Clever Culture Systems Limited (CC5) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the LBT Innovations quarterly investor call. [Operator Instructions] I'd now like to hand the conference over to Mr. Brent Barnes, CEO and Managing Director.

Thank you, Jack, and welcome, everyone. I hope you are doing well and keeping safe during this COVID-19 situation. Today, I host this call from my home office and I have enjoyed the ritual of putting on a business suit as part of the many video calls that I have become widely adopted to and pretty common during these times. For today's quarterly investor call, we have shifted platform to use Zoom for the event. Since this period of lockdown, many institutions, including schools and businesses have moved to video-enabled communication. And we hope that for those who have joined by the video-enabled link today that the personal experience is a little bit more beneficial compared to previously just voice only. The presentation will still follow the usual format. I'll talk through the activities of the previous quarter. Ray Ridge, our CFO, will take us through the financials, and I'll wrap it up with a business outlook before heading into questions and answers. As in the past, a recording of this call will be made available on our website later today. Now I'd like to introduce our Chief Financial Officer, Ray Ridge. Ray, you're on mute. We're still getting used to this.

Yes. Thanks, Brent. Just the usual formality before we commence. I would like to remind those on the call that today's update may contain forward-looking statements, which do involve inherent risks and uncertainties. Those risks and uncertainties include those disclosed in our ASX documents, which we do 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 these statements and actual results may, of course, differ materially from those forward-looking statements. We're now ready to go. Brent, back to you.

Thanks, Ray. So I'll begin today by discussing the impact the COVID-19 pandemic has had on our business. I've spoken with a number of shareholders already and appreciate that this question is front of mind for many of you. Firstly, I'd love to announce a synergistic opportunity with COVID-19 and LBT. However, as outlined in our quarterly statement, there is unfortunately no opportunity that exists. COVID-19 testing involves the identification of a virus, and these tests are done using what's called molecular diagnostic equipment. There is no imaging involved in that process and therefore, no image analysis. Many of you would know that LBT's core strength is the image analysis component and associated APAS platform. Shifting to the impact on our customers. Our customers have been on the front line against COVID-19. They remain under pressure to rapidly develop both the capability and capacity to deliver the essential COVID-19 testing within our communities. Conversely, many of these same laboratories have seen their overall testing volumes decline by 30% to 40% as patients have avoided any nonessential medical appointments. As a result of this decline, we've heard labs are taking cost reduction measures to stabilize their operations during this time. Many of you would be aware of the travel restrictions and lockdown rules established that flattened the curve of COVID-19. These restrictions have resulted in the cancellation of major conferences that we had planned on attending, including from a European perspective, the ECCMID meeting, which was this month in April. And then from an American perspective, the American Society of Microbiology Meeting was scheduled for June. So both of these events have now been canceled. Our key opinion leaders had presentation abstracts accepted for these conferences where they would present data about their use of APAS. Pleasingly, we expect those papers to still be completed and data to be published and shared sometime in the second half of this year. We see conference organizers pivoting to online channels, such as this one, very quickly and expect this new method will soon support creating awareness of our product and from a positive perspective, doing so at a significantly lower cost than attending these conferences in person. From a sales point of view, our efforts have not stopped. It is only 6 weeks ago that I was in the U.S. with our new business development director, meeting with customers, and it was only in January that he started trying to connect with leads already generated. We have a nimble sales presence. We have 1 field-based sales role in the U.S. and 1 in Europe. And while travel restrictions have done away our face-to-face communication, that ratio of customer accounts to sales numbers or the number of salespeople we have within this field is large enough for them to be very busy and continue work. The important message is that while we expect COVID-19 to adversely impact the sales time line, we have not stopped and moreover, expect that as COVID-19 restrictions ease and that backlog of medical appointments unwind, our customers will face a tsunami of testing due to that backlog, and we'll really struggle to keep up with those new demands. From a longer-term perspective, we expect labs to be challenged to deliver greater cost reductions as hospital systems recover from the economic impact of the crisis. In this environment, we expect an even greater push towards automation within labs and believe the APAS Independence remains well placed to support our customers meet this challenge. As previously announced, the company has been in advance discussions with potential distribution partners for the APAS Independence in both Europe and in the United States. The impact of COVID-19 has meant that their immediate attention has been on addressing their existing businesses and their existing customers as well as ensuring their own employee safety. Whilst this has certainly caused some delay, discussions have continued to progress, and we still expect distribution agreements in the coming months as we've previously given indication of guidance to the market. Turning to our operations and ongoing technology development. Our #1 priority has been to protect the safety and well-being of our employees. We have followed government guidelines on social distancing and implemented flexible work-from-home arrangements as well as enhanced hygiene practices throughout our organization. Importantly, our technology development momentum has not been impacted. In view of the current market uncertainty and unknown during the COVID-19 restrictions, we've also taken steps to prudently manage our cash flows during this period. As a result, we are implementing cost-saving measures, whilst protecting near-term sales opportunities and ensuring the continuation of our APAS analysis module development. Moving to our activities during the quarter. The company achieved 2 milestones toward extending the APAS technology capability into infection control. Firstly, we launched our 510(k) application for the MRSA analysis module for the United States with the FDA. In line with previous submissions, we expect to have a collaborative dialogue with the FDA with interactive questions and answers throughout that process. When our application is successful, the company will have 2 analysis modules in the United States covering 50% to 70% of specimens processed by the majority of labs. In addition to the above, the company commenced a clinical study on the validation of its VRE analysis module. Similar to MRSA, VRE, or vancomycin-resistant Enterococcus, is an antibiotic-resistant bacterium, which is commonly screened and has a negativity rate of over 90%. The high negativity rate makes the test particularly well suited for APAS, which automatically reports those negative results to clinicians and allows microbiologists to focus their efforts on those positive cases. I'll now turn it over to Ray to talk through the financial results.

Thanks, Brent. Hello, ladies and gentlemen. I'd, firstly, like to review the financial results that were reported in the appendix 4C on the ASX. These numbers are all in Australian dollars and in accordance with ASX listing rules are not audited. So for the quarter ended 31st of March 2020, LBT recorded net cash inflows from operating activities of $0.3 million. That included receipt of $1.1 million for the R&D tax incentive. We also had net cash outflows from investing and financing activities of $0.7 million. And also reported a cash balance of $6.8 million at the end of the quarter. Given the current market conditions, LBT has undertaken a number of proven cost reduction initiatives, including a 20% reduction in Board compensation. At this stage, the cost reductions are a balancing act between conserving cash wherever possible but not impacting progress on existing sales leads and continuing the development and regulatory clearance of additional analysis modules. It is these additional analysis modules that extend the utility of the APAS instrument on the other side of this pandemic. Back to you, Brent.

Thanks, Ray. As mentioned previously, our focus over the coming months is to continue our operational momentum with the ongoing development of new analysis modules. This will include our ongoing clinical study of the VRE analysis module and reporting to any questions from the FDA on our MRSA 510(k) application. Beyond these 2 activities, we have commenced to work on a new antibiotic susceptibility testing, or AST, module with APAS Independence. This is an exciting development for the company, extending the functionality of the APAS technology to deliver AST results that inform clinicians of the appropriate antibiotic treatment for patients. These tests are performed routinely across the world in parallel to the culture-plate testing workflow in laboratories. Adding this new capability to the APAS Independence will significantly broaden the scope of the technology and the utility to laboratories. Whilst the impact of COVID-19 on travel and social distancing continue, our sales efforts will be focused towards engaging with our existing leads and sales opportunities in the U.S. and in Europe. In the U.S., our sales executive continues to follow up on the 220-odd leads that have been generated through our outbound call center program with the goal of getting APAS Independence into laboratory budgets for the coming year. Whilst in the U.K. and Germany, we will continue active sales discussion with approximately 25 labs. Meanwhile, our global negotiations are expected to continue from a distribution perspective, and we hope to be able to announce these in coming months. In closing, it is difficult to predict how long the COVID-19 crisis will continue to impact our lives and travel and social distancing restrictions will be in place. However, we've responded and taken steps to ensure that during this period, we've positioned the company to emerge stronger and better placed to support our customers once it's over and the market stabilizes. I'd now like to hand it over to Jack to help us through the question-and-answers session.

Thank you, Brent. [Operator Instructions] Your first question comes from [ Paul James, HUP Partners.]

Just really around that last point you mentioned on the distribution, the global distribution arrangement. Because if you look at 25 targets you're pushing along with, LBT has done a lot of heavy lifting in the last 10 years. So just wondering how a global distribution partner will be announced and will be sort of going forward in the next 6 months.

Yes. I spoke through our last quarterly kind of giving direction that the distribution discussions are more likely to be regional in focus or unlikely to be a single global distributor. And you're absolutely right, we've done some work over the last kind of 12 to 18 months in Europe and more recently done work in the U.S. And without going into too many specifics, we would expect to have some carve-outs perhaps in an agreement that would protect the effort that we've gone to. But at the same time, we recognize that we have got a nimble sales force. We've only got 1 person to enter those territories, and we have many more opportunities than we do or can target just with that single sales person. So what we, I guess, directionally don't want to do is to say you can have these territories and then carve out a lot of the accounts that we've been working on. So I guess, directionally, what I can share is that we would look to create some kind of a carve-out to recognize the efforts that we've gone to and the expense that we've gone to, to support those. But at the same time, balance that by not wanting to carve too much out of that process because the end goal is looking longer term where we're creating really a partnership kind of approach where we're working with that distributor to create a win-win situation where we're able to get traction in the market together.

So just on the -- as far as the time line then, Brent, for that first stage, where you do a bit of a carve-out, in the second stage, where you have a long-term partnership, is that a -- is it 3 months for the first one and 12 months for the second one? Can you give us some idea there, please?

It's hard to -- look, I can't give definitive time lines. I think what I can share is that had the COVID-19 issue not presented itself, we were probably much more confident or landed some kind of distribution deal already. And there's been some timing delay. But as I said importantly, that strategic momentum and the kind of relationship and the discussions that we've been having have not changed in any way. It's just been a shift in focus for them. I can't really kind of say -- I think that the key thing what we need to do is get the agreement in place as the starting point. It is both of our interests to perform the sales and marketing activity and build in APAS within their existing portfolio of products and be successful within an opening or a short period of time.

[Operator Instructions] There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.