Micro-X Ltd

ASX:MX1

Earnings Call Transcript

[Operator]

Thank you for standing by, and welcome to the Micro-X Limited Quarterly Investor Call. [Operator Instructions] I would now like to hand the conference over to Mr. Peter Rowland, Managing Director. Please go ahead.

[Peter Rowland, executive]

Thank you, Cameron. Welcome, everyone. This is Peter Rowland, and I'm pleased to welcome you all today to Micro-X's quarterly investor call. The format for the call will, as usual, include an overview of our operations and financial matters for the quarter ending 30th of September 2022, which we outlined in our Appendix 4C filed with the ASX yesterday, the 26th of October. We will then open up to questions and answers. And for those that are not able to attend, a recording of this will be on our website shortly. We hope that this format continues to provide you with the additional information about the company and also the opportunity to better engage with us and hear about our progress. Now before we begin, I'd also like to welcome our Chief Financial Officer, Kingsley Hall, who is with me on the call today.

[Kingsley Hall, executive]

Thanks, Peter. Good morning, everyone. It's great to be speaking with you again today. Before we start, I would like to cover off on one brief formality and remind everyone on the call that today's call may contain forward-looking statements, which involve inherent risks and uncertainties. Those risks and uncertainties include those disclosed in our ASX lodgments, which we recommend that you review. While there are reasonable grounds for any forward-looking statements made today due to their inherent uncertainties, we recommend that you do not place undue reliance on those statements, and you note that actual results may, of course, differ materially from those forward-looking statements. Now I'll hand back to Peter to run through the highlights for the quarter.

[Peter Rowland, executive]

Thanks, Kingsley. I'm very pleased today to discuss the commercial and technical progress that we've made across each of our 4 business units. However, I would like to start off with the long-term investments and collaboration arrangement with Varex Imaging that we had executed last month. As those who heard our last investor call will be aware that Varex is a recognized market leader in the development and manufacturer of high-technology components for x-ray imaging equipment. Kingsley, myself and several of our executives have been to their headquarters in Salt Lake City, a number of times already this year to view their capability and meet with their leadership group.

And when there, you instantly become aware of the scale, not just of their manufacturing operations, but the depth of their customer base and technical design capabilities. They make well over 25,000 x-ray tubes annually, obviously, traditional hot filament technology, of course, so far and over 20,000 digital x-ray detectors each year, that some of those for our very own Micro-X rover. Their customer list includes a who's who of the global x-ray manufacturers globally, counting in their top 5 customers, Canon Medical, General Electric, Elekta, United Imaging and Varian Medical.

When we first met with the Varex CEO and his team, it was clear to us that they are an industry leader in innovation, and they share our vision that the next generation of X-ray sources will be electronically controlled, in other words, using coal cathode or any x technology. As you might expect, there was extensive due diligence undertaken on us as well, which led to a strong respect for what we have achieved and how advanced our tube designs and manufacturing processes are compared with what they're used to.

Having now executed on our collaboration, which licenses the Micro-X NEX technology exclusively to Varex for the field of multi-beam x-ray tubes. We are immensely proud to have this validation and also a way to build broader adoption of the NEX technology across a whole new cohort of potential customers. Now some investors have asked me, are we building a competitor for our 4 key products. But that's not the case as none of our current products nor others which we can foresee, use multi-beam x-ray tubes. In other words, we have licensed out a small part of our technology platform that we did not plan to use.

Financially, the collaboration with Varex is also significant, and we will receive a total of $15 million over 12 months, split equally between $7.5 million for a technology license, which, of course, is nondilutive to shareholders and a share subscription for $7.5 million at a premium to the market price, which will result in Varex holding just under 10% at Micro-X. For a business like ours executing multiple commercial development programs, this funding greatly strengthens our balance sheet and enables us to keep up our momentum in commercialization and development activities well into 2024.

I would also like to mention that in the 5 weeks since we announced the Varex deal, there's been a tremendous rapport built between the technical teams on both sides. And the collaboration echo is a mutual respect and excitement of what we're building. We've already received the first funds being just under $5 million as the first installment of the license fee and the first tranche of the equity investment. Varex's foreign investment review board application for the second tranche was lodged at the start of this month, and assessment appears to be well advanced. As you will see in our notice of Annual General Meeting, we're also looking forward to the upcoming appointment of Mr. Andrew Hartmann as a Nonexecutive Director to the Board.

I've known Andrew for 8 years since the time he led the x-ray imaging team at Carestream. I'm pleased to say that he brings a wealth of truly global commercial expertise in the medical x-ray imaging market, having worked in senior roles at Philips, Siemens, Akusan as well as Carestream. And he, of course, is currently the Senior Vice President of Global Medical Sales and Marketing at Varex. While Andrew has worked in the U.K., in Germany, in Holland, in Hong Kong and for the last 20 years in the United States, Andrew originally actually hailed from Sydney.

I'll now run through each of our 4 business units in the order of its -- their commercial readiness. Starting with Mobile DR, this quarter sold the team undertake a number of commercial initiatives, the most successful of which was a customer demonstration roadshow in a number of U.S. states with our major and recently appointed U.S. distribution partner, MXR. During the roadshow, the joint MXR, a Micro-X clinical and sales specialists met a range of potential customers. And pleasingly, almost all of these organizations, which have the opportunity to get hands-on with the Rover requested a formal quotation for supply.

This type of roadshow demonstration is clearly effective means to build the sales funnel. And now other road shows are in planning. While we are aware that the process of building sales pipeline seems long, we are starting to make real progress now with our first nationwide U.S. distributor. On the development front, integration of the Viewworks Imaging Software and the digital detector into the Rover is close to completion. Our regulatory team is now preparing the technical dossier for a special 510(k) filing to the FDA. And when [indiscernible] this will allow Medlink Imaging to market Rover to their network of over 100 subdistributors across the U.S. FDA approval, which is a comparatively quick for a special filing, will kick off the commitment from Medlink to buy a minimum of USD 1 million of Rover units per annum.

In other markets across EMEA, our management is working hard, growing the number of distributors to expand market access in countries which accept the U.S. FDA clearance such as Israel, Thailand, Vietnam, United Arab Emirates and Taiwan. Unfortunately, the timing to receive CE Mark has moved out again with another request from our notified body for additional information in respect of 2 of the technical documents.

We'll be preparing this response shortly for submission. And pleasingly, the rest of the technical and clinical dossiers have been accepted with no additional questions remaining. In summary, our Mobile DR revenues for the quarter were flat at $0.4 million, which is not the growth we were hoping for. But it's actually not out of step with what other radiology companies are reporting, i.e., this year is still much weaker demand for mobile systems following the big surge in sales in 2020 associated with the COVID-19 pandemic.

As we look to close out 2022, we are focusing our efforts on a [indiscernible] launch with Medlink as well as continue to build a brand presence to support sales activity with an exhibitor presence again at the upcoming RSNA conference in Chicago in November. Moving on to our X-ray Camera Business Unit, the Argus. During the quarter, we continued the imaging test with Argus, which has yielded the high-resolution imaging results we were looking for, and we continue to refine our user interface software.

In parallel with this, the manufacturing team are resolving some technical issues around the consistency of processes that we have in putting or encapsulation of the high-voltage components for voltage insulation. To provide some context that design of the Argus unit is exceptional technology, to squeeze 160-kilovolt x-ray tube and generator along with the detector battery and control and transmission electrodes into such a small 17 kilogram package is quite a unique achievement.

As part of our commitment to quality, our development team is focused on achieving the consistency in production necessary to ensure that the Argus units we send for trial are robust to meet the customers' expectations. On the commercial front, we're focused on continuing to build market interest in the product. And to start the quarter end, we presented Argus in Pennsylvania at the U.S. International Association of Bomb technicians and investigators.

We're also eagerly awaiting the outcome of the Australian Department of Defense's land 154 tender evaluation process, which is scheduled to be announced during the December quarter. During the quarter, our Checkpoint's team once again achieved their development milestones and remain on time and on budget. For the Miniature CT Baggage Scanner program, the U.S. Department of Homeland Security have been so pleased with the detailed design of the Checkpoint concept and the baggage scanner that they've requested that Micro-X provide an additional prototype unit to accelerate in-house testing.

This second prototype unit will be delivered in mid-2023 for an additional payment of USD 430,000. On our second program with the DHS, the development team in Seattle have been focused on refining the portal design for the self-screening checkpoint. They developed a series of full-size mockups in the -- of the portal in our lab at SeaTac, and the DHS were delighted with the concept when they visited last month. Also during the quarter, the DHS signed off on the second part of the passenger cell screening Checkpoint contract, which analogs the remaining USD 1.2 million of funding across the next 8 months.

And our final business unit, Brain CT. During the quarter, our team successfully completed the third milestone on the MRFF program on time and on budget. This released a further $2.3 million of funding and an advanced portion of GBP 1.6 million of this was received in July. Team have now turned their attention to developing an integrated test bench using a movable tube, which is settled for testing in Melbourne during 2023.

Needless to say, we're delighted that the development activities across both these areas in Checkpoint and the Brain CT business units remain on schedule and on budget. And of course, they're both largely self-funded by the contracts in place. Before we move on to the financials, I would like to, on behalf of all of the Micro-X directors, express our gratitude in Ms. Yasmin King, who retired from the Micro-X Board in early October. Yasmin served on the board for nearly 6 weeks -- 6 years, helping guide the company through its early growth years after listing, and she leaves now with the company in a much stronger position. We thank her for all her efforts over her time on the board. I'll now pass over to Kingsley, who will run you through the corporate and financial activities for the quarter.

[Kingsley Hall, executive]

Thanks, Peter. I'll start with the financial results as reported in the Appendix 4C lodged with the ASX on the 26th of October 2022. And the numbers I'll be referring to are all in Australian dollars and in accordance with ASX listing rules, these are not audited. As Peter mentioned earlier, during the quarter, we entered into an equity subscription and license agreement with Varex Imaging. We received the first of 5 milestone payments under the licensing agreement of $1.4 million upon execution of that agreement. And there's a further 4 milestone payments over the next 12 months, totaling approximately $6 million to be received.

Under the equity subscription agreement, Varex were issued 23.8 million shares at $0.147 for a total cash consideration of $3.5 million. The second tranche of the equity subscription agreement, which totals approximately $4 million is expected to be received in the current quarter following further approval. So for the quarter ended 30 September 2022, we built, shipped and invoiced approximately $400,000 of mobile DR units and parts. We received $280,000 in customer receipts from sales, $2.6 million from our contracts with the DHS and the ASA and a further $1.4 million from the Varex technology transfer agreement.

We had total cash outflows from operations of $7.2 million, which resulted in net operating cash outflows of $2.8 million for the quarter. We had cash outflows of a little over $350,000 from investing activities essentially for buying additional capital equipment. We had cash inflows of approximately $3.3 million from financing activity, being the $3.5 million received from the first tranche of the Varex investment, offset by about $160,000 being the principal component of operating lease payments as calculated under AASB 1016.

In summary, we had overall net cash inflows of just over $100,000 and a cash balance of $10.4 million as at the 30th of September 2022. In the upcoming quarter, the quarter we're currently in, we expect to receive approximately $7.5 million from 2 key sources being $3.5 million from our R&D tax rebate and $4 million from the second tranche of investment from Varex, which I mentioned earlier, to be received upon further approval. The company has extended its funding runway into calendar year 2024, as Peter mentioned, with a conservative sales forecast, but we will continue to prudently manage our cash flows. I'll now hand it back to you, Peter.

[Peter Rowland, executive]

Thanks, Kingsley. Now as we close out the first half of the 2023 financial year, completing the final development activities for August in preparation for releasing the FERC demonstration units is at the very top of our listed priorities. Sales team is working hard to expand the number of customer organizations anxious to trial the first units to become available. And of course, we're, as I mentioned, eagerly awaiting in the announcement of the Department of Defense's Land 154 procurement.

If we were successful in that tender, a multimillion dollar procurement contract from the Australian defense force would be a perfect global launch platform for such an innovative product. Now we're also hard at work with multiple sales-focused initiatives in our Mobile DR division. We are impatient to see sales net numbers, reach expectations. So we're focused on closing out the current quotes in the sales funnel as well as the FDA submission for the Viewworks variant, which will unlock Medlink's marketing to domains.

Now finally, I would like to remind all investors, our Annual General Meeting will be held on Monday, the 14th of November by Zoom and for those who can make it in person at our Tonsley facility in Adelaide, I would very much welcome your attendance in Adelaide, if you could make it. We will be offering a tour of the Tonsley facility and the opportunity to meet staff to all shareholders immediately following the meeting. I'll now pass you back to the operator who will commence the Q&A portion of this call.

[Operator]

Thank you very much. [Operator Instructions] Your first question comes from Scott Power at Morgans Financial.

[Scott Power, analyst]

Peter & Kingsley. Can you hear me okay?

[Peter Rowland, executive]

We can.

[Scott Power, analyst]

Just a couple of questions from me. Kingsley, I just might just start with one on inventory. Just your sort of sense of the inventory that's shown on the balance sheet, the expectation that you've a, got enough componentry there to handle any increase in orders? And b, given you've secured a fair bit of inventory over the last sort of 6 months or so, whether that will start to sort of decrease in size?

[Kingsley Hall, executive]

Yes. Thanks, Scott. Look, I think both of those points you make are right. When we -- one of our initiatives probably going back 18 months ago or so now, 2 years ago was to kind of proactively build up inventory so that we could settle orders very, very quickly and be very competitive in that space, and we did that. That kind of inventory increase program is largely over. We've got a number of finished items, I think we're probably about -- we've got a couple of million dollars' worth of finished items now in Seattle, which can be sold and delivered very quickly.

And we've also got enough inventory in Tonsley, that we could make and settle further orders when they arrive. So look, we're very well placed. I think to the second part of your question, yes, I would think we would see no further net increases in the inventory and probably a reduction over the short to medium term as those sales come in with CE, Mark and MXR and Medlink taking hold in the U.S.

[Scott Power, analyst]

Yes. Great. Okay. And how should we be thinking about the cost base? I think in your last presentation, we were -- you were sort of mentioning reductions and sort of realignment and all that. Just from sort of a higher level, how should we now think about that?

[Kingsley Hall, executive]

Yes. Look, I think everything is very consistent with what we spoke about probably in the last quarter, I think, in our -- in getting ready for the '23 financial year, we took about 20% out of the overhead side, the cost base of the business, and that included the operating side of Mobile DR. We have continued to invest in the 2 major contract payment -- contract areas of the business, which is the DHS and the ASA. But those parts of the business are largely funded by the 2 contracts that underpin those business units.

So overall, about a 20% decrease to the non, I guess, non-contracted costs within the business. And that coupled with the funding and the agreement that we've made with Varex and the deal we did there sees us funded comfortably through well into 2024.

[Scott Power, analyst]

Right. Okay. And Peter, if I can just ask you a little bit about the upcoming RSNA conference. I mean, that's always been a big component for industry to show their new ways. What's your expectation this year in terms of the participants there, perhaps whether the hospitals are starting to open up their budgets and trying to sort of get that sales momentum going?

[Peter Rowland, executive]

Yes. Look, I haven't had any information yet on what the sort of preregistrations look like for RSNA. Everyone is expecting it to be bigger than last year because, obviously, last year was -- travel was still difficult with COVID. The -- but it's still the big global radiology conference. And although it's held in the U.S. Thanksgiving weekend, there's still a huge participation from Asia and from Europe. So it's still the premier show. And Yes, hoping. I mean, we use -- obviously, the big advantage there is where you do have people from the hospitals and the buying groups coming to see and look at the equipment, but it's a big opportunity for the industry to talk to the industry. So for instance, the genesis of our deal with Varex was started from meetings a year ago at RSNA. So very important from both the sales and the strategic future.

[Scott Power, analyst]

Sure. Okay. That's great. And Peter, just one final question for me. Can you just check or can I just check what you said about that special 510(k) filing, just the timing and your expectation of that coming through reasonably quickly to sort of trigger the [indiscernible].

[Peter Rowland, executive]

Yes. The last one that we did like this, which is where you've basically got the same product, but you're adding a different detector and software package. The approval came through in about 21 days. I think for a special the maximum is something like a month rather than the 90 days, which is the target completion for a full 510(k) submission. So this is just a special because you're adding new components but other -- to an imaging system, but the components themselves have a separate FDA approval.

[Scott Power, analyst]

Okay. Great. And you said you've submitted or about to?

[Peter Rowland, executive]

We're about to, the guys are working on it this very weak. So it's pretty close. We've done all the work backwards and forwards with the team in Seoul. So yes, it's paperwork on writing and submission.

[Operator]

[Operator Instructions] Your next question comes from Brendan Earle, a Private Investor.

[Brendan Earle]

Peter. The Checkpoint's progress is very positive. Is there any political or industrial risk do you think with a purchase order from DHS down the line? Because it seems it's going to involve quite a lot of job losses that technology when it's rolled out. Do you think there's a risk there that there could be interference in the procurement process when they're ultimately ready?

[Peter Rowland, executive]

Look, it -- it's not impossible, but the number of people who aren't anxious to see such a huge change to airport checkpoint security is so small. The -- I think it -- the way that TSA is planning it is winning the hearts and minds of the passengers because it's the passenger experience there. And if that's good, and they're happy because they're actually getting better levels of security than the kind of the manpower reduction becomes something that people aren't going to focus on quite so much.

[Operator]

Thank you. [Operator Instructions] As we are showing no further questions at this time, I will hand back to Peter Rowland for closing remarks.

[Peter Rowland, executive]

Thanks, Cameron. Well, thank you again for your support and for joining us on this investor call. Our next few quarters will be very busy and some important milestones are expected right across the X-ray Camera and Baggage Scanner Divisions. I look forward to speaking with you again to report on our further progress.

[Operator]

Thank you everyone. That concludes our conference for today. Thank you for participating. You may now disconnect your lines.