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Enzo Biochem Inc, a biotechnology company, has disclosed in its quarterly report that it has identified material weaknesses in its internal control over financial reporting. These weaknesses were discovered following a ransomware attack that occurred in April 2023, which disrupted the company’s systems and operations. As a result of the attack, Enzo faced challenges in accessing and restoring its financial systems, leading to the need to rebuild financial information from backups and manually perform previously automated workflows. Consequently, Enzo was unable to adequately perform assessments, redesign controls, and generate real-time information across the organization.
The material weaknesses identified by Enzo are related to its control environment, risk assessment, information and communication, and control activities. These weaknesses hinder the company’s ability to prevent or detect material misstatements in its financial statements and could cause delays and inaccuracies in financial reporting. Enzo’s management has taken steps to address these weaknesses and is currently assessing additional measures that may be necessary.
Impact on Operations
The ransomware attack also had a significant impact on Enzo’s operations, particularly its clinical reference testing. As a result, the company had to outsource much of the testing to third parties, including Labcorp. This outsourcing negatively affected Enzo’s services revenue and increased its outsourcing costs. Additionally, Enzo incurred and expects to continue incurring substantial expenses related to the attack, including transaction-related costs.
In terms of liquidity, Enzo experienced a net loss of $37,142 and utilized cash in operating activities of $19,945 during the nine months ending April 30, 2023. As of April 30, 2023, the company has a working capital deficit of $10,153. Based on its fiscal 2023 forecast, Enzo believes its current level of cash and cash equivalents is insufficient to meet its foreseeable liquidity and capital resource needs over the next twelve months. To address this issue, Enzo has pursued various financing strategies, such as establishing a revolving line of credit, selling convertible debentures and warrants, and entering into an agreement to sell its clinical laboratory business. Additionally, Enzo has filed a Form S-3 “shelf” registration statement and sales agreement prospectus for the offering, issuance, and sale of its common stock.
Uncertainty and Potential Alternatives
However, it is important to note that the completion of the asset sale is not guaranteed. If the sale does not close, Enzo may have to consider other strategic alternatives, including bankruptcy and liquidation. Enzo is subject to termination provisions in the Purchase Agreement, and the closing conditions may not be met. Furthermore, Enzo will continue to incur substantial expenses, including transaction-related costs, during the pendency of the Asset Sale. The specific proceeds from the sale are uncertain, as are the potential benefits or improvements to Enzo’s financial condition and operations.
Internal Control Risks
It is crucial to highlight that Enzo’s internal controls over financial reporting provide only reasonable assurance and may not prevent or detect misstatements. Failures to maintain effective internal controls and lapses in disclosure controls and procedures could undermine Enzo’s ability to provide accurate and timely financial disclosures, which may result in a loss of investor confidence and potential legal or regulatory consequences. Management has identified a deficiency considered to be a “material weakness,” which could lead to a material misstatement in the company’s financial statements. While Enzo is taking remedial measures to address this material weakness, there is no guarantee of complete remediation or the absence of future material weaknesses.
In summary, Enzo Biochem Inc is currently dealing with material weaknesses in its internal control over financial reporting following a ransomware attack. The attack had a significant impact on the company’s operations and financial systems, resulting in delays, additional costs, and the need for outsourced testing. Enzo has implemented measures to address these weaknesses and improve its liquidity through various financing strategies. However, the completion of the asset sale remains uncertain, and Enzo may need to consider alternative options, including bankruptcy and liquidation. The company’s internal control deficiencies and the timing and effectiveness of remediation efforts create uncertainties regarding its ability to provide accurate financial reporting in the future.
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