NNOX - Nano-X: Next Few Quarters Will Be Critical For Adoption

2023-12-14 14:28:47 ET

Summary

• Nano-X Imaging received FDA 510(k) clearance for its multi-source Nanox.ARC scanner, disproving claims of fraud and sparking a rally in shares.
• Despite FDA approval, Nano-X's stock has fallen 53% since October, as the focus shifts to sales execution and deployment.
• Investors should now closely monitor how the company delivers on its sales execution milestones in the coming quarters since the company can no longer blame regulatory approval for missed milestones.

About a year ago, I wrote a cautious follow-up article on Nano-X Imaging Ltd. ( NNOX ), advising investors to stay on the sidelines until we get more clarity on the FDA approval process for its multi-source Nanox.ARC scanner. After years of delays (the company was initially supposed to seek FDA approval in 2020), I was not prepared to give the company the benefit of the doubt until I saw actual milestones delivered.

To the company's credit, Nano-X did receive FDA 510(k) clearance for its much anticipated multi-source Nanox.ARC scanner in May, sparking a sharp rally in NNOX shares. NNOX was able to disprove many skeptics like Muddy Waters and Citron who did not expect NNOX to ever receive FDA approval.

However, after the initial approval euphoria (to which NNOX took full advantage by issuing more shares), Nano-X has come back to earth, fully erasing all of the FDA approval gains. In fact, since my last article in October, NNOX's stock is down a stunning 53%, inclusive of the May-July rally (Figure 1).

With FDA approval in hand, what is holding Nano-X back? Are the shares a good buy now, after being significantly de-risked?

Brief Company Overview

For those not familiar with the Nano-X story, Nano-X Imaging Ltd. was a hot IPO in 2020 that promised to deliver a revolutionary low-cost x-ray scanner called the multi-source Nanox.ARC. Unlike traditional cathode-ray tube-based scanners, the multi-source Nanox.ARC scanner was designed using silicon-based Micro-Electro-Mechanical Systems ("MEMS") technology that promised to be much lower cost than existing x-ray machines (Figure 2).

The most important piece of the Nano-X puzzle is the technology used to produce the X-ray images. Nano-X appears to be the only company focused on MEMS technology whereas other companies looking to disrupt X-ray imaging are mostly focused on Carbon Nanotube ("CNT") technologies (Figure 3).

Theoretically, MEMS is silicon-based and can be mass-produced like the silicon microchips that power our phones and computers. However, to date, Nano-X still has not begun mass production of its X-ray sources and scanners.

Regulatory Approvals Have Taken Longer Than Expected

Perhaps the biggest struggle with the Nano-X story has been its tortuous regulatory approval process. Initially, when Nano-X went public in 2020, the company was expecting to breeze through regulatory approvals for its multi-source scanner by Q4/2020:

We will continue to optimize and develop further features of the Nanox.ARC, and plan to submit an additional 510(k) application under the Third Party Review Program with respect to the multiple-source Nanox.ARC during the fourth quarter of 2020, which, if cleared, will be our commercial imaging system.

-Quote from F-1 filed during IPO

However, Nano-X did not receive FDA clearance on the multi-source scanner until recently in Q2/2023.

Similarly, when Nano-X announced agreements to ship imaging systems to African countries like Ghana and Nigeria in 2021, investors and analysts were expecting rapid deployment of systems, since these developing nations are in massive need of medical imaging technologies and services.

However, Nano-X only began recording revenues from Africa in the most recently completed third quarter. Furthermore, not only was the amount paltry, $99,000 for the quarter, but it actually came from the sale and deployment of Nano-X's 2-D systems, not the multi-source scanner!

As recently as the second quarter, Nano-X still has not received regulatory approval for human scans in both Nigeria and Ghana. It is unclear from the company's third quarter disclosures whether these approvals were received.

Deployment In U.S. May Be A Tough Slog

For the important U.S. market, Nano-X is employing a 2-pronged approach. It will first go the traditional capex route by selling systems to clinic practitioners. In addition, Nano-X will also roll out a scan-as-a-service ("SAAS") model where Nano-X will charge a fixed fee per scan (Figure 4).

Although the SAAS model may help with adoption, it shifts the capital burden to Nano-X as it must finance the production of the systems with uncertain revenues to be recorded in the future.

Looking at Nano-X's balance sheet, with less than $100 million in cash and marketable securities vs. a quarterly cash burn of ~$10 million (-$32 million in cash flow from operations so far in 2023), it is unclear how Nano-X can support a capital intensive roll-out of the SAAS model without raising significantly more capital (Figure 5).

Monitor The Upcoming Quarters For Execution

With most of the regulatory hurdles completed or near completion, the company can no longer blame a slow regulatory process for its failure to meet financial milestones. For me, I will be looking for a few things in the next 12 months.

First, I would be watching closely to see the deployment roll-out in Africa. Based on the initial contracts alone, Nigeria should see 1,000 systems, Ghana 350, and Morocco 270 systems. In the Q2/2023 earnings call, the CEO said that:

Ross Osborn

And then following up on this, when can we expect for you to deliver more systems to your commercialized operating countries? I believe Nigeria calls for 1,000, Ghana for 350, and Morocco for 270 systems.

Erez Meltzer

First of all, as soon as we get the final approvals. But this basically will start in the next 2 quarters for sure.

However, not much activity was recorded in the most recent third quarter. So a lot of expectations will be riding on the current fourth quarter if Nano-X is to be held accountable.

Furthermore, for the U.S. roll-out, since Nano-X has received FDA clearance to market the multi-source scanner, investor attention will now turn to how quickly Nano-X can sign up customers, as well as manufacture and deploy systems.

To help with deployment, Nano-X has signed a supply agreement with Varex Imaging Corporation ( VREX ), one of the leading global suppliers of imaging products, to supply Nano-X with X-ray tubes for its imaging systems. Nano-X has also signed an evaluation agreement with 626 Opco, a leading U.S. technology & equipment management company, to provide services for its scanners including warehousing, installation, training, maintenance, and customer support (Figure 6).

Finally, speaking of manufacturing, the company has been very tight-lipped on the most basic financial figures like how much it costs to manufacture each system and how many systems it can produce and assemble with its current facilities. I will be looking for more details on these important topics in the upcoming quarter and annual reports.

Conclusion

In summary, as Nano-X received FDA clearance for its multi-source scanner in May, the Nano-X story is changing from regulatory approval to sales execution. After the initial euphoria of FDA approval, now comes the tough grind of manufacturing and delivering systems to customers around the world.

If Nano-X is successful in its execution, the shares could be an incredible bargain, trading at only a $360 million market cap compared to $5 billion when it became public. However, history is also littered with many promising medical technology companies that failed to gain adoption even with interesting technologies.

I believe the company's execution in the next 12 months will be critical in whether it will be a success or failure. I personally would like to see more evidence of strong sales execution before committing capital, but I can certainly see the upside for NNOX. I rate the company a hold for now.

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