Filing summary
Entity and period: The supplied filing is Second Sight Medical Products, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2018—not a filing for Vivani Medical, Inc. The summary below reflects the filing’s named registrant.
Business context and reporting period
Second Sight develops and sells implantable visual prosthetics. Its commercial product was the Argus II retinal prosthesis; Orion, a visual cortical prosthesis, was in an early feasibility study. The results cover the three and nine months ended September 30, 2018, compared with the same 2017 periods. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise indicated.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $2.246 | $1.610 | $5.129 | $4.855 |
| Gross profit | $0.462 | $0.609 | $1.842 | $1.600 |
| Gross margin | 20.6% | 37.8% | 35.9% | 33.0% |
| Operating expenses | $9.008 | $7.358 | $28.145 | $22.776 |
| Operating loss | $(8.546) | $(6.749) | $(26.303) | $(21.176) |
| Net loss | $(8.522) | $(6.716) | $(26.236) | $(21.107) |
| Net loss per share | $(0.12) | $(0.12) | $(0.41) | $(0.40) |
| Operating cash flow | Not provided for the quarter | $(22.079) | $(17.233) |
- Q3 revenue grew 38%, while nine-month revenue increased 6%. The company recognized revenue for 22 units in Q3 versus 12 a year earlier, and 48 units in the first nine months versus 41.
- Q3 gross profit fell despite higher sales: cost of sales rose 80% to $1.784 million. The nine-month gross margin improved, but the filing notes low manufacturing yields, under-capacity production and unabsorbed overhead.
- At September 30, cash and cash equivalents were $4.972 million, down from $7.839 million at December 31, 2017. Working capital was $2.8 million, versus $6.6 million. Current assets were $10.277 million and current liabilities $7.528 million.
- Financing provided $19.356 million in the first nine months, principally from common-stock sales. The company reported no off-balance-sheet arrangements and no debt balance in the presented balance sheet.
- Common shares outstanding were 70.312 million at September 30, compared with 57.630 million at year-end. The filing reports 22.268 million potentially dilutive securities excluded from loss-per-share calculations as anti-dilutive.
Material changes and management commentary
- Research and development expense rose 50% in Q3 and 36% year to date, primarily for Argus 2s verification and validation work. Clinical and regulatory expense rose 67% in Q3 and 79% year to date, primarily due to the Orion feasibility study. Selling and marketing expense also increased; general and administrative expense declined in Q3 and was broadly unchanged year to date.
- Management said cash on hand was expected to fund operations only into January 2019 and that the company lacked sufficient funds for the 12 months following issuance of the statements. It concluded there was substantial doubt about the company’s ability to continue as a going concern.
- After quarter-end, the company disclosed a further $4.0 million common-stock placement in October 2018 to entities beneficially owned by its board chairman. May and August placements to affiliated entities had generated $10.0 million and $5.0 million, respectively. These financings provide liquidity but involve substantial insider participation and shareholder dilution.
- In October, the company announced a restructuring focused on reducing international Argus II commercial operations and concentrating on selected markets and centers. Management estimated annual savings of about $3.0 million and expected approximately $0.6 million of cash restructuring charges in Q4 2018.
- Management anticipated average recognized revenue per Argus II implant of $100,000–$120,000 for the remainder of 2018, depending on geographic mix. It expected Orion’s next clinical study to begin in 2019, subject to feasibility-study results and regulatory agreement; it was evaluating a pivotal study design and expected to seek FDA agreement in early 2019.
Outlook, risks and contingencies
- Funding and going concern: Ongoing operating losses and negative operating cash flows mean continued operations depend on raising capital, grants or partnerships. Additional financing may be unavailable or unfavorable and could dilute shareholders or require concessions. Failure to raise funds could force program delays, cuts or cessation.
- Product and clinical risk: Orion remained investigational, with a small feasibility study and no published human data stated in the filing. Safety, efficacy, trial design, regulatory approval and commercial adoption remain uncertain; the filing describes potentially serious surgical and device-related risks.
- Commercial and reimbursement risk: Argus II revenue is limited and depends on reimbursement decisions, patient demand and payment timing. Coverage varied across U.S. Medicare jurisdictions and international markets. The company said the English evaluation program was progressing slower than expected.
- Customer and geographic concentration: Several customers individually represented more than 10% of quarterly revenue or period-end receivables. The U.S. represented 47% of Q3 revenue; France represented 15%.
- Legal and intellectual property: Twenty-two European Patent Office oppositions challenge patents owned or licensed by the company. Management said a successful challenge was not expected to materially affect operations, though it could limit the ability to block competitors. Other ordinary-course litigation was described as not expected to have a material effect.
- Controls: Management reported disclosure controls were effective at a reasonable-assurance level, while also noting previously identified material weaknesses in internal control over financial reporting remained subject to remediation.
Important facts for investors to verify
- Confirm the intended issuer: the provided metadata names Vivani Medical, but the filing identifies Second Sight Medical Products, Inc.
- Verify current cash runway and subsequent financing, including the October 2018 $4.0 million insider-affiliated placement and any later capital raises.
- Track operating cash burn, working capital, Argus II unit volume, per-implant revenue and gross-margin trends against management’s expectations.
- Monitor Orion feasibility results, FDA discussions, trial timing, safety events and the resources required to reach a pivotal study.
- Assess dilution and governance implications of the increased share count, potential securities and the chairman-affiliated financings.
- Check whether the estimated $3.0 million annual restructuring savings were realized and whether Argus II patient support and commercial activity were maintained.