s counterclaims. On December 9, 2021, the court granted the motion to dismiss HDF’s counterclaims except HDF’s Section 14(a) claim against the Company concerning its statement that it intended to “delay” the 2019 Annual Meeting, and HDF’s Section 20(a) and breach of fiduciary duty counterclaims against Dr. Elazar Rabbani, Barry W. Weiner, Dr. Bruce Hanna, Dov Perlysky and Rebecca Fischer with respect to that statement. The Court allowed HDF to move for leave to replead with respect to its dismissed counterclaims. On June 7, 2022, the Court “so ordered” a stipulation of dismissal with prejudice of the Company’s claims against Harbert Discovery Fund, LP, Harbert Discovery Co-Investment Fund I, LP, Harbert Fund Advisors, Inc., Harbert Management Corp., and Kenan Lucas, and HDF’s counterclaims against the Company, Dr. Bruce Hanna, Dov Perlysky, Rebecca Fischer, Dr. Ian B. Walters and Dr. Mary Tagliaferri. The only remaining claims were HDF’s counterclaims against Dr. Rabbani and Mr. Weiner. HDF asked the Court to dismiss those claims without prejudice. Dr. Rabbani and Mr. Weiner asked the Court to dismiss those counterclaims with prejudice and to allow them to take discovery from HDF, the Company, and possibly others. On December 1, 2022, the court granted HDF’s motion for voluntary dismissal without prejudice, denied Dr. Rabbani and Mr. Weiner’s motion to compel discovery, and directed the Clerk of the Court to close this case.
There can be no assurance that the Company will be successful in any of these litigations. Even if the Company is not successful, management does not believe that there will be a significant adverse monetary impact on the Company. The amount of damages sought by the Petitioners is unspecified. The Company is party to other claims, legal actions, complaints, and contractual disputes that arisewill defend itself vigorously in the ordinary course of business. The Company believes that any liability that may ultimately result from the resolution of these matters will not, individually or in the aggregate, have a material adverse effect on its financial position or results of operations.appraisal action.
As described in Note 3,In our discontinued Clinical Labs operations, third-party payers, including government programs, may decide to deny payment or recoup payments for testing that they contend was improperly billed or not medically necessary, against their coverage determinations, or for which they believe they have otherwise overpaid (including as a result of their own error), and we may be required to refund payments alreadythat we received.
Former executives arbitration
The Company terminated the employment of Elazar Rabbani, Ph.D., the Company’s former Chief Executive Officer, effective April 21, 2022. Dr. Rabbani remains a board director of the Company.Company until the Annual Meeting on January 31, 2024. Dr. Rabbani iswas a party to an employment agreement with the Company which entitlesthat entitled him to certain termination benefits, including severance pay, acceleration of vesting of share-based compensation, and continuation of benefits. Based on the terms of his employment agreement, the Company estimated and accrued a charge of $2,600 in fiscal year 2022 which is included in Selling, general and administrative expenses. The charge was partially offset by the reversal of bonus accruals. In May 2022, the Company paid Dr. Rabbani $2,123 in severance (the payment constituted taxable income but the Company did not withhold taxes from the payment). In July 2022, the Company paid Dr. Rabbani’s income and other withholding taxes of $1,024 related to that payment on Dr. Rabbani’s behalf, which iswas included in “prepaid expense and other current assets” as of July 31, 2022, as the payment is reimbursable from Dr. Rabbani. Dr. Rabbani disputed, among other things, the Company’s decision to not award him a bonus for fiscal year 2021 and the amount of severance that was owed to him under his employment agreement. On July 8, 2022, the Company filed a demand for arbitration with the American Arbitration Association (the “AAA”) seeking, among other things, a declaration that the Company has fully satisfied its contractual obligations to Dr. Rabbani and seeking the tax withholding reimbursement referenced above. On August 4, 2022, Dr. Rabbani filed counterclaims in the arbitration seeking, among other things, a bonus for fiscal year 2021 and additional severance that he asserts isasserted was owed to him. TheAt the parties’ joint request, the arbitration has been stayed while the parties have chosen an arbitrator fromwork towards resolving the AAA’s panel andmatter. A provision was made in the financial statements as of July 31, 2023 based on a hearing is scheduled for June 8-16, 2023.reasonable estimate; however, the actual exposure may differ.
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On February 25, 2022, Barry Weiner, the Company’s co-founder and President, notified the Company that he was terminating his employment as President of the Company for “Good Reason” as defined in his employment agreement. The Company accepted Mr. Weiner’s termination, effective April 19, 2022, but disagreed with Mr. Weiner’s assertion regarding “Good Reason.” On July 20, 2022,October 24, 2023, the Company and Mr. Weiner filedreached an agreement resolving the dispute and a demandprovision was made in the financial statements as of July 31, 2023 based on the settlement agreement. The Company paid Mr. Weiner $3,600, less applicable withholding taxes, related to the agreement in November 2023.
Note 14 – Departure and Appointment of Certain Officers
On September 5, 2023, the Company entered into a Separation Agreement and General Release (the “Separation Agreement”) with Hamid Erfanian, the Company’s Chief Executive Officer, which provides for arbitrationMr. Erfanian’s separation of employment, resignations from his positions as Chief Executive Officer and as a director of the Company and the payment of severance benefits as described below. Pursuant to the Separation Agreement, Mr. Erfanian’s resignations as Chief Executive Officer and as a director became effective immediately and his final date of employment with the AAA asserting, among other things, thatCompany was November 18, 2023 (the “Separation Date”).
Pursuant to the Separation Agreement, Mr. Erfanian is entitled to the following severance benefits: (i) a payment equaling twelve (12) months of his annual bonus for fiscal year 2021 was too lowbase salary of $624, subject to standard payroll deductions and that his resignation (effective April 19, 2022) was for “Good Reason” under the terms of his employment agreement. He seeks, among other things,withholdings; (ii) a lump-sum payment of $187, representing his annual bonus; (iii) a higher 2021grant of restricted shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), in an amount equal to $1,502 with 50% of the restricted Common Stock granted as soon as reasonably practicable after September 13, 2023, and the remaining 50% granted on the earlier of July 24, 2024 or a Change in Control of the Company (as defined in Mr. Erfanian’s employment agreement with the Company); and (iv) the immediate vesting on the Separation Date of the remainder of a restricted stock unit award of 260,000 shares of Common Stock and an option to purchase 700,000 shares of Common Stock that were previously granted to Mr. Erfanian upon his employment. The foregoing are subject to continued compliance with existing restrictive covenants under Mr. Erfanian’s employment agreement with the Company and his reaffirmation.
The severance benefits with respect to salary and bonus and severance payments and benefits. The parties have chosen an arbitrator fromwere accrued during the AAA’s panel and a hearing is scheduled for July 18-21, and 24, 2023. As ofthree months ended October 31, 2022, the Company has not accrued any2023. The share-based charges related to the immediate vesting of the remainder of the restricted stock unit award and options granted upon employment were recognized during the three months ended October 31, 2023.
On September 5, 2023, the Company’s board of directors appointed Kara Cannon, the Company’s Chief Operating Officer, to serve as Interim Chief Executive Officer of the Company, which became effective immediately upon Mr. Weiner’s termination.Erfanian’s resignation as Chief Executive Officer.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes and other information included elsewhere in this Quarterly Report on Form 10-Q.
Forward-Looking Statements
Our disclosure and analysis in this report, including but not limited to the information discussed in this Item 2, contain forward-looking information about our(within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)). All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q, including statements regarding the Company’s future financial condition, results and estimates, business prospectsof operations and products in research and development that involve substantial risks and uncertainties. From time to time, we also may provide oral or writteninclude forward-looking statements in other materials we release to the public.statements. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historic or current facts. They typically use words such as “anticipate”, “estimate”, “expect”, “project”, “intend”, “plan”, “believe”, “will”, and other words and terms of similar meaning in connection with any discussion of future operations or financial performance. All forward-looking statements are subject to important factors, risks, uncertainties, and assumptions, including industry and economic conditions, that could cause actual results to differ materially from those described in the forward-looking statements.
In particular, theseForward-looking statements may include, without limitation, statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, interest rates, foreign currency rates, intellectual property matters, the outcome of contingencies, such as legal proceedings, impacts of the COVID-19 pandemic and measures we have taken in response, andfuture financial results. We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from past results and those anticipated, estimated or projected. As a result, investors are cautioned not to place undue reliance on any of our forward-looking statements. Investors should bear this in mind as they consider forward-looking statements. We do not assume any obligation to update or revise any forward-looking statement that we make, even if new information becomes available or other events occur in the future. We are also affected by other factors that may be identified from time to time in our filings with the Securities and Exchange Commission, some of which are set forth in Item 1A - Risk Factors in our Form 10-K filing for the July 31, 20222023 fiscal year. You are advised to consult any further disclosures we make on related subjects in our periodic reports on Forms 10-Q, 8-K and 10-K reports tofiled with the Securities and Exchange Commission. Although we have attempted to provide a list of important factors which may affect our business, investors are cautioned that other factors may prove to be important in the future and could affect our operating results.
You should understand that it is not possible to predict or identify all such factors or to assess the impact of each factor or combination of factors on our business. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.
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Impact of COVID-19Overview
We made substantial investments to expandThe Company’s Enzo Life Sciences Products reporting unit, as described below, operates in our one reportable segment, Products, and maintain the amount of COVID-19 testing available in the communities we serve since the start of the pandemic in March 2020. Enzo applied its technical expertise in molecular diagnostics to develop next generation COVID-19 diagnosticis a global company affected by different US and antibody testing options which were approved under the FDA Emergency Use Authorization (EUA). During the fiscal year ended July 31, 2022, the Company generated substantial COVID-19 related services revenues, representing 44% of all services revenues. This testing had a significantly positive impact on the profitability and cash flowglobal economic conditions. Our company evolved out of our Clinical services segment for most of fiscal 2022. Revenues from COVID-19 testing represented 7% of all services revenues during the three months ended October 31, 2022.
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 the severity of its variants have dramatically declined in the US. 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, volume, revenues, profitability, and cash flow from COVID-19 testing during the current period were all substantially and materially lower than the prior year period levels. At this time, COVID-19 testing is no longer a material part of our Services business.
We expect volume and revenues from COVID-19 testing will remain less significant in the periods ahead as the percentage of Americans who are vaccinated increases, the severity of its variants declines, and the general increase incore competence: the use of “at home” testing. However,nucleic acids as informational molecules and the emergenceuse of compounds for immune modulation. Costs excluded from this reporting unit and spreadreported as “Corporate and Other” consist of potentially more serious variants may cause our COVID-19 testing volume to increase again. With respect to our non-COVID-19 operations, even after the COVID-19 pandemic impact has greatly moderated, we may continue to experience similar adverse effects to our businesses, consolidated results of operations, financial positioncorporate general and cash flows resulting from a recessionary economic environment, including inflation and actions by the Federal Reserve to increase interest rates.
The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably availableadministrative costs which are not allocable to the Company and the unknown future impacts of COVID-19 and the recessionary economic environment, including inflation and actions by the Federal Reserve to increase interest rates as of October 31, 2022 and through the datereportable segment. Below is a brief description of this Quarterly Report. The accounting matters assessed included, but were not limited to, the Company’s patient self-pay revenue concessions and credit losses in the Clinical Servicesoperating segment accounts receivable, inventories and the carrying value of goodwill and other long-lived assets. The Company’s future assessment of the magnitude and duration of COVID-19, as well as other economic factors, could result in additional material adverse impacts to the Company’s consolidated financial statements in future reporting periods.
Overview
Enzo Biochem, Inc. (the “Company”, “we”, “our”, or “Enzo”) is an integrated diagnostics, clinical lab, and life sciences company focused on delivering and applying advanced technology capabilities to produce affordable reliable products and services that enable our customers to meet their clinical needs. Through a connection with the market, we provide advanced biotechnology solutions to the global community as affordable and flexible quality products and services. We develop, manufacture and sell our proprietary technology solutions and platforms to clinical laboratories, specialty clinics, researchers and physicians globally. Enzo’s structure and business strategy represent the culmination of years of extensive planning and work. The Company has the ability to offer low cost, high performance products and services for diagnostic testing, which ideally positions us to capitalize on the reimbursement pressures facing diagnostic labs. Our pioneering work in genomic analysis coupled with our extensive patent estate and enabling platforms have positioned the Company to continue to play an important role in the rapidly growing molecular medicine marketplaces.
Enzo develops low cost diagnostic platform products and related services. Our platform development includes automation-compatible reagent systems and associated products for sample collection and processing through analysis. We develop affordable products and services to improve healthcare, one of the greatest challenges today. Enzo combines over 40 years of expertise in technology development with assay development capabilities and diagnostic testing services to create high performance, cost-effective, and open assay solutions. The ability to combine these assets in one company is unique. With our strong intellectual property portfolio integrated with assay development know-how, production, distribution, validation and services capabilities, we have enabled sustainable products and services for a market that is facing increasing pressure in costs and reimbursement.
Enzo technology solutions and platforms and unique operational structure are designed to reduce overall healthcare costs for both government and private insurers. Our proprietary technology platforms reduces our customers’ need for multiple, specialized instruments, and offer a variety of high throughput capabilities together with a demonstrated high level of accuracy and reproducibility. Our genetic test panels are focused on large and growing markets primarily in the areas of personalized medicine, women’s health, infectious diseases and genetic disorders.
In the course of our research and development activities, we have built a substantial portfolio of intellectual property assets, comprised of approximately 472 issued patents worldwide and over 64 pending patent applications, along with extensive enabling technologies and platforms.
Below are brief descriptions of each of our two operating segments (See(see Note 1112 in the Notes to Consolidated Financial Statements):.
Enzo Clinical ServicesLife Sciences Products is a clinical reference laboratory providing a wide range of clinical services to physicians, medical centers, other clinical labs and pharmaceutical companies. The Company believes having a Clinical Laboratory Improvement Amendments of 1988operates through the Company’s wholly owned subsidiary, Enzo Life Sciences, Inc. (“CLIA”) certified and College of American Pathologists (“CAP”) accredited medical laboratory located in New York provides us the opportunity to more rapidly introduce cutting edge products and services to the clinical marketplace. Enzo Clinical Labs offers an extensive menu of molecular and other clinical laboratory tests and procedures used in patient care by physicians to establish or support a diagnosis, monitor treatment or medication, and search for an otherwise undiagnosed condition. Our laboratory is equipped with state-of-the-art communication and connectivity solutions enabling the rapid transmission, analysis and interpretation of generated data. We operate a full service clinical laboratory in Farmingdale, New York, a network of over 30 patient service centers throughout New York, New Jersey and Connecticut, two free standing “STAT” or rapid response laboratories in New York City and Connecticut, an in-house logistics department, and an information technology department. Under our license in New York State, we are able to offer testing services to clinical laboratories and physicians nationwide.
The Clinical Laboratory Services reporting unit is impacted by various risk factors, including among others, reduced reimbursements from third party payers for testing performed and from recent health care legislation. Despite the growth we have experienced in previous years, there can be no assurance future growth can be achieved. The introduction of new molecular and esoteric tests is expected to increase our revenue per test and could offset impacts from the above factors. The Company anticipates improved profitability with increased service volume.
Enzo ProductsLife Sciences”). It manufactures, develops and markets products and tools for clinical research,to life sciences, drug development and bioscienceclinical research customers worldwide. Underpinned by broad technological capabilities,world-wide and has amassed a large patent and technology portfolio. Enzo Life Sciences has developed proprietary products usedis a recognized leader in the identificationlabeling and detection technologies across research and diagnostic markets. Our strong portfolio of genomic information by laboratories around the world. Information regarding our technologies can be found in the “Core Technologies” section of our most recently filed Form 10-K. We are internationallyproteins, 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. It is globally recognized and acknowledged as a leader in the development, manufacturing, validationin-licensing, and commercialization of numerousover 20,000 products. The strategic focus of this segment 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 serving not only the clinical research market, but also the life sciences marketsto scientific experts in the fields of cellular analysiscancer, cardiovascular disease, neurological disorders, diabetes and drug discovery, among others. Ourobesity, endocrine disorders, infectious and autoimmune disease, hepatotoxicity and renal injury.
Discontinued operations are supported by global operations allowing– sale of Clinical Services business to Labcorp
Effective July 24, 2023, pursuant to an Asset Purchase Agreement, dated March 16, 2023 (the “Asset Purchase Agreement”), we completed the sale of certain assets used in the operation of Enzo Clinical Labs and the assignment of certain clinical lab liabilities to Laboratory Corporation of America Holdings, a Delaware corporation (“Labcorp”) for an aggregate purchase price of $113.25 million in cash, subject to customary closing adjustments (such assets and liabilities, the “clinical services business”). In accordance with the sale, we ceased our clinical services operations. As a consequence of the sale, for the efficient marketingthree months ended October 31, 2023 and delivery of our products around2022 we have classified as discontinued operations all income and expenses attributable to the world.clinical services business.
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Discontinued Operations Carve Out and Expense Allocations
As a consequence of the sale of the clinical services business, for the three months ended October 31, 2023 and 2022, results from operations for that business are classified as discontinued operations, as are its assets and liabilities as of October 31 and July 31, 2023. The carve out of the discontinued operations was prepared in accordance with the Securities and Exchange Commission’s carve out rules under ASC 205-20 Discontinued Operations and is derived from identifying and carving out the specific assets, liabilities, operating expenses and interest expense associated with the clinical services business’s operations. Certain administrative and overhead expenses, including personnel expenses, which were incurred by us (for which the discontinued operation benefited from such resources) are allocated out of the discontinued operations based upon the identification of those allocated expenses and to the continuing operations.
For the three months ended October 31, 2022, we allocated $536 of selling, general and administrative expenses from the discontinued operations to the continuing operations in the accompanying results of operations tables and explanations.
Ransomware attack
In April 2023, the Company experienced a ransomware attack that impacted certain critical information technology systems. In response, we promptly deployed containment measures, including disconnecting our systems from the internet, launching an investigation with assistance from third-party cybersecurity experts, and notifying law enforcement. We adhered to our disaster recovery plan, which enabled us to maintain operations throughout the incident response process. The Company’s facilities remained open, and we continued to provide services to patients and partners. We later became aware that certain data, including names, test information, and Social Security numbers, was accessed, and in some instances, exfiltrated from the Company’s information technology systems as part of this incident. The investigation identified unauthorized access to or acquisition of clinical test information of approximately 2,470,000 individuals. The Social Security numbers of approximately 600,000 of these individuals may also have been involved. Additionally, the Company has determined that some employees’ information may have been involved. The Company has provided notice to the individuals whose information may have been involved, as well as to regulatory authorities, in accordance with applicable law. The Company has incurred, and may continue to incur, related expenses. The Company’s cybersecurity insurance carrier has indicated that it will cover up to $3 million of the remediation costs related to this incident and pay all service providers directly from the policy.
The Company remains subject to risks and uncertainties as a result of the incident, including as a result of the data that was accessed or exfiltrated from the Company’s network as noted above. Additionally, security and privacy incidents have led to, and may continue to lead to, additional regulatory scrutiny and class action litigation exposure. We are in the process of evaluating the full scope of the costs and related impacts of this incident. See Note 13 of the consolidated financial statements for litigation in connection with this incident.
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Results of Operations from Continuing Operations
Three months ended October 31, 20222023 compared to October 31, 20212022
(in 000s)$000s)
Comparative Financial Data from Continuing Operations for the Three Months Endedthree months ended October 31,
2022 | 2021 | Favorable (Unfavorable) | % Change | 2023 | 2022 | Favorable (Unfavorable) | % Change | |||||||||||||||||||||||||
Revenues | $ | 18,276 | $ | 26,519 | $ | (8,243 | ) | (31 | ) | $ | 7,806 | $ | 7,103 | $ | 703 | 10 | ||||||||||||||||
Operating costs and expenses: | ||||||||||||||||||||||||||||||||
Cost of revenues | 14,671 | 15,273 | 602 | 4 | 4,351 | 4,589 | 238 | 5 | ||||||||||||||||||||||||
Research and development | 996 | 744 | (252 | ) | (34 | ) | 849 | 699 | (150 | ) | (21 | ) | ||||||||||||||||||||
Selling, general and administrative | 11,451 | 11,052 | (399 | ) | (4 | ) | 7,007 | 5,437 | (1,570 | ) | (29 | ) | ||||||||||||||||||||
Legal and related expenses | 1,071 | 1,282 | 211 | 16 | 1,075 | 1,007 | (68 | ) | (7 | ) | ||||||||||||||||||||||
Total operating costs and expenses | 28,189 | 28,351 | 162 | 1 | 13,282 | 11,732 | (1,550 | ) | (13 | ) | ||||||||||||||||||||||
Operating loss | (9,913 | ) | (1,832 | ) | (8,081 | ) | ** | (5,476 | ) | (4,629 | ) | (847 | ) | (18 | ) | |||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||||||||||
Interest | 70 | 39 | 31 | 79 | ||||||||||||||||||||||||||||
Interest, net | 977 | 72 | 905 | ** | ||||||||||||||||||||||||||||
Fair value adjustment | (328 | ) | — | (328 | ) | ** | ||||||||||||||||||||||||||
Other | 5 | (145 | ) | 150 | ** | 158 | — | 158 | ** | |||||||||||||||||||||||
Foreign currency loss | (797 | ) | (381 | ) | (416 | ) | (109 | ) | ||||||||||||||||||||||||
Foreign exchange loss | (1,006 | ) | (797 | ) | (209 | ) | (26 | ) | ||||||||||||||||||||||||
Loss before income taxes | $ | (10,635 | ) | $ | (2,319 | ) | $ | (8,316 | ) | ** | $ | (5,675 | ) | $ | (5,354 | ) | $ | (321 | ) | (6 | ) |
** | not meaningful |
Consolidated Results:
The “2023 period” and the “2022 period” refer to the three months ended October 31, 2022 of fiscal year 2023 and October 31, 2021 of the fiscal year 2022, respectively.
Impacts of COVID-19
We made substantial investments to expand and maintain the amount of COVID-19 testing availableProduct revenues were $7.8 million in the communities we serve since2023 period and $7.1 million in the start2022 period, an increase of the pandemic in March 2020. 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)approximately $0.7 million or 10%. During the fiscal year ended July 31, 2022,2023 period, we experienced increases in revenues in the Company generated substantial COVID-19 related services revenues, representing 44% of all services revenues. This testing hadUS and European markets, partially offset by a significantly positive impact ondecrease in the profitability and cash flow of our Clinical services segment for most of fiscal 2022.Asia Pacific market.
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 availabilityThe cost 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 the severity of its variants has dramatically declinedProduct revenues was $4.4 million in the US. 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, volume, revenues, profitability, and cash flow from COVID-19 testing during the 2023 period were all substantially and materially lower than the 2022 period levels. At this time, COVID-19 testing is no longer a material part of our Services business.
We expect volume and revenues from COVID-19 testing will remain less significant in the periods ahead as the percentage of Americans who are vaccinated increases, the severity of its variants declines, and the general increase in the use of “at home” testing. However, the emergence and spread of potentially more serious variants may cause our COVID-19 testing volume to increase again. With respect to our non-COVID-19 operations, even after the impact of the COVID-19 pandemic greatly 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.
Clinical services revenues for the 2023 period were $11.2 million compared to $19.7$4.6 million in the 2022 period, a decrease of $8.5$0.2 million or 43%5%. Revenues from COVID-19 testing represented 7% and 47% of Clinical revenues in the 2023 and 2022 periods, respectively as COVID-19 accessions declined 92% in the 2023 period versus the 2022 period. Accessions from all other testingThe gross profit margin for Products was down 2%.
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. Furthermore, the current recessionary environment, including inflation and actions by the Federal Reserve to increase interest rates, have, in part, resulted in longer lag periods between the time when we perform and report on our clinical services and when we are ultimately paid. While we believe this to be a timing issue, any changes in our estimates of collections could have a material adverse impact on our consolidated financial statements.
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 2023 and 2022 periods by $0.2 million and $0.3 million, respectively.
Product revenues were $7.1 millionapproximately 44% in the 2023 period and $6.8 million35% in the 2022 period. The 2023 period an increase of $0.3 million or 5%. Increased revenues in the United States and Asia Pacific regions were partially offsetgross profit was positively impacted by a decrease in manufacturing headcount, other cost containment measures, and a more profitable mix of revenues in Europe. During theproducts sold. The 2022 period we closed our manufacturing and distribution center in Ann Arbor, MI and moved the operations to our Farmingdale, NY campus. As a result we experienced some disruption in the manufacture and distribution of our products during the period, and experienced delays in product availability and fulfillment. This primarilywas negatively impacted customers in Europe and to a lesser extent the Asia Pacific region. Revenues in the United States were unchanged.
The cost of Clinical Services was $10.1 million in the 2023 period and $11.2 million in the 2022 period, a decrease of $1.1 million or 10%. Due to the decline in revenues in the 2023 period versus 2022, we decreased our reagent costs by $0.7 million, our outside reference testing by $0.3 million, and salaries by $0.1 million. During the 2022 period, we significantly reduced our outside reference testing costs for COVID-19 by utilizing our internal manufacturing capabilities, thereby reducing some of our reliance on testing and reagents sourced from third parties. The gross profit margin on Clinical Services revenues in the 2023 period was approximately 10% versus 43% in the 2022 period, due to the magnitude of the decline in high margin COVID-19 testing.
The cost of Product revenues was $4.6 million in the 2023 period and $4.1 million in the 2022 period, an increase of $0.5 million or 13%, driven by higher revenues, the impact of inflation on materials cost and market adjustment salary increases at our Farmingdale, NY manufacturing facility as compared to the 2022 period. As a result of those increases, the gross profit margin on Products was 35% in the 2023 period and 40% in the 2022 period . During the 2022 period, we closed our manufacturing and distribution center in Ann Arbor, MI and moved the operations to our Farmingdale, NY campus. As a result there was a temporary increase and overlap in manufacturing headcount and overhead costs during the transition in the 2022 period.increases.
Research and development expenses were $1.0$0.8 million in the 2023 period and $0.7 million in the 2022 period, an increase of $0.3$0.1 million or 34%. Research activities include but are not limited21%, due to lab developed tests (LDTs) for sexually transmitted infection (STI) panelsincreased investment in research and the detection of COVID-19development resources and its variants.materials consumed.
Selling, general and administrative expenses were $11.5$7.0 million during the 2023 period versus $11.1$5.4 million during the 2022 period, an increase of $0.4$1.6 million or 4%29%. The Clinical Services expense increased $0.5 million primarily due to increased facility costsCorporate and market adjustment salary increases in billing, information technology and administrative operations departments, partially offset by lower sales commissions. The Other segment expense increased $0.5$1.4 million during the 2023 period primarily due to severance provisions and accelerated recognition of share-based compensation related to a former senior officer of $1.5 million. The Products segment expense in the 2023 period increased $0.2 million compared to 2022 primarily due to consulting fees of $0.9 million related to advisory services including the evaluation of strategic alternatives for the Company. Additionally share based compensation increased $0.2 million. These increases were partially offset by a decrease in executive salaries and bonus accruals of $0.5 million. The Life Sciences Products expense decreased $0.6 million during the 2023 period, of which $0.4 million was due to the 2022 period expense for employee severance expenses associated with the closure of the facility in Ann Arbor, MI and the cost of moving its operations to our Farmingdale, NY campus. The segment also experienced a decreaseinvestments in sales & marketing headcount and other marketing expenses such as website ads, promotions and campaigns and trade shows totaling $0.2 million.marketing.
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Legal and related expenses were $1.1 million on a net basis during the 2023 period comparedand $1.0 million in the 2022 period, an increase of $0.1 million or 7%. During both periods, we required significant legal expertise and assistance associated with the ransomware attack and matters related to $1.3two former senior executives’ arbitration, one of which was settled during the 2023 period and one of which is ongoing.
Interest income, net was $1.0 million on a net basisin the 2023 period and $0.1 million in the 2022 period, a decreasefavorable variance of $0.2 million or 16%. During the 2022 period, we incurred higher legal activities associated with strategic initiatives and other corporate matters but recognized a credit of $1.0 million associated with a fee settlement and release agreement with a former legal services provider.
Interest income, net was less than $0.1 million in the 2023 and 2022 periods.$0.9 million. The 2023 period’s interest income was higher due to higher interestis earned on cashthe net proceeds from the Asset Purchase Agreement (as defined above), which are on deposit in a money market fund. We incur interest expense on 10% convertible debentures. In the 2022 period, we also earned some interest on marketable securities in bond funds. In both periods we hada money market fund and incurred interest expense primarily on a mortgage.
We recorded a fair value adjustment charge of approximately $0.3 million for the 10% convertible debentures based on their fair value as of October 31, 2023.
Other income (expense) in the 2023 and 2022 period was nil and ($0.1)of $0.2 million respectively,is from the subletting of a favorable varianceportion of approximately $0.1 million. During the 2022 period, the primary component of the expense was unrealized losses on marketable securities in bond funds held at that time as trading securities.our office space.
The foreign currency revaluationexchange loss recognized by the Life Sciences Products segment during the 2023 period was $0.8$1.0 million compared to $0.4$0.8 million in the 2022 period, an unfavorable variance of $0.4$0.2 million.
The 2023 period revaluation loss was due to the depreciation of the British pound and Swiss franc versus the U.S. dollarEuro and British pound as of the end of the period compared to its start.the start of the period. The revaluation loss in the 2022 period was smaller due to less significantthe depreciation of the British pound and Swiss franc versus the U.S. dollar as of the end of that period compared to its start.start as a result of actions by the US Federal Reserve to raise interest rates.
Liquidity and Capital Resources
At October 31, 2022, the Company hadOur aggregate cash and cash equivalents totaling $12.1and restricted cash as of October 31 and July 31, 2023 was $69.2 million and $83.4 million, respectively. Our working capital was $59.2 million and $58.5 million as of which $0.6October 31 and July 31, 2023, respectively. The decrease of $14.2 million was in foreign accounts, as compared toour cash and cash equivalents of $21.6 million, of which $0.6 million was in foreign accounts at July 31, 2022. 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 capitalrestricted cash balance as of $20.3 million at October 31, 2022, compared to $29.8 million at July 31, 2022, a decrease of $9.5 million. The decrease in working capital2023 was primarily due to the useperiod net loss and by cash used to pay down accounts payable – trade and accrued liabilities including those of cash and cash equivalents to fund operations and capital expenditures.the discontinued operations.
Net cash used in operating activities during the 2023 period was $8.7$13.4 million, compared to $6.0$8.7 million during the 2022 period, an unfavorable variance of $2.6 million. The net cash used in the 2023 period was$4.7 million, primarily due to the netperiod loss of $10.6 million and a net decreasepaydown of $0.5 million in operating liabilities, primarily accounts payable. These uses were partially offset by non-cash expense adjustments of $2.2 million and a net decrease of $0.2 million in operating assets, primarily prepaid assets. The net cash used in the 2022 period was due to the net loss of $2.3 million, a net increase of $2.2 million in operating assets, (primarily accounts receivable and inventories), and a net decrease of $3.1 million in operating liabilities, primarily accounts payable – trade and accrued expenses. These uses were partially offset by net non-cash adjustments of $1.6 million.liabilities.
Net cash used in investing activities during the 2023 period was approximately $0.7$0.3 million as compared to $1.1$0.7 million in the 2022 period. Capital expenditures in the 2023 and 2022 periods were $0.7 million and $1.0 million, respectivelyperiod and represent expenditures to support and grow our existing operations, including investments in laboratory equipment, information technology, and the buildout of our Farmingdale campus. During the 2022 period, we also purchased marketable securities in bond funds, representing reinvestment of income, of less than $0.1 million.capital expenditures.
Cash used in financing activities in both the 2023 and 2022 periods approximatedperiod amounted to $0.5 million compared to $0.1 million in the 2022 period, an increase of $0.4 million, primarily for paymentstaxes on bonuses paid in stock.
The Company is a defendant in a number of legal matters, including class action lawsuits related to the ransomware attack of its information technology systems in April 2023. We face a long term debt includingsignificant risk due to ongoing litigation that has the potential to result in future financial obligations, adversely impacting the Company’s business and profitability.
Management is not aware of any other trends, events or uncertainties that have or are reasonably likely to have a mortgagematerial negative impact upon our(i) short-term or long-term liquidity, or (ii) net sales or income from continuing operations. Our business is subject to seasonal variations thereby impacting our liquidity and working capital during the course of our fiscal year. To the extent that we do not generate sufficient cash from operations, our cash balances will decline. We may also use our cash to explore and/or acquire new product technologies, applications, product line extensions, or other new business opportunities. In the event that our available cash is insufficient to support such initiatives, we may need to incur indebtedness or issue Common Stock to finance leases.plans for growth. Volatility in the credit markets and the liquidity of major financial institutions may have an adverse effect on our ability to fund our business strategy through borrowings, under either existing or newly created instruments in the public or private markets on terms that we believe to be reasonable, if at all.
As of October 31, 2022 we had a mortgage principal balance of $3.9 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 October 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 $5.8 million at October 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 October 31, 2022 and July 31, 2022.
The Company believes based on its 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. However, should the net loss and use of cash trends continue through fiscal 2023, the Company may need to raise additional capital during the current fiscal year. Although there can be no assurances, in the event additional capital is required, the Company believes it has the ability to raise additional funds, either through securing debt or the reactivation and utilization of the Controlled Equity Offering Program, or other sources. That program’s Form S-3 expired in October 2020 but may be refiled at any time at the discretion of the Company, as disclosed in Note 10 in the Notes to the Consolidated Financial Statements. 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.
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Off-BalanceLabcorp Asset Purchase Agreement
We have indemnification obligations to Labcorp under the Asset Purchase Agreement that may require us to make future payments to Labcorp and other related persons for any damages incurred by Labcorp or such related persons as a result of any breaches of our representations, warranties, covenants or agreements contained in the Asset Purchase Agreement, or arising from the Retained Liabilities (as such term is defined in the Asset Purchase Agreement) or certain third-party claims specified in the Asset Purchase Agreement. Generally, our representations and warranties survive for a period of 15 months from the closing date, which was July 24, 2023, other than certain fundamental representations which survive until the expiration of the applicable statute of limitations. There is an indemnification cap with respect to a majority of the Company’s indemnification obligations under the Asset Purchase Agreement with the exception of claims for actual fraud, the breach of any fundamental representations and certain other items, which are subject to a higher indemnification cap (up to the purchase price). Pursuant to the terms of the Asset Purchase Agreement, we, Labcorp, and an escrow agent entered into an Escrow Agreement at closing, pursuant to which Labcorp deposited $5 million of the aggregate purchase price of the clinical service business into an escrow account established with the Escrow Agent in order to satisfy, in whole or in part, certain of our indemnity obligations, if any, that arise under the Asset Purchase Agreement. If, on the 15-month anniversary of the closing date, there are funds remaining in the escrow account, the Escrow Agent will release any funds remaining in the escrow account to us minus any amounts being reserved for escrow claims asserted by Labcorp prior to such date. Upon the resolution of any pending escrow claims, the Escrow Agent will, within two business days of receipt of joint instructions or a final order from a court (as described in the Escrow Agreement) disburse such reserved amount to the parties entitled to such funds. Through the date of this filing, no disbursements have been made out of the escrow funds.
Off Balance Sheet Arrangements
The Company does not have any “off-balance sheet arrangements” as such term is defined in Item 303(a)(4) of Regulation S-K.
General and estimates
The Company’s discussion and analysis of its financial condition and results of operations are based upon Enzo Biochem, Inc.’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and judgments also affect related disclosure of contingent assets and liabilities.
On an on-going basis, we evaluate our estimates, including those related to contractual expense, allowance for uncollectible accounts, inventory, intangible assets, goodwill and income taxes. The Company bases its estimates on experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Revenues – Clinical ServicesContingencies
Contractual AdjustmentContingencies are evaluated and a liability is recorded when the matter is both probable and reasonably estimable. Gain contingencies are evaluated and not recognized until the gain is realizable or realized.
The Company’s estimate of contractual adjustment is based on significant assumptions and judgments, such as its interpretation of payer reimbursement policies, and bears the risk of change. The estimation process is based on the experience of amounts approved as reimbursable and ultimately settled by payers, versus the corresponding gross amount billed to the respective payers. The contractual adjustment is an estimate that reduces gross revenue, based on gross billing rates, to amounts expected to be approved and reimbursed.
Gross billings are based on a standard fee schedule we set for all third party payers, including Medicare, HMO’s and managed care. The Company adjusts the contractual adjustment estimate quarterly, based on its evaluation of current and historical settlement experience with payers, industry reimbursement trends, and other relevant factors. The other relevant factors that affect our contractual adjustment include the monthly and quarterly review of: 1) current gross billings and receivables and reimbursement by payer, 2) current changes in third party arrangements and 3) the growth of in-network provider arrangements and managed care plans specific to our Company.
Our clinical business is primarily dependent upon reimbursement from third-party payers, such as Medicare (which principally serves patients 65 and older) and insurers. We are subject to variances in reimbursement rates among different third-party payers, as well as constant changes of reimbursement rates. Changes that decrease reimbursement rates or coverage would negatively impact our revenues. The number of individuals covered under managed care contracts or other similar arrangements has grown over the past several years and may continue to grow in the future. In addition, Medicare and other government healthcare programs continue to shift to managed care. These trends will continue to reduce our revenues from these programs.
For the three months ended October 31, 2022 and 2021, the contractual adjustment percentages, determined using current and historical reimbursement statistics, was 87.6% and 83.7% respectively, of gross billings. The Company estimates (by using a sensitivity analysis) that each 1% point change in the contractual adjustment percentage could result in a change in clinical services revenues of approximately $0.9 million and $1.2 million for the three months periods ended October 31, 2022 and 2021 respectively, and a change in the net accounts receivable of approximately $0.4 million as of October 31, 2022.
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Our clinical services financial billing system records gross billings using a standard fee schedule for all payers and does not record contractual adjustment by payer at the time of billing. Therefore, we are unable to quantify the effect contractual adjustments recorded during the current period have on revenue recorded in a previous period. However, we can reasonably estimate our monthly contractual adjustment to revenue on a timely basis based on our quarterly review process, which includes: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.
Accounts Receivable
Accounts receivable are reported at realizable value, net of allowances for doubtful accounts, which is estimated and recorded in the period of the related revenue.
The following is a table of the Company’s net accounts receivable by 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 October 31 2022 and July 31, 2022, approximately 62% and 59%, respectively of the Company’s net2023, Products accounts receivable, relates to its Clinical Laboratory Services business, which operates in the New York, New Jerseynet were $4,181 and Connecticut medical communities. The Life Sciences products segment’s accounts receivable includes approximately $1.0 million or 22% and $1.1 million or 24% of foreign receivables as of October 31, 2022 and July 31, 2022,$4,808, respectively.
Net accounts receivable (in thousands)
October 31, 2022 | July 31, 2022 | |||||||||||||||
Net accounts receivable by segment | Amount | % | Amount | % | ||||||||||||
Clinical Labs (by billing category) | ||||||||||||||||
Third party payers | $ | 3,054 | 43 | $ | 2,647 | 40 | ||||||||||
Patient self-pay | 2,758 | 39 | 2,779 | 41 | ||||||||||||
Medicare | 765 | 11 | 768 | 11 | ||||||||||||
HMO’s | 519 | 7 | 560 | 8 | ||||||||||||
Total Clinical Labs | 7,096 | 100 | % | 6,754 | 100 | % | ||||||||||
Total Life Sciences | 4,419 | 4,762 | ||||||||||||||
Total accounts receivable – net | $ | 11,515 | $ | 11,516 |
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 October 31 2022, approximately 16% of Clinical Labs receivables are from one payer other than Medicare and as of July 31, 2022, approximately 23%,2023, these totals include foreign receivables, net, of Clinical Labs receivables are from two payers other than Medicare.$1,353 and $1,277, respectively.
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.
GoodwillLong-Lived Assets
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired.
The Company tests goodwill annually as of the first day of the fourth quarter, or more frequently if indicators of potential impairment exist. In assessing goodwill for impairment, the Company has the option to first perform a qualitative assessment to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company is not required to perform any additional tests in assessing goodwill for impairment. However, if the Company concludes otherwise or elects not to perform the qualitative assessment, then it identifies the reporting units and compares the fair value of each of these reporting units to their respective carrying amount. If the carrying amount of the reporting unit is less than its fair value, no impairment exists. If the carrying amount of the reporting unit is higher than its fair value, the impairment charge is the amount by which the carrying amount exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
The Company reviews the recoverability of the carrying value of long-lived depreciable assets of an asset or asset group for impairment annually as of the end of the fiscal year, or more frequently if indicators of potential impairment exist. Should indicators of impairment exist, the carrying values of the depreciable 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 depreciable long lived asset is adjusted to fair value if its expected future undiscounted cash flow is less than its book value.
During the three months ended October 31, 2023 and 2022 there was no impairment of depreciable long-lived assets used in continuing operations.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
WeAs a smaller reporting company, we are exposednot required to market risk from changes in foreign currency exchange rates resulting from acquisitions with foreign locations (See Item 1A. Risk Factors section ofprovide the Form 10-K for the fiscal year ended July 31, 2022) that could impact our results of operations and financial position. We do not currently engage in any hedging or market risk management tools.information required by this Item.
Foreign Currency Exchange Rate Risk
The financial reporting of our non-U.S. subsidiaries is denominated in currencies other than the U.S. dollar. Since the functional currency of our non-U.S. subsidiaries is the local currency, foreign currency translation adjustments are accumulated as a component of accumulated other comprehensive income in stockholders’ equity. Assuming a hypothetical increase of 10% in the value of the U.S. dollar versus foreign currencies at October 31, 2022, our assets and liabilities would decrease by $0.3 million and $0.1 million, respectively, and our net revenues and net income (loss) would decrease by $0.8 million and $0.5 million, respectively, on an annual basis.
We also maintain intercompany balances and loans with subsidiaries in different local currencies. These amounts are at risk of foreign exchange losses if exchange rates fluctuate. Assuming a hypothetical increase of 10% in the value of the U.S. dollar versus foreign currencies, our pre-tax earnings (loss) would be unfavorably impacted by approximately $2.0 million on an annual basis.
Interest Rate Risk
As of October 31, 2022, we have fixed interest rate financing on a building mortgage and equipment finance leases.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company’s management conducted an evaluation (as required under Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) of the Company’s “disclosure controls and procedures” (as such term is defined under the Exchange Act), under the supervision and with the participation of theeach of our principal executive officer and the principal financial officer. Based on this evaluation, as a result of the material weakness identified below, the principal executive officer and the principal financial officer concluded that the Company’s disclosure controls and procedures arewere not effective as of the end of the period covered by this report. Notwithstanding the foregoing, a control system, no matter how well designed
As previously disclosed on Current Reports on Form 8-K dated April 13, 2023, and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures withinMay 30, 2023, respectively, the Company experienced a ransomware attack that impacted certain critical information technology systems. In response, the Company promptly deployed containment measures, including disconnecting its systems from the internet, launching an investigation with assistance from third-party cybersecurity experts, and notifying law enforcement. The Company adhered to discloseits disaster recovery plan, which enabled it to substantially maintain operations throughout the incident response process.
As a result of the ransomware attack and the subsequent investigation, the Company determined a material information otherwise required to be set forth inweakness existed that impaired the Company’s periodic reports.ability to ensure that standard systems and accounting processes could operate effectively. As a result, a reasonable possibility exists that a material misstatement of the Company’s annual or interim financial statements would not be prevented or detected and corrected in a timely manner. The following is a description of the material weakness identified:
(b) Control Environment, Risk Assessment, Information and Communication, and Control Activities
We did not maintain effective internal control related to our control environment, risk assessment, information and communication, and control activities:
● | In April 2023, we became aware that we were exposed to a ransomware attack in our Information Technology environment which interrupted systems and affected operations. The effect of these circumstances significantly impacted the following: |
o | our ability to access and reinstate our financial systems for an extended period to a new normal state of operation; |
o | the need to rebuild our financial information from backups as a result of the ransomware incident; |
o | additional workload associated with process workflows that were previously automated but were manually performed as a result of the ransomware attack. |
● | We were required to supplement resources and as a result, did not adequately perform in a timely manner the following: |
o | assessment, redesign and timely evaluation of performance of controls over financial reporting risks as a result of existing IT circumstances; and |
o | generate real time information across the organization to allow the finance department to perform timely application of controls; and |
o | Internal controls over financial reporting related to the recording and processing of revenue transactions could not be completed timely using standard methods due to the limitations of access to data. |
Management began remediation measures during and after the April 30, 2023 period end which were substantially implemented by July 31, 2023. During the first quarter of the fiscal year ending July 31, 2024, evaluation of certain controls’ effectiveness could not be performed according to the typical frequency or sufficient evidence of control performance was not available for testing due to the cyber incident.
Changes in Internal Controls overControl Over Financial Reporting
There were no changes inManagement assessed the effectiveness of our internal control over financial reporting that occurred during the quarter endedas of October 31, 20222023. In making this assessment, management used the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management has concluded that, have materially affected, or are reasonably likely to materially affect,as of October 31, 2023, our internal control over financial reporting.reporting was not effective because the first quarter included timeframes during which specific data was not available for testing.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There have been no other material developments with respect to previously reported legal proceedings discussed in the annual report on Form 10-K, as amended for the fiscal year ended July 31, 20222023 filed with the Securities and Exchange Commission, other than as noted in Note 1213 to the Consolidated Financial Statements as of October 31, 2022.2023.
Item 1A. Risk Factors
There have been no material changes from the risk factors disclosed in Part 1, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2022.2023.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit No. | Exhibit | |
31.1 | Certification of | |
31.2 | Certification of Patricia Eckert pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of | |
32.2 | Certification of | |
101. INS* | Inline XBRL Instance Document. | |
101. SCH* | Inline XBRL Taxonomy Extension Schema Document. | |
101. CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
* | XBRL (Extensible Business Reporting Language) information is being furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ENZO BIOCHEM, INC. | ||
(Registrant) | ||
Date: December | by: | /s/ Patricia Eckert |
Interim Chief Financial Officer and Principal Accounting Officer |
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