Barry Weiner - President, Principal Accounting Officer and CFO Jim O'Brien - EVP, Finance

Kevin Ellich - Craig-Hallum Robert Gold - Gold Capital Management Robert Smith - Center for Performance Investing

Good morning and thank you for joining us today. On the call with me is Jim O'Brien, our Executive Vice President of Finance.

We distributed our press release detailing our second quarter results last night, after the market closed. I hope you had a chance to review it.

The second quarter marked continued progression at Enzo, to implement our strategic plan, focused on the development of low cost, highly effective molecular diagnostic technology platforms, and products for the laboratory marketplace. These are extremely in need today, as a result of the cost pressures that are affecting this industry.

Let me summarize our significant accomplishments, since we last updated you in December. In February, we just completed validation and began running the full women's health panel on our AmpiProbe platform in our laboratory.

This is significant for two reasons; first, we anticipate that Enzo will realize more improvement in gross margin, based on tests currently run in our laboratory, and on expected volumes. You have to recall that the approval of the final 13 analyte women's health panel was approved by New York State just before year end.

Second and more importantly, Enzo is now positioned to market and sell the AmpiProbe panel or to provide our reference services to other independent or hospital laboratories at lower costs than exists in the market today. We estimate the market opportunity for the women's health panel alone to be in excess of $800 million for products excluding the value of services.

We believe that Enzo has the ability to capture market share based on our low cost and easily adaptable platform, which the laboratory market desperately needs. During the quarter, we continue to develop products that will be tested, validated and submitted to the New York State Department of Health for Approval.

We anticipate approval of our HPV, that's a Hepatitis B virus in our HIV viral load assays, in the months ahead, as well as other tests currently in various phases of development. As we have previously noted, to meet expected demand, we have embarked on an aggressive project to expand our manufacturing facilities under CGMP.

This project is well on its way, and is expected to be completed this year. We have also initiated and are in process of a significant information technology infrastructure project, that is expected to last over 12 months, and will include new IT platforms, redesigned architecture and backup and recovery systems.

We expect to invest between $1 million and $2 million during the project lifecycle. A strong financial position allows us to make critical long term investments to build capacity and expand capabilities to support our strategic business plan.

At the end of the January quarter, our cash balance was slightly higher than our previous fiscal year, at more than $64 million and our operations have generated positive cash flow for the first six months of the fiscal year. We are building our commercial sales teams, and planning to launch marketing campaigns around our technology platforms, products, and services.

Recently, we added several sales professionals and we expect to add an additional seven to 10 professionals that will provide us with reach across the United States. In addition, we are training our existing global salesforce of more than 30 professionals, to enable them to attract new commercial and hospital laboratory business.

This is occurring not only in United States, but in Europe as well, where Enzo maintains a direct sales force. Finally, Enzo has been in discussions with a number of laboratories, product and instrument developers and suppliers about potential business development opportunities.

These discussions have included and are not limited to third party distribution of Enzo's products, providing an expanded test menu to laboratories with up to, now [ph] limited opportunities for growth, and strategic opportunities to expand Enzo's ability to provide cost relief to partners. It is important to note that Enzo's large portfolio of technology platforms and deep market knowledge in the Northeast, provides unique competitive advantage to diagnostic companies looking to penetrate this market.

We expect these discussions and ultimate agreements to add additional market opportunities for Enzo over the short and long term. We are implementing our strategic plan on many different fronts.

As important as it is, all of this activity, as it will result in our financial results, it will demonstrate to laboratories and diagnostic companies, that critical application of a highly sensitive and highly economic technology. While development on new molecular diagnostic based assays continues, we are building a critical mass of products.

The 13 analyte women's health panel is very much a case in point in our breakthrough platforms and products that provide real sound benefits to independent labs, and to those in hospitals to effectively offset diminishing reimbursements. Our AmpiProbe platform is only one of our demonstrated capabilities in key diagnostic segments.

Enzo has already developed platforms and products in the areas of anatomical pathology, histology and cytology, immunoassays for cardiovascular and fertility testing, genetics and genomics, as well as carrier and cancer screening, and finally flow cytometry, with tests such as the FlowScript E6/E7 assay. Each of these platforms provides affordable patient care and opportunities for Enzo to be a full service diagnostic provider.

Recently, Enzo's technology development capabilities have been recognized by industry experts in several peer review publications, as having demonstrated in outperforming existing products in the marketplace, in terms of sensitivity and efficiency, than higher cost products that are in wide use. As we have noted previously in quarterly calls, in many cases, Enzo's products and services could save upwards of 30% to 50% of specific products compared to competitor prices in the markets today.

At a time when PAMA reimbursement pricing cuts are impacting laboratories, Enzo's products and services are needed more than ever. As many of you already know, the newest PAMA schedules became effective January 1 of this year, and by all measures, may reduce reimbursements by 10% this year, and probably a like percentage again in the next two years.

It's important to note that we have prepared for this development by equipping our laboratory with the very same platforms and products, that we are making available to independent and hospital labs. Our strategy, again is twofold; to be a supplier of low cost products to labs for use with in-house systems, that require no real transitional costs or efforts.

Or for those labs without the capital or the ability to ramp up their technology, by using our capabilities as a reference laboratory, that is well equipped digitally to process and report results anywhere in the United States. Key to our transitional activities is Enzo's unique operating structure, and the integration of Enzo Lifesciences and Enzo Clinical Labs, that provides us with a unique advantage.

Enzo Lifesciences has brought capabilities for developing critical assays that have demonstrated unusually high sensitivity. In our facilities in New York and Michigan, we also have the capability to manufacture them as they are approved.

In turn, Enzo Clinical Labs, with its state-of-the-art diagnostic capabilities is working seamlessly with Lifesciences, to assure the quality and effectiveness of our products through testing services. The result of this unique integration, is that we are able to bring to market, platforms and technologies that are fully vetted in a real world diagnostic facility.

Not least of our unique capabilities is our long history as an innovator in the diagnostic field. This includes our demonstrated developmental capabilities, our large international patent estate, that I might add, provides us with a developmental independence, that few, if any other companies, enjoy; and the comparable professional experience of our scientists.

So what we are capitalizing on, is 40 years of experience in technology development, a sound ability to develop low cost and high performing platforms and products, for the expanding field of molecular diagnostics, and to manufacture them as well, and an in-house ability to validate and clinically test all of our products, to assure full compliance, along with turning out products of exceptionally high performance in the economy. It has been a very busy and productive period for Enzo to prepare for the commercialization of our business strategy, that has taken a number of years to develop.

We expect our execution to continue and our efforts to be recognized by the industry. I'd like to now turn to the quarterly results.

Total revenues continue to grow this quarter, up to $27 million, an increase on a consolidated basis of 3% from a year ago. Notably, both our operating units contributed to the gain in volume.

Clinical Labs posted revenue of $19.5 million, an increase of 4% over the prior year, despite one of the severest winter weather scenarios, that has sharply curtailed operations for roughly two to three days this quarter, as patients remained home, rather than risk travel to physician's offices or clinics. Physician clients also noted less patient visits due to the flu, which was especially high in this area this winter.

Lifesciences revenues grew to $7.4 million, which was unchanged from the prior year, with the international market showing some strengthening, following an extended period of weak expenditures. Gross margins were 42%, down from 44% in the prior year period, while testing and product volume was up.

We noted a decline in certain segments, which carry higher margins. We view this decline as somewhat cyclical or temporary, as both segments are performing well so far in this current quarter.

Among operating expenses, SG&A as a percentage of revenues declined to 41% from 43%, and was also lower on an absolute dollar basis. Our R&D spending remains robust, with such expenditures increasing 68%.

Legal fee expenses increased to $1.7 million from $370,000 a year ago. The large increase this period relates to the longstanding patent and contract dispute with Roche in New York.

It follows a favorable Markman decision late last year, in the Federal Court on our behalf regarding patents involved in this litigation. Preparatory to further proceeding with the case, it required extensive expert pretrial testimony, which necessitated this expenditure.

As many of you already know, our return on legal investments has been substantial over the past several years. So while legal expenses impact our profitability as has occurred, we view them as strategic and separate from our core business operations.

As a point in reference, we have incurred approximately $23 million in legal costs since fiscal 2014, with legal settlements in excess of $100 million during this time period. While there are no assurances of future settlements, we feel confident in our legal status in this case.

On a GAAP basis, we reported in the second quarter of fiscal 2018, a net loss of $914,000 or $0.02 per share, compared with a net loss of $1 million or $0.02 per share in the prior year period. The current year's quarter results also included a onetime income tax benefit of approximately $1.1 million, which is due to the Tax Cut and Jobs Act of 2017.

On an adjusted basis, the net loss was $2 million or $0.04 per share compared to a loss of $1.1 million or $0.02 per share in the prior year period. EBITDA, a non-GAAP measure was a loss of $1.4 million in the current quarter, compared to a loss of $200,000 in the prior year.

The increase in adjusted net loss, adjusted net loss per share and EBITDA was largely due to legal expenses incurred in the quarter, as we noted previously. Looking at the six months for the year-to-date, revenues were $54.6 million, up 4% over the prior year.

Gross profit was essentially the same, with the year ago, $23.6 million versus $23.8 million. While up slightly by $700,000 year-over-year, SG&A as a percentage of revenues declined to 40% compared to 43%, underscoring our work and success in holding down costs.

The first half net loss was $1.6 million or $0.03 per share compared to $2.5 million or $0.05 per share in the prior year six month period. On an adjusted basis, current year-to-date net loss was $2.6 million or $0.06 per share and was impacted by the $1.1 million tax benefit noted previously, with no corresponding adjustment in the prior year.

Cash flow from operations for the first half totaled $800,000. Our balance sheet as of January 31, 2018 remained strong, working capital was nearly $70 million, including cash and cash equivalents of $64.5 million, slightly higher than the balance as of July 31 in 2017.

We remain debt free. I'd like to share with you a short perspective on our segment results; for the quarter, Clinical Labs, despite the impact of weather and flu noted earlier, was $19.5 million or 4% above the prior year.

Gross profit was roughly $7.8 million and gross margin at approximately 40%, both essentially the same as prior year. Likewise, SG&A as a percentage of revenues remained at 31%, despite an uptick in expenditures of approximately $210,000, with higher revenues the uncollectable receivables provision was 4.1% of revenue.

Operating income dipped to $900,000 from $1.2 million. First half revenues amounted to $39.9 million, that's up 7% over the prior year, and operating income totaled $2.3 million versus $2.2 million a year ago.

Enzo Lifesciences revenues were $7.4 million, unchanged from a year ago. Gross profit totaled $3.5 million compared to $3.9 million last year, as a result of lower genomic product sales.

SG&A remained flat at approximately $2.9 million, though as a percentage of revenues declined 10 basis points to 39%. Operating income amounted to $51,000 versus $381,000 a year ago.

Lifesciences for the year-to-date had revenues of $14.8 million compared to $15.1 million with an operating income of $900,000, down from last year's $1.2 million. While our financial results were impacted due to events outside of our control such as the weather or the adverse flu season or due to timing of legal expenses, our business operations are performing to plan.

We are pleased that Enzo's strategic initiatives are on-schedule and moving forward, and our performance should result and benefit, especially from savings we anticipate from the installation of our AmpiProbe platforms and tests. Before we wrap up our comments, let me end by noting a few interesting points.

We are currently in the midst of expanding our marketing sales teams, to reach national and international markets, for not only our AmpiProbe and other molecular diagnostic platforms and tests, but for all of our proprietary platforms, that combine high sensitivity, efficiency, and reduced costs. We also are actively pursuing our outreach via conferences and trade shows.

If you take a look at our web site, you would see through July, we are booked to appear at 14 conferences, and as many trade shows to exhibit our products and services, as well as being personally available to customers to discuss their needs. Our outreach programs include not only new customers, but also potential new customers and our diversified shareholder group.

We are working tirelessly to introduce Enzo's strategic plan to all parties, so that they can too appreciate the uniqueness of what we have to offer. We are excited about the positive feedback that we are receiving from each of these outreach efforts.

Our Molecular Diagnostic development program remains strong, which differentiates the medically related molecular diagnostic testing assays developing, is that they are designed to provide enhanced informatics handling and cost savings. The immediate pipeline of products, includes a fertility assay, HPV viral load, PH1 TH2 in cancer market panels, both utilizing our FlowScript gene expression panel.

We are also working on an HPV high risk panel, utilizing our AmpiProbe realtime amplification and detection panel, and other analytes, also destined for use on our AmpiProbe platform. The market opportunities for just these products, we estimate to be upwards of $1 billion.

Thus far, we have been granted New York State Health Department approval for several noteworthy medically related molecular diagnostic testing assays, that provide unusual sensitivity and cost savings, while adaptable to novel systems. These include diagnostics for human papillomavirus infection E6/E7, a cardiac marker and an in-situ hybridization test allowing for localizing specific nucleic acid targets within fixed tissues and cells.

In conclusion, Enzo is strategically deploying it's integrated Lifesciences and Clinical Laboratory business units to provide cost effective, high performance, and easily adaptable solutions to address the increasing diagnostic lab industry's challenges and stresses. We are using our technology and experience to provide an alternative business model, designed to improve laboratory economics through the focused introduction into the market of novel molecular platform systems.

Enzo is achieving this via strategic utilization of its integrated business capabilities, which allows for the delivery of solutions across a complete diagnostic workflow, from patient sample to sample collection to sample processing to analytical detection to clinical results. Moreover, these solutions cover multiple diagnostic segments, which include molecular diagnostics, anatomical pathology, immunoassays and genetics.

I'd like to now turn the meeting over for questions.

Good morning. Hey Barry, got a few questions for you.

Starting off with the women's health panel; how much gross margin improvement do you think we will see, and how soon or how quickly will we start to see gross margins improve?

Kevin, good morning. It's Jim O'Brien.

I think on the AmpiProbe platform alone, it's probably going to be a couple hundred basis points, based upon Enzo's internal volume today. That will only expand -- we are really excited about, as we continue to market and sell that product to other laboratories, we will see the incremental margin come through, as the volume increases.

So based upon our current business today, it's a couple of hundred basis points, and that should improve, as the sales and marketing efforts expand globally.

It should be noted, that we are running that test in the lab now, and realizing those improvements. So that is not a speculative commentary.

Okay. So it's an immediate improvement that we are going to see and that -- a couple hundred basis points will probably ramp over the next couple of quarters, Jim?

Is that a good way to think about it?

Yeah. You will see that in the third quarter, ramp again in the fourth quarter and beyond.

Sure. Okay, great.

And then Barry, you talked about weather? Clearly, we know that weather has been very harsh and severe in the northeast.

You commented two to three days for fiscal Q2. How much of that volume do you think you will get back?

And then on top of that, with the recent northeaster especially even this week, should we expect a similar impact for fiscal Q3 or do you think it's going to be even more pronounced than we saw last quarter?

In terms of realizing revenue loss, as you know, doctors office visits tend to flow over time. People will go to the doctor, if they need to go to the doctor.

So that will flow in over time. So we do anticipate recouping that volume over a period of time.

The weather has been particularly harsh. As we sit here today, we are looking out the windows, and we are in the midst of another Northeaster here in New York.

This quarter, we have seen a number of days already that have been impacted by the weather. I think we are all waiting for spring passionately here.

So there will be some effect in this quarter, I can't tell you how much at this point in time. But there definitely will be a winter effect.

Okay. That's helpful.

And then you talked about building up the commercial sales team, I think you said you plan to add an additional seven to 10 professionals, how should we bake in, I guess what's the incremental costs for those professionals?

We [will] [ph] be recruiting those professionals over the next couple of quarters, [indiscernible] you continue to see the revenue ramp, we will continue to add staff to that. We will be prudent in terms of our hiring and our pace of doing so, to make sure that the revenues come with that, we are not looking to build incremental costs in the P&L without the revenue.

So we will do it modestly, and we will make sure that it's a prudent spend as it occurs.

Okay. That's helpful.

And then, so you are clearly looking for experienced salespeople within the clinical lab diagnostic industry? You are not --

That's absolutely correct.

Okay. That's helpful Jim.

And then the last question I have is, Barry, you talked about investing $1 million or $2 million for a new healthcare IT platform. Could you provide a little bit more details in terms of how those costs are going to bake in, which vendor you are using and how long this project is going to take?

Is it just 12 months or is it really a big ERP implementation?

Kevin, it's Jim. It's not considered to be an ERP implementation.

We do run on a Microsoft platform here. I won't get into vendor specifics, but it is a very strategic project for us in terms of making sure that we got the capacity and capabilities to perform on an IT basis.

I think we have got an industry leading IT platform as it stands, in terms of customer service today. We are going to make sure that that's sustainable for growth.

We will be investing behind that. So I think the spend will happen somewhat easily over every quarter in the next 12 to 18 months, and we have got a project leadership team that is executing to plan, even under budget at this point.

So I think we are very satisfied with what we are doing, and we believe our systems to be in good shape, as we expand the business.

You know, it's our goal and objective to become a state-of-the-art reference provider, and as a result, the IT or the informatic capability that we can provide, not only for our own utility, but for those that will partner with us, I think is very important, and will give us a competitive edge within the marketplace.

Great. And Jim, I forgot to ask, is that $1 million to $2 million cost or investment, are those capital expenditures, or will any of those run through the P&L?

We were referring to capital expenditures. I don't believe a significant expense will be borne on the P&L.

We are using a lot of internal resources, so we have built capabilities and talent within Enzo. So we are not looking to bring on a major consulting arm or expand to burden the performance of the business.

That's great. Thanks guys and congrats on the progress on AmpiProbe.

Good morning. I have been a shareholder for decades, and though I am not thrilled with the stock price, I must say that the presentation today is probably the best I have heard over that period of time.

So I am quite encouraged by that. Couple of questions, one is, you talked about rolling out things nationally and internationally, can you speak about approval or approvals that are needed for that, and my second question is if you could expand a little bit on the therapeutic side of things?

Thank you.

The laboratory is CLIA CAP certified and New York State validated. As a result, we are able to provide testing services to about, I would say, a 45 or so states within the United States.

We recently just got approval to market our products in Florida. I believe, if we don't have it, it should be coming soon will be California, and at that point, we will have the capabilities to provide every major state I believe, in the United States.

In terms of Europe, we today are providing reagents through our Enzo Lifesciences operation, which is headquartered in Basel, Switzerland, to academic laboratories, to Clinical Labs, throughout the European continent. We do have sales operations, physically in the United Kingdom, in Belgium, in France, in Germany, as well as Switzerland, and then we work through distributors in many, many regional markets.

Those products are products that are sold for research purposes as a labeled product, which are utilized in Clinical Labs, when they format their own testing platforms, which many labs in the European continent do. Europe has been under extreme reimbursement pressure for many years, similar to what the U.S.

is just beginning to experience. So the laboratory universe in the European arena tends to be more self-developed than in the United States, and as a result, we do sell them reagents.

But, we are proceeding forward with many of our kits that we are getting approval for, in the United States, to get CE mark in Europe, so that we can sell them as a registered diagnostic product, and that is part of our process as well. I should make note, that ultimately, these products that we are marketing under a New York state approval, will be ultimately applied for, in many cases, for FDA approval, as part of the process here, our goal is to get a critical mass of products into the market, in a form of LDT or research approach and also, to provide our testing approaches through the provision of reference services, and this is a very important concept, which I think is somewhat unique in the market, in that, we can go out nationally and provide either products to laboratories or in our opinion, sometimes preferentially, provide them the option to utilize our reference services, and I believe we will be able to provide them an economic advantage, by referencing a test out rather than performing it in-house and that is a somewhat unique concept within the clinical laboratory industry, and that is the real target of our goal right now.

So I think at this point in time, we have the unique capability of a bifurcated marketing opportunity to provide product or services, that will be low cost to labs across the United States. And so our goal here is to get these services into the market.

It has taken us perhaps more time than we had anticipated, to get into this marketplace, just because of the challenges and the labors of regulation, and utility of these products. But I think we are embarking now on our journey, and I think we are very-very excited about it.

In terms of the therapeutic areas, we have not commented much on our therapeutic activity, because we did not want to divert the focus on our diagnostic strategy. As you well know, because you asked the question, we do have a number of therapeutic compounds under development, most of these are being developed in the form of funded partnerships with different entities.

One was with NIH, others are under other grant processes. I can't say too much, but I hope you will begin to hear more about these into the future, as they are beginning to emerge from the testing protocols that they have been undergoing.

I believe, that there is asset value here, and it is something that we as a company are absolutely focused on, and we hope to create shareholder value from that. I think it's probably wise to just not say too much more about it, and the wait -- the evolution of this, but it is definitely in the vision of where we are moving right now.

Hi, good morning.

Good morning.

Thanks for taking my question. I came on the call late, and I [indiscernible].

What are the stakes with the Roche costs?

Sorry, we are breaking up. I could not hear your question.

Could you repeat it please?

What are the stakes in the Roche cost?

Hold it. Let me repeat that, what are the stakes in the Roche litigation, is that your question?

Yes, yes.

The Roche litigation dates back to one of our earliest relationships, in which we were a supplier to Hoffman-La Roche of our non-radioactive labeling products and systems. This was a contractual relationship, which was breached.

The components of this litigation involved both contract issues, as well as patent related issues. I believe this case has been held up for quite a long time, as we were awaiting the outcome of a Markman hearing, which rules on the claim sets that are embodied in the patient component of this particular case.

So there are multiple components, but the case does involve a longstanding relationship between Enzo and Roche. I am reticent to say too much more about the case, but it is one that has been a long time in process, and we are very-very happy it is now moving.

It has been help up for quite a long time, and it now moving forward, very-very quickly. That is the reason you saw that large expenditure for legal fees this past quarter.

So it's a major case for us, and one that we are looking forward to bring to trial.

Thanks. Is the marketing opportunity for the AmpiProbe panel is around $800 million I think you said?

What are the challenges to its acceptance in the marketplace?

The AmpiProbe market size for just the women's health panel, that's the 13 analyte panel, is approximately $800 million, and if you break that down into its component pieces, you will see, you have gonorrhea and chlamydia as a major component, the bacterial vaginitis strains as a major component. And so, I think when you add that up, you add up all these specific analytes, you will get to about $800 billion to $1 billion market size.

The challenges of that particular product are just the fact that this is a new system, it is lower cost, and that's the advantage. It also has the advantage of being able to test for these multiple analytes from a single swab, and I think that is something quite unique within the marketplace today; because of the unique characteristics of the AmpiProbe system, and the enhanced sensitivity that we have been able to generate by the structure of this particular system, and the methodology that we utilize to detect, we are able to get an extremely high sensitivity without much of any background in the clinical result, which gives us the ability to test multiple analytes from a single swab.

So we provide advantages, and like any new technology, the challenge is education, and I think that is the issue that takes time within the market. Anything new requires validation, education, and historical perspective.

So our goal and that is part of the reason we are enhancing our sales force, we are aggressively moving into the market with seminars and conference presentations, because it's an issue of exposure, education, and as you may or may not know, the medical field tends to be a conservative field in many ways, and as a result, we need to educate. The overwriting opportunity for us is the cost pressure that is existing within the market, and our ability to offer Clinical Labs an economic incentive by utilizing this particular approach.

So we are actively out there. We require the past month or so to get the system up and running in our own lab, which we are now doing, and we are now going out into the market.

So the next quarter or two will be quarters that we will be educating and hopefully, trying to bring the market over to our perspective on the types of testing they should be utilizing, to gain margin in their work, as well as perform superior services.

Well, there is nothing like a lower cost education. Good luck.

I think we are quite optimistic on that. So far the feedback has been quite good.

I mean, economics certainly are carrying an important criteria here.

Thank you.

Thank you. There are no more questions.

I'd like to thank you for joining us this morning. We look forward to speaking with you in early June on our next quarter.

Thank you.