Nano-X Imaging Ltd.
Q4 2020 Earnings Call Transcript

Published: 2 Mar 2021

[Operator:]

Greetings, and welcome to Nano-X Imaging Ltd. Fourth Quarter and Full Year 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce, Bob Yedid of LifeSci Advisors. Thank you. You may begin.

[Bob Yedid:]

Thank you, Daryl, and thanks to everyone for joining the Nano-X Imaging fourth quarter 2020 conference call. On the call today, we will hear from Rand Poliakine, Chairman of the Board of Directors and Chief Executive Officer; and Itzhak Maayan, Chief Financial Officer.

[Rand Poliakine:]

Hey, hello. Thank you very much, Bob and thank you everyone for joining our fourth quarter update call. As Bob mentioned, also joining me on this call this morning is Itzhak Maayan, CFO. So we had a very exciting Q4, our fourth quarter of the year. And we would like to share with you some of the outcome. Before we’ll dig down into the details, I would like to cover numerous number of things that we successfully accomplished in this quarter, which I think would give you a little bit of the feeling of the activity that is going on in the company. So, first and foremost, we successfully demonstrated the Nanox System at the RSNA 2020 meeting. That was a huge milestone for the company, as we demonstrated the technology, the system, and also got two radiologists from the U.S. to that those images and we’ll touch upon it in a minute. We also further invested in Korea, as you well-known, Korea is a major part of our supply chain. And during the last quarter, we invested a lot in human resources, investment and actually a lot of work, basically making sure that our supply chain is in line with our plans, which are basically starting to ship products still with this year, we talked about 1,000 units that will get into Q1 of 2022. To do that, we rented an interim manufacturing facility in Korea for MEMs production. We invested a lot of capital into expenditure for the advanced semiconductor manufacturing equipment, and we even purchased the land, which would be the major site for Nanox in the Far East. We purchased a land that will be our permanent establishment for the MEMs chief facility as well as other R&D matters, all of that in South Korea.

[Itzhak Maayan:]

Thank you very much, Rand. On our last conference call, which was our first as a public company, I went into great detail describing our MSaaS pay-per-scan based business model. The significant upfront capital cost of acquiring an X-ray machine is a material obstacle for many healthcare facilities, particularly those that are smaller in rural areas with all capital constraints. With the Nanox.ARC, we intend to ship and deploy units with no upfront cost to the facility. We will be paid on a pay-per-scan basis, which does in minimum service fee stipulated in our standard contract with our service providers. This makes our technology more broadly attainable by healthcare facilities of all sizes while providing Nanox with recurring and predictable long-term revenue. With our MSaaS model together with our integrated AI image transfer capabilities, we are pioneering a new model and we extended the medical imaging industry to follow. Our MSaaS model is clear and the positive impacts on our early sales effort. As of today, we have executed contracts for the deployment of 5,150 systems with nine service providers in 13 countries, contingent upon regulatory approval, customer acceptance, and other factors. In addition, we have previously announced strategic collaboration with USARAD for the deployment of 3,000 Nanox.CLOUD machines in the U.S. during the next two year, as well as the multi-faceted collaboration with SK Telecom. That’s among other things called for the deployment of 2,500 Nanox.CLOUD machine in South Korea and Vietnam. We are also in active negotiations with many additional – in many additional countries suggesting that we are well positioned to achieve our primary goal of the deploying 15,000 operational Nanox.CLOUD community globally by the end of 2024. Now turning to the financial. Non-GAAP net loss to ordinary share for the fourth quarter 2020 was $8.4 million compared to the non-GAAP net loss of $2.8 million for the same period in 2019. The reconciliation between GAAP net loss and non-GAAP net loss for the three-month period ended December 31, 2020 and 2019 is provided in the financial results that are part of the press release we issued this morning. The difference between GAAP and non-GAAP net loss to ordinary shares in mainly due to share-based compensation and class-action related expenses. Non-GAAP research and development expenses for the fourth quarter of 2020 were $2.1 million, compared to $1.3 million for the comparable period in 2019, reflecting the increased development activities of our Nanox System. Non-GAAP marketing expenses for the fourth quarter of 2020 were $1.6 million as comparable to $0.2 million for the comparable period in 2019, as we continue building our brand awareness and product marketing capabilities. Non-GAAP general and administrative expenses for the fourth quarter of 2020 were $4.8 million as compared to $1.2 million for the comparable period in 2019, as we ramp up our investment in extending our management team and overall organizational infrastructure, in addition to increase costs related with the Company’s IPO. Net cash used in operating activities during the fourth quarter were $13.3 million, as compared to $3.5 million for the comparable period in 2019. As of December 31, 2020, we had approximately 46.1 million shares outstanding. We ended the fourth quarter of 2020 with cash and cash equivalent at approximately $213.5 million and no debts. We believe our current cash is sufficient to fully execute on our plan of manufacturing, shipping and installing 15,000 Nanox Systems globally, which are targeting by the end of 2024, while continuing to expand our delivery capabilities and invest in our clinical and product roadmap. Before opening the call to questions, I would like to comment on the secondary offering ordinary shares that we completed just few weeks ago. As you may have seen, we priced a underwriting offering of approximately 3.1 million ordinary shares by a certain share in shareholders. The company received no proceeds from this offering. A few points worth making, first, this was mostly long-term – long time story, pre-IPO shareholders many of who have been invested in the company since its founding more than eight years ago, looking for follow-up portfolio diversification. Second, the selling shareholders and not the company were responsible for paying the underwriting fees associated with the offering while the company was responsible for accounting, legal and other costs and sell. And for us, most importantly, those things shareholders as they agreed to enter into a new lock up for the remaining 845,000 share for initial period of 90 days. And after that, they are restricted from selling more than one-third of the remaining position in each of the three subsequent 30 day split for a total of 180 days to extend selling restriction. We see this as a sign of support and compliment that they would commit to this new restriction. And with that, we would like to open the call for the question. Operator, please start the Q&A session.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Steve Halper with Cantor Fitzgerald. Please proceed with your question.

[Steve Halper:]

Okay. Good morning. So it sounds like, I just want to confirm that you did send in the response to the last set of questions that you received in December of 2020. Is that correct?

[Rand Poliakine:]

That’s absolutely correct.

[Steve Halper:]

Okay. What is the window for the FDA response now for the single source? Is there a set time limit for them?

[Rand Poliakine:]

As far as we know they should given our call with the examiner that should be within the next 30 days.

[Steve Halper:]

Okay. And so you’ve had direct communication with the examiner?

[Rand Poliakine:]

Correct. Correct. We just clarified exactly.

[Steve Halper:]

Not just the third-party reviewer?

[Rand Poliakine:]

Correct. So when we got the new letter, which was something we addressed, we decided to make sure that this time it’s – we provide – we understand exactly, we provide exactly what the examiners want to see. So we conducted direct contact with the examiner at the FDA. We got the guidance. We got the clarification of what needs to be clarified. We worked hard to complete a very comprehensive answer that was submitted. That could take as long as 30 days. We hopefully will hear much before.

[Steve Halper:]

Okay. And then the other question is, can you just give us a timing update on the multi-source application?

[Rand Poliakine:]

Yes, I mean, I think, just to be cautious and again, depending on given the fact that we’re depending on external laboratories. But it’s very hard to predict their timeline. We’re still in very good shape. We believe to get clearance within this year, which means that we would need to submit in the coming weeks. I cannot confirm – I can confirm this from the company’s point of view, we’ll be ready. We are working with external laboratories for the different safety tests, et cetera. So that may shift a bit, but overall, we’re still on the same timeline, which calls for clearance within this year and shipment of major amount of product stayed within this year. And moving into Q1 of 2022, that’s another cautious move that we took, even though I think it was published on the internet to give you so that we are in full production. I mean, we have three sites were producing products right now. So the products are in production and it’s subject to regulatory clearance to be commercial. That’s it.

[Steve Halper:]

Great. And where were those products being produced, in Israel now?

[Rand Poliakine:]

Yes. So again, as mitigation for the Corona situation, which do not allow us to travel much, we are working very closely with Foxconn. However, we also found a local partner that is making as we speak the first 1,000 units. And it’s done in full transparency also to go Foxconn.

[Steve Halper:]

Yes. And does that change – there was a little bit of a change, obviously due to COVID, but does that change the economics of those first devices?

[Rand Poliakine:]

No. I think, we also – we always envisioned that the first 100 units will be a bit more expensive than the target cost of between $10,000 to $15,000, however, for the 1,000 units or the 900 units we are getting very close to the targeted price. That’s our estimation.

[Steve Halper:]

Great. Thank you.

[Rand Poliakine:]

And the reason, Steve, is because the tubes and the semiconductors are coming from Korea and Japan and the molded parts are coming from China. So basically what we’re doing in Israel is integration and testing, which is not big part of the overall machine.

[Steve Halper:]

Very helpful. Thank you.

[Operator:]

Our next question is, come from the line of Ravi Misra with Berenberg. Please proceed with your questions.

[Ravi Misra:]

Good morning, Rand and Itzhak. Thank you for taking the questions. So I guess I’m going on pass on the FDA questions for now, leave those to others. But I want to talk a little bit about commercial prospects and some of the contract signings that you may be looking forward to do, doing? Just curious in terms of negotiations as they stand now, when you came to market last year, you had announced a number of contracts with service providers in terms of commitment, but not really much sense. Just curious, in terms of discussions or negotiations, number one, I mean, what kind of companies are you – or what kind of service providers are you speaking with, if you could give us some color around that? And then number two is, do you think that kind of the next round of service providers are going to be more contingent on FDA or regulatory approval? Or what’s the kind of thinking there around that approval process as it pertains to the commercial process? Thanks.

[Rand Poliakine:]

Yes. Okay. Thank you, Ravi and good morning. Itzhak, if you don’t mind, I will take that and you can add if you want. So I think what we are facing right now, we’re trying to bridge the gap between our extreme success on the commercial side. I mean, before we had one product cleared, we managed to get contracts for 5,150 a units and additional 5,000 units as part of our strategic collaboration. Of course, everything is subject to regulatory approval at the designated country, but that’s a huge achievement that we now need to live up to our promise. So the focus of the company is really, really right now is simply to make the products, get them through the approval process. We do receive huge amount of inbound traffic from following the RSNA demonstration and we’re managing that. Managing it slowly because I think what we want to see, we want to see this year that’s where clear that lifted the U.S., Korea and Israel. That’s what we want to see. We want to find homes for thousands – I’m sorry, for a hundred and thousand even, a few units still within this year or maximum end of first quarter of next year. We want to keep pushing the regulatory process with our existing contracts. And so we are submitting the CE and that’s would take some time, but we do have to contract very important with key service providers in the Italy and Spain. We also want to service the other countries as we sign. So basically, I think right now my direction to the team is let’s bridge the gap between the promise of the contract to actually ability to deliver let’s focus on three territories that are key which are U.S., Korea and Israel, and continue to service the contracts we already signed and evaluate as we speak the other contracts that we’re negotiating. I will not tell you what was not completed, but we are in negotiation with several service providers in different countries, as we speak right now. The second source of commercial I would say development that I want you to be aware of is of course, the OEM partners. As Itzhak said before, I think and me too, we are not – we are welcoming the big guys to really play with our technology and see how they can utilize it. And following the RSNA demonstration, when I believe that was actually seen the technology in action, we received a dramatic amount of new approaches. That seems to be more serious from the top companies in the world, we’re dealing with it. And actually they were putting a team together to deal with it because it’s a lot of fork. And of course in the future, we would like to see our technology embedded within the systems of not only Nanox.ARC, but also other big healthcare companies. And to that end, I think that we are building a good infrastructure of relationship and testing environment for those guys to get comfort and actually work with us very closely. So this is where we are – where we at, I think 2021 is execution here, and we would see more commercial agreements, but what we need to show I believe is our ability to make those products in MSaaS, deploy them, support the business model and get our customers to be very happy. And that’s what we’re doing.

[Ravi Misra:]

Great. Thanks for the detail. Maybe if I could just ask a follow-up on the partnerships that with the big guys, as you mentioned obviously FDA approval is going to be a contingent there too, but just ahead of that…

[Rand Poliakine:]

No, it’s not true. Ravi, it’s not true.

[Ravi Misra:]

No. Okay. So you could theoretically sign a partnership with before.

[Rand Poliakine:]

Yes. Because it’s a component, the FDA approved the system. When you – okay. So this partners of ours willing need to clear the system as a whole, including our component anyways. So none of – just to clarify for the audience, just to, I know you understand but I want to clarify. We have a technology and we have a product. Our product is Nanox.ARC, and that’s what needs to be – it’s a full system that needs to be cleared by the FDA or the relevant regulatory authority. If so ever, you collaborate, like we did with Fujifilm that was announced. And other companies that are coming now in line, you’re actually providing your technology and it becomes their responsibility to clear the system. So it’s not subject to FDA clearance to work with them.

[Ravi Misra:]

Okay. Thank you for the clarification.

[Operator:]

Thank you. Our next question has come from the line of Suraj Kalia with Oppenheimer. Please proceed with your question.

[Suraj Kalia:]

Good morning, Rand, Itzhak. Can you hear me all right?

[Rand Poliakine:]

Yes.

[Suraj Kalia:]

Perfect. So Rand, Itzhak, congrats, I know you all made a lot of progress. A bunch of questions from my side, what was the exact date of the single source submission that you believe starts this 30 day clock? I guess what I’m trying to understand is, was it submitted mid-February? Hence we are looking at another couple of weeks from now, or is it, any guideposts you can provide?

[Itzhak Maayan:]

Okay. So that’s a good point. Actually one of my team member clarified this to me. We had the management call just before this call. And my understanding is that it may be the date that we started the count may be the date that the letter was received. So in other words, we’re looking at a couple of weeks, but to be conservative, I just answered 30 days just because I don’t know for sure. It seems like the 30 days starts from the letter we received rather than the submission. But so that’s why I gave you the 30 days. There are other views that it’s actually a couple of weeks for now.

[Suraj Kalia:]

Got it. And Rand, the multi-source application, do you all intend to use a third-party or go directly? And I presume you’re already preparing the multi-source application as we speak.

[Rand Poliakine:]

Yes. I think that our team thinks right now that given the fact that we have this experience with a third-party we will submit the multi-source directly to the FDA, in order to save some of the misunderstanding that obviously occurred in the single source submission. I would tell you that talking to the – talking directly and in communication with third-party, but directly to the examiner, the FDA had to fill out to close the gaps of communication.

[Suraj Kalia:]

Are you had liberty to talk about the predicate device for the multi-source?

[Rand Poliakine:]

At Liberty, but I don’t want to do it right now because I think until we submit – my team is still looking at all the options and strategies, and yes.

[Suraj Kalia:]

Completely understood. Okay. Ron, the 10 prototypes that y’all had mentioned on the Q3 call for partner evaluation, can you give us a status on that? Have they been shipped? Are your partners – your commercial partners already evaluating, what’s going on?

[Rand Poliakine:]

No. So, I mean, those 10 are becoming now 100 and actually we’re going to publish the new design for the system. It’s a industrial design that is a bit improved. I think it was leaked somehow already. So we’re going to share with everybody the new design, we’re building 100 of those. For those systems that we build, we are going to – I would say, two main activities. One is activity related to testing and compliance in order to submit perfect submission of the multi-source for that we need five systems actually, or parts of the systems. And the other, systems are being used for the clinical validation. As you recall, we have what we call Nanox.ATLAS, which is basically the intended use or the ability to use our system, multi-source system to meet multiple indications that are covered by CPT codes. So we have a group of radiologists and clinicians that are working with the existing system we have and additional systems that we build actually, in order to really create the recipe for different procedures. So all of the units that were produced so far are being used internally in order to complete the testing and the compliance to the different submission. And remember, we signed contracts for 13 countries actually. So we have different submissions that we need to do. So a lot of work done there and empower it to the FDA submission. We envision that we’re going to submit in many other countries actually. And the second work is done by the clinician that are adding a new feature or new indication as they go to check different parts of the body and come up with a useful recipe for those multi-source devices.

[Suraj Kalia:]

Got it. And final question, Ron, from my side. This Korean subsidiary that you’ll mentioned this morning that, and please correct me if I misunderstood this, that is wholly by Nanox. I thought this was supposed to be a JV with SK Telecom. And a sub part of that question is, how long will this – before this facility is validated, the tech transfer is complete and also are the ceramic tubes going to be manufactured in this facility. Thank you for taking my questions.

[Rand Poliakine:]

Okay, great. So let me clarify. It’s a fully-owned subsidiary of Nanox. Nanox had the philosophy and that’s why we invest tens of millions of dollars in Korea. Our philosophy is that the secret sauce, the heritage we got from Sony’s days always need to be manufactured at-home and at-home means by facility and by employees that are all employed by Nanox. So this is our secret sauce. We have many patents, but we have a lot of know-how that we want to keep close to our chest. And for that reason, we ask and we received huge amount of support from SK Telecom, but not to the level that they became a JV partner for the manufacturing of the core of this technology, which is a chip. So that answering maybe the question of fully-owned subsidiary, yes, by Nanox and the support by SK is giving to us simply because they are very good shareholders and big shareholder in the company. And they have access to a lot of resources that can help us in setting up. However, when it’s all done, it’s Nanox only. So that’s the answer to that. And the reason for that is actually that we want to keep the nano technology on the chip proprietary for Nanox and without any leaking of information outside of the company, because we believe this is very – this is a core value of the company of technology. As to the tubes, currently we’re working on the ceramic tube with two partners in Korea, but the intent is definitely to acquire some of the technology of their tube and to make it in-house. I’ll give you an example. The tube itself is a standard ceramic tube that you can buy from Toshiba or any other thing. The trick is how to put the cold cathode and the chip to stand this temperature and to manage the thermodynamic and all of the know-how. This know-how we want to have within Nanox. So sometimes we’ll use partners for some of this production. And overall, we believe that the know-how of the full know-how of the tube should be also resides within Nanox for flexibility reasons and IP. So initially initial batch of ceramic tubes are coming from partners in Korea, later on, we have the flexibility to manufacture or to final assembly – to make the final assembly in our own permanent facility.

[Operator:]

Thank you. Our next question comes from the line of Rahul Rakhit with LifeSci Capital. Please proceed with your questions.

[Rahul Rakhit:]

Ron, good morning. Thanks for taking the questions. I guess, the first one for me, just kind of echoing on the South Korea facility, how long will it take to get that facility up and running?

[Rand Poliakine:]

So the construction work has done now as we speak. So again, just to clarify, for 2021 shipment, which is 1000 units, we are all set. We have secured actually everything we need in terms of chips and tubes and actually metal parts for the system. So for the 1000 systems that we intend to make and ship this year or latest first quarter of next year, were set. The permanent establishment is based in order with the view of supplying 2022 demand and being able to supply a huge amount of demand above and beyond the 15,000 units that we are planning to the first wave. Now, the land was bought, construction is – I mean, design is done. Construction is already started. We believe that we will open the factory for ramp up of production of the semiconductors by – let’s say, early December of this year. And we’ll have first quarter of next year ramp up production with the hope that from Q2 of next year everything that comes in terms of chip will come from our permanent facility and slowly we’ll move also the tubes to be – the final assembly to be in our permanent facility. So timeline for full production in Q2 of next year.

[Rahul Rakhit:]

Got it. Okay. That makes sense. And then just the other one for me was kind of in terms of thinking about your work with some of the AI partners and Ambra with image sharing. Can you remind us where you are in terms of integrating those services with the Nanox system? Are you supplying them with phantom images to guide the API development? Or do they need access to prototypes as well to kind of get that to a place where it can be commercially viable. Thank you.

[Rand Poliakine:]

Yes. So I think, first of all, the integration would be through an API. So it’s very simple. We have the platform now working and we define the API for everyday – every one of the third-party partners, other than Ambra, that’s already defined their API. So as Ambra there, the case is a bit different because they have an installed base customer that is huge, and they have multimodality image storage archive and sharing system. So it’s Ambra, they’re providing us the API and we connect to our system with all the others, we’re providing them the API and they are connecting. This integration is not yet done. And it’s supposed to be simple, but not yet done. I would expect that it’s not a big technical issue and it should get done before we are starting to ship our first systems in the Q4 of this year.

[Rahul Rakhit:]

Got it. Okay. And I’ll maybe ask one more, do you guys still expect to submit an application for CE Mark in the first half of this year? Assuming you get clearance, would that be sufficient to pursue regulatory approval in any of your target ex-U.S. markets?

[Rand Poliakine:]

Yes. Well, I think we are absolutely going to submit the CE Mark submission for our Nanox.ARC. I would say shortly after we submit the FDA. We believe that this could be clear this year. However, if you know, what’s going on in the Europe, they have an issue with the new rule of the notifying bodies. So everybody’s talking about some delays and that’s why we’re being very conservative. I will tell you that we’re absolutely going to submit it quite soon. And we will expedite as much as we can control it. The response could be as soon as Q3, but it could also delayed to next year. We don’t know that. Now, of course, for us, it’s important because we do have two major customers so far in the big list of customers in Europe. So that’s very important to us. I will tell you that from the company’s point of view, we’re absolutely going to submit and expedite everything. So it will be within this year, we cannot control the timing of the notifying bodies. And I think following the COVID-19 and the new rule, we should be aware of that there may be some delays.

[Rahul Rakhit:]

Got it. Okay. That’s really helpful. I appreciate that. Well, thanks again for taking the questions.

[Rand Poliakine:]

Welcome.

[Operator:]

Thank you. Rejoining the queue is Steve Halper with Cantor Fitzgerald. Please proceed with your questions.

[Steve Halper:]

Yes. Just wanted to confirm that the operating cash and the cash use in the quarter was $13.3 million. Is that correct?

[Itzhak Maayan:]

Correct.

[Steve Halper:]

Okay. Thank you.

[Operator:]

Thank you. There are no further questions at this time. I would like to turn the call back over Ron Poliakine for any closing comments.

[Rand Poliakine:]

Thank you very much. And really – I really want to thank everybody for joining us today. We concluded our calls this morning having now successfully demonstrated our technology in a range of medical imaging applications. We are very excited. We are as excited as ever about the potential of the Nanox.ARC to fundamentally disrupt the imaging market. As I said, 2021 is a very important year for us as we seek to gain regulatory approvals and prepare to ship commercial units, and we look forward to keeping you updated on our progress. Thank you again, and have a good day.

[Operator:]

Thank you for your participation this morning. This does conclude today’s teleconference. You may disconnect your lines at this time. Have a great day.