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 333-198073 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) |
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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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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. (Check one):
Large accelerated filer | ☐ | Accelerated filer | ☐ | |
Non-accelerated filer | ☐ | Smaller reporting company | ☒ |
Emerging growth 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 3, 2018,6, 2019, the issuerregistrant had 67,074,542124,586,323 shares of common stock, issued$0 par value per share and outstanding.61,459,657 warrants, outstanding.
SECOND SIGHT MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
FORM 10-Q
TABLE OF CONTENTS
PART I |
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Item 1. |
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| Condensed Consolidated Balance Sheets as of June 30, | 3 | |
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| 6 | ||
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. | 29 | ||
Item 4. | 29 | ||
Item 5. | 29 | ||
Item 6. | 30 | ||
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SECOND SIGHT MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(in thousands)
June 30, | December 31, |
| June 30, |
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| December 31, |
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2018 | 2017 |
| 2019 |
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| 2018 |
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(unaudited) |
| (unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents | $ | 7,476 | $ | 7,839 |
| $ | 25,161 |
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| $ | 4,471 |
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Accounts receivable, net | 718 | 1,831 |
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| 629 |
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| 504 |
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Inventories, net | 3,567 | 2,700 |
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| 1,474 |
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| 3,250 |
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Prepaid expenses and other current assets | 599 | 795 |
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| 783 |
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| 1,395 |
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Total current assets | 12,360 | 13,165 |
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| 28,047 |
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| 9,620 |
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Property and equipment, net | 1,191 | 1,299 |
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| 993 |
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| 1,025 |
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Right-of-use assets |
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| 2,454 |
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| — |
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Deposits and other assets | 66 | 33 |
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| 26 |
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| 37 |
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Total assets | $ | 13,617 | $ | 14,497 |
| $ | 31,520 |
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| $ | 10,682 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable | $ | 1,220 | $ | 752 |
| $ | 1,255 |
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| $ | 1,305 |
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Accrued expenses | 2,071 | 2,425 |
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| 2,562 |
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| 2,503 |
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Accrued compensation expense | 2,448 | 2,611 |
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| 2,207 |
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| 2,690 |
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Accrued clinical trial expenses | 1,074 | 779 |
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| 1,038 |
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| 933 |
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Current operating lease liabilities |
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| 219 |
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| — |
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Contract liabilities | 260 | 48 |
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| 557 |
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| 167 |
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Total current liabilities | 7,073 | 6,615 |
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| 7,838 |
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| 7,598 |
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Long term operating lease liabilities |
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| 2,487 |
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| — |
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Total liabilities |
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| 10,325 |
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| 7,598 |
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Commitments and contingencies |
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Stockholders’ equity: |
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Preferred stock, no par value, 10,000 shares authorized; none outstanding | — | — |
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| — |
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| — |
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Common stock, no par value; 200,000 shares authorized; shares issued and outstanding: 67,075 and 57,630 as of June 30, 2018 and December 31, 2017, respectively | 216,805 | 202,156 | ||||||||||||||
Common stock issuable | — | 153 | ||||||||||||||
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 |
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| 263,656 |
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| 229,019 |
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Additional paid-in capital | 42,434 | 40,522 |
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| 47,445 |
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| 44,111 |
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Accumulated other comprehensive loss | (604 | ) | (572 | ) |
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| (574 | ) |
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| (575 | ) | ||||
Accumulated deficit | (252,091 | ) | (234,377 | ) |
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| (289,332 | ) |
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| (269,471 | ) | ||||
Total stockholders’ equity | 6,544 | 7,882 |
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| 21,195 |
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| 3,084 |
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Total liabilities and stockholders’ equity | $ | 13,617 | $ | 14,497 |
| $ | 31,520 |
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| $ | 10,682 |
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See accompanying notes.
SECOND SIGHT MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
Condensed Consolidated Statements of Operations (unaudited)
(in thousands, except per share data)
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 |
| Three Months Ended June 30, |
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| Six Months Ended June 30, |
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| 2019 |
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| 2018 |
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| 2019 |
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| 2018 |
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Net sales | $ | 1,907 | $ | 2,236 | $ | 2,883 | $ | 3,245 |
| $ | 1,282 |
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| $ | 1,907 |
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| $ | 2,410 |
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| $ | 2,883 |
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Cost of sales | 836 | 1,127 | 1,504 | 2,254 |
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| 933 |
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| 836 |
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| 1,664 |
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| 1,504 |
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Gross profit | 1,071 | 1,109 | 1,379 | 991 |
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| 349 |
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| 1,071 |
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| 746 |
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| 1,379 |
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Operating expenses: |
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Research and development, net of grants | 2,422 | 1,949 | 4,895 | 3,796 |
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| 3,436 |
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| 2,422 |
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| 5,619 |
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| 4,895 |
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Clinical and regulatory | 1,126 | 684 | 2,475 | 1,298 | ||||||||||||||||||||||||||||
Clinical and regulatory, net of grants |
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| 536 |
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| 1,126 |
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| 1,542 |
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| 2,475 |
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Selling and marketing | 2,879 | 2,447 | 5,891 | 4,682 |
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| 1,689 |
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| 2,879 |
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| 3,792 |
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| 5,891 |
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General and administrative | 2,632 | 2,901 | 5,875 | 5,642 |
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| 2,256 |
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| 2,632 |
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| 4,705 |
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| 5,875 |
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Restructuring charges |
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| 873 |
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| 3,297 |
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Total operating expenses | 9,059 | 7,981 | 19,136 | 15,418 |
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| 8,790 |
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| 9,059 |
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| 18,955 |
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| 19,136 |
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Loss from operations | (7,988 | ) | (6,872 | ) | (17,757 | ) | (14,427 | ) |
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| (8,441 | ) |
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| (7,988 | ) |
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| (18,209 | ) |
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| (17,757 | ) | ||||||||
Interest income | 27 | 29 | 43 | 36 |
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| 1 |
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| 27 |
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| 69 |
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| 43 |
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Net loss | $ | (7,961 | ) | $ | (6,843 | ) | $ | (17,714 | ) | $ | (14,391 | ) |
| $ | (8,440 | ) |
| $ | (7,961 | ) |
| $ | (18,140 | ) |
| $ | (17,714 | ) | ||||
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Net loss per common share – basic and diluted | $ | (0.12 | ) | $ | (0.12 | ) | $ | (0.29 | ) | $ | (0.28 | ) |
| $ | (0.07 | ) |
| $ | (0.12 | ) |
| $ | (0.16 | ) |
| $(0.29) |
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Weighted average common shares outstanding – basic and diluted | 64,418 | 56,513 | 61,750 | 51,380 |
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| 124,332 |
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| 64,418 |
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| 110,526 |
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| 61,750 |
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See accompanying notes.
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, | |||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 |
| Three Months Ended June 30, |
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| Six Months Ended June 30, |
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| 2019 |
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| 2018 |
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| 2019 |
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| 2018 |
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Net loss | $ | (7,961 | ) | $ | (6,843 | ) | $ | (17,714 | ) | $ | (14,391 | ) |
| $ | (8,440 | ) |
| $ | (7,961 | ) |
| $ | (18,140 | ) |
| $ | (17,714 | ) | ||||
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Other comprehensive income (loss): |
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Foreign currency translation adjustments | (77 | ) | 92 | (32 | ) | 122 |
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| 9 |
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| (77 | ) |
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| 1 |
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| (32 | ) | ||||||||||
Comprehensive loss | $ | (8,038 | ) | $ | (6,751 | ) | $ | (17,746 | ) | $ | (14,269 | ) |
| $ | (8,431 | ) |
| $ | (8,038 | ) |
| $ | (18,139 | ) |
| $ | (17,746 | ) |
See accompanying notes.
SECOND SIGHT MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
Condensed Consolidated Statements of Stockholders’ Equity (unaudited)
(in thousands)
Common Stock | Common Stock Issuable | Additional Paid-in | Notes Receivable for Stock Option | Accumulated Other Comprehensive | Accumulated | Total | ||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Exercises | Loss | Deficit | |||||||||||||||||||||||||||||
Balance, December 31, 2016 | 42,701 | $ | 186,769 | 77 | $ | 153 | $ | 30,697 | $ | (2 | ) | $ | (608 | ) | $ | (205,861 | ) | $ | 11,148 | |||||||||||||||||
Issuance of shares of common stock and warrants, net of issuance costs | 13,653 | 13,647 | — | — | 6,021 | — | — | — | 19,668 | |||||||||||||||||||||||||||
Issuance of shares of common stock in connection with employee stock purchase plan | 193 | 189 | — | — | — | — | — | — | 189 | |||||||||||||||||||||||||||
Fair value of stock options issued for services | — | — | — | — | 20 | — | — | — | 20 | |||||||||||||||||||||||||||
Common stock issuance for services | 223 | 262 | (59 | ) | (132 | ) | — | — | — | — | 130 | |||||||||||||||||||||||||
Release of restricted stock units | 24 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | 1,916 | — | — | — | 1,916 | |||||||||||||||||||||||||||
Repayment of notes receivable for stock option exercises | — | — | — | — | — | 1 | — | — | 1 | |||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | (14,391 | ) | (14,391 | ) | |||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | — | 122 | — | 122 | |||||||||||||||||||||||||||
Balance, June 30, 2017 | 56,794 | $ | 200,867 | 18 | $ | 21 | $ | 38,654 | $ | (1 | ) | $ | (486 | ) | $ | (220,252 | ) | $ | 18,803 |
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| Common Stock |
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| Common Stock Issuable |
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| Additional Paid-in |
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| Accumulated Other Comprehensive |
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| Accumulated |
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| Total Stockholders’ |
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| Shares |
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| Amount |
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| Shares |
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| Amount |
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| Capital |
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| Loss |
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| Deficit |
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| Equity |
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Balance, December 31, 2017 |
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| 57,630 |
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| $ | 202,156 |
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| 82 |
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| $ | 153 |
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| $ | 40,522 |
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| $ | (572 | ) |
| $ | (234,377 | ) |
| $ | 7,882 |
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Issuance of shares of common stock, net of issuance costs |
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| 2,224 |
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| 3,992 |
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|
| — |
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| — |
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| — |
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| — |
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| — |
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| 3,992 |
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Warrants exercise |
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| 5 |
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| 7 |
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| — |
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| — |
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| — |
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| — |
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| — |
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| 7 |
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Common stock issuance for services |
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| — |
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| — |
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| 34 |
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| 65 |
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| — |
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| — |
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| — |
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| 65 |
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Release of restricted stock units |
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| 12 |
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| — |
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| — |
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| — |
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| — |
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| — |
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| — |
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| — |
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Stock-based compensation expense |
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| — |
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| — |
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| — |
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| — |
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| 1,285 |
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| — |
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| — |
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| 1,285 |
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Exercise of common stock options |
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| 5 |
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| 8 |
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| — |
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| — |
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| — |
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| — |
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| — |
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| 8 |
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Net loss |
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| — |
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| — |
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| — |
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| — |
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| — |
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| — |
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| (9,753 | ) |
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| (9,753 | ) |
Foreign currency translation adjustment |
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| — |
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| — |
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| — |
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| — |
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| — |
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| 45 |
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| — |
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|
| 45 |
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Balance, March 31, 2018 |
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| 59,876 |
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| 206,163 |
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|
| 116 |
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| 218 |
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| 41,807 |
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| (527 | ) |
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| (244,130 | ) |
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| 3,531 |
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Issuance of shares of common stock, net of issuance costs |
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| 6,757 |
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| 9,978 |
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|
| — |
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|
| — |
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|
| — |
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|
| — |
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|
| — |
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| 9,978 |
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Issuance of common stock in connection with employee stock purchase plan |
|
| 226 |
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| 261 |
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|
| — |
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|
| — |
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|
| — |
|
|
| — |
|
|
| — |
|
|
| 261 |
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Common stock issued or issuable for services |
|
| 133 |
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|
| 262 |
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| (116 | ) |
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| (218 | ) |
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| — |
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| — |
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| — |
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| 44 |
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Release of restricted stock units |
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| 12 |
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| — |
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| — |
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| — |
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| — |
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| — |
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|
| — |
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|
| — |
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Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
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|
| 627 |
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| — |
|
|
| — |
|
|
| 627 |
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Exercise of common stock options |
|
| 71 |
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|
| 141 |
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|
| — |
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|
| — |
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|
| — |
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|
| — |
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|
| — |
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| 141 |
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Net loss |
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| — |
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|
| — |
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|
| — |
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|
| — |
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|
| — |
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|
| — |
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|
| (7,961 | ) |
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| (7,961 | ) |
Foreign currency translation adjustment |
|
| — |
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|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (77 | ) |
|
| — |
|
|
| (77 | ) |
Balance, June 30, 2018 |
|
| 67,075 |
|
| $ | 216,805 |
|
|
| — |
|
| $ | — |
|
| $ | 42,434 |
|
| $ | (604 | ) |
| $ | (252,091 | ) |
| $ | 6,544 |
|
Common Stock | Common Stock Issuable | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | Total | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Loss | Deficit | ||||||||||||||||||||||||||
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 | 8,981 | 13,970 | — | — | — | — | — | 13,970 | ||||||||||||||||||||||||
Issuance of common stock in connection with employee stock purchase plan | 226 | 261 | — | — | — | — | — | 261 | ||||||||||||||||||||||||
Common stock issued or issuable for services | 133 | 262 | (82 | ) | (153 | ) | — | — | — | 109 | ||||||||||||||||||||||
Release of restricted stock units | 24 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | 1,912 | — | — | 1,912 | ||||||||||||||||||||||||
Exercise of common stock warrants | 5 | 7 | — | — | — | — | — | 7 | ||||||||||||||||||||||||
Exercise of common stock options | 76 | 149 | — | — | — | — | — | 149 | ||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | (17,714 | ) | (17,714 | ) | ||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | (32 | ) | — | (32 | ) | ||||||||||||||||||||||
Balance, June 30, 2018 | 67,075 | $ | 216,805 | — | $ | — | $ | 42,434 | $ | (604 | ) | $ | (252,091 | ) | $ | 6,544 |
|
| 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.
SECOND SIGHT MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(in(in thousands)
Six Months Ended June 30, |
| Six Months Ended June 30, |
| |||||||||||||
2018 | 2017 |
| 2019 |
|
| 2018 |
| |||||||||
(unaudited) |
| (unaudited) |
| |||||||||||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
| ||||||||
Net loss | $ | (17,714 | ) | $ | (14,391 | ) |
| $ | (18,140 | ) |
| $ | (17,714 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
| ||||||||
Depreciation and amortization | 222 | 229 |
|
| 196 |
|
|
| 222 |
| ||||||
Stock-based compensation | 1,912 | 1,916 |
|
| 1,757 |
|
|
| 1,912 |
| ||||||
Bad debt recovery | — | (36 | ) | |||||||||||||
Non-cash lease expense |
|
| 10 |
|
|
| — |
| ||||||||
Inventory reserve | 61 | (1,456 | ) |
|
| (446 | ) |
|
| 61 |
| |||||
Restructuring charges-inventory impairment |
|
| 2,587 |
|
|
| — |
| ||||||||
Common stock issuance for services | 109 | 130 |
|
| — |
|
|
| 109 |
| ||||||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
| ||||||||
Accounts receivable | 1,100 | (704 | ) |
|
| (122 | ) |
|
| 1,100 |
| |||||
Inventories | (947 | ) | 1,887 |
|
| (364 | ) |
|
| (947 | ) | |||||
Prepaid expenses and other assets | 161 | 13 |
|
| 585 |
|
|
| 161 |
| ||||||
Accounts payable | 471 | (528 | ) |
|
| (49 | ) |
|
| 471 |
| |||||
Accrued expenses | (344 | ) | 206 |
|
| 192 |
|
|
| (344 | ) | |||||
Accrued compensation expenses | (162 | ) | 224 |
|
| (483 | ) |
|
| (162 | ) | |||||
Accrued clinical trial expenses | 294 | 3 |
|
| 105 |
|
|
| 294 |
| ||||||
Contract liabilities | 213 | 56 |
|
| 387 |
|
|
| 213 |
| ||||||
Deferred grant revenue | — | (104 | ) | |||||||||||||
Net cash used in operating activities | (14,624 | ) | (12,555 | ) |
|
| (13,785 | ) |
|
| (14,624 | ) | ||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
| ||||||||
Purchases of property and equipment | (116 | ) | (151 | ) |
|
| (164 | ) |
|
| (116 | ) | ||||
Net cash used in investing activities | (116 | ) | (151 | ) |
|
| (164 | ) |
|
| (116 | ) | ||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
| ||||||||
Net proceeds from rights offering | — | 19,688 | ||||||||||||||
Net proceeds from sale of common stock | 13,970 | — | ||||||||||||||
Proceeds from repayment of note receivable | — | 1 | ||||||||||||||
Proceeds from exercise of options, warrants and employee stock purchase plan | 417 | 189 | ||||||||||||||
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 | 14,387 | 19,878 |
|
| 34,637 |
|
|
| 14,387 |
| ||||||
Effect of exchange rate changes on cash and cash equivalents | (10 | ) | 82 |
|
| 2 |
|
|
| (10 | ) | |||||
Cash and cash equivalents: |
|
|
|
|
|
|
|
| ||||||||
Net increase (decrease) | (363 | ) | 7,254 |
|
| 20,690 |
|
|
| (363 | ) | |||||
Balance at beginning of period | 7,839 | 10,875 |
|
| 4,471 |
|
|
| 7,839 |
| ||||||
Balance at end of period | $ | 7,476 | $ | 18,129 |
| $ | 25,161 |
|
| $ | 7,476 |
| ||||
Supplemental cash flow information: | ||||||||||||||||
Non-cash financing and investing activities: | ||||||||||||||||
Fair value of stock options issued for services | $ | — | $ | 20 |
See accompanying notes.
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, and the Middle East.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, 2018.2019. 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 currentcommercially 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. During 2016Funding 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 2017December 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, 2018, we funded our business primarily through:
|
| |
|
| |
|
|
|
|
|
|
We entered into a stock purchase agreement on May 3, 2018 with entities beneficially owned by Gregg Williams for the purchaseyear ended December 31, 2018 generated by sales of 6,756,757 shares of common stock priced at $1.48 per share, the last reported sale price of the common stock on that date. Gregg Williams is Chairman of the Board of Directors of Second Sight. This placement of common stock provided net proceeds of $10 million. No warrants or discounts were provided and no placement agent or investment banking fees were incurred in connection with this transaction. The shares issuable to the purchasers under the Securities Purchase Agreement were issued pursuant to an exemption from registration under Rule 506 of Regulation D, which is promulgated under the Securities Act of 1933. We relied on this exemption from registration based in part on representations made by the purchasers.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 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.
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 products.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. Management has concluded that there is substantial doubt about our ability to continue as a going concern, and our independent registered public accounting firm, in its report on our 2017 consolidated financial statements, has raised substantial doubt about our ability to continue as a going concern.
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 the commercialization of 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, 2017,2018, contained in our Annual Report on Form 10-K filed with the SEC on March 20, 2018.19, 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, 2017.2018.
RecentRecently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services.We adopted this ASU onNo. 2016-02—Leases (Topic 842), as amended, as of January 1, 2018 retrospectively,2019, using the cumulative effectmodified retrospective approach. The modified retrospective approach provides a method for recording existing leases at the period of adoption without
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 initial application on ournew 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 that date was immaterial.cash flows.
We generate our revenue from the sale of our Argus II retinal prosthesis systems, which include the implant and external components. Our product sales generally consist of the implant and related surgical supplies and may include a performance obligation related to post-surgical support.
We sell our products through two main sales channels: 1) directly to customers who use our products (the “Direct Channel”) and 2) to distribution partners who resell our products (the “Indirect Channel”).
Under the Direct Channel, we sell our systems to customers who use our products and we receive payment directly from customers who use our products. Under our Indirect Channel, we have entered into distribution agreements that allow the distributors to sell our systems and fulfill performance obligations for surgical support and post-surgical support.
We determine revenue recognition through the following steps:
Identification of the contract, or contracts, with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, we satisfy a performance obligation
Revenue is generally recognized upon surgical implant, unless we have a significant post-surgical support performance obligation. We recognize revenue when a material reversal is no longer probable. Conditions that preclude us from recognizing revenue generally involve new customers with no reimbursement or reimbursement history, and depends on third-party behavior beyond our control, uncertain payment cycles over an extended period of time, and our limited historical experience with these arrangements.
Management doesdo 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 management deemswe 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, 20182019 and 2017:2018:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Direct customers | $ | 1,798 | $ | 1,695 | $ | 2,456 | $ | 2,704 | ||||||||
Distributors | 109 | 541 | 427 | 541 | ||||||||||||
Total | $ | 1,907 | $ | 2,236 | $ | 2,883 | $ | 3,245 |
|
| 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, 20182019 and 2017,2018, the following customers each comprisescomprised greater than 10% of our total revenues:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 |
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| |||||||||||||||||||||||
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| |||||||||||||||||||||
Customer 1 | 15 | % | 11 | % | 15 | % | 11 | % |
|
| 26 | % |
|
| — | % |
|
| 14 | % |
|
| — | % | ||||||||
Customer 2 | 12 | % | — | % | 8 | % | — | % |
|
| 21 | % |
|
| — | % |
|
| 11 | % |
|
| 4 | % | ||||||||
Customer 3 | 7 | % | — | % | 10 | % | — | % |
|
| 13 | % |
|
| 7 | % |
|
| 14 | % |
|
| 10 | % | ||||||||
Customer 4 | 6 | % | 10 | % | 8 | % | 7 | % |
|
| 13 | % |
|
| — | % |
|
| 7 | % |
|
| 3 | % | ||||||||
Customer 5 | — | % | 14 | % | 3 | % | 9 | % |
|
| 10 | % |
|
| 15 | % |
|
| 16 | % |
|
| 15 | % | ||||||||
Customer 6 | — | % | 13 | % | 2 | % | 9 | % |
|
| 10 | % |
|
| — | % |
|
| 10 | % |
|
| — | % | ||||||||
Customer 7 | — | % | 12 | % | 7 | % | 12 | % |
|
| — | % |
|
| 12 | % |
|
| — | % |
|
| 8 | % |
As of June 30, 20182019 and December 31, 2017,2018, the following customers each comprisescomprised greater than 10% of our total accounts receivable:
June 30, 2018 | December 31, 2017 | |||||||
(unaudited) | ||||||||
Customer 1 | 20 | % | 17 | % | ||||
Customer 2 | 20 | % | 8 | % | ||||
Customer 3 | 19 | % | — | % | ||||
Customer 4 | 16 | % | — | % | ||||
Customer 5 | 12 | % | — | % | ||||
Customer 6 | 12 | % | — | % | ||||
Customer 7 | — | % | 16 | % | ||||
Customer 8 | — | % | 11 | % |
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 | % |
During the three and six months ended June 30, 20182019 and 2017,2018, regional revenue based on customer locations which each comprisescomprised greater than 10% of our total revenues, consistconsisted of the following:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 |
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| |||||||||||||||||||||||
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| |||||||||||||||||||||
United States | 56 | % | 50 | % | 55 | % | 52 | % |
|
| 68 | % |
|
| 56 | % |
|
| 65 | % |
|
| 55 | % | ||||||||
China |
|
| 13 | % |
|
| — | % |
|
| 7 | % |
|
| 3 | % | ||||||||||||||||
Italy |
|
| 10 | % |
|
| 15 | % |
|
| 16 | % |
|
| 15 | % | ||||||||||||||||
France | 19 | % | 11 | % | 13 | % | 10 | % |
|
| — | % |
|
| 19 | % |
|
| — | % |
|
| 13 | % | ||||||||
Italy | 15 | % | 11 | % | 15 | % | 11 | % | ||||||||||||||||||||||||
Korea | 6 | % | 10 | % | 8 | % | 7 | % | ||||||||||||||||||||||||
Taiwan | — | % | 14 | % | 3 | % | 9 | % |
Foreign Operations
The accompanying condensed consolidated financial statements as of June 30, 20182019 and December 31, 20172018 both include assets amounting to $2.2$1.4 million and $2.7$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 |
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| |||||||||||||||||
June 30, 2018 (unaudited): | ||||||||||||||||||||||||||||||||
June 30, 2019 (unaudited): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Money market funds | $ | 7,379 | $ | 7,379 | $ | — | $ | — |
| $ | 25,096 |
|
| $ | 25,096 |
|
| $ | — |
|
| $ | — |
| ||||||||
December 31, 2017: | ||||||||||||||||||||||||||||||||
December 31, 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Money market funds | $ | 7,235 | $ | 7,235 | $ | — | $ | — |
| $ | 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.
5. Selected Balance Sheet Detail
Inventories, net
Inventories, consistnet
Inventories consisted of the following (in thousands):
June 30, | December 31, | |||||||
2018 | 2017 | |||||||
(unaudited) | ||||||||
Raw materials | $ | 643 | $ | 485 | ||||
Work in process | 2,137 | 2,620 | ||||||
Finished goods | 2,913 | 1,660 | ||||||
5,693 | 4,765 | |||||||
Allowance for excess and obsolete inventory | (2,126 | ) | (2,065 | ) | ||||
Inventories, net | $ | 3,567 | $ | 2,700 |
|
| 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 |
|
Property and equipment
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 consist
Property and equipment consisted of the following (in thousands):
June 30, | December 31, | |||||||||||||||
2018 | 2017 |
| June 30, |
|
| December 31, |
| |||||||||
(unaudited) |
| 2019 |
|
| 2018 |
| ||||||||||
Laboratory equipment | $ | 2,468 | $ | 2,450 |
| $ | 2,575 |
|
| $ | 2,482 |
| ||||
Computer hardware and software | 1,423 | 1,329 |
|
| 1,516 |
|
|
| 1,456 |
| ||||||
Leasehold improvements | 298 | 298 |
|
| 298 |
|
|
| 298 |
| ||||||
Furniture, fixtures and equipment | 46 | 46 |
|
| 58 |
|
|
| 46 |
| ||||||
|
| 4,447 |
|
|
| 4,282 |
| |||||||||
4,235 | 4,123 | |||||||||||||||
Accumulated depreciation and amortization | (3,044 | ) | (2,824 | ) |
|
| (3,454 | ) |
|
| (3,257 | ) | ||||
Property and equipment, net | $ | 1,191 | $ | 1,299 |
| $ | 993 |
|
| $ | 1,025 |
|
Contract Liabilities
Contract Liabilities
Contract liabilities consistconsisted of the following (in thousands):
Beginning balance, December 31, 2017 | $ | 48 | ||||||||
|
|
|
|
|
| |||||
|
|
|
|
|
| |||||
Beginning balance as of December 31, 2018 |
| $ | 167 |
|
|
| ||||
Consideration received in advance of revenue recognition | 233 |
|
| 390 |
|
|
| |||
Revenue recognized | (21 | ) |
|
| — |
|
|
| ||
Ending Balance, June 30, 2018 | $ | 260 | ||||||||
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 |
|
|
|
6. Equity Securities
Right-of-use assets and operating lease liabilities
Common Stock Issuable 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
Non-employee membersmaterial residual value guarantees or restrictive covenants. As most of our Boardleases do not provide an implicit rate, we used our estimated incremental borrowing rate of Directors have been paid for their services in common stock on June 1 of each year10% based on the average closing pricesinformation 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, | |||||
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 immediately preceding twenty trading days. During thethree and six months ended June 30, 2018, we issued a total2019 were as follows (unaudited):
|
|
|
|
| |||||||||
|
| For the three months ended June 30, 2019 | For the six months ended |
|
|
|
| ||||||
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 |
|
| Payments due |
| ||
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 |
|
Increase in Authorized Shares of 132,996Common 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 for annual service through May 31, 2018from 200,000,000 to the board members. Our Director Compensation Policy was amended in December 2017 and board members may elect to receive compensation in cash or stock options, effective with the annual period commencing June 1, 2018.300,000,000 shares.
Potentially Dilutive Common Stock Equivalents
As of June 30, 20182019 and 2017,2018, 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, | ||||||||||||||||
2018 | 2017 |
| June 30, |
| ||||||||||||
| 2019 |
|
| 2018 |
| |||||||||||
Common stock warrants issued to underwriter of initial public offering | 802 | 802 |
|
| 802 |
|
|
| 802 |
| ||||||
Common stock warrants issued in connection with convertible debt | — | 1,038 | ||||||||||||||
Common stock warrants issued in connection with March 2017 rights offering | 13,647 | 13,652 |
|
| 13,647 |
|
|
| 13,647 |
| ||||||
Common stock warrants issued in connection with February 2019 rights offering |
|
| 47,812 |
|
|
| — |
| ||||||||
Common stock options | 7,072 | 5,536 |
|
| 8,923 |
|
|
| 7,072 |
| ||||||
Common stock issuable | — | 18 | ||||||||||||||
Restricted stock units | 59 | 107 |
|
| 501 |
|
|
| 59 |
| ||||||
Employee stock purchase plan | 234 | 222 |
|
| 456 |
|
|
| 234 |
| ||||||
|
| 72,141 |
|
|
| 21,814 |
| |||||||||
Total | 21,814 | 21,375 |
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.
7.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, 20182019 is presented below (in thousands, except per share and contractual life data).
Weighted Average |
| Number of Shares |
|
| Weighted Average Exercise Price Per Share |
|
| Weighted Average Remaining Contractual Life (in Years) |
| |||||||||||||||
Weighted | Remaining | |||||||||||||||||||||||
Number of | Average | Contractual | ||||||||||||||||||||||
Shares | Exercise Price | Life (in Years) | ||||||||||||||||||||||
Warrants outstanding as of December 31, 2017 | 15,130 | $ | 2.15 | 3.90 | ||||||||||||||||||||
Warrants outstanding as of December 31, 2018 |
|
| 14,449 |
|
| $ | 2.01 |
|
|
| 3.10 |
| ||||||||||||
Issued | — |
|
| 47,812 |
|
|
| 1.47 |
|
|
|
|
| |||||||||||
Exercised | (5 | ) | 1.47 |
|
| — |
|
|
|
|
|
|
|
|
| |||||||||
Forfeited or expired | (676 | ) | 5.00 |
|
| — |
|
|
|
|
|
|
|
|
| |||||||||
Warrants outstanding as of June 30, 2018 | 14,449 | $ | 2.01 | 3.60 | ||||||||||||||||||||
Warrants exercisable as of June 30, 2018 | 14,449 | $ | 2.01 | 3.60 | ||||||||||||||||||||
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 intrinsic value of warrants outstanding as of June 30, 2018 was $2.6 million.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, 20182019 is presented below (in thousands, except per share and contractual life data).
Weighted Average |
| Number of Shares |
|
| Weighted Average Exercise Price Per Share |
|
| Weighted Average Remaining Contractual Life (in Years) |
| |||||||||||||||
Weighted | Remaining | |||||||||||||||||||||||
Number of | Average | Contractual | ||||||||||||||||||||||
Shares | Exercise Price | Life (in Years) | ||||||||||||||||||||||
Options outstanding as of December 31, 2017 | 5,675 | $ | 4.87 | 7.40 | ||||||||||||||||||||
Options outstanding as of December 31, 2018 |
|
| 7,120 |
|
| $ | 3.83 |
|
|
| 6.81 |
| ||||||||||||
Granted | 2,465 | $ | 2.00 |
|
| 2,557 |
|
| $ | 0.77 |
|
|
|
|
| |||||||||
Exercised | (76 | ) | $ | 1.95 |
|
| — |
|
| $ |
|
|
|
|
|
| ||||||||
Forfeited or expired | (992 | ) | $ | 3.98 |
|
| (754 | ) |
| $ | 3.58 |
|
|
|
|
| ||||||||
Options outstanding as of June 30, 2018 | 7,072 | $ | 4.03 | 6.97 | ||||||||||||||||||||
Options exercisable as of June 30, 2018 | 2,766 | $ | 6.17 | 4.40 | ||||||||||||||||||||
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 |
|
The estimated aggregate intrinsic value of stock options exercisable as of June 30, 20182019 was $8,000.approximately $5,000. As of June 30, 2018,2019, there was $5.0$3.9 million of total unrecognized compensation cost related to outstanding stock options that will be recognized over a weighted average period of 2.92.76 years.
During the six months ended June 2018,30, 2019, we granted stock options to purchase 2,464,8722,557,042 shares of common stock to certain employees and a contractor.directors. The options are exercisable for a period of ten years from the date of grant at prices ranging from $1.80$0.69 to $2.07$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.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 $3.1$1.3 million ($1.090.44 to $1.30$0.65 per share) using the following assumptions: expected term of 5.505.5 to 6.116.08 years, volatility of 67.0%72.0%, risk-free interest rate of 2.32%1.92% to 3.00%2.63%, and expected dividend rate of 0%0.0%.
During the six months ended June 30, 2018, we recorded $0.4 million of stock-based compensation expense related to stock option modifications for executive transitions.
The following table summarizes restricted stock unit (“RSU”) activity for the six months ended June 30, 20182019 (in thousands, except per share data):
Number | Weighted | |||||||
Outstanding as of December 31, 2017 | 83 | $ | 12.43 | |||||
Awarded | — | — | ||||||
Vested | (24 | ) | — | |||||
Forfeited/canceled | — | — | ||||||
Outstanding as of June 30, 2018 | 59 | $ | 12.43 |
|
| 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, 2018,2019, there was $0.7$0.4 million of total unrecognized compensation cost related to the outstanding RSUs that will be recognized over a weighted average period of 1.13.56 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, 20182019 the maximum number of shares that may be issued under the plan is 1,550,000. During the six months ended June 30, 2018, 225,887 shares were issued under the stock purchase plan.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 and 2017 iswas as follows (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 |
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| |||||||||||||||||||||||
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| |||||||||||||||||||||
Cost of sales | $ | 63 | $ | 67 | $ | 127 | $ | 148 |
| $ | 43 |
|
| $ | 63 |
|
| $ | 90 |
|
| $ | 127 |
| ||||||||
Research and development | 107 | 75 | 211 | 132 |
|
| 134 |
|
|
| 107 |
|
|
| 321 |
|
|
| 211 |
| ||||||||||||
Clinical and regulatory | 11 | 44 | 103 | 93 |
|
| 31 |
|
|
| 11 |
|
|
| 65 |
|
|
| 103 |
| ||||||||||||
Selling and marketing | 92 | 112 | 215 | 206 |
|
| 131 |
|
|
| 92 |
|
|
| 261 |
|
|
| 215 |
| ||||||||||||
General and administrative | 354 | 637 | 1,256 | 1,337 |
|
| 520 |
|
|
| 354 |
|
|
| 1,020 |
|
|
| 1,256 |
| ||||||||||||
Total | $ | 627 | $ | 935 | $ | 1,912 | $ | 1,916 |
| $ | 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.
operations, however, the results of litigation and claims are inherently unpredictable.
|
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 in conjunctiontogether with theour unaudited condensed financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q as well as our audited 20172018 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 20, 2018. In addition to historical19, 2019. Some of the information thecontained in this discussion and analysis here or set forth elsewhere in this Quarterly Report, including information with respect toourproducts,plansand throughout this Form 10-Qstrategy 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 assumptions. Our actualsimilar 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 those anticipatedthe plans, intentions and expectations disclosed in thesethe forward-looking statements as a result of certain factors, including, but not limited, to those set forth underthat we make. You should read “Risk Factors” in Part II, Item 1A of this report.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 was founded in 1998 with a mission to develop, manufacture,Medical Products, Inc. (NASDAQ: EYES) develops, manufactures and market prosthetic devicesmarkets implantable visual prosthetics that are intended to create andeliver useful artificial form of useful vision forto 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 operations and supports clinical activitiesoperations in Europe, the Middle East and Asia-Pacific.
Asia.
Our current commercially approved product, the Argus®II systemRetinal 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. By creating an artificial formA subset of useful vision inthese patients who otherwise have total sight loss,would be eligible for the Argus II can provide benefitssince 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 include:
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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 clear 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;
Our major corporate, clinicalimproving patients’ orientation and regulatory milestones include: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;
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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.
Currently,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 130$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 involvedassociated 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 systemSystem and future products.
products such as Orion.
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 by the sale of our Argus II System. During 2016Funding 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 2017December 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, 2018, we funded our business primarily through:
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We entered into a stock purchase agreement on May 3, 2018 with entities beneficially owned by Gregg Williams for the purchaseyear ended December 31, 2018 generated by sales of 6,756,757 shares of common stock priced at $1.48 per share, the last reported sale price of the common stock on that date. Gregg Williams is Chairman of the Board of Directors of Second Sight. This placement of common stock provided net proceeds of $10 million. No warrants or discounts were provided and no placement agent or investment banking fees were incurred in connection with this transaction. The shares issuable to the purchasers under the Securities Purchase Agreement were issued pursuant to an exemption from registration under Rule 506 of Regulation D, which is promulgated under the Securities Act of 1933. We relied on this exemption from registration based in part on representations made by the purchasers.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.
Our financial statements have been presentedIn 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 basis that our business is a going concern, which contemplates the realizationBoard of assets and the satisfaction of liabilitiesDirectors, acquired approximately 41.4 million units in the normal courseoffering for an aggregate investment of business.approximately $30 million.
We are subject to the risks and uncertainties associated with a business with one product line and limiteddiminishing commercial product revenues, including limitations on our operating capital resources and uncertain demand for our products.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. Management has concluded that there is substantial doubt about our ability to continue as a going concern, and our independent registered public accounting firm, in its reportBased on our 2017 consolidated financial statements, has raised substantial doubt about our ability to continue as a going concern.
Wecurrent plans, we do not have sufficient funds to supportcontinue operating our operationsbusiness at current levels for the next 12at least twelve months from the date of issuance of these financial statements. We anticipate thatthis report. However, our operating plan may change as a result of many factors currently unknown to us, and we willmay need to seek to fund our operationsadditional 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 the commercialization of 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 U.S.,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.
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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. |
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We retain employees and utilize consultantspayment rate decisions independent of Medicare, and contracts are individually negotiated with insurance reimbursement expertise dedicated to expandfacility and enhance coverage decisions. Currently, eight of 12 Medicare jurisdictions authorize coverage of the Argus II in 31 states, two territories and the District of Columbia when medically necessary, including:physician providers.
● CGS (J15 -- Ohio and Kentucky),
● Palmetto GBA (JM -- Virginia, (excluding Part B for Arlington and Fairfax counties), West Virginia, North Carolina and South Carolina),
● Palmetto GBA (JJ – Alabama, Georgia and Tennessee),
● NGS (J6 -- Minnesota, Illinois and Wisconsin),
● NGS (JK -- Connecticut, New York, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont),
● FCSO (JN -- Florida, Puerto Rico and the U.S. Virgin Islands),
● Novitas (JH-- Arkansas, Colorado, Louisiana, Mississippi, New Mexico, Oklahoma, and Texas) and
● Novitas (JL -- Delaware, District of Columbia, Maryland, New Jersey and Pennsylvania)
We are actively engaged with the remaining MACs and are committed to supporting their requests for additional information and clinical evidence. We expect that additional positive coverage decisions will be issued over time but cannot predict timing or ultimate success with each MAC.
Within Europe, we haveArgus II obtained reimbursement approval or funding in Germany (NUB Innovation Funding Program), France (Forfait Innovation Funding Program), one region of Italy (Regional Funding), and avia Commissioning through Evaluation (CtE)(“CtE”) program in England. If successful, the Forfait Innovation Funding Program and CtE program would result in permanent national funding for Argus II.
WeCurrently, we are seeking additionalin process of evaluating potential reimbursement approvalspathways for Orion in other countries in Europe and international markets.
In France, we were selectedthe US market. Compared to receive the first “Forfait Innovation” (Innovation Bundle) from the Ministry of Health,Argus II, which is largely catering to Medicare patient population, Orion is expected to address a special funding program for breakthrough procedurespatient population with diverse and more balanced payer mix due to be introduced into clinical practice.our potential indications profile and expected younger average patient population. As Orion is a part of thisthe FDA’s Breakthrough Devices program, we are conductingclosely evaluating a post-market study in France which has enrolled a totalvariety of 18 subjects who are being followedfast track reimbursement programs, including recent encouraging announcements from CMS proposing modernization of payment policies for two years. The French programmedical devices that meet FDA’s Breakthrough Devices designation. If feasible, we also funds implantation of upplan to 18 additional patients that are not partapproach some of the post-market study. After reviewkey payers during the second half of the study’s results, we expect Argus II therapy2019 and get their feedback to be covered and funded through the standard payment system in France. However, we can provide no assurance that the French governmentensure our next stage clinical trial design for Orion will continuecater to fund the Argus II after the first 36 implants. their key coverage requirements.
In December 2016, NHS England announced it would cover 10 Argus implantations as part of a CtE program. The CtE program is especially designed for treatments that show significant promise for the future, while new clinical and patient experience data are collected within a formal evaluation program. This program is similar to the Forfait Innovation program in France. NHS England is known to be under significant financial pressure and also highly selective in adopting innovative technologies – which must demonstrate sufficient value for the cost expended. This program is progressing slower than expected and we now believe implants under this program will not begin until late 2018 or early 2019.
To date, our marketing activities have focused on raising awareness of the Argus II with potential patients, implanting physicians, and referring physicians. Our marketing activities include exhibiting, sponsoring symposia, and securing podium presence at professional and trade shows, securing journalist coverage in popular and trade media, attending patient meetings focused on educating patients about existing and future treatments, and sponsoring information sessions for the Argus II. In the United States, our efforts will focus on media advertisements dedicated to RP patients and their families. These advertisements will be placed in geographic areas where we have Centers of Excellence committed to Argus II.
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
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 U.S.US with advanced RP that could be treated with the Argus II given the eligibility criteria of our label.
We believe an opportunity existsGiven the limited addressable market of Argus II, we made the decision to expand the use ofmaximize capital efficiency with our Argus II technologycommercial and clinical activities and increase our investment of resources with our Orion clinical and R&D programs. As a result, we expect to better sighted individuals with RP who are currently not being treated. To achieve this market expansion, we have taken stepssuspend production activities related to request US label expansion with FDAArgus II, sell through our remaining inventory and endeavorreduce our commercial activities related to improve the technology’s performance, including:
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Argus II. We believe that we can further expandremain committed to supporting existing Argus II users and intend to pursue regulatory approvals for our market to include nearly all profoundly blind individuals, other than those who are blind due to preventable diseases or due to brain damage, by developing a visual cortical prosthesis. We refer to this product as the Orion visual prosthesis system. We estimate that there are approximately 5.8 million people worldwide who are legally blind due to causes other than preventable conditions, RP or AMD. We commissioned 3rd party market research for the potential market for Orion that resulted in initial estimates of over 500,000 individuals in the U.S. who are legally blind due to Glaucoma, Diabetic Retinopathy, Optic Nerve Disease and Eye Trauma and a potential U.S. addressable market of more than 70,000 individuals from this population with vision defined as bare light or no light perception. If approved for marketing, the FDA and other regulatory agencies will determine the subset of these patients who are eligible for the Orion.
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 vision. We submitted an IDE application to the FDA in 2017 to begin a human feasibility study of the OrionTM visual prosthesis system. Enrollment began for this study in January 2018 and, to date, the five planned subjects have been implanted and had their devices activated; four at UCLA and one at the Baylor College of Medicine (“Baylor”). In addition, during the second quarter of 2018, we submitted and received approval from the FDA to enroll a sixth subject. We are screening for the sixth subject at Baylor. This study will confirm initial findings in our human pilot study we announced in the fourth quarter of 2016 and provide the first human data of a fully functional wireless visual cortical stimulator system including the external video camera system. This initial study in a small number of subjects, if successful, should also form the basis for an expansion to our next clinical trial in 2019.
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 requiresrequire 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, 2017.2018.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services.We adopted this ASU onNo. 2016-02—Leases (Topic 842), as amended, as of January 1, 2018 retrospectively,2019, using the cumulative effectmodified 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 initial applicationnew 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 accumulated deficit on that date was immaterial.
plans to suspend production of Argus II. Specifically, we reduced expenses and personnel related to commercial activities and production for the Argus II. We generaterecognized 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 revenue from the sale of our Argus II retinal prosthesis systems, which include the implant and external components. Our product sales generally consistreview of the implant and related surgical supplies and may include a performance obligation related to post-surgical support.applicable accounting standards we determined that there was no impairment of any other assets.
We sell our products through two main sales channels: 1) directly to customers who use our products (the “Direct Channel”) and 2) to distribution partners who resell our products (the “Indirect Channel”).
Under the Direct Channel, we sell our systems to customers who use our products and we receive payment directly from customers who use our products. Under our Indirect Channel, we have entered into distribution agreements that allow the distributors to sell our systems and fulfill performance obligations for surgical support and post-surgical support.
We determine revenue recognition through the following steps:
Revenue is generally recognized upon surgical implant, unless we have a significant post-surgical support performance obligation. We recognize revenue when a material reversal is no longer probable. Conditions that preclude us from recognizing revenue generally involve new customers with no reimbursement or reimbursement history, and depends on third-party behavior beyond our control, uncertain payment cycles over an extended period of time, and our limited historical experience with these arrangements.
There have been no other material changes to our critical accounting policies during the six months ended June 30, 2018.
2019.
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. Our objective isIn May 2019, we decided to increaseaccelerate our product revenue over the next several years astransition to our Orion platform. As a result, we pursue commercialization ofexpect to suspend production related to Argus II and sell through our product, as our product becomes more well-known and accepted in the market, and as insurance coverage becomes more widespread.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. While we are currently experiencing low yields on our manufacturing process, we expect that over the next few years we will be able to refine our processes and improve our manufacturing yields. We are also producing at less than our capacity which results in unabsorbed overhead costs. In future years, we expect to produce in greater quantities and improve our manufacturing yields and we expectrecord cost of sales for any remaining Argus II inventory that we will more consistently generate positive gross margins.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 we incur themincurred 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-timetime 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.
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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.
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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.
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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.
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Comparison of the Three Months Ended June 30,, 2019 and 2018 and 2017
We implanted a total of 1711 Argus II products during the second quarter of 20182019 and 1917 in the second quarter of 2017.2018. Of these, eightfour implants were in Europe, the Middle East and Asia (EMEA)(collectively, “EMEA”) in the second quarter of 2018 and ten2019 while eight implants were in EMEA in the second quarter of 2017.
2018.
In North America, there were nineseven implants in the second quarter of 2018 which equaled the2019 while there were nine implants in the second quarter of the prior year. Of these, there wereall seven implants were in the U.S. and two implants in Canada in the second quarter of 2017 as compared to2019 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 $1.9$1.3 million in the second quarter of 20182019 as compared to $2.2$1.9 million in the same period in 2017,2018, a reductiondecrease of $0.3$0.6 million or 14%33%. Revenue was recognized for 1710 units in the current periodsecond quarter of 2019 while revenue from 2017 units waswere recognized in the prior year quarter.second quarter of 2018. Revenue recognized per implant was approximately $112,000$128,000 in the second quarter of 20182019 and 2017.was $112,000 in same period of 2018. We expect our average revenue recognized per implant unit sold for the remaindernet sales to decline as we sell through our existing inventory of 2018 to be in a range of $100,000 to $120,000, depending on the geographic mix of implants.Argus II.
Cost of sales. Cost of sales decreased by approximately $0.3 million, or 27%, from $1.1was $0.9 million in the second quarter 2017of 2019 as compared to $0.8 million in the second quarter of 2018. Cost of sales in the second quarter of 20182019 consists primarily of the cost of products implanted inof $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 inventory of $0.2 million. In the second quarter of 2017, the
inventory. We expect to record cost of sales included approximately $1.8 million for the costany remaining Argus II inventory that we sell and a majority of products implanted less an adjustment of $0.7 million for a reduction in the reserve for excess inventory. We expect cost of goods on a per-unit basis to stabilize, particularlyour expenses related to our production capabilities and fixed overhead absorptionto be reported as research and excess inventory reserve, as we produce more units.development expense in future periods.
Research and development expense. Research and development expense, net of funding received from grants, increased by $0.5$1.0 million, or 26%42%, from $1.9 million in the second quarter of 2017 to $2.4 million in the second quarter of 2018. The increase from the prior year was primarily due2018 to increased headcount, outside services, and costs for internally produced prototypes for next generation products. In the second quarter of 2018, we utilized $0.1 million of grant funds to offset costs compared to $24,000 in the same quarter of the prior year. Excluding the effect of grants, research and development expense increased by $0.6 million in the current year quarter, primarily due to an increase in expenditures related to next generation products.
Clinical and regulatory expense. Clinical and regulatory expense increased $0.4 million, or 57%, from $0.7$3.4 million in the second quarter of 20172019. 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 2018.2018 to $0.5 million in the second quarter of 2019. This increasedecrease is primarily attributable to increaseddecreased costs associated with the Orion feasibility study.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 (i) increase our implant run rate and enroll more patients in post market clinical studies for regulatory authorities, and (ii) conduct additional clinical trials to assess new products such as the Orion I,and related enhancements to our existing product and for better sighted patients.user experience.
Selling and marketing expense. Selling and marketing expense increased $0.5decreased $1.2 million, or 21%, from $2.4 million in the second quarter of 2017 to $2.9 million in the second quarter of 2018. This increase in costs was primarily the result of a $0.2 million increase due to increased market development activities, $0.2 million increase in costs related to additional travel costs, and $0.1 million increase in headcount and related compensation expenses. While we expect these costs to increase in the future as we increase our selling and marketing resources to accelerate the commercialization of our product, we expect selling and marketing expense to decrease over time when expressed as a percentage of product revenue.
General and administrative expense. General and administrative expense decreased $0.3 million, or 10%41%, from $2.9 million in the second quarter of 20172018 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 2018.2019. This decrease is primarily attributable to $0.1 million in lower compensation costs primarily due to cancelled stock option grants. The remaining decrease relatesreduced staffing and patent costs of $0.1 million. We expect general and administrative expenses to decreased outside service costs.remain consistent during the remainder of 2019.
On April 25, 2018, we entered intoRestructuring charges. We recorded a Confidential Separation Agreement and General Release (the “Separation Agreement”) with Dr. Robert J. Greenberg, a former executive and director of the Company. Pursuant to the terms of the Separation Agreement, the Company agreed to pay Dr. Greenberg, as severance, a gross amount of $0.4 million and to extend the exercise period of certain vested options until the earlier of (i) ten years from the applicable option grant date or (ii) October 3, 2019. This extension resulted in anon-cash restructuring charge of $0.1$0.2 million in the second quarter of 2018.2019 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, 20182019 and 2017
2018
We implanted a total of 3321 Argus II products during the first six months of 20182019 and 2017.33 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 as compared 16 in the first six months of 2017.
2018.
In North America, there were 1913 implants in the first six months of 2018 compared to 172019 while there were 19 implants in the first six months of the prior year. Of these, thereall the implants were 12 implants in the U.S. and five implants in Canada in the first six months of 2017 compared to2019 while 17 were in the U.S. and two in Canada in the first six months of 2018.
Net Sales. Net sales were $2.9 million 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 $3.2$2.9 million in 2017the same period in 2018, a reductiondecrease of $0.3$0.5 million or 9%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 as compared to 29 units2018. Revenue recognized per implant was approximately $127,000 in the first six months of 2017. Revenue recognized per implant2019 and was approximately $111,000 in the first half of 2018 as compared to approximately $112,000 in the first halfsame period of 2017.2018. We expect our average revenue recognized per implant unit sold for the remaindernet sales to decline as we sell through our existing inventory of 2018 to be in a range of $100,000 to $120,000, depending on the geographic mix of implants.Argus II.
Cost of sales. Cost of sales decreased by approximately $0.8 million, or 35%, from $2.3was $1.7 million in the first six months 2017of 2019 as compared to $1.5 million in the first six months of 2018. Cost of sales in the first six months of 20182019 consists primarily of the cost of products implanted in the period of $1.4$1.1 million and an increase in the reserve for excess inventoryunabsorbed production costs of $0.1$0.6 million. In the first six months of 2017,2018, the cost of sales included approximately $3.7$1.4 million for the cost of products implanted lessand unabsorbed production costs plus an adjustmentincrease of $1.4$0.1 million for a reduction in the reserve for excess inventory. We expect to record cost of goods onsales for any remaining Argus II inventory that we sell and a per-unit basis to stabilize, particularlymajority of our expenses related to our production capabilities and fixed overhead absorptionto be reported as research and excess inventory reserve, as we produce more units.development expense in future periods.
Research and development expense. Research and development expense, net of funding received from grants, increased by $1.1$0.7 million, or 29%15%, from $3.8 million in the first six months of 2017 to $4.9 million in the first six months of 2018. The increase from the prior year was primarily due2018 to increased headcount, outside services, costs for internally produced prototypes for next generation products. In the first six months of 2018 and 2017, we utilized $0.1 million of grant funds to offset costs. Excluding the effect of grants, research and development expense increased by $1.2 million in the current year period, primarily due to an increase in expenditures related to next generation products.
Clinical and regulatory expense. Clinical and regulatory expense increased $1.2 million, or 92%, from $1.3$5.6 million in the first six months of 20172019. 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 2018.2018 to $1.5 million in the first six months of 2019. This increasedecrease is primarily
attributable to increaseddecreased costs associated with the Orion feasibility study.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 (i) increase our implant run rate and enroll more patients in post market clinical studies for regulatory authorities, and (ii) conduct additional clinical trials to assess new products such as the Orion I,and related enhancements to our existing product and for better sighted patients.user experience.
Sellingand marketing expense. Selling and marketing expense increased $1.2decreased $2.1 million, or 26%36%, from $4.7 million in the first six months of 2017 to $5.9 million in the first six months of 2018.2018 to $3.8 million in the first six months of 2019. This increasedecrease in costs was primarily the result of a $0.5 million increase due to increased market development activities, increaseddecreased use of outside services, reduced headcount and related $0.4 million increase in compensation expense, and a $0.3 million increase in costs related to additional travel costs. While we expect these costs to increase in the future as we increase our selling and marketing resources to accelerate the commercialization of our product, weexpenses. We expect selling and marketing expense to decrease over time when expressed as a percentage of product revenue.we reduce our Argus II commercial activities and sell through our existing inventory.
General and administrative expense. General and administrative expense increased $0.3decreased $1.2 million, or 5%20%, from $5.6$5.9 million in the first six months of 20172018 to $5.9$4.7 million in the same period of 2018.2019. This increasedecrease 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 in higher compensation costs. The remaining increase relatesand patent and travel costs were both reduced by $0.1 million. We expect general and administrative expenses to increased travel costs.remain consistent during the remainder of 2019.
$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 consolidated financial statements have been presented on the basis that itour 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 experiencedincurred recurring operating losses and negative operating cash flows since inception, and have financed our working capital requirements through the recurring sale of our equity securities in both public and private offerings. As a result, our independent registered public accounting firm, in its report on our 2017 consolidated financial statements, has raised substantial doubt about our abilitywe expect to continue as a going concern (see “Going Concern” above).to incur operating losses and negative operating cash flows for the foreseeable future.
In March 2017, we successfully completed a rights offering to existing shareholders, raisingcompleted on February 22, 2019, we sold approximately 47.8 million units, each priced at $0.724 for net cash proceeds of approximately $19.7 million net of offering costs, through the sale of 13,652,341 units at $1.47 per unit.$34.4 million. Each unit consisted of aone share of common stock and a five-yearone immediately exercisable warrant withhaving an exercise price of $1.47.
During the first three months of 2018, we issued 2,224,000 shares of common stock for net proceeds of approximately $4.0 million as part of our At Market Issuance Sales Agreement (“Sales Agreement”) with two separate investment banks.
We entered into a stock purchase agreement on May 3, 2018 with entities beneficially owned$1.47 per share. Entities controlled by Gregg Williams, for the purchase of 6,756,757 shares of common stock priced at $1.48 per share, the last reported sale price of the common stock on that date. Gregg Williams isour Chairman of the Board of Directors, of Second Sight. This placement of common stock provided net proceedsacquired approximately 41.4 million units in the offering for an aggregate investment of approximately $10$30 million. NoThe expiration date of the warrants or discounts were provided and no placement agent or investment banking fees were incurred in connection with this transaction. The shares issuable to the purchasers under the Securities Purchase Agreement were issued pursuant to an exemption from registration under Rule 506this rights offering is March 14, 2024, and the expiration date of Regulation D, which is promulgatedall previously outstanding warrants listed for trading under the Securities Act of 1933. We relied on this exemption from registration based in part on representations made by the purchasers
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 financial statements. In orderfactors among others raise substantial doubt about our ability to continue business operations past that point,as a going concern. However, we will needmay be unable to raise additional debt and/capital or equity capital. However, there can be no assurances that we will be able to secure anyenter into such additional financingother arrangements when needed on acceptablefavorable terms and conditions, or at all. If cash resources become insufficient to satisfyTo the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our ongoing cash requirements, then we wouldcommon stockholders will be required to scale backdiluted, and the terms of these securities may include liquidation or discontinueother preferences that adversely affect the rights of our technology and product development programs and/or clinical trials, or obtain funds,common stockholders. Debt financing, if available, (although there can be no certainty),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 thator licensing arrangements with third parties, we may require ushave to relinquish valuable rights to our products,technologies, future revenue streams, research programs or product candidates, or to discontinue our operations entirely.
grant licenses on terms that may not be favorable to us.
Cash and cash equivalents decreasedincreased by $0.3$20.7 million or 4%, from $7.8$4.5 million as of December 31, 20172018 to $7.5$25.2 million as of June 30, 2018.2019. Working capital was $5.3$20.2 million as of June 30, 2018,2019, as compared to $6.6$2.0 million as of December 31, 2017, a decrease2018, an increase of $1.3 million, or 20%.$18.2 million. We use our cash money market fundsand cash equivalents and working capital to fund our operating activities.
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 increased by a net change in operating assets and liabilities which provided cash of $0.8 million. During the first six months of 2017, we used $12.6 million of cash in operating activities, consisting primarily of a net loss of $14.4 million, offset by non-cash charges of $0.8 million for depreciation and amortization of property and equipment, stock-based compensation, excess inventory reserve, bad debt expense and common stock issuable and cash increased by a net change in operating assets and liabilities of $1.0 million.
Cash Flows from Investing Activities
Cash used for investing activities in the first six months of 20182019 was $0.1 million$164,000 and was $0.2 million$116,000 in the first six months of 2017 primarily2018 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 proceedsthe sale of common stock sold during the period and the remainder$0.4 million from the proceeds from exercise of options and warrants options and employee stock plan purchases. Financing activities provided $19.9 million of cash in the first six months of 2017, $19.7 million from the rights offering with the remainder from employee stock plan purchases.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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, 2018,2019, our investments consisted solely of money market funds.
Exchange Rate Sensitivity
During the six months ended June 30, 2018,2019, approximately 66%77% of our revenue was denominated in U.S. dollars 34%and 23% in Euros and theEuros. 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.
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, 2018.2019. 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, 2018,2019, 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.
Remediation Plan
We identified control deficiencies which constituted material weaknesses in our internal control over financial reporting as noted in our Annual Report on Form 10-K for the year ended December 31, 2017.
In response to the identified weaknesses in our internal control over financial reporting, we continue to remediate the deficiencies that were identified as well as enhance our internal control policies and procedures. We plan to evaluate and test our internal control policies and procedures through the use of internal and external resources, to support management conclusions regarding the effectiveness of our internal controls for the year ended December 31, 2018.
Our CEO and CFO, along with other key members of management, are and will be active participants in the remediation process plan. We believe the steps taken to date have improved the effectiveness of our internal control over financial reporting.
In addition, we have implemented new disclosure controls and procedures with key members of management for the three month period ended June 30, 2018.
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, 20182019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Our CFO is involved in the operation of key review controls 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.
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 financial statements.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.
Entities controlled by Gregg Williams, our Chairman of the Board, have the ability to influence or control the outcome of matters submitted for stockholder approval and may have interests that differ from those of our other stockholders.
As of July 31, 2018 entities controlled and beneficially owned by Gregg Williams, our Chairman of the Board, own in the aggregate approximately 39.7% of the outstanding shares of our common stock (or 45.3% after giving effect to Mr. Williams’ right to acquire beneficial ownership of 6,802,721 shares of common stock upon exercise of options or warrants). As a result, Mr. Williams may be able to exercise substantial influence over all matters requiring stockholder approval, including the election of directors and the approval of significant corporate transactions. Mr. Williams may also have interests that differ from other stockholders and he may vote in a manner that is or could be deemed as adverse to interests of other stockholders. This concentration of voting power may have the effect of deterring, delaying or impeding actions that could be beneficial to other stockholders.
In addition, Mr. Williams may acquire additional shares of common stock through open market transactions or through future offerings of our common stock that may result in a greater than 50% beneficial ownership of our outstanding shares of common stock. Our equity compensation plans and certain of our executive compensation arrangements contain provisions that accelerate vesting of outstanding equity awards upon a change-in-control and some of our agreements may contain provisions related to change-in-control that may adversely affect our results of operations. Our equity awards are generally structured with four year vesting schedules as long-term incentive compensation. Should equity awards fully vest, our ability to retain key employees may be adversely affected.
We have obtained significant invested amounts from entities affiliated with Mr. Williams, our Chairman of the Board, and if as we seek additional funding to support our business Mr. Williams does not participate in our future offerings we may not be able to raise needed amounts and our operations may be adversely affected.
During 2016 and 2017 and the six months ended June 30, 2018, we funded our business primarily through the issuance and sale of our securities and we received $9,008,022 in 2016, $10,000,000 in 2017, and $10,000,000 in May 2018 of proceeds from the sale of our securities from entities affiliated with Mr. Williams, our Chairman of the Board, constituting 45.5%, 49.8% and 100%, respectively, of amounts receiving in the offering we then completed. We do not have sufficient funds to support our operations for the next 12 months from the date of issuance of these financial statements. 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. No assurance can be given that Mr. Williams or entities affiliated with him will continue to participate in any offerings of our securities or that we will be able to obtain additional capital from him. If we are unable to obtain funding on a timely basis, our business and operations may be materially and adversely affected. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations -Going Concern” above.
Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any.
In order to obtain marketing approval for Orion we must demonstrate the safety and efficacy of Orion through clinical trials as well as additional supporting data. If Orion is associated with undesirable side effects in clinical trials or have characteristics that are unexpected, we may need to interrupt, delay or abandon Orion’s development, cause it to have reduced functionality, or limit development to more narrow uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective.
We are conducting at UCLA and Baylor a six subject initial feasibility clinical study of Orion, but we cannot guarantee that any positive results in this limited trial will successfully translate to a pivotal clinical trial. It is not uncommon to observe results in human clinical trials that are unexpected based on limited trials testing, and many product candidates fail in large clinical trials despite promising limited clinical trial results. Moreover, clinical data is often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval for their products. No assurance can be given that we will not encounter similar results in our Orion trials. Human subjects in our clinical trials may suffer significant adverse events, tolerability issues or other side effects, including, but not limited to, adverse events associated with the surgical implantation, chronic implantation, and chronic use of the Orion device (Events that are also anticipated during or following explantation of the Orion device are identified with an asterisk (*)): intracranial hemorrhage*; subcutaneous hematoma*; vascular injury causing stroke or hemorrhage (e.g. injury to the superior sagittal sinus or posterior cerebral artery perforators)*; hydrocephalus*; intracranial hypotension or cerebrospinal fluid (CSF) leak*; headache or pain in the head, including deep pain*; tingling at the implant site*; brain edema*; infection*; meningitis*; implant site pain, swelling, discharge or effusion*; suture-related complications or stitch abscess*; skin erosion on and/or around the implant site; adverse tissue reaction to the implant; tissue damage at the implant/explant site*; cranial defect/bone damage*; decline in residual vision*; dizziness/syncope*; foreign body sensation at the implant site*; activation of motor or sensory neurons (e.g., muscle twitch); clinically symptomatic seizure*; development of epilepsy; coma*; death*; psychiatric events, including but not limited to mood changes, depression, suicidality, and psychosis*; neurological deficit, including but not limited to language (dysphemia), dysesthesias, paresis, parathesias, visual field, motor deficit (including apraxia), and memory impairment*; drug hypersensitivity, adverse drug reaction, or therapeutic agent toxicity*; events related to any surgery and general anesthesia including cardiac risks, including stroke/transient ischemic attack, arrhythmia, cardiac arrest, and myocardial infarction*, venous thromboembolic (VTE) disease*; pneumonia*, urinary tract infection*, post-operative delirium*, post-operative constipation*, post-operative vomiting or nausea*, or post-operative fever*; injuries due to falls or bumps; skin irritation or burns; Orion system failure or malfunction; array migration; damage to the Orion electronics case; device interaction including the Orion device may interfere with the proper functioning of other electronic devices and emissions from other electronic equipment may interfere with the proper functioning of the Orion device; and (explant only) inability to remove all or part of the Orion device due to fibrosis or other reason. No assurance can be given that we will not encounter adverse events in our Orion trials. The observed efficacy and extent of light perception and vision restoration for subjects implanted with Orion in our feasibility study may not be observed in a larger pivotal clinical trial. If general clinical trials of Orion fail to demonstrate efficacy to the satisfaction of regulatory authorities or do not otherwise produce positive results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of Orion.
If significant adverse events or other side effects are observed in any of our future clinical trials, we may have difficulty recruiting subjects to the clinical trial, subjects may drop out of our trial, or we may be required to abandon the trial or our development efforts of that product candidate altogether. We, the FDA or other applicable regulatory authorities may suspend clinical trials of Orion at any time for various reasons, including a belief that subjects in such trials are being exposed to unacceptable health risks or adverse side effects. Some potential devices developed in the prosthesis industry that initially showed promise in early-stage studies have later been found to cause side effects that prevented their further development. Even if the side effects do not preclude Orion from obtaining or maintaining marketing approval, undesirable side effects may inhibit market acceptance of the approved product due to its safety and tolerability profile. Any of these developments could materially harm our business, financial condition and prospects.
Further, if Orion obtains marketing approval, adverse effects associated with it may also develop after such approval and lead to a requirement to conduct additional clinical safety trials, additional warnings being added to the labeling, significant restrictions on the use of Orion or the withdrawal from the market together with attendant costs of explants and exposure to litigation. We cannot predict whether Orion will cause adverse effects in humans that would preclude or lead to the revocation of regulatory approval. However, any such event, were it to occur, would cause substantial harm to our business and financial condition and would result in the diversion of our management’s attention.
Our revenue from sales of Orion will be dependent upon the pricing and reimbursement guidelines adopted in each country and if pricing and reimbursement levels are inadequate to achieve profitability our operations will suffer.
Our financial success is dependent on our ability to price our products in a manner acceptable to government and private payers while still maintaining our profit margins. Numerous factors that may be beyond our control may ultimately impact our pricing of Orion and determine whether we are able to obtain reimbursement or reimbursement at adequate levels from governmental programs and private insurance. If we are unable to obtain reimbursement or our product is not adequately reimbursed, we will experience reduced sales, our revenues likely will be adversely affected, and we may not become profitable.
Obtaining reimbursement approvals is time consuming, requires substantial management attention, and is expensive. Our business will be materially adversely affected if we do not receive approval for reimbursement of Orion under government programs and from private insurers on a timely or satisfactory basis. Limitations on coverage could also be imposed at the local Medicare Administrative Contractor level or by fiscal intermediaries in the US and by regional, or national funding agencies in Europe. Our business could be materially adversely affected if the Medicare program, local Medicare Administrative Contractors or fiscal intermediaries were to make such a determination and deny, restrict or limit the reimbursement of Orion. Similarly in Europe these governmental and other agencies could deny, restrict or limit the reimbursement of Orion at the hospital, regional or national level. Our business also could be adversely affected if surgeons and the facilities within which they operate are not adequately reimbursed by Medicare and other funding agencies for the cost of the procedure in which they implant the Orion on a basis satisfactory to the administering surgeons and their facilities. If the local contractors that administer the Medicare program and other funding agencies are slow to reimburse surgeons or provider facilities for the Argus II System, the surgeons and facilities may delay their payments to us, which would adversely affect our working capital requirements. Also if the funding agencies delay reimbursement payments to the hospitals, any increase to their working capital requirements could reduce their willingness to treat blind patients who wish to have our Orion devices implanted. If reimbursement for our products is unavailable, limited in scope or amount, or if pricing is set at unsatisfactory levels, our business will be materially harmed.
We further 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 20, 2018.
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.
None
We entered into a stock purchase agreement on May 3, 2018 with entities beneficially owned by Gregg Williams for the purchase of 6,756,757 shares of common stock priced at $1.48 per share, the last reported sale price of the common stock on that date. Gregg Williams is Chairman of the Board of Directors of Second Sight. This placement of common stock provided net proceeds of $10 million. No warrants or discounts were provided and no placement agent or investment banking fees were incurred in connection with this transaction. The shares issuable to the purchasers under the Securities Purchase Agreement were issued pursuant to an exemption from registration under Rule 506 of Regulation D, which is promulgated under the Securities Act of 1933. We relied on this exemption from registration based in part on representations made by the purchasers.
None.
Not applicable.
Not applicable.
None.
Not applicable.
|
EXHIBIT INDEX
Exhibit No. |
| Exhibit Description |
|
| |
|
|
|
31.1 |
| |
31.2 |
| |
32.1 |
| |
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. |
(1) Incorporated by reference to the registrant’s registration statement on Form S-1, file no. 333-198073, originally filed with the Securities and Exchange Commission on August 12, 2014, as amended.
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/ J |
| Chief Executive Officer and Director |
| August |
Jonathan Will McGuire |
| (Principal Executive Officer) |
|
|
|
|
|
|
|
/s/ J |
| Chief Financial Officer |
| August |
John T. Blake |
| (Principal Financial and Accounting Officer) |
|
|
2831