X-raying Micro-X

Peter Rowland is the Managing Director of Micro-X, the Adelaide based producer and developer of small X-ray machines for both the medical and hopefully, the security market.

They've recently done a deal with Thales Group, the big global security firm, with the idea of adapting these mobile X-ray machines that Micro-X has developed for use in airports for screening, in particular, electronic devices for bombs so that's kind of off and running.

But in the meantime, they're starting to sell portable X-ray machines for bedside X-rays through the global X-ray business called Carestream. It's quite a competitive business, there's a few on the market. Apparently Micro-X's machines are cheaper than the others and are just as good, but that's of course what Peter would say.

The thing to note about this company is that its still burning quite a lot of cash, about $3 million per quarter; they nearly ran out of money. They got down to $1.6 million in cash in the bank; they've done the deal with Thales Group which is providing $10 million in cash, but they're not going to break even for a couple of years and they need more money. So if you invest in this business, you need to be prepared to put your hand in your pocket for more, because they'll be raising cash for a couple of years before they start generating enough cash to pay their costs.

So just bear that in mind. But it's a very interesting proposition this, I think portable X-rays are the way of the future both medically and in security. So I think this is an interesting business, but as I say, I'm not sure if they're through what we know as 'The Valley of Death' yet in terms of the cash flow, but they've got some deals with some big global companies, Carestream and Thales so that might see them through.

Here's Peter Rowland, the Managing Director of Micro-X.

Peter, I wonder if we could start with cash to begin with. You had net cash outflow in the June quarter of $2.2 million and that was lower than you forecast, that was about $2m less than you’d forecast a quarter before, and you’re saying the reason for that was there was some timing of payments which would flow into the next quarter. Does that mean that the September quarter cash outflow will be like $4 million plus, back to what it was going to be this quarter, the June quarter?

No, it’ll be less than that. One of the issues about our cash burn has been the fact that we’ve been – and we weren’t able to announce this obviously until quite recently, but the cost of building up our own in-house x-ray tube facility. We’ve been funding the build up of our own capability in Adelaide, but basically still funding cheap procurement from North Carolina in the past and that will stop this month, so the burn will be down from what we’d experienced in recent months. It’ll be less than $3 million for the quarter.

Right, because clearly you’re running it close, Peter. I wouldn’t say you’re close to running out of money but you had $1.6 million cash in the bank before you did the deal with Thales Group. You got $5 million from them in July and they owe you another $5 million, but that’s still only $10 million and you’re going through $3 or $4 million a quarter. I suppose the thing is, here at Eureka Report, we’re a bit focused on the valley of death and it does look to me as if you’re not quite through The Valley of Death yet?

Well, I wouldn’t call it the valley of death. We’re a little under two years away from being cash flow positive, which just as the sales build up, but we’re aggressively going for these next two products that we want to take into revenue, and that’s important for us.

You’ve got two years to cash positive, how are you going to get there? Is the plan to just continue to be sort of hand to mouth, or have you got anything big on the horizon?

No, no, we would plan another capital raising at some point to get us through to – because obviously sailing close to the wind isn’t a healthy situation for anyone.

No, indeed. I wonder with the Thales deal, that’s a convertible note, right?

Yes, and they’re not able to convert it until the sixth year.

Oh, I see, I didn’t pick that up.

So it’s basically a loan.

Right, okay, but they can convert after six years?

In the sixth year.

How much of the company does it convert into?

It converts at a – I think it’s a 20per cent discount to the 3-day VWAP, if they choose to convert in the sixth year.

Have you got a business partnership with Thales as well?

Yes, it’s quite a complex deal which is why it took a little longer to – it’s basically four deals in one, the convertible loan, to help accelerate the product development was a part of it. But for Thales, the really exciting bit was they want to use our technology to become an entrant into checkpoint x-ray security for airports and so they will be contracting us at arms’ length consultancy rates to do the design and development of that system. We’ll probably produce the x-ray tubes and detectors, but the whole checkpoint system, it will be a Thales system and then they can install in airports around the world. That’s a big project that we were just starting to kick off. They also are very keen to do the non-English speaking distribution of the back scatter imaging, the little imaging that we have for counter-terrorism imaging of potential improvised explosive devices.

And we’ve already made some very good contacts because of the Five Eyes Intelligence Alliance – we’ve got very good links in there so we’ve been doing a lot of work in the UK and in Washington DC, obviously in Australia as well, but they want to take it to the rest of the world, which kind of suits our purposes nicely. They’re very keen on that and they’re actually going to – because the x-ray tube for that will use a very advanced ceramic technology that they have along with the new limiter technology that we’ve developed, Thales will actually manufacture that tube for us because they’ve got a big vacuum tube facility in Grenoble in France. All of those strands of the deal sort of come together and they’ve got a very strong partnership with us going forward.

So you’ve got two streams of business, I guess. With Thales, you’re doing the airport streaming and with Carestream it’s the medical side of things, is that correct? Those are the two things you’re running with?

Those are the two big international alliances that are very important to us and really provide a – I mean, Thales are a huge multinational technology company and the validation of our technology that they bring, because they only do deals like this when it’s really important and it’s really good. They’ve known for a long time the benefits of what this technology will bring in terms of product. They tried to develop it themselves, but we beat them to market.

As part of this deal have you had to sign over to Thales your airport screening rights, in a sense?

No, no, they’re going to licence the imaging content that we’ve developed and this is something that came from the work we did in contract we won from the UK Government. They’ll pay us a licence fee for every unit that they install, but they’ll also contract us to do the design and development, but no, all the intellectual property still resides with Micro-X.

That’s the same with this Carestream deal?

Oh yes, absolutely. We’ve been very careful to make sure that the technology is all ours and it stays with us, and particularly now since we’ve developed our own imagers and our own tubes, the technology portfolio is really quite valuable.

Did either Carestream or Thales try to buy the company?

No. We had discussions with Thales in the early days and we have had discussions with Carestream. A lot of the large companies these days are very conscious that if they buy a small highly innovative company then the next thing is you get the 27 kilograms of rule books of how that company manages its affairs. History shows that you just kill very quickly the innovation that you think you’ve brought. The kind of new skill amongst these global first tier companies is to work out ways of being able to work with companies like Micro-X without buying them. Carestream’s got a 6per cent stake in Micro-X, so they’ll buy a stake in the company and Thales may in all probability convert their stake as well so that they had a strategic shareholding, but they don’t want to own us because then we become just like them and they bought us because we are more nimble and more able and more innovative to develop things rapidly than they are.

The essence of the relationship is very strong that way. You’ll see there’s a lot of stuff written in technology circles about how you do that, the new competitive advantage for these giant companies is working out how they can source technology from innovative companies.

Another thing to talk about is this business with your cleansing statements during the quarter. Explain to us what happened there, you ended up in the Federal Court and you seem to have missed some statutory statements that you should have put out, is that right?

Yeah, we missed a cleansing notice with issuing of stock, and look, it was just an oversight in the run of things. Unfortunately, to correct the oversight you have to go to the Federal Court to make an application if you haven’t issued your cleansing notice within five days, which we hadn’t, we missed one by a few days cut-off. But we have systems in place. It was unfortunate, but we have systems in place to make sure there’s no recurrence of that.

As you pointed out in your quarterly, you operate in a highly regulated environment, selling medical devices, so that was a bit of a serious lapse in a way wasn’t it?

Yeah, it was just a checklist that was missing in the finance side. The regulatory environment in meeting medical device safety is kind of well established and audited, but the audit – yeah, we were just missing that checklist on the financial side. And look, the notes that we put out in respect of that last year and those two small capital raisings were having to be fair, perhaps a little too unusual and complex for us. It wasn’t kind of a run of the mill thing that we missed, so yeah, our bad, but the issue’s solved. It doesn’t mean that our finance and our accounting isn’t to the highest standards.

Back to the business, you received $940,000 from customers from sales, so you’re actually selling some units now. How many did you sell in the quarter and what are you selling them for?

I kind of like texting a very anxious person not to put that kind of information into the public domain, just because it’s very hard to find out what Siemens and GE and Shimadzu are selling their x-ray machines for. They’re very keen that we don’t give their competitors a free kick. But during the year just finished, we’ve sold about 45 units, so the sales are really starting to pickup quite nicely. We saw a big increase quarter on quarter which was nice and hoping for that to increase. I’m actually visiting Carestream later this week to plot and scheme how they – everyone’s come back from their summer holidays now in Europe and North America and they’re starting to form a picture as to how the back-end of the year is going to look.

Can you give us a bit of a picture of those sales? Who were they to? Do you sell sort of multiple units? When you sign up a hospital as a customer, do you sell them 10 units or what, how does it work?

It varies, there’s no standard recipe. The key that Carestream’s been trying to do is to get units into each kind of sales region so that everyone’s got a customer that’s bought one and is using it somewhere near them. You’re just getting those kind of reference sites, like if you were in Melbourne and there was one in the Alfred, then all the other hospitals would be able to phone them up and say, ‘How’s it going?’ and that kind of thing. They’ve been selling mostly in units like that to the first customers, but having said that, the first sale we had in the UK was to a hospital in a little town that I’d never heard of near Newcastle, and they loved it so much they just bought three and that was the first sale in the whole country so you just can’t predict.

Towards the back-end of the year, often they do tenders and with a bit of a trend for some hospitals to form buying groups and they might buy for four or five hospitals in a tender in the hope of getting some better pricing. So we’d probably see that happening more towards the back-end of the year. There’s 10 countries now that they’re being sold into. Very pleased to see that Asia-Pacific is starting to ramp up faster than Carestream originally had planned, which is good as well.

I’m trying to just get a sense of the potential market here. Is it multiple units per hospital is the potential, is that what we’re looking at?

Yeah. The statistics on mobile x-ray – and market is growing because more and more imaging is being done bedside and less and less are being done just because of the logistics of moving patients about the hospital to take them down to radiology to get a shot. If you can get it bedside it’s kind of like dial-a-pizza. The machine comes into the ward and it’s much less impact on the workflow. The statistics are, in Europe there’ll be one mobile x-ray for about every 100 beds in a hospital. In Australia that figure is probably about 80. In America it’s even less, it’s closer to 50-60 beds per mobile x-ray.

How many mobile x-rays are on the market?

You mean how many different kinds are being sold?

Yeah, what’s the competition like?

It’s pretty intense. Most of the big radiology names are selling – Siemens, GE, Shimadzu, Phillips, Carestream of course have their own one as well. The kind that we’re looking at which is the high intensity hospital ones, there’s some cheap and cheerful ones, you know, the old analogue version with now digital detector and now screen that just work with x-ray film, and while a lot of those are sold in Asia and South America, we consider our market in that first tier, competing against the GE’s and the Siemen’s, and there’s about 2,500 of those sold every year around the world.

How does your pricing compare?

We’re currently sitting in terms of end-user pricing, somewhere between two-thirds and three-quarters of the price of the competition.

And is your product worse than theirs to that extent, or the same, or better?

No.

[Laughs]

[Laughs] It’s actually crap, Alan! [Laughs]

No, but I’m just wondering, is there a difference in functionality, can I put it that way?

For the market we’re aiming at, which is use in ICUs and wards, no, our unit does everything that the competitors do, and in fact our 510K imaging submission showed that the imaging performance is undetectably the same, you just can’t tell the difference between them. Some of the bigger units can do what you might call some extreme shots, some extreme x-rays, some very, very high-powered things that you might need to be done in an operating room, but that wasn’t the market that we were aiming at, we were aiming at just the everyday, happy-snap, on-ward imaging.

Happy-snap! [Laughs]

Well it is, it’s the happy-snap camera concept, because that’s what mobile x-ray is, it’s fast and it’s quick and it’s not the same image that you get in a radiology room but it works and it’s faster and the workflow is just so much better. I mean, for that reason bedside x-ray is growing at about somewhere between 15per cent and 20per cent per annum because they’re discovering how much more efficient it is for staffing to have that imaging done bedside.

Are any of the other mobile x-ray providers like Siemens and GE, trying to sell these units to airports to detect bombs?

No. Interestingly, there doesn’t seem to be any cross-over in x-ray, other than Micro-X, between security and medical imaging. It’s interesting because all the x-rays that are used in security all work and have come from medical concepts, whether it’s two-dimensional or three-dimensional, it’s all stuff that was developed… Even the new CT machines that they’re putting into airports, it’s all medical technology that’s been taken into security, but none of the medical technology companies have done that, it’s a different raft of suppliers for the security stuff.

Does that mean you’ve got it to yourself at the moment?

Yes, and it’s a very important idea of Micro-X is to remain in both of those markets because the path to market for a security device, particularly if it’s a new imaging modality where you can’t do a 510K, you’ve got to go through a de novo application, and I’m thinking here of the stuff that we’re doing in tomographic brain imaging with the Royal Melbourne Hospital. The path to market there is long because of the medical testing, whereas the path to market for security is way faster. Part of our plan is developing new imaging techniques and x-ray tubes in the security space which we can then in later years bring into the medical market. They’re looking to transfer between those two markets is an important part of our strategy plan.

Have you got any units in any airports being tested at the moment?

No, we haven’t. Our work with Thales is very early stage in determining what’s the configuration of the product. We won this contract a year ago from the British Government for The Department for Transport, finding explosives in electronics as part of the future airport/aviation security solutions program that they ran there, and we did all the imaging to show how this combination of back-scatter and transmission x-ray, which is basically the merging of our hyper IED stuff and the more traditional projection imaging that you do in medicine – combining those is what gives the very high detection rates for airport security device, but with low false alarm rate. The big issue with high speed imaging at checkpoint is, particular with CT imaging, is the false alarm rate goes through the roof, which means you’re imaging very quickly but then if you’re getting lots of false alarms, the whole thing slows down.

We’re working with Thales just to finalise the description of the product that we will launch over the next few months and it’s just finding the sweet spot between speed and sensitivity and price and all that usual stuff that you do in the early stages of the concept of a product. But we’ve proven that the technology works, so we’re pretty excited about that and the UK have been very anxious to stay engaged with us because it’s a key new technology that they’ve seen in this program.

Very interesting. Okay, well we’ll have to leave it there, Peter, thanks very much.

My pleasure. Always nice to talk with you, Alan.

That was Peter Rowland, the Managing Director of Micro-X.