Earnings Transcript for ENZ - Q1 Fiscal Year 2022

Operator: Greetings. Welcome to the Enzo Biochem First Quarter 2022 Financial Results and Business Update Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, David Holmes of LifeSci Advisors and Investor Relations for Enzo Biochem. You may begin

David Holmes: Thank you very much, operator, and good afternoon, everyone. Joining us today from the Company are Hamid Erfanian, Chief Executive Officer; and David Bench, Chief Financial Officer. Enzo issued a press release detailing its financial results for the first quarter this afternoon, and is now available on the Investor Relations section of the Enzo website. Before we begin, I would like to read the Company’s safe harbor statement. Except for historical information, the matters discussed in this news release may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements include declarations regarding the intent, belief or current expectation of the Company and its management, including those related to cash flow, gross margins, revenues and expenses, which are dependent on a number of factors outside of the Company’s control, including the markets for the Company’s products and services, cost of goods and services, other expenses, government regulations, litigation and general business conditions. Please see the risk factors in the company’s Form 10-K for the fiscal year ended July 31, 2021. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that could materially affect actual results. The Company disclaims any obligation to update any forward-looking statements as a result of developments occurring after the date of this conference call. During the conference call, the company may refer to EBITDA, a non-GAAP measure. EBITDA is not and should not be considered an alternative to net income or loss, income or loss from operations or any other measure of determining operating performance. The Company has provided a reconciliation of the difference to GAAP on its website and on its -- in its press release issued this afternoon. I would now like to turn the call over to Hamid Erfanian, Chief Executive Officer of Enzo Biochem. Hamid, please go ahead.

Hamid Erfanian: Thank you, David. Good afternoon, and thank you for joining us on our first quarter business and financial update call today. I’m extremely excited and encouraged to join Enzo Biochem. I’ve admired Enzo from afar for its technological and development contributions recognized throughout the industry. While I have been at the helm for a little over a month, I’ve been welcomed by management and staff and have been impressed by the level of expertise and dedication of our team. I look forward to building off of the strong foundation and setting a vision and establishing strategies in the following areas

David Bench: Thanks, Hamid. As Hamid mentioned, we are pleased with our first quarter performance, despite some seasonality in COVID-related testing and onetime costs incurred due to the consolidation of the Ann Arbor facility. As mentioned earlier, with the recent emergence of the new variant, the Omicron strain of COVID-19, there has been a significant uptick in testing demand, despite high vaccination rates and an increased focus on boosters for adults within the United States. Building sessions grew to more than 100,000 per month in the last two months of the quarter with this trend continuing into November, compared to approximately 70,000 per month during the summer months, reflecting the increased COVID-19 volume from back-to-school activities and the emerging variant activities. We also added 70 new customers at Enzo Clinical Labs this quarter, an increase of nearly 50% from 47 new customers in the previous year’s first quarter with accounts ranging from urgent care facilities to government entities such as Suffolk County. The transfer of our Ann Arbor facility was a paramount achievement this quarter not only from a logistical point of view, but also from an operational standpoint. We believe this will prove highly beneficial and generate significant future cost savings. Here is a review of the financials for the first quarter. Total revenue reached $26.5 million for the first quarter, an increase of 7% sequentially compared to $24.8 million in the fourth quarter last year, but a decrease of $2.1 million compared to the first quarter of fiscal year 2021. On a divisional basis, clinical services revenue for the first quarter was $19.7 million, an increase of 17% sequentially compared to $16.8 million in the fourth quarter last year, but a decrease of $1.5 million compared to the first quarter of 2021. The sequential improvement was driven by increased billed accession count and growth in net revenue per accession due to factors related to the COVID-19 pandemic. Product revenue for the first quarter was $6.8 million, a decrease of 9% from $7.4 million in the year ago period due to the temporary delay from transitioning from Ann Arbor, Michigan facility to the upgraded Farmingdale, New York campus, as well as ongoing COVID-19-related shutdowns in Europe. The blended gross margin for the quarter remained unchanged from the year ago period at 42% on a consolidated basis. Clinical service gross margin climbed to 43% from 39% in the first quarter of 2021, primarily due to testing mix and ongoing cost savings initiatives. Enzo Life Science gross margin was 40% compared to 49% in the previous year’s quarter and 47% in the sequential fourth quarter. The current quarter’s gross margin dropped out of our typical 45% to 52% gross margin range due to headcount duplication and other costs related to the Ann Arbor transition. Enzo is working towards significantly improved gross margins in the coming quarters and anticipates a return to the typical gross margin range with a rebound of Life Science revenue. Research and development expenses were unchanged at $0.7 million or 3% of total revenue in the year ago and current period. Selling, general and administrative expenses of $11 million or 42% of total revenue, increased from $10 million or 35% of total revenue in the year ago period. SG&A expenses were slightly lower in Enzo Clinical Lab on a year-over-year basis, but significantly higher in Enzo Life Sciences due to investment in sales headcount to support growth coupled with onetime costs related to the Ann Arbor closing. Adjusted EBITDA loss in the quarter was $0.9 million compared to a positive adjusted EBITDA of $1.2 million in the previous year’s first quarter. GAAP net loss was $2.3 million or negative $0.05 per share versus net income of $0.3 million or $0.01 per share in the year ago quarter. While we were profitable within the Enzo Clinical Lab division this quarter, we did not achieve profitability as a company in aggregate. This is due primarily to the Ann Arbor transition at the Enzo Life Sciences division as well as corporate and other onetime expenses. Enzo’s working capital grew to $42.8 million versus $36.7 million in the previous year’s quarter, an improvement of $6.1 million. Cash and cash equivalents, restricted cash and marketable securities totaled $36.9 million at the end of the first quarter, a decrease from $44.3 million at the end of the fiscal year due primarily to investments in inventory, higher accounts receivable, lower accounts payable and capital expenditures in excess of $1 million. Day sales outstanding at Enzo Clinical Lab remained below 35 days. We continue to see tangible results from our ongoing actions to boost operating efficiency and are proud to have recognized in excess of $10 million, [ph] which exceeded our savings target through fiscal year 2021. Enzo continues to explore cost savings opportunities. And as mentioned in the last quarter’s call, we have targeted an initial goal of an additional $5 million in savings for fiscal year 2022. We remain committed to investing in key growth areas, most notably, our proprietary lab-developed tests and our four proprietary platforms, including molecular, immunology, cytology and immunohistochemistry. Lastly, I believe it is important to highlight the improvement in our current ratio to 2.9x from 2.1x during the first quarter of 2021. This is indicative of a very clean and improving balance sheet. Additionally, we showed an improvement of $7.7 million in shareholders’ equity on a year-over-year basis. As of October 31, 2021, the Company had approximately 48.5 million shares outstanding. I’ll turn the call back over to Hamid for closing remarks.

Hamid Erfanian: Thank you, David. On behalf of the management team, I would like to take the moment to thank the entire Enzo team for their unwavering focus that allowed this quarter’s achievement to reach to a fruition. I want to acknowledge and thank the management team, including the outgoing CEO, Dr. Rabbani, who has helped guide me through the onboarding process. In my short tenure as CEO, I have quickly observed a unifying culture unique to Enzo. I truly believe that Enzo is one of the best kept secrets in diagnostics market, and it is time to let the secret out. We are confident in our strategic vision and our ability to execute in the year ahead. We have made many important transitions in 2021, and believe the Enzo team had laid the solid foundation from which we shall expand our unique offering to a much larger community. Operator, please open the floor to questions.

Operator: [Operator Instructions] Our first question is from Paul Nouri with Noble Equity Fund. Please proceed with your question.

Paul Nouri: Hey. Good afternoon.

Hamid Erfanian: Good afternoon, Paul.

Paul Nouri: For the COVID testing, is the vast majority of it in New York state and New York city?

Hamid Erfanian: So, we have testing. We serve three markets

Paul Nouri: Yes. And I know for a while there was an initiative for Enzo to take in tests from other labs. I think that was before COVID. Is that still a live initiative, or is it not a priority at the moment?

David Bench: Yes. It’s not currently a priority of the Company, but we are always looking at opportunities with regards to reference testing, lab to lab and partnerships.

Paul Nouri: Okay. And last question, are you planning on submitting any tests for FDA approval in the coming year?

Hamid Erfanian: So, again, Paul, thanks for the question. So, when you look at, again, the gamut of diagnostics products that Enzo has in its arsenal, that would be absolutely the strategy to put many of those tests through the FDA approval process, whether it’s 510(k) or de novo. So, the answer to that question in my mind isn’t unequivocal yes. So that would be our strategy, and that’s our goal for expansion of the diagnostics business that we have in our hand. And again, another notable item is that some of that diagnostics, again, products is currently standing up in our laboratory. So, this is what makes Enzo unique. Having the ability to basically test out products in a diagnostic setting, make sure that, again, if it is working and it’s serving the customer base as well as it does at Enzo Clinical Labs, it also would be an asset in our customers’ lab. But again, overall, the answer to your question is, are we going to provide testing and submit FDA filing? Absolutely and unequivocally yes.

Operator: We have reached the end of the question-and-answer session, and I will now turn the call over to CEO, Hamid Erfanian for closing remarks.

Hamid Erfanian: So, once again, thank you very much for joining us today. While we extremely are proud of the team achievement, growth and profitability achieved this year, we remain committed in generating value for our shareholders and look forward to discussing further progress with you on our Q2 report call in mid-March. Thank you very much, and have a good evening. Operator?

Operator: This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.

Hamid Erfanian: Thank you.