Vivani Medical, Inc. annual report, FY2019

Business context and reporting period

Filing identity: The supplied filing is Second Sight Medical Products, Inc.’s Form 10-K for the fiscal year ended December 31, 2019, filed March 19, 2020—not a Vivani Medical filing. Second Sight traded as EYES. The filing reports annual results and includes unaudited fourth-quarter data.

Second Sight’s commercial product was the Argus II retinal prosthesis; its main development program was Orion, a cortical prosthesis intended to address a broader range of blindness causes. In May 2019, the company accelerated its shift toward Orion, suspended Argus II production, and limited future Argus II sales to finished units and inventory on hand.

Financial and operating metrics

Amounts below are in millions of dollars, except per-share data and percentages. Debt is not reported as a separate borrowing balance; operating lease liabilities are shown separately.

Fourth-quarter 2019 product sales were $0.497 million, gross profit $0.373 million, operating loss $8.126 million, and net loss $7.868 million, or $0.50 per share. The filing does not provide a separate quarterly cash-flow figure.

Year-end 2019 operating lease liabilities were $2.602 million ($0.237 million current and $2.365 million long-term). The company reported no off-balance-sheet arrangements.

Material changes versus the prior period

• Sales fell 51%, reflecting lower Argus II implant volumes and the strategic retreat from commercial activity. Commercial implant volume was 28 in 2019 versus 69 in 2018; the MD&A separately reports 26 versus 64 implants for which revenue was recognized.
• Gross margin improved to 36% from 29%, although gross profit declined as sales contracted. The filing attributes the margin change partly to production and cost allocation changes after Argus II production ceased.
• Research and development expense increased 31% to $13.143 million, primarily from Orion-related staffing, outside services, and prototypes. Clinical and regulatory expense decreased 27% to $3.354 million; selling and marketing fell 46% to $6.101 million; general and administrative expense fell 14% to $9.226 million.
• Net loss narrowed by $1.502 million. Lower operating expenses were partly offset by lower gross profit.
• Financing activities provided $34.989 million of cash, including $34.505 million of net proceeds from stock and warrant issuance. The February 2019 rights offering generated approximately $34.4 million net and included warrants; entities controlled by the chairman invested approximately $30 million.

Outlook, commentary, risks, and unusual items

• Going concern and funding: Management said available resources were insufficient to operate at current levels for at least 12 months from issuance; the filing estimated existing cash could sustain operations into April 2020. The auditor highlighted substantial doubt about the company’s ability to continue as a going concern. Additional financing was uncertain, with potential for further dilution or program cuts.
• Orion development: In the six-person feasibility study, five subjects performed significantly better with the device on for square localization, all six for direction of motion, and five received functional-vision benefit under FLORA. One subject was rated neutral. These are limited early-study results, and the filing said no peer-reviewed Orion data were yet available. The company expected FDA alignment on pivotal-trial design during 2020, validation of the revised FLORA endpoint in early 2020, and an IDE filing in the first half of 2021. It anticipated a minimum pivotal pre-market sample of at least 45 subjects, subject to ongoing FDA discussions.
• Device and clinical risks: The six-subject study recorded eight device- or surgery-related adverse events, including one serious event that resolved quickly without hospitalization. One subject had a seizure in 2018. The company also reported electrode impedance changes, including loss of perception in one subject followed by improvement, and higher impedance affecting some electrodes in another. Root causes were unresolved; additional investigation or design changes could delay development.
• Transition charges: 2019 included $3.357 million of restructuring charges, including a $2.587 million non-cash Argus II inventory impairment and approximately $0.8 million of cash severance and related charges. Net inventory declined to $1.029 million from $3.250 million.
• Leadership and other events: The filing disclosed that CEO Will McGuire’s resignation was effective March 27, 2020, with Chairman Gregg Williams appointed acting CEO. A 1-for-8 reverse stock split took effect on a split-adjusted basis in January 2020; Nasdaq subsequently confirmed regained minimum-bid-price compliance.
• Contingencies and governance: The company offered to rescind certain employee stock-purchase-plan sales, with potential payments of up to $281,000 if fully exercised; potential liability could remain. It accrued $100,000 relating to California’s board gender-diversity statute. Patent oppositions involving Pixium were pending at the European Patent Office. The filing also described customer concentration: five customers represented 61% of 2019 revenue.
• Other principal risks: Argus II revenue was expected to decline; Orion required successful trials, regulatory approval, reimbursement, and commercialization. Risks also included sole-source suppliers, manufacturing scale-up, intellectual-property challenges, dilution, and the emerging COVID-19 outbreak’s possible effects on trials, operations, supply chains, and fundraising.

Most important facts for investors to verify

• Confirm the issuer: this filing is for Second Sight Medical Products, Inc., not Vivani Medical, Inc.
• Verify current cash, monthly cash burn, financing availability, and whether the stated April 2020 runway was extended by subsequent events.
• Track Orion study progress, FDA-agreed protocol and endpoints, IDE timing, subject enrollment, device performance, and resolution of impedance issues.
• Assess the pace of Argus II revenue decline and the practical value and timing of any remaining inventory sales or patient-support commitments.
• Review subsequent equity issuance, warrant overhang, dilution, and the chairman-affiliated investor’s ownership and influence.
• Reconcile the filing’s commercial implant counts (28 versus 69) with its revenue-recognized implant counts (26 versus 64), and verify the annual and quarterly figures against the audited statements.