Micro-X Limited (MX1) Earnings Call Transcript & Summary

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

Thank you, Melanie. 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 31st December 2021, which we outlined in our Appendix 4C filed with the ASX on Thursday, 27th of January. We'll 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 this format continues to provide you with additional information about the company and also the opportunity to better engage with us in our progress. Now before we begin, I'd like to also welcome our Chief Financial Officer, Kingsley Hall, who is also with me here on the call today.

Yes. 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 those 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. And 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. Thank you. I'll now hand back over to Peter to run through the highlights for the quarter.

Thanks, Kingsley. Look, the outstanding themes, spanning all our activities and achievements over the last quarter, has been the overwhelming customer feedback and interest from the market that we've witnessed for our technology in each of our 4 product areas. It was in late November, the day after our Annual General Meeting, actually, that I was finally able to make my first international trip since the COVID pandemic started to attend RSNA for our debut presentation of the Micro-X brand, and along with all our sales team to see and hear firsthand feedback from our potential customers. I'll go into more detail shortly on other successful conferences we attended in the U.S. during the quarter. Needless to say, it's critical, as travel freedom has returned, for us to increase face-to-face engagement with our potential end user customers and distribution organizations. Our near-term focus and goals are threefold and remain clear. We must use the brand positioning we've now created to develop our independent medical sales distribution network with key appointments and additional marketing activities to capitalize on the potential of the Mobile DR range of products and generate the level of sales we know we can achieve. We see our IED X-ray camera, the Argus, as the key milestone to be achieved this year as we complete the final development work and start customer demonstrations in the following quarter, ahead of commercial sales starting in the middle of this year. Unlike Mobile DR, where we took control of marketing and selling our own product latencies, with Argus, we will have spent nearly a year priming the market by the time the product is launched. Already 2 military RFI responses have been submitted and 7 military and law enforcement agencies and we're already committed to evaluation trials at the earliest opportunity. Front of mind for us is that the Argus has no direct competitors and the compelling user benefits in this product will translate to a high ASP and very strong margins. Our third objective is to maintain our contracted schedule with our funded development projects for the CT brain scanner and the miniature baggage CT scanner, which is now just over 1 year away from achievement of a functioning prototype for the DHS, the Department of Homeland Security. I'll now run through the details of our progress across the 4 product lines as usual in order of commercial readiness before moving to corporate matters and other highlights of the quarter. Starting with Mobile DR, we've been focused on getting ready to launch our next-generation Micro-X branded Rover Mark II, which remains on track for global commercial launch this quarter. This represents another important milestone in our commercialization strategy as this next generation Rover extends the proven benefits of the first generation product, particularly the smaller size and enhanced maneuverability, to deliver far greater imaging capability with fourfold increase in x-ray output. The Rover Mark II will thus be well suited to the specialized imaging needs in emergency departments, operating theaters and military deployed hospitals, as well as the high-volume daily imaging needs of ICUs. We also expect to see strong margin improvements in our next-generation rover as we shift from the third-party high voltage generator, which is currently the costliest component in the rover, to the in-house Micro-X generator with a higher output. On the regulatory front, based on discussions with our notified body, we hope to achieve our MDR accreditation and thus CE marking during this March 2022 quarter after delays due to the volume of companies simultaneously seeking the same accreditation to this new European regulatory environment. After achieving FDA and TGA certification in 2021, obtaining the CE Mark approval for the Micro-X Rover will represent the last key regulatory approval we need, which will greatly boost our Mobile DR sales prospects in Europe. And Undoubtedly, the highlight of the December quarter was our corporate debut at the 107th RSNA meeting. The conference theme this year was redefining radiology, which was an apposite backdrop for us to introduce the radiology world to Micro-X's cutting edge products and innovative technology. It was very important for us to launch Micro-X with a strong brand image of innovation and disruption because the company's brand image and visible end user acceptance of the new technology are the 2 primary determinants of our distributors' propensity to add our products to their stable. Our exhibition booth included the demonstration area with both a hospital bed and a neonatal intensive care crib for delegates to experience hands-on Rover's simplicity and ease of use. A display of our X-ray tube and generator technology allowed delegates to see the quality and technology maturity of our products. Our unprecedented launch announcement of Tube for Life, i.e., lifetime warranty on the x-ray tube, had a big impact and emphasized the huge end-user benefit of this new technology as well as the manufacturers' confidence in its reliability. It is really hard to convey to listeners the extent of the reception we received, which greatly exceeded all our expectations, with many, many discussions, positive feedback from both radiology and industry experts. The recurring theme I observed was that delegates were amazed that a company they've never heard of was so advanced in the global commercialization of such a new game-changing product and technology. The initials were particularly impressed with the compact size of our cold cathode x-ray tubes, particularly in brain CT, which emphasized the unprecedented miniaturization capability of this technology. Many of the delegates complimented us on the Rover's ease of movement and alignment and a novel see-through skin exhibit of the Rover's articulating an imaging component through admiration for the quality and simplicity of the build. From a sales and marketing perspective, RSNA proved to be exactly what we wanted, to build awareness and interest in the company's products in the industry. Every major multinational x-ray company, detector companies, large system integrators and over 60 interesting distributors from across the globe had meetings with us on our booth. We also performed product demonstrations to a large number of potential end user customers and clinicians, which our sales team are now following up. We have 3 distributors already signed. We're in negotiations with a further 20, as our focus is completely now on building this distribution network that we need to the mobile DR range. Like many other businesses today, much management attention is currently devoted to our supply chain to prevent any delays or restrictions to sales. Global electronic shortages and extended freight delivery times have been a concern. The company has sea-freighted a substantial number of completed Rover units to its Seattle office warehouse to avoid the escalating air freight costs and to pre-position stock for local sales delivery in North America. This investment of nearly $2 million in inventory of completed units and in strategic procurement of long-lead items will be reduced, of course, as these units get sold down in coming months. Now turning to our X-ray cameras business unit. Development activities on Argus continue to progress well, and we remain on track for imaging and system integration during this quarter. We plan to have a pre-production prototype available for customer trials in April of this year, and we'll be commencing production of Argus units in the middle of the year. The Argus sales team made great progress this quarter in presales and marketing activities to build up a sales pipeline of qualified customers. We showcased Argus at the United States Bomb Technician Association annual Critical Skills Challenge and Technology Trade Show, which was in Orlando, Florida. USBTA is a highly regarded organization within the Explosive Ordnance Disposal community, which seeks emerging and cutting-edge technologies and techniques to employ for active bomb technicians. The reaction from conference delegates to this revolutionary new product was best summed up by a senior agent from the FBI, who said, "This product is what we have been looking for and waiting for, for years." A number of representatives from the U.S. government agencies and state police and military bomb squad delegates have asked us to arrange demonstrations with them as soon as the prototype Argus is available. Also during the quarter, we submitted detailed responses to 2 requests for information from the Australian Defense Force and the U.K. Ministry of Defense to provide input into their planned acquisitions of new counter IED x-ray capability. This RFI process is an important step in military acquisition programs, which ensures that innovative new solutions are not accidentally excluded by tender specification requirements from legacy systems. Given that Argus was developed with $2.5 million of ADF funding to meet their identified operational needs and that the U.K. government has already awarded Micro-X two contracts for x-ray explosives detection imaging development, we are optimistic of the potential of both opportunities and hope to have updates within the next 6 months. Our checkpoints business unit has progressed well with the achievement of several development milestones under the 2 contracts executed with the U.S. Department of Homeland Security last quarter, and this has led to milestone payments totaling $400,000. A key commercial insight was gained during December with our attendance at the Future Travel Experience Conference in Las Vegas. This major Think Tank conference involved over 100 speakers, 55 exhibitors, and hundreds of representatives from airlines and airports globally. Micro-X showcased the miniature CT baggage scanner concept, which is, of course, the core technology element for the self-screening checkpoint under development for the TSA. The feedback we received from many delegates included describing it as the missing link in creating passenger-friendly security at airports, as it provides a novel and really quite optimal solution to the most challenging and invasive experience in a passenger's journey. It was clear that the miniature CT baggage scanner product itself has many commercialization opportunities outside of the self-screening checkpoint portal it's designed for. Representatives of several airlines and airports expressed an interest in incorporating this technology in new solutions to transform their passenger travel experience. It's also very pleasing to see strong international interest in the DHS TSA self-screening check portal concept development. Technical development of our brain CT scanner continued to progress well in accordance with our contract with the Australian Stroke Alliance. We showcased the space model of the future brain CT scanner at RSNA booth, which drew considerable crowds of interesting delegates each day. While I was in the U.S., our team also hosted the Prime Minister, at his request, for a tour of our Tonsley facility. At the press conference afterwards, he spoke with pride of the federal government's funding of our brain CT development and of the potential role of Micro-X's technology to save Australian lives through revolutionizing the way stroke is diagnosed and treated in the future. I'll now hand over to Kingsley to run through the corporate and financial activities for the quarter.

Thanks, Peter. Now turning to the financial results reported in the cash flow report launched at the ASX and our appendix 4C on the 27th of January 2022. The numbers I'll be referring to are all in Australian dollars and in accordance with the ASX listing rules. These are not audited. So for the quarter ended 31 December 2021, we built, shipped and invoiced $700,000 of Mobile DR units and associated parts. We received a little under $0.5 million in customer receipts from sales, about $400,000 from our contracts with the DHS, and a further $2.1 million received from the federal government R&D tax rebate system. We had cash outflows for the quarter of $8.18 million from operations, resulting in net operating cash outflows of $5.26 million. These outflows included the additional $2 million investment Peter mentioned earlier with regards to our holding of inventory of both completed Mobile DR units and also longer lead time items, which we've initiated in order to overcome supply chain challenges. We had cash outflows of $290,000 from investing activities related to buying additional equipment. In addition, we had cash outflows of $170,000 from financing activities, which represent the principal component of operating lease repayments as calculated under AASB 1016. In summary, we had overall net cash outflows of $5.7 million and a cash balance of $19.94 million as of the 31st of December 2021. The ramp-up in inventory this quarter will see reduced expenditure on Mobile DR inventory in coming quarters, especially supply chain issues stabilized. I will now hand it back to you, Peter.

Thanks, Kingsley. As I mentioned earlier, we've been truly overwhelmed by the amount of positive feedback and interest we've received from these important international conferences during the quarter. It represents very important independent market feedback that the products we are developing and are being paid to develop are indeed the game changers in each application that we have believed them to be. Looking ahead, our immediate focus will be finalizing negotiations with our growing new team of distributors and then providing training, initial stocking, and helping them to build sales funnels for our Mobile DR range. Completing our CE Mark certification process will also further open up our European market opportunities. It's a little more than a year now since we updated our Mobile DR strategy to build our own sales channels while maintaining a nonexclusive arrangement with Carestream, which has just been renewed for further 2 years. So while that distributor arrangement continues to generate sales for us, our own network is growing. We have a line of sight to rapidly growing sales traction, especially now with our own superior FDA-cleared range of products, customer enthusiasm, which was dramatically buoyed by the face-to-face and hand-on meetings and live demonstrations of the capabilities at RSNA. As I said at the outset, the successful commercial launch of Argus in the second half of the year is a critical milestone for the company. And in the coming months you can expect to see preproduction prototype complete its first high-definition imaging followed by full systems integration early in the second quarter of 2022. From there, several prototypes will be manufactured for multiple EOD customer trials and independent expert validation of the technology and its features and performance. So in summary, there's a lot of work and many exciting milestones and events ahead for the company. And I would like to acknowledge and again, thank the Micro-X team for what we achieved in 2021. We are refreshed and excited for what is to come in 2022. We remain focused to work hard and converting the strong levels of interest seen across all of our products into revenue growth. I'll now pass you back to the operator who will commence the Q&A portion of this call.

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

Congratulations on a good presentation there. I'm just wondering if we could start off by just talking about the sales that you've achieved in the first half. So they were, I'm presuming, below your expectations. But you've spoken very positively about the feedback from RSNA. Can you give us some sort of general comments around what we can expect over the next, say, 6 months in terms of how that positive feedback that you've received will translate into potential sales?

Yes. Thanks, Scotty. And yes, look, the mobile VR sales channels are taking longer to establish than we first thought. Having said that, if I can give a bit of context, as I mentioned, it's only just over 12 months since we were able to change our distribution agreement with Carestream to become nonexclusive. So this is what enabled us to implement a major change in our sales strategy from being solely an OEM provider of the nano electronic x-ray to a position where we're directly offering a complete imaging system, the Rover, under the Micro-X brand. So while we continue to sell the nano units through Carestream, we created our own imaging product for sale, got it FDA approved last year, started to build sales and distribution team to implement our own independent channels to market. I actually think we underestimated last year how hard it would be to get interest from independent distributors when our company, our technology and our product were so little known. Of course, Carestream sold the nano as their own product. So despite 2 years of being in the market and achieving sales in 30 countries with an enviable in-service reputation, few people have actually ever heard of Micro-X. And that was why the company's launch at RSNA was so important. The excitement we built at RSNA, both the technology and products, became infectious. And the distributors, seeing the reaction of end users, realized this would be a product range that they wanted to become engaged with in selling. So the brand awareness and the excitement that we built for Micro-X and Rover at RSNA, we were the hot booth to visit at the conference, just changed the whole dynamic of our discussions with potential distributors and provided a turning point, I think, in the buildup of our Micro-X branded sales distribution team, which frankly is exactly what we had hoped to achieve in Chicago. So building this team of quality independent distributors is what we want, is the most important thing going forward. And now the task is then supporting them with good sales training, marketing materials, product support, because that's what will deliver the sales performance during this year. But the distributors we're looking at are now, since RSNA, really are the cream of distributors we were looking for. So we're very confident that the sales will build through these channels.

Right. Okay. If I can ask another question just in relation to the Argus or the x-ray camera. Just trying to get a better understanding of what these customer demonstrations might look like and then how that would translate into a sales order. So for example, do you show the customer the unit, they have it for a month or something like that, and then they will order 100 of these? Or would they go after sort of a couple of days of looking at it, we might just start off with a small order and then build up over time. How does this typically work with these RFIs and dealing with army, police, these types of groups?

Look, this is such a different product with really no precedent to guide us here. What we've done is show them what the unit looks like, the weight, the size, how it interfaces with the robot. And we've shown them the imaging capability that we demonstrated in the lab. So the demos they are looking to, they're not a month there, they give it to them for a day, and they'll be able to practice grabbing the unit with their robot, taking it down range, and then they'll fire the x-ray against some pretend targets that they'll build, just to validate the image quality. From the reaction we were getting in Florida, then that would -- some of the bigger police bomb squads have got budgets big enough that they would buy 1 or 2 systems immediately to put it into service. The slightly longer time scale with the government purchase is in the military. And the backdrop to all of that is getting some independent testing done with some of the federal agencies like the FBI at their bomb school, because they are the kind of thought leadership and educators in the bomb school at Redstone Arsenal. That will be an important validation. And then probably tenders from the military organizations and then the larger bomb squads, who will buy 1, 2 units, put them into service, and buy more as the story grows. That's the way we're imagining it. We've got 2 sales technicians, who are ex-bomb technicians, one in the U.S., one in Australia, guiding us on this. Not only did they used to be bomb technicians, but they've also been in the industry selling counter IED x-ray equipment. So we're well-guided by people who've been on this path before.

Your next question comes from Jamie Fitzgerald with Fitzgerald Enterprises.

Peter, first of all, I'd like to thank you and team Micro-X. It's very humbling being an ex-engineer to see what you all have achieved so far. However, I'd like to know if our marketing manager is being supported, as most marketing managers would be salivating at the bit with photos and images from the world's largest radiology conference and the bomb disposal conference, yet we have no video and just 1 image from the RSNA conference. Our YouTube channel that I push for is lacking keywords and SEOs and we still have not embedded the videos into our website. YouTube is the world's second largest search engine owned by the world's biggest. Doing all this takes no time at all and costs almost nothing to do. We not only need to market our products, but also the business itself. We issued nearly 3 million shares in the last 12 months to compensate directors for the conservative incomes, but we issued these shares at what, and I quote Alan Cole, "a drastically undervalued share price." What are we planning to do marketing moving forward?

Yes. Look, we're overhauling our marketing organization right now. And we're realizing that, I think, our corporate communications is not as good as it should be. In the medical space, we've got a new product marketing manager, who's just come from 20 years experienced marketing with some top line companies in Europe. So it's great to have that overseas capability on the team. But no, your points are well made. Particularly in the security area, we're not greatly encouraged to have too much material about counter IED stuff. The world of bomb technicians doesn't like to be put in a very public spotlight. So we have to be a little bit careful there in the security areas about striking the balance between publicizing the company and the technology and just not being out of step with our market, which doesn't do an awful lot of boasting on Facebook. But thanks, your points are well made.

I understand that side of it, but there's 2 parts to this, and one is marketing the business. And for example, I e-mailed Micro-X numerous times in regards to AuntMinnie, world's largest radiology magazine, of a story that they had done on Micro-X. We still haven't got that up on the website. This all helps market the business, because it shows justification of the amount of amazing work that you and your team are doing at Micro-X. It's marketing that side of the business. And also the bomb disposal stuff. I don't mean showing exactly how your stuff works, but it's showing investors the amazing opportunity that lays ahead of Micro-X. And the only way they can see that and find that is if it's out there in the marketplace. Even having videos linked inside the website helps Micro-X get found. We need the SEOs done properly, search engine optimization. When you search the videos that are on a separate section, obviously, in YouTube, they haven't even got the correct keywords. It's not being found. You have to specifically search for Micro-X.

Yes. Is there a question in what you're saying? I mean, I note your comments.

Well, what are we planning to do to move forward? How are we going to market the business more, not just the products, but the business to shareholders because, obviously, we've been sitting at around [indiscernible].

Okay. The answer, as I mentioned, is we are actually in the process of recruiting a corporate communications manager. And this will be entirely their focus.

[Operator Instructions] Your next question comes from Brendan Earle, who is a private investor.

Thank, Peter, and echo the previous comments about the good work your team are doing. We've heard that Carestream were marketing the Rover under their own brand for a couple of years. We know the sales were not as good as we would have liked during that 2-year period, and I take your comments about the time it's taken to build the brand awareness. My question is around the product itself. Do the changes you've made to Rover Mark II, particularly the increase in the x-ray output and the simplicity and ease of use, et cetera, lifetime warranty, does that imply that the market was looking for something more from the product? And was there something underlying, the lack of success Carestream had in the product itself? And if so, do you think the Rover Mark II addresses that feedback sufficiently, that you can really have some confidence that we're going to see some very strong sales going forward?

Look, thanks, Brendan. Look, the Rover Mark I was very much designed to be an everyday x-ray machine. So it was designed for the really high-intensity use areas with particularly the ICUs and the thoracic boards, which, of course, in the last couple of years have seen incredible activity. So it did what it was designed to do. The issue that we're trying to correct in Mark II is if you're selling into a hospital where this might be the first and only mobile x-ray, then the Rover will have to do everything that needs to be done by a mobile x-ray, and that's we're extending it beyond the -- I mean thoracic and ICU is like 90% of the workload of all x-ray imaging. But if it's the one and only mobile in a hospital, then it needs the capability to do the less frequent and slightly more demanding shots in the ED and occasionally sometimes in the OR. So that's the area where just by extending the areas where you could use the product, that Rover II will fix. So yes, and we're very, very confident that the Rover Mark II is -- it not only helps our financial situation because we brought the generator in-house, but it now just gives us the entire capability of a mobile x-ray.

Your next question is a follow-up from Scott Power with Morgans Financial.

Peter, just wondering if I could get you to sort of think 12 months ahead and just describe what we could expect to see with the brain scanner project and the airport checkpoint? So either if I was to walk into Tonsley or into the facility in the U.S., what would I see in 12 months' time with both of those 2 projects?

Maybe 15 months' time would be -- 12 months from now, we'll just be putting the very first prototype of our miniature baggage scanner for the TSA project together. So that will be happening in this quarter of next year. So with testing happening thereafter. The first sort of visible milestone on the brain CT is a little further out. The first prototype that we'll be doing imaging on that is about 18 months away. And leading to, as we've said, 2 years from contract signature to be in a position to do our first patient imaging trials under FX committee sign off.

There are no further questions at this time. I'll now hand back to Mr. Rowland for closing remarks.

Thank you. Melanie, I appreciate that. As you've heard today, this quarter has been a validation of the confidence and interest in our cutting-edge portfolio of technology and products. We'll be focusing on building out our sales pipeline and momentum in the coming quarters, and we're confident of achieving the positive commercial outcomes that we expect during this year. So thank you again for your patience and support for the company and some very positive comments there from questioners. And thanks for joining us on this investor call. I look forward to speaking with you again to report further on our progress.

That does conclude our conference for today. Thank you for participating. You may now disconnect.