Nanox Reinvents X-Ray Machine, Files IPO

If your job is to screen hundreds of resumes to find the perfect candidate, it’s impossible to compare them all, so you look for red flags. Something as simple as a typo will land your resume squarely in the circular filing cabinet because you clearly don’t pay attention to details. Similarly, when you’re assessing hundreds of tech stocks to find the best ones to invest in, you start by looking for risks you’re not willing to take.

It’s rare that we’ll invest in companies with no revenues because they haven’t shown what venture capitalists refer to as “traction.” Demonstrating product-market fit is critical for startups, and equally critical for publicly traded stocks. When you invest in a company with no revenues, you’re investing in the person who is promising those revenues. In the case of Nanox, that man is Ran Poliakine.

About Nanox

Click for company website

We first came across this company back in March when we published a piece titled Nanox Uses Nanofabrication for Digital Medical Imaging. In that article, we talked about serial entrepreneur Ran Poliakine who says he has made “social impact my life’s purpose.” Now, he’s planning to democratize access to x-ray machines with his own lightweight and mobile digital X-ray system that undercuts other comparable scanning systems using the powers of nanotechnology.

Credit: Nanox

The machines send everything up to the cloud to be analyzed. Nanox plans to sell its hardware at low-cost or no-cost in exchange for a never-ending revenue stream from selling scans until the end of time. Now, they’ve filed for an initial public offering (IPO) with plans to raise about $102 million. Since they’re a pre-revenue company, we’re primarily interested in looking at the risks they’ve detailed in their filing document. First, here’s their master plan:

We introduced a working prototype of the Nanox.ARC in February 2020 and, if cleared, we plan to deploy the first Nanox.ARC in the first half of 2021. If cleared, we are targeting a minimum installed base of at least 1,000 Nanox Systems in the second half of 2021 with the goal to finalize deployment of the initial 15,000 Nanox Systems by 2024.

Credit: Nanox F-1 Filing

Nanox plans to move from a working prototype to 1,000 deployed systems by the end of next year. As the famous American philosopher Mike Tyson once said, “everybody has a plan until they get punched in the mouth.”

Regulatory Risks

As risk-averse investors, we don’t like volatility. One reason biotech stocks are so volatile is because there is so much regulatory risk that cannot be hedged away. If you need a drug approved, the regulatory agency you’re dealing with – the FDA in most cases – has you by the cojones. In the case of Nanox, they’re in the process of navigating the regulatory process.

With a prototype emerging just six months ago, Nanox technology has not been tested over extended periods of time. Consequently, no meaningful data exists regarding the durability, safety, and effectiveness of their X-ray source over extended periods.

In January 2020, Nanox submitted a 501(k) application for a single-source version of the Nanox.ARC. (We’re not sure what “single-source” means, so maybe some kind MarComms person at Nanox can edify us.)

A 510(k) is a premarket submission made to FDA to demonstrate that the device to be marketed is as safe and effective, that is, substantially equivalent, to a legally marketed device (section 513(i)(1)(A) FD&C Act).

Credit: FDA

In March 2020, they received an “additional information request” from the reviewer which asked Nanox “to provide additional data and other information to complete the application and to address certain deficiencies.” Nanox believes they “successfully resolve the deficiencies identified in the letter,” but also notes that this is a back and forth process that can require multiple iterations. Assuming approval does happen, there could be certain stipulations put in place that affect timeline and/or costs.

Nanox also mentions that the software component – Nanox.CLOUD – may require separate regulatory clearances or approvals. Since Nanox is working with third-party medical imaging firms, we can assume they chose vendors with algorithms that have already been approved, so this could be less of a concern.

Building the Machines

If and when FDA approval takes place, the next milestone is producing the machines. If Nanox succeeds in raising the $102 million from the IPO, they plan to use that money, along with cash on hand, to build 12,000 machines at an estimated cost of between $108 million to $159 million ($9,000 to $13,250 per unit). The manufacturer is a subsidiary of Foxconn, presumably a very capable one, but has yet to manufacture a single machine. This unknown also represents risk.

If they do succeed in manufacturing the machines at a cost that matches their estimates, they then plan to sell them into various regions around the globe, each of which will also require regulatory approval.

The Eight Agreements

Nanox has entered into eight agreements to deploy 4,520 Nanox Systems in eleven regions. The agreements stipulate that these parties will “provide a minimum number of scans per year (based on 7 scans per day and 23 days per month) on a pay-per-scan basis at a minimum of $14 per scan, and to pay a minimum annual fee (including payments to our partners) in the amount indicated in the table below.”

Credit: Nanox F-1 Filing

Back of the napkin math tells us that each machine will generate $27,048 a year based on these agreements (12 X 7 X 23 X $14). That’s a run rate of about $286 million for 4,520 machines. If all 12,000 machines they plan to build with the proceeds of the IPO are deployed in a similar fashion, that extrapolates out to a run rate of about $760 million per year. It’s easy to see the potential here, but the 44 pages of risks outlined in their SEC filing represent all the things that could possibly impede their aggressive plan. Included in those risks is the possibility that the product and business model may not be what the market wants, even though the economics make sense on paper.

Running Lean

One last thing to note. This is a company with 27 employees, 40% of whom are in G&A.

Credit: Nanox

Sure, these days it’s all about outsourcing to third parties who specialize in their own areas of competence. What’s concerning is how much they’re reliant on external parties to execute. The filing also noted that “most members of our management team have limited experience managing a publicly traded company,” which makes this seem more like an impulse filing as opposed to something they’ve been staffing for all along.

Conclusion

We’re risk-averse investors that err on the side of caution. Sure, this could be the next Dexcom. If it is, we won’t kick ourselves because we didn’t get in on the ground floor. Once regulatory approval happens and revenues start trickling in, we’ll take another look at Nanox. For now, we’re on the sidelines rooting for Mr. Poliakine and hoping he succeeds in helping the two-thirds of the world’s population that have no access to medical imaging systems.

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4 thoughts on “Nanox Reinvents X-Ray Machine, Files IPO

    1. Thanks for commenting Stan.

      We saw that come across the wire and hadn’t read it. Just gave it a quick read and they seem to have uncovered some pretty damning evidence that things may be much worse than they appear. We’ll look forward to reading their follow-up piece.

      On a similar note, we were actually thinking about Citron’s track record and wondering how accurate they’ve been historically when it comes to these calls. We don’t often cross paths, but Intrexon comes to mind as a stock they were bearish on and we reached that same conclusion, exiting our position when the CEO started talking about how many apple slices they were going to sell. (Intrexon has since renamed and pivoted.)

      Especially give Citron’s accusations, we would avoid this stock altogether. Shorting in the face of the crazies over at Robinhood isn’t advised.

      1. Thanks for you reply. I was thinking more about it. To me NanoX business model makes a lot of sense.
        Obviously critical item will be getting FDA approval. They expect to get that approval in H1 2021.

        One issue I see is company’s huge valuation. My guess is the company will need to raise money many times before it is profitable. The road to success will be long. Currently they only have just over 20 employees – they will need to build much larger workforce.
        So early investosts in NNOX may get heavily dilluted.

        Company presentation – September 2020:
        https://investors.nanox.vision/static-files/3b7ec273-6500-47da-8907-dd07c3447069

        1. Thank you for the comments Stan.

          The nicest thing about red flags is they mean you don’t have to work anymore. It’s not like during an interview when a candidate throws off a red flag in the first five minutes and you have to sit through the remaining 25 asking questions you could care less about. Not with stocks. When a stock shows us a red flag, we move on. When Citron starts finding red flags, we really move on.

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