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

Thank you for standing by, and welcome to the LBT Innovations Investor Update Call. [Operator Instructions]. An audio recording of this call will be made available on our website later today. I'd now like to hand the conference over to Mr. Brent Barnes, CEO and Managing Director.

Thank you, Jack, and welcome, everyone. Happy New Year. The acquisition of our joint venture company, Clever Culture Systems was a fantastic way to finish last year. And I'm really pleased to be here providing this update to you today. As usual, I have our CFO, Ray Ridge, with me on the call, and we will talk through our presentation that outlines the details of this transaction, the strategic benefits for LBT, and why this is the perfect time to be taking full control of the joint venture. There will be an opportunity to ask questions at the end of the call. Now I would like to introduce Ray Ridge, our CFO.

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 lodgments, which we recommend that you do 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, of course, differ materially from those forward-looking statements. We're now ready to go back to you, Brent.

Awesome. Thank you, Ray. Obtaining full ownership of Clever Culture Systems, which I'm going to refer to as CCS. So CCS, Clever Culture Systems. It's a transformative acquisition that gives us complete control over our unique intellectual property at a critical time in our commercialization journey. CCS was a joint venture company that was established in 2013, and it was owned 50% by LBT innovations. The other 50% was owned by a German company called Hettich. Hettich are a leading manufacturer of laboratory centrifuges and incubators. Together, we've invested over $30 million into the JV and have run the company with a governance structure that has facilitated alignment over many years. CCS has been a virtual company managed and operated by LBT to develop and commercialize our APAS technology globally. I know many shareholders and potential investors didn't like the complexities of the JV, and it's clear that this acquisition simplifies the structure while allowing Hettich to remain invested in the potential of APAS through a direct investment in LBT. This is a low-risk acquisition and should be viewed as effectively buying back our intellectual property, where we understand and manage all aspects of the business as well as the customer and channel partnerships that we've already established. It brings back full ownership of the APAS opportunity to LBT Innovations at a time where both the technology and commercialization building blocks are established with Thermo Fisher and Beckman Coulter driving our sales efforts. We are seeing these benefits already with a series of product evaluations in Europe being completed and a growing pipeline of advanced sales opportunities established. With full ownership, LBT will benefit from 100% of the revenues from each APAS sale and expect to improve our time to cash flow breakeven for the company. The simplified ownership structure has the potential to attract new strategic opportunities and open the door for new product extensions and partnerships. The total consideration for the transaction was AUD 4 million. It was payable in cash, LBT shares and LBT options and included the purchase of Hettich's 50% shares in Clever Culture Systems, including all outstanding shareholding loans existing between Hettich and CCS. To be really clear, there is no loan owing to Hettich. No earnout payments and no royalties. It is a clean acquisition that results in a 100% ownership of our joint venture Clever Culture Systems. This structure provides a mutually beneficial opportunity for both parties, where Hettich remains significantly invested in the APAS opportunity, having swapped their ownership and debt in CCS for LBT shares. As a result, Hettich is now the largest shareholder in LBT owning 9.6% of the company. I'll now hand it over to Ray, who's going to provide some specific details on the transaction structure.

Thanks, Brent. As Brent just mentioned, the total consideration for the acquisition was $4 million, which was payable by $1 million cash consideration, which has been paid upfront and 30.66 million LBT shares valued at $2.8 million based on a share price of $0.091 being the last traded price prior to the announcement. The shares we held in escrow for 12 months until 31st of December 2022. And the third element of the consideration was the 8 million LBT options with an exercise price of $0.25 per share and they are expiring in 3 years' time at 31st December 2024. Under the transaction for this 4 million consideration, LBT acquired Hettich's 50% shareholding in CCS and also Hettich's shareholder loans being $17.3 million, which is their past funding that they have contributed to CCS. As a result, these loans are transferred from Hettich to LBT, meaning that neither CCS nor LBT has any outstanding debt owing to Hettich post acquisition. Clearly, the structure of the transaction is predominantly in LBT shares, which was very deliberate to preserve LBT's cash to support the ongoing commercialization of the APAS Independence. Post completion, LBT will have an expected cash position of $5.6 million with a further $800,000 of the research and development tax incentive expected to be received in February. So effectively a final cash position of approximately $6.4 million. Now this slide outlines the expected financial impacts of the transaction on future operations. And these are all in Australian dollars and, of course, are not audited. They are our best expectation of the business moving forward at this point. LBT's total quarterly cash flows before sales are expected to be around $300,000 or 17% higher than what we had previously internally forecast for the 2022 calendar year, increasing from what we have been planning on of $1.8 million to now $2.1 million per quarter. This includes the SAFA loan repayments. This forecast benefits from a cost management plan put in place immediately following the acquisition to reduce costs and defer expenditure. But with the overriding provides us that there is no impact on sales activities. So reducing the CCS expenditure in 2022 by approximately $800,000 compared to the most recent CCS budgeting prior to the acquisition. Now each instrument sold will further reduce these cash outflows. So be clear, those cash outflows do not include any sales. So following the acquisition, LBT's share of earnings has doubled for each instrument sold to now approximately a target of $284,000 and increased by 43% for the annual license fees to retire approximately $43,000 per instrument. This means that for each instrument sold, LBT currently expects to earn $328,000 in the year of the first sale, being an increase of 90% and $585,000 over the life of the instrument being an increase of 66%. These revenues are net of any anticipated distributor margins. And importantly, the end result is a shorter time to cash breakeven for the company. I'll now hand back to you, Brent.

Fantastic. Thank you, Ray. I'm going to talk through the strategic rationale and the outlook. As I outlined earlier, CCS was formed in 2013 as a 50-50 JV between LBT and Hettich for the development of the commercialization of our APAS technology. Under the terms of the agreement, LBT granted an exclusive license for our APAS technology to the joint venture for this purpose. Since 2013, both Hettich and LBT has jointly funded the development of the APAS Independence with over $30 million spent between the 2 companies in developing the technology. During this time, LBT has managed the operations of the JV and have been the team driving getting the APAS Independence to market as the world's first automated culture plate reader. It is really important to understand that all of the know-how, the expertise of CCS lies within LBT, which is why, as I said earlier, it's like buying back our own company and is a derisked acquisition from an operational perspective with no major integration hurdles or unknown business risks. Looking at this next slide, it really aims to try to explain or further explain how this is significantly a derisked opportunity. I've mentioned before the significant investment made by both companies over a long period of time. And it really represents the fact that the majority of the product development costs is now largely complete at a really -- and at the moment, we're at a really critical commercialization inflection point. Over the last 18 months, we've achieved some really important milestones for the business that have laid the foundation for the next 2 to 3 years ahead, and this has been achieved in the backdrop of the COVID-19 global pandemic. We have secured a number of sales to key laboratory networks in Germany and the U.K, established a remote service delivery model, enabling us to scale the placement of new instruments while travel restrictions have been in place and secured partnerships with global giants to scale the sales and marketing efforts for our technology. As a result, we are now seeing customer access improving in both the U.S. and in Europe. For example, in Europe. Over the last 6 months, we have completed back-to-back product evaluations where prospective customers are able to execute a shortened 5-week protocol to evaluate the technology, which has led to a growing pipeline of what we're calling advanced sales opportunities. As we move forward, we expect our ongoing product development spend for the APAS Independence to reduce as sales progress for the APAS product, and we're able to target new strategic opportunities for future product pipeline opportunities. Back in July of 2020, we appointed Beckman Coulter as our marketing agent for Europe and more recently, Thermo Fisher, who were appointed the exclusive distributor in our largest market being in the U.S. These partnerships provided us with the capacity to scale our sales activity in a way that we could have just not done by ourselves. We are beginning to see the benefits of these relationships. In Europe, our commercialization traction with Beckman has not resulted in the sales that we had expected. That said, as the customer access has improved, we have been able to complete a number of these back to back customer evaluations, like I mentioned before. And this has been through the Beckman Coulter's sales efforts. It has enabled us to get products used by many more laboratories and the sales process is going through with these customers. Moving to the U.S. I've been really impressed by the speed with which Thermo Fisher had moved and kind of onboarded with the APAS technology. In really a short period of time, we've already completed detailed product training with over 50 of the Thermo Fisher sales representatives. Their sales teams are highly engaged, and there's been a number of joint customer visits with our U.S.-based sales representatives and we've received positive feedback from both our customers as well as Thermo Fisher as part of that sales process. Put simply, through these partnerships and their extensive sales networks, we're able to access many more customers than we would have otherwise, and we expect to see some of this translate in greater sales traction through our sales process and through our sales funnel. The market opportunity for the APAS Independence remains large with over 2,000 labs meeting the target customer profile for the APAS Independence in the markets that we've launched already to date. What we're now seeing with Thermo Fisher and Beckman Coulter is momentum building in the 2 largest markets, so the U.S. and Europe. We now have over 400 qualified opportunities where the customer has been qualified and an initial contact has been made. We're introducing this concept of advanced opportunities. We've got 10 of these, and this is where a customer have either completed their evaluation or under negotiation for purchase. And we expect to continue updating this metric on a go-forward basis. As I've said from the outset, this is the perfect time to be acquiring the remaining 50% of CCS. And we are really in an exciting phase of the commercialization of our product. The major technology development has been completed and the product is launched in global markets, and it remains the only regulatory cleared device for culture plate reading in the market globally today. We have completed sales in each of our target markets and have established key opinion leaders or influencers in those markets, who communicate the benefits of our technology to their peer group. After the significant disruption due to COVID, and I don't think we're quite out of the woods yet, but what we have definitely seen is customer access improving to kind of pre-pandemic levels and customers are now seeking operational improvements to address other areas of their workflow besides the kind of COVID-related areas. The APAS Independence addresses a clear unmet need for laboratories, enabling labs to re-prioritize highly skilled personnel to other value-added activities and tasks within the lab. And now we have the backing of two of the global leaders in clinical diagnostics. With Thermo Fisher and Beckman Coulter onboard, we have absolutely the right teams in place to realize this market opportunity. I've said in recent presentations that there is no better time to be in clinical microbiology. In fact, just the diagnostic space more generally at the moment. And now with full control of CCS, we are well placed to execute our commercial strategy for the APAS Independence. The acquisition will provide a simplified operational structure and remove the need to manage the joint venture. There is a simple integration plan in place to ensure we're able to realize operational synergies and cost management. However, our #1 priority is to ensure that there is no disruption to the current operations, and we remain laser-focused on executing the commercialization of APAS with both Thermo Fisher and the Beckman Coulter's teams globally. In terms of commercial outlook, we are seeing laboratories refocus on operations other than COVID looking at other areas that they can implement operational efficiencies. Our sales pipeline is growing, and we now have 10 advanced opportunities in place. Look, overall, this is really a great announcement for our shareholders, really pleasing to be able to kind of close out the year so positively, and thanks to management and to the board, in particular, who have really been heavily involved in making this happen over several weeks leading up to this critical event. I'll now hand it back to Jack to open up for any questions that might come up.

Thank you, Brent. [Operator Instructions] I'll start with a couple of questions that have come through the Q&A panel. The first is from James Tracey. Can you please comment on the sales pipeline now that your partnership with Thermo Fisher is well established?

Yes. Look, I think this advanced opportunities metric. We identified those of 10s. So this is where the customer has completed an evaluation or has even progressed through to kind of talking through procurement process. We're going to start talking through that metric on a go-forward basis. And obviously, we're not putting out forecasts but what we are wanting to better articulate for shareholders is the sales velocity. So we're very busy getting the evaluations done. When a customer has access to the instrument, it is a positive interaction. So moving through that kind of sales funnel being able to report on that is something that we're going to, on a go-forward basis, start reporting on. Thermo Fisher are really aggressive in the market. They -- like I said, they're very enthusiastic, and we expect really great things from them. So look, other than saying we're reporting on these advanced opportunities. That's a combination of Beckman Coulter and Thermo Fisher in addition to our direct efforts. Thermo Fisher are doing a great job for us in the U.S. in a relatively short period of time.

Thank you, Brent. Now we have 2 further questions that are on the same theme. So we'll combine them into one. Why did Hettich agree to the sale back of CCS given LBT see this is the perfect time to reacquire the business?

Yes. Look, it's a good question. I think it was the right time for both parties to be fair. CCS was no longer a key part of Hettich's strategy and didn't really want the direct management influence of the business. Like I said, we have a governance process in place that for a long period of time has really seen us manage the JV in a positive way. And they continue to be involved, I guess, in a direct sense in terms of owning shares in LBT. So they still can benefit from the upside of their investment, but they're just doing it in a different way. And they recognize like we do. The complexities associated with the structure and the opportunities that it may unlock by simplifying that structure.

Now the next question comes from Peter Gregory.

I'm really pleased to see the simplification of the business that this transaction puts in place. I'd like to ask about gross margins. The investment case for tech AI companies is usually on the premises of a high gross margin will lead to strong profit growth as volume grows. Now that the whole business operation is under a single entity, can you please share the gross margin of both the APAS machine and the analysis modules with us?

Right. Look, Peter, I would love to share that information. But obviously, that requires us to disclose our cost of goods sold, and that is a commercially sensitive thing for us not to want to put into the market. Obviously, not for our shareholders, but more for competitors. So unfortunately, I can't answer that question, but we have put as much into the presentation as we could, which is what our earnings are after the margin is paid to the distributors. So we have put that in there. We've also put in the analysis modules, had an estimated -- and these are all, I should point out, targets, of course, because once we get into commercial sales, we'll take into account the -- what the market is ultimately telling us. But we expect to make 43,000 in terms of analysis modules, the analysis modules we make internally. So there is no direct cost of goods sold from those other than our development costs, which is in our cost base. So I hope -- hopefully, that provides a little bit more information for you, Peter.

I wonder if given that when your FY '22 results are out, we will see some cost of goods information. If you're not able to give us some kind of even broad indication of the sort of ballpark we'd be looking at?

Look, no. But as you have indicated, you do look to other margins made by medical devices in the market. So I really wouldn't like to comment any further than that.

If I can ask, I guess, a sort of related question. You've got a fairly substantial sales pipeline that's looking at -- in terms of the quantum of -- the total quantum of numbers plus those that you're talking about as being at the advanced stage. Can you give me an indication of the availability of working capital to satisfy that expected demand in a timely manner?

Yes, we have taken those into account in our forecasting. And in terms of working capital, we don't expect it to be -- it will be a slow deal, but we don't expect it to be a significant drain. We're already used to paying for sufficient parts to manufacture the next lot of units. In fact, we're just put in an order for another 5 units -- enough to make another 5 units, to make sure that we've got the parts on hand, ready to manufacture. And then beyond that, it's really a 1-week turnaround to manufacture once we got those parts on hand. So we manage it quite lean.

If I can just add to that, Peter. So obviously, the whole supply chain starts with our sales team. So we work quite closely with Beckman Coulter and Thermo Fisher, understanding what the market looks like, understanding what those kind of advanced pipeline opportunities look like. And we take that all the way back through to planning innovation through other ones manufacturing our products. We have very clear line of sight visibility on key components. There is some global shortages across many supply chains, and we've identified for our purpose, some of those and have done some advanced buying to protect our supply chain efforts. So those are some of the considerations that we've kind of already taken, but we don't want, obviously, to tie up a lot of working capital on inventory that's sitting around. So we want to make sure our working capital is going to work. And so to that extent, the whole supply chain from sales all the way through to the components is one that we are really well across and understand.

Okay. And just a final question. Are you able to give an update on development work in expanding the analysis module products that are on the marketplace in terms of fit with media and particular tests that you're looking at?

Yes, yes, absolutely. So we -- I'll start to kind of -- it's region specific. So if I look at the U.S., what we're really focused on at the moment is expanding our urine module. So we already have had enough to get a clear urine module that's on the Thermo Fisher media. What we found is that there's an increase in what's called bi-plate, so this is a single plate that's kind of split in the middle. And so rather than having a 2-plate protocol, some labs are using a single bi-plate. And so we're expanding that to cover both Thermo Fisher and BD. So expanding our urine module portfolio in the U.S. And in a similar way, we're doing that for Europe. So I guess urine is an expanding the plates that we support is a key initiative. The AST, this antimicrobial resistance is another key initiative. And this is for those positive plates and looking at antimicrobial resistance to the bacteria. We're really excited about this project, had a lot of interest from customers. And so that's the second important initiative that we have with this clinical space that the teams are working on. So just summarize, really focusing on urine, expanding the suite of modules in both Europe and the U.S. and then secondly, focused on the AST module.

[Operator Instructions] We have another couple of questions through the Q&A panel. So the next one is from James [ Prose ]. Are there any restrictions on Hettich's selling their LBT shares when issued? Have they expressed an intention to remain a shareholder longer term?

Yes, I'll take that one. So look, they have entered into a voluntary escrow for 12 months. And so that means that they can't trade their allocation of shares until January 2023. They haven't indicated any intention during this process of negotiating this term sheet of wanting to sell at that point in time. So I guess, really, they entered under voluntary escrow, and that's a year from now.

The next question comes from Daniel . Aside from the COVID-19, are there any other reasons for the slow uptake of sales to date? What is the feedback from microbiologists and laboratory chiefs to the APAS presentations and relevant published data, are they waiting for more real-world data?

Yes. Look, COVID has been a real challenge for us. And I think that's really obvious due to travel restrictions. But I think, moreover, labs are just inundated by doing COVID tests and personnel are being moved from all areas of labs to focus on that throughput. Like I said during the presentation, we are seeing that in various kind of geographies starting to open up and things getting back to normal, which I think is really positive. Every lab that we've put the APAS Independence in, customers have really liked it. They've been surprised by the extent that APAS can deliver the automation and identify the various colonies on the plate. So they haven't believed it beforehand and obviously, after using APAS they have that kind of burden of proof that's available to them. There's going to be early adopters. There's going to be people who are going to want more data. We've sold 6 instruments globally. So we're still early days in terms of generating that scale and people kind of buying off a catalog. So I'd say, look, I'm not going to say there's not going to be a COVID impact over the next 12 months. We hope that, that kind of diminishes. There's always an opportunity to deliver more proof points. We're doing a study at the moment, which demonstrates the utility from a cost perspective in the U.S. at the moment, and we expect to have those results published later this year. So shifting a little bit from proving the technology works because we've now got a number of publications that have been presented on that and really demonstrating the fact that the cost utility, the benefits with the instrument in the lab promotes the right justification. So that's the type of effort that we're doing in terms of working with key opinion leaders to get that data published.

Thank you, Brent. There are no further questions at this time. So that does conclude our conference for today. Thank you for participating. You may now disconnect.