Sintx Technologies, Inc. (SINT) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Second Quarter 2015 Amedica Corporation Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today’s conference, Mr. Mike Houston, VP of Commercialization and Communications. Mike you may begin.

Thank you, Andrew. Good afternoon, and welcome to Amedica Corporation’s second 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 June 30, 2015 that went out this afternoon at approximately 4:00 PM Eastern Time. 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 result, 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?

Thanks, Mike, and good afternoon everyone. Welcome to our earnings conference call. I will begin by providing an overview of the Amedica’s second quarter business highlights and afterwards Ty Lombardi will give us details on the financial results for the quarter and then we will take questions. I’d like to begin today’s call sharing how pleased I am with the progress we made across Amedica year-to-date both financially and operationally as Ty will outline later in the call. We were able to reduce year-to-date operational cash burn levels by 37% from last year. So, a positive impact of the restructuring actions that we took at the beginning of the year now starting to show and those are paramount to our continued success through the balance of this year. I remain very confident in our ability and my personal resolve to unlock the intrinsic value that this company holds and specifically that our material silicon nitride holds. Not only have things improved dramatically on the financial side, but we have had enormous success in our operations, and manufacturing and research and development and business development efforts. As I’ve been out on the road, in the US and across the world, speaking with investors, banks, surgeons, distributors and additional business partners this past quarter, I am reminded that our silicon nitride material is extremely unique and differentiated. There really isn’t anything else out there from a biomaterial standpoint that quite compares. I am also very pleased with the attention we have received this year with potential private-label and OEM partners as we continue to selectively invest in the organization to support our growth. We’ve continued those feasibility studies that I mentioned last quarter and we are closer to finalizing agreements with other private-label and OEM partnerships and that we hope to announce throughout the balance of this year. Our business development team continues to present and share why we and others know and realize that silicon nitride is a truly differentiated ideal biomaterial and the audience for those presentations continues to be diverse and influential from basic researchers to scientists to surgeons [indiscernible] industry. That said, I’d like to remind you that these discussions do take some time to finalize and we anticipate being able to provide more details in a few of these advanced conversations in the forthcoming months. I’d also like to point out that these discussions are not limited to the United States or to spine applications, they go beyond. We are actively assessing these partnerships here domestically, and as well as in the Europe and Asia for medical applications that include hip, spine, knee and the dental field at this time. The white paper that our research and development team has submitted to many peer review journals this year as well as additional retrospective studies that we are completing have helped stimulate additional points of contact for our sales team and business development team while also advancing current OEM and private-label discussions. I am very pleased with the progress we have made to-date with our private-label and OEM strategy and look forward to sharing more details with you soon. As a reminder, the private-label and OEM strategy will allow us to achieve incremental sales gains at a more favorable operating margin contribution and will also lead to faster and more widespread market penetration acceptance and adoption of silicon nitride technology. We’ve already begun to see this concept as we fulfilled our first private-label order with Spinal Kinetics last quarter and look to expand that relationship in the coming months and years. We are also delighted with the clearance notice we received in Brazil recently for our first-generation silicon nitride interbody fusion devices and instrument sets. While this is definitely a third quarter event I wanted to take this opportunity to thank our teams both internal and external for the hard work and diligence they performed to provide Amedica with an additional global presence and sales channel. We anticipate recognizing revenue during this current quarter, all due to the tireless efforts of our teams in lining up key partners in the area ahead of clearance. We look forward also to cultivating this opportunity further and accelerating the adoption of silicon nitride in South America for use in biomedical applications. Our increased efforts to expand the use of silicon nitride to our existing sales and distribution channels are also beginning to pay off despite the slower sales results for the first half of the year. My resolve last quarter was making a concentrated effort to openly discuss challenges, successes and opportunities with our current distributor and surgeon base is paying dividends and as I shared my excitement and our literatures support around our improved financial situation, and increased upside potential for the Amedica going forward. The feedback that I’ve continued to receive is that our material is superb and produces excellent clinical outcomes. More and more surgeons are realizing that our interbody devices, our spinal fusion devices are not simply commodity spacers like metal and plastic. I am convinced that there are many opportunities to help strengthen the existing distributor and surgeon base and build further on it and additionally I am proud to announce that all four abstracts scientific presentations that we submitted for presentation at the 28th Annual International Society for Technology and Arthroplasty Congress that begins September 30, this year were accepted. This is a prestigious forum and it’s perfect for Amedica to convincingly demonstrate two things, one the serious limitations of existing ceramics today and two, highlighting the advantage of the silicon nitride and it’s associated body of research. This Congress is ISTA is focused exclusively on arthroplasty, i.e. hip and knee replacement and it attracts the field’s leading surgeons, researchers, scientists, device makers from around the world. There were more than 700 abstracts submitted for presentation this year and I am proud to say that all four of our submissions were accepted because of our robust science and innovation efforts. We are committed to this material and we will work to prove it out. We stand behind our evidence-based outcomes and we continue to enter the way behind our material claims. There is still much to do on this front and our scientific team continues to build on the portfolio of peer reviewed orange times publications that are related to the basic material properties of silicon nitride for the rest of this year and beyond. We have recently submitted two additional papers for acceptance in peer review journals and that brings our total count to seven papers submitted for peer review and on track with our robust publication strategy of one per month and we have plenty more in the backlog. This is a very exciting time for Amedica as we look to publish many of our research findings over the next several months. There should be no one else leading this space other than us and there isn’t anybody. We are the leaders in nanotechnology surfaces for medical applications and these scientific papers give us the credibility, the knowledge and scientific basis to further improve upon an innovative technology. Now clinical outcomes and peer reviewed scientific data that validates the material science are absolutely vital to our success going forward with a new biomaterial. Our customers need this data to add scientific credibility and to validate the use of silicon nitride over other materials used in spine surgery and beyond today and together these studies will continue to provide us with a solid clinical and research foundation that our sales and marketing team can build and that our surgeon and hospital customers, as well as our OEM and private-label partners need in order to safely and confidently adopt their technology more broadly. Moving on to our regulatory efforts we announced, the FDA’s request for 24-months clinical performance data before they would further consider appearance of a cervical composite silicon nitride interbody fusion device that we had reported on in the CASCADE data from Europe. Two year performance data from the CASCADE clinical trial will be available a few months from now at the beginning of the fourth quarter thereby pushing the timeline for an anticipated final response from the FDA to late fourth quarter 2015 or early first quarter 2016 and while it’s unfortunate that we are unable to bring this unique and differentiated interbody fusion device to the domestic US market as soon as we would have liked, we have been successful in aligning our efforts to get the FDA what they need in a timely manner. We remain dedicated to bringing additional new and innovative solutions and products to the market throughout the balance of this year that we believe offer distinct benefits to improve the efficiency of spine procedures resulting in better patient care. Now I’ll do this request for additional clinical data by the FDA pushes out our commercialization timeline for the composite device by a few months, we have been anxiously engaged with several other opportunities that will drive strong revenue growth and position silicon nitride as the ideal material in biomedical applications for many years to come. Now first of these opportunities is our femoral head testing protocol for total hip replacement. We received very constructive and meaningful feedback on our proposed testing protocol, which is very comprehensive. We now have a more thorough understanding of the pathway to market for our silicon nitride femoral heads in the US. The commentary by the FDA will ensure that the testing of a material as compared to all other ceramic predicated devices on the market will meet or exceed every testing standard. We anticipate being able to provide additional details on this test later on this year and look forward to a direct comparison of all femoral heads to our material. Additionally, we have experienced increased interest in our silicon nitride composition with dental applications. Those discussions are still in their early stages, but we are thrilled with the activity we’ve seen with potential partners, particularly since this material is ideally suited for the dental market given its anti-infected properties, stop tissue in growth and advanced bone in growth. Moving to manufacturing, our team continued to exceed expectations this quarter as production yields increase beyond 97.5%, up from the low 90s during the same period last year. Additional opportunities for increased yields and reduced production hoop at time this year have identified and we’ll continue to implement them this year. Before I turn the call over to Ty Lombardi to review our financials, I’d like to remind our listeners why we are so excited about Amedica’s future. We are a unique single company, the only one in the world that develops and commercializes silicon nitride as a biomaterial platform, a material that’s enabled to use in the spine, and potentially many, many other medical applications. We are unique for three reasons, first, we sell branded products directly to hospitals through a sales force and distribution structure that’s established, second, we can privately label these innovative silicon nitride products to other companies looking to broaden and differentiate the product portfolio and lastly, we are able to develop OEM partnerships where we can take a company’s existing device, the product line which is made out of the legacy material such as plastic, or metals with limitations are known and we can ceramitize it or convert it very precisely into silicon nitride better than anybody else. This multi-pronged strategy allows us to capture additional market share while achieving profitability on an accelerated timeline as compared to our peers given the superior benefits of our biomaterial technology platform. Thank you for listening 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 second quarter 2015. Our total revenue for the quarter was $4.8 million down 18% from the prior year period and primarily driven by lower metals business. As for product mix, our silicon nitride products were responsible for 49% of our overall product revenue during the quarter compared to 46% of our overall product revenue in Q2 of 2014. Silicon nitride sales decreased by $0.3 million or 13% as compared to the same period in 2014. This decline was primarily attributable to the loss of a few key surgeons in the quarter which is partially offset by increased recruiting efforts of our sales organization. These efforts have resulted in new surgeons using silicon nitride products which we expect to outweigh the year-to-date declines in revenue in the second half of 2015. Our non-silicon nitride sales during the quarter declined by 22% year-over-year. This decline was due to a lack of sufficient diversity in our customer base and as the level of activity declined among a few key surgeons that greatly impacted our top-line results for the quarter. Furthermore, given the important role our metals product is [playing pulling] [ph] to additional silicon nitride sales, we are working to diversify our metals user base while 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. Second quarter 2015 gross margins ended at 71% of total sales as compared to 73% during the prior year period. Although we have reduced our product cost to production efficiencies and lower overhead costs, the decline in gross margins was due to private-label sales during the second quarter of 2015, which had lower gross margins due to lower selling prices, but higher operating contribution margin since no commissions are 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 systems. We anticipate additional savings to be captured by our manufacturing teams through the balance of 2015. Research and development expense for the quarter decreased by $1.5 million or 49% to $1.6 million, when compared to the prior year period. This decrease is primarily due to a $0.7 million decrease in stock-based compensation and $0.8 million decrease in personnel-related and other development costs. Clinical studies and research expense as well as the development of an upgraded metal system to support the utility of our silicon nitride products will continue to play a role in year-over-year offsetting decreases in R&D spend. General and administrative expenses decreased $4.9 million or 78% to $1.4 million in the second quarter compared to $6.3 million last year. This decline in expense is primarily due to a $4.6 million decrease in stock-based compensation and a $0.3 million decrease in personnel-related cost resulting from the restructure in the first quarter of 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 $3.1 million in the quarter compared to $5.5 million in the prior year period, a decrease of 45% or $2.5 million. This decrease was primarily due to a $1.3 million decrease in stock-based compensation, a $0.4 million decrease in commissions due to lower sales, and a $0.8 million decrease in personnel-related cost, consulting and other operating expenses as we have reduced operating cost in 2015. We expect that sales and marketing cost in 2015 will decline as compared to 2014 due to the implemented cost saving measures. Operating expenses for the second quarter of 2015 declined by 60% or $8.8 million from the prior year period to $6 million. This year-over-year decline in operating expenses is 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 a $6.6 million reduction in stock-based compensation expense during the second quarter of 2015. Our GAAP net loss for the quarter was $5.9 million compared to a loss of $13.2 million in the prior year period, a decrease in loss of $7.3 million. This is primarily due to improved operating expenses and reduced stock-based compensation as mentioned previously. Turning to adjusted EBITDA which we define as earnings before deductions for interest, taxes, depreciation, amortization, stock-based compensation, change in fair value of our derivative liabilities, loss on extinguishment of debt and gain loss on extinguishment of derivative liabilities was a loss of $2 million for the second quarter 2015 compared to a loss of $3.2 million for the prior year period. Once again, this improvement is due to reduced operating expenses as previously discussed. As of June 30, 2015, our cash balance was approximately $12.4 million, while total debt principal obligations were approximately $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 quarter four of 2015. As Dr. Bal mentioned earlier in the call, our year-to-date operational cash flows decreased by $3 million or 37%. The decline in total cash burn year-over-year was driven by a decrease in operational cash burn of $4.1 million in the second quarter of 2015 as compared to the prior year period. This speaks to the wonderful job our teams have done in reducing operating expenses and properly managing cash burn levels. We remain on the right trajectory in reducing total cash burn and we are making continued progress on this front with each passing month and quarter. Additionally, I wanted to provide an update on our total shares outstanding count, now that the majority of the warrants issued in our follow-on offering completed last November have been exercised. A total of $13 million of these warrants issued have been exercised on a cashless basis since March 26th bringing our total shares outstanding to 65.8 million. As of yesterday there remain approximately 140,000 of these warrants yet to be exercised. Lastly, I’d like to provide an update on the 2015 guidance we shared earlier this year. We are maintaining our previously stated estimates of total annual revenue in the range of $19 million to $20 million which includes increased 2015 silicon nitride sales growth of 15% to 20%. I would like to point out that although we will be having incremental revenue come online from Brazil, and elsewhere during the second half of the year, it is likely that silicon nitride sales growth is coming at the lower end of the guidance we provided due to the decline in revenue during the first half of the year. Additionally, the company expects the impact from the previously announced financial and operational alignment actions to deliver $5 million to $7 million of annualized operating process benefits, these changes are anticipated to reduce total cash burn, increased financial sustainability and strengthen the balance sheet, positioning the company to maintain compliance with all debt covenants into Q4 of this year and becoming operating cash flow breakeven during the second half of 2016. We expect total operating 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 began this month. Additionally, we are maintaining our previously stated guidance for three additional OEMs, or 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 and business development teams to drive broad product portfolio growth and adoption of silicon nitride. Back to you Dr. Bal.

Thanks, Ty, and operator would you please instruct the callers on how to join the queue for questions?

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

Hi, thanks for taking my question. I guess, I want to start with the news about the composite implant with the FDA wanting to see the tier data, do you have any reason to believe or I guess, first of all, you haven’t seen anything beyond the one-year data. Have you?

Yes, we have two year data that’s should be completed very soon but we have that data. It just wasn’t in the format that we could supply to the FDA, and there may be a few straggling patients that we have to complete, but we have seen that data.

Okay, so, I mean, do you have any reason to believe that it’s not going to meet non-inferiority and because if it doesn’t meet non-inferiority that the FDA is going to [stall though] the product?

No, no, no reason to worry at all. I mean, this is my perspective as an orthopedic surgeon, when bone fuses or heals at six to eight weeks it doesn’t change in the next six years or sixteen years or whatever, unless there is some adverse effect. Specifically to this point, the 12 year data showed clinical benefits and showed in clinical bone in growth which for the first time without the use of any grafting material shows the result as good as autograft. So that was the excitement of the 12 month data. There is no reason why the 24 month data would be any less than that or frankly even more than that, it should remain static, once bone heals and fuses, maybe the clinical scores may go slightly up and down and in an insignificant way, but the data won’t be any different. And so there is no reason to suspect the FDA will not approve us.

Okay, all right. And then, I guess, just a few more financially oriented questions, so, just starting with the potential for delisting, what’s the timing, the deadline there to get the stock above $1 and are you considering anything like a reverse split or anything to try to avoid getting de-listed? A – Ty Lombardi: We would anticipate to receive the notice from the NASDAQ here in the next week or two and from there, we would expect to able to meet the provisions to have another six months extension and our goal and plan is to continue to drive on the strategy that we began implementing in the beginning of this year that is starting to come around and we are trying to take a turn for the better as a company and we believe there is upside and significant upside in the upcoming months. And so our goal is to continue to drive the strategy to increase the value of the company in the investors mind and strive to increase that value and hope that our stock goes in excess of the $1 prior to the middle of January.

Okay, and then, I guess, a couple of lenders are claiming that you are in default, I was wondering what’s the impact of that is, and how that can be resolved? A – Ty Lombardi: Yes, so there, we have a couple of notices with regard to default, we are addressing those, in the process of addressing those and getting those resolved and we are hoping in the coming months that we [indiscernible] have more insight with regards to that. No we don’t believe that the default [indiscernible] and we don’t see that there is any issues related to the default notices.

Okay, and then, the share count, I mean, what, I thought you said 65.8 million versus the 54.3 for this quarter I think it was, so, what should putting in my model going forward from here? A – Ty Lombardi: Yes, no our stock count is 65.8 million at June 30 and as a big part of that increase during Q2 is related to the secondary offering warrants that we did last November which increased the share count. As I indicated, we are now down to 140,000 of those warrants and so we are not expecting a significant impact in share count increase related to warrants. So, I think that 65.8 million is a good number.

All right, I mean, I was just looking at your financial – at your income statement, and looks like you are showing 54.3, so what’s the source of that difference? A – Ty Lombardi: Sorry, I am not – [indiscernible] on the balance sheet, we have 65.8 million. On the income, that’s on a weighted average based off, when the shares were issued and so forth and so, with the quarter I would, beginning the quarter at 65.8 that would be a better number to view for quarter three.

All right. That makes sense. All right, and then can you tell us anything additional about the OEM agreement that you announced during the quarter, letter of intent? A – Sonny Bal: Not much beyond what we talk about. It’s a party we are working on. There is some regulatory issues and the preferences that we discussed and disclosed further details on some of those issues have been talked about.

I guess, I would add to that, obviously they are [indiscernible] issues, but they want to make sure the regulatory path is clear. Well understood by them and so that’s what we are supporting them and working with them to get – to make sure that regulatory pathway is clear. And so, once that is cleared up and we hope that we will be able to happen in the coming months, we’ll be able to then enter into the definitive agreement and then be able to provide more information in that regard. A – Sonny Bal: Correct, this is Sonny, that’s a better way of phrasing, there aren’t any issues and just to go back to your earlier question on the default notices, there aren’t any lawsuits, no issues, no missed payments or not in default of any covenants, just to provide some clarification.

And then, just on Brazil, how quickly can the revenues ramp there, it sounds like you are expecting to generate revenue pretty quickly, I mean is that, can that be a material contributor to your revenue this year?

It will be a contributor for sure and we have our partner online down there and – but it will be a new introduction and so [indiscernible] will be a contributor. It will take a little time for that to ramp up and so we anticipate little more upside in 2016, but it will definitely be a contribution to our revenue lines in 2015 as well.

All right. That’s all I have. Thanks a lot.

Thanks, Mike.

Thank you. That’s all the questions that we have in the queue for today. I’d like to turn the call over to Dr. Sonny Bal for closing remarks.

Great. Well thanks to everyone who participated on the call. I’d like to reiterate my excitement for this year. We truly believe the orthopedic market is at an inflection point and looking for innovation, given the legacy products made out of metal and plastic are getting several decades old. And this is evidenced in our recent discussions with potential OEM and private-label partners as well as with surgeons and distributors. So this is a great opportunity for our company Amedica to prove the benefits of silicon nitride technology and get wider and more rapid adoption of this material. I am very optimistic that our team can take advantage of this opportunity and I look forward to providing you another update in November. Thank you.

Ladies and gentlemen, thank you again for your participation in today’s conference. This now conclude the program and you may all disconnect your telephone lines. Everyone have a great day.