UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2019
or
For the transition period from _______ to _________
Commission File No. 001-33624
SINTX Technologies, Inc.
(previously known as “Amedica Corporation”)
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
84-1375299
(IRS Employer
Identification No.)
1885 West 2100 South, Salt Lake City, UT 84119
(Address of principal executive offices and Zip Code)
(801) 839-3500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.01 par value
Trading Symbol
SINT
Name of each exchange on which registered
The NASDAQ Capital Market
Securities registered under Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Non-Accelerated Filer
[ ]
[ ]
Accelerated Filer
Smaller reporting company
Emerging growth company
[ ]
[X]
[ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last
sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter was $26,936,976.
The number of shares outstanding of the registrant’s common stock, $0.01 par value per share, as of March 19, 2020 was 10,563,618.
DOCUMENTS INCORPORATED BY REFERENCE:
None
Item Number and Caption
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
Item 15.
Item 16.
Signatures
Index to Consolidated Financial Statements
Exhibits and Financial Statement Schedules
Form 10-K Summary
2
Page
4
4
26
46
46
46
46
47
47
47
48
59
59
59
59
60
61
61
67
72
73
74
75
75
81
82
F-1
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the
Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than
statements of historical fact are forward-looking statements. SINTX Technologies, Inc. (“we”, “us”, “ourselves”, “the Company”) has tried to identify forward-looking
statements by using words such as “believe,” “may,” “might,” “could,” “will,” “aim,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “plan” and similar words. These
forward-looking statements are based on our current assumptions, expectations and estimates of future events and trends. Forward-looking statements are only predictions and
are subject to many risks, uncertainties and other factors that may affect our businesses and operations and could cause actual results to differ materially from those predicted.
These risks and uncertainties include, but are not limited to, factors affecting our quarterly and annual results, our ability to manage our growth, our ability to sustain our
profitability, demand for our products, our ability to compete successfully, our ability to rapidly develop and introduce new products, our ability to develop and execute on
successful business strategies, our ability to comply with changes and applicable laws and regulations that are applicable to our businesses, our ability to safeguard our
intellectual property, our success in defending legal proceedings brought against us, trends in the medical device industry, and general economic conditions, and other risks set
forth throughout this Annual Report, including under “Item 1, Business,” “Item 1A, Risk Factors,” and “Item 7, Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” and those discussed in other documents we file with the Securities and Exchange Commission (the “SEC”). Moreover, we operate in
an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for us to predict all risk factors and uncertainties, nor can we assess
the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any
forward-looking statements.
Given these risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements. Forward-looking statements contained in this Annual
Report speak only as of the date of this Annual Report. We undertake no obligation to update any forward-looking statements as a result of new information, events or
circumstances or other factors arising or coming to our attention after the date hereof.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Exchange Act. Accordingly, we file periodic reports and other information with the SEC. We will make our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports available through our Internet site, https://ir.sintx.com/ as
soon as reasonably practicable after electronically filing such materials with the SEC. They may also be obtained free of charge by writing to SINTX Technologies, Inc., Attn:
Investor Relations, 1885 West 2100 South, Salt Lake City, UT 84119. In addition, copies of these reports may be obtained through the SEC’s website at www.sec.gov or by
visiting the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549 or by calling the SEC at 800-SEC-0330. Our common stock trades on The NASDAQ
Capital Market under the symbol “SINT.”
Unless otherwise indicated, all information contained in this Annual Report reflects a 1-for-15 reverse split of our common stock which was effected on January 25, 2016, a 1-
for-12 reverse split which was effected on November 10, 2017, and a 1-for-30 reverse split which was effected on July 26, 2019.
3
ITEM 1.
BUSINESS
PART I
Overview – SINTX Technologies
We are an advanced materials company focused on providing ceramic based solutions in a variety of medical and industrial applications. To date, our primary focus has been
the research, development and commercialization of medical implant products manufactured with silicon nitride. We believe that silicon nitride has a superb combination of
properties that make it ideally suited for long-term human implantation. Other biomaterials are based on bone grafts, metal alloys, and polymers- all of which have well-known
practical limitations and disadvantages. In contrast, silicon nitride has a legacy of success in the most demanding and extreme industrial environments. As a human implant
material, silicon nitride offers bone ingrowth, resistance to bacterial and viral infection, ease of diagnostic imaging, resistance to corrosion, and superior strength and fracture
resistance, among other advantages, all of which claims are validated in our large and growing inventory of peer-reviewed, published literature reports. We believe that our
versatile silicon nitride manufacturing expertise positions us favorably to introduce new and innovative devices in the medical and non-medical fields.
We also believe that we are the first and only company to commercialize silicon nitride medical implants. Prior to October 1, 2018, we designed, manufactured and
commercialized silicon nitride products for our own behalf in the spine implant market. Over 35,000 of our spinal implants manufactured with silicon nitride have been
implanted into patients, with an excellent safety record. On October 1, 2018, we sold our spine implant business to CTL Medical and now manufacture spine implants made
with silicon nitride for CTL Medical. Prior to selling our spine implant business to CTL Medical, we had received 510(k) regulatory clearance in the United States, a CE mark
in Europe, ANVISA approval in Brazil, and ARTG and Prostheses approvals in Australia for a number of silicon nitride spine implant products designed for spinal fusion
surgery. Spine implant products manufactured by us from silicon nitride are currently marketed and sold by CTL Medical under the Valeo® brand to surgeons and hospitals in
the United States and to selected markets in Europe and South America. These implants are designed for use in cervical (neck) and thoracolumbar (lower back) spine surgery.
We are collaborating with CTL Medical to establish commercial partners in other parts of the world and also working with other partners to obtain regulatory approval for
silicon nitride implants in Japan.
The sale of our spine implant business to CTL Medical enables us to now focus on our core competencies. These core competencies are research and development of silicon
nitride and the design and manufacture of medical and nonmedical products manufactured from silicon nitride and other ceramic materials for our own account and in
collaboration with other manufacturers. We are targeting original equipment manufacturer (“OEM”) – including CTL Medical - and private label partnerships in order to
accelerate adoption of silicon nitride in future markets such as coating products with silicon nitride, hip and knee replacements, dental and maxillofacial implants, extremities,
trauma, and sports medicine. Existing biomaterials, based on plastics, metals, and bone grafts have well-recognized limitations that we believe are addressed by silicon nitride,
and we are uniquely positioned to convert existing, successful implant designs made by other companies into products manufactured with silicon nitride. OEM and private label
partnerships allow us to work with a variety of partners, accelerate the adoption of silicon nitride, and realize incremental revenue at improved operating margins, when
compared to the cost-intensive direct sales model.
We believe that silicon nitride addresses many of the biomaterial-related limitations in fields such as hip and knee replacements, dental and maxillofacial implants, sports
medicine, extremities, and trauma surgery. We further believe that the inherent material properties of silicon nitride, and the ability to formulate the material in a variety of
compositions, combined with precise control of the surface properties of the material, opens up a number of commercial opportunities across orthopedic surgery, neurological
surgery, maxillofacial surgery, and other medical disciplines.
Our grade of silicon nitride is of a very high quality and is well suited for a wide variety of applications that would benefit from its mechanical, thermal, and chemical
properties. We have several commercial partnerships and have opportunities ranging from low-volume, highly engineered components to high-volume simple shapes.
We operate a 30,000 square foot manufacturing, laboratory and administrative facility at our corporate headquarters in Salt Lake City, Utah, and we believe we are the only
vertically integrated silicon nitride medical device manufacturer in the world.
4
Overview - Biomaterials
Biomaterials are natural or synthetic biocompatible materials that are used in virtually every medical specialty to improve or preserve body functionality. Various types of
biomaterials are used as essential components in medical devices, drug delivery systems, replacement and tissue repair technologies, prostheses, and diagnostic technologies.
There are four general categories of biomaterials:
● Ceramics. Ceramics are hard, non-metallic, non-corrosive, heat-resistant materials made by shaping and then applying high temperatures. Traditional ceramics
commonly used as biomaterials include carbon, oxides of aluminum, zirconium and titanium, calcium phosphate and zirconia-toughened alumina. Examples of medical
uses of ceramics include repair, augmentation or stabilization of fractured bones, bone and joint replacements, spinal fusion devices, dental implants and restorations,
heart valves and surgical instruments.
● Metals. Metals commonly used as biomaterials include titanium, stainless steel, cobalt, chrome, gold, silver and platinum, and alloys of these metals. Examples of
medical uses of metals include the repair or stabilization of fractured bones, stents, surgical instruments, bone and joint replacements, spinal fusion devices, dental
implants and restorations and heart valves.
● Natural biomaterials. Natural biomaterials are derived from human donors, animal or plant sources and include human bone, collagen, gelatin, cellulose, chitin, alginate
and hyaluronic acid. Examples of medical uses of natural biomaterials include the addition or substitution of hard and soft tissue, cornea protectors, vascular grafts,
repair and replacement of tendons and ligaments, bone and joint replacements, spinal fusion devices, dental restorations and heart valves.
●
Polymers. Polymers are synthetic compounds consisting of similar molecules linked together that can be created to have specific properties. Polymers commonly used as
biomaterials include nylon, silicon rubber, polyester, polyethylene, cross-linked polyethylene (a stronger version), polymethylmethacrylate, polyvinyl chloride and
polyetheretherketone – which is commonly referred to as PEEK. Examples of medical uses of polymers include soft-tissue replacement, sutures, drug delivery systems,
joint replacements, spinal fusion devices and dental restorations.
Our Silicon Nitride Technology Platform
We believe we are the only FDA-cleared and ISO 13485 certified silicon nitride medical device manufacturing facility in the world, and the only provider of structural
ceramics-based medical devices used for spinal fusion applications. Silicon nitride is a chemical compound comprised of the elements silicon and nitrogen, with the chemical
formula Si3N4. Silicon nitride, an advanced ceramic, is lightweight, resistant to fracture and strong, and is used in many demanding mechanical, thermal and wear applications,
such as in space shuttle bearings, jet engine components and body armor.
We believe our silicon nitride is ideal as an implant material and is superior to other biomaterials currently used in the market such as PEEK, allograft and autograft bone, metal
and traditional oxide ceramics, none of which possess all of the favorable characteristics of silicon nitride:
●
Promotes Bone Growth. Our silicon nitride is osteointegrative through its inherent surface topography and surface chemistry. The surface topography provides
scaffolding for new bone growth. As a hydrophilic material, silicon nitride attracts protein cells and nutrients that stimulate osteoprogenitor cells to differentiate into
osteoblasts, which are needed for optimal bone growth environments. Our silicon nitride has an inherent surface chemistry that favors bone formation and healing, much
more so than PEEK and metals. These properties were highlighted in an in vivo study, where we measured the force required to separate devices from the spine after
being implanted for three months, which indicates the quality of osteointegration. In the absence of bacteria, the force required to separate our silicon nitride from its
surrounding bone was approximately three times that of PEEK, and nearly two times that of titanium. In the presence of bacteria, the force required to separate our
silicon nitride from its surrounding bone was over five times that of titanium, while there was effectively no separation force required for PEEK, indicating essentially no
osteointegration in a septic environment.
5
●
●
●
●
Antibacterial. We have demonstrated in in vitro and in vivo studies that silicon nitride has inherent surface antibacterial properties, which reduce the risk of bacterial
infection and biofilm in and around a silicon nitride device. PEEK, traditional ceramics, metals and bone do not have this bacterial resistance. These properties were
highlighted in an in vitro study (Acta Biomater. 2012 Dec;8(12):4447-54. doi: 10.1016/j.actbio.2012.07.038. Epub 2012 Jul 31.), where live bacteria counts were
between 8 and 30 times lower on our silicon nitride than PEEK and up to 8 times lower on our silicon nitride than titanium. In addition to improving patient outcomes,
we believe the antibacterial properties of our silicon nitride should make it an attractive biomaterial to hospitals and surgeons who are not reimbursed by third-party
payers for the treatment of acute, implant-related infections. Additionally, silicon nitride is synthetic and, therefore, there is a lower risk of disease transmission through
cross-contamination or of an adverse auto-immune response, sometimes associated with the use of allograft bone.
Antiviral: Solid-surface inactivation of microbial pathogens has ancient roots; the Smith Papyrus (2600~2200 B.C.) described the use of copper surfaces to sterilize chest
wounds and drinking water. Today, brass and bronze on door knobs help prevent microbial spread in hospitals, and metal particles and surface coatings of selected
metals are used in hygiene-sensitive environments, both as inactivators and adjuvants in inducing cellular immunity. Cellular toxicity limits these approaches because
while the reactive oxygen radicals generated at metal surfaces efficiently kill bacteria and viruses, they also damage cells by oxidizing their proteins and lipids. Recent
data have shown that silicon nitride surfaces are effective against several types of viruses. With surface-contact transmission of viral pathogens, particularly influenza,
and the increasing use of consumer touchscreens in various retail industries, we believe that our material has value to OEM partners focused on consumer glass-based
surface coatings and treatments. We have filed a U.S. patent application on this effect.
Antifungal: We have conducted preliminary studies which suggest that our silicon nitride may be effective against fungal microbes. Plant-based viruses, bacteria, and
fungi affect some 15% of the world’s edible crops, or about 1 billion metric tons of edible produce annually, with an economic impact in the US and Canada alone
estimated to be between $1.5 to $5 Billion per year. The mycotoxins produced by these plant fungi have an overall negative impact on human health and longevity. The
inorganic nature of silicon nitride may prove to be more beneficial than the use of petrochemical or organometallic fungicides which are known to have residual effects
in soil, on plants, and in fruit
Imaging Compatible. Our silicon nitride interbody spinal fusion devices are semi-radiolucent, clearly visible in X-rays, and produce no distortion under MRI and no
scattering under CT. These characteristics enable an exact view of the device for precise intra-operative placement and post-operative bone fusion assessment in spinal
fusion procedures. These qualities provide surgeons with greater certainty of outcomes with our silicon nitride devices than with other biomaterials, such as PEEK and
metals.
● Hard, Strong and Resistant to Fracture. Our silicon nitride is hard, strong and possesses superior resistance to fracture over traditional ceramics and greater strength than
polymers currently on the market. For example, our silicon nitride’s flexural strength is more than five times that of PEEK and our silicon nitride’s compressive strength
is over twenty times that of PEEK. Unlike PEEK interbody spinal fusion devices, we believe our silicon nitride interbody spinal fusion devices can withstand the forces
exerted during implantation and daily activities over the long term.
●
Resistant to Wear. We believe our silicon nitride joint implant product candidates could have higher resistance to wear than metal-on-cross-linked polyethylene and
traditional oxide ceramic-on-cross-linked polyethylene joint implants, the two most commonly used total hip replacement implants. Wear debris associated with metal
implants increases the risk of metal sensitivity and metallosis. It is a primary reason for early failures of metal and polymer articulating joint components.
● Non-Corrosive. Our silicon nitride does not have the drawbacks associated with the corrosive nature of metal within the body, including metal sensitivity and metallosis,
nor does it result in the release of metal ions into the body. As a result, we believe our silicon nitride products will have lower revision rates and fewer complications
than comparable metal and traditional oxide ceramic products.
6
We and a number of independent third parties have conducted extensive biocompatibility, biomechanical, in vivo and in vitro testing on our silicon nitride composition to
establish its safety and efficacy in support of regulatory clearance of our biomaterial, products and product candidates. We have also completed additional testing of our silicon
nitride products and product candidates. The results of this testing have been published in over 130 peer reviewed publications and presentations that include basic science
studies, small- and large-animal data, and human clinical studies. We believe that our product development strategy is consistent with the manner in which other biomaterials
have been successfully introduced into the market and adopted as the standard of care. Listed below is an overview of some of the key testing completed on our silicon nitride
biomaterial, products and product candidates to date, as well as other information about our silicon nitride and other biomaterials.
Supporting Data
Biocompatibility
Before our silicon nitride was cleared by the FDA in 2008, we conducted a series of biocompatibility tests following the guidelines of the FDA and ISO and submitted the
results to the FDA as part of the regulatory clearance process. These tests confirmed that our silicon nitride products meet required biocompatibility standards for human use.
Promotion of Bone Growth
In 2012, we conducted two separate studies at Brown University, the results of which suggest that the chemistry and inherent surface topography of our solid silicon nitride
provides an optimal environment for bone growth onto and around the device.
The first study was a series of in vitro analyses of protein adsorption, or presence on the surface of the biomaterial, onto silicon nitride, PEEK and titanium. The results of this
study indicated that adsorption of two key proteins necessary for bone growth (fibronectin and vitronectin) were up to eight times greater on our silicon nitride than on PEEK,
and up to four times greater than on titanium. A third important protein (laminin) had up to two times greater adsorption on our silicon nitride than on PEEK, and up to two-and-
one-half times greater adsorption than on titanium.
The second study was an in vivo investigation of the osteointegration characteristics of these same three biomaterials after they had been surgically implanted into the skulls of
laboratory rats. This study included an examination of the effect of Staphylococcus epidermidis bacteria on osteointegration. At time intervals of up to three months after
implantation of the biomaterial, the amount of new bone growth within the surgical site and in direct contact with the implanted biomaterial was evaluated. In the absence of
bacteria, new bone formation within the surgical site surrounding our silicon nitride was approximately 69%, compared with 36% and 24% for titanium and PEEK, respectively.
Similarly, bone in direct contact, or apposition, with our silicon nitride, titanium and PEEK was 59%, 19% and 8%, respectively. As is common, in the presence of bacteria,
new bone formation within the surgical site was suppressed, but still significantly greater for our silicon nitride than for the other two biomaterials. Observed new bone growth
within the surgical site surrounding our silicon nitride was 41%, compared with 26% and 21% for titanium and PEEK, respectively. At the implant interface, the bone apposition
for our silicon nitride, titanium and PEEK was 23%, 9% and 5%, respectively. To further characterize the extent of osteointegration, the force needed to separate each implant
from its surrounding bone was measured. A larger force needed to separate the implant is an indication of improved osteointegration. At three months after implantation, in the
absence of bacteria, the force required to separate our silicon nitride from its surrounding bone was approximately three times that of PEEK, and nearly two times that of
titanium. In the presence of bacteria, there was effectively no separation force required for PEEK, indicating essentially no osteointegration. Our silicon nitride required over
five times the force to separate it from its surrounding bone in the presence of bacteria in comparison to titanium.
7
In 2008, we conducted an animal study in which we evaluated the level of osteointegration of our porous silicon nitride with a knee-defect model in adult sheep. At three
months after implantation, three out of five of the silicon nitride implants had extensive new bone formation at and into the implant surface, showing that the bone had grown
into our porous silicon nitride to a depth of 3 millimeters, or mm. This animal study demonstrated the rapid osteointegration potential of our porous silicon nitride composition.
Hardness, Strength and Resistance to Fracture
Comparative Information
As shown in the table of comparative information publicly available about various biomaterials below:
●
●
●
the hardness, or a material’s resistance to deformity, of silicon nitride is comparable to traditional ceramics, but is substantially higher than either polymers or metals;
the strength of silicon nitride is comparable or higher than metals and traditional ceramics, and is about sixteen to fifty-five times stronger than highly-cross-linked
polyethylene, and four to eight times stronger than PEEK; and
silicon nitride has the highest fracture resistance of any medical ceramic material and is three to eleven times more resistant to fracture than PEEK or highly-cross-linked
polyethylene. This is due to the interwoven microstructure of silicon nitride. Metals have the highest fracture resistance.
Comparison of Mechanical Properties Among Orthopedic Biomaterials
Material
Silicon Nitride
Aluminum Oxide Ceramic
Zirconia-Toughened Alumina Ceramic
PEEK
Highly-Cross-Linked Polyethylene Polymer
Cobalt-Chromium Metal
Titanium Alloy Metal
Hardness
(GPa)(1)
13 – 16
14 – 19
12 – 19
0.09 – 0.28
0.03 – 0.07
3 – 4
3 – 4
Strength
(MPa)(1)
800 – 1200
300 – 500
700 – 1150
160 – 180
22 – 48
700 – 1000
920 – 980
Fracture Resistance
(MPam1/2)(1)
8 – 11
3 – 5
5 – 10
2 – 3
1 – 2
50 – 100
75
(1) GPa is a giga-pascal. Pascals are a measure of pressure. MPam1/2 is mega-pascal times a square root meter and is a measure related to the energy required to initiate fracture
of a material.
We believe that the combination of high hardness, strength and fracture resistance positions our silicon nitride as an ideal biomaterial for many medical applications.
Burst Strength
In 2006, we conducted in-house comparative “burst strength” tests on femoral heads made from our silicon nitride produced by a contract manufacturer to our specifications
and femoral heads made from one of the strongest commercially available ceramics, BIOLOX® delta (zirconia-toughened alumina). These tests were performed on three
designs of 28 mm femoral heads using accepted testing protocols. The tests involved applying a load to each femoral head while mounted on a cobalt-chromium simulated hip
implant stem, until the head burst. This enabled us to directly compare the strength of the femoral heads made of the two biomaterials. The results also provided an indication of
each biomaterial’s resistance to fracture. The results of these tests are shown in the chart below.
8
The average burst test strength for the silicon nitride femoral heads in these tests was 75 kilonewtons, or kNs, compared with 65 kN for BIOLOX® delta, or about a 15%
improvement. The burst strengths observed in our tests for BIOLOX® delta femoral heads are comparable to those observed by an independent party testing the same design
BIOLOX® delta femoral heads as we did. We also conducted burst strength tests of 36 mm femoral heads made from our silicon nitride which showed those femoral heads had
burst strengths that averaged 164 kN.
Resistance to Wear
In 2011, we commissioned an independent laboratory to conduct a wear study using our silicon nitride femoral heads. We tested our 28 mm silicon nitride femoral heads
articulated against cross-linked polyethylene acetabular liners and our 40 mm silicon nitride femoral heads articulated against cross-linked polyethylene acetabular liners using
well-established protocols in a hip simulator for their wear performance over 5 million cycles. We then compared the results for our silicon nitride product candidates to the
results for the cobalt chrome femoral head and publicly available data from other commonly paired products. The results and comparison showed that:
●
●
o u r silicon nitride-on-cross-linked polyethylene had approximately half the wear rate of that publicly reported for cobalt chrome-on-cross-linked polyethylene
articulating hip components; and
our silicon nitride-on-cross-linked polyethylene had comparable wear to that publicly reported for traditional oxide ceramic-on-cross-linked polyethylene articulating hip
components.
Antibacterial Properties
The results of the two studies at Brown University in 2012, demonstrate that our solid silicon nitride has antibacterial properties. The objective of the in vitro study was to
determine how our silicon nitride, PEEK and titanium interact with bacteria, protein and bone cells without the use of antibiotics and compared the growth of five different
types of bacteria on silicon nitride, PEEK and titanium over time. Live bacteria counts were between 8 to 30 times lower on silicon nitride than PEEK and up to 8 times lower
on silicon nitride than titanium.
In the in vivo study, bacteria were applied to the biomaterials before implantation. Three months after implantation, no infection was observed with silicon nitride, whereas both
PEEK and titanium showed infection. The data demonstrate that our silicon nitride inhibits biofilm formation and bacterial colonization around the biomaterial.
Antiviral and Antifungal Properties
Antiviral: Our data have shown that off-stoichiometric reactions at the surface of our silicon nitride can inactivate different types of single-strand RNA viruses. This antiviral
property derives from reactive nitrogen species without harm to mammalian cells. Testing based on polymerase chain reaction tests of viral RNA and in situ Raman
spectroscopy suggest that our material is effective in counteracting several viruses relevant to public health concerns, such as Influenza A, Feline calcivirus, and Enterovirus.
9
Antifungal: We have conducted preliminary studies which suggest that our silicon nitride may be effective against fungal microbes. After sintering and processing, powdered
silicon nitride was dissolved in a 1.5 vol.% aqueous solution that underwent field testing on two species of grape vine leaves that were infected with a fungal pathogen
Plasmopara viticola. After 1 minute of exposure to our silicon nitride, the infected area of the leaves was reduced by ~95%. The likely mechanism likely involves electrical
attraction to, and attachment of silicon nitride particles to oppositely-charged pathogen spores.
Imaging Compatibility
In 2007, we conducted a study to compare the imaging characteristics of test blanks made of PEEK, the metals titanium and tantalum, and silicon nitride using a cadaver human
vertebral body. Images of the vertebral body and the blanks were obtained using X-ray, CT and MRI under identical conditions. We assessed the radiolucent characteristics of
the blanks in X-ray images quantitatively, assessed the presence of scatter in CT qualitatively and assessed distortion in MRI quantitatively. In X-ray, the metal blanks did not
permit visualization of the underlying bone of the vertebral body, while PEEK was transparent, rendering its location difficult to determine. The silicon nitride blank had an
intermediate radiolucency that rendered it visible and allowed a visual assessment of the underlying bone of the vertebral body. CT and MRI of the metal blanks indicated the
presence of distortion while silicon nitride and PEEK exhibited no scattering.
Our Forms of Silicon Nitride
To control the quality, cost and availability of our silicon nitride products and product candidates, we operate our own manufacturing facility. Our 30,000 square foot corporate
facility includes an 18,000 square foot FDA Registered and ISO 13485 certified medical device manufacturing space. It is equipped with state-of-the-art powder processing,
spray drying, pressing and computerized machining equipment, sintering furnaces, and other testing equipment that enables us to control the entire manufacturing process for
our silicon nitride products and product candidates. To our knowledge, we are the only vertically integrated silicon nitride orthopedic medical device manufacturer in the world.
All operations with the exception of raw material production are performed in-house. We purchase raw materials, consisting of silicon nitride ceramic powder and dopant
chemical compounds, from several vendors which are ISO registered and approved by us. These raw materials are characterized and tested in accordance with our specifications
and then blended to formulate our silicon nitride. We believe that there are multiple vendors that can supply us these raw materials and we continually monitor the quality and
pricing offered by our vendors to ensure high quality and cost-effective supply of these materials.
The chemical composition of our in-house formulation of silicon nitride and our processing and manufacturing experience allow us to produce silicon nitride in four distinct
forms. This capability provides us with the ability to utilize our silicon nitride biomaterial in a variety of ways depending on the intended application, which, together with our
silicon nitride’s key characteristics, distinguishes us from manufacturers of products using other biomaterials.
We currently produce silicon nitride for use in our commercial products and product candidates in the following forms:
●
Solid Silicon Nitride. This form of silicon nitride is a fully dense, load-bearing solid used for devices that require high strength, toughness, fracture resistance and low
wear, including interbody spinal fusion devices, hip and knee replacement implants, and dental implants.
10
●
Porous Silicon Nitride. While this form of silicon nitride has a chemical composition that is identical to that of our monolithic solid silicon nitride, this formulation has a
porous structure, which is engineered to mimic cancellous bone, the spongy bone tissue that typically makes up the interior of human bones. Our porous silicon nitride
has interconnected pores ranging in size between about 90 and 600 microns, which is similar to that of cancellous bone. This form of silicon nitride can be used for the
promotion of bone in-growth and attachment. We believe our porous silicon nitride can act as a substitute for the orthobiologics currently used to fill interbody devices in
an effort to stimulate fusion, as a bone void filler, and as a porous scaffold for medical devices.
● Composite of Solid and Porous Silicon Nitride. This form of silicon nitride is a combination, or composite, of our solid monolithic and porous formulations of silicon
nitride. This composite may be used to manufacture devices and implants that mimic the structure of natural bone by incorporating both a fully dense, load-bearing solid
component on the outside and a porous component intended to promote bone in-growth on the inside. This composite form of silicon nitride is used in interbody spinal
fusion devices and can be used in components for total hip and knee replacement implants.
● Composite of Silicon Nitride and PEEK. We have demonstrated in the laboratory that it is possible to compound our silicon nitride powder and the polymer PEEK and
that the ensuing composite material maintains the bioactive properties of silicon nitride. We have engaged commercial partners to assist us in developing this technology.
This composite material would allow the straightforward machinability of a complex device that would be more challenging to manufacture from silicon nitride alone.
●
Silicon Nitride Coating. With a similar chemical composition as our other forms of silicon nitride, this form of silicon nitride can be applied as an adherent coating to
metallic substrates, including cobalt-chromium, titanium and steel alloys, polymers, and ceramics. We believe applying an extremely thin layer of silicon nitride as a
coating may provide a highly wear-resistant articulation surface, such as on femoral heads, which may reduce problems associated with metal or polymer wear debris.
We also believe that the silicon nitride coating can be applied to devices that require firm fixation and functional connections between the device or implant and the
surrounding tissue, such as hip stems and screws. The use of silicon nitride coating may also create an antibacterial, antiviral, and antifungal barrier between the device
and the adjacent bone or tissue. We are currently evaluating several different coating technologies.
11
We believe we can use our silicon nitride technology platform to become a leading biomaterial company and have the following principal competitive strengths:
Our Competitive Strengths
●
●
●
Sole Provider of Silicon Nitride Medical Devices. We believe we are the only company that designs, develops, manufactures and sells medical grade silicon nitride-based
products. Due to its key characteristics, we believe our silicon nitride enables us to offer new and transformative products across multiple medical specialties. In
addition, with the FDA clearance of our silicon nitride Valeo products, we are the only company to develop and manufacture a ceramic for use in FDA cleared spinal
fusion medical devices in the United States.
In-House Manufacturing Capabilities. We operate an 18,000 square foot manufacturing facility located at our corporate headquarters in Salt Lake City, Utah. This
operation complies with the FDA’s quality system regulation, or QSR, and is certified under the International Organization for Standardization’s, or ISO, standard 13485
for medical devices. This facility allows us to rapidly design and produce silicon nitride products while controlling the entire manufacturing process from raw material to
finished components.
Extensive Network of Scientific Collaborators. We have developed strong, multi-year, collaborative relationships with surgeons who have used our products. These
surgeons have supported us in collecting clinical data on silicon nitride and on reporting the successful patient outcomes they have observed. We also have long standing
relations with university laboratories in Japan and the US and have recently been invited to participate in a European consortium on silicon nitride. Our partner in Japan
has been at the forefront of silicon nitride biomaterial research for several years and has published extensively on the subject.
● Highly Experienced Management and Technical Advisory Team. Members of our management team have extensive experience in silicon nitride, ceramics, research and
development, manufacturing and operations, product development, launching of new products into the orthopedics market and selling to hospitals through direct sales
organizations, distributors, manufacturers and other orthopedic companies. We also collaborate with a network of leading technical (academic and surgeon) advisors in
the design, development and use of our silicon nitride products and product candidates.
Our Strategy
Our goal is to become a leading biomaterial company focused on using our silicon nitride technology platform to develop, manufacture and commercialize a broad range of
medical devices. Key elements of our strategy to achieve this goal are the following:
●
Support CTL and drive further adoption of silicon nitride interbody spinal fusion devices. We have entered into a 10-year agreement to manufacture all of CTL Medical’s
requirements of silicon nitride based spinal implant products. This includes the current product line as well as new applications for silicon nitride in the spine.
● Develop a commercial opportunity outside of spine. We have had active programs outside of spine for several years. We expect to commercialize on one or more of these
in the near future.
● Develop new silicon nitride manufacturing technologies. Our current manufacturing process has allowed us to successfully produce spinal implants for over 10 years.
However, this process has limitations and we are actively pursuing other manufacturing technologies such as additive manufacturing, and surface coating technologies.
● Make improvements to our current formulation of silicon nitride to increase the bioactive properties of the material. We have demonstrated in the laboratory that we can
make our material more bioactive. This work has been independently corroborated by researchers in other parts of the world. We expect that the availability of silicon
nitride with enhanced bioactivity would open up new markets to us.
12
●
Apply our silicon nitride technology platform to other OEM opportunities – medical and non-medical. We believe our biomaterial expertise, flexible manufacturing
process, and strong intellectual property will allow us to transition currently available medical device products made of inferior biomaterials and manufacture them using
silicon nitride and our technology platform to improve their characteristics. We are seeking partnerships to utilize our capabilities and manufacture products for medical
and non-medical original equipment manufacturer (“OEM”) and private label partnerships. We see specific opportunities in markets such as dental, maxillofacial, total
hip and knee joint replacements, bearings, automotive and aerospace components, and cutting tools.
Overview
Market Opportunity
We believe our silicon nitride biomaterial technology platform provides us with numerous competitive advantages in the biomaterials market. We manufactured interbody
spinal fusion devices for our own retail spine business from 2008 to 2018, presently manufacture these for CTL Medical, and have a 10-year exclusive right to continue to
manufacture them for CTL Medical. We are developing products on our own behalf and for third party manufacturers – including CTL Medical - for use as components in
spine, total hip and knee joint replacements, as well as dental and maxillofacial applications. We believe we can also utilize our silicon nitride technology platform to develop
future products in additional medical and non-medical markets.
We believe that the main drivers for growth within the orthopedic biomaterials market are the following:
●
●
Introduction of New Technologies. Better performing and longer-lasting biomaterials, improved diagnostics, and advances in surgical procedures allow for surgical
intervention earlier in the continuum of care and better outcomes for patients. We believe surgical options using better performing and longer-lasting biomaterials will
gain acceptance among surgeons and younger patients and drive accelerated growth and increase the size of the spinal fusion and joint replacement markets.
Favorable and Changing Demographics. With the growing number of elderly people, age-related ailments are expected to rise sharply, which we believe will increase
the demand and need for biomaterials and devices with improved performance capabilities. Also, middle-aged and older patients increasingly expect to enjoy active
lifestyles, and consequently demand effective treatments for painful spine and joint conditions, including better performing and longer-lasting interbody spinal fusion
devices and joint replacements.
● Market Expansion into New Geographic Areas. We anticipate that demand for biomaterials and the associated medical devices will increase as the applications in which
biomaterials are used are introduced to and become more widely accepted in underserved countries, such as Brazil and China. We also expect to introduce our products
into established markets such as Australia and Japan.
The Interbody Spinal Fusion Market
We believe there is opportunity for significant growth in the spinal fusion market for interbody spinal fusion devices manufactured with silicon nitride. Currently, in spinal
fusion procedures conducted in the United States today, a significant majority utilize interbody devices comprised of PEEK and bone, with occasional use of metals and other
materials including ceramics. The market for interbody spinal fusion devices has shifted over time as new biomaterials with superior characteristics have been incorporated into
these devices and have launched into the market. We believe the market has reached another inflection point as surgeons and hospitals recognized the limitations of devices
currently available. Similarly, we believe silicon nitride interbody spinal fusion products address the key limitations of other biomaterials currently used in interbody spinal
fusion devices and demonstrate superior characteristics needed to improve clinical outcomes.
We selected this market as the first application for our silicon nitride technology because of the limitations of currently available products, its size, and the key characteristics
silicon nitride possesses, which are critical for superior interbody spinal fusion outcomes.
13
●
●
●
●
Promotion of Bone Growth. The biomaterial should be both osteoconductive and create an osteoinductive environment to promote bone growth in and around the
interbody device to further support fusion and stability. Osteoconduction occurs when material serves as a scaffold to support the growth of new bone in and around the
material. Osteoinduction involves the stimulation of osteoprogenitor cells to develop, or differentiate, into osteoblasts, which are cells that are needed for bone growth. A
material which stimulates bone growth and accelerates fusion rates is ideal in spinal fusion procedures.
Antibacterial. Spinal fusion devices can become colonized with bacteria, which may limit fusion to adjacent vertebrae or cause serious infection. Treating device-related
infection is costly and generally requires repeat surgery, including surgery to replace the device, referred to as revision surgery, which may extend hospital stays,
suffering and disability for patients. A biomaterial that has antibacterial properties can reduce the incidence of bacteria colonization in and around the interbody device
that can lead to infection, revision surgery and associated increased costs.
Imaging Compatibility. The biomaterial should be visible through, and not inhibit the effective use of, common surgical and diagnostic imaging techniques, such as X-
ray, CT and MRI. These imaging techniques are used by surgeons during and after spinal fusion procedures to assist in the proper placement of interbody devices and to
assess the quality of post-operative bone fusion.
Strength and Resistance to Fracture. The biomaterial should be strong and resistant to fracture during implantation of the device and to successfully restore
intervertebral disc space and spinal alignment during the fusion process. The biomaterial should have high flexural strength, which is the ability to resist breakage during
bending, and high compressive strength, which is the ability to resist compression under pressure, to withstand the static and dynamic forces exerted on the spine during
daily activities over the long term.
Spinal Fusion Products
Current spinal fusion products that we manufacture for CTL Medical are:
Valeo Interbody Fusion Devices
AL: Anterior Lumbar
PL: Posterior Lumbar
OL: Oblique Lumbar
TL: Transforaminal Lumbar
LL: Lateral Lumbar
C: Cervical
CORP: Corpectomy
C+CSC (cleared in Australia and the EU but not the USA)
C+CSC with Lumen
The Dental Market
Generation
2nd
1st and 2nd
1st and 2nd
1st and 2nd
2nd
1st and 2nd
1st
1st
1st
We believe there is opportunity for significant growth in the dental implant market for dental implant devices manufactured with silicon nitride and are pursuing this opportunity
aggressively. We have entered into a joint development agreement with a dental implant design company and distributor of dental technologies for the development of a silicon
nitride based dental implant system and devices.
When a tooth is removed, one common approach to restoration is to use a multi-part construct consisting of a titanium implant (or screw), a zirconia abutment, and a crown.
Potential applications for silicon nitride in this procedure include the implant and the abutment.
14
Silicon nitride is appealing because this application takes advantage of the same bioactive properties discussed in the spinal implant section:
●
Promotion of bone growth
● Antibacterial
●
Imaging compatible
● Hard, strong, resistant to fracture and wear
We also believe it may be possible to leverage our knowledge of medical device manufacturing of ceramics and commercialize products for the dental market made from
ceramics other than silicon nitride. We have engaged an investment banker to assist us in identifying partner companies for our technologies.
The Hip and Knee Joint Replacement Market
We believe there is opportunity for significant growth in the hip and knee joint replacement market for interbody devices manufactured with silicon nitride.
Total joint replacement involves removing the diseased or damaged joint and replacing it with an artificial implant consisting of components made from several different types
of biomaterials. The key components of a total hip implant include an artificial femoral head, consisting of a ball mounted on an artificial stem attached to the femur, and a
liner, which is placed inside a cup affixed into the pelvic bone. The femoral head and liner move against each other to replicate natural motion in what is known as an
articulating implant. Total knee replacement implants also use articulating components and are comprised of the following four main components: a femoral condyle, which is a
specially shaped bearing that is affixed to the lower end of the femur; a tibial tray that is affixed to the upper-end of the tibia; a tibial insert that is rigidly fixed to the tibial tray
and serves as the surface against which the femoral condyle articulates; and a patella, or knee cap, which also articulates against the femoral condyle.
Implants for total hip and knee replacements are primarily differentiated by the biomaterials used in the components that articulate against one another. The combinations of
biomaterials most commonly used in hip and knee replacement implants in the United States are metal-on-cross-linked polyethylene and traditional oxide ceramic-on-cross-
linked polyethylene. The use of hip replacement implants incorporating metal-on-metal and traditional oxide ceramic-on-traditional ceramic biomaterials experienced a steep
decline in the United States over the last several years due to their significant limitations. We believe that the most commonly used biomaterials in joint replacement implants
also have limitations, and do not possess all of the following key characteristics required for optimal total joint replacement implants:
●
Resistance to Wear. The biomaterials should have sufficient hardness and toughness, as well as extremely smooth surfaces, to effectively resist wear. Because the
articulating implants move against each other, they are subject to friction, which frequently leads to abrasive wear and the release of small wear particles. This may cause
an inflammatory response which results in osteolysis, or bone loss. Surgeons have identified osteolysis as a leading cause of joint implant failure, resulting in the need
for costly revision surgery to replace the failed implant. One of the most commonly used combinations of biomaterials, metal-on-cross-linked polyethylene, as well as
metal-on-metal implants, tends to generate a large number of metal wear particles, which can cause osteolysis and a moderate to severe allergic reaction to the metal,
referred to as metal sensitivity. While less common, metal implants may also cause a serious medical condition called metallosis, which involves the deposition and
build-up of metal debris in the soft tissues of the body. Both metal sensitivity and metallosis can result in revision surgery. In addition, we believe traditional oxide
ceramics currently used in total joint replacements accelerate wear of the cross-linked polyethylene liner as compared to our non-oxide ceramic composition found in our
silicon nitride biomaterial platform.
● Non-Corrosive. The biomaterials should be non-corrosive and should not cause adverse patient reactions. Metal placed in the human body corrodes over time and also
results in the formation of metal ions, which leads to metal sensitivity in approximately 10% to 15% of the population and, less commonly, metallosis. As a result, there
are significant increased risks from using metal-on-cross-linked polyethylene and metal-on-metal implants.
● Hardness, Strength and Resistance to Fracture. The biomaterials should be hard, strong and resistant to fracture to adequately bear the significant loads placed on the
hip and knee joints during daily activities. We believe there are strength limitations associated with traditional oxide ceramic-on-cross-linked polyethylene and traditional
oxide ceramic-on-traditional oxide ceramic implants.
●
Antibacterial. The biomaterials should have antibacterial properties to reduce the risk of bacteria colonization, infection, revision surgeries and associated increased
costs. None of the most commonly used biomaterials in joint replacement implants have antibacterial properties.
15
Our Total Hip Implant Product Candidates
We have developed a femoral head that is made from our solid silicon nitride, which could be used for total hip replacement product candidates. This femoral head is expected
to articulate against a cross-linked polyethylene liner fixed into a metal acetabular cup. Most recently we participated in a university study that demonstrated the comparatively
better behavior of silicon nitride femoral heads in taper fretting corrosion behavior study. As we continue to gather evidence that silicon nitride femoral heads are superior in
terms of wear performance, taper corrosion, strength and in vitro hydrothermal stability, we eventually intend to commercialize this product in cooperation with a strategic
partner. However, clearance of these types of devices by the FDA will be required. Currently, the FDA has indicated that a limited one to two-year clinical trial may be
necessary to obtain clearance.
Our Total Knee Implant Product Candidates
We have developed a femoral condyle design made from our solid silicon nitride. The femoral condyle component will attach to the lower end of the femur. The femoral
condyle is expected to articulate against a cross-linked polyethylene tibial insert that will attach to the tibial tray at the upper end of the tibia, which we expect will be made from
metal. We have successfully made prototypes of this design. Following the potential clearance of the femoral head components (discussed above), we intend to initiate
biomechanical testing with a strategic partner for silicon nitride components for use in knee replacement procedures to support a 510(k) submission to the FDA. If this clearance
is eventually obtained, we intend to commercialize our products for use in total knee replacement surgeries post-FDA clearance.
Other Product Opportunities
Our silicon nitride technology platform is adaptable, and we believe it may be used to develop products to address other significant opportunities, such as in the cranial-
maxillofacial, extremities, sports medicine and trauma markets.
We also believe our coating technology may be used to enhance metal products as well as other commercially available metal or PEEK spinal fusion and joint replacement
products. We have produced feasibility prototypes of dental implants, other components for use in total hip implants in addition to our total hip and knee implant product
candidates discussed above, a suture anchor for sports medicine applications, an osteotomy wedge for extremities applications, and prototypes of silicon nitride-coated plates for
potential trauma applications. We have also developed a process to apply our silicon nitride as a coating on other materials which may find applications in markets outside of the
medical device industry.
Our recent discoveries of the antiviral and antifungal properties of silicon nitride have opened up completely new opportunities for us in the consumer and agriculture markets.
The FDA has not evaluated any of these potential products and we are not currently advancing the development of any of these product candidates. We plan to collaborate with
medical device companies to complete the development of and commercialize any product candidates we advance in these areas or develop any one of them ourselves if
sufficient resources should become available.
We also see a wide variety of opportunities for our silicon nitride technology platform in non-medical applications. To that effect, we have begun applying our technology to the
manufacture of products for several third-party ceramic companies which we are hopeful will result in commercial partnerships with opportunities ranging from low-volume,
highly engineered components to high-volume simple shapes.
We rely on a combination of patents, trademarks, trade secrets, nondisclosure agreements, proprietary information ownership agreements and other intellectual property
measures to protect our intellectual property rights. We believe that in order to have a competitive advantage, we must continue to develop and maintain the proprietary aspects
of our technologies.
Intellectual Property
16
We have thirteen issued U.S. patents, three pending U.S. non-provisional patent applications, three pending U.S. provisional patent applications, seven pending foreign
applications and two pending PCT patent applications. Our first issued patent expired in 2016, with the last of these patents expiring in 2036. The core patent (US 6,881,229)
expires in 2022.
We have seven U.S. patents directed to articulating implants using our high-strength, high toughness doped silicon nitride solid ceramic. The issued patents, which include US
6,881,229; US 7,666,229; US 7,780,738; US 8,123,812; US 8,133,284; US 9,051,639; and US 9,517,136 begin to expire in 2022.
We also have two U.S. patents related to our CSC technology that are directed to implants that have both a dense load-bearing, or cortical, component and a porous, or
cancellous, component, together with a surface coating. These issued patents, US 8,133,284 and US 9,649,197 will expire in 2022 and 2035, respectively.
With respect to PCT patent application serial no. PCT/US2018/014781 directed to antibacterial biomedical implants, we recently entered the national stage in Europe, Australia,
Brazil, Canada, China, Japan, and South Korea in order to seek potential patent protection for our proprietary technologies in those countries.
In relation to the sale of our spine implant business to CTL Medical under the Asset Purchase Agreement dated September 5, 2018 we assigned our entire right to forty eight
(48) U.S. patents, two (2) foreign patents and three (3) pending patent applications from our patent portfolio to CTL Medical under that transaction. In addition, three (3) U.S.
patents (U.S. patent nos. 9,399,309; 9,517,136; and 9,649,197) directed to silicon nitride manufacturing processes were licensed to CTL Medical under an irrevocable, fully
paid-up, worldwide license for a ten year term with CTL Medical also having a Right of First Negotiation to acquire these patents if SINTX decides to later sell these IP assets
to a third party. The previously listed licensed patents under Schedule A that were licensed to SINTX (Amedica) by the Dr. Jackson and SMS Trust pursuant to a license
agreement between the parties has been assigned to CTL Medical as part of the sale of the spine business.
Our remaining issued patents and pending applications are directed to additional aspects of our products and technologies including, among other things:
●
●
●
●
●
●
designs for intervertebral fusion devices;
designs for hip implants;
designs for knee implants;
implants with improved antibacterial characteristics;
implants with improved wear performance; and
Antipathogenic compositions.
We also expect to rely on trade secrets, know-how, continuing technological innovation and in-licensing opportunities to develop and maintain our intellectual property position.
However, trade secrets are difficult to protect. We seek to protect the trade secrets in our proprietary technology and processes, in part, by entering into confidentiality
agreements with commercial partners, collaborators, employees, consultants, scientific advisors and other contractors and into invention assignment agreements with our
employees and some of our commercial partners and consultants. These agreements are designed to protect our proprietary information and, in the case of the invention
assignment agreements, to grant us ownership of the technologies that are developed.
Competition
The main alternatives to our silicon nitride biomaterial include: PEEK, which is predominantly manufactured by Invibio; BIOLOX® delta, which is a traditional oxide ceramic
manufactured by CeramTec; allograft bone; metals; and coated metals.
We believe our main competitors in the orthopedic implant market, which utilize a variety of competitive biomaterials, include: Medtronic, Inc.; DePuy Synthes Companies, a
group of Johnson & Johnson companies; Stryker Corporation; Biomet, Inc.; Zimmer Holdings, Inc.; Smith & Nephew plc; and Aesculap Inc. Presently, these companies buy
ceramic components on an OEM basis from manufacturers such as CeramTec, Kyocera and CoorsTek, Inc., among others. We anticipate that these and other orthopedic
companies and OEMs will seek to introduce new biomaterials and products that compete with ours.
17
Competition within the industry is primarily based on technology, innovation, product quality, and product awareness and acceptance by surgeons. Our principal competitors
have substantially greater financial, technical and marketing resources, as well as significantly greater manufacturing capabilities than we do, and they may succeed in
developing products that render our implants and product candidates non-competitive. Our ability to compete successfully will depend upon our ability to develop innovative
products with advanced performance features based on our silicon nitride technologies.
Government Regulation of Medical Devices
Governmental authorities in the United States, at the federal, state and local levels, and other countries extensively regulate, among other things, the research, development,
testing, manufacture, labeling, promotion, advertising, distribution, marketing and export and import of products such as those we are commercializing and developing. Failure
to obtain approval or clearance to market our products and products under development and to meet the ongoing requirements of these regulatory authorities could prevent us
from continuing to market or develop our products and product candidates.
United States
Pre-Marketing Regulation
In the United States, medical devices are regulated by the FDA. Unless an exemption applies, a new medical device will require either prior 510(k) clearance or approval of a
premarket approval application, or PMA, before it can be marketed in the United States. The information that must be submitted to the FDA in order to obtain clearance or
approval to market a new medical device varies depending on how the medical device is classified by the FDA. Medical devices are classified into one of three classes on the
basis of the controls deemed by the FDA to be necessary to reasonably ensure their safety and effectiveness. Class I devices, which are those that have the lowest level or risk
associated with them, are subject to general controls, including labeling, premarket notification and adherence to the QSR. Class II devices are subject to general controls and
special controls, including performance standards. Class III devices, which have the highest level of risk associated with them, are subject to most of the previously identified
requirements as well as to premarket approval. Most Class I devices and some Class II devices are exempt from the 510(k) requirements, although manufacturers of these
devices are still subject to registration, listing, labeling and QSR requirements.
A 510(k) premarket notification must demonstrate that the device in question is substantially equivalent to another legally marketed device, or predicate device, that did not
require premarket approval. In evaluating the 510(k), the FDA will determine whether the device has the same intended use as the predicate device, and (a) has the same
technological characteristics as the predicate device, or (b) has different technological characteristics, and (i) the data supporting the substantial equivalence contains
information, including appropriate clinical or scientific data, if deemed necessary by the FDA, that demonstrates that the device is as safe and as effective as a legally marketed
device, and (ii) does not raise different questions of safety and effectiveness than the predicate device. Most 510(k)s do not require clinical data for clearance, but the FDA may
request such data. The FDA’s goal is to review and act on each 510(k) within 90 days of submission, but it may take longer based on requests for additional information. In
addition, requests for additional data, including clinical data, will increase the time necessary to review the notice. If the FDA does not agree that the new device is substantially
equivalent to the predicate device, the new device will be classified in Class III, and the manufacturer must submit a PMA. Since July 2012, however, with the enactment of the
Food and Drug Administration Safety and Innovation Act, or FDASIA, a de novo pathway is directly available for certain low to moderate risk devices that do not qualify for
the 510(k) pathway due to lack of a predicate device. Modifications to a 510(k)-cleared medical device may require the submission of another 510(k) or a PMA if the changes
could significantly affect the safety or effectiveness or constitute a major change in the intended use of the device.
Modifications to a 510(k)-cleared device frequently require the submission of a traditional 510(k), but modifications meeting certain conditions may be candidates for FDA
review under a Special 510(k). If a device modification requires the submission of a 510(k), but the modification does not affect the intended use of the device or alter the
fundamental scientific technology of the device, then summary information that results from the design control process associated with the cleared device can serve as the basis
for clearing the application. A Special 510(k) allows a manufacturer to declare conformance to design controls without providing new data. When the modification involves a
change in material, the nature of the “new” material will determine whether a traditional or Special 510(k) is necessary. For example, in its Device Advice on How to Prepare a
Special 510(k), the FDA uses the example of a change in a material in a finger joint prosthesis from a known metal alloy to a ceramic that has not been used in a legally
marketed predicate device as a type of change that should not be submitted as a Special 510(k). However, if the “new” material is a type that has been used in other legally
marketed devices within the same classification for the same intended use, a Special 510(k) is appropriate. The FDA gives as an example a manufacturer of a hip implant who
changes from one alloy to another that has been used in another legally marketed predicate. Special 510(k)s are typically processed within 30 days of receipt.
18
The PMA process is more complex, costly and time consuming than the 510(k) clearance procedure. A PMA must be supported by extensive data including, but not limited to,
technical, preclinical, clinical, manufacturing, control and labeling information to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device for its
intended use. After a PMA is submitted, the FDA has 45 days to determine whether it is sufficiently complete to permit a substantive review. If the PMA is complete, the FDA
will file the PMA. The FDA is subject to performance goal review times for PMAs and may issue a decision letter as a first action on a PMA within 180 days of filing, but if it
has questions, it will likely issue a first major deficiency letter within 150 days of filing. It may also refer the PMA to an FDA advisory panel for additional review and will
conduct a preapproval inspection of the manufacturing facility to ensure compliance with the QSR, either of which could extend the 180-day response target. While the FDA’s
ability to meet its performance goals has generally improved during the past few years, it may not meet these goals in the future. A PMA can take several years to complete and
there is no assurance that any submitted PMA will ever be approved. Even when approved, the FDA may limit the indication for which the medical device may be marketed or
to whom it may be sold. In addition, the FDA may request additional information or request the performance of additional clinical trials before it will reconsider the approval of
the PMA or as a condition of approval, in which case the trials must be completed after the PMA is approved. Changes to the device, including changes to its manufacturing
process, may require the approval of a supplemental PMA.
If a medical device is determined to present a “significant risk,” the manufacturer may not begin a clinical trial until it submits an investigational device exemption, or IDE, to
the FDA and obtains approval of the IDE from the FDA. The IDE must be supported by appropriate data, such as animal and laboratory testing results and include a proposed
clinical protocol. These clinical trials are also subject to the review, approval and oversight of an institutional review board, or IRB, which is an independent and multi-
disciplinary committee of volunteers who review and approve research proposals, and the reporting of adverse events and experiences, at each institution at which the clinical
trial will be performed. The clinical trials must be conducted in accordance with applicable regulations, including but not limited to the FDA’s IDE regulations and current good
clinical practices. A clinical trial may be suspended by the FDA, the IRB or the sponsor at any time for various reasons, including a belief that the risks to the study participants
outweigh the benefits of participation in the trial. Even if a clinical trial is completed, the results may not demonstrate the safety and efficacy of a device or may be equivocal or
otherwise not be sufficient to obtain approval.
Post-Marketing Regulation
After a device is placed on the market, numerous regulatory requirements apply. These include:
●
compliance with the QSR, which require manufacturers to follow stringent design, testing, control, documentation, record maintenance, including maintenance of
complaint and related investigation files, and other quality assurance controls during the manufacturing process;
●
labeling regulations, which prohibit the promotion of products for uncleared or unapproved or “off-label” uses and impose other restrictions on labeling; and
● medical device reporting obligations, which require that manufacturers investigate and report to the FDA adverse events, including deaths, or serious injuries that may
have been or were caused by a medical device and malfunctions in the device that would likely cause or contribute to a death or serious injury if it were to recur.
19
Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following sanctions:
● warning letters;
●
●
●
●
fines, injunctions, and civil penalties;
recall or seizure of our products;
operating restrictions, partial suspension or total shutdown of production;
refusal to grant 510(k) clearance or PMA approvals of new products;
● withdrawal of 510(k) clearance or PMA approvals; and
●
criminal prosecution.
To ensure compliance with regulatory requirements, medical device manufacturers are subject to market surveillance and periodic, pre-scheduled and unannounced inspections
by the FDA, and these inspections may include the manufacturing facilities of our subcontractors.
International Regulation
International sales of medical devices are subject to foreign government regulations, which vary substantially from country to country. The time required to obtain approval by a
foreign country may be longer or shorter than that required for FDA approval, and the requirements may differ. For example, the primary regulatory authority with respect to
medical devices in Europe is that of the European Union. The European Union consists of 28 countries and has a total population of over 500 million people. The unification of
these countries into a common market has resulted in the unification of laws, standards and procedures across these countries, which may expedite the introduction of medical
devices like those we are offering and developing. Norway, Iceland, Lichtenstein and Switzerland are not members of the European Union but have transposed applicable
European medical device laws into their national legislation. Thus, a device that is marketed in the European Union may also be recognized and accepted in those four non-
member European countries as well.
The European Union has adopted numerous directives and standards regulating the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices.
Devices that comply with the requirements of relevant directives will be entitled to bear CE Conformity Marking, indicating that the device conforms to the essential
requirements of the applicable directives and, accordingly, can be commercially distributed throughout the European Union. Actual implementation of these directives,
however, may vary on a country-by-country basis. The CE Mark is a mandatory conformity mark on medical devices distributed and sold in the European Union and certifies
that a medical device has met applicable requirements.
The method of assessing conformity varies, but normally involves a combination of self-assessment by the manufacturer and a third-party assessment by a “Notified Body.”
Notified Bodies are independent testing houses, laboratories, or product certifiers authorized by the European Union member states to perform the required conformity
assessment tasks, such as quality system audits and device compliance testing. An assessment by a Notified Body based within the European Union is required in order for a
manufacturer to distribute the product commercially throughout the European Union. Medium and higher risk devices require the intervention of a Notified Body which will be
responsible for auditing the manufacturer’s quality system. The Notified Body will also determine whether or not the product conforms to the requirements of the applicable
directives. Devices that meet the applicable requirements of E.U. law and have undergone the appropriate conformity assessment routes will be granted CE “certification.” The
CE Mark is mandatory for medical devices sold not only within the countries of the European Union but more generally within most of Europe. As many of the European
standards are converging with international standards, the CE Mark is often used on medical devices manufactured and sold outside of Europe (notably in Asia that exports
many manufactured products to Europe). CE Marking gives companies easier access into not only the European market but also to Asian and Latin American markets, most of
whom recognize the CE Mark on medical device as a mark of quality and adhering to international standards of consumer safety, health or environmental requirements.
20
Compliance with Healthcare Laws
We must comply with various U.S. federal and state laws, rules and regulations pertaining to healthcare fraud and abuse, including anti-kickback and false claims laws, rules,
and regulations, as well as other healthcare laws in connection with the commercialization of our products. Fraud and abuse laws are interpreted broadly and enforced
aggressively by various state and federal agencies, including the U.S. Department of Justice, the U.S. Office of Inspector General for the Department of Health and Human
Services and various state agencies.
We have entered into agreements with certain surgeons for assistance with the design of our products, some of whom we anticipate may make referrals to us or order our
products. A majority of these agreements contain provisions for the payments of royalties. In addition, some surgeons currently own shares of our stock. We have structured
these transactions with the intention of complying with all applicable laws, including fraud and abuse, data privacy and security, and transparency laws. Despite this intention,
there can be no assurance that a particular government agency or court would determine our practices to be in full compliance with such laws. We could be materially impacted
if regulatory or enforcement agencies or courts interpret our financial arrangements with surgeons to be in violation of healthcare laws, including, without limitation, fraud and
abuse, data privacy and security, or transparency laws.
The U.S. federal Anti-Kickback Statute prohibits persons, including a medical device manufacturer (or a party acting on its behalf), from knowingly or willfully soliciting,
receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for a service or product or the purchasing,
ordering, arranging for, or recommending the ordering of, any service or product for which payment may be made by Medicare, Medicaid or any other federal healthcare
program. This statute has been interpreted to apply to arrangements between medical device manufacturers on one hand and healthcare providers on the other. The term
“remuneration” is not defined in the federal Anti-Kickback Statute and has been broadly interpreted to include anything of value, such as cash payments, gifts or gift
certificates, discounts, waiver of payments, credit arrangements, ownership interests, the furnishing of services, supplies or equipment, and the provision of anything at less than
its fair market value. Courts have broadly interpreted the scope of the law, holding that it may be violated if merely “one purpose” of an arrangement is to induce referrals,
irrespective of the existence of other legitimate purposes. The Anti-Kickback Statute prohibits many arrangements and practices that are lawful in businesses outside of the
healthcare industry. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain business arrangements from prosecution, the exemptions
and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchasing or recommending may be subject to scrutiny if they do
not qualify for an exemption or safe harbor. Our practices may not in all cases meet all of the criteria for safe harbor protection from federal Anti-Kickback Statute liability. The
reach of the Anti-Kickback Statute was broadened by the recently enacted Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Affordability
Reconciliation Act of 2010, collectively, the Affordable Care Act or ACA, which, among other things, amends the intent requirement of the federal Anti-Kickback Statute such
that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. In addition, the ACA
provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent
claim for purposes of the federal False Claims Act (discussed below) or the civil monetary penalties statute, which imposes fines against any person who is determined to have
presented or caused to be presented claims to a federal healthcare program that the person knows or should know is for an item or service that was not provided as claimed or is
false or fraudulent. In addition to the federal Anti-Kickback Statute, many states have their own anti-kickback laws. Often, these laws closely follow the language of the federal
law, although they do not always have the same scope, exceptions, safe harbors or sanctions. In some states, these anti-kickback laws apply not only to payments made by
government healthcare programs but also to payments made by other third-party payors, including commercial insurance companies.
Sales, marketing, consulting, and advisory arrangements between medical device manufacturers and sales agents and physicians are subject to the Anti-Kickback Statute and
other fraud and abuse laws. Government officials have focused recent enforcement efforts on, among other things, the sales and marketing activities of healthcare companies,
including medical device manufacturers, and have brought cases against individuals or entities whose personnel allegedly offered unlawful inducements to potential or existing
customers in an attempt to procure their business. We expect these activities to continue to be a focus of government enforcement efforts. Settlements of these cases by
healthcare companies have involved significant fines and penalties and, in some instances, criminal plea agreements. We are also aware of governmental investigations of some
of the largest orthopedic device companies reportedly focusing on consulting and service agreements between these companies and orthopedic surgeons. These developments
are ongoing, and we cannot predict the effects they will have on our business.
21
The federal False Claims Act imposes liability on any person that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by
a federal healthcare program. The qui tam provisions of the False Claims Act allow a private individual to bring civil actions on behalf of the federal government alleging that
the defendant has submitted a false claim, or has caused such a claim to be submitted, to the federal government, and to share in any monetary recovery. There are many
potential bases for liability under the False Claims Act. Liability arises, primarily, when a person knowingly submits, or causes another to submit, a false claim for
reimbursement to the federal government. The False Claims Act has been used to assert liability on the basis of inadequate care, kickbacks, and other improper referrals, and
allegations as to misrepresentations with respect to the services rendered. Qui tam actions have increased significantly in recent years, causing greater numbers of healthcare
companies, including medical device manufacturers, to defend false claim actions, pay damages and penalties, or be excluded from participation in Medicare, Medicaid or other
federal or state healthcare programs as a result of investigations arising out of such actions. In addition, various states have enacted similar laws analogous to the False Claims
Act. Many of these state laws apply where a claim is submitted to any third-party payor and not merely a federal healthcare program. We are unable to predict whether we
would be subject to actions under the False Claims Act or a similar state law, or the impact of such actions. However, the cost of defending such claims, as well as any sanctions
imposed, could adversely affect our financial performance. The Health Insurance Portability and Accountability Act of 1996, or HIPAA, also created several new federal
crimes, including healthcare fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing a scheme to
defraud any healthcare benefit program, including private third-party payors. The false statements statute prohibits knowingly and willfully falsifying, concealing, or covering
up a material fact or making any materially false, fictitious, or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items, or services.
In addition, we may be subject to, or our marketing or research activities may be limited by, data privacy and security regulation by both the federal government and the states
in which we conduct our business. For example, HIPAA and its implementing regulations established uniform federal standards for certain “covered entities” (healthcare
providers, health plans and healthcare clearinghouses) governing the conduct of certain electronic healthcare transactions and protecting the security and privacy of protected
health information. The American Recovery and Reinvestment Act of 2009, commonly referred to as the economic stimulus package, included expansion of HIPAA’s privacy
and security standards called the Health Information Technology for Economic and Clinical Health Act, or HITECH, which became effective on February 17, 2010. Among
other things, HITECH makes HIPAA’s privacy and security standards directly applicable to “business associates”—independent contractors or agents of covered entities that
create, receive, maintain, or transmit protected health information in connection with providing a service for or on behalf of a covered entity. HITECH also increased the civil
and criminal penalties that may be imposed against covered entities, business associates and possibly other persons, and gave state attorneys general new authority to file civil
actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney’s fees and costs associated with pursuing federal civil actions. These
laws also require the reporting of breaches of protected health information to affected individuals, regulators and in some cases, local or national media. HIPAA and HITECH
impose strict limits on our physician collaborators’ ability to use and disclose patient information on our behalf.
There are also an increasing number of state “sunshine” laws that require manufacturers to provide reports to state governments on pricing and marketing information. Several
states have enacted legislation requiring medical device companies to, among other things, establish marketing compliance programs, file periodic reports with the state, make
periodic public disclosures on sales and marketing activities, and to prohibit or limit certain other sales and marketing practices. In addition, a federal law known as the
Physician Payments Sunshine Act, now requires medical device manufacturers to track and report to the federal government certain payments and other transfers of value made
to physicians and teaching hospitals and ownership or investment interests held by physicians and their immediate family members. The first reporting period covered only
payments or transfers of value made and ownership or investment interests held by physicians and their immediate family members from August 1, 2013 to December 31, 2013.
The federal government disclosed the reported information on a publicly available website beginning in September 2014. For calendar year 2014, the Physician Payments
Sunshine Act will require medical device manufacturers to report payments and transfers of values made and ownership or investment interests held by physicians and their
immediate family members for the full calendar year. These laws may adversely affect our sales, marketing, and other activities by imposing administrative and compliance
burdens on us. If we fail to track and report as required by these laws or to otherwise comply with these laws, we could be subject to the penalty provisions of the pertinent state
and federal authorities.
22
Clinical research is heavily regulated by FDA regulations for the protection of human subjects (21 C.F.R. 50 and 56) and also the regulations of the U.S Department of Health
and Human Services, or the Common Rule (45 C.F.R 46). Both FDA human subject regulations and the Common Rule impose restrictions on the involvement of human
subjects in clinical research and require, among other things, the balancing of the risks and benefits of research, the documented informed consent of research participants,
initial and ongoing review of research by an IRB. Similar regulations govern research conducted in foreign countries. Compliance with human subject protection regulations is
costly and time consuming. Failure to comply could substantially and adversely impact our research program and the development of our products.
Because of the breadth of these laws and the narrowness of available statutory and regulatory exemptions, it is possible that some of our business activities could be subject to
challenge under one or more of such laws. If our operations are found to be in violation of any of the federal and state laws described above or any other governmental
regulations that apply to us, we may be subject to penalties, including criminal and significant civil monetary penalties, damages, fines, imprisonment, exclusion from
participation in government healthcare programs, injunctions, recall or seizure of products, total or partial suspension of production, denial or withdrawal of pre-marketing
product clearances and approvals, private “qui tam” actions brought by individual whistleblowers in the name of the government or refusal to allow us to enter into supply
contracts, including government contracts, and the curtailment or restructuring of our operations. Public disclosure of privacy and data security violations could cause significant
reputational harm. Any of these events could adversely affect our ability to operate our business and our results of operations. To the extent that any of our products are sold in a
foreign country, we may be subject to similar foreign laws and regulations, which may include, for instance, applicable post-marketing requirements, including safety
surveillance, anti-fraud and abuse laws, implementation of corporate compliance programs, as well as laws and regulations requiring transparency of pricing and marketing
information and governing the privacy and security of health information, such as the E.U.’s Directive 95/46 on the Protection of Individuals with regard to the Processing of
Personal Data, or the Data Directive, and the wide variety of national laws implementing the Data Directive.
Healthcare Reform
The regulations we are subject to may change as result of legislative and regulatory healthcare reform.
Significant healthcare reform was enacted in 2010 when the Patient Protection and Affordable Care Act or the PPACA, was signed into law. State laws also were enacted to
implement the PPACA. While a primary goal of these healthcare reform efforts was to expand coverage to more individuals, it also involved increased government price
controls, additional regulatory mandates and other measures designed to constrain medical costs. The PPACA significantly impacts the medical device industry. Among other
things, the PPACA:
●
●
●
imposes an annual excise tax of 2.3% on any entity that manufactures or imports medical devices offered for sale in the United States, which began on January 1, 2013,
but was suspended during 2016 and 2017 and has been suspended for 2018 and 2019;
establishes a new Patient-Centered Outcomes Research Institute to oversee and identify priorities in comparative clinical effectiveness research in an effort to coordinate
and develop such research; and
implements payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the
coordination, quality and efficiency of certain healthcare services through bundled payment models.
23
In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. For example, on January 2, 2013, former President Obama signed into
law the American Taxpayer Relief Act of 2012, or the ATRA, which, among other things, further reduced Medicare payments to several providers, including hospitals, imaging
centers and cancer treatment centers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. Moreover,
certain legislative changes to and regulatory changes under the PPACA have occurred in the 115th United States Congress and under the Trump Administration. For example,
on December 22, 2017, President Trump signed a budget reconciliation act into law, which among other things, repealed the penalty for individuals who do not maintain
minimum essential coverage, which was a central component of PPACA’s approach to expanding coverage. On January 9, 2018, President Trump signed the Bipartisan Budget
Act of 2018, which, among other things, repealed the PPACA provision establishing an independent payment advisory board that would have submitted recommendations to
reduce Medicare spending if projected Medicare spending exceeded a specified growth rate.
Additional legislative changes to and regulatory changes under the PPACA remain possible. We expect that other state and federal healthcare reform measures will be adopted
in the future, any of which could reduce the number of patients with coverage or limit the amounts that federal and state governments will pay for healthcare products and
services, which could result in reduced demand for our products or additional pricing pressure.
Third-Party Reimbursement
Because we and our customers typically receive payment directly from hospitals and surgical centers, we do not anticipate relying directly on payment for any of our products
from third-party payors, such as Medicare, Medicaid, private insurers, and managed care companies. However, our business will be affected by policies administered by federal
and state healthcare programs, such as Medicare and Medicaid, as well as private third-party payors, which often follow the policies of the state and federal healthcare
programs. For example, our business will be indirectly impacted by the ability of a hospital or medical facility to obtain coverage and third-party reimbursement for procedures
performed using our products. Many hospitals and clinics in the United States belong to group purchasing organizations (that typically incentivize their hospital members to
make a relatively large proportion of purchases from a limited number of vendors of similar products that have contracted to offer discounted prices). Such contracts often
include exceptions for purchasing certain innovative new technologies, however. Accordingly, the commercial success of our products may also depend to some extent on our
ability to either negotiate favorable purchase contracts with key group purchasing organizations or persuade hospitals and clinics to purchase our product “off contract.” These
third-party payors may deny reimbursement if they determine that a device used in a procedure was not medically necessary; was not used in accordance with cost-effective
treatment methods, as determined by the third-party payor; or was used for an unapproved use. A national or local coverage decision denying Medicare coverage for one or
more of our products could result in private insurers and other third party payors also denying coverage. Even if favorable coverage and reimbursement status is attained for our
products, less favorable coverage policies and reimbursement rates may be implemented in the future. The cost containment measures that third-party payors and providers are
instituting, both within the United States and abroad, could significantly reduce our potential revenues from the sale of our products and any product candidates. We cannot
provide any assurances that we will be able to obtain and maintain third party coverage or adequate reimbursement for our products and product candidates in whole or in part.
For inpatient and outpatient procedures, including those that will involve use of our products, Medicare and many other third-party payors in the United States reimburse
hospitals at a prospectively determined amount. This amount is generally based on one or more diagnosis related groups, or DRGs, associated with the patient’s condition for
inpatient treatment and generally based on ambulatory payment classifications, or APCs, associated with the procedures performed as an outpatient at an ambulation
surgicenter. Each DRG or APC is associated with a level of payment and may be adjusted from time to time, usually annually. Prospective payments are intended to cover most
of the non-physician hospital costs incurred in connection with the applicable diagnosis and related procedures. Implant products, such as those we plan to sell, represent part of
the total procedure costs while labor, hospital room and board, and other supplies and services represent the balance of those costs. However, the prospective payment amounts
are typically set independently of a particular hospital’s actual costs associated with treating a particular patient and implanting a device. Therefore, the payment that a hospital
would receive for a particular hospital visit would not typically take into account the cost of our products.
24
Medicare has established a number of DRGs for inpatient procedures that involve the use of products similar to ours. Although Medicare has authority to create special DRGs
for hospital services that more properly reflect the actual costs of expensive or new-technology devices implanted as part of a procedure, it has declined to do so in the past, and
we do not expect that it will do so with respect to our current products and product candidates. Medicare’s DRG and APC classifications may have implications outside of
Medicare, as many other U.S. third-party payors often use Medicare DRGs and APCs for purposes of determining reimbursement.
We believe that orthopedic implants generally have been well received by third-party payors because of the ability of these implants to greatly reduce long-term healthcare costs
for patients with degenerative joint disease. However, coverage and reimbursement policies vary from payor to payor and are subject to change. As discussed above, hospitals
that purchase medical devices for treatment of their patients generally rely on third-party payors to reimburse all or part of the costs and fees associated with the procedures
performed with these devices. Both government and private third-party coverage and reimbursement levels are critical to new product acceptance. Neither hospitals nor surgeons
are likely to use our products if they do not receive reimbursement for the procedures adequate to cover the cost of our products.
While it is expected that hospitals will be able to obtain coverage for procedures using our products, the level of payment available to them for such procedures may change over
time. State and federal healthcare programs, such as Medicare and Medicaid, closely regulate provider payment levels and have sought to contain, and sometimes reduce,
payment levels. Commercial insurers and managed care plans frequently follow government payment policies and are likewise interested in controlling increases in the cost of
medical care. These third-party payors may deny payment if they determine that a procedure was not medically necessary, a device used in a procedure was not used in
accordance with cost-effective treatment methods, as determined by the third-party payor, or was used for an unapproved use.
In addition, some payors are adopting pay-for-performance programs that differentiate payments to healthcare providers based on the achievement of documented quality-of-
care metrics, cost efficiencies, or patient outcomes. These programs are intended to provide incentives to providers to find ways to deliver the same or better results while
consuming fewer resources. As a result of these programs, and related payor efforts to reduce payment levels, hospitals and other providers are seeking ways to reduce their
costs, including the amounts they pay to medical device suppliers. Adverse changes in payment rates by payors to hospitals could adversely impact our ability to market and sell
our products and negatively affect our financial performance.
In international markets, healthcare payment systems vary significantly by country and many countries have instituted price ceilings on specific product lines. There can be no
assurance that our products will be considered cost-effective by third-party payors, that reimbursement will be available or, if available, that the third-party payors’
reimbursement policies will not adversely affect our ability to sell our products profitably.
Member countries of the European Union offer various combinations of centrally financed healthcare systems and private health insurance systems. The relative importance of
government and private systems varies from country to country. Governments may influence the price of medical devices through their pricing and reimbursement rules and
control of national healthcare systems that fund a large part of the cost of those products to consumers. Some jurisdictions operate positive and negative list systems under which
products may be marketed only once a reimbursement price has been agreed upon. Some of these countries may require, as condition of obtaining reimbursement or pricing
approval, the completion of clinical trials that compare the cost-effectiveness of a particular product candidate to currently available therapies. Some E.U. member states allow
companies to fix their own prices for devices but monitor and control company profits. The choice of devices is subject to constraints imposed by the availability of funds within
the purchasing institution. Medical devices are most commonly sold to hospitals or healthcare facilities at a price set by negotiation between the buyer and the seller. A contract
to purchase products may result from an individual initiative or as a result of a competitive bidding process. In either case, the purchaser pays the supplier, and payment terms
vary widely throughout the European Union. Failure to obtain favorable negotiated prices with hospitals or healthcare facilities could adversely affect sales of our products.
25
Employees
As of March 1, 2020, we had 28 employees. We believe that our success will depend, in part, on our ability to attract and retain qualified personnel. We have never experienced
a work stoppage due to labor difficulties and believe that our relations with our employees are good. None of our employees are represented by labor unions.
ITEM 1A. RISK FACTORS
In addition to the other information contained in this Annual Report, the following risk factors should be considered carefully in evaluating our company. Our business,
financial condition, liquidity or results of operations could be materially adversely affected by any of these risks.
Risks Related to Our Business and Strategy
A pandemic, epidemic or outbreak of an infectious disease in the United States or elsewhere may adversely affect our business.
If a pandemic, epidemic or outbreak of an infectious disease occurs in the United States or elsewhere, our business may be adversely affected. In December 2019, a novel strain
of coronavirus, COVID-19, was identified in Wuhan, China. This virus continues to spread globally and, as of March 2020, has spread to over 100 countries, including the
United States. The spread of COVID-19 from China to other countries has resulted in the World Health Organization declaring the outbreak of COVID-19 as a “pandemic,” or a
worldwide spread of a new disease, on March 11, 2020. We are still assessing the effect on our business, from the spread of COVID-19 and the actions implemented by the
governments across the globe. A significant outbreak of contagious diseases, such as COVID-19, could result in a widespread health crisis that could adversely affect the
economies and financial markets of many countries, resulting in an economic downturn. As a result, our ability to raise additional funds, if necessary, may be adversely
impacted by risks, or the public perception of the risks, related to the recent outbreak of COVID-19. Furthermore, the third parties we engage, or seek to engage, with respect to
OEM manufacturing relationships, and, for supply and development activities, may be adversely impacted by risks, or the public perception of the risks, related to the recent
outbreak of COVID-19, which may delay OEM relationships, and, product development opportunities, and increase our costs.
We have incurred net losses since our inception and anticipate that we will continue to incur substantial net losses for the foreseeable future. We may never achieve or
sustain profitability.
We have incurred substantial net losses since our inception. For the years ended December 31, 2019 and 2018 we incurred a net loss of $4.8 million and $8.7 million,
respectively, and used cash in operations of $6.4 million and $9.3 million, respectively. We have an accumulated deficit of $234.1 million as of December 31, 2019. Our losses
have resulted principally from costs incurred in connection with our sales and marketing activities, research and development activities, manufacturing activities, general and
administrative expenses associated with our operations, impairments on intangible assets and property and equipment, interest expense, loss on extinguishment of debt and
offering costs. Even if we are successful in launching new products into the market, we expect to continue to incur substantial losses for the foreseeable future as we continue to
manufacture products for CTL Medical and other OEM customers and research and develop and seek regulatory approvals for our product candidates.
26
If sales revenue from any of our products or product candidates that receive marketing clearance from the FDA or other regulatory body is insufficient, if we are unable to
develop and commercialize any of our product candidates, or if our product development is delayed, we may never become profitable. Even if we do become profitable, we may
be unable to sustain or increase our profitability on a quarterly or annual basis.
Our success depends on our ability to successfully commercialize silicon nitride-based products for medical and industrial applications, which to date have experienced only
limited market acceptance.
We believe we are the first and only company to use silicon nitride in medical applications. To date, however, we have had limited acceptance of our silicon nitride-based
products and prior to the disposition of our spine implant business to CTL Medica, our product revenue was derived substantially from our non-silicon nitride products. In order
to succeed in our goal of becoming a leading biomaterial technology company utilizing silicon nitride, we must increase market awareness of our silicon nitride interbody spinal
fusion products in conjunction with CTL Medical, continue to develop our other product candidates outside of spinal fusion applications, enhance our commercial infrastructure
and commercialize our silicon nitride joint replacement components and other products. If we fail in any of these endeavors or experience delays in pursuing them, we will not
generate revenues as planned and will need to curtail operations or seek additional financing earlier than otherwise anticipated.
Our current products and our future products may not be accepted by hospitals and surgeons and may not become commercially successful.
With the sale of our spine business to CTL Medical we are now dependent on the efforts of CTL Medical to sell the spinal fusion products that we manufacture and then sell to
CTL Medical. If CTL Medical is not able to sell such products or is unable to increase demand for such products, then our revenues will substantially decline. Since obtaining
regulatory clearance from the FDA for our first silicon nitride spinal fusion products in 2008, we have not been able to obtain significant market share of the interbody spinal
fusion market, and CTL Medical may not obtain such market share in the future. Even if we receive regulatory clearances or approvals for our other product candidates in
development, these product candidates may not gain market acceptance among orthopedic surgeons and the medical community.
If surgeons do not perceive silicon nitride products and product candidates as superior alternatives to competing products, we will not be able to generate significant
revenues, if any.
Even if surgeons are convinced of the superior characteristics of our silicon nitride products and our product candidates that we successfully introduce compared to the
limitations of the current commonly used biomaterials, surgeons may find other methods or turn to other biomaterials besides silicon nitride to overcome such limitations. For
instance, with respect to interbody spinal fusion products, surgeons or device manufacturers may use more effective markers for enhancing the imaging compatibility of PEEK
devices, more effective antibiotics to prevent or treat implant-related infections, and more effective osteoconductive and osteoinductive materials when implanting an interbody
spinal fusion device. Device manufacturers may also coat metal with existing traditional ceramics to reduce the risk of metal wear particles and corrosion in total joint
replacement implants. Additionally, surgeons may increase their use of metal interbody spinal fusion devices if there is an increasing perception that PEEK devices are limited
by their strength and resistance to fracture.
The orthopedic market is highly competitive, and we may not be able to compete effectively against the larger, well-established companies that dominate this market or
emerging and small innovative companies that may seek to obtain or increase their share of the market.
The markets for spinal fusions and total hip and knee implant products are intensely competitive, and many of our competitors are much larger and have substantially more
financial and human resources than we do. Many have long histories and strong reputations within the industry, and a relatively small number of companies dominate these
markets. Medtronic, Inc.; DePuy Synthes Companies, a group of Johnson & Johnson companies; Stryker Corporation; Zimmer-Biomet, Inc.; Zimmer Holdings, Inc.; and Smith
& Nephew plc, account for a significant amount of orthopedic sales worldwide.
These companies enjoy significant competitive advantages over us, including:
●
●
●
●
●
●
●
broad product offerings, which address the needs of orthopedic surgeons and hospitals in a wide range of procedures;
products that are supported by long-term clinical data;
greater experience in, and resources for, launching, marketing, distributing and selling products, including strong sales forces and established distribution networks;
existing relationships with orthopedic surgeons;
extensive intellectual property portfolios and greater resources for patent protection;
greater financial and other resources for product research and development;
greater experience in obtaining and maintaining FDA and other regulatory clearances and approvals for products and product enhancements;
27
●
●
●
established manufacturing operations and contract manufacturing relationships;
significantly greater name recognition and widely recognized trademarks; and
established relationships with healthcare providers and payers.
Our products and any product candidates that we may introduce into the market may not enable us to overcome the competitive advantages of these large and dominant
orthopedic companies. In addition, even if we successfully introduce additional product candidates incorporating our silicon nitride biomaterial into the market, emerging and
small innovative companies may seek to increase their market share and they may eventually possess competitive advantages, which could adversely impact our business. Our
competitors may also employ pricing strategies that could adversely affect the pricing of our products and pricing in the spinal fusion and total joint replacement market
generally.
Moreover, many other companies are seeking to develop new biomaterials and products which may compete effectively against our products in terms of performance and price.
For example, Smith & Nephew has developed a ceramic-coated metal, known as Oxinium, which may overcome certain of the limitations of metal joint replacement products
and could directly compete with our silicon nitride and silicon nitride-coated product candidates.
We are dependent on CTL Medical’s ability to sell the spinal fusion products we manufacture from silicon nitride. If CTL Medical is not able to sell such products or
increase demand for the products our revenues will be substantially impacted which would have a significant impact on our business and operating results.
Sales of spinal fusion products manufactured from silicon nitride to CTL Medical account for all our revenues from the sale of products. We have entered into a 10-year
manufacturing and supply agreement with CTL Medical to supply CTL Medical with its requirements of silicon nitride manufactured spinal fusion products. CTL Medical is
not under any obligation to purchase any minimum quantities of products from us. If CTL Medical is not successful in creating demand for such products and selling such
products, then they are not required to purchase any products from us. Because of our significant customer concentration, our revenue could fluctuate significantly due to
changes in economic conditions, the use of competitive products, or the loss of, reduction of business with, CTL Medical. A reduction or delay in orders from CTL Medical, or
a delay or default in payment by any significant customer, could materially harm our business and results of operations.
The manufacturing process for our silicon nitride products is complex and requires sophisticated state-of-the-art equipment, experienced manufacturing personnel and
highly specialized knowledge. If we are unable to manufacture our silicon nitride products on a timely basis consistent with our quality standards, our results of operation
will be adversely impacted.
In order to control the quality, cost and availability of our silicon nitride products, we developed our own manufacturing capabilities. We operate a 30,000 square foot facility
which is certified under the ISO 13485 medical device manufacturing standard for medical devices and operates under the FDA’s quality systems regulations, or QSRs. All
operations with the exception of raw material production are performed at this facility.
28
We are the sole manufacturer of our silicon-nitride based products. Our reliance solely on our internal resources to manufacture our silicon nitride products entails risks to which
we would not be subject if we had secondary suppliers for their manufacture, including:
●
●
the inability to meet our product specifications and quality requirements consistently;
a delay or inability to procure or expand sufficient manufacturing capacity to meet additional demand for our products;
● manufacturing and product quality issues related to the scale-up of manufacturing;
●
●
●
the inability to produce a sufficient supply of our products to meet product demands;
the disruption of our manufacturing facility due to equipment failure, natural disaster or failure to retain key personnel; and
our inability to ensure our compliance with regulations and standards of the FDA, including QSRs, and corresponding state and international regulatory authorities,
including the CFDA.
Any of these events could lead to a reduction in our product sales, product launch delays, failure to obtain regulatory clearance or approval or impact our ability to successfully
sell our products and commercialize our products candidates.
We depend on a limited number of third-party suppliers for key raw materials used in the manufacturing of our silicon nitride products, and the loss of these third-party
suppliers or their inability to supply us with adequate raw materials could harm our business.
We rely on a limited number of third-party suppliers for the raw materials required for the production of our silicon nitride products and product candidates. Our dependence on
a limited number of third-party suppliers involves several risks, including limited control over pricing, availability, quality, and delivery schedules for raw materials. We have
no supply agreements in place with any of our suppliers and cannot be certain that our current suppliers will continue to provide us with the quantities of raw materials that we
require or that satisfy our anticipated specifications and quality requirements. Any supply interruption in limited or single sourced raw materials could materially harm our
ability to manufacture our products until a new source of supply, if any, could be identified and qualified. We may be unable to find a sufficient alternative supply channel
within a reasonable time or on commercially reasonable terms. Any performance failure on the part of our suppliers could delay the production of our silicon nitride products
and product candidates and delay the development and commercialization of our product candidates, including limiting supplies necessary for commercial sale, clinical trials
and regulatory approvals, which could have a material adverse effect on our business.
In order to be successful, we must expand our available product lines by commercializing new silicon nitride-based medical device product candidates and identify other
non-medical uses of silicon-nitride, but we may not be able to do so in a timely fashion and at expected costs, or at all.
Although we are currently manufacturing silicon nitride interbody spinal fusion implants for CTL Medical, in order to be successful, we will need to expand our product lines to
include other silicon nitride devices and products for both medical and non-medical applications. Therefore, we are developing silicon nitride product candidates for total hip
and knee replacement procedures, dental implants and are exploring the application of our silicon nitride technology for other potential applications. To succeed in our
commercialization efforts, we must effectively continue product development and testing, find new strategic partners, obtain regulatory clearances and approvals, and enhance
our sales and marketing capabilities. Because of these uncertainties, there is no assurance that we will succeed in bringing any of our current or future product candidates to
market. If we fail in bringing our product candidates to market, or experience delays in doing so, we will not generate revenues as planned and will need to curtail operations or
seek additional financing earlier than otherwise anticipated.
29
We will depend on one or more strategic partners to develop and commercialize our total joint replacement and dental implant product candidates, and if our strategic
partners are unable to execute effectively on our agreements with them, we may never become profitable.
We are seeking a strategic partner to develop and commercialize our total joint replacement and dental implant product candidates. We will be reliant on our strategic partners to
develop and commercialize a total hip or knee joint replacement product candidate that utilizes silicon nitride-coated components, although we have not yet entered into an
agreement with any strategic partner to develop products with these silicon nitride-coated components and may be unable to do so on agreeable terms. In order to succeed in our
joint commercialization efforts, we and any future partners must execute effectively on all elements of a combined business plan, including continuing to establish sales and
marketing capabilities, manage certified, validated and effective commercial-scale manufacturing operations, conduct product development and testing, and obtain regulatory
clearances and approvals for our product candidate. If we or any of our strategic partners fail in any of these endeavors, or experience delays in pursuing them, we will not
generate revenues as planned and will need to curtail operations or seek additional financing earlier than otherwise anticipated.
Part of our strategy is to establish and develop OEM partnerships and arrangements, which subjects us to various risks.
Because we believe silicon nitride is a superior platform and technology for application in the spine, total joint and other markets and industrial applications, we are establishing
OEM partnerships with other companies to replace their materials and products with silicon nitride. Sales of products to OEM customers will expose our business to a number
of risks. Sales through OEM partners could be less profitable than direct sales. Sales of our products through multiple channels could also confuse customers and cause the sale
of our products to decline. In addition, OEM customers will require that products meet strict standards. Our compliance with these requirements could result in increased
development, manufacturing, warranty and administrative costs. A significant increase in these costs could adversely affect our operating results. If we fail to meet OEM
specifications on a timely basis, our relationships with our OEM partners may be harmed. Furthermore, we would not control our OEM partners, and they could sell competing
products, may not incorporate our technology into their products in a timely manner and may devote insufficient sales efforts to the OEM products.
If hospitals and other healthcare providers are unable to obtain coverage or adequate reimbursement for procedures performed with our products, it is unlikely our
products will be widely used.
In the United States, the commercial success of our products will depend, in part, on the extent to which governmental payers at the federal and state levels, including Medicare
and Medicaid, private health insurers and other third-party payers provide coverage for and establish adequate reimbursement levels for procedures utilizing our products.
Because we typically receive payment directly from the companies for whom we manufacture, such as CTL Medical, we do not anticipate relying directly on payment from
third-party payers for our products. However, hospitals and other healthcare providers that purchase orthopedic products manufactured by us from our customers for treatment
of their patients generally rely on third-party payers to pay for all or part of the costs and fees associated with our products as part of a “bundled” rate for the associated
procedures. The existence of coverage and adequate reimbursement for our products and the procedures performed with them by government and private payers is critical to
market acceptance of our existing and future products. Neither hospitals nor surgeons are likely to use our products if they do not receive adequate reimbursement for the
procedures utilizing our products.
Many private payers currently base their reimbursement policies on the coverage decisions and payment amounts determined by the Centers for Medicare and Medicaid
Services, or CMS, which administers the Medicare program. Others may adopt different coverage or reimbursement policies for procedures performed with our products, while
some governmental programs, such as Medicaid, have reimbursement policies that vary from state to state, some of which may not pay for the procedures performed with our
products in an adequate amount, if at all. A Medicare national or local coverage decision denying coverage for one or more of our products could result in private and other
third-party payers also denying coverage for our products. Third-party payers also may deny reimbursement for our products if they determine that a product used in a
procedure was not medically necessary, was not used in accordance with cost-effective treatment methods, as determined by the third-party payer, or was used for an
unapproved use. Unfavorable coverage or reimbursement decisions by government programs or private payers underscore the uncertainty that our products face in the market
and could have a material adverse effect on our business.
Many hospitals and clinics in the United States belong to group purchasing organizations, which typically incentivize their hospital members to make a relatively large
proportion of purchases from a limited number of vendors of similar products that have contracted to offer discounted prices. Such contracts often include exceptions for
purchasing certain innovative new technologies, however. Accordingly, the commercial success of our products may also depend to some extent on our ability to either
negotiate favorable purchase contracts with key group purchasing organizations and/or persuade hospitals and clinics to purchase our product “off contract.”
30
The healthcare industry in the United States has experienced a trend toward cost containment as government and private payers seek to control healthcare costs by paying
service providers lower rates. While it is expected that hospitals will be able to obtain coverage for procedures using our products, the level of payment available to them for
such procedures may change over time. State and federal healthcare programs, such as Medicare and Medicaid, closely regulate provider payment levels and have sought to
contain, and sometimes reduce, payment levels. Private payers frequently follow government payment policies and are likewise interested in controlling increases in the cost of
medical care. In addition, some payers are adopting pay-for-performance programs that differentiate payments to healthcare providers based on the achievement of documented
quality-of-care metrics, cost efficiencies, or patient outcomes. These programs are intended to provide incentives to providers to deliver the same or better results while
consuming fewer resources. As a result of these programs, and related payer efforts to reduce payment levels, hospitals and other providers are seeking ways to reduce their
costs, including the amounts they pay to medical device manufacturers. We may not be able to sell our implants profitably if third-party payers deny or discontinue coverage or
reduce their levels of payment below that which we project, or if our production costs increase at a greater rate than payment levels. Adverse changes in payment rates by
payers to hospitals could adversely impact our ability to market and sell our products and negatively affect our financial performance.
In international markets, medical device regulatory requirements and healthcare payment systems vary significantly from country to country, and many countries have instituted
price ceilings on specific product lines. We cannot assure you that our products will be considered cost-effective by international third-party payers, that reimbursement will be
available or, if available, that the third-party payers’ reimbursement policies will not adversely affect our ability to sell our products profitably. Any failure to receive regulatory
or reimbursement approvals would negatively impact market acceptance of our products in any international markets in which those approvals are sought.
Moreover, certain legislative changes to and regulatory changes under the PPACA have occurred in the 115th United States Congress and under the Trump Administration. For
example, on December 22, 2017, President Trump signed a budget reconciliation act into law, which among other things, repealed the penalty for individuals who do not
maintain minimum essential coverage, which was a central component of PPACA’s approach to expanding coverage. On January 9, 2018, President Trump signed the
Bipartisan Budget Act of 2018, which, among other things, repealed the PPACA provision establishing an independent payment advisory board that would have submitted
recommendations to reduce Medicare spending if projected Medicare spending exceeded a specified growth rate we cannot predict the ultimate content, timing or effect of any
changes to the Health Care Reform Act or other federal and state reform efforts. There is no assurance that federal or state healthcare reform will not adversely affect our
business and financial results, and we cannot predict how future federal or state legislative, judicial or administrative changes relating to healthcare reform will affect our
business.
Prolonged negative economic conditions in domestic and international markets may adversely affect us, our suppliers, partners and consumers, and the global orthopedic
market which could harm our financial position.
There is a risk that one or more of our current suppliers may not continue to operate. Any lender that is obligated to provide funding to us under any future credit agreement
with us may not be able to provide funding in a timely manner, or at all, when we require it. The cost of, or lack of, available credit or equity financing could impact our ability
to develop sufficient liquidity to maintain or grow our company. These negative changes in domestic and international economic conditions or additional disruptions of either or
both of the financial and credit markets may also affect third-party payers and may have a material adverse effect on our business, results of operations, financial condition and
liquidity.
In addition, we believe that various demographics and industry-specific trends will help drive growth in the orthopedics markets, but these demographics and trends are
uncertain. Actual demand for orthopedic products generally, and our products in particular, could be significantly less than expected if our assumptions regarding these factors
prove to be incorrect or do not materialize, or if alternative treatments gain widespread acceptance.
31
We are dependent on our senior management team, engineering team, and external advisors, and the loss of any of them could harm our business. We may not have
sufficient personnel to effectuate our business strategy due to our recent reduction in force.
The members of our current senior management team have worked together in their new positions with us for a limited time and may not be able to successfully implement our
strategy. In addition, we have not entered into employment agreements, other than change-in-control severance agreements, with any of the members of our senior management
team. There are no assurances that the services of any of these individuals will be available to us for any specified period of time. The successful integration of our senior
management team, the loss of members of our senior management team, engineering team and key external advisors, or our inability to attract or retain other qualified
personnel or advisors could have a material adverse effect on our business, financial condition and results of operations. We may not have sufficient number of qualified
personnel to effectuate our business strategy which could have a material adverse effect on our business, financial condition and results of operations.
If we experience significant disruptions in our information technology systems, our business, results of operations and financial condition could be adversely affected.
The efficient operation of our business depends on our information technology systems. We rely on our information technology systems to effectively manage our sales and
marketing, accounting and financial functions; manufacturing processes; inventory; engineering and product development functions; and our research and development
functions. As such, our information technology systems are vulnerable to damage or interruption including from earthquakes, fires, floods and other natural disasters; terrorist
attacks and attacks by computer viruses or hackers; power losses; and computer systems, or Internet, telecommunications or data network failures. The failure of our
information technology systems to perform as we anticipate or our failure to effectively implement new systems could disrupt our entire operation and could result in decreased
sales, increased overhead costs, excess inventory and product shortages, all of which could have a material adverse effect on our reputation, business, results of operations and
financial condition.
Cyber security risks and the failure to maintain the integrity of company, employee or guest data could expose us to data loss, litigation and liability, and our reputation
could be significantly harmed.
We collect and third parties collaborating on our clinical trials collect and retain large volumes of data, including personally identifiable information regarding clinical trial
participants and others, for business purposes, including for regulatory, research and development and commercialization purposes, and our collaborators’ various information
technology systems enter, process, summarize and report such data. We also maintain personally identifiable information about our employees. The integrity and protection of
our company, employee and clinical data is critical to our business. We are subject to significant security and privacy regulations, as well as requirements imposed by
government regulation. Maintaining compliance with these evolving regulations and requirements could be difficult and may increase our expenses. In addition, a penetrated or
compromised data system or the intentional, inadvertent or negligent release or disclosure of data could result in theft, loss or fraudulent or unlawful use of company, employee
or clinical data which could harm our reputation, disrupt our operations, or result in remedial and other costs, fines or lawsuits.
Risks Related to Our Capital Resources and Impairments
We will require additional financing and our failure to obtain additional funding would force us to delay, reduce or eliminate our product development programs or
commercialization efforts.
We currently have limited committed sources of capital and we have limited liquidity. Our cash and cash equivalents as of December 31, 2019 was $1.8 million. We require
substantial future capital in order to continue to conduct the research and development and regulatory clearance and approval activities necessary to bring our products to
market, to establish effective marketing and sales capabilities. Our existing capital resources are not sufficient to enable us to fund the completion of the development and
commercialization of all of our product candidates. We cannot determine with certainty the duration and completion costs of the current or future development and
commercialization of our product candidates for spinal fusion, joint replacement and coated metals or if, when, or to what extent we will generate revenues from the
commercialization and sale of any of these product candidates for which we obtain regulatory approval. We may never succeed in achieving regulatory approval for certain or
all of these product candidates. The duration, costs and timing of clinical trials and development of our spinal fusion, joint replacement and coated metal product candidates will
depend on a variety of factors, including:
●
●
●
●
the scope, rate of progress, and expense of our ongoing, as well as any additional, clinical trials and other research and development activities;
future clinical trial results we may must or choose to conduct;
potential changes in government regulation; and
the timing and receipt of any regulatory approvals.
32
A change in the outcome of any of these variables with respect to the development of spinal fusion, joint replacement or coated metal product candidates could mean a
significant change in the costs and timing associated with the development of these product candidates.
In addition, if adequate funds to develop our product candidates are not available on a timely basis, we may terminate or delay the development of one or more of our product
candidates, or delay activities necessary to commercialize our product candidates. Additional funding may not be available to us on acceptable terms, or at all. Any additional
equity financing, if available, may not be available on favorable terms and will most likely be dilutive to our current stockholders, and debt financing, if available, may involve
more restrictive covenants. Our ability to access capital when needed is not assured and, if not achieved on a timely basis, will materially harm our business, financial condition
and results of operations or could cause us to cease operations.
The timing and amount of our future capital requirements will depend on many factors, including:
●
●
●
●
●
●
●
the level of sales of our current products and the cost of revenue and sales and marketing;
the extent of any clinical trials that we will be required to conduct in support of the regulatory clearance of our total hip and knee replacement product candidates;
the scope, progress, results and cost of our product development efforts;
the costs, timing and outcomes of regulatory reviews of our product candidates;
the number and types of products we develop and commercialize;
the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims; and
the extent and scope of our general and administrative expenses.
Raising additional capital by issuing securities or through debt financings or licensing arrangements may cause dilution to existing stockholders, restrict our operations or
require us to relinquish proprietary rights.
To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest may be diluted, and the terms may include
liquidation or other preferences that adversely affect your rights as a stockholder. Debt financing, if available, may involve agreements that include covenants limiting or
restricting our ability to take specific actions such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through
collaboration and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or products or grant licenses on terms that are not
favorable to us. Any of these events could adversely affect our ability to achieve our product development and commercialization goals and have a material adverse effect on
our business, financial condition and results of operations.
In previous years we have indicated that there was substantial doubt as to our ability to continue as a going concern. Depending on the results of our future operations, we
may again have substantial doubt as to our ability to continue as a going concern.
If we seek additional financing to fund our business activities, investors or other financing sources may be unwilling to provide additional funding on commercially reasonable
terms or at all. If we seek additional funds and are unable to obtain sufficient additional funding, our business, prospects, financial condition and results of operations will be
materially and adversely affected, and we may be unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets
and may receive less than the value at which those assets are carried on our consolidated financial statements, and it is likely that investors will lose all or a part of their
investment. Our future reports may disclose our doubt about our ability to continue as a going concern.
33
Risks Related to Regulatory Approval of Our Products and Other Government Regulations
Our long-term success depends substantially on our ability to obtain regulatory clearance or approval and thereafter commercialize our product candidates; we cannot be
certain that we will be able to do so in a timely manner or at all.
The process of obtaining regulatory clearances or approvals to market a medical device from the FDA or similar regulatory authorities outside of the United States can be costly
and time consuming, and there can be no assurance that such clearances or approvals will be granted on a timely basis, or at all. The FDA’s 510(k) clearance process generally
takes one to six months from the date of submission, depending on whether a special or traditional 510(k) premarket notification has been submitted, but can take significantly
longer. An application for premarket approval, or PMA, must be submitted to the FDA if the device cannot be cleared through the 510(k) clearance process or is not exempt
from premarket review by the FDA. The PMA process almost always requires one or more clinical trials and can take two to three years from the date of filing, or even longer.
In some cases, including in the case of our interbody spinal fusion devices which incorporate our CSC technology and our solid silicon nitride femoral head component, the
FDA requires clinical data as part of the 510(k) clearance process.
It is possible that the FDA could raise questions about spinal fusion products, spinal fusion product candidates, dental implant products, and our total hip and knee joint
replacement product candidates and could require us to perform additional studies on our products and product candidates. Even if the FDA permits us to use the 510(k)
clearance process, we cannot assure you that the FDA will not require either supporting data from laboratory tests or studies that we have not conducted, or substantial
supporting clinical data. If we are unable to use the 510(k) clearance process for any of our product candidates, are required to provide clinical data or laboratory data that we do
not possess to support our 510(k) premarket notifications for any of these product candidates, or otherwise experience delays in obtaining or fail to obtain regulatory clearances,
the commercialization of our product candidates in the United States will be delayed or prevented, which will adversely affect our ability to generate additional revenues. It also
may result in the loss of potential competitive advantages that we might otherwise attain by bringing our products to market earlier than our competitors. Additionally, although
the FDA allows modifications to be made to devices that have received 510(k) clearance with supporting documentation, the FDA may disagree with our decision to modify our
cleared devices without submission of a new 510(k) premarket notification, subjecting us to potential product recall, field alerts and corrective actions. Any of these
contingencies could adversely affect our business.
Similar to our compliance with U.S. regulatory requirements, we must obtain and comply with international requirements, in order to market and sell our products outside of the
United States and we may only promote and market our products, if approved, as permitted by applicable regulatory authorities. There is no guarantee that we will receive the
necessary regulatory approvals for our product candidates either inside the United States or internationally. If our product candidates do not receive necessary regulatory
approvals, our business could be materially and adversely affected.
The safety of our products is not yet supported by long-term clinical data, and they may prove to be less safe and effective than our laboratory data indicate.
We obtained FDA clearance for each of our spinal fusion products that we currently manufacture for CTL Medical, and we have sought and intend to seek FDA clearance or
approval through the FDA’s 510(k) or PMA process and, where applicable, CE marking for our product candidates. The 510(k) clearance process is based on the FDA’s
agreement that a new product candidate is substantially equivalent to an already marketed product for which a PMA was not required. While most 510(k) premarket
notifications do not require clinical data for clearance, the FDA may request that such data be provided. Long-term clinical data or marketing experience obtained after
clearance may indicate that our products cause unexpected complications or other unforeseen negative effects. If this happens, we could be subject to the withdrawal of our
marketing clearance and other enforcement sanctions by the FDA or other regulatory authority, product recalls, significant legal liability, significant negative publicity, damage
to our reputation and a dramatic reduction in our ability to sell our products, any one of which would have a material adverse effect on our business, financial condition and
results of operations.
34
We expect to be required to conduct clinical trials to support regulatory approval of some of our product candidates. We have little experience conducting clinical trials,
they may proceed more slowly than anticipated, and we cannot be certain that our product candidates will be shown to be safe and effective for human use.
In order to commercialize our product candidates in the United States, we must submit a PMA for some of these product candidates, which will require us to conduct clinical
trials. We also plan to provide the FDA with clinical trial data to support some of our 510(k) premarket notifications. We will receive approval or clearance from the FDA to
commercialize products requiring a clinical trial only if we can demonstrate to the satisfaction of the FDA, through well-designed and properly conducted clinical trials, that our
product candidates are safe and effective and otherwise meet the appropriate standards required for approval or clearance for specified indications.
Clinical trials are complex, expensive, time consuming, uncertain and subject to substantial and unanticipated delays. Before we may begin clinical trials, we must submit and
obtain approval for an investigational device exemption, or IDE, that describes, among other things, the manufacture of, and controls for, the device and a complete
investigational plan. Clinical trials generally involve a substantial number of patients in a multi-year study. Because we do not have the experience or the infrastructure
necessary to conduct clinical trials, we will have to hire one or more contract research organizations, or CROs, to conduct trials on our behalf. CRO contract negotiations may be
costly and time consuming and we will rely heavily on the CRO to ensure that our trials are conducted in accordance with regulatory and industry standards. We may encounter
problems with our clinical trials and any of those problems could cause us or the FDA to suspend those trials or delay the analysis of the data derived from them.
A number of events or factors, including any of the following, could delay the completion of our clinical trials in the future and negatively impact our ability to obtain FDA
approval for, and to introduce our product candidates:
●
●
●
●
●
●
●
●
●
●
●
●
failure to obtain financing necessary to bear the cost of designing and conducting clinical trials;
failure to obtain approval from the FDA or foreign regulatory authorities to commence investigational studies;
conditions imposed on us by the FDA or foreign regulatory authorities regarding the scope or design of our clinical trials;
failure to find a qualified CRO to conduct our clinical trials or to negotiate a CRO services agreement on favorable terms;
delays in obtaining or in our maintaining required approvals from institutional review boards or other reviewing entities at clinical sites selected for participation in
our clinical trials;
insufficient supply of our product candidates or other materials necessary to conduct our clinical trials;
difficulties in enrolling patients in our clinical trials;
negative or inconclusive results from clinical trials, or results that are inconsistent with earlier results, that necessitate additional clinical studies;
failure on the part of the CRO to conduct the clinical trial in accordance with regulatory requirements;
our failure to maintain a successful relationship with the CRO or termination of our contractual relationship with the CRO before completion of the clinical trials;
serious or unexpected side effects experienced by patients in whom our product candidates are implanted; or
failure by any of our third-party contractors or investigators to comply with regulatory requirements or meet other contractual obligations in a timely manner.
35
Our clinical trials may need to be redesigned or may not be completed on schedule, if at all. Delays in our clinical trials may result in increased development costs for our
product candidates, which could cause our stock price to decline and limit our ability to obtain additional financing. In addition, if one or more of our clinical trials are delayed,
competitors may be able to bring products to market before we do, and the commercial viability of our product candidates could be significantly reduced.
Our current and future relationships with third-party payers and current and potential customers in the United States and elsewhere may be subject, directly or indirectly, to
applicable anti-kickback, fraud and abuse, false claims, transparency, health information privacy and security and other healthcare laws and regulations, which could
expose us to criminal sanctions, civil penalties, contractual damages, reputational harm administrative burdens and diminished profits and future earnings.
Our current and future arrangements with third-party payers and current and potential customers, including providers and physicians, as well as physician owned distributorships
or PODs, may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations, including, without limitation, the federal Anti-Kickback Statute and
the federal False Claims Act, which may constrain the business or financial arrangements and relationships through which we sell, market and distribute our products. In
addition, we may be subject to transparency laws and patient privacy regulations by U.S. federal and state governments and by governments in foreign jurisdictions in which we
conduct our business. The applicable federal, state and foreign healthcare laws and regulations that may affect our ability to operate include:
●
●
●
t h e federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing
remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, order or
recommendation of, any good or service, for which payment may be made under federal healthcare programs, such as Medicare and Medicaid;
federal civil and criminal false claims laws and civil monetary penalty laws, including the federal False Claims Act, which impose criminal and civil penalties,
including civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government,
including the Medicare and Medicaid programs, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an
obligation to pay money to the federal government;
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which imposes criminal and civil liability for executing a scheme to defraud any
healthcare benefit program or making false statements relating to healthcare matters;
● HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and their respective implementing
regulations, which impose obligations on covered healthcare providers, health plans, and healthcare clearinghouses, as well as their business associates that create,
receive, maintain or transmit individually identifiable health information for or on behalf of a covered entity, with respect to safeguarding the privacy, security and
transmission of individually identifiable health information;
●
the Physician Payments Sunshine Act, which requires (i) manufacturers of drugs, devices, biologics and medical supplies for which payment is available under
Medicare, Medicaid or the Children’s Health Insurance Program, with specific exceptions, to report annually to CMS information related to certain “payments or
other transfers of value” made to physicians, which is defined to include doctors, dentists, optometrists, podiatrists and chiropractors, and teaching hospitals, with
data collection beginning on August 1, 2013, (ii) applicable manufacturers and applicable group purchasing organizations to report annually to CMS ownership and
investment interests held in such entities by physicians and their immediate family members, with data collection beginning on August 1, 2013, (iii) manufacturers
to submit reports to CMS by March 31, 2014 and the 90th day of each subsequent calendar year, and (iv) disclosure of such information by CMS on a publicly
available website beginning in September 2014; and
36
●
analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may apply to sales or marketing arrangements and claims
involving healthcare items or services reimbursed by non-governmental third-party payers, including private insurers; state and foreign laws that require medical
device companies to comply with the medical device industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal
government or otherwise restrict payments that may be made to healthcare providers; state and foreign laws that require medical device manufacturers to report
information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and state and foreign laws
governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not
preempted by HIPAA, thus complicating compliance efforts. Efforts to ensure that our business arrangements with third parties will comply with applicable
healthcare laws and regulations may involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply
with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to
be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative
penalties, including, without limitation, damages, fines, imprisonment, exclusion from participation in government healthcare programs, such as Medicare and
Medicaid, and the curtailment or restructuring of our operations, which could have a material adverse effect on our business. If any of the physicians or other
healthcare providers or entities with whom we expect to do business, including our collaborators, are found not to be in compliance with applicable laws, they may
be subject to criminal, civil or administrative sanctions, including exclusions from participation in government healthcare programs, which could also materially
affect our business.
U.S. federal income tax reform could adversely affect us.
On December 22, 2017, President Donald Trump signed into law sweeping tax reform, which overhauls individual, business and international taxes including, but not limited
to:
● Cutting the corporate federal statutory tax rate to 21%;
●
●
Limiting net interest expense deductions to 30% of adjusted taxable income; and
Limiting the net operating loss deduction to 80% of taxable income.
The reduction in tax rate will result in a reduction in the deferred tax assets. We have previously used the 35% federal statutory tax rate to calculate the value of those assets.
Also, if we fail to generate significant taxable income, we may not be able to fully deduct the interest expense on our debt, which could result in us having to pay increased
federal income taxes. We have also generated substantial taxable losses in the past and may continue to do so in the future. Although the treatment of tax losses generated before
December 31, 2018 has not changed, tax losses generated in fiscal 2019 and beyond will only be able to offset 80% of taxable income, although the losses may be carried
forward indefinitely. This could cause us to have to pay federal income taxes despite generating a loss for federal income tax purposes in the future. We continue to work with
our tax advisors to determine the full impact that the new tax bill will have on our Company.
Recently enacted and future legislation may increase the difficulty and cost for us to obtain and monitor regulatory approval or clearance of our product candidates and
affect the prices we may obtain for our products.
In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that
could prevent or delay clearance and/or approval of our product candidates, restrict or regulate post-clearance and post-approval activities and affect our ability to profitably sell
our products and any product candidates for which we obtain marketing approval or clearance.
37
In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. Any new
regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of our products. Delays in receipt of or failure to
receive regulatory clearances or approvals for our new products would have a material adverse effect on our business, results of operations and financial condition. In addition,
the FDA is currently evaluating the 510(k) process and may make substantial changes to industry requirements, including which devices are eligible for 510(k) clearance, the
ability to rescind previously granted 510(k) clearances and additional requirements that may significantly impact the process.
Among policy makers and payers in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing
healthcare costs, improving quality and expanding access. In the United States, the medical device industry has been a particular focus of these efforts and has been significantly
affected by major legislative initiatives. In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and
Education Affordability Reconciliation Act, or collectively the ACA, a sweeping law intended, among other things, to broaden access to health insurance, reduce or constrain
the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for the healthcare and health insurance industries, impose
new taxes and fees on the health industry and impose additional health policy reforms.
Among the provisions of the ACA of importance to our products and product candidates are:
●
●
establishes a new Patient-Centered Outcomes Research Institute to oversee and identify priorities in comparative clinical effectiveness research in an effort to coordinate
and develop such research; and
implements payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the
coordination, quality and efficiency of certain healthcare services through bundled payment models.
In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. For example, on January 2, 2013, former President Obama signed into
law the American Taxpayer Relief Act of 2012, or the ATRA, which, among other things, further reduced Medicare payments to several providers, including hospitals, imaging
centers and cancer treatment centers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. Moreover,
certain legislative changes to and regulatory changes under the PPACA have occurred in the 115th United States Congress and under the Trump Administration. For example,
on December 22, 2017, President Trump signed a budget reconciliation act into law, which among other things, repealed the penalty for individuals who do not maintain
minimum essential coverage, which was a central component of PPACA’s approach to expanding coverage. On January 9, 2018, President Trump signed the Bipartisan Budget
Act of 2018, which, among other things, repealed the PPACA provision establishing an independent payment advisory board that would have submitted recommendations to
reduce Medicare spending if projected Medicare spending exceeded a specified growth rate.
Additional legislative changes to and regulatory changes under the PPACA remain possible. We expect that other state and federal healthcare reform measures will be adopted
in the future, any of which could reduce the number of patients with coverage or limit the amounts that federal and state governments will pay for healthcare products and
services, which could result in reduced demand for our products or additional pricing pressure.
38
In the European Union and some other international markets, the government provides health care at a low cost to consumers and regulates prices of healthcare products, patient
eligibility or reimbursement levels to control costs for the government-sponsored health care system. Many countries are reducing their public expenditures and we expect to
see strong efforts to reduce healthcare costs in international markets, including patient access restrictions, suspensions on price increases, prospective and possibly retroactive
price reductions and other recoupments and increased mandatory discounts or rebates and recoveries of past price increases. These cost control measures could reduce our
revenues. In addition, certain countries set prices by reference to the prices in other countries where our products are marketed. Thus, our inability to secure adequate prices in a
particular country may not only limit the marketing of our products within that country but may also adversely affect our ability to obtain acceptable prices in other markets.
This may create the opportunity for third-party cross border trade or influence our decision to sell or not to sell a product, thus adversely affecting our geographic expansion
plans and revenues.
Risks Related to Our Intellectual Property and Litigation
If the combination of patents, trade secrets and contractual provisions that we rely on to protect our intellectual property is inadequate, our ability to commercialize our
products successfully will be harmed, and we may not be able to operate our business profitably.
Our success depends significantly on our ability to protect our proprietary rights to the technologies incorporated in our products. We rely on a combination of patent protection,
trade secret laws and nondisclosure, confidentiality and other contractual restrictions to protect our proprietary technology. However, these may not adequately protect our
rights or permit us to gain or keep any competitive advantage.
The issuance of a patent is not conclusive as to its scope, validity or enforceability. The scope, validity or enforceability of our issued patents can be challenged in litigation or
proceedings before the U.S. Patent and Trademark Office, or the USPTO, or foreign patent offices. In addition, our pending patent applications include claims to numerous
important aspects of our products under development that are not currently protected by any of our issued patents. We cannot assure you that any of our pending patent
applications will result in the issuance of patents to us. The USPTO or foreign patent offices may deny or require significant narrowing of claims in our pending patent
applications. Patents issued as a result of the pending patent applications, if any, may not provide us with significant commercial protection or be issued in a form that is
advantageous to us. Proceedings before the USPTO or foreign patent offices could result in adverse decisions as to the priority of our inventions and the narrowing or
invalidation of claims in issued patents. The laws of some foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States, if
at all.
Our competitors may successfully challenge and invalidate or render unenforceable our issued patents, including any patents that may issue in the future, which could prevent or
limit our ability to market our products and could limit our ability to stop competitors from marketing products that are substantially equivalent to ours. In addition, competitors
may be able to design around our patents or develop products that provide outcomes that are comparable to our products but that are not covered by our patents.
We have also entered into confidentiality and assignment of intellectual property agreements with all of our employees, consultants and advisors as one of the ways we seek to
protect our intellectual property and other proprietary technology. However, these agreements may not be enforceable or may not provide meaningful protection for our trade
secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements.
In the event a competitor infringes upon any of our patents or other intellectual property rights, enforcing our rights may be difficult, time consuming and expensive, and would
divert management’s attention from managing our business. There can be no assurance that we will be successful on the merits in any enforcement effort. In addition, we may
not have sufficient resources to litigate, enforce or defend our intellectual property rights.
39
We have no patent protection covering the composition of matter for our solid silicon nitride or the process we use for manufacturing our solid silicon nitride, and
competitors may create silicon nitride formulations substantially similar to ours.
Although we have a number of U.S. and foreign patents and pending applications relating to our solid silicon nitride products or product candidates, we have no patent
protection either for the composition of matter for our silicon nitride or for the processes of manufacturing solid silicon nitride. As a result, competitors may create silicon
nitride formulations substantially similar to ours and use their formulations in products that may compete with our silicon nitride products, provided they do not violate our
issued product patents. Although we have, and will continue to develop, significant know-how related to these processes, there can be no assurance that we will be able to
maintain this know-how as trade secrets, and competitors may develop or acquire equally valuable or more valuable know-how related to the manufacture of silicon nitride.
We could become subject to intellectual property litigation that could be costly, result in the diversion of management’s time and efforts, require us to pay damages, prevent
us from marketing our commercially available products or product candidates and/or reduce the margins we may realize from our products that we may commercialize.
The medical devices industry is characterized by extensive litigation and administrative proceedings over patent and other intellectual property rights. Whether a product
infringes a patent involves complex legal and factual issues, and the determination is often uncertain. There may be existing patents of which we are unaware that our products
under development may inadvertently infringe. The likelihood that patent infringement claims may be brought against us increases as the number of participants in the
orthopedic market increases and as we achieve more visibility in the marketplace and introduce products to market.
Any infringement claim against us, even if without merit, may cause us to incur substantial costs, and would place a significant strain on our financial resources, divert the
attention of management from our core business, and harm our reputation. In some cases, litigation may be threatened or brought by a patent holding company or other adverse
patent owner who has no relevant product revenues and against whom our patents may provide little or no deterrence. If we were found to infringe any patents, we could be
required to pay substantial damages, including triple damages if an infringement is found to be willful, and royalties and could be prevented from selling our products unless we
obtain a license or are able to redesign our products to avoid infringement. We may not be able to obtain a license enabling us to sell our products on reasonable terms, or at all,
and there can be no assurance that we would be able to redesign our products in a way that would not infringe those patents. If we fail to obtain any required licenses or make
any necessary changes to our technologies or the products that incorporate them, we may be unable to commercialize one or more of our products or may have to withdraw
products from the market, all of which would have a material adverse effect on our business, financial condition and results of operations.
In addition, in order to further our product development efforts, we have entered into agreements with orthopedic surgeons to help us design and develop new products, and we
expect to enter into similar agreements in the future. In certain instances, we have agreed to pay such surgeons royalties on sales of products which incorporate their product
development contributions. There can be no assurance that surgeons with whom we have entered into such arrangements will not claim to be entitled to a royalty even if we do
not believe that such products were developed by cooperative involvement between us and such surgeons. In addition, some of our surgeon advisors are employed by academic
or medical institutions or have agreements with other orthopedic companies pursuant to which they have agreed to assign or are under an obligation to assign to those other
companies or institutions their rights in inventions which they conceive or develop or help conceive or develop.
There can be no assurance that one or more of these orthopedic companies or institutions will not claim ownership rights to an invention we develop in collaboration with our
surgeon advisors or consultants on the basis that an agreement with such orthopedic company or institution gives it ownership rights in the invention or that our surgeon
advisors on consultants otherwise have an obligation to assign such inventions to such company or institution. Any such claim against us, even without merit, may cause us to
incur substantial costs, and would place a significant strain on our financial resources, divert the attention of management from our core business and harm our reputation.
40
We may be subject to damages resulting from claims that we have wrongfully used or disclosed alleged trade secrets of our competitors or are in breach of non-competition
agreements with our competitors or non-solicitation agreements.
Many of our employees were previously employed at other orthopedic companies, including our competitors and potential competitors. Many of our former distributors and
potential distributors sell, or in the past have sold, products of our competitors. We may be subject to claims that either we, or these employees or distributors, have
inadvertently or otherwise used or disclosed the trade secrets or other proprietary information of our competitors. In addition, we have been and may in the future be subject to
claims that we caused an employee or sales agent to break the terms of his or her non-competition agreement or non-solicitation agreement. Litigation may be necessary to
defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. If we fail
in defending such claims, in addition to paying money damages, we may lose valuable intellectual property rights or personnel. A loss of key personnel or their work product
could hamper or prevent our ability to commercialize products, which could have an adverse effect on our business, financial condition and results of operations.
If our silicon nitride products or our product candidates conflict with the rights of others, we may not be able to manufacture or market our products or product
candidates, which could have a material and adverse effect on us.
Our commercial success will depend in part on not infringing the patents or violating the other proprietary rights of third parties. Issued patents held by others may limit our
ability to develop commercial products. All issued patents are entitled to a presumption of validity under the laws of the United States. If we need suitable licenses to such
patents to permit us to develop or market our product candidates, we may be required to pay significant fees or royalties and we cannot be certain that we would even be able to
obtain such licenses. Competitors or third parties may obtain patents that may cover subject matter we use in developing the technology required to bring our products to
market, that we use in producing our products, or that we use in treating patients with our products. We know that others have filed patent applications in various jurisdictions
that relate to several areas in which we are developing products. Some of these patent applications have already resulted in patents and some are still pending. If we were found
to infringe any of these issued patents or any of the pending patent applications, when and if issued, we may be required to alter our processes or product candidates, pay
licensing fees or cease activities. If use of technology incorporated into or used to produce our product candidates is challenged, or if our processes or product candidates
conflict with patent rights of others, third parties could bring legal actions against us, in Europe, the United States and elsewhere, claiming damages and seeking to enjoin
manufacturing and marketing of the affected products. Additionally, it is not possible to predict with certainty what patent claims may issue from pending applications. In the
United States, for example, patent prosecution can proceed in secret prior to issuance of a patent, provided such application is not filed in foreign jurisdiction. For U.S. patent
applications that are also filed in foreign jurisdictions, such patent applications will not publish until 18 months from the filing date of the application. As a result, third parties
may be able to obtain patents with claims relating to our product candidates which they could attempt to assert against us. Further, as we develop our products, third parties may
assert that we infringe the patents currently held or licensed by them, and we cannot predict the outcome of any such action.
There has been extensive litigation in the medical devices industry over patents and other proprietary rights. If we become involved in any litigation, it could consume a
substantial portion of our resources, regardless of the outcome of the litigation. If these legal actions are successful, in addition to any potential liability for damages, we could
be required to obtain a license, grant cross-licenses and pay substantial royalties in order to continue to manufacture or market the affected products.
We cannot assure you that we would prevail in any legal action or that any license required under a third-party patent would be made available on acceptable terms, or at all.
Ultimately, we could be prevented from commercializing a product, or forced to cease some aspect of our business operations, as a result of claims of patent infringement or
violation of other intellectual property rights, which could have a material and adverse effect on our business, financial condition and results of operations.
41
Risks Related to Potential Litigation from Operating Our Business
We may become subject to potential product liability claims, and we may be required to pay damages that exceed our insurance coverage.
Our business exposes us to potential product liability claims that are inherent in the design, testing, manufacture, sale and distribution of our currently marketed products and
each of our product candidates that we are seeking to introduce to the market. The use of orthopedic medical devices can involve significant risks of serious complications,
including bleeding, nerve injury, paralysis, infection, and even death. Any product liability claim brought against us, with or without merit, could result in the increase of our
product liability insurance rates or in our inability to secure coverage in the future on commercially reasonable terms, if at all. In addition, if our product liability insurance
proves to be inadequate to pay a damage award, we may have to pay the excess of this award out of our cash reserves, which could significantly harm our financial condition. If
longer-term patient results and experience indicate that our products or any component of a product causes tissue damage, motor impairment or other adverse effects, we could
be subject to significant liability. A product liability claim, even one without merit, could harm our reputation in the industry, lead to significant legal fees, and result in the
diversion of management’s attention from managing our business.
Any claims relating to our improper handling, storage or disposal of biological or hazardous materials could be time consuming and costly.
Although we do not believe that the manufacture of our silicon nitride or non-silicon nitride products will involve the use of hazardous materials, it is possible that regulatory
authorities may disagree or that changes to our manufacturing processes may result in such use. Our business and facilities and those of our suppliers and future suppliers may
therefore be subject to foreign, federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous materials and waste
products. We may incur significant expenses in the future relating to any failure to comply with environmental laws. Any such future expenses or liability could have a
significant negative impact on our business, financial condition and results of operations.
Risks Related to Our Common Stock
The price of our common stock is volatile and is likely to continue to fluctuate due to reasons beyond our control.
The volatility of publicly traded company stocks, including shares of our common stock, often do not correlate to the operating performance of the companies represented by
such stocks or our operating performance. Some of the factors that may cause the market price of our common stock to fluctuate include:
● CTL Medical’s ability to sell silicon nitride based spinal fusion products and our cost of manufacturing such products for CTL Medical;
●
●
●
●
●
●
●
●
●
our ability to develop, obtain regulatory clearances or approvals for, and market new and enhanced product candidates on a timely basis;
our ability to enter into OEM and private label partnership agreements and the terms of those agreements;
changes in governmental regulations or in the status of our regulatory approvals, clearances or future applications;
o u r announcements or our competitors’ announcements regarding new products, product enhancements, significant contracts, number and productivity of
distributors, number of hospitals and surgeons using products, acquisitions or strategic investments;
announcements of technological or medical innovations for the treatment of orthopedic pathology;
delays or other problems with the manufacturing of our products, product candidates and related instrumentation;
volume and timing of orders for our products and our product candidates, if and when commercialized;
changes in the availability of third-party reimbursement in the United States and other countries;
quarterly variations in our or our competitors’ results of operations;
42
●
●
●
●
●
●
●
●
●
●
●
changes in earnings estimates or recommendations by securities analysts, if any, who cover our common stock;
failure to meet estimates or recommendations by securities analysts, if any, who cover our stock;
changes in the fair value of our derivative liabilities resulting from changes in the market price of our common stock, which may result in significant fluctuations in
our quarterly and annual operating results;
changes in healthcare policy in the United States and internationally;
product liability claims or other litigation involving us;
sales of a substantial aggregate number of shares of our common stock;
sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;
disputes or other developments with respect to intellectual property rights;
changes in accounting principles;
changes to tax policy; and
general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors.
These and other external factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent our stockholders from
readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, in the past, when the market price of a stock
has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. If our stockholders brought a
lawsuit against us, we could incur substantial costs defending the lawsuit regardless of the merits of the case or the eventual outcome. Such a lawsuit also would divert the time
and attention of our management from running our company.
Securities analysts may not continue to provide coverage of our common stock or may issue negative reports, which may have a negative impact on the market price of our
common stock.
Since completing our initial public offering of shares of our common stock in February 2014, a limited number of securities analysts have been providing research coverage of
our common stock. If securities analysts do not continue to cover our common stock, the lack of research coverage may cause the market price of our common stock to decline.
The trading market for our common stock may be affected in part by the research and reports that industry or financial analysts publish about our business. If one or more of the
analysts who elect to cover us downgrade our stock, our stock price would likely decline rapidly. If one or more of these analysts cease coverage of us, we could lose visibility
in the market, which in turn could cause our stock price to decline. In addition, under the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and a global settlement
among the Securities and Exchange Commission, or the SEC, other regulatory agencies and a number of investment banks, which was reached in 2003, many investment
banking firms are required to contract with independent financial analysts for their stock research. It may be difficult for a company such as ours, with a smaller market
capitalization, to attract independent financial analysts that will cover our common stock. This could have a negative effect on the market price of our stock.
43
Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent a change in control, even if an acquisition would be beneficial to
our stockholders, which could affect our stock price adversely and prevent attempts by our stockholders to replace or remove our current management.
Our restated certificate of incorporation and restated bylaws contain provisions that could discourage, delay or prevent a merger, acquisition or other change in control of our
company or changes in our board of directors that our stockholders might consider favorable, including transactions in which you might receive a premium for your shares.
These provisions also could limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our
common stock. Stockholders who wish to participate in these transactions may not have the opportunity to do so. Furthermore, these provisions could prevent or frustrate
attempts by our stockholders to replace or remove management. These provisions:
●
●
●
●
●
●
allow the authorized number of directors to be changed only by resolution of our board of directors;
provide for a classified board of directors, such that not all members of our board will be elected at one time;
prohibit our stockholders from filling board vacancies, limit who may call stockholder meetings, and prohibit the taking of stockholder action by written consent;
prohibit our stockholders from making certain changes to our restated certificate of incorporation or restated bylaws except with the approval of holders of 75% of
the outstanding shares of our capital stock entitled to vote;
require advance written notice of stockholder proposals that can be acted upon at stockholders’ meetings and of director nominations to our board of directors; and
authorize our board of directors to create and issue, without prior stockholder approval, preferred stock that may have rights senior to those of our common stock
and that, if issued, could operate as a “poison pill” to dilute the stock ownership of a potential hostile acquirer to prevent an acquisition that is not approved by our
board of directors.
In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain business combinations with stockholders
owning 15% or more of our outstanding voting stock. Any delay or prevention of a change in control transaction or changes in our board of directors could cause the market
price of our common stock to decline.
We do not intend to pay cash dividends.
We have never declared or paid cash dividends on our capital stock and we do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain
all available funds and any future earnings for debt service and use in the operation and expansion of our business. In addition, the terms of any future debt or credit facility may
preclude us from paying any dividends.
Our outstanding shares of Series B Convertible Preferred Stock and Series C Convertible Preferred Stock and our outstanding common stock warrants are convertible and
exercisable into shares of our common stock and when converted or exercised, the issuance of additional shares of common stock may result in downward pressure on the
trading price of our common shares.
We have outstanding shares of Series B Convertible Preferred Stock and Series C Convertible Preferred Stock that are each convertible into shares of common stock. We
believe that as such holders convert their preferred shares into common shares, they will immediately sell their shares of common stock. The sale of such shares of common
stock may result in downward pressure on the trading price of our common stock resulting in a lower stock price. Additionally, we have outstanding warrants to purchase shares
of common stock. Many of these warrants have a cashless exercise provision that if exercised may also result in downward pressure on the trading price of our common stock
and cause such price to decline.
44
Risks Related to Public Companies
We are a “smaller reporting company” and the reduced disclosure requirements applicable to smaller reporting companies may make our common stock less attractive to
investors.
We are currently a “smaller reporting company” as defined in the Securities Exchange Act of 1934. Smaller reporting companies are able to provide simplified executive
compensation disclosures in their filings, are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that independent registered public accounting
firms provide an attestation report on the effectiveness of internal control over financial reporting, and have certain other decreased disclosure obligations in their SEC filings,
including, among other things, only being required to provide two years of audited financial statements in annual reports. We cannot predict whether investors will find our
common stock less attractive because of our reliance on any of these exemptions. If some investors find our common stock less attractive as a result, there may be a less active
trading market for our common stock and our stock price may be more volatile.
We could be delisted from Nasdaq, which could seriously harm the liquidity of our stock and our ability to raise capital.
On March 24, 2020, we received a notice from the Nasdaq Listing Qualifications Department (the “Staff”) of the Nasdaq Stock Market LLC (“Nasdaq”) stating that the bid
price of the Company’s common stock for the last 30 consecutive trading days had closed below the minimum $1.00 per share required for continued listing under Listing Rule
5550(a)(2). If the Company does not regain compliance with Rule 5550(a)(2) by September 21, 2020, the Company may be afforded a second 180 calendar day period to regain
compliance. To qualify, the Company would be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards
for The Nasdaq Capital Market, except for the minimum bid price requirement. In addition, the Company would be required to notify Nasdaq of its intent to cure the deficiency
during the second compliance period, which may include, if necessary, implementing a reverse stock split. There can be no assurance that the Company will be able to regain
compliance with Nasdaq requirements or will otherwise be in compliance with other Nasdaq listing criteria.
If we cease to be eligible to trade on the Nasdaq Capital Market:
● We may have to pursue trading on a less recognized or accepted market, such as the OTC Bulletin Board or the “pink sheets.”
●
●
The trading price of our common stock could suffer, including an increased spread between the “bid” and “asked” prices quoted by market makers.
Shares of our common stock could be less liquid and marketable, thereby reducing the ability of stockholders to purchase or sell our shares as quickly and as
inexpensively as they have done historically. If our stock is traded as a “penny stock,” transactions in our stock would be more difficult and cumbersome.
● We may be unable to access capital on favorable terms or at all, as companies trading on alternative markets may be viewed as less attractive investments with higher
associated risks, such that existing or prospective institutional investors may be less interested in, or prohibited from, investing in our common stock. This may also
cause the market price of our common stock to decline.
45
We incur substantial costs as a result of being a public company and our management expects to devote substantial time to public company compliance programs.
As a public company, we incur significant legal, insurance, accounting and other expenses, including costs associated with public company reporting. We intend to invest
resources to comply with evolving laws, regulations and standards, and this investment will result in increased general and administrative expenses and may divert
management’s time and attention from product development and commercialization activities. If our efforts to comply with new laws, regulations and standards differ from the
activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us, and our business
may be harmed. These laws and regulations could make it more difficult and costlier for us to obtain director and officer liability insurance for our directors and officers, and we
may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain
qualified executive officers and qualified members of our board of directors, particularly to serve on our audit and compensation committees. In addition, if we are unable to
continue to meet the legal, regulatory and other requirements related to being a public company, we may not be able to maintain the listing of our common stock on The
NASDAQ Capital Market, which would likely have a material adverse effect on the trading price of our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
PROPERTIES
Our 30,000 square foot corporate office and manufacturing facilities are located in Salt Lake City, Utah. We occupy these facilities pursuant to a lease that expires in December
2024. Pursuant to the terms of the lease agreement, we may extend the lease for two additional periods of five years each. We believe that our existing facilities are adequate for
our current and projected needs for the foreseeable future.
ITEM 3.
LEGAL PROCEEDINGS
We are currently not a party to any material legal proceedings. However, our industry is characterized by frequent claims and litigation, including claims regarding intellectual
property and product liability. As a result, we may be subject to various legal proceedings in the future.
ITEM 4. MINE SAFETY DISCLOSURES
This item does not apply to our business.
46
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY
PART II
SECURITIES
Market Information
Our shares of common stock are currently quoted on The NASDAQ Capital Market under the symbol “SINT”.
The following table sets forth the high and low sale prices of our common stock, as reported by NASDAQ Capital Markets for the periods indicated:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2019
High
Low
10.47 $
7.20 $
4.39 $
2.78 $
2018
High
Low
122.84 $
123.61 $
28.44 $
12.30 $
4.80
2.25
1.25
1.38
41.10
27.00
5.45
4.80
$
$
$
$
$
$
$
$
Prices listed are adjusted to reflect both the January 25, 2016 reverse stock split, the November 10, 2017 reverse stock split and the July 26, 2019 reverse stock split.
Holders of Record
As of March 19, 2020, we had approximately 158 holders of record of our common stock. Because many of our shares of common stock are held by brokers and other
institutions on behalf of stockholders, this number is not indicative of the total number of stockholders represented by these stockholders of record.
Dividends
We have not declared or paid dividends to stockholders since inception and do not plan to pay cash dividends in the foreseeable future. We currently intend to retain earnings, if
any, to finance our growth.
Issuer Purchases of Equity Securities
None
ITEM 6.
SELECTED FINANCIAL DATA
Not applicable.
47
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes
appearing elsewhere in this Annual Report. This discussion and analysis contain forward-looking statements based upon current beliefs, plans, expectations, intentions and
projections that involve risks, uncertainties and assumptions, such as statements regarding our plans, objectives, expectations, intentions and projections. Our actual results
and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under
“Risk Factors” and elsewhere in this Annual Report.
Overview
We are an advanced materials company that develops and commercializes silicon nitride for medical and non-medical applications. The core strength of SINTX Technologies is
the manufacturing, research, and development of silicon nitride ceramics for external partners. We believe that silicon nitride has a superb combination of properties that make it
ideally suited for long-term human implantation. Other biomaterials are based on bone grafts, metal alloys, and polymers, all of which have well-known practical limitations
and disadvantages. In contrast, silicon nitride has a legacy of success in the most demanding and extreme industrial environments. As a human implant material, silicon nitride
offers bone ingrowth, resistance to bacterial and viral infection, ease of diagnostic imaging, resistance to corrosion, and superior strength and fracture resistance, among other
advantages, all of which claims are validated in our large and growing inventory of peer-reviewed, published literature reports. We believe that our versatile silicon nitride
manufacturing expertise positions us favorably to introduce new and innovative devices in the medical and non-medical fields.
We also believe that we are the first and only company to commercialize silicon nitride medical implants. Prior to October 1, 2018, we designed, manufactured and
commercialized silicon nitride products for our own behalf in the spine implant market. Over 35,000 of our spinal implants manufactured with silicon nitride have been
implanted into patients, with an excellent safety record. On October 1, 2018, we sold our spine implant business to CTL Medical and now manufacture spine implants made
with silicon nitride for CTL Medical. Prior to selling our spine implant business to CTL Medical, we had received 510(k) regulatory clearance in the United States, a CE mark
in Europe, ANVISA approval in Brazil, and ARTG and Prostheses approvals in Australia for a number of silicon nitride spine implant products designed for spinal fusion
surgery. Spine implant products manufactured by us from silicon nitride are currently marketed and sold by CTL Medical under the Valeo® brand to surgeons and hospitals in
the United States and to selected markets in Europe and South America. These implants are designed for use in cervical (neck) and thoracolumbar (lower back) spine surgery.
We are collaborating with CTL Medical to establish commercial partners in other parts of the world and also working with other partners to obtain regulatory approval for
silicon nitride implants in Japan.
The sale of our spine implant business to CTL Medical enables us to now focus on our core competencies. These include research and development of silicon nitride and the
design and manufacture of medical and nonmedical products manufactured from silicon nitride and other ceramic materials for our own account and in collaboration with other
medical device manufacturers. We are targeting original equipment manufacturer (“OEM”) – including CTL Medical - and private label partnerships in order to accelerate
adoption of silicon nitride in future markets such as coating products with silicon nitride, hip and knee replacements, dental and maxillofacial implants, extremities, trauma,
bearings, automotive and aerospace components, and cutting tools. Existing biomaterials, based on plastics, metals, and bone grafts have well-recognized limitations that we
believe are addressed by silicon nitride.
We believe that silicon nitride addresses many of the biomaterial-related limitations in medical related fields such as hip and knee replacements, dental and maxillofacial
implants, sports medicine, extremities, and trauma surgery. We further believe that the inherent material properties of silicon nitride, and the ability to formulate the material in a
variety of compositions, combined with precise control of the surface properties of the material, opens up a number of commercial opportunities across orthopedic surgery,
neurological surgery, maxillofacial surgery, other medical disciplines, as well as commodity items such as industrial fasteners, bushings, and valves to addressing more complex
demands of hypersonic missile radomes, aerospace, air-conditioning systems, beverage dispensers, touch-screen glass, and agribusiness fungicides.
Components of our Results of Operations
We manage our business within one reportable segment, which is consistent with how our management reviews our business, makes investment and resource allocation
decisions and assesses operating performance.
Product Revenue
We derive our product revenue primarily from the manufacture and sale of spinal fusion products used in the treatment of spine disorders to CTL Medical, with whom we
entered into a 10-year exclusive sales agreement in October 2018. We are currently pursuing other sales opportunities for silicon nitride products outside the spinal fusion
application. We generally recognize revenue from sales where control transfers at a point in time as the title and risk of loss passes to the customer, which is at the time the
product is shipped. In general, our customer does not have rights of return or exchange.
We believe our product revenue will increase as CTL Medical increases sales of silicon nitride spinal fusion products, as we secure other opportunities to manufacture third
party products with silicon nitride, and as we continue to introduce new products into the market.
Cost of Revenue
The expenses that are included in cost of revenue include all in-house manufacturing costs for the products we manufacture.
48
Gross Profit
Our gross profit measures our product revenue relative to our cost of revenue. We expect our gross profit percentage to decrease as we expand the penetration of our silicon
nitride technology platform through OEM and private label partnerships, which offer additional avenues for the adoption of silicon nitride. Prior to the sale of our retail spine
business, our revenues and gross profits were based on our retail sales. With the focus on OEM and private label partnerships, the margins are lower, thus causing the decrease
in our gross profit percentage.
Research and Development Expenses
Our research and development costs are expensed as incurred. Research and development costs consist of engineering, product development, clinical trials, test-part
manufacturing, testing, developing and validating the manufacturing process, manufacturing, facility and regulatory-related costs. Research and development expenses also
include employee compensation, employee and non-employee stock-based compensation, supplies and materials, consultant services, and travel and facilities expenses related
to research and development activities.
We expect to incur additional research and development costs as we continue to develop new spinal fusion products, product candidates for total joint replacements, dental
applications, and other products which may increase our total research and development expenses.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation for certain members of our executive
team and other personnel employed in finance, compliance, administrative, information technology, customer service, executive and human resource departments. General and
administrative expenses also include other expenses not part of the other cost categories mentioned above, including facility expenses and professional fees for accounting and
legal services.
Results of Operations
Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018
The following table sets forth, for the periods indicated, our results of operations for the years ended December 31, 2019 and 2018 (in thousands):
Product revenue
Costs of revenue
Gross profit
Operating expenses:
Research and development
General and administrative
Sales and marketing
Goodwill impairment
Total operating expenses
Loss from operations
Other income, net
Net loss before income taxes
Provision for income taxes
Loss from continuing operations
Loss from discontinued operations
Gain from disposal of discontinued operations
Net loss
Deemed dividend related to beneficial conversion feature and accretion of
discount on convertible series A preferred stock
Net loss attributable to common stockholders
Year Ended December 31,
2018
2019
$
$
689
551
138
$
95
56
39
3,394
2,908
430
-
6,732
(6,594)
1,797
(4,797)
-
(4,797)
-
-
(4,797)
2,991
3,866
135
6,163
13,155
(13,116)
3,427
(9,689)
-
(9,689)
(324)
1,361
(8,652)
(2,703)
(7,500)
$
(13,900)
(22,552)
$
$
49
$ Change
% Change
594
495
99
403
(958)
295
(6,163)
(6,423)
6,522
(1,630)
4,892
-
4,892
324
(1,361)
3,855
11,197
15,052
625%
884%
254%
13%
-25%
219%
-100%
-49%
-50%
-48%
-50%
N/A
-50%
-100%
-100%
-45%
-81%
-67%
Product Revenue
Total silicon nitride revenue was $0.7 million in 2019 as compared to $0.1 million in 2018, an increase of $0.6 million or 625%. This increase was primarily due to the sale of
the retail spine business in October 2018, the restatement of 2018 revenues to $0.1 million as a result of the discontinued retail spine operations and the subsequent sale of only
silicon nitride products during the fourth quarter of 2018. In addition, sales increased as a result of increased sales and marketing efforts from CTL Medical.
Costs of Revenue and Gross Profit
The Company’s cost of revenue increased $0.5 million, or 884%, as compared to the same period in 2018. Gross profit increased $0.1 million, or 254%, as compared to the same
period in 2018. Both increases are primarily due to the discontinued operations treatment and the sale of the retail spine business in October 2018. In addition, cost of revenue
increased as a result of increased revenue due to increased sales and marketing efforts from CTL Medical.
Research and Development Expenses
Research and development expenses increased $0.4 million, or 13%, as compared to the same period in 2018. This increase was primarily attributable to an overall increase in
R&D activity to support the Company’s strategic objective of developing new technologies and related products.
General and Administrative Expenses
General and administrative expenses decreased $1.0 million, or 25%, as compared to the same period in 2018. This decrease is due to the Company maintaining a lower
overhead structure during 2019.
Sales and Marketing Expenses
Sales and marketing expenses increased $0.3 million, or 219%, as compared to the same period in 2018. This increase was primarily attributable to an overall increase in
marketing activities to generate interest in and exposure to the Company’s potential new product lines.
50
Deemed Dividends
Deemed dividends related to a beneficial conversion feature and accretion of discount on convertible preferred stock was recorded at $2.7 million in 2019, compared to $13.9
for 2018. A beneficial conversion amount was calculated in association with the 2018 issuance of certain convertible preferred stock and warrants that could convert to common
stock at a discount below the trading price on the date of issuance. The accretion of a discount related to the actual conversion of the preferred stock into common stock. During
2019, 3,825 shares of the preferred stock were converted to common stock and 10,926 shares of the preferred stock were converted to common stock during 2018.
Other Income (Expense), Net
Other income decreased $1.6 million, or 48%, as compared to the same period in 2018. This decrease was primarily due to the change in the fair value of the derivative liabilities
in the amount of $5.7 million offset by the decrease in the loss on the extinguishment of derivative liabilities of $1.2 million, the decrease in interest expense of $1.4 million, the
decrease in the loss on extinguishment of debt of $0.3 million and the increase in interest income of $0.5 million, and a decrease in offering costs of $0.7 million.
Liquidity and Capital Resources
The consolidated financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and
settlement of liabilities in the normal course of business, and does not include any adjustments to reflect the possible future effects on the recoverability and classification of
assets or the amounts and classifications of liabilities that may result from uncertainty related to its ability to continue as a going concern within one year from the date of
issuance of these consolidated financial statements.
For the years ended December 31, 2019 and 2018, the Company incurred a net loss of $4.8 million and $8.7 million, respectively, and used cash in continuing operations of
$6.4 million and $9.3 million, respectively. The Company had an accumulated deficit of $234.1 million and $229.3 million as of December 31, 2019 and 2018, respectively. To
date, the Company’s operations have been principally financed from proceeds from the issuance of preferred and common stock and, to a lesser extent, cash generated from
product sales. It is anticipated that the Company will continue to generate operating losses and use cash in operations. The Company’s continuation as a going concern is
dependent upon its ability to increase sales, and/or raise additional funds through the capital markets. Whether and when the Company can attain profitability and positive cash
flows from operations or obtain additional financing is uncertain.
The Company is actively generating additional scientific and clinical data to have it published in leading industry publications. The unique features of our silicon nitride
material are not well known, and we believe the publication of such data would help sales efforts as the Company approaches new prospects. The Company is also making
additional changes to the sales strategy, including a focus on revenue growth by expanding the use of silicon nitride in other areas outside of spinal fusion applications.
The Company has common stock that is publicly traded and has been able to successfully raise capital when needed since the date of the Company’s initial public offering in
February 2014. In March 2018, the Company closed on gross proceeds of $1.4 million, before payment of placement agent fees and costs, on a warrant reprice and exercise
transaction. Additionally, on May 14, 2018, the Company closed on a public offering of units, consisting of convertible preferred stock and warrants, for gross proceeds of $15
million, which excludes underwriting discounts and commissions and offering expenses payable by the Company.
51
During the year ended December 31, 2019, the Company entered into an ATM equity distribution agreement in which the Company may sell, from time to time, shares of
common stock having an aggregate offering price of up to $2.5 million (see Note 8). The Company sold 527,896 shares during the year ended December 31, 2019, raising
approximately $1.5 million net of issuance cost of $0.2 million. The Company is eligible to raise an additional $0.8 million under this offering.
On October 1, 2018, the Company sold the retail spine business to CTL Medical. The sale included a $6 million noninterest bearing note receivable payable over a 36-month
term. The 36-month term of the note receivable requires 18 payments of $138,889 followed by 18 payments of $194,444, with maturing of the note receivable to occur October
1, 2021. The Company expects cash flows totaling $0.6 million from January 1, 2020 through April 30, 2020, the last four months of the initial 18-month payment period, and,
cash flows of $3.5 million over the following eighteen months. The buyer also assumed the Company’s $2.5 million related party note payable. Further, the Company raised
gross proceeds of approximately $9.4 million subsequent to December 31, 2019, under a rights offering consisting of shares of preferred stock and common stock warrants.
Management has concluded that its existing capital resources and availability under its existing ATM offering, proceeds of approximately $9.4 million from the February 2020
offering, and payments on the note receivable from the purchaser of the Spine business will be sufficient to fund operations for at least the next 12 months, or through March
2021.
Cash Flows
The following table summarizes, for the periods indicated, cash flows from operating, investing and financing activities (in thousands):
Net cash used in operating activities – continuing operations
Cash loss on sale – discontinued operations
Net cash provided by operating activities – discontinued operations
Net cash used in operating activities
Net cash provided by (used in) investing activities – continuing operations
Net cash used in investing activities – discontinued operations
Net cashed provided by (used in) investing activities
Net cash provided by financing activities – continuing operations
Net cash provided by financing activities – discontinued operations
Net cash provided by financing activities
Net cash provided (used)
Net Cash Used in Operating Activities – continuing operations
Year Ended December 31,
2019
2018
(6,435)
-
-
(6,435)
1,381
-
1,381
1,394
-
1,394
(3,660)
$
$
(9,328)
(695)
675
(9,348)
(61)
(84)
(145)
14,401
-
14,401
4,908
$
$
Net cash used in operating activities – continuing operations was $6.4 million in 2019, compared to $9.3 million used in 2018, a decrease of $2.9 million. The decrease in the net
loss for continuing operations, and related non-cash add backs to the net loss, was $1.8 million from 2019 when compared to 2018. The decrease in cash used for operating
activities – continuing operations during 2019 was primarily due to the $1.8 million mentioned above plus changes in the movement of working capital items during 2019 as
compared to the same period in 2018 as follows: a $1.5 million decrease in cash used in accounts payable and accrued liabilities, and a $0.3 million decrease in cash used in
account and other receivables, offset by a $0.8 million increase in cash payments on operation lease liability.
Net Cash Provided By (Used in) Investing Activities – continuing operations
Net cash provided by investing activities – continuing operations was $1.4 million during 2019, compared to $0.0 million used in investing activities during the same period in
2018, an increase of $1.4 million. The increase in cash provided in investing activities during 2019 was primarily due to an increase of $1.5 million for the proceeds from notes
receivable, offset by the decrease of $0.1 million for the purchase of property and equipment.
Net Cash Provided by Financing Activities – continuing operations
Net cash provided by financing activities was $1.4 million during 2019, compared to $14.4 million provided by financing activities during the same period in 2018, a decrease of
$13.0 million. The decrease was primarily due to a $7.6 million decrease in cash generated from the issuance of warrant derivative liabilities, a $6.7 million decrease in cash
generated from the issuance of preferred stock, a $1.6 million decrease in cash generated from the exercise of warrants, a $0.7 million decrease in proceeds from the issuance of
debt, and a $0.2 million increase in cash for capital raise costs, all of which was offset by an increase of $1.5 million in cash generated from the issuance of common stock and
$2.3 million decrease in payments for debt extinguishment.
52
Indebtedness
L2 Capital Debt
On January 31, 2018, the Company signed a promissory note in the aggregate principal amount of up to $0.84 million (the “L2 Note”) for an aggregate purchase price of up to
$0.75 million and warrants to purchase up to an aggregate of 68,257 shares of common stock (the “Warrants”) at an exercise price of $3.31 per share. The maturity date was six
months from date of funding. The L2 Note’s interest rate was 8% per year and a default interest rate of 18% per year.
On May 14, 2018, the Company closed on an underwritten public offering of units, consisting of convertible preferred stock and warrants, for gross proceeds of $15.0 million.
Part of the proceeds from this offering were used to pay off the outstanding debt with L2 Capital. The total payoff was $1.1 million, with $0.7 million in principal and $0.4
million in interest.
Hercules and MEF I, LP/Anson Investments Debt Exchange
On January 3, 2018, the Company entered into an Assignment Agreement (the “Assignment Agreement”) with MEF I, LP and Anson Investments Master Fund (collectively the
“Assignees” and each an “Assignee”), Hercules Technology III, L.P. (“HT III”) and Hercules Capital, Inc. (“HC” and, together with HT III, “Hercules”), pursuant to which
Hercules assigned to the Assignees all amounts remaining due under the Loan and Security Agreement, dated June 30, 2014, as amended, between the Company and Hercules
(the “Loan and Security Agreement”) and (2) the note (the “Hercules Note”) between the Company and Hercules evidencing the amounts due under the Loan and Security
Agreement. The total amount assigned by Hercules to the Assignees in the aggregate was $2.3 million and was secured by the same collateral underlying the Loan and Security
Agreement. Subsequently, the Company entered into an exchange agreement pursuant to which the Assignees agreed to exchange the Hercules Term Loan obligation acquired
by them for two senior secured convertible promissory notes issued by the Company, each in the principal amount of $1.1 million for an aggregate principal amount of $2.2
million, (the “Exchange Notes”). The Exchange Notes were scheduled to mature on February 3, 2019 (the “Maturity Date”). The Exchange Notes had interest at a rate of 15%
per annum. The Exchange Notes were secured by a first priority security interest in substantially all of the Company assets, including intellectual property, and contained
covenants restricting payments to certain of our affiliates.
On May 14, 2018, the Company closed on an underwritten public offering of units, consisting of convertible preferred stock and warrants, for gross proceeds of $15.0 million.
Part of the proceeds from this offering were used to pay off the outstanding debt with MEF I, L.P and Anson Investments. The total payoff was $1.6 million, with $1.4 million in
principal and $0.2 million in interest.
North Stadium Term Loan – Related Party
On July 28, 2017, the Company entered into a $2.5 million term loan (the “North Stadium Loan”) with North Stadium Investments, LLC (“North Stadium”), a company owned
and controlled by the Company’s Chief Executive Officer and Chairman of the Board. The North Stadium Loan bore interest at 10% per annum and required the Company to
make monthly interest only payments from September 5, 2017 through July 5, 2018. All principal and unpaid interest (if any) under the North Stadium Loan was due and
payable on July 28, 2018. The North Stadium Loan was secured by substantially all of the Company’s assets but was junior to security interest in assets encumbered by the
Hercules Term Loan (see below). In connection with the North Stadium Loan the Company also issued North Stadium a warrant to purchase up to 1,833 shares of the
Company’s common stock at a purchase price of $151.20 per share, subject to a 5-year term. The relative estimated value of the warrants on the date of grant approximated $0.2
million, which was being amortized as interest expense over the life of the term loan.
53
On October 1, 2018, CTL Medical assumed the North Stadium Term Loan debt as part of the sale of the retail spine business. As of December 31, 2018, the Company has been
released by North Stadium from any and all obligations related to this debt.
Hercules Term Loan
On June 30, 2014, the Company entered into a Loan and Security Agreement with Hercules which provided the Company with a $20.0 million term loan. The Hercules Term
Loan matured on January 1, 2018. The Hercules Term Loan included a $0.2 million closing fee, which was paid to Hercules on the closing date of the loan. The closing fee was
recorded as a debt discount and was being amortized to interest expense over the life of the loan. The Hercules Term Loan also included a non-refundable final payment fee of
$1.7 million. The final payment fee was being accrued and recorded to interest expense over the life of the loan.
On January 3, 2018, the Hercules Term Loan and all amounts owing thereunder was assigned to MEF I and Anson Investments. See discussion above under “Hercules and
MEF I, LP/Anson Investments Debt Exchange” for a more detailed description of that transaction.
Equipment Loan
In September 2019 the Company entered into a debt arrangement with a finance company to purchase equipment. The debt balance at September 30, 2019, totaled $0.02
million. The debt incurs interest at 12%, is collateralized by the equipment and is payable in monthly payments of $1.0 thousand (including interest) over 36 months.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined in Item 303(a)(4) of Regulation S-K.
Related-Party Transactions
For a description of our related-party transactions, see Item 13 “Certain Relationships and Related Party Transactions, Director Independence” contained in Part III of this 2019
Annual Report on Form 10-K.
Seasonality and Backlog
Our business is generally not seasonal in nature. We derive our product revenue primarily from the sale of spinal fusion products, used in the treatment of spine disorders, to
CTL Medical, with whom we have an exclusive sales agreement in place with a remaining term of 9-years. CTL Medical’s sales generally consist of products that are in stock
with them or maintained at hospitals or with their sales distributors. Accordingly, we do not have a backlog of sales orders.
54
Critical Accounting Policies and Estimates
A summary of our significant accounting policies and estimates is discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in
Note 1 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019. There have been no material changes to
those policies for the year ended December 31, 2019, except as explained below in Accounting Pronouncements Adopted in 2019. The preparation of the consolidated financial
statements in accordance with U.S. generally accepted accounting principles requires us to make judgments, estimates and assumptions regarding uncertainties that affect the
reported amounts of assets and liabilities. Significant areas of uncertainty that require judgments, estimates and assumptions include the accounting for income taxes and other
contingencies as well as valuation of derivative liabilities, asset impairment and collectability of accounts receivable. We use historical and other information that we consider
to be relevant to make these judgments and estimates. However, actual results may differ from those estimates and assumptions that are used to prepare our consolidated
financial statements.
Accounting Pronouncement Adopted In 2019
In August 2016, the FASB updated accounting guidance on the following eight specific cash flow classification issues: (1) debt prepayment or debt extinguishment costs; (2)
settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (3)
contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-
owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization
transactions; and (8) separately identifiable cash flows and application of the predominance principle. Under prior U.S. GAAP, there was no specific guidance on the eight cash
flow classification issues aforementioned. The Company adopted the new guidance effective January 1, 2019. The guidance in this standard did not have a material impact on
the financial statements of the Company upon adoption.
In February 2016, the FASB updated the accounting guidance related to leases as part of a joint project with the International Accounting Standards Board (“IASB”) to increase
transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing
arrangements. The Company adopted the new guidance effective January 1, 2019 (see Note 15), using the modified retrospective approach. Adoption of the new guidance
resulted in the Company being required to record an additional operating lease right-of-use asset totaling approximately $0.7 million and liability totaling approximately $0.9
million (with $0.7 million incremental to adoption of the new guidance) on the date of adoption. Subsequent to the initial adoption of the new standard the Company amended
the lease (see Note 15). The standard did not materially impact the consolidated net loss and had no impact on cash flows.
In May 2014, in addition to several amendments issued during 2016, the FASB updated the accounting guidance related to revenue from contracts with customers, which
supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The Company adopted the new guidance effective January 1, 2019. The core principle of the new
guidance is that a company should recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an
entity expects to be entitled for those goods or services. The standard defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates are
often required within the revenue recognition process than were required under prior U.S. GAAP. The Company has one primary customer (see Note 14) and related contract
that has one performance obligation to which revenue is allocated. Revenue under this contract is recognized when the product is shipped to the customer. The Company
generally bills its customer upon shipment of the product and invoices are generally due within 30 days. Historically, the Company’s product returns and exchanges have not
been significant. The Company does not anticipate incurring significant incremental costs to obtain contracts with future customers. The guidance in this standard did not have a
material impact on the financial statements of the Company upon adoption.
55
New Accounting Pronouncement, Not Yet Adopted
The Company has reviewed all other recently issued, but not yet adopted, accounting standards, in order to determine their effects, if any, on its results of operations, financial
position or cash flows. Based on that review, the Company believes that no other pronouncements will have a significant effect on its financial statements upon adoption.
Revenue Recognition
The Company derives its product revenue primarily from the sale of spinal fusion products, used in the treatment of spine disorders to CTL Medical, with whom the Company
has a 10-year exclusive sales agreement in place, 9 years of which remain. The Company is currently pursuing other sales opportunities for silicon nitride outside the spinal
fusion application. The sale of the Company’s products has a single performance obligation and revenue is recognized at the time the product is shipped to the customer. In
general, the Company’s customers do not have any rights of return or exchange.
As of January 1, 2019, the Company adopted Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASC 606), and elected to use the modified
retrospective method. Under the modified retrospective method, the Company has presented prior periods under legacy GAAP, with the cumulative effect of initial application
adjusted through beginning retained earnings. The new standard did not have a material impact on the revenue recognition process of the Company and no cumulative effect
was recognized upon initial application.
With the adoption of ASC 606 at the beginning of 2019, revenue is recognized when control of the goods or services promised under the contract is transferred to the customer
either at a point in time (e.g., upon delivery) or over time (e.g., as performed under the contract). The Company accounts for a contract when it has approval and commitment
from both parties, the rights and payment terms of the parties are identified, the contract has commercial substance and collectability of consideration is probable. Contracts are
reviewed to determine whether there is one or multiple performance obligations. A performance obligation is a promise to transfer a distinct good or service to a customer and
represents the unit of accounting for revenue recognition. For contracts with multiple performance obligations, the expected consideration, or the transaction price, is allocated to
each performance obligation identified in the contract based on the relative standalone selling price of each performance obligation. Revenue is then recognized for the
transaction price allocated to the performance obligation when control of the promised goods or services underlying the performance obligation is transferred. Contract
consideration is not adjusted for the effects of a significant financing component when, at contract inception, the period between when control transfers and when the customer
will pay for that good or service is one year or less. Contact modifications that provide for additional distinct goods or services at the standalone selling price are treated as
separate contracts. The transaction price for our contracts reflects our estimate of returns, rebates and discounts, which historically have not been significant. Amounts billed to
customers for shipping and handling are included in the transaction price and generally are not treated as separate performance obligations as these costs fulfill a promise to
transfer the product to the customer. The Company does not employee salespeople to actively seek additional customers; there are no incremental costs for obtaining customers
that need to be capitalized.
Account and Other Receivables and Allowance for Doubtful Accounts
Account and other receivables are carried at invoiced amount less an allowance for doubtful accounts. On a regular basis, the Company evaluates account and other receivables
and estimates an allowance for doubtful accounts, as needed, based on various factors such as customers’ current credit conditions, length of time past due, and the general
economy as a whole. Receivables are written off against the allowance when they are deemed uncollectible.
56
Inventories
Inventories are stated at the lower of cost or net realizable value, with cost for manufactured inventory determined under the standard costs, which approximate actual costs,
determined on the first-in first-out (“FIFO”) method. Manufactured inventory consists of raw material, direct labor and manufacturing overhead cost components. The Company
reviews the carrying value of inventory on a periodic basis for excess or obsolete items, and records any write-down as a cost of revenue, as necessary.
Long Lived Intangible Assets
The Company evaluates the carrying value of definite-lived intangibles when events or changes in circumstances indicate that the carrying value may not be recoverable.
Factors the Company considers important which could trigger an impairment review include, but are not limited to, significant under-performance relative to historical or
projected future operating results, significant changes in the manner of its use of acquired assets or its overall business strategy, and significant industry or economic trends. The
Company amortizes definite-lived intangible assets on a straight-line basis over their useful lives. The Company recorded no impairment loss for definite-lived intangible assets
during the year ended December 31, 2019. As explained above, the Company sold most intangible assets that had a carrying value to CTL Medical, retaining the carrying value
of only one trademark asset.
Property and Equipment
Property and equipment, including leasehold improvements, are stated at cost, less accumulated depreciation and amortization. Property and equipment are depreciated using the
straight-line method over the estimated useful lives of the assets, which range from three to five years. Leasehold improvements are amortized over the shorter of their estimated
useful lives or the related lease term, generally five years.
The Company reviews the carrying value of the Company’s property and equipment that are held and used in the Company’s operations for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of these assets is determined based upon expected undiscounted
future net cash flows from the operations to which the assets relate, utilizing management’s best estimate, assumptions, and projections at the time. If the carrying value is
determined to be unrecoverable from future operating cash flows, the asset is deemed impaired and an impairment charge would be recognized to the extent the carrying value
exceeded the estimated fair value of the asset. The Company estimates the fair value of assets based on the estimated future discounted cash flows of the asset.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to the differences between the financial statement carrying value of
existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the fiscal year in which those
temporary differences are expected to be recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be
realized.
57
The Company operates in various tax jurisdictions and is subject to audit by various tax authorities. The Company provides for tax contingencies whenever it is deemed
probable that a tax asset has been impaired, or a tax liability has been incurred for events such as tax claims or changes in tax laws. Tax contingencies are based upon their
technical merits relative tax law and the specific facts and circumstances as of each reporting period. Changes in facts and circumstances could result in material changes to the
amounts recorded for such tax contingencies.
The Company recognizes uncertain income tax positions taken on income tax returns at the largest amount that is more-likely than-not to be sustained upon audit by the
relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.
The Company’s policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of our income tax provision. For the
years ended December 31, 2019 and 2018, the Company did not record any material interest income, interest expense or penalties related to uncertain tax positions or the
settlement of audits for prior periods.
Stock-Based Compensation
The Company measures stock-based compensation expense related to employee stock-based awards based on the estimated fair value of the awards as determined on the date of
grant and is recognized as expense over the remaining requisite service period. The Company utilizes the Black-Scholes-Merton option pricing model to estimate the fair value
of employee stock options. The Black-Scholes-Merton model requires the input of highly subjective and complex assumptions, including the estimated fair value of the
Company’s common stock on the date of grant, the expected term of the stock option, and the expected volatility of the Company’s common stock over the period equal to the
expected term of the grant. The Company estimates forfeitures at the date of grant and revises the estimates, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. The Company accounts for stock options to purchase shares of stock that are issued to non-employees based on the estimated fair value of such instruments
using the Black-Scholes-Merton option pricing model.
The Company uses the simplified method as prescribed by the Securities and Exchange Commission Staff Accounting Bulletin No. 107, Share-based Payment, to calculate the
expected term of stock option grants to employees as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the
expected term of stock options granted to employees. The Company utilizes a dividend yield of zero because the Company has never paid cash dividends and has no current
intention to pay cash dividends. The risk-free rate of return used for each grant is based on the U.S. Treasury yield curve in effect at the time of grant for instruments with a
similar expected life.
Derivative Liabilities
Derivative liabilities include the fair value of instruments such as common stock warrants, preferred stock warrants and convertible features of notes, that are initially recorded
at fair value and are required to be re-measured to fair value at each reporting period. The change in fair value of the instruments is recognized as a component of other income
(expense) in the Company’s consolidated statements of operations until the instruments settle, expire or are no longer classified as derivative liabilities. The Company estimates
the fair value of these instruments using the Black-Scholes-Merton or Monte-Carlo valuation models depending on the complexity of the underlying instrument. The significant
assumptions used in estimating the fair value include the exercise price, volatility of the stock underlying the instrument, risk-free interest rate, estimated fair value of the stock
underlying the instrument and the estimated life of the instrument.
58
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements
The consolidated financial statements of the Company appear at the end of this Annual Report beginning with the index to Financial Statements on page F-1 (see Part IV, Item
15 “Financial Statements”), and are incorporated herein.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), that are
designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act, is recorded, processed, summarized, and reported within
the time periods specified by the Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information
required to be disclosed in our reports filed or submitted under the Exchange Act are properly recorded, processed, summarized and reported within the time periods required by
the Commission’s rules and forms.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (principal executive officer and
principal financial officer), of the effectiveness of the design and operation of these disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e),
as of December 31, 2019. Based on this evaluation, the Chief Executive Officer concluded that our disclosure controls and procedures were effective as of December 31, 2019,
the end of the period covered by this Annual Report on Form 10-K.
59
(b) Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act.
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our internal control over financial reporting is designed to provide reasonable assurance of achieving its objectives as specified above. Management does not expect, however,
that our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain
assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
Management, including our Chief Executive Officer, has assessed the effectiveness of our internal control over financial reporting as of December 31, 2019. In making our
assessment of the effectiveness of internal control over financial reporting, management used the criteria set forth in Internal Control—Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
As defined in SEC Regulation S-X, a material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Based on this
assessment, management determined that, as of December 31, 2019, the Company’s internal control over financial reporting was effective.
(c) Changes in Internal Control Over Financial Reporting
As of December 31, 2018, Management, including our Chief Executive Officer concluded the design and operating effectiveness of our controls were inadequate to ensure that
complex accounting matters are always properly accounted for and reviewed in a timely manner, as outlined below:
Control Activities – The Company did not always have adequate control activities that were designed and operating effectively, including timely management review controls
and controls to verify the completeness and adequacy of information prior to presentation of the information to the independent auditors.
Monitoring Activities – The Company did not always maintain effective monitoring controls related to the financial reporting process.
As of December 31, 2019, the material weaknesses outlined above were remediated. During 2019, a new controller was hired who has implemented controls to verify the
completeness and adequacy of information prior to presentation of the information to the independent auditors and has also implemented monitoring controls related to the
financial reporting process. The specific controls implemented are as follows:
1. Complex transaction accounting issues faced by the Company will be presented to a subject matter expert to obtain input on industry trends and preferred solutions
2. Approval procedures refined over the preparation and posting of entries
3. Detailed review of general ledger accounts expanded prior to close
4. Second review performed on financial statements prior to release to auditors
5. Expanded training for accounting staff
Other than described above in the Item 9A. Controls and Procedures, there were no changes in our internal control over financial reporting that occurred during 2019 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
60
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
Directors
The following table sets forth the names, ages, and positions with SINTX for each of our directors.
Name
B. Sonny Bal, M.D.
David W. Truetzel
Jeffrey S. White
Eric A. Stookey
Mark Froimson, M.D.
Age
57
63
66
49
59
Positions
Chairman of the Board of Directors, President and Chief Executive Officer
Director
Director
Director
Director
Our Board is divided into three classes (Class I, Class II and Class III) with staggered three-year terms. Directors in each class are elected to serve for three-year staggered terms
that expire in successive years. Officers serve at the discretion of our Board. The following is information on the business experience of each director now serving and a
discussion of the qualifications, attributes and skills that led to the Board of Directors’ conclusion that each one is qualified to serve as a director.
The following is a brief summary of the background of each of our directors.
Class III Directors— up for election at the 2020 Annual Meeting of Stockholders with a term expiring at the 2023 annual meeting of stockholder if re-elected.
B. Sonny Bal, M.D. has served on our Board of Directors since February 2012, as Chairman of our Board of Directors since August 2014 and as our President and Chief
Executive Officer since October 2014. Dr. Bal was a tenured Professor in Orthopaedic Surgery at the University of Missouri, Columbia, and has an extensive history of research
into silicon nitride ceramics. He is Adjunct Professor of Material Sciences at Missouri Science and Technology University at Rolla. Dr. Bal is a member of the American
Academy of Orthopaedic Surgeons, the American Association of Hip and Knee Surgeons, and the International Society of Technology in Arthroplasty. Dr. Bal received his
M.D. degree from Cornell University and an M.B.A. from Northwestern University, a J.D. from the University of Missouri, and a Ph.D. in Engineering from the Kyoto Institute
of Technology in Japan. We believe that Dr. Bal’s breadth of experience and scientific expertise in silicon nitride qualifies him to serve as our Chairman, President and Chief
Executive Officer.
61
Jeffrey S. White has served on our Board of Directors since January 2014. From January 2013 to 2018, Mr. White served as Principal at Medtech Advisory Group LLC, a firm
he founded that advises early and mid-stage medical technology firms. In that capacity Mr. White has consulted MiMedx Group Inc., the leading amniotic tissue and allograft
regenerative biomaterials firm since mid-2015 and served as Vice President, Product Management Strategies at MiMedix. Mr. White previously served as a director of
Residency Select LLC, a company which offers psychometric assessment, training and compliance products to medical and surgical residency programs. Mr. White also served
in 2014 and 2015 as President and director of Liventa Bioscience LLC, a provider of specialty amniotic tissue allografts for use in surgical and wound care applications. From
May 2006 to December 2012 he served as Global Director of Business Development for Synthes Inc., a global orthopedic firm that was acquired by Johnson and Johnson in
2012. Mr. White has served as Chief Executive Officer and/or co-founder of several start-up surgical device firms and has previously held executive level positions at United
States Surgical Corporation, now part of Medtronic. Mr. White holds a B.S. in Biology from Union College in Schenectady NY. We believe that Mr. White’s experience as an
executive and founder of medical device companies qualifies him to serve on our Board of Directors.
Class II Directors - continuing directors with a term expiring at the 2022 annual meeting of stockholders.
David W. Truetzel has served on our Board of Directors since our acquisition of US Spine, Inc. in September 2010. Mr. Truetzel has been the general partner of Augury Capital
Partners, a private equity fund that invests in life sciences and information technology companies, which he co-founded in 2006. Mr. Truetzel is a director of Enterprise Bank,
Inc., Bonfyre, LLC, a provider of enterprise technology management solutions, and Paranet, LLC, an IT services provider. Mr. Truetzel holds a B.S. in Business Administration
from Saint Louis University and an M.B.A. from The Wharton School. We believe that Mr. Truetzel’s financial and managerial expertise qualify him to serve on our Board of
Directors.
Eric A. Stookey has served on our Board of Directors since October 2014. Mr. Stookey has served as Chief Operating Officer of Osteoremedies, LLC since March of 2015.
From October 2011 until August 2014, Mr. Stookey served as the President of the Extremities-Biologics division at Wright Medical Group Inc. Mr. Stookey also served in
various other marketing and sales positions at Wright Medical Group Inc. since 1995, including as the Senior Vice President and Chief Commercial Officer from January 2010
to November 2011, as the Vice President North American Sales from 2007 to January 2010, as the Vice President US Sales from 2005 to 2007, as the Senior Director of Sales,
Central Region, from 2003 to 2005 and as the Director of Marketing for Large Joint Reconstruction Products from 2001 to 2003. Mr. Stookey earned his M.B.A. from Christian
Brothers University and his B.S. in Business from the Indiana University School of Business. We believe that Mr. Stookey’s industry and executive leadership experience
qualifies him to serve on our Board of Directors.
Class I Directors - continuing directors with a term expiring at the 2021 annual meeting of stockholders.
Mark Froimson, M.D. has served on our Board of Directors since February 2019. Dr. Froimson is currently a Principal at Riverside Health Advisors, a consulting company that
provides strategic advice and services to health care executive leaders. Dr. Froimson served as the President of the American Association of Hip and Knee Surgeons from
March 2017 to March 2018. Previously, he was the Executive Vice President and Chief Clinical Officer of Trinity Health, a major national non-profit Catholic healthcare
system comprising 93 hospitals in 22 states. Prior to his executive leadership position at Trinity Health, Dr. Froimson was President and Chief Executive Officer of Euclid
Hospital, a Cleveland Clinic Hospital. Dr. Froimson served as a staff surgeon in the Department of Orthopedic Surgery at the Cleveland Clinic for over 16 years, during which
time he held a variety of leadership positions, including President of the professional staff, Vice Chair of the Orthopedic and Rheumatologic Institute, and member of the board
of governors and board of trustees. Dr. Froimson also serves on the board of directors of Pacira Biosciences, Inc., a publicly traded company on the NASDAQ Stock Market.
Dr. Froimson received a B.S. in philosophy from Princeton University, an M.D. from Tulane University School of Medicine and an MBA from the Weatherhead School of
Business at Case Western Reserve University.
62
We believe Dr. Froimson’s qualifications to sit on our Board include his clinical expertise and executive experience in the medical field.
Executive Officers
Our current executive officers and their respective ages and positions are as follows:
Name
B. Sonny Bal, M.D.
Bryan J. McEntire
David O’Brien
Age
57
67
55
Position
Chairman of the Board of Directors, President and Chief Executive Officer, Principal Financial
Officer
Chief Scientific Officer
Chief Operating Officer
The following is a brief summary of the background of each of our executive officers.
B. Sonny Bal, M.D. has served on our Board of Directors since February 2012, as Chairman of our Board of Directors since August 2014 and as our President and Chief
Executive Officer since October 2014. Dr. Bal was a tenured Professor in Orthopaedic Surgery at the University of Missouri, Columbia, and has an extensive history of research
into silicon nitride ceramics. He is Adjunct Professor of Material Sciences at Missouri Science and Technology University at Rolla. Dr. Bal is a member of the American
Academy of Orthopaedic Surgeons, the American Association of Hip and Knee Surgeons, and the International Society of Technology in Arthroplasty. Dr. Bal received his
M.D. degree from Cornell University and an M.B.A. from Northwestern University, a J.D. from the University of Missouri, and a Ph.D. in Engineering from the Kyoto Institute
of Technology in Japan. We believe that Dr. Bal’s breadth of experience and scientific expertise in silicon nitride qualifies him to serve as our Chairman, President and Chief
Executive Officer.
Bryan J. McEntire has served as our Chief Scientific Officer since May 2012. From June 2004 to May 2012 he served as our Vice President of Manufacturing and as our Vice
President of Research from December 2006 to May 2012. Dr. McEntire has worked in various advanced ceramic product development, quality engineering and manufacturing
roles at Applied Materials, Inc., (Santa Clara, CA), Norton Advanced Ceramics, a division of Saint-Gobain Industrial Ceramics Corporation (E. Granby, CT), Norton/TRW
Ceramics (Northboro, MA) and Ceramatec, Inc., (Salt Lake City, UT). Dr. McEntire has a BS degree in Materials Science and Engineering and an MBA both from the
University of Utah (Salt Lake City, UT), and a Ph.D. from the Kyoto Institute of Technology (Kyoto, Japan).
David O’Brien has served as our Chief Operating Officer since July 2019. Mr. O’Brien previously served as the Company’s Vice President and General Manager from October
2016 to July 2019 and from March 2014 through September 2016, he held prior roles as our Vice President of Operations and Vice President of Manufacturing. Mr. O’Brien
has over 30 years of experience in engineering, manufacturing, and operations leadership in advanced materials and medical device organizations. From 2005 to 2014, he
fulfilled several engineering leadership roles for Covidien including Manufacturing Engineering Manager for the Norfolk, Nebraska facility. From 1991 to 2005, he worked for
Arnold Magnetic Technologies in the production of ceramic, powder metal and molded magnets in multiple facilities across the U.S. and in England. He has extensive
experience with Lean and other Continuous Improvement initiatives. Mr. O’Brien holds an M.S. in Ceramic Engineering from the Georgia Institute of Technology, and a B.S.
in Physics from the University of Texas at San Antonio.
Arrangements between Officers and Directors
To our knowledge, there is no arrangement or understanding between any of our officers and any other person, including directors, pursuant to which the officer was selected to
serve as an officer.
63
Family Relationships
None of our directors are related by blood, marriage, or adoption to any other director, executive officer, or other key employees.
Other Directorships
With the exception of Dr. Froimson, who is also on the board of directors of Pacira Biosciences, Inc., a SEC public reporting company, none of the directors of the Company
are also directors of issuers with a class of securities registered under Section 12 of the Exchange Act (or which otherwise are required to file periodic reports under the
Exchange Act).
Other Involvement in Certain Legal Proceedings
None of our directors or executive officers has been involved in any bankruptcy or criminal proceedings (other than traffic and other minor offenses) or been subject to any of
the items set forth under Item 401(f) of Regulation S-K, nor have there been any judgments or injunctions brought against any of our directors or executive officers during the
last ten years that we consider material to the evaluation of the ability and integrity of any director or executive officer.
The Board and Committees
Our Board of Directors has five members. The Chairman of the Board and our Chief Executive Officer, B. Sonny Bal, MD, PhD, is a member of the Board and is a full-time
employee of SINTX. David W. Truetzel, Eric A. Stookey, Jeffrey S. White, and Mark Froimson are non-employee directors, and the Board has determined that these persons
(who constitute a majority of the Board) are “independent directors” under the criteria set forth in Rule 5605(a)(2) of the Nasdaq Listing Rules. The Board met four (4) times
during the year ended December 31, 2019. All directors attended all of the meetings of the Board and committee meetings of which such director was a member held during
2019.
In accordance with our restated Certificate of Incorporation, our Board of Directors is divided into three classes with staggered three-year terms. At each annual meeting of
stockholders, the successors to the directors whose terms then expire will be elected to serve until the third annual meeting following such election. Our directors are divided
among the three classes as follows:
●
●
●
The Class I director is Mark Froimson and his term will expire at the annual meeting of stockholders to be held in 2021.
The Class II directors are David W. Truetzel and Eric A. Stookey, and their terms are expiring at the 2022 annual meeting of stockholders.
The Class III directors are B. Sonny Bal, M.D. and Jeffrey S. White, and their terms will expire at the annual meeting of stockholders to be held in 2020
Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will
consist of one-third of the directors.
Our Board of Directors has three permanent committees: the Audit Committee, the Compensation Committee, and the Corporate Governance and Nominating Committee. The
written charters for these committees are on our website at https://ir.sintx.com/corporate-governance. Our Board of Directors may from time to time establish other standing
committees. In addition, from time to time, special committees may be established under the direction of our Board of Directors when necessary to address specific issues.
64
The following table sets forth a description of the three permanent Board committees and the chairpersons and members of those committees, all of whom are independent
directors:
Committee
Audit Committee
Independent Chairman
Independent Members
David W. Truetzel
Eric A. Stookey
Jeffrey S. White
Compensation Committee
Jeffrey S. White
David W. Truetzel
Eric A. Stookey
Governance and Nominating Committee
Eric A. Stookey
Jeffrey S. White
David W. Truetzel
Corporate Governance and Nominating Committee
The Corporate Governance and Nominating Committee is currently comprised of the following members: Eric A. Stookey (Chairman), David W. Truetzel and Jeffrey S White.
Among other items, the Corporate Governance and Nominating Committee is tasked by the Board to: (1) identify individuals qualified to serve as members of the Board and,
recommend individuals to be nominated by the Board for election by the stockholders or to be appointed by the Board to fill vacancies consistent with the criteria approved by
the Board; (2) develop and periodically evaluate and recommend changes to SINTX’s Corporate Governance Guidelines and Code of Ethics, and to review the Company’s
policies and programs that relate to matters of corporate responsibility, including public issues of significance to the Company and its stakeholders; and (3) oversee an annual
evaluation of the performance of the Board. The Board has determined that each of the members of the Corporate Governance and Nominating Committee is “independent”
under the standard set forth in Rule 5605(a)(2) of the Nasdaq Listing Rules. The Corporate Governance and Nominating Committee did not meet as a separate committee in
2019, but rather, because the committee is comprised of all three independent directors, governance matters were addressed as necessary in meetings of the Board. The
Corporate Governance and Nominating Committee operates under a written charter adopted by the Board of Directors, which sets forth the responsibilities and powers
delegated by the Board to the Corporate Governance and Nominating Committee.
Board Nominations
In considering Board candidates, the Board seeks individuals of proven judgment and competence who have strong reputations in their respective fields. Although we do not
have a formal diversity policy, the Board considers such factors as experience, education, employment history, special talents or personal attributes, anticipated participation in
Board activities, and geographic and diversity factors. The process for identifying and evaluating nominees would include detailed consideration of the recommendations and
opinions of members of our Board, our executive officers, and our stockholders. There would be no difference in the process of evaluation of candidates recommended by a
stockholder and those recommended by other sources.
The Nominating and Governance Committee has adopted a policy and procedures for shareholders to recommend nominees to the Company’s Board. The Committee will only
consider qualified proposed nominees that meet the qualification standards set forth on Appendix A to the Committee’s charter available on the Company’s website at
www.SINTX.com. Pursuant to the policy, only shareholders who meet minimum percentage ownership requirements as established by the Board may make recommendations
for consideration by the Committee. At this time, the Board has set a minimum percentage ownership of 5% of the Company’s issued and outstanding shares of common stock
for a period of at least one year. To make recommendations, a shareholder must submit the recommendation in writing by mail, courier or personal delivery to: Corporate
Secretary, SINTX Technologies, Inc., 1885 West 2100 South, Salt Lake City, UT 84119. For each annual meeting the Committee will consider only one proposed nominee from
each shareholder or shareholder group (within the meaning of Regulation 13D under the Exchange Act).
The recommendation must set forth (1) the name, address, including telephone number, of the recommending shareholder or shareholder group; (2) the number of the
Company’s shares of common stock held by such shareholder and proof of ownership if the shareholder is not a holder of record; and (3) a statement that the shareholder has a
good faith intention of holding the shares through the record date of the Company’s next annual meeting. For shareholder groups this information must be submitted for each
shareholder in the group.
65
The recommendation must set forth in relation to the proposed nominee being recommended by the shareholder: (1) the information required by Items 401, 403 and 404 of
Regulation S-K under the Exchange Act, (2) any material relationships or agreements between the proposed nominee and the recommending shareholder or the Company’s
competitors, customers, labor unions or other persons with special interests in the Company; (3) a statement regarding the qualifications of the proposed nominee to serve on the
Board; (4) a statement that the proposed nominee can fairly represent the interests of all shareholders of the Company; and (5) a signed consent by the proposed nominee to
being interviewed by the Nominating and Governance Committee.
Recommendations must be made not later than 120 calendar days prior to the first anniversary of the date of the proxy statement for the prior annual meeting of shareholders. In
the event that the date of the annual meeting of shareholders for the current year is more than 30 days following the first anniversary date of the annual meeting of shareholders
for the prior year, the submission of a recommendation will be considered timely if it is submitted not earlier than the close of business on the 120 days prior to such annual
meeting and not later than the close of business on the later of 90 days prior to such annual meeting or the close of business 10 days following the day on which public
announcement of the date of such meeting is first made by the Company.
Audit Committee
We have a standing Audit Committee and audit committee charter, which complies with Rule 10A-3 of the Exchange Act, and the requirements of the Nasdaq Listing Rules.
Our Audit Committee was established in accordance with Section 3(a)(58)(A) of the Exchange Act. The Audit Committee is currently comprised of the following members:
David W. Truetzel (Chairman), Eric A. Stookey and Jeffrey S White. The Audit Committee provides oversight for financial reporting matters, internal controls, and compliance
with the Company’s financial policies, and meets with its auditors when appropriate. The Audit Committee did not meet as a separate committee in 2019, but rather, because
the committee is comprised of all three independent directors, committee matters were addressed as necessary in meetings of the Board. The Board has determined that David
W. Truetzel is an “audit committee financial expert” within the meaning of Item 407(d)(5) of Regulation S-K. Further, the Board has determined that each of David W.
Truetzel, Jeffrey S. White and Eric A. Stookey are “independent” under the standard set forth in Rule 5605(a)(2) of the Nasdaq Listing Rules. The Audit Committee operates
under a written charter adopted by the Board of Directors, which sets forth the responsibilities and powers delegated by the Board to the Audit Committee.
Compensation Committee
The Compensation Committee of the Board is comprised of the following members: Jeffrey S. White, (Chairman), David W. Truetzel and Eric A. Stookey. The Board has
determined that each of David W. Truetzel, Jeffrey S. White and Eric A. Stookey are “independent” under the standard set forth in Rule 5605(a)(2) of the Nasdaq Listing Rules.
The Compensation Committee recommends to the Board for determination compensation of our executive officers, including the chief executive officer, and addresses salary
and benefit matters for other key personnel and employees of the Company. The Compensation Committee did not meet as a separate committee in 2019, but rather, because the
committee is comprised of all three independent directors, committee matters were addressed as necessary in meetings of the Board. The Compensation Committee operates
under a written charter adopted by the Board of Directors, which sets forth the responsibilities and powers delegated by the Board to the Compensation Committee.
Code of Business Conduct
The Board has adopted a Code of Business Conduct that applies to all of our employees, officers and directors, including those officers responsible for financial reporting. The
code of business conduct is available on our website at https://ir.sintx.com/corporate-governance. We intend to disclose any amendments to the code or any waivers of its
requirements on our website.
The Bylaws of the Company provide that no contract or transaction between SINTX and one or more of its directors or officers, or between SINTX and any other corporation,
firm, association, or other organization in which one or more of its directors or officers are financially interested, shall be void or voidable solely for this reason, or solely
because the director or officer is present at or participates in the meeting of the Board of Directors or committee that authorizes or approves the contract or transaction, or
because their votes are counted for such purpose, provided that:
●
the material facts as to his, her, or their relationship or interest as to the contract or transaction are disclosed or are known to the Board of Directors or the committee
and noted in the minutes, and the Board of Directors or committee authorizes the contract or transaction in good faith by the affirmative vote of a majority of
disinterested directors, even though the disinterested directors are less than a quorum;
66
●
the material facts as to his, her, or their relationship or interest as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon
and the contract or transaction is specifically approved in good faith by vote of the stockholders; or
●
the contract or transaction is fair as to SINTX as of the time it is authorized, approved or ratified by the Board of Directors, a committee thereof, or the stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The following discussion relates to the compensation of our “named executive officers.”
Summary Compensation Table
The following table sets forth information about certain compensation awarded or paid to our named executive officers for the 2019 and 2018 fiscal years.
Name and
Principal
Position
B. Sonny Bal
Chief Executive Officer
Bryan McEntire
Chief Scientific Officer
David O’Brien
Chief Operating Officer
Year
Salary
Bonus
Compensation
Non-Equity
Incentive
Plan
Stock
Awards
Option
Awards
All
Other
Comp (1)
2019 $
2018
400,000 $
400,000
- $
-
2019
2018
238,702
234,959
4,001
-
2019
2018
231,750
219,202
3,984
-
- $
-
-
-
-
-
- $
-
-
-
-
-
- $
-
-
-
-
-
Total
Compensation
401,231
411,693
1,231 $
11,693
6,610
9,398
6,418
7,386
249,313
244,357
242,152
226,588
(1) Amount reflects matching of 401(k) contributions paid by us, unless otherwise noted.
Narrative Disclosure to Summary Compensation Table. We do not have written employment agreements with any of our executive officers. All of our executive officers serve
on an at-will basis. The base salaries for our named executive officers were determined by our compensation committee after reviewing a number of factors, including: the
responsibilities associated with the position, the seniority of the executive’s position, the base salary level in prior years, and our financial position; and for executive officers
other than our Chief Executive Officer, recommendations made by our Chief Executive Officer.
67
Outstanding Equity Awards at Fiscal Year-End
The following table shows information regarding equity awards held by our named executive officers as of December 31, 2019:
Name
Sonny Bal
Bryan McEntire
David O’Brien
401(k) Plan
Number of Securities
Underlying Unexercised
Options (#)
Exercisable
Unexercisable
Option
Exercise
Price
Option
Expiration
Date
1
16
9
28
19
13
9
9
6
9
$
-
-
-
-
-
-
-
-
-
-
139,158
5,221
2,321
367
5,130
5,221
608
5,129
5,222
608
3/15/2022
1/7/2025
9/16/2025
9/14/2026
8/13/2024
1/7/2025
1/4/2026
7/17/2024
1/7/2025
1/4/2026
We offer our executive officers, including our named executive officers, retirement benefits, including participation in our tax-qualified profit sharing plan that includes a
“cash-or-deferred” (or 401(k)) feature in the same manner as other employees. The plan is intended to satisfy the requirements of Section 401 of the Internal Revenue Code. Our
employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit and have a like amount contributed to the plan. In addition, we may
make discretionary and/or matching contributions to the plan in amounts determined annually by our Board. We currently elect to match the contributions of our employees
who participate in our 401(k) plan as follows: a match of 100% on the first 3% of compensation contributed by a plan participant and a match of 50% on amounts above 3%, up
to 5%, of compensation contributed by a plan participant.
Potential Payments upon Termination or Change in Control
We had entered into certain agreements and maintained certain plans that may have required us to make certain payments and/or provide certain benefits to the executive
officers named in the Summary Compensation Table in the event of a termination of employment or change in control.
68
Pursuant to severance agreements that we have entered into with each of our named executive officers, upon the consummation of a change in control, all outstanding options,
restricted stock and other such rights held by the executives will fully vest. Additionally, if a change in control occurs and at any time during the one-year period following the
change in control (i) we or our successor terminate the executive’s employment other than for cause (but not including termination due to the executive’s death or disability) or
(ii) the executive terminates his employment for good reason, then such executive has the right to receive payment consisting of a lump sum payment equal to two times his
highest annual salary with us during the preceding three-year period, including the year of such termination and including bonus payments (measured on a fiscal year basis), but
not including any reimbursements and amounts attributable to stock options and other non-cash compensation. “Change in control” is defined in the severance agreements as
occurring upon: (i) any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becoming the “beneficial owner” (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities representing 50% or more of the total voting power represented by our then outstanding voting securities (excluding securities
held by us or our affiliates or any of our employee benefit plans) pursuant to a transaction or a series of related transactions which our Board did not approve; (ii) a merger or
consolidation of our company, other than a merger or consolidation which would result in our voting securities outstanding immediately prior thereto continuing to represent at
least 50% of the total voting securities or such surviving entity or parent of such corporation outstanding immediately after such merger or consolidation; or (iii) the approval by
our stockholders of an agreement for the sale or disposition of all or substantially all of our assets. As defined in the severance agreements, “cause” means: (i) the executive’s
commission of a felony (other than through vicarious liability or through a motor vehicle offense); (ii) the executive’s material disloyalty or dishonesty to us; (iii) the
commission by the executive of an act of fraud, embezzlement or misappropriation of funds; (iv) a material breach by the executive of any material provision of any agreement
to which the executive and we are party, which breach is not cured within 30 days after our delivery to the executive of written notice of such breach; or (v) the executive’s
refusal to carry out a lawful written directive from our Board. “Good reason” as defined in the severance agreements means, without the executive’s consent: (i) a change in the
principal location at which the executive performs his duties to a new work location that is at least 50 miles from the prior location; or (ii) a material change in the executive’s
compensation, authority, functions, duties or responsibilities, which would cause his position with us to become of less responsibility, importance or scope than his prior
position, provided, however, that such material change is not in connection with the termination of the executive’s employment with us for any reason.
In the event that an officer entitled to receive or receives payment or benefit under the severance agreements described above, or under any other plan, agreement or
arrangement with us, or any person whose action results in a change in control or any other person affiliated with us and it is determined that the total amount of payments will
be subject to excise tax under Section 4999 of the Internal Revenue Code, or any similar successor provisions, we will be obligated to pay such officer a “gross up” payment to
cover all taxes, including any excise tax and any interest or penalties imposed with respect to such taxes due to such payment.
Code of Business Conduct Violations
It is our policy under our Code of Business Conduct to take appropriate action against any executive officer whose actions are found to violate the Code or any other policy of
SINTX. Disciplinary actions may include immediate termination of employment and, where SINTX has suffered a loss, pursuing its remedies against the executive officer
responsible. SINTX will cooperate fully with the appropriate authorities where laws have been violated.
Role of the Board in Risk Oversight
Risk is inherent with every business, and how well a business manages risk can ultimately determine its success. Management is responsible for the day-to-day management of
the risks that we face, while our Board of Directors, as a whole and through its committees, has responsibility for the oversight of risk management. In its risk oversight role,
our Board of Directors is responsible for satisfying itself that the risk management processes designed and implemented by management are adequate and functioning as
designed.
Our Board of Directors does not have a standing risk management committee, but rather administers this oversight function directly through our Board of Directors as a whole,
as well as through various standing committees of the Board of Directors that address risks inherent in their respective areas of oversight. In particular, our Board of Directors is
responsible for monitoring and assessing strategic risk exposure, including a determination of the nature and level of risk appropriate for us. Our Audit Committee has the
responsibility to consider and discuss our major financial risk exposures and the steps our management has taken to monitor and control these exposures, including guidelines
and policies to govern the process by which risk assessment and management is undertaken. The Audit Committee also monitors oversight of the performance of our internal
audit function. Our Corporate Governance and Nominating Committee monitors the effectiveness of our corporate governance guidelines, including whether they are successful
in preventing illegal or improper liability-creating conduct. Our Compensation Committee assesses and monitors whether any of our compensation policies and programs have
the potential to encourage excessive risk-taking or promote behaviors contra to our Code of Business Conduct.
69
Board Compensation
The following table shows the total compensation paid or accrued during the fiscal year ended December 31, 2019 to each of our non-employee directors.
Name
David W. Truetzel
Jeffrey S. White
Eric A. Stookey
Mark Froimson
Fees Earned
or Paid in
Cash
($)
$
$
122,000
41,997
41,997
-
Stock
Awards
($)
Option
Awards
($)
$
-
-
-
-
Total
($)
122,000
41,997
41,997
-
$
-
-
-
-
The following compensation schedule sets forth compensation for non-employee directors (paid on a quarterly basis) as approved by the Board:
● Annual Retainer of $40,000 paid in four equal installments of $10,000 each at the beginning of each calendar quarter;
●
●
$1,000 for each board and committee meeting attended in person;
$500 for each board and committee meeting attended via telephone or other remote medium; and
● Reimbursement of reasonable expenses as supported by documentation and receipts.
A new Board appointee receives an award of 40,000 stock options upon appointment. Further, historically, each member of the Board is awarded an option grant for 15,000
stock options on an annual basis. No awards were made for 2019.
The chair of the Audit Committee is paid an annual retainer of $120,000 payable in monthly increments of $10,000 each.
The following table sets forth information as of December 31, 2019 relating to all of our equity compensation plans:
Equity Compensation Plan Information
Plan Category
Equity compensation plans
approved by stockholders
Equity compensation plans not
approved by Stockholders
Total
(a) Number of
Securities
to be Issued upon
Exercise of
Outstanding
Options
(b) Weighted-
average
Exercise
Price of
Outstanding
Options
(c) Number of Securities
Remaining Available for Future
Issuance under
Equity Compensation
Plans (Excluding
Securities Referenced
in Column (a))
377(1)
$
-
377(1)
$
7,447(2)
-
7,447(2)
2,520
-
2,520
(1)
Includes options outstanding under our 2012 Equity Incentive Plan
(2) Represents weighted-average exercise price per share of common stock acquirable upon exercise of outstanding stock options.
(3) See description below under the 2012 Equity Incentive Plan describing the plan’s evergreen formula.
70
2012 Equity Incentive Plan
The 2012 Plan is intended to encourage ownership of common stock by our employees and directors and certain of our consultants in order to attract and retain such people, to
induce them to work for the benefit of us and to provide additional incentive for them to promote our success. The number of shares of our common stock reserved for issuance
under the 2012 Plan is 3,173, which number is automatically increased on January 1 of each of year by the lesser of (i) 601 shares of our common stock on such date, (ii) 5% of
the number of outstanding shares of our common stock on such date, and (iii) such other amount determined by the Board through the termination of the 2012 Plan.
Types of Awards. The 2012 Plan provides for the granting of incentive stock options, NQSOs, stock grants and other stock-based awards, including RSUs.
● Incentive and Nonqualified Stock Options. The plan administrator determines the exercise price of each stock option. The exercise price of an NQSO may not be less
than the fair market value of our common stock on the date of grant. The exercise price of an incentive stock option may not be less than the fair market value of our
common stock on the date of grant if the recipient holds 10% or less of the combined voting power of our securities, or 110% of the fair market value of a share of our
common stock on the date of grant otherwise.
● Stock Grants. The plan administrator may grant or sell stock, including restricted stock, to any participant, which purchase price, if any, may not be less than the par
value of shares of our common stock. The stock grant will be subject to the conditions and restrictions determined by the administrator. The recipient of a stock grant
shall have the rights of a stockholder with respect to the shares of stock issued to the holder under the 2012 Plan.
● Stock-Based Awards. The administrator of the 2012 Plan may grant other stock-based awards, including stock appreciation rights, phantom stock awards and RSUs,
with terms approved by the administrator, including restrictions related to the awards. The holder of a stock-based award shall not have the rights of a stockholder until
shares of our common stock are issued pursuant to such award.
Plan Administration. Our Board is the administrator of the 2012 Plan, except to the extent it delegates its authority to a committee, in which case the committee shall be the
administrator. Our Board has delegated this authority to our compensation committee. The administrator has the authority to determine the terms of awards, including exercise
and purchase price, the number of shares subject to awards, the value of our common stock, the vesting schedule applicable to awards, the form of consideration, if any, payable
upon exercise or settlement of an award and the terms of award agreements for use under the 2012 Plan.
Eligibility. Our Board will determine the participants in the 2012 Plan from among our employees, directors and consultants. A grant may be approved in advance with the
effectiveness of the grant contingent and effective upon such person’s commencement of service within a specified period.
Termination of Service. Unless otherwise provided by our Board or in an award agreement, upon a termination of a participant’s service, all unvested options then held by the
participant will terminate and all other unvested awards will be forfeited.
Transferability. Awards under the 2012 Plan may not be transferred except by will or by the laws of descent and distribution, unless otherwise provided by our Board in its
discretion and set forth in the applicable agreement, provided that no award may be transferred for value.
71
Adjustment. In the event of a stock dividend, stock split, recapitalization or reorganization or other change in change in capital structure, our Board will make appropriate
adjustments to the number and kind of shares of stock or securities subject to awards.
Corporate Transaction. If we are acquired, our Board of Directors (or Compensation Committee) will: (i) arrange for the surviving entity or acquiring entity (or the surviving or
acquiring entity’s parent company) to assume or continue the award or to substitute a similar award for the award; (ii) cancel or arrange for cancellation of the award, to the
extent not vested or not exercised prior to the effective time of the transaction, in exchange for such cash consideration, if any, as our Board of Directors in its sole discretion,
may consider appropriate; or (iii) make a payment, in such form as may be determined by our Board of Directors equal to the excess, if any, of (A) the value of the property the
holder would have received upon the exercise of the award immediately prior to the effective time of the transaction, over (B) any exercise price payable by such holder in
connection with such exercise. In addition, in connection with such transaction, our Board of Directors may accelerate the vesting, in whole or in part, of the award (and, if
applicable, the time at which the award may be exercised) to a date prior to the effective time of such transaction and may arrange for the lapse, in whole or in part, of any
reacquisition or repurchase rights held by us with respect to an award.
Amendment and Termination. The 2012 Plan will terminate on September 6, 2022 or at an earlier date by vote of the stockholders or our Board; provided, however, that any
such earlier termination shall not affect any awards granted under the 2012 Plan prior to the date of such termination. The 2012 Plan may be amended by our Board, except that
our Board may not alter the terms of the 2012 Plan if it would adversely affect a participant’s rights under an outstanding stock right without the participant’s consent.
Stockholder approval will be required for any amendment to the 2012 Plan to the extent such approval is required by law, include the Internal Revenue Code or applicable stock
exchange requirements.
Amendment of Outstanding Awards. The administrator may amend any term or condition of any outstanding award including, without limitation, to reduce or increase the
exercise price or purchase price, accelerate the vesting schedule or extend the expiration date, provided that no such amendment shall impair the rights of a participant without
such participant’s consent.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the beneficial ownership of our common stock as of March 19, 2020 by:
●
●
●
●
each of our current directors;
each of our executive officers; and
all of our directors and executive officers as a group;
each stockholder known by us to own beneficially more than 5% of our Common Stock.
Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities. Shares of common stock that
may be acquired by an individual or group within 60 days of March 19, 2020, pursuant to the exercise or vesting of options or warrants or conversion of convertible promissory
notes, are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person shown in the table. Percentage of shares beneficially owned is based on 10,563,618 shares issued and outstanding on
March 19, 2020.
Except as indicated in footnotes to this table, we believe that the stockholders named in this table have sole voting and investment power with respect to all shares of common
stock shown to be beneficially owned by them, based on information provided to us by such stockholders. The address for each director and executive officer listed is: c/o
SINTX Technologies, Inc., 1885 West 2100 South, Salt Lake City, Utah 84119.
72
Name and Address of Beneficial Owner
Five Percent Stockholders:
none
Directors and Named Executive Officers:
B. Sonny Bal, M.D. (1)
David W. Truetzel (2)
Jeffrey S. White (3)
Eric A. Stookey (4)
Bryan McEntire (5)
David O’Brien (6)
Mark Froimson, M.D.
All executive officers and directors as a group (7 persons)
Shares Beneficially Owned
Number
Percentage
1,899
119
15
13
54
24
-
2,124
*
*
*
*
*
*
*
*
*
Indicates ownership of less than 1% of the outstanding shares of the Company’s common stock.
(1) Represents 12 shares of Common Stock and options and warrants to purchase 1,887 shares of Common Stock that are currently exercisable within 60 days of March 1, 2020.
(2) Represents 71 shares of Common Stock and options to purchase 48 shares of Common Stock that are currently exercisable within 60 days of March 1, 2020.
(3) Represents 2 shares of Common Stock and options to purchase 13 shares of Common Stock that are currently exercisable within 60 days of March 1, 2020.
(4) Represents options to purchase 13 shares of Common Stock that are currently exercisable within 60 days of March 1, 2020.
(5) Represents 13 shares of Common Stock and options to purchase 41 shares of Common Stock that are currently exercisable within 60 days of March 1, 2020.
(6) Represents options to purchase 24 shares of Common Stock that are currently exercisable within 60 days of March 1, 2020
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Transactions with Related Persons
We have not entered into any transactions since January 1, 2019 to which we have been a party, in which the amount involved in the transaction exceeded the lesser of $120,000
or one percent of the average of our total assets at year-end for the last two completed fiscal years, and in which any of our directors, executive officers or, to our knowledge,
beneficial owners of more than 5% of our common stock, on an as converted basis, or any member of the immediate family of any of the foregoing persons had or will have a
direct or indirect material interest, other than equity and other compensation, termination, change in control and other arrangements, which are described above under
“Executive and Director Compensation.”
Indemnification Agreements. We have entered into indemnification agreements with each of our executive officers and directors that require us to indemnify such persons
against any and all expenses, including judgments, fines or penalties, attorney’s fees, witness fees or other professional fees and related disbursements and other out-of-pocket
costs incurred, in connection with any action, suit, arbitration, alternative dispute resolution mechanism, investigation, inquiry or administrative hearing, whether threatened,
pending or completed, to which any such person may be made a party by reason of the fact that such person is or was a director, officer, employee or agent of our company,
provided that such director or officer acted in good faith and in a manner that the director or officer reasonably believed to be in, or not opposed to, our best interests. The
indemnification agreements also set forth procedures that will apply in the event of a claim for indemnification thereunder. We believe that these provisions and agreements are
necessary to attract and retain qualified persons as directors and officers.
73
Policy for Review of Related Party Transactions
We have a policy for the review of transactions with related persons as set forth in our Audit Committee Charter and internal practices. The policy requires review, approval or
ratification of all transactions in which we are a participant and in which any of our directors, executive officers, shareholders holding more than 5% of our outstanding
common stock, an immediate family member of any of the foregoing persons or any other person who the Board determines may be considered to be a related person has a
direct or indirect material interest and which meet the threshold requirements set forth in Item 404 of Regulation S-K under the Exchange Act (typically $120,000 or more in
value). All related party transactions must be reported for review by the Audit Committee pursuant to the Audit Committee’s charter.
In reviewing and approving such transactions, the Audit Committee shall obtain, or shall direct management to obtain on its behalf, all information that the Audit Committee
believes to be relevant and important to a review of the transaction prior to its approval. Following receipt of the necessary information, a discussion shall be held of the
relevant factors if deemed to be necessary by the Audit Committee prior to approval. No related party transaction shall be entered into prior to the completion of these
procedures.
Following its review, the Audit Committee determines whether these transactions are in, or not inconsistent with, the best interests of the Company and its stockholders, taking
into consideration whether they are on terms no less favorable to the Company than those available with other parties and the related person’s interest in the transaction.
Our policy for review of transactions with related persons was followed in all of the transactions set forth above and all such transactions were reviewed and approved in
accordance with our policy for review of transactions with related persons.
Director Independence
Information regarding the independence of directors is disclosed above under Item 10 under the heading “The Board and Committees” and incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The aggregate fees and expenses incurred from our principal accounting firm, Tanner LLC, for fiscal years ended December 31, 2019 and 2018, were as follows (in thousands):
Audit fees
Audit related fees
Tax fees
All other fees
Total Fees
Year Ended
December 31, 2019
$
$
259,929 $
64,971
16,750
-
341,650 $
Year Ended
December 31, 2018
251,558
124,974
17,482
-
394,014
Each of the permitted non-audit services has been pre-approved by the Audit Committee or the Audit Committee’s Chairman pursuant to delegated authority by the Audit
Committee, other than de minimus non-audit services for which the pre-approval requirements are waived in accordance with the rules and regulations of the Securities and
Exchange Commission.
74
Audit Fees
Consist of fees billed for professional services rendered for the audit of our financial statements and review of interim consolidated financial statements included in quarterly
reports and services that are normally provided by the principal accountants in connection with statutory and regulatory filings or engagements.
Audit Related Fees
Consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not
reported under “Audit Fees”.
Tax Fees
Consist of fees billed for professional services for tax compliance, tax advice and tax planning. These services include preparation of federal and state income tax returns.
All Other Fees
Consist of fees for product and services other than the services reported above.
Policy for Approval of Audit and Permitted Non-Audit Services
The Audit Committee charter provides that the Audit Committee will pre-approve audit services and non-audit services to be provided by our independent auditors before the
accountant is engaged to render these services. The Audit Committee may consult with management in the decision-making process, but may not delegate this authority to
management. The Audit Committee may delegate its authority to pre-approve services to one or more committee members, provided that the designees present the pre-
approvals to the full committee at the next committee meeting.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Reference is made to the Index to Consolidated Financial Statements beginning on Page F-1 hereof.
PART IV
(1) Financial Statements. The following consolidated financial statements and the notes thereto, and the Report of Independent Registered Public Accounting Firm are
incorporated by reference as provided in Item 8 of this report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Operations for the Years Ended December 31, 2019 and 2018
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2019 and 2018
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019 and 2018
Notes to Consolidated Financial Statements
(2) Consolidated Financial Statement Schedules
F-2
F-3
F-4
F-5
F-6
F-7
Consolidated Financial Statement Schedules have been omitted because they are either not required or not applicable, or because the information required to be presented is
included in the consolidated financial statements or the notes thereto included in this Annual Report.
75
(3) Exhibits
The exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference as part of this Annual Report and such Exhibit Index is incorporated by reference.
Exhibit
Number
Exhibit Description
Filed with
this
Report
Incorporated by
Reference herein from Form
or Schedule
Filing Date
SEC File/Reg.
Number
2.1
3.1
3.1.1
3.1.2
3.1.3
3.1.4
3.1.5
3.1.6
3.2
3.2.1
4.1
4.2
4.3
Asset Purchase Agreement by and among Amedica Corporation, CTL
Corporation and US Spine Inc. dated as of September 5, 2018
Form 8-K (Exhibit 2.1)
10/5/18
001-33624
Restated Certificate of Incorporation of the Registrant
Form 8-K (Exhibit 3.1)
2/20/14
001-33624
Certificate of Amendment to the Restated Certificate of Incorporation of
SINTX Corporation
Certificate of Amendment to the Restated Certificate of Incorporation of
SINTX Corporation
Form 8-K (Exhibit 3.1)
1/22/16
001-33624
Form 8-K (Exhibit 3.1)
11/16/17
001-33624
Certificate of Designation of Series B Preferred Stock
Form 8-K (Exhibit 3.1)
5/15/18
001-33624
Certificate of Amendment to the Restated Certificate of Incorporation
Form 8-K (Exhibit 3.1)
11/02/18
001-33624
Certificate of Amendment to the Restated Certificate of Incorporation of
SINTX Technologies, Inc.
Form 8-K (Exhibit 3.1)
7/26/19
001-33624
Certificate of Designation of Series C Preferred Stock
Form 8-K (Exhibit 3.1)
2/07/20
001-33624
Restated Bylaws of the Registrant
Form 8-K (Exhibit 3.1)
2/20/14
001-33624
Amendment to the Bylaws of Amedica Corporation dated as of October 30,
2018.
Form 8-K (Exhibit 3.2)
11/02/18
001-33624
Form of Common Stock Certificate of the Registrant
Warrant to Purchase Shares of Series F Convertible Preferred Stock by and
between the Registrant and GE Capital Equity Investments, Inc., dated as of
December 17, 2012
Warrant to Purchase Shares of Series F Convertible Preferred Stock by and
between the Registrant and Zions First National Bank, dated as of December
17, 2012
76
Amendment No. 3 to Form S-1
(Exhibit 4.1)
1/29/14
333-192232
Form S-1 (Exhibit 4.10)
11/8/13
333-192232
Form S-1 (Exhibit 4.11)
11/8/13
333-192232
Exhibit
Number
Exhibit Description
Filed with
this
Report
Incorporated by
Reference herein from Form
or Schedule
Filing Date
SEC File/Reg.
Number
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
Form of Warrant to be Issued to Investors in the Offering
Amendment No. 3
to Form S-1 (Exhibit 4.24)
11/20/14
333-199753
Form of Common Stock Purchase Warrant issued on April 4, 2016.
Form 8-K (Exhibit 4.1)
4/05/16
001-33624
Form of Series E Warrant
Amendment No. 3 to Form S-1
(Exhibit 4.25)
6/30/16
333-211520
Form of Warrant
Form 8-K (Exhibit 4.1)
1/20/17
001-33624
North Stadium Investments, LLC Warrant to Purchase Common Stock
Form 8-K (Exhibit 4.2)
8/3/17
001-33624
Common Stock Warrant
Form 8-K (Exhibit 3.2)
5/15/18
001-33624
Form of Warrant Agency Agreement between Amedica Corporation and
American Stock Transfer and Trust Company, LLC
Form S-1 (Exhibit 4.28)
4/26/18
333-223032
Westlake Securities LLC Common Stock Purchase Warrant
Form S-1 (Exhibit 4.30)
4/26/18
333-223032
Form of Common Stock Purchase Warrant Issued on September 11, 2015
Form 8-K (Exhibit 4.1)
9/18/15
001-33624
Form of Indenture
Form S-3 (Exhibit 4.2)
3/25/19
333-230492
77
Exhibit
Number
4.14
4.15
4.16
4.17
4.18
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
Form of Common Stock Warrant
Exhibit Description
Filed with
this
Report
Incorporated by
Reference herein from Form
or Schedule
Form S-1/A
Filing Date
1/15/20
SEC File/Reg.
Number
333-234438
Form of Warrant Agency Agreement between Amedica Corporation and
American Stock Transfer and Trust Company, LLC, dated February 6, 2020
Form 8-K (Exhibit 10.1)
2/07/20
001-33624
Warrant Issued to Maxim Group LLC on February 6, 2020
Form 8-K (Exhibit 4.1)
2/07/20
001-33624
Warrant Issued to Ascendiant Capital Markets, LLC on February 6, 2020
Form 8-K (Exhibit 4.2)
2/07/20
001-33624
Description of Registrant’s Securities
X
Loan and Security Agreement by and among the Registrant, its subsidiary,
Hercules Technology Growth Capital, Inc., and Hercules Technology III,
L.P., dated as of June 30, 2014
Centrepointe Business Park Lease Agreement Net by and between the
Registrant and Centrepointe Properties, LLC, dated as of April 21, 2009
First Addendum to Centrepointe Business Park Lease Agreement Net by and
between the Registrant and Centrepointe Properties, LLC, dated as of
January 31, 2012
Form 8-K (Exhibit 10.3)
7/1/14
001-33624
Form S-1 (Exhibit 10.10)
11/8/13
333-192232
Form S-1 (Exhibit 10.11)
11/8/13
333-192232
Form of Change of Control Agreement*
Form 8-K (Exhibit 10.1)
7/22/15
001-33624
Form of Indemnification Agreement by and between the Registrant and its
officers and directors
SINTX Technologies Amended and Restated 2012 Equity Incentive Plan*
Form of 2012 Stock Option Grant Notice and Stock Option Agreement*
Form of 2012 Restricted Stock Award and Restricted Stock Unit
Agreement*
78
Amendment No. 2
to Form S-1 (Exhibit 10.14)
Amendment No. 4
to Form S-1 (Exhibit 10.15)
Amendment No. 4
to Form S-1 (Exhibit 10.16)
Amendment No. 4
to Form S-1 (Exhibit 10.17)
12/20/13
333-192232
2/12/14
333-192232
2/12/14
333-192232
2/12/14
333-192232
Exhibit
Number
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
Exhibit Description
Consent and First Amendment to Loan and Security Agreement dated
September 8, 2015 by and among Hercules Technology Growth Capital Inc.,
the financial institutions signatory thereto, SINTX Corporation, and the
guarantors signatory thereto.
First Amendment to Warrant to Purchase Shares of Common Stock of
SINTX Corporation dated September 8, 2015, by and between SINTX
Corporation and Hercules Technology III, L.P.
Filed with
this
Report
Incorporated by
Reference herein from Form
or Schedule
Form 8-K (Exhibit 10.1)
Filing Date
9/8/15
SEC File/Reg.
Number
001-33624
Form 8-K (Exhibit 10.2)
9/8/15
001-33624
Form of Securities Purchase Agreement between SINTX Technologies and
the Purchasers Dated September 8, 2015
Form 8-K (Exhibit 10.5)
9/8/15
001-33624
Exchange Agreement dated April 4, 2016, by and among SINTX
Corporation and Riverside Merchant Partners, LLC
Warrant Agency Agreement, dated July 8, 2016, by and between SINTX
Corporation and American Stock Transfer & Trust Company, LLC
Warrant Agency Agreement dated January 24, 2017, by and between
SINTX Corporation and American Stock Transfer & Trust Company, LLC
Form 8-K (Exhibit 10.2)
5/05/16
001-33624
Form 8-K (Exhibit 10.1)
7/8/16
001-33624
Form 8-K (Exhibit 8-K)
1/24/17
001-33624
Security Agreement, dated July 28, 2017
Form 8-K (Exhibit 10.1)
8/3/17
001-33624
Assignment Agreement, dated January 3, 2018, by and among the Company,
US Spine, Inc., MEF I, L.P., Anson Investments Master Fund LP, Hercules
Technology III, L.P. and Hercules Capital, Inc.
Exchange Agreement, dated January 3, 2018, by and among SINTX
Corporation and MEF I, L.P.
79
Form 8-K (Exhibit 10.1)
1/4/18
001-33624
Form 8-K (Exhibit 10.2)
1/4/18
001-33624
Exhibit
Number
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
Exhibit Description
Exchange Agreement, dated January 3, 2018, by and among Amedica
Corporation and Anson Investments Master Fund LP
Senior Secured Convertible Promissory Note, dated January 3, 2018, by and
among Amedica Corporation and MEF I, L.P.
Senior Secured Convertible Promissory Note, dated January 3, 2018, by and
among Amedica Corporation and Anson Investments
Securities Purchase Agreement, dated January 30, 2018, by and among the
Company and L2 Capital, LLC.
Filed with
this
Report
Incorporated by
Reference herein from Form
or Schedule
Form 8-K (Exhibit 10.3)
Filing Date
1/4/18
SEC File/Reg.
Number
001-33624
Form 8-K (Exhibit 10.4)
1/4/18
001-33624
Form 8-K (Exhibit 10.5)
1/4/18
001-33624
Form 8-K (Exhibit 10.1)
2/1/18
001-33624
Amended and Restated Promissory Note payable to L2 Capital
Form S-1 (Exhibit 10.25)
4/26/18
333-223032
Form of Warrant Amendment Agreement
Form S-1 (Exhibit 10.26)
4/26/18
333-223032
Amendment to Centrepointe Business Park Lease Agreement, dated June 7,
2019, between SINTX Technologies, Inc. and Centrepointe Properties, LLC.
Form 8-K (Exhibit 10.1)
6/10/19
001-33624
Equity Distribution Agreement, dated as of June 4, 2019, by and between
SINTX Technologies, Inc and Maxim Group LLC
Amendment to Equity Distribution Agreement, dated as of September 12,
2019, by and between SINTX Technologies, Inc. and Maxim Group LLC
Promissory Note issued by CTL Corporation in favor of Amedica
Corporation dated as of October 1, 2018.
Security Agreement between Amedica Corporation and CTL Corporation
dated as of October 1, 2018.
Guaranty between Amedica Corporation and Daniel Chon dated as of
October 1, 2018.
ROFN Security Agreement between Amedica Corporation and CTL
Corporation dated as of October 1, 2018.
80
Form 8-K (Exhibit 10.1)
6/04/19
001-33624
Form 8-K (Exhibit 10.1)
9/12/19
001-33624
Form 8-K (Exhibit 10.1)
10/5/18
001-33624
Form 8-K (Exhibit 10.2)
10/5/18
001-33624
Form 8-K (Exhibit 10.3)
10/5/18
001-33624
From 8-K (Exhibit 10.4)
10/5/18
001-33624
Exhibit Description
Filed with
this
Report
Incorporated by
Reference herein from
Form or Schedule
Filing Date
SEC
File/Reg.
Number
List of Subsidiaries of the Registrant
Form S-1 (Exhibit 21.1)
11/01/19
333-234438
Exhibit
Number
21.1
23.1
31.1
31.2
32
Consent of Independent Registered Public Accounting Firm, Tanner LLC
Certification of Chief Executive Officer
Certification of Principal Financial Officer
Certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002
101 SCH
XBRL Taxonomy Extension Schema Document (A)
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document (A)
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document (A)
101.LAB
XBRL Taxonomy Extension Label Linkbase Document (A)
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document (A)
X
X
X
X
X
X
X
X
X
*
(A)
Management contract of compensatory plan or arrangement
XBRL (EXTENSIBLE BUSINESS REPORTING LANGUAGE) information is furnished and not filed for purposes of Section 11 and 12 of the Securities Act of
1933 and Section 18 of the Securities Exchange Act of 1934.
ITEM 16. FORM 10-K SUMMARY
None.
81
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SIGNATURES
Date: March 25, 2020
SINTX Technologies, Inc.
/s/ B. Sonny Bal
B. Sonny Bal
Chief Executive Officer
(Principal Executive Officer and Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Date: March 25, 2020
Date: March 25, 2020
Date: March 25, 2020
Date: March 25, 2020
Date: March 25, 2020
/s/ B. Sonny Bal
B. Sonny Bal, M.D., Director
/s/ David W. Truetzel
David W. Truetzel, Director
/s/ Jeffrey S. White
Jeffrey S. White, Director
/s/ Eric A. Stookey
Eric A. Stookey, Director
/s/ Mark Froimson
Mark Froimson, M.D., Director
82
As of and For the Years ended December 31, 2019 and 2018
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
F-1
F-2
F-3
F-4
F-5
F-6
F-7
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders of
SINTX Technologies, Inc. (previously known as Amedica Corporation)
Salt Lake City, Utah
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of SINTX Technologies, Inc. and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related
consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2019, and the related notes (collectively
referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December
31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with U.S. generally
accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that our audits provide a reasonable basis for our opinion.
/s/ TANNER LLC
March 25, 2020
Salt Lake City, Utah
We have served as the Company’s auditors since 2017
F-2
SINTX Technologies, Inc.
(previously known as Amedica Corporation)
Consolidated Balance Sheets
(in thousands, except share and per share data)
As of December 31,
2019
2018
Assets
Current assets:
Cash and cash equivalents
Account and other receivables, net of allowance of $0 and $56, respectively
Prepaid expenses and other current assets
Inventories
Notes receivable, current portion
Total current assets
Inventories
Property and equipment, net
Intangible assets, net
Long-term note receivable, net of current portion
Operating lease right of use asset
Other long-term assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued liabilities
Current portion of long-term debt
Derivative liabilities, current portion
Current portion of operating lease liability
Other current liabilities
Total current liabilities
Operating lease liability, net of current portion
Derivative liabilities, net of current portion
Other long-term liabilities
Long term debt, net of current portion
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Convertible preferred stock, $0.01 par value, 130,000,000 shares authorized; 249 and 4,074 shares issued and
outstanding as of December 31, 2019 and 2018, respectively.
Common stock, $0.01 par value, 250,000,000 shares authorized; 2,434,009 and 726,455 shares issued and
outstanding as of December 31, 2019 and 2018, respectively.
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
F-3
$
$
$
$
$
$
$
1,787
136
310
106
1,724
4,063
533
190
41
1,944
2,341
35
9,147
191
1,266
6
220
360
23
2,066
1,867
-
-
12
3,945
5,447
263
171
52
1,084
7,017
624
124
46
3,669
-
35
11,515
301
838
-
1,062
169
10
2,380
-
504
232
-
3,116
-
24
239,256
(234,078)
5,202
9,147
$
-
7
237,673
(229,281)
8,399
11,515
SINTX Technologies, Inc.
(previously known as Amedica Corporation)
Consolidated Statements of Operations
(in thousands, except share and per share data)
Product revenue
Costs of revenue
Gross profit
Operating expenses:
Research and development
General and administrative
Sales and marketing
Goodwill impairment
Total operating expenses
Loss from operations
Other income (expenses):
Interest expense
Interest income
Offering costs
Change in fair value of derivative liabilities
Loss on extinguishment of debt
Loss on extinguishment of derivative liabilities
Other income
Total other income, net
Net loss before income taxes
Provision for income taxes
Loss from continuing operations
Loss from discontinued operations
Gain from disposal of discontinued operations
Net loss
Deemed dividend related to beneficial conversion feature and accretion of discount on convertible Series A
preferred stock
Net loss attributable to common stockholders
Net loss per share – basic and diluted
Basic – continuing operations
Basic – discontinued operations
Basic – gain from sale of discontinued operations
Basic – deemed dividend and accretion of a discount on conversion of Series B preferred stock
Basic – attributable to common stockholders
Diluted – continuing operations
Diluted – discontinued operations
Diluted – gain from sale of discontinued operations
Diluted – deemed dividend and accretion of a discount on conversion of Series B preferred stock
Diluted – attributable to common stockholders
Weighted average common shares outstanding:
Basic
Diluted
The accompanying notes are an integral part of these consolidated financial statements.
F-4
$
$
$
$
$
Year Ended December 31,
2019
2018
$
689
551
138
3,394
2,908
430
-
6,732
(6,594)
(4)
450
-
1,303
-
-
48
1,797
(4,797)
-
(4,797)
-
-
(4,797)
(2,703)
(7,500)
(3.08)
-
-
(1.74)
(4.82)
(3.95)
-
-
(1.74)
(5.69)
$
$
$
$
1,555,988
1,555,988
95
56
39
2,991
3,866
135
6,163
13,155
(13,116)
(1,388)
-
(682)
7,005
(339)
(1,252)
83
3,427
(9,689)
-
(9,689)
(324)
1,361
(8,652)
(13,900)
(22,552)
(26.57)
(0.89)
3.73
(38.12)
(61.85)
(43.21)
(0.85)
3.54
(36.21)
(76.73)
364,602
383,855
SINTX Technologies, Inc.
(previously known as Amedica Corporation)
Consolidated Statements of Stockholders’ Equity
(in thousands, except share data)
Preferred Stock
Common Stock
Paid-In Accumulated
Shares
Amount
Shares
Amount
Balance as of December 31, 2017
Issuance of common stock from the exercise of warrants
Issuance of common stock from the reduction in debt
Issuance of preferred stock from offering, net of issuance
costs
Warrants issued in association with debt
Loss on extinguishment of derivative liabilities
Deemed dividend related to adjustment of the exercise price
of warrants issued with debt
Accretion of change in warrant exercise price
Issuance of common stock due to conversion of preferred
stock
Accretion of convertible preferred stock discount
Deemed dividend related to the issuance of preferred stock
Extinguishment of derivative liabilities
Stock-based compensation
Net loss
Balance as of December 31, 2018
Issuance of common stock upon exercise of warrants
Issuance of common stock for cash
Issuance of common stock due to conversion of preferred
stock
Accretion of convertible preferred stock discount
Deemed dividend related to the issuance of preferred stock
Extinguishment of derivative liability upon exercise of
warrant
Stock-based compensation
Net loss
Balance as of December 31, 2019
- $
-
-
15,000
-
-
-
-
(10,926)
-
-
-
-
-
4,074
-
-
(3,825)
-
-
-
-
-
249 $
The accompanying notes are an integral part of these consolidated financial statements.
F-5
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
100,936 $
36,205
19,348
-
-
-
-
-
569,966
-
-
-
-
-
726,455
35,874
527,896
- 1,143,784
-
-
-
-
-
-
-
-
-
-
- 2,434,009 $
Capital
1 $
-
-
226,070 $
1,652
1,453
Deficit
(220,629) $
-
-
-
-
-
-
-
6
-
-
-
-
-
7
-
5
12
-
-
-
-
-
24 $
6,749
98
1,040
(9)
9
(6)
13,900
(13,900)
575
42
-
237,673
103
1,446
(12)
2703
(2703)
-
-
-
-
-
-
-
-
-
-
(8,652)
(229,281)
-
-
-
-
-
44
2
-
239,256 $
-
-
(4,797)
(234,078) $
Total
Equity
5,442
1,652
1,453
6,749
98
1,040
(9)
9
-
13,900
(13,900)
575
42
(8,652)
8,399
103
1,451
-
2703
(2703)
44
2
(4,797)
5,202
SINTX Technologies, Inc.
(previously known as Amedica Corporation)
Consolidated Statements of Cash Flows
(in thousands)
Cash flow from operating activities
Net loss from continuing operations
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense
Amortization of right of use asset
Amortization of intangible assets
Non-cash interest income
Non-cash interest expense
Loss on extinguishment of debt
Stock based compensation
Change in fair value of derivative liabilities
Loss on extinguishment of derivative liabilities
Loss on impairment of goodwill
Bad debt expense
Changes in operating assets and liabilities:
Account and other receivables
Prepaid expenses and other current assets
Inventories
Accounts payable and accrued liabilities
Payments on operating lease liability
Net cash used in operating activities – continuing operations
Cash loss on sale – discontinued operations
Net cash provided by operating activities – discontinued operations
Net cash used in operating activities
Cash flows from investing activities
Purchase of property and equipment
Proceeds from notes receivable, net of imputed interest
Purchase of intangible asset
Net cash provided by (used in) investing activities – continuing operations
Net cash used in investing activities – discontinued operations
Net cash provided by (used in) investing activities
Cash flows from financing activities
Proceeds from issuance of warrant derivative liability, net of issuance costs
Proceeds from issuance of preferred stock, net of issuance costs
Proceeds from issuance of common stock, net of issuance costs
Proceeds from exercise of warrants, net of fees
Capital raise costs
Principal payment on debt
Proceeds from issuance of debt
Payments on debt extinguishment
Net cash provided by (used in) financing activities – continuing operations
Net cash provided by financing activities – discontinued operations
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Noncash investing and financing activities
Right-of-Use Assets and assumption of operating lease liability
Extinguishment of derivative liabilities through exercise of warrants
Issuance of debt for equipment
Change in par value due to conversion of preferred stock to common stock
Debt exchange
Payment of debt with common stock
Warrants issued in association with debt
Supplemental cash flow information
Cash paid for interest
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Year Ended December 31,
2019
2018
$
(4,797)
$
102
363
5
(443)
-
-
2
(1,303)
-
-
(3)
131
19
37
216
(764)
(6,435)
-
-
(6,435)
(147)
1,528
-
1,381
-
1,381
-
-
1,451
103
(157)
(3)
-
-
1,394
-
1,394
(3,660)
5,447
$
$
$
1,787
$
Year Ended December 31,
2019
2018
$
2,704
44
21
11
-
-
-
4
$
(9,689)
105
-
4
(86)
956
339
42
(7,005)
1,252
6,163
-
(139)
19
(8)
(1,281)
-
(9,328)
(695)
675
(9,348)
(11)
-
(50)
(61)
(84)
(145)
7,577
6,749
-
1,652
-
-
705
(2,282)
14,401
-
14,401
4,908
539
5,447
-
565
-
-
2,265
1,453
98
426
1. Organization and Summary of Significant Accounting Policies
SINTX Technologies, Inc. (“SINTX” or “the Company”) was incorporated in the state of Delaware on December 10, 1996 (and was previously known as Amedica
Corporation). SINTX is an OEM ceramics company that develops and commercializes silicon nitride for medical and non-medical applications. The core strength of SINTX is
the manufacturing, research, and development of silicon nitride ceramics for external partners. The Company presently manufactures silicon nitride spinal implant in its ISO
13485 certified manufacturing facility for CTL Amedica, the exclusive retail channel for silicon nitride spinal implants. The Company believes it is the first and only
manufacturer to use silicon nitride in medical applications. The Company’s products are primarily sold in the United States.
As further explained in Note 14, on October 1, 2018, the Company completed the sale of its retail spine business to CTL Medical, a Dallas, Texas-based privately held medical
device manufacturer. As a result of the sale, CTL Medical is now the exclusive owner of Amedica’s portfolio of metal and silicon nitride spine products, which are presently
sold under the brand names of Taurus, Preference, and Valeo, with access to future silicon nitride spine technologies. Manufacturing, R&D, and all intellectual property related
to the core, non-spine, biomaterial technology of silicon nitride remains with the Company. The Company will serve as CTL’s exclusive OEM provider of silicon nitride
products.
On October 30, 2018, the Company amended its Certificate of Incorporation with the State of Delaware to change its corporate name to SINTX Technologies, Inc. in order to
better reflect its focus on silicon nitride science and technologies and pipeline of silicon nitride-based products in various biomedical applications. The Company also changed
its trading symbol on the NASDAQ Capital Market to “SINT”.
The previous name, Amedica, has transferred to CTL Medical, which is now CTL-Amedica. The Company’s new corporate brand reflects both the Company’s core competence
in the science and production of silicon nitride ceramics, as well as encouraging prospects for the future, as an OEM supplier of spine implants to CTL-Amedica, and several
opportunities outside of spine. As SINTX Technologies Inc., the Company will focus on developing silicon nitride in terms of product design, and future biomaterial
formulations, for a variety of OEM customers.
Basis of Presentation and Principles of Consolidation
These consolidated financial statements have been prepared by management in accordance U.S. generally accepted accounting principles (“U.S. GAAP”) and include all assets,
liabilities and operations of the Company and its wholly-owned subsidiary, US Spine. All material intercompany transactions and balances have been eliminated in
consolidation.
Liquidity and Capital Resources
The consolidated financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and
settlement of liabilities in the normal course of business, and does not include any adjustments to reflect the possible future effects on the recoverability and classification of
assets or the amounts and classifications of liabilities that may result from uncertainty related to its ability to continue as a going concern within one year from the date of
issuance of these consolidated financial statements.
For the years ended December 31, 2019 and 2018, the Company incurred a net loss of $4.8 million and $8.7 million, respectively, and used cash in continuing operations of
$6.4 million and $9.3 million, respectively. The Company had an accumulated deficit of $234.1 million and $229.3 million as of December 31, 2019 and 2018, respectively. To
date, the Company’s operations have been principally financed from proceeds from the issuance of preferred and common stock and, to a lesser extent, cash generated from
product sales. It is anticipated that the Company will continue to generate operating losses and use cash in operations. The Company’s continuation as a going concern is
dependent upon its ability to increase sales, and/or raise additional funds through the capital markets. Whether and when the Company can attain profitability and positive cash
flows from operations or obtain additional financing is uncertain.
The Company is actively generating additional scientific and clinical data to have it published in leading industry publications. The unique features of our silicon nitride
material are not well known, and we believe the publication of such data would help sales efforts as the Company approaches new prospects. The Company is also making
additional changes to the sales strategy, including a focus on revenue growth by expanding the use of silicon nitride in other areas outside of spinal fusion applications.
The Company has common stock that is publicly traded and has been able to successfully raise capital when needed since the date of the Company’s initial public offering in
February 2014. In March 2018, the Company closed on gross proceeds of $1.4 million, before payment of placement agent fees and costs, on a warrant reprice and exercise
transaction. Additionally, on May 14, 2018, the Company closed on a public offering of units, consisting of convertible preferred stock and warrants, for gross proceeds of $15
million, which excludes underwriting discounts and commissions and offering expenses payable by the Company.
F-7
During the year ended December 31, 2019, the Company entered into an ATM equity distribution agreement in which the Company may sell, from time to time, shares of
common stock having an aggregate offering price of up to $2.5 million (see Note 8). The Company sold 527,896 shares during the year ended December 31, 2019, raising
approximately $1.5 million net of issuance cost of $0.2 million. The Company is eligible to raise an additional $0.8 million under this offering.
On October 1, 2018, the Company sold the retail spine business to CTL Medical. The sale included a $6 million noninterest bearing note receivable payable over a 36-month
term. The 36-month term of the note receivable requires 18 payments of $138,889 followed by 18 payments of $194,444, with maturing of the note receivable to occur October
1, 2021. The Company expects cash flows totaling $0.6 million from January 1, 2020 through April 30, 2020, the last four months of the initial 18-month payment period and
cash flows of $3.5 million for the following eighteen months. The buyer also assumed the Company’s $2.5 million related party note payable. As further explained in Note 16,
the Company raised gross proceeds of approximately $9.4 million subsequent to December 31, 2019, under a rights offering consisting of shares of preferred stock and
common stock warrants.
Management has concluded that together with its existing capital resources and availability under its existing ATM offering, proceeds from the 2020 offering, and payments on
the note receivable from the sale of the Spine business will be sufficient to fund operations for at least the next 12 months, or through March 2021.
Reverse Stock Split
On July 26, 2019, the Company effected a 1 for 30 reverse stock split of the Company’s common stock. The par value and the authorized shares of the common and preferred
stock were not adjusted as a result of the reverse stock split. All common stock shares, equivalents, and per-share amounts for all periods presented in these consolidated
financial statements have been adjusted retroactively to reflect the reverse stock split.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses
during the period. Actual results could differ from those estimates. As of December 31, 2019, the most significant estimate relates to derivative liabilities.
Concentrations of Credit Risk and Significant Customers
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities and account
and other receivables. Because the financial institution that the Company currently uses does not participate in the Certificate of Deposit Account Registry Service (“CDARS”),
the Company does not presently have a program to limit its exposure to credit loss. The Company’s deposits, at times, may exceed federally insured limits.
As of December 31, 2019, one customer receivable balance was 100% of the Company’s total accounts receivable from continuing operations. One customer accounted for
100% of the Company’s total revenues from continuing operations for the year ended December 31, 2019 and 2018.
Revenue Recognition
The Company derives its product revenue primarily from the sale of spinal fusion products, used in the treatment of spine disorders to CTL Medical, with whom the Company
signed a 10-year exclusive sales agreement in October 2018. The Company is currently pursuing other sales opportunities for silicon nitride outside the spinal fusion application.
The Company recognizes revenue from sales at the time the product is shipped. Historically, the Company’s product returns and exchanges have not been significant.
As of January 1, 2019, the Company adopted Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASC 606), and elected to use the modified
retrospective method. Under the modified retrospective method, the Company has presented prior periods under legacy GAAP, with the cumulative effect of initial application
adjusted through beginning retained earnings. The new standard did not have a material impact on the revenue recognition process of the Company and no cumulative effect
was recognized upon initial application.
With the adoption of ASC 606 at the beginning of 2019, revenue is recognized when control of the goods or services promised under the contract is transferred to the customer
either at a point in time (e.g., upon delivery) or over time (e.g., as performed under the contract). The Company accounts for a contract when it has approval and commitment
from both parties, the rights and payment terms of the parties are identified, the contract has commercial substance and collectability of consideration is probable. Contracts are
reviewed to determine whether there is one or multiple performance obligations. A performance obligation is a promise to transfer a distinct good or service to a customer and
represents the unit of accounting for revenue recognition. For contracts with multiple performance obligations, the expected consideration, or the transaction price, is allocated to
each performance obligation identified in the contract based on the relative standalone selling price of each performance obligation. Revenue is then recognized for the
transaction price allocated to the performance obligation when control of the promised goods or services underlying the performance obligation is transferred. Contract
consideration is not adjusted for the effects of a significant financing component when, at contract inception, the period between when control transfers and when the customer
will pay for that good or service is one year or less. Contact modifications that provide for additional distinct goods or services at the standalone selling price are treated as
separate contracts. The transaction price for our contracts reflects our estimate of returns, rebates and discounts, which historically have not been significant. Amounts billed to
customers for shipping and handling are included in the transaction price and generally are not treated as separate performance obligations as these costs fulfill a promise to
transfer the product to the customer. The Company does not employee salespeople to actively seek additional customers; there are no incremental costs for obtaining customers
that need to be capitalized.
F-8
Costs of Revenue
The expenses that are included in costs of revenue include all in-house manufacturing costs for the products we manufacture.
Cash and Cash Equivalents
The Company considers all cash on deposit, money market accounts and highly-liquid debt instruments purchased with original maturities of three months or less to be cash and
cash equivalents.
Inventories
Inventories are stated at the lower of cost or net realizable value, with cost for manufactured inventory determined under the standard costs, which approximate actual costs,
determined on the first-in first-out (“FIFO”) method. Manufactured inventory consists of raw material, direct labor and manufacturing overhead cost components. The Company
reviews the carrying value of inventory on a periodic basis for excess or obsolete items, and records any write-down as a cost of revenue, as necessary.
Property and Equipment
Property and equipment, including leasehold improvements, are stated at cost, less accumulated depreciation and amortization. Property and equipment are depreciated using the
straight-line method over the estimated useful lives of the assets, which range from three to five years. Leasehold improvements are amortized over the shorter of their estimated
useful lives or the related lease term, generally five years.
The Company reviews the carrying value of the Company’s property and equipment that are held and used in the Company’s operations for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of these assets is determined based upon expected undiscounted
future net cash flows from the operations to which the assets relate, utilizing management’s best estimate, assumptions, and projections at the time. If the carrying value is
determined to be unrecoverable from future operating cash flows, the asset is deemed impaired and an impairment charge would be recognized to the extent the carrying value
exceeded the estimated fair value of the asset. The Company estimates the fair value of assets based on the estimated future discounted cash flows of the asset.
F-9
Account and Other Receivable and Allowance for Doubtful Accounts
Account and other receivables are carried at invoiced amount less an allowance for doubtful accounts. On a regular basis, the Company evaluates account and other receivables
and estimates an allowance for doubtful accounts, as needed, based on various factors such as customers’ current credit conditions, length of time past due, and the general
economy as a whole. Receivables are written off against the allowance when they are deemed uncollectible.
Long Lived Intangible Assets
The Company evaluates the carrying value of intangibles when events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the
Company considers important which could trigger an impairment review include, but are not limited to, significant under-performance relative to historical or projected future
operating results, significant changes in the manner of its use of acquired assets or its overall business strategy, and significant industry or economic trends. The Company
amortizes definite-lived intangible assets on a straight-line basis over their useful lives. The Company recorded no impairment loss for definite-lived intangible assets during the
year ended December 31, 2019. As explained in Notes 1 and 14, the Company sold most intangible assets that had a carrying value to CTL Medical, retaining the carrying
value of only one trademark asset.
Derivative Liabilities
Derivative liabilities include the fair value of instruments such as common stock warrants, preferred stock warrants and convertible features of notes, that are initially recorded
at fair value and are required to be re-measured to fair value at each reporting period. The change in fair value of the instruments is recognized as a component of other income
(expense) in the Company’s consolidated statements of operations until the instruments settle, expire or are no longer classified as derivative liabilities. The Company estimates
the fair value of these instruments using the Black-Scholes-Merton or Monte-Carlo valuation models depending on the complexity of the underlying instrument. The significant
assumptions used in estimating the fair value include the exercise price, volatility of the stock underlying the instrument, risk-free interest rate, estimated fair value of the stock
underlying the instrument and the estimated life of the instrument.
F-10
Research and Development
All research and development costs, including those funded by third parties, are expensed as incurred. Research and development costs consist of engineering, product
development, test-part manufacturing, testing, developing and validating the manufacturing process, and regulatory related costs. Research and development expenses also
include employee compensation, employee and nonemployee stock-based compensation, supplies and materials, consultant services, and travel and facilities expenses related to
research activities.
We expect to incur additional research and development costs as we continue to develop new spinal fusion products, product candidates for total joint replacements, dental
applications, and other products, which may increase our total research and development expenses.
Advertising Costs
Advertising costs are expensed as incurred. The primary component of the Company’s advertising expenses is advertising in trade periodicals. Advertising costs were not
significant for each of the years ended December 31, 2019 and 2018.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to the differences between the financial statement carrying value of
existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the fiscal year in which those
temporary differences are expected to be recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be
realized.
The Company operates in various tax jurisdictions and is subject to audit by various tax authorities. The Company provides for tax contingencies whenever it is deemed
probable that a tax asset has been impaired, or a tax liability has been incurred for events such as tax claims or changes in tax laws. Tax contingencies are based upon their
technical merits relative tax law and the specific facts and circumstances as of each reporting period. Changes in facts and circumstances could result in material changes to the
amounts recorded for such tax contingencies.
The Company recognizes uncertain income tax positions taken on income tax returns at the largest amount that is more-likely than-not to be sustained upon audit by the
relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.
The Company’s policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of our income tax provision. For the
years ended December 31, 2019 and 2018, the Company did not record any material interest income, interest expense or penalties related to uncertain tax positions or the
settlement of audits for prior periods.
Stock-Based Compensation
The Company measures stock-based compensation expense related to employee stock-based awards based on the estimated fair value of the awards as determined on the date of
grant and is recognized as expense over the remaining requisite service period. The Company utilizes the Black-Scholes-Merton option pricing model to estimate the fair value
of employee stock options. The Black-Scholes-Merton model requires the input of highly subjective and complex assumptions, including the estimated fair value of the
Company’s common stock on the date of grant, the expected term of the stock option, and the expected volatility of the Company’s common stock over the period equal to the
expected term of the grant. The Company estimates forfeitures at the date of grant and revises the estimates, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. The Company accounts for stock options to purchase shares of stock that are issued to non-employees based on the estimated fair value of such instruments
using the Black-Scholes-Merton option pricing model.
F-11
The Company uses the simplified method as prescribed by the Securities and Exchange Commission Staff Accounting Bulletin No. 107, Share-based Payment, to calculate the
expected term of stock option grants to employees as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the
expected term of stock options granted to employees. The Company utilizes a dividend yield of zero because the Company has never paid cash dividends and has no current
intention to pay cash dividends. The risk-free rate of return used for each grant is based on the U.S. Treasury yield curve in effect at the time of grant for instruments with a
similar expected life.
Offering Costs
Offering costs consist of legal, accounting, and other advisory costs related to the Company’s efforts to raise debt and equity capital.
Offering costs paid in cash or by issuing warrants associated with the Company’s equity fundraising activities are either recorded to additional paid in capital as a reduction of
the proceeds or expensed in the case of failed offerings.
Accounting Pronouncement Adopted In 2019
In August 2016, the FASB updated accounting guidance on the following eight specific cash flow classification issues: (1) debt prepayment or debt extinguishment costs; (2)
settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (3)
contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-
owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization
transactions; and (8) separately identifiable cash flows and application of the predominance principle. Under prior U.S. GAAP, there was no specific guidance on the eight cash
flow classification issues aforementioned. The Company adopted the new guidance effective January 1, 2019. The guidance in this standard did not have a material impact on
the financial statements of the Company upon adoption.
In February 2016, the FASB updated the accounting guidance related to leases as part of a joint project with the International Accounting Standards Board (“IASB”) to increase
transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing
arrangements. The Company adopted the new guidance effective January 1, 2019 (see Note 15), using the modified retrospective approach. Adoption of the new guidance
resulted in the Company being required to record an additional operating lease right-of-use asset totaling approximately $0.7 million and liability totaling approximately $0.9
million (with $0.7 million incremental to adoption of the new guidance) on the date of adoption. Subsequent to the initial adoption of the new standard the Company amended
the lease (see Note 15). The standard did not materially impact the consolidated net loss and had no impact on cash flows.
In May 2014, in addition to several amendments issued during 2016, the FASB updated the accounting guidance related to revenue from contracts with customers, which
supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The Company adopted the new guidance effective January 1, 2019. The core principle of the new
guidance is that a company should recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an
entity expects to be entitled for those goods or services. The standard defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates are
often required within the revenue recognition process than were required under prior U.S. GAAP. The Company has one primary customer (see Note 14) and related contract
that has one performance obligation to which revenue is allocated. Revenue under this contract is recognized when the product is shipped to the customer. The Company
generally bills its customer upon shipment of the product and invoices are generally due within 30 days. The Company does provide certain rights of return, which historically
have not been significant. The Company does not anticipate incurring significant incremental costs to obtain contracts with future customers. The guidance in this standard did
not have a material impact on the financial statements of the Company upon adoption.
New Accounting Pronouncement, Not Yet Adopted
The Company has reviewed all other recently issued, but not yet adopted, accounting standards, in order to determine their effects, if any, on its results of operations, financial
position or cash flows. Based on that review, the Company believes that no other pronouncements will have a significant effect on its financial statements upon adoption.
F-12
Net Loss Per Share – Basic and Diluted
Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period, without consideration for common
stock equivalents. Diluted net loss per share is calculated by dividing the net loss by the weighted-average number of common share equivalents outstanding for the period that
are determined to be dilutive. Dilutive common stock equivalents are comprised of convertible preferred stock, warrants for the purchase of common stock and stock options
outstanding under the Company’s equity incentive plans.
Potentially dilutive securities not included in the calculation of diluted net loss per share because to do so would be anti-dilutive are as follows (in common stock equivalent
shares):
Convertible preferred stock
Common stock warrants
Common stock options
As of December 31,
2019
2018
95,303
390,883
377
486,563
311,209
48,489
377
360,075
Below are basic and diluted loss per share data for the year ended December 31, 2019, which are in thousands except for share and per share data:
Numerator:
Loss from continuing operations
Loss from discontinued operations
Gain from disposal of discontinued operations
Deemed dividend and accretion of a discount
Net loss attributable to common stockholders
Denominator:
Number of shares used in per common share calculations:
Net loss per common share:
Loss from continuing operations
Loss from discontinued operations
Gain from disposal of discontinued operations
Deemed dividend and accretion of a discount
Net loss attributable to common stockholders
Basic
Calculation
Effect of
Dilutive
Warrant
Securities
Diluted
Calculation
(4,797)
-
-
(2,703)
(7,500)
1,555,988
(3.08)
-
-
(1.74)
(4.82)
$
$
$
$
$
$
$
$
F-13
(1,346)
-
-
-
(1,346)
-
(0.87)
-
-
-
(0.87)
$
$
$
$
(6,143)
-
-
(2,703)
(8,846)
1,555,988
(3.95)
-
-
(1.74)
(5.69)
Below are basic and diluted loss per share data for the year ended December 31, 2018, which are in thousands except for share and per share data:
Basic
Calculation
Effect of
Dilutive
Warrant
Securities
Diluted
Calculation
$
$
$
$
(9,689)
(324)
1,361
(13,900)
(22,552)
364,602
(26.57)
(0.89)
3.73
(38.12)
(61.85)
Numerator:
Loss from continuing operations
Loss from discontinued operations
Gain from disposal of discontinued operations
Deemed dividend and accretion of a discount
Net loss attributable to common stockholders
Denominator:
Number of shares used in per common share calculations:
Net loss per common share:
Loss from continuing operations
Loss from discontinued operations
Gain from disposal of discontinued operations
Deemed dividend and accretion of a discount
Net loss attributable to common stockholders
2. Inventories
The components of inventory were as follows (in thousands):
Raw materials
WIP
Finished goods
3. Property and Equipment
The following is a summary of the components of property and equipment (in thousands):
Manufacturing and lab equipment
Leasehold improvements
Software and computer equipment
Furniture and equipment
Less: accumulated depreciation
$
$
$
$
$
$
$
$
(6,899)
-
-
-
(6,899)
19,253
(16.64)
0.04
(0.19)
1.91
(14.88)
$
$
$
$
As of December 31,
2019
2018
533
106
-
639
$
$
As of December 31,
2019
2018
247
941
636
82
1,906
(1,716)
190
$
$
(16,588)
(324)
1,361
(13,900)
(29,451)
383,855
(43.21)
(0.85)
3.54
(36.21)
(76.73)
624
47
5
676
234
863
745
635
2,477
(2,353)
124
Depreciation expense for 2019 was approximately $0.1 million. Depreciation expense for 2018 was approximately $0.5 million, with $0.1 million from continuing operations
and $0.4 million from discontinued operations.
F-14
4. Intangible Assets
Intangible assets consisted of the following (in thousands):
Trademarks
Less: accumulated amortization
Year Ended December 31,
2019
2018
$
$
50
(9)
41
$
$
50
(4)
46
Amortization expense for 2019 was approximately $5.0 thousand. Amortization expense for 2018 was approximately $0.4 million, with $4.0 thousand from continued
operations and $0.396 million from discontinued operations.
5. Fair Value Measurements
Financial Instruments Measured and Recorded at Fair Value on a Recurring Basis
The Company has issued certain warrants to purchase shares of common stock, which are considered mark-to-market liabilities and are re-measured to fair value at each
reporting period in accordance with accounting guidance. Fair value is based on the price that would be received from selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date, under a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
Level 1
- quoted market prices for identical assets or liabilities in active markets.
Level 2
- observable prices that are based on inputs not quoted on active markets but corroborated by market data.
Level 3
- unobservable inputs reflecting management’s assumptions, consistent with reasonably available assumptions made by other market participants. These
valuations require significant judgment.
The Company classifies assets and liabilities measured at fair value in their entirety based on the lowest level of input that is significant to their fair value measurement. No
financial assets were measured on a recurring basis as of December 31, 2019 and 2018. The following tables set forth the financial liabilities measured at fair value on a
recurring basis by level within the fair value hierarchy as of December 31, 2019 and 2018.
Description
Derivative liability
Common stock warrants
Description
Derivative liability
Common stock warrants
Fair Value Measurements as of December 31, 2019
(in thousands)
Level 1
Level 2
Level 3
Total
$
$
-
$
-
$
220
$
220
Fair Value Measurements as of December 31, 2018
(in thousands)
Level 1
Level 2
Level 3
Total
-
$
-
$
1,566
$
1,566
F-15
The Company did not have any transfers of assets and liabilities between Level 1 and Level 2 of the fair value measurement hierarchy during the years ended December 31,
2019 and 2018. The following table presents a reconciliation of the derivative liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level
3) during the years ended December 31, 2019 and 2018 (in thousands):
Balance as of December 31, 2017
Issuance of derivatives
Change in fair value
Exercise of warrants
Other, net
Balance as of December 31, 2018
Issuance of derivatives
Change in fair value
Exercise of warrants
Other, net
Balance as of December 31, 2019
Common Stock Warrants
Common Stock
Warrants
(1,357)
(7,577)
7,005
575
(212)
(1,566)
-
1,303
44
(1)
(220)
$
$
As of December 31, 2019, and 2018, approximately $0.2 million and $1.6 million respectively, of the derivative liabilities were calculated using the Black-Scholes-Merton
valuation model. As of and December 31, 2019 and 2018, no significant amount of the derivative liability was calculated using the Monte Carlo valuation model.
The assumptions used in estimating the common stock warrant liability using the Black-Scholes-Merton valuation model as of December 31, 2019 and 2018 were as follows:
Weighted-average risk-free interest rate
Weighted-average expected life (in years)
Expected dividend yield
Weighted average expected volatility
F-16
December 31,
2019
December 31,
2018
1.62%
3.4
-%
64%
2.51%
0.9
-%
157%
Other Financial Instruments
The Company’s recorded values of cash and cash equivalents, account and other receivables, accounts payable and accrued liabilities approximate their fair values based on
their short-term nature. The recorded value of notes payable approximates the fair value as the interest rate approximates market interest rates.
6. Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
Payroll and related expenses
Resterilization and repackaging costs
Other
7. Debt
L2 Capital Debt
Year Ended December 31,
2019
2018
$
$
589
392
285
1,266
$
$
388
344
106
838
On January 31, 2018, the Company signed a promissory note in the aggregate principal amount of up to $0.84 million (the “L2 Note”) for an aggregate purchase price of up to
$0.75 million and warrants to purchase up to an aggregate of 68,257 shares of common stock (the “Warrants”) at an exercise price of $3.31 per share. The maturity date was six
months from date of funding. The L2 Note’s interest rate was 8% per year and a default interest rate of 18% per year.
On May 14, 2018, the Company closed on an underwritten public offering of units, consisting of convertible preferred stock and warrants, for gross proceeds of $15.0 million.
Part of the proceeds from this offering were used to pay off the outstanding debt with L2 Capital. The total payoff was $1.1 million, with $0.7 million in principal and $0.4
million in interest.
F-17
Hercules and MEF I, LP/Anson Investments Debt Exchange
On January 3, 2018, the Company entered into an Assignment Agreement (the “Assignment Agreement”) with MEF I, LP and Anson Investments Master Fund (collectively the
“Assignees” and each an “Assignee”), Hercules Technology III, L.P. (“HT III”) and Hercules Capital, Inc. (“HC” and, together with HT III, “Hercules”), pursuant to which
Hercules assigned to the Assignees all amounts remaining due under the Loan and Security Agreement, dated June 30, 2014, as amended, between the Company and Hercules
(the “Loan and Security Agreement”) and (2) the note (the “Hercules Note”) between the Company and Hercules evidencing the amounts due under the Loan and Security
Agreement. The total amount assigned by Hercules to the Assignees in the aggregate was $2.3 million and was secured by the same collateral underlying the Loan and Security
Agreement. Subsequently, the Company entered into an exchange agreement pursuant to which the Assignees agreed to exchange the Hercules Term Loan obligation acquired
by them for two senior secured convertible promissory notes issued by the Company, each in the principal amount of $1.1 million for an aggregate principal amount of $2.2
million, (the “Exchange Notes”). The Exchange Notes were scheduled to mature on February 3, 2019 (the “Maturity Date”). The Exchange Notes had interest at a rate of 15%
per annum. The Exchange Notes were secured by a first priority security interest in substantially all of the Company assets, including intellectual property, and contained
covenants restricting payments to certain of our affiliates.
On May 14, 2018, the Company closed on an underwritten public offering of units, consisting of convertible preferred stock and warrants, for gross proceeds of $15.0 million.
Part of the proceeds from this offering were used to pay off the outstanding debt with MEF I, L.P and Anson Investments. The total payoff was $1.6 million, with $1.4 million in
principal and $0.2 million in interest.
North Stadium Term Loan – Related Party
On July 28, 2017, the Company entered into a $2.5 million term loan (the “North Stadium Loan”) with North Stadium Investments, LLC (“North Stadium”), a company owned
and controlled by the Company’s Chief Executive Officer and Chairman of the Board. The North Stadium Loan bore interest at 10% per annum and required the Company to
make monthly interest only payments from September 5, 2017 through July 5, 2018. All principal and unpaid interest (if any) under the North Stadium Loan was due and
payable on July 28, 2018. The North Stadium Loan was secured by substantially all of the Company’s assets but was junior to security interest in assets encumbered by the
Hercules Term Loan (see below). In connection with the North Stadium Loan the Company also issued North Stadium a warrant to purchase up to 1,833 shares of the
Company’s common stock at a purchase price of $151.20 per share, subject to a 5-year term. The relative estimated value of the warrants on the date of grant approximated $0.2
million, which was being amortized as interest expense over the life of the term loan.
On October 1, 2018, CTL Medical assumed the North Stadium Term Loan debt as part of the sale of the retail spine business. As of December 31, 2018, the Company has been
released by North Stadium from any and all obligations related to this debt.
Hercules Term Loan
On June 30, 2014, the Company entered into a Loan and Security Agreement with Hercules which provided the Company with a $20.0 million term loan. The Hercules Term
Loan matured on January 1, 2018. The Hercules Term Loan included a $0.2 million closing fee, which was paid to Hercules on the closing date of the loan. The closing fee was
recorded as a debt discount and was being amortized to interest expense over the life of the loan. The Hercules Term Loan also included a non-refundable final payment fee of
$1.7 million. The final payment fee was being accrued and recorded to interest expense over the life of the loan.
On January 3, 2018, the Hercules Term Loan and all amounts owing thereunder was assigned to MEF I and Anson Investments. See discussion above under “Hercules and
MEF I, LP/Anson Investments Debt Exchange” for a more detailed description of that transaction.
F-18
Equipment Loan
In September 2019 the Company entered into a debt arrangement with a finance company to purchase equipment. The debt balance at September 30, 2019, totaled $20
thousand. The debt incurs interest at 12%, is collateralized by the equipment and is payable in monthly payments of $1 thousand (including interest) over 36 months.
8. Equity
2019 and 2018 Preferred Stock Conversions
During 2018, Series B Convertible Preferred shareholders of the Company converted 10,926 shares of Series B Convertible Preferred Stock into 569,966 shares of common
stock.
During the year ended December 31, 2019, Series B Convertible Preferred shareholders of the Company converted 3,825 shares of Series B Convertible Preferred Stock into
1,143,784 shares of common stock.
2019 and 2018 Warrant Exercise
During August 2018, pursuant to the cashless exercise provision contained in their warrant, L2 Capital exercised its warrants and was issued 8,069 shares of common stock.
The L2 Capital warrant is no longer outstanding.
During May 2018, the Company closed on a public offering, consisting of both convertible preferred stock and warrants. During July 2018, 998 of the warrants were exercised
and converted into 998 shares of common stock.
During March 2018, the Company repriced 832,000 warrants dated July 8, 2016, from $12 to $2.125 (for further description see “Warrant Reprice March 2018” below).
During May 2018, an additional 145,834 of the repriced warrants were exercised resulting in gross proceeds to the Company of $0.3 million.
During the year ended December 31, 2019, 35,874 warrants were exercised resulting in gross proceeds to the Company of approximately $0.1 million.
F-19
May 2018 Unit Offering
On May 14, 2018, the Company closed on an underwritten public offering of units (“the Units”), consisting of convertible preferred stock and warrants, for gross proceeds of
$15.0 million, which excludes underwriting discounts and commissions and offering expenses payable by SINTX. The offering was priced at a public offering price of $1,000
per unit. Each unit consisted of one share of Series B Convertible Preferred Stock, with a stated value of $1,100, and warrants to purchase up to 758 shares of common stock
(the “May 2018 Warrants”). The May 2018 Warrants are initially exercisable at an exercise price of $1.60 per share and expire 5 years from the date of issuance. The Series B
Preferred Stock is convertible into shares of common stock by dividing the stated value of $1,100 by: (i) for the first 40 trading days following the closing of this offering,
$1.4512 (the “Conversion Price”), (ii) after 40 trading days but prior to the 81st trading day, the lesser of (a) the Conversion Price and (b) 87.5% of the lowest volume weighted
average price for our Common Stock as reported at the close of trading on the market reporting trade prices for the Common Stock during the five trading days prior to the 41st
trading day, and (iii) after 80 trading days, the lesser of (a) the Conversion Price and (b) 87.5% of the lowest volume weighted average price for our Common Stock as reported
at the close of trading on the market reporting trade prices for the Common Stock during the five trading days prior to the date of the notice of conversion. In the case of (ii)(b)
and (iii)(b) above, the share price shall not be less than $0.48 (the “Floor Price”). Each of the Conversion Price and Floor Price is subject to adjustment in certain circumstances.
The Company raised $15.0 million associated with the issuance of the Units, with $6.8 million, net of issuance costs of $0.6 million, allocated to the preferred stock and $6.9
million, net of issuance costs of $0.7 million, allocated to the warrants. In association with the warrants that were recorded as a derivative liability, the Company immediately
expensed approximately $0.7 million of issuance costs. The 15,000 preferred shares were initially convertible into 11,369,900 shares of common stock and had an effective
conversion rate of $1.45 per share based on the proceeds that were allocated to them. The conversion price was adjusted to $0.6543, effective July 12, 2018, and was adjusted
again on September 7, 2018 to $0.48.
Warrant Reprice March 2018
During the three months ended March 31, 2018, the Company entered into a warrant amendment agreement (the “Amendment Agreement”) with certain holders of previously
issued Series E Common Stock Purchase Warrants (collectively, “Investors”). In connection with that certain Series E Common Stock Purchase Warrant between the Company
and Investors dated July 8, 2016, the Company issued to Investors warrants to purchase up to 832,000 shares of common stock (the “Warrant Shares”) at an exercise price of
$12.00 per share, (the “Investors Warrants”). Under the terms of the Amendment Agreement, in consideration of Investors exercising 668,335 of the Investors Warrants (the
“Warrant Exercise”), the exercise price per share of the Investors Warrants was reduced to $2.125 per share. 668,335 of the Investors Warrants were exercised resulting in gross
proceeds to the Company of $1.4 million before payment of placement agent fees and costs. In addition, and as further consideration, the Company issued to Investors new
warrants to purchase up to the number of shares of common stock equal to 100% of the number of Warrant Shares issued pursuant to the Warrant Exercise at an exercise price
per share equal to $2.00 per share.
F-20
2019 ATM Stock Offerings
On June 4, 2019, the Company entered into an Equity Distribution Agreement, (the “Distribution Agreement”), with Maxim Group LLC (“Maxim”), pursuant to which the
Company may sell from time to time, shares of its common stock, having an aggregate offering price of up to $1.6 million through Maxim, as agent (the “ATM Offering”). On
September 12, 2019, the Company entered into an amendment to the Distribution Agreement with Maxim, which increased the maximum aggregate offering price of the shares
of the Company’s common stock from $1.6 million to $2.5 million. Subject to the terms and conditions of the Distribution Agreement, Maxim will use its commercially
reasonable efforts to sell the shares from time to time, based on the Company’s instructions. The Company has no obligation to sell any of the shares and may at any time
suspend offers under the Distribution Agreement. The Offering will terminate upon the earlier of (i) the sale of Shares having an aggregate offering price of $2.5 million, (ii) the
termination of the Distribution Agreement by either Maxim or the Company upon the provision of fifteen (15) days written notice, or (iii) September 12, 2020. The Company
agrees to pay Maxim a transaction fee at a fixed rate of 4.25% of the gross sales price of shares sold under the Distribution Agreement and agreed to provide indemnification
and contribution to Maxim with respect to certain liabilities under the Securities Act and the Securities Exchange Act of 1934, as amended. During the year ended December 31,
2019, the Company raised approximately $1.5 million, net of fees, through the issuance of 527,896 shares of common stock under the Distribution Agreement with Maxim. The
Company is eligible to raise an additional $0.8 million under this offering.
9. Stock-Based Compensation
The Company recorded no outstanding stock option activity for the years ended December 31, 2019 and 2018. As of December 31, 2019 and 2018, the Company had 377
options exercisable and outstanding with a weighted average exercisable price of approximately $7,447. The weighted average remaining contractual life was 5.3 years and 6.3
years as of December 31, 2019 and 2018 respectively. The options hold no intrinsic value. Total stock-based compensation expense included in the consolidated statements of
operations was $2 thousand and $42 thousand for the years ended December 31, 2019 and 2018, respectively. There was no significant unrecognized stock-based compensation
as of December 31, 2019 and 2018.
F-21
10. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes.
The following is a reconciliation of the expected statutory federal income tax provision to the actual income tax expense:
Federal statutory rate
State taxes, net of federal benefit
Return to provision
Equity related expenses
Change in valuation allowance
Goodwill impairment
Other permanent differences
Total income tax expense
Significant components of the Company’s deferred tax assets and liabilities were as follows (in thousands):
Deferred tax assets:
Net operating loss carryforwards
Stock-based compensation
Inventory reserve
Federal R&D credit
Accrued expenses
Depreciation
Intangibles
Other
Total deferred tax assets
Deferred tax liabilities:
Depreciation
Intangibles
Total deferred tax liabilities
Less valuation allowance
Net deferred tax liability
Pre-tax book income tax at statutory rate
State taxes, net of federal benefit
Return to provision
Equity related expenses
Change in statutory rate
Change in valuation allowance
Other
Total income tax expense
December 31,
2019
2018
(21.0)%
(7.0)%
(11.2)%
(5.7)%
44.9%
0.0%
0.0%
0.0%
December 31,
2019
2018
$
48,104
2,918
-
2,222
112
27
1
-
53,384
-
-
-
(53,384)
-
$
December 31,
2019
2018
(1,007)
(336)
(538)
(274)
-
2,153
2
-
$
$
(21.0)%
(2.9)%
0.0%
(10.7)%
17.7%
14.7%
2.2%
0.0%
46,096
2,918
-
2,222
49
-
-
98
51,383
(31)
(134)
(165)
(51,352)
(134)
(1,845)
(252)
4
501
-
1,556
36
-
$
$
$
$
As of December 31, 2019 and 2018, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $192.8 million and $184.8
million, respectively. The federal and state net operating loss carryforwards will expire from 2024 to 2038, unless previously utilized. Additionally, the Company believes an
ownership change has occurred that would trigger the limitation on usage of net operating losses imposed by Internal Revenue Code section 382. Because of this limitation, a
significant portion of the net operating losses would more likely than not expire unused.
During the years ended December 31, 2019 and 2018, the Company recognized no amounts related to interest or penalties related to uncertain tax positions. The Company is
subject to taxation in the United States and various state jurisdictions. The Company currently has no years under examination by any jurisdiction.
A valuation allowance has been established as realization of such deferred tax assets has not met the more likely-than-not threshold requirement. If the Company’s judgment
changes and it is determined that the Company will be able to realize these deferred tax assets, the tax benefits relating to any reversal of the valuation allowance on deferred tax
assets will be accounted for as a reduction to income tax expense. The tax valuation allowance increased by approximately $2.2 million and $1.6 million for the years ended
December 31, 2019 and 2018, respectively.
F-22
11. Commitment and Contingencies
The Company has executed agreements with certain executive officers of the Company which, upon the occurrence of certain events related to a change in control, call for
payments to the executives up to three times their annual salary and accelerated vesting of previously granted stock options.
From time to time, the Company is subject to various claims and legal proceedings covering matters that arise in the ordinary course of its business activities. Management
believes any liability that may ultimately result from the resolution of these matters will not have a material adverse effect on the Company’s consolidated financial position,
operating results or cash flows.
12. 401(k) Plan
Effective June 1, 2004, the Company adopted a defined contribution retirement plan under Section 401(k) of the Internal Revenue Code. The plan covers substantially all
employees. Eligible employees may contribute amounts to the plan, via payroll withholdings, subject to certain limitations. The plan permits, but does not require, additional
matching contributions to the plan by the Company on behalf of the participants in the plan. The Company incurred approximately $0.1 million relating to retirement
contributions for each of the years ended December 31, 2019 and 2018.
13. Note Receivable
On October 1, 2018, the Company completed the sale of its spine business to CTL Medical. The sale included a $6 million noninterest bearing note receivable. The 36-month
term of the note receivable requires 18 payments of $138,889 followed by 18 payments of $194,444, with maturing of the note receivable on October 1, 2021. The note
receivable includes an imputed interest rate of 10%, which totaled $915,725 as of October 31, 2018, and has a 36-month amortization. As of December 31, 2019, the net
carrying value of the note receivable was $3.7 million.
F-23
14. Discontinued Operations
As explained in Note 1, on October 1, 2018, the Company completed the sale of its retail spine business to CTL Medical The gain on the sale of the retail spine business is
estimated to approximate $1.4 million, which was recognized during the year ended December 31, 2018.
The Company and CTL Medical entered in an asset purchase agreement whereby CTL Medical agreed to acquire all of the Company’s commercial spine business for total
consideration of $8.5 million, which includes a $6.0 million (including interest) note receivable (See Note 13) and CTL Medical’s assumption of the Company’s $2.5 million
related party note payable (see Note 7). As a result of the closing, CTL Medical is now the exclusive owner of the Company’s portfolio of metal and silicon nitride spine
products, which are presently sold under the brand names of Taurus, Preference, and Valeo, with access to future silicon nitride spine technologies. The Company has agreed to
pay the cost, if any, to re-sterilize and re-package select silicon nitride spinal inventories sold to CTL Medical if the sterilization date expires prior to CTL Medical selling the
inventories to a third-party customer. On October 1, 2018 the Company estimated the sterilization and repackaging cost to approximate $0.5 million. Manufacturing, R&D, and
all intellectual property related to the core, non-spine, biomaterial technology of silicon nitride remains with the Company in Salt Lake City. The Company will serve as CTL’s
exclusive OEM provider of silicon nitride products.
15. Leases
The Company leases office, warehouse and manufacturing space under a single operating lease, which lease originally expired during 2019 (see Note 1 under Accounting
Pronouncements Adopted During the year ended December 31, 2019). On June 7, 2019, the lease was amended to extend the rental period through 2024 and reduce the amount
of space leased from 54,428 square feet to 29,534 square feet. The new rent is effective January 1, 2020. The amended lease has two five-year extension options. As of
December 31, 2019, the operating lease right-of-use asset totaled approximately $2.3 million and the operating lease liability totaled approximately $2.2 million. Amortization
of right of use asset during the year ended December 31, 2019, totaled approximately $0.4 million. As of December 31, 2019, the weighted-average discount rate for the
Company’s operating lease totaled 6.5%. During the year ended December 31, 2019, the Company recorded a loss of approximately $0.1 million in association with the lease
amendment.
Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense is recognized on a straight-line basis over the term of the lease. The
Company accounts for lease components separately from the non-lease components. The depreciable life of the assets and leasehold improvements are limited by the expected
lease term.
Operating lease future minimum payments together with the present values as of December 31, 2019, are summarized as follows:
2020
2021
2022
2023
2024
Total future minimum lease payments
Less amounts representing interests
Present value of lease liability
Current-portion of operating lease liability
Long-term portion operating lease liability
16. Subsequent Events
December 31,
2019
494
509
525
540
557
2,625
(398)
2,227
360
1,867
$
$
Subsequent events have been evaluated through March 25, 2020, the date these financial statements were available to be issued.
As a result of the spread of the COVID-19 Coronavius, economic uncertainties have arisen across a range of industries. The extent of the impact of COVID-19 on the
Company’s operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customer, employees
and vendors, all of which are uncertain and cannot be predicted. As of March 24, 2020, the extent to which COVUID-19 may impact our financial condition or results of
operations is uncertain. Events occurring after that date have not been evaluated to determine whether a change in the financial statements would be required.
During February 2020, the Company closed on a rights offering capital raise wherein the Company’s holders of common stock, Series B Preferred Stock, and certain
outstanding warrants on the date of record, obtained, at no charge, non-transferable subscription rights to purchase units (“Units”). Each Unit consisted of one share of Series C
Convertible Preferred Stock (“Preferred Stock”) and 675 warrants to purchase common stock (“Warrants”). Each Unit sold for $1,000. Each share of the Preferred Stock is
convertible, at the Company’s option at any time on or after the first anniversary of the expiration of the rights offering or at the option of the holder at any time, into a number
of shares of our common stock equal to the quotient of the stated value of the Preferred Stock ($1,000) divided by the Conversion Price ($1.4814 per share). Each Warrant is
exercisable for one share of our common stock at an exercise price of $1.50 per share from the date of issuance through its expiration five years from the date of issuance. The
Warrants also contain a cashless exercise provision that allows the holder to receive 70% of the common stock otherwise available to the holder electing the $1.50 cashless
exercise provision. The Company issued 9,440 Units, which includes 6,372,000 Warrants exercisable into shares of our common stock and preferred shares that are convertible
into 6,372,350 shares of Common Stock, for gross proceeds of $9.4 million.
F-24
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE SECURITIES
EXCHANGE ACT OF 1934
EXHIBIT 4.18
SINTX Technologies, Inc. (“SINTX,” “we,” “our,” or “us”) has one class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended: our
common stock.
Authorized Shares of Capital Stock
Our Restated Certificate of Incorporation authorizes us to issue 250,000,000 shares of common stock, par value $0.01 per share, and 130,000,000 shares of preferred stock, par
value $0.01 per share. The following is a summary of the rights of our common stock and some of the provisions of our Restated Certificate of Incorporation and Restated
Bylaws, and the Delaware General Corporation Law. Because it is only a summary, it does not contain all the information that may be important to you and is subject to and
qualified in its entirety by our Restated Certificate of Incorporation and our Restated Bylaws.
Our Restated Certificate of Incorporation and our Restated Bylaws contain certain provisions that are intended to enhance the likelihood of continuity and stability in the
composition of the board of directors, which may have the effect of delaying, deferring or preventing a future takeover or change in control of the Company unless such
takeover or change in control is approved by our board of directors.
Common Stock
Holders of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders, and do not have cumulative voting
rights. Accordingly, the holders of a majority of the shares of our common stock entitled to vote can elect all of the directors standing for election. Subject to preferences that
may be applicable to any outstanding shares of preferred stock, holders of our common stock are entitled to receive ratably such dividends, if any, as may be declared from time
to time by our board of directors out of funds legally available for dividend payments. All outstanding shares of our common stock are fully paid and nonassessable. The
holders of common stock have no preferences or rights of conversion, exchange, pre- emption or other subscription rights. There are no redemption or sinking fund provisions
applicable to our common stock. In the event of any liquidation, dissolution or winding-up of our affairs, holders of our common stock will be entitled to share ratably in our
assets that are remaining after payment or provision for payment of all of our debts and obligations and after liquidation payments to holders of outstanding shares of preferred
stock, if any.
The transfer agent and registrar for our common stock is American Stock Transfer and Trust Company. The transfer agent and the registrar’s address is 59 Maiden Lane, New
York, New York 10038.
Our common stock is listed on The NASDAQ Capital Market under the symbol “SINT”.
Effects of Anti-Takeover Provisions of Our Restated Certificate of Incorporation, Our Restated Bylaws and Delaware Law
The provisions of (1) Delaware law, (2) our Restated Certificate of Incorporation and (3) our Restated Bylaws discussed below could discourage or make it more difficult to
prevail in a proxy contest or effect other change in our management or the acquisition of control by a holder of a substantial amount of our voting stock. It is possible that these
provisions could make it more difficult to accomplish, or could deter, transactions that stockholders may otherwise consider to be in their best interests or our best interests.
These provisions are intended to enhance the likelihood of continuity and stability in the composition of our board of directors and in the policies formulated by the board of
directors and to discourage certain types of transactions that may involve an actual or threatened change in control of our company. These provisions are designed to reduce our
vulnerability to an unsolicited acquisition proposal. These provisions also are intended to discourage certain tactics that may be used in proxy fights. These provisions also may
have the effect of preventing changes in our management.
Delaware Statutory Business Combinations Provision. We are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. In general,
Section 203 prohibits a publicly-held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date
of the transaction in which the person became an interested stockholder, unless the business combination is, or the transaction in which the person became an interested
stockholder was, approved in a prescribed manner or another prescribed exception applies. For purposes of Section 203, a “business combination” is defined broadly to include
a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and, subject to certain exceptions, an “interested stockholder” is a person
who, together with his or her affiliates and associates, owns (or within three years prior, did own) 15% or more of the corporation’s voting stock.
Classified Board of Directors; Appointment of Directors to Fill Vacancies; Removal of Directors for Cause. Our Restated Certificate of Incorporation provides that our board of
directors will be divided into three classes as nearly equal in number as possible. Each year the stockholders will elect the members of one of the three classes to a three-year
term of office. All directors elected to our classified board of directors will serve until the election and qualification of their respective successors or their earlier resignation or
removal. The board of directors is authorized to create new directorships and to fill any positions so created and is permitted to specify the class to which any new position is
assigned. The person filling any of these positions would serve for the term applicable to that class. The board of directors (or its remaining members, even if less than a
quorum) is also empowered to fill vacancies on the board of directors occurring for any reason for the remainder of the term of the class of directors in which the vacancy
occurred. Members of the board of directors may only be removed for cause and only by the affirmative vote of holders of at least 80% of our outstanding voting stock. These
provisions are likely to increase the time required for stockholders to change the composition of the board of directors. For example, in general, at least two annual meetings
will be necessary for stockholders to effect a change in a majority of the members of the board of directors.
Authorization of Blank Check Preferred Stock. Our Restated Certificate of Incorporation provides that our board of directors is authorized to issue, without stockholder
approval, blank check preferred stock. Blank check preferred stock can operate as a defensive measure known as a “poison pill” by diluting the stock ownership of a potential
hostile acquirer to prevent an acquisition that is not approved by our board of directors.
Advance Notice Provisions for Stockholder Proposals and Stockholder Nominations of Directors. Our Restated Bylaws provide that, for nominations to the board of directors or
for other business to be properly brought by a stockholder before a meeting of stockholders, the stockholder must first have given timely notice of the proposal in writing to our
Secretary. For an annual meeting, a stockholder’s notice generally must be delivered not less than 90 days nor more than 120 days prior to the anniversary of the mailing date
of the proxy statement for the previous year’s annual meeting. For a special meeting, the notice must generally be delivered no less than 60 days nor more than 90 days prior to
the special meeting or ten days following the day on which public announcement of the meeting is first made. Detailed requirements as to the form of the notice and information
required in the notice are specified in our Restated Bylaws. If it is determined that business was not properly brought before a meeting in accordance with our bylaw provisions,
this business will not be conducted at the meeting.
Special Meetings of Stockholders. Special meetings of the stockholders may be called only by our board of directors pursuant to a resolution adopted by a majority of the total
number of directors.
No Stockholder Action by Written Consent. Our Restated Certificate of Incorporation does not permit our stockholders to act by written consent. As a result, any action to be
affected by our stockholders must be affected at a duly called annual or special meeting of the stockholders.
Super-Majority Stockholder Vote required for Certain Actions. The Delaware General Corporation Law provides generally that the affirmative vote of a majority of the shares
entitled to vote on any matter is required to amend a corporation’s certificate of incorporation or bylaws, unless the corporation’s certificate of incorporation or bylaws, as the
case may be, requires a greater percentage. Our Restated Certificate of Incorporation requires the affirmative vote of the holders of at least 80% of our outstanding voting stock
to amend or repeal any of the provisions discussed in this section entitled “Effect of Anti-Takeover Provisions of Our Restated Certificate of Incorporation, Our Restated Bylaws
and Delaware Law” or to reduce the number of authorized shares of common stock or preferred stock. This 80% stockholder vote would be in addition to any separate class
vote that might in the future be required pursuant to the terms of any preferred stock that might then be outstanding. An 80% vote is also required for any amendment to, or
repeal of, our Restated Bylaws by the stockholders. Our Restated Bylaws may be amended or repealed by a simple majority vote of the board of directors.
Potential Effects of Authorized but Unissued Stock
We have shares of common stock and preferred stock available for future issuance without stockholder approval. We may utilize these additional shares for a variety of
corporate purposes, including future public offerings to raise additional capital, to facilitate corporate acquisitions or payment as a dividend on the capital stock.
The existence of unissued and unreserved common stock and preferred stock may enable our board of directors to issue shares to persons friendly to current management or to
issue preferred stock with terms that could render more difficult or discourage a third-party attempt to obtain control of us by means of a merger, tender offer, proxy contest or
otherwise, thereby protecting the continuity of our management. In addition, the board of directors has the discretion to determine designations, rights, preferences, privileges
and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences of each series of preferred stock, all to the fullest
extent permissible under the Delaware General Corporation Law and subject to any limitations set forth in our certificate of incorporation. The purpose of authorizing the board
of directors to issue preferred stock and to determine the rights and preferences applicable to such preferred stock is to eliminate delays associated with a stockholder vote on
specific issuances. The issuance of preferred stock, while providing desirable flexibility in connection with possible financings, acquisitions and other corporate purposes, could
have the effect of making it more difficult for a third-party to acquire, or could discourage a third-party from acquiring, a majority of our outstanding voting stock.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
SINTX Technologies, Inc. (previously known as Amedica Corporation)
Salt Lake City, Utah
We hereby consent to the incorporation by reference in Registration Statements on Form S-1 (Nos. 333-223032 and 333-234438), Form S-3 (Nos. 333-207289, 333-205545,
333-214804, and 333-230492) and Form S-8 (No. 333-194977) of SINTX Technologies, Inc. (the Company) of our report dated March 25, 2020, relating to our audit of the
financial statements, which appears in this Annual Report on Form 10-K of SINTX Technologies, Inc. for the year ended December 31, 2019.
/s/ Tanner LLC
March 25, 2020
Exhibit 31.1
I, B. Sonny Bal, certify that:
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
1. I have reviewed this annual report on Form 10-K of SINTX Technologies, Inc. (previously known as Amedica Corporation);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this
report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over
financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Date: March 25, 2020
By:
/s/ B. Sonny Bal
B. Sonny Bal
Chief Executive Officer
Exhibit 31.2
I, B. Sonny Bal, certify that:
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
1. I have reviewed this annual report on Form 10-K of SINTX Technologies, Inc. (previously known as Amedica Corporation);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this
report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over
financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Date: March 25, 2020
By:
/s/ B. Sonny Bal
B. Sonny Bal
Principal Financial Officer
CERTIFICATIONS UNDER SECTION 906
Exhibit 32
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned
officers of SINTX Technologies, Inc. (previously known as Amedica Corporation), a Delaware corporation (the “Company”), does hereby certify, to such officer’s knowledge,
that:
The Annual Report on Form 10-K for the year ended December 31, 2019 (the “Form 10-K”) of the Company fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: March 25, 2020
By:
/s/ B. Sonny Bal
B. Sonny Bal
Chief Executive Officer and Principal Financial Officer