Nano-X Imaging Ltd. (NNOX) Q4 2021 Earnings Call Transcript

Nano-X Imaging Ltd. (NNOX -2.36%)
Q4 2021 Earnings Call
Mar 31, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Nano-X Imaging Q4 and full year 2021 earnings conference call. [Operator instructions] I would now like to turn the call over to Mike Cavanaugh, investor relations. You may begin.

Mike Cavanaugh -- Investor Relations

Thank you. Good afternoon and thank you for joining us today. Earlier today, Nano-X Imaging Limited released financial results for the full year and quarter ended December 31, 2021. 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 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 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 on 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 non-GAAP to GAAP measures is provided with our press release, with the primary differences being stock-based compensation and class action-related expenses. I'd now like to turn the call over to Nano-X's CEO, Erez Meltzer.

Erez Meltzer -- Chief Executive Officer

Thank you, Mike, and thank you all for joining the call today. As most of you know, I assumed my role as CEO on January 1st. It's what I consider to be a pivotal time in Nano-X development trajectory. We have made several advancements since our last earnings call.

I look forward to sharing some exciting developments with you today. I will give an overview of our achievements since our last earnings call, as well as share our outlook on the year ahead. Before turning the call over to Ran Daniel, our CFO, to review our financial results, we will then open the call up to questions. I would like to start by providing an update on our regulatory and commercialization progress as it pertains to our conversations with the FDA around the Nanox.ARC system.

We announced last quarter that we would be reviewing feedback from the FDA pertaining to our first submission relating to our remote stores, Nanox.ARC. In January of this year, after careful review of the FDA feedback on our first submission, we filed a pre-submission toward an additional 510(k) application for the second version of Nanox.ARC, our high performance, multi-store system via the agency's Q submission program. We are in continuous communication with the FDA and believe that this route will be the most expeditious pathway to further FDA feedback, which will be followed by formal submission. We expect that the Q submission will lead to thoughtful improvements to the Nanox.ARC and thereby cleared by the FDA.

The system will be suitable for development later this year. We have made considerable headway toward commercialization over the past year and our team remains committed to deployment of the Nanox.ARC units and is focused on execution in the months ahead. We are pleased to report that we have begun generating revenues in large part due to our three previously announced strategic transactions, the combination of which created a path to streamline commercialization. Combined with our current patented x-ray technology, the acquisitions of Zebra Medical Group, now Nanox.AI, a deep learning machine analytics company; and MDW, LLC, a decentralized marketplace connecting imaging facilities with radiologists; USARAD Holdings, Inc., a leading provider of teleradiology services, we are well on the path to provide more accessible and affordable healthcare.

We believe that integrating AI-powered imaging analysis in global teleradiology solution with our Nanox.ARC technology takes us one step closer to creating a global, streamlined medical imaging continuum from image capture through analysis to intervention by trained radiologists. Under one umbrella, we now have the potential capability to significantly improve access, reduce cost, and enhance efficiency, which could increase the chances of early detection as well as patient access to care in a meaningful manner. We are pleased with our ongoing integration of the companies we acquired at the end of 2021 and have taken a number of cost reduction measures in order to streamline operations and benefit from synergies. As these companies begin to contribute to Nano-X top line, we believe they will enhance the services provided by Nano-X system.

We intend to explore collaborations for additional solutions and wide array of product offering. In December 2021, we were excited to announce that USARAD was rectified with The Joint Commission's Gold Seal of Approval, which reflects the high standards that USARAD has maintained since its inception. By leading the quality standards of most widely recognized medical credentialing programs in the country. Furthermore, I'm pleased to share that we have strengthened the leadership team of Nanox.AI.

Effective March 1, 2022, we appointed Pini Ben Elazar as general manager of Nanox.AI. Mr. Ben Elazar brings 20 years of strategic and commercial expertise in the healthcare industry and is uniquely equipped to help drive the integration of Nano-X collective roadmap and vision. Having served on the Board of Zebra Medical Vision since its inception, Mr.

Ben Elazar understands the joint vision and mission of the merged company. Mr. Ben Elazar was one of the architects of Zebra Clalit Health Services. Clalit is the largest health maintenance organization in Israel and is the second largest HMO in the world, strategic collaboration.

Mr. Ben Elazar previously also served as CEO of Moore Research application, a technology transfer organization of Clalit. We are confident that he has the vision and the expertise to help drive Nanox.AI into the global market. I would like to also highlight a few other achievements since our last report.

In January 2022, we announced that the American Medical Association issued a new Category III Current Procedural Terminology, CPT code, for quantitative CPT tissue's characterization, enabling potentially broader use of Nanox.AI's health cardiac calcium scoring, our FDA-cleared AI-enabled cardiac imaging solution, that detects coronary artery calcium, CAC, for patients in the U.S. The code will become effective on July 1, 2022. We consider this important validation of our technology and a key step toward advancing detection and treatment of cardiovascular disease. We believe focusing on reimbursement of our technology, where it results in further interest and demand for the Nano-X system.

I would like to announce another agreement that has recently been signed for Nanox.AI. Earlier this month, Nanox.AI entered into an agreement with a large integrated healthcare organization based in the U.S. that provide caring coverage with the potential to create a more equitable model of health and wellness. Under this agreement, the healthcare organization will deploy the Nanox.AI-enabled software designed to promote increased early detection of risk for cardiovascular diseases, an osteoporosis in chest, computerizing tomography, CT scans.

We believe that the partnership between Nanox.AI and the integrated healthcare organization will enable physicians to efficiently identify many previously under-educated patients, who may be at risk for cardiovascular diseases and/or osteoporosis, which could improve individual patient's lives as well as having broader implications for population health and management of chronic diseases. Implementation will begin immediately, and the tools are expected to be rolled out to hospitals within the organization's network of hospitals in the coming months. As for Nanox.ARC, as previously reported, we have signed 11 MSaaS agreement for global deployment of 6,500 units of Nanox.ARC multi-store system. These agreements are for different territories, including Africa, Central America, and Europe.

And the system will be deployed in such markets according to the local regulation, subject to requisite clearance in each market. Since the beginning of the year, we have made significant progress in materializing our vision both within the company and outside of it. We've been focused mainly on establishing our production capabilities toward the deployment of Nanox.ARC system later this year, establishing new partnerships and enhancing our regulatory path. Our assembly efforts are primarily conducted at our [Inaudible] facility in Israel.

Since the beginning of the year, we have been improving our production line capabilities and establishing an operational assembly line to enable the expected ramp up in production and preparation for shipments of the Nanox.ARC system later this year. Operationally, our technology transfer to Nano-X wholly owned Korean subsidiary to enable production of the silicon MEMs chip has been completed. This is an integral piece of the digital x-ray stores. And with the launch of the production facility now underway, we anticipate being at full production by mid-year 2022.

The key initiative is especially important given the current supply chain shortages for chips worldwide. We believe this will help to secure a stable supply of chips that we need for the production of the Nanox.ARC while ensuring the quality of our chips for us and the healthcare professionals who will use our Nanox.ARC systems. With that, I would like to turn the call over to, Ran Daniel, chief financial officer.

Ran Daniel -- Chief Financial Officer

Thank you, Erez. We reported a GAAP net loss for the full year of 2021 of $61 million, compared with a net loss of $43 million for 2020. We reported a GAAP net loss for the fourth quarter of 2021 of $22 million, compared to a net loss of $19 million for the same period in 2020. Our revenue for the year ended on December 31, 2021, and for the fourth quarter of '21 was $1.3 million and our gross loss was $1.5 million.

Our revenue stems from the sale of radiology services and AI solutions resulting from the acquisitions of Nanox.AI, USARAD, and the Nano-X marketplace platform, which we closed during the fourth quarter of 2021. And in fact, those revenues represent two months of operations. Of such revenue, our revenue from radiology services for the same period was $1 million with a gross profit of $0.0 million on a GAAP basis and a gross profit of $0.4 million on a non-GAAP basis, which represents a gross profit margin of approximately 40%. In addition, our revenue from licensing of AI applications for the same period of -- was $0.3 million, with the gross loss of $1.5 million on a GAAP basis and a $0.2 million on a non-GAAP basis.

Research and development expenses for the year ended on December 31, 2021 were $17.1 million, compared to a $9.2 million in 2020. Research and development expenses for the fourth quarter of 2021 were $6.5 million, as compared to $3.0 million for the same period in 2020. The increase in our research and development expenses was mainly due to the merger with Nanox.AI, the development of our multi-source and cloud system, increase in our R&D headcount, share-based compensation, and costs related to the ongoing regulatory approval process. Sales and marketing expenses for the year ended on December 31, 2021 were $7.0 million as compared to $12.4 million in 2020, while marketing expenses for the fourth quarter of 2021 were $1.9 million as compared to $8.0 million for the same period in 2020.

The decrease was mainly due to the decrease in share-based compensation. General and administrative expenses for the year ended on December 31, 2021 were $34.7 million as compared to $22.3 million in 2020. General and administrative expenses for the fourth quarter of 2021 were $10.9 million, compared to $8 million for the same period in 2020. The increase was due largely to the merger with Nanox.AI, the acquisitions of USARAD, and assets of MDW, increasing our labor costs due to an increase in our headcount in connection with the expansion of the company's management team and the overall organization infrastructure, and increase in our legal fees in connection with the SEC probe and class action litigation.

Non-GAAP net loss applicable to the ordinary shares for the year ended on December 31, 2021 was $39.2 million, compared to $18.9 million in 2020. The non-GAAP net loss for the fourth quarter of 2021 was $15.0 million, compared to a non-GAAP net loss of $8.4 million for the same period in 2020. A reconciliation between our GAAP net loss and our non-GAAP net loss for the full year and for the fourth quarter of 2021 and 2020 is provided in the financial results that are part of the press release that we have issued this morning. The difference between GAAP and non-GAAP net loss is mainly due to the amortization of intangible assets, share-based compensation, fees related to the -- to our secondary offering, which was closed during the first quarter of 2021, and legal fees in connection with the SEC probe and the class action litigation.

Turning to our balance sheet. As of December 31, 2021, our cash, cash equivalents and marketable securities were $156.6 million, and we add $3.8 million in loans from banks. We ended the year with plant, property, and equipment net of $77.4 million. The increase of $23.4 million during the year of 2021 is mainly due to the completion of the construction of our fabrication facility in South Korea.

We also ended the year with intangible assets of $160.1 million as opposed to none at the end of 2020. Increases due to the merger with Nanox.AI, the acquisitions of USARAD, and the assets of MDW. As of December 31, 2021, we had approximately 51.8 million shares outstanding as compared to 46.1 million shares outstanding as of December 31, 2020. The increase was mainly due to the issuance of shares in connection with the three acquisitions that we have completed during the fourth quarter of 2021.

With that, I will hand the call back over to Erez.

Erez Meltzer -- Chief Executive Officer

Thank you for the financial update, Ran. I was delighted to assume the role of CEO for this exciting company, and I'm pleased to have so much positive news to report. In my first earnings call as Nano-X leader. We thank you for joining us today and as always, appreciate your continued support.

We will now open the call for questions. Operator, please begin the Q&A session.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Suraj Kalia with Oppenheimer.

Suraj Kalia -- Oppenheimer and Company -- Analyst

Good morning. Good afternoon, Erez, Ran. Hope everyone is safe and healthy.

Erez Meltzer -- Chief Executive Officer

Yes, we are.

Suraj Kalia -- Oppenheimer and Company -- Analyst

Hey. So, Erez, historically Q subs usually yield the pathway by -- at least by guidelines by around 75 days and by our calculation, your somewhere around 77. Maybe if you could give us some additional color of the type of communications, if you've had any, written feedback. And specifically, as we stand today, what is your update expectation on approval or clearance for the multi-source?

Erez Meltzer -- Chief Executive Officer

OK. Thank you, Suraj. The -- first of all, with respect to the 75 days, when we decided a few months ago to go through the Q subs pathway, we indeed thought that it will be 75 days before they get a response to us. Having said that, I think it took us -- it took them about 4 to 5 weeks to respond, schedule a meeting, and we had already a few discussions with them over time.

The one thing that they said already a few times that the decision to go to a continuance dialog with the FDA has proven to be the right one. We are talking to them quite a lot. So it's not only Q sub, waiting for the answers, respond, etc. The Q subs that we have made was based on the indications, all the comments that they have in the past.

When we initially send the submission for the multi-source, they send us a lot of comments. In the Q sub, we have already fixed all their comments. It seems that right now, from their point of view, especially due to the fact that it's a new technology, it seems that they are now internalizing what we are trying to do. And they -- the decision last day was that they gave us a few guidance -- guidelines for what to do for supplement information as part of the Q sub.

So this is -- this will be -- and I don't think that -- I don't expect that -- they had 75 days, but I don't expect that it will take the 75 days. They will probably respond, at least based on the notion of the calls that we had, they will respond earlier. Having said that, right now, we hope for the good for the good, but we can't estimate exactly what will be the time. But the one thing I would reiterate is the fact that, first of all, we are making a lot of progress in this area and the fact that we have decided to go to a continuous dialog proven to be the right one.

Suraj Kalia -- Oppenheimer and Company -- Analyst

Erez, has the discussion come up for a de novo 510(k)?

Erez Meltzer -- Chief Executive Officer

Can you please say it again? I couldn't hear.

Suraj Kalia -- Oppenheimer and Company -- Analyst

Sorry, Erez. What I was asking is do you think there's a chance that the FDA might want you all to go down a de novo pathway?

Erez Meltzer -- Chief Executive Officer

Right now, the answer is no. And we are not going into the details, but it seems that it's not going to be this way. It's going to be, I would say, it's not going to be identified as such.

Suraj Kalia -- Oppenheimer and Company -- Analyst

OK. Erez, one quick one for you and, Ran, I'll throw in one for you also. Erez, What are the yields now on the MEMs chips with this technology transfer to your Korean partners. Because if memory serves me right, in Japan, the yields were roughly around 50%.

So I'm curious on that. And Ran, if you could, what are the annualized revenue run rates and growth rates that we should assume for the Nanox.AI and the USARAD segments for FY '22? Gentlemen, thank you for taking my questions.

Erez Meltzer -- Chief Executive Officer

OK. So with respect to the with respect to the Korean, since we've indicated that in the very near future, we're going to go for the mass production, once we started the mass production with the load to indicate what's the yield, definitely it's better than it used to be in the past, of course. But the mass production will be the ones that will indicate where we are, OK? With respect to Ran, would you like to address the --

Ran Daniel -- Chief Financial Officer

Yes. So you would expect a growth rate of growth of 50% growth of more than two lines that you have mentioned. That was the question, correct?

Suraj Kalia -- Oppenheimer and Company -- Analyst

Right. And what are the -- how should we think about the revenue run rate for the AI and the USARAD [Inaudible]?

Ran Daniel -- Chief Financial Officer

So about the revenue run rate of the USARAD, you should expect for $8 million to $9 million on an annual basis. And as for the AI section of the business, you should expect the $3 million to $4 million a year.

Erez Meltzer -- Chief Executive Officer

As of now, as of now.

Ran Daniel -- Chief Financial Officer

As of now, correct.

Suraj Kalia -- Oppenheimer and Company -- Analyst

Thank you.

Operator

Our next question comes from Jeffrey Cohen with Ladenburg Thalmann.

Jeffrey Cohen -- Ladenburg Thalmann and Company -- Analyst

Hey, Erez and Ran. How are you?

Erez Meltzer -- Chief Executive Officer

Good.

Jeffrey Cohen -- Ladenburg Thalmann and Company -- Analyst

Just throw you a bunch of questions. So, firstly, what was the litigation expense in the fourth quarter?

Ran Daniel -- Chief Financial Officer

Are you referring to the SEC probe and the class action?

Jeffrey Cohen -- Ladenburg Thalmann and Company -- Analyst

Yes.

Ran Daniel -- Chief Financial Officer

It's actually mentioned in our non-GAAP adjustment between GAAP and non-GAAP. It was $455,000 for the quarter.

Jeffrey Cohen -- Ladenburg Thalmann and Company -- Analyst

OK. Got it. And I know that we've heard about manufacture and delivery, so any commitment on deliveries or units for 2022 from the company as far as production and/or deliveries?

Erez Meltzer -- Chief Executive Officer

Right now, we don't change anything with respect to what they've been indicated. Right now, I would say that due to the fact that we have identified what are the load-lead items in the -- to be ready for the assembly, we have already ordered what is needed for the for the foreseeable future is we can say. The other thing that we have indicated that in the first quarter with our assembly line in the [Inaudible] will be ready for hundreds of machine on a quarterly basis. So right now, that's where we are.

Jeffrey Cohen -- Ladenburg Thalmann and Company -- Analyst

OK. So with the Korean facility up, you would anticipate next quarter that a few hundred could be produced by the end of this year?

Erez Meltzer -- Chief Executive Officer

We haven't disclosed yet but I think that in the very near future, you will hear something about it which will not be far away from what you anticipate, I believe.

Jeffrey Cohen -- Ladenburg Thalmann and Company -- Analyst

Got it. OK Could you talk about this large integrated healthcare organization in the case of cardiovascular? Is that -- can you give us a sense of the number of large covered by this organization? Is it over a million or is it over 10 million?

Erez Meltzer -- Chief Executive Officer

You mean the number of hospice subscribers?

Jeffrey Cohen -- Ladenburg Thalmann and Company -- Analyst

Just the -- I'm trying to get a sense of the size of the integrated healthcare organization.

Erez Meltzer -- Chief Executive Officer

OK. I would say that it's among the top -- I would say top 30 in the U.S. I would even dare to say that it's among the top 25. And it's a pretty advance in the way they think about AI and [Inaudible] healthcare providing -- providing healthcare and it's pretty sizable.

We have also indicated that we are in continuous dialog with a few others and at least one of them is even more sizable than the one that we've signed already.

Jeffrey Cohen -- Ladenburg Thalmann and Company -- Analyst

OK. Got it. And one more, if we could. Could you give us a sense of initially -- I don't know what the initial period is as far as work placements or system purchases.

Any insight there into one or the other or what we should anticipate for the coming year? We have indicated already that we have orders for at least 6,500. None of which have been either canceled or -- so we still what we currently have. And since we have already indicated and we're repeatedly saying that the first country that we're going to install are countries with different regulation that the the FDA is not necessary. Another regulation is necessary over there.

And the indication that we currently have with the regulation that we are will be required for the first part of the deployment, which obviously will be shortly announced, will be -- we will get it again once again in the very near future. I don't know the exact date, but once we have it will announce it.

OK. One more, if I may. Was your resolution on the glass versus ceramic tube manufacturing, or is it currently two sources on the manufacturing front for the tubes?

Erez Meltzer -- Chief Executive Officer

OK. So right now we are really working on a very wide range of solutions, OK? And I'm not talking about one or two suppliers. I'm talking about five -- four or five suppliers that we are currently exploring. One or two of them is exploring this ceramic solution, and one or two of them are exploring some gas solutions.

And right now, we are we're doing both. The decision on which one we actually focus will probably be in the next few months once we get the [Inaudible], once we get the power in, and once we pass the FDA as well.

Jeffrey Cohen -- Ladenburg Thalmann and Company -- Analyst

OK. And can you give us a sense of which one was filed with the FDA Q?

Erez Meltzer -- Chief Executive Officer

We don't disclose it, but I think that shortly it will be disclosed.

Jeffrey Cohen -- Ladenburg Thalmann and Company -- Analyst

Perfect. OK. That does it for us. Thanks for taking the questions.

Erez Meltzer -- Chief Executive Officer

Thank you.

Ran Daniel -- Chief Financial Officer

Thank you.

Operator

And I'm not showing any further questions at this time. Let's turn the call back to Erez for any final remarks.

Erez Meltzer -- Chief Executive Officer

OK. So thank you all for being with us today. We are -- really appreciate the support, the continuous support in the company and its future. The -- it's interesting that the ecosystem that we are building with the combination of the Nanox.ARC with other equipment that will be joining this -- in the future and with the leading by teleradiology provided by USARAD and the MDW and, of course, the layer that we are adding with the A.I.

is definitely something that we see when we talk to customers and to potential players and to partner that it's something that resonates quite well, to say the least. And we hope that it will be fulfilled in the very near future and will generate the expected outcome for the company. Thanks once again and we'll talk soon.

Operator

[Operator signoff]

Duration: 35 minutes

Call participants:

Mike Cavanaugh -- Investor Relations

Erez Meltzer -- Chief Executive Officer

Ran Daniel -- Chief Financial Officer

Suraj Kalia -- Oppenheimer and Company -- Analyst

Jeffrey Cohen -- Ladenburg Thalmann and Company -- Analyst

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