SINTX Technologies, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Financial statement amounts are in thousands of dollars, except per-share and share data.
Business context
SINTX develops and manufactures silicon nitride ceramics for medical and non-medical uses. Following its October 2018 sale of its retail spine business to CTL Medical, SINTX retained its silicon nitride manufacturing, research and development, and related intellectual property, and became CTL’s exclusive OEM provider of silicon nitride products. The company says it is pursuing OEM and private-label opportunities beyond spine products.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Product revenue | $167 | $0 | $264 | $0 |
| Gross profit / margin | $34 / 20% | $0 | $52 / 20% | $0 |
| Operating expenses | $1,556 | $1,902 | $3,304 | $4,133 |
| Operating loss | $(1,522) | $(1,902) | $(3,252) | $(4,133) |
| Net loss | $(730) | $(2,312) | $(2,359) | $(5,710) |
- Cash flow: For the six months, operating activities used $2,979; investing activities provided $680, mainly from note-receivable collections; financing activities provided $44. Cash declined $2,255 to $3,192.
- Balance sheet at June 30: Current assets were $5,083, including cash of $3,192 and current notes receivable of $1,399. Current liabilities were $2,172; total liabilities were $4,837; stockholders’ equity was $6,440. Total assets were $11,277.
- Lease obligations: Operating lease liabilities totaled $2,637 ($587 current and $2,050 long-term). The company reported no material debt balance in the presented balance sheet; the related-party $2.5 million loan was assumed by CTL Medical in the business sale.
- Receivable from CTL: The note receivable from the sale had a net carrying value of approximately $4.3 million at June 30. The filing describes $1.4 million of cash flows from July 2019 over ten months and $3.5 million over the following eighteen months.
Changes versus prior period
- Reported revenue and gross profit were higher than in 2018, but the comparison is not like-for-like: 2018 spine-business results were classified as discontinued operations after the October 2018 sale. The discontinued business reported $4,330 of revenue in the first half of 2018.
- Six-month operating expenses fell 20%, with lower R&D and general and administrative costs partly offset by higher sales and marketing expenses. Management attributed the lower R&D costs mainly to reduced payroll, and lower G&A primarily to reduced accounting and legal costs.
- Six-month net loss narrowed to $2,359 from $5,710. The improvement reflects lower operating expenses and more favorable other income, including reduced interest and extinguishment costs and a $610 gain from the change in fair value of derivative liabilities. These fair-value movements are not equivalent to operating cash generation.
- Cash used in continuing operations fell to $2,979 from $5,532. Financing cash flow was only $44, versus $14,387 in the prior-year period, when substantial offering proceeds were received.
Outlook, risks and unusual items
- Going concern: Management expects continued operating losses and operating cash use. The company says it must increase sales and/or obtain additional financing; financing is uncertain, and the filing states that these uncertainties create substantial doubt about its ability to continue as a going concern.
- Funding and dilution: A June 2019 ATM agreement authorized up to $1.6 million of stock sales. SINTX sold shares for net proceeds of approximately $397 during the quarter; the filing reports differing remaining-capacity figures of $1.1 million and $1.2 million in separate disclosures. Further equity financing may dilute existing holders; debt financing may include restrictive covenants.
- Commercial outlook: SINTX depends on CTL Medical for its current spine-product OEM revenue and has a ten-year exclusive sales agreement with CTL. Management seeks additional OEM/private-label customers and expansion into other applications. It expects gross profit to decrease as OEM and private-label partnerships expand, citing lower margins than the former retail model, and expects additional R&D spending for product development.
- Lease and other commitments: In June, the company amended its facility lease, extending it through 2024 while reducing leased space. It recorded an approximately $120 loss associated with the amendment. SINTX also estimates up to approximately $500 of sterilization and repackaging costs for certain inventory sold to CTL, under an obligation extending to September 30, 2020.
- Accounting and governance: A July 26, 2019, 1-for-30 reverse stock split occurred after quarter-end; share and per-share data in the statements were retroactively adjusted. Management reported disclosure controls were effective at June 30, but also described material weaknesses in internal control over financial reporting identified as of December 31, 2018, involving review of complex accounting and monitoring controls.
- No formal earnings or revenue guidance is provided. Management says it is generating scientific and clinical data and pursuing opportunities beyond spinal fusion.
Investor verification checklist
- Confirm the ATM’s actual remaining capacity and any subsequent share sales, given the differing amounts disclosed.
- Review cash burn, cash runway, and progress toward additional financing or sustainable customer revenue.
- Assess CTL Medical’s sales, payment performance on the note, and SINTX’s customer concentration.
- Distinguish recurring operating performance from derivative fair-value gains and other non-cash or non-operating items.
- Track remediation of the reported internal-control weaknesses and the estimated sterilization/repackaging obligation.