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ENZO BIOCHEM, INC.
FORM 10-Q
April 30, 2023
INDEX
i
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
ENZO BIOCHEM, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share data)
| April 30, 2023 |
July 31, 2022 |
|||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant, and equipment, net | ||||||||
| Right-of-use assets, net | ||||||||
| Goodwill | ||||||||
| Other, including restricted cash of $ |
||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable – trade | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Current portion of operating lease liabilities | ||||||||
| Mortgage debt, net | ||||||||
| Loans payable, net | — | |||||||
| Other current debt and finance leases | ||||||||
| Total current liabilities | ||||||||
| Other liabilities and finance leases long term | ||||||||
| Operating lease liabilities, non-current, net | ||||||||
| Long term debt - net | ||||||||
| Total liabilities | $ | $ | ||||||
| Contingencies – see Note 12 | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred Stock, $ |
||||||||
| Common Stock, $ |
||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( |
) | ( |
) | ||||
| Accumulated other comprehensive income | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
1
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
| Three Months Ended April 30, |
Nine Months Ended April 30, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Operating costs and expenses: | ||||||||||||||||
| Cost of revenues | ||||||||||||||||
| Research and development | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Legal and related expense, net | ||||||||||||||||
| Total operating costs and expenses | ||||||||||||||||
| Operating loss | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest, net | ( |
) | ||||||||||||||
| Other | ( |
) | ( |
) | ||||||||||||
| Foreign exchange gain (loss) | ( |
) | ( |
) | ||||||||||||
| Total other income (expense) | ( |
) | ( |
) | ||||||||||||
| Loss before income taxes | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Income taxes | ||||||||||||||||
| Net loss | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Net loss per common share: | ||||||||||||||||
| $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||
| Weighted average common shares outstanding: | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
2
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
(in thousands)
| Three Months Ended April 30, |
Nine Months Ended April 30, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net loss | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Other comprehensive (loss) income: | ||||||||||||||||
| Foreign currency translation adjustments | ( |
) | ( |
) | ||||||||||||
| Comprehensive loss | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY
Three Months Ended April 30, 2023 and 2022
(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 January 31, 2023 | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
| Net loss for the period ended April 30, 2023 | — | ( |
) | ( |
) | |||||||||||||||||||
| Share-based compensation charges | — | |||||||||||||||||||||||
| Vesting of restricted stock units | ||||||||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||||||
| Issuance of common stock for employee 401(k) plan match | ||||||||||||||||||||||||
| Foreign currency translation adjustments | — | ( |
) | ( |
) | |||||||||||||||||||
| Balance at April 30, 2023 | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
| Common Stock Shares Issued | Common Stock Amount | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Total Stockholders’ Equity | |||||||||||||||||||
| Balance at January 31, 2022 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Net loss for the period ended April 30, 2022 | — | ( | ) | ( | ) | |||||||||||||||||||
| Share-based compensation charges | — | |||||||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||||||
| Issuance of common stock for employee 401(k) plan match | ||||||||||||||||||||||||
| Foreign currency translation adjustments | — | |||||||||||||||||||||||
| Balance at April 30, 2022 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Nine Months Ended April 30, 2023 and 2022
(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, 2022 | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
| Net loss for the period ended April 30, 2023 | — | ( |
) | ( |
) | |||||||||||||||||||
| Share-based compensation charges | — | |||||||||||||||||||||||
| Vesting of restricted stock units | ||||||||||||||||||||||||
| Vesting of performance stock units | ||||||||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||||||
| Issuance of common stock for employee 401(k) plan match | ||||||||||||||||||||||||
| Foreign currency translation adjustments | — | ( |
) | ( |
) | |||||||||||||||||||
| Balance at April 30, 2023 | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
| 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 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Net loss for the period ended April 30, 2022 | — | ( | ) | ( | ) | |||||||||||||||||||
| Share-based compensation charges | — | |||||||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||||||
| Issuance of common stock for employee 401(k) plan match | ||||||||||||||||||||||||
| Foreign currency translation adjustments | — | |||||||||||||||||||||||
| Balance at April 30, 2022 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
| Nine Months Ended April 30, |
||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( |
) | $ | ( |
) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization of property, plant and equipment | ||||||||
| Amortization of intangible assets | ||||||||
| Share-based compensation charges | ||||||||
| Share-based 401(k) employer match expense | ||||||||
| Foreign exchange (gain) loss | ( |
) | ||||||
| Realized loss on marketable securities | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( |
) | ||||||
| Inventories | ( |
) | ||||||
| Prepaid expenses and other assets | ||||||||
| Accounts payable – trade | ( |
) | ||||||
| Accrued liabilities, other current liabilities and other liabilities | ( |
) | ||||||
| Total adjustments | ||||||||
| Net cash used in operating activities | ( |
) | ( |
) | ||||
| Cash flows from investing activities: | ||||||||
| Sales of marketable securities | ||||||||
| Capital expenditures | ( |
) | ( |
) | ||||
| Net cash (used in) provided by investing activities | ( |
) | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from exercise of stock options | ||||||||
| Proceeds from borrowings under Revolving Credit Agreement | ||||||||
| Repayments under Revolving Credit Agreement | ( |
) | ||||||
| Repayments under mortgage agreement, finance leases and other | ( |
) | ( |
) | ||||
| Net cash provided by (used in) financing activities | ( |
) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | ( |
) | ||||||
| (Decrease) increase in cash and cash equivalents and restricted cash | ( |
) | ||||||
| Cash and cash equivalents and restricted cash - beginning of period | ||||||||
| Total cash and cash equivalents and restricted cash - end of period | $ | $ | ||||||
| The composition of total cash and cash equivalents and restricted cash is as follows: | ||||||||
| Cash and cash equivalents | ||||||||
| Restricted cash included in other assets | ||||||||
| Total cash and cash equivalents and restricted cash | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
6
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of April 30, 2023
(UNAUDITED)
(Dollars in thousands, except share data)
Note 1 – Basis of Presentation
The accompanying consolidated financial statements include the accounts of Enzo Biochem, Inc. and its wholly-owned subsidiaries, Enzo Life Sciences, Enzo Clinical Labs, Enzo Therapeutics, Enzo Realty LLC and Enzo Realty II LLC, collectively or with one or more of its subsidiaries referred to as the “Company” or “Companies”. The Company has two reportable segments: Clinical Services and Products. The consolidated balance sheet as of April 30, 2023, the consolidated statements of operations, comprehensive loss and stockholders’ equity for the three and nine months ended April 30, 2023 and 2022, and the consolidated statements of cash flows for the nine months ended April 30, 2023 and 2022 (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 year ended July 31, 2022 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, 2022 has been derived from the audited financial statements at that date. The results of operations for the three and nine months ended April 30, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2023.
Change in segment reporting
Historically, we engaged in the research and development
of therapeutic candidates through 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 researching work of Enzo
Life Sciences. 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, Clinical Services and Products, 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 and nine months ended April 30, 2022 reported in Note 11 has been restated to be included in
the “Other” segment. The operating expenses of Enzo Therapeutics for the three and nine months ended April 30, 2023 now included
in the “Other” segment were $
Ransomware attack
On April 6, 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 are open, and continue to provide services to patients and partners. On April 11, 2023, we 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 of this incident and the assessment of
its impact is ongoing. However, the Company identified unauthorized access to or acquisition of clinical test information of approximately
7
Liquidity and Going Concern
During the nine months ended April 30, 2023, the Company incurred a
net loss of $
Specifically, the Company entered into a revolving line of credit for
up to $
There can be no assurance that these capital raising strategies will
ultimately prove to be successful, and the Company may need to raise additional capital during the current fiscal year. Our liquidity
plans are subject to a number of risks and uncertainties, some of which are outside our control. The revolving line of credit agreement
and the
Clinical Labs Asset Sale Agreement
On March 16, 2023, the Company entered into an Asset Purchase Agreement with respect to the sale to Labcorp of substantially all the operating assets and assignment of certain liabilities of the Clinical Labs division. The sale is expected to close in July 2023, at which time we will exit the clinical laboratory services business. See Note 13 Clinical Labs Asset Sale Agreement with Labcorp for additional information.
Revolving Line of Credit Agreement
On March 31, 2023, the Company entered into a Revolving Loan and Security
Agreement with Gemino Healthcare Finance, LLC d/b/a SLR Healthcare ABL as lender specializing in direct lending to middle-market companies
in the healthcare sector. The credit facility provides for a maximum $
8
Sale of
Subsequent to our fiscal
quarter ended April 30, 2023, the Company entered into a Securities Purchase Agreement on May 19, 2023 for
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. We applied our 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
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.
Volume, revenues, profitability, and cash flow from COVID-19 testing during the current periods were all substantially and materially lower than the prior year period levels. COVID-19 testing is no longer a material part of our Clinical Services business.
The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company, including inflation and actions by the Federal Reserve to increase interest rates as of April 30, 2023 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 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.
Effect of New Accounting Pronouncements
Pronouncements Issued but Not Yet Adopted
In June 2016, the Financial Accounting Standards Board (“FASB” issued Accounting Standards Update (“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.
9
The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. Adoption of this standard is required for our annual and interim periods beginning August 1, 2023, as we qualified as a smaller reporting company at the end of fiscal 2022 and must be adopted using a modified retrospective transition approach. We are currently assessing the impact of the adoption of this standard on our results of operations, financial position and cash flows.
We reviewed all other recently issued accounting pronouncements and have concluded they are not applicable or not expected to be significant to the accounting for our operations.
Concentration Risk
Other than the Medicare program, one provider whose programs are included
in the “Third-party payers” and “Health Maintenance Organizations” (“HMO’s”) categories represents
approximately
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.
Note 2 – Net income (loss) per share
Basic net income (loss) per share represents net income (loss) divided by the weighted average number of common shares outstanding during the period. As a result of the net loss for the three and nine months ended April 30, 2023 and 2022, 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 so would be antidilutive.
For the three and nine months ended April 30, 2023, approximately
For the three and nine months ended April 30, 2023, the effect of
approximately
10
Note 3 – Revenue Recognition
Clinical Services Revenue
The Company accounts for revenue pursuant to Accounting Standards Codification
(“ASC”) Topic 606. Service revenues in the Company’s clinical services business accounted for
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.
11
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 April 30, 2023 | Three months ended April 30, 2022 | |||||||||||||||
| Revenue category | ||||||||||||||||
| Third-party payer | $ | % | $ | % | ||||||||||||
| Medicare | ||||||||||||||||
| Patient self-pay | ||||||||||||||||
| HMOs | ||||||||||||||||
| Total | $ | % | $ | % | ||||||||||||
| Nine months ended April 30, 2023 | Nine months ended April 30, 2022 | |||||||||||||||
| Revenue category | ||||||||||||||||
| Third-party payer | $ | % | $ | % | ||||||||||||
| Medicare | ||||||||||||||||
| Patient self-pay | ||||||||||||||||
| HMOs | ||||||||||||||||
| Total | $ | % | $ | % | ||||||||||||
For three and nine months ended April 30, 2023 and 2022, all of the Company’s clinical services revenues were generated within the United States.
Products Revenue
In accordance with ASC Topic 606, the 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.
12
Products revenue by geography is as follows:
Three
Months Ended | Nine
Months Ended | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||
| Europe | ||||||||||||||||
| Asia Pacific | ||||||||||||||||
| Products revenue | $ | $ | $ | $ | ||||||||||||
As of February 1, 2023 and 2022, the consolidated balance of accounts
receivables was $
Note 4 – Supplemental disclosure for statement of cash flows
In the nine months ended April 30, 2023 and 2022, interest paid by
the Company was $
For the nine months ended April 30, 2023 and 2022, the net reductions
in the measurement of right of use assets and liabilities included in cash flows from operating activities was $
For the nine months ended April 30, 2023 and 2022, tax on capital
paid by the Company was $
Note 5 – Inventories
Inventories consist of the following:
| April 30, 2023 | July 31, 2022 | |||||||
| Raw materials | $ | $ | ||||||
| Work in process | ||||||||
| Finished products | ||||||||
| $ | $ | |||||||
Note 6 – Goodwill and Long-Lived Assets
The Company’s carrying amount of goodwill is in the Clinical
Labs Services segment and is $
The Company reviews the recoverability of the carrying value of long-lived assets (including its intangible assets, all of which have finite lives) of an asset or asset group for impairment annually as of the end of the fiscal year, or more frequently if indicators of potential impairment exist. Should indicators of impairment exist, the carrying values of the assets are evaluated in relation to the operating performance and future undiscounted cash flows of an asset or asset group. The net book value of the long-lived asset is adjusted to fair value if its expected future undiscounted cash flow is less than its book value. Primarily based on the Asset Purchase Agreement with Labcorp, the Company has determined that there is no impairment of goodwill or long-lived assets at April 30, 2023.
13
Note 7 – Mortgage and Loans payable, net
Loans payable, net
On March 31, 2023, we entered into a Revolving
Loan and Security Agreement (the “Credit Facility”) among Enzo Clinical Labs, Inc. and Enzo Life Sciences, Inc., and the Company
as borrowers and certain of its domestic subsidiaries, as guarantors (the “Guarantors”), and Gemino Healthcare Finance, LLC
d/b/a SLR Healthcare ABL as lender (“SLR”). The Credit Facility provides for a maximum $
Borrowings under the
Credit Facility, which are based on eligible receivables of the Company’s Clinical Labs and U.S.-based Life Sciences operating
segments, accrue interest at the rate per annum equal to Term SOFR (Secured Overnight Financing Rate) for a three-month tenor of
The Credit Facility includes customary affirmative and negative covenants
for revolving credit facilities of this nature, including certain limitations on the incurrence of additional indebtedness and liens.
In addition, the Credit Facility requires the Borrowers to maintain certain minimum liquidity levels as of the last day of each calendar
month.
The Credit Facility includes customary events of default for revolving credit facilities of this nature, including failure to pay outstanding principal or interest, failure of applicable representations or warranties to be correct in any material respects, failure to perform any other term, covenant or agreement, certain defaults upon obligations under the Employee Retirement Income Security Act, bankruptcy or a change in control. Such events of default would require the repayment of any outstanding borrowings and the termination of the right to borrow additional funds under the Credit Facility.
In April 2020, our subsidiary in Switzerland received a loan of CHF
Mortgage debt, net
In connection with the purchase of a building in Farmingdale, NY in
November 2018, a wholly-owned subsidiary (the “mortgagor subsidiary”) of the Company entered into a Fee Mortgage and Security
Agreement (the “mortgage agreement”) with Citibank, N.A. (the “mortgagee”). The mortgage agreement provides for
a loan of $
14
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 waived 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
term of the loan at least $
Minimum future annual principal payments under the mortgage and Corona Krise agreements as of April 30, 2023 are as follows:
| July 31, | Total | |||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total principal payments | ||||
| Less: current portion, included in other current liabilities and finance leases | ( | ) | ||
| unamortized mortgage cost | ( | ) | ||
| Mortgage and Corona Krise debt - current and long term – net | $ | |||
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 $
15
Note 8 – Leases
The Company determines if an arrangement is or contains a lease at contract inception. The Company leases buildings, office space, patient service centers, and equipment primarily through operating leases, and equipment through a limited number of finance leases. Generally, a right-of-use asset, representing the right to use the underlying asset during the lease term, and a lease liability, representing the payment obligation arising from the lease, are recognized on the balance sheet at lease commencement based on the present value of the payment obligation. For operating leases, expense is recognized on a straight-line basis over the lease term. For finance leases, interest expense on the lease liability is recognized using the effective interest method and amortization of the right-of-use asset is recognized on a straight-line basis over the lease term. Short-term leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company primarily uses its incremental borrowing rate in determining the present value of lease payments as the Company’s leases generally do not provide an implicit rate.
The Company has lease agreements with (i) right-of-use asset payments
and (ii) non-lease components (i.e. payments related to maintenance fees, utilities, etc.,) which have generally been combined and accounted
for as a single lease component. The Company’s leases have remaining terms of less than
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 | April 30, 2023 | July 31, 2022 | |||||||
| Assets | ||||||||||
| Operating | Right-of-use assets | $ | $ | |||||||
| Finance | Property, plant and equipment, net (a) | |||||||||
| Total lease assets | $ | $ | ||||||||
| Liabilities | ||||||||||
| Current: | ||||||||||
| Operating | Current portion of operating lease liabilities | $ | $ | |||||||
| Finance | Finance leases short term | |||||||||
| Non-current: | ||||||||||
| Operating | Operating lease liabilities, non-current | |||||||||
| Finance | Other liabilities and finance leases long term | |||||||||
| Total lease liabilities | $ | $ | ||||||||
| (a) |
16
Components of lease cost were as follows:
| Three months ended April 30, | Nine months ended April 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Operating lease cost – net (a) | $ | $ | $ | $ | ||||||||||||
| Finance lease cost: | ||||||||||||||||
| Amortization of leased assets | ||||||||||||||||
| Interest on lease liabilities | ||||||||||||||||
| Total lease cost | $ | $ | $ | $ | ||||||||||||
| (a) |
The maturity of the Company’s lease liabilities as of April 30, 2023 is as follows:
| Maturity of lease liabilities, years ending July 31, | Operating leases | Finance leases | Total | |||||||||
| 2023 | $ | $ | $ | |||||||||
| 2024 | ||||||||||||
| 2025 | ||||||||||||
| 2026 | ||||||||||||
| 2027 | ||||||||||||
| Thereafter | ||||||||||||
| Total lease payments | ||||||||||||
| Less: Interest (a) | ( | ) | ( | ) | ( | ) | ||||||
| Present value of lease liabilities | $ | $ | $ | |||||||||
| (a) |
Lease term and discount rate for the nine months ended April 30 were as follows:
| Lease term and discount rate | 2023 | 2022 | ||||||
| Weighted-average remaining lease term (years): | ||||||||
| Operating leases | ||||||||
| Finance leases | ||||||||
| Weighted-average discount rate: | ||||||||
| Operating leases | % | % | ||||||
| Finance leases | % | % | ||||||
See Note 4 for cash flow information on cash paid for amounts included in the measurement of lease liabilities for the three and nine months ended April 30, 2023 and 2022.
Note 9 – Accrued Liabilities
| Accrued liabilities consist of: | April 30, 2023 | July 31, 2022 | ||||||
| Payroll, benefits, and commissions | $ | $ | ||||||
| Professional fees | ||||||||
| Legal | ||||||||
| Other | ||||||||
| $ | $ | |||||||
17
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 April 30, 2023 and July 31, 2022, the Company has established a reserve of $
Note 10 – Stockholders’ equity
Controlled Equity Offering
In May 2023, the Company entered into a sales agreement (the “Sales
Agreement”) with B. Riley Securities, Inc. as sales agent (“Riley”). Under the Sales Agreement, the Company may offer
and sell, from time to time, through Riley, shares of the Company’s common stock, par value $
Share based awards and share based compensation
In January 2011, the Company’s stockholders approved the adoption
of the 2011 Incentive Plan (the “2011 Plan”) for the issuance of equity awards, including, among others, options, restricted
stock, restricted stock units and performance stock units for up to
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 April 30, 2023, there were approximately
The Company estimates the fair value of each stock option award on the measurement date using a Black-Scholes option pricing model. 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.
18
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.
The amounts of share-based compensation expense recognized in the periods presented are as follows:
| Three months ended April 30, | Nine months ended April 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Stock options and performance stock units | $ | $ | $ | $ | ||||||||||||
| Restricted stock units | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
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 April 30, | Nine months ended April 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Selling, general and administrative | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
No excess tax benefits were recognized during the three and nine month periods ended April 30, 2023 and 2022.
Stock Option Plans
The following table summarizes stock option activity during the nine month period ended April 30, 2023:
| Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value (000s) | |||||||||||||
| Outstanding at July 31, 2022 | $ | |||||||||||||||
| Awarded | $ | |||||||||||||||
| Exercised | ( | ) | $ | |||||||||||||
| Cancelled or expired | ( | ) | $ | |||||||||||||
| Outstanding at end of period | $ | $ | ||||||||||||||
| Exercisable at end of period | $ | $ | ||||||||||||||
As of April 30, 2023, the total future compensation cost related to
non-vested options, not yet recognized in the statements of operations, was $
The intrinsic value of in the money stock option awards at the end of the period represents the Company’s closing stock price on the last trading day of the period in excess of the exercise price multiplied by the number of outstanding options.
19
Performance 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
During the nine months ended April 30, 2023 a former officer forfeited
The following table summarizes PSU’s granted and outstanding through April 30, 2023:
| Grant Date | Total Grant | Forfeitures | Outstanding | Fair Market Value At Grant Date (000s) | ||||||||||||
| 10/19/2020 | ( | ) | $ | |||||||||||||
Restricted Stock Units
The following table summarizes Restricted Stock Unit (“RSU”) activity for the nine month period ended April 30, 2023:
| Number of Unvested 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 | $ | |||||||||||||
| Granted | ||||||||||||||
| Vested | ( | ) | ||||||||||||
| Cancelled | ||||||||||||||
| Outstanding at end of period | $ | $ | ||||||||||||
| Expected to vest at end of period | $ | $ | ||||||||||||
20
During the three and nine months ended April 30, 2023, the Company
recognized shared based compensation expense for these RSUs of $
As of April 30, 2023, the total future compensation cost related to
non-vested RSUs, not yet recognized in the statements of operations, was $
Note 11 – Segment reporting
The Company has two reportable segments: Clinical Services and Products. The Clinical Services segment provides diagnostic services to the health care community. The Company’s Products segment 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” consist of corporate general and administrative costs which are not allocable to the two reportable segments.
Legal and related expenses incurred to defend the Company’s intellectual property, which may result in settlements recognized in another segment and other general corporate matters are considered a component of the Other segment. Legal and related expenses specific to other segments’ activities are allocated to those segments. The accounting policies of the reportable segments 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, Clinical Services and Products, 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:
21
| Three months ended April 30, 2023 | Clinical Services | Products | Other | Consolidated | ||||||||||||
| Revenues | $ | $ | $ | |||||||||||||
| Operating costs and expenses: | ||||||||||||||||
| Cost of revenues | ||||||||||||||||
| Research and development | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Legal fee expense | ||||||||||||||||
| Total operating costs and expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest, net | ( | ) | ( | ) | ( | ) | ||||||||||
| Other | ||||||||||||||||
| Foreign exchange loss | ||||||||||||||||
| Loss before income taxes | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Depreciation and amortization included above | $ | |||||||||||||||
| Share-based compensation included in above: | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Cost of revenues | ||||||||||||||||
| Total | $ | |||||||||||||||
| Capital expenditures | $ | |||||||||||||||
| Three months ended April 30, 2022 | Clinical Services | Products | Other | Consolidated | ||||||||||||
| Revenues | $ | $ | $ | |||||||||||||
| Operating costs and expenses: | ||||||||||||||||
| Cost of revenues | ||||||||||||||||
| Research and development | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Legal fee expense | ||||||||||||||||
| Total operating costs and expenses | ||||||||||||||||
| Operating income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Other income (expense): | ||||||||||||||||
| Interest, net | ( | ) | ||||||||||||||
| Other | ( | ) | ( | ) | ( | ) | ||||||||||
| Foreign exchange loss | ( | ) | ( | ) | ||||||||||||
| Income (loss) before income taxes | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Depreciation and amortization included above | $ | |||||||||||||||
| Share-based compensation included in above: | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Cost of revenues | ||||||||||||||||
| Total | $ | |||||||||||||||
| Capital expenditures | $ | |||||||||||||||
22
| Nine months ended April 30, 2023 | Clinical Services |
Products | Other | Consolidated | ||||||||||||
| Revenues | $ | $ | $ | |||||||||||||
| Operating costs and expenses: | ||||||||||||||||
| Cost of revenues | ||||||||||||||||
| Research and development | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Legal fee expense | ||||||||||||||||
| Total operating costs and expenses | ||||||||||||||||
| Operating loss | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest, net | ( |
) | ||||||||||||||
| Other | ||||||||||||||||
| Foreign exchange loss | ||||||||||||||||
| Loss before income taxes | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Depreciation and amortization included above | $ | |||||||||||||||
| Share-based compensation included in above: | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Cost of revenues | ||||||||||||||||
| Total | $ | |||||||||||||||
| Capital expenditures | $ | |||||||||||||||
| Nine months ended April 30, 2022 | Clinical Services | Products | Other | Consolidated | ||||||||||||
| Revenues – Services and Products | $ | $ | $ | |||||||||||||
| Operating costs and expenses: | ||||||||||||||||
| Cost of revenues | ||||||||||||||||
| Research and development | ||||||||||||||||
| Selling, general and administrative | $ | |||||||||||||||
| Legal and related expenses | ||||||||||||||||
| Total operating costs and expenses | ||||||||||||||||
| Operating income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Other income (expense): | ||||||||||||||||
| Interest, net | ( | ) | ||||||||||||||
| Other | ( | ) | ( | ) | ||||||||||||
| Foreign exchange (loss) | ( | ) | ( | ) | ||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Depreciation and amortization included above | $ | $ | $ | $ | ||||||||||||
| Share-based compensation included in above: | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Cost of revenues | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Capital expenditures | $ | $ | $ | $ | ||||||||||||
23
Note 12 – Contingencies
Enzo has identified several purported class action complaints that have been filed against Enzo Biochem, Inc. and Enzo Clinical Labs, Inc. arising from the recent ransomware attack and data breach on Enzo’s computer network. All of the actions that we have identified were commenced in the United States District Court for the Eastern District of New York. The complaints generally allege that Enzo failed to adequately secure and safeguard the private and confidential information of the class members entrusted to it. The complaints assert various common law claims and seek money damages, restitution and injunctive relief. To date, neither Enzo Biochem, Inc. nor Enzo Clinical Labs, Inc. has been served with a copy of the summons and complaint in any of the actions.
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 also 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. The Company cannot predict the outcome of this matter; however, no inference whatsoever should be drawn from the absence of such prediction that the Company will not prevail.
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 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 patent against Becton Dickinson Defendants. The claims in that case are stayed.
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, LP and Harbert Discovery
Co-Investment Fund I, LP (“HDF”) brought an action in the United States District 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 filed an amended complaint against the same defendants. Count I asserted the Company violated
Section 14(a) of the Securities and Exchange Act 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
24
On November 27, 2020, the Company brought an action in the United States District Court for the Southern District of New York against Harbert Discovery Fund, LP, Harbert Discovery Co-Investment Fund I, LP, Harbert Fund Advisors, Inc., Harbert Management Corp. and Kenan Lucas (together, “Harbert”). The Company alleged 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 sought damages and injunctive relief. On October 12, 2021, HDF filed five 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 claimed 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 were liable under Section 20(a) of the Exchange Act for the Company’s purported misstatements. HDF also claimed 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 Company is party to other claims, legal actions, complaints, and contractual disputes that arise in the ordinary course of business. The Company believes that any liability that may ultimately result from the resolution of these matters will not, individually or in the aggregate, have a material adverse effect on its financial position or results of operations.
As described in Note 3, third-party payers, including government programs, may decide to deny payment or recoup payments for testing that they contend was improperly billed or not medically necessary, against their coverage determinations, or for which they believe they have otherwise overpaid (including as a result of their own error), and we may be required to refund payments already received.
25
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.
Dr. Rabbani is a party to an employment agreement with the Company, which entitles 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 $
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, Mr. Weiner filed a demand for arbitration with the AAA asserting, among other things, that his annual bonus for fiscal year 2021 was too low and that his resignation (effective April 19, 2022) was for “Good Reason” under the terms of his employment agreement. He seeks, among other things, payment of a higher 2021 bonus, and severance payments and benefits. At the parties’ joint request, the arbitration has been stayed while the parties work towards finalizing a settlement agreement. As of April 30, 2023, the Company has not accrued any charges related to Mr. Weiner’s termination.
Note 13 – Clinical Labs Asset Sale Agreement with Labcorp
On March 16, 2023, the Company filed a Form 8-K indicating that it
and Enzo Clinical Labs, Inc. (the “Subsidiary” and, together with the Company, the “Seller”) entered into an Asset
Purchase Agreement (the “Purchase Agreement”) with Laboratory Corporation of America Holdings, a Delaware corporation (the
“Buyer”). Pursuant to the Purchase Agreement, the Seller has agreed to sell substantially all operating assets and assign
certain liabilities of its clinical labs business (the “Business”) to the Buyer in exchange for approximately $
The Purchase Agreement contains customary representations, warranties, covenants and termination rights for a transaction of this nature, including, among other things, customary covenants: (i) relating to the conduct of the Business between the signing of the Purchase Agreement and the closing of the Transaction and (ii) regarding the efforts of the parties to cause the Transaction to be consummated, including obtaining certain consents and approvals. The consummation of the Transaction is subject to the satisfaction or waiver of customary closing conditions, including the expiration or termination of any required waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. In addition, closing under the Purchase Agreement is contingent on the Company obtaining approval of the Transaction by shareholders of the Company holding a majority of the shares of its common stock outstanding.
At a Special Meeting of shareholders on May 22, 2023, shareholders approved, by majority vote, the Transaction and adoption of the Purchase Agreement. Seller has also met all regulatory requirements for closing the sale of the Business.
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The Purchase Agreement also includes customary termination provisions
for both the Company and the Buyer and provides that, in connection with the termination of the Purchase Agreement under specified circumstances,
including termination by the Company to accept and enter into a definitive agreement with respect to an unsolicited Superior Proposal,
the Company will be required to pay Buyer a termination fee of $
Subject to the terms and conditions stated in the Purchase Agreement, after shareholder approval of the Transaction, which was obtained on May 22, 2023, Buyer is be obligated to pay a ticking fee to the Company for each day after the date of such approval, payable at the end of the applicable month, until the closing of the Transaction. At the closing of the Transaction, such ticking fees paid will be wholly or partially credited against the purchase price. On May 31, 2023, the Company received the May portion of such ticking fee.
There can be no assurances that the Transaction will close or, if it does close, the exact net proceeds to be received by the Company.
Note 14 – Subsequent Events
Sale of Convertible Debentures and Warrants
On May 19, 2023, Enzo
Biochem, Inc. (the “Company”) entered into a Securities Purchase Agreement (the “Purchase Agreement”) with 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
“Agent”).
Debentures
The Debentures bear
interest at a rate of
The Company’s obligations
under the Debentures may be accelerated, at the Purchasers’ election, upon the occurrence of certain customary events of default.
In the event of a default and acceleration of the Company’s obligations, the Company would be required to pay the greater of (i) the
outstanding principal amount of the Debentures, all accrued and unpaid interest, plus the amount of additional interest that would accrue
on such principal through the date of maturity, divided by the conversion price on the date accelerated payment is either (A) demanded
(if demand or notice is required to create an Event of Default) or otherwise due or (B) paid in full, whichever has a lower conversion
price, multiplied by the VWAP on the date the accelerated payment is either (x) demanded or otherwise due or (y) paid in full, whichever
has a higher VWAP, or (ii)
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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, (i) second-priority liens on certain collateral (the “SLR Collateral”) that secures on a first-priority basis the Revolving Loan and Security Agreement between the Company, as borrower, and Gemino Healthcare Finance, LLC d/b/a SLR Healthcare ABL, as lender (the “Credit Facility”), and (ii) first-priority liens on the collateral (the “Non-SLR Collateral” and together with the Non-SLR Collateral, the “Collateral”) that does not secure the Credit Facility, in each case subject to permitted liens described in the Indenture. Upon an event of default under the Security Agreement, subject to the security interests under the Credit Agreement, the Purchasers may, among other things, take possession of the Collateral and enter any premises where the Collateral, or any part thereof, is or may be placed and remove the Collateral. In addition, on May 19, 2023, the Company and all of the Guarantors entered into Subsidiary Guarantees (the “Subsidiary Guarantees”), pursuant to which they guaranteed all of the Company’s obligations under the Purchase Agreement and the Debentures.
Warrants
The Warrants are exercisable
for
If, at the time a Purchaser exercises its Warrant, there is no effective registration statement available for an issuance of the shares underlying the Warrant to the Purchasers, then in lieu of making the cash payment otherwise contemplated to be made to the Company upon the exercise of the Warrant, the Purchaser may elect to receive upon exercise (either in whole or in part) on a cashless basis the net number of shares of Common Stock determined according to a specified formula (as set forth in the Warrant).
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 by June 19, 2023 (the “Registration Deadline”). If the Company fails to meet the Registration Deadline or maintain the effectiveness of the Registration Statement for the required effectiveness period, subject to certain permitted exceptions, the Company will be required to pay liquidated damages to the Purchasers. The Company also agreed, among other things, to indemnify the selling holders under the Registration Statement from certain liabilities and to pay all fees and expenses incident to the Company’s performance of or compliance with the Registration Rights Agreement.
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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 Company’s financial results and estimates, business prospects and products in research and development that involve substantial risks and uncertainties. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historic or current facts. They use words such as “anticipate”, “estimate”, “expect”, “project”, “intend”, “plan”, “believe”, “will”, and other words and terms of similar meaning in connection with any discussion of future operations or financial performance.
In particular, these include statements relating to future actions, including the Asset Purchase Agreement with respect to the sale of substantially all assets and assignment of certain liabilities of the Clinical Labs division and the timing of its closing, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, interest rates, foreign currency rates, intellectual property matters, the outcome of contingencies, such as legal proceedings, impacts of the COVID-19 pandemic and measures we have taken in response, and financial results. We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from past results and those anticipated, estimated or projected. As a result, investors are cautioned not to place undue reliance on any of our forward-looking statements. Investors should bear this in mind as they consider forward-looking statements. We do not assume any obligation to update or revise any forward-looking statement that we make, even if new information becomes available or other events occur in the future. We are also affected by other factors that may be identified from time to time in our filings with the Securities and Exchange Commission, some of which are set forth in Item 1A - Risk Factors in our Form 10-K filing for the July 31, 2022 fiscal year and in this Form 10-Q filing. You are advised to consult any further disclosures we make on related subjects in our Forms 10-Q, 8-K and 10-K reports to 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.
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. We applied our 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 and nine months ended April 30, 2022 represented 43% and 49%, respectively of all services revenues. The rate of transmission of COVID-19 and the severity of its variants have dramatically declined in the U.S. Revenues from COVID-19 testing during the three and nine months ended April 30, 2023 represented approximately 4% and 5%, respectively of all services revenues.
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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.
The COVID-19 impact on the Company’s operations is consistent with the overall industry and our competitors, partners, and vendors. Volume, revenues, profitability, and cash flow from COVID-19 testing during the current periods were all substantially and materially lower than the prior year period levels. COVID-19 testing is no longer a material part of our Services business.
Clinical Labs Asset Sale Agreement
On March 16, 2023, the Company entered into an Asset Purchase Agreement with respect to the sale to Labcorp of substantially all the operating assets and assignment of certain liabilities which are necessary for Labcorp to operate the business of the Clinical Labs division. The sale is expected to close in July 2023, at which time we will exit the clinical laboratory services business. See Note 13 Clinical Labs Asset Sale Agreement with Labcorp for additional information.
Ransomware attack
On April 6, 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, launched an investigation with assistance from third-party cybersecurity experts, and notified law enforcement. We adhered to our disaster recovery plan, which enabled us to maintain operations throughout the incident response process. The Company’s facilities are open, and continue to provide services to patients and partners. The Company has incurred, and may continue to incur, certain expenses related to this attack, including expenses to respond to, remediate and investigate this matter. Further, 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. 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. During the disaster recovery, our ability to perform clinical reference testing was severely curtailed and we were forced to outsource much of the testing to third parties, including Labcorp. This negatively impacted the 2023 period’s services revenue and increased the cost of outsourcing the testing to third parties.
Other
The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company, including inflation and actions by the Federal Reserve to increase interest rates as of April 30, 2023 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 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.
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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 reduce 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 Note 11 in the Notes to Consolidated Financial Statements):
Enzo Clinical Services is a clinical reference laboratory providing a wide range of clinical services to physicians, medical centers, other clinical labs and pharmaceutical companies. The Company believes having a Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) certified and College of American Pathologists (“CAP”) accredited medical laboratory located in New York provides us the opportunity to more rapidly introduce cutting edge products and services to the clinical marketplace. Enzo Clinical Labs offers an extensive menu of molecular and other clinical laboratory tests and procedures used in patient care by physicians to establish or support a diagnosis, monitor treatment or medication, and search for an otherwise undiagnosed condition. Our laboratory is equipped with state-of-the-art communication and connectivity solutions enabling the rapid transmission, analysis and interpretation of generated data. We operate a full service clinical laboratory in Farmingdale, New York, a network of over 30 patient service centers throughout New York, New Jersey and Connecticut, two free standing “STAT” or rapid response laboratories in New York City and Connecticut, an in-house logistics department, and an information technology department. Under our license in New York State, we are able to offer testing services to clinical laboratories and physicians nationwide.
The Clinical Laboratory Services reporting unit is impacted by various risk factors, including among others, loss of a substantial portion of revenues from COVID-19 testing, reduced reimbursements from third party payers for testing performed and from recent health care legislation.
On March 16, 2023, the Company entered into an Asset Purchase Agreement with respect to the sale of assets and assignment of certain liabilities of the Clinical Labs division. See Note 13 - Clinical Labs Asset Sale Agreement with Labcorp.
Enzo Products manufactures, develops and markets products and tools for clinical research, drug development and bioscience research customers worldwide. Underpinned by broad technological capabilities, Enzo Life Sciences has developed proprietary products used in the identification of genomic information by laboratories around the world. Information regarding our technologies can be found in the “Core Technologies” section of our most recently filed Form 10-K. We are internationally recognized and acknowledged as a leader in the development, manufacturing validation and commercialization of numerous products serving not only the clinical research market, but also the life sciences markets in the fields of cellular analysis and drug discovery, among others. Our operations are supported by global operations allowing for the efficient marketing and delivery of our products around the world.
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Results of Operations
Three months ended April 30, 2023 compared
to April 30, 2022
(in 000s)
Comparative Financial Data for the Three Months Ended April 30,
| 2023 | 2022 | Favorable (Unfavorable) |
% Change | |||||||||||||
| Revenues | $ | 16,107 | $ | 26,222 | $ | (10,115 | ) | (39 | ) | |||||||
| Operating costs and expenses: | ||||||||||||||||
| Cost of revenues | 14,469 | 16,049 | 1,580 | 10 | ||||||||||||
| Research and development | 975 | 1,133 | 158 | 14 | ||||||||||||
| Selling, general and administrative | 12,022 | 11,442 | (580 | ) | (5 | ) | ||||||||||
| Legal and related expenses | 4,286 | 734 | (3,552 | ) | ** | |||||||||||
| Total operating costs and expenses | 31,752 | 29,358 | (2,394 | ) | (8 | ) | ||||||||||
| Operating loss | (15,645 | ) | (3,136 | ) | (12,509 | ) | ** | |||||||||
| Other income (expense): | ||||||||||||||||
| Interest | (37 | ) | 54 | (91 | ) | (169 | ) | |||||||||
| Other | 148 | (716 | ) | 864 | 121 | |||||||||||
| Foreign exchange gain (loss) | 347 | (1,056 | ) | 1,403 | 133 | |||||||||||
| Loss before income taxes | $ | (15,187 | ) | $ | (4,854 | ) | $ | (10,333 | ) | (213 | ) | |||||
| ** | not meaningful |
Consolidated Results:
The “2023 period” and the “2022 period” refer to the three months ended April 30, 2023 of fiscal year 2023 and April 30, 2022 of the fiscal year 2022, respectively.
Clinical services revenues for the 2023 period were $8.6 million compared to $18.6 million in the 2022 period, a decrease of $10.0 million or 54%. Revenues from COVID-19 testing decreased approximately $7.8 million and represented 4% and 43% of Clinical revenues in the 2023 and 2022 periods, respectively. The 2023 period’s operations were severely impacted by the ransomware attack. Accessions from all testing other than COVID-19 decreased versus the 2022 period resulting in a decline in such revenues from this testing period over period. Additionally, revenues decreased due to changes in payer and test mix and liquidation rate adjustments.
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. 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 by $0.2 million in the 2023 and $0.3 million in the 2022 period.
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Product revenues were $7.5 million in the 2023 period and $7.6 million in the 2022 period, a decrease of $0.1 million or 1%. In the 2023 period, decreases in revenues from European and Asia Pacific markets were almost offset by an increase in revenues from the US market.
The cost of Clinical Services was $10.0 million in the 2023 period and $11.2 million in the 2022 period, a decrease of $1.2 million or 11%. Due to the decline in testing services in the 2023 period versus 2022, from both the decline in COVID-19 testing and the ransomware attack, our reagent costs decreased by $0.4 million, salaries by $0.7 million, and supplies usage by $0.6 million, which were partially offset by an increase in outside reference testing of $0.5 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 and internally. The gross profit (loss) margin on Clinical Services revenues in the 2023 period was approximately (16%) versus 40% in the 2022 period, due to the magnitude of the decline in high margin COVID-19 testing, the ransomware attack, and market changes resulting in liquidation rate adjustments.
The cost of Product revenues was $4.5 million in the 2023 period and $4.9 million in the 2022 period, a decrease of approximately $0.4 million or 8%, driven by lower revenues. The gross profit margin on Products was 40% in the 2023 period and 36% in the 2022 period due to distribution channel conversion and expansion efforts.
Research and development expenses were $1.0 million in the 2023 period and $1.1 million in the 2022 period, a decrease of $0.2 million or 14%, due to a reduction in focus on COVID-19 testing.
Selling, general and administrative expenses were $12.0 million during the 2023 period versus $11.4 million during the 2022 period, an increase of $0.6 million or 5%. The Other segment expense increased $1.1 million during the 2023 period compared to 2022. During the 2023 period, we incurred increased consulting and professional fees other than legal of $1.3 million related to the Clinical Labs Asset Sale Agreement, the Credit Facility and the Controlled Equity Offering, which were partially offset by lower salaries, bonus and benefits as compared to the 2022 period. The Life Sciences Products expense decreased $0.1 million during the 2023 period due to lower compensation. The Clinical Services expense decreased $0.4 million primarily due to a decrease in sales commissions earned on lower revenues.
Legal and related expenses were $4.3 million during the 2023 period compared to $0.7 million in the 2022 period, an increase of $3.6 million. During the 2023 period, we required significant legal expertise and assistance associated with our strategic initiatives which include negotiation and sale of the Clinical Labs assets, the revolving line of credit agreement, the ransomware attack, and matters related to two former executives’ arbitration, which are ongoing.
Interest income (expense), net was less than ($0.1) million in the 2023 and less than $0.1 million in the 2022 period, an unfavorable variance of approximately $0.1 million. The 2023 period’s expense was due to interest expense on the mortgage facility and interest on the new Credit Facility entered into the last month of the 2023 period. In the 2022 period, we earned some interest on marketable securities in bond funds, which were sold by the end of the 2022 period.
Other income (expense) in the 2023 and 2022 period was $0.1 million and ($0.7) million respectively, a favorable variance of approximately $0.8 million. During the 2022 period, the primary component of the expense was realized losses on marketable securities in bond funds liquidated in full by the end of that period.
The foreign exchange gain (loss) recognized by the Life Sciences Products segment during the 2023 period was $0.3 million compared to ($1.1) million in the 2022 period, a favorable variance of $1.4 million. The 2023 period revaluation gain was due to the continued appreciation of the British pound and Swiss franc versus the U.S. dollar as of the end of the 2023 period compared to its start. The revaluation loss in the 2022 period was due to significant depreciation of the British pound and Swiss franc versus the U.S. dollar as of the end of that period compared to its start, as a result of actions by the US Federal Reserve to begin raising interest rates.
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Results of Operations
Nine months ended April 30, 2023 compared
to April 30, 2022
(in 000s)
Comparative Financial Data for the Nine Months Ended April 30,
| 2023 | 2022 | Favorable (Unfavorable) | % Change | |||||||||||||
| Revenues | $ | 50,721 | $ | 86,787 | $ | (36,066 | ) | (42 | ) | |||||||
| Operating costs and expenses: | ||||||||||||||||
| Cost of revenues | 44,219 | 49,160 | 4,941 | 10 | ||||||||||||
| Research and development | 3,402 | 2,697 | (705 | ) | (26 | ) | ||||||||||
| Selling, general and administrative | 35,285 | 36,960 | 1,675 | 5 | ||||||||||||
| Legal and related expenses | 6,352 | 4,861 | (1,491 | ) | (31 | ) | ||||||||||
| Total operating costs and expenses | 89,258 | 93,678 | 4,420 | 5 | ||||||||||||
| Operating loss | (38,537 | ) | (6,891 | ) | (31,646 | ) | ** | |||||||||
| Other income (expense): | ||||||||||||||||
| Interest | 95 | 161 | (66 | ) | (41 | ) | ||||||||||
| Other | 278 | (1,211 | ) | 1,489 | 123 | |||||||||||
| Foreign exchange gain (loss) | 1,022 | (1,887 | ) | 2,909 | 154 | |||||||||||
| Loss before income taxes | $ | (37,142 | ) | $ | (9,828 | ) | $ | (27,314 | ) | (278 | ) | |||||
| ** | not meaningful |
Consolidated Results:
The “2023 period” and the “2022 period” refer to the nine months ended April 30, 2023 and April 30, 2022, respectively, which represent the first three quarters of the Company’s fiscal year ending July 31.
Clinical services revenues for the 2023 period were $28.6 million compared to $62.0 million in the 2022 period, a decrease of $33.4 million or 54%. Revenues from COVID-19 testing decreased approximately $29.1 million and represented 5% and 49% of Clinical revenues in the 2023 and 2022 periods, respectively as COVID-19 accessions declined in the 2023 period versus the 2022 period. Revenues from all other testing decreased period over period due to the impact of the ransomware attack as well as changes in payer and test mix and liquidation rate adjustments. Due to a Medicaid audit, we recorded a $1.3 million charge as a reduction of revenue.
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 $0.6 million and $0.9 million, respectively.
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Product revenues were $22.1 million in the 2023 period and $24.7 million in the 2022 period, a decrease of approximately $2.6 million or 11%. The 2022 period includes a $2.8 million bulk sale of a GMP reagent to a large industrial customer in the US. Excluding the bulk sale, in the 2023 period there was an approximate $1.0 million increase in revenues in the US market, partially offset by a $0.8 million decrease in revenues in the European and Asia Pacific markets.
The cost of Clinical Services was $30.6 million in the 2023 period and $35.0 million in the 2022 period, a decrease of $4.4 million or 13%. Due to the decline in Services revenues in the 2023 period versus 2022, our headcount and salaries, including temporary employees, decreased $2.7 million, our reagent costs decreased by $1.5 million and supplies cost decreased $0.4 million, partially offset by an increase in outside reference testing of $0.2 million. The gross profit (loss) margin on Clinical Services revenues in the 2023 period was approximately (7%) versus 44% in the 2022 period, due to the magnitude of the decline in high margin COVID-19 testing, the ransomware attack, the Medicaid charge, and market changes resulting in liquidation rate adjustments. 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, which improved the period’s profit margin.
The cost of Product revenues was $13.7 million in the 2023 period and $14.2 million in the 2022 period, a decrease of $0.5 million or 4%. The gross profit margin on Products was approximately 38% in the 2023 period and 43% in the 2022 period. During the 2022 period we made a large bulk sale of a GMP reagent which had a significantly positive impact on that period’s profit margin. The 2023 period gross profit was also impacted by an increase in production headcount and related salaries and benefits compared to the 2022 period.
Research and development expenses were $3.4 million in the 2023 period and $2.7 million in the 2022 period, an increase of $0.7 million or 26%, due to headcount increases and materials consumed in the Product segment.
Selling, general and administrative expenses were $35.3 million during the 2023 period versus $37.0 million during the 2022 period, a decrease of $1.7 million or 5%.
The Other segment expense decreased $0.6 million during the 2023 period. In the 2022 period we recorded $2.6 million for severance and other discrete employment matters related to the termination of our former chief executive officer. During the 2023 period, salaries, bonuses and benefits also decreased $0.4 million. These decreases were partially offset by an increase of $2.2 million for professional fees relating to advisory services including the evaluation of strategic alternatives for the Company, including the Clinical Labs Asset Sale Agreement, the Credit Facility, and the Controlled Equity Offering. Bank fees and insurance expenses also increased $0.2 million. The Life Sciences Products expense in the 2023 period decreased $1.3 million compared to 2022, of which $0.9 million was due to a decrease in marketing and selling expenses and salaries. Additionally, the 2022 period includes $0.4 million for employee severance and winding down costs associated with the closure of the Ann Arbor MI manufacturing and distribution center. The Clinical Services expense increased $0.2 million due to increased salaries, marketing and facility costs totaling $1.1 million, partially offset by lower commissions totaling $0.9 million.
Legal and related expenses were $6.4 million during the 2023 period compared to $4.9 million in the 2022 period, an increase of $1.5 million or 31%. During the 2023 period, we required significant legal expertise and assistance associated with our strategic initiatives which include negotiation and sale of the Clinical Labs assets, the Credit Facility, the ransomware attack, and matters related to two former executives’ arbitration, which are ongoing. The 2023 period expense is net of a reimbursement of $0.8 million under the Company’s directors and officers insurance policy. During the 2022 period, we incurred legal expenses associated with strategic initiatives, and corporate employment matters related to two former executives’ arbitration, which are ongoing.
Interest income, net was $0.1 million in the 2023 period and $0.2 million in the 2022 period. The 2023 period’s interest income was earned on available cash in a money market fund. In the 2022 period, we earned interest on marketable securities in bond funds. In the 2023 period we had interest expense primarily on a mortgage and a Credit Facility. In the 2022 period we had interest expense primarily on a mortgage.
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Other income (expense) in the 2023 period was $0.3 million versus ($1.2) million in the 2022 period, a favorable variance of approximately $1.5 million. During the 2022 period, the primary component of the expense was realized losses on marketable securities in bond funds liquidated in full by the end of that period.
The foreign exchange gain (loss) recognized by the Life Sciences Products segment during the 2023 period was $1.0 million compared to ($1.9) million in the 2022 period, a favorable variance of $2.9 million. The 2023 period revaluation gain was due to the significant appreciation of the British pound and Swiss franc versus the U.S. dollar as of the end of the 2023 period compared to its start. The revaluation loss in the 2022 period was due to the depreciation of the British pound and Swiss franc versus the U.S. dollar as of the end of that period compared to its start as a result of actions by the US Federal Reserve to begin raising interest rates.
Liquidity and Capital Resources
During the nine months ended April 30, 2023, the Company incurred a net loss of $37,142, used cash in operating activities of $19,945 and has as of April 30, 2023 a working capital deficit of $10,153.
The Company believes that based on its fiscal 2023 forecast, its current cash and cash equivalents level is not sufficient for its foreseeable liquidity and capital resource needs over at least the next twelve (12) months, which conditions raise substantial doubt about the Company’s ability to continue as a going concern for one year after the date that the unaudited interim financial statements are issued. In response to these conditions, the Company evaluated and is acting upon various financing strategies to obtain sufficient additional liquidity to meet its operating and capital requirements for the next twelve months following the date of issuance of these unaudited interim consolidated financial statements.
Specifically, the Company entered into a revolving line of credit for up to $8 million based on eligible receivables in March 2023, sold 10% convertible debentures and warrants for proceeds of $7 million in May 2023, and as previously disclosed, entered into an agreement to sell substantially all the operating assets and assign certain liabilities of our clinical laboratory business in March, with an expected closing in July 2023. Additionally, in May 2023, we filed a Form S-3 “shelf” registration statement and sales agreement prospectus covering the offering, issuance and sale of our Common Stock that can be issued and sold under the sales agreement in an aggregate amount of up to $30 million. The registration statement in connection with the sales agreement is pending effectiveness with the SEC. See Note 10 Stockholders’ equity for additional information.
There can be no assurance that these financing and capital raising strategies will ultimately prove to be successful, and the Company may need to raise additional capital during the current fiscal year. Our liquidity plans are subject to a number of risks and uncertainties, some of which are outside our control. The revolving line of credit agreement and the 10% convertible debenture securities are dependent on our closing the asset sale with Labcorp within a given time frame. Macroeconomic conditions could limit our ability to successfully execute our business plans and therefore adversely affect our liquidity plans. The unaudited interim financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.
At April 30, 2023, the Company had cash and cash equivalents totaling $2.6 million of which $0.8 million was in foreign accounts, as compared to 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. Its current plans do not demonstrate a need to repatriate them to fund its United States operations.
The Company had a working capital deficit of $10.2 million at April 30, 2023, compared to working capital of $29.8 million at July 31, 2022, a decrease of $40.0 million. The decrease in working capital was due to the use of cash and cash equivalents to fund operations, capital expenditures, and the reclassification of mortgage debt from long term to current.
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Net cash used in operating activities during the 2023 period was $19.9 million, compared to $7.5 million during the 2022 period, an unfavorable variance of approximately $12.4 million. The net cash used in the 2023 period was due to the net loss of $37.1 million, which was partially offset by a net increase of $10.6 million in operating liabilities, primarily accounts payable and accrued liabilities, an increase in non-cash expense adjustments of $3.3 million, and a decrease in operating assets of $3.3 million, primarily accounts receivable and prepaid assets. In order to conserve cash and maintain overall liquidity, the Company has been working with some vendors and professional services providers to delay payments, which has resulted in the large increase in its accounts payable-trade and accrued liabilities balances at April 30, 2023 as compared to July 31, 2022.
Net cash (used) provided by investing activities during the 2023 period was approximately ($2.2) million as compared to $25.6 million in the 2022 period. In both periods we made capital expenditures to support and grow our existing operations, including investments in equipment, information technology, and the buildout of our Farmingdale campus. In the 2022 period, we sold our investments in bond funds for proceeds of $28.7 million.
Cash provided by financing activities in the 2023 period amounted to $3.1 million – net, primarily from borrowings and repayments under our Revolving Credit Agreement. In both the 2023 and 2022 periods we used approximated $0.1 million for payments related to a mortgage and finance leases.
As of April 30, 2023 we had a mortgage principal balance of $3.8 million entered into for the purchase of a building facility at our Farmingdale campus, which bears a fixed interest rate of 5.09% per annum. It requires monthly mortgage payments totaling $0.4 million annually. Our obligations under the mortgage agreement are secured by the facility, assets of the Company, and by a $1.0 million cash collateral deposit with the mortgagee as additional security, which is included in other assets as of April 30, 2023. As of April 30, 2023, we had a short term Credit Facility Agreement with a principal balance of $3.4 million which accrues interest at the rate per annum equal to Term SOFR (Secured Overnight Financing Rate) for a three-month tenor of 5.30% at April 30, 2023 plus 5.50%.
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. As of April 30, 2023, the Company was not in compliance with the liquidity covenant, but was in compliance with the other financial covenants related to this mortgage. Effective March 20, 2023, the Company and the mortgagee agreed to a waiver of the liquidity covenant default as of January 31, 2023. As of April 30, 2023, the Company was not in compliance with the liquidity covenant or an unsubordinated liabilities to net capital base leverage ratio covenant. While the Company believes it will be able to either achieve compliance or obtain waivers going forward, as there can be no assurances, all of the mortgage debt is classified as current in the consolidated balance sheet as of April 30, 2023.
The Credit Facility includes customary affirmative and negative covenants for revolving credit facilities of this nature, including certain limitations on the incurrence of additional indebtedness and liens. In addition, the Credit Facility requires the Borrowers to maintain certain minimum liquidity levels as of the last day of each calendar month. The levels decline over time, starting at $4 million as of April 30, 2023, then $3 million as of May 31, 2023 and $2 million as of the end of each month thereafter. As of April 30, 2023, the Company was not in compliance with the lender’s minimum liquidity covenant as per the strict definitions in the agreement pertaining to qualified cash, which constituted an event of default. On June 12, 2023, SLR and the Company agreed to a waiver limited to the specific event of default with respect to the minimum liquidity covenant.
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Off-Balance Sheet Arrangements
Asset Purchase Agreement
On March 16, 2023, the Company filed a Form 8-K indicating that it and Enzo Clinical Labs, Inc. (the “Subsidiary” and, together with the Company, the “Seller”) entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Laboratory Corporation of America Holdings, a Delaware corporation (the “Buyer”). Pursuant to the Purchase Agreement, the Seller has agreed to sell substantially all operating assets and assign certain liabilities of its clinical labs business (the “Business”) to the Buyer which are necessary to operate the Business in exchange for approximately $146,000,000 in cash (subject to certain adjustments), on and subject to the terms and conditions set forth therein (such transaction, the “Transaction”).
The Purchase Agreement contains customary representations, warranties, covenants and termination rights for a transaction of this nature, including, among other things, customary covenants: (i) relating to the conduct of the Business between the signing of the Purchase Agreement and the closing of the Transaction and (ii) regarding the efforts of the parties to cause the Transaction to be consummated, including obtaining certain consents and approvals. The consummation of the Transaction is subject to the satisfaction or waiver of customary closing conditions, including the expiration or termination of any required waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. In addition, closing under the Purchase Agreement is contingent on the Company obtaining approval of the Transaction by shareholders of the Company holding a majority of the shares of its common stock outstanding.
At a Special Meeting of shareholders on May 22, 2023, shareholders approved by majority vote the asset sale Transaction and adoption of the asset Purchase Agreement. Enzo has also met all regulatory requirements for closing the sale of the clinical labs business.
The Purchase Agreement also includes customary termination provisions for both the Company and Buyer and provides that, in connection with the termination of the Purchase Agreement under specified circumstances, including termination by the Company to accept and enter into a definitive agreement with respect to an unsolicited Superior Proposal, the Company will be required to pay Buyer a termination fee of $5 million or a reimbursement of Buyer’s expenses of up to $5 million.
Subject to the terms and conditions stated in the Purchase Agreement, after shareholder approval of the Transaction, which occurred on May 22, 2023, Buyer is be obligated to pay a fee to the Company for each day after the date of such approval until the closing of the Transaction. At the closing of the Transaction, such fee will be wholly or partially credited against the purchase price. On May 31, 2023, the Company received the May portion of the fee.
There can be no assurances that the Purchase Agreement will close and if it does close, the exact proceeds to be received by the Company.
General and estimates
The Company’s discussion and analysis of its financial condition and results of operations are based upon Enzo Biochem, Inc.’s interim 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.
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Revenues – Clinical Services
Contractual Adjustment
The Company’s estimate of contractual adjustment is based on significant assumptions and judgments, such as its interpretation of payer reimbursement policies, and bears the risk of change. The estimation process is based on the experience of amounts approved as reimbursable and ultimately settled by payers, versus the corresponding gross amount billed to the respective payers. The contractual adjustment is an estimate that reduces gross revenue, based on gross billing rates, to amounts expected to be approved and reimbursed.
Gross billings are based on a standard fee schedule we set for all third party payers, including Medicare, HMO’s and managed care. The Company adjusts the contractual adjustment estimate quarterly, based on its evaluation of current and historical settlement experience with payers, industry reimbursement trends, and other relevant factors. The other relevant factors that affect our contractual adjustment include the monthly and quarterly review of: 1) current gross billings and receivables and reimbursement by payer, 2) current changes in third party arrangements and 3) the growth of in-network provider arrangements and managed care plans specific to our Company.
Our clinical business is primarily dependent upon reimbursement from third-party payers, such as Medicare (which principally serves patients 65 and older) and insurers. We are subject to variances in reimbursement rates among different third-party payers, as well as constant changes of reimbursement rates. Changes that decrease reimbursement rates or coverage would negatively impact our revenues. The number of individuals covered under managed care contracts or other similar arrangements has grown over the past several years and may continue to grow in the future. In addition, Medicare and other government healthcare programs continue to shift to managed care. These trends will continue to reduce our revenues from these programs.
During the three months ended April 30, 2023 and 2022, the contractual adjustment percentages, determined using current and historical reimbursement statistics, was 89.8% and 83.4% respectively, of gross billings. During the nine months ended April 30, 2023 and 2022, the contractual adjustment percentages, determined using current and historical reimbursement statistics, was 89.3% and 82.5% 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 $2.7 million and $3.5 million for the nine months periods ended April 30, 2023 and 2022 respectively, and a change in the net accounts receivable of approximately $0.5 million as of April 30, 2023.
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:
| ● | an analysis of industry reimbursement trends; | |
| ● | an evaluation of third-party reimbursement rates changes and changes in reimbursement arrangements with third-party payers; | |
| ● | a rolling monthly analysis of current and historical claim settlement and reimbursement experience statistics with payers; and | |
| ● | an analysis of current gross billings and receivables by payer. |
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 April 30, 2023 and July 31, 2022, approximately 58% and 59%, respectively of the Company’s net accounts receivable relates to its Clinical Laboratory Services business, which operates in the New York, New Jersey and Connecticut medical communities. The Life Sciences products segment’s accounts receivable includes foreign receivables of approximately $0.8 million or 19% and $1.1 million or 24% of total segment receivables as of April 30, 2023 and July 31, 2022, respectively.
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Net accounts receivable (in thousands)
| April 30, 2023 | July 31, 2022 | |||||||||||||||
| Net accounts receivable by segment | Amount | % | Amount | % | ||||||||||||
| Clinical Labs (by billing category) | ||||||||||||||||
| Third party payers | $ | 2,362 | 43 | $ | 2,647 | 40 | ||||||||||
| Patient self-pay | 2,340 | 42 | 2,779 | 41 | ||||||||||||
| Medicare | 458 | 8 | 768 | 11 | ||||||||||||
| HMO’s | 396 | 7 | 560 | 8 | ||||||||||||
| Total Clinical Labs | 5,556 | 100 | % | 6,754 | 100 | % | ||||||||||
| Total Life Sciences | 4,080 | 4,762 | ||||||||||||||
| Total accounts receivable – net | $ | 9,636 | $ | 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 April 30, 2023, approximately 13% of Clinical Labs receivables are from one payer other than Medicare and as of July 31, 2022, approximately 23%, of Clinical Labs receivables are from two payers other than Medicare.
Billing for laboratory services is complicated due to several factors, including, but not limited to, the differences between our standard gross fee schedule for all payers and the reimbursement rates of the various payers we deal with, disparity of coverage and information requirements among the various payers, and disputes with payers as to which party is responsible for reimbursement.
Income Taxes
The Company accounts for income taxes under the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The liability method requires that any tax benefits recognized for net operating loss carry forwards and other items be reduced by a valuation allowance where it is not more likely than not the benefits will be realized in the foreseeable future. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under the liability method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. It is the Company’s policy to provide for uncertain tax positions, if any, and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. To the extent the Company prevails in matters for which a liability for an unrecognized tax benefit is established or is required to pay amounts in excess of the liability, the Company’s effective tax rate in a given financial statement period may be affected.
The proposed Clinical Labs Asset Sale will be treated as a sale of corporate assets in exchange for cash and the assumption of certain liabilities. The adjusted tax basis in the assets being sold is less than the sales proceeds that will be received from the Buyer in which case we will incur U.S. federal and state income tax as a result of a realized gain from the Asset Sale. However, we anticipate that our tax attributes, including our U.S. federal and state net operating loss carryforwards (“NOLs”), will be available to offset a substantial portion of our U.S. federal and state income tax liabilities resulting from such gain. In addition, in general, under Section 382 of the Code, a corporation that undergoes an “ownership change” is subject to annual limitations on its ability to use its pre-change NOLs or other tax attributes to offset future taxable income or reduce taxes. Although no formal Section 382 study has been performed, we do not anticipate any limitation under Section 382.
As of April 30, 2023, we estimate we have $65 million of unlimited U.S. federal NOL carryforwards and approximately $32 million of U.S. federal NOL carryforwards subject to an 80% limitation. We estimate we have state and local NOL carryforwards of approximately $38 million. The determination of our realized gain on the proposed Asset Sale and whether and to what extent our tax attributes will be available to offset the gain is highly complex and is based in part upon facts that will not be known until the completion of the Asset Sale. Therefore, it is possible that we could incur substantial U.S. federal and state income taxes as a result of the proposed Clinical Labs Asset Sale.
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.
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Goodwill and Long-Lived Assets
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired.
The Company reviews the recoverability of the carrying value of long-lived assets (including its intangible assets, all of which have finite lives) of an asset or asset group for impairment annually as of the end of the fiscal year, or more frequently if indicators of potential impairment exist. Should indicators of impairment exist, the carrying values of the assets are evaluated in relation to the operating performance and future undiscounted cash flows of an asset or asset group. The net book value of the long-lived asset is adjusted to fair value if its expected future undiscounted cash flow is less than its book value. Primarily based on the Asset Purchase Agreement with Labcorp, the Company has determined that there is no impairment of goodwill or long-lived assets at April 30, 2023.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable. As a smaller reporting company, we are not required to provide the information required by this Item.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company’s management conducted an evaluation (as required under Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) of the Company’s “disclosure controls and procedures” (as such term is defined under the Exchange Act), under the supervision and with the participation of the principal executive officer and the principal financial officer. Based on this evaluation, 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 were not effective as of the end of the period covered by this report. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.
As previously disclosed on Form 8-K’s dated April 13, 2023, and May 30, 2023, 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 its 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 weakness existed that impaired the Company’s ability to assure 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:
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 has begun remediation measures during and after the April 30, 2023 period end and continues to assess additional necessary remediation measures.
(b) Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended April 30, 2023 other than the discussion above, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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, 2022 filed with the Securities and Exchange Commission, other than as noted in Note 12 to the Consolidated Financial Statements as of April 30, 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, except as follows:
We rely on network and information systems and other technology whose failure or misuse could cause, and has caused, a disruption of services or loss or improper disclosure of personal data, business information, including intellectual property, or other confidential information, resulting in increased costs, loss of revenue or other harm to our business.
Network and information systems and other technologies, including those related to the Company’s network management, are important to its business activities. The Company also relies on third party providers for certain technology and “cloud-based” systems and services that support a variety of business operations. Network and information systems-related events affecting the Company’s systems, or those of third parties upon which the Company’s business relies, such as computer compromises, cyber threats and attacks, ransomware attacks, computer viruses, worms or other destructive or disruptive software, process breakdowns, denial of service attacks, malicious social engineering or other malicious activities, or any combination of the foregoing, as well as power outages, equipment failure, natural disasters (including extreme weather), terrorist activities, war, human or technological error or malfeasance that may affect such systems, could result in disruption of the Company’s business and/or loss, corruption or improper disclosure of personal data, business information, including intellectual property, or other confidential information. In addition, any design or manufacturing defects in, or the improper implementation of, hardware or software applications the Company develops or procures from third parties could unexpectedly compromise information security. In recent years, there has been a rise in the number of cyber-attacks and ransomware attacks on companies’ network and information systems, and such attacks have become more sophisticated, targeted and difficult to detect and prevent against. As a result, the risks associated with such an event continue to increase, particularly as the Company’s digital businesses expand. The Company’s security measures and internal controls that are designed to protect personal data, business information, including intellectual property, and other confidential information, to prevent data loss, and to prevent or detect security breaches, have not always provided, and cannot provide, absolute security and have at times failed and may not be successful in preventing these events from occurring, particularly given that techniques used to access, disable or degrade service, or sabotage systems change frequently, and any network and information systems-related events have required and could continue to require the Company to expend significant resources to remedy such event. Moreover, the development and maintenance of these measures is costly and requires ongoing monitoring and updating as technologies change and efforts to overcome security measures become more sophisticated. The Company’s cyber risk insurance may not be sufficient to cover all losses from any future breaches of our systems.
A significant cyber attack, ransomware attack, failure, compromise, breach or interruption of the Company’s systems, or those of third parties upon which its business relies, could result in a disruption of its operations, customer, audience or advertiser dissatisfaction, damage to its reputation or brands, regulatory investigations and enforcement actions, lawsuits, remediation costs, a loss of customers, advertisers or revenues and other financial losses. If any such failure, interruption or similar event results in the improper disclosure of information maintained in the Company’s information systems and networks or those of its vendors, including financial, personal, credit card, confidential and proprietary information relating to personnel, customers, vendors and the Company’s business, including its intellectual property, the Company could also be subject to liability under relevant contractual obligations and laws and regulations protecting personal data and privacy. In addition, media or other reports of perceived security vulnerabilities to our systems or those of third parties upon which the Company’s business relies, even if nothing has actually been attempted or occurred, could also adversely impact our brand and reputation and materially affect our business.
On April 6, 2023, the Company experienced a ransomware attack that impacted certain critical information technology systems. The Company has incurred, and may continue to incur, certain expenses related to this attack and 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. Additionally, security and privacy incidents have led to, and may continue to lead to, additional regulatory scrutiny and class action litigation exposure. This incident severely curtailed our ability to perform clinical reference testing and we were forced to outsource much of the testing to third parties, including Labcorp, which negatively impacted the 2023 period’s services revenue and increased the cost of outsourcing the testing to third parties. See Note 1 Ransomware Attack for additional information.
Cyber security risks and the failure to maintain the confidentiality, integrity, and availability of our computer hardware, software, and Internet applications and related tools and functions could result in damage to the Company’s reputation and/or subject the Company to costs, fines, or lawsuits.
The integrity and protection of our own data, and that of its customers and employees, is critical to the Company’s business. The regulatory environment governing information, security and privacy laws is increasingly demanding and continues to evolve. Maintaining compliance with applicable security and privacy regulations may increase the Company’s operating costs and/or adversely impact the Company’s ability to market its products and services to customers. Although the Company’s computer and communications hardware is protected through physical and software safeguards, it is still vulnerable to cyber threat actors, fire, storm, flood, power loss, earthquakes, telecommunications failures, physical or software break-ins, software viruses, and similar events. These events could lead to the unauthorized access, disclosure and use of non-public information. The techniques used by criminal elements to attack computer systems are sophisticated, change frequently and may originate from less regulated and remote areas of the world. As a result, the Company may not be able to address these techniques proactively or implement adequate preventative measures. If the Company’s computer systems are compromised, it could be subject to fines, damages, litigation, and enforcement actions, customers could curtail or cease using its applications, and the Company could lose trade secrets, the occurrence of which could harm its business.
Liquidity and Going Concern
During the nine months ended April 30, 2023, the Company incurred a net loss of $37,142 and used cash in operating activities of $19,945, and had as of April 30, 2023 a working capital deficit of $10,153. The Company believes that based on its fiscal 2023 forecast, its current cash and cash equivalents level is not sufficient for its foreseeable liquidity and capital resource needs over at least the next twelve (12) months, which conditions raise substantial doubt about the Company’s ability to continue as a going concern for one year after the date that the unaudited interim financial statements are issued. In response to these conditions, the Company evaluated and acted upon various financing strategies to obtain sufficient additional liquidity to meet its operating and capital requirements for the next twelve months following the date of issuance of these unaudited interim consolidated financial statements.
Specifically, the Company entered into a revolving line of credit for up to $8 million based on eligible receivables in March 2023, sold 10% convertible debentures and warrants for proceeds of $7 million in May 2023, and as previously disclosed entered into an agreement to sell substantially all the operating assets and assign certain liabilities of our clinical laboratory business in March, with an expected closing in July 2023. Additionally, in May 2023, we filed a Form S-3 “shelf” registration statement and sales agreement prospectus covering the offering, issuance and sale of our Common Stock that can be issued and sold under the sales agreement in an aggregate amount of up to $30 million. See Note 10 Stockholders’ equity for additional information.
There can be no assurance that these capital raising strategies will ultimately prove to be successful, and the Company may need to raise additional capital during the current fiscal year. Our liquidity plans are subject to a number of risks and uncertainties, some of which are outside our control. The revolving line of credit agreement and the 10% convertible debenture securities are dependent on our closing the asset sale with Labcorp within a given time frame. Macroeconomic conditions could limit our ability to successfully execute our business plans and therefore adversely affect our liquidity plans. The unaudited interim financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.
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Enzo has concluded that there are material weaknesses in its internal control over financial reporting, which, if not remediated, could materially adversely affect its ability to timely and accurately report its results of operations and financial condition. The accuracy of Enzo’s financial reporting depends on the effectiveness of its internal controls over financial reporting.
Internal controls over financial reporting can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements and may not prevent or detect misstatements. Failure to maintain effective internal controls over financial reporting, or lapses in disclosure controls and procedures, could undermine the ability to provide accurate disclosure (including with respect to financial information) on a timely basis, which could cause investors to lose confidence in Enzo’s disclosures (including with respect to financial information), require significant resources to remediate the lapse or deficiency, and expose it to legal or regulatory proceedings. In connection with our April 30, 2023 unaudited consolidated financial statements, Enzo’s management identified a deficiency, which it considers to be a “material weakness,” which, could reasonably result in a material misstatement in the Company's financial statements. The Company has begun remediation measures during and after the April 30, 2023 period end and continues to assess additional necessary remediation measures. The material weakness cannot be considered completely remediated until the applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. Enzo cannot guarantee that it will be successful in remediating the material weakness it identified or that its internal control over financial reporting, as modified, will enable it to identify or avoid material weaknesses in the future.
There can be no guarantee that the Asset Sale will be completed and, if not completed, we may have to file for bankruptcy and liquidation.
The consummation of the Asset Sale is subject to the satisfaction or waiver of various conditions, including the approval of the Asset Sale by our stockholders, which we obtained on May 22, 2023. We cannot guarantee that the closing conditions set forth in the Asset Purchase Agreement will be satisfied. If we are unable to satisfy our closing conditions under the Purchase Agreement or if other mutual closing conditions are not satisfied, Buyer will not be obligated to complete the Asset Sale. If the Asset Sale is not completed, our board of directors, in discharging its fiduciary obligations to our stockholders, will evaluate other strategic alternatives that may be available, which alternatives may not be as favorable to our stockholders as the Asset Sale and may include a bankruptcy and liquidation of the Company.
The Company has incurred and will continue to incur substantial expenses, including transaction-related costs, pending the Asset Sale.
Claims, liabilities and expenses from operations, such as operating costs, salaries, directors’ and officers’ insurance, payroll and local taxes, legal, accounting and consulting fees and office expenses will continue to be incurred by us during the pendency of the Asset Sale. Further, Enzo has incurred, and expects to continue to incur, a number of non-recurring transaction-related costs in initiating and completing the Asset Sale. Non-recurring transaction costs include, but are not limited to, fees paid to Enzo’s financial, legal and accounting advisors, filing fees and printing costs. These fees and costs have been, and will continue to be, substantial. We cannot estimate what the aggregate of these expenses will be and these costs may be higher than expected. There can be no assurance of the exact amount of net cash proceeds Enzo will receive from the Asset Sale or the exact timing at which it will receive such proceeds. Therefore, it is uncertain the extent to which our financial condition and operations will benefit from or improve as a result of or after the Asset Sale.
The Purchase Agreement also includes customary termination provisions for both the Company and Buyer and provides that, in connection with the termination of the Purchase Agreement under specified circumstances, including termination by the Company to accept and enter into a definitive agreement with respect to an unsolicited Superior Proposal, the Company will be required to pay Buyer a termination fee of $5 million, or reimbursement of Buyer’s expenses of up to $5 million.
Subject to the terms and conditions stated in the Purchase Agreement, after shareholder approval of the Transaction, which occurred on May 22, 2023, Buyer is be obligated to pay a fee to the Company for each day after the date of such approval until the closing of the Transaction. At the closing of the Transaction, such fee will be wholly or partially credited against the purchase price. On May 31, 2023, the Company received the May portion of the fee.
There can be no assurance that the Purchase Agreement will close and that if it does close, the exact proceeds to be received by the Company.
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Item 6. Exhibits
| * | 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. |
| (a) | Filed as Exhibit 4.1 of Form 8-K filed May 22, 2023. |
| (b) | Filed as Exhibit 4.2 of Form 8-K filed May 22, 2023. |
| (c) | Filed as Exhibit 2.1 of Form 8-K filed March 16, 2023. |
| (d) | Filed as Exhibit 10.1 of Form 8-K filed April 5, 2023. |
| (e) | Filed as Exhibit 10.1 of Form 8-K filed May 22, 2023. |
| (f) | Filed as Exhibit 10.2 of Form 8-K filed May 22, 2023 |
| (g) | Filed as Exhibit 10.3 of Form 8-K filed May 22, 2023 |
| (h) | Filed as Exhibit 10.4 of Form 8-K filed May 22, 2023 |
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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: June 14, 2023 | by: | /s/ Patricia Eckert |
Interim Chief Financial Officer and Principal Accounting Officer | ||
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