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 [indiscernible]. Welcome, everyone. This is Peter Rowland, and I am pleased to welcome you all today to Micro-X Quarterly Investor Call. The format for the call will, as usual, include an overview of our operations and financial matters for quarter ending 31st of December 2022, which we outlined in our nice filed with the ASX on the 30th of January.

We will then open up to questions and answers. And for those that are not able to attend a recording of this call will be on our website shortly. We hope that this format continues to provide you with additional information about the company, but also the opportunity to better engage with us and hear about our progress. Now before we begin, I would also like to welcome our Chief Financial Officer, Kingsley Hall, who is with me here in the Micro-X [indiscernible] facility in Seattle, Washington.

[Kingsley Hall, executive]

Thanks, Peter. Good morning, everyone. It's great to be speaking with you again today. Before we start, I would just like to cover off on one brief formality and remind everyone on the call today that the 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.

I'll now hand back over to Peter to run through the highlights for the quarter.

[Peter Rowland, executive]

Thanks for that, Kingsley. And before we get into the progress, we've made across each of our 4 business units over the last quarter, I would like to provide a quick update on our long-term collaboration with Varex Energy, which we commenced last quarter. As we noted in the quarterly, the 2 tranches of equity investments totaling $7.5 million have now been received, which takes the Barrick shareholding in Micro-X up to 9.9%.

The first $1.5 million under the technology license was also received in the previous quarter. And both these demands helped strengthen our balance sheet with an increase in the cash we held at the end of December, up from that at the end of the September quarter. We were also very pleased to welcome Andrew Hart, Senior Vice President of Direct to our Board as a Non-Executive Director. Our Board and leadership team look forward to Andrew joining us in person in Adelaide for his first board meeting later this month. And I'm sure that the global commercial experience in sales and marketing in the medical x-ray energy market will be invaluable to us as we look to build our mobile VR business and at any time or skin scanner products.

I would like to stress though that we working relationship with Arix bring us many strategic benefits in addition to the funding elements. Initially, our technology team is primarily focused with the Varex [indiscernible] in Salt Lake City on the technology transfer and design for the multi-beam remeasure.

These achievements will unlock scheduled milestone payments as the work progresses. But of course, working on the inside with the world's leading entry technology engineers, brings many other invaluable insights and benefits. I will likely be meeting with the Varex CEO, Sunny Sanyal later this week to review progress and to further other collaboration plans.

I'm pleased to say that the arrangement with Varex, not the highly respected leader in the tray industry globally has created additional external interest in Micro-X in a number of ways at the recent RSNA industry conference in Chicago. We had many meetings about our products and technology with a number of X-ray imaging industry companies, both large and small. A common theme in those meetings was a recognition that our Micro-X next [indiscernible] technology must be truly world-leading for Varex to engage as a long-term partner.

This interest has also flowed to the financial industry, where we've been receiving considerable interest from sell-side brokers and analysts as well as buy-side funds here in the U.S. Many of the analysts we are talking to are med tech specialists and cover Barrick hence want to get ahead of the leap forward in the next X-ray technology.

Kingsley and I have just had a very productive 3 days in New York last week, meeting face to face with a number of these brokers, analysts and investors. As our U.S. businesses in health care, defense and security continue to grow, we plan to continue nurturing these relationships to hopefully expand our shareholder base in the future. [indiscernible] 4 business units, as usual in order of commercial readiness.

Signing the [indiscernible], this quarter so the team achieved $1.3 million of sales. This growth was particularly pleasing as the pessimistic outlook here in the U.S. created a difficult quarter for the actual industry with many hospitals and buying groups bring freedom capital purchasing. Our sales mostly came from the maturation of the sales pipeline opportunities established by our distributor in the earlier part of the year and the sales pipeline of potential customers also grew as an increased level of awareness and sales traction for loves achieved. The demand may be lumpy going forward, but it is improving.

Towards the end of this call, we were very pleased to launch the new variant of the Micro-X [indiscernible] which has been treated with the detector and software from Vieworks, a large store and the tanker manufacturer. As I've mentioned before, Vieworks owns Medlink here in the U.S., the second largest independent distributor of digital radiology equipment in the U.S.

Our regulatory team was able to achieve FDA approval for this new level, and this has triggered the Medlink sales efforts to begin. Medlink have placed their first $250,000 order for rovers and are now contractually committed to buy a minimum of $1 million of rovers for each of the next 3 years. Our regulatory team is still working to provide our notified body with further requested information to achieve our MBR certification for over.

While the last time since we commenced this MDR processes frustratingly long, our progress seems to be in line with what many x-ray manufacturers are experiencing. We are hoping now for the EU launch in the middle of 2023, subject obviously to a successful regulatory decision. In the meantime, our sales team are working hard in countries outside the U.S., which do set the U.S. FDA clearance, and we have a secured robust sales to Israel, Uzbekistan and the Middle East during this last quarter.

Now moving into our X-ray camera business, the Argus, which is still targeting first commercial sales in the middle of 2023. I'm very pleased to say that our engineering team looked to have successfully addressed the technical excise we face in manufacturing of the [indiscernible] generators last quarter. And we now have newly produced Argus systems being tested in Ponzi as part of the validation and production with ability process.

A challenge designing Argus to be in such a compact and whiteboard form factor required some very advanced high-voltage engineering. I'm pleased to say that we believe in meeting this challenge, we have actually designed the smallest 160-kilowatt generator in the world. Huge credit is due to the team for this achievement. Once we are completely satisfied with reliability and [indiscernible] of this new Argus system, we will arrange local customer demonstrations here in Australia in the coming months to please and defense ELD personnel.

This will be an opportunity to gain some customer feedback on our operator interface and controls, which we can incorporate during our production readiness preparation before we move to international customer demonstrations later in the year. We have nearly 2 dozen key end users with last trial units.

During the quarter, our Check Point team here in Seattle once again achieved their development milestones and remain on time and on budget for both the Minister CT baggage scanner and the search screening checkpoint programs for the U.S. Department of Homeland Security. One key event for us during the quarter here in Seattle was a walk-through of our mockup of the self-screening checkpoint portal design with DHS representatives from Washington, D.C. and TSA representatives from both DC and the Seattle Airport.

A key part of our design contract for the self-service checkpoint is the passenger experience and making the user interface intuitive and inviting. The team here built a full-scale mockup of the portal which notes obviously who attended our AGM the seen featured by video. Our customer, the TSA got to use and interact with the portal and our scanner in an accurate representation in the revolution new checkpoint environment. The clear excitement and enthusiasm of the demonstration as the vision of self-screening is evolving to exceed what everybody initially imagine might be possible.

I got tried out this week for myself, and it is an amazing experience with its simplicity [indiscernible] the contrast with the current checkpoint experience at airports could not be greater. And it's plain trip for us now reinforces the motivation to bring this technology to market as soon as possible. The development work on our brand CT for the Australian stroke alliance continues on time and on budget.

Our focus during the quarter has been building the test bench, which we planned for capturing Phantom and/or PDA images to feed the CT image reconstruction team in Seattle. This test bench incorporates the world's first dynamic curve detector recently received from Tucci, our partner in this development.

Meanwhile, in Baltimore, the John Hopkins I-STAR Labs have a growing team working on the image processing algorithms. And we're very proud that a scientific paper entitled adaptive credo-based [indiscernible] for multisource station CT has been accepted for presentation at the prestigious SPIE Medical Imaging conference later this month in San Diego.

In Melbourne, the Monash University Health collaboration have produced a detailed usability and workflow study for us for point-of-care CT energy scans. And this has been used by our team at Adelaide to start the concept design for the scanners integration into road and air and using vehicles. Also, in Adelaide, our core technology team are nearing completion of the mini design for the scanner at 2 and plan to release design drawings for the initial procurement shortly.

I'll now pass you 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 launched with the ASX on the 30th of January 2023. And the numbers I'll be referring to are all in Australian dollars and in accordance with ASX listing rules, these are not audited. Before I get into the trading results, there were several corporate and finance events that have strongly boosted our balance sheet this quarter.

As Peter mentioned, during the quarter, we completed the second tranche of the equity subscription agreement with Barrick. And in total, issued 50.7 million shares at $0.147 each for a cash consideration of $7.5 million. Again, as previously noted, we received the first $1.5 million from Barrick for their first milestone payment of the license agreement in September. And additionally, in December, we received our R&D tax rebate of $3.9 million.

So for the quarter ended 31 December 2022, we built ship invoiced approximately $1.2 million worth of mobile DR units and parts were $1.3 million in customer sets and sales, $950,000 from our contracts with both the DHS and ASA and a further $460,000 from the Advanced Manufacturing Growth Center. We had cash outflows from operations of $9.3 million, resulting in net operating cash outflows of $2.7 million. We had outflows from investing activities of $90,000 for buying some additional capital equipment.

We had cash inflows of approximately $3.7 million from financing activities being the second tranche of the direct investment, offset by 2 amounts of $160,000 being the principal component of our operating lease repayments as calculated under AASB 1016 and $70,000 in transaction costs associated with the Barrick investment. We had overall net cash inflows of $970,000 and a cash balance of $11.4 million as at the 31st of December 2022.

I would like to add that the supply chain challenges that we've seen over the last 2 years or so seem to be easy. To manage this, we have been buying additional inventory and also holding a large number of completed or semi complete rover unit. We've got approximately $7.7 million worth of long lead items and completed mobile DI units held at 31st of December. That $7.2 million includes some Argus inventory also, but predominantly mobile VR. And whilst this has reduced the cash we have on hand, we're confident that this inventory will be sold in coming quarters and converted back into cash.

More importantly, as supply chain issues improve, we don't believe we'll need to reinvest as much and hold the high levels of inventory, which we will see reducing to more normal levels throughout 2023, further helping our cash position. I should also add that while the December quarter was lumpy in some respects from a cash expenditure perspective with some previously accrued expenditure payments and the Varex transaction costs. It was in line with our expectations.

I'll now hand it back to you, Peter.

[Peter Rowland, executive]

Thanks Kingsley. As we move into the 2020 calendar year, we have 3 key priorities in front of us. Firstly, now we are confident the Argus can complete its validation testing. We want to enable customer demonstrations as soon as we can, followed by the commercial launch. We see the Argus as both the near term and a significant commercial opportunity for us to deliver sales revenues and cash flows.

Secondly, priority to continue increasing sales traction to rover and to build a larger funnel. Working closely with our second major U.S. distributor, Medlink, Crane sub distributors, now we have regulatory approval, will be a key element of this along with targeted opportunities similar to the recent Ukrainian orders Thirdly, our priority is to continue to enhance the technology in the other 2 development divisions of checkpoints and [indiscernible], including the associated miniaturized it.

The technology train will also be focusing on the Varex technology transfer to meet the next 2 milestones in the upcoming quarter. I will now pass you back to the operator who will commence the Q&A portion of this call.

[Operator]

[Operator Instructions] Your first question comes from Scott Power with Morgans Financial.

[Scott Power, analyst]

Congratulations on that result. Just a couple of quick questions from me. Peter, just with the certification, can I just confirm that you provided all the information and you're really just now waiting for the decision. So there's nothing sort of further that you can do. It's just a case of waiting for them to process that application. Is that correct?

[Peter Rowland, executive]

Sort of correct. We have the notified body has given us a date at which they are available to consider the outstanding information they want to see that date is, I think, about 2 weeks away. And so we are just continuing to refine and add the data to the data pack that we will deliver on that schedule be for them to consider. But after that date, I can recall off the top of my mind, but it is sometime in the middle of this month, what you said would be great.

[Scott Power, analyst]

And then as soon as that certifications in your hand, the next day sales can commence through your distribution partner?

[Peter Rowland, executive]

Yes, given the [indiscernible] from the point where the auditors decided that it's all good. They then recommend to their principles in the side body hold the senior level meeting to endorse the recommendation actually issued the certificate. So there's a little bureaucratic weight. But we -- our sales team in Europe has done a fantastic job in getting a rough of distribute distributors, all fired up and sign and ready to go and including a number of orders that are -- we will be dispatching the day we get the certification through.

[Scott Power, analyst]

And the next question, just an accounting question for Kingsley. Just in terms of recognizing the license revenue from Varex. That will come through as revenue in 2023.

[Peter Rowland, executive]

That's right, Scott. So obviously, from a cash flow perspective, we will recognize the milestones as they are paid in the quarters that they paid. So there was one in the September quarter, there wasn't one in December from an accounting standards P&L perspective, you will accurately reflect the revenue on a kind of percentage earn basis, but there are some pretty clear milestones in our development agreement. So that's not a difficult exercise. We -- I think when we announced the deal back in September, we said that the 5 milestones, which in total of $7.5 million or unlikely to be earned payer kind of a 12-month period, and that remains on track. So the $6 million in remaining fees to be this year.

[Scott Power, analyst]

Okay, great. Terrific.

[Peter Rowland, executive]

And I'd say we're targeting for that to be completed probably around September [indiscernible] comes last year.

[Scott Power, analyst]

And just in terms of your staffing levels, are you comfortable that you've sort of achieved what you originally set out when you first made those comments a couple of quarters ago.

[Peter Rowland, executive]

[indiscernible]

[Scott Power, analyst]

Yes.

[Peter Rowland, executive]

The reductions that we made Scott back in July of '22 to have remained intact. We've not reappointed any of those roles. And the process is in place are adequate for what we need.

[Operator]

[Operator Instructions] We will now pass for a short moment while waiting for more questions to be registered. There are no further questions at this time. I'll now hand back to Mr. Rowland for some closing remarks.

[Peter Rowland, executive]

Thank you all again for your support and for joining us on this investor call today. This will be a very good year for Micro-X and our next few quarters will be critical as we bring our first security product to market. I look forward to speaking with you again to report on our further progress.

[Operator]

Thank you, that concludes our conference for today. Thank you for participating. You may now disconnect.