Sintx Technologies, Inc. — 2014 Q2 Form 10-Q Summary
Filing identity: The supplied filing is for Amedica Corporation, the registrant named in the 10-Q, for the quarter ended June 30, 2014. The company described itself as a commercial-stage biomaterials and medical-device business focused on silicon nitride technology.
Business context and reporting period
Amedica sold spinal-fusion devices and related products, with products marketed primarily in the United States. It was expanding sales of silicon nitride products and developing additional spinal, joint-replacement and other medical-device products. Financial statements are unaudited; amounts below are in U.S. dollars, generally millions unless otherwise stated.
Financial results and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Product revenue | $5.84 | $6.05 | $11.62 | $11.31 |
| Gross profit | $4.23 | $4.72 | $8.36 | $8.03 |
| Gross margin | 72.5% | 78.0% | 72.0% | 71.0% |
| Operating loss | $(10.63) | $(2.67) | $(14.68) | $(5.45) |
| Net loss | $(13.24) | $(3.07) | $(17.95) | $(6.60) |
| Operating cash used | — | — | $(8.41) | $(3.66) |
- At June 30, cash and cash equivalents were $11.55 million, versus $2.28 million at December 31, 2013. Current assets were $28.75 million and current liabilities $23.85 million.
- Total debt carrying value was $20.12 million, including $18.90 million of current debt and $1.22 million of long-term debt. The company classified the Hercules loan as current because it anticipated a liquidity-covenant breach during Q4 2014.
- Six-month investing cash outflow was $0.96 million; financing provided $18.63 million. Financing included $15.37 million of net IPO proceeds and new debt, offset by debt repayments and related costs.
- The filing reports basic and diluted loss per share of $(1.07) for Q2 2014 and $(1.95) for the first half, versus $(5.75) and $(13.87), respectively, in 2013. Comparison is affected by the IPO conversion of preferred stock and the reverse stock split.
Material changes versus prior comparable periods
- Q2 revenue fell 4%, while first-half revenue rose 3%. Silicon nitride product sales increased 52% in Q2 and 46% in the first half; non-silicon nitride sales declined 27% and 17%, respectively.
- Operating expenses rose sharply: first-half research and development increased 65%, general and administrative 226%, and sales and marketing 20%. The company attributed much of the increase to stock-based compensation, including restricted stock units, as well as product-development and public-company costs. First-half stock-based compensation was $8.82 million.
- First-half net loss widened to $17.95 million from $6.60 million, and operating cash use increased to $8.41 million from $3.66 million. Inventory increased to $12.67 million from $10.08 million, including $10.11 million of finished goods.
- The February 2014 IPO raised approximately $15.4 million net. Preferred stock converted into common stock, substantially changing the capital structure; stockholders’ equity was $14.86 million at June 30, versus a deficit of $153.06 million at year-end 2013.
Outlook, financing, risks and unusual items
- Management expected operating losses and operating cash use to continue through 2014 and stated that additional funding would be needed in Q4 to maintain compliance with the Hercules liquidity covenant. Required liquidity was at least $6 million through August 15, 2014 and $9 million thereafter. The filing states that financing availability was uncertain and that this created substantial doubt about the company’s ability to continue as a going concern.
- The June 30 Hercules term loan provided $20 million, was secured by substantially all assets, and carried interest at the greater of prime plus 7.7% or 10.95%. Principal payments were scheduled to begin in August 2015, subject to possible extension of the interest-only period. Failure to meet covenants could make the debt immediately payable.
- A June 30 Magna agreement provided an initial convertible note with $2.9 million face value for $2.5 million and contemplated an additional $3.5 million note. The registration statement became effective August 6, 2014; the filing reports that the additional note was then due under the agreement. Subsequent to quarter-end, $400,000 of initial-note principal was extinguished upon registration milestones.
- After the share price trigger described in the agreement occurred on August 1, Magna could, beginning October 1, convert at the lesser of $3.75 per share or 80% of the lowest five-day VWAP, unless the company redeemed the notes by September 30 at a 127.5% premium. This creates potential dilution or a costly redemption obligation.
- Product development and commercialization plans included completing the full launch of second-generation Valeo products in Q3 2014, launching second-generation cervical and thoracolumbar products in Q4, and seeking U.S. clearance for composite silicon nitride devices after expected European trial results in the second half of 2014. These were plans, not guaranteed outcomes.
- Q2 included a $1.60 million loss on extinguishment of the GE Capital debt and a $0.45 million loss from the change in fair value of derivative liabilities. Management cited inventory reserves and production efficiencies as factors affecting cost of revenue.
- The company reported no material pending legal proceedings and stated that disclosure controls were effective as of June 30, 2014. It reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the additional Magna note was funded as expected, and the resulting cash balance, debt and covenant headroom.
- Whether Amedica obtained enough additional financing to meet the $9 million liquidity threshold and avoid a Hercules default or accelerated repayment.
- The effect of Magna’s conversion and redemption provisions, including potential share dilution and the number of shares issuable.
- Whether silicon nitride sales growth and product launches offset declining non-silicon nitride revenue, and whether margins improve as planned.
- The timing and results of the CASCADE clinical trial, subsequent U.S. regulatory submission plans, and the expected cash cost of continued development.
- The scale and timing of stock-based compensation expense and the implications of the IPO-related share unlocks described in the filing.