Nano-X Imaging Ltd. (NNOX) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the NANO-X IMAGING Second Quarter 2022 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mike Cavanaugh, Managing Director of Investor Relations. Please go ahead.

Good morning, and thank you for joining us today. Earlier today, NANO-X IMAGING, LTD. released its financial results for the quarter ended June 30, 2022. The release is currently available on the Investors section of the company's website. Erez Meltzer, Chief Executive Officer; and Ran Daniel, Chief Financial Officer, will host this morning's call. Before we get started, I would like to remind everyone that management will be making statements during this call that include forward-looking statements regarding the company's financial results, research and development, manufacturing and commercialization activities, regulatory process operations and other matters. These statements are subject to risks, uncertainties and assumptions that are based on management's current expectations as of today and may not be updated in the future. Therefore, these statements should not be relied upon as representing the company's views as of any subsequent date. Factors that may cause such a difference include, but are not limited to, those described in the company's filings with the Securities and Exchange Commission. We will also refer to certain non-GAAP financial measures to provide additional information to investors. A reconciliation of the non-GAAP to GAAP measures is provided with our press release with the primary differences being goodwill impairment, change an obligation in connection of a merger and acquisitions, stock-based compensation, amortization of intangible assets and class action litigation and SEC inquiry related expenses. I'd now like to turn the call over to Erez Meltzer.

Thank you, Mike, and thank you all for joining us on the call today. As always, we appreciate your continued support of Nanox. As on our last call, I will give an overview of our recent achievements and share our outlook on the coming months before turning the call over to Ran Daniel, our Chief Financial Officer, to review our financial results. We will then open the call up to questions. We have continued to make progress during the past quarter to advance the Nanox.ARC system towards commercialization, and we continue to proceed full force ahead to make headway in the FDA clearance process. On the call today, I will discuss the advances we have made since our last earnings call by breaking my comments into 3 distinct segments: regulatory; commercialization; and finally, AI and teleradiology. I will discuss what we have done in each of these segments, and how we have moved closer to our goal of system deployment at scale. Before I do that, I'll touch on our financial results at a high level but will leave most of the details to Ran's commentary later in the call. Nanox generated top line revenue of $2.2 million in the second quarter of 2022 compared to $1.8 million in Q1 2022. As in previous quarter, all revenue was generated by Nanox teleradiology services business unit and by Nanox.AI, our deep learning machine analytics company. As most of you know, these business units began generating revenue since their acquisitions in November 2021. And it's gratifying to see our teleradiology services growing quarter-over-quarter. These revenues were relatively small at this time are important for 2 reasons: First, they help us to improve our cash flow and its management; and second, we believe they demonstrate that customers and other stakeholders such as hospitals and integrated health systems value these services, which in turn strengthens our belief that these applications and services will add value within our multi-source system when integrated with our proprietary imaging technology. I'm happy to report that during the second quarter of 2022, we signed 14 new client agreements for teleradiology services. Our clients in the teleradiology segment include hospitals, outpatient imaging centers, urgent cares, multi-specialty physician group, research facility and mental health facilities. We continue to see accelerated revenue growth in our teleradiology services driven by new client additions as well as organic growth from existing clients. The AI solution business continued to gain tractions, both in the U.S. and abroad. For example, Nanox had their first go live at 5 Northwell Health outpatient centers on July 26, followed by South Shore Hospital on August 8. Additional hospitals and outpatient sites throughout the system are anticipated to go live through the remainder of August and into September. In addition, we previously reported a large strategic agreement with one of the leading IDNs in the Northwest of the U.S. to use our AI population health solution. We can now share that this customer is in Spectrum Health, an integrated health care network based in Michigan with 15 hospitals and health facilities. I'd now like to discuss our progress on the regulatory front. Beyond the beneficial revenue streams I just mentioned, we made further progress in our efforts to gain FDA clearance for the Nanox.ARC multisource system. Recently, we received feedback from the FDA on our Q-submission supplement that we previously submitted to the agency. The feedback we have received has been valuable, and it's helping us to optimize our 510(k) submission. Subsequently, we are now preparing our 510(k) submission to the FDA for our multisource Nanox.ARC, which we expect will have the full power levels and indications that we believe will result in a successful deployment of the Nanox.ARC. In parallel, we are preparing for global deployment of our multisource Nanox.ARC, according to local regulations and subject to requisite approval in each market. Regarding regulatory efforts to obtain the CE mark for Nanox.ARC, we have submitted all necessary documentation to begin the process for CE marking. We look forward to providing additional updates as this process advances. Moving on to commercialization. We have continued to progress toward commercialization of the multisource Nanox.ARC in several areas. I'm happy to announce that we have taken steps to advance deployment of the multisource Nanox.ARC in Nigeria. In April, we sent a preliminary deployment team to be on the ground there and are preparing to send our first commercial unit for demonstration and training purposes. Our shipment plan to Nigeria is progressing hand-in-hand with the local regulation process. I also have the pleasure to announce another new agreement that we have signed recently with the distributor in Ghana, under which we agreed to deploy 350 units subject to local regulatory requirements, which brings our total contracted units to 6,850 worldwide. This is a great milestone for the company, and we are pushing forward on the development and the deployable system to fulfill these orders. We believe that once we begin to deploy the multisource Nanox.ARC in Nigeria and other early adoption area, health systems, hospitals and distributors will see the service that the Nanox.ARC provides and that we will then begin to fulfill the backlog of orders with buildup. In addition, we have an agreement in place with a nongovernmental organization, BIO Ventures for Global Health, known as BVGH for developing and implementing a medical imaging training initiative in Nigeria. BVGH is a Seattle-based nonprofit organization that strategically develops and manage programs across the for-profit and nonprofit sectors to accelerate research and development for poverty-related diseases, build biomedical R&D capacity in low and middle-income countries and improve cancer patient care in Africa. Some new book collaboration and developments. Finally, I'd also like to take a minute to announce another milestone on the path to commercialization that we are excited about. We are in the process of establishing a technology development center based in Israel to develop the chips and the tubes that we'll need for the Nanox.ARC in the years to come. This center will complement our facilities in Korea and Japan. To close my remarks, I want to thank the Nanox team for all their hard work and progress achieved in this quarter. But most of all, I want to thank all our investors for their continued support for our mission to democratize health care by making imaging affordable and available anywhere in the world. We look forward to reporting more progress on our next earnings call. With that, I would like to turn the call over to Ran Daniel, Chief Financial Officer, to review our financial results.

Thank you, Erez. First, I'm delighted to announce that we were added to the Russell 2000 and Russell 3000 Indices effective after the U.S. market opened on June 27 as part of the 2022 Russell Indices annual reconstitution. This is a great development for our company. As for our financial results, we reported a GAAP net loss for the second quarter of 2022 of $19.6 million compared to a net loss of $13.6 million in the second quarter of 2021, largely due to expenses related to the acquisition of the Nanox market platform in November 2021. The consolidation of Nanox.AI and USARAD with the company since the fourth quarter of 2021, an increase in our research and development expenses, goodwill impairment and increase in our general and administrative expenses which was mitigated by a decrease in our sales and marketing expenses and a decrease in our obligation in connection of merchants and acquisitions. Our revenues for the second quarter of 2022 were $2.2 million, and gross loss was $1.8 million. Revenue from teleradiology services for the period was $2.1 million with a gross profit of $0.3 million on a GAAP basis and a gross profit of $0.9 million on a non-GAAP basis, which represents gross profit margins of approximately 43% on a non-GAAP basis. Revenue from licensings of AI solutions for the period was $0.1 million, with a gross loss of $2.1 million on a GAAP basis and a $0.1 million on a non-GAAP basis. Research and development expenses for the second quarter of 2022 were $6.5 million compared to $4.3 million for the comparable period in 2021. The increase in our research and development expenses was mainly due to consolidation of Nanox.AI with the company since November 2021, increasing our share based compensation and the balance due to the development of the multisource Nanox.ARC system and the Nanox.CLOUD. Sales and marketing expenses for the second quarter of 2022 were $1.1 million compared to $1.8 million for the comparable period in 2021. The decrease was mainly due to a decrease of $0.6 million in our share base compensation. General and administrative expenses for the second quarter of 2022 were $11.1 million compared to $7.4 million for the comparable period in 2021. The increase of $3.7 million was mainly due to the acquisitions of the Nanox markets platform in November 2021 and the consolidation of Nanox.AI and USARAD with the company since the fourth quarter of 2021, an increase in the company's headcount and the overall organization infrastructure and an increase in the company's legal fees due to the U.S. Securities Exchange Commission equally and the class action litigation as described in the company's Form 20-F for the year ended December 31, 2021, filed on May 2, 2022. Change in obligation in connection of merger and acquisitions for the second quarter of 2022 was $2.6 million (sic) [ $12.6 million ] compared to none for the second quarter of 2021. The increase was mainly due to the change in the company's contingent and our stability. Goodwill impairment for the 3 months ended June 30, 2022, was $14.3 million due to the goodwill impairment in connection to the -- of the acquisition of Nanox.AI. Our non-GAAP net loss for the second quarter of 2022 was $8.2 million compared to a non-GAAP net loss of $8.6 million for the same period in 2021. A reconciliation between GAAP net loss and non-GAAP net loss for the second quarter of 2022 and 2021 is provided in the financial results that are part of the press release we issued this morning. The difference between GAAP and non-GAAP network is mainly due to goodwill impairment, change in obligation in connection of merger and acquisition, amortization of intangible assets, share-based compensation expenses, legal fees in connection with the class action litigation and the SEC inquiry and the secondary offering expenses. Turning to our balance sheet. As of June 30, 2022, with cash, cash equivalents and marketable securities of approximately $126.7 million. We ended the quarter with a property and equipment net of $42.9 million compared to $37.4 million as of December 31, 2021. The net increase of $5.5 million during the first half of '22 is mainly due to the completion of the construction of the company's fabrication facility in South Korea and the purchase of machinery and equipment. As of June 30, 2022, we had intangible assets of $140.5 million as compared to $160.1 million as of December 31, 2021. The decrease is mainly due to the periodic amortization of intangible assets and impairment of the goodwill. As of June 30, 2022, the company had approximately 52.2 million shares outstanding compared to 51.8 million shares outstanding as of December 31, 2021. The increase was mainly due to the exercise of 192,927 warrants and the exercise of 141,067 auctions, the company generated approximately $0.5 million in gross proceeds from the exercise of such options and formats. In addition, during the first half of 2022, the company issued 89,286 shares to the former equity holders of Nanox.AI due to the achievement of a milestone pursuant to the terms of the agreement and plan of merger dated August 9, 2021, as amended, among the company Nanox.AI and Perryllion, Ltd as a representative of Nanox.AI's equity holders. With that, I will hand the call back over to Erez.

Thank you, Ran, for the financial update. And once again, thank you all for joining us today. I feel very good about Nanox results in the second quarter as CEO. But all of us recognize there is more to do. We hope to provide additional updates in the coming weeks and months. I would also like to share with you all that the Nanox management team will have a non-deal road show with investors in late September. If you would like to schedule a meeting, please contact our Investor Relations partners at ICR. With that, I'd like now to open the call for questions. Operator, please begin the Q&A session.

[Operator Instructions] Our first question comes from Jeff Cohen with Ladenburg.

A couple of questions for Erez. So could you talk about the technologies you're planning on opening to [ Azure ] capabilities that you anticipate there versus the current and anticipated capabilities in the facilities in Korea and Japan.

First of all, the -- it's going to be very similar, but we're going to strength the fact that we are willing to base our future on further advanced technologies. Right now, we have both centers in Japan and in Korea for the chips and the tubes. We thought that it would be appropriate that the core technology and knowledge will be developed very close to where we do the R&D, the product design, the road map, our future products, et cetera, and that Korea will be kind of more of manufacturing and supply for the chips and further development that will be on the engineering side.

Okay. Got it. Could you talk about ARC manufacturing and number of ARCs, which have been manufactured and maybe anticipated number of ARCs manufactured by the end of the year and then tie that into your anticipated time line at the FDA as far as your project?

Okay. So first of all, we are accelerating the production, as mentioned. Obviously, we're not disconnected from the reality of the -- what's going on in the market in terms of the supply chain, in terms of the various components, which are part of this assembly. So we have actually -- part of the systems will be pushed to 2023 to hopefully, for the beginning. And this is with respect to the production. We are -- even before the end of the year, we are going to go even to the next step to further explore the discussion with the mass production. And I mean beyond the 1,000 units in 1 or 2 locations, which are not in Israel. We mentioned that the first 1,000 units will be assembled in Israel. And the -- and we hope that either Q4 or Q1 next year, we will have the arrangement for the assembly of the -- of all the systems following after the first 1,000 units. With respect to the question that you asked about the FDA. First of all, I was very happy with the meeting that was held last week, which was actually the last -- not the last, but the last meeting before the final preparation for the submission. I would say that the feedback that we received from the FDA was very helpful and meaningful for us. So as we say, we are in the final preparation for the formal submission and it's going to be aligned with our path moving forward. Right now, I would say that the idea to go to the pre-sub and to the submission and to take the advantage for, I would say, about 8 -- almost 8 months dialogue, continuous dialogue with the FDA and prudent self to be the right decision. And I think that all the feedback that we got and the cooperation that we are -- that we had with FDA and we continue to have with FDA will make it much easier for us to do it. So...

Got it. And then finally, talk about Ghana as far as manufacturing and delivering ARC units. How many would you expect to be delivered there in the coming quarter or 2?

Right now, I would say that the -- we explained in the past that basically not all the countries that we're working in require the FDA regulation like we mentioned Nigeria, one of them and Ghana will be another one. We have another 2 that are not really related to the submission of the -- to the formal approval of the FDA. Ghana has a special process that we are going through. They give us indications, but I wouldn't actually -- I feel I see it in my eyes, I wouldn't actually commit to -- we hope to have the approval to send the systems during the fourth quarter. And I would say the -- starting next year, it will be probably more a system that will be sent. Overall, the agreement is for 350 units.

Got it. And then one quick question for Ran. Would you expect any goodwill impairment in the back half of the year for Q3 or Q4?

As we say in the PR, it really depends on the market parameter, the interest rate, there will be an increase or there will be any change in other capital market format. So we may have to do an impairment again. We have to test it at least and it also depends on our internal management estimate.

Our next question comes from the line of Suraj Kalia with Oppenheimer.

Erez, can you hear me all right?

Loud and clear.

Hope everyone is safe and healthy. So Erez, just following up on Nanox.ARC, the multisource submission. Was a full power level ever in doubt, maybe I'm misreading from your comments on the feedback from the FDA. If I remember correctly last quarter, I think so you all had mentioned that from 40 to 120 kVp. It would cover the entire gamut. So maybe if you could kindly shed some additional light on your specific comments at the full power level feedback.

First of all, I hope that I understand the question, but it was -- it has never been a doubt.

Okay. Fair enough. So Ran, when -- are you at -- or can you give us a time frame as to when the multisource 510(k) will actually be filed? And when you are expecting clearance?