SINTX Technologies Inc (SINT) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Amedica second-quarter 2014 corporate conference call. (Operator Instructions). As a reminder this conference is being recorded. I would now like to introduce your host for today's conference, Mike Houston, Director of Investor Relations. Sir, you may now begin.

Thank you, Marcus. Good morning and welcome to Amedica's Corporation second-quarter 2014 earnings conference call. With me today are Eric Olson, Chief Executive Officer, and Jay Moyes, Chief Financial Officer.

By now everyone should have access to the earnings release for the period ending June 30, 2014 that went out this morning at approximately 9 AM Eastern time. If you have not received the release, it is available on the Amedica website at www.amedica.com. This call is being webcast and a replay will be unavailable on the Company's website.

I would like to remind you that certain items that may be 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 Eric Olson. Eric?

Thank you, Mike. Good morning, everyone, and welcome to our second-quarter 2014 earnings conference call. I will begin today's discussion with an overview of our second-quarter business highlights. Afterward our CFO, Jay Moyes, will provide greater detail on the financial results for the second quarter and first half of 2014. Then we will open the call for questions.

I am pleased to announce that during the second quarter of this year revenue for the Company's proprietary silica nitride products increased by 51% over the year period to $2.7 million. For the six months ended June 30, 2014, our silicon nitride revenues increased by 46% over the first half of 2013. In addition, silicon nitride revenue increased by 8% sequentially over the first quarter of 2014. Our total revenue for Q2 2014 was $5.84 million which is in line with consensus estimates.

Our silica nitride sales continued to grow in the second quarter due to the launch of our second generation Valeo interbody devices. Marketplace acceptance has been very positive and we are excited with the improved features and benefits of these products which enhance search and control during implantation and stability post procedure.

Beginning at the end of last year, we launched new second-generation designs of our Valeo anterior, posterior and oblique lumbar interbody fusion devices. Two versions of the second generation posterior lumbar device resulted from our design and build program. As you will recall, this strategy was initiated during the first half of 2013 and has enabled us to collaborate with influential surgeons to develop, customize silicon nitride spinal fusion products and instruments. Additionally, we initiated the limited release of our second generation cervical interbody devices during the month of July which is also receiving early positive feedback from influential surgeons within our design and build program.

It is important to reiterate that our silicon nitride products have unique beneficial properties that aid in rapid bone growth and our anti-infective. Based on scientific data, our silicon nitride interbody devices have superior biomaterial characteristics that are preferred by surgeons instead of older products made from titanium or PEEK technologies.

Turning now to our research efforts, we are pleased to announce that three research papers have been accepted for presentation at the annual meeting of the International Society for Technology in Arthroplasty. This event will be held in Kyoto, Japan next month.

The first of three research papers will review the friction, lubrication and wear between two silicon nitride moving surfaces as tested in a classic hip simulator. It will be an independent presentation by Dr. Ian Clark of Loma Linda University, a distinguished scholar in the area of bearings for hip arthroplasty. His study will show the lack of detectable wear for silicon nitride bearings after testing almost 13 million cycles. The negligible wear was particularly due to the strength and toughness of the silica nitride material itself but also the result of a preferential protein absorption on the surfaces of the bearing couple.

We are very pleased with Dr. Clark's findings that the application of our non-oxide ceramics may become a viable alternative for total hip arthroplasty designs in the next decade.

The lead author of the second paper is Dr. Sunny Bal, a noted orthopedic surgeon and member of the Amedica Board of Directors. His paper will review the essential physical, mechanical and surface chemistry of silicon nitride and contrast these properties with other available bio ceramics for total hip arthroplasty. In particular, a comparative demonstration of the inherent stability of silicon nitride over oxide ceramics will be highlighted.

The third paper led by Brian McEntire, Amedica's Chief Technology Officer, will discuss the use of silicon nitride in spinal fusion cages using laboratory data and human case studies. The results will demonstrate its improved osteo integration characteristics when compared to PEEK cages.

Every year the IST hosts a congress where the best clinicians, engineers, researchers and industry members from across the globe come together to present and discuss leading-edge work in the field of arthroplasty and we are honored to have a presence at this event.

I would now like to provide a manufacturing update. In support of our rollout of our second-generation silicon nitride spine products, manufacturing volumes increased by approximately 500% during the first half of this year as compared to prior-year period. Production yields have also increased by approximately 18% in 2014 compared to the same half year period in 2013.

Unit production costs for silicon nitride interbody devices have commensurately declined by between approximately 26% and 45% depending on the product when compared to the first half of 2013. Additionally, we experienced a sequential increase of 32% in production volumes during the second quarter of 2014 as compared to the first quarter of 2014.

Now I would like to move on to the Company's clinical trials. First is our retrospective study. We are on schedule for the September completion of a retrospective analysis of cervical patient outcomes in California. The analysis compares silicon nitride to PEEK and will compare data on lumbar silicon nitride interbody devices.

Next, our prospective studies the first of which being our prospective clinical trial in Europe named CASCADE. It is fully enrolled with 100 patients and compares our first-generation Valeo composite silicon nitride interbody devices utilizing our core CSC material to PEEK interbody devices. Once results become available, we expect to file a manuscript submission for publication in the second half of this year and then a 5-10(k) submission with the US FDA by mid-2015. The primary endpoint for this trial is patient outcomes namely the Neck Disability Index, while the secondary endpoint is fusion.

Next, our SNAP prospective study is 88% enrolled and compares our first-generation oblique lumbar silicon nitride devices to PEEK devices. Enrollment is progressing and expected to be completed by the first quarter of next year. The primary endpoint for this trial is patient outcomes namely the Oswestry Disability Index and the secondary endpoint is fusion.

Lastly, we are pleased to announce that we have initiated a new randomized prospective clinical trial in Jacksonville, Florida which compares our second-generation cervical silicon nitride devices to PEEK devices.

The study is in the final stages of development as we await IRB approval. The six surgeons leading the study will be using our second-generation cervical interbody devices developed under the design and build program that I mentioned earlier. We will have more details on its progress during our next call in November.

Jay will discuss our recent refinancing activities later in the call but I wanted to reiterate that this was a significant milestone for the Company. Refinancing the GE credit facility and securing the additional working capital now puts us in a stronger financial position to further our Company objectives. We are pleased to have the support in maximizing the potential of our silicon nitride biomaterial.

Finally on our call last quarter, we announced an expansion of our sales organization. This expansion is now complete with the addition of two new area vice presidents and three new medical education managers during Q2 and we look forward to their contributions. The addition of these new experienced and accomplished team members allows us to continue our enhanced focus on our silicon nitride products and drive additional growth and acceptance in the marketplace.

As a result of the sales team expansion, I'm happy to report that we have added 34 new surgeon customers in 2014 so far. For those investors who may be new to Amedica, I would like to summarize our Company's competitive strengths.

Amedica is the only Company that designs, produces and sells silicon nitride medical devices. We operate a 30,000 square foot state-of-the-art manufacturing facility that allows us to control the entire process of manufacturing silicon nitride implants both internally and with our outsource vendor. Our established network of over 50 independent distributors and an in-house sales and marketing teams are highly experienced experts from top companies in spine and orthopedics.

Additionally, the Company has a highly active network of leading surgeons that advise us in the design, development and practical use of our silicon nitride and non-silicon nitride products and product candidates.

Thank you. This now concludes my remarks. I would like to turn the call over to Jay Moyes who will discuss our financial results. Jay?

Thank you, Eric. I am pleased to discuss the financial performance of the Company during the second quarter of 2014. As Eric mentioned, our total revenue for Q2 of 2014 was $5.84 million and for the six months ended June 30, 2014, our total revenue was $11.62 million.

As for product mix, our silicon nitride ceramic products were responsible for 46% of our overall product revenues in Q2 2014 compared to 29% of our overall product revenues in Q2 of 2013. The Company experienced a 1 point increase in the gross margin percentage to 72% for the six months ended June 30, 2014.

Research and development expense for Q2 of 2014 increased by $1.9 million when compared to Q2 of 2013 primarily related to a $700,000 increase and an enhanced focus on our silicon nitride products and non-cash stock-based compensation expense during the second quarter of 2014. We believe that research and development expenses will continue to increase in 2014 as we implement additional clinical studies to support the utility of our silicon nitride products.

General and administrative expenses amounted to $6.3 million in Q2 of 2014 compared to $1.5 million in Q2 of 2013. This is primarily due to again a non-cash stock compensation expense of $4.6 million and to a lesser extent increases in professional service expenses and patent expenses. We expect general and administrative expenses excluding non-cash stock compensation expense to grow modestly in 2014 as a result of becoming a publicly traded company.

Non-cash compensation expense will remain elevated during the third quarter of 2014 due to vesting of the restricted stock units which I will cover later in the call.

Sales and marketing expenses were $5.6 million in Q2 of 2014 compared to $4.8 million in Q2 of 2013, an increase of $800,000. This increase was primarily the result of non-cash stock compensation of $1.1 million, and increase sales and marketing expenses including new headcount that Eric mentioned. We expect the sales and marketing costs will increase in 2014 as our sales continue to increase.

Other expenses of $2.6 million for Q2 of 2014 was the result of a $1.6 million charge for loss on extinguishment of debt related to the GE Capital debt facility which was refinanced on June 30, interest expense of $600,000, and a $450,000 non-cash charge from the change in fair value of our derivative liability related to warrants.

Speaking of non-cash expenses, I would like to emphasize that during Q2 of 2014 and the six months ended June 30, 2014, we recorded approximately $7.4 million and $8.8 million respectively and non-cash stock compensation expense. This compares to $300,000 in non-cash stock compensation expense for each of the same periods in 2013. A large portion of the non-cash stock compensation expense for 2014 is related to the [RSEs] granted to employees and directors at the time of our IPO.

As a reminder, the magnitude of the total non-cash charge related to the RSEs in the neighborhood of the $11 million so the remaining $3 million or so will be recorded in Q3 of 2014 when the RSE vests.

Our GAAP net loss for Q2 of 2014 was $13.2 million compared to a loss of $3.1 million for Q2 of 2013, an increase of $10.1 million. This is primarily due to non-cash stock compensation expense of approximately $7.4 million and a loss on extinguishment of debt of $1.6 million in Q2 of 2014.

Finally our adjusted EBITDA which we define as our earnings before deductions for interest, taxes, depreciation, amortization, non-cash stock compensation expense, change in fair value of our derivative liability and loss on extinguishment of debt was a loss of $2.6 million for the second quarter of 2014 compared to a loss of $1.9 million for Q2 2013, an increase in loss of approximately $700,000.

As of June 30, 2014, our cash balance was approximately $11.6 million. For the first six months of 2014, we paid monthly principal payments to GE Capital of $600,000 along with approximately $100,000 per month in interest.

As we announced last month, we completed a restructuring of our debt facility on June 30 which provided the Company with a 12 to 18 month interest-only period and other favorable terms. The repayment of the GE credit facility will eliminate approximately $3.6 million in remaining scheduled principal payments in 2014 which would have otherwise been under the GE credit facility. This will enable the Company to now spend those resources on the commercialization of our products.

Lastly, as you may have already seen in the filing this morning, I will be stepping down as Chief Financial Officer and Board Director effective tomorrow. I very much appreciated the opportunity to serve during my time here at Amedica. I look forward to watching the Company continue to grow and execute on its strategy to drive awareness and adoption of this innovative silicon nitride technology platform. Back to you, Eric.

Thank you, Jay. Before we open the call for questions, I would like to acknowledge Jay's invaluable contributions to Amedica through both the IPO and debt refinancing process. We wish him well in his future personal endeavors as he leaves us with an experienced financial team in place that will help ensure a seamless transition.

Operator, will you now please instruct the callers on how to join the queue for questions?

(Operator Instructions). Mike Watson, Needham & Company.

Good morning. Thanks for taking my questions. I guess first of all, I wanted to just make sure I knew where your cash position stands post the refinancing because I think it was completed after the end of the quarter so the balance sheet and the press release doesn't reflect that. So I think you had a net increase of about $11 million in your cash so that would put you at around $22 million. Is that correct?

No, that is not correct.

So where were you I guess as of the completion of the refinancing in terms of your debt and sorry -- your cash and debt positions?

June 30 cash balance was $11.5 million and then we are expecting an additional $3.5 million that will be coming in this quarter, this part that is in connection with that refinancing. The $6 million from Magna will come in two tranches, $2.5 million we have received on June 30, and the additional $3.5 million upon the effectiveness of the S-1.

It will occur the current quarter or the third quarter.

Okay. So the $11.5 million as of the end of the quarter includes $2.5 million from the refinancing?

From the Magna portion of the refinancing and all of the proceeds from the Hercules refinance.

Okay. All right. And then I guess what was your cash, how much cash did you actually use during the second quarter?

Cash used in operations was -- I don't have it right at my fingertips so we will look at it in just a second, Mike.

Okay. All right. And then I guess -- just can you give us an update on the number of distributors and salespeople that you have? You mentioned the numbers that you added. I just wanted to make sure that the net increase given potential for turnover, etc.

So the number of distributors I don't believe has changed, it is still in the range of 50 distributors. No, actually it has increased, I lied. 63 distributors now in total that we have and that is approximately 250 sales reps that represent through those distributors and we have four internal area vice presidents -- individuals and we also have four field medical education experts so for a total with other sales management, we have 10 in the sales team and 10 people in the marketing department.

Okay. All right. And then I guess just on your metal and biologics business, I understand the impact from the Biologic Distribution agreement ending but I am just wondering going forward what is the outlook for that part of your business? Do you expect it to continue to decline or do you think it is largely stabilized at this point?

Clearly the biologics is going to continue to decline as we work through the dissolution of the agreement with Bio D we anticipate that the metal sales will be flat as we work on the launch of the third generation product of our metal devices and also the application of the coating of silicon nitride on the system. So I think what we will anticipate for the rest of the year is that the biologics will probably continue to decrease, the metals will probably stay about the same, maybe marginal growth and all of that growth as you can see from this quarter, all that decline or being flat is being greatly offset by the dramatic increase in the utilization of our silicon nitride interbody devices.

50% is a pretty good increase.

Yes, 50% is a pretty good increase and we anticipate that that will continue to grow as we go through the rest of the year and we launch more of the new second-generation products and the feedback from the surgeons has been very, very favorable on the new design and we are very pleased with the direction that that is headed.

Okay. Then just on the manufacturing side of things. The numbers that you gave around efficiency and so forth seem pretty good but the volume number being up so much I'm wondering where all of that volume is going if your sales are up 50%. And then secondarily, I guess with the yields up and the costs down wondering when we will see that -- I guess we saw some improvement in gross margin but given that big decline in unit costs, it seems like gross margins should be going up a lot more.

Yes, so what happens is, as you know, Mike, when you launch a new system and you put in 25 to 50 new sets into the market place, you have to have a complete bank of business, a complete bank of inventories that you send out with those new sets. And so the ramp is really the creation of that bank of inventory products that goes out with each of the new sets and then as we have got those banks in place, what you will see is a dramatic reduction as all we do at that point is we replenish the products that are used in the procedure. So I think you have heard us give this example before. All orthopedic and spine distribution is pretty inefficient. It is like if you were Amazon in selling a pair of shoes you would send out the entire catalog of shoes, your customer would pick out one and then ship the entire catalog back, that is kind of what we have to do with implants. And so you have the buildup of that catalog or that bank of business that has to be done before you can even send out the first instrument set.

You are selling one pair of shoes and that one pair of shoes while it is definitely at an improved cost, it does take a while for that to filter through the process and actually show an overall increase in the margin but that will be occurring over the next couple of quarters.

Absolutely. I think for the most part, we have built up a good majority of our banks so far. The production efforts have been very impressive. The fact that they have been able to increase production at the same time dramatically improve yield and drive down the cost, I think is -- speaks very well for the manufacturing for Brian McEntire and his team so they have done a great job.

So just where do things stand between your own manufacturing and Kyocera? So are these numbers that you are giving for your internal production or with Kyocera?

What we are sharing right now is just internal numbers from our own manufacturing. That will be augmented and as you know the gross margins will improve as we get products coming in from Kyocera. So we are mostly through the process with Kyocera and we hope to have products come in very soon.

Okay. To what degree, given your explanation there about getting the sets out in the field and so forth and the 500% increase in manufacturing volumes, to what degree do you think that had been the lack of those sets had been a constraint on your silicon nitride growth? I mean were there doctors that were interested and wanted to use the products and you just didn't have the sets to get to them?

Yes, I think there is actually a little bit of pent-up demand, Mike, to be very candid. We are trying to get new sets out as quickly as possible. It is not just the buildup of the inventory but it is also the capital investment in the instrument sets that you need to grow.

It is probably -- it is a good problem to have that you have more demand than you have products. We thought we had a pretty aggressive forecast but we have exceeded our forecast in the demand that we have seen of the products and we will continue to work towards ramping that up and getting inventory out to the surgeon customers that want the technology.

That is a 50% increase in silicon nitride sales.

All right. That is all I have. Thank you.

Mike, thanks so much. Appreciate it.

Your question on the cash proceeds, so we closed those on June 30. Like I said, we have an additional $3.5 million that will be funded probably in the next week because our S-1 was declared effective. But in the quarter, we received about $4.3 million of net proceeds from the refinance and we then have some expenses that hit in July related to those refinances of about $1 million.

Okay, thanks.

Thanks, Mike. Appreciate your questions.

David Turkaly, JMP Securities.

This is John on for Dave. Jay, congratulations on retiring again. We will miss working with you.

I am getting good at it.

I want to start out maybe just hitting on the stuff you mentioned, the hip data that will be presented in Kyoto. I know that any revenue from that would be far out in the future but I just want to make sure I am understanding it. Was that silicon nitride coated metal joints or was that solid silicon nitride?

That is all solid silicon nitride articulating on polyethylene.

Okay. Do you know if CeramTec has any IP around that that could make that challenging? It just seems like it could potentially be a pretty solid home run for you guys if you got that out there?

Not that we are aware of.

Okay, great. I wanted to talk just a little bit about some of the second generation products. Obviously you guys have been referencing that. It has been a big driver for you. Now that some of the surgeons have had a couple of quarters to get more used to those products, can you give us just some insights into the things you are hearing from the field, what they are saying as they gain experience with those, what they like, if there are any improvements they want to see as you move forward?

No, I think clearly the new design with the threaded inserter which is much more what surgeons are accustomed to, I think they have really liked that design. So the increased control of the device during insertion, the accurate placement of the device, some of the more of aggressive features on the product makes it much more stable at the time of implantation. And so I think all of those things have been extremely positive.

The benefits we continue to hear from surgeons which is that they feel like they are getting better fusions, faster fusions. We want to be able to demonstrate that obviously in our clinical studies that we are doing but anecdotally the input that we get from these surgeons is very, very favorable. So I think it is going very well and I think not only just the standard instruments that we have put in place but we have done some pretty impressive instrumentation enhancements with the systems and I think it makes for the surgical procedure to be much more easy for them. It is not just the second-generation design or the implant, it is the second-generation design of the instrumentation as well.

Okay, that is helpful. As you are rolling those out, you are getting pretty solid growth in silicon nitride. You beat our forecast there. Is that more from increased penetration within existing accounts as guys get more experienced with these and start using it more in their practice or is this getting out to new surgeons? Can you help us tease those effects out a little bit?

I think there is probably a little bit of growth with our existing surgeons. I think as they -- typically what you see is sometimes surgeons will use one device for one application. For example, you will say I really like silicon nitride for cervical but I might not like it because I use a lateral device or whatever. But because of the really good result I think they are getting with the cervical, they might consider converting from a lateral to maybe an oblique or to a posterior implant because they like the benefits of the material.

So I think we are definitely seeing -- I know that we are seeing some growth with our existing business but the vast majority of the growth is really coming from new surgeons who are trying the technology for the first time and utilizing the new designs.

And then looking at Europe, we are still modeling a pretty small contribution there. Can you talk to us about how things are going in terms of rolling out the second generation products there and any sort of impact you are seeing from that?

So we have now fully converted all of K2M's gen 1 products to generation 2 products in Europe. We are in the process of scheduling kind of a commercial meeting with them here in the near future in Advanced EuroSpine which will be held in October for us to be able to really focus our joint sales and marketing efforts during that meeting. I think that the growth -- we didn't anticipate strong growth in that area. This is a mutual partnership that we have been working on for a while. We have both been fairly conservative really targeting key surgeons and trying convert them and get them to have good experiences so that we can utilize them to speak about the technology. And I think today I think we are fairly pleased with the progress but we are at a stage now where our expectations for the rest of the year is that they are going to start ramping up. All the work that we have done the first half to make sure that everything is in place is now completed. Our efforts and the objective of our meeting with them in the upcoming EuroSpine is to ensure that the second half of the year that we dramatically increase the use of the second-generation products there in Europe.

That makes sense. Can you just remind us what kind of diligence process did you go through with K2M when they originally signed the license agreement for Europe?

It was a long and painful diligence process. Back and forth between the two companies to have them understand the technology, get comfortable with it before they presented it to their first surgeon. We decided to do kind of a mini -- not trial but experiment or sample of our technologies so they identified key surgeons and allowed them to do X number of implants and then those surgeons followed those patients for I think it was three to six months depending on the surgeon. And then based on feedback from those surgeons, then K2M decided that they felt it was so much more beneficial than what they were currently using that they went ahead and signed an agreement with us to go to Europe and we continue to have conversations with K2M about the potential expansion plans and we will see where that goes.

Okay, that is helpful. And then looking at the new surgeons if my numbers are correct and I am remembering last quarter correctly, I think you had 12 surgeons new in the first quarter which would mean that 22 of those 34 came in the second quarter which would imply a pretty solid acceleration. First off, are my numbers correct there?

That is exactly right. Good memory.

Okay. So as you are moving into these new accounts, how long does it take a surgeon to sort of really roll this out in their practice? And maybe you can help us think through some of the hurdles they have got to clear before they get comfortable enough to make it a meaningful part of their practice?

That is a great question and there is a lag between the time that a surgeon is converted and the time that the hospital will actually allow the surgeon to utilize the device. Often times hospitals have put in artificial barriers of entry for new technology. They expect companies to go in and provide some kind of data on new technologies and often that data is used for a new tech committee and then it has to be approved with that committee to get it for use in the hospital. That timeline depends really on the hospital, sometimes it is as quick as a couple of weeks to a month. Other times it takes longer than that.

But luckily for us I think the things that really support those efforts are the published data, the biomaterial claims and the sheer number of implants that we have done to date with no issues at all really bode well for us as we go to those new committee meetings and get the products approved.

That is the greatest gating item. Surgeons, actually the time from as we go in and present and if we do a cataberic trial with them for them to get comfortable with the implant and the instrumentation, it really doesn't take very much time to convert a new surgeon to the technology. I think they readily see the benefits of it and really the lag is the time it takes to get into the hospital itself.

I hope I explained that well, John. Does that make sense?

Yes, that makes sense. That is helpful. That is everything from us. Congrats on the nice uptick in the silicon nitrite sales. Thanks, guys.

Thank you, John. We are pleased with the quarter. I think that is it.

So that concludes our second-quarter earnings call. I would like to thank all those who participated and we look forward to speaking to you again in November and please feel free to call myself directly if you have any additional questions. Thanks again and we will talk to you soon.

Ladies and gentlemen, thank you for attending today's conference. This concludes today's program. You may all disconnect. Have a wonderful day.