Sintx Technologies, Inc. (SINT) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Amedica Corporation First Quarter 2015 Financial Results Conference Call. At this time, all participants have been placed on mute. Later, we will conduct a question-and-answer session and the instructions will be given at that time. [Operator Instructions] Please note, today’s program is being recorded. I would like to introduce our first speaker, Mr. Mike Houston, Director of Marketing and Communications. Sir, please begin.

Thank you, Rowan. Good afternoon, and welcome to Amedica Corporation’s first quarter 2015 earnings conference call. On the call with me today are Dr. Sonny Bal, Chairman and Chief Executive Officer; and Ty Lombardi, Principal Accounting Officer. By now, everyone should have access to the earnings release for the period ended March 31, 2015 that went out earlier this afternoon. If you have not received the release, it’s available on the Amedica’s website at www.amedica.com. This call is being webcast, and a replay will be available on the company’s website as well. I’d like to remind you that certain items that maybe discussed in today’s call are not based entirely on historical facts. These items should be considered forward-looking statements, and are subject to many risks, uncertainties and other factors that are difficult to predict and may affect our businesses and operations. As a consequence, our actual results may differ materially and adversely from those expressed or implied by our forward-looking statements. A discussion of some of these risks, uncertainties and other factors are set forth in our SEC filings. We undertake no obligation and do not intend to update any forward-looking statements, as a result of new information or future events or circumstances, arising after the date on which it was made. With that, I would now like to turn the call over to Dr. Sonny Bal. Dr. Bal?

Thank you, Mike. Good afternoon everyone. Welcome to this earnings call. I will begin by providing an overview of the Amedica’s first quarter business highlights afterwards Ty will give details on the quarterly financial results. Then we will open the call for questions. In prior calls, I’ve outlined three focal points that we are executing in order to accelerate our vision of silicon nitride becoming the premium biomaterial of choice. Those areas of focus remain key to our success as we made great progress on them to date. First is executing our private label and OEM strategy. Second is strengthening and nurturing our relationships with surgeon and distributor our customers. Third is to focus on clinical and research data so that we can validate the established foundation of basic material science work that we have completed and published. I’m pleased with the attention we have continued to receive this year with potential private label and OEM partners as we continue to selectively invest in the organization to support our growth. We have begun a couple of feasibility studies. We are close to finalizing agreements with other private label and OEM partnership and we hope to announce those soon. With the recent AAOS and AANS professional meetings behind us and as we get closer to announcing additional partners, I would like to provide some visibility around the discussions we’ve been having. As a result of the restructuring announcement made this past January, interest in silicon nitride and Amedica has increased yielding many discussions each with differing levels of interest. Our business development team has given many presentations sharing why we and others recognized in those silicon nitride as the ideal biomaterial, very differentiated from everything else out there. We presented to marketing and business development teams to senior management teams to surgical advisory boards and also to directors of company boards. The audience for these presentations is obviously diverse and influential and that said, I’d like to remind you that these discussions take some time to finalize. We anticipate being able to provide additional details on few of these advanced conversations in the coming few months. I’d like to point out that these discussions have not been limited to the United States. We are actively assessing partnerships in the U.S, Europe and Asia and many countries. The recent CASCADE clinical results and white papers our R&D team have submitted to Peer Review Journals have also helped stimulate additional points of contact while also advancing current OEM and private label discussions. I am very pleased with the progress we've made to-date with the private label and OEM strategy and look forward to sharing additional details with you. As a reminder this private label and OEM strategy will allow us to achieve incremental sales gains at more favourable operating margin contributions and will also lead to faster and more widespread market penetration of silicon nitride. In fact, we’ve already begun to see this as we fulfilled our first private label order with Spinal Kinetics during the quarter. Now, we’ve also increased our efforts to expand these of silicon nitride through our existing sales and distribution channels. While silicon nitride sales were slower than anticipated during the quarter, the improvement and expansion of our distributor and surgeon relationships and the underlying quality of these relationships remains extremely important. The financial results of this first quarter underscore the important role of metals products plan pulling through additional silicon nitride sales. As we announced in our year-end earnings call a few months ago, we’ve begun actively investing in our metals portfolio in order to update it, in order to improve certain ease-of-use and bring it on par with other products used in the market today. This was much needed. Additionally, we experienced what we think was some increasing value from a handful of our distributors because of the restructuring initiatives that we announced in January which probably and likely impacted our total and silicon nitride sales. Part of this is why I’ve made a more concentrated effort to openly discuss challenges and successes with our current distributor base, meet with them and share my excitement around our improved financial situation, improved model and improved and increased upside potential for Amedica going forward. Now sales and marketing have had my full attention in the last several months and we’ve made a few changes to the teams to make them a more cohesive communicating unit that’s focused on diversifying of surgeon and distributor base. A company of our size cannot afford to miss a few cases during the quarter. We must continuously be focused on targeting the right customers, the right surgeons, the right distributors in educating and enlightening them on the benefits of our material silicon nitride. I’ve met personally with several from our base of distributors and surgeons and it’s absolutely wonderful to see their excitement about the material as we share its unique scientific properties. The feedback I have consistently received is that nitride is a superb material that produces excellent clinical results. More and more surgeons are recognizing that our interbody devices are spinal fusion devices and not simply commodity spacers. And I can fully relate to a sort of surgeon customers being an orthopaedic surgeon myself and I’m convinced that there are many opportunities to help strengthen the existing distributor and surgeon base and build on it and we are doing so. With some of these changes made to the sales and marketing teams, we’ll be compiling many additional case studies and white papers in the coming months that conform the findings of our R&D team and others and in tandem with our recent CASCADE clinical results we believe these data will enable surgeons and distributors to better understand and appreciate why silicon nitride is a superior material compared to everything else out there and allow for more widespread adoption of it. In addition to this very robust clinical outcomes data strategy we remain committed to submitting a research paper a month to peer-reviewed journals. This has been a great passion of mine after becoming CEO last year and recognizing and realizing the treasure trove of data that we have already inside the company so far. Additionally, I’m proud to announce that an abstract we’ve submitted for the presentation at the NASS conference later this year has been accepted. This presentation and its associated body of research addressed an important question. They addressed the common myth in the marketplace that a material as stiff as silicon nitride ceramic could lead to subsidence. It does not. And it was concluded that material type or stiffness does not play any role in the probability of a device subsiding both peak and silicon nitride in fact has statistically equivalent levels of likelihood that subsidence would occur. It was also found that the footprint of the device was what decides the likelihood of subsidence and surgeons should select the cage with the largest implantable contact area to reduce the likelihood of subsidence. In the other words, the modulus or stiffness of the cage material itself is unrelated to the risk of subsidence and this is an important observation that’s relevant. We look forward to presenting these findings with NASS later this year and we have submitted several abstracts to several other podium presentations worldwide at key orthpedic events. And this is consistent with our vision and the bottom-line that we no longer want silicon nitride to be a well kept secret here in Salt Lake City. We’re committed to this material and we will prove it out. We stand behind our evidence based outcomes and we will continue to answer the why behind our material claims. There is still much to do on this front. We are in the process of remapping our website to make this body of data more easily accessible. In fact, if we go to our website there is a tab called Our Data, if you scroll down you will see our publications already there and we keep adding to them. Also during the first quarter, our scientific team continued to build on the portfolio of peer-reviewed publications related to the basic material, properties of silicon nitride and we continue to learn that this material is even better than we thought it was. Having recently submitted two additional papers for acceptance and peer-reviewed journals that brings our total to five papers submitted for peer review and on track with our robust publication schedule of one submission a month. These two papers I mentioned review the modern history, the physical and chemical properties, the in Vitro and in Vivo performance of all types of ceramics including silicon nitride that are available for use today. To highlight and contrast silicon nitride’s performance data and superiority and stability against all other ceramics used today in the biomedical sciences. These and other papers we’ve submitted for review this year will show that silicon nitride is an exceptionally unique material and is the only material we know of today that can alter its chemistry favourably for example to improve its vetting characteristics, a characteristic that’s very important in spinal fusion procedures and antibacterial behaviour and to improve the bone fusion process. So to summarize, this is a very exciting time for Amedica as we look to publish these ground breaking results over the next several months. There should be no one else leading this space other than us. We own the science and the space. We are the leaders in nanotechnology surfaces, for medical applications and the scientific papers will give us a knowledge basis to further improve on our innovative technology platform. Now moving on to our regulatory efforts, we announced very favourable CASCADE clinical study results recently, which allowed us to submit for 510k clearance with the FDA for our composite silicon nitride fusion device the one that can work without any bone setter of any kind. The significance of this data cannot be overstated. The CASCADE study is the first to show that its synthetic material mainly ours can heal and fuse as well as the patient’s own bone. Nothing else can do that. We have shown that it is no longer necessary to use hollow interbody spaces filled with expensive bone or bone void fillers with uncertain results to achieve optimal fusion results. Now, although we made it through the administrative review process and the 90-day clock began with the FDA, they have since responded with several questions for our regulatory team that we are in the process of answering in the coming weeks. We still anticipate a final response from the FDA in the second or third quarter of this year as with any review by the FDA. I’d like to remind you that these types of predictions are hard to make and probably beyond our control. Clinical outcomes and peer-reviewed scientific data are absolutely vital to our success and credibility going forward with this new biomaterial. Our customers need this information to have scientific credibility and value and to validate the use of silicon nitride over the other materials that they are familiar with. Together these studies will continue to provide us with a solid, unquestioned clinical foundation that our sales and marketing team can build on and that our surgeon and hospital customers as well as our OEM and private label customers and partners need in order to adapt our technology more broadly. As we mentioned in our last call, ANVISA, the FDA equivalent in Brazil recently cleared a first generation Valeo silicon nitride devices for use in spinal procedures. Since then we have been down to Brazil for the Annual Spine Congress to present our material in tandem with the neurosurgeon familiar with silicon nitride. Because our material is the only cleared alternative to peak and antiquated titanium systems in Brazil, we’re very excited about this development and plan to begin recognizing additional revenue in the back half of this year once our instrument sets are also cleared by ANVISA, the regulatory body in Brazil. Moving on to manufacturing, I’m proud that our team continued to exceed expectations this quarter as production yields increased beyond 97%, which was up from the low 90s during the same period last year. Additional opportunities to increase yield and reduce production throughput time this year have been identified and will continue to implement throughout the year. Our manufacturing partnership with Kyocera very important continues to improve as our internal team has worked closely with him throughout this past year, which is why we are so proud to announce that Kyocera is now officially an approved supplier for Amedica. This status will improve our margins as the year progresses, but more importantly, it will ensure the supply of silicon nitride products in the case of a catastrophic event. Before I turn the call over to Ty to review the financial, I’d like to remind our listeners why we are so excited about Amedica’s future. We are a unique company, one of a kind in the world. We’re the only ones that develops and commercialize silicon nitride as a biomaterial platform for use in spine, for use in potentially many other medical applications that we are exploring. This is very significant. We have almost the perfect material of all materials out there that heals to bone that resists bacteria, that undergoes favourable changes over the long haul once it’s in the body and that is amenable to manufacturers in a wide variety of formats, nothing else comes close. As a company we are unique for three reasons. First, we sell branded products directly to hospitals through a dedicated sales force and distribution structure. Second, we can private label these innovative silicon nitride products to other companies looking to broaden their product portfolio, and lastly, we’re able to develop OEM partnerships uniquely where we can take a company’s existing device or new design made out of an inferior material such as plastic or metal and convert it into silicon nitride ceramic. The uniqueness of our material, its superiority and this multi-pronged strategy will allow us to capture additional market share while achieving profitability on an accelerated timeline as compared to our peers given the benefits of our biomaterial technology platform. I appreciate your attention and I will turn the call over to Ty Lombardi, who will discuss our financial results. Ty?

Thank you, Dr. Bal. I am pleased to discuss the financial results of the company during the first quarter 2015. Our total revenue for the quarter was $4.7 million driven by 7% growth in our silicon nitride products but more than offset by a decline of 37% in our non-silicon nitride sales which was primarily driven by lower metals business. Total revenue for the quarter decreased by 18%. As for product mix, our silicon nitride products were responsible for 56% of our overall product revenue during the quarter compared to 44% of our overall product revenue in Q1 of 2014. Our metal sales during the quarter declined by 40% year-over-year. This decline was due to a lack of sufficient diversity in our customer base and as the level of activity declined amongst key surgeons it greatly impacted our top line results for the quarter. Furthermore, given the important role our metals products play and pulling through additional silicon nitride sales we are working to diversify our metals user base. We are also investing in our metals portfolio in order to improve surgeon ease of use and bring it on par with other products used in the market today. Excluding the impact of excess or obsolete inventory for both years' first quarter 2015 gross margins ended at 75% of total sales as compared to 79% during the prior year period. Although we have reduced our product cost in production efficiencies and our overhead costs, the decline in gross margin was due to private label sales during the first quarter of 2015, which had lower gross margins due to lower selling prices, but higher operating contribution margin since no commissions were paid and there are less operating expenses required to support these sales. Our manufacturing team continued to drive efficiencies and cost savings on our cost of goods sold by keeping labor costs low and improving our quality and tooling system. We anticipate additional savings to be captured by our manufacturing team through the balance of 2015 as Kyocera fully comes online and additional cost saving initiatives are implemented. Research and development expense for the quarter increased by $1.3 million to $1.8 million, when compared to the prior year period primarily related to how the account for inventory overhead allocation due to decreased production volumes during the quarter compared to the prior year period fewer expenses were allocated to inventory and more to research and development activity. Clinical studies expense and development of an upgraded metal systems to support the utility of our silicon nitride products also played a role in year-over-year increase. General and administrative expenses were 2 million in the first quarter compared to 3.1 million last year. This decline in expenses primarily due to $0.5 million decrease in stock-based compensation and $0.7 million decrease in consulting, professional services, legal, patent and other general operating expenses as we focus on reducing operating costs in 2015. We expect general and administrative expense levels to decline moderately through 2015 as cost saving measures have been implemented to improve financial performance increase operational efficiencies and strengthen the company’s value proposition. Sales and marketing expenses totaled $3.4 million in the quarter compared to $4.5 million in the prior year period, a decrease of $1.1 million. This decrease was primarily due to $0.7 million decrease in commission, $0.3 million decrease in stock compensation and $0.2 million decrease in consulting and other operating expenses. We expect the sales and marketing cost in 2015 will remain flat or slightly declined as compared to 2014, due to the implemented cost saving measures. Operating expenses for the first quarter of 2015 declined by 12% or $1million from the prior year period to $7.2 million. This year-over-year decline in operating expenses was primarily due to the actions taken by the company to simplify the organization and align financial objectives earlier in the year as well as lower commission cost and stock-based compensation expense during the first quarter of 2015. Our GAAP net loss for the quarter was $5.4 million compared to a loss of $4.7 million in the prior year period, an increase in loss of about $700,000. This was primarily due to year-over-year revenue, severance-related expenses and increased interest expense incurred during the quarter. Turning to adjusted EBITDA which we defined earnings before deductions for interest, taxes, depreciation, amortization, stock-based compensation expense, change in fair value of our derivative liabilities offering costs and loss on extinguishment of debt was a negative $2.9 million for the first quarter of 2015 compared to a negative $2.1 million for the prior year period. This decline in adjusted EBITDA was primarily attributable to severance-related expenses of $0.7 million during the first quarter of 2015 and lower year-over-year revenue. As of March 31, 2015, our cash balance was approximately $14.9 million while total debt principle obligations were $24.3 million. I would also like to point out that although total sales were down 18% for the quarter we remain on track with projected cash balance forecast and our ability to remain in compliance with all debt covenants until the fourth quarter of this year. Additionally, I wanted to provide an update on our total shares outstanding count. Now that the lockup period has expired for the ones issued in our follow-on offering completed last November. A total of $9.6 million of the warrants issued has been exercised on a cashless basis since March 25th bringing our total shares outstanding to 55.4 million. As of yesterday there remained 3.5 million warrants yet to be exercised. And then lastly, I’d like to provide an update on the 2015 guidance we shared earlier this year. We are revising our previously stated estimates of increased 2015 silicon nitride sales this year to 15% to 20% growth. That’s equating to a total annual revenue range of $19 million to $20 million. Due to the estimated decline in annual revenue, the company expects the impact on the previously announced financial and operational alignment actions to deliver $5 million to $7 million of annualized operating process benefit. These changes are anticipated to reduce total cash burn, increase financial sustainability and strengthen the balance sheet, positioning the company to maintain compliance with all debt covenants into Q4 of this year and become operating cash flow breakeven during the second half of 2016. We expect total quarterly cash burn levels to decline throughout the balance of this year and we expect to realize total quarterly cash burn rates between $2 million and $2.5 million in 2015 on an annualized basis excluding principal payments which begin in August of this year. Additionally, we are maintaining our previously stated guidance for additional OEM our private label partners to be announced during the balance of 2015. We remain committed to improving the focus on profitability of Amedica, as these strategic measures will allow us to execute on the development of our core silicon nitride technology by aligning sales, marketing and product development teams to drive broad product portfolio growth and adoption of silicon nitride. Back to you Dr. Bal.

Thank you, Ty, and operator can you please instruct the callers on how to join the queue for questions at this time.

[Operator Instructions]. Our first question comes from the line of Mike Matson with Needham & Company. Your line is now open. Your question please.

Yes. Thanks. I guess just -- I understand you took your guidance down on the overall and specifically on silicon nitride, but it only grew 7% this quarter, so I’m just wondering how you plan to hit that 15% to 20%. I mean, what’s going to happen that’s going to cause that growth to pick up?

Well, there’s a number of short-term, long-term milepost that we’re looking forward to. Number one, continued growth of silicon nitride through existing sales channels there’s a lot of interest in the material, number two, upgrading our metal systems and that was a keenly needed variable that we had not done for a long, long time. Then we have the OEM private label agreements coming up. Finally, we’ve seen meaningful progress in Brazil where we will recognize additional revenue in the back half of this year once the instrument sets are cleared and they should be cleared. So that coupled with the private label OEM partnerships which we’ll announce soon position us for our strong future. Very importantly, one more time, I think it’s the upgrading of the metal systems that from my view is a key move that we made that was a long overdue.

And what’s the -- I mean, are those upgraded metal implants available now or what’s the timing back? I guess I thought it was going to be later this year or something.

It’ll be -- where the process -- there are number of strategies we could have done, we could have simply private labelled somebody else’s metals. But as it turns out the feedback we got from our surgeons was that our system was superb and probably better than anything else out there simply needed to be brought into the modern times. So we focused on that and that will be toward the end of this year into next year that we will introduce our upgraded metals line. But that has built up the enthusiasm among surgeons and the distributors that we’re committed to doing so.

Okay. And I mean, just from a cash burn perspective I mean, you’re saying it looks like your cash declined by about $3.3 million this quarter, so I think you are saying expected it to drop the burn – quarterly burn rate to drop to $2 million to $2.5 million, so I mean, you’re looking at kind of like $6 million to $7 million more for the remainder of the year, is that $7 million roughly?

Yes. Yes. That would be correct. So, we – Q1was a little higher than we anticipated in future quarters due to the severance-related and payments as well as benefit associated with that and so which approximated $700,000. And so in the future quarters, we don’t anticipate that much expenditure and expect our total cash burns to reduce as compared to Q1.

Okay. So what’s your normalized quarterly operating expense run rate then if you back out although, if you take into account the cost cuts implemented and the one-time things you had in the first quarter, I mean, I guess you used sorry, you lost about – or use about $7 million on operating expenses, $7.2 million, so what do you expect to be at in the next three quarters roughly per quarter $6 million range, $6.5 million seem reasonable?

That would be reasonable; however, a lot is also dependent on sales, the commissions associated with sales as the large chunk of our operating expenses. And so that will definitely vary depending on the sales numbers. but those amounts that you indicated seem a reasonable number to anticipate in future quarters.

Okay. And then just on the share count, I mean, so you’re basically – you ended the quarter, you’re currently at like 55 million roughly speaking, so that all we should be modelling for the remainder of the year somewhere in that range?

Yes. We are currently at 55 million and it is – no, there are still some warrants that are outstanding as I indicated, there is 3.5 million of warrant from the secondary offering in November there are still outstanding and so those could be exercised to be a cashless – via the cashless exercise provision, which could depending on where the stock price is and the exercise could be around 3 to 1. So that could impact as well as the convertible notes that we have outstanding in it.

Okay. All right. And then I guess, I just wondering on you talked about Brazil, but I mean just given the position you’re in here with limited cash and the fact that you’re barely growing in or you’re declining in the U.S. I mean, wouldn’t the dollars be better spent on trying to fix the U.S. and trying to invest in these emerging markets?

That is a good point and that’s definitely something that we have looked at. We had already – we spent the last two years trying to get this clearance down in Brazil. So we have received that clearance and so there isn’t a whole of additional costs that are required to further that development in Brazil and so we are determined and there is excitement down there in Brazil for our product. And so it made sense that to move forward on that and furthermore, the initial purchasing will be of our Gen-1 product which isn’t – we are not selling as much here in the United States, it’s an opportunity to sell some of the Gen-1 product.

Okay. All right. That’s all I have. Thank you.

Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Greg Simpson with Dawson James Securities. Your line is now open. Your question please.

Okay. Thank you. Good afternoon guys. Sonny, first on [indiscernible] maybe characterize the questions, you’ve gotten from the FDA and whether they’re just random, ordinary questions or anything more significant than that.

Yes. I’ve looked at it myself and there are several of them mostly bureaucrats speak random questions, a few relevant to the clinical situation, a few technical questions nothing that we can’t answer.

Okay. Great. And does that approval – will that approval give you the chance to market the CASCADE results, really kind of hammer those with surgeons?

And that’s exactly what I would do. I mean, their products are already in use and approved overseas so this would give us a leg in the United States to directly market and promote it to surgeons here.

Okay. And then on a related note, can you realize the timing of the CASCADE data presentation late in the quarter. Can you maybe give just anything anecdotal as to the early reaction to the CASCADE result?

It’s very positive in terms of surgeon interest, in terms of surgeon’s reaching out with design variations, with future studies and certainly in terms of the benefits of the disk device in terms of its being able to cause bone healing in the absence of bone void fillers, which is very relevant in today’s cost conscious market. And more importantly that new to the market technology has generated a lot of interest from our OEM partners as well.

Okay. All right. Thanks very much.

Thank you. I am showing no further questions in the queue at this time. I’d like to hand the call back over to Dr. Sonny Bal for any concluding remarks.

Thanks to everyone who participated on the call. I would like to reiterate my excitement, genuine excitement for this year. We truly, truly believe that the market is at an inflection point and is looking for innovation, which has been evidenced in our recent discussions with potential OEM and private label partners as well as with surgeons and distributors worldwide. This is a great opportunity for Amedica to prove the benefits of silicon nitride and to get wider adoption of the material. I’m very optimistic that our team can take advantage of that opportunity and I look forward to providing another update in August. Thank you.

Ladies and gentlemen, thank you very much for your participation. This does conclude the program. You may now disconnect.