Nano-X Imaging Ltd. Q1 FY2022 Earnings Call

Good afternoon, and thank you for joining us today. Earlier today, NANO-X IMAGING LTD released financial results for the quarter ended March 31, 2022. The release is currently available on the Investors section of the company's website. Erez Meltzer, Chief Executive Officer; and Ran Daniel, Chief Financial Officer, will host this afternoon's call. Before we get started, I would like to remind everyone that management will be making statements during this call that include 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 that 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 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 the non-GAAP to GAAP measures is provided with our press release, with the primary differences being stock-based compensation, amortization of intangible assets and class action related expenses. I'd now like to turn the call over to Erez Meltzer.

Thank you, Mike, and thank you all for joining the call today. As always, we appreciate your continued support of Nanox. As on our last call, I will give an overview of our recent achievements and share our outlook on the year ahead before turning the call over to Ran Daniel, our Chief Financial Officer, to review our financial results. We will then open the call up to questions. Overall, I'm pleased with our performance in the first quarter, as Nanox experienced accelerating revenue growth, continued to advance the design and deployments of the Nanox System, and we continue to make headway in the FDA clearance process. The first quarter of 2022 was our first full quarter of revenue generation. The company generated top line revenue of $1.8 million compared to $1.3 million in Q4 2021. As in the previous quarter, the revenue growth was due to the acquisition of Zebra Medical Vision, now Nanox.AI, a deep learning machine analytics company; MDW, now Nanox Marketplace, which is a decentralized marketplace connecting imaging facilities with the radiologists; and USARAD Holdings, Inc., a leading provider of teleradiology services. The acquisitions were completed at the end of 2021 and started to generate revenue in mid-Q4. Beyond the acquired revenue streams, we are pleased to note that we also experienced organic growth in the teleradiology business, which accelerated in the first quarter of 2022. The sales and marketing efforts around our teleradiology solution, which began in November of 2021, have begun to produce results. During the first quarter, our team generated growth from existing clients, while also implementing new contracts with new imaging centers. Our teleradiology solution now consists of a network of more than 300 independent radiologists that are certified by the American Board of Radiology, and we provide our teleradiology service to over 500 imaging facilities, including hospitals. We believe that the progress in our teleradiology business will strengthen the Nanox end-to-end medical imaging platform and will support our global deployment efforts and ultimately help to increase the accessibility of medical imaging solutions. These acquisitions are important pieces that we have put in place around the innovative Nanox.ARC technology and we believe they will help prepare Nanox to advance our vision of democratizing health care around the world. It is gratifying to see our AI-powered software adopted by large hospital systems, designed to promote increased early detection of risks for cardiovascular disease and osteoporosis, which was first announced on our last call. We believe the value of our AI solution will become stronger once it is paired with a Nanox.ARC to create an end-to-end connected, affordable, and streamlined medical imaging solution, from image capture through analytics, to intervention by trained radiologists. It is well-known that early detection saves lives, and we believe that the increasing use of advanced AI-enabled diagnostic equipment for rapid diagnosis will shift healthcare from predictive to preventive. In developed countries, this is one of the major factors anticipated to contribute to the rising product demand as this technology continues to gain momentum with healthcare providers. Currently, only a handful of players are operating in the market providing AI-enabled imaging technologies to the healthcare industries. We believe that these successes demonstrate that the integration of the acquired companies is going smoothly. As part of our integration effort, we are focused on improving our internal controls by implementing procedures, processes, and policies. We are continuing to invest and improve our human capital and technological infrastructure. We plan to continue to evaluate our potential additive technologies that may enhance the value of the Nanox ecosystem. With that, I'd like to turn to the regulatory update. Our continuing dialogue with the FDA enabled us to receive feedback on our Q submission, and we expect that the next step in the process will be the submission of the supplement to the Q submission, followed by a formal 510(k) application to the FDA for the multisource Nanox.ARC that will have the power levels and indications that we believe will result in a successful deployment of the Nanox.ARC. In another related matter to our regulatory efforts, we announced several weeks ago that Nanox.AI had secured another FDA 510(k) clearance, this time for our health host device, an AI software that provides qualitative and quantitative analysis of the spine from CP to support clinicians in the evaluation and assessment of vertebral compression fractures and low bone density. This is our 10th clearance with our innovative portfolio of AI-powered clinical decision assistance. In addition to these FDA clearances, Nanox has secured the CE Mark in Europe for 11 radiology AI solutions, as well as numerous regulatory approvals in other countries for its radiology AI solutions. I'd like to finish up the regulatory update by announcing another new initiative on the regulatory front. We are now in discussions with several notified bodies in the European Union to begin the process of securing the CE Mark in the EU for the Nanox System. This is an important step towards achieving a global footprint. We are pleased with our regulatory developments, and we are committed to continue our efforts diligently to meet the goals we have set for ourselves. We took another important step over commercialization with the commencement of large-scale production of our MEMs chips at our new semiconductor fabrication plant in South Korea, as announced at the beginning of April. The facility will be the production site for the Nanox source, the chip that produces the digital X-ray source and lies at the heart of the company's Nanox.ARC system. We continue to prepare for full-scale production soon, and this facility will support our manufacturing needs for the foreseeable future once we begin deployment. As we also reported last month, we are continuing to build our production lines for the Nanox systems at our Israeli facility in anticipation of the first Nanox.ARC shipments. With that, I'd like to turn the call over to Ran Daniel, Chief Financial Officer, to review our financial results.

Thank you, Erez. We reported a GAAP net loss for the first quarter of 2022 of $21.7 million compared with a net loss of $12.7 million in the first quarter of 2021. Our revenues for the first quarter of 2022 were $1.28 million and the gross loss was $1.9 million. Our revenue stems from the sales of teleradiology services and AI solutions and those revenues represent a full quarter of operation. Of such revenue, our revenue from teleradiology services for the same period was $1.7 million with a gross profit of $0.1 million on a GAAP basis and a gross profit of $0.7 million on a non-GAAP basis, which represents a gross profit margin of approximately 39%. In addition, our revenue from licensing of AI applications for the same period was $0.1 million, with a gross loss of $2.0 million on a GAAP basis and $0.0 million on a non-GAAP basis. Research and development expenses for the first quarter of 2022 were $6.8 million as compared to $2.7 million for the comparable period in 2021. The increase in our research and development expenses was mainly due to the consolidation of Nanox.AI with the company, development of our multisource and cloud systems, and share-based compensation. Sales and marketing expenses for the first quarter of 2022 were $1.1 million as compared to $1.7 million for the comparable period in 2021. The decrease was due to the reduction in share-based compensation. General and administrative expenses for the first quarter of 2022 were $11.3 million as compared to $8.2 million for the comparable period in 2021. The increase was largely due to the consolidation of Nanox.AI and USARAD Holdings with the company and the acquisition of the assets of MDW, an increase in our labor cost due to the increase in our headcount in connection with the expansion of the company's management team and our overall organizational infrastructure, and legal fees in connection with the SEC inquiry and class-action litigation. Other expenses for the three months ended March 31, 2022 were $0.8 million as compared to none for the three months ended March 31, 2021. The increase was mainly due to the relocation of our fabrication facility in Korea to its permanent location and change in our contingent earn-out liability. The non-GAAP net loss for the first quarter of 2022 was $12.0 million compared to a non-GAAP net loss of $7 million for the same period in 2021. A reconciliation between GAAP net loss and non-GAAP net loss for the first quarter of '22 and 2021 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 is mainly due to amortization of intangible assets, share-based compensation, fees related to our secondary share offering, which was closed during the first quarter of 2021, and legal fees related to the SEC inquiry and class-action. Turning to our balance sheet. As of March 31, 2022, we had cash, cash equivalents, and marketable securities of approximately $139.4 million, and we had $3.7 million loan from banks. We ended the quarter with property and equipment net of $41.2 million; the increase of $3.8 million during the first quarter of 2022 is mainly due to the completion of the construction of our fab in South Korea and the preparation for mass production of our MEMs chips. As of March 31, 2022, we had approximately 52.1 million shares outstanding as opposed to 51.8 million shares outstanding as of December 31, 2021. The increase was mainly due to the exercise of warrants and issuance of shares to the former shareholders of Nanox.AI due to the achievement of a milestone. With that, I will hand the call back over to Erez.

Thank you, Ran, for the financial update. And once again, thank you all for joining us today. I feel very good about Nanox' results at the first quarter as a CEO, but all of us recognize there is more to do. We hope to provide additional updates in the coming weeks and months. I would also like to share with you all that Nanox management team will have a non-deal roadshow in person with investors in late June. If you would like to schedule a meeting, please contact our Investor Relations partners at ACR. With that, I'd like now to open the call for questions. Operator, please begin the Q&A session.

Our first question comes from Suraj Kalia with Oppenheimer.

So, sorry, just hopping around on a couple of things. In terms of the timing of the actual 510(K) submission and CE Mark, can you give us broad timelines as to how you see it currently?

For some reason, unfortunately, I can't hear you. Mike, can you repeat the question or Ran?

Yes. Suraj is asking for a general timeline regarding the 510(k) submission in the future.

I can't hear you for some reason. Can you repeat the question, please?

Suraj, can you repeat that, sorry?

Sure, Erez. I was just inquiring about the timing of the actual 510(k) submission and the CE Mark?

Okay. I understand. Right now, we only have what we've shared in the press release and the earnings report. We've changed our communication approach with the FDA to have an ongoing dialogue with a Q sub. We are currently awaiting the FDA's approval for the Q sub before submitting it. In recent months, we have provided all the information they requested. Following our last two meetings with the FDA, they asked for a lot of additional information, which we have shared with them. Now, we are waiting for their approval. They tend to take their time. The last time they took about 75 days to respond to a submission, but they replied in 35 days. It's uncertain what the timeline will be this time. As soon as we receive their response, we will move quickly to publish the information.

Fair enough. Erez, hopefully, you can hear me. I will just ask one more question, and I'll hop back in queue. Has there been any validation testing done by any client on the multisource?

First of all, I'd like to address the previous question regarding the CE. We are currently evaluating several notified bodies in Europe, and we hope to finalize this soon, allowing us to move forward with submissions. As for customer implementation, we cannot proceed until we receive FDA approval or authorization for clinical trials. However, once we obtain clearance from countries with different regulations that don't require FDA approval, we can begin deployment. We expect this to happen soon, after which we will conduct trials at customer sites.

Our next question comes from Jeffrey Cohen with Ladenburg Thalmann.

I'm going to follow up with Suraj's follow-up. So what I was hearing was that you will receive some feedback from the agency on your last Q submission and you should get feedback in the maybe near or medium term, and then you will again submit another supplement from their feedback in the coming months.

No. Right now, we have provided and submitted all the supplemental information they required, and we are waiting for their approval to proceed with the submission. They may have additional questions, and we plan to have a session with them similar to those held in recent months since we entered the Q submission process. Based on this, we're waiting for the go-ahead to proceed. If more information is needed, we will submit it. Additionally, we are taking all necessary steps to provide further simulations and supporting evidence. I believe that the process is progressing well from our perspective, especially considering that this is new technology for them, and they have been asking many fundamental questions. I think this will allow us to move quickly to get the necessary approvals and proceed forward.

Okay. So they may require or you may be going through one more iteration perhaps? Or at some point, they will inform you to go ahead and file the formal 510(k) for the ARC?

Yes, there are a few options. We hope that the next step will be the submission. They may ask us to conduct clinical trials simultaneously with the submission. We are not certain yet, but we believe this will happen shortly afterward. Our main hope is that we can submit directly and start the timeline for approval as soon as possible.

Got it. Okay. And then as far as your commentary for the European Union, was your commentary referring to the ARC submission? Or was your commentary about single source?

No, it's a multisource submission. The same submission going to the FDA will also be submitted for CE approval. As you may know, the guidance in Europe has changed, limiting the number of notified bodies that can handle the increased workload resulting from COVID. Previously, there were about 40 to 50 notified bodies, but now there are around 20. However, I believe the efforts we are currently making will yield positive results, and we are hopeful to advance with the CE approval in the near future.

Okay, got it. And then for Ran, any commentary? I think that our estimates for the first quarter were slightly lower on the overall OpEx front. Could you give us any indication of how you currently see OpEx rolling out for the rest of the year? Would you expect it to decrease a bit due to lower one-time charges?

Well, I think, first of all, you should expect to see us become more efficient. We are implementing many processes and steps to enhance our efficiency, which will impact our operating expenses. Currently, the strengthening of the dollar is providing us some relief regarding our operating expenses since most of our workforce is in Israel, allowing us to benefit from savings in the first quarter. We anticipate similar results in the second quarter. Overall, we are aligned with our annual operating plan.

Okay, got it. And what's been the net FTE change over the past quarter or so from the end of the year to now? Is the organization continuing to grow or stabilize at the same size?

The total employee count, we had a decrease in the total employee count. But of course, per our annual operating plan, we do plan to recruit more people, and to exercise our plan.

Our next question comes from Rahul Rakhit with LifeSci Capital.

Just a couple from me. I know you mentioned that certain countries don't require FDA approval in order for you to get regulatory clearances there. Could you comment on what the regulatory process looks like in those countries? And when do you anticipate receiving those regulatory clearances?

The processes in these countries are what I would consider local processes that require special approvals. We hope to receive at least one or two of them shortly. They are slightly simpler than the usual FDA and CE processes. We are working to obtain them as soon as possible, which will allow us to start the...

Can you guys hear me?

Yes.

Sorry, I think I cut off for a second. Apologies. And then last one is, do you guys expect to sign any additional MSaaS agreements through the year? I know there were two last year. I guess maybe you can kind of just touch on your efforts there and what that pipeline might look like?

The short answer is yes. The little bit longer answer is that we are negotiating right now a few more agreements. I don't think that I can actually share when they are going to be signed, but at least in one or two of them, it's in an advanced process.

Got it, okay. And last one for me. I know a few of the contracts you guys signed back in 2020 had three-year initial terms. Just realistically, how many did you expect to renew? And of the ones that do renew, should we expect any changes in the terms of these contracts in terms of the minimum number of units they may deploy or the minimum annual fee that might be agreed upon?

Currently, we don't anticipate any changes to the existing contracts. We are working on a project that is still in the planning phase, but once we begin the deployment, it will allow us to better analyze the minimum charges and fees per scan. It's important to note that for the additional scans we plan to implement, we will charge significantly more than our current rates, approximately three to four times higher. This is the topic of our current discussions, and we may consider adjusting both the minimum charge per scan and the minimum number of scans conducted daily.

That's all the time we have for questions. I'd like to turn the call back over to Erez Meltzer for closing remarks.

So once again, thank you all for joining us today. We do hope to give you some more good news in the next few months. And as always, what I'm trying at least to ensure that I'm saying or informing only things that I'm 100% sure that are going to be implemented or have been implemented already. Sometimes it's more careful to be like this. But at the end, that's the better way. So thank you all for today and we'll be in touch. We'll see you probably in sometime in late June.

This concludes today's conference call. Thank you for participating. You may now disconnect.