Business context and reporting period
The supplied filing is Second Sight Medical Products, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2016—not a Vivani Medical, Inc. filing. Second Sight develops and sells the Argus II retinal prosthesis for people with profound vision loss from outer retinal degeneration. Amounts below are in thousands of dollars unless noted.
Financial performance and liquidity
- Revenue: Q2 2016 net sales were $1,037, down 61% from $2,661 in Q2 2015. First-half sales were $2,090, down 52% from $4,361. Implants fell to 11 for the quarter from 20, and to 21 for the half-year from 39.
- Profit and margins: Q2 gross loss was $2,204 (gross margin −213%), versus gross profit of $1,092 (41%) a year earlier. First-half gross loss was $2,063 (−99%), versus gross profit of $1,496 (34%). Net loss was $8,504 for Q2 and $14,320 for the first half, compared with $4,922 and $9,879, respectively, in 2015. First-half diluted loss per share was $0.39, versus $0.28.
- Costs: Q2 operating expenses were $6,303, up from $6,039; first-half expenses were $12,265, up from $11,404. First-half R&D, net of grants, fell 11% to $1,678, while G&A rose 38% to $5,030. Cost of sales included an approximately $1.5 million increase in excess-inventory reserves and unabsorbed manufacturing costs.
- Cash flow: First-half operating cash use was $12,107, compared with $9,893 in 2015. Investing activities used $8,263, including $7,968 invested in money market funds; financing provided $20,299, principally from the rights offering.
- Liquidity and capital: Cash and money market funds totaled $23,875 at June 30, 2016, versus $15,960 at year-end 2015; working capital was $26,513, up from $18,782. The June rights offering generated $19,483 net cash proceeds and issued 5,978,465 shares. Management said available resources should fund operations for at least 12 months. No debt balance is listed in the presented balance sheet.
Material changes and outlook
- Management attributed lower sales to fewer implants and lower revenue per implant, including reduced Medicare reimbursement and temporary U.S. discounts. Q2 revenue recognized per implant was approximately $94,000, versus $133,000 a year earlier.
- Management expected 2016 revenue per implant of approximately $80,000–$90,000 under temporary discounts, and projected $100,000–$120,000 for 2017 depending on geographic mix, based on a proposed—not final—2017 Medicare outpatient payment rate of approximately $150,000. The 2016 rate was $95,000.
- The company reduced production, increased reserves for slow-moving inventory, and laid off six direct manufacturing employees. It reported that lower output increased unit costs and unabsorbed overhead. Management expected future operating losses and negative operating cash flows for at least the next few years and aimed to grow revenue toward operating and cash-flow break-even, with no assurance of success.
- Plans included new Argus II software already introduced in the first half of 2016 and new eyewear and a more powerful video processing unit targeted for early 2017, subject to testing and regulatory approvals. The company was evaluating a larger AMD study after a five-patient pilot and planned to apply to the FDA for an Orion I cortical prosthesis feasibility study around late 2016; timing, cost, development, and approval were uncertain.
Risks, contingencies, and notable disclosures
- The auditor’s 2015 report had raised substantial doubt about the company’s ability to continue as a going concern. The rights offering led management to conclude it had at least 12 months of funding, but the company remained loss-making and cash-consuming.
- Disclosure controls were deemed ineffective as of June 30, 2016, in light of material weaknesses in financial reporting and tracking of backup prosthesis units. Remediation was underway but incomplete.
- Sales depended on reimbursement and were exposed to payer decisions, customer concentration, and competition. Five of 12 Medicare Administrative Contractors had made positive coverage decisions. Ontario’s health technology committee recommended against public funding, and an AHRQ draft assessment found evidence insufficient to estimate patient benefit; the final report’s impact was uncertain.
- Several Argus II components or services had sole-source suppliers. Fourteen European patent oppositions challenged company patents; management did not expect successful challenges to materially affect operations, but outcomes were uncertain.
- Other notable items included the $1.5 million inventory reserve increase, $191,000 bad-debt expense, and foreign-exchange exposure. The company reported no off-balance-sheet arrangements.
Key facts for investors to verify
- Confirm the issuer identity: the source filing names Second Sight Medical Products, Inc., while the request metadata names Vivani Medical, Inc.
- Review implant volumes, reimbursement coverage and realized revenue per implant, including whether the proposed 2017 Medicare rate became final and affected sales.
- Assess cash burn, remaining liquidity, and the timing and terms of any future financing needs.
- Track inventory reserves, production levels, and whether gross margins recover as volumes change.
- Monitor remediation of material weaknesses and any subsequent conclusion on internal-control effectiveness.
- Check developments in AMD and Orion I studies, regulatory approvals, competition, supplier continuity, and European patent challenges.