Business context and reporting period
Filing identity: The supplied filing is Second Sight Medical Products, Inc.’s Form 10-Q for the quarter ended March 31, 2019, not a filing for Vivani Medical, Inc. The summary below reflects the filing provided.
Second Sight develops implantable visual prosthetics. Its commercial product was the Argus II retinal prosthesis; Orion, a cortical prosthesis, was in an early feasibility study at UCLA and Baylor. The company said it was shifting resources toward Orion given Argus II’s limited addressable market. Financial amounts below are in U.S. dollars; statement amounts are in millions unless otherwise noted.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $1.128 million | $0.976 million |
| Gross profit / margin | $0.397 million / 35.2% | $0.308 million / 31.6% |
| Operating expenses | $10.165 million | $10.077 million |
| Operating loss | $(9.768) million | $(9.769) million |
| Net loss | $(9.700) million | $(9.753) million |
| Net loss per share, basic and diluted | $(0.10) | $(0.17) |
| Cash used in operating activities | $7.150 million | $6.778 million |
- Cash and cash equivalents were $31.682 million at March 31, 2019, versus $4.471 million at December 31, 2018. Working capital was $27.6 million, up from $2.0 million.
- The February 2019 rights offering generated $34.4 million of net proceeds. Financing cash flow was $34.399 million; investing cash flow used $0.037 million.
- Current liabilities were $7.433 million. Operating lease liabilities totaled $2.796 million, including $0.210 million current and $2.586 million long-term. The balance sheet reports no borrowings or other debt.
- The company reported a $2.424 million non-cash inventory impairment charge related to plans to suspend Argus II production.
Material changes versus the prior comparable period
- Revenue increased 16%, although Argus II implants declined to 10 from 16. Revenue was recognized for nine units in each period; reported revenue per recognized implant rose to approximately $125,000 from $108,000.
- Gross margin improved to 35.2% from 31.6%. Operating loss was essentially unchanged, as lower spending in several functions was offset by the inventory impairment.
- Research and development expense, net of grants, declined 12% to $2.183 million; the filing cites $0.6 million of grant offsets in 2019 versus none in 2018. Clinical and regulatory expense declined 25%, selling and marketing 30%, and general and administrative 25%.
- Operating cash use increased to $7.150 million from $6.778 million. Cash rose substantially because of the rights offering, while common shares outstanding increased to 124.198 million from 76.336 million at year-end 2018.
Outlook, management commentary, risks and unusual items
- Going concern: Despite the quarter-end cash balance, management stated that available funds were insufficient to support operations for the next 12 months from issuance of the statements. Recurring losses and negative operating cash flow raise substantial doubt about the company’s ability to continue as a going concern. Additional financing may be needed and may not be available on acceptable terms.
- Strategic transition: On May 10, 2019, after quarter-end, the board approved accelerating the shift from Argus II to Orion. The company planned to suspend Argus II production, sell remaining inventory, reduce related commercial activity, and continue supporting existing users. It expected Argus II revenue to decline and forecast approximately $4.9 million of annual manufacturing-capacity costs to be reported as R&D expense in future quarters.
- Restructuring: The May plan included eliminating 21 Argus II-related positions and approximately $0.7 million of pre-tax severance and other termination costs, expected to be incurred in Q2 2019 and substantially paid over the following two quarters. Management expected selling and marketing expense to decline by about $2.3 million in 2019 and a further $2.7 million in 2020.
- Development and regulatory uncertainty: Orion had no peer-reviewed study data disclosed. The company anticipated enrolling additional feasibility subjects in 2019 and was discussing the clinical and regulatory pathway with the FDA. It estimated a potential pivotal study might require at least 30 subjects and six months of follow-up, but the design was not finalized.
- Other risks: The company received a Nasdaq notice that its share price had been below the $1.00 minimum for 30 consecutive trading days and was monitoring options to regain compliance. Argus II’s CE Mark was due to expire September 1, 2019 absent renewal; the company expected a recertification audit. It also disclosed 22 European patent opposition proceedings and cybersecurity and product-security risks.
- The February rights offering sold about 47.8 million units at $0.724 each, each comprising a share and a warrant exercisable at $1.47. Entities controlled by the chairman purchased about 41.4 million units for approximately $30 million. The filing also disclosed a two-year extension of existing March 2017 warrants.
Important facts for investors to verify
- Confirm the issuer: the filing supplied is for Second Sight Medical Products, Inc. (NASDAQ: EYES), not Vivani Medical, Inc.
- Review the company’s cash-burn outlook and financing needs against management’s explicit statement that funds were insufficient for the next 12 months.
- Track Argus II sell-through, the planned production suspension, and whether expected expense reductions offset declining revenue and the shift of manufacturing costs to R&D.
- Monitor Orion feasibility results, enrollment, FDA agreement on trial design, regulatory timing, reimbursement prospects, and the substantial costs and execution risks of development.
- Check Nasdaq bid-price compliance, CE Mark renewal, and the status and potential effect of the European patent challenges.
- Assess dilution and potential warrant overhang from the rights offering and other outstanding securities; the filing reports differing warrant counts in different sections, which should be reconciled.