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

Thank you for standing by, and welcome to the Micro-X Limited quarterly investor conference call. [Operator Instructions] I would now like to hand the conference over to Mr. Kingsley Hall, Chief Executive Officer. Please go ahead.

Thank you, Zach. Welcome, everyone. My name is Kingsley Hall, and I am pleased to welcome you all today to Micro-X's quarterly investor call. I'm joined today by our Chief Operating Officer, Anthony Skeats, who was also on the call last quarter. He's in Houston, Texas, today, attending the National Robot Rodeo. Today, we'll provide some details and insights on our exciting progress forward in airport security before I run through an overview of our operations and financial matters for the quarter ending 30th of June 2023, which we outlined in our Appendix 4C filed with the ASX on the 27th of July. We will then open up to questions and answers. And for those who are not able to attend a recording of this call, we'll be on our website shortly. Now before we begin, we would like to 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 clauses, 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 that you note that actual results may, of course, differ materially from those forward-looking statements. So to begin, firstly with a quick overview of my first 3 months in the role of Chief Executive Officer since being appointed back in May. It's been a really busy time for the team, especially the leadership group, as we've conducted a very detailed operational review across every area of the business from our strategic priorities and product portfolio, capital planning and allocation through the development line of our activities, and of course, current customers and partners as well as near-term commercial activities. As a truly innovative company, we at Micro-X are always looking to learn and improve what we do, and I truly feel, the outcome of this process has been extraordinarily positive and will be well received when we release our Strategy Refresh in the next coming weeks. Now while we have proven ourselves time and time again as being able to overcome technical challenges and developed revolutionary products with our CNT X-ray platform, we must now shift to a highly efficient commercial operation that can drive value from this technology for our shareholders. Moving forward, we will become better at managing our costs and cash outflows, working with commercial and development partners to reduce our capital cost and risk and leverage their skills and infrastructure to our advantage. We see development of our technology funded by partners in some aspects as a win for both sides, especially when we continue to own the product. This then brings us to the largest contract in our company's history for up to $21 million that we signed last week with the U.S. Department of Homeland Security, taking our airport checkpoint station through real airport trials. We're absolutely thrilled by the combination of funding for all of this development work, with recognition by a global leading government organization and the invaluable access to a real-world airport to refine and perfect our solution. We feel very privileged that they have placed their continued faith in Micro-X to work alongside their experts to deliver their dream of a new airport experience. In that regard, I would like to acknowledge the efforts of Brian Gonzales and his team, largely in Seattle, firstly, by delivering exactly what DHS wanted under the first 2 contracts with Micro-X on time, and importantly, on budget. To put this contract extension into some context, as listeners will remember, we signed 2 contracts with the DHS back in September 2021 for USD 4 million. These are to work towards a vision of replacing the current conveyor belt design for screening passengers' carry-on luggage at the airport with a bank of multiple self-service security stations, which can scan the passengers themselves as well as their carry-on luggage. When you think of this, imagine a self-service checkout of supermarket and how much better and faster it will be to the millions of passengers moving through airports every day, which, as we know, can be a horrible time before you board your flight, standing in the line, sometimes walking around in your socks with your belt in your hand. So what we've done with the DHS is to sign an extension of our original self-service checkpoint contract for up to USD 14 million, of which the first USD 4.9 million is locked in for the next 18 months. This is a huge news for us and a conclusion could represent our largest ever contract. The key take home is that this contract extension will see us fully funded over the next 40 months to develop and build our own self-screening passenger checkpoint, including running live tests in the U.S. airport for up to 10 months. The leading to this was in late June when we completed the critical design review of the self-screening station design with technical experts from the DHS and the TSA. This completed our initial USD 2.5 million contract with the DHS. Under that contract, as prime contractor, Micro-X led an international consortium merging different technologies with our own miniaturized CT scanner to create an integrated self-screening module design. Having completed that initial work, it was important for the DHS that we maintain continuity in the development work. So by extending our initial contract with them, we were able to achieve that in a much quicker and simpler way, and it also means that we didn't have any funding gap between the projects. This new 40-month project has 3 phases in total, with some of these running in parallel. As I said, DHS is committed to the first phase of the project, which will run for about 18 months. This will see us building and testing the first prototype of the self-screening checkpoint station. While the exact details are commercial and confidence, there are staged milestones as we work through the phases, firstly building one self-screening station, then a bank of 3 self-screening stations, and then a full 6 station line. At each key juncture, the self-screening stations will be tested in TSA laboratories. And then finally, we'll have one -- at least one full line being tested in a live airport in the U.S. So that means every day passengers may use that station before they board their flight alongside other passengers who will still be using the current conventional conveyor-belt system. Once again, we are the prime contractor and systems integrator, and will lead our partners, including [indiscernible] in [ Breda ], who'll be supplying the real-time millimeter wave panels, and Monash University, who will help refine the passenger [indiscernible] communications design. Those costs are baked into our scope of works and funding from the DHS. It's also important to note that this contract will run in parallel to the other existing contracts that we have with the DHS for the miniaturized baggage scanner itself, which is a key piece within the self-screening station. This contract is nearing completion as we will be delivering the 2 prototype baggage scanning units to the DHS this quarter for testing. I would add that we showed the DHS some early test images taken from Tonsley, and the confidence that, that brought is another reason we've been able to extend our self-screening stations contract. As listeners may not know, U.S. airport security is a unique market, where the TSA is both the regulator and our customer. Additionally, U.S. airport security strongly influences the rest of the world's airport security. And so, the partnership we formed with DHS and TSA is also unique and enables us to combine input from both our customer and the regulator to deliver a product that completely reimagines security screening, but is also grounded in the reality of airport operations and regulations. Airports are one of the most secure places on Earth and you just can't replicate that real-world experience in a laboratory when you're looking to develop next-generation solutions. In summary, we are very excited to continue our partnership with DHS and TSA as we build and then demonstrate this design in real airports. We have a huge opportunity ahead of us as we move towards our commercial product that can transform the passenger experience across the United States 440-odd airports. Now, on to our Mobile Digital Radiography business for diagnosing patients in hospital and health settings. During the quarter, we completed a review of the sales process and pipeline for the Rover Plus product. Our sales team and I spent a long time meeting with customers and key distribution partners in the U.S. What I found was that they see the real benefits of the product. But within a range of other products, they also sell. We need to be smarter about how we position and sell the Rover and be better at supporting those distributors in their activities. To that end, we have focused and are now focused on providing additional support around targeted opportunities for our distributors. Initially, we've been working on U.S. professional sports teams and coroners' offices. We've been successful in those areas, and we want to be able to drive them to sell more of our product and support them to do so. The review of the sales process has resulted in us streamlining the business unit, and we have taken deliberate steps to shed some staff and reduce costs in that business. We need to be much more efficient and effective in how we spend our capital and drive sales and returns accordingly. One way we will do that is by converting the $6 million-odd of Rover inventory that we currently have on hand, with only a limited additional costs of goods required to finish and sell those units, reducing this high level of inventory that we feel we no longer need on our balance sheet to a level that's more manageable and converting that into cash at bank throughout that process. Another benefit of this approach is we're now selling the remaining generators through our Canadian suppliers which are higher priced and produce lower gross margins and selling those of our own internally built high-powered generator. This quarter saw an increase in revenues on the March quarter from Rover with $1.3 million with -- of revenues. However, this is still below where we need sales to be in order for the business to be self-sustaining and then grow. Pleasingly, we did receive nearly $1 million worth of orders in June. But today, we've almost cleared that backlog with only a few to go, and those Rover plus and Carestream Nano units will be shipped and all customers invoiced in the next couple of days. Moving on to Argus. Having Argus ready for its commercial launch before the end of 2023 remains our highest near-term priority. During this quarter just gone, we made significant strides in respect to this. And we're pleased to have completed both in-field testing, and finally having prototype units in front of some customers. In May, we completed our first in-field testing of Argus, where the unit was able to capture high-definition images of an anti-personnel mine buried underground, and a simulated bomb inside of a car door, which we viewed on the operator's monitor more than 1,500 metres away. And I hope everyone on this call had the opportunity to see those amazing images on our website. We also carried out our first customer demonstrations in the U.S. at the International Association of Bomb Technicians Expo in Florida, a major event for bomb disposal experts. And also in Asia, we presented an IMDEX in Singapore, which is a leading maritime security show attended by the 10,000 delegates from 70-odd countries. And we look forward to hosting further similar demonstrations as we seek to finalize the product and broaden our channels to market ahead of the launch later this year. Final thing I'd like to say on Argus is that, we know the delay has been unacceptable, and our team is working incredibly hard to get this product to market, and I look forward to keeping you up to date as we move closer to launching our first security product over this year. I'd now like to hand over to Anthony Skeats, our Chief Operating Officer, to talk about the Brain CT project, which has led since its inception. So, over to you, Ant, and it's not too warm for you in Houston.

Thanks, Kingsley. Yes, I am calling from the National Robot Rodeo here in Houston, Texas. It is a bit warm, but it's a terrific event. It's only been the day 1 so far. We've had set up a scenario where potential future customers can use the Argus to triage a nightclub evacuation scene when there's been an explosion in the nightclub and there is other devices distributed around. So it's pretty exciting. There's, representatives here from the Army, U.S. Marines, Navy, the U.S. Air Force, and some other institutions such as Sandia National Labs and the DSTL. So I'm looking forward to engaging with those customers over the coming days. But on to the Brain CT, so I'm going to talk about what is often referred to as our fourth product, the revolutionary Brain CT for stroke diagnosis. Our team has made strong progress this quarter. The project remains on time and on budget. We are happy to complete the part of the fourth development milestone under our agreement with the Australian Stroke Alliance. That milestone has been split into 2. It involved the ASA technical team reviewing images which stimulated real-life scenarios on stroke patients using a Micro-X test bench. And we've also commenced the initial phase of our marketing plan. This is designed to generate global awareness of our solution amongst key opinion leaders, early adopters and the general medical fraternity involved in stroke. Our partnership with the ASA is really at the core of this, and it allows us to communicate frequently with Australian Ambulance Services, the Royal Flying Doctors and other people involved in the stroking industry in Australia. They're all key partners that help them form the design process provider needs to clinically test the devices, which is going to happen in 2024. But more recently, we've signed 2 Memorandum of Understanding to supply preclinical prototype systems. One is for the Norwegian Lift Ambulance service. They are the provider of helicopter emergency services and mobile stroke units in Norway. And the other Memorandum of Understanding is with a German company called MEYTEC and they run the STEMOstroke units, which were the first stroke units in Berlin, in Germany, of which they currently have 5, and they're looking to expand their operations through the rest of Germany and Western Europe. Both are significant thought leaders in the field of pre-hospital care, and their participation in clinical trials will really greatly assist the regulatory submission process, which is planned towards the end of 2024. Our key development partner, Fujifilm, remains strongly engaged in the program, as does the Monash Health Care Lab team, and the I-STAR Labs team of John Hopkins University, who have been presenting at several conferences, were quite recently presented a leading conference called Fully3D, and at the American Associates of Physicists in Medicine, which really helps bring global attention to the excellent progress we are making in CT image reconstruction as well as our core imaging technology. The team is now focused on developing the CT scanner and improving the imaging software for the remainder of this year. We remained on track for first human clinical trials at the Royal Melbourne Hospital, which is planned in the first quarter of 2024, and another exciting milestone for the project and for the company. And now, back to you, Kingsley.

Thanks, Ant. Appreciate that. I'll now run everybody through the financial activities for the quarter as reported in the Appendix 4-C [ lots ] with the ASX on 27 July 2023. And the numbers I'll be referring to are all in Australian dollars and according to the ASX existing rules, these are not audited. So for the quarter ended 30 June 2023, our headline numbers were receipts from customers of $1.3 million being the sale of Rover units and associated spare parts and components. Receipts for project work of $1.5 million, representing payments from the Australian Stroke Alliance and the DHS. We had net operational cash outflows of $2.9 million, leaving us with a cash balance of $5.2 million at the 30th of June 2023. Looking forward from a financial perspective, we've budgeted to receive $13 million of project-related income in financial year '24, which is largely related to contracted payments from Varex, the DHS and the ASA. We'll receive customer orders representing $1 million for Rover and Nano that we received in June. They are now almost fully shipped. And our sales team, through our distribution partners, to be targeting selling the $6 million worth of inventory that we currently hold of Rover units. And of course, we have our R&D rebate of close to $6 million, which is due around the end of September this year. We expect these factors to result in a significant and ongoing reduction in our operating cash outflows. On top of this, the AUD 21 million across the length of the DHS contract fully funds our team of engineers to build the self-screening passenger checkpoint into a commercial product. With Brain CT also being fully funded through our agreement with the ASA, we've greatly minimized the amount of unfunded development work we will be undertaking. This will be a key strategy of mine as CEO and will allow us to lower the cost base and focus our resources. After my first 3 months in the role, we have completed a comprehensive review of the business. Together with the leadership team we have formulated a revised strategy for Micro-X which will seek to leverage our unique technology and improve commercial outcomes for the company. We look forward to giving you a more comprehensive view of this strategy when it's released to the access in the coming weeks. Looking forward, we have 2 critical near-term priorities. Financially, we will reduce our operational cash outflows by improving commercial outcomes in our Mobile DR business, and of course, getting Argus ready for commercial launch before the end of this year. From a development perspective, we will be doubling down on our work with the DHS, and we're working tirelessly to get ready for the first human clinical trials on our Brain CT product during the first part of 2024. I'll now pass you back to the operator who will commence the Q&A portion of this call. Thank you, Zach.

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

Just a quick question for Anthony, if I can. Just in terms of the Brain CT project. Just that the regulatory path, I just wonder if you could give a little bit more detail on that? So first, the human trial first quarter next year and then the sort of steps through to getting the price approved?

Yes, Scott, no problem. The clinical trial process will commence initially with comparative trials of CT units at the Royal Melbourne Hospital in the first quarter. Somewhere towards the -- in the second quarter we'll also start doing what's an in-vehicle trial. So we replicate what happened doing the CT scanning whilst in an ambulance. And a third trial that will occur probably towards the mid part of the year involving putting the unit in the air so we can demonstrate the deployability of the CT scanner for the Royal Flying Doctors to use. Now that's -- that whole process will take about 3 to 6 months to gather some data. In the meantime, Micro-X team will be focused on building the clinical submission file, the clinical evaluation report and again trying to get additional data from MEYTEC and [ nevertheless ] through the latter part of 2024. We aim to have our technical file submission ready for the regulators. We will be filing in the U.S., in Australia, and of course, for the medical device regulation in Europe hopefully, by early 2025. I can't comment on how long it will take the regulator to approve the filing. But we hope to have a fairly well-documented detailed submission with a lot of clinical data coming from actual end users to support the submission. So hopefully, it will be relatively straightforward. We'll have to wait and see.

And just a similar question with Argus, just the sort of steps through to product being demonstrated with the customers at the moment? What are the next steps that we can look forward to?

Yes. So the prototypes that we're using -- the early production units that we're using to demonstrate with the customers still have to go through formal safety testing and -- so we can place safety test marks, ETL mark on the product before we can actually market it. It's not a medical device. So that's a different standard that we have to comply to. It's a lot simpler. Once we have completed that testing over the next 2 to 3 months, we'll be finalizing the design going through our formal transfer phase and looking to launch it formally by the end of the year.

Your next question comes from [ Mariam Lee ], private investor.

I have lot of questions. You may need to go on to somebody else. But if you have time at the end, please come back to me. Now with respect to the stroke scanner, is the idea that it's going to be as good as in terms of picking up a stroke, 2-centimeter long problem as a conventional CT scanner that you get full size in the hospital?

Yes. Ant, do you want to talk to that?

Yes, sure. So the stroke -- basically, there were 2 forms of stroke, a clot and a bleed. And if you can diagnose 85% of the strokes being a clot, if you can diagnose the presence of blood, then you know -- you do not want to administer the drugs to treat the clot-busting drug TPA. So our target is not necessarily to be competing with a conventional hospital-grade CT unit, but we need to be able to provide diagnostic confidence that there is no blood present in the brain. So far, our testing is showing that we're actually overachieving in that regard. Conventional mobile stroke units have either an 8-slice or a 16-slice CT in there. We don't quite have slices because we're using volumetric imaging. But the equivalent image quality that we're getting is actually better than that. We can see fine tissue structures and stuff in the brain. So from a stroke perspective, we're very confident that we can achieve the diagnostic threshold. And actually, the technology really now is a platform for us to start increasing resolution with more sources to start competing in the high-end CT space in the future.

So what you're saying is that what you've got at the moment is better than what's being used in a mobile situation at the moment?

Well, yes, that's what it looks like, obviously subject to us completing the testing here.

Because -- I w as reading about the fact that there's a strip down -- well, there's a unit in Melbourne that's being used, the 40 kilometer [ radio terminal ] [ at ] one of the major hospitals. So is that what you're comparing yourselves look when you talked about a mobile CT scanner?

We're comparing ourselves with the existing mobile stroke unit in Melbourne, which contains the maritime.

And so if you actually can detect the presence of drug then -- well, I'll put it the other way. Is -- what you've got -- [ and ] to take the presence of blood, does that mean that even in remote regions or on the flight with the Royal Flying Doctor service that they'd be able to administer the TPA already before getting to the hospital?

Yes, that's the point. Yes. They currently administer TPA in the mobile stroke unit.

Well, that's -- I mean it's only wonderful development that has happened in the last few months and that seems one of them. Well, look, can I get on to Argus. The quarter you talked about limited competition. Does that mean there's anyone like [ users ] of the backscatter, and it can be deployed remotely so that no one has to have any form of [indiscernible], or is there somebody of this like you? Or are you comparing yourself with at the moment, people -- I mean -- anyway, what sort of competition now are you comparing with?

There are other backscatter units that are made. They're not anything like Argus. They're not the high resolution images that Argus is. Argus is the only one that's robot deployable and remotely deployable. So the current backscatter unit's a bomb disposal person needs to -- they're handheld, so they need to hold them. They need to approach the subject matter and scan a unit, scan the suspect package or scan the object with the unit in their hand. So Argus is the only one that is remote deployable, which saves humans from having time over target and can look at the image that Argus produces from a very, very long way away from the target matter, and in the field testing that we released in May that was some 1,500-odd metres. So no, to answer your question, there isn't anything that does what Argus does.

Now there was a [ price ] one, and it was against hundreds of others. Will you actually first prize out of that competition or like…?

Are you talking about the design prize, Mariam?

I can't remember, it's on the website. I just wondered what were you competing against to win that prize?

[ You're ] stick to that -- Anthony, you might have the data?

Yes, it was an IF award. We were a winner in our category. So there are many categories in these awards. And we will -- I don't -- we didn't win the overall competition, but we were the winner of our category.

And what category was that?

I can't remember exactly off the top of my head, I'm sorry. We can find out for you, Mariam.

I mean, that's not the major thing. It would have been a good opportunity for you to transit your achievements. Anyway, now, with respect to the Argus, now if you just Google mines, you get a tremendous number of different ways that they can be dealt with at the moment. And one is just to have like a big cloud that goes through a wide terrain and digs up the mines and there's definitely a cloud that doesn't have anybody on it and -- because the big metal structure is not really damaged in doing that. And -- so obviously, what you've got is Argus isn't competing against that. I'm assuming that it's -- I think you were talking about a nightclub situation. Is that the more sort of where Argus is going to be useful in a built-up situation where you can't have a big cloud?

Yes. And I think that's a very good example in that -- what Argus does is it provides an alternative way for IED bomb disposal teams to diagnose the content of the suspect package or to diagnose the internals of an object without having to approach the object. And that's the key difference. And so, when you think about a built-up like the Boston Marathon, for example, where there were literally thousands of [ backpacked ] left on the ground and the inspection teams at that time need to assume that each package could contain a bomb or a threat. The Argus gives you the opportunity to diagnose what is within that package safely and without the human needing to attend to the object directly. And that's the core point of difference. It's not -- also it can -- we've done a test of it, that'll be identifying a mine that was buried underground. And there would be some applications for our technology. It's a different scenario than what you're talking about where there's maybe an automated land mine detection device that just plays across land. It's not -- there are 2 different scenarios.

And is there some problem also about the depth to which the Argus could even see a mine? I've forgotten what they've -- it was that buried there?

Mines are typically buried under a shallow amount of earth, maybe 10 or 20 millimeters so that they don't trigger. We can detect mines, so it can be used for that application, but it's primarily being -- it's used for any hidden IED device that could be used to look in the gas tanks or cars, for example, as many different applications like that.

Your next question comes from [ Brandon Harley ], Private Investor.

I was just wanting to know what the current status of the [ LAND 154 ] defence tender is for the Argus and whether that's been impacted by the defence strategic review? And then also the status of the European clearance for the Rover?

I'll take those in order. We don't have any update from [ LAND 154 ]. Whether or not that's been impacted by the strategic review I can't speak too. But we've not -- yes, we don't have anything further to talk to on that since we met last. On the [ Mobile DR CE ] mark, we are in the middle of that process. It's an incredibly frustrating and long process. Since our leadership we structured 3 months ago, Anthony is deep into that process, where the company is all over it. I think we're progressing well through it. But it's unfortunately a very long and arduous [ trek ] to get through. But it feels -- I feel very confident that we'll get through that process.

[Operator Instructions] If there are no further questions, I would like to hand the conference over to Mr. Hall for his closing remarks.

Thanks very much, Zach. Thanks once again for all of you attending. Thank you for your support. As we -- certainly, for Anthony on and Brian Gonzales as we've commenced our new leadership roles in the company, the next 6 months will be critical for Micro-X, as we seek to drive improved commercial outcomes and bring our first security product to market. And I -- we look very forward to speaking with you again to report on that progress. Thank you very much.

Thank you, Zach.

Ladies and gentlemen, now, that's conclude our conference for today. Thank you for participating. You may now disconnect.