Q3 2023 Nano-X Imaging Ltd Earnings Call

Participants

Mike Cavanaugh

Erez I. Meltzer; CEO & Directo; Nano-X Imaging Ltd.

Ran Daniel; CFO; Nano-X Imaging Ltd.

Jeffrey Cohen; Analyst; Ladenburg Thalmann & Co. Inc.

Ross Osborn; Analyst; Cantor Fitzgerald & Co.,

Ben Haynor; Analyst; Alliance Capital

Presentation

Operator

Good day and thank you for standing by, and welcome to the Neenah XQ. three 2023 earnings conference call. At this time, all participants are on a listen-only mode. At the speakers' presentation, there will be a question and answer session to ask a question. During that session, you'll need to press star one one on your phone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one. Again. Please be advised that today's conference is being recorded, and I would now like to hand the conference over to your speaker today, Mr. Mike Cavanagh, Investor Relations. Sir, please go ahead.

Mike Cavanaugh

Good afternoon, and thank you for joining us today. Earlier today, Nanox imaging limited release financial results for the quarter ended September 30th, 2023. The release is currently available on the Investors section of the company's website, Erez Meltzer, Chief Executive Officer, and Ron 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 in 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 issued 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 now like to turn the call over to Eric Meltzer.

Erez I. Meltzer

Thanks, Mike. And as always, thank you all for joining us today for our financial results call and corporate update. As previously noted, we have intensified our efforts and focus on the U.S. market to jumpstart our commercialization efforts in the region to support these important efforts. Our team and I have increased our presence in the United States over the last few months, and I'm currently in the U.S. We have engaged in discussions with potential customers, clinical partners, particularly U.S. health care sector professionals, focusing on reimbursement and medical workflow and other key stakeholders. We end to expedite the implementation of our commercial infrastructure and advance our future strategic plans.
Moving to the recent developments in deployments, I am pleased to announce that we have established the first US-based commercial site and demonstration center for the Nanox, ARC, which is part of our initial wave in the U.S. and Nanox. Arc system has been installed in the New Jersey based imaging center, which marks the beginning of Nanox commercial expansion into the U.S. market. The system passed all necessary tests conducted by licensed and certified physicians and maybe like the comments scanning of patients to acquire medical imaging using the Nanox, ARC, a stationary x-ray system intended to produce 3D tomo graphic images of the MSK system. The clinic staff will manage the operational, professional and administrative services allocating human resources and equipment for the efficient operation of Nanox system in the imaging center. The center will also serve as the demonstration center for our medical professionals, offering them an opportunity to familiarize himself with the system and facilitate the implementation process. More updates on the progress on installments in the US are expected on the investor day on December fourth, we are enhancing our US sales and service team, and I'm happy to announce we have signed an agreement with six to six and national healthcare technology and equipment management company. They will provide services for the Nanox ARC, including warehousing, installation, training, maintenance and customer support, headquartered in Boca Raton, Florida six to six offers tools necessary for imaging centers to achieve maximum uptime and maintain better patient care. Six to six has expertise in modalities and medical imaging equipment and provides customized services tailored to their clients' needs for their eyes. Those 1348 and 85 certification national footprint and over 160 field service engineers. They are an ideal company to partner with and as we ramp up our commercialization efforts in the US. In addition to them supporting installations, maintenance and services in the field, we intend to install an ARC system in their suburban Atlanta, six to six imaging Academy. We're trained in demonstration purposes.
Turning now to our deployment efforts in the rest of the world outside of the key US market, we have begun to generate revenues from hardware deployment in Africa While these revenues are currently small, they are growing. Additionally, as previously announced and Alex, our journey has been installed in the University of Ghana Medical Center limited EGMC. one of the largest and most advanced hospitals in Ghana. We are pleased to announce that our local partner has obtained approval from the Ghana, food and drug authority. The G. FDA and it will soon be operational for clinical scanning of patients. In the meanwhile, we have received an order for additional units in Ghana. We're also actively working on establishing a presence in Latin America. One of our distribution partners is in the process of securing an import license for Nanox, Arques as well as laying the groundwork or demonstration center that potential location for the demo site in Boston College Hospital offerings is the very space and expertise both on the non-op side, we will provide further detail on these developments as we make substantial progress.
Turning to our OEM initiatives to meet the anticipated demand of our system. As previously announced, we entered into original equipment manufacturing agreement with Mark's, a leading global manufacturers of imaging components based in Utah. We have since held a formal partnership kickoff meetings, Exalytics headquarters in Salt Lake City. What are the company's executive and technical teams came together to continue final to design efforts and map out all the road maps towards production expanding on our OEM related activity. We are currently engaged with an industrial imaging equipment manufacture on a chip development and manufacturing program we expect to formalize by the year end to ensure an adequate future supply of chips. Additionally, our collaboration with the US government agency exploring none of our technology for use in security screening application is advancing with the acquisition of tubes and further testing and evaluation. Finally, a leading global medical technology company has purchased amateurs for internal testing and application development project. We have not in our regulatory path despite our efforts to gain regulatory approval in a number of markets across the world. Sometimes our grand total Ford receives slower than we would like in some instances, such as with the FDA in the U.S., each jurisdiction has its independent set of regulations contributing to the complexity of the process. We are diligently navigating these challenges, prioritizing Swift approvals while ensuring accuracy and regulatory compliance. Nonetheless, we have not stopped pushing ahead with our regulatory efforts, which continue to be of paramount importance to NetIQ's. As previously communicated, we partnered with ESI. Group, an incredible Notified Body based on the United Kingdom for eventual CE Marking review and approval. I'm happy to announce that we have submitted our technical file for obtaining the CE mark DSI's formulary review will begin in the first quarter of 2024 according to the plan time line. And I look forward to providing updates upon the conclusion of this process.
We have also made substantial progress in our home market, Israel, the Medical Device division of the Ministry of cells known as MRAMAR. is the regulatory body that oversees medical devices. On November 22nd, 2023 Nanox. Arc received our approval from the Israeli Ministry of Health, and it is now registered as a medical device and base oil market. Following this approval from the Israeli Ministry of Health granted Nano-X ARC, a free sales certificate, which is a requirement for regulatory submission in some markets.
Turning to our clinical efforts, as previously disclosed, the second phase of collecting clinical sample images of multiple human body have not optimized for the Nanox. Our systems deployed at Shamir hospital and Israeli is continuing. Additionally, Nanox reach an agreement with billings in the hospital as part of the club retail services, the largest health service organization in Israel and one of the largest in the world. According to this agreement, a human trial designed to assess diagnostic capabilities of genomics, art in detecting chest and lung diseases will be launch and the balance of hospital all required Israeli Ministry of Health approval and institutional Ethics Committee has been obtained and the trial is scheduled to commence by the end of 2023.
Now I would like to provide an update on our Nanox I. a business segment. We generated $141,000 in revenue during this quarter and one, we'll review it in more detail shortly.
At the end of the quarter, we announced compelling study results, which demonstrated that annex AI. product phone at approximately 60% of patients unknowingly had moderate to severe level of coronary artery calcium, also known as CAC, a proven indicator of future cardiac events. The study was sponsored by Nanox AI. and conducted by vendors for hospitals utilizing Nanox. A I hope CCS and FDA cleared and CE Marked tool designed specifically for cardiac health assessment, helps CCM solution utilizes medical imaging data from routine chest CT scans to automatically quantify and analyze CAC, potentially offering an early detection mechanism for cardiovascular calcium and presenting cardiac care in other non-op sire news, a five 10 K submission for Nanox. Fatty liver detection, known as health FLD. was submitted in September and is pending FDA five 10 K clearance Health System V is designed to detect early signs of fatty liver diseases from routine tests and update on CT scans, not specifically for broker liver assessments. These updates are highly promising, and I look forward to providing additional updates on dynamics. I noticed our business throughout 2024. Before turning the call over to Ron, I'd like to revisit one of the AI. products agreement that we have announced previously. In mid 2022, we announced a strategic agreement with Spectrum Health now known as CORE, will Health, one of the leading integrated delivery system IDNs to use our AI population health solutions, Kobo management reports that their team has successfully integrated the Nanox, a i-Health CCS solution into their patient care flow, recognizing its significant value in identifying new patients with medium and high calcium level on chest CT scans. We have also received similar positive feedback from another health care system using non-US AI solutions.
And with that, I'd like to now turn the call over to Rand Daniel for review our financial results run.

Ran Daniel

Thank you, Eric. We have reported GAAP net loss for the third quarter of 2023 of $21.4 million compared with a net loss of $19.1 million in the third quarter of 2022, which is the comparable period. The aqueous was largely due to a quarter, I will impairment of $7.4 million, an increase of $0.4 million in the sales and marketing expenses, which was offset by a decrease in our general and administration expenses in the amount of $5.6 million.
Our non-GAAP net loss for the third quarter of 2023 was $9.4 million compared with net loss of $8.1 million a net loss for a period. The increase was largely due to an increase of $0.4 and of itself and marketing expenses and $0.1 million in other expense. Revenues for the third quarter of 2023 of our $2.5 billion and growth of $1.7 million on a GAAP basis, revenue for the comparable period, where $2.4 million and graphical, whilst the $1.5 million on a GAAP basis, non-GAAP gross profit for the three months ended September 30th, 2023, was $0.9 million as compared to $1.1 million in the comparable period, which represents a gross profit margin of approximately 37% on a non-GAAP basis for the three months ended September 30, 2023, as compared to 46% on a non-GAAP basis in the comparable period.
Revenue from teleradiology services for the three months ended September 30, 2023 was $2.2 million with the gross profit of $0.2 million on a GAAP basis as compared to revenue of $2.4 million with a gross profit of $0.6 million on a GAAP basis in the comparable period, which represents a gross profit margins of approximately 11% on a GAAP basis for the three months ended September 30, 2023, as compared to 26% on a GAAP basis in the comparable period.
Non-gaap gross profit of the companies that have ideology benefits for the three months ended September 30, 2023, was $0.8 million compared to $1.2 million of in the comparable period, which represents a gross profit margin of approximately 36% on a non-GAAP basis for the three months and September 30, 2023, as compared to 49% on a non-GAAP basis in the comparable period.
Decrease in gross profit margin on a GAAP and non-GAAP basis is mainly due to an increase in the cost of the company through our geology due to the decrease in the risk rate and payment of incentive payments, which the company paid to the company that ideologies engaging the ratings during the overnight and weekend shift.
During the three months ended September 30, 2023, the company for us to generate revenue for the sales and deployment of its imaging systems, which amounted to $99,000 with a gross profit of $36,000 and a GAAP and non-GAAP basis, which represents a gross profit margins of approximately 37%. On a GAAP and non-GAAP basis, revenue expense from the sales and deployments.
Research and development expenses for the first quarter of 2023 were $6.0 million as compared to $6.1 million for the comparable period in 2022, a decrease of $0.1 million of mainly due to a decrease in the cost of labor of $0.6 billion of which are was offset by an increase in the company's development of the art distance expenses in the amount of $0.5 million.
Sales and marketing expenses for the third quarter of 2023 were $1.1 million compared to $0.7 million reported for the comparable period in 2022 to the increase was mainly due to our go-to-market efforts in the US market in anticipation for the soft launch of our products in the US market.
General and administrative expenses for the third quarter of 2023 were $5.0 million as compared to $10.6 million for the comparable period in 2022 that the credit of $5.6 million was mainly due to a decrease in our legal expenses in the amount of $2.9 million, largely as a result of the finalization of the SEC investigation. A decrease in share-based compensation in the amount of $2.7 million and a decrease in the cost of directors' and officers' liability insurance peer trillion in the amount of $0.3 million.
Goodwill impairment for the third quarter of 2023 was $7.4 million due to the goodwill impairment related to the teleradiology reporting unit in the amount of $7.0, and then Alex Xie reporting unit in the amount of [$0.4 million], largely due to the increase in the discount rate and management estimates that it will take longer than we originally expected to generate original growth of revenues, gross profit and positive operating cash flow in the AI. and tell our geology business segments.
During the first nine months of 2023, we had that occurred $0.7 million of future government expenses in connection with the SEC investigation. As previously discussed, the company and around project came our Chairman of the Board of Directors and reached a settlement agreement with the SEC. During October 2023, the company paid $650,000 in civil penalties under this agreement.
Turning to our balance sheet. As of September 30, 2023, we had cash, cash equivalents, restricted deposits and marketable securities of approximately $95.6 million and at $3.3 million loan from a bank. We ended the quarter with property and equipment net of $45.1 million. As of September 30, 2023 we have approximately $57.7 million shares outstanding compared to $52.1 million shares outstanding as of December 31, 2022 the increase was mainly due to the sales of approximately $2.1 million shares of our warrants to purchase up to $2.1 million shares in a registered direct offering consideration of the gross profit of $30 million and a net profit of approximately [$20.7 million] and the issuance of approximately 255,000 ordinary shares for the former shareholders of US Rob, under the amendment to the US for our stock purchases previously discussed.+ With that, I will end the call back over to Eric.

Erez I. Meltzer

Thank you all. Once again for joining our call today and for your ongoing support of Nellix. We are making significant progress toward deployment of the Nanox, the ARC system that scale in both the U.S. and other markets. And I'm looking forward to our Investor Day next week and ours Q4 update call in early 2020s to Investor Day or meet with the Nanox team.
While we are in New York area, please contact our Investor Relations partners at ICR. Westlake has a good day. Operator, please open the session to Q&A.

Question and Answer Session

Operator

Thank you. As a reminder, to ask a question, please press star one one on your phone and wait for your name to be announced to withdraw your question, please press star one one. Again stand by as you compile the Q&A roster. And one moment please for our first question. Our first question will come from Jeff Cohen of Ladenburg Thalmann.

Jeffrey Cohen

Good morning, Erez and Ran every year.+ Great manager.+ So a few questions from Merrill Lynch. You spoke about a government agency and some security screening, and this may be a stupid question, but the shelf for people or is it true goods such as luggage?

Erez I. Meltzer

No. We indicated last year, no matter where it's the same. It's the same agency that we acquired. The first one in the first trial was successful. So they now go to the next step. We don't know exactly what's the what's the purpose of the use it.

Jeffrey Cohen

Okay, got it. And so can you go back to your submission and notified body, walk us through the time line there as some of the documentation has gone in or will be going in shortly? And what would you anticipate on the time line being that there's some further precedent in the restaurant.

Erez I. Meltzer

So So in a way, we are kind of ahead of ahead of what we anticipated to do it next year. We have already submitted all the information, all the if the weight goes that that the notified body who opens kind of a window are over a site that you'd say you upload all the information, you know, it's thousands of pages. And then once all the information is on, then you go to some questions, further invest in further visits at the site today or kind of check. And I don't want to give any.
You know, we have been saying all the time that regulation is in medical equipment is something that is always challenging and very complicated, and it allows a lot of facets. But but we assume that with the quality of the information and the quality of the of the clinical trials that we have in the with the quality of the (unk), the eyes of the two we passed all of this. It will be real reasonably faster than what ours operate. And I have an estimation, but but I think that it would be better to wait until we get a better clarity winning 2024, we will get it.

Jeffrey Cohen

Okay. Is it safe to say you're hopeful currently that you're going to see you clearance in 2024.

Erez I. Meltzer

As I say from his point of view from, I would say that data, it would be reasonable to say.

Jeffrey Cohen

Got it. Okay. And then lastly for us, could you go back to on Cervarix facility in Utah and talk about their capabilities there as far as anticipated number of units that could be assembled and produce per month or per quarter or per year.

Erez I. Meltzer

So as you know, Varex is the largest player in tubes for the imaging in the world come from. And I was there a few weeks ago, we had a long day session of the kickoff from both for the future road map of future breakthrough technologies wrote problem aspects for four products and the other thing is the continuous supply. And from from the capacity point of view, they will be able to supply whatever we need going forward. They are not going we're not going to be dependent our volumes. We're going to continue with our strategy to ensure that we have at least two or three suppliers for each one of the components that we have. So this, the tubes will be included and they will be one of the there will be a major supplier, but not the sole supplier.

Jeffrey Cohen

Okay, perfect retention for us. Thanks for taking the questions.

Erez I. Meltzer

Thank you for that, Jeff.

Operator

Thank you. One moment please, for our next question. Our next question will come from Ross Osborne of Cantor Fitzgerald. Your line is open guys.

Ross Osborn

Good morning. Congrats on the progress. Thanks for taking the questions. And hope your loved ones and employees are safe as possible. And given the war was just starting off with the New Jersey Imaging Center, which you provide some more color on the types of patients that center manages. And when we take expect the synergy to be up and running at scale Okay, up and running right now.

Erez I. Meltzer

The second is at scale right now is what we are focusing on and we do hope that that it will be, I would say we'll be in scale, probably the by the end of the year or beginning of the next year. January, we are planning to open the site for demos for people who would be willing to visit and see some I would say also that this will be another solution that we have managed to to create a sense of right now in Israel, although we do business business as usual and everything that we're planning we're doing and some people or some visits that were supposed to come to Israel have postponed their visit. So they will be able to come to come to New Jersey and come and see and we're going to be there. It's going to be serve as the, you know, six to six for example, the one that we mentioned already, where part of the installations that we have there. So it's kind of fast friendly environments for us to ensure that we're going to take all the benefits of the proof of concept, both for demonstration purposes and for operational. We mentioned also that as we speak, we are making the next site installations before the year before the end of the year. So basically, the of the go-to-market strategy and the go-to-market action plan in the U.S. is up and running. We're building the team. We signed the agreement, we are aiming to scan the first U.S. patients patients in the coming days. So we have all the necessary approvals. But the this is something that we're planning do we have managed to get almost all the certification and finding that physics that the game to be there enable us to commence the scanning of patients, et cetera. So it's good or we are happy with it.

Ross Osborn

Sounds great. And then turning to Morocco, can you discuss the level of utilization in terms of scans per day or your metric of choice there at the moment systems you have delivered today.

Erez I. Meltzer

And I think that this is something that we will share. We will shed some light on the Investors Day next week.

Ross Osborn

I guess Fair enough leading towards that by name.
But baseball, you basically right now it's in line of I would say that the feed slate is in line with what we anticipated.
It is starting to think about next year, given some of your recent manufacturing agreements, when should we expect an inflection in system deployments and expansion into new geographies outside of Morocco, Ghana and Nigeria. Just trying to get an understanding of system placement cadence for 2024, given you're now commercial and have contracts with these geographies for one hundreds of systems.

Erez I. Meltzer

So you asked about the next. I think that we've indicated already working with the family to work to fulfill the, um, the orders that we had originally mentioned, the agreements that we have in each one of them. We are making progress in terms of the regulation approvals. So part of them will be other countries in Africa are part of them will be in Latin America and part of them will be in Asia and and European countries, which are not dependent on on yield. So that's that's that's the plan so far, we've put it's all depend on the process and the progress that we made with the regulation approvals. But this is also something that we will we will give some more color on next week.

Operator

Thank you again. One moment please for our next question. Our next question will come from Ben Haynor of the Alliance Capital Partners. Your line is open.

Ben Haynor

Good day, gentlemen. Can you hear me okay.

Erez I. Meltzer

Yet another Good morning.

Ben Haynor

Great.
So I was just looking to understand the next ARC revenue a little bit better for the quarter. It sounds like some of that came from sales. If you give me a sense of or give us a sense of how how much capital revenue was included in there. And then would you expect the revenue that you're generating out of Africa from these systems to grow from the Q3 level going forward?
Yes.

Erez I. Meltzer

So Tom, you referred to the 19 $99,000 that we recorded in the quarter, correct?

Ben Haynor

Correct.

Erez I. Meltzer

Yes. Okay. So those are actually stems from the sales revenue from our two D imaging systems. There are the split is between three countries.
The first one is coming from. The second one is Morocco and the other one is Ghana. We're talking of a few of a few a few systems in each region and some of the revenue comes from the sales of those units and the other one from the usage of those units.

Ben Haynor

But okay.
This is I guess what I'm getting at. That's helpful. But what I'm getting at is would you expect the revenue from a system to tick up from the 9,000 level, the ones that are currently in those geographies, then everybody said generally?

Ran Daniel

Yes, because some of those on a provided for demo and training purposes, and we expect that those units will become commercial yield, of course, we'll add more and more units on those ones. And of course, we expect to start generating revenue from the Arca for the revenue from the ARC systems itself in those regions.
In the US itself in these units.

Erez I. Meltzer

By the way, I would say that the numbers of scans per day where they are operational is actually our numbers are exceeding our original expectations.

Ben Haynor

Okay. That's good to hear and helpful. And then just on the on the various agreements, I was curious about the minimal annual amount on that. Is that something that's relatively easy to achieve? Or is it that kind of a small fraction of the anticipated the realization? Or what's the right way to think about that?

Erez I. Meltzer

From my side? profitability are from our point of view.

Ben Haynor

Maybe both

Erez I. Meltzer

First of all, we have not disclosed the details of the agreement yet, but we'll we'll we'll add more details in our next 20 F, what can I tell you there's some formula over there that is going to build in some minimums, but not in the current point in time. Yes.
And some percentage, but we don't want to get into this just because the way we structure the agreement is very beneficial.
And for us in terms of the way we want to manage our business.

Ben Haynor

Okay, fair enough.

Erez I. Meltzer

I think I think the ball we have related to some of you have to remember that Pizza Pizza, it's a long-term agreement. Well, even though the built-up in agreement in a way that both sides can can execute.

Ben Haynor

Okay, got it on. But I think that that's all we have. So we'll see you guys at the Analyst Day next week,

Erez I. Meltzer

Thank you

Operator

Thank you. And this is all the time we have for questions, thus ending the Q&A session. I would now like to turn the conference back to Eric Meltzer for closing remarks.

Erez I. Meltzer

So thank you all for the being with us today and looking forward to see part of you and that the others will be able to hear next week when we have the Investor Day when we're going to have it should then give some colors on on technology on the go to market here in the US and on the operational as well as the some clinical from a management team will present there. So a CEO next week, and thank you for being less than that support of NetIQ's Good day.

Operator

As this concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.