Nano-X Imaging (NNOX) Q1 2023 Earnings Call Transcript

Nano-X Imaging (NNOX -2.36%)
Q1 2023 Earnings Call
May 22, 2023, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Nano-X Q1 2023 earnings call. [Operator instructions] After the speakers' presentation, there will be a question-and-answer session. Instructions will be given at that time. As a reminder, this call may be recorded.

I would like to turn the call over to Mike Cavanaugh, investor relations. You may begin.

Mike Cavanaugh -- Investor Relations

Good afternoon and thank you for joining us today. Earlier today, Nano-X Imaging Limited released financial results for the quarter ended March 31, 2023. 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 financial measures to the nearest GAAP financial measure is provided in our press release. 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, and non-GAAP gross loss per share. With that, I'd now like to turn the call over to Erez Meltzer.

Erez Meltzer -- Chief Executive Officer

Thank you, Mike, and thank you all for joining the call today. I will provide an overview of our recent operational accomplishments before handling the call over to Ran to review our financial results, and then we will close, as usual, with a question-and-answer session. With that, I'll get right into it, and I'll start with the news that I'm sure is at the top of everyone's mind, which is the recent FDA clearance for Nanox.ARC system. As a reminder, on April 28, 2023, we received a 510(k) clearance from the FDA to market the Nanox.ARC, including the Nanox.CLOUD.

It's a company cloud-based infrastructure. The approved device is intended to be used in professional healthcare facilities or radiological environments such as hospitals, clinics, imaging center, and other medical practices by trained radiographers, radiologists, and physicians. Representing a major advancement in the X-ray tube technology, the Nanox.ARC is a multisource 3D tomosynthesis system that utilizes novel cold cathode X-ray tubes, which the company intends to offer using an innovative pay-per-scan business model. We believe that the Nanox.ARC has the potential to increase availability to medical imaging globally once approved by local regulatory authorities and deployed in scale.

We intend to deploy this version of the Nanox.ARC that was cleared by the FDA, which has the power level necessary to scan the MSK system. We believe the FDA clearance will assist in our efforts to gain regulatory clearance in certain other jurisdictions, including in other countries that are FDA clearance-based market. Following this clearance, Nanox will continue to work with the FDA to pursue additional regulatory clearances and intends to expand clinical indications. Other applications may be available in other markets there are local regulatory approvals.

With FDA clearance secured, we are in the process of setting up a U.S. demo center located in Fort Lauderdale, Florida, which will be used for commercial purposes. We are currently working to secure an import license and expect to ship the Nanox.ARC units later this quarter. Additionally, we continue pursuing the European Union CE mark and continue our work with our notified body, BSI, to whom we have already submitted a contract package.

While it is gratifying to see the commercial and regulatory process of recent months, at the same time, we are collecting additional data supporting the use of the Nanox.ARC system. Under the Helsinki permit, which we have previously disclosed, we started to collect clinical sample images of multiple human body anatomies with Nanox.ARC's system that was deployed in the Shamir Hospital in Israel. Additionally, we recently passed independent evaluation of the device by the Israeli Ministry of Health, which facilitates further clinical trials in Israel utilizing the Nanox.ARC. We are planning to conduct a clinical trial in Israel to evaluate the diagnostic potential of the Nanox.ARC for chest and lung diseases on patients with these pathologies.

The trial is expected to be executed in collaboration with a local hospital in Israel and is expected to begin in the second half of 2023. Turning to commercial deployment activities, Nanox has entered into a three-year distribution agreement with a local partner in Morocco, Vital Tech SARL. Under the distribution agreement, Vital Tech will purchase, deploy, and operate an estimated 270 Nanox.ARC units over three years for clinical use. The execution is subject to a separate test of the first units and regulatory clearances.

We have already received an import license. We have sent the first unit, and our deployment team is on the ground as we speak. Morocco is enhancing our footprint in Africa, in addition to work we are doing to deploy in Nigeria and Ghana, which we have discussed on previous calls. I will now take a few minutes to introduce and discuss a new commercial partnership, which extends the reach of Nanox.AI.

During this quarter, we entered a global partnership with Blackford Analytics to market our Nanox.ARC product. Blackford Analytics is a global imaging AI solution provider, and this partnership is intended to broaden the reach of Nanox.AI cardiac and bone solutions by presenting the Nanox.AI algorithm on Blackford's platform, which offers a wide portfolio of imaging AI software and services. We believe partnering with Blackford is an important step in expanding the reach of Nanox.AI HealthOST and HealthCCSng solutions into radiology departments globally, including the U.S. and Europe.

Nanox.AI solution may also benefit downstream physicians in cardiology and endocrinology by enhancing their abilities and help detect subclinical levels of osteoporosis and cardiac disease. Moreover, we have already completed the installation of our application in four out of five NHS clinical institutions in the U.K., and our system has been installed in 10 clinical institutions in the U.S. for the purpose of initial clinical pilot. Turning to technology and manufacturing and as previously mentioned in our previous earnings calls, since the beginning of this year, we have been improving our production line capabilities and establishing an operational assembly line to enable the expected ramp-up in the production and preparation for the shipments of the Nanox.ARC system later this year.

With deployment as a key focus, I'm pleased to report that the production line at Dagesh is now fully operational. Furthermore, I'm happy to share that Nanox Korea received the ISO 123485 certificate on April 5, 2023. The scope of this certificate obtained by Nanox Korea covers design, development, manufacturing, and sales of X-ray tubes for medical use. Before turning the call over to Ran, I'd like to touch on the Nanox.AI and teleradiology business segment, which continued to generate revenue.

This business has generated top-line revenues of $2.4 million, compared to $2.1 million revenues in Q4 2022, almost a quarter-to-quarter increase of 15%. Ran will review the financials in more detail. But as I've stated before, these businesses are attracting customers, thereby demonstrating the utility of these services to healthcare systems, and we are confident they will add significant value to the fully integrated Nanox.ARC system upon deployment. Our work is not done, but we are now at an inflection point in our company's history and are now looking ahead to deploying the Nanox.ARC at a large scale globally.

With that, I'd like to turn the call over to Ran Daniel, chief financial officer, to review our financial results.

Ran Daniel -- Chief Financial Officer

Thank you, Erez. We reported a GAAP net loss for the first quarter of 2023 of $11.8 million, compared with a net loss of $21.7 million in the first quarter of 2022, which decrease was largely due to the decrease in earnout liabilities in the amount of $5.0 million and the decrease in our general and administrative expenses in the amount of $3.5 million. Our non-GAAP net loss for the first quarter of 2023 was $10.5 million, compared to a non-GAAP net loss of $11.6 million for the same period in 2022. Revenue for the first quarter of 2023 were $2.4 million and gross loss was $1.5 million on a GAAP basis.

Revenue from teleradiology services for the same period was $2.4 million, with a gross profit of $0.5 million on a GAAP basis and a gross profit of $1.1 million on a non-GAAP basis, which represents a gross profit margin of approximately 21% on a GAAP basis and 44% on a non-GAAP basis. The increase in the company's revenue and gross profit margin in the first quarter of 2023 is mainly due to the increase in the amount of the radiologic interpretations or -- and read and our rates for teleradiology services during the three months ended March 31, 2023, as compared to the comparable period. Research and development expenses for the first quarter of 2023 were $6.3 million, as compared to $6.8 million for the comparable period in 2022. The decrease of $0.5 million was mainly due to the decrease in the company's cost of labor in the amount of $0.5 million and a decrease in the share-based compensation in the amount of $0.8 million, which was mitigated by an increase of $0.2 million in development expenses.

General and administrative expenses for the first quarter of 2023 were $7.8 million, compared to $11.3 million for the comparable period in 2022. The decrease was largely due to a decrease in the company's cost of labor in the amount of $0.8 million, a decrease in share-based compensation in the amount of $4.5 million, a decrease in the company's directors' and officers' liability insurance premium of $0.3 million, which was offset, in part, by an increase in professional services in the amount of $0.5 million and increase in the company's legal fees in the amount of $1.4 million due to an increase in the company's legal fees in connection with the SEC investigation and class action litigation as described in the company's Form 6-K filed on May 22, 2023. During the fourth quarter of 2022, we had accrued $8 million for future settlement expenses in connection with the two pending class action lawsuits against the company. On April 28, 2023, we signed a term sheet with the lead plaintiff in both actions to settle all claims in both actions in consideration for $8 million.

The settlement is subject to finalization of a formal settlement agreement and court approval of the settlement. Change in contingent earnout liabilities was minus $4.7 million in three months ended March 31, 2023, as compared to $0.4 million in the comparable period in 2022, due to the decrease in the company's contingent earnout liability as a result of the amendment of the stock purchase agreement that we entered into with the former shareholders of the USARAD on April 28, 2023. Under this amendment, the company shall pay an aggregated amount of approximately $0.3 million in cash and 45,392 ordinary shares to the former stockholders of USARAD in consideration for the achievement of certain milestones in connection with the first earnout period as defined in the USARAD Stock Purchase Agreement. In addition, the company and the former shareholders of USARAD agreed that the company shall pay an aggregate of $0.5 million in cash and 210,000 ordinary shares to the former stockholders of USARAD as consideration for the remainder of the milestones and applicable earnouts under the USARAD Stock Purchase Agreement.

Turning to our balance sheet. As of March 31, 2023, we had cash, cash equivalents, and marketable securities of approximately $91.0 million and had $3.5 million loans from banks. We ended the quarter with the property and equipment with a net of $45.1 million. As of March 31, 2023, we had approximately 55.2 million shares outstanding, as compared to 52.1 million shares outstanding as of December 31, 2022.

On April 28, 2023, we issued approximately 255,000 ordinary shares to the former stockholders of USARAD under the amendment to the USARAD Stock Purchase Agreement previously discussed. With that, I'll hand the call back over to Erez.

Erez Meltzer -- Chief Executive Officer

Thank you, operator, and thank you all once again for your support of Nanox. I've been the CEO of Nanox for over a year now and have been looking forward to sharing the welcome news of FDA clearance. The U.S. regulatory clearance also paves the way for Nanox.ARC to be approved in other countries that are FDA clearance-based markets.

Other applications will be available in other markets for local regulatory approvals. We will continue to push ahead on multiple fronts: commercialization and deployment across multiple geographies, continue to strengthen our manufacturing capabilities of the supply chains, and continue to generating and collecting imaging data that supports the use of Nanox.ARC across multiple pathologies and uses. I look forward to our next update call in August when we will discuss our Q2 results. In the meantime and if you want to connect with us, please contact our investor relations partner at ICR Westwicke.

Have a good day.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Jeffrey Cohen with Ladenburg Thalmann. Your line is open.

Jeffrey Cohen -- Ladenburg Thalmann and Company -- Analyst

Hi, Erez and Ran. How are you?

Erez Meltzer -- Chief Executive Officer

Great.

Ran Daniel -- Chief Financial Officer

Good morning, Jeff.

Jeffrey Cohen -- Ladenburg Thalmann and Company -- Analyst

So, congratulations again on the clearance. It's very exciting. Can you walk us through and talk about a little bit as far as the backbone of production and where that's existing now? And you mentioned fully operational. And then talk about the -- all the components and subcomponents and -- to manufacturing and tie that into the facility in Korea as well.

Erez Meltzer -- Chief Executive Officer

OK. Thank you, Jeff. First of all, indeed, we are very excited about the FDA clearance and the work that is ahead of us. We've indicated in the -- what we talked actually in the last 15 minutes, first -- and in the press release that we did that, A, we continue to manufacture the chips in Korea.

Same goes with the tubes that currently we are manufacturing in Korea. We've indicated that in the future, we have plans to have more than one or two sources for each one of the components, so including the tubes. So, this will come in the future. In addition, in terms of the assembly, we are -- we -- we've actually opened the facility at Dagesh in Israel, where we're going to manufacture all the systems that we're going to assemble this year and ship to the various location that will be part of the deployment.

So, this is what we mean by fully operational. In the future, we have already mentioned that we will consider and also explore opportunities to assemble in other countries when we go to the mass production other than Israel, specifically, as we do right now.

Operator

Thank you. Our next question comes from Ross Osborn with Cantor Fitzgerald. Your line is open.

Ross Osborn -- Cantor Fitzgerald -- Analyst

Hi, guys. Congrats on the progress. Thanks for taking our questions.

Erez Meltzer -- Chief Executive Officer

Hey, Ross. How are you?

Ran Daniel -- Chief Financial Officer

Hi, Ross.

Ross Osborn -- Cantor Fitzgerald -- Analyst

So, maybe starting off, could you just provide an update out of Ghana and Nigeria? You know, where does the company stand and beginning to generate scans there and also related revenue?

Erez Meltzer -- Chief Executive Officer

OK. So, right now, it's the -- we've just started, so the revenues are expected later this year. In terms of the deployment that -- about those that you mentioned, we are working country by country with the local regulation, starting with the import license and the local regulation in those countries that are FDA-based clearance and are not FDA-based clearance and have their local regulation. We have indicated that we are focusing on Africa, and we are exploring and extending the -- expanding the business in Africa.

In Ghana, the system is already there, installed, operating. In Nigeria, the system is there. We'll be operating there shortly when we get all the permits and certificates to operate it. We have also indicated today that we signed another big agreement or meaningful agreement in Morocco.

The system is already at the hospital as we speak, and we have a team in the ground which are going to operate it, and it will start to generate, of course, images. This is with respect to Morocco. In terms of the others, right now, we are going one by one of the agreements that we have in order to ensure that we'll have a path and road map for the deployment. At the same time, we have indicated today something very important that originally we thought that U.S.

will be only next year. We really understand right now that we have to find a way and do our best in order to accelerate the process of the deployment and the go to market in the U.S. And it's going to be this year. And we've already indicated that the first -- the demo center that we talked about in the script, in the PR, and also the machine that will be sent this quarter.

Ross Osborn -- Cantor Fitzgerald -- Analyst

Great.

Erez Meltzer -- Chief Executive Officer

We're starting to [Inaudible] the process.

Ross Osborn -- Cantor Fitzgerald -- Analyst

Maybe I'll follow up on your Morocco contract. You mentioned being able -- or deploying 270 units over three years. If you're able to receive the required license, let's say, tomorrow and begin deployment, based upon your current manufacturing capabilities, would you be able to meet the three-year window?

Erez Meltzer -- Chief Executive Officer

The answer is there is no reason why not.

Ross Osborn -- Cantor Fitzgerald -- Analyst

OK. That's great to hear. And then maybe one more, if I may. Just on the U.S.

commercialization, is the plan to deploy systems in the U.S. also on the pay-per-scan model rather than a capital sale? And then, if so, should we think about price around $14, similar to your global average?

Erez Meltzer -- Chief Executive Officer

The short answer is -- without going into the details, the short answer is that, basically, yes. But I think it's too early to say. Once we start the deployment, we'll see the various model that can be explored, the various type of units or clinics or hospitals that we'll hear. Right now, from what we hear from the market, the answer is yes.

We may explore and then decide something else. But this is too early to say. But I will say once again, in general, the answer is yes. Not necessarily the $14 that was mentioned but might be that it will be different or higher.

But right now, that's the plan.

Ross Osborn -- Cantor Fitzgerald -- Analyst

Thanks for taking my questions. Congrats again on the progress.

Ran Daniel -- Chief Financial Officer

Thank you, Ross.

Erez Meltzer -- Chief Executive Officer

Thank you, Ross.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Mike Cavanaugh -- Investor Relations

Erez Meltzer -- Chief Executive Officer

Ran Daniel -- Chief Financial Officer

Jeffrey Cohen -- Ladenburg Thalmann and Company -- Analyst

Ross Osborn -- Cantor Fitzgerald -- Analyst

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