Nano-X Imaging Ltd
NASDAQ:NNOX
Earnings Call Analysis
Q3-2023 Analysis
Nano-X Imaging Ltd
In the third quarter of 2023, the company reported a GAAP net loss of $21.4 million, a slight increase from the net loss of $19.1 million in the third quarter of 2022. The increase was primarily due to a goodwill impairment of $7.4 million and an increase in sales and marketing expenses of $0.4 million, partially offset by a $5.6 million decrease in general and administrative expenses.
The third quarter non-GAAP net loss was $9.4 million, in comparison to a net loss of $8.1 million during the same period in the previous year. The company's revenue reached $2.5 million with a gross loss of $1.7 million on a GAAP basis, while non-GAAP gross profit was $0.9 million, representing a decline in the gross profit margin from 46% to 37%. This decrease was attributed to higher cost of radiology primarily due to reduced rates and incentive payments for overnight shifts.
Teleradiology services revenue was $2.2 million with an 11% gross profit margin on a GAAP basis, a considerable decline from a 26% margin in the prior year. The company's non-GAAP gross profit for teleradiology services fell from $1.2 million to $0.8 million. Notably, the quarter also saw initial revenue generation from the sales and deployment of imaging systems of $99,000 with a consistent gross profit margin of 37% on both a GAAP and non-GAAP basis. The reduction in research and development expenses by $0.1 million further underscores management's intention to balance innovative efforts with spending efficiency.
The company's go-to-market strategy in the U.S. included an increase in sales and marketing expenses to $1.1 million, to prepare for the soft launch of products in the U.S. market. The reduction in general and administrative expenses to $5.0 million from $10.6 million in the prior year period demonstrates significant cost-saving measures, particularly in legal expenses and share-based compensation.
A goodwill impairment of $7.4 million was recorded, attributed to the teleradiology and Nanox.AI reporting units. This reflects the management's revised expectations on the timeline required to achieve growth in revenues, gross profit, and positive operating cash flow in these segments. Additionally, the company accrued $0.7 million for future settlement expenses in connection with an SEC investigation and paid a $650,000 penalty as part of a settlement agreement.
As of September 30, 2023, the company's balance sheet showed a strong liquidity position with cash, cash equivalents, deposits, and marketable securities totaling approximately $95.6 million. A bank loan of $3.3 million was also recorded, alongside property and equipment net valued at $45.1 million.
While the regulatory processes proved challenging, the company remains hopeful for EU clearance in 2024. The executive team expressed confidence that their robust clinical trials, ISO certification, and overall product quality would expedite regulatory stages. Furthermore, the potential for scale operations in a New Jersey Imaging Center could be realized by the end of 2023 or early 2024, offering the company a strategic base for demonstrations and patient scanning in the U.S. market.
The company plans to expand into new geographies such as other countries in Africa, Latin America, Asia, and non-EU European countries, subject to obtaining necessary regulatory approvals. Details on this expansion and the pace of system deployments were reserved for the upcoming Investor Day and reveal an optimistic, though cautious, projection of the company's growth strategy for the next year.
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Good day, and thank you for standing by. Welcome to the Nanox Q3 2023 Earnings Conference Call. [Operator Instructions] 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 Cavanaugh, Investor Relations. Sir, please go ahead.
Good afternoon, and thank you for joining us today. Earlier today, Nanox Imaging Ltd. released financial results for the quarter ended September 30, 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. 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 Erez 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 jump start 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 aim to expedite the implementation of our commercial infrastructure and advance our future strategic plans.
Moving to the recent developments and 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. A 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 a licensed and certified physicist and able to commence scanning of patients to acquire medical imaging using the Nanox.ARC, a stationary X-ray system intended to produce 3D demographic 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. This center will also serve as a demonstration center for our medical professionals, offering them an opportunity to familiarize themselves with the system and facilitate the [ implementation ] process. More updates on the progress on installments in the U.S. are expected on the Investor Day on December 4.
We are enhancing our U.S. sales and service team, and I'm happy to announce we have signed an agreement with 626, a national health care 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, 626 offers tools necessary for imaging centers to achieve maximum uptime and maintain better patient care.
626 has expertise in modalities and medical imaging equipment and provides customized services tailored to their clients' needs, where there ISO1385 certification national footprint and over 160 field service engineers, they are an ideal company to partner with as we ramp up our commercialization efforts in the U.S.
In addition to them, supporting installations, maintenance and services in the field, we intend to install an ARC system in their suburban Atlanta 626 Imaging Academy for trading and demonstration purposes.
Turning now to our deployment efforts in the rest of the world. Outside of the key [indiscernible] market, we have begun to generate revenues from hardware deployment in Africa. While these revenues are currently [Audio Gap] are growing. Additionally, as previously announced, Nanox.ARC unit has been installed in the university of Ghana Medical Center Limited, UGMC, 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 GFDA 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.ARC as well as laying the groundwork for a demonstration center, a potential location for the demo site [indiscernible], offering every space and expertise for the Nanox.ARC. We will provide further detail on this development 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 Varex, a leading global manufacturers of imaging components based in Utah. We have since held formal partnership kickoff meetings at Varex headquarters in Salt Lake City, where the company's executive and technical teams came together to continue final tube design efforts and map out all the road map towards production.
Expanding on our OEM-related activity, we are currently engaged with an industrial imaging equipment manufacturer on a tube development and manufacturing program we expect to formalize by the year-end to ensure an adequate future supply of tubes. Additionally, our collaboration with the U.S. government agency exploring Nanox.ARC 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 [indiscernible] for internal testing and application development projects. Regarding our regulatory path, despite our efforts to gain regulatory approval in a number of markets across the world, sometimes our regulatory progress is slower than we would like in some instances, such as with the FDA in the U.S. Each jurisdiction has an 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. Nevertheless, we have not stopped pushing ahead with our regulatory efforts, which continue to be our [ forment ] importance to Nanox. As previously communicated, we partnered with BSI Group and a credible 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. BSI's formula review will begin in the first quarter of 2024 according to the planned 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 Health known as AMAR, A-M-A-R, is the regulatory body that oversees medical devices. On November 22, 2023, Nanox.ARC received a AMAR approval from the Israeli Ministry of Health and it is now registered as a medical device in the Israeli market. Following this approval, the Israel Ministry of Health granted Nanox.ARC, a free cell certificate which is the 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 anatomies with a Nanox.ARC system deployed at Shamir Hospital in Israel is continuing. Additionally, Nanox reached an agreement with Beilinson Hospital, a part of the Clalit Health 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 the Nanox.ARC in detecting chest and lung diseases will be launched in the Beilinson hospital. All required Israelian 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.AI business segment. We generated $141,000 in revenue during this quarter, and Ron will review it in more detail shortly. At the end of the quarter, we announced compelling study results, which demonstrated that Nanox.AI product found that 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. This study was sponsored by Nanox.AI and conducted by Beilinson Hospital utilizing Nanox.AI Health, an FDA cleared and CE Mark tool designed specifically for cardiac health assessment.
Health CPS solution utilizes medical imaging data from routine chest CT scans to automatically quantify and analyze PAC potentially offering an early detection mechanism for cardiovascular, calcium and preventing cardiac care.
Another Nanox.AI a 510(k) submission for Nanox fatty liver detection known as Health FLD was submitted in September and is pending FDA 510(k) [ clearness ]. Health FLD is designed to detect early signs of fatty liver diseases from routine chest and abdominal CT scans, not specifically for liver assessment. These updates are highly promising, and I look forward to providing additional updates on the Nanox.AI business throughout 2024. Before turning the call over to Ron, I'd like to revisit one of the AI product agreement that we have announced previously. In mid-2022, we announced a strategic agreement with Spectrum Health now known as Corewell Health, one of the leading integrated delivery system of IDMs to use our AI population health solutions. Corewell management reports that their team has successfully integrated the Nanox.AI 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 Nanox.AI solutions.
And with that, I'd like to now turn the call over to Ran Daniel to review our financial results. Ran?
Thank you, Erez. We reported a 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 increase was largely due to a goodwill 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 a net loss of $8.1 million in the comparable period. The increase was largely due to an increase of $0.4 million the sales and marketing expenses and $0.7 million in other expenses. Revenues for the third quarter of 2023 were $2.5 million and gross loss was $1.7 million on a GAAP basis. Revenue for the comparable period were $2.4 million and gross loss was $1.5 million on a GAAP basis.
Non-GAAP gross profit for the 3 months ended September 30, 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 3 months ended September 30, 2023 as compared to 46% on a non-GAAP basis in the comparable period.
Revenue from teleradiology services for the 3 months ended September 30, 2023, was $2.2 million with a 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 margin of approximately 11% on a GAAP basis for the 3 months ended September 30, 2023, as compared to 26% on a GAAP basis in the comparable period.
Non-GAAP gross profit of the company's teleradiology services for the 3 months ended September 30, 2023, was $0.8 million compared to $1.2 million in the comparable period, which represents a gross profit margin of approximately 36% on a non-GAAP basis for the 3 months ended September 30, 2023, as compared to 49% on a non-GAAP basis in the comparable period. The decrease in the gross profit margin on a GAAP and non-GAAP basis is mainly due to an increase in the cost of the company's radiology due to the decrease in the [indiscernible] rate and payments of incentive payments, which the company pays to the company's radiology engaging the reading during the overnight and we can shift.
During the 3 months ended September 30, 2023, the company started to generate revenue through the sales and deployment of its imaging systems, which amounted to $99,000 with a gross profit of $36,000 in a GAAP and non-GAAP basis, which represents a gross profit margin of approximately 37% on a GAAP and non-GAAP basis. Those revenue stems from the sales and deployment of our 2D systems in Africa. Research and development expenses for the first quarter of 2023 were $0.6 million as compared to [ $6.1 ] million for the comparable period in 2022. The decrease of $0.1 million was mainly due to a decrease in the cost of labor of $0.6 million, which was offset by an increase in the company's development of the ARC systems expenses in the amount of $0.5 million.
Sales and marketing expenses for the first quarter of 2023 were $1.1 million compared to $0.7 million for the comparable period in 2022. The increase was mainly due to our go-to-market efforts in the U.S. market in anticipation for the soft launch of our products in the U.S. 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. The decrease 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 of liability insurance premium in the amount of $0.3 million.
Go-to will 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 million and the Nanox.AI reporting unit in the amount of $0.4 million, largely due to the increase in discount rate and management estimates that it would take longer than we originally expected to generate the original growth of revenues, gross profit and positive operating cash flow in the AI and teleradiology business segment.
During the first 9 months of 2023, we had accrued $0.7 million for the future settlement expenses in connection with the SEC investigation. As previously discussed, the company and Ron Codeine, our Chairman of the Board of Directors have reached the settlement agreement with the SEC. During October 2023, the company paid in $650,000 in [indiscernible] penalties under this agreement.
Turning to our balance sheet. As of September 30, 2023, with cash, cash equivalents, [ fixed ] deposits and marketable securities of approximately $95.6 million and a $3.3 million loan from a bank. We ended the quarter with a property and equipment net of $45.1 million. As of September 30, 2023, we had approximately 57.7 million shares outstanding as 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 [ comparing ] to purchase of 2.1 million shares in a registered direct offering in consideration of the gross proceeds of $30 million and a net proceed of approximately [ $27.1 ] million and the issuance of approximately 255,000 ordinary shares to the former shareholders of USARAD under the amendment to the USARAD stock purchase agreement previously discussed.
With that, I will hand the call back over to Erez.
Thank you all once again for joining our call today and for your ongoing support of Nanox. We are making significant progress toward deployment of the Nanox.ARC system at scale in both the U.S. and other markets, and I'm looking forward to our Investor Day next week, and our Q4 update call in early 2024. If you would like to register for our Investor Day, we'll meet with the Nanox team while we are in New York area, please contact our Investor Relations partners at ICR Westlie, have a good day. Operator, please open the session to Q&A.
[Operator Instructions] Our first question will come from Jeff Cohen of Ladenburg Thalmann.
So a few questions from our end. You spoke about a government agency and some security screening, and this may be a stupid question, but is that for people? Or is it for goods such as luggage?
No. We indicated last time -- by the way, it's the same agency that acquired the first one, and the first trial was successful. So they now go to the next step. We don't know exactly what's the purpose of the usage. The only thing that we know that the indication that we got that it's a kind of defense. But we don't know exactly what it is for. So that's the -- that's what I can say.
Okay. Got it. And can you go back to your EU submission and notified body walk us through the time line there as all 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 U.S. now?
So in a way, we are kind of ahead of what we anticipated to do it next year. We have already submitted all the information, all -- the way it goes that the notified battle opens kind of a window or a site that you upload all the information. It's thousands of stages. Then once all the information is on, then you go to questions further in the further visits at the site, all kind of checks.
I don't want to give any -- we have been saying all the time that the regulation is -- in medical equipment is something that is always challenging and very complicated and has a lot of [ facets ], but we assume that with the quality of the information and the quality of the clinical trials that we have and with the quality of the [ ISO ] that we passed all of this, it will be reasonably faster than what [indiscernible] and I have an estimation, but I think that it would be better to wait until we get a better clarity when in 2024, we will get it.
Okay. Is it safe to say you're hopeful currently that you'll get a EU clearance in 2024?
Say from who's point of view -- from -- I would say that it would be reasonable to say.
Got it. Okay. And then lastly for us, could you go back to [ Varex ] facility in Utah and talk about their capabilities there as far as anticipated number of units that could be assembled and produced per month or per quarter or per year.
So as you know, [ Varex ] is the largest player in tubes for the imaging in the world from I was there a few weeks ago. We had a long the session of the kickoff both for the future road map of future breakthrough technologies [indiscernible] for products. And the other thing is the continuous supply. And 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 only -- we're going to continue with our strategy to ensure that we have at least 2 or 3 suppliers for each one of the components that we have. So this -- the tubes will be included, and they will be one of -- they will be a major supplier, but not the sole supplier.
Our next question will come from Ross Osborn of Cantor Fitzgerald.
So starting off with the New Jersey Imaging Center, would you provide some more color on the types of patients the senator manages and when we can expect the synergy to be up and running at scale?
Okay. Up and running right now. The second is at scale right now is what we are focusing on. And we do hope that it will be -- I would say, will be in scale probably by the end of the year or beginning of the next year in January. We are planning to open this site for demos for people who would be willing to visit and see. I would say also that this will be another solution that we have managed to create since right now in Israel, although we do business as usual and everything that we are planning, we are doing, some people or some visits that were supposed to come through Israel have postponed their visits. So they will be able to come to New Jersey and come and see and we're going to be there.
It's going to be served as the 626, for example, the one that we mentioned already were part of the installations that we have there. So kind of a friendly environment 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 installations before the year -- before the end of the year.
So basically, 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 and we are aiming to scan the first U.S. patients in the coming days. So we have all the necessary approvals, but this is something that we're planning to do. We have managed to get all the certification defining the physics that came to be there enable us to commence the scanning of patients, et cetera. So it's good. We are happy with it.
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? And then the amount of systems you have delivered to date.
I think that this is something that we will share -- we will shed some light in the Investors Day next week. Basically, now it's in line of -- I would say that it is in line with what we anticipated.
Okay. Got it. And then 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 the some placement cadence for 2024, given you're now commercial and have contracts with these geographies for hundreds of systems.
So you asked about next -- I think that we indicated already [indiscernible] to work to fulfill 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 approval. So part of them will be other countries in Africa, part of them will be in Latin America, and part of them will be in Asia and European countries, which are not dependent on EU. So that's the plan so far. But 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 give some more color on next week.
Our next question will come from Ben Haynor of the Alliance Capital Partners.
Good day gentlemen, can you hear me okay?
Good morning.
Great. So just looking to understand the Nanox.ARC revenue a little bit better for the quarter. It sounds like some of that came from sales. So if you could give me a sense of -- or give us a sense of 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. So you referred to the $99,000 that we recorded in the [indiscernible]
Correct, yes.
Okay. So those are actually stems from the sales revenue from our 2D imaging systems. The split is between 3 countries. The first one is Cameron. The second one is Morocco and the other one is Ghana. We're talking of 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.
Okay. I guess what I'm getting at, that's helpful. But what I'm getting at is, would you expect the revenue from those systems to pick up from the $99,000 level, the ones that are currently in those geographies?
Generally saying, yes, because some of the provided for demo and training purposes, and we expect that those units will become commercial use. Of course, we'll add more units on those ones. And of course, we expect to start generating revenue from the -- the revenue from the ARC systems itself in those regions and in the U.S. itself.
In these units, by the way, I would say that the numbers of scans per day, where their operational is actually the numbers are exceeding our original expectations.
Okay. That's good to hear and helpful. And then just on the Varex agreement, I was curious about the minimal annual amount on that. Is that something that's relatively easy to achieve? Or is it kind of a small fraction of the anticipated utilization? Or what's the right way to think about that?
From who's side?
From our point of view or from our point of view?
Both
First of all, we have not disclosed the details of the agreement yet, but will 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 for us in terms of the way we want to manage our business.
You have to remember that it's a long-term agreement. There is a buildup in agreement in a way that both sides can execute.
Okay. Got it. But I think that's all we have. So we'll see you guys at the Analyst Day next week.
This is all the time we have for questions as ending the Q&A session. I would now like to turn the conference back to Erez Meltzer for closing remarks.
So thank you all for being with us today. 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 shed and give some colors on technology, on the go-to-market in the U.S. and on the operational as well as the some clinical. The management team will present there. So see you next week, and thank you for being with us and the support of Nanox. Good day.
This concludes today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.