Business context and reporting period
Entity mismatch: The supplied filing is Second Sight Medical Products, Inc.’s Form 10-K for the fiscal year ended December 31, 2017, not a filing for Vivani Medical, Inc. The summary below describes the filing provided. It reports annual results; fourth-quarter figures are also disclosed.
Second Sight develops and sells the Argus II retinal prosthesis for certain patients with profound vision loss, principally from retinitis pigmentosa, and is developing the Orion cortical visual prosthesis. Argus II was FDA-approved and the company’s only commercial product. The filing describes Orion as investigational, not approved for sale.
Financial results and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $8.0 million | $4.0 million |
| Gross profit (loss) | $2.8 million; 36% reported gross margin | $(6.1) million; (153%) reported gross margin |
| Operating expenses | $31.5 million | $27.1 million |
| Operating loss | $(28.6) million | $(33.2) million |
| Net loss | $(28.5) million; $(0.53) per share | $(33.2) million; $(0.84) per share |
| Cash used in operating activities | $(23.9) million | $(25.1) million |
FY 2017 net sales nearly doubled as implants increased to 75 from 42 and recognized revenue per implant rose to approximately $106,000 from $95,000. The gross-margin improvement included a $3.1 million inventory-reserve reversal; cost of sales also included $2.8 million of unabsorbed overhead. Excluding inventory-reserve changes and unabsorbed overhead, management reported adjusted gross margins of 32% for 2017 and 35% for 2016.
Fourth-quarter 2017 sales were $3.1 million, gross profit was $1.2 million, operating loss was $7.4 million and net loss was $7.4 million. The filing provides no standalone fourth-quarter cash-flow figure.
At year-end, cash was $0.6 million and money-market funds were $7.2 million; working capital was $6.6 million, total assets were $14.5 million and stockholders’ equity was $7.9 million. Current liabilities were $6.6 million. The balance sheet lists no outstanding borrowings; the filing does not present a separate debt balance. Accumulated deficit was $234.4 million.
The company used $23.9 million of operating cash in 2017 and raised $21.2 million from financing activities, primarily the March 2017 rights offering ($19.7 million net) and ATM share sales ($1.1 million net). It sold a further 2.2 million shares through the ATM in January–February 2018 for approximately $4.0 million net.
Material changes versus the prior comparable period
- Sales rose by $4.0 million (100%) from 2016, while implant volume increased by 33 units. North American implants increased to 38 from 12; Europe and Middle East volume remained at 30.
- Gross result swung from a $6.1 million loss to $2.8 million profit, materially helped by the inventory-reserve reversal. Operating expenses rose $4.3 million, including higher R&D, clinical and regulatory, selling and marketing, and general and administrative costs.
- Net loss narrowed by $4.7 million, but the company continued to incur substantial losses and negative operating cash flow.
- Year-end cash and money-market funds together declined to $7.8 million from $10.9 million; working capital fell to $6.6 million from $9.6 million. The company’s 2017 equity offerings increased shares outstanding.
Outlook, risks and unusual items
- Going concern and funding: Management and the auditor expressed substantial doubt about the company’s ability to continue as a going concern. Management said available funds were expected to support operations only through the end of the second quarter of 2018, absent additional financing. The auditor noted there were no committed sources of capital. Additional equity or debt financing might not be available on acceptable terms or at all.
- Management outlook: For 2018, management expected average recognized revenue per implant of approximately $95,000–$105,000, despite a lower U.S. CMS payment rate of $122,500. It expected expenses to rise as it advanced Orion and Argus II development and clinical work. These are expectations, not assurances.
- Development milestones: The FDA granted Orion Expedited Access Pathway designation in November 2017. The first human Orion implant, activation and testing occurred in early 2018; management planned additional feasibility-study implants and hoped to use results to support a pivotal trial. Argus II enhancements, better-vision patient studies and redesigned external hardware were also planned. Timelines and clinical outcomes remain uncertain.
- Reimbursement and demand: Medicare coverage applied in eight of 12 jurisdictions. Coverage and payment differ among payers and regions; France’s funding program covered up to 36 implants, while NHS England’s evaluation program covered 10. Continued funding and expanded coverage were not assured.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2017 because key controls were not fully documented and tested. The auditor reported it did not identify material weaknesses in its 2017 audit, but did not audit or opine on internal-control effectiveness.
- Other risks and unusual items: Sole-source suppliers, manufacturing yields and scale, product liability, regulatory approval, and patent challenges could affect operations. Twenty-one European patent oppositions were disclosed. A 2017 ownership change under Section 382 limits use of tax-loss carryforwards; the company estimated substantial federal and state losses could expire unused. The 2017 gross-margin result was affected by the inventory-reserve reversal noted above.
Most important facts for investors to verify
- Confirm the issuer identity: this filing is for Second Sight Medical Products, Inc., not Vivani Medical, Inc.
- Review the auditor’s going-concern paragraph and determine whether financing was secured after the filing; the disclosed cash runway was only through Q2 2018.
- Assess the quality and repeatability of the 2017 gross-margin improvement, particularly the inventory-reserve reversal and unabsorbed overhead.
- Verify subsequent operating cash burn, sales, implant volume, reimbursement coverage and any further share issuance or dilution.
- Track Orion and Argus II clinical, regulatory and commercialization milestones, and the status of material patent oppositions and internal-control remediation.