Basis of Presentation
|9 Months Ended|
Apr. 30, 2023
|Accounting Policies [Abstract]|
|Basis of Presentation||
Note 1 – Basis of Presentation
The accompanying consolidated financial statements include the accounts of Enzo Biochem, Inc. and its wholly-owned subsidiaries, Enzo Life Sciences, Enzo Clinical Labs, Enzo Therapeutics, Enzo Realty LLC and Enzo Realty II LLC, collectively or with one or more of its subsidiaries referred to as the “Company” or “Companies”. The Company has two reportable segments: Clinical Services and Products. The consolidated balance sheet as of April 30, 2023, the consolidated statements of operations, comprehensive loss and stockholders’ equity for the three and nine months ended April 30, 2023 and 2022, and the consolidated statements of cash flows for the nine months ended April 30, 2023 and 2022 (the “interim statements”) are unaudited. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present fairly the financial position and operating results for the interim periods have been made. Certain information and footnote disclosure, normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), have been condensed or omitted. The interim statements should be read in conjunction with the consolidated financial statements for the year ended July 31, 2022 and notes thereto contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. The consolidated balance sheet at July 31, 2022 has been derived from the audited financial statements at that date. The results of operations for the three and nine months ended April 30, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2023.
Change in segment reporting
Historically, we engaged in the research and development of therapeutic candidates through Enzo Therapeutics, a biopharmaceutical venture that was developing multiple novel approaches in the areas of gastrointestinal, infectious, ophthalmic and metabolic diseases, many of which were derived from the researching work of Enzo Life Sciences. Enzo Therapeutics focused its efforts on researching treatment regimens for diseases and conditions for which treatment options were ineffective, costly, and/or caused unwanted side effects. This focus generated a clinical and preclinical pipeline, as well as numerous patents and patent applications with Enzo Therapeutics as the assignee. At the beginning of fiscal 2023, we determined we would redirect our research resources and efforts to our two operating segments, Clinical Services and Products, and no longer consider Enzo Therapeutics a segment. The operating results of Enzo Therapeutics are now included in the “Other” segment. The prior period segment information for the three and nine months ended April 30, 2022 reported in Note 11 has been restated to be included in the “Other” segment. The operating expenses of Enzo Therapeutics for the three and nine months ended April 30, 2023 now included in the “Other” segment were $12 and $33, respectively. The operating expenses of Enzo Therapeutics for the three and nine months ended April 30, 2022 now included in the “Other” segment were $9 and $34, respectively.
On April 6, 2023, the Company experienced a ransomware attack that impacted certain critical information technology systems. In response, we promptly deployed containment measures, including disconnecting our systems from the internet, launching an investigation with assistance from third-party cybersecurity experts, and notifying law enforcement. We adhered to our disaster recovery plan, which enabled us to maintain operations throughout the incident response process. The Company’s facilities are open, and continue to provide services to patients and partners. On April 11, 2023, we became aware that certain data, including names, test information, and Social Security numbers, was accessed, and in some instances, exfiltrated from the Company’s information technology systems as part of this incident. The investigation of this incident and the assessment of its impact is ongoing. However, the Company identified unauthorized access to or acquisition of clinical test information of approximately 2,470,000 individuals. The Social Security numbers of approximately 600,000 of these individuals may also have been involved. The Company is evaluating whether its 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, certain expenses related to this attack, including expenses to respond to, remediate and investigate this matter. Further, the Company remains subject to risks and uncertainties as a result of the incident, including as a result of the data that was accessed or exfiltrated from the Company’s network 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.
Liquidity and Going Concern
During the nine months ended April 30, 2023, the Company incurred a net loss of $37,142, used cash in operating activities of $19,945 and had as of April 30, 2023 a working capital deficit of $10,153. The Company believes that based on its fiscal 2023 forecast, its current cash and cash equivalents level is not sufficient for its foreseeable liquidity and capital resource needs over at least the next twelve (12) months, which conditions raise substantial doubt about the Company’s ability to continue as a going concern for one year after the date that the unaudited interim financial statements are issued. In response to these conditions, the Company evaluated and is acting upon various financing strategies to obtain sufficient additional liquidity to meet its operating and capital requirements for the next twelve months following the date of issuance of these unaudited interim consolidated financial statements.
Specifically, the Company entered into a revolving line of credit for up to $8 million based on eligible receivables in March 2023, sold 10% convertible debentures and warrants for proceeds of $7 million in May 2023, and entered into an agreement to sell substantially all the operating assets and assign certain liabilities of our clinical laboratory business in March 2023, with an expected closing in July 2023. Additionally, in May 2023, we filed a Form S-3 “shelf” registration statement and sales agreement prospectus covering the offering, issuance and sale of our Common Stock that can be issued and sold under the sales agreement in an aggregate amount of up to $30 million. A total of $150 million of securities, including those covered by the Sales Agreement, may be sold under the shelf registration when it is declared effective. See Note 10 Stockholders equity for additional information.
There can be no assurance that these capital raising strategies will ultimately prove to be successful, and the Company may need to raise additional capital during the current fiscal year. Our liquidity plans are subject to a number of risks and uncertainties, some of which are outside our control. The revolving line of credit agreement and the 10% convertible debenture securities (discussed below) both contain clauses that require our closing the asset sale with Labcorp within a given time frame. Macroeconomic conditions could limit our ability to successfully execute our business plans and therefore adversely affect our liquidity plans. The unaudited interim financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.
Clinical Labs Asset Sale Agreement
On March 16, 2023, the Company entered into an Asset Purchase Agreement with respect to the sale to Labcorp of substantially all the operating assets and assignment of certain liabilities of the Clinical Labs division. The sale is expected to close in July 2023, at which time we will exit the clinical laboratory services business. See Note 13 Clinical Labs Asset Sale Agreement with Labcorp for additional information.
Revolving Line of Credit Agreement
On March 31, 2023, the Company entered into a Revolving Loan and Security Agreement with Gemino Healthcare Finance, LLC d/b/a SLR Healthcare ABL as lender specializing in direct lending to middle-market companies in the healthcare sector. The credit facility provides for a maximum $8 million revolving line of credit based on the Company’s eligible accounts receivable. The annual interest rate is equal to the 90 day term SOFR rate plus 5.5%. The line of credit would terminate one year from closing and unused line fees and early prepayment penalties apply. As of April 30, 2023, the outstanding balance of the revolving loan was $3,354. See Note 7 Mortgage and loans payable, net for additional information.
Sale of 10% Convertible Debentures and Warrants
Subsequent to our fiscal quarter ended April 30, 2023, the Company entered into a Securities Purchase Agreement on May 19, 2023 for 10% Original Issue Discount Secured Convertible Debentures with an aggregate principal amount of $7,608,696 with a conversion price of $3.01 per share and (ii) warrants to purchase up to 1,000,000 shares of the Company’s common stock, par value $0.01 per share for an exercise price of $2.31 per share, for a total purchase price of $7,000,000. The Purchase Agreement contains customary representations, warranties and covenants. See Note 14 Subsequent Events for additional information.
Impact of COVID-19
We made substantial investments to expand and maintain the amount of COVID-19 testing available in the communities we serve since the start of the pandemic in March 2020. We applied our technical expertise in molecular diagnostics to develop next generation COVID-19 diagnostic and antibody testing options which were approved under the FDA Emergency Use Authorization (EUA). During the fiscal year ended July 31, 2022, the Company generated substantial COVID-19 related services revenues, representing 44% of all services revenues. This testing had a significantly positive impact on the profitability and cash flow of our Clinical services segment for most of fiscal 2022. Revenues from COVID-19 testing during the three and nine months ended April 30, 2022 represented 43% and 49%, respectively of all services revenues. The rate of transmission of COVID-19 and the severity of its variants have dramatically declined in the U.S. Revenues from COVID-19 testing during the three and nine months ended April 30, 2023 represented approximately 4% and 5%, respectively, of all services revenues.
In March 2022, the U.S. Health Resources and Services Administration (“HRSA”) informed providers that, after March 22, 2022, it would stop accepting claims for testing and treatment for uninsured individuals under the HRSA COVID-19 Uninsured Program and that claims submitted prior to that date would be subject to eligibility and availability of funds. Although we believe that our estimates for contractual allowances and patient price concessions are appropriate, actual results could differ from those estimates.
Volume, revenues, profitability, and cash flow from COVID-19 testing during the current periods were all substantially and materially lower than the prior year period levels. COVID-19 testing is no longer a material part of our Clinical Services business.
The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company, including inflation and actions by the Federal Reserve to increase interest rates as of April 30, 2023 and through the date of this Quarterly Report. The accounting matters assessed included, but were not limited to, the Company’s patient self-pay revenue concessions and credit losses in the Clinical Services segment, accounts receivable, inventories and the carrying value of goodwill and other long-lived assets. The Company’s future assessment of economic factors could result in additional material adverse impacts to the Company’s consolidated financial statements in future reporting periods.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Effect of New Accounting Pronouncements
Pronouncements Issued but Not Yet Adopted
In June 2016, the Financial Accounting Standards Board (“FASB” issued Accounting Standards Update (“ASU”) No. 2016-13 Financial Instruments – Credit Losses (Topic 326). This standard changes the impairment model for most financial instruments, including trade receivables, from an incurred loss method to a new forward-looking approach, based on expected losses.
The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. Adoption of this standard is required for our annual and interim periods beginning August 1, 2023, as we qualified as a smaller reporting company at the end of fiscal 2022 and must be adopted using a modified retrospective transition approach. We are currently assessing the impact of the adoption of this standard on our results of operations, financial position and cash flows.
We reviewed all other recently issued accounting pronouncements and have concluded they are not applicable or not expected to be significant to the accounting for our operations.
Other than the Medicare program, one provider whose programs are included in the “Third-party payers” and “Health Maintenance Organizations” (“HMO’s”) categories represents approximately 16% and 17% of Clinical Services net revenue for the three and nine months ended April 30, 2023, respectively and 13% of the Clinical Services net accounts receivable as of April 30, 2023. Other than the Medicare program, two providers whose programs are included in the “Third-party payers” and “Health Maintenance Organizations” (“HMO’s”) categories represent approximately 30% and 34% of Clinical Services net revenue for the three and nine months ended April 30, 2022, respectively.
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.
The entire disclosure for the basis of presentation and significant accounting policies concepts. Basis of presentation describes the underlying basis used to prepare the financial statements (for example, US Generally Accepted Accounting Principles, Other Comprehensive Basis of Accounting, IFRS). Accounting policies describe all significant accounting policies of the reporting entity.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef