Filing Summary
Entity and period: The supplied filing is Second Sight Medical Products, Inc.’s Form 10-K for the fiscal year ended December 31, 2016—not a filing for Vivani Medical, Inc. The requested “2016 Q4” corresponds to the fourth quarter within this annual report; the filing also reports full-year results.
Business Context and Reporting Period
Second Sight develops and sells implantable visual prostheses. Its commercial product, Argus II, is approved for certain patients with profound vision loss, principally due to retinitis pigmentosa (RP). Orion I, a cortical visual prosthesis, and expanded Argus II indications remain in development. The company reported 42 Argus II implants in 2016 versus 75 in 2015.
Key Financial Metrics
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales | $4.0 million | $9.0 million |
| Gross profit (loss) | $(6.1) million | $3.7 million |
| Operating expenses | $27.1 million | $23.7 million |
| Operating loss | $(33.2) million | $(20.0) million |
| Net loss | $(33.2) million | $(20.0) million |
| Net loss per share, basic and diluted | $(0.84) | $(0.56) |
| Net cash used in operating activities | $(25.1) million | $(20.5) million |
| Cash and money market funds at year-end | $10.9 million | $16.0 million |
| Working capital at year-end | $9.6 million | $18.8 million |
At December 31, 2016, total assets were $16.8 million, current liabilities were $5.7 million, and stockholders’ equity was $11.1 million. The balance sheet shows no outstanding borrowings at year-end. Inventory was $3.4 million net of a $5.4 million reserve; the company recorded a $4.7 million excess-inventory charge during 2016. Warranty liabilities were $1.5 million.
Fourth-quarter 2016 product sales were $715,000; gross loss was $2.6 million, operating loss was $10.4 million, and net loss was $10.4 million.
Material Changes Versus Prior Period
- Sales fell 55% year over year, reflecting fewer implants and lower recognized revenue per implant ($95,000 versus $119,000). U.S. and Canada implants declined to 12 from 32; EMEA implants declined to 30 from 43.
- Gross results deteriorated from $3.7 million profit to a $6.1 million loss. Management attributed this to lower sales, $4.7 million of inventory reserves, and approximately $2.8 million of unabsorbed production variances following reduced manufacturing output.
- Operating expenses rose 14% to $27.1 million. Research and development increased to $5.3 million and general and administrative expense to $10.1 million; clinical and regulatory expense declined to $2.7 million.
- Net loss increased by $13.2 million. Operating cash use rose to $25.1 million, while year-end cash and money market funds declined by $5.1 million.
Outlook, Risks and Unusual Items
- Going concern and funding: The auditor’s report and management state that substantial doubt exists about the company’s ability to continue as a going concern. The company said available funds were insufficient to support operations through the end of the first quarter of 2018 and anticipated needing further financing. A March 2017 rights offering generated approximately $19.7 million net; this subsequent financing does not remove the stated uncertainty.
- Commercial outlook: CMS set a $150,000 payment rate for the Argus II procedure and system effective January 1, 2017. Management expected average revenue per implant in 2017 of $110,000–$120,000, depending on geographic mix. Five Medicare administrative contractor jurisdictions covering 17 states had positive coverage decisions; coverage and reimbursement remain uneven.
- Development plans: The company planned 2017 clinical data collection for better-sighted RP patients and an FDA investigational-device exemption application and feasibility work for Orion I. It reported early encouraging results from retinal stimulation testing, but these efforts are preliminary and success is uncertain. The dry-AMD pilot had not demonstrated significant objective benefit over patients’ residual vision.
- Controls and reporting: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end, citing material weaknesses involving account reconciliations, backup-prosthesis tracking, standard-cost updates, documentation, and control testing. Management reported remediation efforts were underway but incomplete.
- Other risks and contingencies: The business depends on one commercial product and adequate reimbursement, faces sole-source supplier and manufacturing risks, and has patent oppositions pending in Europe. The filing also discloses a February 2017 SEC civil complaint against the CFO relating to his prior employment; the company is not a party to that proceeding. No material effect from ordinary-course litigation was anticipated by management.
Important Facts for Investors to Verify
- Confirm the issuer identity: this filing is for Second Sight Medical Products, Inc., not Vivani Medical, Inc.
- Review the auditor’s going-concern language and the company’s cash runway assumptions, including the effect and use of the March 2017 rights-offering proceeds.
- Track implant volumes, realized revenue per implant, reimbursement coverage, and whether the $150,000 CMS payment rate supports hospital participation and sales.
- Assess inventory valuation, manufacturing costs, gross-margin recovery, and the effectiveness of remediation for the disclosed material weaknesses.
- Monitor clinical and regulatory progress for Orion I, expanded RP use, and AMD, as well as the outcomes of patent challenges and the disclosed SEC proceeding involving the CFO.