10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on June 13, 2024
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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ENZO BIOCHEM, INC.
FORM 10-Q
April 30, 2024
INDEX
i
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
ENZO BIOCHEM, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| April 30, 2024 (unaudited) |
July 31, 2023 |
|||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses and other current assets, including $ |
||||||||
| Total current assets | ||||||||
| Property, plant, and equipment, net | ||||||||
| Right-of-use assets | ||||||||
| Non-current assets of discontinued operations, net | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable – trade | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Current portion of operating lease liabilities | ||||||||
| Current portion of long term debt | ||||||||
| Convertible debentures | ||||||||
| Current liabilities of discontinued operations, net | ||||||||
| Total current liabilities | ||||||||
| Operating lease liabilities, non-current | ||||||||
| Long term debt, net | ||||||||
| Total liabilities | $ | $ | ||||||
| Contingencies – see Note 13 | ||||||||
| 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, |
|||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| 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 | ( |
) | ||||||||||||||
| Change in fair value of convertible debentures | ( |
) | ( |
) | - | |||||||||||
| Other | ||||||||||||||||
| Foreign exchange (loss) gain | ( |
) | ( |
) | ||||||||||||
| Total other income (expense) | ( |
) | ||||||||||||||
| Loss before income taxes | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Income taxes | — | — | ||||||||||||||
| Net loss from continuing operations | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Net loss from discontinued operations | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Net loss | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Net loss per common share – basic and diluted: | ||||||||||||||||
| $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||
| ( |
) | ( |
) | ( |
) | ( |
) | |||||||||
| $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||
| 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, |
|||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| 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, 2024 and 2023
(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, 2024 | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
| Net loss for the period ended April 30, 2024 | — | ( |
) | ( |
) | |||||||||||||||||||
| Share-based compensation charges | — | |||||||||||||||||||||||
| Vested restricted and performance stock units issued | ||||||||||||||||||||||||
| Issuance of common stock for employee 401(k) plan match | ||||||||||||||||||||||||
| Foreign currency translation adjustments | — | |||||||||||||||||||||||
| Balance at April 30, 2024 | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
| 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 | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
4
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Nine Months Ended April 30, 2024 and 2023
(unaudited)
(in thousands, except share data)
| Common Stock Shares Issued |
Common Stock Amount |
Additional Paid-in Capital |
Accumulated Deficit |
Accumulated Other Comprehensive Income |
Total Stockholders’ Equity |
|||||||||||||||||||
| Balance at July 31, 2023 | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
| Net loss for the period ended April 30, 2024 | — | ( |
) | ( |
) | |||||||||||||||||||
| Vested restricted and performance stock unit issued | ||||||||||||||||||||||||
| Common stock issued for Asset Purchase Agreement bonus payment | ||||||||||||||||||||||||
| Share-based compensation charges | — | |||||||||||||||||||||||
| Issuance of common stock for employee 401(k) plan match | ||||||||||||||||||||||||
| Foreign currency translation adjustments | — | |||||||||||||||||||||||
| Balance at April 30, 2024 | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
| 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 | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
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, |
||||||||
| 2024 | 2023 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( |
) | $ | ( |
) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Change in fair value of convertible debentures | ||||||||
| Depreciation and amortization of property, plant and equipment | ||||||||
| Share-based compensation charges | ||||||||
| Share-based 401(k) employer match expense | ||||||||
| Unrealized foreign exchange loss (gain) | ( |
) | ||||||
| Gain on operating lease terminations | ( |
) | ||||||
| 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: | ||||||||
| Capital expenditures | ( |
) | ( |
) | ||||
| Net cash used in 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 and capital leases | ( |
) | ( |
) | ||||
| Cash payments for taxes related to net share settlements of equity compensation and awards | ( |
) | ||||||
| Net cash (used in) provided by financing activities | ( |
) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | ( |
) | ||||||
| Decrease in cash and cash equivalents and restricted cash | ( |
) | ( |
) | ||||
| Cash and cash equivalents and restricted cash - beginning of period | ||||||||
| Cash and cash equivalents and restricted cash - end of period | $ | $ | ||||||
| Composition of cash and cash equivalents and restricted cash is as follows: | ||||||||
| Cash and cash equivalents | ||||||||
| Restricted cash | ||||||||
| 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, 2024
(unaudited)
(Dollars in thousands except share data)
Note 1 – Basis of Presentation
Enzo Biochem, Inc. (the “Company,” “we,” “our” or “Enzo”), is a manufacturer and supplier of a comprehensive portfolio of thousands of high-quality products, including antibodies, genomic probes, assays, biochemicals, and proteins. The Company’s proprietary products and technologies play central roles in translational research and drug development areas, including cell biology, genomics, assays, immunohistochemistry, and small molecule chemistry. Enzo Biochem, Inc.’s Life Science division supports the work of research centers and industry partners. Enzo Biochem, Inc. has a broad and deep intellectual property portfolio, with patent coverage across many vital enabling technologies.
The accompanying consolidated financial statements include the accounts of Enzo Biochem, Inc. and its wholly-owned subsidiaries, Enzo Life Sciences, Inc. (“Enzo Life Sciences”), Enzo Therapeutics, Inc. (“Enzo Therapeutics”), Enzo Realty LLC (“Enzo Realty”), and Enzo Realty II LLC (“Enzo Realty II”), collectively or with one or more of its subsidiaries referred to as the “Company” or “Companies.” The financial statements also include as discontinued operations the accounts of its wholly owned subsidiary Enzo Clinical Labs, Inc. (“Enzo Clinical Labs”). Effective July 24, 2023 we completed the sale of certain assets used in its clinical services operations to Laboratory Corporation of America Holdings, a Delaware corporation (“Labcorp”), and thereby exited the clinical services business. See Note 2.
The Company has one reportable segment, Products. The consolidated balance sheet as of April 30, 2024, the consolidated statements of operations, comprehensive loss and stockholders’ equity for the three and nine months ended April 30, 2024 and 2023, and the consolidated statements of cash flows for the nine months ended April 30, 2024 and 2023 (the “interim statements”) are unaudited. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present fairly the financial position and operating results for the interim periods have been made. Certain information and footnote disclosure, normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), have been condensed or omitted. The interim statements should be read in conjunction with the consolidated financial statements for the fiscal year ended July 31, 2023 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, 2023 has been derived from the audited financial statements at that date. The results of operations for the nine months ended April 30, 2024 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2024.
Principles of consolidation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries, Enzo Life Sciences (and its wholly-owned foreign subsidiaries), Enzo Therapeutics, Enzo Realty, Enzo Realty II, and Enzo Clinical Labs (a corporate entity with discontinued operations). All intercompany transactions and balances have been eliminated.
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.
7
Contingencies
Contingencies are evaluated and a liability is recorded when the matter is both probable and reasonably estimable. Gain contingencies are evaluated and not recognized until the gain is realizable or realized.
Fair Value Measurements
The Company determines fair value measurements used in its consolidated financial statements based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive of any transaction costs, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy. The basis for fair value measurements for each level within the hierarchy is described below with Level 1 having the highest priority and Level 3 having the lowest.
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.
Level 3 Valuations derived from valuation techniques in which one or more significant inputs are unobservable.
Cash and cash equivalents
Cash
and cash equivalents consist of demand deposits with banks and highly liquid money market funds. At April 30, 2024 and July 31, 2023,
the Company had cash and cash equivalents in foreign bank accounts of $
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of cash and cash equivalents and accounts receivable. The Company believes the fair value of the aforementioned financial instruments approximates the cost due to the immediate or short-term nature of these items. At April 30, 2024 and July 31, 2023, the Company had cash deposited in certain financial institutions in excess of federally insured levels. The Company regularly monitors the financial stability of these financial institutions and believes that it is not exposed to any significant credit risk in cash and cash equivalents or restricted cash.
Concentration of credit risk with respect to the Company’s Products segment is mitigated by the diversity of the Company’s customers and their dispersion across many different geographic regions. To reduce risk, the Company routinely assesses the financial strength of these customers and, consequently, believes that its accounts receivable credit exposure with respect to these customers is limited.
Income Taxes
The Company accounts for income taxes under the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The liability method requires that any tax benefits recognized for net operating loss carry forwards and other items be reduced by a valuation allowance when it is more likely than not that the benefits may not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Under the liability method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
8
Effect of New Accounting Pronouncements - Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-13 Financial Instruments – Credit Losses (Topic 326). This standard changes the impairment model for most financial instruments, including trade receivables, from an incurred loss method to a new forward-looking approach, based on expected losses. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. We adopted this standard for our interim period beginning August 1, 2023 using a modified retrospective transition approach. The impact of the adoption of this standard on our results of operations, financial position and cash flows was not material.
In November 2023, FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (ASU 2023-07), which requires an enhanced disclosure of significant segment expenses on an annual and interim basis. This guidance will be effective for our annual period ending July 31, 2025 and our interim periods beginning August 1, 2025. Early adoption is permitted. Upon adoption, we expect the guidance will be applied retrospectively to all prior periods presented in the financial statements. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
We reviewed all other recently issued accounting pronouncements and have concluded they are not applicable or not expected to be significant to the accounting for our operations.
Note 2 – Discontinued operations
Prior
to July 24, 2023, we operated a clinical laboratory, doing business as Enzo Clinical Labs, which provided reference, molecular and esoteric
diagnostic medical testing services in the New York, New Jersey, and Connecticut medical communities. Effective July 24, 2023, we completed
the sale of certain assets used in the operation of Enzo Clinical Labs and the assignment of certain clinical lab liabilities to Labcorp
for an aggregate purchase price of $
| Three Months Ended April 30 |
Nine Months Ended April 30 |
|||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net revenues | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Legal and related expenses | ||||||||||||||||
| Other (income) expense, net | ( |
) | ( |
) | ||||||||||||
| Income tax (benefit) | ( |
) | — | ( |
) | — | ||||||||||
| Loss from discontinued operations | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
Other expense, net for the nine months ended April 30, 2024 is primarily the cost for a third party to maintain and destroy health records according to statute related to the discontinued operations.
9
| April 30, 2024 |
July 31, 2023 |
|||||||
| Carrying amounts of major current assets included as part of discontinued operations: | ||||||||
| Trade receivables | $ | $ | ||||||
| Prepaid and other current | ||||||||
| Total current assets | ||||||||
| Carrying amounts of major current liabilities included as part of discontinued operations: | ||||||||
| Trade payables and accrued liabilities | ||||||||
| Operating lease liabilities and other | ||||||||
| Total current liabilities | ||||||||
| Current liabilities of discontinued operations, net | ||||||||
| Carrying amount of major non-current assets included as part of discontinued operations: | ||||||||
| Right of use assets | $ | $ | ||||||
| Other | ||||||||
| Total non-current assets | ||||||||
| Carrying amount of major non-current liabilities included as part of discontinued operations: | ||||||||
| Operating lease liabilities and other | ||||||||
| Non-current assets of discontinued operations, net | $ | $ | ||||||
During
the nine months ended April 30, 2024, the cash used in operating and investing activities of the discontinued operations was $
Note 3 – Net income (loss) per share
Basic net income (loss) per share represents net income (loss) divided by the weighted average number of common shares outstanding during the period. The dilutive effect of potential common shares, consisting of outstanding stock options, and unvested restricted stock units and performance stock units, is determined using the treasury stock method. As a result of the net loss for the three and nine months ended April 30, 2024 and 2023, 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, warrants, assumed conversion of debentures, or unearned performance stock units because to do so would be anti-dilutive.
For
the three and nine months ended April 30, 2024, the effect of approximately
10
For
the three and nine months ended April 30, 2023, approximately
Note 4 – Revenue Recognition
Products Revenue
The Company generates 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 revenues.
| Three Months Ended April 30 |
Nine Months Ended April 30 |
|||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||
| Europe | ||||||||||||||||
| Asia Pacific | ||||||||||||||||
| Products revenue | $ | $ | $ | $ | ||||||||||||
As
of August 1, 2023 and 2022, accounts receivable from continuing operations was $
Note 5 – Supplemental disclosure for statement of cash flows
During
the nine months ended April 30, 2024 and 2023, interest paid by the Company was $
For
the nine months ended April 30, 2024 and 2023, the net reductions in the measurement of right of use assets and liabilities included
in cash flows from operating activities was $
In
connection with the completed sale of certain assets used in the operation of Enzo Clinical Labs, $
11
During
the nine months ended April 30, 2024, state taxes paid on the gain on the completed sale of certain assets used in the operation of Enzo
Clinical Labs were $
During
the nine months ended April 30, 2024, the Company disbursed $
Note 6 – Inventories
| April 30, 2024 |
July 31, 2023 |
|||||||
| Raw materials | $ | $ | ||||||
| Work in process | ||||||||
| Finished products | ||||||||
| $ | $ | |||||||
Note 7 – Convertible debentures and other current debt
On
May 19, 2023, 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”). Pursuant
to the Purchase Agreement, the Company agreed to sell to the Purchasers (i)
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. As of April 30, 2024 and July 31, 2023, there were no events of default. The Debentures contain customary representations, warranties and covenants including among other things and subject to certain exceptions, covenants that restrict the Company from incurring additional indebtedness, creating or permitting liens on assets, amending its charter documents and bylaws, repurchasing or otherwise acquiring more than a de minimis number of its Common Stock or equivalents thereof, repaying outstanding indebtedness, paying dividends or distributions, assigning or selling certain assets, making or holding any investments, and entering into transactions with affiliates.
12
| Fair value, July 31, 2023 | $ | |||
| Change in fair value of convertible debentures | ||||
| Fair value, April 30, 2024 | $ |
During the three months ended April 30, 2024,
the change in fair value expense recorded was $
As of April 30, 2024, the outstanding principal
of the Debentures was $
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. Subsequent to the payoff of the Debentures on May 20, 2024, all obligations under the Security Agreement were terminated.
Warrants
The Warrants are exercisable for
Registration Rights Agreement
In connection with the Purchase Agreement, on May 19, 2023, the Company and the Purchasers entered into a Registration Rights Agreement, pursuant to which the Company is obligated to register the shares of Company Common Stock issuable upon exercise of the Debentures and the Warrants. The Company has registered the shares. With the full payoff of the Debentures, there is no longer a right to a conversion of the Debentures into shares.
Note 8 – Long term debt
In April 2020, the Company’s subsidiary in Switzerland received
a loan of CHF
13
| July 31, | Total | |||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Total principal payments | ||||
| Less: current portion | ( |
) | ||
| Long term debt – net | $ | |||
Note 9 – Leases
The Company determines if an arrangement is or contains a lease at contract inception. The Company leases buildings, office space, and equipment through operating 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. 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 (e.g. payments related to maintenance fees, utilities, etc.) which have generally been combined and accounted
for as a single lease component. The Company’s leases have remaining terms of less than
| Leases | Balance Sheet Classification | April 30, 2024 |
July 31, 2023 |
|||||||
| Assets | ||||||||||
| Operating | $ | $ | ||||||||
| Total lease assets | $ | $ | ||||||||
| Liabilities | ||||||||||
| Current: | ||||||||||
| Operating | $ | $ | ||||||||
| Non-current: | ||||||||||
| Operating | ||||||||||
| Total lease liabilities | $ | $ | ||||||||
14
| Three months ended April 30, |
Nine months ended April 30, |
|||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Operating lease cost – net (a) | $ | $ | $ | $ | ||||||||||||
| (a) |
| Maturity of lease liabilities, years ending July 31, | Operating leases |
|||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Total lease payments | ||||
| Less: Interest (a) | ( |
) | ||
| Present value of lease liabilities | $ | |||
| (a) |
| Lease term and discount rate | 2024 | 2023 | ||||||
| Weighted-average remaining lease term (years) - operating leases | ||||||||
| Weighted-average discount rate – operating leases | % | % | ||||||
See Note 5 for cash flow information on cash paid for amounts included in the measurement of lease liabilities for the nine months ended April 30, 2024 and 2023.
Note 10 – Accrued Liabilities and other current liabilities
| April 30, 2024 |
July 31, 2023 |
|||||||
| Payroll, benefits and commissions | $ | $ | ||||||
| Professional fees | ||||||||
| Legal | ||||||||
| Other | ||||||||
| $ | $ | |||||||
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, 2024 and July 31, 2023, the Company had established reserves of $
15
Note 11 – 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 $
Incentive stock plans
In January 2011, the Company’s stockholders approved the adoption
of the 2011 Incentive Plan (the “2011 Plan”) for the issuance of equity awards, including, among others, options, restricted
stock, restricted stock units and performance stock units for up to
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, 2024, 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 or the fair value of our stock at the date of grant. The fair value of awards is amortized to expense on a straight-line basis over the requisite service period. The Company expenses restricted stock awards based on vesting requirements, primarily time elapsed. Performance stock awards are not recognized until it is probable they will be earned. At such time, their expense is then recognized over the requisite service period, including that portion of the service period already elapsed. Options granted pursuant to the plans may be either incentive stock options or non-statutory options. The 2011 Plan provides for the issuance of stock options, restricted stock and restricted stock unit awards which generally vest over a two or three year period.
During the nine months ended April 30, 2024, the Company recognized
$
16
| Three months ended April 30, |
Nine months ended April 30, |
|||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Stock options and performance stock units | $ | $ | $ | $ | ||||||||||||
| Restricted stock units | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Three months ended April 30, |
Nine months ended April 30, |
|||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Selling, general and administrative | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
No excess tax benefits were recognized during the nine month periods ended April 30, 2024 and 2023.
| Options | Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term |
Aggregate Intrinsic Value (000s) |
|||||||||||
| Outstanding at July 31, 2023 | $ | |||||||||||||
| Granted | ||||||||||||||
| Exercised | $ | |||||||||||||
| Cancelled or expired | ( |
) | $ | |||||||||||
| Outstanding at end of period | $ |
|
$ | |||||||||||
| Exercisable at end of period | $ |
|
$ | |||||||||||
As of April 30, 2024, the total future compensation cost related to
non-vested options, not yet recognized in the statements of operations, was $
17
Restricted Stock Units
| Number of RSUs outstanding |
Weighted Average Fair Value per Unit at Date of Grant |
Weighted Average Remaining Contractual Term |
Aggregate Intrinsic Value (000s) |
|||||||||||||
| Outstanding at beginning of fiscal year | $ | |||||||||||||||
| Granted | $ | |||||||||||||||
| Vested | ( |
) | $ | |||||||||||||
| Cancelled | ( |
) | $ | |||||||||||||
| Outstanding at end of period | $ | $ | ||||||||||||||
| Expected to vest at end of period | $ | $ | ||||||||||||||
Certain directors had not received their vested RSU shares, totaling
During the nine months ended April 30, 2024,
During the three and nine months ended April 30, 2024, the Company
recognized shared based compensation expense for RSU’s of $
Performance Stock Units
During the three and nine months ended April 30, 2024, the Company
recognized share based compensation for Performance Stock Units (“PSUs”) because no PSUs were outstanding during either
period. During the three and nine months ended April 30, 2023, the Company recognized $
Note 12 – Segment reporting
The Company has
Legal and related expenses incurred to defend the Company’s intellectual property, which may result in settlements recognized in another segment and other general corporate matters are considered a component of the Corporate & Other segment. Legal and related expenses specific to the Products’ segment’s activities are allocated to that segment.
Management of the Company assesses assets on a consolidated basis only and therefore, assets by reportable segment have not been included in the reportable segments below. The accounting policies of the reportable segment are the same as those described in the summary of significant accounting policies.
18
Three months ended April 30, 2024
| Products | Corporate & Other |
Consolidated | ||||||||||
| Revenues | $ | $ | $ | |||||||||
| 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 | ||||||||||||
| Change in fair value of convertible debentures | ( |
) | ( |
) | ||||||||
| Other | ( |
) | ||||||||||
| Foreign exchange loss | ( |
) | ( |
) | ||||||||
| Loss before taxes | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| Depreciation and amortization included above | $ | $ | $ | |||||||||
| Share-based compensation included above: | ||||||||||||
| Selling, general and administrative | ||||||||||||
| Cost of sales | ||||||||||||
| Total | $ | $ | $ | |||||||||
| Capital expenditures | $ | $ | $ | |||||||||
Three months ended April 30, 2023
| Products | Corporate & Other |
Consolidated | ||||||||||
| Revenues | $ | $ | $ | |||||||||
| Operating costs and expenses: | ||||||||||||
| Cost of revenues | ||||||||||||
| Research and development | ||||||||||||
| Selling, general and administrative | ||||||||||||
| Legal and related expenses | ||||||||||||
| Total operating costs and expenses | ||||||||||||
| Operating loss | ( |
) | ( |
) | ( |
) | ||||||
| Other income (expense) | ||||||||||||
| Interest | ( |
) | ( |
) | ||||||||
| Other | ||||||||||||
| Foreign exchange gain | ||||||||||||
| Loss before taxes | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| Depreciation and amortization included above | $ | $ | $ | |||||||||
| Share-based compensation included above: | ||||||||||||
| Selling, general and administrative | ||||||||||||
| Cost of sales | ||||||||||||
| Total | $ | $ | $ | |||||||||
| Capital expenditures | $ | $ | $ | |||||||||
19
Nine months ended April 30, 2024
| Products | Corporate & Other |
Consolidated | ||||||||||
| Revenues | $ | $ | $ | |||||||||
| 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 | ||||||||||||
| Change in fair value of convertible debentures | ( |
) | ( |
) | ||||||||
| Other | ( |
) | ||||||||||
| Foreign exchange loss | ( |
) | ( |
) | ||||||||
| Loss before taxes | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| Depreciation and amortization included above | $ | $ | $ | |||||||||
| Share-based compensation included above: | ||||||||||||
| Selling, general and administrative | ||||||||||||
| Cost of sales | ||||||||||||
| Total | $ | $ | $ | |||||||||
| Capital expenditures | $ | $ | $ | |||||||||
20
Nine months ended April 30, 2023
| Products | Corporate & Other |
Consolidated | ||||||||||
| Revenues | $ | $ | $ | |||||||||
| Operating costs and expenses: | ||||||||||||
| Cost of revenues | ||||||||||||
| Research and development | ||||||||||||
| Selling, general and administrative | ||||||||||||
| Legal and related expenses | ||||||||||||
| Total operating costs and expenses | ||||||||||||
| Operating loss | ( |
) | ( |
) | ( |
) | ||||||
| Other income (expense) | ||||||||||||
| Interest | ||||||||||||
| Other | ||||||||||||
| Foreign exchange gain | ||||||||||||
| Income (loss) before taxes | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| Depreciation and amortization included above | $ | $ | $ | |||||||||
| Share-based compensation included above: | ||||||||||||
| Selling, general and administrative | ||||||||||||
| Cost of sales | ||||||||||||
| Total | $ | $ | $ | |||||||||
| Capital expenditures | $ | $ | $ | |||||||||
Note 13 – Contingencies
Ransomware Attack
In April 2023, the Company experienced a ransomware attack (the “ransomware
attack”) that impacted certain critical information technology systems. In response, we promptly deployed containment measures,
including disconnecting our systems from the internet, launching an investigation with assistance from third-party cybersecurity experts,
and notifying law enforcement. We adhered to our disaster recovery plan, which enabled us to maintain operations throughout the incident
response process. We are in the process of evaluating the full scope of the costs and related impacts of this incident. The Company’s
facilities remained open, and we continued to provide services to patients and partners. We later became aware that certain data, including
names, test information, and Social Security numbers, was accessed, and in some instances, exfiltrated from the Company’s information
technology systems as part of this incident. The investigation identified unauthorized access to or acquisition of clinical test information
of approximately
Enzo Biochem is currently subject to regulatory inquiry from the New York Attorney General, a joint inquiry from the Connecticut and New Jersey Attorneys General and an inquiry from the Utah Attorney General. All inquiries ask questions about the ransomware attack, as well as the corrective actions taken in response. We are unable to evaluate the likelihood of an outcome, favorable or unfavorable, to the Company or to estimate the amount or range of any potential liability, if any, at this time.
21
Enzo Biochem is also subject to regulatory inquiries from the U.S. Department of Health and Human Services Office for Civil Rights (the “Office for Civil Rights”) regarding the ransomware attack. It is not known at this time whether the Office for Civil Rights will seek a penalty against the Company. We are unable to evaluate the likelihood of an outcome, favorable or unfavorable, to the Company or to estimate the amount or range of any potential liability, if any, at this time.
There is also pending Class Action litigation:
In re Enzo Biochem Data Breach Litigation, No. 2:23-cv-04282 (EDNY)
In the Eastern District of New York twenty putative class actions have been consolidated alleging various harms stemming from the April 2023 data incident. Interim lead counsel has been appointed and filed a Consolidated Amended Complaint on November 13, 2023. The complaint seeks to certify a federal class as well as several state subclasses. The Consolidated Amended Complaint brings various statutory and common law claims including negligence, negligence per se, breach of fiduciary duty, breach of implied contract, breach of the implied covenant of good faith and fair dealing, violation of the New York’s General Business Law § 349, Invasion of Privacy, violations of the Connecticut Unfair Trade Practices Act, and violations of the New Jersey Consumer Fraud Act. The Company filed its motion to dismiss on April 8, 2024. Plaintiffs filed their Opposition on May 23, 2024 and our Reply was filed on May 30, 2024. We are now awaiting the court’s decision.
Maria Sgambati et al., v. Enzo Biochem, Inc., et al., Index No. 619511/2023 (N.Y. Sup. Ct.)
This is a putative class action pending in state court alleging various harms stemming from the April 2023 data incident. The complaint seeks to certify a class of New York residents. The complaint brings claims of negligence; negligence per se; breach of implied covenant and good faith and fair dealing; breach of duty; breach of implied contract; and violations of New York’s Deceptive Acts and Practices § 349. This court granted our motion to stay the case pending the outcome of the federal action in the Eastern District of New York.
Louis v. Enzo Biochem, Inc. et al., Index No. 653281/2023 (N.Y. Sup. Ct.)
This is a putative class action pending in state court alleging various harms stemming from the April 2023 data incident. The complaint seeks to certify a class of New York citizens. The complaint brings claims of negligence; negligence per se; breach of duty, breach of implied contract; breach of implied covenant of good faith and fair dealing; and violations of New York’s Deceptive Acts and Practices § 349. We have filed a motion to stay this action pending the resolution of the federal action in the Eastern District of New York and the motion remains pending.
A provision was made in the financial statements as of July 31, 2023 for the above matters based on a reasonable estimate of loss; however, the actual exposure may differ.
Patent Matters
The Company (as plaintiff) has brought cases in the United States District Court for the District of Delaware (“the Court”), alleging patent infringement against various companies. At this time, the majority of such cases have been resolved.
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.
On September 2, 2021, the U.S. Patent and Trademark Office (“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.
22
Arbitration with former executives
The Company terminated the employment of Elazar Rabbani, Ph.D., the
Company’s former Chief Executive Officer, effective April 21, 2022. Dr. Rabbani was a board director of the Company until
the Annual Meeting on January 31, 2024, when his term expired. Dr. Rabbani was a party to an employment agreement with the Company that
entitled him to certain termination benefits, including severance pay, acceleration of vesting of share-based compensation, and continuation
of benefits. Based on the terms of his employment agreement, the Company estimated and accrued a charge of $
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 October 24, 2023, the Company and Mr. Weiner reached an agreement
resolving the dispute and a provision was made in the financial statements as of July 31, 2023 based on the settlement agreement. The
Company paid Mr. Weiner $
Other Matters
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 (as plaintiff) v. Mary Tagliaferri, et al. (as defendants), Index No. 651120/2023. The verified complaint purports to assert causes of action for breach of fiduciary duty and corporate waste under N.Y.B.C.L. § 720, and seeks an accounting and certain injunctive relief. Plaintiff served a copy of the verified complaint on Enzo’s agent for service in New York on or about March 13, 2023. On August 4, 2023, defendants moved to dismiss all the causes of action asserted in the verified complaint. Plaintiff filed an amended complaint on or about October 4, 2023, adding, among other things, an additional cause of action for violation of N.Y.B.C.L. § 626. On October 23, 2023, Defendants filed a reply in further support of their motion to dismiss. On October 24, 2023, Plaintiff sought leave to file an opposition brief. Defendants filed an opposition to that request on October 26, 2023. On October 31, 2023, in response to a question from the Court’s law clerk, Defendants reiterated that they had elected to apply their original motion to dismiss to the amended pleading. On November 6, 2023, Plaintiff filed an opposition to Defendants’ motion to dismiss. On November 17, 2023, Defendants filed a reply brief in further support of their motion to dismiss the Amended Complaint. The Company cannot predict the outcome of this matter. Oral argument on Defendants’ motion to dismiss is scheduled for June 18, 2024.
On or about September 26, 2023, James G. Wolf, Individually and as the Trustee of the Wolf Family Charitable Foundation, Barbaranne R. Wolf, Stephen Paul Wolf, and Preston M. Wolf initiated an appraisal action against Enzo Biochem, Inc. in the New York Supreme Court for Suffolk County. Petitioners seek an appraisal of the value of their shares in the Company. The amount of damages sought by the Petitioners is unspecified. The Company will defend itself vigorously in the appraisal action.
23
In our discontinued Clinical Labs operations, third-party payers, including government programs, may decide to deny payment or recoup payments for testing that they contend was improperly billed or not medically necessary, against their coverage determinations, or for which they believe they have otherwise overpaid (including as a result of their own error), and we may be required to refund payments that we received. In April 2024, the Company engaged in settlement negotiations for a government payer and reached a verbal settlement. A provision is included in the financial statements based on a reasonable estimate of loss; however, the actual exposure may differ.
Note 14 – Departure and Appointment of Certain Officers
On September 5, 2023, the Company entered into a Separation Agreement and General Release (the “Separation Agreement”) with Hamid Erfanian, the Company’s Chief Executive Officer, which provides for Mr. Erfanian’s separation of employment, resignations from his positions as Chief Executive Officer and as a director of the Company and the payment of severance benefits as described below. Pursuant to the Separation Agreement, Mr. Erfanian’s resignations as Chief Executive Officer and as a director became effective immediately and his final date of employment with the Company was November 18, 2023 (the “Separation Date”).
Pursuant to the Separation Agreement, Mr. Erfanian is entitled
to the following severance benefits: (i) a payment equaling twelve (12) months of his annual base salary of $
The severance benefits with respect to salary and bonus were accrued during the three months ended October 31, 2023. The share-based charges related to the immediate vesting of the remainder of the restricted stock unit award and options granted upon employment were also recognized during the three months ended October 31, 2023.
On September 5, 2023, the Company’s board of directors appointed Kara Cannon, the Company’s Chief Operating Officer, to serve as Interim Chief Executive Officer of the Company, which became effective immediately upon Mr. Erfanian’s resignation as Chief Executive Officer. On January 31, 2024, the Company’s board of directors appointed Kara Cannon as the Company’s Chief Executive Officer and Patricia Eckert, CPA as the Company’s Chief Financial Officer.
24
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 (within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)). All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q, including statements regarding the Company’s future financial condition, results of operations and products in research and development may include forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historic or current facts. They typically use words such as “anticipate”, “estimate”, “expect”, “project”, “intend”, “plan”, “believe”, “will”, and other words and terms of similar meaning in connection with any discussion of future operations or financial performance. All forward-looking statements are subject to important factors, risks, uncertainties, and assumptions, including industry and economic conditions, that could cause actual results to differ materially from those described in the forward-looking statements.
Forward-looking statements may include, without limitation, statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, interest rates, foreign currency rates, intellectual property matters, the outcome of contingencies, such as legal proceedings, and future 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, 2023 fiscal year. You are advised to consult any further disclosures we make on related subjects in our periodic reports on Forms 10-Q, 8-K and 10-K filed with the Securities and Exchange Commission. Although we have attempted to provide a list of important factors which may affect our business, investors are cautioned that other factors may prove to be important in the future and could affect our operating results.
You should understand that it is not possible to predict or identify all such factors or to assess the impact of each factor or combination of factors on our business. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.
Overview
The Company’s Enzo Life Sciences Products reporting unit, as described below, operates in our one reportable segment, Products, and is a global company affected by different US and global economic conditions. Our company evolved out of our core competence: the use of nucleic acids as informational molecules and the use of compounds for immune modulation. Costs excluded from this reporting unit and reported as “Corporate and Other” consist of corporate general and administrative costs which are not allocable to the reportable segment. Below is a brief description of this operating segment (see Note 12 in the Notes to Consolidated Financial Statements).
25
Enzo Life Sciences Products operates through the Company’s wholly owned subsidiary, Enzo Life Sciences, Inc. (“Enzo Life Sciences”). It manufactures, develops and markets products and tools to life sciences, drug development and clinical research customers world-wide and has amassed a large patent and technology portfolio. Enzo Life Sciences is a recognized leader in labeling and detection technologies across research and diagnostic markets. Our strong portfolio of proteins, antibodies, peptides, small molecules, labeling probes, dyes and kits provides life science researchers tools for target identification/validation, high content analysis, gene expression analysis, nucleic acid detection, protein biochemistry and detection, and cellular analysis. It is globally recognized and acknowledged as a leader in manufacturing, in-licensing, and commercialization of over 20,000 products. The strategic focus of this segment is directed to innovative high quality research reagents and kits in the primary key research areas of genomics, immunohistochemistry, immunoassays, cellular analysis, and small molecule chemistry. The segment is an established source for a comprehensive panel of products to scientific experts in the fields of cancer, cardiovascular disease, neurological disorders, diabetes and obesity, endocrine disorders, infectious and autoimmune disease, hepatotoxicity and renal injury.
Discontinued operations – sale of Clinical Services business to Labcorp
Effective July 24, 2023, pursuant to an Asset Purchase Agreement, dated March 16, 2023 (the “Asset Purchase Agreement”), we completed the sale of certain assets used in the operation of Enzo Clinical Labs and the assignment of certain clinical lab liabilities to Laboratory Corporation of America Holdings, a Delaware corporation (“Labcorp”) for an aggregate purchase price of $113.25 million in cash, subject to customary closing adjustments (such assets and liabilities, the “clinical services business”). In connection with the sale, $5 million of escrowed proceeds were included in prepaid and other assets as of April 30, 2024 and in other assets as of July 31, 2023 In accordance with the sale, we ceased our clinical services operations. As a consequence of the sale, for the three and nine months ended April 30, 2024 and 2023 we have classified as discontinued operations all income and expenses attributable to the clinical services business.
Discontinued Operations Carve Out and Expense Allocations
As a consequence of the sale of the clinical services business, for the three and nine months ended April 30, 2024 and 2023, results from operations for that business are classified as discontinued operations, as are its assets and liabilities as of April 30, 2024 and July 31, 2023. The carve out of the discontinued operations was prepared in accordance with the Securities and Exchange Commission’s carve out rules under ASC 205-20 Discontinued Operations and is derived from identifying and carving out the specific assets, liabilities, operating expenses and interest expense associated with the clinical services business’s operations. Certain administrative and overhead expenses, including personnel expenses, which were incurred by us (for which the discontinued operation benefited from such resources) are allocated out of the discontinued operations based upon the identification of those allocated expenses and to the continuing operations.
For the three and nine months ended April 30, 2023, we allocated $527 and $1,623, respectively of selling, general and administrative expenses from the discontinued operations to the continuing operations in the accompanying results of operations tables and explanations.
Ransomware attack
In April 2023, the Company experienced a ransomware attack that impacted certain critical information technology systems. In response, we promptly deployed containment measures, including disconnecting our systems from the internet, launching an investigation with assistance from third-party cybersecurity experts, and notifying law enforcement. We adhered to our disaster recovery plan, which enabled us to maintain operations throughout the incident response process. The Company’s facilities remained open, and we continued to provide services to patients and partners. We later became aware that certain data, including names, test information, and Social Security numbers, was accessed, and in some instances, exfiltrated from the Company’s information technology systems as part of this incident. The investigation identified unauthorized access to or acquisition of clinical test information of approximately 2,470,000 individuals. The Social Security numbers of approximately 600,000 of these individuals may also have been involved. Additionally, the Company has determined that some employees’ information may have been involved. The Company has provided notice to the individuals whose information may have been involved, as well as to regulatory authorities, in accordance with applicable law. The Company has incurred, and may continue to incur, related expenses. The Company’s cybersecurity insurance carrier is covering up to $3 million of the remediation costs related to this incident and is paying all service providers directly from the policy.
The Company remains subject to risks and uncertainties as a result of the incident, including as a result of the data that was accessed or exfiltrated from the Company’s network as noted above. Additionally, security and privacy incidents have led to, and may continue to lead to, additional regulatory scrutiny and class action litigation exposure. We are in the process of evaluating the full scope of the costs and related impacts of this incident. See Note 13 of the consolidated financial statements for discussion of litigation in connection with this incident.
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Results of Operations from Continuing Operations
Three months ended April 30, 2024 compared
to April 30, 2023
(in $000s)
Comparative Financial Data from Continuing Operations for the three months ended April 30,
| 2024 | 2023 | Favorable (Unfavorable) |
% Change |
|||||||||||||
| Revenues | $ | 8,022 | $ | 7,485 | $ | 537 | 7 | |||||||||
| Operating costs and expenses: | ||||||||||||||||
| Cost of revenues | 4,289 | 4,476 | 187 | 4 | ||||||||||||
| Research and development | 605 | 884 | 279 | 32 | ||||||||||||
| Selling, general and administrative | 4,479 | 6,212 | 1,733 | 28 | ||||||||||||
| Legal and related expenses | 692 | 4,265 | 3,573 | 84 | ||||||||||||
| Total operating costs and expenses | 10,065 | 15,837 | 5,772 | 36 | ||||||||||||
| Operating loss | (2,043 | ) | (8,352 | ) | 6,309 | 76 | ||||||||||
| Other income (expense): | ||||||||||||||||
| Interest, net | 726 | (36 | ) | 762 | ** | |||||||||||
| Fair value adjustment | (384 | ) | — | (384 | ) | ** | ||||||||||
| Other | 94 | 144 | (50 | ) | (34 | ) | ||||||||||
| Foreign exchange (loss) gain | (524 | ) | 347 | (871 | ) | ** | ||||||||||
| Loss before income taxes | $ | (2,131 | ) | $ | (7,897 | ) | $ | 5,766 | 73 | |||||||
| ** | not meaningful |
Consolidated Results:
The “2024 period” and the “2023 period” refer to the three months ended April 30, 2024 and April 30, 2023, respectively.
Product revenues were $8.0 million in the 2024 period and $7.5 million in the 2023 period, an increase of approximately $0.5 million or 7%. During the 2024 period, we experienced a 40% increase in revenues in European markets, driven by an increase in the marketing effort in drug development product sales and a 15% increase in revenues in the Asia Pacific market. These increases were partially offset by a slight decrease in revenues from the US market period over period.
The cost of Product revenues was $4.3 million in the 2024 period and $4.5 million in the 2023 period, a decrease of $0.2 million or 4%. The gross profit margin for Products was approximately 47% in the 2024 period and 40% in the 2023 period. The 2024 period gross profit was positively impacted by the more positive mix of the types of products sold and lower input costs. The 2023 period was negatively impacted by the impact of inflation on materials cost and market adjustment salary increases.
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Research and development expenses were $0.6 million in the 2024 period and $0.9 million in the 2023 period, a decrease of $0.3 million or 32%. Throughout the 2024 period there were no research and development activities pertaining to translational research due to our exiting the clinical reference business at the end of fiscal 2023.
Selling, general and administrative expenses were $4.5 million during the 2024 period versus $6.2 million during the 2023 period, a decrease of $1.7 million or 28%. The Corporate and Other segment expense decreased $1.5 million during the 2024 period primarily due to the consulting and other professional fees incurred in the 2023 period related to the Asset Purchase Agreement (as defined above), a revolving credit facility, the ransomware attack, and lower salaries and share based compensation for our senior officers in the 2024 period.
Legal and related expenses were $0.7 million during the 2024 period and $4.3 million in the 2023 period, a decrease of $3.6 million or 84%. During the 2023 period, we required significant legal expertise and assistance associated with matters related to the Asset Purchase Agreement, a revolving credit facility, the ransomware attack, the Debentures, and matters relating to arbitrations with two former senior executives, one of which was settled during the 2024 period and one of which is ongoing.
Interest income, net was $0.7 million in the 2024 period compared to $0.1 interest expense in the 2023 period, a favorable variance of $0.8 million. The 2024 period’s interest income was earned on the net proceeds from the Asset Purchase Agreement, which are on deposit in a money market fund. In the 2024 period we incurred interest expense on the Debentures which partially offset some of the interest income. In the 2023 period, we earned some interest in a money market fund which was offset by interest expense, primarily on a mortgage and a revolving credit facility.
We recorded a fair value adjustment charge of approximately $0.4 million for the Debentures based on their fair value as of April 30, 2024, which were due and fully repaid in May 2024.
Other income in both periods is primarily from the subletting of a portion of our office space in New York, NY.
The foreign exchange loss recognized by the Products segment during the 2024 period was $0.5 million compared to gain of $0.4 million in the 2023 period, an unfavorable variance of $0.9 million.
The foreign exchange revaluation loss in the 2024 period was primarily due to the appreciation of the U.S. dollar versus the Swiss franc as at the end of the period compared to its start and the negative impact that had when the Swiss operating entity’s U.S dollar liabilities were revalued into Swiss francs. The gain during the 2023 period was due to the depreciation of U.S. dollar versus the Swiss franc and British pound as of the end of that period compared to its start and the positive impact that had when the Swiss operating entity’s U.S dollar liabilities were revalued into Swiss francs and when certain British pound denominated assets were revalued into U.S. dollars.
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Results of Operations from Continuing Operations
Nine months ended April 30, 2024 compared
to April 30, 2023
(in $000s)
Comparative Financial Data from Continuing Operations for the nine months ended April 30,
| 2024 | 2023 | Favorable (Unfavorable) |
% Change |
|||||||||||||
| Revenues | $ | 24,381 | $ | 22,102 | $ | 2,279 | 10 | |||||||||
| Operating costs and expenses: | ||||||||||||||||
| Cost of revenues | 12,969 | 13,681 | 712 | 5 | ||||||||||||
| Research and development | 2,035 | 2,708 | 673 | 25 | ||||||||||||
| Selling, general and administrative | 16,550 | 17,078 | 528 | 3 | ||||||||||||
| Legal and related expenses | 2,527 | 6,160 | 3,633 | 59 | ||||||||||||
| Total operating costs and expenses | 34,081 | 39,627 | 5,546 | 14 | ||||||||||||
| Operating loss | (9,700 | ) | (17,525 | ) | 7,825 | 45 | ||||||||||
| Other income (expense): | ||||||||||||||||
| Interest, net | 2,595 | 99 | 2,496 | ** | ||||||||||||
| Fair value adjustment | (1,095 | ) | — | (1,095 | ) | ** | ||||||||||
| Other | 373 | 262 | 111 | 42 | ||||||||||||
| Foreign exchange (loss) gain | (842 | ) | 1,022 | (1,864 | ) | ** | ||||||||||
| Loss before income taxes | $ | (8,669 | ) | $ | (16,142 | ) | $ | 7,473 | 46 | |||||||
| ** | not meaningful |
Consolidated Results:
The “2024 period” and the “2023 period” refer to the nine months ended April 30, 2024 and April 30, 2023, respectively.
Product revenues were $24.4 million in the 2024 period and $22.1 million in the 2023 period, an increase of approximately $2.3 million or 10%. During the 2024 period, we experienced a 10% increase in the US market, a 16% increase in the European market, and a 2% increase in the Asia Pacific market. The increase in revenues was driven by an increase in the marketing effort in drug development and cell and gene therapy markets.
The cost of Product revenues was $13.0 million in the 2024 period and $13.7 million in the 2023 period, a decrease of $0.7 million or 5%. The gross profit margin for Products was approximately 47% in the 2024 period and 38% in the 2023 period. The 2024 period gross profit was positively impacted by the more profitable mix of the types of products sold, higher revenues sourced from the US market, and lower input costs. The 2023 period was negatively impacted by the impact of inflation on materials cost and market adjustment salary increases.
Research and development expenses were $2.0 million in the 2024 period and $2.7 million in the 2023 period, a decrease of $0.7 million or 25%. As of the start of the 2024 period, we had ended our research and development activities into translation products due to our exiting the clinical reference business.
Selling, general and administrative expenses were $16.6 million during the 2024 period versus $17.1 million during the 2023 period, a decrease of $0.5 million or 3%. The Corporate and Other segment expense decreased $0.8 million during the 2024 period primarily due to the consulting and other professional fees incurred in the 2023 period related to the Asset Purchase Agreement, a revolving credit facility, the ransomware attack, and lower salaries and share based compensation for our senior officers in the 2024 period. The Products segment expense in the 2024 period increased approximately $0.3 million compared to the 2023 period due to investments in information technology and sales and marketing.
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Legal and related expenses were $2.5 million during the 2024 period and $6.2 million in the 2023 period, a decrease of $3.6 million or 59%. During the 2023 period, we required significant legal expertise and assistance associated with matters related to the Asset Purchase Agreement, a credit facility, the ransomware attack, the convertible debentures, and matters relating to arbitrations with two former senior executives, one of which was settled during the 2024 period and one of which is ongoing.
Interest income, net was $2.6 million in the 2024 period and $0.1 million in the 2023 period, a favorable variance of $2.5 million. The 2024 period’s interest income was earned on the net proceeds from the Asset Purchase Agreement, which are on deposit in a money market fund. In the 2024 period we incurred interest expense on the Debentures which partially offset some of the interest income. In the 2023 period, we earned some interest in a money market fund which was offset by interest expense, primarily on a mortgage and a revolving credit facility.
During the 2024 period we recorded a fair value adjustment charge of approximately $1.1 million for the Debentures based on their fair value as of April 30, 2024, which were due and fully repaid in May 2024.
Other income in both periods is primarily from the subletting of a portion of our office space in New York, NY.
The foreign exchange loss recognized by the Products segment during the 2024 period was approximately ($0.9) million compared to gain of $1.0 million in the 2023 period, an unfavorable variance of $1.9 million. The foreign exchange revaluation loss in the 2024 period was primarily due to the depreciation of the Swiss franc versus the Great British pound and Euro as at the end of the period compared to its start and the negative impact that had when the Swiss operating entity’s pound and Euro receivables were revalued into Swiss francs. The gain during the 2023 period was due to the depreciation of the U.S. dollar versus the British pound and Swiss franc as of the end of that period compared to its start and the positive impact that had when revaluing certain British pound denominated assets and the Swiss operating entity’s U.S. dollar liabilities into U.S. dollars.
Liquidity and Capital Resources
Our aggregate cash and cash equivalents and restricted cash as of April 30, 2024 and July 31, 2023 was $57.2 million and $83.4 million, respectively. Our working capital was $54.1 million and $58.5 million as of April 30, 2024 and July 31, 2023, respectively. The decrease of $26.2 million in our cash and cash equivalents and restricted cash balance as of April 30, 2024 was primarily due to the period net loss and by cash used to pay down accounts payable – trade and accrued liabilities, particularly those of the discontinued operations. Based on the current available working capital, management believes the Company has sufficient funds to meet it operating requirements for the next twelve months from the date of the filing of this report.
Net cash used in operating activities during the 2024 period was $25.2 million, compared to $19.9 million during the 2023 period, an unfavorable variance of $5.3 million, due to the paydown of accounts payable – trade and accrued liabilities in the 2024 period.
Net cash used in investing activities during the 2024 and 2023 period was approximately $0.4 million and $2.2 million, respectively and represents capital expenditures.
Net cash used in financing activities in the 2024 period amounted to $0.6 and primarily represents cash payments for withholding taxes on bonuses paid in stock. Net cash provided by financing activities in the 2023 period primarily represents net proceeds from borrowings under a revolving credit agreement.
The Company is a defendant in a number of legal matters, including class action lawsuits related to the ransomware attack of its information technology systems which occurred in April 2023. We face a significant risk due to ongoing litigation that has the potential to result in future financial obligations, adversely impacting the Company’s business and profitability.
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Management is not aware of any other trends, events or uncertainties that have or are reasonably likely to have a material negative impact upon our (i) short-term or long-term liquidity, or (ii) net sales or income from continuing operations. Our business is subject to seasonal variations thereby impacting our liquidity and working capital during the course of our fiscal year. To the extent that we do not generate sufficient cash from operations, our cash balances will decline. We may also use our cash to explore and/or acquire new product technologies, applications, product line extensions, or other new business opportunities. In the event that our available cash is insufficient to support such initiatives, we may need to incur indebtedness or issue Common Stock to finance plans for growth. Volatility in the credit markets and the liquidity of major financial institutions may have an adverse effect on our ability to fund our business strategy through borrowings in the public or private markets on terms that we believe to be reasonable, if at all.
Labcorp Asset Purchase Agreement
We have indemnification obligations to Labcorp under the Asset Purchase Agreement that may require us to make future payments to Labcorp and other related persons for any damages incurred by Labcorp or such related persons as a result of any breaches of our representations, warranties, covenants or agreements contained in the Asset Purchase Agreement, or arising from the Retained Liabilities (as such term is defined in the Asset Purchase Agreement) or certain third-party claims specified in the Asset Purchase Agreement. Generally, our representations and warranties survive for a period of 15 months from the closing date, which was July 24, 2023, other than certain fundamental representations which survive until the expiration of the applicable statute of limitations. There is an indemnification cap with respect to a majority of the Company’s indemnification obligations under the Asset Purchase Agreement with the exception of claims for actual fraud, the breach of any fundamental representations and certain other items, which are subject to a higher indemnification cap (up to the purchase price). Pursuant to the terms of the Asset Purchase Agreement, we, Labcorp, and an escrow agent entered into an Escrow Agreement at closing, pursuant to which Labcorp deposited $5 million of the aggregate purchase price of the clinical service business into an escrow account established with the Escrow Agent in order to satisfy, in whole or in part, certain of our indemnity obligations, if any, that arise under the Asset Purchase Agreement. If, on the 15-month anniversary of the closing date, there are funds remaining in the escrow account, the Escrow Agent will release any funds remaining in the escrow account to us minus any amounts being reserved for escrow claims asserted by Labcorp prior to such date. Upon the resolution of any pending escrow claims, the Escrow Agent will, within two business days of receipt of joint instructions or a final order from a court (as described in the Escrow Agreement) disburse such reserved amount to the parties entitled to such funds. Through the date of this filing, no material escrow claims with respect to indemnity obligations have been asserted.
Off Balance Sheet Arrangements
The Company does not have any “off-balance sheet arrangements” as such term is described in Item 303(a)(4) of Regulation S-K.
General and estimates
The Company’s discussion and analysis of its financial condition and results of operations are based upon Enzo Biochem, Inc.’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and judgments also affect related disclosure of contingent assets and liabilities.
On an on-going basis, we evaluate our estimates, including those related to contractual expense, allowance for expected credit losses, inventory, 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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Contingencies
Contingencies are evaluated and a liability is recorded when the matter is both probable and reasonably estimable. Gain contingencies are evaluated and not recognized until the gain is realizable or realized.
Product revenues
Products revenues consist of the sale of single-use products used in the identification of genomic information and are recognized at a point in time following the transfer of control of such products to the customer, which generally occurs upon shipment. Payment terms for shipments to end-user and distributor customers may range from 30 to 90 days. Any claims for credit or return of goods may be made generally within 30 days of receipt. Revenues are reduced to reflect estimated credits and returns, although historically these adjustments have not been material. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenue. Amounts billed to customers for shipping and handling are included in revenue, while the related shipping and handling costs are reflected in cost of products.
Accounts Receivable
Accounts receivable are reported at realizable value, net of expected credit losses, which is estimated and recorded in the period of the related revenue.
As of April 30, 2024 and July 31, 2023, Products accounts receivable, net were $3,935 and $4,808, respectively. As of April 30, 2024 and July 31, 2023, these totals include foreign receivables, net, of $1,276 and $1,277, respectively.
Income Taxes
The Company accounts for income taxes under the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The liability method requires that any tax benefits recognized for net operating loss carry forwards and other items be reduced by a valuation allowance where it is not more likely than not the benefits will be realized in the foreseeable future. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under the liability method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. It is the Company’s policy to provide for uncertain tax positions, if any, and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. To the extent the Company prevails in matters for which a liability for an unrecognized tax benefit is established or is required to pay amounts in excess of the liability, the Company’s effective tax rate in a given financial statement period may be affected.
Inventory
The Company values inventory at the lower of cost (first-in, first-out) or net realizable value. Work-in-process and finished goods inventories consist of material, labor, and manufacturing overhead. Write downs of inventories to net realizable value are based on a review of inventory quantities on hand and estimated sales forecasts based on sales history and anticipated future demand. Unanticipated changes in demand could have a significant impact on the value of our inventory and require additional write downs of inventory which would impact our results of operations.
Long-Lived Assets
The Company reviews the recoverability of the carrying value of long-lived depreciable assets of an asset or asset group for impairment if indicators of potential impairment exist. Should indicators of impairment exist, the carrying values of the depreciable assets are evaluated in relation to the operating performance and future undiscounted cash flows of an asset or asset group. The net book value of the depreciable long lived asset is adjusted to fair value if its expected future undiscounted cash flow is less than its book value.
During the three and nine months ended April 30, 2024 and 2023 there was no impairment of depreciable long-lived assets used in continuing operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are not required to provide the information required by this Item.
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Item 4. Controls and Procedures
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 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 each of our principal executive officer and 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.
As previously disclosed on Current Reports on Form 8-K dated April 13, 2023, and May 30, 2023, respectively, the Company experienced a ransomware attack that impacted certain critical information technology systems. In response, the Company promptly deployed containment measures, including disconnecting its systems from the internet, launching an investigation with assistance from third-party cybersecurity experts, and notifying law enforcement. The Company adhered to 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 ensure that standard systems and accounting processes could operate effectively. As a result, a reasonable possibility exists that a material misstatement of the Company’s annual or interim financial statements would not be prevented or detected and corrected in a timely manner. The following is a description of the material weakness identified:
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 attack; |
| o | additional workload associated with process workflows that were previously automated but were manually performed as a result of the ransomware attack. |
| ● | We were required to supplement resources and as a result, did not adequately perform in a timely manner the following: |
| o | assessment, redesign and timely evaluation of performance of controls over financial reporting risks as a result of existing IT circumstances; and |
| o | generate real time information across the organization to allow the finance department to perform timely application of controls; and |
| o | Internal controls over financial reporting related to the recording and processing of revenue transactions could not be completed timely using standard methods due to the limitations of access to data. |
Management began remediation measures during and after the April 30, 2023 period end which were substantially implemented by July 31, 2023. During the nine months of the fiscal year ending July 31, 2024, evaluation of certain controls’ effectiveness could not be performed according to the typical frequency or sufficient evidence of control performance was not available for testing due to the cyber incident.
Changes in Internal Control Over Financial Reporting
Management assessed the effectiveness of our internal control over financial reporting as of April 30, 2024. In making this assessment, management used the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management has concluded that, as of April 30, 2024, our internal control over financial reporting was not effective because the nine months of the period included timeframes during which specific data was not available for testing.
Except as otherwise described above, there was no change in our internal control over financial reporting that occurred during the third quarter of fiscal 2024 that has materially affected, or is 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, 2023 filed with the Securities and Exchange Commission, other than as noted in Note 13 to the Consolidated Financial Statements as of April 30, 2024, which is incorporated herein by reference.
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, 2023.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Item 6. Exhibits
| Exhibit No. | Exhibit | |
| 31.1 | Certification of Kara Cannon pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of Patricia Eckert pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Certification of Kara Cannon pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Certification of Patricia Eckert pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101. INS* | Inline XBRL Instance Document. | |
| 101. SCH* | Inline XBRL Taxonomy Extension Schema Document. | |
| 101. CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| * | XBRL (Extensible Business Reporting Language) information is being furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ENZO BIOCHEM, INC. | ||
| (Registrant) | ||
| Date: June 13, 2024 | by: | /s/ Patricia Eckert |
|
Chief Financial Officer and Principal Accounting Officer |
||
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