Clever Culture Systems Limited (CC5.AX) Q2 FY2026 Earnings Call Transcript & Summary

Good morning. Thank you for standing by, and welcome to the Clever Culture Systems Quarterly Investor Call. [Operator Instructions]. On today's call is Rebecca Wilson, Chair of our Board; Brent Barnes, CEO and Managing Director; and Ray Ridge, the company's Chief Financial Officer. I will facilitate a question-and-answer session at the end of the conference call. An audio recording of this call will be made available on the company's website later today. I would now like to hand the conference over to Ray Ridge.

Thank you, Jack. I would just like to remind those listening to this call that today's update may contain forward-looking statements, which do involve inherent risks and uncertainties, and those risks and uncertainties include those disclosed in our ASX announcements, which we recommend that you review. There are reasonable grounds for any forward-looking statements made today. However, due to their inherent uncertainties, we recommend that you do not place undue reliance on those statements, and actual results may differ materially from those forward-looking statements. We're now ready to go, and I'll hand over to our CEO and Managing Director, Brent Barnes.

Awesome. Thank you, Ray, and good morning to everyone joining the call. I hope that those that are listening were able to enjoy a bit of downtime over the Australian Christmas and New Year period. Most of our team are based here in Australia, so we shut the office down for 2 weeks over the break, like many businesses and returned to the office on the 5th of January. Personally, I find the break a good chance to step back and reflect on what's been a genuinely positive period for the company, while also being ambitious about where we still need to push hard to keep the momentum going. The December quarter is my favorite quarter of the year for both commercial and shareholder interactions. We attended 2 major international pharmaceutical microbiology conferences in both the U.S. and Europe, which are critical for driving awareness of APAS and an opportunity to interact with both existing and prospective customers. On the corporate side, we held our Annual General Meeting during the quarter. The last -- and last year, that was the first time we followed this with an investor open house here in Adelaide. It was great to welcome both existing and potential investors into our office and particularly pleasing to see people fly in from Interstate. There's no substitute for meeting the team, seeing the technology running and getting hands on with what we do. Thank you to everyone who attended, and the feedback has been hugely positive, and we expect it to be an initiative that will continue on a go-forward basis. From a Board perspective, it's also a time that we meet face-to-face with the leadership team to conduct our strategy meeting. This is important to align priorities for the coming year, but more importantly, establishes the context for building the rolling strategic growth road map for the company over future years. From a commercial execution standpoint, the quarter delivered progress that met or perhaps exceeded expectations set by the company. We sold 3 APAS Independence instruments, taking our global installed base to 27 instruments across both the clinical and pharmaceutical markets. Hopefully, investors that read our quarterly report noticed the new table on sales and installed base performance. That came directly from investor feedback, and it's aimed at improving transparency around sales, installations and how the installed base moves quarter-to-quarter. Over the past 18 months, we've transitioned into a sustainable revenue-generating business. And while we're still early in that commercialization journey, we want to help investors to track our progress and make that as easy as possible. I do want to clarify a couple of points on the installed base. The 27 instruments we reported are fully installed customer sales and exclude instruments that are under lease evaluation. During the December quarter, we received 3 new sales orders, but only one of these were installed before quarter end, which is why the installed base moved from 26 to 27. The instruments under evaluation are excluded because they may be returned at the end of the evaluation period and are typically under a monthly lease or rental program. While we don't expect returns, we deliberately don't include those units in the installed base, so that investors have a clear view of where each customer sits in the sales cycle. It's about transparency rather than optimism that we're focused on reporting to our investors. Another important point is market mix. To date, 16 APAS independent sales have been made into the pharmaceutical market with AstraZeneca now accounting for 11 of those 16 instruments. Over the past 2 years, we've been very clear that our strategic focus is pharma environmental monitoring in a relatively short time frame and with R&D and commercialization running in parallel, the company achieved cash flow positivity and delivered its maiden profit in fiscal year '25 due to this updated strategic focus. FY '25 was a strong turnaround year for the company, and AstraZeneca was a key strategic partner in that success. But it's also important to say that having around 80% of revenue coming from a single customer isn't sustainable or a repeatable business model. That's why for FY '26, we've constantly set expectations to investors that success should be defined by growing the number of customers with a key focus on growing the global pharma customer segment. The way we think about this is simple: Land more customers then expand across their network once evaluations are complete. It's worth remembering that we only launched the contact plate application at the end of August last year. That launch is what converted Novo Nordisk and Boehringer Ingelheim from pipeline prospects into active evaluations. The true commercial journey in pharma is still early with a complete product essentially available to the market at the end of 2025 with our customers. During the December quarter, we completed the rollout of this contact plate capability with our customers. We installed new instruments at Novo Nordisk in Denmark and Boehringer Ingelheim in Germany, which were delivered with the updated contact plate hardware and software already in place from our manufacturing facility. At Pfizer in Australia, we upgraded an existing system in the field, enabling them to proceed with their evaluation. That work means we now have a complete APAS platform available for customers to properly assess the technology for environmental monitoring. I attended both major pharmaceutical conferences late last year, and one of the highlights was seeing AstraZeneca, Bristol-Myers Squibb and Pfizer independently present strong performance data on APAS. Our science-led approach builds trust and having customers act as advocates is a genuine competitive advantage for us in this highly regulated market. Before handing over to Ray, I want to briefly touch on the financial transformation of the company. We've been appreciative of the shareholders who backed us at the end of 2023 when we refreshed our R&D and commercialization strategy that shifted focus to the pharma market. Since then, the business has changed materially, and it's important to note that Board and management, along with other shareholders, exercised outstanding share options that concluded this financial and strategic company reset during the December quarter. As a result, with subsequent execution against that strategy over the past 2 years, we have welcomed new shareholders that see the potential in our outlook, which is an important focus for the company from a capital markets, liquidity and overall shareholding perspective. I'd also like to acknowledge the South Australian Financing Authority for their support through the restructuring of our $1 million loan, which has now been fully repaid. This was a critical part of our financial reset, and we successfully exit the quarter debt-free with no options overhang and a very much cleaner balance sheet. With that, I'll hand it over to Ray to take through the financials in more detail.

Thanks, Brent. I will now provide an overview of the financial results we reported in our Appendix 4C lodged with the ASX in January. All figures are in Australian dollars and in accordance with ASX listing rules, they are not audited. Pleasingly, the company remains in a strong financial position, increasing its cash balance to $3.1 million over the quarter. This will be further improved by expected cash inflows of at least $1.9 million in the next 3 quarters from receivables and committed instrument sales. The company does expect to place more APAS instruments with customers during the second half of the year, which will further improve cash flows. It is also worth noting that recurring income is now over $1 million per annum and growing. So for the quarter, the company had total net cash inflows of $1.7 million. This was represented by net cash inflows from operating and investing activities of $0.6 million, and this consisted of 3 components: $1.8 million in cash inflows from customers, which included final receipt of amounts from Novo Nordisk and Bristol-Myers Squibb and receipts from instrument upgrades to contact plates processing and other income for maintenance and software renewals. The second component was $1.1 million cash inflow from the receipt of the F '25 research and development tax incentive. And then the third component is the $2.3 million in cash outflows from expenditures, now this was higher than usual and as expected with $0.6 million for payments relating to replenishment of instrument parts. And we now have enough parts to manufacture the next 10 instruments. And there's also around $0.3 million relating to additional rechargeable expenses associated with sales such as installation, et cetera. So net cash inflows from financing activities were $1.1 million, with $2.1 million from receipt of proceeds from the exercise of options that Brent mentioned and also the $1 million outflow for the repayment of the South Australian government loan. And as Brent also mentioned, this loan is now fully repaid and the company carries no debt. So overall, the company remains well capitalized, recording positive net cash inflows for the quarter and maintains a disciplined outlook on future cash flows. Back to you, Brent.

Great. Thanks, Ray. Looking ahead, our main focus remains firmly on disciplined execution within the pharmaceutical market. Our priority is to stay close to the customers who are actively evaluating APAS Independence. We have disclosed key global customers that include AstraZeneca, Pfizer, Novo Nordisk, Bristol-Myers Squibb and Boehringer Ingelheim. These customers, along with others in our installed base, underpin our confidence in the sales pipeline we're building. Based on existing relationships, we estimate an opportunity of more than 90 APAS Independence instruments over time, representing potential upfront sales of more than $45 million. Our near-term focus is very clear. It's about supporting our customers, becoming trusted partners and working through the expand phase of our land and expand strategy. We expect that work to progressively translate into broader rollouts and sales as we move into the fiscal year '27 and beyond time horizon. In parallel, we're focused on landing new customers. Over the next 6 months, we expect to complete additional placements with new customer groups, expanding our global APAS user base and continuing to build depth and resilience into our long-term sales pipeline. As I mentioned earlier, success in fiscal year '26 is about broadening the customer base that we can grow with over time that is expected to deliver sustainable growth for shareholders. Under the leadership of our Chief Scientific Officer, Dr. Steven Giglio, we've also established a global APAS expert user group made up of existing customers. I participated in the first global meeting last quarter, and this group will meet to share best practice around regulatory strategy, validation and workflow implementation. We genuinely see the potential for APAS to become a new standard for environmental monitoring globally. That won't happen overnight, and it won't happen without close collaboration. But we've established this partnership model early because both we and our customers recognize the need to support change across a global industry. Thank you for your continued support, and I'll now hand it back over to Jack to facilitate any Q&A.

Thank you, Brent. We will now commence the question-and-answer session. [Operator Instructions]. We have 2 questions on the Q&A panel to start with. The first is how many APAS units can the company produce in a year?

Yes. So the answer to that is, at the moment, we do about 1 a month, and we can increase that to 24 with the existing infrastructure that we've got. So basically, a little effort. It's just about ordering more inventory. So short answer is we could do 24 per year starting this month. And building out more than that and going to, let's say, 3 a month would require a small increase to the current manufacturing cell that we've got at Planet Innovation.

Next question on annual recurring revenue. For the annual recurring revenue growth from approximately $500,000 at the end of calendar year '24 to now over $1 million, how many new units installed is this growth from?

Well, the growth in recurring income comes not just from sales in the last 24 months -- 12 months or 6 months, but it comes from a longer period of time because the maintenance income is a key part of that as well. And for the first year, we provide a warranty on sales and then the maintenance income kicks in. So the uptick in recurring revenues, both on sales from 24 to 12 months ago with the recurring income now coming through on maintenance sales or maintenance income. And the other is the license fees, which increases immediately as the sales occur over the last 12 months.

And then 2 further clarifications on the sales. The first is around the Novo Nordisk July order. Was this sale a straightforward sale or an evaluation? And is it included in the '27 installed? And then was the sale to Labor Wisplinghoff in Germany included in the 3 units sold to Pharmaceuticals?

So the first one, yes, so Novo Nordisk was a straightforward sale. So they bought that instrument upfront and outright, and that is included in the 27 units that were reported as being installed because the order was complete and installed with the customer. The second point around the German lab Labor Dr. Wisplinghoff, that's obviously a clinical market sale, and it was included in the December quarter for the 3 instruments. So effectively, we had 2 sales into pharma and 1 sale into clinical as reported in that December quarter.

So I now open the question to Peter Gregory. So please go ahead.

A couple of questions. Firstly, I'd like to understand about the gross margin of a new installation. Can you tell me what the gross margin percentage is of an install, including expected warranty costs, commissioning and other installation costs?

Do you want to take that, Ray? Or do you want me to have a go at that...

That's [indiscernible] on it. Gross margin, we don't disclose per se because it's quite a sensitive metric in the market in which we compete. But I can say that our retail sales value per instrument is now USD 350,000. Obviously, that differs a little bit with all customers depending on what their need is and what our relationship with them is, et cetera. And you can think of the license fee being around USD 50,000, which is the -- it covers 2 license fees, and that's recurring. And then we've got around USD 20,000 for maintenance income, which, as I mentioned an answer to an earlier question is that kicks in after year 1, the first year being, maintenance provided for free as part of that warranty too.

And maybe just to add, Ray, just to -- we have got on our corporate slide deck that's available on our website, a slide that kind of talks through our revenue model. And from that slide, what we say is that the revenue per single APAS independent sale is approximately $1.5 million, and that's over a 7-year time frame. And as Ray mentioned, there's a few components of that revenue item. So the first is the physical instrument itself, and that's a USD 350,000 bit of CapEx. The first year is under warranty. And then every year thereafter is an annual support and maintenance contract that is provided. So that's the second part of the recurring revenue. And then you've got the APAS software, we call the analysis modules, that's the AI algorithms that have a -- you can -- very high margin associated with that. So probably refer you to that slide because it does kind of break that down and is, again, also publicly disclosed into the market.

And we do charge for installation fees as well.

Yes.

Yes. I mean I guess I understand the sensitivity -- commercial sensitivity position. But I guess as a shareholder, I'm trying to figure out what the profit might look like going forward and how much contribution of that comes from every additional placement. Also, I'd like to ask you about Thermo Fisher and the clinical market. It's been a long time since we've heard any activity from them. Are they still excited about it and actively going out and generating customer interest? Or are they kind of sitting back and just taking the business as it comes to walks in the door?

Yes, great question. And we did actually provide an update in this last quarterly about the clinical market. I'd say, look, overall, and part of the reason why the company pivoted back in 2023 is because we recognize the slow traction in that market segment. And I think it's fair to say that Thermo Fisher is our global distributor in that market are also frustrated and seeing some of the challenges within that global market. They're still -- it's still on their website. They still have it as part of their sales material. I'd say it's absolutely less of a focus for them just because of the lack of traction. But we did report a particular opportunity within the European market that Thermo kind of working particularly in France. And so that is an evaluation that's happening and that could -- has the potential to be a kind of a network opportunity. So I'd say Look, in summary, we've said for some time, the clinical market is not our core focus. We've got a channel partner in Thermo Fisher that are still advertising and selling it. But due to the overall kind of challenges in that market segment that we observed as well as our channel partner have observed, I'd say it's not a huge focus, and it's one that we're maintaining and supporting on a go-forward basis. But it's a low effort, low-cost, I guess, outlook for us.

Thank you, Peter. And now another question in person from James Tracy.

There was a subtle change in your sort of near-term pipeline outlook at the latest quarterly. I think previously, you were saying you're expecting that you could sell 60 to 80 instruments within the top 20 pharma. And now what you're saying is it's 90 instruments from within current customers and also customers who are conducting validation. So perhaps could you explain the change there?

Yes, it's probably a little nuanced. I think there are a couple of different kind of reporting characteristics. I think in the 60 to 80, it was referring to a specific group of large customers. So for example, AstraZeneca, Novo Nordisk, but it was limited to 3 or 4. And so this is more looking at our larger installed base. So obviously, those large customers that I mentioned, but also including our existing customers. So Thermo Fisher Pharma Services or Patheon would be added and included in that and the existing installed base that we've got. So as we grow with our customers, we definitely learn more about where we see the opportunities throughout their global networks and organizations. I'd say, generally speaking, it's kind of no material difference in the way that we see the opportunity with the current customer base. Other than saying that we've obviously added new customers during the quarter. We expect to add further large pharma customers in this quarter and the following quarter or in the half, I should say. And as those new customers are landed, we would expect that global opportunity of our existing customer base to broaden as well, which is why it goes back to the strategy of landing is so important. We've got to win with our current customers and grow with them, but we've also got to expand that customer base. And that's really what should be characterized as a successful fiscal year '26 for the company is really broadening the number of customers that we've got, active evaluations, active sales with knowing that we have the opportunity to expand throughout their network in future years. So it's really building that resilience and confidence across the sales pipeline that we didn't really have in the first year FY '25, although it was a great case study to clearly have AstraZeneca really backing the technology, and it kind of validates that land and expand strategy.

Yes. And I guess, initially, when you were going to sell this product, there was a lot of skepticism around replacing -- not replacing people, but supplementing people with AI and getting some of the colony counting and things done with AI as opposed to a human. Has that changed? And do you think there is a consensus forming around the need for a solution such as yours to sort of improve the quality of the results and the traceability and things like that?

Yes. So short answer is yes, around it's all about improving traceability and quality of those results. And so what's been really interesting, I think, with the -- with AI really becoming a commodity technology, I think what we've seen from customers in general is probably more thinking, well, of course, AI can do what we do. I think the harder part, what we're seeing from a competitive perspective is that, yes, it's very easy for a lot of people to generate an AI model and be able to perhaps identify growth, but to do it in a statistically significant way to go through a whole validation program and demonstrate performance across the Compendial guidelines, which are required by our customers is actually very difficult. And so you've got this technology acceptance being AI can do everything. And maybe that's true. But for our application, when our customers require us not to miss growth that happens on a plate and to prove that the technology can do it, that's actually setting a really high bar. And so the answer kind of is twofold. Do our customers expect it? The answer is yes. But do they expect also the associated validation and proof that the technology works? Absolutely, yes. And that's where we see the, I guess, the biggest challenge for incumbent or potential competitors coming into this space.

Thank you, James. And we have some further questions through the Q&A control panel. First is, what is the global competitive landscape?

Sure. I mean I just spoke a little bit there about the competitive landscape. And I'd probably just encourage shareholders to go to our investor deck. We've got it kind of listed there around kind of who we see the main competitors are. And we see ourselves being very differentiated. We're the only endpoint reader in the market that's being used routinely, again, in pharmaceutical manufacturing applications. So we have a competitive advantage here in that regard. And we see while AI on the surface is a commodity technology, the fit for purpose and the validation that is required in such a highly regulated market is a high barrier for entry. And so far, we haven't seen competitors successfully come into the market in that regard.

Is there any capital raising expected in the next 12 months?

Look, it's -- that's a great question for a small cap. But I think all we would just say there is that we've clearly got a really healthy balance sheet. We've been once again cash flow positive for the quarter, and we're well capitalized. I think Ray covered that very clearly in his financial part.

And then some further clarification around activity in the clinical market and more about the Labor Wisplinghoff sale and whether the Labor Wisplinghoff sale was for clinical use?

Yes, yes. So Labor Dr. Wisplinghoff is the single largest lab facility in Germany, and they've been one of our key opinion leaders and early adopters of the APAS technology starting back in 2019. So they bought their third instrument for their lab in Germany, in Cologne. And yes, so it was a sale for clinical diagnostic use.

Another question coming in. When negotiating with prospective customers, what are the questions they raised that pose hurdles for their purchase decision? Are there any common threats?

So the biggest common threat, it's just around prioritization for the customer in terms of embedding the technology into their workflow. Remember that the manufacturing of pharmaceutical products is a highly regulated process. That means that our customers don't change their manufacturing process for drugs unless there's a very good reason. Any change that's done goes through a full risk assessment and a whole series of documentation updates, validation to make sure that the new technology is fit for purpose and ultimately, it needs to reduce risk. And that's what APAS obviously does. And so the common theme that we see here is that it's fantastic that the technology exists, so that they've got to understand the technology is available. They always want to understand who's using the technology. We've got now a large portfolio of proof points and the technology works effectively. It's really more about how the APAS system can be integrated within our customer workflow and then having the prioritization as a project. So it's really more a timing issue for them for adoption.

What maintenance is required on the system and how often?

Yes. So we have one -- so on an annualized basis, we have one routine scheduled, what we call a preventative maintenance. So that's where we have an engineer go out to our customers and they will assess the instrument, and that's for preventative reasons. And typically, there's one other, I guess, nonscheduled maintenance event. So overall, the instrument has now been in the market since we launched in 2018. So it's quite a number of years. And I'd say overall, it's quite a reliable instrument.

Is the semiconductor development sector that requires a clean environment, a potential future market for APAS?

Look, potentially, but I think most likely, no. I think the difference here with the semiconductor market in clean rooms, so it's a good observation or comment that they also use clean rooms is they manufacture within the clean room, but then they can irradiate, which effectively means that they can kill anything on that chip at the end of the process. And so you kind of like -- it's an endpoint sterilization. And so therefore, the hygiene of the clean room still clearly needs to be clean, but the -- for a biological drug, you can't do that. You can't irradiate, you can't kill that substance. And so therefore, you've got to prove and you've got to demonstrate that the manufacturing of that sterile product from the start to the end is manufactured in an aseptically clean environment. And that's why environmental monitoring is so important and the results that APAS generates are so critical. So I think probably not, but it's a question that's been asked a number of times.

Does Thermo still hold many units in inventory yet to be sold?

They do they hold 2. So one is with the group in France, and they've got one other in inventory.

And does each country have its own approval required before a sale?

No. So in the -- and again, assuming we're talking about pharmaceutical manufacturing market, all of the onus is on the manufacturer of the drugs to ensure that the technology being implemented in this case, APAS meets the requirements for their organization. And so no, there are no additional country-specific approvals that are required.

Another question in person from Peter Gregory.

Just a quick one, sorry. Do you have an idea as to whether you see -- we'll see a similar RDTI payment in FY '27?

Yes, Peter, broadly should be similar sort.

Thank you, Peter. And a further question through the Q&A. Would you consider a distribution partner for the pharma market?

Yes. I think we -- in time, we'll look at all options to try to maximize our opportunity. So short answer is yes. But look, we're very comfortable with our near-term strategy, which is focused on the largest pharma customers globally and delivering quite well on that strategy.

Thank you for the questions. That does conclude today's conference. Thank you.