SINTX Technologies, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. The company, formerly Amedica Corporation, is a commercial-stage biomaterials business focused on silicon nitride. Following its October 2018 sale of the retail spine business to CTL Medical, SINTX retained its silicon nitride manufacturing, research and development, and core non-spine intellectual property; it is CTL’s exclusive OEM provider of silicon nitride products.
Financial results and liquidity
- Revenue and gross margin: Product revenue was $97,000, cost of revenue was $79,000, and gross profit was $18,000, a 19% gross margin. The prior-year continuing-operations comparison was zero revenue; the 2018 spine business results were classified as discontinued operations, so the periods are not directly comparable.
- Expenses and earnings: Operating expenses were $1.748 million, down 22% from $2.231 million. Operating loss was $1.730 million. Net loss from continuing operations and net loss were both $1.629 million, compared with $3.486 million and $3.399 million, respectively, in Q1 2018. Q1 2019 basic loss per share was $0.07.
- Cash flow: Cash used in operating activities was $1.469 million; the MD&A describes continuing-operations cash use as approximately $1.7 million. Investing activities provided $416,000, primarily from note-receivable collections; financing activities used $230,000, including lease payments. Cash declined $1.283 million to $4.164 million.
- Balance sheet: Total assets were $10.257 million and total liabilities were $3.487 million; stockholders’ equity was $6.770 million. Current assets of $5.572 million exceeded current liabilities of $2.872 million. The company reported an accumulated deficit of $230.910 million.
- Debt, obligations, and receivables: The balance sheet reports $1.588 million of warrant derivative liabilities and operating lease liabilities, including $715,000 current. The filing describes prior debt as repaid or assumed by CTL Medical. The CTL note receivable had a net carrying value of approximately $4.5 million at quarter-end.
Material changes and outlook
- Operating expenses fell, mainly from lower payroll-related R&D costs and lower accounting, legal, and other G&A costs. The smaller net loss also reflected improved other income/expense versus 2018, when debt and derivative extinguishment losses were recorded.
- The company expects continued operating losses and cash use. Management said profitability, positive operating cash flow, and additional financing are uncertain; the filing states that these uncertainties create substantial doubt about SINTX’s ability to continue as a going concern.
- Management is pursuing increased sales through CTL Medical, OEM and private-label partnerships, and applications beyond spinal fusion. It is generating scientific and clinical data to support market adoption. Management expects R&D costs may rise as it develops products for joint replacement and dental applications; OEM/private-label channels may have lower margins than the former direct-sales model.
- The CTL sale is expected to provide cash flows totaling $2.5 million over the next 18 months and $3.5 million over the following 18 months, according to the filing. Additional financing is being explored but is not assured and could be dilutive or include restrictive covenants.
Risks, contingencies, and unusual items
- SINTX depends on raising capital and/or increasing sales; unavailable or unfavorable financing could have a material adverse effect. The financial statements include no adjustments for the outcome of the going-concern uncertainty.
- The company estimated up to approximately $0.5 million for possible resterilization and repackaging of selected inventory transferred to CTL, under an agreement running through September 30, 2020.
- Disclosure controls and procedures were assessed as ineffective at March 31, 2019 because of material weaknesses in control activities and monitoring, including review of complex accounting matters. Management reported adding accounting expertise and considering enhanced review controls.
- Warrant derivative liabilities are Level 3 fair-value measurements that rely on valuation models and significant assumptions. The filing also identifies potential dilution from approximately 22.2 million potentially dilutive securities as of March 31, 2019; these were excluded from diluted loss per share as anti-dilutive.
- The company was negotiating a new lease for its Salt Lake City facility; its existing operating lease expires in 2019. Management said it knew of no pending or threatened legal proceeding expected to have a material adverse effect.
Important facts for investors to verify
- Cash runway, expected cash receipts under the CTL note, and whether additional financing can be obtained on acceptable terms.
- CTL’s sales performance and SINTX’s revenue, gross margin, and customer concentration under the exclusive OEM arrangement.
- Progress on non-spine products, partnerships, regulatory pathways, and the timing and cost of R&D.
- Resolution of the material weaknesses in financial reporting controls and the assumptions underlying Level 3 warrant valuations.
- Potential cash costs associated with transferred inventory, lease negotiations, and any dilution from outstanding preferred stock, warrants, or other securities.