Nano-X Imaging Ltd. Q4 FY2020 Earnings Call

Greetings, and welcome to the Nano-X Imaging Ltd. Fourth Quarter and Full Year 2020 Earnings Call. All participants are currently in a listen-only mode. A question-and-answer session will follow the formal presentation. This conference is being recorded. I am pleased to introduce Bob Yedid of LifeSci Advisors. Thank you. You may begin.

Thank you, Daryl, and thanks to everyone for joining the Nano-X Imaging fourth quarter 2020 conference call. On the call today, we will hear from Rand Poliakine, Chairman of the Board of Directors and Chief Executive Officer; and Itzhak Maayan, Chief Financial Officer. Before we begin, I'd like to remind everyone that management's remarks today 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 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 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 with our press release, with the primary differences being stock-based compensation and class action related expenses. With those prepared remarks, it's now my pleasure to turn the call over to Nano-X's Chairman and CEO, Rand Poliakine. Rand?

Hey, hello. Thank you very much, Bob and thank you everyone for joining our fourth quarter update call. As Bob mentioned, also joining me on this call this morning is Itzhak Maayan, CFO. So we had a very exciting Q4, our fourth quarter of the year. And we would like to share with you some of the outcomes. Before we dig down into the details, I would like to cover a number of things that we successfully accomplished in this quarter, which I think would give you a little bit of the feeling of the activity that is going on in the company. First and foremost, we successfully demonstrated the Nanox System at the RSNA 2020 meeting. That was a huge milestone for the company, as we demonstrated the technology, the system, and also got two radiologists from the U.S. to analyze those images and we’ll touch upon it in a minute. We also further invested in Korea, as you well know, Korea is a major part of our supply chain. During the last quarter, we invested a lot in human resources and capital to make sure that our supply chain is in line with our plans, which are basically starting to ship products this year, with a target of 1,000 units that will get into Q1 of 2022. To do that, we rented an interim manufacturing facility in Korea for MEMs production. We've invested heavily in capital expenditure for advanced semiconductor manufacturing equipment, and we even purchased land, which will be our major site for Nanox in the Far East. This land will be our permanent establishment for the MEMs chief facility as well as other R&D matters, all of that in South Korea. Another key accomplishment in this quarter is we added to the senior leadership team a new COO, CTO and CMO. All of them will guide the company’s expansion and execution plan to build out our team so that we can deliver on our promise. We extended our technology collaboration by signing an agreement with Ambra Health to facilitate the transfer of our files to the Ambra Health platform into medical hospitals and providers in the U.S. This aligns very well with our operational strategy in the U.S. We also added two additional strong board members, one of them is Dan Suesskind, who was the CFO of Teva Pharmaceutical for 25 years and even served on the Board as a board member there. The second is Noga Kainan, who is well-known in Israel as the Head of the CFO Forum for Israel. Both bring extensive experience in publicly traded companies. I think this is the news that everybody wanted to hear. We submitted a comprehensive response to the U.S. Food and Drug Administration, the FDA, which Nanox believes addresses the agency's outstanding questions regarding the company’s 510(k) submission seeking U.S. regulatory clearance for its single-source Nanox.ARC. Nanox expects that it can obtain U.S. regulatory clearance of the single source quite soon. Lastly, we completed a successful offering of 3.1 million shares by certain non-director, non-officer selling pre-IPO shareholders. So that summarizes how exciting this quarter was. We’ll get into details in a minute, but just before then, allow me a couple of additional minutes just to remind those who may not be following the company on a daily basis of what we have developed. We created proprietary imaging technology based on a novel digital MEMs semiconductor cathode. We believe we can achieve the same functionality as legacy x-ray systems with lower cost production than existing medical imaging systems. The Nanox.ARC is a 3D tomosynthesis full-body imaging system generating high-resolution 3D x-ray images that reconstruct the human body or images of specific body parts that can be read by medical professionals. It’s a multi-purpose device, and this is a very important point. The Nanox.CLOUD software component is now in prototype stage. Images from the Nanox.ARC can be sent to the cloud where they can be viewed, stored, matched with radiologists' review using diagnostic AI, and sent for billing and reporting. A very quick overview of our business model, we call it MSaaS, medical-screening-as-a-service, which removes the large capital expenditure associated with traditional systems. We’re building a global network to deliver imaging availability. We have signed nine MSaaS agreements for global deployment of over 5,000 units of our Nanox.ARC and an additional 5,500 units through strategic collaboration agreements. To date, we have a very strong balance sheet, ending 2020 with $213 million and zero debt. This will fund continued development, manufacturing, and distribution of Nanox.ARC. I hope you now have a clearer idea of what Nanox is and what we're here to do. With that in mind, I’d like to provide more details on the different activities we’ve engaged in. Let’s start with the RSNA demonstration. We successfully demonstrated our Nanox.ARC next-generation x-ray prototype at the 2020 Radiology Society of North America (RSNA) virtually this year. This live demonstration was viewed by a global audience of thousands and featured a range of 2D and 3D imaging procedures using our groundbreaking digital x-ray tube in a unique multi-source array structure. I would like to highlight a few points from the demonstration, which featured analysis and commentary by two U.S.-based radiologists of images generated by the Nanox.ARC compared to images from legacy systems. In the first demonstration, an image of my hand was captured. The radiologists noted the Nanox.ARC image provided excellent quality, even capturing smaller details with good contrast between bone and soft tissues. They were quite impressed. In the second demonstration, a multi-source Nanox.ARC was used to capture a 3D tomosynthesis of a phantom hand. This image was compared to a conventional 2D x-ray taken the day before at a nearby hospital. The radiologists were impressed with the high resolution of the Nanox.ARC image and were able to see features on it that were not visible on the 2D study. Additionally, the overlapping images generated using the multi-source Nanox.ARC allowed the radiologists to examine details that were often obscured in conventional 2D images. We aim to deploy thousands of these machines globally, providing access to imaging for the roughly two-thirds of the world’s population that either have limited or no access to images today or experience very long wait times. We see significant opportunities as access to medical imaging enables earlier detection of serious diseases that can be more treatable, potentially driving improved patient outcomes and reducing costs to healthcare systems worldwide. A replay of the RSNA demonstration is included in the investor webinar we hosted after the RSNA, and I encourage all interested parties to view it if you have not already done so. Again, the RSNA was a major milestone for the company. I am proud of our team for showcasing this type of demonstration, which brought significant interest and credibility to the company. I also want to take a step back and discuss unmet needs in medical imaging, especially for those who may be new to this story. We founded Nanox to address a significant unmet need due to a lack of meaningful innovation in legacy analog x-ray technology for over 120 years. High-end x-ray products are costly and complex, resulting in machines that are expensive to purchase and maintain. Our device, the Nanox.ARC, could revolutionize the availability of medical imaging globally. Another significant advantage of the Nanox.ARC is its seamless integration with Nanox.CLOUD, our cloud-based platform that provides hospitals and physicians with faster access to critical information. We believe the Nanox.CLOUD will play an important role in our overall value proposition. Now, let's move to recent developments since the last quarterly report. In January, we announced an expansion of our strategic collaboration with USARAD Holdings to launch an advanced diagnostic service combining over 300 expert radiologists and over 20 FDA-cleared artificial intelligence algorithms to support the medical diagnostics industry. Once operational, this AI-based second opinion service will be an integral part of Nanox's offerings. We also announced agreements with Ambra Health to facilitate transferring medical images between U.S. hospitals and providers. Ambra’s solution integrates with the Nanox system deployed via Nanox.CLOUD infrastructure, providing a unified source of imaging data. Ambra's network includes seven of the top 10 hospitals in the U.S. The next point I want to highlight is our Korean subsidiary. We established a fully owned subsidiary in Korea to manufacture MEMs x-ray chips, supported by SK Telecom and its affiliates. We have secured an interim facility and are proceeding with tech transfer and capital equipment purchases. We plan to commence full-scale manufacturing later this year. To expand our leadership team, we’ve welcomed several key hires including Jim Dara as Chief Operating Officer, Ofir Koren as Chief Technology Officer, and Tamar Aharon as Chief Marketing Officer. As we push towards shipping 1,000 commercial units by the end of Q1 2022, having highly qualified individuals is critical for strengthening our operational capacity. Additionally, we’ve expanded our Board of Directors with the appointments of Dan Suesskind and Noga Kainan. Our focus now shifts to regulatory approvals for our units and subsequently executing our plans. In terms of our U.S. regulatory approval, we've submitted the 510(k) application and have kept in regular communication with the FDA, which we believe will help facilitate a smooth clearance process. We expect FDA approval for our single-source and multi-source devices within this year. If approved, we anticipate that the Nanox.ARC imaging procedure in the U.S. will be covered by existing radiology CPT reimbursement codes. At this point, I would like to turn the call over to Itzhak to discuss the financials. Itzhak, please.

Thank you very much, Rand. On our last conference call, which was our first as a public company, I described in detail our MSaaS pay-per-scan based business model. The significant upfront capital cost of acquiring an X-ray machine is a material obstacle for many healthcare facilities, particularly those that are smaller and in rural areas. With the Nanox.ARC, we intend to ship and deploy units with no upfront cost to facilities. We’ll be paid on a pay-per-scan basis, with a minimum service fee stipulated in our standard contracts with service providers. This makes our technology more broadly attainable across healthcare facilities while providing Nanox with recurring regular long-term revenue. Our MSaaS model is clear and positively impacts our early sales efforts. As of today, we’ve executed contracts for the deployment of 5,150 systems with nine service providers in 13 countries. We have also previously announced a strategic collaboration with USARAD for deploying 3,000 Nanox.CLOUD machines in the U.S. over the next two years, as well as multi-faceted collaborations with SK Telecom, which includes deploying 2,500 Nanox.CLOUD machines in South Korea and Vietnam. We are actively negotiating additional contracts, suggesting we are well positioned to achieve our primary goal of deploying 15,000 operational Nanox.CLOUD community globally by the end of 2024. Now turning to the financials, non-GAAP net loss for the fourth quarter of 2020 was $8.4 million, compared to the non-GAAP net loss of $2.8 million for the same period in 2019. The reconciliation between GAAP and non-GAAP net loss for the three-month period ended December 31, 2020, and 2019 is provided in the financial results part of our press release. The difference between GAAP and non-GAAP net loss is mainly due to share-based compensation and class-action related expenses. Non-GAAP research and development expenses for the fourth quarter of 2020 were $2.1 million, compared to $1.3 million for the comparable period in 2019, reflecting the increased development activities of our Nanox System. Non-GAAP marketing expenses for the fourth quarter of 2020 were $1.6 million compared to $0.2 million for the same period in 2019, as we continue building our brand awareness and product marketing capabilities. Non-GAAP general and administrative expenses for the fourth quarter of 2020 were $4.8 million compared to $1.2 million for the comparable period in 2019, reflecting increased investment in management and overall infrastructure, alongside costs related with the company’s IPO. Net cash used in operating activities during the fourth quarter was $13.3 million, compared to $3.5 million for the same period in 2019. As of December 31, 2020, we had approximately 46.1 million shares outstanding. We ended the fourth quarter of 2020 with cash and cash equivalents of approximately $213.5 million and no debts. We believe our current cash is sufficient to execute our plan of manufacturing, shipping, and installing 15,000 Nanox Systems globally by the end of 2024, while continuing to expand our delivery capabilities and invest in our clinical and product roadmap. I'd like to comment on a secondary offering of ordinary shares that we completed just a few weeks ago. We priced an underwriting offering of approximately 3.1 million ordinary shares by certain shareholders. The company received no proceeds from this offering. A few key points worth mentioning: firstly, these were mainly long-time pre-IPO shareholders looking for portfolio diversification. Secondly, the selling shareholders, and not the company, were responsible for paying the underwriting fees associated with the offering, while the company was responsible for accounting, legal, and other costs. Most importantly, those shareholders agreed to enter into a new lockup for their remaining 845,000 shares, committing to a period of 90 days, and then restricted from selling more than one-third of their remaining position in each of the subsequent three 30-day splits for a total of 180 days of selling restriction. We see this as both a sign of support and confirmation of their commitment. And with that, we would like to open the call for questions. Operator, please start the Q&A session.

Thank you. We will now begin the question-and-answer session. Our first question comes from Steve Halper with Cantor Fitzgerald. Please go ahead with your question.

Okay. Good morning. So it sounds like, I just want to confirm that you did send in the response to the last set of questions that you received in December of 2020. Is that correct?

That’s absolutely correct.

Okay. What is the window for the FDA response now for the single source? Is there a set time limit for them?

As far as we know they should, based on our call with the examiner, that should be within the next 30 days.

Okay. And so you’ve had direct communication with the examiner?

Correct. We just clarified exactly.

Not just the third-party reviewer?

Correct. So when we got the new letter, we made sure we understood exactly what the examiners needed to see. So we conducted direct contact with the examiner at the FDA. We got guidance and clarification of what needed to be addressed. We worked hard to complete a very comprehensive response that was submitted. That could take as long as 30 days, but we hopefully will hear back much sooner.

Okay. And then the other question is, can you just give us a timing update on the multi-source application?

Yes, just to be cautious and again, depending on external laboratories, it's hard to predict their timeline. We still believe we're in very good shape to get clearance within this year, which means we would need to submit in the coming weeks. I can't confirm this from the company’s point of view, but we'll be ready. We are currently working with external laboratories for different safety tests, etc. So timelines may shift slightly, but overall, we’re still on track to get clearance within this year and begin shipping a major amount of product within this year, moving into Q1 of 2022. That said, we have three sites in production right now. So the products are in production, subject to regulatory clearance to be commercial.

Great. And where were those products being produced, in Israel now?

Yes. To mitigate the Corona situation, which has limited our ability to travel, we’re working closely with Foxconn. We've also found a local partner in Israel that is making the first 1,000 units, done transparently alongside Foxconn.

Yes. And does that change – there was a little bit of a change, obviously due to COVID, but does that change the economics of those first devices?

No. I think we always envisioned that the first 100 units would be a bit more expensive than our target cost of between $10,000 to $15,000. However, for the 1,000 units we are getting very close to the target price.

Great. Thank you.

And the reason, Steve, is because the tubes and the semiconductors are coming from Korea and Japan, while the molded parts are coming from China. What we’re doing in Israel is integration and testing, which is not a major part of the overall machine.

Our next question comes from the line of Ravi Misra with Berenberg. Please proceed with your questions.

Good morning, Rand and Itzhak. Thank you for taking the questions. I want to talk a little about commercial prospects and some of the contracts you may be looking forward to. About negotiations as they stand now, I'm just curious about the kind of companies or service providers you are speaking with.

Thank you, Ravi, and good morning. If you don’t mind, I will address that, and Itzhak can add if necessary. We're trying to bridge the gap between our remarkable commercial success. Before we had one product cleared, we secured contracts for 5,150 units and an additional 5,000 units as part of strategic collaboration, all subject to regulatory approval at designated countries. That’s a tremendous achievement we now strive to fulfill. Our focus is on making the products, getting them through the approval process. We are receiving significant inbound traffic following the RSNA demonstration and managing that slowly. Our goal is to see products cleared in the U.S., Korea, and Israel. We want to secure homes for thousands of units by the end of this year or the first quarter of next year. We are also assessing other contracts with key service providers across Italy and Spain. Right now, we’re also in negotiation with several others in different countries.

Great. Appreciate that. Maybe if I could just ask a follow-up about the partnerships with larger companies. Do you think the next round of service providers will be contingent on FDA or regulatory approval?

No, it's not true. We believe we can sign agreements before approval.

Thank you for clarifying.

Thank you. Our next question comes from the line of Suraj Kalia with Oppenheimer. Please proceed with your question.

Good morning, Rand, Itzhak. Can you hear me all right?

Yes.

Congratulations. You all made a lot of progress. A bunch of questions from my side. What was the exact date of the single source submission that starts this 30-day clock?

One of my team members clarified that the 30-day clock starts from the date we received the letter, not the submission date. So we're looking at a couple of weeks from now.

Got it. Can you share your intention regarding the multi-source application submission?

Yes. Given our experience with the third-party review for the previous submission, we will likely submit the multi-source directly to the FDA to avoid previous misunderstandings. We are in communication with external laboratories while also focusing on our submissions as part of our strategy.

That makes sense. Okay. What’s the current status of the 10 prototypes you mentioned on the Q3 call for partner evaluation?

The initial 10 prototypes are becoming 100. We're designing better systems. The first of the produced units are for testing and compliance and later for clinical validation. We're working with a group of radiologists to put the system through its paces.

Understood. Just a clarification on the Korean subsidiary; you mentioned that it will be wholly owned by Nanox. What’s the timeline for that facility to be operational?

The construction is ongoing. For shipments this year, we’re set. The permanent establishment is required for meeting our demand for 2022. We're estimated to ramp up production of the semiconductors by December of this year and aim to have full-scale production running in Q2 of next year.

Great. Thank you.

Our next question comes from the line of Rahul Rakhit with LifeSci Capital. Please proceed with your questions.

Rand, good morning. Thanks for taking the questions. How long will it take to get the Korean facility up and running?

The design is done, and construction started. We're looking to open the factory for semiconductor production by early December of this year. Preliminary ramp-up timing suggests Q2 of next year for full production.

Okay. Understood. Also in terms of your work with AI partners and Ambra for image sharing, are you supplying them with images to guide the API development, or do they need access to prototypes?

The integration will be through an API. We've defined it already. We're working closely with Ambra as they have an established network. While integration isn't complete yet, I anticipate it shouldn't take long and should be finalized before we begin shipping our first systems in Q4.

Understood. Do you still expect to submit a CE Mark application this half of the year? And would this be sufficient for pursuing regulatory approval in your target ex-U.S. markets?

Absolutely. We plan to submit the CE Mark for Nanox.ARC shortly after we submit to the FDA. We are committed to expedite the process as much as we can. However, we are aware of potential delays based on new rules affecting notifying bodies in Europe. We are preparing to submit soon, and will not delay the process if we can control it; we'll see how the response fares.

That’s really helpful. I appreciate the details. Thanks again for taking the questions.

You're welcome.

Thank you. Rejoining the queue is Steve Halper with Cantor Fitzgerald. Please proceed with your questions.

Yes. Just wanted to confirm that the operating cash and the cash used in the quarter was $13.3 million. Is that correct?

Correct.

Okay. Thank you.

Thank you. There are no further questions at this time. I would like to turn the call back over to Rand Poliakine for any closing comments.

Thank you very much. I want to thank everybody for joining us today. We've successfully demonstrated our technology in a range of medical imaging applications. We are excited about the potential of the Nanox.ARC to fundamentally disrupt the imaging market. As I said, 2021 is a very important year for us as we seek regulatory approvals and prepare to ship commercial units. We look forward to keeping you updated on our progress. Thank you again, and have a good day.

Thank you for your participation this morning. This does conclude today’s teleconference. You may disconnect your lines at this time. Have a great day.