SINTX Technologies, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. SINTX develops and manufactures silicon nitride ceramics for medical and non-medical uses. It sold its retail spine business in 2018 and now manufactures spine products for CTL Medical, its exclusive sales partner for those products.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Product revenue | $207,000 | $97,000 |
| Gross profit (margin) | $41,000 (19.8%) | $18,000 (18.6%) |
| Operating expenses | $1.895 million | $1.748 million |
| Operating loss | $1.854 million | $1.730 million |
| Net income (loss) | $1.169 million | $(1.629) million |
| Net loss attributable to common stockholders | $(8.115) million | $(1.629) million |
| Cash used in operations | $3.398 million | $1.699 million |
Revenue grew 113%, primarily from increased CTL Amedica orders. R&D expense rose 38% to $994,000; sales and marketing rose 132% to $137,000; general and administrative expense fell 21% to $764,000. Operating loss widened by $124,000.
Reported net income was driven by a $4.166 million favorable change in the fair value of warrant derivative liabilities, partly offset by $1.246 million in offering costs. It does not reflect operating profitability: the company recorded an operating loss, and a $9.284 million deemed dividend and preferred-stock discount accretion resulted in a loss attributable to common stockholders. Basic loss per common share was $1.35.
At March 31, cash and cash equivalents were $8.224 million, versus $1.787 million at December 31, 2019. Current assets were $10.990 million and current liabilities $2.363 million. Total assets were $15.363 million; total liabilities were $4.155 million. Debt was approximately $17,000; operating lease liabilities totaled approximately $2.154 million. The company held a note receivable with a net carrying value of approximately $3.3 million, payable through October 2021.
Capital, changes, and liquidity
- A February rights offering raised $9.4 million gross through Series C preferred stock and warrants. The cash flow statement reports $9.439 million of financing cash inflow, including proceeds associated with warrant derivative liabilities.
- During the quarter, 9,208 Series C preferred shares converted into 6,215,742 common shares; holders also exercised 4,469,850 warrants on a cashless basis, receiving 3,128,895 common shares. Common shares outstanding increased from 2,434,009 at year-end to 11,778,746 at March 31.
- Investing activities provided $396,000, primarily from note-receivable collections. Cash increased by $6.437 million during the quarter, notwithstanding operating cash use.
- The company stated that existing capital resources, up to $800,000 remaining under its ATM offering, and expected note-receivable payments were sufficient to fund operations through at least May 2021. It also warned that it expects continuing operating losses and cash use; continued operation depends on increasing sales and/or raising additional capital.
Outlook, risks, and unusual items
- COVID-19: Management expected the pandemic to adversely affect revenue in the first half of 2020 and potentially longer. The filing cites reduced orders from CTL Amedica, delays in collaborator and OEM discussions and some R&D activity, and remote work. The duration and overall financial and operational effects were uncertain, including potential constraints on access to capital.
- Strategy: SINTX planned to broaden silicon nitride applications beyond spinal fusion, pursue OEM and private-label partnerships, and generate and publish scientific and clinical data to support sales. Management expected gross-margin percentage to decline as OEM and private-label activity grows, reflecting lower margins than prior retail sales.
- Subsequent event: On April 28, 2020, SINTX received a $390,820 PPP loan at 1% interest, due April 2022. Some or all may be forgiven subject to program requirements and lender and SBA approval; forgiveness was not assured.
- Other exposures: The company estimated approximately $0.3 million of potential resterilization and repackaging costs related to inventory sold to CTL Medical; accrued liabilities included $332,000 for these costs. Change-in-control agreements could require executive payments and accelerated option vesting. Management said ordinary-course legal matters were not expected to have a material adverse effect and reported no material pending or threatened legal proceeding.
Important facts for investors to verify
- Whether post-quarter revenue and CTL Amedica orders were materially affected by COVID-19, given customer concentration and the filing’s stated expectation of lower sales.
- Whether operating cash burn, available financing, ATM capacity, and CTL Medical note payments support the stated funding horizon through May 2021.
- The quality and sustainability of reported net income, particularly the noncash derivative revaluation, offering costs, and preferred-stock deemed dividend and accretion.
- The dilution and potential future share issuance associated with preferred stock conversions and outstanding warrants.
- Whether the PPP loan qualified for forgiveness and whether the sterilization and repackaging estimate or other contingencies changed.