Nano-X Imaging Ltd. Q3 FY2022 Earnings Call

Ladies and gentlemen, thank you for joining us today. And welcome to the Nanox’s Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker host, Mike Cavanaugh of Investor Relations. Please go ahead.

Good morning, and thank you for joining us today. Earlier today, Nano-X Imaging Limited released its financial results for the quarter ended September 30, 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 morning'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 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 amortization of intangible assets, share-based compensation, secondary offering expenses, goodwill impairment, change in obligation in connection with acquisitions and legal fees in connection with class action litigation and SEC inquiry. I'd now like to turn the call over to Erez Meltzer.

Thank you, Mike. And thank you all for joining the call today. Reporting on our third quarter of 2022, I'm proud of the results our team has been able to deliver as we continue to advance our commercialization of the Nanox.ARC system. As in our last call, I will give an overview of our recent achievements. And we'll share our outlook for the rest of 2022. Before turning the call over to Ran Daniel, our CFO to review our financial results in detail. We will then open the call up to questions. I'm pleased with the progress our team made during the quarter, which as most of you know includes our 510 (k) submission to the FDA for our multi-source Nanox.ARC system at the end of September, and which is now under FDA review. I'm very proud of the hard work behind the scenes by our regulatory product and other teams to absorb the continuous feedback from our Q submission process and incorporate it into the research submission. We do not have any insights into the timing of the FDA's response. In other regulatory news, we continue to pursue CE Mark approval in the European Union. And I'm happy to report that we have engaged with VSI, the notified body with whom we will work during this process. We look forward to providing updates to you as the process advances in the coming months. I'd like to take a few minutes now to discuss our progress toward commercialization of the multi-source Nanox.ARC system. It remains our goal to begin to deploy the multi-source Nanox.ARC system in 2022. And we've continued to push toward the goal. We continue to advance the process toward deployments of the multi-source Nanox.ARC in Nigeria subject to regulatory approval, as we recently received an import license. We intend to ship the first system and begin trading as soon as we secure regulatory approval. Globally, we have a total of 6,850 pre-ordered units, we believe that once we begin to deploy the multi-source Nanox.ARC in Nigeria and in other early adopting countries, health systems, hospitals and distributors will see the service that the Nanox.ARC provides. Clinical updates, we have received the Helsinki permits to conduct clinical trials in Israel using our multi-source Nanox.ARC system. We anticipate that the results of these trials will generate clinical central images of multiple body organs during the fourth quarter of 2022. Now turning to our AI and teleradiology segments, we continue to see revenue from these important business segments. I'm happy to report that during the third quarter of 2022, we signed nine new client agreements for teleradiology services. And we continue to see revenue growth in these services driven by new client additions, as well as organic growth from existing clients. These businesses generated a top line revenue of $2.4 million in the third quarter of 2022, compared to $2.2 million in the second quarter of 2022. Ran then will review the financials in more detail. But these revenues continue to demonstrate the viability and utility of these additional services to the healthcare system, which services are intended to be part of a fully integrated multi-source Nanox.ARC system upon deployment, and an integral part of our ecosystem and end-to-end solution. Before I turn the call over to Ran, I'd like to remind everyone that we will be hosting a multi-source Nanox.ARC demonstration broadcast with a live audience in Neve Ilan on Wednesday, November 16, at 9:30 am Eastern Time. Due to capacity limitations, we invite you to attend virtually; you can find the link for registration on our website. I want to thank our investors for their continued support of our vision to help make medical imaging accessible throughout the world. I'm very happy with the progress we made this quarter. And we look forward to meeting additional milestones as we move towards large scale commercialization. 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 third quarter of 2022 of $19.1 million, compared with a net loss of $13.5 million in the third quarter of 2021, which increase was largely due to the consolidation of Nanox.AI and USARAD with the Company since the fourth quarter of 2021, an increase in our research and development expenses, and an increase in our general and administrative expenses, which was mitigated by a decrease in our sales and marketing expenses and a $1.0 million expense due to change in our obligation in connection with acquisitions. Revenues for the third quarter of 2022 were $2.4 million, and gross loss was $1.4 million. Revenue from teleradiology services for the same period was $0.3 million with a gross profit of $0.6 million on a GAAP basis, and a gross profit of $1.2 million on a non-GAAP basis, which will present a gross profit margin of approximately 49.4%. The increase in the company's revenue and gross profit margin in the third quarter of 2022 is due to revenues from a data monetization project with a total revenue of $0.3 million. Revenue from licensing of AI applications for the same period was $0.1 million with a gross loss of $2.1 million on a GAAP basis and $0.0 million on a non-GAAP basis. Research and development expenses for the third quarter of 2022 were $6.1 million as compared to $3.7 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 as well as due to the development of the multi-source Nanox.ARC and Nanox.CLOUD and share-based compensation. Sales and marketing expenses for the third quarter of 2022 were $0.7 million as compared to $1.5 million for the comparable period in 2021. The decrease was mainly due to a decrease in cost of labor and share-based compensation. General and administrative expenses for the third quarter of 2022 were $10.6 million as compared to $8.2 million for the comparable period in 2021. The increase was due largely to the consolidation of Nanox.AI and USARAD with the company since the fourth quarter of 2021, an increase in the company's headcount and the overall organization infrastructure and an increase in the company’s legal fees due to the US Securities and Exchange Commission inquiry and class-action litigation as discussed in the company's Form 6-K filed today and Form 20-F from the year ended December 31, 2021, filed on May 2, 2022. Change in obligation in connection with acquisitions was $1.0 million, as compared to none in the comparable period, due to the decrease in the Company’s contingent earnout liability. The Non-GAAP net loss for the third quarter of 2022 was $8.1 million compared to a non-GAAP net loss of $8.4 million for the same period in 2021. A reconciliation between GAAP net loss and non-GAAP net loss for the third quarter of 2022 and 2021 is provided in the financial results that are part of this press release issued this morning. Turning to our balance sheet; as of September 30, 2022, we had cash, cash equivalents and marketable securities of approximately $117.1 million, and we had $3.5 million in loans from the bank. We entered the quarter with property and equipment net of $44.1 million, compared with $37.4 million as of December 31, 2021, the increase is largely due to the purchasing of long lead items for our multiple systems and machinery and equipment for our publication facility in South Korea. As of September 30, 2022, we had approximately 52.3 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 stock options. 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 Nano’s results in the third quarter; as CEO, I recognize that there is more to do. We hope to provide additional updates in the coming weeks and months. With that, I'd like to now open the call for questions. Operator, please begin the Q&A session.

Our first question is from Jeffrey Cohen with Ladenburg.

Hello, Erez and Ran. How are you? Just fine. So, a few questions for you. I guess firstly, as far as Nigeria and units that may be available for replacement, could you give us a sense of manufactured units as they stand at the moment?

In terms of manufacturing, we are in the process; we have all the materials available. We are actually working hand in hand with the regulatory approvals. So once we get all the paperwork, we can start to ship the units. And it goes the same with the other countries when we get all the regulatory approvals. Just to complete the answer about Nigeria, the next step is to send the first unit for demonstration. The demo center is already ready over there. And then to engage with those customers who are expecting to get the machines to do the training. As you know, we've indicated the work we are doing with BVDH for the deployment and the training in Nigeria. So that's the process that we are following.

Can you give us a sense of the size of the order over the coming year? Specific to Nigeria.

We don't, as you know and I'm going to stick to it until further or future indications. We haven't given numbers so far. The main reason, of course, was a relation. But we haven't given numbers so far, and we may make changes in the future.

Got it, okay. And jumping over to the teleradiology, can you give us a sense of number of accounts and account growth and/or utilization trends, and utilization growth?

Okay, Ran, would you like to address this question?

Yes. Jeffrey, we had an additional nine accounts this quarter. The total account is approximately four, right, as of now, and so you can calculate the growth rate from there.

Basically, you see the numbers in terms of the revenues; they reflect the growth rate. We are still waiting for all the approvals, licenses, and the accreditation that we are always waiting on. When we sign, there is a gap between the time that we can start to do the readings. But right now, in terms of the customers, we tend to have a sort of 60:40 or 70:30 where a few customers generate at least 60% of the revenues. And right now, we see a lot of growth in those that have been with us for quite some time, and we see the future as well.

Okay, got it, and then could you talk about a couple of millions of goodwill impairment for the quarter? Is more than fair, I can see the goodwill number, but would you anticipate any more breakdown so that there's a low number for the balance year? Give us a sense of what was written down for the third quarter?

Yes. And then just to complete my answer from before about the new accounts, it takes us two to three months to go through the credentialing process once we get a new client. As for the goodwill, the goodwill impairment comes from a few factors; the two main ones are first, changing the discount rate that we're using. And as long as the Federal Reserve continues to increase the rate, we should expect to at least examine if impairment is needed. And that's what we do on a quarterly basis. This specific quarter, there was no impairment, but there is an obligation that impairment is needed. So we had to go through the process. As for your question regarding the third quarter impairment, there is no impairment expense, but we may have to go through the process for the fourth quarter, and you can also consider that we'll have to estimate for 2023 and going forward, coupled with any change that will be in the discount rate set by the Federal Reserve.

Now, you can imagine, by the way, that once we start the deployment of the Nanox.ARC, obviously, all the teleradiology services will be expanded and grow.

Got it, and then finally, where things stand at the FDA regarding the permutations that we should expect going forward? Do you anticipate that a clearance would be one option? The second would be that they would be back with additional questions? What are the few permutations that we could see?

Okay, the one thing that I don't bet or indicate is the timing of the process from the FDA. We saw it in the last three years and I think the whole business world has seen it. What we are saying is that we have done everything that we could to increase the likelihood of the clearance from the FDA. Having said that, we spoke about it and emphasized that this year Nanox changed a little bit its regulatory strategy from the single step FDA submission process to a stepwise approach using Q submission path for questions and answers with the FDA team priority to the 510 (k) submission. And, frankly speaking, we intend to continue to use this dialogue with the FDA as we develop the next generation of the Nanox.ARC system, as well as the future products that Nanox will generate.

Our next question in queue is from an unidentified analyst.

Hi. Hope everyone's doing well. Congrats on the progress. So starting off, is there any update on the Ghana contract? I know you made a special approval process last quarter. So if you could provide a little bit more color just on what the regulatory environment is there? And kind of where you stand in Ghana?

You asked about the Ghana deployment? We haven't had an update up until now. And we'll do it in the future. As soon as we have information that needs to be shared with the public, we will do so. We signed the agreement. We're waiting for the regulatory processes. Once we get the clearance as we did now with Nigeria, or the approval, then we'll release it. But then, by the way, in the meantime, of course, as we do with any other countries, we are doing all the preparations, meeting with the customers, conducting training, and checking the availability of the internet and telecommunications infrastructure.

That sounds great. I guess just one more on the Ghana contract. I know you disclosed 350 units. But are you able to provide us with a minimum annual fee? If there is a letter of credit associated with the contract?

There is always the difference between able and willing.

And the answer is that as soon as we have something to say, we will say it.

Okay. And then I guess, looking ahead at deployment, do you expect for scans to be read in Nigeria? Or will those be outsourced to Nanox? And if it is the latter, do you have radiologists in place? And are those radiologists financially motivated to read the scans?

Right now based on everything that we know, which may change in the future, but based on the studies and groundwork that we did in Nigeria, it will be both.

Good morning, Erez, Ran. How are you? Erez, I have a few questions for you. As you consider commercialization, could you describe how the workflow for these products will look, particularly in Nigeria? What steps will take place in Israel, and what will happen in Korea, especially regarding your manufacturing facility? Additionally, how will things proceed in Japan with the ceramic or glass kit? Please walk us through the expected workflow.

It's interesting, and it's funny, but actually, what you are asking for is a promo for next week. On the Art Day, you will see the whole workflow. As we have explained in the past, the chips are being manufactured in Korea, the tubes are being installed in Korea, and we are planning to source more from other suppliers in the future. All the integration and assembly are currently being done in Israel and will, in the future, as we stated in the prospectus, be done partly outside of Israel. The system is fully installed and assembled in Israel. When it shifts, it will be secured in a box and shipped to the place where they are going to be deployed. In Nigeria, you asked specifically about Nigeria, but it will be the same in other countries. We are doing the installation, the connection to the network, and sometimes even to the tech system in the future. We conduct all the training of the operators and of the maintenance on-site, and we provide training for the radiologists on-premise. We have a demo center, and we will have a demo center in every country in which we deploy. Currently in Nigeria, we have the demo center ready to install the first unit. Additionally, we work with partners in Nigeria and are exploring joint ventures with other partners. We have already started discussions with customers and hospitals in Nigeria, and other countries.

Fair enough. And in areas, I presume the Nigeria configuration is the same as the US configuration.

It's a good question. Hopefully, yes, but we are not sure what it will be. We hope that the FDA will approve the configuration that we intended to use, and I hope that no changes will take place.

Got it, and Erez, finally the 6,800 or so confirmed pre-orders that you talked about. How confident are you in these contracts' ability to fulfill, and your ability to enforce them? Because many of them, our recollection indicates, are at least a few years old and have not gone through validation testing. Any additional color would be greatly appreciated. Gentlemen, thank you for taking my questions.

Okay, I've been in business for over 40 years and more than 35 as CEO, and one thing I’ve learned is that you can only be confident in a deal once the money is in the bank. This is the specific condition that the payments from each one of them will be in our bank account. This is in terms of confidence. However, it all depends on clearance processes, approvals, and regulations in each place. We are in continuous dialogue with these business entities that we signed agreements with. A few of them, by the way, come from time to time to Israel to see the progress, to receive training, and to get to know better the system and the product intended for use.

Hey, guys, thanks for taking the questions. I was just wondering if you could touch a little bit on the initial utilization levels at Northwell Health. Maybe help us better understand how to think about the revenue generation from these integrated business networks moving forward.

First of all, we have not indicated that specifically from each integrated business network, but I will add a couple of things with regard to one of the integrated business networks where we have already installed and received the money last year. The agreement or the extension of the agreement for next year is expected to generate much higher revenues coming from this integrated business network. In terms of the Northwell situation, this is a continuous dialogue. We have, I think, a few hospitals that were already installed as part of the Northwell project. I would say that Northwell is more than just an integrated business network. They are kind of a strategic integrated business network that we work with, where we jointly develop some applications and business models for the intended uses of our AI applications. They are planning to adapt and install them. All the applications we have are either in place or coming soon. Furthermore, we are in the final process of developing future business models that will communicate the value we bring to the integrated business networks, insurance companies, and pharmaceutical companies, tailoring the best model to grow the business while ensuring they benefit from our services.

Got it. Okay. Thank you.

And, Rahul, just one more sentence. We have not, as Erez said, indicated the amount of revenue that we generated or are going to generate from those two projects. Nevertheless, we have to keep in mind these are the two projects that we have in our preparatory area.

Got it, no, I appreciate that. Thank you. And just one for making, can you tell us a little bit more about the clinical trials that you intend to conduct in Israel? Can you provide color on trial design or what images specifically you guys are focusing on initially and how you intend to leverage that data moving forward? Thanks for taking the questions.

We will update as soon as we complete the sample collection. We have indicated that we received the Helsinki permit to conduct clinical trials in one of the leading hospitals in Israel, where the system is already installed. The X-ray room is already installed there. We anticipate that the results of these trials will generate samples of images of multiple body organs during the fourth quarter of 2022. I do hope and believe that in the next earnings call, we will have more to share about it.

Thank you. And I am showing no further questions at this time. I would now like to turn the call back over to Mr. Meltzer for any closing remarks.

Thank you all for taking the time to join us. For those of you who are interested in what we have to show, we hope that next week will be fruitful for those that would like to participate. I thank all the investors for being with us, and we hope to fulfill the promises that we made to really change the world with what we're doing.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect. Good day.