Business context and reporting period
Issuer identity: The supplied metadata names Vivani Medical, Inc., but the filing identifies the registrant as Second Sight Medical Products, Inc. (NASDAQ: EYES). This summary covers the registrant named in the filing.
The 10-K reports the fiscal year ended December 31, 2015, with 2014 as the principal comparable period. Second Sight develops and sells the Argus II retinal prosthesis for people with profound vision loss from retinal degeneration. The company was early in commercialization and relied on one principal product; it was also developing possible expanded uses, including dry AMD, and the Orion I cortical prosthesis.
Financial performance and position
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $8.95 | $3.40 |
| Gross profit (loss) | $3.66 | $(0.16) |
| Gross margin | 40.9% | (4.7%) |
| Operating expenses | $23.70 | $21.07 |
| Operating loss | $(20.05) | $(21.23) |
| Net loss | $(20.02) | $(35.20) |
| Net loss per share | $(0.56) | $(1.41) |
| Cash used in operating activities | $(20.55) | $(17.09) |
Sales rose 162%, primarily as Argus II implants increased to 75 from 29. Gross profit turned positive, reflecting higher volume and improved manufacturing yields. The net loss narrowed largely because 2014 included approximately $14.1 million of non-cash convertible-debt interest, discount amortization and discount write-off; operating expenses increased in 2015.
At year-end 2015, cash was $0.24 million and money market funds were $15.72 million, for approximately $15.96 million combined. Working capital was $18.78 million, down from $33.53 million in 2014; total assets were $28.25 million and stockholders’ equity was $20.26 million. Convertible notes had been converted to equity in the 2014 IPO; the balance sheet reported no convertible notes payable at year-end 2015. The filing identifies recurring operating losses and negative operating cash flows and states that the auditor raised substantial doubt about the company’s ability to continue as a going concern.
Material changes versus 2014
- Implants increased to 75 from 29, with 43 in Europe and the Middle East and 32 in North America. France and Italy together accounted for 31 implants in 2015, versus three in 2014.
- Average revenue recognized per implant was approximately $119,000 versus $117,000. Reported unit revenue depended on geography, payer coverage, payment terms and other factors.
- Research and development expense fell 40% to $3.04 million, mainly because $1.9 million of Johns Hopkins Applied Physics Laboratory grant funding offset 2015 costs. Clinical and regulatory, selling and marketing, and general and administrative expenses increased.
- Cash used in operations increased to $20.55 million from $17.09 million, while year-end money market funds fell to $15.72 million from $34.00 million. Financing cash inflow was $2.76 million, chiefly from option and warrant exercises, compared with $43.80 million in 2014, which included IPO and private-placement proceeds.
Outlook, risks and unusual items
- Funding and going concern: Management said the business required additional capital. A registered rights offering filed in January 2016 was expected to raise gross proceeds of approximately $12.75 million to $19.8 million, but completion was not assured. The company warned that, if the offering failed and other financing was unavailable, it might not be able to continue at current operating levels beyond the fourth quarter of 2016.
- Reimbursement and pricing: CMS set a 2016 outpatient payment rate of $95,000 for the procedure and Argus II system. Management said at least $150,000 would be needed to cover hospitals’ device and procedure costs. In late February 2016, the company decided to temporarily discount its U.S. device price to approximately $92,000, compared with $144,000 in 2015, and expected lower average revenue per implant and lower gross margins in 2016. Five of 12 Medicare Administrative Contractors had made positive coverage decisions as of March 1, 2016; outcomes and timing of further coverage or higher payment rates were uncertain.
- Near-term commercial outlook: The company expected 10–14 worldwide implants in Q1 2016, compared with 19 in Q1 2015, citing U.S. reimbursement concerns. It anticipated possible improvement in subsequent quarters but gave no assurance.
- Development plans: Management planned new clinical software in 2016 and new external hardware in early 2017. A five-patient UK dry-AMD pilot was underway; a larger trial depended on pilot results and other decisions. Orion I clinical trials were planned for the first half of 2017. These are forward-looking plans, not assured outcomes.
- Key risks: Continued losses and financing needs; reimbursement shortfalls or delays; dependence on Argus II; uncertain clinical and regulatory progress; manufacturing yields and sole-source suppliers; competition; and patent challenges. The filing describes European patent oppositions involving Pixium and Retina Implant; management said successful challenges were not expected to materially impair current operations.
- Other notable items: The 2014 net loss included a $6.96 million write-off of unamortized convertible-note discount upon IPO conversion. The 2015 warranty liability was $1.07 million. The filing reported no material legal proceedings apart from the described intellectual-property matters.
Important facts for investors to verify
- Confirm the issuer: the filing is for Second Sight Medical Products, Inc., not Vivani Medical, Inc.
- Review the rights-offering outcome, actual proceeds and share dilution, and subsequent liquidity relative to the going-concern warning.
- Track U.S. Medicare coverage, the $95,000 payment rate, hospital economics and the effect of the approximately $92,000 temporary U.S. price.
- Compare actual 2016 implants, revenue per implant, gross margin and operating cash burn with management’s stated expectations.
- Assess progress and results for the dry-AMD study, product upgrades and Orion I, including regulatory requirements and funding needs.