Earnings Call Transcript - NNOX Q2 2021

Operator, Conference Operator

Thank you for standing by. Welcome to the Nano-X Imaging Second Quarter 2021 Earnings Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Bob Yedid of Investor Relations. Please go ahead.

Bob Yedid, Investor Relations

Thank you, operator, and thanks to everyone for joining the Nano-X Imaging Second Quarter 2021 Conference Call. On today's call, we will hear from Ran Poliakine, Chairman of the Board and Chief Executive Officer; and Itzhak Maayan, Chief Financial Officer. Before we begin, I would like to remind everyone that management's remarks today contain forward-looking statements regarding the Company's financial results, proposed acquisitions, research and development, manufacturing and commercialization activities, regulatory process operations, the impact of COVID-19 on its business and other matters. These statements are subject to risks, uncertainties, and assumptions that are based on management's current expectations as of today and may not be updated in the future. Therefore, these statements should not be relied upon as representing the Company's views as of any subsequent date. Factors that may cause such a difference include, but are not limited to, those described in the Company's filings with the Securities and Exchange Commission. We will also refer to certain non-GAAP financial measures to provide additional information to investors. A reconciliation of the non-GAAP to GAAP measures is provided with our press release with the primary differences being stock-based compensation and class action related expenses. Completion of the proposed Zebra Med acquisition is subject to, among others, approval of the transaction by the equity holders of Zebra Med. The acquisition of USARAD is subject to the completion of due diligence and negotiations of a definitive agreement. The definitive agreement with USARAD may not be entered into on terms or in the time frame currently contemplated. Both acquisitions are subject to satisfaction of the conditions to closing in the definitive agreements, regulatory approvals, and other customary conditions. Therefore, neither of the proposed transactions may be consummated on a timely basis or at all. With those prepared remarks, it's my pleasure to turn the call over to Nano-X Chairman and CEO, Ran Poliakine.

Ran Poliakine, Chairman and CEO

Thank you, Bob, and thank you, everyone, for joining our call this morning. Also joining me is Itzhak Maayan, our Chief Financial Officer. After my prepared remarks, I will turn the call over to Itzhak to review the financials before opening the call for questions. During the second quarter and the following period, we made substantial progress towards our goal of democratizing medical imaging. As we've stated many times before, roughly two-thirds of the world population do not have meaningful access to medical imaging. We believe that extending global access to medical imaging devices will lead to earlier detection of chronic conditions. To fulfill our mission, we aim to tackle three significant worldwide challenges. The first one is a global shortage of medical imaging devices. The second one is a global shortage of radiologists to read these images. The third is a lack of data connectivity between patients and physicians, as well as a lack of data crunching platforms. Regarding the shortage of medical imaging devices, we have made significant progress in production, signing more partners, and the regulatory path. Concerning the first challenge, regarding the Nanox.ARC production, we continue to make important progress towards building our global supply chain, including scaling up our semiconductor fabrication plant in South Korea as planned. We are also advancing our schedule with our two production tube suppliers for the multi-source system in Italy and South Korea. Finally, our production assembly line in Israel is fully occupied, integrating those chips and tubes into the systems. We recently signed an MSaaS agreement with EiLEENO Pharma to deploy 1,000 Nanox.ARC systems across Nigeria, a country with a population of over 200 million. This is our first entry into the West African market where we aim to make medical imaging available to both public and private medical institutions. With this agreement, we now have contracts in place to deploy a total of 6,150 Nanox.ARC units plus agreements with USARAD and SK Telecom to deploy an additional 5,500 units across the U.S., Korea, and Vietnam, pending local regulatory approvals and passing user acceptance tests. We are in constant communication with our various MSaaS partners around the globe. This includes ongoing webinar sessions held on a monthly basis that include virtual tours of our production sites, 3D tomosynthesis images review and analysis, system comprehensive review, and system technical support, maintenance review. All of this is done towards the first deployment that is expected later this year and early next year. In April, we received FDA clearance for our single-source Nanox.ARC X-ray system, a critical achievement for our company and an important reference point for our digital source. In the second quarter of 2021, we submitted to the FDA a 510(k) application for the first version of our multi-source Nanox.ARC, and this is in progress as we speak. We're in preparation phase for CE submission and submissions to other regulatory bodies expected during the first half of 2022. In summary, deployment of 15,000 units of Nanox.ARC before the end of 2024 is our way of increasing medical imaging availability worldwide. We made significant advances addressing the first challenge of global medical imaging device shortages in terms of production, existing and new MSaaS partners, and the regulatory path. Now, let's talk about the second challenge, the global shortage of radiologists. With many devices deployed globally, the next bottleneck will be radiologists. In response to the global shortage of trained radiologists, which creates a significant bottleneck in the imaging process, we developed a way to connect our imaging device via the Internet, securely upload the images to our Nanox.CLOUD, and then to a third-party network of radiology. Utilizing AI-based technology, we have decision support software for radiologists intended to streamline and optimize the workload of diagnoses. We are establishing a Nanox Academy to educate hundreds of radiologists and clinicians worldwide across multiple segments to read and diagnose imaging from Nanox.ARC. I believe this can be achieved through our proposed acquisitions. The first one is USARAD Holding Inc., and the second is Zebra Medical Vision. With USARAD Holding, we have a network of over 300 U.S. certified radiologists who can read medical images remotely. We've signed a binding letter of intent for the acquisition of USARAD Holding, Inc. If consummated, this acquisition represents a strategic opportunity for Nanox. With USARAD, we enhance our go-to-market strategy, allowing us to place Nanox.ARC into thousands of smaller U.S. practices and provide an end-to-end globally connected medical imaging solution. This will increase our share in the value chain by providing not only the upload of the image, but now the radiology services as well. USARAD is expected to play a significant role in the Nanox Academy initiative. We expect to acquire USARAD for a total consideration of up to $27 million, comprised of $18 million in Nanox shares and $9 million in cash. Of this total, $18.5 million in cash and shares is expected to be paid upon closing, and the remaining $8.5 million is expected to be paid in cash and shares based on achievement of certain milestones. We also expect to acquire Medical Diagnostics Web for a total consideration of up to $3 million in Nanox shares. We've also entered into an agreement to acquire Zebra Medical Vision, a deep learning medical imaging analytics company. If consummated, this acquisition will support our systems with advanced AI algorithms and bring to Nanox clinical, regulatory, and cloud deployment credibility. If consummated, this acquisition includes creating a next-generation medical device with imaging AI solution and enabling us to capture a larger share of the average $40 per scan in our existing MSaaS agreement. Zebra's capabilities, including seven FDA-cleared products for radiology AI and numerous key partnerships, will enhance our service offerings while aligning with Nanox's goals. Regarding the Zebra acquisition specifics, we expect to pay the shareholders and employees of Zebra up to $200 million in Nanox stocks for 100% of the shares on a fully diluted basis. $100 million is expected to be payable by means of Nanox shares upon closing. Additionally, $16 million in deferred consideration is expected to be payable in shares issued upon signing new business contracts within six months of closing, and up to $84 million will be payable in shares upon achievement of certain milestones. Zebra will operate as a wholly-owned subsidiary under the Nanox brand. If the combination of Zebra and USARAD with the Company is completed, it has the potential to bring together the powers of human radiologists and advanced AI capabilities, thus addressing the radiologist shortage. All of this leads us to our third challenge, which is the lack of data connectivity between patients and physicians, as well as a lack of sophisticated data analytics and population health solutions. We believe Nanox can solve this challenge with our Nanox.ARC system, and if our proposed transactions are consummated, we will have radiologists from USARAD and AI capabilities from Zebra. This will create a globally connected end-to-end radiology solution. Before turning the call over to Itzhak to review the financials, I'd like to provide an update on our leadership transition that we announced today. In preparation for scaling globally and integrating the newly founded partnerships, I've asked Erez Meltzer, who served as Director of Nanox for the last two years, to step forward and become our CEO. Erez is a world-class executive with a tremendous amount of experience in scaling organizations into global corporations. I am confident he will help take Nanox forward. I will continue as Nanox Executive Chairman, focusing on long-term initiatives and future collaborations to fulfill our goal of providing a worldwide end-to-end medical imaging solution for everyone. We're also announcing today that Ran Daniel will replace Itzhak Maayan, our Chief Financial Officer, who will continue in his role until the end of September. We thank Itzhak for his many contributions to get us to where we are today, including guiding the company through a very successful initial public offering last year. We are excited to welcome Ran Daniel, who will join us as of August 15. Ran is a licensed and certified public accountant in both the United States and Israel with over 25 years of financial and business management experience. At this point, I would like to turn the call over to Itzhak to review the financials.

Itzhak Maayan, CFO

Thank you, Ran. It has been a privilege working at Nano-X and being part of a vision aimed at changing people's lives on a global scale. During the past two years, I believe we have built a solid foundation to drive future growth, and I feel that Ran and the rest of the senior management team are very capable of moving forward. Now, turning to the numbers. Nano-X reported a GAAP net loss applicable to ordinary shares for the second quarter of 2021 of $13.6 million compared to a net loss of $6.4 million for the comparable period in 2020. Non-GAAP net loss applicable to ordinary shares for the second quarter of 2021 was $8.6 million compared to a non-GAAP net loss of $2.9 million for the same period in 2020. The difference between GAAP and non-GAAP net loss to ordinary shares is mainly due to share-based compensation and secondary offering costs. Non-GAAP research and development expenses for the second quarter of 2021 were $3.4 million compared to $1.5 million for the comparable period in 2020, reflecting increased development activities of our Nano-X system and related regulatory costs. Non-GAAP marketing expenses for the second quarter of 2021 were $1 million compared to $0.5 million for the same period in 2020 as we continue building our brand awareness and product marketing capabilities. Non-GAAP general and administrative expenses for the second quarter of 2021 were $4.1 million compared to $0.9 million for the comparable period in 2020 as we ramped up our investment in expanding our management team and our global organizational infrastructure. For the six months ended June 30, 2021, Nano-X reported a GAAP net loss applicable to ordinary shares of $26.3 million compared to a net loss of $13.8 million for the comparable year 2020. Non-GAAP net loss applicable to ordinary shares for the first half of 2021 was $15.7 million compared to a non-GAAP net loss of $5.4 million for the same period in 2020. The difference between GAAP and non-GAAP net loss to ordinary shares is mainly due to share-based compensation and expenses related to the secondary share offering which closed in the first quarter of 2021. Net cash used in operating activities during the first six months of 2021 was $11.7 million compared to $4.7 million in the comparable period in 2020. As of June 30, 2021, we had approximately 47.8 million shares outstanding. We ended the second quarter of 2021 with cash, cash equivalents, and marketable securities in approximately $193.4 million and zero debt. For the quarter, cash usage included funding operating activities and investing $6.7 million in purchasing property and equipment as we establish manufacturing capacity in Korea. With that, we would like to open the call for questions.

Operator, Conference Operator

Our first question is from Steve Halper with Cantor.

Steve Halper, Analyst

A couple of questions. I appreciate the operational update on the 15,000 units by 2024. Could you give us an update on the 1,000 units in 2022? Can you give us a framework of the revenue and EBITDA contribution from the companies that you're acquiring?

Ran Poliakine, Chairman and CEO

Yes, sure. So Steve, I will start with answering the first question, and then Itzhak will address the second one. We are on plan and we are confident that at least 1,000 units will be shipped during 2022. We have everything ready, and we are getting the final integration, but there is no reason for us to believe that we could not ship at least 1,000 units. As you know, we have at least 6,100 units booked by customers. We should start to see a significant ramp-up as of 2022 as planned as reported before. Itzhak, do you want to answer the second one?

Itzhak Maayan, CFO

Yes. We are not giving at this stage any guidance on revenue, but I can tell you that our estimation, especially related to Zebra, is that it will move to profitability as it ramps up into the population health product offering around 2023. The second one regarding USARAD's performance currently is on a cash-neutral basis.

Operator, Conference Operator

The next question is from Jeffrey Cohen with Ladenburg.

Jeffrey Cohen, Analyst

Could you recap the Zebra acquisition? It sounds like 60-40 shares in cash, and could you recap that? Also, how many milestones are there, and are they related solely to sales numbers?

Ran Poliakine, Chairman and CEO

Well, first of all, it's only shares divided into three tranches. The first is $100 million in ordinary shares of Nano-X upon closing. Then there are three agreements that will grant an additional $16 million in ordinary shares upon signing of three new business contracts within six months after closing. Lastly, up to $84 million in ordinary shares will be granted upon achieving about seven different types of milestones including revenues, retention, etc.

Itzhak Maayan, CFO

That was pretty accurate. The milestones are indeed relating to attaining the business projections that came with the acquisition and integrating the Zebra technology within the overall product offering at Nano-X.

Operator, Conference Operator

The next question is from Suraj Kalia with Oppenheimer & Company.

Suraj Kalia, Analyst

Can you explain the management change now? What was the process and timing behind this decision?

Ran Poliakine, Chairman and CEO

2021 has been a year of infrastructure building for us. As we've invested significantly in Korea and have grown our teams, we recognized the need for a management shift to ensure we have the right people in place to execute our future plans. Erez Meltzer has a proven track record, and we feel confident he will lead the company forward.

Suraj Kalia, Analyst

Can you provide additional color on the Zebra acquisition and its strategic fit for your organization?

Ran Poliakine, Chairman and CEO

The strategic fit is clear: we need AI capabilities and a strong network of diagnostics. Zebra provides a deep knowledge base and has the ability to integrate advanced algorithms to enhance our offerings, fitting perfectly with our democratization vision. They have proven their regulatory capabilities, which will help streamline our processes further.

Operator, Conference Operator

The next question is from Rahul Rakhit with LifeSci Capital.

Rahul Rakhit, Analyst

Can you provide more context regarding the regulatory timeline for the Nanox.ARC? Is it commercially ready, and what are the key differences between the submissions?

Ran Poliakine, Chairman and CEO

We view the Nanox.ARC and Nanox.CLOUD as significant FDA approvals, and while the multi-source submission is currently in progress, we anticipate submitting a second submission of the Nanox.ARC during this year. As for the differences between the submissions, while I can't provide specifics, I can assure you that we're on track.

Operator, Conference Operator

This concludes the question-and-answer session. Please go ahead.

Ran Poliakine, Chairman and CEO

Thank you for your time today and continued support, especially for your belief in our vision that will improve the health of all of us. We will be engaging in robust investor outreach and have several upcoming events that we look forward to discussing more with you.

Operator, Conference Operator

Thank you. This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.