UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

 

Commission File Number 001-36747

Second Sight Medical Products, Inc.

(Exact name of Registrant as specified in its charter)

 

California

 

02-0692322

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

12744 San Fernando Road, Suite 400, Sylmar, CA 91342

(Address of principal executive offices, including zip code)

 

(818) 833-5000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    No 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes    No 

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.     Yes      No  

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock

 

EYES

 

NASDAQ

Warrants

 

EYESW

 

NASDAQ

 

 

 

 

 

As of August 6, 2019, the registrant had 124,586,323 shares of common stock, $0 par value per share and 61,459,657 warrants, outstanding.

 

 

 


 

SECOND SIGHT MEDICAL PRODUCTS, INC.

AND SUBSIDIARY

 

FORM 10-Q

TABLE OF CONTENTS 

 

PART I

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2019 (unaudited) and December 31, 2018

3

 

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018 (unaudited)

4

 

Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2019 and 2018 (unaudited)

5

 

Condensed Consolidated Statements of Stockholders’ Equity for each of the three-month periods ended during the six months ended June 30, 2019 and 2018 (unaudited)

6

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018 (unaudited)

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

 

 

 

Item 4.

Controls and Procedures

28

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

29

 

 

 

Item 1A.

Risk Factors

29

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

 

 

 

Item 3.

Defaults Upon Senior Securities

29

 

 

 

Item 4.

Mine Safety Disclosures

29

 

 

 

Item 5.

Other Information

29

 

 

 

Item 6.

Exhibits

30

 

 

 

SIGNATURES

31

 

2


 

Part I. Financial Statements

Item 1. Financial Statements

SECOND SIGHT MEDICAL PRODUCTS, INC.

AND SUBSIDIARY

Condensed Consolidated Balance Sheets

(in thousands)

 

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

25,161

 

 

$

4,471

 

Accounts receivable, net

 

 

629

 

 

 

504

 

Inventories, net

 

 

1,474

 

 

 

3,250

 

Prepaid expenses and other current assets

 

 

783

 

 

 

1,395

 

Total current assets

 

 

28,047

 

 

 

9,620

 

Property and equipment, net

 

 

993

 

 

 

1,025

 

Right-of-use assets

 

 

2,454

 

 

 

 

Deposits and other assets

 

 

26

 

 

 

37

 

Total assets

 

$

31,520

 

 

$

10,682

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,255

 

 

$

1,305

 

Accrued expenses

 

 

2,562

 

 

 

2,503

 

Accrued compensation expense

 

 

2,207

 

 

 

2,690

 

Accrued clinical trial expenses

 

 

1,038

 

 

 

933

 

Current operating lease liabilities

 

 

219

 

 

 

 

Contract liabilities

 

 

557

 

 

 

167

 

Total current liabilities

 

 

7,838

 

 

 

7,598

 

Long term operating lease liabilities

 

 

2,487

 

 

 

 

Total liabilities

 

 

10,325

 

 

 

7,598

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, no par value, 10,000 shares authorized; none outstanding

 

 

 

 

 

 

Common stock, no par value; 300,000 shares authorized; shares issued and

   outstanding: 124,586 and 76,336 as of June 30, 2019 and December 31,

   2018, respectively

 

 

263,656

 

 

 

229,019

 

Additional paid-in capital

 

 

47,445

 

 

 

44,111

 

Accumulated other comprehensive loss

 

 

(574

)

 

 

(575

)

Accumulated deficit

 

 

(289,332

)

 

 

(269,471

)

Total stockholders’ equity

 

 

21,195

 

 

 

3,084

 

Total liabilities and stockholders’ equity

 

$

31,520

 

 

$

10,682

 

 

See accompanying notes.

3


 

SECOND SIGHT MEDICAL PRODUCTS, INC.

AND SUBSIDIARY

Condensed Consolidated Statements of Operations (unaudited)

(in thousands, except per share data)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net sales

 

$

1,282

 

 

$

1,907

 

 

$

2,410

 

 

$

2,883

 

Cost of sales

 

 

933

 

 

 

836

 

 

 

1,664

 

 

 

1,504

 

Gross profit

 

 

349

 

 

 

1,071

 

 

 

746

 

 

 

1,379

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development, net of grants

 

 

3,436

 

 

 

2,422

 

 

 

5,619

 

 

 

4,895

 

Clinical and regulatory, net of grants

 

 

536

 

 

 

1,126

 

 

 

1,542

 

 

 

2,475

 

Selling and marketing

 

 

1,689

 

 

 

2,879

 

 

 

3,792

 

 

 

5,891

 

General and administrative

 

 

2,256

 

 

 

2,632

 

 

 

4,705

 

 

 

5,875

 

Restructuring charges

 

 

873

 

 

 

 

 

 

3,297

 

 

 

 

Total operating expenses

 

 

8,790

 

 

 

9,059

 

 

 

18,955

 

 

 

19,136

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(8,441

)

 

 

(7,988

)

 

 

(18,209

)

 

 

(17,757

)

Interest income

 

 

1

 

 

 

27

 

 

 

69

 

 

 

43

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(8,440

)

 

$

(7,961

)

 

$

(18,140

)

 

$

(17,714

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share – basic and diluted

 

$

(0.07

)

 

$

(0.12

)

 

$

(0.16

)

 

$(0.29)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding – basic and diluted

 

 

124,332

 

 

 

64,418

 

 

 

110,526

 

 

 

61,750

 

 

See accompanying notes.

4


 

SECOND SIGHT MEDICAL PRODUCTS, INC.

AND SUBSIDIARY

Condensed Consolidated Statements of Comprehensive Loss (unaudited)

(in thousands)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net loss

 

$

(8,440

)

 

$

(7,961

)

 

$

(18,140

)

 

$

(17,714

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

9

 

 

 

(77

)

 

 

1

 

 

 

(32

)

Comprehensive loss

 

$

(8,431

)

 

$

(8,038

)

 

$

(18,139

)

 

$

(17,746

)

 

See accompanying notes.

5


 

SECOND SIGHT MEDICAL PRODUCTS, INC.

AND SUBSIDIARY

Condensed Consolidated Statements of Stockholders’ Equity (unaudited)

(in thousands)

 

 

 

Common Stock

 

 

Common Stock

Issuable

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balance, December 31, 2017

 

 

57,630

 

 

$

202,156

 

 

 

82

 

 

$

153

 

 

$

40,522

 

 

$

(572

)

 

$

(234,377

)

 

$

7,882

 

Issuance of shares of common

   stock, net of issuance costs

 

 

2,224

 

 

 

3,992

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,992

 

Warrants exercise

 

 

5

 

 

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7

 

Common stock issuance for

   services

 

 

 

 

 

 

 

 

34

 

 

 

65

 

 

 

 

 

 

 

 

 

 

 

 

65

 

Release of restricted stock units

 

 

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

   expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,285

 

 

 

 

 

 

 

 

 

1,285

 

Exercise of common stock options

 

 

5

 

 

 

8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,753

)

 

 

(9,753

)

Foreign currency translation

  adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

45

 

 

 

 

 

 

45

 

Balance, March 31, 2018

 

 

59,876

 

 

 

206,163

 

 

 

116

 

 

 

218

 

 

 

41,807

 

 

 

(527

)

 

 

(244,130

)

 

 

3,531

 

Issuance of shares of common

   stock, net of issuance costs

 

 

6,757

 

 

 

9,978

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,978

 

Issuance of common stock in

   connection with employee

   stock purchase plan

 

 

226

 

 

 

261

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

261

 

Common stock issued or

   issuable  for services

 

 

133

 

 

 

262

 

 

 

(116

)

 

 

(218

)

 

 

 

 

 

 

 

 

 

 

 

44

 

Release of restricted stock units

 

 

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

   expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

627

 

 

 

 

 

 

 

 

 

627

 

Exercise of common stock options

 

 

71

 

 

 

141

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

141

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,961

)

 

 

(7,961

)

Foreign currency translation

  adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(77

)

 

 

 

 

 

(77

)

Balance, June 30, 2018

 

 

67,075

 

 

$

216,805

 

 

 

 

 

$

 

 

$

42,434

 

 

$

(604

)

 

$

(252,091

)

 

$

6,544

 

6


 

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balance, December 31, 2018

 

 

76,336

 

 

$

229,019

 

 

$

44,111

 

 

$

(575

)

 

$

(269,471

)

 

$

3,084

 

Adoption of ASC Topic 842-Leases

   (see note 2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(144

)

 

 

(144

)

Issuance of shares of common stock and

   warrants in connection with rights offering,

   net of issuance costs

 

 

47,812

 

 

 

34,399

 

 

 

 

 

 

 

 

 

 

 

 

34,399

 

Release of restricted stock units

 

 

50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants modification (see note 7)

 

 

 

 

 

 

 

 

1,577

 

 

 

 

 

 

(1,577

)

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

898

 

 

 

 

 

 

 

 

 

898

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,700

)

 

(9,700)

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

(8

)

 

 

 

 

 

(8

)

Balance, March 31, 2019

 

 

124,198

 

 

 

263,418

 

 

 

46,586

 

 

 

(583

)

 

 

(280,892

)

 

 

28,529

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Release of restricted stock units

 

 

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock in connection with employee stock purchase plan

 

 

376

 

 

 

238

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

238

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

859

 

 

 

 

 

 

 

 

 

859

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,440

)

 

 

(8,440

)

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

9

 

 

 

 

 

 

9

 

Balance, June 30, 2019

 

 

124,586

 

 

$

263,656

 

 

$

47,445

 

 

$

(574

)

 

$

(289,332

)

 

$

21,195

 

 

See accompanying notes.

 

7


 

SECOND SIGHT MEDICAL PRODUCTS, INC.

AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(18,140

)

 

$

(17,714

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

196

 

 

 

222

 

Stock-based compensation

 

 

1,757

 

 

 

1,912

 

Non-cash lease expense

 

 

10

 

 

 

 

Inventory reserve

 

 

(446

)

 

 

61

 

Restructuring charges-inventory impairment

 

 

2,587

 

 

 

 

Common stock issuance for services

 

 

 

 

 

109

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(122

)

 

 

1,100

 

Inventories

 

 

(364

)

 

 

(947

)

Prepaid expenses and other assets

 

 

585

 

 

 

161

 

Accounts payable

 

 

(49

)

 

 

471

 

Accrued expenses

 

 

192

 

 

 

(344

)

Accrued compensation expenses

 

 

(483

)

 

 

(162

)

Accrued clinical trial expenses

 

 

105

 

 

 

294

 

Contract liabilities

 

 

387

 

 

 

213

 

Net cash used in operating activities

 

 

(13,785

)

 

 

(14,624

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(164

)

 

 

(116

)

Net cash used in investing activities

 

 

(164

)

 

 

(116

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net proceeds from sale of common stock and warrants

 

 

34,399

 

 

 

13,970

 

Proceeds from exercise of options, warrants and employee stock purchase plan options

 

 

238

 

 

 

417

 

Net cash provided by financing activities

 

 

34,637

 

 

 

14,387

 

Effect of exchange rate changes on cash and cash equivalents

 

 

2

 

 

 

(10

)

Cash and cash equivalents:

 

 

 

 

 

 

 

 

Net increase (decrease)

 

 

20,690

 

 

 

(363

)

Balance at beginning of period

 

 

4,471

 

 

 

7,839

 

Balance at end of period

 

$

25,161

 

 

$

7,476

 

 

See accompanying notes.

8


 

SECOND SIGHT MEDICAL PRODUCTS, INC.

AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

1. Organization and Business Operations

Second Sight Medical Products, Inc. (“Second Sight,” “we,” “us,” or “the Company”) was incorporated in the State of California in 2003. Second Sight develops, manufactures and markets implantable visual prosthetics to enable blind individuals to achieve greater independence.

In 2007, Second Sight formed Second Sight Medical Products (Switzerland) Sàrl, initially to manage clinical trials for its products in Europe, and later to manage sales and marketing in Europe, the Middle East and Asia-Pacific. As the laws of Switzerland require at least two corporate stockholders, Second Sight Medical Products (Switzerland) Sàrl is 99.5% owned directly by us and 0.5% owned by an executive of Second Sight as of June 30, 2019. Accordingly, Second Sight Medical Products (Switzerland) Sàrl is considered 100% owned for financial statement purposes and is consolidated with Second Sight for all periods presented.

We are currently developing the Orion® Visual Cortical Prosthesis System (“Orion”), an implanted cortical stimulation device intended to provide useful artificial vision to individuals who are blind due to a wide range of causes, including glaucoma, diabetic retinopathy, optic nerve injury or disease, or forms of cancer and trauma. A feasibility study of the Orion device is currently underway at the Ronald Reagan UCLA Medical Center in Los Angeles (“UCLA”) and Baylor College of Medicine in Houston (“Baylor”).

Our commercially approved product, the Argus® II retinal prosthesis system (“Argus II”), entered clinical trials in 2006, received CE Mark approval for marketing and sales in the European Union (“EU”) in 2011, and received approval by the United States Food and Drug Administration (“FDA”) for marketing and sales in the United States in 2013. We began selling the Argus II in Europe at the end of 2011, Saudi Arabia in 2012, the United States and Canada in 2014, Turkey in 2015, Iran, Taiwan, South Korea and Russia in 2017, and Singapore in 2018. Given the limited addressable market of Argus II, we have made the decision to maximize capital efficiency with our Argus commercial and clinical activities and increase our investment of resources with our Orion clinical and R&D programs. See Note 2 for discussion of Discontinued Operations.

Liquidity and Going Concern

From inception, our operations have been funded primarily through the sales of our common stock and warrants, as well as from the issuance of convertible debt, research and clinical grants, and limited product revenue generated from the sale of our Argus II product. Funding of our business since 2018 has been provided by:

         

 

 

Issuance of common stock through our At Market Issuance Sales Agreement (the “Sales Agreement”) during the first quarter        of 2018 which provided net cash proceeds of $4.0 million.    

 

Issuance of common stock in securities purchase agreements in May, August, October and December 2018, which provided net cash proceeds of $22.0 million. 

 

Issuance of common stock and warrants in a rights offering in February 2019, which provided net cash proceeds of $34.4 million.

 

Revenue of $2.4 million for the six months ended June 30, 2019 and $6.9 million for the year ended December 31, 2018 generated by sales of our Argus II product.

            

In November 2017, we entered into an At Market Issuance Sales Agreement with B. Riley FBR Inc. and H.C. Wainwright & Co., LLC, as agents (“Agents”) pursuant to which we may offer and sell, from time to time through either of the Agents, shares of our common stock having an aggregate offering price as set forth in the Sales Agreement and a related prospectus supplement filed with the SEC. We agreed to pay the Agents a cash commission of 3.0% of the aggregate gross proceeds from each sale of shares under the Sales Agreement. During January and February 2018, we sold 2.2 million shares of common stock which provided net proceeds of $4.0 million under the Sales Agreement. No shares have been sold since February 2018 under the Sales Agreement.

In a rights offering completed on February 22, 2019, we sold approximately 47.8 million units, each priced at $0.724 for gross proceeds of approximately $34.6 million. Each unit consisted of one share and one immediately exercisable warrant having an exercise price of $1.47 per share. Entities controlled by Gregg Williams, our Chairman of the Board of Directors, acquired approximately 41.4 million units in the offering for an aggregate investment of approximately $30 million.

9


 

On January 25, 2019, we received a letter from The Nasdaq Stock Market advising us that for 30 consecutive trading days preceding the date of the letter, the bid price of our common stock had closed below the $1.00 per share minimum required for continued listing on The Nasdaq Capital Market pursuant to listing rules, and therefore we could become subject to delisting if we did not regain compliance within the compliance period. Nasdaq has extended the compliance period for an additional 180 days through January 20, 2020 and we continue to monitor and evaluate our options to cure this deficiency within this extended compliance period.

Our financial statements have been presented on the basis that our business is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We are subject to the risks and uncertainties associated with a business with one product line and limited commercial product revenues, including limitations on our operating capital resources and uncertain demand for our product. We have incurred recurring operating losses and negative operating cash flows since inception, and we expect to continue to incur operating losses and negative operating cash flows for the foreseeable future.

We do not have sufficient funds to support our operations for the next 12 months from the date of issuance of these financial statements. Accordingly, these and other related factors raise substantial doubt about our ability to continue as a going concern. We anticipate that we will seek to additionally fund our operations through public or private equity or debt financings, grants, collaborations, strategic partnerships or other sources. However, we may be unable to raise additional capital or enter into such other arrangements when needed on favorable terms or at all. If we are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay or discontinue one or more of our research or development programs or any other approved product candidates, or we may be unable to expand our operations, maintain our current organization and employee base or otherwise capitalize on our business opportunities, as desired, which could materially affect our business, financial condition and results of operations. The accompanying financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

2. Basis of Presentation, Significant Accounting Policies and Recent Accounting Pronouncements

Basis of Presentation

These unaudited interim financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) and following the requirements of the United States Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted. In our opinion, the unaudited interim financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of our financial position and our results of operations and cash flows for periods presented. Certain prior year amounts have been reclassified to conform to the current year presentation. These statements do not include all disclosures required by GAAP and should be read in conjunction with our financial statements and accompanying notes for the fiscal year ended December 31, 2018, contained in our Annual Report on Form 10-K filed with the SEC on March 19, 2019. The results of the interim periods are not necessarily indicative of the results expected for the full fiscal year or any other interim period or any future year or period.

Significant Accounting Policies

 

    

Discontinued operations

 

       Based upon our decision on May 10, 2019 to accelerate our transition to the Orion platform, we evaluated our accounting policies related to the disposition in accordance with ASC 205-20 Discontinued Operations, and assessed our long-lived assets for any indications that their carrying values may not be recoverable in accordance with ASC 360, Property, Plant, and Equipment, for any impairment. Based upon these reviews we recorded in March, 2019 an impairment charge of $2.4 million related to inventory of Argus II based on our plans to suspend production of Argus II. As part of this transition we commenced a corporate restructuring plan to focus on development of Orion and other key research projects. Specifically, we reduced expenses and personnel related to commercial activities and production for the Argus II. We recognized approximately $0.7 million of pre-tax restructuring charges in the second quarter of fiscal year 2019 in connection with this restructuring, consisting of severance and other employee termination benefits, substantially all of which are expected to be settled in cash during the next two quarters of 2019. In addition we incurred an additional $0.2 million impairment charge related to inventory in the three months ended June 30, 2019. Until Argus II operations cease, we continue to present it as part of continuing operations. Based upon our review of the applicable accounting standards we determined that there was no impairment of any other assets.

Our significant accounting policies are set forth in Note 2 of the financial statements in our Annual Report on Form 10-K for the year ended December 31, 2018.

Recently Adopted Accounting Pronouncements

We adopted ASU No. 2016-02—Leases (Topic 842), as amended, as of January 1, 2019, using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at the period of adoption without

10


 

restating prior comparative periods which is the method we have chosen. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification. Adoption of the new standard resulted in the recording of right-of-use assets and operating lease liabilities of approximately $2.6 million and $2.8 million respectively, as of January 1, 2019. The difference of $0.2 million between the right-of-use assets and operating lease liabilities, net of the deferred tax impact, was recorded as an adjustment to accumulated deficit at January 1, 2019. The standard did not materially impact our consolidated net earnings and had no impact on cash flows.

       We do not believe that any other recently issued, but not yet effective, accounting standards, if adopted, will have a material effect on the financial statements.

3. Concentration of Risk

Credit Risk

Financial instruments that subject us to concentrations of credit risk consist primarily of cash, money market funds, and trade accounts receivable. We maintain cash and money market funds with financial institutions that we deem reputable. We extend differing levels of credit to our customers, and typically do not require collateral.

Customer Concentration

The following tables provide information about disaggregated revenue by service type, customer and geographical market.

The following table shows our revenues by customer type during the three and six months ended June 30, 2019 and 2018:

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Direct customers

 

$

1,006

 

 

$

1,798

 

 

$

1,952

 

 

$

2,456

 

Distributors

 

 

276

 

 

 

109

 

 

 

458

 

 

 

427

 

Total

 

$

1,282

 

 

$

1,907

 

 

$

2,410

 

 

$

2,883

 

 

During the three and six months ended June 30, 2019 and 2018, the following customers each comprised greater than 10% of our total revenues:

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Customer 1

 

 

26

%

 

 

%

 

 

14

%

 

 

%

Customer 2

 

 

21

%

 

 

%

 

 

11

%

 

 

4

%

Customer 3

 

 

13

%

 

 

7

%

 

 

14

%

 

 

10

%

Customer 4

 

 

13

%

 

 

%

 

 

7

%

 

 

3

%

Customer 5

 

 

10

%

 

 

15

%

 

 

16

%

 

 

15

%

Customer 6

 

 

10

%

 

 

%

 

 

10

%

 

 

%

Customer 7

 

 

%

 

 

12

%

 

 

%

 

 

8

%

 

As of June 30, 2019 and December 31, 2018, the following customers each comprised greater than 10% of our total accounts receivable:

 

 

 

June 30,

2019

 

 

December 31, 2018

 

Customer 1

 

 

26

%

 

 

%

Customer 2

 

 

21

%

 

 

%

Customer 3

 

 

19

%

 

 

%

Customer 4

 

 

17

%

 

 

%

Customer 5

 

 

14

%

 

 

%

Customer 6

 

 

%

 

55

%

Customer 7

 

%

 

22

%

Customer 8

 

%

 

21

%

 

11


 

Geographic Concentration

During the three and six months ended June 30, 2019 and 2018, regional revenue based on customer locations which each comprised greater than 10% of our total revenues, consisted of the following:

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

United States

 

 

68

%

 

 

56

%

 

 

65

%

 

 

55

%

China

 

 

13

%

 

 

%

 

 

7

%

 

 

3

%

Italy

 

 

10

%

 

 

15

%

 

 

16

%

 

 

15

%

France

 

 

%

 

 

19

%

 

 

%

 

 

13

%

 

Foreign Operations

The accompanying condensed consolidated financial statements as of June 30, 2019 and December 31, 2018 both include assets amounting to $1.4 million and $1.5 million, respectively, relating to operations of our subsidiary based in Switzerland. It is possible that unanticipated events in foreign countries could disrupt our operations.

4. Fair Value Measurements

The authoritative guidance with respect to fair value establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels, and requires that assets and liabilities carried at fair value be classified and disclosed in one of three categories, as presented below. Disclosure as to transfers in and out of Levels 1 and 2, and activity in Level 3 fair value measurements, is also required.

Level 1. Observable inputs such as quoted prices in active markets for an identical asset or liability that we have the ability to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active-exchange traded securities and exchange-based derivatives.

Level 2. Inputs, other than quoted prices included within Level 1, which are directly observable for the asset or liability or indirectly observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include fixed income securities, non-exchange based derivatives, mutual funds, and fair-value hedges.

Level 3. Unobservable inputs in which there is little or no market data for the asset or liability which requires the reporting entity to develop its own assumptions. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded non-exchange-based derivatives and commingled investment funds, and are measured using present value pricing models.

Cash equivalents which includes money market funds are the only financial instrument measured and recorded at fair value on our consolidated balance sheet, and they are valued using Level 1 inputs.

Assets measured at fair value on a recurring basis are as follows (in thousands):

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

June 30, 2019 (unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

25,096

 

 

$

25,096

 

 

$

 

 

$

 

December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

4,156

 

 

$

4,156

 

 

$

 

 

$

 

 

       As of June 30, 2019 and December 31, 2018, the money market funds include $0.2 million held in a deposit account in Switzerland as security for the performance of contracts.

 

12


 

5. Selected Balance Sheet Detail

Inventories, net

Inventories consisted of the following (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Raw materials

 

$

850

 

 

$

791

 

Work in process

 

 

2,656

 

 

 

3,055

 

Finished goods

 

 

1,895

 

 

 

2,089

 

 

 

 

5,401

 

 

 

5,935

 

Allowance for excess and obsolete inventory and impairment charge

 

 

(3,927

)

 

 

(2,685

)

Inventories, net

 

$

1,474

 

 

$

3,250

 

 

 

       We recorded $2.6 million as an impairment charge during the six months ended June 30, 2019, related to our plans to suspend Argus II production. See note 2 for further details.

 

Property and equipment

Property and equipment consisted of the following (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Laboratory equipment

 

$

2,575

 

 

$

2,482

 

Computer hardware and software

 

 

1,516

 

 

 

1,456

 

Leasehold improvements

 

 

298

 

 

 

298

 

Furniture, fixtures and equipment

 

 

58

 

 

 

46

 

 

 

 

4,447

 

 

 

4,282

 

Accumulated depreciation and amortization

 

 

(3,454

)

 

 

(3,257

)

Property and equipment, net

 

$

993

 

 

$

1,025

 

 

Contract Liabilities

Contract liabilities consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance as of December 31, 2018

 

$

167

 

 

 

        Consideration received in advance of revenue recognition

 

 

390

 

 

 

        Revenue recognized

 

 

 

 

 

Ending balance as of June 30, 2019

 

$

557

 

 

 

 

Allowance for Doubtful Accounts

Allowance for doubtful accounts consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance as of December 31, 2018

 

$

181

 

 

 

        Additions

 

 

 

 

 

        (Write-offs) Recoveries

 

 

(66

)

 

 

Ending balance as of June 30, 2019

 

$

115

 

 

 

      

       Right-of-use assets and operating lease liabilities

 

      We lease certain office space and equipment for our use. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease costs are recognized in the income statement over the lease term on a straight-line basis. Operating leases with a term of one year or more are recognized on a straight line basis over the term. Depreciation is computed using the straight-line method over the estimated useful life of the respective assets. Our operating lease for office space includes one option to renew, with a five year renewal term that can extend the lease term to 2027. The exercise of this lease renewal option is at our sole discretion. The depreciable life of assets and leasehold improvements are limited by the expected lease term. Our lease agreements do not contain any

13


 

material residual value guarantees or restrictive covenants. As most of our leases do not provide an implicit rate, we used our estimated incremental borrowing rate of 10% based on the information available at commencement date in determining the present value of lease payments.

 

 

       Lease assets and liabilities consisted of the following (in thousands)(unaudited):

 

 

 

 

 

 

 

 

 

 

 

Assets

Classification

June 30,
2019

 

 

 

      Non-current assets

Right-of-use assets

$

       2,454

 

 

 

 

Liabilities

 

 

 

  Current

Current operating lease liabilities

$

         219

 

 

 

 

      Long term

Long term operating lease liabilities

$         2,487

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The components of lease expense for the three and six months ended June 30, 2019 were as follows (unaudited):

 

 

 

 

 

 

                           

 

For the three months ended

June 30, 2019

For the six months ended
June 30, 2019

 

 

 

 

Lease expense:

 

  

  

 

 

 

 

 

 

Operating lease expense

 

$                    123

$

                    246

 

 

 

 

 

Short-term lease expense

 

                      

 

 

 

 

Total lease expense

 

$                    123

$

246

 

 

 

 

 

 

Other information:

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

Operating cash flows from operating leases

 

$

237

 

 

 

 

 

 

For operating lease:

 

 

 

 

Weighted average remaining lease term (in years)

 

 

7.6

 

Weighted average discount rate

 

 

10

%

 

Minimum future payments under the Company’s leases at June 30, 2019 and their application to the corresponding lease liabilities are as follows (unaudited):

 

 

 

Discounted lease
liability payments

 

 

Payments due
under lease
agreements

 

2019 (remaining six months)

 

$

105  

 

 

$

239

 

2020

 

 

237

 

 

 

491

 

2021

 

 

277

 

 

 

505

 

2022

 

 

322

 

 

 

521

 

2023

 

 

352

 

 

 

516

 

Thereafter

 

 

1,413

 

 

 

1,704

 

Total

 

$

2,706

 

 

$

3,976

 

 

14


 

6. Equity Securities

 

 

        Increase in Authorized Shares of Common Stock

 

        On June 4, 2019, our shareholders approved an amendment to our restated articles of incorporation increasing our authorized no par value shares of common stock from 200,000,000 to 300,000,000 shares.

Potentially Dilutive Common Stock Equivalents

As of  June 30, 2019 and 2018, we excluded the potentially dilutive securities summarized below, which entitle the holders thereof to potentially acquire shares of common stock, from our calculations of net loss per share and weighted average common shares outstanding, as their effect would have been anti-dilutive (in thousands).

 

 

 

June 30,

 

 

 

2019

 

 

2018

 

Common stock warrants issued to underwriter of initial public offering

 

 

802

 

 

 

802

 

Common stock warrants issued in connection with March 2017 rights offering

 

 

13,647

 

 

 

13,647

 

Common stock warrants issued in connection with February 2019 rights offering

 

 

47,812

 

 

 

 

Common stock options

 

 

8,923

 

 

 

7,072

 

Restricted stock units

 

 

501

 

 

 

59

 

Employee stock purchase plan

 

 

456

 

 

 

234

 

 

 

 

72,141

 

 

 

21,814

 

 

15


 

7. Warrants

Warrants to purchase 47,812,371 shares of common stock with an exercise price of $1.47 per share were issued in the rights offering completed in February 2019.  The warrants are listed for trading under the symbol “EYESW” on the NASDAQ Capital Market and expire on March 14, 2024.

At the Company’s discretion, the warrants are redeemable on 30 days’ notice (i) if, after March 14, 2019, the shares of the Company’s common stock are trading at $2.94 for 15 consecutive trading days and (ii) if all of the independent directors vote in favor of redeeming the warrants. Holders may be able to sell or exercise warrants prior to any announced redemption date and the Company will redeem outstanding warrants not exercised by the announced redemption date for a nominal amount of $0.01 per Warrant.

The net cash proceeds were allocated to the relative fair values of the common stock and warrants on the date of issuance resulting in an allocation of $0.47 per share to the common stock and $0.25 per share to the warrants. In calculating the fair value of the warrants using the Black-Scholes model, the assumptions included a risk free interest rate of 2.49%, expected volatility of 82% and expected life of 5.08 years, and a 0% dividend yield.

We extended the term of 13,647,286 warrants issued in our March 2017 rights offering (“March 2017 Warrants”) by approximately two years effective as of February 15, 2019 as part of our February 2019 rights offering. We determined the fair value of the March 2017 Warrants immediately before and after the modification. The fair value of the March 2017 Warrants after the modification was increased by approximately $1.6 million, resulting in an accounting adjustment to additional paid-in capital and accumulated deficit in the consolidated statements of shareholders’ equity. The assumptions used in the determination of fair value of the warrants before and after the extension included a risk free interest rate of 2.50% and 2.49%, expected volatility of 81% and 82%, and expected lives of 3.08 years and 5.08 years, respectively and 0% dividend yields for both.

    

A summary of warrants activity for the six months ended June 30, 2019 is presented below (in thousands, except per share and contractual life data).

 

 

 

Number of

Shares

 

 

Weighted

Average

Exercise

Price

Per Share

 

 

Weighted

Average

Remaining

Contractual

Life (in Years)

 

Warrants outstanding as of December 31, 2018

 

 

14,449

 

 

$

2.01

 

 

 

3.10

 

        Issued

 

 

47,812

 

 

 

1.47

 

 

 

 

 

        Exercised

 

 

 

 

 

 

 

 

 

 

 

        Forfeited or expired

 

 

 

 

 

 

 

 

 

 

 

Warrants outstanding as of June 30, 2019

 

 

62,261

 

 

$

1.60

 

 

 

4.65

 

Warrants exercisable as of June 30, 2019

 

 

62,261

 

 

$

1.60

 

 

 

4.65

 

 

The warrants outstanding as of June 30, 2019 had no intrinsic value.

8. Stock-Based Compensation

A summary of stock option activity under our 2011 Equity Incentive Plan (“2011 Plan”) for the six months ended June 30, 2019 is presented below (in thousands, except per share and contractual life data).

 

 

 

Number of

Shares

 

 

Weighted

Average

Exercise

Price

Per Share

 

 

Weighted

Average

Remaining

Contractual

Life (in

Years)

 

Options outstanding as of December 31, 2018

 

 

7,120

 

 

$

3.83

 

 

 

6.81

 

        Granted

 

 

2,557

 

 

$

0.77

 

 

 

 

 

        Exercised

 

 

 

 

$

 

 

 

 

 

 

        Forfeited or expired

 

 

(754

)

 

$

3.58

 

 

 

 

 

Options outstanding as of June 30, 2019

 

 

8,923

 

 

$

2.98

 

 

 

7.59

 

Options exercisable as of June 30, 2019

 

 

3,870

 

 

$

4.90

 

 

 

5.85

 

 

16


 

The estimated aggregate intrinsic value of stock options exercisable as of June 30, 2019 was approximately $5,000. As of June 30, 2019, there was $3.9 million of total unrecognized compensation cost related to outstanding stock options that will be recognized over a weighted average period of 2.76 years.

During the six months ended June 30, 2019, we granted stock options to purchase 2,557,042 shares of common stock to certain employees and directors. The options are exercisable for a period of ten years from the date of grant at prices ranging from $0.69 to $1.00 per share, which was the fair value of our common stock on the respective grant dates. The options generally vest over a period of four years with the exception of options issued in connection with Director Compensation which vest in one year. The fair value of these options, calculated using the Black-Scholes option-pricing model, was determined to be $1.3 million ($0.44 to $0.65 per share) using the following assumptions: expected term of 5.5 to 6.08 years, volatility of 72.0%, risk-free interest rate of 1.92% to 2.63%, and expected dividend rate of 0.0%. 

 

The following table summarizes restricted stock unit (“RSU”) activity for the six months ended June 30, 2019 (in thousands, except per share data):

 

 

 

Number

of Shares

 

 

Weighted

Average Grant

Date Fair Value

Per Share

 

Outstanding as of December 31, 2018

 

 

35

 

 

$

12.43

 

        Awarded

 

 

527

 

 

 

0.75

 

        Vested and released

 

 

(61

)

 

 

5.36

 

        Forfeited/canceled

 

 

 

 

 

 

Outstanding as of June 30, 2019

 

 

501

 

 

$

1.02

 

 

As of June 30, 2019, there was $0.4 million of total unrecognized compensation cost related to the outstanding RSUs that will be recognized over a weighted average period of 3.56 years.

 

During the six months ended June 30, 2019, we awarded RSUs of 526,500 to certain employees. The fair value of these RSUs totaled $0.4 million. The RSUs generally vest over a four year period, and were awarded at the fair value of our common stock on the respective award dates.

We adopted an employee stock purchase plan in June 2015 for all eligible employees. At June 30, 2019 the maximum number of shares that may be issued under the plan is 2,050,000.

Stock-based compensation expense recognized for stock-based awards in the condensed consolidated statements of operations for the three and six months ended June 30, 2019 and 2018 was as follows (in thousands):

 

 

 

Three Months Ended

June 30,

 

 

Six Months  Ended

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Cost of sales

 

$

43

 

 

$

63

 

 

$

90

 

 

$

127

 

Research and development

 

 

134

 

 

 

107

 

 

 

321

 

 

 

211

 

Clinical and regulatory

 

 

31

 

 

 

11

 

 

 

65

 

 

 

103

 

Selling and marketing

 

 

131

 

 

 

92

 

 

 

261

 

 

 

215

 

General and administrative

 

 

520

 

 

 

354

 

 

 

1,020

 

 

 

1,256

 

Total

 

$

859

 

 

$

627

 

 

$

1,757

 

 

$

1,912

 

 

9. Litigation, Claims and Assessments

Twenty-two oppositions have been filed by third-parties in the European Patent Office each challenging the validity of a European patent owned or exclusively licensed by us. The outcome of the challenges is not certain. However, if successful, they may affect our ability to block competitors from utilizing some of our patented technology in Europe. We do not believe a successful challenge will have a material effect on our ability to manufacture and sell our products, or otherwise have a material effect on our operations.

We are party to litigation arising in the ordinary course of business. It is our opinion that the outcome of such matters will not have a material effect on our results of operations, however, the results of litigation and claims are inherently unpredictable.

17


 

Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

18


 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q as well as our audited 2018 financial statements and related notes included in our Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission (“SEC”) on March 19, 2019. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our products, plans and strategy for our business and related financing, contains forward-looking statements that involve risks and uncertainties, including statements regarding our expected financial results in future periods. The words “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “projects,” “will,” “would,” “strategy” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Examples of forward-looking statements include, among others, statements we make regarding expectations for revenues, liquidity, cash flows and financial performance, the anticipated results of our development efforts and the timing for receipt of required regulatory approvals, insurance reimbursements and product launches. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. You should read “Risk Factors” in Part II, Item 1A of this Quarterly Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. We assume no obligations to update these forward-looking statements to reflect events or circumstances after the date of this Quarterly Report or to reflect actual outcomes.

Second Sight Medical Products, Inc. (NASDAQ: EYES) develops, manufactures and markets implantable visual prosthetics that are intended to deliver useful artificial vision to blind individuals. We are a recognized global leader in neuromodulation devices for blindness, and are committed to developing new technologies to treat the broadest populations of sight-impaired individuals.

Leveraging our 20 years of experience in neuromodulation for vision, we are developing the Orion® Visual Cortical Prosthesis System (“Orion”), an implanted cortical stimulation device intended to provide useful artificial vision to individuals who are blind due to a wide range of causes, including glaucoma, diabetic retinopathy, optic nerve injury or disease and eye injury. Orion is intended to convert images captured by a miniature video camera mounted on glasses into a series of small electrical pulses. The device is designed to bypass diseased or injured eye anatomy and to transmit these electrical pulses wirelessly to an array of electrodes implanted on the surface of the brain’s visual cortex, where it is intended to provide the perception of patterns of light. A six-subject early feasibility study of the Orion device is currently underway at the Ronald Reagan UCLA Medical Center in Los Angeles (“UCLA”) and Baylor College of Medicine in Houston (“Baylor”). No peer-reviewed data is available yet for the Orion system. We anticipate enrolling additional feasibility subjects in 2019 while simultaneously negotiating the clinical and regulatory pathway to commercialization with the FDA as part of the Breakthrough Devices Program.

Our principal offices are located in Los Angeles, California. We also have an office in Lausanne, Switzerland, that manages our commercial and clinical operations in Europe, the Middle East and Asia.

Our current commercially approved product, the Argus® II Retinal Prosthesis System (“Argus II”), treats outer retinal degenerations, such as retinitis pigmentosa, also referred to as RP. RP is a hereditary disease, affecting an estimated 1.5 million people worldwide including about 100,000 people in the United States, that causes a progressive degeneration of the light-sensitive cells of the retina, leading to significant visual impairment and ultimately blindness. The Argus II is the only retinal prosthesis approved in the United States by the Food and Drug Administration (“FDA”), and was the first approved retinal prosthesis in the world. A subset of these patients would be eligible for the Argus II since the approved baseline vision for the Argus II is worse than legally blind (20/200). We commissioned 3rd party market research to estimate the size of the RP market that resulted in an estimate of approximately 1,500 patients in the US with advanced RP that could be treated with the Argus II given the eligibility criteria of our label.

The Argus II system provides an artificial form of vision that differs from the vision of people with normal sight. It does not restore normal vision and there is no evidence that it can slow or reverse the progression of the disease. The majority of patients receive a significant benefit from the Argus II, however results can vary and some patients report receiving little or no benefit. By creating an artificial form of useful vision in patients who otherwise have total sight loss, the Argus II can provide benefits that include: 

 

restoring independence through a renewed ability to navigate independently in unfamiliar environments;

 

improving patients’ orientation and mobility, such as locating doors and windows, avoiding obstacles, and following the lines of a crosswalk;

 

allowing patients to feel more connected with people in their surroundings, such as seeing when someone is approaching or moving away;

19


 

 

providing patients with enjoyment from being “visual” again, such as locating the moon, tracking groups of players as they move around a field, and watching moving streams of lights from fireworks;

 

enabling some patients to re-enter the workforce through multiple vocations that become possible because of Argus II; and

 

improving patients’ well-being and ability to perform activities of daily living.

We began selling the Argus II System in Europe at the end of 2011, Saudi Arabia in 2012, the United States and Canada in 2014, Turkey in 2015, Iran, Taiwan, South Korea and Russia in 2017, and Singapore in 2018. Given the limited addressable market of Argus II, we made the decision in 2018 to maximize capital efficiency with our Argus commercial and clinical activities and increase our investment of resources with our Orion clinical and R&D programs. In October 2018, we announced a restructuring of our international commercial activities and personnel. This restructuring resulted in a decision to no longer support new implants of Argus II in Turkey, Iran, Singapore and Russia.  We retained a team that continues to support existing Argus II patients and Centers of Excellence in all markets. We anticipate that the annual savings from the restructuring will amount to approximately $3.0 million per year and we plan to reallocate savings to the Orion program and other related projects. We recognized approximately $0.6 million of pre-tax restructuring charges in the fourth quarter of fiscal year 2018 in connection with this restructuring, consisting of severance and other employee termination benefits, substantially all of which were settled in cash during the fourth quarter of 2018.

Based on assessments of the development of our Orion technology and Orion’s positive results in our Early Feasibility Study of the six subjects implanted with the Orion at UCLA and Baylor, on May 10, 2019 our Board approved an acceleration of our transition from the Argus II to the Orion platform so we may more rapidly implement our strategy of treating blindness domestically and worldwide with the Orion technology. As a result, we have or will:  

 

accelerate the changeover to, and upgrades of, our supply chain, manufacturing and quality assurance processes, as well as our facilities and talent pool to the Orion program and suspend production of Argus II systems;

 

plan for the manufacture of the relatively large number of additional Orion devices that we will require to support FDA approval of the Orion as an approved commercial product;

 

seek to expand our early feasibility study and/or conduct a pivotal clinical trial with the intent of seeking regulatory approval for marketing Orion in the U.S.;

 

reduce our commercial activities and other costs associated with expanding or maintaining Argus II sales domestically and outside the United States;

 

limit future sales and implants of the Argus II to finished units and inventory on hand;

 

incurred non-cash impairment charges of our inventory of approximately $2.6 million in the six months ended June 30, 2019;

 

incurred cash severance and related expenses of approximately $700,000 during this quarter and the next covering employees associated with Argus II operations; and

 

continue to support our existing and future Argus II users, which includes our commitment to bring the Argus 2s enhanced software and peripherals, following regulatory approval, to market in a limited manner which may improve the current user experience.

We anticipate annual selling and marketing expense will decline by approximately $2.3 million in 2019 and decline further by approximately $2.7 million in 2020. We also expect revenue to decline as we sell through our existing inventory. We expect approximately $4.9 million of annual expense related to our manufacturing capacity to be reported as additional R&D expense in future quarters.

We are actively developing multiple technologies that we believe to be complimentary to artificial vision and could potentially provide significant enhancements to the Argus II or Orion user experience.  In most cases, we collaborate with 3rd party firms to advance and integrate these innovative technologies with our artificial vision systems.  Examples of technologies that we are currently researching include: eye tracking, object recognition and localization, thermal imaging and depth-based decluttering.  We expect to advance several of these technologies to the point of having prototype eyewear suitable for clinical testing in 2019.

As of June 30, 2019, after more than 20 years of research and development, more than $250 million of investment and over $35 million of grants awarded in support of our technology development, we employ over 115 people in the development (research, engineering and clinical), manufacture, and commercialization of the Argus II System and future products such as Orion.

20


 

Capital Funding

From inception, our operations have been funded primarily through the sales of our common stock and warrants, as well as from the issuance of convertible debt, research and clinical grants, and limited product revenue generated by the sale of our Argus II System. Funding of our business since 2018 has been provided by:

 

Issuance of common stock through our At Market Issuance Sales Agreement during the first quarter of 2018 which provided $4.0 million of net cash proceeds.

 

Issuance of common stock in securities purchase agreements in May, August, October and December 2018, which provided net cash proceeds of $22.0 million.

 

Issuance of common stock and warrants in a rights offering in February 2019, which provided net proceeds of $34.4 million.

 

Revenue of $2.4 million for the six months ended June 30, 2019 and $6.9 million for the year ended December 31, 2018 generated by sales of our Argus II product

In November 2017, we entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley FBR Inc. and H.C. Wainwright & Co., LLC, as agents (“Agents”) pursuant to which we may offer and sell, from time to time through either of the Agents, shares of our common stock having an aggregate offering price as set forth in the Sales Agreement and a related prospectus supplement filed with the SEC. We agreed to pay the Agents a cash commission of 3.0% of the aggregate gross proceeds from each sale of shares under the Sales Agreement. During January and February 2018, we sold 2.2 million shares of common stock for additional net proceeds of $4.0 million under the Sales Agreement. No shares have been sold since February 2018 under the Sales Agreement. We are utilizing these proceeds to further develop and enhance our products, support operations and for general corporate purposes.

In a rights offering completed on February 22, 2019 we sold approximately 47.8 million units, each priced at $0.724 for net cash proceeds of approximately $34.4 million. Each unit consisted of one share and one immediately exercisable warrant having an exercise price of $1.47 per share. Entities controlled by Gregg Williams, our Chairman of the Board of Directors, acquired approximately 41.4 million units in the offering for an aggregate investment of approximately $30 million.

     We are subject to the risks and uncertainties associated with a business with one product line and diminishing commercial product revenues, including limitations on our operating capital resources and uncertain demand for our product. We have incurred recurring operating losses and negative operating cash flows since inception, and we expect to continue to incur operating losses and negative operating cash flows for the foreseeable future. Based on our current plans, we do not have sufficient funds to continue operating our business at current levels for at least twelve months from the date of issuance of this report. However, our operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity offerings or debt financings, grants, collaborations, strategic partnerships or other sources. However, we may be unable to raise additional capital or enter into such other arrangements when needed on favorable terms or at all. If we are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay or discontinue one or more of our research or development programs or any other approved product candidates, or we may be unable to expand our operations, maintain our current organization and employee base or otherwise capitalize on our business opportunities, as desired, which could materially affect our business, financial condition and results of operations.

Insurance Reimbursement

Obtaining reimbursement from governmental and private insurance companies is critical to our commercial success. Due to the price of the Argus II system, our sales would be limited without the availability of third party reimbursement. In the US, coding, coverage, and payment are necessary for the surgical procedure and Argus II system to be reimbursed by payers. Coding has been established for the device and the surgical procedure. The same will be required for Orion. Coverage and payment vary by payer. The majority of Argus II patients are eligible for Medicare, and coverage is primarily provided through traditional Medicare, sometimes referred to as Medicare Fee-for-Service (“FFS”) or Medicare Advantage. A small percentage of patients are covered by commercial insurers.

 

Medicare FFS patients – Coverage is determined by Medicare Administrative Contractors (“MACs”) that administer various geographic regions of the US. Positive coverage decisions for the Argus II are effective in eight of 12 MAC jurisdictions (comprising 31 states, two territories and the District of Columbia). Effective January 1, 2019, the Centers for Medicare and Medicaid Services (“CMS”) established a 2019 average payment rate of $152,500 for both the procedure and the Argus II Retinal Prosthesis System. CMS has established a preliminary rule maintaining this rate for 2020.

 

Medicare Advantage patients – Medicare Advantage plans are required to cover the same benefits as those covered by the MAC in that jurisdiction. For example, if a MAC in a jurisdiction has favorable coverage for the Argus II, then all Medicare Advantage plans in that MAC jurisdiction are required to offer the same coverage for the Argus II. Individual hospitals and

21


 

 

ASCs may negotiate contracts specific to that individual facility, which may include additional separate payment for the Argus II implant system. In addition, procedural payment is variable and can be based on a percentage of billed charges, payment groupings or other individually negotiated payment methodologies. Medicare Advantage plans may allow providers to confirm coverage and payment for the Argus II procedure in advance of implantation. Over the last several years a large majority of all Medicare Advantage pre-authorization requests for Argus II procedures were granted.

 

Commercial insurer patients – Commercial insurance plans make coverage and payment rate decisions independent of Medicare, and contracts are individually negotiated with facility and physician providers.

Within Europe, Argus II obtained reimbursement approval or funding in Germany (NUB Innovation Funding Program), France (Forfait Innovation Funding Program), one region of Italy (Regional Funding), and via Commissioning through Evaluation (“CtE”) program in England. If successful, the Forfait Innovation Funding Program and CtE program would result in permanent national funding for Argus II.

Currently, we are in process of evaluating potential reimbursement pathways for Orion in the US market. Compared to Argus II, which is largely catering to Medicare patient population, Orion is expected to address a patient population with diverse and more balanced payer mix due to our potential indications profile and expected younger average patient population. As Orion is a part of the FDA’s Breakthrough Devices program, we are closely evaluating a variety of fast track reimbursement programs, including recent encouraging announcements from CMS proposing modernization of payment policies for medical devices that meet FDA’s Breakthrough Devices designation. If feasible, we also plan to approach some of the key payers during the second half of 2019 and get their feedback to ensure our next stage clinical trial design for Orion will cater to their key coverage requirements.

Product and Clinical Development Plans

Orion.  By further developing our visual cortical prosthesis, Orion, we believe we will significantly expand our market to include nearly all profoundly blind individuals. The only notable exceptions for potential use of the Orion are those who are blind due to otherwise currently treatable diseases, individuals who are born blind, or blindness due to direct damage of the visual cortex, which is rare. However, of the estimated 36 million blind people worldwide, there are approximately 5.8 million people who are legally blind due to causes that are not otherwise treatable (including RP) or age-related macular degeneration (“AMD”). If approved for marketing, the FDA and other regulatory agencies will determine the subset of these patients who are eligible for the Orion based on our clinical trials and the associated results.

Our objective in designing and developing the Orion visual prosthesis system is to bypass the optic nerve and directly stimulate the part of the brain responsible for human vision. A six-subject early feasibility study of the Orion device is currently underway at UCLA and Baylor. No peer-reviewed data is available yet for the Orion system.

In November 2017, the FDA granted Breakthrough Devices Program designation for the Orion. This designation is given to a few select medical devices in order to provide more effective treatment of life-threatening or irreversibly debilitating diseases or conditions. This program is intended to help patients have more timely access to these medical devices by expediting their development, assessment, and review. With this designation, we believe the Orion will have the following advantages during the FDA review process:

 

Greater interactive review both for the Investigational Device Exemption and Premarket Approval application;

 

Greater reliance on post-market vs. pre-market data collection and greater acceptance of uncertainty in the benefit-risk profile at the time of approval;

 

Priority review (i.e., review of the submission is placed at the top of the review queue and receives additional review resources); and,

 

Senior FDA management involvement and assignment of a cross-disciplinary case manager.

We expect that inclusion in the Breakthrough Devices Program may shorten the timeline required to bring the Orion to market as a commercial product. We also are currently evaluating our pivotal trial design for Orion and expect to reach consensus with the FDA on design specifics during 2019. Major elements of our clinical trial design include the number of patients, study duration, and the endpoints suitable for assessing visual function, functional vision and quality of life. While negotiations with the FDA are ongoing, we are evaluating two different paths for Orion.  The first path is a Premarket Approval, or PMA, track.  The projected start of the pivotal trial is still not determined pending resolution of various aspects of the pivotal study and post approval requirements. Depending on the timing of the PMA study, it is possible that we would expand our Early Feasibility Study in order to collect additional data before proceeding to a pivotal trial.  The second path would involve first obtaining a Humanitarian Device Exemption, or HDE, approval followed by PMA approval.   This path would become preferable if the PMA requirements push the start of the PMA study too far into the future.  Given an HDE path is typically less rigorous than a PMA path, we believe that we could start an HDE study much

22


 

sooner than a PMA study. In parallel to seeking an HDE approval, we would continue negotiations with the Agency as well as preparations to start a PMA study.

Argus II. The Argus II is currently approved for RP patients with bare or no light perception in the US, and in Europe for severe to profound vision loss due to outer retinal degeneration, such as from RP, choroideremia, and other similar conditions. The number of people who are legally blind due to RP is estimated to be about 25,000 in the US, 42,000 in Europe, and about 375,000 total worldwide. A subset of these patients would be eligible for the Argus II since the approved baseline vision for the Argus II is worse than legally blind (20/200). We commissioned 3rd party market research for the size of the RP market that resulted in an estimate of approximately 1,500 patients in the US with advanced RP that could be treated with the Argus II given the eligibility criteria of our label.

Given the limited addressable market of Argus II, we made the decision to maximize capital efficiency with our Argus II commercial and clinical activities and increase our investment of resources with our Orion clinical and R&D programs.  As a result, we expect to suspend production activities related to Argus II, sell through our remaining inventory and reduce our commercial activities related to Argus II. We remain committed to supporting existing Argus II users and intend to pursue regulatory approvals for our new externals, Argus 2s.

Critical Accounting Policies

The preparation of our condensed consolidated financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) and the requirements of the United States Securities and Exchange Commission require management to make estimates and assumptions that affect the amounts reported in the financial statements and the notes to the financial statements. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions. A summary of our critical accounting policies is presented in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018.

We adopted ASU No. 2016-02—Leases (Topic 842), as amended, as of January 1, 2019, using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at adoption and in comparative periods that approximates the results of a full retrospective approach. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification.

       Adoption of the new standard resulted in the recording of right-of-use assets and operating lease liabilities of approximately $2.6 million and $2.8 million respectively, as of January 1, 2019. The difference of $0.2 million between the right-of-use assets and operating lease liabilities, net of the deferred tax impact, was recorded as an adjustment to accumulated deficit at January 1, 2019. The standard did not materially impact our consolidated net loss and had no impact on cash flows.

       Based upon our decision on May 10, 2019 to accelerate our transition to the Orion platform, we evaluated our accounting policies related to the disposition in accordance with ASC 205-20 Discontinued Operations, and assessed our long-lived assets for any indications that their carrying values may not be recoverable in accordance with ASC 360, Property, Plant, and Equipment, for any impairment. Based upon these reviews we recorded in March, 2019 an impairment charge of $2.4 million related to inventory of Argus II based on our plans to suspend production of Argus II. Specifically, we reduced expenses and personnel related to commercial activities and production for the Argus II. We recognized approximately $0.7 million of pre-tax restructuring charges in the second quarter of fiscal year 2019 in connection with this restructuring, consisting of severance and other employee termination benefits, substantially all of which are expected to be settled in cash during the next two quarters of 2019. In addition we incurred an additional $0.2 million impairment charge related to inventory in the three months ended June 30, 2019. Based upon our review of the applicable accounting standards we determined that there was no impairment of any other assets.

       There have been no other material changes to our critical accounting policies during the six months ended June 30, 2019.

23


 

Results of Operations

Net sales. Our net sales are derived primarily from the sale of our Argus II product. We began selling the Argus II in Europe at the end of 2011, Saudi Arabia in 2012, the United States and Canada in 2014, Turkey in 2015, Iran, Taiwan, South Korea and Russia in 2017, and Singapore in 2018. In May 2019, we decided to accelerate our transition to our Orion platform.  As a result, we expect to suspend production related to Argus II and sell through our remaining inventory.

Cost of sales. Cost of sales includes the salaries, benefits, material, overhead, third party costs, warranty, charges for excess and obsolete inventory, and other costs required to make our Argus II system at our Los Angeles, California facility. Our product involves technologically complex materials and processes. We expect to record cost of sales for any remaining Argus II inventory that we sell and a majority of our expenses related to our production capabilities and fixed overhead to be reported as research and development expense in future periods. We record cost of sales when products are implanted, which may differ from the period we are able to record revenue. Such timing differences may cause our reported results of operations to be difficult to compare from period to period.

Operating Expenses. We generally recognize our operating expenses as incurred in four general operational categories: research and development, clinical and regulatory, sales and marketing, and general and administrative. Our operating expenses also include a non-cash component related to the amortization of stock-based compensation for research and development, clinical and regulatory, sales and marketing, and general and administrative personnel. From time to time we have received grants from institutions or agencies, such as the National Institutes of Health, to help fund the some of the cost of our development efforts. We have recorded these grants as reductions to operating expenses.

 

Research and development expenses consist primarily of employee compensation and consulting costs related to the design, development, and enhancements of our current and potential future products, offset by grant revenue received in support of specific research projects. We expense our research and development costs as they are incurred. We expect research and development expenses to increase in the future as we pursue further enhancements of our existing product and develop technology for our potential future products, such as Orion. We also expect to receive additional grants in the future that will be offset primarily against research and development costs.

 

Clinical and regulatory expenses consist primarily of salaries, travel and related expenses for personnel engaged in clinical and regulatory functions, as well as internal and external costs associated with conducting clinical trials and maintaining relationships with regulatory agencies. We expect clinical and regulatory expenses to increase as we assess the safety and efficacy of enhancements to our current Argus II and conduct clinical studies of potential future products such as Orion.

 

Sales and marketing expenses consist primarily of salaries, commissions, travel and related expenses for personnel engaged in sales, marketing and business development functions, as well as costs associated with promotional and other marketing activities including the cost of units consumed as demos or samples. We expect sales and marketing expenses to decrease as we reduce our Argus II commercial activities and sell through our existing inventory.

 

General and administrative expenses consist primarily of salaries and related expenses for executive, legal, finance, human resources, information technology and administrative personnel, as well as recruiting and professional fees, patent filing and annuity costs, insurance costs and other general corporate expenses, including rent. We expect general and administrative expenses to remain consistent through 2019 but increase in future years as we add personnel and incur additional costs related to the growth of our business and operate as a public company.

Comparison of the Three Months Ended June 30, 2019 and 2018

We implanted a total of 11 Argus II products during the second quarter of 2019 and 17 in the second quarter of 2018. Of these, four implants were in Europe, the Middle East and Asia (collectively, “EMEA”) in the second quarter of 2019 while eight implants were in EMEA in the second quarter of 2018.

In North America, there were seven implants in the second quarter of 2019 while there were nine implants in the second quarter of the prior year. Of these, all seven implants were in the U.S. in the second quarter of 2019 while there were eight implants in the U.S. and one implant in Canada in the second quarter of 2018.

Net Sales. Net sales were $1.3 million in the second quarter of 2019 as compared to $1.9 million in the same period in 2018, a decrease of $0.6 million or 33%. Revenue was recognized for 10 units in the second quarter of 2019 while 17 units were recognized in the second quarter of 2018. Revenue recognized per implant was approximately $128,000 in the second quarter of 2019 and was $112,000 in same period of 2018. We expect our net sales to decline as we sell through our existing inventory of Argus II.

Cost of sales. Cost of sales was $0.9 million in the second quarter of 2019 as compared to $0.8 million in the second quarter of 2018. Cost of sales in the second quarter of 2019 consists primarily of the cost of products implanted of $0.3 million and unabsorbed production costs of $0.6 million. In the second quarter of 2018, the cost of sales included approximately $0.6 million for the cost of products implanted and unabsorbed production costs plus an adjustment of $0.2 million for an increase in the reserve for excess

24


 

inventory. We expect to record cost of sales for any remaining Argus II inventory that we sell and a majority of our expenses related to our production capabilities and fixed overhead to be reported as research and development expense in future periods.

Research and development expense. Research and development expense, net of funding received from grants, increased by $1.0 million, or 42%, from $2.4 million in the second quarter of 2018 to $3.4 million in the second quarter of 2019. The costs increased from the prior year primarily due to increased headcount and costs for internally produced prototypes. We expect our research and development expenses to increase in future periods as we accelerate our transition to the Orion platform, including costs previously related to production activities such as facilities and personnel that will be transitioning to Orion development activities.

Clinical and regulatory expense. Clinical and regulatory expense, net of funding received from grants, decreased $0.6 million, or 52%, from $1.1 million in the second quarter of 2018 to $0.5 million in the second quarter of 2019. This decrease is attributable to decreased costs associated with the Orion feasibility study and an allocation of grant funds which offset costs in the period. We expect clinical and regulatory costs to increase in the future as we conduct additional clinical trials to assess new products such as Orion and related enhancements to our user experience.

Selling and marketing expense. Selling and marketing expense decreased $1.2 million, or 41%, from $2.9 million in the second quarter of 2018 to $1.7 million in the second quarter of 2019. This decrease in costs was primarily the result of decreased use of outside services, reduced headcount and related compensation expense. We expect selling and marketing expense to decrease as we reduce our Argus II commercial activities and sell through our existing inventory.

General and administrative expense. General and administrative expense decreased $0.3 million, or 14%, from $2.6 million in the second quarter of 2018 to $2.3 million in the same period of 2019. This decrease is primarily attributable to $0.1 million in lower compensation costs primarily due to reduced staffing and patent costs of $0.1 million. We expect general and administrative expenses to remain consistent during the remainder of 2019.

 

Restructuring charges. We recorded a non-cash restructuring charge of $0.2 million in the second quarter of 2019 to our reserve for excess and obsolete inventory in connection with our plans to suspend Argus II production. In addition, we recognized approximately $0.7 million of pre-tax restructuring charges in the second quarter of fiscal year 2019 consisting of severance and other employee termination benefits, substantially all of which are expected to be settled in cash during the next two quarters of 2019.

 

 

Comparison of the Six Months Ended June 30, 2019 and 2018

We implanted a total of 21 Argus II products during the first six months of 2019 and 33 in the first six months of 2018. Of these, eight implants were in Europe, the Middle East and Asia (collectively, “EMEA”) in the first six months of 2019 while 14 implants were in EMEA in the first six months of 2018.

In North America, there were 13 implants in the first six months of 2019 while there were 19 implants in the first six months of the prior year. Of these, all the implants were in the U.S. in the first six months of 2019 while 17 were in the U.S. in the first six months of 2018 along with two implants in Canada.

Net Sales. Net sales were $2.4 million in the first months of 2019 as compared to $2.9 million in the same period in 2018, a decrease of $0.5 million or 16%. Revenue was recognized for 19 units in the first six months of 2019 as compared to 26 units in the first six months of 2018. Revenue recognized per implant was approximately $127,000 in the first six months of 2019 and was $112,000 in same period of 2018. We expect our net sales to decline as we sell through our existing inventory of Argus II.

Cost of sales. Cost of sales was $1.7 million in the first six months of 2019 as compared to $1.5 million in the first six months of 2018. Cost of sales in the first six months of 2019 consists primarily of the cost of products implanted of $1.1 million and unabsorbed production costs of $0.6 million. In the first six months of 2018, the cost of sales included approximately $1.4 million for the cost of products implanted and unabsorbed production costs plus an increase of $0.1 million in the reserve for excess inventory. We expect to record cost of sales for any remaining Argus II inventory that we sell and a majority of our expenses related to our production capabilities and fixed overhead to be reported as research and development expense in future periods.

Research and development expense. Research and development expense, net of funding received from grants, increased by $0.7 million, or 15%, from $4.9 million in the first six months of 2018 to $5.6 million in the first six months of 2019. In the first six months of 2019 we utilized $0.3 million of grant funds to offset costs as compared to $0.1 million in 2018. The costs before the grant revenue offset increased from the prior year primarily due to increased headcount and costs for internally produced prototypes. We expect our research and development expenses to increase in future periods as we accelerate our transition to the Orion platform, including costs previously related to production activities such as facilities and personnel that will be transitioning to Orion development activities.

Clinical and regulatory expense. Clinical and regulatory expense, net of funding received from grants, decreased $1.0 million, or 38%, from $2.5 million in the first six months of 2018 to $1.5 million in the first six months of 2019. This decrease is primarily

25


 

attributable to decreased costs associated with the Orion feasibility study of $0.5 million and offset costs from grants of $0.5 million. We expect clinical and regulatory costs to increase in the future as we conduct additional clinical trials to assess new products such as Orion and related enhancements to our user experience.

Selling and marketing expense. Selling and marketing expense decreased $2.1 million, or 36%, from $5.9 million in the first six months of 2018 to $3.8 million in the first six months of 2019. This decrease in costs was primarily the result of decreased use of outside services, reduced headcount and related compensation expenses. We expect selling and marketing expense to decrease as we reduce our Argus II commercial activities and sell through our existing inventory.

General and administrative expense. General and administrative expense decreased $1.2 million, or 20%, from $5.9 million in the first six months of 2018 to $4.7 million in the same period of 2019. This decrease is primarily attributable to $0.6 million in lower compensation costs primarily due to cancelled stock option grants and reduced staffing.  Outside service costs were reduced by $0.2 million and patent and travel costs were both reduced by $0.1 million. We expect general and administrative expenses to remain consistent during the remainder of 2019.

 

Restructuring charges. We recorded a non-cash restructuring charge of $2.6 million in the first six months of 2019 to our reserve for excess and obsolete inventory in connection with our plans to suspend Argus II production. In addition, we recognized approximately $0.7 million of pre-tax restructuring charges in the second quarter of fiscal year 2019 consisting of severance and other employee termination benefits, substantially all of which are expected to be settled in cash during the next two quarters of 2019.

 

Liquidity and Capital Resources

Our financial statements have been presented on the basis that our business is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We are subject to the risks and uncertainties associated with a business with one product line and limited commercial product revenues, including limitations on our operating capital resources and uncertain demand for our products. We have incurred recurring operating losses and negative operating cash flows since inception, and we expect to continue to incur operating losses and negative operating cash flows for the foreseeable future. 

 

In a rights offering completed on February 22, 2019, we sold approximately 47.8 million units, each priced at $0.724 for net cash proceeds of approximately $34.4 million. Each unit consisted of one share and one immediately exercisable warrant having an exercise price of $1.47 per share. Entities controlled by Gregg Williams, our Chairman of the Board of Directors, acquired approximately 41.4 million units in the offering for an aggregate investment of approximately $30 million. The expiration date of the warrants issued pursuant to this rights offering is March 14, 2024, and the expiration date of all previously outstanding warrants listed for trading under the symbol “EYESW” were extended to March 14, 2024.

We do not have sufficient funds to support our operations for the next 12 months from the date of issuance of this report. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. Conducting clinical trials is a time-consuming, expensive and uncertain process that takes many years to complete and we may never generate the necessary data or results required to obtain marketing approval. We expect revenues for Argus II to decrease as we sell through our remaining inventory and expenses to increase in connection with our ongoing activities, particularly as we continue clinical trials of Orion, initiate new research and development projects and seek marketing approval for any product candidates that we successfully develop. In addition, if we obtain marketing approval for Orion, we expect to incur significant additional expenses related to sales, marketing, distribution and other commercial infrastructure to commercialize such product. In addition, our product candidates, if approved, may not achieve commercial success. We incur significant costs associated with operating as a public company in a regulated industry.

Until such time, if ever, as we can generate substantial product revenues, we anticipate that we will seek to fund our operations through public or private equity or debt financings, grants, collaborations, strategic partnerships or other sources. Accordingly, these factors among others raise substantial doubt about our ability to continue as a going concern. However, we may be unable to raise additional capital or enter into such other arrangements when needed on favorable terms or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our common stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through additional collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates, or to grant licenses on terms that may not be favorable to us.

Cash and cash equivalents increased by $20.7 million from $4.5 million as of December 31, 2018 to $25.2 million as of June 30, 2019. Working capital was $20.2 million as of June 30, 2019, as compared to $2.0 million as of December 31, 2018, an increase of $18.2 million. We use our cash and cash equivalents and working capital to fund our operating activities. 

26


 

Cash Flows from Operating Activities

During the first six months of 2019, we used $13.8 million of cash in operating activities, consisting primarily of a net loss of $18.1 million, offset by non-cash charges which provided cash of $4.1 million for depreciation and amortization of property and equipment, stock-based compensation, change in right of use assets, excess inventory reserve, impairment charge and by a net change in operating assets and liabilities which provided cash of $0.2 million. During the first six months of 2018, we used $14.6 million of cash in operating activities, consisting primarily of a net loss of $17.7 million, offset by non-cash charges which provided cash of $2.3 million for depreciation and amortization of property and equipment, stock-based compensation, excess inventory reserve and common stock issuable and by a net change in operating assets and liabilities which provided cash of $0.8 million.

Cash Flows from Investing Activities

Cash used for investing activities in the first six months of 2019 was $164,000 and was $116,000 in the first six months of 2018 both for the purchase of property and equipment.

Cash Flows from Financing Activities

Financing activities provided $34.6 million of cash in the first six months of 2019 consisting of $34.4 million of net proceeds from the rights offering and $0.2 million from employee stock plan purchases. Financing activities provided $14.4 million of cash in the first six months of 2018 consisting of $14.0 million in net proceeds from the sale of common stock and $0.4 million from the exercise of options and warrants and employee stock plan purchases.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

27


 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Sensitivity

The primary objective of our investment activities is to maintain the safety of principal and preserve liquidity without incurring significant risk. We invest cash in excess of our current needs in money market funds. As of June 30, 2019, our investments consisted solely of money market funds.

Exchange Rate Sensitivity

During the six months ended June 30, 2019, approximately 77% of our revenue was denominated in U.S. dollars and 23% in Euros. The majority of our operating expenses were denominated in U.S. dollars. We have not entered into foreign currency forward contracts to hedge our operating expense exposure to foreign currencies, but we may do so in the future. 

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures 

Our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. As of June 30, 2019, based on the evaluation of these disclosure controls and procedures, our CEO and CFO have concluded that our disclosure controls and procedures were effective at the reasonable assurance level. 

Changes in Internal Control over Financial Reporting   

There has been no change in our internal control over financial reporting during the quarter ended June 30, 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

28


 

PART II-OTHER INFORMATION

Item 1.

Legal Proceedings

Twenty-two oppositions have been filed by third parties in the European Patent Office each challenging the validity of a European patent owned or exclusively licensed by us. The outcome of the challenges is not certain. However, if successful, they may affect our ability to block competitors from utilizing some of its patented technology in Europe. We do not believe a successful challenge will have a material effect on our ability to manufacture and sell our products, or otherwise have a material effect on our operations.

We are party to litigation arising in the ordinary course of business. It is our opinion that the outcome of such matters will not have a material effect on our results of operations, however, the results of litigation and claims are inherently unpredictable. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

Item 1A.

Risk Factors

 

We incorporate herein by reference the risk factors included in our Annual Report on Form 10-K, which we filed with the Securities and Exchange Commission on March 19, 2019 and updated in our Form 10-Q for the period ending March 31, 2019 filed on May 15, 2019. There have been no material changes to such risk factors as of June 30, 2019.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.

Defaults upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

29


 

Item 6.Exhibits

EXHIBIT INDEX

 

Exhibit

No.

 

Exhibit Description

 

 

 

 

 

 

31.1

 

Certification of Principal Executive Officer of Second Sight Medical Products, Inc. pursuant to Section 302 of Sarbanes-Oxley Act of 2002.*

 

 

 

31.2

 

Certification of Principal Financial and Accounting Officer of Second Sight Medical Products, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

 

 

32.1

 

Certifications of Principal Executive Officer and Principal Financial and Accounting Officer of Second Sight Medical Products, Inc.  pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 

 

 

101.INS

 

XBRL Instant Document.*

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document.*

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document.*

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document.*

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document.*

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document.*

 

*

Included herein.

30


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Name

 

Title

 

Date

 

 

 

 

 

/s/  Jonathan Will McGuire

 

Chief Executive Officer and Director

 

August 6, 2019

 Jonathan Will McGuire

 

(Principal Executive Officer)

 

 

 

 

 

 

 

/s/  John T. Blake

 

Chief Financial Officer

 

August 6, 2019

John T. Blake

 

(Principal Financial and Accounting Officer)

 

 

 

31