On December 8, 2016 Enzo Biochem, Inc. (NYSE: ENZ) reported strong operating results for the first fiscal quarter ended October 31, 2016, with significant operating profit achieved at Enzo Clinical Labs (Filing, Q1, Enzo Biochem, 2016, DEC 8, 2016, View Source [SID1234517012]).

Quarterly Highlights

· Consolidated revenues grew 4% and Clinical Labs revenue grew 9% over the prior year period as a result of demand for high margin molecular diagnostic services.
· Gross margin at Clinical Labs increased 100 basis points to 41% and consolidated gross margins increased to 46%.
· Non-GAAP net loss and Non-GAAP EBITDA registered steady quarterly progress, improving 35% and 53%, respectively, year-over-year. Both Clinical Labs and Life Science units remained profitable, in addition to generating positive cash flow.
· Balance sheet remains strong with cash and cash equivalents and working capital exceeding $67 million and $69 million, respectively. Remaining bank debt was eliminated following quarter’s end.
· Also post-quarter, federal court in Delaware set firm trial target dates for next year on three patent infringement cases.

Barry Weiner, President, Comments

"The year has gotten off to a good start, and we expect to see the year progress nicely as we continue to complete development and file for approval of additional proprietary low cost, high performance molecular diagnostic products designed to capitalize on reimbursement pressures facing diagnostic labs. Our strategic focus is paying off, notably at the Clinical Labs, where our molecular diagnostics services are increasing and our extensive and growing women’s health diagnostic services is experiencing increased usage. As we add to our product line-up in this field, we are providing cost savings that can ensue from our growing line of high performing competitive cost products. We are increasing marketing efforts to we expand into the national market."

"Meanwhile, we are operating at a highly efficient level, as underscored by steady improvement in gross margins as the Company moves to sustained profitability. We are holding expenses flat overall, while increasing our sales and marketing and development efforts. Life Sciences continues to see delayed orders and currency fluctuations that impact quarterly product revenues, however, it remains focused on developing medically relevant products that are of the highest quality and easily adaptable to market needs. For example, we recently introduced our PolyView Plus line of pathology-based detection systems which has been shown in a peer-reviewed publication to provide improved results to the marketplace. Furthermore, our product pipeline continues to be robust. We will shortly introduce extensions to our human papillomavirus (HPV) product line, providing our customers additional optionality. We also continue to progress on development of a comprehensive suite of women’s health infectious disease tests based on our AmpiProbe platforms, as well as a biomarker assay for the rapidly growing infertility market. The common thread connecting all of these products is that they are easily adaptable to open laboratory systems, providing our customers with the flexibility to offer such tests while reducing their cost of goods."

"On the legal front, the recent announcement by the federal court in Delaware setting trial dates should help progress the remaining patent infringement cases."

"We are highly encouraged and confident regarding the outlook for our business, and our exceptionally strong and debt free financial position assures us of the ability to move forward toward operational profitability and further growth."

October 2016 First Fiscal Quarter Results

Consolidated revenues increased 4%, to $26.3 million from $25.2 million. Gross profit increased to $12.1 million, or 8%, and gross margin advanced 100 basis points, to 46%. Selling, general and administrative (SG&A) expenses were $11.5 million, an increase of $1.2 million, or 12%, due largely to commissions, bonuses and salaries, along with increased administrative expenses related to the greater molecular diagnostics volume. The provision for uncollectible receivables, reflecting improved collection efforts, continues to decline, falling 5% for the quarter. Legal expenses were sharply lower at $0.4 million compared to $1.6 million, a decline of 77% from a year ago.

The Company reported an operating loss of $1.3 million compared to a year ago operating income of $4.6 million. The prior year period included a licensing and legal settlement of $6.8 million. Net loss amounted to $1.5 million or $0.03 per diluted share, compared to a year ago net income of $4.4 million or $0.10 per diluted share. Adjusted for licensing and legal settlements, the non-GAAP net loss was $1.5 million or $0.03 per diluted share compared to a loss of $2.3 million or $0.05 per diluted share in the prior year, an improvement of $0.8 million, or 35%. EBITDA (earnings before interest, taxes, depreciation and amortization) amounted to a loss of $0.6 million, compared with a positive $5.5 million a year ago (which included the licensing and legal settlement of $6.8 million, as noted above). Non-GAAP EBITDA was a loss of $0.6 million compared to a loss of $1.2 million, an improvement of 53% year over year.

On October 31, 2016, cash and cash equivalents totaled $67.2 million, and working capital was $69.7 million. Consolidated cash flows used in operation was only $334,000 in the current year quarter. With the retirement in December 2016 of our outstanding bank loan, the Company, apart from lease obligations, currently has no outstanding debt.

Segment Analysis

Enzo Clinical Labs continued to benefit from growing demand and new accounts for molecular diagnostics, especially in the women’s health marketplace. Service revenues were $18.6 million, an increase of $1.5 million, or 9%, from the year ago period. Gross profit improved 13%, to $7.7 million, and gross margin increased to 41%, from 40%, helped by an increasing menu of approved, laboratory-developed tests (LDTs) tests. Despite higher SG&A related to sales growth, operating income increased to approximately $1 million, compared to $0.8 million a year ago, a 31% increase.

Enzo Life Sciences reported revenue of $7.7 million compared to $8.1 million from the year ago period. The segment continues to rationalize its product offerings to higher valued items, while focusing on product development and sales and marketing efforts. Gross profit remained flat, at $4.1 million, and gross margin advanced 200 basis points, to 57%. SG&A declined to $2.9 million, or 4%. Operating income amounted to $0.8 million. The year ago period operating income totaled $7.6 million, including the aforementioned $6.8 million legal settlement, net.

Legal Developments

The federal court in Delaware in late November issued orders regarding certain pending patent infringement cases brought by Enzo against various defendants. For the cases involving Gen-Probe/Hologic, Becton Dickinson, and Roche, the court has set summary judgment briefing deadlines, a summary judgment argument hearing, and trial dates in October, November and December 2017. "We are encouraged to have our day in court regarding our claims of infringement, and look forward to presenting our cases, a similar number of which have already been resolved by settlements," said Mr. Weiner.

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