Sintx Technologies, Inc. (then Amedica Corporation) — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Financial amounts below are in U.S. dollars; unless noted, amounts are in millions.
Business context
Amedica developed, manufactured and sold silicon nitride and other spinal implant products, primarily in the United States. It reported one operating segment. The filing describes a 10-year exclusive China distribution agreement with Weigao, subject to regulatory approval, and a pending FDA 510(k) submission for a composite spinal device; the FDA had requested additional information.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Product revenue | $3.378 | $4.835 | $11.574 | $14.358 |
| Gross profit | $2.613 | $3.195 | $8.899 | $9.833 |
| Gross margin | 77.3% | 66.1% | 76.9% | 68.5% |
| Operating loss | $(3.207) | $(2.806) | $(8.192) | $(9.408) |
| Net loss | $(4.338) | $(10.133) | $(12.790) | $(21.447) |
| Net loss attributable to common stockholders | $(6.837) | $(10.133) | $(15.289) | $(21.447) |
- Revenue fell 30% in Q3 and 19% for the nine-month period. Silicon nitride revenue declined 27% and 21%, respectively; non-silicon nitride revenue declined 34% and 17%.
- Q3 gross margin improved despite lower revenue. Management cited lower costs, the medical-device excise-tax moratorium, and minimal private-label revenue; for the nine-month period, a tax refund also contributed.
- Operating expenses were $5.820 million in Q3, down 3%, and $17.091 million for nine months, down 11%. Q3 general and administrative expense rose 34%, primarily due to higher legal expense.
- Q3 net loss improved substantially from 2015, chiefly because the prior-year period included a large warrant-related loss and offering costs. Nine-month net loss also improved, but remained significant. A $2.499 million deemed dividend from the July preferred-stock financing increased the loss attributable to common stockholders.
- Cash used in operations was $5.257 million for nine months, compared with $7.065 million a year earlier. Investing used $0.397 million; financing provided $4.782 million. Cash declined $0.872 million from year-end to $10.613 million.
- At September 30, current assets were $20.109 million and current liabilities $13.018 million; working capital was $7.091 million. Inventory was $7.851 million, including $3.4 million of consigned finished goods.
- Debt carrying value was $8.432 million, all classified as current; Hercules principal outstanding was $8.981 million. The Hercules loan bore 12.7% interest, was secured by substantially all company assets including intellectual property, and matures January 1, 2018.
Material changes and financing
- In July, the company raised approximately $11.4 million net through a public offering of common and preferred units and warrants. The preferred shares were converted into 7.392 million common shares; offering warrants covered 12.65 million shares at a $1.00 exercise price. Warrant exercises generated a further approximately $0.447 million.
- Shares outstanding increased from 10.886 million at December 31, 2015 to 26.403 million at September 30, 2016. Potentially dilutive securities totaled approximately 13.2 million shares at quarter-end.
- The company repaid the remaining Magna Note in July for $0.888 million and paid Riverside $0.840 million to redeem the remaining Third Exchange Note. Riverside debt exchanges and conversions also resulted in common-share issuance.
Outlook, risks and unusual items
- Going concern and liquidity: Management stated that continuing operating losses and cash use were expected through 2016 and disclosed substantial doubt about the company’s ability to continue as a going concern. It expected to maintain Hercules liquidity-covenant compliance into Q2 2017; further compliance would require refinancing or additional funding. The minimum required cash balance at September 30 was $3.5 million, versus $10.6 million held. Failure to meet covenants could make the remaining loan balance immediately payable at the lender’s option.
- Sales and commercial risks: Management attributed weaker revenue to lower private-label sales, weaker-than-expected commercial sales, pricing pressure and hospital vendor consolidation. It anticipated revenue growth from sales efforts and new products, but provided no numeric revenue or earnings guidance. It expected gross profit to decrease as OEM and private-label partnerships expand.
- Restructuring after quarter-end: A workforce reduction of 21 employees, about 38% of staff, was completed October 4. Management estimated approximately $2.0 million in annualized cash operating-expense savings and approximately $465,000 of one-time severance and related costs in Q4 2016.
- Regulatory and legal matters: FDA review of the composite spinal device remained pending. A lawsuit filed by Hampshire GP alleged breach of a warrant anti-dilution provision and sought damages exceeding $1 million; the company denied the material allegations.
- Other notable factors: The Hercules loan’s high interest rate and asset security, the need for future financing, potential shareholder dilution, and the Level 3 valuation of warrant liabilities are material risks. The filing reported no material changes in internal control over financial reporting and stated disclosure controls were effective.
Investor verification priorities
- Track cash burn, covenant compliance, and the timing and terms of any Hercules refinancing or additional financing, particularly ahead of Q2 2017.
- Verify whether revenue stabilizes after the reported declines and assess the contribution of silicon nitride, private-label, and international sales.
- Monitor the FDA submission, China regulatory approval and distribution milestones, and whether the stated purchase commitments become commercially actionable.
- Confirm realized savings and restructuring costs from the workforce reduction, and assess any effect on sales, product development, and operations.
- Review dilution from outstanding warrants and other potentially dilutive securities, and follow the Hampshire warrant litigation and any material resolution.