Nano-X Imaging Ltd. Q2 FY2023 Earnings Call

Good morning, and thank you for standing by. Welcome to the Nano-X Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would like now to turn the conference over to Mike Cavanaugh, Investor Relations. Please go ahead.

Good afternoon, and thank you for joining us today. Earlier today, Nano-X Imaging Ltd. released financial results for the quarter ended June 30, 2023. The release is currently available on the Investors section of the company's site. 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. Management will also refer to certain non-GAAP financial measures to provide additional information to investors. A reconciliation of each non-GAAP financial measure to the nearest GAAP financial measure is provided in the company's press release filed today. The non-GAAP financial measures include non-GAAP net loss attributable to ordinary shares, non-GAAP cost of revenue, non-GAAP gross profit, non-GAAP gross profit margin, non-GAAP research and development expenses, non-GAAP sales and marketing expenses, non-GAAP general and administrative expenses, non-GAAP other expenses, and non-GAAP gross loss per share. With that, I'd like to turn the call over to Erez Meltzer.

Thanks, Mike, and welcome all to the Nano-X second quarter 2023 earnings conference call. Throughout this quarter, we achieved significant advancements across multiple business segments. I would like to highlight that today's call will extend a bit beyond our typical duration as I aim to offer more comprehensive insights. I will delve into specifics, including our strategic approach to the U.S. market, the reinforcement of our manufacturing and supply chain and our regulatory process. During the quarter ended June 30, 2023, we continue to advance our commercialization efforts outside the U.S. following FDA clearance to market the multi-source Nanox.ARC. With this clearance, we are now preparing to establish our foothold in the U.S. market, complemented by our ongoing commercialization initiatives outside the U.S. Today, we are excited to delve into our commercial efforts in both the U.S. and the non-U.S. markets. About the U.S. deployment and strategy. Obtaining the 510(k) clearance from the FDA for the multi-source Nanox.ARC has been a long-standing strategic goal for the company and enable us to deploy the Nanox.ARC in the U.S. for the indication of use cleared by the FDA. As previously announced, we are in the process of establishing a U.S. demo as part of our strategic approach for our U.S. commercial activities. We have decided to shift this first unit and are now planning to install the unit in a clinical setting rather than a stand-alone commercial site. The system is planned to be installed in an East Coast facility and will expect to start to generate revenues alongside training and demonstrations. We believe that this first site will serve a dual purpose: first, as a training and demonstration center for Nanox.ARC, which will provide potential buyers with live demonstrations of the technology that we believe is essential for informed acquisitions purposes by health care practices, hospitals and health systems; secondly, we believe the clinical site can raise awareness of the Nanox.ARC among key opinion leaders, radiologists and hospital system personnel. The first Nanox.CLOUD system was shipped from Israel and arrived in the U.S. for installation in the clinical site, which we expect to open during the fourth quarter of this year. Based on market analysis of the U.S. market of clinicians, imaging administrators and directors, stakeholders recognize the clinical benefits of the Nanox.ARC and its more affordable approach to advanced imaging techniques. Furthermore, outpatient facilities such as skilled nursing facilities, freestanding emergency clinics and primary clinics showed interest in adopting the Nanox.ARC. Specifically, because such facilities typically do not have city capabilities, we believe such facilities view the Nanox.ARC as a more affordable way to keep patients in-house for advanced imaging needs, combined with a 2-D X-ray. Outpatient facilities also expressed potential interest in our MSaaS business model, which we believe reduces the risk of an upfront purchase because the cost is based on equipment use. We believe that gathering further clinical evidence will strengthen the support of our technology. Our U.S. go-to-market strategy is comprised of three primary components: customer targeting, building the sales team and using a hybrid business model. In terms of the customer targeting, we believe several factors impact willingness to adapt to our system, including the type of facility, the current imaging capabilities, imaging volumes and geographic locations, namely rural versus urban. Our aim is to strategically engage segments that show early adoption potential such as orthopedic clinics, skilled nursing facilities, freestanding emergency departments and urgent care facilities. We intend to continue to build clinical evidence, particularly with the U.S. market, to support the adoption of our system as well as reimbursement mechanisms, specifically with commercial payers. We have strategically realigned our focus to enhance our presence in the U.S. market. Our initial efforts in commercialization and deployment within the U.S. will be concentrated on select states. This approach allows us to optimize customer service delivery and support in the near term. To execute our strategy, we have allocated internal sales resources, and we are planning to leverage the USARAD network in order to accelerate our initial penetration in the market. Furthermore, we are in the process of enhancing a U.S.-based sales and service team that will seek to generate leads, close sales, manage relationships and provide services for the Nanox.ARC installed base. We are also in the process of engaging an independent service provider to provide service needs in remote geographies and to decrease equipment downtime. We expect that the other operating areas such as medical affairs, regulatory, billing, finance and contracting will be supported by the existing international Nanox organization. For our business model in the U.S., we intend to use a hybrid approach combining a usage-based MSaaS model with a CapEx model to help promote adoption based on different segments. We have designed a training program to promote the Nanox.ARC. We intend to use a combination of pilot staff training, sales and marketing efforts to help meet customer needs. These aspects of our business strategy will require us to hire additional experienced health care business development professionals who will be charged with raising awareness of the Nanox.ARC among physicians, hospitals, urgent care operators and large health systems throughout the USA. To support these important efforts, I intend to increase my personal presence in the U.S. and make myself available for meetings with potential customers as well as investors who would like to have an in-depth conversation about our technology, commercial strategy and future strategic plans. We look forward to providing further details in the upcoming months. With respect to the rest of the world deployment, turning to our commercialization efforts outside of the U.S. We continue to make significant progress in multiple countries, principally in Africa. As we have previously announced, we have an agreement with a distributor in Morocco and are working to accelerate deployments. We have deployed a Nanox.ARC system in a prominent hospital in Morocco that is a major health care provider in the southern region of the country. The distributor in Morocco received appropriate clearance to conduct certain scans with the Nanox.ARC. Subject to the clearance, the Nanox.ARC system has generated human images on incoming patients at the hospital, including chest. In Nigeria, we have installed a Nanox.ARC system, which we access will become operational upon receipt of the necessary regulatory approvals and certification that has been formally submitted to the local authorities, the NNRA, to facilitate clinical activities. We hope to begin generating human images in the very near future. As previously reported, we have already placed a system in Ghana at the UGMC Hospital mainly for training purposes. Meanwhile, our distributor has submitted the specific Nanox.ARC device for approval to the Ghana Food and Drug Authority for commercial use. We anticipate receiving an initial response in the fourth quarter of 2023. In addition, we have engaged a clinical research organization to potentially hold clinical trials in both Morocco and Ghana, subject to local regulatory approvals. In alignment with our global initiatives and as announced in the past, we established a partnership with BIO Ventures for Global Health, BVGH, a nonprofit organization dedicated to solving global health issues by forming connections between people, resources and ideals. We completed the first phase of this program and are excited to begin the second series in just a few weeks, which involves a series of export-led seminars to train Nigerian and other African health care professionals on imaging topics. We also regularly host radiologists, distributors, representatives from hospital systems, investors and analysts at Nanox headquarters in Israel to discuss the Nanox.ARC system in detail and conduct live demonstrations of the systems on site, providing firsthand insight into the capabilities of the Nanox.ARC. I'm happy to report that these meetings resulted in very positive feedback in writing. All of those efforts constitute just the beginning of our goal to help people achieve better health outcomes. Lastly, on this front, as part of our global commercialization, we have started to generate initial revenues from the medical imaging equipment and MSaaS. With respect to the OEM. Before I provide an update on the manufacturing and production front, I'd like to share the news that we have entered an original equipment manufacturing, OEM, relationship with a U.S. government agency that we have signed and are working to develop. The government agency I referred to has procured Nanox systems for assessment. Their interest in our technology is for the purposes of developing next-generation security scanning and nondestructive testing applications. The project is scheduled to commence next month. As part of our OEM efforts, we have sent several demo units to industry partners, out of which a leading partner independently examined Nanox cold cathode chip and reported a real technological breakthrough. With respect to the mass production, as we begin to deploy the Nanox.ARC and prepare for mass production, I would like to provide updates regarding research and development and manufacturing. We are currently using chips produced by our Korean fabrication facility in our Nanox.ARC system. However, to secure additional chips supply in anticipation of commercialization scale-up and acceleration of manufacturing activity, we recently entered into an agreement with CSEM, a chip maker located in Switzerland. We have proceeded to pay a phase 2 lab to fab development, which is expected to manufacture sample chips by the end of this year and provide production of chips in Q1 2024. For the commercial production of our digital X-ray tubes for use in Nanox.ARC, we plan to engage third-party manufacturers and suppliers based on, among other things, cost effectiveness. We are currently developing both ceramic and glass-based digital X-ray tubes for use in Nanox.ARC. Our Korean facility is currently our primary manufacturer and supplier for our ceramic digital X-ray tubes, and we are working with a third party for the production of glass-based digital x-ray tubes. For example, we recently started testing glass-based digital X-ray tubes manufactured by CEI. The testing includes performance, integration and radiation testing. Furthermore, we are negotiating with additional third parties to produce digital X-ray tubes. Along with our existing manufacturing facilities in Israel and Korea, we believe these developments further strengthen our future supplies of both chip tubes, the two key components of the Nanox.ARC to support the scaled deployment of the Nanox.ARC units. In an additional step towards optimizing our mass manufacturing capabilities, we have initiated collaboration with ScanRay for Nanox.ARC systems assembly at scale. ScanRay, a medical equipment manufacturer, meets central standard requirements and serves as a supplier for prominent global medical entities. It is also the parent company of CEI, our Italian provider of glass-based digital X-ray tubes. With robust technological manufacturing capabilities in India, we plan to leverage in the coming years of the Nanox.ARC deployment. Regarding regulatory, I'd like to now turn our attention to regulatory and clinical trials update. On April 28, 2023, we obtained a 510(k) clearance from the FDA to market the Nanox.ARC, including the Nanox.CLOUD, its company cloud-based infrastructure. The Nanox.ARC is a stationary X-ray system intended to produce demographic images of the human musculoskeletal system adjunctive to conventional radiology on adult patients. The approved device is intended to be used in professional health care facilities for radiological environments such as hospitals, clinics, imaging centers, and other medical practices by trained radiographers, radiologists, and physicians. This version of the Nanox.ARC has the required capabilities to scan musculoskeletal chest and abdomen and to provide 2D X-ray images, conventional radiography subject to local regulatory approvals. We are also continuing to pursue the CE mark in the European Union with our notified body, aiming to submit during Q3 of 2023. In Israel, we are pursuing the AMAR clearance, the Israeli medical device listing. The required technical file was completed and submitted in early July 2023, and we expect a decision in the few months. Clinical. As previously discussed under our Helsinki permit, we started to collect clinical sample images of multiple human body anatomies with a Nanox.ARC system that was deployed in the Shamir Hospital in Israel. We have completed the first phase of clinical sampling and have begun the second phase. We are in the final stages of approval of additional clinical sites in Israel, and this additional trial aims to utilize the Nanox.ARC, subject to receiving the final approval from the institutional IRB. This trial will aim to assess the diagnostic capabilities of Nanox.ARC in detecting chest and lung diseases. Installation of Nanox.ARC is expected to be completed within a month from its commencement, and the trial itself is scheduled to commence in the third quarter. With respect to Nanox.AI, I'm excited to share the progress we have made in the ADAPT trial with the National Health Service in the U.K. To date, all five of the testing sites in the U.K. have signed the collaboration agreement, and in addition, three sites: Cambridge, South Hampton and Bradford, have begun sending images to the Nanox.CLOUD platform. And we expect two more sites in Nottingham and Cardiff to begin sending images very soon. Nanox.AI is currently engaged in showcasing the product across a range of platforms to ten integrated delivery networks in both the United States and in other regions. 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 second quarter of 2023 of $17.4 million compared with a net loss of $19.6 million in the second quarter of 2022. The decrease was largely due to a goodwill impairment of $14.3 million that was recorded in the comparable period and not in the three months ended June 30, 2023, which effect was offset in part by a decrease in the company's earn-out liabilities in the amount of $12.8 million in the second quarter of 2022 versus an increase of $0.1 million in the second quarter of 2023. Revenues for the second quarter of 2023 were $2.6 million and the gross loss was $1.7 million on a GAAP basis. Revenues from the teleradiology services for the same period were $2.5 million with a gross profit of $0.4 million on a GAAP basis and a gross profit of $0.9 million on a non-GAAP basis, which represents a gross profit margin of approximately 14% on a GAAP basis and 36% on a non-GAAP basis. The increase in the company's revenue in the second quarter of 2023 is mainly due to the increase in the number of radiologists that engaged in reading during the overnight and weekend shifts. The decrease in the gross profit margin on a GAAP and a non-GAAP basis is mainly due to an increase in the cost of the company's radiology due to the incentive payments which the company pays to the radiologists to engage in reading during the overnight and weekend shifts. Research and development expenses for the second quarter of 2023 were $6.9 million as compared to $6.5 million for the comparable period in 2022. The increase of $0.4 million in our research and development expenses was mainly due to an increase in the company's labor costs in the amount of $0.7 million, mainly due to an increase in headcount in connection with the development of the Nanox.ARC system, which was partially offset by a decrease in share-based compensation of $0.3 million, and an increase in research and development grants that the company has received in the amount of $0.1 million. Sales and marketing expenses for the second quarter of 2023 were $0.8 million as compared to $1.1 million for the comparable period in 2022. General and administrative expenses for the second quarter of 2023 were $7.6 million as compared to $11.2 million for the comparable period in 2022. The decrease of $3.6 million in the general and administrative expenses was mainly due to a decrease in the company's labor costs in the amount of $0.5 million due to a reduction in headcount as part of the company's plan to increase efficiencies. In addition, we had a decrease in our share-based compensation in the amount of $2.8 million and a decrease in the cost of directors and officers liability insurance premium in the amount of $0.3 million. During the second quarter of 2023, we had accrued $0.7 million for the future settlement expenses in connection with the SEC investigation. As previously disclosed, the company and our team, our Chairman of the Board of Directors, reached an agreement in principle with the SEC staff to settle the SEC investigation. The agreements are subject to finalization, including any financial remedies, which the company estimates will be approximately $0.7 million in civil penalties from the company. Final resolution of this matter is subject to the preparation and negotiation of the documentation to all parties, including with respect to the company, approval by the company's Board of Directors, and in the case of the SEC, authorization by the commission as well as approval by a federal district court. As mentioned above, we incurred an expense of $0.1 million and change in contingent earnout ability in the three months ended June 30, 2023. During the second quarter of 2023, we entered into an amendment to the stock purchase agreement with the former stockholders of USARAD. Under this amendment, the company paid an aggregate amount of approximately $0.3 million in cash and 45,392 ordinary shares to the former stockholders of USARAD in consideration for the achievement of certain milestones in connection with the first earn-out period as defined in the USARAD stock purchase agreement. In addition, we paid an aggregate of $0.5 million in cash and 210,000 ordinary shares to the former stockholders of USARAD as consideration for the remainder of the milestones and applicable earn-out under the USARAD stock purchase agreement. Turning to our balance sheet. As of June 30, 2023, we had cash, cash equivalents, restricted cash, and marketable securities of approximately $80.3 million and had $3.4 million loans from banks. We ended the quarter with property and equipment of $45.2 million. As of June 30, 2023, we had approximately 55.5 million shares outstanding as compared to 52.1 million shares outstanding as of December 31, 2022. The increase was mainly due to the issuance of approximately 255,000 ordinary shares for the primary stockholders of USARAD under the amendment to the USARAD stock purchase agreement as previously discussed. On July 26, 2023, we raised $30 million in a registered direct offering by selling approximately 2.1 million shares and warrants to purchase up to 2.1 million shares. The net proceeds of the raise are intended to be used for further development, restructuring, and commercial deployment of our systems. With that, I'll hand the call back over to Erez.

Once again, I want to thank you all for being here today and for being with Nano-X on our multiyear journey to make medical imaging more accessible around the world. We have made tremendous strides in realizing our vision this year, and I'm proud of what our team has done to bring our company to the doorstep of commercializing the ARC system at scale. Before we end the call, I want to announce that we will be hosting an Investor Day to be held in New York City at the end of September or the beginning of October 2023. And if you would like to attend either in person or virtually, please contact our Investor Relations partner at ICR West. Have a great day. Operator, please open the call for questions.

The first question will come from Ross Osborn with Cantor Fitzgerald.

Congrats on the progress. So starting off, would you discuss the level to which your system in Nigeria is operating in terms of scans per day?

I believe it was mentioned that the system in Nigeria is currently operating without approval to conduct scans on patients or humans, and we are awaiting the final NNRA approval for human scans.

Apologies, I may have missed it. So is Ghana operating on human scans, or is that also waiting?

Ghana is waiting for the final approval for commercial use.

Okay. Understood. And then following on.

The one in Morocco is operating with human scans with images, like it's in full operation at the hospital.

Okay. Great. Would you be able to provide.

Right now, we don't disclose what's the number of scans per day. But I think that in the next call or probably even earlier, in the Investor Day, we will provide the initial indication for the scans per day in all the units that we have installed.

And then following up on this, when can we expect for you to deliver more systems to your commercialized operating countries? I believe Nigeria calls for 1,000, Ghana for 350 and Morocco for 270 systems.

First of all, as soon as we get the final approvals. But this basically will start in the next two quarters for sure.

And then turning to the U.S., could you just walk us through the rationale for the delay in the training center operating? I believe it was previously calling for this summer.

We've received early indications that we will send out the first systems soon. We are currently awaiting approval for the demo center. In the meantime, we've decided, as I mentioned earlier, that we prefer to have the first system installed at a clinical site to commercialize it sooner than originally planned. We have several clinics ready to install the systems even without the complete operating system in the U.S. Therefore, we plan to install the first system in the coming weeks at one of these locations, which will start generating patient scans and revenue.

And then last one for us and I'll jump back in the queue. Would you discuss the size of your U.S. contract you announced today? And just so we're on the same page, did the OEM sign on for your comprehensive system? Or are you now selling your chips on a stand-alone basis?

You mean the OEM agreement? The OEM, we have a few OEM arrangements and collaborations. The one that was mentioned is for the chip only. The others are into either chip or chip and tube. In addition, we are in the process of having a full demo, not only the tube itself, that will be tested in the next, I would say, six months.

And then are you able to disclose the size of the contract with the U.S. government agency?

We are not allowed to.

The next question comes from Jeff Cohen with Ladenburg. Your line is open.

This is actually Destiny on for Jeff. I will start by kind of continuing on the last group of questions. I'm curious, how are you determining the initial physicians that will be welcomed into your demo sites? And is this going to be more of a group demonstration? Or is this going to be on a one-to-one basis?

First of all, we currently have a full range of individuals visiting our systems, and we expect more to come. We've hosted groups, including delegations of 10 to 15 people. We are prepared to accommodate any size of group that would like to see what we do.

And there could be multiple people from a single site, I would assume. So that makes sense.

Absolutely.

And then you mentioned the sales team, a direct sales force in the U.S. I'm wondering about the size of that sales team, the timing of the onboarding of your initial sales reps and then how we should be thinking about the impact to sales and marketing expense going forward for modeling purposes.

Let's start with the first question. As I mentioned, we are currently building the team. We have previously indicated that we are in the final stages of completing our full action plan for deployment in the U.S. I shared some of this earlier today. The comprehensive plan, including detailed numbers and further insights, will be presented at our Investor Day scheduled for the end of September. By that time, we expect to have most of the team in place to commence their work. We are planning the kickoff for early October in the U.S. A few team members are already engaged and working in the U.S. You can expect to hear more about this when we talk on September 22 at NASDAQ, where we will hold our Investor Day. More details will follow.

Excellent. Looking forward to that Investor Day. And then lastly for us, you're collecting a lot of clinical and some real-world data. I'm wondering if you'll create some kind of registry to capture all of that.

The answer is yes. Part of the information will be displayed on our website. Everything will comply with regulations concerning this disclosure. We are currently preparing all the clinical data we've collected and drafting the paper we plan to release. While we handle the commercial deployment, we will also focus significantly on the clinical aspects of our work. As mentioned, in the U.S. we are currently permitted to conduct musculoskeletal scans, while internationally we perform scans of the chest, abdomen, and other areas. We have already conducted human tests and scans in other regions such as Israel and Morocco. Essentially, our plan is to advance our capacity to provide clinical data and explore future usage opportunities.

Thank you. This is all the time we have for questions. Thank you for your participation in today's conference. You may disconnect. Have a great day.