SINTX Technologies, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unaudited results. The company develops and manufactures silicon nitride ceramics for medical and non-medical applications. After selling its retail spine business to CTL Medical on October 1, 2018, SINTX retained its silicon nitride manufacturing, research and development, and core intellectual property, and became CTL’s exclusive OEM supplier of silicon nitride products. SINTX said it had a 10-year exclusive sales agreement with CTL.
Financial performance and position
| Metric | Q3 2019 | Nine months 2019 | Comparable 2018 |
|---|---|---|---|
| Product revenue | $173,000 | $437,000 | $0, following discontinued-operations presentation of the sold retail spine business |
| Gross profit (margin) | $22,000 (13%) | $73,000 (17%) | $0 revenue reported |
| Operating expenses | $1.722 million | $5.026 million | $7.365 million and $11.499 million |
| Net loss | $1.446 million | $3.805 million | $3.247 million and $8.958 million |
| Net loss attributable to common stockholders | $1.791 million | $6.508 million | $9.600 million and $22.644 million |
| Cash used in operating activities | Not separately provided | $4.322 million | $7.953 million, including discontinued operations |
Amounts are in U.S. dollars; financial statement figures are rounded. Q3 and nine-month 2018 revenue and operating results are not directly comparable because the retail spine business was sold and presented as discontinued operations. The 2019 loss attributable to common stockholders includes preferred-stock deemed dividends and discount accretion: $345,000 for Q3 and $2.703 million year to date. Other income included a $144,000 gain from the change in fair value of derivative liabilities in Q3 and a $754,000 gain for the nine months; these non-operating fair-value changes affect comparisons.
Research and development expense was $869,000 in Q3 and $2.557 million year to date; general and administrative expense was $714,000 and $2.166 million, respectively; sales and marketing expense was $139,000 and $303,000. Year-to-date operating cash use declined from $7.953 million in 2018 to $4.322 million in 2019. Investing activities provided $970,000, primarily from note-receivable collections, while financing activities provided $831,000, mainly from common-stock sales and warrant exercises. Cash declined by $2.521 million to $2.926 million.
At September 30, 2019, total assets were $10.598 million, current assets $4.865 million, current liabilities $2.053 million, and stockholders’ equity $6.028 million. Current assets included $1.603 million of current notes receivable; the note receivable from CTL had a net carrying value of approximately $4.0 million, including its long-term portion. Reported debt was approximately $21,000; operating lease liabilities totaled $2.434 million, and derivative liabilities totaled $769,000. Total liabilities were $4.570 million.
Material changes and business developments
- Revenue in 2019 reflects OEM product sales after the retail spine business sale; management attributed the year-over-year revenue and gross-profit comparisons to the sale and discontinued-operations treatment.
- Year-to-date operating expenses fell 56%, mainly because 2018 included a $6.162 million goodwill impairment and 2019 general and administrative costs were lower. Research and development and sales and marketing spending increased to support product development and market outreach.
- During the first nine months, SINTX converted 3,825 preferred shares into 1,143,784 common shares and raised approximately $1.3 million net under its ATM program. The company reported 2,363,991 common shares outstanding at September 30 and 2,434,008 at November 12, 2019. A 1-for-30 reverse stock split took effect July 26, 2019; share and per-share figures were adjusted retroactively.
- The company amended its facility lease, reducing leased space from 54,428 to 29,534 square feet and extending the lease through 2024, with two five-year extension options. It recorded an approximately $120,000 loss related to the amendment.
Outlook, risks, and contingencies
No quantified revenue, earnings, or cash-flow guidance was provided. Management expected continuing operating losses and operating cash use, and said profitability and positive operating cash flow were uncertain. Its strategy is to grow sales through CTL and additional OEM or private-label partners, expand silicon nitride applications beyond spinal fusion, and generate and publish scientific and clinical data. Management said broader adoption and new partnerships could support revenue growth; the filing does not provide a clear timetable or quantified outlook.
The filing states that substantial doubt exists about SINTX’s ability to continue as a going concern. Continued operations depend on increasing sales and/or raising additional capital. The company had $2.926 million in cash at quarter-end and used $4.322 million in operating activities over nine months. Additional financing was not assured; equity financing could dilute shareholders, and debt financing could carry restrictive covenants. The company had capacity to raise an additional $1.2 million under its ATM agreement at September 30. On November 1, it filed a registration statement for a subscription-rights offering; the number of warrants per unit was still undetermined.
Payments on the CTL note were expected to provide cash flows beginning in November 2019, which management described as $1.0 million over the following seven months and $3.5 million over the next 18 months. SINTX also agreed to cover certain sterilization and repackaging costs on inventory sold to CTL if applicable; it estimated these costs at approximately $0.5 million. Accrued liabilities included $365,000 for resterilization and repackaging. Management did not identify pending or threatened legal proceedings expected to have a material adverse effect. Change-in-control agreements could require executive payments of up to three times annual salary and accelerated option vesting.
Management reported that disclosure controls were effective at September 30, 2019. A material weakness concerning the timely accounting and review of complex matters, identified in the first and second quarters, was reported as remedied during Q3.
Important facts for investors to verify
- Cash runway and timing and collectability of CTL note payments, given the going-concern disclosure and continuing cash burn.
- Terms, proceeds, and potential dilution from the proposed subscription-rights financing and any further ATM or other capital raises.
- CTL sales volumes and SINTX’s dependence on its principal customer, as well as progress securing additional OEM customers and non-spine applications.
- Actual product gross margins and whether they improve or decline as the business shifts toward OEM and private-label sales.
- Potential cash requirements for sterilization and repackaging, lease commitments, and the valuation of Level 3 derivative liabilities.
- Whether the reported remediation of the material weakness is sustained in subsequent filings.