Nano-X Imaging Ltd. Q3 FY2020 Earnings Call

Greetings, and welcome to Nanox Imaging Ltd. Third Quarter 2020 Earnings Conference Call. As a reminder, this conference is being recorded.

Thank you, operator, and thanks to everyone for joining Nanox Imaging Third Quarter Conference Call. On today's call, we will hear from Ran Poliakine, Chairman of the Board of Directors and Chief Executive Officer; and Itzhak Maayan, Nanox' Chief Financial Officer; Lydia Edwards, President of Nano-X U.S.A., will join the team for the Q&A at the conclusion of the management's prepared remarks. Before we begin, I'd like to remind everyone that management's remarks may contain forward-looking statements regarding the company's financial results, research and development, manufacturing and commercialization activities, regulatory process, operations, the impact of COVID-19 on its business and other matters. These statements are subject to risks, uncertainties and assumptions and are based on the top management's current expectations as of today, and may not be updated in the future. Therefore, these statements should not be relied upon as representing the company's views as of any subsequent date. Factors that may cause such a difference include, but are not limited to, those described in the company's filings with the Securities and Exchange Commission. We will also refer to certain non-GAAP financial measures to provide additional information to investors. A reconciliation of non-GAAP to GAAP measures is provided in our press release, with the primary differences being stock-based compensation expense adjustments.

Thank you very much, Bob, and thank you, everybody, for joining our first quarterly conference call as a public company. It's very exciting times. As Bob mentioned, also joining me on the call this morning is Itzhak Maayan, our Chief Financial Officer; Lydia Edwards, our President of Nano-X U.S.A., is also on the call and will join us for the Q&A session. Now on August 25, we closed a very successful initial public offering, including the full exercise of the underwriters' option, which raised gross profits to the company of approximately $190 million. This transaction, which was the result of tireless work on behalf of the entire Nanox team, together with a successfully completed crossover financing round that closed in July, provides capital for Nanox to continue to execute on our vision: to increase early detection of medical conditions that are discoverable by X-ray and significantly expand access to medical screening globally. Our investors include strategic partners such as SK Telecom, Foxconn and Fujifilm as well as new institutional investors that share and support management's long-term vision of the company. Now let's talk a bit about the need in the market. We founded Nanox to address a significant unmet need in medical imaging. There has been a lack of meaningful innovation in legacy analog X-ray systems since the invention by Wilhelm Röntgen more than 120 years ago. High-end X-ray products are very expensive and complex, resulting in machines that are costly to purchase, maintain and operate, not to mention the significant footprint they require. In short, these machines are too costly and complex for most global deployment. As a result, it is estimated that approximately two-thirds of the world population lacks meaningful access to medical imaging, while the remaining one-third experiences long wait times. There is a significant missed opportunity here, and we decided to pursue it, since access to medical imaging allows for early detection of serious diseases such as cancer and cardiovascular failure when they are more treatable. Early detection has the potential to improve patient outcomes and reduce costs to healthcare systems around the world. I'm going to talk a bit about Nanox.ARC. Nanox.ARC is one of the components of our system, and with Nanox.ARC, we developed a novel digital X-ray source that we believe addresses the drawbacks of the current technology and will enable a new class of medical imaging systems that can be produced at a significantly lower cost than existing systems. Our technology has its roots in field-emission technology or field-emission display, which was originally developed by Sony in Japan. After investing substantial financial and human resources for over a decade, it successfully developed this technology for the television industry. Sony ceased development of this project in 2011, and Nanox acquired the underlying know-how for the FED technology in 2012, retained the original development team from Sony and spent over eight more years developing a digital X-ray source for the medical imaging industry that could be produced on a commercial scale. So what we're talking about is a very deep and proprietary technology that took years and substantial R&D investment to bring it to its current standards. This technology is protected by patents that have been granted to Nanox. Based on our digital X-ray technology, we are developing what we believe is a new breed of medical imaging device that we call the Nanox.ARC. The Nanox.ARC is a low-cost machine, manufactured at a fraction of the cost of the current imaging equipment, that will potentially revolutionize global availability of medical imaging. Our Nanox.ARC is a full-body multipurpose tomosynthesis X-ray system that we believe is capable, once approved by the applicable regulatory bodies, of delivering medical imaging for a wide range of clinical procedures inside and outside of hospitals and large imaging centers. With that, I want to switch gears into the Nanox.CLOUD, which is the other part of the system. In addition to the significantly lower cost and the reduced size of Nanox.ARC compared to existing X-ray machines, another key advantage of Nanox.ARC is its seamless integration with the Nanox.CLOUD, our purpose-built cloud-based platform that seamlessly connects Nanox.ARC with medical professionals who will review and interpret the images. Radiology diagnostics are a significant bottleneck in providing early detection because there are not enough licensed radiologists to review and analyze scans. In most cases, licensed radiologists are not located in close proximity to the imaging devices. To avoid potentially magnifying the bottleneck with the deployment of the first wave of Nanox.ARC systems, we developed the Nanox.CLOUD to connect third-party radiology diagnostic services to the Nanox.ARC and provide bill control, among other features. Images captured by the Nanox.ARC are transmitted through the Nanox.CLOUD safely and securely to radiologists and enable connectivity to AI-driven systems, which can provide initial analysis and decision-assistive information to those radiologists. With the Nanox.CLOUD, hospitals and doctors would also gain real-time access to medical imaging scans, which would have the potential to facilitate timely patient care. The Nanox.CLOUD is an essential backbone of our Nanox imaging system, and it's expected to be HIPAA and GDPR compliant and interoperable with existing medical systems via API, which is the application programming interface, to other devices. With that, I wanted to touch upon a bit of what happened during the third quarter in Nanox following the IPO. So turning now to the recent development of the company. Of course, the key element is to execute our strategy. To do that, we further strengthened both the leadership team and the Board of Directors. First, we were pleased to announce that Mr. Park, CEO of SK Telecom, has joined our Board. SK Telecom is a global leader in the development and manufacturing of semiconductors. They are both an investor in Nanox as well as a strategic partner. In addition to our collaboration agreement with SK to deploy 2,500 Nanox.ARC systems across South Korea and Vietnam, we are currently working to establish a fully owned Korean subsidiary that will focus on scaling up production of the Nanox X-ray source semiconductors while leveraging SK's deep expertise in the area of semiconductors. Mr. Park's insights and guidance will be invaluable as we establish and grow our footprint, particularly in Asia. Furthermore, in September, we announced the appointment of Gilad Yron, our Chief Business Officer. In this newly created role, Gilad will play a lead role in executing our existing MSaaS agreement, medical screening as a service, while simultaneously refining the company's commercial strategy and overseeing customer-facing activities. Gilad brings extensive experience leading high-tech organizations and rounds out what I believe is a world-class team, capable of realizing our vision for the company. Also, since the IPO, we signed agreements with SPI Medical to deploy Nanox.ARC units in Mexico and Guatemala and Ambra Health, a leading medical data and image management cloud software company, to facilitate the transfer of medical images between U.S. hospitals and medical imaging providers. Itzhak will provide more details on this agreement in a moment. Now let's talk about regulatory. At this point, I would like to provide a brief update on the regulatory approval process. Recall that in January 2020, we submitted the 510(k) application to the FDA under its third-party review program for a single source version of Nanox.ARC. In March 2020, we received the request for additional information from the third-party reviewer, which we responded to in September 2020. Nanox is working to continue to optimize and develop additional features in the Nanox.ARC, and we plan to submit an additional 510(k) application for the multisource version of Nanox.ARC in the coming months. The multisource version of the Nanox.ARC will be the imaging system that we will seek to commercialize with our partners. We currently expect to receive FDA clearance for the multisource system by mid-2021, which would allow us to deploy our first machine during the second half of 2021 in the U.S. and other countries. We anticipate that the Nanox.ARC imaging procedures in the U.S. will be covered by existing radiology CPT reimbursement code. In parallel, we remain on track to submit the multisource version of the Nanox.ARC, foreseeing market approval by the first quarter of 2021 and anticipate possible clearance in the EU next year as well. Now I know that everybody is very interested to hear about the RSNA. So before turning the call over to Itzhak to review a few financial highlights, I would like to remind you that we intend to conduct a live demonstration of our technology at the upcoming annual meeting of the Radiology Society of North America. This year, the RSNA conference will be a virtual medical meeting held from November 29 to December 5. At the meeting, we will demonstrate live our digital X-ray technology in a range of 2D and 3D medical imaging procedures. This session will be followed by a lecture and presentations of clinical applications of Nanox.ARC system by well-known radiologists and company distribution partners. We intend to make this material available to our investors and global stakeholders so they can join and witness our technology. At this point, I will turn the call over to Itzhak to discuss the market, competition, our business model and financials. Itzhak, please?

Thank you, Ran. So let's turn to the large market that is now in full swing. The estimated size of the X-ray-based medical imaging market is approximately $21 billion and to a large extent, it is dominated by many large multinational organizations, including GE, Philips and Siemens. One may wonder how a relatively small company such as ours can compete effectively. Our strategy is to expand the medical imaging market so that we are not competing with and do not intend to take away market share from those existing players, but instead, we intend to increase the size of the pie. The existing dominant players in the medical imaging market primarily target hospitals and large medical imaging centers. We intend to target other places that deliver healthcare services that are not able to afford expensive medical imaging systems, such as urgent care units and outpatient clinics in countries where most of the population lacks meaningful access to medical imaging because there are simply not enough imaging machines. We are ultimately offering availability and affordability with the Nanox.ARC. We will aim to target many healthcare providers who do not have medical imaging capabilities and thereby increase the size of the market while avoiding head-to-head competition with the big players in the market. A distinct advantage of Nanox is our flexible business model. The MSaaS model allows healthcare providers to pay on a per-scan basis, avoiding the significant upfront capital expenditures, sometimes measured in millions of dollars per machine that are associated with legacy X-ray technology. Even with the guaranteed minimum services fees included in our customer contracts at 7 scans per day and $14 per scan to Nanox, the initial outlay is far less for the Nanox system than the conventional X-ray machine. We believe that this financial model is critical to our vision to increase early detection of medical conditions that are discovered by X-ray by eliminating the significant upfront capital cost of X-ray systems as a barrier to broader adoption while providing growth and value to our shareholders. To that end, it is our goal to globally deploy 15,000 Nanox.ARC units by the end of 2024. We are very pleased with the significant progress we are making towards this growth, with contracted deployment of 5,150 systems with 9 service providers in 13 countries, contingent about regulatory approval, customer acceptance, and other factors. During the third quarter of 2020, we signed an initial 7-year MSaaS agreement with SPI Medical to deploy 630 Nanox.ARC units across Mexico and Guatemala. SPI distributes specialty pharmaceutical products and medical devices across Mexico and also works with global health imaging leaders such as Philips, GE, Siemens, and Toshiba. Using the contractual minimum of 7 scans per day at $14 per scan payable to Nanox, this contract is expected to generate minimum annual service fees of $17 million to the company once all systems are deployed and upon obtaining the necessary regulatory approvals and additional contractual terms. In addition, we signed a strategic collaboration agreement aiming to deploy an additional 5,500 units in the U.S., Korea and Vietnam, using our MSaaS business model. Subsequent to the end of the third quarter, we announced an agreement with Ambra Health, a leading medical data and image management cloud software company, to facilitate the transfer of medical images between U.S. hospitals and medical imaging providers. Ambra will serve as the enterprise image exchange solution integrated with planned U.S. Nanox.ARC system deployment via the Nanox.CLOUD infrastructure. Ambra's suite consolidates multiple imaging systems into a cloud storage platform that lets medical imaging be accessed securely anytime, anywhere. Leading facilities use Ambra to connect directly to multiple modalities and imaging systems, creating a unified source of imaging data that is accessible to providers and patients. Ambra is the ideal partner for Nanox as their solution perfectly complements the Nanox.ARC and Nanox.CLOUD. In summary, over the past year, we were able to form what we believe is a very strong coalition of strategic partners, service providers, and AI technology partners that share our vision and our go-to-market initiative. Now for the financial review. On August 25, 2020, we announced that we closed a very successful initial public offering of 10.5 million shares of our ordinary shares at $18 per share. The net profit of the offering to the company after underwriting discounts and commission and related expenses were approximately $170 million. This included the full exercise of the underwriters' option. We want to express our appreciation to the high-quality healthcare-dedicated and general investment funds in the U.S., Europe, Asia, and Israel that became shareholders in Nanox. The Nanox offering was one of the top 5 largest pure medtech IPOs completed since 2015 on the NASDAQ. Together with profit from the earlier crossover funding round, we ended the third quarter of 2020 with cash and cash equivalents of approximately $240 million and with no debt. We believe our current cash is sufficient to fully execute our plan of manufacturing, shipping and installing 15,000 Nanox.ARC systems globally while continuing to expand our delivery capabilities and investing in our clinical and product roadmap. Highlighting a few key financial statement items. Non-GAAP net loss attributed to ordinary shares for the first quarter of 2020 was $5.1 million compared to a non-GAAP net loss of $1.9 million in the prior year period. A reconciliation between GAAP net loss and non-GAAP net loss for the 3-month period ended September 30, 2020, and 2019 is provided in the financial results that are part of the press release we issued this morning. The difference between GAAP and non-GAAP net loss to ordinary shares is mainly due to share-based compensation. Non-GAAP research and development expenses for the third quarter 2020 were $1.5 million as compared to $0.4 million for the comparable period in 2019, reflecting the increased development activities of our Nanox system. Non-GAAP marketing expenses for the third quarter of 2020 were $0.5 million as compared to $0.5 million for the comparable period in 2019 as we continue to build our brand awareness and product marketing capabilities. Non-GAAP general and administrative expenses for the third quarter 2020 were $3.1 million as compared to $1 million for the comparable period in 2019 as we ramp up our investment in expanding our management team and the overall organization infrastructure in addition to increased costs related to the company's IPO. Net cash used in operating activities during the quarter was $3.4 million. As of September 30, 2020, we had approximately 45.6 million shares outstanding. We want to make investors aware that we will be participating in several upcoming virtual conferences, including the Berenberg CEO Conference on November 12; the Jefferies London Healthcare Conference on November 17; and the Canaccord 2020 Medical Technologies & Diagnostic Forum in November 19. We hope to have the opportunity to meet you, virtually, of course, at one of these events.

Our first question comes from Suraj Kalia with Oppenheimer.

So Ran, a bunch of questions. On the 510(k) application for the single source, I know it's just been a few weeks, when do you expect any feedback from the FDA, if at all?

From our point of view, our expectation is that very soon, within a matter of weeks, we will hear something from the third-party evaluator. I think in the FDA matter, it's very hard to predict. So I would say that we feel that we completed our submission and we answered the additional information satisfactorily. Therefore, the feedback should be coming soon. But of course, we cannot know that for sure.

Got it. And Ran, the devices to be commercialized by our partners are multisource. When do you all expect to provide prototypes to your partners for their individual review?

Yes. So in terms of process, we are currently assembling about 10 of those devices in Israel. These devices will need to go through rugged testing. We will conduct some tests that also will impact the submission to the FDA, such as safety and other types of tests. Once this is concluded, we will ship some of the devices to our partners for training sessions on how to operate the Nanox.ARC. This should all be completed in the coming months.

Got it. And Ran, I'll have two final questions, and then I'll let others jump in. The ceramic tube, can you give us a status update on the ceramic tube? That is first. And the second and the last question, at least from my side, Ran, obviously, there has been a lot of speculation on the viability of the platform. At your RSNA live demo, what is the one thing that you would advise investors and skeptics, and say, you know what, have a look at this, this is what core competency we bring, and this is, in essence, going to be a paradigm shift you need to watch out for?

Okay. So, I mean, as you know, the tubes are being made by glass and ceramic. We're on our way to actually produce ceramic tubes getting ready for serial production, so we can ship a significant number of them. That's happening mainly in Korea, and that's going well. In terms of skepticism, I think it's not my role to tell skeptics how to assess. However, I believe that seeing is believing. We do have solid technology. We believe that we will demonstrate our technology and explain the differences between our technology and the analog technology, which should provide a lot of comfort, as you can actually see the device function, taking images and hear from radiologists about it. Overall, once again, seeing is believing. That's why we are going to stream live from one of the prominent locations in Israel, and I hope it will present a strong demonstration of Nanox technology and the platform we are building.

Our next question comes from Steve Halper with Cantor Fitzgerald.

Two questions. So in terms of the FDA single-source submission, how important is that relative to the development on the multisource, whether it's the prototypes or the next application? And then on an unrelated question, could you just talk to us about where you stand with Foxconn and their ability to ramp up assembly of the ARC devices, assuming you get the multisource approval?

Thank you, Steve. Well, I think that the single-source and multisource are part of one strategy, where we bring our novel X-ray source and incorporate it into a device that has a predicate. It's not a precondition for the multisource, but we feel that while we have the single source, it was a good idea to take it through the regulatory path alongside the multisource. However, one will not stop the other.

And what was your second question, I'm sorry, Steve? Ramping up production from Foxconn for the ARC devices?

Yes. So Foxconn is fully on board. We have routine meetings, engineers to engineers. It's important to them, all the way to the Chairman of Foxconn. Our supply chain management and R&D are based in Korea and Israel. As you know, they're working very closely with Foxconn. The next step for us is to complete the assembly of 10 prototypes in Israel, which will also go through regulatory clearances while ramping up production. I do not expect any significant issues in terms of our ability to ramp up so that we can deliver the expected quantities in the second half of next year.

Our next question comes from Ravi Misra with Berenberg Capital.

So first on the commercial strategy. Can you just walk us through how you go about identifying some of the partners and how that process plays out in terms of how long it takes and what is the back and forth that you have between some of these customers?

Sure. Itzhak, do you want to take this one?

Yes, absolutely. It's a really good opportunity to speak about those service providers because we feel that we had a very good process of selecting partners that both have the experience and capabilities to take our offering to the respective market. It's important that we provide some very visible examples. For instance, we've been speaking about a 1,000-unit agreement for the markets of Australia, New Zealand, and Norway, that came with an agreement with the Gateway Group. Gateway Group is one of Australia's largest independent product distributors, specialized in health, wellness, medical supplies and devices. They reach over 20,000 locations with the distribution of medical devices, bringing significant experience and presence to that market. That agreement is for three years and encompasses 1,000 units. Another good example is a company named Promedica for the Italian market. Promedica is a reputable company with over 25 years of experience in representing diagnostic imaging vendors like Fujifilm, Siemens Medical, and GE Healthcare. They also manage commercial strategic activities for multinational companies in marketing systems such as MR-guided focused ultrasound, and robotic systems for interventional radiology procedures. So those are two examples, and if I need to summarize my answer, we are looking for service providers that have accessibility to the market, strong capabilities, and most importantly, believe in our vision. They have all come to Israel for demos, interacted with the device, and acknowledge the development stage of our offering, feeling very comfortable collaborating with us.

And then maybe on Ambra Health and just the infrastructure build that's ongoing right now. Can you help us understand how you perceive the end-to-end chain and where the gaps are that you need to continue to build out, similar to Ambra Health and USARAD partnership? What other work needs to be done here?

Yes, Lydia can provide a good perspective on the U.S. market. Lydia, please?

Thank you, Ran. As far as the role USARAD will play in our collaboration, it's pretty simple. The goal of that business agreement is to have USARAD use its strong presence in the U.S. teleradiology market, as well as the standard radiology market, to deploy our systems. They serve as a strong partner, with 25% ownership by Siemens, giving it a significant competitive edge. The deal with USARAD is nonexclusive, and as part of the partnership, USARAD will perform the teleradiology services which would leverage our Nanox cloud-based platform. Their teleradiologists have a massive presence in the United States, which we can utilize to build out our sales structure. Now as far as Ambra Health and in terms of the agreement, do you want to take that, Ran? Or do you want Itzhak to take that?

Yes, Itzhak will take this.

Yes. As we explained before, this is a very strong piece of the overall offering. The Nanox.CLOUD can be described as a crucial switchboard over the cloud that connects an end-to-end offering, which includes the service provider providing images on the ground using our Nanox.ARC. It connects AI technology partners that can provide initial image annotation, and also enables accessibility for radiologists who will perform diagnostics of the images. Ambra also provides connectivity back to hospitals, especially in the U.S., linking back to the patients' medical files. This creates an end-to-end suite of services that allows for a comprehensive solution for different service providers.

Great. And then maybe one last one, just on RSNA. Did you guys announce what day the presentation will be on? And then just following that conference, can you help us understand a little more about clinical build-out? Is there any study or partnerships with hospitals or universities that you're willing to announce here regarding building usage and conversation around that aspect of the device?

Yes. Regarding RSNA, it is primarily a commercial conference that companies typically attend. Like any conference, we're going to provide materials on our science and technology, along with videos featuring clinicians explaining our objectives. We have a partnership with Duke University, and we hope someone from there will discuss the project we are running together. We are going to conduct a full technology demo, showing the chip, the tube, and the multisource system for acquiring images. We'll showcase our very unique geometry to create reconstruction images that radiologists can easily access. This is all standard practice at trade shows. Now, we are reaching out to larger medical healthcare companies because we believe that our technology could be beneficial for their usage. I can confirm that we are in talks with many significant companies beyond Fujifilm, which was already announced. We will also approach service providers. Our website and Chief Business Officer have been flooded with inquiries from companies worldwide interested in partnering with us under the MSaaS model. All these activities will be pursued at RSNA, in addition to the live demo combining technology and clinicians to strengthen investor confidence. As for collaborations, we do have partnerships with a few university hospitals in Israel and elsewhere. We believe we can utilize and examine Nanox technology in various clinical settings. This is an ongoing effort, and when we have news to share, we will announce it. That answers your question, Ravi.

At this time, there are no further questions in the queue. I would like to turn the call back over to Mr. Ran Poliakine for closing comments.

Well, that concludes our call this morning. We hope that we were effective in conveying our enthusiasm for the opportunity that lies in front of us as a potential disruptor in the field of medical imaging, and we look forward to providing updates on our progress along the way, including the conferences that Itzhak mentioned and our year-end update. Thank you again, and have a good day.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.