Earnings Call Transcript - NNOX Q3 2021

Mike Cavanaugh, Investor Relations

Good afternoon and thank you for joining us today. Earlier today, Nano-X Imaging Limited released financial results for the quarter ended September 30, 2021. The release is currently available on the Investors section of the Company's website. Ran Poliakine, Chairman of the Board and Chief Executive Officer, Erez Meltzer, Executive Board Member and incoming 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, 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 may cause such a difference. Those 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 and class-action related expenses.

Ran Poliakine, Chairman and CEO

Thank you, Mike. And thank you all for joining the call today. Today, I will give an overview of our achievements during the quarter, as well as a corporate update before turning the call over to Ran Daniel our CFO to review your financial results. We have been busy since our last earnings call, advancing the NANO-X system which has the potential to improve accessibility and aims to drive a significant increase in the delivery of medical imaging, all over the world. Besides greater availability and accessibility, we believe the Nanox.ARC system, and its end-to-end ecosystem, will enable healthcare providers to obtain crucial information which has the potential to shorten diagnostic and treatment time and promote early detection. It is well known that earlier intervention is the key contributor to better health outcomes for patients. Before I begin, I would like to have Erez Meltzer, NANO-X's incoming CEO, say a few words and introduce some of our latest developments. Erez.

Erez Meltzer, Executive Board Member and Incoming CEO

Thank you, Ran. And thank you all for being on the call today. I'm excited about the leading and dedicated and talented Nanox team as we move ahead towards commercializing the Nanox.ARC system. I'm working closely with the team to prepare for assuming the CEO role beginning on January 1st, 2022 and look forward to participating in the Q&A session at the end of today's call. Turning to accomplishments during the quarter, as many of you know, we recently completed our three previously announced strategic transactions. First, we completed the merger with Nanox AI, formerly known as Zebra Medical Vision. Second, we completed the acquisition of USARAD Holdings. And third, completed the acquisition of the assets of MBW. We believe that having a more accessible medical imaging technology would not be enough to transform the global marketplace; we also need to have AI capability to complement our technology. Nano-X AI will fulfill these needs and provide the image analytics necessary to identify problems and begin the process of diagnosis and treatment. The acquisition of USARAD and MBW provides a connected team of professional radiologists and a decentralized marketplace that connects facilities and patients with radiologists to begin the next step of the evaluation process in the AI alerts to potential problems. These transactions helped to fulfill our AI-powered workflow and provide some of the important final pieces of the Nanox.ARC system as we head toward commercialization.

Ran Poliakine, Chairman and CEO

Thank you, Erez. And I would like to quickly highlight a few other achievements since our last report. In October, we announced that we entered into an MSaaS agreement with International Clinics Group and medical equipment distributors that serves hospitals, health systems, clinics, and other medical facilities in Chile, Bolivia, and Peru, which adds to the growing future demand for our Nanox.ARC system. The agreement calls for the deployment of 350 Nanox.ARC devices across the region. To date, the Company has entered into MSaaS agreements for deployment of 6,500 Nanox.ARC units. In September, Nanox AI received its 8th 510(k) FDA clearance, in this case for the Coronary Artery Calcium solution known as CAC, as part of its population health offering. CAC is a key biomarker indicating risk of cardiovascular disease and can help Nanox AI identify potential medium and high-risk patients, which can then be flagged for further evaluation. As another enhancement of the AI-powered workflow, we feel this will lead to better value-based population health. Operationally, we continue to progress towards commercial production of the silicon MEMs chip, which is integral to Nanox's digital X-ray source. We expect production at the new facility to begin pilot production in 2022. This key initiative is especially important given the current supply chain shortage for many products worldwide. This will not only help secure the stable supply of the chips that we need for the production of the Nanox.ARC, but will also ensure that the quality of our chips is not a concern for us or the healthcare professionals using the Nanox.ARC systems. Finally, I would like to update you on our commercialization efforts, including the regulatory process with the FDA. We are still in the process of responding to the FDA after receiving their comments on our first submission. As you all know, we are planning a second submission in the near term that will cover the next version of the multi-source Nanox.ARC. We believe that the feedback we have received from our first submission will help inform any subsequent submissions.

Ran Daniel, Chief Financial Officer

Thank you, Ran. Before I get started in my first earnings commentary as the CFO of Nanox, I would like to say how excited I am to be part of the team that is working to shape the future of medical imaging. I am looking forward to the work ahead with the talented team. I would also like to mention another change. We recently partnered with a leading communications firm as our new Investor Relations advisor. They are highly experienced in the medical technology space and will be a good addition to the team as we head into an important year of 2022. With that, on to the financials. Nanox reported a GAAP net loss for the third quarter of 2021 of $13.6 million compared to a net loss of $11.1 million for the same period in 2020, largely due to an increase in our research and development expenses and general administrative expenses, which were mitigated by a decrease in our marketing expenses. Non-GAAP net loss applicable to the ordinary shares for the third quarter of 2021 was $8.5 million compared to a non-GAAP net loss of $5.1 million for the same period in 2020. A reconciliation between GAAP net loss and non-GAAP net loss for the three-month period ended on September 30, 2021 and 2020 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 share-based compensation and legal fees related to the SEC inquiry and class-action litigation. Research and development expenses for the third quarter of 2021, were $3.7 million as compared to $2.1 million for the same period in 2020, reflecting the increased development activities for our Nanox systems and the related regulatory costs. Marketing expenses for the third quarter of 2021, were $1.5 million as compared to $2.7 million for the same period in 2020, due to a decrease in share-based compensation. General and administrative expenses for the first quarter of 2021, were $8.2 million as compared to $6.3 million for the same period in 2020. The increase was largely due to a labor cost increase of approximately $500,000 due to an increase in our headcount in connection with the expansions of the Company's management team and overall organizational infrastructure. This included an increase of approximately $0.5 million in D&O insurance expenses and an increase of approximately $0.6 million in legal fees due to the SEC inquiry and class-action litigation, as described in our Form 6-K filed today and transaction expenses in connection with the acquisitions of Nanox AI, USARAD Holdings and the assets of MBW, in the amount of approximately $0.5 million. Net cash used in operating activities during the third quarter of 2021 was $7.0 million. For the nine months ended September 30, 2021, Nanox reported a GAAP net loss applicable to the ordinary shares of $39.8 million, compared to a net loss of $24.9 million for the same period in 2020. Non-GAAP net loss for the first nine months of 2021 was $4.2 million, compared to a non-GAAP net loss of $10.5 million for the same period in 2020. The difference between GAAP and non-GAAP net loss applicable to the ordinary shares is mainly due to share-based compensation, expenses related to the secondary share offering which closed in the first quarter of 2021, and legal fees in response to the SEC inquiry and class action litigation, as reported in our 6-K filed today. As of September 30th, 2021, we had approximately $47.9 million shares outstanding. We ended the third quarter of 2021 with cash equivalents and marketable securities of over $180 million, and $3 million loans from banks. Before we take your questions, I would like to mention that the Company has been providing documents and information to the SEC in connection with an investigation and has now received a subpoena from the SEC requesting that the Company provide documents and other information relating to the development of the Company's Nanox.ARC prototypes, as well as the Company's estimates for the cost of assembling the final Nanox.ARC product at scale. The Company is cooperating with the SEC in responding to its request.

Ran Poliakine, Chairman and CEO

Thank you for the financial update, Ran. I understand that this is a lot of information to digest and that many of you likely have more questions than we can address on the call today. We're committed to being accessible to the investment community, and for this reason, we will engage in a robust investor outreach in the coming months. Additionally, as noted in our last press release last week, we will be attending the 2021 Radiology Society of North America Annual Meeting in Chicago from November 28 to December 2nd. While there, we will demonstrate new features of the Nanox.ARC system. Nanox AI will host an onsite booth, while the Company will showcase its AI-enabled medical imaging software, Population Health solution. On December 1, Nanox will broadcast a virtual tour of Nanox.ARC in a clinical setting from the Shamir Hospital in Israel. We will close our attendance at the RSNA annual meeting with an exclusive webinar for investors. We hope to see many of you there. Thank you for your time today and continued support, especially for your belief in our vision—a vision that will improve the health of all of us.

Operator, Operator

Thank you. Our first question comes from Jeffrey Cohen with Ladenburg Thalmann. Your line is open.

Jeffrey Cohen, Analyst

Good morning. How are you?

Ran Daniel, Chief Financial Officer

Good.

Jeffrey Cohen, Analyst

A couple of questions from our end. You have $0.6 million of legal expenses for Q3, any insight into what that may look like for the fourth quarter?

Ran Daniel, Chief Financial Officer

Yes. We don't have any insight at the moment. But as we said, we filed the 6-K today and we referred to the information that we closed over there. That's what we can update at the moment.

Jeffrey Cohen, Analyst

Okay. Got it. You had some commentary, Ran, about pilot production. I think the press release read early '22 and you stated 2022. Can you give us a walk-through of this facility in South Korea, as far as how the construction looks now and how timelines are looking over the next number of months, please?

Ran Poliakine, Chairman and CEO

With respect to the Korean facility?

Jeffrey Cohen, Analyst

Yes, please.

Mike Cavanaugh, Investor Relations

Okay. I think we've indicated that we have launched the new site, which is operating right now on a temporary basis. We expect that the new site will be operational in the second quarter of next year, and it's in line with the original expectations and plans.

Jeffrey Cohen, Analyst

Okay. Got it. And then could you walk us through what you stated about the FDA timeline? I know that you stated that you're responding to the first set of questions from the FDA. Will that go in as a response to the first other questions, or would that be separate from a second submission, as you called it for the ARC?

Ran Poliakine, Chairman and CEO

First of all, I think that Ran addressed it very clearly that basically we are going to meet the 180-day window that we currently have for the latest submission. We are going to use all the feedback that we get, including the future feedback that we will receive to work on future applications and submissions that we're planning to do. This is basically with respect to the ARC; as you can see on the Nanox.AI, we continue to submit other FDAs and work with them to get more approvals.

Jeffrey Cohen, Analyst

Okay, got it. Thank you very much. That does it for us.

Ran Poliakine, Chairman and CEO

Thank you, Jeffrey.

Ran Daniel, Chief Financial Officer

Thank you very much.

Operator, Operator

Thank you. Our next question comes from Suraj Kalia with Oppenheimer. Your line is open.

Suraj Kalia, Analyst

Good morning, everyone. Can you hear me all right?

Ran Poliakine, Chairman and CEO

Yes. We're trying to. Yes, we do.

Suraj Kalia, Analyst

Okay. So, Ran, Erez, anyone, what does considering filing another 510(k) mean? There's a change in the wording again; I'm curious what is driving that or am I reading too much into it?

Erez Meltzer, Executive Board Member and Incoming CEO

I'm not sure I understand what you're referring to; that is not clearly written in the documents.

Suraj Kalia, Analyst

Yes, your earnings release states that you're considering filing another 510(k). I’m curious if there's any mitigating factor that is causing some sort of reconsideration of filing or am I reading too much into the word considering filing?

Ran Poliakine, Chairman and CEO

You're reading too much into it. I think that if you look at the developments we're making on all fronts—Nanox AI, including the ARC—we are continually developing. We are going to show new applications and ways of using the ARC at the RSNA. That doesn't imply that we're not planning to submit further FDA approvals or requests for FDA approvals for future uses of our system, including both the source and the ARC itself.

Suraj Kalia, Analyst

Got it. In terms of the multi-source, has it been independently validated, i.e., by non-Nanox affiliated people? Has any other independent expert evaluated it so far?

Ran Poliakine, Chairman and CEO

First of all, this happens all the time. But I would suggest that as Ran said, wait for the RSNA, and you'll see what's coming up.

Suraj Kalia, Analyst

Okay. And, Erez, forgive me if I missed this. The thousand-unit production run that has been talked about in the past; I'm not sure if I heard an update on that. Maybe you could provide some color?

Ran Poliakine, Chairman and CEO

We don't have any reason right now to believe that this is not the target that we would like to continue to stand behind.

Suraj Kalia, Analyst

And finally, on the SEC's subpoena, when was the original request for documentation received?

Erez Meltzer, Executive Board Member and Incoming CEO

As we stated in our filings today, the original written requests for documentation from the SEC were received on November 8th.

Suraj Kalia, Analyst

November 8. Okay. Perfect. Gentlemen, thank you very much for your time and answering my questions. I do appreciate it.

Ran Poliakine, Chairman and CEO

You're more than welcome.

Operator, Operator

Thank you. And our next question comes from Ravi Misra with Berenberg Capital. Your line is open.

Ravi Misra, Analyst

Good morning Erez. Good morning, Ran.

Ran Poliakine, Chairman and CEO

Hi, Ravi.

Ran Daniel, Chief Financial Officer

Good morning.

Ravi Misra, Analyst

So, I want to just kind of go back to that thousand units production cycle that you're discussing. Can you just kind of give us some insight in light of the updated commentary on the Korean facility? I think you said second quarter and kind of the original commentary from earlier this year saying some of these units will be produced in Israel. What is the kind of production schedule right now, as you see it? In terms of where the first thousand will be made? Is there any risk of delays in Korea that would prevent hitting that number next year?

Ran Poliakine, Chairman and CEO

So first of all, we have not disclosed any specific details on this one. Bear in mind that we have enough chips that will enable us to do what we need from the original manufacturer in Japan. Currently, all the units are being assembled in Israel, and we have not made a decision yet about when we will switch to scaling up the assembly process. Once we do, and this may happen sometime during the first quarter of next year, if there are any changes, we will let the market know about them. Right now, we don't foresee issues— we're taking significant actions in securing our supply chain to be ready.

Ravi Misra, Analyst

Okay. And then on the potential second submission to the FDA. Can you just help us think about what is going to be the key difference between that and the original submission?

Ran Poliakine, Chairman and CEO

I think it was clear that it's not a second submission. We are planning many submissions in the future to the FDA as we continue to develop more applications and releases in terms of how we utilize the system; we will submit further. I think that after the RSNA, when you see the system, you will probably have a better understanding of what has to be done and what kind of further submissions we would like to pursue in the future.

Ravi Misra, Analyst

Is the RSNA going to be in person or virtual? And my last question would be just on the SEC investigation; November 8 is when you said they started the first line of inquiry. The subpoena was received when?

Ran Poliakine, Chairman and CEO

I will have Ran answer the SEC-related question, and then I'll address the RSNA.

Ran Daniel, Chief Financial Officer

As for the SEC matter, the subpoena was received on November 8. We had informal and verbal discussions with the SEC.

Ran Poliakine, Chairman and CEO

Regarding RSNA, the ARC will be presented virtually. Nanox.AI has secured a booth at RSNA, and they are going to be present there, as will several of our team members, including representatives from the ARC division.

Ravi Misra, Analyst

Okay. Thanks. And maybe just one final clarification, and thank you very much. If the subpoena is November 8, when did the original SEC investigation begin?

Ran Daniel, Chief Financial Officer

It began during the short period before that.

Operator, Operator

Okay. Our next question comes from Rahul Rakhit with LifeSci Capital. Your line is open.

Rahul Rakhit, Analyst

Hey guys, thanks for taking the questions. Just two questions from me. In terms of the upcoming filing, could you comment on the x-ray tube that you guys want to use, specifically regarding the KVP or whether it's going to be glass or ceramic tube and maybe an update on the manufacturing there as well?

Ran Poliakine, Chairman and CEO

First of all, I think I mentioned it; we're proceeding with the original plans for manufacturing. It's currently being done in Israel, and we have no need to add anything regarding the technology that we have already achieved. It will all be presented at the RSNA, and you'll be able to see and question what you asked.

Rahul Rakhit, Analyst

Got it. I appreciate that color. And just last one for me. Congratulations on the most recent contract. Could you talk a little bit about the interest that you're seeing—geographically—where you expect to see interest for the next few contracts? Thanks for taking the questions.

Ran Poliakine, Chairman and CEO

Once we decide, we will announce. This will be in the next 6-K. I would say that there is keen interest among several players that we are currently trying to engage, and it's a matter of who will sign first. I’m kidding. But seriously, there is increasing attraction for future deals, and as we proceed, we anticipate more contracts in the pipeline.

Operator, Operator

Thank you. And we have a follow-up from Jeffrey Cohen with Ladenburg Thalmann. Your line is open.

Jeffrey Cohen, Analyst

Thanks again for taking the question. So, I was wondering about the regulatory front outside the U.S. for the multi-source; is there any update or any progress on timing regarding CE and other territories?

Ran Poliakine, Chairman and CEO

No, there's nothing to update on this front. We will be working on the regulatory aspects simultaneously with the FDA. As you can imagine, since we work on a global basis, we don’t necessarily need FDA approvals in every territory. Some countries will require local approvals, so generally speaking, we work to obtain the necessary certifications globally while implementing deployments in countries where those approvals are not required.

Jeffrey Cohen, Analyst

Okay. Perfect. Thanks again.

Operator, Operator

Thank you and I am showing no other questions in queue. I'd like to turn the call back to Erez Meltzer for closing comments.

Erez Meltzer, Executive Board Member and Incoming CEO

Thanks for the support and for participating in this call. We'll further discuss what we are seeing and will probably have more discussions either on what went on or others that will come in the near future. Feel free to get in touch with Michael or either one of us for further insights. Thank you for being part of today's call.

Ran Daniel, Chief Financial Officer

Thank you all.

Operator, Operator

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