SINTX Technologies, Inc. (formerly Amedica Corporation) — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unless stated otherwise, amounts are in millions of dollars. The company develops silicon nitride ceramics for medical and industrial uses. Its October 1, 2018 sale of the commercial spine business occurred after the quarter-end; accordingly, spine results are presented as discontinued operations.
Financial highlights
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Continuing product revenue | $0 | $0 | $0 | $0 |
| Spine revenue, discontinued operations | $1.844 | $2.956 | $6.174 | $8.793 |
| Spine gross profit / margin | $1.415 / 77% | $1.548 / 52% | $4.700 / 76% | $6.002 / 68% |
| Continuing operations loss | $(2.967) | $(1.487) | $(8.634) | $(3.773) |
| Net loss | $(3.247) | $(2.069) | $(8.958) | $(4.284) |
| Net loss attributable to common stockholders | $(10.888) | $(2.069) | $(23.933) | $(4.284) |
Common-stockholder losses include deemed dividends and accretion on Series B preferred stock of $7.641 million in Q3 and $14.975 million year to date; these amounts are distinct from reported net loss. Basic and diluted loss per share attributable to common stockholders was $0.87 for Q3 and $3.28 year to date, compared with $0.68 and $1.47, respectively, in 2017.
- Operating expenses and unusual items: Continuing operating expenses were $7.365 million in Q3 and $11.499 million year to date. These included a $6.162 million goodwill impairment recorded in Q3; goodwill was fully impaired. The impairment drove the higher operating loss.
- Other income: Other income was $4.398 million in Q3 and $2.865 million year to date, principally reflecting favorable derivative-liability fair-value changes ($4.480 million and $6.500 million, respectively). These noncash valuation gains partly offset operating losses. Year-to-date other charges included $1.252 million for extinguishment of derivative liabilities, $0.682 million in offering costs, and $0.340 million for debt extinguishment.
- Cash flow: Nine-month operating cash use was $7.953 million, versus $4.396 million in 2017; investing cash use was $0.194 million versus $0.917 million. Financing provided $14.401 million versus $1.214 million. Cash rose by $6.254 million to $6.793 million.
- Balance sheet at September 30: Current assets were $10.956 million and current liabilities $5.456 million; total assets were $14.397 million and total liabilities $6.307 million. Stockholders’ equity was $8.090 million. No continuing debt was presented as a separate balance-sheet debt line; the $2.5 million related-party note was classified within liabilities held for sale. Derivative liabilities totaled $2.071 million.
Changes versus prior comparable periods
- Spine revenue fell 38% in Q3 and 30% year to date. Management attributed the decline to loss of surgeons and renegotiated hospital pricing. Silicon nitride spine revenue fell 46% in Q3 and 43% year to date.
- Spine gross margin increased to 77% in Q3 and 76% year to date, mainly because 2017 cost of revenue included obsolete-inventory write-offs. Gross profit nevertheless declined year to date with lower revenue.
- Year-to-date net loss more than doubled. Lower R&D expense was offset by higher G&A, the goodwill impairment, and other items. Q3 net loss also increased year over year.
- Operating cash use increased by $3.557 million year over year, which management linked mainly to the larger loss and working-capital movements.
Liquidity, transactions, outlook, and risks
- The company stated that recurring operating losses and cash use, together with uncertainty about sales growth and additional financing, create substantial doubt about its ability to continue as a going concern. It expects continued operating losses and cash use and said profitability, positive operating cash flow, and future financing are uncertain. Cost reductions and capital-raising alternatives were under consideration.
- In May 2018, the company raised $15.0 million gross through an offering of Series B preferred stock and warrants, and used proceeds to repay debt, including amounts owed to L2 Capital and MEF/Anson. It also received approximately $1.4 million gross from a March warrant repricing and exercise transaction.
- On October 1, the company completed the sale of its commercial spine business to CTL Medical for stated consideration of $8.5 million: a $6.0 million noninterest-bearing note receivable and assumption of the $2.5 million related-party note. The filing describes expected collections of $2.5 million over the first 18 months and $3.5 million over the following 18 months. Management estimated a sale gain of approximately $1.2 million for recognition in Q4 2018. SINTX estimated potential sterilization and repackaging costs of approximately $0.5 million.
- SINTX retained its silicon nitride biomaterial R&D, manufacturing, and related core intellectual property, and agreed to a 10-year arrangement to supply CTL with spinal silicon nitride products. Management described plans to pursue OEM and private-label opportunities in other medical markets; no quantified financial guidance was provided. The filing notes that spinal OEM sales will have only one customer.
- The May preferred-stock conversion price was adjusted to $0.48 by September 7. The filing reported approximately 22.9 million potentially dilutive securities at September 30 and 21.042 million common shares outstanding then; 21.794 million were outstanding November 9. These instruments and conversions create material dilution risk.
- The company reported no pending or threatened legal proceeding expected to have a material adverse effect. Management said disclosure controls were effective at quarter-end, following prior-period conclusions that they were ineffective and the engagement of advisors to improve controls.
Important facts for investors to verify
- Whether the CTL note receivable is collected on schedule, and whether the stated $8.5 million consideration, debt assumption, and estimated sale gain are realized as expected.
- Cash runway and financing needs in light of the going-concern warning, continuing cash burn, and the company’s ability to secure additional funding.
- Post-sale revenue and margins under the CTL OEM relationship, including customer concentration and the prospects for non-spine products.
- The potential dilution and accounting volatility associated with preferred stock, warrants, derivative liabilities, and future conversions or exercises.
- Whether the estimated $0.5 million sterilization and repackaging costs, and other sale-related contingencies, change materially.