Mike Houston - VP of Commercialization Sonny Bal - Chairman, CEO and President Ty Lombardi - CFO.

Jeff Cohen - Ladenburg Thalmann Anita Dushyanth - Zacks Investment Research.

Good day, ladies and gentlemen, and welcome to the Second Quarter 2016 Amedica Corporation Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Mr. Mike Houston, Vice President of Commercialization. Mike, you may begin..

Thank you, David, and good afternoon. Welcome to Amedica Corporation Second Quarter 2016 Earnings Conference Call. On the call with me today are Dr. Sonny Bal, Chairman and Chief Executive Officer, and Ty Lombardi, Chief Financial Officer.

By now, everyone should have access to the earnings release for the period ended June 30, 2016 that went out earlier this afternoon. If you have not received the release, it's available on the Amedica Web-site at www.amedica.com. This call is being Webcast and a replay will be available on the Company's Web-site.

I would like to remind you that certain items that may be discussed in today's call are not based entirely on historical facts. These items should be considered forward-looking statements and are subject to many risks, uncertainties and other factors that are difficult to predict and may affect our businesses and operations.

As a result, our actual results may differ materially and adversely from those expressed or implied by our forward-looking statements. A discussion of some of these risks, uncertainties and other factors are set forth in our SEC filings.

We undertake no obligation and do not intend to update any forward-looking statement as a result of new information or future events or circumstances arising after the date on which it was made. With that, I'd now like to turn the call over to Dr. Sonny Bal. Dr.

Bal?.

Thank you, Mike, and good afternoon to everyone. I will update recent developments and review our outlook and strategy for the balance of 2016. Afterwards, we will provide details on the quarterly financial results. First and foremost, our financial position is so much better today than even the recent past.

We successfully closed on a $12.7 million public offering. As of July 2016, the Company has enough cash and has reduced our debt obligations by $14.3 million over the last 12 months, with term debt now less than $10 million.

That's a meaningful and significant departure from the past when debt was more than twice as high and toxic financing was a serious concern on our balance sheet. Things look much healthier now, and importantly, we were also able to decrease operating cash burn year-to-date by 55%.

So we can now face the challenges ahead from a stronger and healthier financial position. Second important point, you will remember that the Company had almost no clinical or scientific data even a year ago. This was a huge limitation and a serious risk for a company claiming to have a new and disruptive material for the orthopedic implant market.

Recall, the key goal for us was to confirm, affirm our data that silicon nitride was truly as good as we thought it would be. On that front, Amedica has exceeded all goals and expectations. In the last 18 months alone, we had 34 published peer-reviewed articles in the top tier journals worldwide.

Select clinical articles that are coming out, a number of that, most if not all academic departments would have a hard time matching. All of these data testify to the strength, durability and stability of our material, including many other advantages compared to existing biomaterials being sold on the market today.

Importantly, we learned the molecular mechanisms behind the antimicrobial properties of silicon nitride and why it leads to superior bone healing in much more detail than is known for any other biomaterial in our estimation.

Earlier this year, with the strong scientific data behind us, we made a pivot towards placing a stronger emphasis on collecting and publishing our existing clinical data. It was important to get it out in front of clinicians who actually use the implants.

Just like with the basic science, that effort phased off to a very promising start with several clinical papers in the pipeline, some already accepted for publication, and efforts that will continue for the rest of the year.

Another important discovery in the past year was that silicon nitride is not a one-dimensional material like PEEK or titanium or anything else.

It's what engineers call a [tactile] [ph] material in which we can modulate, manipulate change and engineer the surface chemistry to specifically optimize the material for distinct biological applications such as bone healing versus orthopedic bearings.

This promises that the material will have a great future and that it is truly cross platform in its nature, as we continue to uncover its full potential. As an example, there is an improved version of the material we've been experimenting with, we call it second generation for now, and it's ready for large animal testing.

All evidence so far shows an incredibly marked increase in bone formation when compared to our existing silicon nitride. How good is the material, our existing silicon nitride that is? We have sold over 30,000 implants between lumbar and cervical fusion devices with a solid eight year track record and zero failures related to the implant or material.

Several of our papers now attest to the antimicrobial properties of silicon nitride. Now that's a property just a couple of years ago may have been of theoretical or scientific interest, today it's a very relevant and practical advantage in a cost-conscious quality and safety emphasizing healthcare environment.

Also the silicon nitride composite device that was part of our CASCADE clinical trial from Europe showed that bone-graft could be eliminated entirely from spinal fusion surgery, because the material fuses bone by itself. Those study results were submitted with the FDA and we are still in dialog with them.

As you may know, the FDA had questions about the outcomes at earlier time points, all of which we answered in June with statistical proof to support each one of our answers.

Very recently we were granted an extension from the FDA to provide more time to determine proper indications and labeling of the composite product that is already being sold in Europe. I cannot give a precise timeline for FDA clearance nor our operating assurances, but so far our interactions with the FDA are encouraging and collegial and ongoing.

The scientific paper attesting to the data from the clinical trial is finalized. It will be submitted for publication this month. And that data has been presented at various peer-meetings already with considerable surgeon interest.

There was a second clinical trial from Europe called the SNAP trial which compared silicon nitride lumbar spaces to PEEK in spinal fusion. Those preliminary 12-month results are equally encouraging as in the cervical spine and in favor of silicon nitride.

We will publish those results this year and the final results will be at the 24-month time point next year, at which time we'll update with a second manuscript.

Also of clinical interest is a recent paper that's in peer review that we submitted, compared our material to PEEK and titanium spinal fusion implants, specifically asking if material thickness has any impact of subsidence risk.

This topic has been reported in the past by independent biomaterial experts and I mentioned it because some surgeons and sales agents influenced by PEEK marketing efforts believe that thick materials like ceramics are more likely to subside into the vertebral bone.

We now have additional proof through robust scientific inquiry that that is simply not the case. Science publications and clinical papers are absolutely critical in a market, given a very sophisticated audience that demands data and relies on it. Our market is driven by quality data.

Going forward, while we will continue to investigate the material, it is safe to say that our science and investigative strategy has been very productive and we have enough momentum now to ensure a continued start of the output and visibility in professional forums.

We spoke previously of manufacturing improvements, specifically 3D printing of silicon nitride.

Now while there is work to be done before we can commercialize 3D printed silicon nitride, the fact is that our particular material composition has been 3D printed by [across the skull] [ph] robocasting and that scientific paper is ready and in final edits for submission this month to a peer journal.

The bottom line is, when it comes to understanding and developing and working with this complex advanced ceramic, Amedica has a strong leading position.

3D printing of silicon nitride can change the manufacturing cost dramatically, particularly when it comes to the porous implant, which was the subject of the CASCADE trial from Europe that I talked about. Going forward from this point on, I see two challenges in front of the Company.

One, the Company must become more efficient and work harder to reduce the operational cash burn, and eventually eliminate it. Two, our efforts must be directed now, all efforts, at increasing retail sales now that we have the scientific and clinical data necessary to drive sales.

We are now in a position to increase surgeon awareness and increase our revenue. So taking the first point about cash burn, we know we can do it because we've already done it, but we need to do more, especially if we are to make our money last and grow the business while we revamp our sales.

Many of our projects have timelines that are imprecise and there are many, many such projects in the pipeline. Now while that's encouraging, the Company needs to be prudent in its uses of cash, focusing on opportunities that drive near-term sales. And that's exactly what our strategy will be for the upcoming several quarters.

We have professional teams on the ground right now examining all of our projects and costs and I'm anxiously awaiting the results of their work and recommendations, which we will act upon. I'm confident we will be able to further decrease our operating expenses while maintaining a focus on growing our retail sales.

This will be an accomplishment compared to what we were even a year ago. There is no substitute for fiscal discipline. About our sales, we have a much broader product line now and it's complete with modern instrumentation and proven clinical efficacy.

With 30,000 implants sold and eight-year solid track history and a solid portfolio of clinical data and science data, we can now focus on growing our retail sales.

And our sales were down recently because while we executed on a number of fundamental foundational issues that I talked about, particularly data, we anticipated sales uncertainty for several reasons. One, two years ago, our metal implant system that drives silicon nitride sales was antiquated.

It was difficult to sell an advanced bioceramic with an obsolete metal system. We invested in a major upgrade on the new pedicle screw system, which has been accepted enthusiastically by new surgeons. While they examine it, it will be rolled out this fall.

Two, our sales were concentrated in two huge geographic locations with too few surgeons accounting for the majority of sales. As those surgeons would take a vacation or retire or slow down, our sales went down.

Three, our sales model was outdated relying on legacy personal friendships and relationships to sell an advanced bioceramic with almost no clinical data to drive sales two years ago. Now we are engaged in a major revitalization of our sales strategy.

First, we are bringing in new sales management at all levels, and all of them with extensive spine experience. This new team is already bringing us additional area distributors, increasing the number of field representatives and in turn new surgeons.

We have data-driven horsepower now to drive a sales team and a sales model that is relevant in today's world where we are very competitive rather than the relationship-driven sales model that is fading fast from the industry.

Specifically, since April of this year, not long ago, we have added three additional regional sales directors, two of whom were hired just in July. We have added 18 distributors year-to-date, 12 of which were hired in the past 45 days, and we have several additional new distributor agreements pending signatures.

This is a work-in-progress as we bring new distributors and their surgeons onboard while helping them through the hospital and regulatory approval process. From these new sales professionals and distributors, we anticipate new sales and gains beginning to materialize in the fourth quarter of this year and into next year.

I have all the confidence in our products and science. I have no doubt that it can achieve sales success with this major new strategy in a data-driven world. Importantly, we will trim up the Company and exercise every cost component that does not drive sales, whether OEM or retail.

My role as CEO will be to work closely with our sales team and be directly involved in selling and in teaching surgeons about the exciting material that we understand better than any other biomaterial in existence. I am comfortable and very familiar with our sophisticated customer audience, namely surgeons.

The changes to our sales organization began in earnest this quarter and they will be substantially completed by the end of next quarter. The goal is to come to growth, predictability, stability, and a growing curve in our sales results.

Surgeons are finally gaining understanding of our material, they are curious about it, they are expressing genuine interest. In a market that remains very underpenetrated with our material, we're very optimistic about our future.

We'll continue with the strategy of expanding OEM partnerships, which we talked about, that are foundationally important to a long-term business strategy. As the efforts to develop OEM business continue, the addition of a new focused sales leadership will allow our emphasis on growing revenue by driving primary Amedica spine sales, as I mentioned.

And the reason is OEM partners take time to test and validate our material, whether for medical or nonmedical applications, such that the timeline of revenue generation from those efforts cannot be firmly predicted. As an example, we now have one additional OEM partner keen on using our silicon nitride for dental applications.

That development came on the heels of a landmark paper that we published at a very high impact forum showing not just how but why silicon nitride is effective against bacteria that cause gingivitis or gum disease.

Similarly, we have several companies working with our material for testing in total hips, cartilage articulation, hemi-arthroplasty, bioactive coatings, metal bracing and much more.

Now, exciting as these projects are and even as the material grow beyond medicine to electrical and aerospace industries and others, we are of the opinion that spine implant sales must be our primary focus going forward. Among the pipeline projects, for example, we continue to work with Weigao Orthopedic, the largest orthopedic company in China.

This strategic partnership was announced earlier and it will allow us to increase our global sales footprint with a large scale distribution partner in a big country. With hundreds of devices cleared by the Chinese FDA, we believe Weigao will be a strong choice for Chinese partnership.

We are currently in the phase of completing biomechanical testing of a spinal fusion implant for the Chinese FDA. Likewise, we are working with a major orthopedic company in Japan to help get our material approved by the Japanese Pharmaceuticals and Medical Devices Agency, the equivalent of our FDA.

We recently submitted our extensive body of data, both clinical and scientific, to the Japan FDA through our Japanese partners to gain clearance into that market where surgeons are very well aware of silicon nitride and eager to use it in their spinal surgeries.

So to summarize, the two goals ahead of us are to address the operational cash burn rate and to put additional emphasis on resources toward growing spine sales. These are immediate goals, these are important goals before the Company.

The other projects, scientific or otherwise, with or without partners, in or out of the medical field, in or outside the United States, exciting and promising as they truly are, can safely be reprioritized since the foundational work is done, the investments made, and the rest takes time for a variety of reasons.

Our focus must be on running a company with fiscal discipline and selling the breadth of products that we already have and whose advantages are now well-established by our data. With that being said, I'll turn over the call to Ty Lombardi, who will discuss the financial results.

Ty?.

Thank you, Dr. Bal, and welcome everyone as I discuss in greater detail our second quarter financial results for 2016.

Our second quarter total revenue was $4 million, a decrease of $800,000 from the second quarter of 2015, primarily driven by lower private label sales during the quarter and weaker than expected commercial sales in a key geographic area during the implementation of the Company's commercial sales expansion strategy.

We expect this plan will be substantially completed during the third quarter with benefits expected to be realized during the fourth quarter of 2016 and into 2017. The decrease in revenue for the second quarter of 2016 was also attributable in part to continued market pricing pressure and hospital vendor consolidation.

Silicon nitride sales decreased by $500,000 as compared to the same period in 2015. This decrease is in part due to the timing of initial private-label orders last year which were sizable as compared to the replenishment orders received this quarter.

As we bring on additional private-label and OEM partners, we anticipate this type of activity with larger initial orders to fill inventory bank, then more moderate replenishment orders to maintain proper inventory levels.

International revenue increased $0.1 million during the three months ended June 30, 2016, as compared to the same period last year, primarily as a result of increased sales of our silicon nitride products in Brazil and Europe. Our cost of revenue decreased $0.3 million or 25% as compared to the same period in 2015.

The decrease in cost of revenue was primarily a result of the change in sales during 2016 as compared to the same period in 2015. Excluding the impact of the provision for excess and obsolete inventory, our gross profit as a percentage of product revenue increased by 5 points to 83%, as compared to 78% during the prior year period.

The increase in gross margins is primarily attributable to lower private label sales during the quarter and the moratorium on the medical device excise tax. Research and development expenses for the quarter were unchanged as compared to the same period in 2015.

Personnel related expenses decreased $0.1 million but were offset by an increase of $0.1 million in consulting and clinical related expenses. General and administrative expenses also remained substantially unchanged as compared to the same period in 2015.

Personnel related expenses decreased $0.1 million but were offset by a corresponding increase in legal related expenses. Sales and marketing expenses decreased $0.5 million or 17% as compared to the same period in 2015.

This decrease was primarily attributable to a $0.1 million decrease in personnel related expenses and a decrease of $0.4 million in commissions due to lower commercial sales. Operating expenses decreased $0.5 million or 8% as compared to the same period in 2015. This decrease was primarily due to the items mentioned previously.

Net loss for the second quarter of 2016 was $5.1 million, compared to $5.9 million in the prior year period, primarily as a result of improved gross profit and decreases in operating costs and other expenses during the quarter.

Adjusted EBITDA, which is defined as earnings before deductions for interest, taxes, depreciation, amortization, non-cash stock compensation expense, change in fair value of derivative liabilities, offering costs, loss on extinguishment of derivative liabilities and loss on extinguishment of debt, for the second quarter 2016 was a loss of $1.9 million, compared to a loss of $2.0 million for the second quarter 2015.

Cash and cash equivalents totaled $5.2 million as of June 30, 2016. Operating cash burn decreased to $2.4 million for the six months ended June 30, 2016, as compared to $5.3 million the prior year period or 55%. We expect our operating cash burn for 2016 to decrease by 30% to 40% year-over-year.

Total principal debt obligations were $12.1 million as of June 30, 2016, a decrease of $12.2 million from June 30, 2015.

Shortly after the close of the second quarter, we completed a $12.7 million public offering, including a full exercise of the underwriters' over-allotment option, which allowed us to fully extinguish the outstanding debt balances to Magna and Riverside, leaving Hercules as our sole debtholder, and our principal balance is now under $9.5 million and continues to decrease each month.

Our cash balance now exceeds our debt balance, which hasn't been the case for a long time.

Additionally, I think it's important to emphasize that the conversion price of the preferred stock issued in the transaction as well as the exercise price of the warrants are fixed price and do not contain any variable pricing features or any price-based anti-dilutive features. Furthermore, the warrants are for-cash warrants.

Of the 7,392 convertible preferred stock issued and paid for in the public offering, 5,018 have been converted into approximately 5 million shares of common stock. We currently have approximately 23.6 million shares of common stock outstanding as of today.

These financial improvements speak to the wonderful job our teams have done in reducing operating expenses and properly managing cash levels to date. This quarter marked another important step toward reducing the uncertainty associated with our capitalization structure.

To reduce our debt from $24.3 million in July 2015 to less than $9.5 million within one year and getting to maintain a positive position of certainty in our capitalization table is a testament to the focus we place on improving our financial certainty. We are confident in our ability to continue improving our balance sheet and income statement.

Given all that we have been able to accomplish in such a short period of time, I'm extremely optimistic for what the future holds. And although we have a good portion of the heavy-lifting behind us, we remain focused on continuing down this positive trajectory to reduce total cash burn, grow sales and achieve operational cash flow breakeven.

Thank you.

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

[Operator Instructions] Our first question is from Jeff Cohen from Ladenburg Thalmann..

Just a few for you.

So firstly, could you talk about the porous structure and what it's doing currently in Europe and any other geographies where it's commercial?.

So we do sell it, it is available for sale in Europe. However, we don't have a significant distribution channel outside of the U.S. And so we have some limited distributors who do sell the product in Europe, but it's on a very limited basis at this point in time..

Got it, okay.

Could you talk about the SNAP trial a little bit, is that available to view as far as some of the endpoints and what was the size and when should we see data in the public domain?.

This is Sonny. The SNAP trial compared to – it's a randomized clinical trial, which is the gold standard. It compares silicon nitride to PEEK, specifically in lumbar spine fusion, which is relevant not just in the U.S. [if you sell] [ph] lumbar spine spaces, but more importantly in Japan where lumbar fusion is much more common than cervical fusion.

As with any clinical trial, the number of participants, in this case 100, was based on a rigorous pre-study power analysis and randomization. We looked at the 12-month data specifically recently to make sure that patient follow-up was appropriate and that the results were meaningful. And preliminarily, they look excellent.

In terms of writing them up and be available for publication, i.e., public release, including the endpoints, which are radiographic and clinical, we will submit something by the end of the year..

Okay, so we'll see in the public domain end of the year.

And then lastly, can you give us a little more color if you're able to as far as the dialog with the FDA as far as the porous structure, and you said you got a recent extension, and what does that look like as far as timeframe and how do you expect this to go forward?.

Not much more than we provided. I'm in the midst of it. We answered every one of the questions that the FDA had, and previous calls made it clear. The eventual two year outcome is not in question. It's three months, six months, 12 months, and the statistical noise, so to speak, related to such.

And we answered that qualitatively and we answered that quantitatively with statistical analysis and proof of evidence explaining the data. The FDA doesn't have more questions at this point. We are working our way through labeling and indications for the product, though that dialog is ongoing.

In terms of when the FDA could approve us, it's impossible to say. It's a priority for the Company, so we are not delaying anything at our end in terms of submission. Certainly the conversation with them has been collegial and amicable and hoping for the best..

Okay.

So, [indiscernible] you said they had no more questions, would that lead you or us to believe that you are still along the pathway for approval?.

That's my hope. No new questions came back. Like I said, I was very confident about the submission we made. We had answered every question qualitatively and quantitatively, mathematically, statistically, and analyzed the world's data on fusion and attested 700 pages of supporting documents.

I don't think we can go further into quantitative detail and analysis than what the FDA has..

Okay.

And is there a definitive end date on the extension?.

It's 180 days. We received approval just recently. So we've got time. But we're not going to need all that time because we're working quickly on this..

So not approval, we just got that back, that extension just recently..

Yes, okay.

So you'll have your next set of data or information back to the FDA certainly within the timeframe?.

Yes, that's an ongoing dialog and there is no new data I want to emphasize and no new analysis asked for it, just an ongoing dialog on some specific points that we are talking about..

Okay, perfect. That does it for me. Thanks for taking the questions..

Our next question is from Anita Dushyanth with Zacks Investment Research..

My first question would be, you did sign a distribution agreement with Weigao in China and would you be requiring any trials for getting the CFDA clearance, do you have any light on that?.

We hope not, and I think the same answer goes for the Japanese FDA. And the reason is that we have clinical data. We have – this is not a new material in human.

This is 30,000 implants; eight-year follow-ups; zero implant related; zero material related failures; soon to be published CASCADE data, randomized Level 1 evidence clinical trial, that's about the gold test for an implant's performance; the SNAP trial 12 month data to be published this year; we submitted all of our registry data; we have retrospective studies that have been presented, that are in publication; we have isolated case reports.

That's a lot of clinical data. So hopefully the Chinese FDA is satisfied with that, combined with some 35 basic biomaterial papers through the top institutions and the top peer-reviewed journals. Hopefully, they don't need even more data than that..

And we are in the process of putting those applications together with Weigao, and also like Sonny mentioned earlier, with a company in Japan as well. So we are hopeful that as those get submitted to the various regulatory agencies, that they will come back, that there is no clinical trial needed.

However, at this time we don't know for sure how that will play out..

Okay. And my next question would be regarding the dental applications of silicon nitride.

So what would be like the applications that you are looking for using this and who will be the target audience and which regions are you planning to sell those initially?.

That's a pipeline project, but I'll give you the high-level details. Since we published the findings that silicon nitride is lethal for oral bacteria, particularly a really bad actor, feeds and develops, that causes gum disease, and our molecular evidence shows the bacteria actually hacks cells in your gums and converts them into some nasty actors.

So there's been a lot of interest from the dental market, which uses the titanium and zirconium ceramics in dental implants, and that's the market we are targeting. Our manufacturing and our precision allows us to get through very fine threads and very fine implants. And in terms of strength, we're the toughest.

We're the strongest in terms of bone in-growth. That's why we've proven the antimicrobial activity. We're the only ones out there. So it's almost a perfect implant for dental applications. But having said that, that's a pipeline product, that's what we're working on and very confident about it..

Okay, thank you. That's it for me..

Ladies and gentlemen, we have reached the end of the question-and-answer session. I'd like to turn the call back to Dr. Bal for closing remarks..

Sure. Thanks everyone who participated on the call and a special thank you to our loyal shareholders.

We've been through a lot together in the last two years and with the recent improvements in our sales team and additions and a proven balance sheet and particularly robust data, I think we are uniquely positioned for the second half of this year and beyond. We'll look forward to providing another update next quarter.

Thank you everyone for your continued support..

Thank you. This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time..