Enzo Biochem(ENZ) - 2020 Q2 - Quarterly Report

markdown PART I - FINANCIAL INFORMATION [Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) Presents unaudited consolidated financial statements for Q2 and H1 2020, detailing financial position, performance, and cash flows Consolidated Balance Sheets (Unaudited, in thousands) | Assets & Liabilities | Jan 31, 2020 | July 31, 2019 | | :--- | :--- | :--- | | **Total current assets** | $71,100 | $81,453 | | **Total assets** | $116,782 | $106,640 | | **Total current liabilities** | $23,200 | $16,009 | | **Total liabilities** | $45,922 | $20,612 | | **Total stockholders' equity** | $70,860 | $86,028 | Consolidated Statements of Operations (Unaudited, in thousands) | Metric | Three Months Ended Jan 31, 2020 | Three Months Ended Jan 31, 2019 | Six Months Ended Jan 31, 2020 | Six Months Ended Jan 31, 2019 | | :--- | :--- | :--- | :--- | :--- | | **Revenues** | $19,384 | $19,327 | $39,591 | $40,587 | | **Operating loss** | $(8,009) | $(8,893) | $(16,212) | $(14,871) | | **Net loss** | $(7,687) | $(8,408) | $(15,335) | $(14,389) | | **Net loss per share** | $(0.16) | $(0.18) | $(0.32) | $(0.30) | Consolidated Statements of Cash Flows (Unaudited, in thousands) | Cash Flow Activity | Six Months Ended Jan 31, 2020 | Six Months Ended Jan 31, 2019 | | :--- | :--- | :--- | | **Net cash used in operating activities** | $(7,991) | $(14,775) | | **Net cash used in investing activities** | $(434) | $(6,988) | | **Net cash (used in) provided by financing activities** | $(229) | $4,456 | | **Decrease in cash and cash equivalents** | $(8,644) | $(17,313) | - On August 1, 2019, the Company adopted a new lease accounting standard, resulting in the recognition of right-of-use assets of approximately **$24.4 million** and lease liabilities of **$25.1 million** on the balance sheet[33](index=33&type=chunk)[34](index=34&type=chunk) - The company is involved in several legal proceedings, primarily related to patent infringement cases. On February 26, 2020, Enzo filed a petition for writ of certiorari to the U.S. Supreme Court regarding a Federal Circuit decision. Additionally, a shareholder complaint was filed on February 5, 2020, in connection with the company's 2020 annual meeting[96](index=96&type=chunk)[99](index=99&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=22&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management analyzes financial performance, revenue trends, operating costs, liquidity, and critical accounting policies for the recent periods [Overview](index=22&type=section&id=Overview) Enzo Biochem operates as an integrated diagnostics and life sciences company, exploring strategic alternatives for its Therapeutics segment - Enzo operates as an integrated diagnostics, clinical lab, and life sciences company with three main segments: Enzo Clinical Lab, Enzo Life Sciences, and Enzo Therapeutics[107](index=107&type=chunk)[112](index=112&type=chunk)[114](index=114&type=chunk) - The company holds a substantial intellectual property portfolio with **463** issued patents worldwide and over **75** pending applications[112](index=112&type=chunk) - The company is exploring strategic alternatives for its Enzo Therapeutics biopharmaceutical venture, including a possible spin-off, sale, joint venture, or licensing of its intellectual property[115](index=115&type=chunk) [Results of Operations](index=24&type=section&id=Results%20of%20Operations) Analyzes Q2 and H1 2020 financial results, highlighting revenue trends, operating losses, and the impact of legal expenses Three-Month Financial Comparison (in thousands) | Metric | Q2 2020 | Q2 2019 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | **Revenues** | $19,384 | $19,327 | $57 | 0% | | **Operating Loss** | $(8,009) | $(8,893) | $884 | 10% | | **Net Loss** | $(7,687) | $(8,408) | $721 | 9% | Six-Month Financial Comparison (in thousands) | Metric | H1 2020 | H1 2019 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | **Revenues** | $39,591 | $40,587 | $(996) | (2%) | | **Operating Loss** | $(16,212) | $(14,871) | $(1,341) | (9%) | | **Net Loss** | $(15,335) | $(14,389) | $(946) | (7%) | - Q2 2020 Clinical Services revenue increased **4%** YoY to **$12.5 million**, as higher testing volume offset negative reimbursement impacts from the Protecting Access to Medicare Act (PAMA)[120](index=120&type=chunk) - Legal expenses for Q2 2020 increased by **$0.9 million** YoY, primarily due to incurring **$1.8 million** in contested proxy costs for the February 2020 annual meeting[127](index=127&type=chunk) [Liquidity and Capital Resources](index=26&type=section&id=Liquidity%20and%20Capital%20Resources) Details cash, working capital, and cash flow from operations, affirming sufficient liquidity for the next twelve months - Cash, cash equivalents, and restricted cash totaled **$52.3 million** at January 31, 2020, down from **$60.9 million** at July 31, 2019[142](index=142&type=chunk) - Working capital decreased by **$17.5 million** to **$47.9 million**, influenced by the period's net loss and the recognition of **$4.6 million** in current operating lease liabilities following the adoption of a new accounting standard[142](index=142&type=chunk) - Net cash used in operating activities for the first six months of fiscal 2020 was **$8.0 million**, a **$6.8 million** improvement compared to the **$14.8 million** used in the same period of 2019[143](index=143&type=chunk) - The company believes its current cash position is sufficient for its foreseeable liquidity and capital needs over the next twelve months[147](index=147&type=chunk) [Critical Accounting Policies](index=27&type=section&id=Critical%20Accounting%20Policies) Outlines key accounting policies, including revenue recognition, accounts receivable, inventory, leases, and goodwill valuation - The contractual adjustment percentage for Clinical Services was **88.5%** of gross billings for the six months ended January 31, 2020, compared to **88.0%** for the same period in 2019[156](index=156&type=chunk) - A **1-percentage-point** change in the contractual adjustment could result in a change in clinical services revenues of approximately **$2.2 million** for the six-month period[157](index=157&type=chunk) - As of January 31, 2020, approximately **17%** of Clinical Labs net accounts receivable are from a single payer, indicating a concentration of credit risk[39](index=39&type=chunk)[164](index=164&type=chunk) - The company adopted a new lease accounting standard, recognizing right-of-use assets and lease liabilities on the balance sheet based on the present value of payment obligations, primarily using its incremental borrowing rate[172](index=172&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=31&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Discusses market risks from foreign currency fluctuations and interest rates, noting potential impacts on sales and earnings - The company is exposed to market risk from foreign currency exchange rates and does not currently engage in hedging[175](index=175&type=chunk) - A hypothetical **10%** increase in the U.S. dollar's value against foreign currencies would decrease annual net sales by **$0.8 million** and unfavorably impact pre-tax earnings by approximately **$1.6 million**[176](index=176&type=chunk)[177](index=177&type=chunk) - Interest rate risk is limited as the company has fixed interest rate financing on its building mortgage and equipment finance leases[178](index=178&type=chunk) [Controls and Procedures](index=31&type=section&id=Item%204.%20Controls%20and%20Procedures) Confirms the effectiveness of disclosure controls and procedures with no material changes in internal control over financial reporting - Management, including the principal executive and financial officers, concluded that the company's disclosure controls and procedures are effective as of the end of the period covered by the report[179](index=179&type=chunk) - No changes in internal control over financial reporting occurred during the quarter ended January 31, 2020, that have materially affected, or are reasonably likely to materially affect, internal controls[180](index=180&type=chunk) PART II – OTHER INFORMATION [Legal Proceedings](index=32&type=section&id=Item%201.%20Legal%20Proceedings) Reports no material legal developments since the last annual report, except for ongoing patent litigation and a new shareholder lawsuit - There have been no material developments regarding legal proceedings other than those disclosed in Note 12 to the Consolidated Financial Statements[184](index=184&type=chunk) - Note 12 discloses that on February 26, 2020, Enzo filed a petition for writ of certiorari to the U.S. Supreme Court concerning a patent case[96](index=96&type=chunk) - A shareholder complaint was filed against the company and its directors on February 5, 2020, related to the 2020 annual meeting[99](index=99&type=chunk) [Risk Factors](index=32&type=section&id=Item%201A.%20Risk%20Factors) States no material changes to risk factors previously disclosed in the Annual Report on Form 10-K for FY2019 - There have been no material changes from the risk factors disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended July 31, 2019[185](index=185&type=chunk) [Exhibits](index=32&type=section&id=Item%206.%20Exhibits) Lists exhibits filed with Form 10-Q, including SOX certifications and XBRL data files List of Exhibits | Exhibit No. | Description | | :--- | :--- | | 31.1, 31.2 | Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | 32.1, 32.2 | Certifications pursuant to 18 U.S.C. §1350 (Section 906 of Sarbanes-Oxley). | | 101 Series | XBRL Instance Document and related taxonomy files. | [Signatures](index=33&type=section&id=Signatures) The Form 10-Q report was signed on March 6, 2020, by the Chief Financial Officer and Principal Accounting Officer - The report was signed on March 6, 2020, by David Bench, Chief Financial Officer and Principal Accounting Officer[189](index=189&type=chunk)