Nano-X Imaging: Optimism Is Untimely (NASDAQ:NNOX)

Nano-X Imaging overview

Investing in thrilling new applied sciences may be very rewarding. However it’s also a really dangerous endeavor. A terrific instance of this may be seen by a comparatively small enterprise by the title of Nano-X Imaging Ltd. (NASDAQ:NNOX). In essence, this firm is targeted on producing and promoting a brand new sort of X-ray know-how that additionally has a cloud part to it, whereby the photographs taken from the units in query are instantly uploaded to the cloud to be securely analyzed.

Though I used to be initially impartial on the corporate once I first wrote about it in March 2022, my sentiment rapidly turned bearish. I wrote two separate articles in regards to the firm from August 2022 by way of February of this 12 months that resulted in a “Promote” ranking for the agency. The primary of those identified the weak basic situation of the corporate, whereas the latter checked out a market overreaction that occurred in response to information that semiconductor large Nvidia (NVDA) owned a bit of the enterprise.

For the reason that publication of the primary bearish article that I wrote in regards to the firm, shares are down 51.1% at a time when the S&P 500 (SP500) is down 32.7%. And since my newer article, shares are down 31.6% whereas the S&P 500 is up 10.7%. You’d assume that, with such a big decline, the worth investor in me may lastly flip no less than impartial. However given how the corporate is presently trying, I do not assume it will be improper to stay bearish till one thing substantively adjustments for the higher.

Anticipate ache to proceed

Basically talking, issues haven’t been going significantly effectively for Nano-X Imaging. The newest knowledge that I had relating to the corporate once I wrote about it in February of this 12 months lined the third quarter of 2023. That knowledge now extends by way of the primary quarter of this 12 months. Given this, it is perhaps a good suggestion to the touch first on how the corporate ended 2023 earlier than transferring into outcomes for the primary quarter of this 12 months.

For 2023 as a complete, there have been some enhancements, however not sufficient to warrant any actual diploma of optimism. Income for the 12 months was solely $9.9 million. That was up solely marginally from the $8.6 million reported for 2022. For a corporation that, in the present day, has a market capitalization of $395.3 million, that is nonetheless a ridiculously small quantity of gross sales.

As has traditionally been the case, nearly all of the agency’s income got here from its teleradiology providers. Administration attributed the rise from $8.2 million to $9.5 million to the enterprise gaining extra contracts with hospitals and imaging facilities, and likewise due to elevated charges that it determined to cost present prospects. The remainder of its income got here from a mixture of AI options, scan providers, and gross sales involving its Nanox.CONNECT know-how.

On the underside line, issues improved, however not by sufficient to warrant any actual optimism. The agency’s internet loss went from $113.2 million to $60.8 million. There have been some vital price financial savings, corresponding to a discount usually and administrative prices from $41.3 million to $24.3 million. However a lot of the change got here from non-cash objects corresponding to a discount in impairment fees from $50.9 million to $7.2 million, in addition to to a change in contingent earn out legal responsibility. The corporate’s precise price of income declined from 180.2% to 166.6%. However that’s nonetheless an astronomical operational price for the enterprise. Different profitability metrics improved for probably the most half. The one exception was working money circulate, which went from unfavorable $43.4 million to unfavorable $44.8 million. If we modify for adjustments in working capital, nevertheless, we’d get an enchancment from unfavorable $54.8 million to unfavorable $37.3 million. Lastly, EBITDA went from unfavorable $59.7 million to unfavorable $47.7 million.

For the first quarter of 2024, there was a continued enhance in income, with gross sales climbing from $2.4 million to $2.6 million. However earnings and money flows stay an issue. The corporate’s internet loss expanded from $11.8 million to $12.2 million. Working money circulate did enhance from unfavorable $10.7 million to unfavorable $9.4 million. And on an adjusted foundation, it went from unfavorable $11.9 million to unfavorable $8 million. Lastly, EBITDA for the corporate improved barely from unfavorable $13.8 million to unfavorable $10.2 million.

Outdoors the basics, you will need to consider latest updates for the corporate. In spite of everything, traders will not be banking on present efficiency persevering with. They’re banking on the potential for speedy progress in some unspecified time in the future. What this may in the end appear to be is anyone’s guess. I say this as a result of the corporate has a historical past of falling far in need of expectations. You see, once I first wrote in regards to the firm in March 2022, I identified how the agency’s purpose was to deploy round 15,000 of its Nanox.ARC tomosynthesis X-ray units by the top of 2024. In its first quarter earnings name, for this 12 months, the corporate claimed to have round 20 of its methods within the US, with solely 13 of these having been put in. It will take a miracle for the corporate to come back even near its goal from two years in the past.

This isn’t to indicate that there aren’t some constructive issues for traders to depend on. The very fact of the matter is that this can be a massive and rising market. The worldwide medical X-ray market, for example, was estimated to be value about $14.2 billion final 12 months. It is anticipated to develop to roughly $15 billion this 12 months earlier than climbing to $23.9 billion by 2032. That works out to an annualized progress fee of about 6%. The corporate obtained FDA 510(okay) clearance, indicating that the product is protected as marketed and efficient, again in April 2023. That included not solely the Nanox.ARC know-how, but in addition its corresponding Nanox.CLOUD platform that the photographs are then securely analyzed on.

The rationale why I convey up the worldwide market is as a result of Nano-X Imaging aspires to be a world firm. The agency already has a presence in elements of Africa, Latin America, and Asia. As an illustration, the corporate put in one among its items on the College of Ghana Medical Middle, with its know-how receiving native regulatory clearance. In Latin America, the corporate is targeted on Mexico, Peru, and Chile. Different nations that it has methods working in embody Morocco, Cameroon, and Israel. And thru a collaboration with AhealthZ, a well being care distribution firm, in addition to SCL Science, the agency introduced that it’s getting into into the market in South Korea.

One of many actually thrilling elements of the corporate’s know-how is what it’s doing on the AI entrance. Even earlier than AI grew to become common, administration was selling what it termed Robodiology. In essence, the corporate can make the most of AI-based options to boost photos which might be constructed from its know-how to enhance the power to diagnose affected person points. Earlier this 12 months, the corporate introduced that it had entered into two separate agreements relating to these initiatives. This included a multi-year contract with Covera Well being to supply that firm with three of its AI options (centered round cardiac, bone, and liver imaging), and an settlement with Dandelion Well being to assist that firm in offering its purchasers with further AI insights.

Add on high of this extra submissions made to the FDA for numerous approvals, in addition to continued progress prospects centered round different belongings like Second Opinion (a web-based medical platform aimed toward serving to to supply sufferers with second opinions), and I can perceive why traders is perhaps bullish in regards to the firm.

Whereas all of this sounds thrilling, what’s miserable is that none of it has actually proven up, no less than to not any vital extent, on the corporate’s high or backside traces. Gross sales are barely transferring increased and are extremely low for a enterprise of this market capitalization. The agency continues to generate vital internet losses and money outflows. Admittedly, the corporate does have $69.7 million in internet money on its books. That does give it some gasoline for now. However in case you take a look at the chart beneath, you may see how a lot money circulate the corporate would wish to generate simply to be pretty valued at worth to working money circulate multiples of both 10, 15, or 20, in addition to at EV to EBITDA multiples of both 10, 15, or 20.

Even when we’re beneficiant, and assume a excessive buying and selling a number of, these numbers are a world away from what the corporate is presently reaching. There’s additionally the truth that, on June seventh, the corporate entered into a brand new ATM (At-The-Market) providing for inventory whereby it may situation as much as one other $100 million value of shares. At the moment, shares had been $8.10. At the moment, they’re at $6.84. If the agency had been to situation $100 million value of items on the present worth, we’d be dilution of about 20.2%. So along with coping with an organization that’s hemorrhaging money, and that gives up super uncertainty relating to true scaling, there’s the prospect of a fabric quantity of dilution impacting shareholders as effectively.

Takeaway

At first look, Nano-X Imaging seems like an thrilling firm that would supply traders some good upside. If administration can truly begin reaching progress, then it isn’t unthinkable that this might flip into a superb alternative.

However at current, the basics inform a unique story. Nano-X Imaging Ltd.’s lack of ability to come back even remotely near expectations from two years in the past means that traders ought to be cautious on the subject of counting on the emotions that administration have made public. Given all of this uncertainty, I feel that retaining the corporate rated a “promote” is acceptable at the moment.