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 September 30, 2017March 31, 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)
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, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” and “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 | ☒ |
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 November 3, 2017,May 10, 2019, the issuerregistrant had 56,806,352124,197,961 shares of common stock, issued$0 par value per share and outstanding.61,459,657 warrants, outstanding.
SECOND SIGHT MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
FormFORM 10-Q for the Quarter Ended September 30, 2017
INDEXTABLE OF CONTENTS
PART I | |||
Item 1. | |||
3 | |||
4 | |||
5 | |||
6 | |||
7 | |||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17 | |
Item 3. | 25 | ||
Item 4. | 25 | ||
PART II | |||
Item 1. | 26 | ||
Item 1A. | 26 | ||
Item 2. | 28 | ||
Item 3. | 28 | ||
Item 4. | 28 | ||
Item 5. | 28 | ||
Item 6. | 29 | ||
30 |
SECOND SIGHT MEDICAL PRODUCTS, INC.
AND SUBSIDIARYPart I. Financial Statements
Condensed Consolidated Balance Sheets
(In thousands)
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 639 | $ | 539 | ||||
Money market funds | 12,705 | 10,336 | ||||||
Accounts receivable, net | 668 | 274 | ||||||
Inventories, net | 3,245 | 3,416 | ||||||
Prepaid expenses and other current assets | 462 | 717 | ||||||
Total current assets | 17,719 | 15,282 | ||||||
Property and equipment, net | 1,327 | 1,489 | ||||||
Deposits and other assets | 35 | 39 | ||||||
Total assets | $ | 19,081 | $ | 16,810 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 826 | $ | 1,156 | ||||
Accrued expenses | 2,330 | 2,088 | ||||||
Accrued compensation expense | 2,266 | 1,600 | ||||||
Accrued clinical trial expenses | 623 | 629 | ||||||
Deferred revenue | 64 | 85 | ||||||
Deferred grant revenue | — | 104 | ||||||
Total current liabilities | 6,109 | 5,662 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, no par value, 10,000 shares authorized; none outstanding | — | — | ||||||
Common stock, no par value; 200,000 shares authorized; shares issued and outstanding: 56,806 and 42,701 at September 30, 2017 and December 31, 2016, respectively | 200,867 | 186,769 | ||||||
Common stock to be issued | 86 | 153 | ||||||
Additional paid-in capital | 39,559 | 30,697 | ||||||
Notes receivable to finance stock option exercises | — | (2 | ) | |||||
Accumulated other comprehensive loss | (572 | ) | (608 | ) | ||||
Accumulated deficit | (226,968 | ) | (205,861 | ) | ||||
Total stockholders’ equity | 12,972 | 11,148 | ||||||
Total liabilities and stockholders’ equity | $ | 19,081 | $ | 16,810 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Item 1. Financial Statements
SECOND SIGHT MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(in thousands)
|
| March 31, |
|
| December 31, |
| ||
|
| 2019 |
|
| 2018 |
| ||
|
| (unaudited) |
|
|
|
|
| |
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 31,682 |
|
| $ | 4,471 |
|
Accounts receivable, net |
|
| 597 |
|
|
| 504 |
|
Inventories, net |
|
| 1,602 |
|
|
| 3,250 |
|
Prepaid expenses and other current assets |
|
| 1,155 |
|
|
| 1,395 |
|
Total current assets |
|
| 35,036 |
|
|
| 9,620 |
|
Property and equipment, net |
|
| 963 |
|
|
| 1,025 |
|
Right-of-use assets |
|
| 2,508 |
|
|
| — |
|
Deposits and other assets |
|
| 41 |
|
|
| 37 |
|
Total assets |
| $ | 38,548 |
|
| $ | 10,682 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 1,600 |
|
| $ | 1,305 |
|
Accrued expenses |
|
| 2,309 |
|
|
| 2,503 |
|
Accrued compensation expense |
|
| 2,080 |
|
|
| 2,690 |
|
Accrued clinical trial expenses |
|
| 1,016 |
|
|
| 933 |
|
Current operating lease liabilities |
|
| 210 |
|
|
| — |
|
Contract liabilities |
|
| 218 |
|
|
| 167 |
|
Total current liabilities |
|
| 7,433 |
|
|
| 7,598 |
|
Long term operating lease liabilities |
|
| 2,586 |
|
|
| — |
|
Total liabilities |
|
| 10,019 |
|
|
| 7,598 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
Preferred stock, no par value, 10,000 shares authorized; none outstanding |
|
| — |
|
|
| — |
|
Common stock, no par value; 200,000 shares authorized; shares issued and outstanding: 124,198 and 76,336 as of March 31, 2019 and December 31, 2018, respectively |
|
| 263,418 |
|
|
| 229,019 |
|
Additional paid-in capital |
|
| 46,586 |
|
|
| 44,111 |
|
Accumulated other comprehensive loss |
|
| (583 | ) |
|
| (575 | ) |
Accumulated deficit |
|
| (280,892 | ) |
|
| (269,471 | ) |
Total stockholders’ equity |
|
| 28,529 |
|
|
| 3,084 |
|
Total liabilities and stockholders’ equity |
| $ | 38,548 |
|
| $ | 10,682 |
|
See accompanying notes.
SECOND SIGHT MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
Condensed Consolidated Statements of Operations (Unaudited)(unaudited)
(Inin thousands, except per share data)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net sales | $ | 1,610 | $ | 1,180 | $ | 4,855 | $ | 3,270 | ||||||||
Cost of sales | 1,001 | 2,615 | 3,255 | 6,768 | ||||||||||||
Gross profit (loss) | 609 | (1,435 | ) | 1,600 | (3,498 | ) | ||||||||||
Operating expenses: | ||||||||||||||||
Research and development, net of grants | 1,826 | 1,588 | 5,622 | 3,266 | ||||||||||||
Clinical and regulatory | 629 | 609 | 1,927 | 1,955 | ||||||||||||
Selling and marketing | 2,375 | 2,262 | 7,057 | 6,473 | ||||||||||||
General and administrative | 2,528 | 2,605 | 8,170 | 7,635 | ||||||||||||
Total operating expenses | 7,358 | 7,064 | 22,776 | 19,329 | ||||||||||||
Loss from operations | (6,749 | ) | (8,499 | ) | (21,176 | ) | (22,827 | ) | ||||||||
Interest income | 33 | 10 | 69 | 18 | ||||||||||||
Net loss | $ | (6,716 | ) | $ | (8,489 | ) | $ | (21,107 | ) | $ | (22,809 | ) | ||||
Net loss per common share – basic and diluted | $ | (0.12 | ) | $ | (0.20 | ) | $ | (0.40 | ) | $ | (0.57 | ) | ||||
Weighted average common shares outstanding – basic and diluted | 56,799 | 42,220 | 53,206 | 39,929 |
The accompanying notes are an integral part of these condensed consolidated financial statements
|
| Three Months Ended March 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Net sales |
| $ | 1,128 |
|
| $ | 976 |
|
Cost of sales |
|
| 731 |
|
|
| 668 |
|
Gross profit |
|
| 397 |
|
|
| 308 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
Research and development, net of grants |
|
| 2,183 |
|
|
| 2,474 |
|
Clinical and regulatory |
|
| 1,006 |
|
|
| 1,348 |
|
Selling and marketing |
|
| 2,103 |
|
|
| 3,011 |
|
General and administrative |
|
| 2,449 |
|
|
| 3,244 |
|
Impairment charge |
|
| 2,424 |
|
|
| — |
|
Total operating expenses |
|
| 10,165 |
|
|
| 10,077 |
|
Loss from operations |
|
| (9,768 | ) |
|
| (9,769 | ) |
Interest income |
|
| 68 |
|
|
| 16 |
|
Net loss |
| $ | (9,700 | ) |
| $ | (9,753 | ) |
Net loss per common share – basic and diluted |
| $ | (0.10 | ) |
| $ | (0.17 | ) |
Weighted average common shares outstanding – basic and diluted |
|
| 96,567 |
|
|
| 59,052 |
|
See accompanying notes.
SECOND SIGHT MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
Condensed Consolidated Statements of Comprehensive Loss (Unaudited)(unaudited)
(Inin thousands)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net loss | $ | (6,716 | ) | $ | (8,489 | ) | $ | (21,107 | ) | $ | (22,809 | ) | ||||
Other comprehensive income (loss): | ||||||||||||||||
Foreign currency translation adjustments | (86 | ) | 34 | 36 | 57 | |||||||||||
Comprehensive loss | $ | (6,802 | ) | $ | (8,455 | ) | $ | (21,071 | ) | $ | (22,752 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
|
| Three Months Ended March 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Net loss |
| $ | (9,700 | ) |
| $ | (9,753 | ) |
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
| (8 | ) |
|
| 45 |
|
Comprehensive loss |
| $ | (9,708 | ) |
| $ | (9,708 | ) |
See accompanying notes.
SECOND SIGHT MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)(unaudited)
(Inin thousands)
Nine months ended September 30, 2017 and 2016
|
| Common Stock |
|
| Common Stock Issuable |
|
| Additional Paid-in |
|
| Accumulated Other Comprehensive |
|
| Accumulated |
|
| Total Stockholders’ |
| ||||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Loss |
|
| Deficit |
|
| Equity |
| ||||||||
Balance, December 31, 2017 |
|
| 57,630 |
|
| $ | 202,156 |
|
|
| 82 |
|
| $ | 153 |
|
| $ | 40,522 |
|
| $ | (572 | ) |
| $ | (234,377 | ) |
| $ | 7,882 |
|
Issuance of shares of common stock, net of issuance costs |
|
| 2,224 |
|
|
| 3,992 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,992 |
|
Warrants exercise |
|
| 5 |
|
|
| 7 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 7 |
|
Common stock issuance for services |
|
| — |
|
|
| — |
|
|
| 34 |
|
|
| 65 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 65 |
|
Release of restricted stock units |
|
| 12 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,285 |
|
|
| — |
|
|
| — |
|
|
| 1,285 |
|
Exercise of common stock options |
|
| 5 |
|
|
| 8 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 8 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (9,753 | ) |
|
| (9,753 | ) |
Foreign currency translation adjustment |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 45 |
|
|
| — |
|
|
| 45 |
|
Balance, March 31, 2018 |
|
| 59,876 |
|
| $ | 206,163 |
|
|
| 116 |
|
| $ | 218 |
|
| $ | 41,807 |
|
| $ | (527 | ) |
| $ | (244,130 | ) |
| $ | 3,531 |
|
Common Stock | Common Stock Issuable | Additional Paid-in | Notes Receivable for Stock Option | Accumulated Other Comprehensive | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Exercises | Loss | Deficit | Equity | ||||||||||||||||||||||||||||
Balance, December 31, 2015 | 35,942 | $ | 166,049 | 33 | $ | 205 | $ | 27,277 | $ | (5 | ) | $ | (581 | ) | $ | (172,682 | ) | $ | 20,263 | |||||||||||||||||
Issuance of common stock in connection with rights offering, net of expenses | 5,978 | 19,430 | — | — | — | — | — | — | 19,430 | |||||||||||||||||||||||||||
Exercise of stock options | 95 | 478 | — | — | — | 3 | — | — | 481 | |||||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | 2,581 | — | — | — | 2,581 | |||||||||||||||||||||||||||
Fair value of stock options issued for services in connection with rights offering | — | — | — | — | 53 | — | — | — | 53 | |||||||||||||||||||||||||||
Stock issued or issuable for professional services | 82 | 324 | (7 | ) | (118 | ) | — | — | — | — | 206 | |||||||||||||||||||||||||
Issuance of common stock in connection with Employee Stock Purchase Plan | 102 | 337 | — | — | — | — | — | — | 337 | |||||||||||||||||||||||||||
Issuance of RSUs | 48 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Comprehensive loss: | ||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | (22,809 | ) | (22,809 | ) | |||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | — | 57 | — | 57 | |||||||||||||||||||||||||||
Comprehensive loss | — | — | — | — | — | — | 57 | (22,809 | ) | (22,752 | ) | |||||||||||||||||||||||||
Balance, September 30, 2016 | 42,247 | $ | 186,618 | 26 | $ | 87 | $ | 29,911 | $ | (2 | ) | $ | (524 | ) | $ | (195,491 | ) | $ | 20,599 | |||||||||||||||||
Balance, December 31, 2016 | 42,701 | $ | 186,769 | 77 | $ | 153 | $ | 30,697 | $ | (2 | ) | $ | (608 | ) | $ | (205,861 | ) | $ | 11,148 | |||||||||||||||||
Issuance of common stock and warrants in connection with rights offering, net of offering costs | 13,653 | 13,647 | — | — | 6,021 | — | — | — | 19,668 | |||||||||||||||||||||||||||
Issuance of common stock in connection with Employee Stock Purchase Plan | 193 | 189 | — | — | — | — | — | — | 189 | |||||||||||||||||||||||||||
Fair value of stock options issued for services in connection with rights offering | — | — | — | — | 20 | — | — | — | 20 | |||||||||||||||||||||||||||
Common stock issued or issuable for services | 223 | 262 | (2 | ) | (67 | ) | — | — | — | — | 195 | |||||||||||||||||||||||||
Issuance of RSUs | 36 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | 2,821 | — | — | — | 2,821 | |||||||||||||||||||||||||||
Repayment of notes receivable for stock option exercises | — | — | — | — | — | 2 | — | — | 2 | |||||||||||||||||||||||||||
Comprehensive loss: | ||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | (21,107 | ) | (21,107 | ) | |||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | — | 36 | — | 36 | |||||||||||||||||||||||||||
Comprehensive loss | — | — | — | — | — | — | 36 | (21,107 | ) | (21,071 | ) | |||||||||||||||||||||||||
Balance, September 30, 2017 | 56,806 | $ | 200,867 | 75 | $ | 86 | $ | 39,559 | $ | — | $ | (572 | ) | $ | (226,968 | ) | $ | 12,972 |
|
| 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 |
|
TheSee accompanying notes are an integral part of these condensed consolidated financial statements.
notes.
SECOND SIGHT MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Inin thousands)
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (21,107 | ) | $ | (22,809 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization of property and equipment | 345 | 311 | ||||||
Stock-based compensation | 2,821 | 2,581 | ||||||
Bad debt (recovery) expense | (128 | ) | 191 | |||||
Excess inventory (recovery) reserve | (1,731 | ) | 2,611 | |||||
Common stock issuable for services | 195 | 206 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (311 | ) | 874 | |||||
Inventories | 1,955 | (166 | ) | |||||
Prepaid expenses and other assets | 261 | 492 | ||||||
Accounts payable | (299 | ) | (16 | ) | ||||
Accrued expenses | 233 | (377 | ) | |||||
Accrued compensation expenses | 668 | (15 | ) | |||||
Accrued clinical trial expenses | (6 | ) | (61 | ) | ||||
Deferred revenue | (25 | ) | (135 | ) | ||||
Deferred grant revenue | (104 | ) | (1,741 | ) | ||||
Net cash used in operating activities | (17,233 | ) | (18,054 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchases of property and equipment | (181 | ) | (406 | ) | ||||
Investment in money market funds | (2,362 | ) | (1,820 | ) | ||||
Net cash used in investing activities | (2,543 | ) | (2,226 | ) | ||||
Cash flows from financing activities: | ||||||||
Net proceeds from rights offering | 19,688 | 19,483 | ||||||
Proceeds from repayment of note receivable | 2 | — | ||||||
Proceeds from exercise of options and employee stock plan purchases | 189 | 816 | ||||||
Net cash provided by financing activities | 19,879 | 20,299 | ||||||
Effect of exchange rate changes on cash | (3 | ) | 19 | |||||
Cash: | ||||||||
Net increase | 100 | 38 | ||||||
Balance at beginning of period | 539 | 239 | ||||||
Balance at end of period | $ | 639 | $ | 277 | ||||
Supplemental cash flow information: | ||||||||
Non-cash financing and investing activities: | ||||||||
Fair value of stock options issued for services rendered in connection with rights offering | $ | 20 | $ | 53 |
The accompanying notes are integral part of these condensed consolidated financial statements.
|
| Three Months Ended March 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
|
| (unaudited) |
| |||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
| $ | (9,700 | ) |
| $ | (9,753 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 99 |
|
|
| 111 |
|
Stock-based compensation |
|
| 898 |
|
|
| 1,285 |
|
Non-cash lease expense |
|
| 6 |
|
|
| — |
|
Inventory reserve |
|
| — |
|
|
| (109 | ) |
Impairment charge |
|
| 2,424 |
|
|
| — |
|
Common stock issuance for services |
|
| — |
|
|
| 65 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (95 | ) |
|
| 1,374 |
|
Inventories |
|
| (786 | ) |
|
| 21 |
|
Prepaid expenses and other assets |
|
| 236 |
|
|
| (16 | ) |
Accounts payable |
|
| 297 |
|
|
| 857 |
|
Accrued expenses |
|
| (57 | ) |
|
| (354 | ) |
Accrued compensation expenses |
|
| (609 | ) |
|
| (534 | ) |
Accrued clinical trial expenses |
|
| 84 |
|
|
| 161 |
|
Contract liabilities |
|
| 53 |
|
|
| 114 |
|
Net cash used in operating activities |
|
| (7,150 | ) |
|
| (6,778 | ) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
| (37 | ) |
|
| (68 | ) |
Net cash used in investing activities |
|
| (37 | ) |
|
| (68 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net proceeds from sale of common stock and warrants |
|
| 34,399 |
|
|
| 3,992 |
|
Proceeds from exercise of options and warrants |
|
| — |
|
|
| 15 |
|
Net cash provided by financing activities |
|
| 34,399 |
|
|
| 4,007 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
| (1 | ) |
|
| 14 |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Net increase (decrease) |
|
| 27,211 |
|
|
| (2,825 | ) |
Balance at beginning of period |
|
| 4,471 |
|
|
| 7,839 |
|
Balance at end of period |
| $ | 31,682 |
|
| $ | 5,014 |
|
See accompanying notes.
SECOND SIGHT MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and Nine Months Ended September 30, 2017 and 2016(unaudited)
1. Organization and Business Operations
Second Sight Medical Products, Inc. (“Second Sight”Sight,” “we,” “us,” or “the Company”), formerly Second Sight LLC, was founded in 1998 as a limited liability company and was subsequently incorporated in the State of California in 2003. Second Sight develops, manufactures and markets implantable prosthetic devices that can restore some functional visionvisual prosthetics to patients blinded by outer retinal degenerations, such as Retinitis Pigmentosa.
enable blind individuals to achieve greater independence.
In 2007, Second Sight formed Second Sight Medical Products (Switzerland) Sarl,Sàrl, initially to manage clinical trials for its products in Europe, and later to manage sales and marketing in Europe, the Middle East and Asia.Asia-Pacific. As the laws of Switzerland require at least two corporate stockholders, Second Sight Medical Products (Switzerland) SarlSàrl is 99.5% owned directly by the Companyus and 0.5% is owned by an executive of Second Sight who is acting as a nominee of the Company.March 31, 2019. Accordingly, Second Sight Medical Products (Switzerland) SarlSàrl is considered 100% owned for financial statement purposes and is consolidated with Second Sight for all periods presented.
Since its inception,We are currently developing the Company has generated limited revenues from the saleOrion® 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 productscauses, including glaucoma, diabetic retinopathy, optic nerve injury or disease, or forms of cancer and has financed its operations primarily through the issuance of common stock, convertible debt (which has been converted into common stock), and grants primarily from government agencies.
On March 6, 2017, the Company successfully completed a registered Rights Offering to existing stockholders raising net proceeds of approximately $19.7 million in which it sold 13.7 million Units at $1.47 per Unit, which was the closing pricetrauma. A feasibility study of the Company’s common stock on that date. Each Unit consisted of a share of the Company’s common stock and a warrant to purchase an additional share of the Company’s stock for $1.47. The warrants have a five-year life and trade on Nasdaq under the symbol EYESW. At the Company’s discretion, the warrants are redeemable on 30 days’ notice (i) at any time 24 months after the date of issuance, (ii) if the shares of its common stock are trading at 200% or higher than the Subscription Price for 15 consecutive trading days and (iii) if all of the independent directors vote in favor of redeeming the warrants. Holders may be able to sell or exercise warrants prior to any announced redemption date and the Company will redeem outstanding warrants not exercised by the announced redemption date for a nominal amount of $0.01 per Warrant. The Company deemed it appropriate not to record the liability for this warrant redemption amount as the probability of any redemptions was deemed remote based upon its terms. For purposes of recording this transaction, the Company allocated the proceeds from the offering between the common stock and warrants issued based on their relative fair values on the date of issuance. The fair value used for the common stock was the closing price of the stock of $1.47 on March 6, 2017. The fair value used for the warrants was their Black-Scholes value of $0.64 per warrant, calculated as of March 6, 2017. Accordingly, the relative fair value assigned to the common stock was $1.02 per share and the relative fair value assigned to the warrants was $0.45 per warrant. The CompanyOrion device is using these proceeds to invest in its business to expand sales and marketing efforts, enhance current products, gain regulatory approvals for additional indications, and continue research and development into next generation technology.
The Company evaluated the financial impact of FASB ASC 260, “Earnings per Share,” which states, among other things, that if a rights issue is offered to all existing stockholders at an exercise price that is less than the fair value of the stock, then the weighted average shares outstanding and basic and diluted earnings per share shall be adjusted retroactively to reflect the bonus element of the rights offering for all periods presented. The Company determined that the application of this specific provision of ASC 260 was immaterial to previously issued financial statements and, therefore, did not retroactively adjust previously reported weighted average shares outstanding and basic and diluted earnings per share.
The Company’s financial statements have been presented on the basis that its business is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company is subject to the risks and uncertainties associated with a business with one product line and limited commercial product revenues, including limitations on its operating capital resources and uncertain demand for its products. The Company has incurred recurring operating losses and negative operating cash flows since inception, and expects to continue to incur operating losses and negative operating cash flows for at least the next several years as a result of which, management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern. The Company’s independent registered public accounting firm, in its report on the Company’s 2016 consolidated financial statements, has also raised substantial doubt about the Company’s ability to continue as a going concern.
The Company believes that it has sufficient funds to last through the first quarter of 2018. To continue business operations beyond that point, the Company will need to raise additional debt and/or equity capital. However, there can be no assurances that the Company will be able to secure any such additional financing on acceptable terms and conditions, or at all so as to be able to continue operating its business at current levels past the first quarter of 2018. If cash resources become insufficient to satisfy the Company’s ongoing cash requirements, the Company would be required to scale back or discontinue its technology and product development programs and/or clinical trials, or obtain funds, if available (although there can be no certainty), through strategic alliances that may require the Company to relinquish rights to its products, or to discontinue its operations entirely.
2. Basis of Presentation, Significant Accounting Policies and Recent Accounting Pronouncements
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for Form 10-Q. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet at December 31, 2016 has been derived from the Company’s audited consolidated financial statements.
In the opinion of management, these financial statements reflect all normal recurring and other adjustments necessary for a fair presentation. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year or any other future periods.
Significant Accounting Policies
The Company’s significant accounting policies are set forth in Note 2 of the financial statements in its Annual Report on Form 10-K for the year ended December 31, 2016.
Net Operating Loss Carryforwards
As of December 31, 2016 pursuant to an analysis done under Section 382, Limitations on Net Operating Losses, of the Internal Revenue Code of 1986, as amended, the Company had $142.3 million and $93.8 million of federal and state operating loss carryforwards, respectively, with which to offset any future taxable income. The federal and state net operating loss carryforwards will begin to expire at various dates from 2016 through 2036. If these loss carryforwards are unavailable for use in future periods, the Company’s results of operations and financial position may be adversely affected.
The Company experienced an “ownership change” within the meaning of Section 382(g) of the Internal Revenue Code of 1986, as amended, during the second quarter of 2017. The ownership change will subject the Company’s net operating loss carryforwards to an annual limitation, which will significantly restrict the Company’s ability to use them to offset taxable income in periods following the ownership change. In general, the annual use limitation equals the aggregate value of the Company’s stockcurrently underway at the timeRonald Reagan UCLA Medical Center in Los Angeles (“UCLA”) and Baylor College of the ownership change multiplied by a tax-exempt interest rate specified by the Internal Revenue Service. The Company has analyzed the available information to determine the amount of the annual limitation. Based on information available to the Company, the limitation arising from this ownership change is estimated to range between $1.4 million and $3.7 million annually. In total, the Company estimates that the 2017 ownership change will resultMedicine in approximately $102 million and $54 million of federal and state net operating loss carryforwards, respectively, expiring unused.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards UpdateHouston (“ASU”) No. 2014-09-Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which provides new guidance for revenue recognition. The Financial Accounting Standards Board (“FASB”) subsequently issued ASU No. 2015-14-Revenue from Contracts with Customers (Topic 606), which deferred the effective date of ASU 2014-09, ASU No. 2016-08-Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net),ASU No. 2016-10-Revenue fromContracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, ASU No. 2016-12-Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, and ASU No. 2016-20-Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The above subsequent ASUsdid not change the core principle of the guidance in ASU 2014-09. The ASUs referred to above collectively will supersede and replace the revenue recognition requirements in ASC Topic 605-Revenue Recognition, and most of the related industry specific guidance and replace them with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”Baylor”).
The core principle in ASC 606 is that revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:
Step 1: Identify the contract(s) with a customer
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
ASU 2014-09 also creates ASC Subtopic 340-40-Other Assets and Deferred Costs-Contracts with Customers (“ASC 340-40”), which requires an entity to recognize an asset for certain types of costs related to a contract with a customer within the scope of ASC 606 and amortize the asset over a period consistent with the transfer of the goods and services to which the asset relates. Specifically, the costs required to be capitalized are (a) incremental costs of obtaining a contract with a customer and (b) costs incurred in fulfilling a contract with a customer that are not in the scope of another ASC Topic.
ASC 606 and ASC 340-40 (the “new accounting standards”) require the Company to make significant judgments and estimates. The new accounting standards also require more extensive disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
The Company will adopt the new accounting standards as of January 1, 2018 using the modified retrospective transition method, in which the two new accounting standards are applied retrospectively with the cumulative effect of initially applying the new accounting standards as an adjustment to the opening balance of retained earnings at January 1, 2018, the date of initial adoption. In accordance with the modified retrospective transition method, the Company will apply the new guidance retrospectively only to contracts that are not completed contracts at January 1, 2018.
Also in accordance with the modified retrospective transition method, the Company will provide additional disclosures in its financial statements for each of the quarterly and annual reporting periods in 2018 of (a) the amount by which each financial statement line item is affected in the reporting period by the application of the new accounting standards as compared to the accounting guidance that was in effect before the change, and (b) an explanation of the reasons for significant changes identified.
The Company completed an initial assessment of adoption of ASC 606, and is currently in the process of updating that assessment to reflect changes in contractual terms and the Company’s customary business practices since completion of the initial assessment. The Company is also assessing the ASC 606 revenue recognition policy related to a new type of revenue arrangement the Company entered into subsequent to September 30, 2017 which is expected to generate revenue in the fourth quarter of 2017.
The Company has not yet estimated the financial statement impact of the expected changes due to the adoption of ASC 606. The Company expects to complete its assessment during the fourth quarter of 2017 and will adopt the new accounting standards effective January 1, 2018.
Management does 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 the Company to concentrations of credit risk consist primarily of cash, money market funds, and trade accounts receivable. The Company maintains cash and money market funds with financial institutions that management deems reputable, and at times, cash balances may be in excess of Federal Deposit Insurance Corporation and Securities Investor Protection Corporation insurance limits. The Company extends differing levels of credit to customers, and typically does not require collateral.
The Company also maintains a cash balance at a bank in Switzerland, which is insured up to an amount specified by the deposit insurance agency of Switzerland.
Customer Concentration
During the three and nine months ended September 30, 2017 and 2016, the following customers comprised more than 10% of revenues (unaudited):
Three Months September 30, 2017 | Three Months September 30, 2016 | Nine Months September 30, 2017 | Nine Months September 30, 2016 | ||||||||||||||
Customer 1 | 18 | % | 0 | % | 8 | % | 0 | % | |||||||||
Customer 2 | 18 | % | 0 | % | 6 | % | 4 | % | |||||||||
Customer 3 | 18 | % | 0 | % | 6 | % | 0 | % | |||||||||
Customer 4 | 10 | % | 0 | % | 3 | % | 0 | % | |||||||||
Customer 5 | 9 | % | 0 | % | 11 | % | 0 | % | |||||||||
Customer 6 | 0 | % | 21 | % | 0 | % | 8 | % | |||||||||
Customer 7 | 0 | % | 12 | % | 3 | % | 3 | % | |||||||||
Customer 8 | 0 | % | 11 | % | 0 | % | 16 | % | |||||||||
Customer 9 | 0 | % | 0 | % | 0 | % | 10 | % |
As of September 30, 2017 and December 31, 2016, the following customers comprised more than 10% of accounts receivable:
September 30, | December 31, | ||||||||
2017 | 2016 | ||||||||
(unaudited) | |||||||||
Customer 1 | 24 | % | 0 | % | |||||
Customer 2 | 22 | % | 0 | % | |||||
Customer 3 | 20 | % | 0 | % | |||||
Customer 4 | 19 | % | 0 | % | |||||
Customer 5 | 14 | % | 34 | % | |||||
Customer 6 | 0 | % | 34 | % | |||||
Customer 7 | 0 | % | 28 | % |
Geographic Concentration
During the three and nine months ended September 30, 2017 and 2016, regional revenue, based on customer locations which comprised more than 10% of revenues, consisted of the following (unaudited):
Three Months September 30, 2017 | Three Months September 30, 2016 | Nine Months September 30, 2017 | Nine Months September 30, 2016 | |||||||||||||
United States | 72 | % | 47 | % | 59 | % | 47 | % | ||||||||
Italy | 9 | % | 11 | % | 11 | % | 21 | % | ||||||||
Germany | 5 | % | 35 | % | 3 | % | 15 | % |
Sources of Supply
Several of the components, materials and services used in the Company’s current Argus II product are available from only one supplier, and substitutes for these items cannot be obtained easily or would require substantial design or manufacturing modifications. Any significant problem experienced by one of the Company’s sole source suppliers could result in a delay or interruption in the supply of components to the Company until that supplier cures the problem or an alternative source of the component is located and qualified. Even where the Company could qualify alternative suppliers, the substitution of suppliers may be at a higher cost and create time delays that impede theOur commercial production of the Argus II and impact the Company’s abilities to deliver its products as may be timely required to meet demand.
Foreign Operations
The accompanying condensed consolidated financial statements as of September 30, 2017 (unaudited) and December 31, 2016 include assets amounting to $2.0 million and $1.7 million, respectively, relating to operations of the Company’s subsidiary based in Switzerland. It is possible that unanticipated events in foreign countries could disrupt the Company’s operations.
4. Money Market Funds
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.
Level 1. Observable inputs such as quoted prices in active markets for an identical asset or liability that the Company has 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.
Money market funds are the only financial instrument measured and recorded at fair value on the Company’s balance sheet, and they are considered Level 1 valuation securities. The following table presents money market funds at their level within the fair value hierarchy at September 30, 2017 and December 31, 2016 (in thousands):
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
September 30, 2017 (unaudited): | ||||||||||||||||
Money market funds | $ | 12,705 | $ | 12,705 | $ | $ | — | |||||||||
December 31, 2016: | ||||||||||||||||
Money market funds | $ | 10,336 | $ | 10,336 | $ | — | $ | — |
5. Selected Balance Sheet Detail
Accounts receivable, net
Accounts receivable consisted of the following at (in thousands):
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
(Unaudited) | ||||||||
Accounts receivable | $ | 757 | $ | 487 | ||||
Allowance for doubtful accounts | (89 | ) | (213 | ) | ||||
Accounts receivable, net | $ | 668 | $ | 274 |
Inventories, net
Inventories consisted of the following at (in thousands):
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
(Unaudited) | ||||||||
Raw materials | $ | 390 | $ | 477 | ||||
Work in process | 3,378 | 5,032 | ||||||
Finished goods | 3,123 | 3,284 | ||||||
6,891 | 8,793 | |||||||
Allowance for excess and obsolescence | (3,646 | ) | (5,377 | ) | ||||
Inventories, net | $ | 3,245 | $ | 3,416 |
Property and equipment, net of accumulated depreciation and amortization
Property and equipment consisted of the following at (in thousands):
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
(Unaudited) | ||||||||
Laboratory equipment | $ | 2,398 | $ | 2,300 | ||||
Computer hardware and software | 1,297 | 1,220 | ||||||
Leasehold improvements | 299 | 288 | ||||||
Furniture, fixtures and equipment | 46 | 45 | ||||||
4,040 | 3,853 | |||||||
Accumulated depreciation and amortization | (2,713 | ) | (2,364 | ) | ||||
Property and equipment, net | $ | 1,327 | $ | 1,489 |
6. Equity Securities
Common Stock Issuable
Non-employee members of the Board of Directors are paid for their services in common stock on June 1 of each year based on the average closing prices for the immediately preceding twenty trading days. As of September 30, 2017, the Company accrued $86,000 for these services, which equates to 75,000 shares. These shares have not yet been issued and are excluded from the calculation of weighted average common shares outstanding for EPS purposes.
Potentially Dilutive Common Stock Equivalents
At September 30, 2017 and 2016, the Company excluded the outstanding securities summarized below, which entitle the holders thereof to ultimately acquire shares of common stock, from its calculations of earnings per share and weighted average shares outstanding, as their effect would have been anti-dilutive (in thousands), as follows (unaudited):
September 30, | September 30, | |||||||
2017 | 2016 | |||||||
Long Term Investor Rights | — | 342 | ||||||
Underwriter’s warrants | 802 | 802 | ||||||
Warrants associated with convertible debt | 676 | 1,038 | ||||||
Warrants associated with March 2017 Rights Offering | 13,652 | — | ||||||
Common stock options | 5,530 | 3,669 | ||||||
Restricted stock units | 95 | 142 | ||||||
Employee stock purchase plan | 220 | 109 | ||||||
Total | 20,975 | 6,102 |
7. Warrants
A summary of warrant activity for the nine months ended September 30, 2017 is presented below (in thousands, except per share and contractual life data) (unaudited).
Weighted Average | ||||||||||||
Weighted | Remaining | |||||||||||
Number of | Average | Contractual | ||||||||||
Shares | Exercise Price | Life (in Years) | ||||||||||
Warrants outstanding at December 31, 2016 | 1,840 | $ | 7.72 | 1.80 | ||||||||
Issued | 13,652 | $ | 1.47 | |||||||||
Exercised | — | |||||||||||
Forfeited or expired | (362 | ) | $ | 5.00 | ||||||||
Warrants outstanding at September 30, 2017 | 15,130 | $ | 2.15 | 4.15 | ||||||||
Warrants exercisable at September 30, 2017 | 15,130 | $ | 2.15 | 4.15 |
The intrinsic value of warrants outstanding at September 30, 2017 was $0.
8. Stock-Based Compensation
Effective June 1, 2011, the Company adopted the 2011 Equity Incentive Plan (the “2011 Plan”), which replaced previous equity plans. On June 6, 2017, the shareholders approved amendments to the 2011 Plan increasing the maximum number of shares of common stock that may be issued from 7,500,000 to 9,500,000, which is offset and reduced by options previously granted under previous plans. The option price is determined by the Board of Directors but cannot be less than the fair value of the shares at the grant date. Generally, the options vest ratably over either four or five years and expire ten years from the grant date. In the event of a change of control, as defined in the 2011 Plan, vesting is accelerated.
A summary of stock option activity for the nine months ended September 30, 2017 is presented below (in thousands, except per share and contractual life data) (unaudited).
Number | Weighted Average | Weighted Average Remaining Contractual | ||||||||||
of Shares | Exercise Price | Life (in Years) | ||||||||||
Options outstanding at December 31, 2016 | 3,667 | $ | 7.23 | 6.27 | ||||||||
Granted | 2,504 | $ | 1.85 | |||||||||
Exercised | — | — | ||||||||||
Forfeited or expired | (641 | ) | $ | 5.58 | ||||||||
Options outstanding at September 30, 2017 | 5,530 | $ | 4.98 | 7.56 | ||||||||
Options exercisable at September 30, 2017 | 2,090 | $ | 7.15 | 5.36 |
The estimated aggregate intrinsic value of stock options exercisable at September 30, 2017 was $0. As of September 30, 2017, there was $5.7 million of total unrecognized compensation cost related to outstanding stock options that will be recognized over a weighted average period of 2.91 years.
During the nine months ended September 30, 2017, the Company granted stock options to purchase 2,464,150 shares of common stock to certain employees. The options are exercisable for a period of ten years from the date of grant at prices ranging from $1.13 to $1.97 per share, which was the fair value of the Company’s common stock on the respective grant dates. The options vest over a period of four years. The fair value of these options, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $2,222,000 ($0.55 to $0.96 per share). Assumptions used in the model were an expected term of 6.25 years, volatility of 48.0%, a risk-free interest rate of 1.92% to 2.14%, and an expected dividend rate of 0%.
In March 2017, the Company granted stock options to purchase 40,000 shares of common stock to an outside attorney in connection with his services relating to the Company’s March, 2017 rights offering to stockholders. The options are exercisable for a period of four years from the date of grant at a price of $1.76 per share, which was 120% of the fair value of the Company’s common stock on the grant date of March 6, 2017. The options vested as of the date of grant. The fair value of these options, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $19,640 ($0.49 per share). Assumptions used in the model were an expected term of 4.0 years, volatility of 48.0%, a risk-free interest rate of 1.81%, and an expected dividend rate of 0%. The cost of these shares was treated as an issuance cost of the offering and was deducted from the gross proceeds from the offering.
The Company adopted an employee stock purchase plan (“ESPP”) starting in June 2015 for all eligible employees. On June 6, 2017, the shareholders approved an amendment to the ESPP increasing the maximum number of shares of common stock that may be issued from 250,000 to 750,000. Under the ESPP, shares of the Company’s common stock may be purchased at six-month intervals at 85% of the lower of the closing fair market value of the common stock (i) on the first trading day of the offering period or (ii) on the last trading day of the purchase period. An employee may purchase in any one calendar year shares of common stock having an aggregate fair market value of up to $25,000 determined as of the first trading day of the offering period. Additionally, a participating employee may not purchase more than 100,000 shares of common stock in any one offering period. At September 30, 2017, 435,139 shares had been purchased under the ESPP.
The following table summarizes Restricted Stock Unit (RSU) activity (unaudited) for the nine months ended September 30, 2017 (in thousands, except per share data):
Number of Awards | Weighted Average Grant Date Fair Value Per Share | ||||||||
Outstanding as of December 31, 2016 | 131 | $ | 12.43 | ||||||
Awarded | — | — | |||||||
Vested | (36 | ) | 12.43 | ||||||
Forfeited/canceled | — | — | |||||||
Outstanding as of September 30, 2017 | 95 | $ | 12.43 |
As of September 30, 2017, there was $1.1 million of total unrecognized compensation cost related to the outstanding RSUs that will be recognized over a weighted average period of 1.88 years.
Stock-based compensation expense recognized for stock-based awards granted under the 2011 Plan and the ESPP in the condensed consolidated statements of operations for the three and nine months ended September 30, 2017 and 2016 is as follows (in thousands) (unaudited):
Three Months September 30, 2017 | Three Months September 30, 2016 | Nine Months September 30, 2017 | Nine Months September 30, 2016 | |||||||||||||
Cost of sales | $ | 36 | $ | 80 | $ | 184 | $ | 245 | ||||||||
Research and development | 71 | 77 | 203 | 238 | ||||||||||||
Clinical and regulatory | 42 | 43 | 135 | 136 | ||||||||||||
Selling and marketing | 116 | 74 | 321 | 59 | ||||||||||||
General and administrative | 641 | 624 | 1,978 | 1,903 | ||||||||||||
Total | $ | 906 | $ | 898 | $ | 2,821 | $ | 2,581 |
9. Litigation, Claims and Assessments
Twenty-one oppositions have been filed by a third-party in the European Patent Office each challenging the validity of a European patent owned or exclusively licensed by the Company. The outcome of the challenges is not certain, however, if successful, they may affect the Company’s ability to block competitors from utilizing some of its patented technology in Europe. Management of the Company does not believe that a successful challenge will have a material effect on the Company’s ability to manufacture and sell its products, or otherwise have a material effect on the Company’s operations.
The Company is party to litigation arising in the ordinary course of business. It is management’s opinion that the outcome of such matters will not have a material effect on the Company’s financial statements.
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 conjunction with the unaudited condensed financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q as well as our audited 2016 financial statements and related notes included in our Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 16, 2017. In addition to historical information, the discussion and analysis here and throughout this Form 10-Q contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited, to those set forth under “Risk Factors” in Part II, Item 1A of this report.
Second Sight was founded in 1998 with a mission to develop, manufacture, and market prosthetic devices that restore some useful vision to blind individuals. Our principal offices are located in Sylmar, California, approximately 25 miles northwest of downtown Los Angeles. We also have an office in Lausanne, Switzerland, that manages our commercial and clinical operations in Europe, the Middle East and Asia.
Our current product, the Argus® II System, treats outer retinal degenerations, such as retinitis pigmentosa, which we refer to as RP. RP is a hereditary disease, affecting an estimated 1.5 million people worldwide including about 100,000 peopleprosthesis 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 that causes a progressive degeneration of the light-sensitive cells of the retina, leading to significant visual impairment and ultimately blindness. The Argus II System 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 providing a useful form of artificial vision in patients who otherwise have total sight loss, the Argus II System can provide benefits which include:
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 it does not slow or reverse the progression of the disease. Results vary among patients and while the majority of patients receive a significant benefit from the Argus II, some patients report receiving little or no benefit.
Our major corporate, clinical and regulatory milestones include:
2013. 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, andIran, Taiwan, South Korea and Russia in 2017. With2017, and Singapore in 2018. Given the exceptionlimited addressable market of Taiwan and Russia,Argus II, we have full regulatory approvalmade the decision to sell in these regions. In Taiwanmaximize capital efficiency with our Argus commercial and Russia we have limited regulatory approval but we are working to obtain full regulatory approval in both countries. We sell primarily throughclinical activities and increase our direct sales force, but use distributors in certain countries.investment of resources with our Orion clinical and R&D programs.
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 byfrom the sale of our Argus II System. During product. Funding of our business since 2018 has been provided by:
Issuance of common stock through our At Market Issuance Sales Agreement (the years“Sales Agreement”) during the first quarter of 2018 which provided net cash proceeds of $4.0 million.
Issuance of common stock in a securities purchase agreement in May 2018, which provided net cash proceeds of $10.0 million.
Issuance of common stock in a securities purchase agreement in August 2018, which provided net cash proceeds of $5.0 million.
Issuance of common stock in a securities purchase agreement in October 2018, which provided net cash proceeds of $4.0 million.
Issuance of common stock in a securities purchase agreement in December 2018, which provided net cash proceeds of $3.0 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 $1.1 million for the three months ended March 31, 2019 and $6.9 million for the year ended December 31, 2016 and 2015 and the nine months ended September 30,2018 generated by sales of our Argus II product.
In November 2017, we fundedentered into an At Market Issuance Sales Agreement with B. Riley FBR Inc. and H.C. Wainwright & Co., LLC, as agents (“Agents”) pursuant to which we may offer and sell, from time to time through either of the Agents, shares of our business primarily through: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 (or the compliance period as may be extended). We continue to monitor and evaluate our options to cure this deficiency within the 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. 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 at leastthe foreseeable future.
We do not have sufficient funds to support our operations for the next few years, as a result12 months from the date of which, management has concluded that there isissuance of these financial statements. Accordingly, these and other related factors raise substantial doubt about the Company’sour ability to continue as a going concern. We anticipate that we will seek to additionally fund our operations through public or private equity or debt financings, grants, collaborations, strategic partnerships or other sources. However, we may be unable to raise additional capital or enter into such other arrangements when needed on favorable terms or at all. If we are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay or discontinue one or more of our research or development programs or any other approved product candidates, or we may be unable to expand our operations, maintain our current organization and employee base or otherwise capitalize on our business opportunities, as desired, which could materially affect our business, financial condition and results of operations. The Company’s independent registered public accounting firm, in its report on the Company’s 2016 consolidatedaccompanying financial statements has also raised substantial doubt about the Company’s abilitydo 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 June 2016,our opinion, the unaudited interim financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of our financial position and our results of operations and cash flows for periods presented. Certain prior year amounts have been reclassified to conform to the current year presentation. These statements do not include all disclosures required by GAAP and should be read in conjunction with our financial statements and accompanying notes for the fiscal year ended December 31, 2018, contained in our Annual Report on Form 10-K filed with the SEC on March 18, 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 an impairment charge of $2.4 million related to inventory of Argus II based on our plans to suspend production of Argus II. Based upon our review of the applicable accounting standards we determined that there was no impairment of any other assets.
Our significant accounting policies are set forth in Note 2 of the financial statements in our Annual Report on Form 10-K for the year ended December 31, 2018.
Recently Adopted Accounting Pronouncements
We adopted ASU No. 2016-02—Leases (Topic 842), as amended, as of January 1, 2019, using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at the period of adoption without restating prior comparative periods which is the method we have chosen. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification. Adoption of the new standard resulted in the recording of right-of-use assets and operating lease liabilities of approximately $2.6 million and $2.8 million respectively, as of January 1, 2019. The difference of $0.2 million between the right-of-use assets and operating lease liabilities, net of the deferred tax impact, was recorded as an adjustment to accumulated deficit at January 1, 2019. The standard did not materially impact our consolidated net earnings and had no impact on cash flows.
We do not believe that any other recently issued, but not yet effective, accounting standards, if adopted, will have a material effect on the financial statements.
3. Concentration of Risk
Credit Risk
Financial instruments that subject us to concentrations of credit risk consist primarily of cash, money market funds, and trade accounts receivable. We maintain cash and money market funds with financial institutions that we deem reputable. We extend differing levels of credit to our customers, and typically do not require collateral.
Customer Concentration
The following tables provide information about disaggregated revenue by service type, customer and geographical market.
The following table shows our revenues by customer type during the three months ended March 31, 2019 and 2018:
|
| Three Months Ended March 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Direct channel |
| $ | 946 |
|
| $ | 659 |
|
Indirect channel |
|
| 182 |
|
|
| 317 |
|
|
| $ | 1,128 |
|
| $ | 976 |
|
During the three months ended March 31, 2019 and 2018, the following customers each comprised greater than 10% of our total revenues:
|
| Three Months Ended March 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Customer 1 |
|
| 23 | % |
|
| 15 | % |
Customer 2 |
|
| 15 | % |
|
| 14 | % |
Customer 3 |
|
| 13 | % |
|
| — | % |
Customer 4 |
|
| 12 | % |
|
| — | % |
Customer 5 |
|
| 12 | % |
|
| — | % |
Customer 6 |
|
| 10 | % |
|
| 11 | % |
Customer 7 |
|
| 10 | % |
|
| — | % |
Customer 8 |
|
| — | % |
|
| 22 | % |
Customer 9 |
|
| — | % |
|
| 12 | % |
Customer 10 |
| — | % |
| 11 | % |
As of March 31, 2019 and December 31, 2018, the following customers each comprised greater than 10% of our total accounts receivable:
|
| March 31, 2019 |
|
| December 31, 2018 |
| ||
Customer 1 |
|
| 28 | % |
|
| — | % |
Customer 2 |
|
| 24 | % |
|
| 22 | % |
Customer 3 |
|
| 23 | % |
|
| 21 | % |
Customer 4 |
|
| 22 | % |
| — | % | |
Customer 5 |
| — | % |
| 55 | % | ||
|
|
|
|
|
|
|
Geographic Concentration
During the three months ended March 31, 2019 and 2018, regional revenue based on customer locations which each comprised greater than 10% of our total revenues, consisted of the following:
|
| Three Months Ended March 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
United States |
|
| 60 | % |
|
| 53 | % |
Italy |
|
| 23 | % |
|
| 15 | % |
Korea |
|
| 10 | % |
|
| 11 | % |
Singapore |
|
| — | % |
|
| 12 | % |
|
|
|
|
|
|
|
|
Foreign Operations
The accompanying condensed consolidated financial statements as of March 31, 2019 and December 31, 2018 both include assets amounting to $1.5 million 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 |
| ||||
March 31, 2019 (unaudited): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
| $ | 31,335 |
|
| $ | 31,335 |
|
| $ | — |
|
| $ | — |
|
December 31, 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
| $ | 4,156 |
|
| $ | 4,156 |
|
| $ | — |
|
| $ | — |
|
As of March 31, 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 consisted of the following (in thousands):
|
| March 31, |
|
| December 31, |
| ||
|
| 2019 |
|
| 2018 |
| ||
Raw materials |
| $ | 791 |
|
| $ | 791 |
|
Work in process |
|
| 2,512 |
|
|
| 3,055 |
|
Finished goods |
|
| 2,705 |
|
|
| 2,089 |
|
|
|
| 6,008 |
|
|
| 5,935 |
|
Allowance for excess and obsolete inventory and impairment charge |
|
| (4,406 | ) |
|
| (2,685 | ) |
Inventories, net |
| $ | 1,602 |
|
| $ | 3,250 |
|
We recorded $2.4 million as an impairment charge in the first quarter of 2019, related to our plans to suspend Argus II production. See note 10 for further details.
Property and equipment
Property and equipment consisted of the following (in thousands):
|
| March 31, |
|
| December 31, |
| ||
|
| 2019 |
|
| 2018 |
| ||
Laboratory equipment |
| $ | 2,482 |
|
| $ | 2,482 |
|
Computer hardware and software |
|
| 1,493 |
|
|
| 1,456 |
|
Leasehold improvements |
|
| 298 |
|
|
| 298 |
|
Furniture, fixtures and equipment |
|
| 46 |
|
|
| 46 |
|
|
|
| 4,319 |
|
|
| 4,282 |
|
Accumulated depreciation and amortization |
|
| (3,356 | ) |
|
| (3,257 | ) |
Property and equipment, net |
| $ | 963 |
|
| $ | 1,025 |
|
Contract Liabilities
Contract liabilities consisted of the following (in thousands):
|
|
|
|
|
| |
|
|
|
|
|
| |
Beginning balance as of December 31, 2018 |
| $ | 167 |
|
|
|
Consideration received in advance of revenue recognition |
|
| 51 |
|
|
|
Revenue recognized |
|
| — |
|
|
|
Ending Balance as of March 31, 2019 |
| $ | 218 |
|
|
|
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 |
|
| (1 | ) |
|
|
Ending Balance as of March 31, 2019 |
| $ | 180 |
|
|
|
Right-of-use assets and operating lease liabilities
We lease certain office space and equipment for our use. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease costs are recognized in the income statement over the lease term on a straight-line basis. Operating leases with a term of one year or less 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 material residual value guarantees or restrictive covenants. As most of our leases do not provide an implicit rate, we used our estimated incremental borrowing rate of 10% based on the information available at commencement date in determining the present value of lease payments.
Lease assets and liabilities consisted of the following (in thousands):
Assets | Classification | March 31, | |||||
Non-current assets | Right-of-use assets | $ | 2,508 | ||||
Liabilities | |||||||
Current | Current operating lease liabilities | $ | 210 | ||||
Long term | Long term operating lease liabilities | $ 2,586 | |||||
:
The components of lease expense for the three months ended March 31, 2019 were as follows (unaudited):
|
|
|
|
| |||||||||
|
| For the three months ended |
|
|
|
|
| ||||||
Lease expense: |
|
|
|
|
|
|
|
|
| ||||
Operating lease expense |
| $ | 123 |
|
|
|
|
|
| ||||
Short-term lease expense |
|
| — |
|
|
|
| ||||||
Total lease expense |
| $ | 123 |
|
|
|
|
|
|
Other information: |
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
Operating cash flows from operating leases |
| $ | 117 |
|
|
|
|
|
|
For operating lease: |
|
|
|
|
Weighted average remaining lease term (in years) |
|
| 7.9 |
|
Weighted average discount rate |
|
| 10 | % |
Minimum future payments under the Company’s leases at March 31, 2019 and their application to the corresponding lease liabilities are as follows (unaudited):
|
| Discounted lease |
|
| Payments due |
| ||
2019 (remaining nine months) |
| $ | 155 |
|
| $ | 359 |
|
2020 |
|
| 237 |
|
|
| 491 |
|
2021 |
|
| 277 |
|
|
| 505 |
|
2022 |
|
| 322 |
|
|
| 521 |
|
2023 |
|
| 352 |
|
|
| 516 |
|
Thereafter |
|
| 1,453 |
|
|
| 1,704 |
|
Total |
| $ | 2,796 |
|
| $ | 4,096 |
|
Potentially Dilutive Common Stock Equivalents
As of March 31, 2019 and 2018, we excluded the potentially dilutive securities summarized below, which entitle the holders thereof to potentially acquire shares of common stock, from our calculations of net loss per share and weighted average common shares outstanding, as their effect would have been anti-dilutive (in thousands).
|
| March 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Common stock warrants issued to underwriter of initial public offering |
|
| 802 |
|
|
| 802 |
|
Common stock warrants issued in connection with March 2017 rights offering |
|
| 13,647 |
|
|
| 13,647 |
|
Common stock warrants issued in connection with February 2019 rights offering |
|
| 47,812 |
|
|
| — |
|
Common stock options |
|
| 8,587 |
|
|
| 7,921 |
|
Common stock issuable |
|
| — |
|
|
| 116 |
|
Restricted stock units |
|
| 513 |
|
|
| 71 |
|
Employee stock purchase plan |
|
| 451 |
|
|
| 229 |
|
|
|
| 71,812 |
|
|
| 22,786 |
|
7. Warrants
Warrants to purchase 47,812,371 shares of common stock with an exercise price of $1.47 per share were issued in the rights offering completed in February 2019. The warrants are listed for trading under the symbol “EYESW” on the NASDAQ Capital Market and expire on March 14, 2024.
At the Company’s discretion, the warrants are redeemable on 30 days’ notice (i) if, after March 14, 2019, the shares of the Company’s common stock are trading at $2.94 for 15 consecutive trading days and (ii) if all of the independent directors vote in favor of redeeming the warrants. Holders may be able to sell or exercise warrants prior to any announced redemption date and the Company successfully completedwill redeem outstanding warrants not exercised by the announced redemption date for a Rights Offeringnominal amount of $0.01 per Warrant.
The net cash proceeds were allocated to the relative fair values of the common stock and warrants on the date of issuance resulting in an allocation of $0.47 per share to the common stock and $0.25 per share to the warrants. In calculating the fair value of the warrants using the Black-Scholes model, the assumptions included a risk free interest rate of 2.49%, expected volatility of 82% and expected life of 5.08 years, and a 0% dividend yield.
We extended the term of 13,647,286 warrants issued in our March 2017 rights offering (“March 2017 warrants”) by approximately two years effective as of February 15, 2019 as part of our February 2019 rights offering. We determined the fair value of the March 2017 warrants immediately before and after the modification. The fair value of the March 2017 warrants after the modification was increased by approximately $1.6 million, resulting in an accounting adjustment to additional paid-in capital and accumulated deficit in the consolidated statements of shareholders’ equity. The assumptions used in the determination of fair value of the warrants before and after the extension included a risk free interest rate of 2.50% and 2.49%, expected volatility of 81% and 82%, and expected lives of 3.08 years and 5.08 years, respectively and 0% dividend yields for both.
A summary of warrants activity for the three months ended March 31, 2019 is presented below (in thousands, except per share and contractual life data).
|
| Number of Shares |
|
| Weighted Average Exercise Price Per Share |
|
| Weighted Average Remaining Contractual Life (in Years) |
| |||
Warrants outstanding as of December 31, 2018 |
|
| 14,449 |
|
| $ | 2.01 |
|
|
| 3.10 |
|
Issued |
|
| 47,812 |
|
|
| 1.47 |
|
|
|
|
|
Exercised |
|
| — |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
| — |
|
|
|
|
|
|
|
|
|
Warrants outstanding as of March 31, 2019 |
|
| 62,261 |
|
| $ | 1.60 |
|
|
| 4.90 |
|
Warrants exercisable as of March 31, 2019 |
|
| 62,261 |
|
| $ | 1.60 |
|
|
| 4.90 |
|
The warrants outstanding as of March 31, 2019 had no intrinsic value.
A summary of stock option activity under our 2011 Equity Incentive Plan (“2011 Plan”) for the three months ended March 31, 2019 is presented below (in thousands, except per share and contractual life data).
|
| Number of Shares |
|
| Weighted Average Exercise Price Per Share |
|
| Weighted Average Remaining Contractual Life (in Years) |
| |||
Options outstanding as of December 31, 2018 |
|
| 7,120 |
|
| $ | 3.83 |
|
|
| 6.81 |
|
Granted |
|
| 2,103 |
|
| $ | 0.78 |
|
|
|
|
|
Exercised |
|
| — |
|
| $ |
|
|
|
|
|
|
Forfeited or expired |
|
| (636 | ) |
| $ | 3.99 |
|
|
|
|
|
Options outstanding as of March 31, 2019 |
|
| 8,587 |
|
| $ | 3.07 |
|
|
| 7.77 |
|
Options exercisable as of March 31, 2019 |
|
| 3,357 |
|
| $ | 5.26 |
|
|
| 5.76 |
|
The estimated aggregate intrinsic value of stock options exercisable as of March 31, 2019 was approximately $1,000. As of March 31, 2019, there was $4.4 million of total unrecognized compensation cost related to outstanding stock options that will be recognized over a weighted average period of 3.02 years.
During the three months ended March 31, 2019, we granted stock options to purchase 2,102,862 shares of common stock to certain employees. The options are exercisable for a period of ten years from the date of grant at prices ranging from $0.69 to $0.87 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. The fair value of these options, calculated using the Black-Scholes option-pricing model, was determined to be $1.1 million ($0.45 to $0.57 per share) using the following assumptions: expected term of 6.02 to 6.08 years, volatility of 72.0%, risk-free interest rate of 2.51% to 2.63%, and expected dividend rate of 0.0%.
The following table summarizes restricted stock unit (“RSU”) activity for the three months ended March 31, 2019 (in thousands, except per share data):
|
| Number of Shares |
|
| Weighted Average Grant Date Fair Value Per Share |
| ||
Outstanding as of December 31, 2018 |
|
| 35 |
|
| $ | 12.43 |
|
Awarded |
|
| 527 |
|
|
| 0.75 |
|
Vested and released |
|
| (49 | ) |
|
| 3.66 |
|
Forfeited/canceled |
|
| — |
|
|
| — |
|
Outstanding as of March 31, 2019 |
|
| 513 |
|
| $ | 1.28 |
|
As of March 31, 2019, there was $0.6 million of total unrecognized compensation cost related to the outstanding RSUs that will be recognized over a weighted average period of 3.73 years.
During the three months ended March 31, 2019, we awarded RSUs of 526,500 to certain employees. 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 March 31, 2019 the maximum number of shares that may be issued under the plan is 2,050,000.
Stock-based compensation expense recognized for stock-based awards in the condensed consolidated statements of operations for the three months ended March 31, 2019 and 2018 was as follows (in thousands):
|
| Three Months Ended March 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Cost of sales |
| $ | 47 |
|
| $ | 65 |
|
Research and development |
|
| 187 |
|
|
| 103 |
|
Clinical and regulatory |
|
| 34 |
|
|
| 92 |
|
Selling and marketing |
|
| 130 |
|
|
| 123 |
|
General and administrative |
|
| 500 |
|
|
| 902 |
|
|
| $ | 898 |
|
| $ | 1,285 |
|
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.
10. Subsequent Event
On May 10, 2019, we commenced a corporate restructuring plan to focus on development of Orion and other key research projects. Specifically, we will reduce expenses and personnel by 21 employees related to commercial activities and production for the Argus® II. We will maintain a team that will continue to support existing stockholders, raisingArgus II patients and centers of excellence.
We expect to recognize 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.
We also recorded $2.4 million as an impairment charge in the first quarter of 2019, related to our plans to suspend production of Argus II. The $2.4 million includes a non-cash impairment charge to our inventory. We determined that there was no impairment of any other assets.
The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q as well as our audited 2018 financial statements and related notes included in our Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission (“SEC”) on March 18, 2019. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect toourproducts,plansand strategy for our business and related financing, contains forward-looking statements that involve risks and uncertainties, including statements regarding our expected financial results in future periods. The words “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “projects,” “will,” “would,” “strategy” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.. Examples of forward-looking statements include, among others, statements we make regarding expectations for revenues, liquidity, cash flows and financial performance, the anticipated results of our development efforts and the timing for receipt of required regulatory approvals, insurance reimbursements and product launches. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. You should read “Risk Factors” in Part II, Item 1A of this Quarterly Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. We assume no obligations to update these forward-looking statements to reflect events or circumstances after the date of this Quarterly Report or to reflect actual outcomes.
Second Sight Medical Products, Inc. (NASDAQ: EYES) develops, manufactures and markets implantable visual prosthetics that are intended to deliver useful artificial vision to blind individuals. We are a recognized global leader in neuromodulation devices for blindness, and are committed to developing new technologies to treat the broadest populations of sight-impaired individuals.
Leveraging our 20 years of experience in neuromodulation for vision, we are developing the Orion® Visual Cortical Prosthesis System (“Orion”), an implanted cortical stimulation device intended to provide useful artificial vision to individuals who are blind due to a wide range of causes, including glaucoma, diabetic retinopathy, optic nerve injury or disease and eye injury. Orion is intended to convert images captured by a miniature video camera mounted on glasses into a series of small electrical pulses. The device is designed to bypass diseased or injured eye anatomy and to transmit these electrical pulses wirelessly to an array of electrodes implanted on the surface of the brain’s visual cortex, where it is intended to provide the perception of patterns of light. A six-subject early feasibility study of the Orion device is currently underway at the Ronald Reagan UCLA Medical Center in Los Angeles (“UCLA”) and Baylor College of Medicine in Houston (“Baylor”). No peer-reviewed data is available yet for the Orion system. We anticipate enrolling additional feasibility subjects in 2019 while simultaneously negotiating the clinical and regulatory pathway to commercialization with the FDA as part of the Breakthrough Devices Program.
Our principal offices are located in Los Angeles, California. We also have an office in Lausanne, Switzerland, that manages our commercial and clinical operations in Europe, the Middle East and Asia.
Our current commercially approved product, the Argus ® II Retinal Prosthesis System (“Argus II”), treats outer retinal degenerations, such as retinitis pigmentosa, also referred to as RP. RP is a hereditary disease, affecting an estimated 1.5 million people worldwide including about 100,000 people in the United States, that causes a progressive degeneration of the light-sensitive cells of the retina, leading to significant visual impairment and ultimately blindness. The Argus II is the only retinal prosthesis approved in the United States by the Food and Drug Administration (“FDA”), and was the first approved retinal prosthesis in the world. A subset of these patients would be eligible for the Argus II since the approved baseline vision for the Argus II is worse than legally blind (20/200). We commissioned 3rd party market research to estimate the size of the RP market that resulted in an estimate of approximately 1,500 patients in the US with advanced RP that could be treated with the Argus II given the eligibility criteria of our label.
The Argus II system provides an artificial form of vision that differs from the vision of people with normal sight. It does not restore normal vision and there is no evidence that it can slow or reverse the progression of the disease. The majority of patients receive a significant benefit from the Argus II, however results can vary and some patients report receiving little or no benefit. By creating an artificial form of useful vision in patients who otherwise have total sight loss, the Argus II can provide benefits that include:
restoring independence through a renewed ability to navigate independently in unfamiliar environments;
improving patients’ orientation and mobility, such as locating doors and windows, avoiding obstacles, and following the lines of a crosswalk;
allowing patients to feel more connected with people in their surroundings, such as seeing when someone is approaching or moving away;
providing patients with enjoyment from being “visual” again, such as locating the moon, tracking groups of players as they move around a field, and watching moving streams of lights from fireworks;
• | enabling some patients to re-enter the workforce through multiple vocations that become possible because of Argus II; and |
improving patients’ well-being and ability to perform activities of daily living.
We began selling the Argus II System in Europe at the end of 2011, Saudi Arabia in 2012, the United States and Canada in 2014, Turkey in 2015, Iran, Taiwan, South Korea and Russia in 2017, and Singapore in 2018. Given the limited addressable market of Argus II, we made the decision in 2018 to maximize capital efficiency with our Argus commercial and clinical activities and increase our investment of resources with our Orion clinical and R&D programs. In October 2018, we announced a restructuring of our international commercial activities and personnel. This restructuring resulted in a decision to no longer support new implants of Argus II in Turkey, Iran, Singapore and Russia. We retained a team that continues to support existing Argus II patients and Centers of Excellence in the remaining international markets. We anticipate that the annual savings from the restructuring will amount to approximately $3.0 million per year and we plan to reallocate savings to the Orion program and other related projects. We recognized approximately $0.6 million of pre-tax restructuring charges in the fourth quarter of fiscal year 2018 in connection with this restructuring, consisting of severance and other employee termination benefits, substantially all of which were settled in cash during the fourth quarter of 2018.
Based on assessments of the development of our Orion technology and Orion’s positive results in our early feasibility study of the six subjects implanted with the Orion at UCLA and Baylor, on May 10, 2019 our Board approved an acceleration of our transition from the Argus II to the Orion platform so we may more rapidly implement our strategy of treating blindness domestically and worldwide with the Orion technology. As a result, we 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;
incur a one-time non-cash impairment charge of our inventory of approximately $2.4 million in the quarter ended March 31, 2019;
incur cash severance and related expenses of approximately $700,000 over the next two quarters covering 21 employees associated with Argus II operations; and
continue to support our existing and future Argus II users, which includes our commitment to bring the Argus 2s enhanced software and peripherals, following regulatory approval, to market in a limited manner which may improve the current user experience
We anticipate annual selling and marketing expense will decline by approximately $2.3 million in 2019 and decline further by approximately $2.7 million in 2020. We also expect revenue to decline as we sell through our existing inventory. We expect approximately $4.9 million of annual expense related to our manufacturing capacity to be reported as additional R&D expense in future quarters.
We are actively developing multiple technologies that we believe to be complimentary to artificial vision and could potentially provide significant enhancements to the Argus II or Orion user experience. In most cases, we collaborate with 3rd party firms to advance and integrate these innovative technologies with our artificial vision systems. Examples of technologies that 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 having prototype eyewear suitable for clinical testing in 2019.
As of March 31, 2019, after more than 20 years of research and development, more than $250 million of investment and over $34 million of grants awarded in support of our technology development, we employ over 120 people in the development (research, engineering and clinical), manufacture, and commercialization of the Argus II System and future products such as Orion. In May 2019, we announced a restructuring plan that provides for separation of 21 employees over approximately the next six months.
From inception, our operations have been funded primarily through the sales of our common stock and warrants, as well as from the issuance of convertible debt, research and clinical grants, and limited product revenue generated by the sale of our Argus II System. Funding of our business since 2018 has been provided by:
Issuance of common stock through our At Market Issuance Sales Agreement during the first quarter of 2018 which provided $4.0 million of net cash proceeds.
Issuance of common stock in a securities purchase agreement in May 2018, which provided net proceeds of $19.5$10.0 million.
Issuance of common stock in a securities purchase agreement in August 2018, which provided net proceeds of $5.0 million.
Issuance of common stock in a securities purchase agreement in October 2018, which provided net proceeds of $4.0 million.
Issuance of common stock in a securities purchase agreement in December 2018, which provided net cash proceeds of $3.0 million.
Issuance of common stock and warrants in a rights offering in February 2019, which provided net proceeds of $34.4 million.
Revenue of $1.1 million netfor the three months ended March 31, 2019 and $6.9 million for the year ended December 31, 2018 generated by sales of our Argus II product
In November 2017, we entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley FBR Inc. and H.C. Wainwright & Co., LLC, as agents (“Agents”) pursuant to which we may offer and sell, from time to time through either of the Agents, shares of our common stock having an aggregate offering price as set forth in the Sales Agreement and a related prospectus supplement filed with the SEC. We agreed to pay the Agents a cash offering costs, selling 6.0commission 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 at $3.315 per share, representing 85%for additional net proceeds of $4.0 million under the Company’s per share stock price atSales Agreement. No shares have been sold since February 2018 under the close of the Rights Offering.
Sales Agreement. We are utilizing these proceeds to further develop and enhance our products, support operations and for general corporate purposes.
In March 2017, the Company successfullya rights offering completed a Rights Offering to existing stockholders, raisingon February 22, 2019 we sold approximately 47.8 million units, each priced at $0.724 for gross proceeds of $19.7 million net of cash offering costs, selling 13.7 million Units at $1.47 per Unit, which was the Company’s per share stock price at the close of the Rights Offering.approximately $34.6 million. Each Unitunit consisted of one share of common stock and one immediately exercisable warrant with a five-year life, to buyhaving an additional shareexercise price of common stock at $1.47 per share. The Company believes that it hasEntities controlled by Gregg Williams, our Chairman of the Board of Directors, acquired approximately 41.4 million units in the offering for an aggregate investment of approximately $30 million.
We are subject to the risks and uncertainties associated with a business with one product line and diminishing commercial product revenues, including limitations on our operating capital resources and uncertain demand for our products. We have incurred recurring operating losses and negative operating cash flows since inception, and we expect to continue to incur operating losses and negative operating cash flows for the foreseeable future. Based on our current plans, we do not have sufficient funds to last through the first quarter of 2018. To continue business operations beyond that point, the Company will need to raise additional debt and/or equity capital. However, there can be no assurances that the Company will be able to secure any such additional financing on acceptable terms and conditions, or at all so as to be able to continue itsoperating our business at current levels pastfor at least twelve months from the enddate of the first quarterissuance of fiscal 2018.this report. However, our operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity offerings or debt financings, grants, collaborations, strategic partnerships or other sources. However, we may be unable to raise additional capital or enter into such other arrangements when needed on favorable terms or at all. If cash resources become insufficientwe are unable to satisfy the Company’s ongoing cash requirements, the Company wouldobtain funding on a timely basis, we may be required to scale backsignificantly curtail, delay or discontinue its technology and productone or more of our research or development programs and/or clinical trials,the commercialization Argus II or obtain funds, if available (although there canany other approved product candidates, or we may be no certainty), through strategic alliances that may require the Companyunable to relinquish rights to its products,expand our operations, maintain our current organization and employee base or to discontinue its operations entirely.otherwise capitalize on our business opportunities, as desired, which could materially affect our business, financial condition and results of operations.
Obtaining reimbursement from governmental and private insurance companies is critical to our commercial success. Due to the costprice of the Argus II System,system, our sales would be limited without the availability of third party reimbursement. In the US, coding, coverage, and payment are necessary for the surgical procedure and Argus II system to be reimbursed by payers. Coding has been established for the device and the surgical procedure. 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)(“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.
Medicare Advantage patients– Medicare Advantage plans are required to cover the same benefits as those covered by the MAC in that jurisdiction. For example, if a MAC in a jurisdiction has favorable coverage for the Argus II, then all Medicare Advantage plans in that MAC jurisdiction are required to offer the same coverage for the Argus II. Individual hospitals and 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 alsomay allow providers to confirm coverage and payment for the Argus II procedure in advance of implantation.
The Company employs dedicated employees and consultants with insurance reimbursement expertise engaged to expand and enhance coverage decisions. Currently, seven Over the last several years a large majority of all Medicare jurisdictions, including CGS (J15 -- Ohio and Kentucky), Palmetto GBA (JM -- Virginia, (excluding Part BAdvantage pre-authorization requests for Arlington and Fairfax counties), West Virginia, North Carolina and South Carolina), 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), and Novitas (JH and JL -- Arkansas, Colorado, Delaware, District of Columbia, Louisiana, Maryland, Mississippi, New Jersey, New Mexico, Oklahoma, Pennsylvania, and Texas) provide coverage of the Argus II in 28 states, two territoriesprocedures were granted.
Commercial insurer patients – Commercial insurance plans make coverage and the Districtpayment rate decisions independent of Columbia when medically necessary. WeMedicare, and contracts are actively engagedindividually negotiated with the remaining MACsfacility 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.physician providers.
Within Europe, we haveArgus II obtained reimbursement approval or funding in Germany (NUB Innovation Funding Program), France and(Forfait Innovation Funding Program), one region of Italy. In France,Italy (Regional Funding), and via Commissioning through Evaluation (“CtE”) program in England. If successful, the Company was selectedForfait Innovation Funding Program and CtE program would result in permanent national funding for Argus II.
Currently, we are in process of evaluating potential reimbursement pathways for Orion in the US market. Compared to 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 part of this program, the CompanyOrion is conducting a post-market study in France which has enrolled a total of 18 subjects and will follow them for two years. The French program will fund implantation of up to 18 additional patients that will not be part of the post-market study. After reviewFDA’s Breakthrough Devices program, we are closely evaluating a variety of fast track reimbursement programs, including recent encouraging announcements from CMS proposing modernization of payment policies for medical devices that meet FDA’s Breakthrough Devices designation. If feasible, we also plan to approach some of the study’s results, we expect Argus II therapykey payers during the second half of 2019 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. We expect first implants to occur sometime in 2018.
We are also seeking reimbursement approval in other countries including Belgium and Turkey and we are also seeking reimbursement approval in additional regions of Italy.
To date, our marketing activities have focused on raising awareness of the Argus II System 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 System. In the United States, our efforts are currently focused on media advertisements dedicated to RP patients and their families. These advertisements are 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 believe the study design will require a minimum sample population of 30 subjects with at least six months of follow-up data for each patient prior to submittal of a premarket (PMA) application.
Argus II.The Argus II System 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 retinitis pigmentosa (RP),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 System since the approved baseline vision for the Argus II System is worse than legally blind (20/200).
The Company believes an opportunity exists to expand the use of its Argus II technology to better sighted individuals with RP who are currently not being treated. To achieve this We commissioned 3rd party market expansion, the Company is undertaking multiple clinical data collection efforts and product development efforts to improve the technology’s performance, including:
We believe we can further expand 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 I 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. If approved for marketing, the FDA and other regulatory agencies will determine the subset of these patients who are eligibleresearch for the Orion I based on our clinical trial and the associated results.
Our objective in designing and developing the Orion I visual prosthesis system is to bypass the optic nerve and directly stimulate the partsize of the brain responsible for vision. In October 2017, we received final IDE approval from the FDA to begin a human feasibility studyRP market that resulted in an estimate of the Orion I visual prosthesis system. This study will confirm initial findings in our human pilot study we announcedapproximately 1,500 patients 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. We expect to implant and activate our Orion I visual prosthesis system in human subjects in late 2017. This study will provide the first human data of a fully functional wireless visual cortical stimulator system including an external video camera system. This initial study in a small number of subjects, if successful, should also form the basis for an expansion to a pivotal clinical trial in 2018.
We began a five-subject pilot study in the United Kingdom in June 2015, to determine the utility ofUS with advanced RP that could be treated with the Argus II System for use in persons suffering from dry AMD. Ingiven the second quartereligibility criteria of 2016our label.
Given the limited addressable market of Argus II, we completed enrollmentmade the decision to maximize capital efficiency with our Argus commercial and continueclinical activities and increase our investment of resources with our Orion clinical and R&D programs. As a result, we expect to track the subjects via the site in Manchester. The subjects have reported the abilitysuspend production activities related to integrate their native peripheral vision with their artificial central vision. Subjects also report that they enjoy using their Argus system. To date, however, the subjects have not demonstrated significant objective benefit over their residual vision when using theII, sell through our remaining inventory and reduce our commercial activities related to Argus II. We planremain committed to continue testing these subjectssupporting existing Argus II users and will submit a revised clinical protocol in 2017. Our approachesintend to improving the effective resolution in RP patients may work in AMD patients, which could help us demonstrate objective benefit over their residual vision. The revised protocol will request approval to testpursue regulatory approvals for our new retinal stimulation programs with the existing subjects with the belief they may benefit. If this clinical testing is successful, we plan to enroll additional patients in our pursuit of a solution for this large patient population.
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 or GAAP, requires(“GAAP”) and the requirements of the United States Securities and Exchange Commission require management to make estimates and assumptions that affect the amounts reported in the financial statements and the notes to the financial statements. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions. A summary of our critical accounting policies is presented in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016.2018.
We adopted ASU No. 2016-02—Leases (Topic 842), as amended, as of January 1, 2019, using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at adoption and in comparative periods that approximates the results of a full retrospective approach. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification.
Adoption of the new standard resulted in the recording of additional net lease assets and 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 additional lease assets and 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.
There have been no other material changes to our critical accounting policies during the ninethree months ended September 30, 2017.March 31, 2019.
Net sales.Our net sales are derived primarily from the sale of our Argus II System.product. We began selling our productsthe Argus II in Europe inat the end of 2011, Saudi Arabia in 2012, the United States and Canada in 2014, Turkey in 2015, Russia,Iran, Taiwan, South Korea and TaiwanRussia in 2017. Our objective is2017, and Singapore in 2018. In 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 Systemsystem at our Sylmar,Los Angeles, California facility. In the second quarter of 2016, due to lower implant ratesOur product involves technologically complex materials and revenue, we decreased production output and increased our reserve for slow-moving inventory. As a result of the lower production levels, we have been incurring expenses for unabsorbed overhead charges. Beginning in the first quarter of 2017, based on our rolling 12-month sales forecasts, we have been reducing our reserve for slow moving inventory, which has the effect of offsetting the cost of goods shipped for revenue in the period.processes. We expect to work throughrecord cost of sales for any remaining Argus II inventory that we sell and a majority of our slow-moving inventoryexpenses related to our production capabilities and resume normal production whenfixed overhead to be reported as research and if sales orders increase. Our ability to generate a gross profitdevelopment expense in future periods will depend onperiods. 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 abilityreported results of operations to (i) generate higher revenues and (ii)be difficult to produce our product in sufficient quantities that will allow uscompare from period to absorb all production costs in a given period by spreading our costs over a larger production base, which will lower our cost per unit.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 deferred stock-based compensation allocated tofor research and development, clinical and regulatory, sales and marketing, and general and administrative personnel. From time to time we have received grants from institutions or agencies, such as the National Institutes of Health, to help fund the some of the cost of our development efforts. We have recorded these grants as offsetsreductions 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 incurredincurred. We expect research and development expenses to completeincrease in the future as we pursue further enhancements of our existing product and develop technology for our potential future products, such as Orion. We also expect to receive additional grants in the future that will be offset primarily against research and development costs.
Clinical and regulatory expenses consist primarily of salaries, travel and related work.expenses for personnel engaged in clinical and regulatory functions, as well as internal and external costs associated with conducting clinical trials and maintaining relationships with regulatory agencies. We expect clinical and regulatory expenses to increase as we assess the safety and efficacy of enhancements to our current Argus II and conduct clinical studies of potential future products such as Orion.
Sales and marketing expenses consist primarily of salaries, commissions, travel and related expenses for personnel engaged in sales, marketing and business development functions, as well as costs associated with promotional and other marketing activities including the cost of units consumed as demos or samples. We expect sales and marketing expenses to decrease as we reduce our Argus II commercial activities and sell through our existing inventory.
General and administrative expenses consist primarily of salaries and related expenses for executive, legal, finance, human resources, information technology and administrative personnel, as well as recruiting and professional fees, patent filing and annuity costs, insurance costs and other general corporate expenses, including rent. We expect general and administrative expenses to increase as we add personnel and incur additional costs related to the growth of our business and operate as a public company.
Comparison of the Three Months Ended September 30, 2017March 31, 2019 and 20162018
Worldwide commercial implant volume forWe implanted a total of ten Argus II products during the threefirst quarter of 2019 and nine months ended September 30, 2017 was as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Europe and the Middle East | 4 | 10 | 16 | 25 | ||||||||||||
Asia | 1 | — | 5 | — | ||||||||||||
Canada | 0 | — | 5 | 1 | ||||||||||||
United States | 7 | 4 | 19 | 9 | ||||||||||||
Total | 12 | 14 | 45 | 35 |
Net Sales.Net sales increased by $430,000, or 36%, from $1,180,000sixteen in the thirdfirst quarter of 2016 to $1,610,0002018. Of these, four implants were in Europe, the Middle East and Asia (collectively, “EMEA”) in the thirdfirst quarter of 2017, which was the result of fewer2019 while six implants offset by a higher amount of revenue per implantwere in EMEA in the current year quarter.
first quarter of 2018.
In the third quarter implant volume outside of North America, declined from 10 implants in 2016 to five implants in 2017 due, in part, to summer seasonality typical of the European market. In the U.S., we had seventhere were six implants in the thirdfirst quarter of 2017 compared to four in the third quarter of 2016, as our Centers of Excellence strategy continued to gain traction. Based on implant activity through October, and the number of implants scheduled for the remainder of the quarter, we expect to see growth in2019 while there were ten implants in the fourthfirst quarter of 2017 relativethe prior year. Of these, there were six implants in the U.S. in the first quarter of 2019 and nine in the first quarter of 2018 and one implant in Canada in the first quarter of 2018.
Net Sales. Net sales were $1.1 million in the first quarter of 2019 as compared to $1.0 million in the third quarter.
same period in 2018, an increase of $0.1 million or 16%. Revenue was recognized for nine units in both periods. Revenue recognized per implant was $134,000approximately $125,000 in the thirdfirst quarter of 2017 compared to $84,0002019 and was $108,000 in the third quarter of 2016. The higher revenue per implant is due mainly to (i) a higher mix of implants in the U.S. and Asia where the prices tend to be higher, (ii) the higher U.S. Medicare reimbursement level in 2017 compared to 2016, and (iii) higher deferred revenue recognized in the third quarter of 2017 compared to same period of 2016.2018. We expect our average revenue per implant for the remaindernet sales to decline as we sell through our existing inventory of 2017 to be in a range of $100,000 to $120,000, depending on the geographic mix of implants. In 2018, with the lower CMS rate discussed above, we expect that our average revenue per implant will be in the range of $90,000 to $105,000, depending on the geographic mix of implants.Argus II.
Cost of sales.Cost of sales decreased by approximately $1,614,000, or 62%, from $2,615,000was $0.7 million in the third quarter 2016 to $1,001,000 in the third quarter of 2017.both periods. Cost of sales in the thirdfirst quarter of 2017 included a charge2019 consists primarily of $498,000 for unabsorbed production costs and a credit of $275,000 for the partial reversal of a reserve for slow moving inventory. Cost of sales in the third quarter of 2016 included a charge of $665,000 for unabsorbed production costs and approximately $1,044,000 to increase the reserve for slow moving inventory. Excluding these costs, cost of goods sold decreased by approximately $128,000, or 14%, from $906,000 in the third quarter of 2016 to $778,000 in the third quarter of 2017. The decrease in costs of goods sold, excluding the impact of unabsorbed production costs and inventory reserves, is consistent with the 14% decrease in implants from 14 in the third quarter of 2016 to 12 in the third quarter of 2017. For the next few quarters we expect that we will continue to keep our production levels low which will result in the generation of significant unabsorbed production costs. We also expect that we will continue to reverse our reserve for excess inventory, as we sell our existing supply of Argus II systems, which will offset the cost of products implanted and unabsorbed production costs. In the first quarter of 2018, the cost of sales included approximately $0.8 million for the cost of products implanted and unabsorbed production costs less an adjustment of $0.1 million for a reduction in the reserve for
excess inventory. We expect to record cost of sales for any remaining Argus II inventory that we ship.sell and a majority of our expenses related to our production capabilities and fixed overhead to be reported as research and development expense in future periods.
Research and development expense.Research and development expense, increasednet of funding received from grants, decreased by $238,000,$0.3 million, or 15%12%, to $1,826,000from $2.5 million in the thirdfirst quarter of 20172018 to $2.2 million in the first quarter of 2019. In the first quarter of 2019 we utilized $0.6 million of grant funds to offset costs as compared to $1,588,000zero in 2018. The costs before the third quarter of 2016. These expense amounts include $107,000 of offsetting grant revenue in the third quarter of 2017 and $713,000 of offsetting grant revenue in the third quarter of 2016. Excluding the impact of grant revenues, research and development expense decreased by $368,000, or 16%, from $2,301,000 in the third quarter of 2016 to $1,933,000 in the third quarter of 2017. This decreaseoffset increased from the prior year is primarily attributabledue to $63,000verification and validation activities related to Argus 2s and consists of higher people-related costs, including compensation, benefitsincreased headcount and travel, offset in part by $387,000 of lower costs for supplies and productinternally produced prototypes. While weWe expect our research and development expenseexpenses to remain fairly constant for the remainder of the year, we expect that research and development costs will increase in future periods as we continueaccelerate our transition to enhance our current productsthe Orion platform, including costs previously related to production activities such as facilities and develop new products. personnel that will be transitioning to Orion development activities.
Clinical and regulatory expense.Clinical and regulatory expense increased $20,000,decreased $0.3 million, or 3%25%, from $609,000$1.3 million in the thirdfirst quarter of 20162018 to $629,000$1.0 million in the thirdfirst quarter of 2017.2019. This decrease is primarily attributable to decreased costs associated with the Orion feasibility study. We expect clinical and regulatory costs to increase in the future as (i) we increase our implant run rate and enroll more patients in post-market clinical studies for regulatory authorities, and (ii) we conduct newadditional clinical trials to assess new products such as the Orion I, test furtherand related enhancements to our existing product, and begin new trials for better sighted patients.user experience.
Selling and marketing expense.Selling and marketing expense increased $113,000,decreased $0.9 million, or 5%30%, from $2,262,000$3.0 million in the thirdfirst quarter of 20162018 to $2,375,000$2.1 million in the thirdfirst quarter of 2017.2019. This increasedecrease in costs was primarily the result of $326,000 more in peopledecreased use of outside services, reduced headcount and related costs, including salaries, benefits, stock based compensation travel and commissions partially offset by $248,000 in lower costs for consultants related to items such as customer outreach programs and marketing strategies in the U.S. and foreign markets. 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. expense. General and administrative expense decreased $77,000,$0.8 million, or 3%25%, from $2,605,000$3.2 million in the thirdfirst quarter of 20162018 to $2,528,000$2.4 million in the third quartersame period of 2017.2019. This decrease is primarily attributable to decreases$0.5 million in patentlower compensation costs business insuranceprimarily due to cancelled stock option grants and bad debt expense offset, partially, by increases in peoplereduced outside service costs and outside legal expense. While we expect these costs to increase in the future, weof $0.2 million. We expect general and administrative expenseexpenses to decrease over time when expressed as a percentage of product revenue.decline in the short-term after reducing our foreign subsidiary expenses by approximately $0.2 million in 2019.
ComparisonImpairment charge. We recorded a non-cash impairment charge of the Nine Months Ended September 30, 2017 and 2016
Net Sales.Our net sales increased from $3,270,000$2.4 million in the first nine monthsquarter of 20162019 to $4,855,000 in the first nine months of 2017, an increase of $1,585,000, or 48%. This increase in net sales was due to an increase in the number of implants to 45 in the first nine months of 2017 compared to 35 in the first nine months of 2016 coupled with a higher average revenue per implant.
In the first nine months of 2017 implant volume in the North American market increased from 10 to 24 units. This increase was driven mainly by the U.S. where we had 19 implants in the first nine months of 2017 compared to nine implants in the first nine months of 2016, as our Centers of Excellence strategy continued to gain momentum. In Europe, the Middle East and Asia, we saw implant volume decrease slightly from 25 units in first nine months of 2016 to 21 units in the first nine months of 2017.
In the first nine months of 2017, revenue recognized per implant of $108,000 was compared to $93,000 in first nine months of 2016. The higher revenue per implant is due mainly to (i) a higher mix of implants in the North America and Asia where the prices tend to be higher, and the (ii) the higher U.S. Medicare reimbursement level in 2017 compared to 2016. We expect our average revenue per implant for the remainder of 2017 to be in a range of $100,000 to $120,000, depending on the geographic mix of implants. In 2018, with the lower CMS rate discussed above, we expect that our average revenue per implant will be in the range of $90,000 to $105,000, depending on the geographic mix of implants.
Cost of sales.Cost of sales decreased by approximately $3,513,000, or 52%, from $6,768,000 in the first nine months of 2016 to $3,255,000 in the first nine months of 2017. Cost of sales in the first nine months of 2017 included charges of $2,027,000 for unabsorbed production costs and a benefit of approximately $1.7 million for the partial reversal of a reserve for slow moving inventory. Cost of sales in the first nine months of 2016 included charges of $2,099,000 for unabsorbed production costs and approximately $2.6 million to increase the reserve for slow moving inventory. Excluding these costs, cost of goods sold increased by approximately $901,000 or 44%, from $2,058,000 in the first nine months of 2016 to $2,959,000 in the first nine months of 2017. This increase in costs of goods sold, excluding the impact of unabsorbed production costs and inventory reserves, compares to the 29% increase in implants from 35 in the first nine months of 2016 to 45 in the first nine months of 2017. For the next few quarters we expect that we will continue to keep our production levels low which will result in the generation of significant unabsorbed production costs. We also expect that we will continue to reverse our reserve for excess and obsolete inventory as we sellin connection with our existing supply ofplans to suspend Argus II systems, which will offset the cost of products that we ship.
Research and development expense.Research and development expense, net of grant revenue, increased by $2,356,000, or 72%, from $3,266,000 in the first nine months of 2016 to $5,622,000 in the first nine months of 2017. In the first nine months of 2017, we utilized $235,000 of grant funds to offset costs versus $1,985,000 of grant funds utilized in the first nine months of 2016. Excluding this grant revenue offset, there was an increase in research and development expense of $606,000, or 12%, from $5,251,000 in the first nine months of 2016 to $5,857,000 in the first nine months of 2017. This increase is primarily the result of increased expenditures of $582,000 for compensation costs and $339,000 for outside services, including consultants, partially offset by $389,000 of lower costs for supplies and product prototypes. We expect to see research and development costs remain at the 2017, or higher, levels as we continue to invest in improvements to our Argus II product and development of our new Orion cortical implant.
Clinical and regulatory expense.Clinical and regulatory expense decreased by $28,000, or 1%, from $1,955,000 in the first nine months of 2016 to $1,927,000 in the nine months of 2017. We expect clinical and regulatory costs to increase in upcoming quarters as we (i) conduct clinical trials to assess new products such as the Orion cortical implant, (ii) test enhancements to our existing products, (iii) continue to assess the safety and efficacy of our current product for treating blindness due to age related macular degeneration, and (iv) conduct clinical trials to determine whether better-sighted patients would benefit from our current product.
Selling and marketing expense.Selling and marketing expense increased by $584,000, or 9%, from $6,473,000 in the first nine months of 2016 to $7,057,000 in the first nine months of 2017. This increase was primarily due to $823,000 in higher people related costs in 2017 as compared to 2016, including higher salaries, stock based compensation, travel and commissions, offset in part by $250,000 less spent out outside services for items such as customer outreach and reimbursement consultants. 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 increased by $535,000, or 7%, from $7,635,000 in the first nine months of 2016 to $8,170,000 in the first nine months of 2017. This increase is primarily attributable to $488,000 of higher personnel costs in 2017 and $478,000 more for outside services, including legal and consulting costs, partially offset by a $317,000 decrease in bad debt expense.
production.
Liquidity and Capital Resources
Our consolidated financial statements have been presented on the basis ofthat our beingbusiness 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 we expect to continue to incur operating losses and negative operating cash flows for the foreseeable future.
In a rights offering completed on February 22, 2019, we sold approximately 47.8 million units, each priced at $0.724 for 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. The expiration date of the warrants issued pursuant to this rights offering is March 14, 2024, and the expiration date of all previously outstanding warrants listed for trading under the symbol “EYESW” were extended to March 14, 2024.
We have financeddo not have sufficient funds to support our working capital requirementsoperations for the next 12 months from the date of issuance of these financial statements. 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 recurring salenecessary 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 securities in both public and private offerings. As a result, our independent registered public accounting firm, in its report on our 2016 consolidated financial statements, has raisedor debt financings, grants, collaborations, strategic partnerships or other sources. Accordingly, these factors among others raise substantial doubt about our ability to continue as a going concern (see “Going Concern” above). In March 2017, the Company successfully completed a Rights Offering to existing shareholders, raising proceeds of $19.7 million net of cash offering costs, and selling 13.7 million Units at $1.47 per Unit. Each Unit consisted of a share of common stock and a five-year warrant with an exercise price of $1.47. Based upon this funding, management believes it has sufficient funds to through the first quarter of 2018. In order to continue business operations past that point,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 money market fundscash equivalents increased by $2.4$27.2 million or 22%, from $10.9$4.5 million atas of December 31, 20162018 to $13.3$31.7 million at September 30, 2017.as of March 31, 2019. Working capital was $11.6$27.6 million at September 30, 2017,as of March 31, 2019, as compared to $9.6$2.0 million atas of December 31, 2016,2018, an increase of $2.0 million, or 21%.$25.6 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 ninethree months of 2017,2019, we used $17.2$7.2 million of cash in operating activities, consisting primarily of a net loss of $21.1$9.7 million, offset by non-cash charges which provided cash of $1.5$3.4 million for depreciation and amortization of property and equipment, stock-based compensation, change in right to use assets, excess inventory reserve and by a net change in operating assets and liabilities which used cash of $0.9 million. During the first three months of 2018, we used $6.8 million of cash in operating activities, consisting primarily of a net loss of $9.8 million, offset by non-cash charges which provided cash of $1.4 million for depreciation and amortization of property and equipment, stock-based compensation, excess inventory reserve bad debt recovery and common stock issuable and increased by a net change in operating assets and liabilities which provided cash of $2.4$1.6 million. During
Cash Flows from Investing Activities
Cash used for investing activities in the first ninethree months of 2016, we used $18.12019 was $37,000 and was $68,000 in the first three months of 2018 primarily for the purchase of property and equipment.
Cash Flows from Financing Activities
Financing activities provided $34.4 million of cash in operating activities, consisting primarily of a net loss of $22.8 million, offset by non-cash charges of $5.9 million for depreciation and amortization of property and equipment, stock-based compensation, bad debt expense, excess inventory reserves and common stock issuable, and decreased by a net change in operating assets and liabilities of $1.2 million.
Cash Flows from Investing Activities
During the first ninethree months of 2017, investing activities used $2.5 million2019 consisting of cash, reflecting $2.3 million used by the purchase of money market investments and $0.2 million used for the purchase of equipment. This compares to the first nine months of 2016 when investing activities used $2.2 million, reflecting $1.8 million used by the purchase of money market investments and $0.4 million used for the purchase of equipment.
Cash Flows from Financing Activities
During the first nine months of 2017, finance activities provided $19.9 million of cash, of which $19.7 million wasnet proceeds from the Rights Offering and $0.2 million was from employee stock plan purchases.rights offering completed during the period. Financing activities provided $20.3$4.0 million of cash in the first ninethree months of 2016,2018 consisting of which $19.5 million was provided by a Rights Offering and $0.8 millionnet proceeds from the exercisesale of stock options and employee stock plan purchases.
common stock.
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 September 30, 2017,March 31, 2019, our investments consisted solely of money market funds.
Exchange Rate Sensitivity
During the ninethree months ended September 30, 2017,March 31, 2019, approximately 69%70% of our revenue was denominated in U.S. dollars 27%and 30% in Euros, and 4% in Canadian dollars. In the same time period 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 September 30, 2017.March 31, 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 September 30, 2017,March 31, 2019, based on the evaluation of these disclosure controls and procedures, our CEO and in light of the material weaknesses found in our internal controls over financial reporting, our Chief Executive Officer and Chief Financial OfficerCFO have concluded that our disclosure controls and procedures were not effective.
Remediation Plan
As of September 30, 2017, there were control deficiencies which constituted material weaknesses in our internal control over financial reporting. Management has taken, and is taking steps to strengthen our internal control over financial reporting. Specifically:
While we have taken certain actions to address the material weaknesses identified, additional measures may be necessary as we work to improve the overall effectiveness of our internal controls over financial reporting. Through the actions in the remediation plan reported in our Annual Report on Form 10-K for the year ended December 31, 2016 and in our Quarterly Report on Form 10-Q for the period ended September 30, 2017, we believe that we are addressing the deficiencies that affected our internal control over financial reporting for the year and period then ended however we have not completed all of the corrective processes and procedures as contemplated herein for the identified material weaknesses. Until the remediation plan is fully implemented and operating for a sufficient period of time, we will not be able to conclude that the material weaknesses have been remediated. We will continue to monitor and assess our remediation activities to address the material weaknesses discussed above through remediation as soon as practicable and to provide reasonable assurance that they will prevent or detect material error in the financial statements.level.
Changes in Internal Control over Financial Reporting
Other than changes that haveThere has been enacted pursuant to our remediation plan, there were no changeschange in our internal control over financial reporting during the quarter ended September 30, 2017March 31, 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Twenty-oneTwenty-two oppositions have been filed by a third-partythird parties in the European Patent Office each challenging the validity of a European patent owned or exclusively licensed by the Company.us. The outcome of the challenges is not certain, however,certain. However, if successful, they may affect the Company’sour ability to block competitors from utilizing some of its patented technology in Europe. Management of the Company believes thatWe do not believe a successful challenge or challenges will not have a material effect on the Company’sour ability to manufacture and sell itsour products, or otherwise have a material effect on the Company’sour operations.
The Company isWe are party to litigation arising in the ordinary course of business. It is management’sour opinion that the outcome of such matters will not have a material effect on the Company’sour financial statements.
Although we believe that our strategy to (i) leverage proven Argus II technology to develop the Orion visual cortical prosthesis and (ii) significantly expand our addressable market to include a portion of the almost 6 million patients who are blind from eye trauma, optic nerve disease and injury, diabetic retinopathy, glaucoma and other untreatable causes is more likely to address a better and faster way to treat many causes of blindness, including the Retinitis Pigmentosa population, we will incur material near term losses, market uncertainty and our stock may experience significant fluctuations as we make the transition from the Argus II to the Orion.
Based on assessments of the development of our Orion technology and the positive results in an early feasibility study of the six subjects implanted with the Orion at UCLA Medical and Baylor College of Medicine, 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. As a result, we 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 Orion devices that we will require to support FDA approval of the Orion 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;
incur a non-cash impairment charge of our inventory of approximately $2.4 million in the quarter ended March 31, 2019;
incur cash severance and related expenses of approximately $700,000 over the next two quarters covering 21 employees associated with Argus II operations; and
continue to support our existing and future Argus II patient population, 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 patient experience.
Our decision to accelerate Orion development may cause physicians or individuals who are eligible for Argus II to delay implantation in favor of Orion which may have an adverse effect on our Argus II sales and results of operations.
As a result of this transition from the Argus II, our future success will depend on the further development, regulatory approval and commercialization of the Orion product. Although we believe this more rapid changeover and implementation of our long term strategy for treating blindness by Orion will provide us a sizable, commercially sustainable domestic and worldwide market for our products, in the near term we will incur significant losses, market volatility and regulatory uncertainty, including uncertainty associated with pricing and reimbursement coverage with no current assurance of market acceptance. No assurance can be given that this strategy will achieve domestic and regulatory approvals or result in commercial viability of our products or our company.
If our development activity, regulatory efforts and substantial investments related to Orion do not result in a commercial product or if our company never achieves profitability or positive free cash flow, our stock price will decline, we will not be able to sustain operations and our stockholders may incur a complete loss of their investment in our company.
We expect our revenues for Argus II to decrease as we sell through our remaining inventory and our 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 the Orion and any product candidates that we successfully develop. In addition, if we obtain marketing approval for Orion, we expect to continue incurring significant additional expenses related to sales, marketing, distribution and other commercial infrastructure to commercialize such product. Nevertheless no assurance can be given that Orion will achieve
commercial success or result in profitable operations, in which case investors may lose all or substantially all of their investment in our company.
The CE marking regulations in the European Union are subject to a significant effort to strengthen the regulatory regime for medical devices which, if adopted, will make the approval process more time consuming and costly for us to obtain access to and continue to market within the European markets.
We are subject to an annual audit of compliance with the rules necessary to support our CE Mark. In April 2017 the European Commission published a new regulatory scheme that imposes significant additional obligations on medical device companies. As such, devices with a current CE marking, such as the Argus II, will have to comply with additional, more challenging regulatory obligations. The changes being made to the regulations include stricter requirements for clinical evidence and pre-market assessment of safety and performance, new classifications to indicate risk levels, requirements for third party testing by government accredited groups for some types of medical devices, and tightened and streamlined quality management system assessment procedures. With the additional provisions adopted by the European Parliament, the European Medicines Agency (EMA) may be involved in regulation of some types of medical devices in the qualification and monitoring of notified bodies (NBs), and enhancing the roles of other bodies, including a new Medical Devices Coordination Group (MDCG). The European Parliament’s revisions also impose enhanced competence requirements for NBs and “special notified bodies” (SNBs) for specific categories of devices, such as implantable devices. These changes are anticipated to result in stricter conformity assessment procedures. The medical device industry anticipates that there will be significant changes under these initiatives to the regulation of medical devices which will increase the time and costs for obtaining CE marking after May 2020. We will be audited to this new standard in 2020.
Our CE Mark registration must be renewed on a periodic basis. Our current CE Mark registration for the Argus II will expire on September 1, 2019, if not renewed. We expect to commence our recertification audit in June 2019 and expect to receive a recertification through May 2022. However, if we fail to successfully renew our CE Mark registration, we will not be able to sell Argus II in most international markets after September 1, 2019. Further, the Medical Device Single Audit Program (MDSAP) is a new multi-national standard adopted by Australia, Brazil, Canada, Japan and the European Union. MDSAP may impose a higher compliance burden than CE Mark through more rigorous audit requirements. In connection with our strategic decision to accelerate Orion development, we decided not to pursue MDSAP compliance during 2019 and will suspend our commercial activities for Argus II in Canada until further notice.
We are increasingly dependent on sophisticated information technology systems, including systems from third parties, and if we fail to properly maintain the integrity of our data or if our products do not operate as intended, our business could be materially affected.
We are increasingly dependent on sophisticated information technology systems for our products and infrastructure, and we rely on these information technology systems, including technology from third party vendors, to process, transmit and store electronic information in our day-to-day operations. We continuously monitor, upgrade and expand the systems we operate to improve information systems capabilities. Our information systems require an ongoing commitment of significant resources to maintain, protect, and enhance existing systems and develop or contract new systems to keep pace with continuing changes in information processing technology, evolving systems and regulatory standards, and the increasing need to protect patient and customer information. In addition, third parties may attempt to hack into our products or systems and may obtain data relating to patients with our products or proprietary information. If we fail to maintain or protect our information systems and data integrity with cyber security effectively, we could lose existing customers, have difficulty attracting new customers, have problems in determining product cost estimates and establishing appropriate pricing, have difficulty preventing, detecting, and controlling fraud, have disputes with customers, physicians, and other health care professionals, have regulatory sanctions, fines, or penalties imposed, have increases in operating expenses, incur expenses or lose revenues as a result of a data privacy breach, or suffer other adverse consequences. There can be no assurance that our process of upgrading and expanding our information systems capabilities, protecting and enhancing our systems including cyber security methods, and developing new systems to keep pace with continuing changes in information processing technology will be successful or that additional systems issues will not arise in the future. Our products contain hardware and software protections which are intended to prevent unauthorized access or control of our implanted device. However, if an unauthorized user is able to breach our controls and gain access to one of our devices implanted in a patient, serious harm, injury and/or death may result. Any significant breakdown, intrusion, interruption, corruption, or destruction of these systems, as well as any data breaches, could have a material adverse effect on our business.
Other Risk Factors
We incorporate herein by reference the risk factors includeddescribed in our Annual Report on Form 10-K, including those risk factors which weare updated, expanded or otherwise modified by this report with respect to our transitioning from a reliance on Argus II to a reliance on our new Orion development program, as filed with the Securities and Exchange Commission on March 16, 2017.18, 2019.
None
Not applicable.
None.
Not applicable.
Not applicable.
Item 5. |
None.
On June 20, 2017, Thomas B. Miller, Chief Financial Officer of the Company, notified the Company that he was submitting his resignation as Chief Financial Officer to pursue other opportunities. Mr. Miller agreed to remain in his current role during a transition period. Mr. Miller’s departure did not result from a disagreement with the Company on any matter relating to the Company’s operations, policies or practices.
Exhibits |
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.* |
(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.
* | Included herein. |
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 | May 15, 2019 | ||
Jonathan Will McGuire | (Principal Executive Officer) | |||
/s/ J | Chief Financial Officer | May 15, 2019 | ||
John T. Blake | (Principal Financial and Accounting Officer) |
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