Sintx Technologies, Inc. annual report, FY2016

Business context and reporting period

The supplied filing is Amedica Corporation’s Form 10-K for the fiscal year ended December 31, 2016, signed September 19, 2017. It is not a quarter-only report. The request identifies Sintx Technologies, Inc.; the filing itself names Amedica Corporation as registrant, so the entity identity should be verified.

Amedica develops, manufactures and sells silicon nitride ceramic medical implants, primarily for spinal fusion, and also sells metal-based spinal products. It reported more than 28,000 silicon nitride implants placed. Silicon nitride products had U.S. FDA clearance and certain international approvals; a modified composite spinal device was re-submitted to the FDA in December 2016.

Financial performance and liquidity

Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.

• Revenue declined 22% year over year. Silicon nitride revenue fell 22% to $7.896 million; non-silicon nitride revenue fell 21% to $7.330 million. Domestic revenue was $14.919 million and international revenue was $0.307 million.
• Gross profit fell 13%, but gross margin rose to 75.2% from 67.9%, principally as costs of revenue declined faster than sales. Operating expenses decreased 9%, with lower sales and marketing costs partly offset by asset impairment and higher legal fees.
• Other expense was $5.063 million, compared with $11.871 million in 2015. The 2016 net loss included a $6.278 million noncash deemed dividend tied to convertible preferred stock; this increased the loss attributable to common stockholders but not reported net loss.
• Cash and cash equivalents were $6.915 million at year-end, down from $11.485 million. Current assets were $15.987 million and current liabilities $10.853 million. Inventory was $7.213 million, including $5.6 million of consigned finished goods.
• Year-end debt was $7.421 million gross, or $7.012 million net of unamortized discount and issuance costs; all was classified as current. The Hercules term loan was secured by substantially all assets, carried a 12.7% rate at year-end, and had a January 2018 stated maturity. The loan’s minimum cash covenant was $3.0 million at December 31, 2016.
• Cash used in investing activities was $0.617 million; financing activities provided $3.217 million. The company reported an accumulated deficit of $213.135 million.

Material changes versus the prior comparable period

• Revenue decreased by $4.227 million, attributed primarily to losing several surgeons and restructuring, with the remaining decline linked to reduced private-label sales. Both silicon nitride and non-silicon nitride product categories declined.
• Operating loss improved modestly by $0.506 million. Net loss improved by $7.314 million, largely reflecting lower derivative-related expense and offering costs versus 2015; the comparison also included different debt-extinguishment items.
• Cash used in operations decreased by $1.893 million, but remained substantial. Cash fell by $4.570 million during 2016.
• Property and equipment fell to $0.889 million from $2.472 million. The company recorded $0.852 million in impairment charges relating to manufacturing equipment, leasehold improvements and surgical instrument sets, citing continuing revenue declines.
• Shares issued and outstanding rose to 27.365 million at year-end from 10.886 million. The July 2016 offering generated approximately $11.4 million net proceeds and included common stock, convertible preferred stock and warrants; the preferred stock converted to common stock during 2016.

Outlook, risks and unusual items

• No quantified revenue, earnings or cash-flow guidance is provided. Management expected operating losses and operating cash use to continue, and said additional financing would be needed to maintain covenant compliance beyond the fourth quarter of 2017.
• Management described cost reductions, including a workforce reduction of approximately 38% in October 2016, and continued evaluation of further cuts. Its commercial priorities included increasing adoption of silicon nitride products, lateral lumbar implants and the newly cleared Taurus pedicle screw system.
• The auditor’s report and management disclosure state that recurring losses, negative operating cash flow and the need for additional financing raise substantial doubt about the company’s ability to continue as a going concern. Financing or refinancing was not assured; covenant failure could make debt immediately payable.
• Disclosure controls and internal control over financial reporting were ineffective at December 31, 2016 because of material weaknesses involving complex accounting, review and monitoring. The company restated its 2016 third-quarter filing after omitting part of the preferred-stock deemed dividend; management said remediation was still under review.
• The 10-K was filed late. The filing also disclosed delinquent 2017 quarterly reports and a Nasdaq listing risk involving the minimum bid-price and filing requirements; a hearing was scheduled for October 12, 2017, with no assurance of continued listing.
• In January 2017, the company raised approximately $4.1 million net through a stock-and-warrant offering. In July 2017, it closed a $2.5 million, 10% secured loan from an entity owned and controlled by its CEO, chairman and principal financial officer, with an accompanying warrant. These post-year-end events are not reflected in the December 31, 2016 balance sheet.
• Other key risks include limited market acceptance of silicon nitride, customer and distributor concentration, reliance on suppliers and manufacturing capacity, regulatory and reimbursement uncertainty, competition, potential dilution, product liability and intellectual-property risks. The company said it was not party to material legal proceedings at the filing date.

Important facts for investors to verify

• Confirm that this Amedica Corporation filing is the intended issuer and period for the Sintx Technologies request.
• Review subsequent filings for the outcome of the Hercules refinancing, liquidity covenant compliance, later financing, and the related-party loan’s repayment and warrant terms.
• Check subsequent Nasdaq disclosures and 2017 quarterly filings for listing status and the resolution of filing delinquencies.
• Assess remediation of the disclosed control weaknesses, the third-quarter restatement, and any subsequent audit or reporting issues.
• Track product revenue trends, surgeon adoption, customer concentration, and progress on FDA review and international approvals; the China purchase commitment depends on CFDA clearance.
• Reconcile the reported debt and share counts with subsequent conversions, warrant exercises and offerings; the filing’s September 2017 share count differs from its December 2016 year-end balance-sheet count.