Filing summary
Identity and period: The supplied filing is a Form 10-Q for the quarter ended September 30, 2016, filed by Second Sight Medical Products, Inc. It does not identify Vivani Medical, Inc.; verify that this is the intended filing. Financial statement amounts below are in U.S. dollars and, unless noted, in millions.
Business context
Second Sight develops, manufactures, and markets the Argus II retinal prosthesis for people with profound vision loss from retinitis pigmentosa. The filing describes limited commercial revenue, continuing development and clinical programs, and recurring operating losses. Its unaudited statements cover the three and nine months ended September 30, 2016, with comparisons to the same 2015 periods.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net sales | $1.180 | $2.227 | $3.270 | $6.588 |
| Gross profit (loss) | $(1.435) | $1.470 | $(3.498) | $2.966 |
| Operating expenses | $7.064 | $6.132 | $19.329 | $17.537 |
| Operating loss | $(8.499) | $(4.662) | $(22.827) | $(14.571) |
| Net loss | $(8.489) | $(4.666) | $(22.809) | $(14.545) |
| Net loss per share | $(0.20) | $(0.13) | $(0.57) | $(0.41) |
- Gross margin was negative 122% in Q3 2016 versus positive 66% a year earlier; for the first nine months it was negative 107% versus positive 45%.
- Operating cash use was $18.054 million in the first nine months of 2016, compared with $14.652 million in 2015. Investing activities used $2.226 million; financing activities provided $20.299 million, including $19.483 million of net rights-offering proceeds.
- At September 30, cash was $0.277 million and money market funds were $17.546 million, totaling $17.823 million. Working capital was $19.017 million. Current liabilities were $5.666 million and total assets were $26.265 million.
- The balance sheet reports no debt line; the filing does not provide a separate debt total. Common shares outstanding were 42.247 million at September 30, versus 35.942 million at December 31, 2015; the June rights offering issued 5.978 million shares.
Material changes and operating drivers
- Q3 sales fell 47% year over year; nine-month sales fell 50%. Nine-month implants declined to 35 from 54, and recognized revenue per implant fell to about $93,000 from $122,000. In Q3, 14 systems were implanted versus 15; revenue per implant was $84,000 versus $148,000.
- Cost of sales rose sharply, producing gross losses. Management attributed the nine-month increase to a $2.6 million excess-inventory reserve and $2.1 million of unabsorbed manufacturing overhead. Q3 cost of sales also included about $1.0 million of additional excess-inventory reserves and about $0.7 million of unabsorbed overhead. Net inventory fell to $5.810 million from $8.209 million.
- Nine-month R&D expense, net of grants, increased 31% to $3.266 million, while clinical and regulatory expense decreased 23% to $1.955 million. Selling and marketing was nearly flat at $6.473 million; general and administrative expense rose 26% to $7.635 million, principally due to personnel and stock-based compensation.
Outlook, risks, and contingencies
- Funding: Management said the June 2016 rights offering raised $19.5 million net and expected available funds to last through the end of Q2 2017. The company anticipated needing additional debt or equity financing in the following months; it gave no assurance financing would be available on acceptable terms or at all. The 2015 auditor’s report had raised substantial doubt about the company’s ability to continue as a going concern.
- Revenue and reimbursement: Management expected 2016 revenue per implant of approximately $80,000–$90,000 under temporary U.S. discounts, and approximately $100,000–$120,000 in 2017, depending on geographic mix. CMS set a 2016 hospital outpatient payment rate of $95,000 and finalized a 2017 rate of $150,000 for the system and implantation procedure. Coverage remained limited and payer-dependent; five of 12 Medicare Administrative Contractors had positive coverage decisions as of September 30, 2016.
- Products and spending: Management planned further Argus II software and hardware enhancements, subject to testing and regulatory approval; it also described an AMD pilot study and preclinical development of the Orion I cortical prosthesis. Timing, costs, clinical success, and approvals were uncertain. Management expected R&D and clinical/regulatory costs to increase and grant offsets to decrease in 2017.
- Operations and competition: Management reduced production and manufacturing staffing amid lower demand, and warned that further slow-moving inventory reserves might be required if volumes or forecasts weaken. The company cited potential competitors and patient deferrals in Europe, as well as reliance on sole-source suppliers for certain components.
- Controls: Management concluded disclosure controls were not effective as of September 30, 2016, due to material weaknesses in financial reporting and backup-prosthesis tracking. Remediation was underway but incomplete.
- Legal: A third party filed 15 European Patent Office oppositions challenging company patents. Management said successful challenges could affect its ability to block competitors, but did not expect a material effect on operations. Other ordinary-course litigation was not expected to be material.
Most important facts to verify
- Confirm the issuer: this text is a Second Sight Medical Products, Inc. filing, not a Vivani Medical, Inc. filing.
- Confirm the company’s financing runway and whether it obtained additional capital after the stated expectation of funds through Q2 2017.
- Track implant volumes, revenue per implant, payer coverage, and realized reimbursement against management’s 2016 and 2017 estimates.
- Assess whether inventory reserves and manufacturing under-absorption continued, and whether gross margins improved.
- Review remediation of material weaknesses and the outcomes of the European patent challenges.