Business context and reporting period
Issuer discrepancy: The supplied 10-Q is for Second Sight Medical Products, Inc. and its subsidiary, not Vivani Medical, Inc. It covers the quarter and six months ended June 30, 2017, and was signed August 7, 2017.
Second Sight develops and sells the Argus II retinal prosthesis for certain patients with profound vision loss. It also reported research and development of the Orion visual cortical prosthesis. The filing describes a company with one commercial product line, limited product revenue, and ongoing operating losses.
Financial results and liquidity
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $2.236m | $1.037m | $3.245m | $2.090m |
| Gross profit (loss) | $1.109m | $(2.204)m | $0.991m | $(2.063)m |
| Gross margin | 49.6% | (212.5%) | 30.5% | (98.7%) |
| Operating loss | $(6.872)m | $(8.507)m | $(14.427)m | $(14.328)m |
| Net loss | $(6.843)m | $(8.504)m | $(14.391)m | $(14.320)m |
| Net loss per share | $(0.12) | $(0.23) | $(0.28) | $(0.39) |
Amounts are in U.S. dollars. Q2 revenue rose 116% year over year; first-half revenue rose 55%. First-half implants increased to 33 from 21. Q2 revenue per implant was $118,000 versus $94,000; first-half revenue per implant was approximately $98,000 versus $100,000.
Operating expenses were $7.981m in Q2 and $15.418m in the first half, up from $6.303m and $12.265m, respectively, in 2016. First-half R&D expense rose to $3.796m from $1.678m, in part because grant offsets fell to $0.128m from $1.272m. Selling and marketing and general and administrative expenses also increased.
At June 30, 2017, cash was $0.763m and money market funds were $17.366m, for combined cash and money market funds of $18.129m. Working capital was $17.3m; total current liabilities were $5.464m. The balance sheet reports no debt. First-half operating cash use was $12.555m; investing cash use was $7.173m, including $7.022m transferred into money market funds; financing provided $19.878m, primarily from the rights offering.
Material changes and unusual items
- Gross profit improved substantially from the prior-year loss, but reported cost of sales was materially affected by inventory reserve reversals and unabsorbed production costs. Q2 2017 included a $0.743m reserve reversal and $0.579m of unabsorbed production costs; first-half figures included a $1.456m reserve reversal and $1.529m of unabsorbed production costs.
- A March 2017 rights offering raised approximately $19.7m net, issuing 13.7m units, each comprising a common share and a five-year warrant. Common shares outstanding rose to 56.794m at June 30 from 42.701m at December 31, 2016; the filing reported 56.794m outstanding as of August 4.
- The company recorded an ownership change under Internal Revenue Code Section 382 in Q2. It estimated annual limits on use of tax-loss carryforwards of $1.4m–$3.7m and estimated that approximately $102m of federal and $54m of state carryforwards would expire unused.
Outlook, risks, and other notable disclosures
- Management said funds were expected to last into Q2 2018, but stated substantial doubt about the company’s ability to continue as a going concern. Further debt or equity financing would be needed beyond that point, with no assurance it could be obtained on acceptable terms or at all. Without funding, the company might reduce or stop development or clinical programs, pursue alliances requiring relinquishment of product rights, or discontinue operations.
- Management expected average revenue per implant of $100,000–$120,000 for the remainder of 2017, depending on geographic mix. It expected low production levels and continuing unabsorbed production costs, with inventory reserve reversals offsetting some product costs. It anticipated higher future R&D and clinical spending as it pursued product improvements and trials, including Orion.
- CMS’s proposed preliminary 2018 payment rate for the Argus II procedure and system was approximately $122,000, compared with a 2017 rate of $150,000. The 2018 rate was not final in the filing.
- Disclosure controls and procedures were deemed ineffective as of June 30 because of material weaknesses in internal control over financial reporting, including incomplete documentation and testing of controls. The company also said it had not completed remediation and was reviewing standard costs.
- Risks include dependence on a single product, uncertain demand and reimbursement, customer and geographic revenue concentration, reliance on sole-source suppliers, foreign currency exposure, and 18 European patent oppositions. Management did not believe the patent challenges or ordinary-course litigation would materially affect operations or financial statements.
- The CFO notified the company of his resignation effective after the Q2 results and filing; the filing stated the departure was not due to a disagreement with the company.
Important facts for investors to verify
- Confirm the filing belongs to the intended company: the document names Second Sight Medical Products, Inc., not Vivani Medical, Inc.
- Assess whether the stated cash runway into Q2 2018 and assumptions about future financing remain supportable given ongoing losses and operating cash use.
- Review the composition and sustainability of gross-profit improvement, particularly inventory reserve reversals and unabsorbed production costs.
- Check the final 2018 CMS reimbursement rate, payer coverage, implant volumes, and revenue per implant against management’s expectations.
- Track remediation of the disclosed material weaknesses and any resulting updates to standard costs and financial reporting controls.