Nano-X Imaging Ltd’s Image Is Fuzzy And Worrisome (NNOX)

We are bearish on Nano-X Imaging Ltd. (NASDAQ:NNOX). In our opinion, there is no value potential for retail investors. We see the stock as a casino play.

The Company & Industry

Nano-X Imaging Ltd., or Nanox per its website, promotes itself as a disruptor of the global medical imaging industry. Nanox has X-ray imaging devices supposedly developed from television tube technology. The images are sent for reading by the company’s transmission software. The vision is to dramatically lower costs and deliver feedback to doctors faster. It promotes itself as the Robinhood of patient care in medical equipment deserts.

Founded in 2011, Nano-X Imaging went public in August 2020. Headquarters are in Israel. 8.7% of shares are owned by individuals. The founder owns 4.78%. Another +26% are owned by institutions and corporations. 65% is owned by the public.

The top 10 stockholders include legacy investment houses. Each increased the number of its shares, since last October. Hedge funds’ holdings have been spotty. In Q4 ’21, when the share price was over $20, 11 hedge funds owned shares. By Q3 ’22, only 6 were shareholders.

In 2021, about half of the medical imaging market was hospital-based. Diagnostic imaging centers are the next busiest with ~40% of the market. Worldwide, medical imaging is valued at around $30B annually. Its U. S. CAGR rate for growth is almost 5% from 2022 to 2030.

The pace is picking up. U.S. Federal spending and other governments intend to expand access with more equipment; one drawback is the skilled radiological labor shortage of technicians and radiologists. Imaging is saving Medicare $18B over several years; it is considered preventive and early intervention medicine. The industry is attracting investors but competitors, too. We believe it is why Seeking Alpha assigns good Factor Grades for Nano-X Imaging momentum in the last 6 months.

Picture Imperfect

The IPO happened propitiously in the age of corporate disruptors popularized by meme marketers. Within six months, the share price soared to $85. It dived to ~$6.41 over the next few years. It bounced around between $7 and $12 last year and in 2023.

The last earnings report released in November for Q3 ’22 and subsequent comments by officers are revealing. There is a lot not said. The Q3 GAAP EPS of -$0.37 beat estimates by $0.05. Revenue missed by $0.38M. Aside from this last quarter, Nanox consistently missed 2022 quarterly earnings estimates:

• June ’22: -0.38 vs -0.23
• March ’22: 0.41 vs -0.22
• December ’21: 0.44 vs -.0.37

We forecast higher revenue over the next few quarters. Demand and access to imaging services are going to increase. Doctors are ordering more imaging to make informed diagnoses. But we expect an EPS Q4 loss of -$0.55. The FY ’22 loss will be -$1.55 or more. The next earnings report will be released in March 2023.

Q3 ended with the company holding $88M cash; equivalents and marketable securities made a total of $117.1M. The market cap is now $488.76M with the 2021 Zebra, down from $3.5B prior to the acquisitions. Debt is $4.92M, as of last September. By issuing more shares, the company has kept its debt-to-equity ratio at 1.5%. Nevertheless, short interest is a whopping 12.52%.

Total assets were last reported to be $90.6M. Liabilities were $43.6M as of September 30, 2022. Working capital of ~$47M. As of December 31, 2021, assets were $94.9M. Total liabilities totaled $52.8M. Working capital was $42.1M. Nano-X had cash flow from operations of -$30.5M.

The Future

The company spends more money on R&D and SG&A while reportedly cutting sales and marketing. It appears to us that the bulk of past revenue and earnings are from consolidation with the acquired subsidiary Nanox AI (formerly Zebra Medical Vision). We think a deeper dive into Nanox AI ought to be part of the management reports.

The latest revenue increases probably come from Nanox AI. Q3 ’22 was $2.4M compared to $2.2M in Q2 ’22 and $1.8M in the first quarter. The sales created a $0.6M profit on a GAAP basis. A portion of the increases come from increases in fees charged to users of Nanox AI subscriptions. The SG&A pop from~$8.2M to $10.6M includes legal fees to thwart a class-action litigation inquiry.

Risks Are Growing

Investors face what we consider severe risks.

First, Nano-X Imaging has no impactfully commercialized products coming to market as the company repeatedly forecasts. The short interest rate is now over 12.5%

A second risk for investors is the money being spent on a Korean chip-making venture that was supposed to be in production by mid-year 2022. It is a highly competitive industry and off-beat for Nano-X. The company spent $7.4M last quarter to purchase property and equipment. It seems a diversion from a focus on the main mission of the company and runs a serious risk of draining cash. We have written articles for Seeking Alpha about the tightly-knit chip industry.

Third, Nanox acquired 2 companies by diluting shareholders in the last 5 years. It bought Zebra Medical Vision imaging company, according to recent SEC filings, for $100M in ordinary shares plus deferred more at closing and others when milestones are met. 89,286 additional ordinary shares were issued to the former shareholders of Zebra because a milestone hit post-closing. Also, there were changes in share price between the signing of the agreement and the closing of the merger. Zebra Medical Vision reported $11M in revenue in FY ’21.

Nanox AI’s solutions analyze millions of clinical imaging data in real time. They detect medical conditions with a wide range of products. Income flows from fixed annual fees that Nano-X has increased. Nanox AI holds multiple regulatory approvals including FDA and CE marks. The FDA gave the subsidiary clearance to use its AI system to spot compression fractures in the spine and low bone density. It previously appeared on Fast Company’s Top-5 AI and Machine Learning list.

Another risk is the continuing delay Nano-X Imaging is experiencing for FDA approval of its bread-and-butter Nanox ARC imaging scanner.

Why Worry

Nano-X investor relations are not responsive to our queries. The Nigerian pharma company that supposedly has 1,000 imaging units on order for almost 2 years has not responded, nor do officials in Israeli hospitals where the company allegedly installed ARC. The latest communications from management to stakeholders do not discuss these issues.

The last risk we want to point out is public relations are growing worrisome. Globes business review attributes much of the company’s stock success to “phenomenal public relations.” Globes reported the rollercoaster ride of the share price is “among other things due to two reports by short-seller investment firms that claimed Nanox’s device (ARC) did not work and that the distributors who has signed agreements with it were not really distributors.” More doubts are arising about the viability of Nano-X’s advanced imaging system. The nanxkorea.com site is woefully lacking dated information and detail.

We give the stock failing grades for valuation and growth in the near term. Nano-X Imaging might report profit if it invests in marketing and development of its acquisitions but we do not expect commercially viable products from the mother ship. Management is, however, a master at stroking demand for its stock.