Nano-X Imaging Ltd. Q4 FY2023 Earnings Call

Good day and thank you for standing by. Welcome to the Nanox Fourth 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 now like to hand the conference over to Mike Cavanaugh, Investor Relations. Please go ahead.

Good morning and thank you for joining us today. Earlier today, Nano-X Imaging Limited released financial results for the quarter ended December 31, 2023. The release is currently available on the investor 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 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 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, and non-GAAP gross loss per share. With that, I’d now like to turn the call over to Erez Meltzer.

Thank you all for joining us today for our financial result call and corporate updates. Before we begin, I want to acknowledge the passing of our founder Ran Poliakine in January. We are grateful for his contributions, and I am honored to lead our team in fulfilling his vision of making medical imaging more accessible to enhance early detection and treatment, ultimately improving health outcomes. My comments today will be more detailed than usual as I cover various business aspects of Nanox. As we review our fourth quarter update and financial results, I take great pride in the progress our team made throughout 2023, particularly the FDA clearance for the Nanox.ARC, which validates our technology and mission and marks our initial steps toward U.S. commercialization. Today's call will focus on our activities in the fourth quarter and achievements in early 2024, a transformative year for Nanox. We are expanding our commercialization of the Nanox.ARC system and looking to steadily increase deployment while raising awareness of our solution. Nanox is committed to enhancing our commercial infrastructure and pursuing future strategies in the U.S., aiming to provide healthcare practices with a revolutionary advantage through the Nanox.ARC, an accessible, cost-effective solution that enhances diagnostic imaging capabilities and overall patient care. Let me start with an update on our U.S. deployment activities. We deployed the ARC at our first U.S. location in New Jersey, within the New York metropolitan area. Since then, we have launched across five states, reflecting a positive trajectory for our U.S. deployment. Currently, ARC systems have been installed at several medical imaging and diagnostic centers in New Jersey, New York, Florida, and Kansas, along with the Georgia 626 Imaging Academy, which serves as a training center. The Nanox.ARC system has started scanning patients, with clinical operations at other sites set to begin pending state regulatory approvals. As discussed in our Investor Day last December, one aim of these installations is to validate our MSaaS assumptions. Evidence from initial deployments suggests that our model is validated, with approximately seven scans per day at a rate of $30 per scan. The Georgia site at 626 Imaging Academy is a technical training center where technicians have successfully completed our training program. We are in advanced negotiations with another service provider to broaden our service coverage before scaling up. As we expand our presence in the U.S., we're also growing our U.S. sales and technical teams, being mindful of hiring to ensure that investments yield good returns. We are also extending our sales network as intended. I'm pleased to report that we have started realizing revenue from ARC imaging scans at U.S. deployed sites utilizing the MSaaS model. Regarding our commercial operations, Nanox has submitted certification requests to expand the placement of Nanox.ARC units in various states. I look forward to updating you on these upcoming installations. Now, regarding our efforts outside the U.S., we are generating revenue from hardware deployments in Africa, having achieved three installations by the end of March. Notably, we have a unit installed at the University of Ghana Medical Center Limited, which has gained local regulatory clearance. We recently signed a Ghana Multisite Agreement as part of our multisite trial to continuously gather data and clinical evidence on the Nanox.ARC. We are also progressing in Latin America, having partnered with a Peru-based medical equipment distributor to market Nanox Connect, which aligns well with their existing offerings. Additionally, our distributor in Mexico is obtaining an import license for the Nanox.ARC and preparing for its first installation, while also having received an import license for Nanox Connect, with the first two systems already shipped. I'm also pleased to update you on our hardware revenues, which Ron will review further shortly. We’ve begun earning revenue from our AI solutions in Q3 and have started generating revenue outside the U.S. from our imaging system sales. Our Nanox AI business has seen our client base increase by 250% compared to the last quarter, with an installed base of health systems using Health CCS, our AI solution for coronary artery calcium detection. We utilized feedback from cardiologists and radiologists to enhance this solution. Corewell Health, an integrated health system that began utilizing our population health solution in mid-2022, has provided positive feedback and fully integrated it into their standard care. We are also pleased to see that our solutions are available on Nuance Precision Imaging Network, impacting over 12,000 healthcare facilities. Moreover, Intermountain Health has signed on to deploy Health CCS, initiating the Go Live process. We achieved another regulatory milestone recently with the FDA’s 510(k) clearance for Health FLD, an AI software aiding in qualitative and quantitative liver attenuation analysis from routine CT scans, facilitating the detection of fatty liver and related conditions. Additionally, we announced early findings from the AI-enabled ADOPT study using our HealthVCF solution, revealing up to six times more identification of vertebral compression fractures compared to national averages at NHS hospitals in the U.K. In our OEM initiatives, we are engaged with Varex to validate tube designs and move toward mass production, with our first purchase order issued to an industrial imaging equipment manufacturer. Our collaboration with a U.S. government agency exploring Nanox.ARC technology for security applications is also progressing, with evaluations underway. Lastly, we’ve developed a demonstration kit containing a tube utilizing our meter, which has passed necessary safety and regulatory certifications. As for mass production, our collaboration with a Swiss chip maker is proceeding as planned. We are conducting a multicenter clinical trial to enhance Nanox.ARC's applications, with patient recruitment upcoming, and the system installed at Beilinson Hospital is ready for patients. Our CE mark pursuit in Europe is also advancing, having successfully completed an audit for regulatory certification. While we expect a timely application process, I note that regulatory bodies worldwide are working through backlogs due to the COVID pandemic. However, we are making significant progress in partnership with our notified body to complete the CE certification process. Now, I’d like to turn the call over to Ran Daniel to review our financial results.

Thank you, Erez. We reported a GAAP net loss for the fourth quarter of 2023 of $10.2 million, which is the reported period, compared with a net loss of $52.8 million in the fourth quarter of 2022, which is the comparable period. The decrease was largely due to a goodwill impairment of $36.5 million and an accrual of $8 million in connection with the settlements of the cloud section which were recorded in the comparable period and a decrease of $4.4 million in the general and administrative expenses. Revenue for the fourth quarter of 2023 was $2.4 million and gross loss was $1.7 million on a GAAP basis. Revenue for the comparable period was $2.1 million and gross loss was $1.8 million on a GAAP basis. Non-GAAP gross profit for the reported period was $0.9 million, as compared to $0.8 million in the comparable period, which represents a gross profit margin of approximately 36% on a non-GAAP basis for the reported period, as compared to 39% on a non-GAAP basis in the comparable period. Revenue from the teleradiology services for the reported period was $2.3 million with a gross profit of $0.3 million on a GAAP basis, as compared to revenue of $2.1 million with a gross profit of $0.3 million on a GAAP basis in the comparable period, which represents a gross profit margin of approximately 14% on a GAAP basis for the reported period as compared to 13% on a GAAP basis in the comparable period. Non-GAAP gross profit for the company's teleradiology services for the reported period was $0.9 million, as compared to $0.8 million in the comparable period, which represents a gross profit margin of approximately 38% on a non-GAAP basis for the recorded period, as compared to 40% on a non-GAAP basis in the comparable period. The decrease in the gross profit margin on a GAAP and non-GAAP basis is mainly due to an increase in the cost of the company's radiology due to the increase in the costs of services and payments of incentive payments, which the company pays to the radiologists to engage in readings during overnight and weekend shifts. During the reported period the company generated revenue for the sales of its AI solutions in the amount of $84,000 as compared to revenue of $63,000 in the reported period. During the first quarter of 2024, Nanox AI sold its Health CCS cardiac solution to a second IDN in the U.S. for an annual fee of $8.5 thousand during the first year of the engagement and an annual fee of $75,000 from the first anniversary of the engagement and onward. During the reported period, the company generated revenue through the sales and deployment of its imaging system, which amounted to $17,000 with a gross loss of $44,000 on a GAAP and non-GAAP basis. Those revenues stem from the sales and deployment of our 2D systems in Africa. Research and development expenses for the reported period were $6.8 million, as compared to $7.1 million in the comparable period. The decrease of $0.3 million was mainly due to a decrease in the company’s development expenses. Sales and marketing expenses for the reported period were $1.0 million, compared to $1.5 million in the comparable period. The decrease was mainly due to a decrease in expenses related to our sales and marketing activities. General and administrative expenses for the reported period were $3.8 million, as compared to $8.2 million in the comparable period. The decrease of $4.4 million was mainly due to a decrease in our legal expenses by $4.0 million, largely as a result of the finalization of the SEC investigation and the settlement of the class action, a decrease in share-based compensation by $0.2 million, and a decrease in the cost of the directors' and officers' liability insurance premium by $0.4 million. Other income was $2.7 million for the reported period, as compared to an expense of $7.8 million for the comparable period. Other expenses in the comparable period included an accrual for the settlement in connection with the class action lawsuit against the company in the amount of $8 million, which was reversed by the amount of $3 million in the reported period since the company received this amount from its directors and officers’ insurance carrier under the settlement agreement in connection with the class action lawsuit against the company. Turning to our balance sheet. As of December 31, 2023, we had cash, cash equivalents, restricted deposits, and marketable securities of approximately $82.8 million, and we had a $3.5 million loan from a bank. We ended the quarter with a property and equipment net of $42.3 million. As of December 31, 2023, we had approximately 57.8 million shares outstanding, as compared to 55.1 million shares outstanding as of December 31, 2022. The increase was mainly due to the sales of approximately 2.1 million shares and warrants to purchase up to 2.1 billion shares in a registered direct offering in consideration of gross proceeds of $30 million and a net profit of approximately $27.1 million, and the issuance of approximately 255,000 ordinary shares to the former shareholders of U.S. Rad under the amendment to the U.S. Rad stock purchase agreement. With that, I will hand the call back over to Erez.

Thank you all once again for joining our call today and your continued support of Nanox’s mission to make medical imaging more efficient, accessible, and affordable worldwide. It has been two years since I stepped into the CEO role. When I came here, Nanox was in a very different place. Just this year, we achieved an important milestone of ADA clearance and are seeking to potentially expand the use case for ARC with the FDA. We are also deep into the process of pursuing CE Mark designation in the European Union and have received local regulatory clearances in other countries like Ghana. We've begun commercialization earnest, and our systems are now deployed for use by imaging centers and hospital systems in Israel, three countries in Africa. As of today's call, we know we have numerous deployed systems in the U.S. Over these two years, we have integrated our AI strategy across the company. Our leading Nanox AI solution provides the ability to use AI to highlight and help identify patients with asymptomatic undetected chronic disease, initiating early diagnosis and preventative management. In this year we also achieved two FDA clearances, a substantial clinical validation of our AI solution. We understand this has been a long road, but our progress is tangible, and we are very excited for even more progress in 2024. Before I end the call, I have one last piece of news to share, and this is something many of you have been anticipating. On Wednesday, April 10, we will demonstrate the use of the installed ARC system, a dynamic medical imaging system in Union, New Jersey, beginning at 9:30 a.m. The demonstration will be followed by a roundtable discussion. Please contact our Investor Relations partners at ICR Westwicke if you are interested in attending, and note that space is limited. With that, I thank you once again and bring our fourth quarter and full year 2023 investor call to a close.

We will now conduct the question-and-answer session. Please be advised that to ask a question, you may press star followed by the number one on your telephone keypad. Our first question will come from the line of Ross Osborn with Cantor Fitzgerald.

Hey guys, congrats on the progress and thanks for taking our questions. Starting off with ARC, would you discuss how many systems in the U.S. are operational across the five states deployed in during the fourth quarter? And also provide us with how 2024 has progressed thus far in terms of placements and visibility into your pipeline or backlog of orders? Thank you.

So Ross, we have already indicated that along the year, we will add more details. So far, we have not informed exactly how many systems. We just say that we have systems installed right now in five states. One thing I would say is that we have already manufactured a few dozens of systems. We have the systems installed in the clinical facilities as indicated. Next, I would say that in the next meetings, I will probably mention and give you more numbers. The numbers we gave so far are scans per day, the dollars per scan, and the few dozens that have already been sold and shipped to the various locations.

And Ross, mind you that there’s a difference between the amount or the number of installed systems and the ones that are operated commercially since there’s a gap of time between due to the local or state registration requirement.

Understood. And then maybe could you provide some color on what types of centers are adopting ARC, and how utilization has trended thus far, and their level of comfort with $30 per scan?

Yes. We have small and medium-sized medical imaging centers right now. One of them is large. The other thing that we can indicate is that, yes, a few installations are in orthopedic clinical centers.

Got it. And then lastly for us, would you remind us of the economics on Connect, given your agreements in Peru and Mexico in terms of whether that’s going to be a capital sale or MSaaS? And if it is MSaaS, how should we think about...

Most of them are MSaaS models in the same manner that we apply to the ARC. Sometimes, we do a capital sales model with regards to Connect. But as I said, most of them are MSaaS models.

Ross, it depends also on the countries. In certain countries, especially in Africa, we make a decision to sell the system. In a few of them, we sell for a partial amount and then charge per scan. We have various models on the Connect.

Okay, got it. Thank you for taking my question.

You're welcome.

Our next question will come from the line of Jeff Cohen with Ladenburg Thalmann.

Hi, Erez and Ran. How are you?

Good, good.

So I did want to follow up on a couple of Ross' questions. Could you talk about Connect a bit in a little deeper scale and give us a sense of Connect versus ARC and how you anticipate both those platforms to play out both in the U.S. and OUS?

Okay. Right now, the Connect is being sold outside of the U.S. Once the Connect gets the FDA in the U.S., we're going to sell it in the U.S. as well. We have right now Connect in more than 10 countries, and a lot of them are in Africa, part of them in Latin America, and in Israel. First of all, the purpose of the Connect was to extend or expand the line of products that we have. The beauty of what we sell in Connect is that we sell it not only as a piece of equipment but bundled with the AI system included in what we sell. The system can analyze the image itself. We have systems that were sold in Morocco, for example, for use in the earthquake by the customer there. It has been used in Israel in various extreme situations when you can do a test in the field or screening in the field. The idea behind them is twofold. The first one is that we say sometimes they get the Connect and later on, get the ARC, and second is the inclusion of AI system into the imaging itself.

Sure. So I guess, Erez, what you're saying is depending on clearances that you would anticipate a lot of sites to or maybe the majority of sites to have both types of deployments, ARC and Connect?

I would not say majority because sometimes some countries prefer to use the Connect more than the ARC. But I would say that in Latin America and in the U.S., it will be mainly ARC. In the rest of the world, we will see many countries focus on selling the Connect. Sometimes there's preparation to get access to medical imaging because that’s the mission we took upon ourselves and we’re trying to get it in various ways. But we have seen a few countries that at the beginning were with the Connect and then we were able to sign for the ARC.

Got it. And could you clarify previous comments on manufacturing? Was that 2,000 systems manufactured?

No, no, no. We said that we have a few dozens of systems that were already manufactured. We are in the process of manufacturing a few more dozens. If you think about the long-lead items and the availability of parts, this enables us to cover the pace of installation that we are doing right now. If you remember, at Investor Day, we said we are going in a very conservative approach. We don’t have a second chance to make a first impression, especially not in the U.S. We are installing the systems, we are analyzing the data. We are adding and improving the installation process. We have been able to shorten the time we install the systems. We are negotiating with another service company that will improve our coverage for the U.S. We have gained the ability to control the systems also remotely. We are opening a call center that will enable us to serve these units better. We are exponentially increasing the number of people in our sales and service team, and we continue to expand our professional teams and recruit personnel. Lastly, we work on the referrals to ensure that people will be aware of the changes we are making in the standard of care, and we’ll do it professionally.

Got it. And lastly for Erez, any commentary on 2024 as far as first quarter sequential revenue changes, et cetera?

Yes. First of all, part of the indication I gave indicates where we are so far. The numbers will be growing. We are focusing on generating more revenue, more installations, and more scans in the current installations of the systems. I believe that next quarter, we'll be able to share a more detailed update as well as numbers of where we are and what the process is heading. Right now, we are making progress according to the plan and exactly what was presented at Investor Day. We are currently, based on past experience, much more careful and conservative in what we say and indicate, ensuring that whatever we promise will be delivered.

Thanks and congratulations on the strong end of last year and strong start to this year. Maybe, Erez, just on the utilization per system for Nanox.ARC, you mentioned $30 per scan, and some early systems are doing seven scans per day. Just on how you expect that to scale, which areas are you seeing utilization? Is it more on the orthopedic side? Are you seeing it in chest X-ray? Just a little bit on where you're seeing the early use cases for Nanox.ARC, and how you see that scaling over 2024? And then I'll have a couple of follow-ups. Thanks.

Okay. No disrespect to the others, but that’s a great question. First of all, I can say that seven scans per day is actually the model that we built and it seems that from the early installations, that's what we see. I would say, however, we had days with 15 scans per day in medical imaging centers where the professionals truly understand what we are doing. This is at the beginning. In terms of the dollars per scan, this is at the $30 compared to $14 to $17 in the rest of the world. So the U.S. is about $30, in line with the CPT code and the reimbursement that could be generated, which actually leaves room for us, for the center, for the medical imaging center, and for the radiologists. Regarding clinical indications, in the U.S., we have right now the MSK FDA clearance. Unlike the rest of the world, we do a lot in Israel and Africa; we focus on chest, abdomen, and skull scans in various indications. Our 2024 FDA submissions will include other indications as stated in the comment I made at the beginning. For example, at Beilinson Hospital in Israel, we do pulmonology cancer screening.

That's helpful. And I have a couple of follow-ups on AI solutions and specifically Health CCS for coronary artery calcification at InterMountain. It's deployed there, and it looks like it’s getting up and running. How do you see that progressing in 2024? And when we think about InterMountain, just in terms of the volume of patients they're seeing with coronary artery disease, how many cases do you think we’ll actually see being analyzed in CCS over the next few months and how will it trend over the next few years as this collaboration with Intermountain Health evolves? Thank you.

With AI, I suggest reading an article that our Chief Medical Officer wrote and another one that I wrote in Forbes about the usage of AI. It seems that right now, not only us, but other companies in the AI business have like engines with really high power. Because the implementation and deployment and adoption by part of especially the U.S. health economy is not fast enough, this will be able to generate more revenues for each institution. However, people are concerned about this situation. I think this is right for any or almost any other business. The adoption is slower than the ability to provide the services. Regarding the CCS, calcium scoring, right now, most of the experience comes mostly from Spectrum or Corewell, from which we provided these indications, and also from the U.K. I would say that 60% of the patients in the study were undetected previously with the risk of having a cardiovascular event from the chest CTs that were not diagnosed.

Thank you again.

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