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ENZ Enzo Biochem

Participants
Barry Weiner President
David Bench Chief Financial Officer
Call transcript
Operator

Good afternoon, and welcome to the Enzo Biochem Inc. Fiscal Third Quarter 2020 Operating Results Conference Call. I will now read the company's Safe Harbor statements. Except for historical information, the matters discussed in this news release maybe 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 expectations 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 control of the company, including the markets for the company's products and services, cost of goods and services, other expenses, government regulations, litigation and other business conditions. Please see Risk Factors in the company's Form 10-K for the fiscal year ended July 31, 2019. 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 this 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 loss, income loss from operations, or any other measure for determining operating performance. The company has provided a reconciliation of the difference to GAAP on its Web site, www.enzo.com and in its press release issued this afternoon.

Our speakers today are, Barry Weiner, President and David Bench, Chief Financial Officer. I would now like to turn the floor over to your host. Mr. Weiner, the floor is yours.

Barry Weiner

Thank you. Good afternoon, and thank you for joining us today. We issued our third quarter results after the market closed today, and I hope you've had a chance to look at them.

First and foremost we hope everyone safe and healthy during this unprecedented time. since the emergence of COVID-19, the safety of our employees has been of utmost important. We've taken measures to safeguard our employees, while maintaining full operations, so we can continue to advance the important work we are doing.

First, let me provide you with some context.

As you can imagine, our third quarter presented many challenges and at the same time opportunities, as we are a global company with headquarters in New York City, the epicenter of the novel cornovirus in the United States with our principle production and clinical laboratory activities in nearby Farmingdale, New York. At the onset of our pandemic, we needed to quickly secure our staff, with the majority of our employees required on the frontlines maintaining the critical testing capabilities to serve the needs of our market. We experienced many challenges consistent with others in the marketplace, including supply issues related to personal protective equipment, swabs, tubes and reagents. With challenge and perseverance, we have overcome the bulk of our supply hurdles.

While we imposed safety standards, our dedicated staff was motivated to show up at work as essential workers, even as the authorities were saying stay home to the general public. We transitioned many of our employees to remote working environment, we’re capable to do search and we overcame short staffed issues when some employees were ill and unable to work for periods of time.

Our staff rose to the occasion and did an extraordinary job. Thanks to their unrelenting efforts we have been able to continue operating, expand our testing development of needed novel approaches to COVID-19 testing without experiencing any interruptions.

Our clinical diagnostics lab was especially impacted in March, virtually the entire health and business structure of this country was shutdown. Patients were ordered to stay home, doctor's offices were closed and elective procedures were cancelled. This environment hampered nearly all healthcare companies, whether they be by a science company, laboratories and health networks alike. I'm pleased to report that we at Enzo determinantly pushed on and are moving forward with as we see it five key positive elements emerging from this pandemic.

First, there was a new found appreciation for clinical laboratories and the diagnostics industry at large.

Second, our vertical integration and open platform business model invested in over the past three years is opportunistic and justified, and allowed us to rapidly address the nationwide testing challenge.

Third, we launched in this a rapidly changing turbulent environment, an extensive novel multifaceted COVID-19 platform for both molecular and antibody testing. Fourth, we are now rapidly scaling capacity to increase volume. And fifth, we are meeting demand. Allowing to go through each of these points in a bit of further depth. There was a new found appreciation for clinical laboratories and the diagnostic industry at large. This pandemic has shed light on vast misperceptions of the diagnostic industry, and the fast restructuring needed to address the challenges of diagnostic testing.

Over the past two years, reimbursements were being dramatically reduced and the diagnostics sector was being marginalized to a point that has now come back to hurt this country. Today, the value proposition of diagnostics is better understood and widely appreciated, and seen as fundamental and critically necessary in being able to restore vitality to our people and nation.

Second, our vertical integration and open platform business model invested in over the past three years is opportunistic and justified and allowed us to rapidly address to testing challenge. Crucial supply issues that developed have shed light and justified our company's proprietary vertical integration to effectively navigate this environment and survive.

For the most part, we own our supply chain and are using our own systems.

We are building on several years of development of the GenFlex platform, which was launched pre-COVID with our Women's Health Panel, and that has been effectively adapted in the current pandemic for COVID-19 testing. We manufacture our own reagents, swabs, utilize our own technological capabilities and have been applying them to address COVID-19 from multiple angles.

We are selling these kits and systems to other labs and customers, as well as running the tests using our unique products and platforms in our own clinical laboratory.

Third, we have launched an extensive novel multifaceted COVID-19 platform for both molecular and antibody testing.

We are offering our own proprietary internally developed molecular diagnostic test to detect the COVID-19 virus, as well as a serological diagnostic test for the novel coronavirus antibodies.

We are also working on repurposing a drug candidate now in early testing for the treatment of COVID-19.

We are now rapidly scaling capacity to increase volume. Enzo Lifesciences is offering a full range of COVID-19 products, including sample collection, molecular and antibody, as well as instrumentation on a global basis.

Our internal manufacturing capability provides security of supply and stronger margins than test currently available from other commercial suppliers. Enzo Clinical Labs is ramping testing volume to address the need to perform thousands of tests a week, increasing from our initial weekly capacity of approximately 10,000 COVID-19 molecular tests, as well as 10,000 ELISA serological antibody tests.

Finally, we are meeting the demand.

We have been working with many entities ranging from academic and research institutions to commercial laboratories and government entities. This includes a recent RFP bid win with the state of Missouri, as well as a contract with the State of New York to provide COVID-19 testing to nursing homes. We fully expect to secure additional strategic relationships that may provide substantial additional revenue as we build capacity to meet demand. On this last point, we should be clear with regards to our investment and strategy that testings demand will remain with us for some time. A recent state by state analysis from the Harvard Global Health Institute found that more than half of the U.S. states would need far more testing if they are considering safely listening coronavirus restrictions. The analysis was based on each state's daily testing totals during an average week in mid-April, using data from the COVID tracking project. The research found that 31 states in the District of Columbia were not doing enough testing. In states just within our historic marketing territory, it is estimated New York would have to perform over 100,000 more tests every day, New Jersey 68,000 and Massachusetts about 23,000 per day. There remains much to be done even once the successful vaccine is found. I'm extremely proud of what we've accomplished over the last few months. The seats have been really quite remarkable. I want to thank our employees for their continued dedication, and really thank our long-term shareholders who have voiced their support for us throughout this pandemic. At this time, let me turn the call over to David who will walk you through the financials for the quarter.

David Bench

Thanks, Barry.

Here's a review of the financials for the third quarter. Total revenue amounted to $16.9 million compared to $19.7 million in the year ago period, reflecting a significant impact from the COVID-19 pandemic related volume decline, slightly offset by collection improvements in services, as well as grant income. Clinical service revenue for the third quarter was $10.5 million compared to $11.8 million in the year ago period, a decrease of 11%. Product revenue for the third quarter was $6.4 million compared to $7.9 million in the year ago period, a decrease of 19%. Average product order value increased sharply as compared to the second quarter of this year, reflective of servicing higher value markets, such as genomics, ELISA kits and antibodies. The services segment was negatively impacted by the COVID-19 pandemic during the third quarter, as we experienced a 28% reduction in excision volume.

However, the trend at excision volume has been improving over recent weeks and is showing signs of ramping back up to pre-COVID-19 levels. Gross margin for the quarter was 26% compared to 27% in the year ago period. Gross margin in clinical services was 13% compared to 7% in the year ago period and 18% in the second quarter. Enzo service margin had been improving before the COVID-19 pandemic hit, but declined sequentially in the third quarter due to reduced volume while maintaining our fixed costs. Despite volume declines, services margin improved year-over-year, primarily due to efficiencies and supplemental grants income. Gross margin and products was 48% compared to 57% in the year ago period due to product mix and the COVID-19 pandemic impact. Research and development expenses increased 49% to $1.2 million from $0.8 million in the year ago period. This increase is mostly attributable to investments in our proprietary GenFlex platform. Selling, general and administrative expenses were substantially unchanged at $11 million from the year ago period. GAAP net loss was $9.9 million or $0.21 per share. Adjusted EBITDA loss in the quarter and a year ago periods were approximately $7.4 million and $6.1 million respectively. Adjustments for the third quarter 2020 include a proxy related expenses and reduction in staffing expenses. At quarter end, cash and cash equivalents totaled $55 million. The company added $10.6 million of capital in the third quarter to strengthen its balance sheet through various grants, loans and advance payments.

As of April 30, 2020, the company have 47.9 million shares outstanding.

Our cost efficiency measures continue to yield results.

We are making progress as a result of efficiency measures we have implemented, having thus far recognized more than $8 million towards our $10 million annualized savings target.

Our strategic goal remains investing in key focus areas, including our proprietary lab developed test. This investment should have a significant positive impact on gross margin. And in our estimation, gross margins should improve by 500 to 1,000 basis points in a post-COVID environment. With operating expenses expected to be relatively flat, Enzo should have a clear path towards profitability from operations when revenue from core solutions and our COVID-19 program scale up based on industry estimates. I'd like to turn the call back over to Barry for closing.

Barry Weiner

Thank you, David.

As one of the few companies to incorporate a biotech entity, a diagnostic division and a CLIA certified clinical laboratory, we believe Enzo is well positioned as a vertically integrated company to address the COVID-19 pandemic from multiple angles.

We have addressed challenges of the supply chain by manufacturing all of our critical reagents in-house.

Our diagnostic equipment and kits are validated in our own lab prior and are currently available for sale to other labs and then users.

We have two submissions with the FDA to address COVID-19 detection and immunity, with an extensive program roadmap making us uniquely positioned to gain momentum within the broader molecular diagnostics market, both in the current COVID-19 setting, as well as in a post-COVID environment. On that, I would like to now turn call over to questions.

Operator

[Operator Instructions] We'll take our first question from [Anthony Kim].

Unidentified Analyst

I have a question about the grant revenue. Could you tell us how large that was in relation to the total cash package that you put together for this quarter?

David Bench

So I'm not sure if you're referring to the PPP loan, or if you're referring to other grants that we have received?

Unidentified Analyst

Well, I understand that the loan will turn into a grant, if you reach certain benchmarks, correct? But if you can break it down into both that would be fantastic.

You just mentioned grants revenue, loans and grants [Multiple Speakers] with apportionments?

David Bench

So approximately $7 million we received from the PPP from the SBA as PPP loan, which as you mentioned, should turn into a forgiveness under certain conditions. And in addition to that, from HHS, we received $750,000 in the first tranche based on Medicare billings, and that we do expect a second tranche to come in as well.

We have not received that yet.

Unidentified Analyst

I'm wondering, you said that you saw sales fall off and that now you have signs of them ramping back up. When did you see the bottoming? I mean, temporarily when did you see it? Was it in the past two weeks or was it a month ago?

David Bench

Yes, so we saw, if you're talking about the clinical laboratory excision volume, we saw that bottoming off in the beginning of April and then recovering over the following weeks and April all the way through May.

Unidentified Analyst

So when you say that you see signs of it ramping back up to pre-COVID levels, you mean that that is quite literally imminent, I mean within days or weeks. Would that be accurate?

David Bench

Yes, we're not providing guidance going forward. But we have enough data points to show that it is trending in the correct direction.

Unidentified Analyst

Are you able to disclose how much the volume of testing that you've done for this COVID-19 in either category, and how much you're getting in total revenue for those?

Barry Weiner

We have not broken it up specifically. But since the inception of our COVID testing, we have run thousands of tests.

Unidentified Analyst

And you said that it will be an ongoing program. We don't know how long that ongoing will go. But do you expect that to become a significant portion of your, say next quarter’s revenues, are you able to comment on that, and maybe for the rest of the year?

David Bench

So we expect it to be material. We can't give you guidance in terms of how it's going to affect the year. I don't think anybody has that guidance at this point. But we do expect it to be material based on current volume.

Barry Weiner

We are seeing a -- I'm sorry, I’d just add a little bit to that. I mentioned in my comments that we have entered into contracts with the State of Missouri, with the State of New York. There are number of others, which are in negotiation as we speak. We believe that the need and the demand for COVID-19 testing will be strong and continuous. And we believe that this will continue even through the introduction of a vaccine and the timing post that.

I think this is something we are going to have to live with. And I believe we as a laboratory, because of our unique structure and capability, will be able to deliver significant volumes of testing that will enhance and really promote or add value to our core business which is ongoing right now and growing.

Operator

Thank you for your question [Operator Instructions].

We’re taking a question from [Jay Ferro]. Please go ahead.

Unidentified Analyst

I got into a call a moment or so later, so please excuse me if I ask the question that's already been asked, but I have a couple quick questions.

First of all, some of the past information you put out we talked about strategic opportunities that got benefit shareholders.

If you haven't already discuss that, how is that progress going? That’s part one and I have another question after that.

Barry Weiner

We are in dialog with a number of different parties concerning many of the different aspects of our business, whether it's on the diagnostics front.

We have historically commented.

We have been exploring opportunities on the therapeutic front as well. The COVID issue certainly forced all companies to take a look inward in terms of their survival, their strategic plans moving forward.

So I think during the last few months that has been the general nature of the industry. We did comment in a white paper and a release about our development activity in the therapeutic area for our SK1 product, a product that is being in some respects repurposed and looked at as an immune modulator for COVID infection in patients. That is just another enhancement of our therapeutic portfolio and so we are actively exploring. But quite bluntly, the last few months have been and required a dedicated exertion of effort to maintain our business, number one, to maintain our staffing and make them healthy and safe and to be able to enhance and build new products. And we've done an unbelievable job in the last few months, bringing up both the molecular, the antibody tests, looking at different sample collection techniques, submitting protocols to the FDA and so forth.

So I think that area of activity did take somewhat of a pause, as we all focused on this pandemic and how we can contribute and create value from it, as well as perhaps just survive for many companies out there.

So we are actively exploring that has not disappeared. But I believe the last few months have caused a bit of a pause in everyone's activity on the strategic front.

Operator

Thank you for your question. This marks the end of today's question-and-answer session. I'd like to turn back the conference over to Mr. Weiner. Please go ahead, sir.

Barry Weiner

Thank you very much for joining us.

As I commented, this has been a remarkable period for Enzo, as well as many other companies in the diagnostics marketplace. I believe we have contributed significantly with the introduction of novel and unique tests to this market.

I think for Enzo, this will be a very important demarcation for our business in terms of our capability and abilities to be formally recognized and make a significant contribution to the overall well being of our population, as well as enhancing the scope of our business and driving value for all of our shareholders. Thank you very much.

Operator

This concludes today's call. Thank you for participating.

You may now disconnect.