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 (§~~229.405~~232.405 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):~~

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).

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 ☐

As of November ~~3, 2017,~~12, 2019, the ~~issuer~~registrant had ~~56,806,352~~124,598,198 shares of common stock, ~~issued~~$0 par value per share and ~~outstanding.~~61,459,657 warrants, outstanding.

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of September 30, ~~2017 (Unaudited)~~2019 (unaudited) and December 31, ~~2016~~2018		3
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, ~~2017~~2019 and ~~2016 (Unaudited)~~2018 (unaudited)		4
	Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, ~~2017~~2019 and ~~2016 (Unaudited)~~2018 (unaudited)		5
	Condensed Consolidated Statements of Stockholders’ Equity for each of the three-month periods ended during the nine months ended September 30, ~~2017~~2019 and ~~2016 (Unaudited)~~2018 (unaudited)		6
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2017~~2019 and ~~2016 (Unaudited)~~2018 (unaudited)		7 8
	~~Notes to Condensed Consolidated Financial Statements~~		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17 19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		25 29

Item 4.	Controls and Procedures		26 29

~~Part~~ PART II	OTHER INFORMATION

Item 1.	Legal Proceedings		27 30

Item 1A.	Risk Factors		27 30

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		27 35

Item 3.	Defaults Upon Senior Securities		27 35

Item 4.	Mine Safety Disclosures		27 35

Item 5.	Other Information		28 35
~~Item 6.~~	~~Exhibits~~		28
Item 6.	~~Signatures~~Exhibits	36
	29

SIGNATURES

~~SECOND SIGHT MEDICAL PRODUCTS, INC.~~

~~AND SUBSIDIARY~~Part 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 ~~Statements of Operations (Unaudited)~~Balance Sheets

(~~In thousands, except per share data)~~in thousands)

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

	September 30,			December 31,
	2019			2018
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	18,462		$	4,471
Accounts receivable, net		264			504
Inventories, net		1,264			3,250
Prepaid expenses and other current assets		366			1,395
Total current assets		20,356			9,620
Property and equipment, net		1,125			1,025
Right-of-use assets		2,399			—
Deposits and other assets		18			37
Total assets	$	23,898		$	10,682
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,126		$	1,305
Accrued expenses		2,082			2,503
Accrued compensation expense		2,461			2,690
Accrued clinical trial expenses		734			933
Current operating lease liabilities		228			—
Contract liabilities		554			167
Total current liabilities		7,185			7,598
Long term operating lease liabilities		2,427			—
Total liabilities		9,612			7,598
Commitments and contingencies
Stockholders’ equity:
Preferred stock, no par value, 10,000 shares authorized; none outstanding		—			—
Common stock, no par value; 300,000 shares authorized; shares issued and outstanding: 124,598 and 76,336 as of September 30, 2019 and December 31, 2018, respectively		263,656			229,019
Additional paid-in capital		48,131			44,111
Accumulated other comprehensive loss		(585	)		(575	)
Accumulated deficit		(296,916	)		(269,471	)
Total stockholders’ equity		14,286			3,084
Total liabilities and stockholders’ equity	$	23,898		$	10,682

~~The~~See accompanying ~~notes are an integral part of these condensed consolidated financial statements~~

notes.

SECOND SIGHT MEDICAL PRODUCTS, INC.

AND SUBSIDIARY

Condensed Consolidated Statements of ~~Comprehensive Loss (Unaudited)~~Operations (unaudited)

(~~In thousands)~~in thousands, except per share data)

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 )

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net sales	$	472		$	2,246		$	2,882		$	5,129
Cost of sales		364			1,784			2,028			3,287
Gross profit		108			462			854			1,842

Operating expenses:
Research and development, net of grants		3,379			2,672			8,998			7,567
Clinical and regulatory, net of grants		862			964			2,404			3,439
Selling and marketing		1,308			3,040			5,100			8,931
General and administrative		2,178			2,332			6,883			8,208
Restructuring charges		—			—			3,297			—
Total operating expenses		7,727			9,008			26,682			28,145

Loss from operations		(7,619	)		(8,546	)		(25,828	)		(26,303	)
Interest income		35			24			104			67

Net loss	$	(7,584	)	$	(8,522	)	$	(25,724	)	$	(26,236	)

Net loss per common share – basic and diluted	$	(0.06	)	$	(0.12	)	$	(0.22	)	$ (0.41)

Weighted average common shares outstanding – basic and diluted		124,592			68,763			115,266			64,113

~~The~~See accompanying ~~notes are an integral part of these condensed consolidated financial statements.~~

notes.

SECOND SIGHT MEDICAL PRODUCTS, INC.

AND SUBSIDIARY

Condensed Consolidated Statements of ~~Stockholders’ Equity (Unaudited)~~Comprehensive Loss (unaudited)

(Inin thousands)

~~Nine months ended September 30, 2017 and 2016~~

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net loss	$	(7,584	)	$	(8,522	)	$	(25,724	)	$	(26,236	)

Other comprehensive income (loss):
Foreign currency translation adjustments		(11	)		24			(10	)		(8	)
Comprehensive loss	$	(7,595	)	$	(8,498	)	$	(25,734	)	$	(26,244	)

~~The~~See accompanying ~~notes are an integral part of these condensed consolidated financial statements.~~

notes.

SECOND SIGHT MEDICAL PRODUCTS, INC.

AND SUBSIDIARY

Condensed Consolidated Statements of Stockholders’ Equity (unaudited)

(in thousands)

Common Stock

Common Stock
Issuable

Additional
Paid-in

Accumulated
Other
Comprehensive

Accumulated

Total
Stockholders’

Shares

Amount

Shares

Amount

Capital

Loss

Deficit

Equity

Balance, December 31, 2017

57,630

$
202,156

82

$
153

$
40,522

$
(572
)

$
(234,377
)

$
7,882

Issuance of shares of common
   stock, net of issuance costs

2,224

3,992

—

—

—

—

—

3,992

Warrants exercise

5

7

—

—

—

—

—

7

Common stock issuance for
   services

—

—

34

65

—

—

—

65

Release of restricted stock units

12

—

—

—

—

—

—

—

Stock-based compensation
   expense

—

—

—

—

1,285

—

—

1,285

Exercise of common stock options

5

8

—

—

—

—

—

8

Net loss

—

—

—

—

—

—

(9,753
)

(9,753
)
Foreign currency translation
  adjustment

—

—

—

—

—

45

—

45

Balance, March 31, 2018

59,876

206,163

116

218

41,807

(527
)

(244,130
)

3,531

Issuance of shares of common
   stock, net of issuance costs

6,757

9,978

—

—

—

—

—

9,978

Issuance of common stock in
   connection with employee
   stock purchase plan

226

261

—

—

—

—

—

261

Common stock issued or
   issuable  for services

133

262

(116
)

(218
)

—

—

—

44

Release of restricted stock units

12

—

—

—

—

—

—

—

Stock-based compensation
   expense

—

—

—

—

627

—

—

627

Exercise of common stock options

71

141

—

—

—

—

—

141

Net loss

—

—

—

—

—

—

(7,961
)

(7,961
)
Foreign currency translation
  adjustment

—

—

—

—

—

(77
)

—

(77
)
Balance, June 30, 2018

67,075

216,805

—

—

42,434

(604
)

(252,091
)

6,544

Issuance of shares of common
   stock, net of issuance costs

3,225

4,969

—

—

—

—

—

4,969

Release of restricted stock units

12

—

—

—

—

—

—

—

Stock-based compensation
   expense

—

—

—

—

877

—

—

877

Net loss

—

—

—

—

—

—

(8,522
)

(8,522
)
Foreign currency translation
  adjustment

—

—

—

—

—

24

—

24

Balance, September 30, 2018

70,312

$
221,774

—

$
—

$
43,311

$
(580
)

$
(260,613
)

$
3,892

Common Stock

Additional
Paid-in

Accumulated
Other
Comprehensive

Accumulated

Total
Stockholders’

Shares

Amount

Capital

Loss

Deficit

Equity

Balance, December 31, 2018

76,336

$
229,019

$
44,111

$
(575
)

$
(269,471
)

$
3,084

Adoption of ASC Topic 842-Leases
   (see note 2)

—

—

—

—

(144
)

(144
)
Issuance of shares of common stock and
   warrants in connection with rights offering,
   net of issuance costs

47,812

34,399

—

—

—

34,399

Release of restricted stock units

50

—

—

—

—

—

Warrants modification (see note 7)

—

—

1,577

—

(1,577
)

—

Stock-based compensation expense

—

—

898

—

—

898

Net loss

—

—

—

—

(9,700
)

(9,700)

Foreign currency translation adjustment

—

—

—

(8
)

—

(8
)
Balance, March 31, 2019

124,198

263,418

46,586

(583
)

(280,892
)

28,529

Release of restricted stock units

12

—

—

—

—

—

Issuance of common stock in connection with employee stock purchase plan

376

238

—

—

—

238

Stock-based compensation expense

—

—

859

—

—

859

Net loss

—

—

—

—

(8,440
)

(8,440
)
Foreign currency translation adjustment

—

—

—

9

—

9

Balance, June 30, 2019

124,586

263,656

47,445

(574
)

(289,332
)

21,195

Release of restricted stock units

12

—

—

—

—

—

Stock-based compensation expense

—

—

686

—

—

686

Net loss

—

—

—

—

(7,584
)

(7,584
)
Foreign currency translation adjustment

—

—

—

(11
)

—

(11
)
Balance, September 30, 2019

124,598

$
263,656

$
48,131

$
(585
)

$
(296,916
)

$
14,286

See accompanying 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.~~

	Nine Months Ended September 30,
	2019			2018
	(unaudited)
Cash flows from operating activities:
Net loss	$	(25,724	)	$	(26,236	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		293			329
Stock-based compensation		2,443			2,789
Bad debt recovery		—			(6	)
Non-cash lease expense		13			—
Inventory reserve		(793	)		171
Restructuring charges-inventory impairment		2,587			—
Common stock issuance for services		—			109
Changes in operating assets and liabilities:
Accounts receivable		240			639
Inventories		186			(1,082	)
Prepaid expenses and other assets		1,010			291
Accounts payable		(178	)		795
Accrued expenses		(282	)		(447	)
Accrued compensation expenses		(227	)		351
Accrued clinical trial expenses		(199	)		155
Contract liabilities		388			63
Net cash used in operating activities		(20,243	)		(22,079	)
Cash flows from investing activities:
Purchases of property and equipment		(394	)		(144	)
Net cash used in investing activities		(394	)		(144	)
Cash flows from financing activities:
Net proceeds from sale of common stock and warrants		34,399			18,939
Proceeds from exercise of options, warrants and employee stock purchase plan options		238			417
Net cash provided by financing activities		34,637			19,356
Effect of exchange rate changes on cash and cash equivalents		(9	)		—
Cash and cash equivalents:
Net increase (decrease)		13,991			(2,867	)
Balance at beginning of period		4,471			7,839
Balance at end of period	$	18,462		$	4,972

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 vision~~visual prosthetics to ~~patients blinded by outer retinal degenerations, such as Retinitis Pigmentosa.~~

potentially 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) ~~Sarl~~Sàrl is 99.5% owned directly by ~~the Company~~us and 0.5% is owned by an executive of Second Sight ~~who is acting~~ as ~~a nominee~~ of ~~the Company.~~September 30, 2019. Accordingly, Second Sight Medical Products (Switzerland) ~~Sarl~~Sàrl is considered 100% owned for financial statement purposes and is consolidated with Second Sight for all periods presented.

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

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

Liquidity and Going Concern

From inception, our operations have been funded primarily through the ~~Company has~~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 ~~limited revenues~~ from the sale of ~~products and has financed its operations primarily through the issuance~~our Argus II product. Funding of ~~common stock, convertible debt (which~~our business since 2017 has been ~~converted into common stock), and grants~~ primarily ~~from government agencies.~~provided by:

~~On March 6, 2017,~~

Revenue of $2.9 million for the ~~Company successfully completed a registered Rights Offering to existing stockholders raising net proceeds~~nine months ended September 30, 2019 and $6.9 million for the year ended December 31, 2018 generated by sales of ~~approximately $19.7 million in which it sold 13.7 million Units at $1.47 per Unit, which was the closing price~~our Argus II product.

Issuance 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~~in a rights offering in February 2019, which provided net cash proceeds of $34.4 million.

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

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

On September 17, 2019, we received a $2.4 million, four-year grant from the National Institutes of Health (NIH) to develop spatial localization and mapping technology (“SLAM”). This grant involves a joint collaboration with the Johns Hopkins University Applied Physics Laboratory, and is intended to speed the integration of SLAM into future generations of Orion. The goal is to give Orion users the ability to localize objects and navigate landmarks in unfamiliar surroundings in real time.

In a rights offering completed on ~~their relative fair values 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.

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

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 ~~issuance. The fair value used for~~ the letter, the bid price of our common stock ~~was~~had closed below 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$1.00 per share ~~and the relative fair value assigned~~minimum required for continued listing on The Nasdaq Capital Market pursuant to the warrants was $0.45 per warrant. The Company 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 statementslisting rules, and therefore we could become subject to delisting if we did not ~~retroactively adjust previously reported weighted average shares outstanding~~regain compliance within the compliance period. Nasdaq has extended the compliance period for an additional 180 days through January 20, 2020 and ~~basic~~we continue to monitor and ~~diluted earnings per share.~~evaluate our options including, if necessary, effecting a reverse stock split to cure this deficiency within this extended compliance period.

~~The Company’s~~Our financial statements have been presented on the basis that ~~its~~our 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~~We are subject to the risks and uncertainties associated with a business with one product line and limited commercial product revenues, including limitations on ~~its~~our operating capital resources and uncertain demand for ~~its products. The Company has~~our product. We have incurred recurring operating losses and negative operating cash flows since inception, and ~~expects~~we expect to continue to incur operating losses and negative operating cash flows for ~~at least~~the foreseeable future.

We do not have sufficient funds to support our operations for the next ~~several years as a result~~12 months from the date of ~~which, management has concluded that there is~~issuance of these financial statements. Accordingly, these and other related factors raise substantial doubt about ~~the Company’s~~our ability to continue as a going concern. We anticipate that we will seek to additionally fund our operations through public or private equity or debt financings, grants, collaborations, strategic partnerships or other sources. However, we may be unable to raise additional capital or enter into such other arrangements when needed on favorable terms or at all. If we are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay or discontinue one or more of our research or development programs or any other approved product candidates, or we may be unable to expand our operations, maintain our current organization and employee base or otherwise capitalize on our business opportunities, as desired, which could materially affect our business, financial condition and results of operations. The ~~Company’s independent registered public accounting firm, in its report on the Company’s 2016 consolidated~~accompanying financial statements ~~has also raised substantial doubt about the Company’s ability~~do not include any adjustments that might be necessary if we are unable 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~~These unaudited ~~condensed consolidated~~interim financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) and following the ~~rules and regulations~~requirements of the United States Securities and Exchange Commission (“SEC”) for ~~Form 10-Q. Accordingly,~~interim reporting. As permitted under those rules, certain footnotes or other financial information ~~and footnote disclosures~~that are normally ~~included in~~required by GAAP can be condensed or omitted. In our opinion, the unaudited interim 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~~prepared on the ~~Company’s~~same basis as the audited ~~consolidated financial statements.~~

~~In the opinion of management, these~~ financial statements ~~reflect~~and include all adjustments, which include only normal recurring ~~and other~~ adjustments, necessary for athe fair ~~presentation.~~presentation of our financial position and our results of operations and cash flows for periods presented. These ~~consolidated financial~~ statements do not include all disclosures required by GAAP and should be read in conjunction with ~~the audited consolidated~~our financial statements ~~included~~and accompanying notes for the fiscal year ended December 31, 2018, contained in ~~the Company’s~~our Annual Report on Form 10-K ~~for~~filed with the ~~year ended December 31, 2016. Operating~~SEC on March 19, 2019. The results ~~for~~of the interim periods are not necessarily indicative of ~~operating~~the results expected for ~~an entire~~the full fiscal year or any other interim period or any future ~~periods.~~year or period.

Significant Accounting Policies

~~Significant Accounting Policies~~

Discontinued operations

~~The Company’s~~ 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 impairment charges of $2.6 million related to inventory of Argus II in the nine months ended September 30, 2019, based on our plans to suspend production of Argus II. As part of this transition we commenced a corporate restructuring plan to focus on development of Orion and other key research projects. Specifically, we reduced expenses and personnel related to commercial activities and production for the Argus II. We recognized approximately $0.7 million of pre-tax restructuring charges in the second quarter of fiscal year 2019 in connection with this restructuring, consisting of severance and other employee termination benefits, $0.4 million of which we have settled at September 30, 2019 with substantially all of the remainder expected to be settled in cash by the end of 2019. Until Argus II operations cease, we continue to present it as part of continuing

operations. Based upon our review of the applicable accounting standards, we determined that there was no impairment of any other assets.

Our significant accounting policies are set forth in Note 2 of the financial statements in ~~its~~our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2018.

Recently Adopted Accounting Pronouncements

~~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,~~We adopted ASU No. 2016-02—Leases (Topic 842), 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 stock at the time 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 result 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 Update (“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 d~~eferred 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 from~~Contracts 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”).

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~~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 ~~method, in which the two new accounting standards are applied retrospectively with the cumulative effect of initially applying~~guidance within the new ~~accounting standards~~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 ~~the opening balance of retained earnings~~accumulated deficit 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~~2019. The standard did not ~~completed contracts at January 1, 2018.~~materially impact our consolidated net earnings and had no impact on cash flows.

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~~ 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 ~~the Company~~us to concentrations of credit risk consist primarily of cash, money market funds, and trade accounts receivable. ~~The Company maintains~~We maintain 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~~we deem reputable. We extend differing levels of credit to our customers, and typically ~~does~~do not require collateral.

Customer Concentration

The ~~Company also maintains a cash balance at a bank in Switzerland, which is insured up to an amount specified~~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 ~~deposit insurance agency of Switzerland.~~three and nine months ended September 30, 2019 and 2018:

~~Customer Concentration~~

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Direct customers	$	412	$	1,921	$	2,364	$	4,378
Indirect customers (distributors)		60		325		518		751
Total	$	472	$	2,246	$	2,882	$	5,129

During the three and nine months ended September 30, ~~2017~~2019 and ~~2016,~~2018, the following customers each comprised ~~more~~greater than 10% of our total revenues ~~(unaudited)~~:

	Three Months Ended September 30, 2017			Three Months Ended September 30, 2016			Nine Months Ended September 30, 2017			Nine Months Ended September 30, 2016			Three Months Ended September 30,						Nine Months Ended September 30,
													2019			2018			2019			2018
Customer 1		18	%		0	%		8	%		0	%		44	%		6	%		23	%		11	%
Customer 2		18	%		0	%		6	%		4	%		29	%		4	%		12	%		4	%
Customer 3		18	%		0	%		6	%		0	%		28	%		—	%		6	%		—	%
Customer 4		10	%		0	%		3	%		0	%		—	%		—	%		12	%		5	%
Customer 5		9	%		0	%		11	%		0	%		—	%		6	%		11	%		3	%
Customer 6		0	%		21	%		0	%		8	%		—	%		12	%		5	%		5	%
Customer 7		0	%		12	%		3	%		3	%		—	%		10	%		9	%		6	%
Customer 8		0	%		11	%		0	%		16	%		—	%		10	%		—	%		4	%
Customer 9		0	%		0	%		0	%		10	%

As of September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, the following customers each comprised ~~more~~greater than 10% of our total 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 %

10	September 30, 2019			December 31, 2018
Customer 1		97	%		—	%
Customer 2		—	%		55	%
Customer 3		—	%		22	%
Customer 4		—	%		21	%

Geographic Concentration

During the three and nine months ended September 30, ~~2017~~2019 and ~~2016,~~2018, regional revenue based on customer locations which each comprised ~~more~~greater than 10% of our total revenues, consisted of the following ~~(unaudited)~~:

	Three Months Ended September 30, 2017			Three Months Ended September 30, 2016			Nine Months Ended September 30, 2017			Nine Months Ended September 30, 2016			Three Months Ended September 30,						Nine Months Ended September 30,
													2019			2018			2019			2018
Italy														44	%		6	%		23	%		11	%
China														29	%		4	%		12	%		4	%
United States		72	%		47	%		59	%		47	%		27	%		47	%		60	%		51	%
Italy		9	%		11	%		11	%		21	%
Germany		5	%		35	%		3	%		15	%
France														—	%		15	%		—	%		14	%
Canada														—	%		10	%		—	%		4	%

~~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 the 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)~~2019 and December 31, ~~2016~~2018 include assets amounting to ~~$2.0~~$1.8 million and ~~$1.7~~$1.5 million, respectively, relating to operations of ~~the Company’s~~our subsidiary based in Switzerland. It is possible that unanticipated events in foreign countries could disrupt ~~the Company’s~~our operations.

4. ~~Money Market Funds~~

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 ~~the Company has~~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.

~~Money~~Cash equivalents, which includes money market funds, are the only financial instrument measured and recorded at fair value on ~~the Company’s~~our consolidated balance sheet, and they are ~~considered~~valued using Level 1 ~~valuation securities. The following table presents money market funds~~inputs.

Assets measured at ~~their level within the~~ fair value ~~hierarchy at September 30, 2017 and December 31, 2016~~on a recurring basis are as follows (in thousands):

	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3

September 30, 2017 (unaudited):
September 30, 2019 (unaudited):
Money market funds	$	12,705	$	12,705	$		$	—	$	18,266	$	18,266	$	—	$	—

December 31, 2016:
December 31, 2018:
Money market funds	$	10,336	$	10,336	$	—	$	—	$	4,156	$	4,156	$	—	$	—

As of September 30, 2019 and December 31, 2018, the money market funds include $0.1 million and $0.2 million, respectively, held in a deposit account in Switzerland as security for the performance of contracts.

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			September 30,			December 31,
	(Unaudited)						2019			2018
Raw materials	$	390		$	477		$	807		$	791
Work in process		3,378			5,032			1,854			3,055
Finished goods		3,123			3,284			2,174			2,089
								4,835			5,935
		6,891			8,793

Allowance for excess and obsolescence		(3,646	)		(5,377	)
Allowance for excess and obsolete inventory and impairment charge								(3,571	)		(2,685	)
Inventories, net	$	3,245		$	3,416		$	1,264		$	3,250

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

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			September 30,			December 31,
	(Unaudited)						2019			2018
Laboratory equipment	$	2,398		$	2,300		$	2,723		$	2,482
Computer hardware and software		1,297			1,220			1,590			1,456
Leasehold improvements		299			288			304			298
Furniture, fixtures and equipment		46			45			58			46
								4,675			4,282
		4,040			3,853

Accumulated depreciation and amortization		(2,713	)		(2,364	)		(3,550	)		(3,257	)
Property and equipment, net	$	1,327		$	1,489		$	1,125		$	1,025

Contract Liabilities

Contract liabilities consisted of the following (in thousands):

Allowance for Doubtful Accounts

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

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. 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):

12

Assets	Classification	September 30, 2019
Non-current assets	Right-of-use assets	$	2,399
Liabilities
Current	Current operating lease liabilities	$	228
Long term	Long term operating lease liabilities	$ 2,427

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



	For the three months ended September 30, 2019	For the nine months ended September 30, 2019
Lease expense:
Operating lease expense	$ 123		$ 370
Short-term lease expense	—		—
Total lease expense	$ 123		$ 370

Other information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	357

For operating lease:
Weighted average remaining lease term (in years)		7.3
Weighted average discount rate		10	%

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

	Discounted lease liability payments		Payments due under lease agreements
2019 (remaining three months)	$	53	$	120
2020		237		491
2021		278		505
2022		322		521
2023		352		516
Thereafter		1,413		1,704
Total	$	2,655	$	3,857

6. Equity Securities

Increase in Authorized Shares of Common Stock ~~Issuable~~

~~Non-employee members~~ On June 4, 2019, our shareholders approved an amendment to our restated articles of ~~the Board~~incorporation increasing our authorized no par value shares 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~~from 200 million to ~~75,000~~300 million 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

AtAs of September 30, ~~2017~~2019 and ~~2016, the Company~~2018, we excluded the ~~outstanding~~potentially dilutive securities summarized below, which entitle the holders thereof to ~~ultimately~~potentially acquire shares of common stock, from ~~its~~our calculations of ~~earnings~~net loss per share and weighted average common 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

	September 30,
	2019		2018
Common stock warrants issued to underwriter of initial public offering		802		802
Common stock warrants issued in connection with March 2017 rights offering		13,647		13,647
Common stock warrants issued in connection with February 2019 rights offering		47,812		—
Common stock options		8,680		7,581
Restricted stock units		488		47
Employee stock purchase plan		456		191
		71,885		22,268

7. Warrants

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

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

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

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

A summary of ~~warrant~~warrants activity for the nine months ended September 30, ~~2017~~2019 is presented below (in thousands, except per share and contractual life data) ~~(unaudited)~~.

						Weighted Average		Number of Shares		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life (in Years)
				Weighted		Remaining
	Number of			Average		Contractual
	Shares			Exercise Price		Life (in Years)
Warrants outstanding at December 31, 2016		1,840		$	7.72		1.80
Warrants outstanding as of December 31, 2018									14,449	$	2.01		3.10
Issued		13,652		$	1.47				47,812		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
Warrants outstanding as of September 30, 2019									62,261	$	1.60		4.40
Warrants exercisable as of September 30, 2019									62,261	$	1.60		4.40

The ~~intrinsic value of~~ warrants outstanding atas of September 30, ~~2017 was $0.~~

2019 had no intrinsic value.

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 under our 2011 Equity Incentive Plan (“2011 Plan”) for the nine months ended September 30, ~~2017~~2019 is presented below (in thousands, except per share and contractual life data) ~~(unaudited)~~.

	Number			Weighted Average		Weighted Average Remaining Contractual		Number of Shares			Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life (in Years)
	of Shares			Exercise Price		Life (in Years)
Options outstanding at December 31, 2016		3,667		$	7.23		6.27
Options outstanding as of December 31, 2018									7,120		$	3.83		6.81
Granted		2,504		$	1.85				2,600		$	0.77
Exercised		—			—				—		$
Forfeited or expired		(641	)	$	5.58				(1,040	)	$	2.89

Options outstanding at September 30, 2017		5,530		$	4.98		7.56

Options exercisable at September 30, 2017		2,090		$	7.15		5.36
Options outstanding as of September 30, 2019									8,680		$	3.03		7.28
Options exercisable as of September 30, 2019									4,385		$	4.62		5.88

The estimated aggregate intrinsic value of stock options exercisable atas of September 30, ~~2017~~2019 was ~~$0.~~approximately $14,000. As of September 30, ~~2017,~~2019, there was ~~$5.7~~$3.2 million of total unrecognized compensation cost related to outstanding stock options that will be recognized over a weighted average period of ~~2.91~~2.51 years.

During the nine months ended September 30, ~~2017, the Company~~2019, we granted stock options to purchase ~~2,464,150~~2,600,042 shares of common stock to certain ~~employees.~~employees and directors. The options are exercisable for a period of ten years from the date of grant at prices ranging from ~~$1.13~~$0.69 to ~~$1.97~~$1.00 per share, which was the fair value of ~~the Company’s~~our common stock on the respective grant dates. The options generally vest over a period of four ~~years.~~years with the exception of options issued in connection with director compensation which vest in approximately one year. The fair value of these options, as calculated ~~pursuant to~~using the Black-Scholes option-pricing model, was determined to be ~~$2,222,000~~$1.3 million ($~~0.55~~0.44 to ~~$0.96~~$0.65 per share)~~. Assumptions used in~~ using the ~~model were an~~following assumptions: expected term of ~~6.25~~5.5 to 6.08 years, volatility of ~~48.0%~~72.0%, a risk-free interest rate of ~~1.92%~~1.63% to ~~2.14%~~2.63%, 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)0.0%. 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)~~restricted stock unit (“RSU”) activity ~~(unaudited)~~ for the nine months ended September 30, ~~2017~~2019 (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

	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		(74	)		6.51
Forfeited/canceled		—			—
Outstanding as of September 30, 2019		488		$	0.74

As of September 30, ~~2017,~~2019, there was ~~$1.1~~$0.3 million of total unrecognized compensation cost related to the outstanding RSUs that will be recognized over a weighted average period of ~~1.88~~3.39 years.

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

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

Stock-based compensation expense recognized for stock-based awards ~~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~~2019 and ~~2016 is~~2018 was as follows (in thousands) ~~(unaudited)~~:

	Three Months Ended September 30, 2017		Three Months Ended September 30, 2016		Nine Months Ended September 30, 2017		Nine Months Ended September 30, 2016		Three Months Ended September 30,				Nine Months Ended September 30,
									2019		2018		2019		2018
Cost of sales	$	36	$	80	$	184	$	245	$	43	$	74	$	133	$	201
Research and development		71		77		203		238		119		110		440		321
Clinical and regulatory		42		43		135		136		19		19		84		122
Selling and marketing		116		74		321		59		118		165		379		380
General and administrative		641		624		1,978		1,903		387		509		1,407		1,765
Total	$	906	$	898	$	2,821	$	2,581	$	686	$	877	$	2,443	$	2,789

9. Litigation, Claims and Assessments

~~Twenty-one~~Twenty-two oppositions have been filed by ~~a third-party~~third-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’s~~our ability to block competitors from utilizing some of ~~its~~our patented technology in Europe. ~~Management of the Company does~~We do not believe ~~that~~ a successful challenge will have a material effect on ~~the Company’s~~our ability to manufacture and sell ~~its~~our products, or otherwise have a material effect on ~~the Company’s~~our operations.

On August 22, 2019, Second Sight and Pixium Vision SA concluded a settlement agreement resolving all advertising disputes between the companies. The agreement provides that all litigation is withdrawn and costs are shared. The settlement does not address the patent opposition proceedings, between the companies, in the European Patent Office.

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

Item 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~~together with ~~the~~our unaudited condensed financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q as well as our audited ~~2016~~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 ~~16, 2017. In addition to historical~~19, 2019. Some of the information ~~the~~contained in this discussion and analysis ~~here~~ or set forth elsewhere in this Quarterly Report, including information with respect toourproducts,plansand ~~throughout this Form 10-Q~~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 ~~assumptions. Our actual~~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 ~~those anticipated~~the plans, intentions and expectations disclosed in ~~these~~the forward-looking statements ~~as a result of certain factors, including, but not limited, to those set forth under~~that we make. You should read “Risk Factors” in Part II, Item 1A of this ~~report.~~

Quarterly Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. We assume no obligations to update these forward-looking statements to reflect events or circumstances after the date of this Quarterly Report or to reflect actual outcomes.

Second Sight ~~was founded in 1998 with a mission~~Medical Products, Inc. (NASDAQ: EYES) develops, manufactures and markets implantable visual prosthetics that are intended to ~~develop, manufacture, and market prosthetic devices that restore some~~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 RP, 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”). Our 12 month results for five of the six subjects and six month results for the sixth subject (who will reach his 12 month mark in January 2020) indicate to us that:

We have a good safety profile. Two subjects experienced a total of six adverse events (AEs) over this time period related to the device or to the surgery. One was considered a serious adverse event (SAE), and all of the adverse events were in the expected category. The one SAE was resolved quickly and did not require a hospital stay.

The efficacy data is encouraging. We measure efficacy by looking at three measures of visual function: The first is square localization, where Orion subjects sit in front of a touch screen and are asked to touch within the boundaries of a square when it appears. The second is direction of motion, where subjects are asked to identify the direction and motion of lines on a screen. The third is grating visual acuity, a measure of visual acuity that is adapted for very low vision. On square localization, five of the six subjects in our feasibility study performed significantly better with the system on than off. On direction of motion, all six performed better on than off; and on grating visual acuity, three had measurable visual acuity on the scale of this test (versus none who can do it with the device off). Another efficacy measurement of day-to-day functionality and benefit is FLORA, which stands for Functional Low-Vision Observer Rated Assessment. FLORA is an assessment performed by an independent, third-party low vision orientation and mobility specialist who spends time with each of the subjects in their homes. The specialist asks each of the subjects a series of questions and also observes them performing 15 or more daily living tasks, such as finding light sources, following a sidewalk, or sorting laundry. The specialist then determines if the system is providing a benefit, if it is neutral, or if it is actually hurting the abilities of subjects to perform these tasks. Our FLORA results show that for five of the six subjects, the Orion system is providing benefit. No peer-reviewed data is available yet for the Orion system. We reached agreement with the FDA in the fourth quarter of 2019 to utilize a revised version of FLORA as our primary efficacy endpoint in our pivotal trial for Orion, pending successful validation of the instrument in the first half of 2020.

Our principal offices are located in ~~Sylmar, California, approximately 25 miles northwest of downtown~~ Los ~~Angeles.~~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, ~~which we refer~~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 ~~System~~ is the only retinal prosthesis approved in the United States by the Food and Drug Administration ~~(FDA)~~(“FDA”), and was the first approved retinal prosthesis in the world. ~~By providing a useful form~~A subset of ~~artificial vision in~~these patients ~~who otherwise have total sight loss,~~would be eligible for the Argus II ~~System can provide benefits which include:~~

●

~~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 the moving streams of lights from fireworks, and

●

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

since the approved baseline vision for the Argus II is worse than legally blind (20/200). We commissioned 3^rd 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~~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 ~~does not~~can slow or reverse the progression of the disease. ~~Results vary among patients and while the~~The majority of patients receive a significant benefit from the Argus II, however results can vary and some patients report receiving little or no benefit. By creating an artificial form of useful vision in patients who otherwise have total sight loss, the Argus II can provide benefits that include:

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

~~Our major corporate, clinical~~improving patients’ orientation and ~~regulatory milestones include:~~mobility, such as locating doors and windows, avoiding obstacles, and following the lines of a crosswalk;

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

●

~~In 1998, Second Sight was founded.~~

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;

●

~~In 2002, we commenced clinical trials in the US for our prototype product, the Argus I retinal prosthesis.~~

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

●

~~In 2007, we commenced clinical trials in the US for the Argus II System, which later became our first commercial product.~~

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

●

~~In 2011, we received marketing approval in Europe (CE Mark) for the Argus II System.~~

●

~~In 2013, we received marketing approval in the United States (FDA) for the Argus II System.~~

●

~~In 2014, we launched the Argus II in the US, completed our initial public offering (“IPO”), and began trading on NASDAQ under the symbol “EYES.”~~

●

~~In 2014, we launched the Argus II in the US, completed our initial public offering (“IPO”), and began trading on NASDAQ under the symbol “EYES.”~~

●

~~In 2015, we commenced a clinical trial in the UK for an expanded indication for the Argus II System in individuals with dry AMD.~~

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, ~~and~~Iran, Taiwan, South Korea and Russia in ~~2017. With~~2017, and Singapore in 2018. Given the ~~exception~~limited addressable market of ~~Taiwan~~Argus II, we made the decision in 2018 to maximize capital efficiency with our Argus commercial and ~~Russia,~~clinical activities and increase our investment of resources with our Orion clinical and R&D programs. In October 2018, we announced a restructuring of our international commercial activities and personnel. This restructuring resulted in a decision to no longer support new implants of Argus II in Turkey, Iran, Singapore and Russia. We retained a team that continues to support existing Argus II patients and Centers of Excellence in all markets. We recognized approximately $0.6 million of pre-tax restructuring charges in the fourth quarter of fiscal year 2018 in connection with this restructuring, consisting of severance and other employee termination benefits, substantially all of which were settled in cash during the fourth quarter of 2018.

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

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

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

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

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

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

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

incurred cash severance and related expenses of approximately $700,000 in the nine months ended September 30, 2019 covering employees associated with Argus II operations; and

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

We expect to realize selling and marketing expense savings of approximately $5.3 million for the year ended December 31, 2019 as compared to the same period in 2018. 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 3^rd party firms to advance and integrate these ~~regions. In Taiwan and Russia we have limited regulatory approval but~~innovative technologies with our artificial vision systems. Examples of technologies that we are ~~working~~currently researching include: eye tracking, object recognition and localization, thermal imaging and depth-based decluttering. We expect to ~~obtain full regulatory approval~~advance several of these technologies to the point of having prototype eyewear suitable for clinical testing in ~~both countries. We sell primarily through~~2019.

As of September 30, 2019, after more than 20 years of research and development, more than $250 million of investment and over $37 million of grants awarded in support of our ~~direct sales force, but use distributors~~technology development, we employ over 105 people in ~~certain countries.~~the development (research, engineering and clinical), manufacture, and commercialization of the Argus II System and future products such as Orion.

~~Going Concern~~

Capital Funding

From inception, our operations have been funded primarily through the sales of our common stock and warrants, as well as from the issuance of convertible debt, research and clinical grants, and limited product revenue generated by the sale of our Argus II System. ~~During the years ended December 31, 2016 and 2015 and~~Funding of our business since 2017 has been primarily provided by:

Revenue of $2.9 million for the nine months ended September 30, 2019 and $6.9 million for the year ended December 31, 2018 generated by sales of our Argus II product.

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

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

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

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

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

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

Insurance Reimbursement

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

Within Europe, Argus II obtained reimbursement approval or funding in Germany (NUB Innovation Funding Program), France (Forfait Innovation Funding Program), and one region of Italy (Regional Funding). We were in the process of obtaining reimbursement through the Commissioning through Evaluation (“CtE”) program in England and discontinued these efforts in connection with our restructuring of the Argus II program. If Argus II was still available, the Forfait Innovation Funding Program and CtE program could have resulted in permanent national funding for Argus II assuming positive outcomes in the program, especially in France where we were in the final stages of reimbursement review process.

Currently, we are in process of evaluating potential reimbursement pathways for Orion in the US market. Compared to Argus II, which is largely catering to the Medicare patient population, Orion is expected to address a patient population with diverse and more balanced payer mix due to our potential indications profile and expected younger patient population, on average. As Orion is a part of the FDA’s Breakthrough Devices program, we are closely evaluating a variety of fast track reimbursement programs, including recent encouraging announcements from CMS proposing modernization of payment policies for medical devices that meet FDA’s

Breakthrough Devices designation. During the second half of 2019, we also approached some commercial payers and CMS to get their feedback to ensure our overall reimbursement strategy for Orion therapy will cater to their key data requirements.

Product and Clinical Development Plans

Orion. By further developing our visual cortical prosthesis, Orion, we believe we will significantly expand our market to include nearly all profoundly blind individuals. The only notable exceptions for potential use of the Orion are those who are blind due to otherwise currently treatable diseases, individuals who are born blind, or blindness due to direct damage of the visual cortex, which is rare. However, of the estimated 36 million blind people worldwide, there are approximately 5.8 million people who are legally blind due to causes that are not otherwise treatable (including RP) or age-related macular degeneration (“AMD”). We continue to develop and refine our estimates of the potential addressable market size as we evaluate the commercial prospects for Orion using a combination of published sources, 3rd party market research, and physician feedback. We currently estimate over 500,000 individuals in the US are legally blind due to retinitis pigmentosa, glaucoma, diabetic retinopathy, optic nerve disease and eye injury. Of this population, we estimate the potential US addressable market is between 50,000 and 100,000 individuals with bi-lateral blindness at the light-perception level or worse. Our marketing approvals by the FDA and other regulatory agencies will ultimately 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. Our 12 month results for five of the six subjects and six month results for the sixth subject show a good safety profile with encouraging efficacy data and benefits in helping subjects perform their daily living tasks. Early promising results are not necessarily indicative of results which may be obtained in large clinical trials. No assurance can be given that we will achieve similar results in our larger Orion clinical trials. See Risk Factors in Item 1A below. 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. We have reached agreement with FDA on the primary effectiveness endpoint, pending validation of an assessment we have developed for the purpose. We anticipate completing the validation study in the first half of 2020. We are currently working with FDA on alignment on a primary safety endpoint and confirmation of a sample size. While negotiations with the FDA are ongoing, we are evaluating two different paths for Orion. The first path is a Premarket Approval, or PMA, track. The projected start of the pivotal trial is still not determined pending resolution of various aspects of the pivotal study and post approval requirements. Depending on the timing of the pivotal study, it is possible that we would expand our Early Feasibility Study in order to collect additional data before proceeding to a pivotal trial. The second path would involve first obtaining a Humanitarian Device Exemption approval, or HDE, followed by a PMA. This path would become preferable if the PMA requirements push the start of the pivotal study too far into the future. Given that an HDE approval requires the demonstration of probable benefit rather than the PMA standard of effectiveness, we believe that we could start a study to support HDE approval much sooner than a pivotal study. In parallel to seeking an HDE approval, we would continue negotiations with the Agency as well as preparations to start a pivotal study.

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~~Revenue of $4.9 million in the first nine months of 2017, and $4.0 million and $8.9 million in fiscal years 2016 and 2015, respectively, generated by sales of our Argus II System,~~

Argus II. The Argus II is currently approved for RP patients with bare or no light perception in the US, and in Europe for severe to profound vision loss due to outer retinal degeneration, such as from RP, choroideremia, and other similar conditions. The number of people who are legally blind due to RP is estimated to be about 25,000 in the US, 42,000 in Europe, and about 375,000 total worldwide. A subset of these patients would be eligible for the Argus II since the approved baseline vision for the Argus II is worse

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~~Issuance of common stock in our Rights Offering in June 2016, which generated net proceeds of $19.5 million after offering expenses,~~

than legally blind (20/200). We commissioned 3^rd party market research for the size of the RP market that resulted in an estimate of approximately 1,500 patients in the US with advanced RP that could be treated with the Argus II given the eligibility criteria of our label.

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~~Issuance of common stock and warrants in our Rights Offering in March 2017, which generated net proceeds of $19.7 million after offering expenses.~~

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

Critical Accounting Policies

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

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

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

Based upon our decision on May 10, 2019 to accelerate our transition to the Orion platform, we evaluated our accounting policies related to the disposition in accordance with ASC 205-20 Discontinued Operations, and assessed our long-lived assets for any indications that their carrying values may not be recoverable in accordance with ASC 360, Property, Plant, and Equipment, for any impairment. Based upon these reviews we recorded in the nine months ended September 30, 2019 impairment charges of $2.6 million related to inventory of Argus II based on our plans to suspend production of Argus II. Specifically, we reduced expenses and personnel related to commercial activities and production for the Argus II. We recognized approximately $0.7 million of pre-tax restructuring charges in the second quarter of fiscal year 2019 in connection with this restructuring, consisting of severance and other employee termination benefits, $0.4 million of which has been settled at September 30, 2019 with substantially all of the remainder expected to be settled in cash by the end of 2019. Based upon our review of the applicable accounting standards we determined that there was no impairment of any other assets.

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

Results of Operations

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

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

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

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

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

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

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

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

We implanted a total of four Argus II products during the third quarter of 2019 and 20 in the third quarter of 2018. All four implants were in Europe, the Middle East and Asia (collectively, “EMEA”) in the third quarter of 2019 while eleven implants were in EMEA in the third quarter of 2018.

In North America, there were no implants in the third quarter of 2019 while there were nine implants in the third quarter of the prior year. Of these, there were seven implants in the U.S. and two implants in Canada in the third quarter of 2018.

Net Sales. Net sales were $0.5 million in the third quarter of 2019 as compared to $2.2 million in the same period in 2018, a decrease of $1.7 million or 79%. Revenue was recognized for four units in the third quarter of 2019 while 22 units were recognized in the third quarter of 2018. Revenue recognized per implant was approximately $118,000 in the third quarter of 2019 and was $102,000 in same period of 2018. We expect our net sales to decline as we sell through our existing inventory of Argus II.

Cost of sales. Cost of sales was $0.4 million in the third quarter of 2019 as compared to $1.8 million in the third quarter of 2018. Cost of sales in the third quarter of 2019 consists primarily of the cost of products implanted of $0.2 million and unabsorbed production costs of approximately $0.2 million. In the third quarter of 2018, the cost of sales included approximately $1.7 million for the cost of products implanted and unabsorbed production costs plus an adjustment of $0.1 million for an increase in the reserve for

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

Research and development expense. Research and development expense increased by $0.7 million, or 26%, from $2.7 million in the third quarter of 2018 to $3.4 million in the third quarter of 2019. The costs increased from the prior year due primarily to costs incurred for internally produced prototypes. We expect our research and development expenses to increase in future periods as we accelerate our transition to the Orion platform, including costs previously related to production activities such as facilities and personnel that will be transitioning to Orion development activities.

Clinical and regulatory expense. Clinical and regulatory expense decreased $0.1 million, or 11%, from $1.0 million in the third quarter of 2018 to $0.9 million in the third quarter of 2019. This decrease is attributable to decreased costs associated with the Orion feasibility study. We expect clinical and regulatory costs to increase in the future as we conduct additional clinical trials to assess new products such as Orion and related enhancements to our user experience.

Selling and marketing expense. Selling and marketing expense decreased $1.7 million, or 57%, from $3.0 million in the third quarter of 2018 to $1.3 million in the third quarter of 2019. This decrease in costs was primarily driven by our reduced commercial activities related to Argus II and the resulting decreased use of outside services, supplies, reduced headcount and related compensation expense. We expect selling and marketing expense to decrease as we reduce our Argus II commercial activities and sell through our existing inventory.

General and administrative expense. General and administrative expense decreased $0.1 million, or 7%, from $2.3 million in the third quarter of 2018 to $2.2 million in the same period of 2019. This decrease is primarily attributable to $0.1 million in lower compensation costs primarily due to reduced staffing. We expect general and administrative expenses to remain consistent during the remainder of 2019.

Comparison of the Nine Months Ended September 30, 2019 and 2018

We implanted a total of 25 Argus II products during the first nine months of 2019 and 53 in the first nine months of 2018. Of these, twelve implants were in Europe, the Middle East and Asia (collectively, “EMEA”) in the first nine months of 2019 while 25 implants were in EMEA in the first nine months of 2018.

In North America, there were 13 implants in the first nine months of 2019 while there were 28 implants in the first nine months of the prior year. Of these, all the implants were in the U.S. in the first nine months of 2019 while 24 were in the U.S. in the first nine months of 2018 along with four implants in Canada.

Net Sales. Net sales were $2.9 million in the first nine months of 2019 as compared to $5.1 million in the same period in 2018, a decrease of $2.2 million or 44%. Revenue was recognized for 23 units in the first nine months of 2019 as compared to 48 units in the first nine months of 2018. Revenue recognized per implant was approximately $125,000 in the first nine months of 2019 and was $107,000 in same period of 2018. We expect our net sales to decline as we sell through our existing inventory of Argus II.

Cost of sales. Cost of sales was $2.0 million in the first nine months of 2019 as compared to $3.3 million in the first nine months of 2018. Cost of sales in the first nine months of 2019 consists primarily of the cost of products implanted of $1.3 million and unabsorbed production costs of $0.7 million. In the first nine months of 2018, the cost of sales included approximately $3.1 million for the cost of products implanted and unabsorbed production costs plus an increase of $0.2 million in the reserve for excess inventory. We expect to record cost of sales for any remaining Argus II inventory that we sell and a majority of our expenses related to our production capabilities and fixed overhead to be reported as research and development expense in future periods.

Research and development expense. Research and development expense, net of funding received from grants, increased by $1.4 million, or 19%, from $7.6 million in the first nine months of 2018 to $9.0 million in the first nine months of 2019. In the first nine months of 2019 we utilized $0.4 million of grant funds to offset costs as compared to $0.2 million in 2018. The costs before the grant revenue offset increased from the prior year primarily due to increased headcount and costs for internally produced prototypes. We expect our research and development expenses to increase in future periods as we accelerate our transition to the Orion platform, including costs previously related to production activities such as facilities and personnel that will be transitioning to Orion development activities.

Clinical and regulatory expense. Clinical and regulatory expense, net of funding received from grants, decreased $1.0 million, or 30%, from $3.4 million in the first nine months of 2018 to $2.4 million in the first nine months of 2019. This decrease is primarily attributable to decreased costs associated with the Orion feasibility study of $0.7 million and offset costs from grants of $0.5 million. We expect clinical and regulatory costs to increase in the future as we conduct additional clinical trials to assess new products such as Orion and related enhancements to our user experience.

Selling and marketing expense. Selling and marketing expense decreased $3.8 million, or 43%, from $8.9 million in the first nine months of 2018 to $5.1 million in the first nine months of 2019. This decrease in costs was primarily driven by our reduced

commercial activities related to Argus II and the resulting decreased use of outside services, reduced headcount and related compensation expenses. We expect selling and marketing expense to decrease as we reduce our Argus II commercial activities and sell through our existing inventory.

General and administrative expense. General and administrative expense decreased $1.3 million, or 16%, from $8.2 million in the first nine months of 2018 to $6.9 million in the same period of 2019. This decrease is primarily attributable to $0.7 million in lower compensation costs primarily due to cancelled stock option grants and reduced staffing. Outside service costs and patent costs were both reduced by $0.2 million and travel costs were reduced by $0.1 million. We expect general and administrative expenses to remain consistent during the remainder of 2019.

Restructuring charges. We recorded a non-cash restructuring charge of $2.6 million in the first nine months of 2019 to our reserve for excess and obsolete inventory in connection with our plans to suspend Argus II production. In addition, we recognized $0.7 million of pre-tax restructuring charges in the second quarter of fiscal year 2019 consisting of severance and other employee termination benefits, $0.4 million of which was settled at September 30, 2019, with substantially all of the remainder expected to be settled in cash during the last quarter of 2019.

Liquidity and Capital Resources

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

In ~~June 2016, the Company successfully~~a rights offering completed ~~a Rights Offering to existing stockholders, raising~~on February 22, 2019, we sold approximately 47.8 million units, each priced at $0.724 for net cash proceeds of ~~$19.5 million net of cash offering costs, selling 6.0 million shares of common stock at $3.315 per share, representing 85% of the Company’s per share stock price at the close of the Rights Offering.~~

In March 2017, the Company successfully completed a Rights Offering to existing stockholders, raising 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 $34.4 million. Each ~~Unit~~unit consisted of one share ~~of common stock~~ and one immediately exercisable warrant ~~with a five-year life, to buy~~having an ~~additional share~~exercise price of ~~common stock at~~ $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 ~~Company believes that it has~~expiration date of the warrants issued pursuant to this rights offering is March 14, 2024, and the expiration date of all previously outstanding warrants listed for trading under the symbol “EYESW” were extended to March 14, 2024.

We do not have sufficient funds to ~~last~~support our operations for the next 12 months from the date of issuance of this report. Our forecast of the period of time 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~~which our financial resources will be ~~able~~adequate to secure any such additional financing on acceptable terms and conditions, or at all so as to be able to continue its business at current levels past the end of the first quarter of fiscal 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 itssupport our operations ~~entirely.~~

~~Global Reimbursement~~

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

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~~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 seven of 12 MAC jurisdictions (comprising 28 states). Effective January 1, 2017, the Centers for Medicare and Medicaid Services (CMS) established a 2017 payment rate of $150,000 for both the procedure and the Argus II Retinal Prosthesis System. On November 1, 2017, CMS posted a final 2018 payment rate of $122,500 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 also allow providers to confirm coverage and payment for the Argus II procedure in advance of implantation.

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

The Company employs dedicated employees and consultants with insurance reimbursement expertise engaged to expand and enhance coverage decisions. Currently, seven Medicare jurisdictions, including CGS (J15 -- Ohio and Kentucky), Palmetto GBA (JM -- Virginia, (excluding Part B 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 territories and the District of Columbia when medically necessary. We are actively engaged with the remaining MACs and are committed to supporting their requests for additional information and clinical evidence. We expect that additional positive coverage decisions will be issued over time but cannot predict timing or ultimate success with each MAC.

Within Europe, we have obtained reimbursement approval or funding in Germany, France, and one region of Italy. In France, the Company was selected to receive the first “Forfait Innovation” (Innovation Bundle) from the Ministry of Health, which is a special funding program for breakthrough procedures to be introduced into clinical practice. As part of this program, the Company is conducting a post-market study in France which has enrolled a total of 18 subjectsforward-looking statement that involves risks 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 review of the study’s results, we expect Argus II therapy to be covereduncertainties, and ~~funded through the standard payment system in France, however, we can provide no assurance that the French government will continue to fund the Argus II after the first 36 implants.~~

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~~

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), 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 market expansion, the Company is undertaking multiple clinical data collection efforts and product development efforts to improve the technology’s performance, including:

	●	~~Clinical trials with better-sighted individuals;~~
	●	~~Development of retinal stimulation programs that we believe can achieve improved resolution by adjusting electronic retinal stimulation methods;~~
	●	Redesigns of the externals (glasses, camera, and video processing unit) that will possess processing power many times greater than the current Argus II system, which will enable enhanced image processing support for the commercial implementation of the new retina stimulation protocols, possibly by 2018.

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 eligible 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 part of the brain responsible for vision. In October 2017, we received final IDE approval from the FDA to begin a human feasibility study of the Orion I visual prosthesis system. This study will confirm initial findings in our human pilot study we announced in the fourth quarter of 2016 and provide the first human data of a fully functional wireless visual cortical stimulator system including the external video camera system. 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 of the Argus II System for use in persons suffering from dry AMD. In the second quarter of 2016 we completed enrollment and continue to track the subjects via the site in Manchester. The subjects have reported the ability 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 the Argus II. We plan to continue testing these subjects and will submit a revised clinical protocol in 2017. Our approaches 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 test 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.

~~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 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~~vary materially. Conducting clinical trials is a time-consuming, expensive and uncertain process that takes many years to complete and we may never generate the necessary data or ~~conditions. A summary of our critical accounting policies is presented in Item 7 of our Annual Report on Form 10-K~~results required to obtain marketing approval. We expect revenues for ~~the year ended December 31, 2016. There have been no material changes to our critical accounting policies during the nine months ended September 30, 2017.~~

~~Results of Operations~~

~~Net sales.~~~~Our net sales are derived primarily from the sale of our~~ Argus II ~~System. We began selling~~to decrease as we sell through our ~~products in Europe in 2011, Saudi Arabia in 2012, the United States~~remaining inventory and ~~Canada in 2014, Turkey in 2015, Russia, South Korea and Taiwan in 2017. Our objective is~~expenses to increase in connection with our ~~product revenue over the next several years~~ongoing activities, particularly as we ~~pursue commercialization~~continue clinical trials of ~~our product, as our product becomes more well-known and accepted in the market, and as insurance coverage becomes more widespread.~~

~~Cost of sales.~~Cost of sales includes the salaries, benefits, material, overhead, third party costs, warranty, charges for excess inventory, and other costs required to make our Argus II System at our Sylmar, California facility. In the second quarter of 2016, due to lower implant rates 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. We expect to work through our slow-moving inventory and resume normal production when and if sales orders increase. Our ability to generate a gross profit in future periods will depend on our ability to (i) generate higher revenues and (ii) to produce our product in sufficient quantities that will allow us 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.

~~Operating Expenses.~~~~We generally recognize our operating expenses as we incur them in four general operational categories:~~Orion, initiate new research and development ~~clinical~~projects and ~~regulatory, sales and~~seek marketing and general and administrative. Our operating expenses also include a non-cash component related to the amortization of deferred stock-based compensation allocated to research and development, clinical and regulatory, sales andapproval for any product candidates that we successfully develop. In addition, if we obtain 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 some of the cost of our development efforts. We have recorded these grants as offsets to the costs as they are incurred to complete the related work.

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Research and development expenses consist primarily of employee compensation, materials, 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 incurred. We expect research and development expenses to increase in the future as we pursue further enhancements of our existing product and develop technologyapproval for ~~our potential future products, such as the~~ Orion, ~~I visual cortical prosthesis. We also expect to receive additional grants in the future that will be offset primarily against research and development costs.~~

●

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

●

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. We expect sales and marketing expenses to increase as we hire additional sales personnel, initiate additional marketing programs, develop relationships with new distributors, and expand the number of medical centers that buy and implant our Argus II System and any future products.

●

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 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, 2017 and 2016~~

~~Worldwide commercial implant volume for the three 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 $1,180,000 in the third quarter of 2016 to $1,610,000 in the third quarter of 2017, which was the result of fewer implants offset by a higher amount of revenue per implant in the current year quarter.

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 seven implants in the third 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 in implants in the fourth quarter of 2017 relative~~incur significant additional expenses related to ~~the third quarter.~~

~~Revenue recognized per implant was $134,000 in the third quarter of 2017 compared~~sales, marketing, distribution and other commercial infrastructure to ~~$84,000 in the third quarter of 2016. The higher revenue per implant is due mainly to (i)~~commercialize such product. In addition, our product candidates, if approved, may not achieve commercial success. We incur significant costs associated with operating as 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. We expect our average revenue per implant for the remainder of 2017 to bepublic company 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,~~regulated industry.

Until such time, if ever, 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 $1,614,000, or 62%, from $2,615,000 in the third quarter 2016 to $1,001,000 in the third quarter of 2017. Cost of sales in the third quarter of 2017 included a charge 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 quarterscan generate substantial product revenues, we ~~expect~~anticipate that we will ~~continue~~seek to ~~keep~~fund 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 that we ship.

~~Research and development expense.~~~~Research and development expense increased by $238,000,~~operations through public or 15%, to $1,826,000 in the third quarter of 2017 as compared to $1,588,000 in 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,private equity or 16%, from $2,301,000 in the third quarter of 2016 to $1,933,000 in the third quarter of 2017. This decrease from the prior year is primarily attributable to $63,000 of higher people-related costs, including compensation, benefits and travel, offset in part by $387,000 of lower costs for supplies and product prototypes. While we expect research and development expense to remain fairly constant for the remainder of the year, we expect that research and development costs will increase in future periods as we continue to enhance our current products and develop new products.

~~Clinical and regulatory expense.~~~~Clinical and regulatory expense increased $20,000,~~debt financings, grants, collaborations, strategic partnerships or 3%, from $609,000 in the third quarter of 2016 to $629,000 in the third quarter of 2017. 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 new clinical trials to assess new products such as the Orion I, test further enhancements to our existing product, and begin new trials for better sighted patients.

~~Selling and marketing expense.~~Selling and marketing expense increased $113,000, or 5%, from $2,262,000 in the third quarter of 2016 to $2,375,000 in the third quarter of 2017. This increase in costs was primarily the result of $326,000 more in people 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 expectother sources. Accordingly, these costs to increase in the future as we increase our selling and marketing resources to accelerate the commercialization of our product, we expect selling and marketing expense to decrease over time when expressed as a percentage of product revenue.

~~General and administrative expense~~. General and administrative expense decreased $77,000, or 3%, from $2,605,000 in the third quarter of 2016 to $2,528,000 in the third quarter of 2017. This decrease is primarily attributable to decreases in patent costs, business insurance and bad debt expense offset, partially, by increases in people costs and outside legal expense. While we expect these costs to increase in the future, we expect general and administrative expense to decrease over time when expressed as a percentage of product revenue.

~~Comparison of the Nine Months Ended September 30, 2017 and 2016~~

~~Net Sales.~~Our net sales increased from $3,270,000 in the first nine months of 2016 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 inventory, as we sell our existing supply of 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.

~~Liquidity and Capital Resources~~

Our consolidated financial statements have been presented on the basis of our being a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We have experienced recurring operating losses and negative operating cash flows since inception, and have financed our working capital requirements through the recurring sale of our equity securities in both public and private offerings. As a result, our independent registered public accounting firm, in its report on our 2016 consolidated financial statements, has raisedfactors 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 need~~may be unable to raise additional ~~debt and/~~capital or ~~equity capital. However, there can be no assurances that we will be able to secure any~~enter into such ~~additional financing~~other arrangements when needed on ~~acceptable~~favorable terms ~~and conditions,~~ or at all. ~~If cash resources become insufficient to satisfy~~To 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 would~~common stockholders will be ~~required to scale back~~diluted, and the terms of these securities may include liquidation or ~~discontinue~~other 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 ~~that~~or licensing arrangements with third parties, we may ~~require us~~have 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 funds~~cash equivalents increased by ~~$2.4~~$14.0 million ~~or 22%,~~ from ~~$10.9~~$4.5 million atas of December 31, ~~2016~~2018 to ~~$13.3~~$18.5 million atas of September 30, ~~2017.~~2019. Working capital was ~~$11.6~~$13.2 million atas of September 30, ~~2017,~~2019, as compared to ~~$9.6~~$2.0 million atas of December 31, ~~2016,~~2018, an increase of ~~$2.0 million, or 21%.~~$11.2 million. We use our cash ~~money market funds~~and cash equivalents and working capital to fund our operating activities.

Cash Flows from Operating Activities

During the first nine months of ~~2017,~~2019, we used ~~$17.2~~$20.2 million of cash in operating activities, consisting primarily of a net loss of ~~$21.1~~$25.7 million, offset by non-cash charges which provided cash of ~~$1.5~~$4.5 million for depreciation and amortization of property and equipment, stock-based compensation, change in right of use assets, excess inventory reserve, ~~bad debt recovery~~impairment charge and ~~common stock issuable and increased~~ by a net change

in operating assets and liabilities which provided cash of ~~$2.4~~$1.0 million. During the first nine months of ~~2016,~~2018, we used ~~$18.1~~$22.1 million of cash in operating activities, consisting primarily of a net loss of ~~$22.8~~$26.2 million, offset by non-cash charges which provided cash of ~~$5.9~~$3.4 million for depreciation and amortization of property and equipment, stock-based compensation, bad debt ~~expense,~~recovery, excess inventory ~~reserves~~reserve and common stock issuable and ~~decreased~~ by a net change in operating assets and liabilities which provided cash of ~~$1.2~~$0.7 million.

Cash Flows from Investing Activities

~~During~~Cash used for investing activities in the first nine months of ~~2017, investing activities used $2.5 million of cash, reflecting $2.3 million used by the purchase of money market investments~~2019 was $394,000 and ~~$0.2 million used for the purchase of equipment. This compares to~~was $144,000 in 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~~2018 both for the purchase of property and equipment.

Cash Flows from Financing Activities

~~During~~Financing activities provided $34.6 million of cash in the first nine months of ~~2017, finance activities provided $19.9~~2019 consisting of $34.4 million of ~~cash, of which $19.7 million was~~net proceeds from the ~~Rights Offering~~rights offering and $0.2 million ~~was~~ from employee stock plan purchases. Financing activities provided ~~$20.3~~$19.4 million of cash in the first nine months of ~~2016,~~2018 consisting of ~~which $19.5~~$19.0 million ~~was provided by a Rights Offering~~in net proceeds from the sale of common stock and ~~$0.8~~$0.4 million from the exercise of ~~stock~~ options and warrants and employee stock plan purchases.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 3.

Quantitative and ~~Qualitative~~Qualitative Disclosures about Market Risk

Interest Rate Sensitivity

The primary objective of our investment activities is to maintain the safety of principal and preserve liquidity without incurring significant risk. We invest cash in excess of our current needs in money market funds. As of September 30, ~~2017,~~2019, our investments consisted solely of money market funds.

Exchange Rate Sensitivity

During the nine months ended September 30, ~~2017,~~2019, approximately ~~69%~~63% of our revenue was denominated in U.S. dollars ~~27%~~and 37% in ~~Euros, and 4% in Canadian dollars. In the same time period the~~Euros. The majority of our operating expenses were denominated in U.S. dollars. We have not entered into foreign currency forward contracts to hedge our operating expense exposure to foreign currencies, but we may do so in the future.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures as of September 30, ~~2017.~~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,~~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 Officer~~CFO 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:

●

~~Control over Financial Reporting~~~~. The Company does not have complete written documentation of its internal control policies, procedures and controls and has not fully completed its testing of its key controls. Management evaluated~~effective at the impact of its failure to have fully tested its internal controls and procedures and has concluded that the control deficiency that resulted represented a material weakness and that our internal control over financial reporting was not effective as of the end of the period covered by this Quarterly Report on Form 10-Q. We will continue to work on completing the documentation and testing of our internal controls.

●

~~Updating of Standard Costs.~~ It is a customary practice for manufacturing companies to update their standard costs on a regular basis (at least annually) to ensure that inventory costs are accurately and properly stated. During 2016, due to (i) the limited levels of production during the year, and (ii) the fact the Company had established reserves against approximately 61% of the cost of year-end inventory, which reserved for the cost of nearly all of the goods manufactured in 2016, the Company did not update its standard costs during fiscal 2016. The Company is currently reviewing it standard costs and expects to adjust its current standard costs before the end of 2017. The impact to the financial statements, taken as a whole, that would result from such an adjustment is expected to be immaterial.

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 have~~There has been ~~enacted pursuant to our remediation plan, there were~~ no ~~changes~~change in our internal control over financial reporting during the quarter ended September 30, ~~2017~~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.

PART II-OTHER INFORMATION

Item 1.

Legal Proceedings

~~Twenty-one~~Twenty-two oppositions have been filed by ~~a third-party~~third 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’s~~our ability to block competitors from utilizing some of its patented technology in Europe. ~~Management of the Company believes that~~We do not believe a successful challenge ~~or challenges~~ will ~~not~~ have a material effect on ~~the Company’s~~our ability to manufacture and sell ~~its~~our products, or otherwise have a material effect on ~~the Company’s~~our operations.

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

Item 1A.

Risk Factors

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 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 Center and Baylor College of Medicine, in May 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 or have:

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;

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

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

incurred non-cash impairment charges of approximately $2.6 million relating to Argus II inventory in the nine months ended September 30, 2019;

incurred cash severance and related expenses of approximately $700,000 in the nine months ended September 30, 2019 covering 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 will likely cause physicians or individuals who are eligible for Argus II to delay implantation of Argus II in favor of Orion which will adversely affect our Argus II sales and results of operations.

As a result of this transition from 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.

Our revenues for Argus II have decreased and we expect that they will continue to decrease as we sell through our remaining inventory and that our expenses will increase in connection with our ongoing activities, particularly as we expand and 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 that 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. A grace period of four years provides medical device companies the opportunity to be compliant with the new standard before May 2024. We anticipate being audited to this new standard by 2024.

Our CE Mark registration must be renewed on a periodic basis. Our CE Mark registration for the Argus II system expired on September 1, 2019. We commenced our recertification audit in June 2019 and expect to receive a recertification through May 2024. No assurance can be made that we will receive recertification. We currently have limited inventory of Argus II placed in the EU market prior to September 1, 2019, and anticipate being able to maintain our Argus II support outside the United States. Further, the Medical Device Single Audit Program (MDSAP) is a new multi-national standard adopted by Australia, Brazil, Canada, Japan and the United States. 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 believe we are able to support current Argus II users through Health Canada’s special access program, but no assurance of approval can be made.

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 and adversely 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.

Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any.

In order to obtain marketing approval for Orion we must demonstrate the safety and efficacy of Orion through clinical trials as well as additional supporting data. If Orion is associated with undesirable side effects in clinical trials or have characteristics that are unexpected, we may need to interrupt, delay or abandon Orion’s development, cause it to have reduced functionality, or limit development to more narrow uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. We are conducting at UCLA and Baylor a six subject initial feasibility clinical study of Orion, but we cannot guarantee that any positive results in this limited trial will successfully translate to a pivotal clinical trial. It is not uncommon to observe results in human clinical trials that are unexpected based on limited trials testing, and many product candidates fail in large clinical trials despite promising limited clinical trial results. Moreover, clinical data is often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials nonetheless failed to obtain marketing approval for their products. No assurance can be given that we will not encounter similar results in our Orion trials.

Human subjects in our clinical trials may suffer significant adverse events, tolerability issues or other side effects associated with the surgical implantation, chronic implantation, and chronic use of the Orion device. These events include, but are not limited to, the following (events that are also anticipated during or following explantation of the Orion device are identified with an asterisk (*)): intracranial hemorrhage*; subcutaneous hematoma*; vascular injury causing stroke or hemorrhage (e.g. injury to the superior sagittal sinus or posterior cerebral artery perforators)*; hydrocephalus*; intracranial hypotension or cerebrospinal fluid (CSF) leak*; headache or pain in the head, including deep pain*; tingling at the implant site*; brain edema*; infection*; meningitis*; implant site pain, swelling, discharge or effusion*; suture-related complications or stitch abscess*; skin erosion on and/or around the implant site; adverse tissue reaction to the implant; tissue damage at the implant/explant site*; cranial defect/bone damage*; decline in residual vision*; dizziness/syncope*; foreign body sensation at the implant site*; activation of motor or sensory neurons (e.g., muscle twitch); clinically symptomatic seizure*; development of epilepsy; coma*; death*; psychiatric events, including but not limited to mood changes, depression, suicidality, and psychosis*; neurological deficit, including but not limited to language (dysphemia), dysesthesias, paresis, paresthesia, visual field, motor deficit (including apraxia), and memory impairment*; drug hypersensitivity, adverse drug reaction, or therapeutic agent toxicity*; events related to any surgery and general anesthesia including cardiac risks, including stroke/transient ischemic attack, arrhythmia, cardiac arrest, and myocardial infarction*, venous thromboembolic (VTE) disease*; pneumonia*, urinary tract infection*, post-operative delirium*, postoperative constipation*, post-operative vomiting or nausea*, or post-operative fever*; injuries due to falls or bumps; skin irritation or burns; Orion system failure or malfunction; array migration; damage to the Orion electronics case; device interaction including the Orion device may interfere with the proper functioning of other electronic devices and emissions from other electronic equipment may interfere with the proper functioning of the Orion device; and (explant only) inability to remove all or part of the Orion device due to fibrosis or other reason.

No assurance can be given that we will not encounter adverse events in our Orion trials. The observed efficacy and extent of light perception and vision restoration for subjects implanted with Orion in our feasibility study may not be maintained over the long term, or may not be observed in a larger pivotal clinical trial. If general clinical trials of Orion fail to demonstrate efficacy to the satisfaction of regulatory authorities or do not otherwise produce positive results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of Orion.

For example, in June 2018, one subject in our Early Feasibility Study for Orion (“EFS”) experienced a seizure while in the clinic when we were evaluating a specific video stimulation algorithm. The seizure resolved quickly with medication and the subject was released from the clinic without need for hospitalization or further treatment. The subject was allowed to continue using the Orion device after the serious adverse event was reviewed by a safety committee for the study and clinicians at the implanting institution.

In addition, in January 2019 we observed higher impedance levels on 11 of 60 electrodes with the first EFS subject implanted with the Orion device in January 2018. As a result, some of these electrodes no longer generate a phosphene, or observable spot of light, for the subject. The subject continues to use the device and is continuing to participate in the clinical study. Mechanical and software safeguards are built into the device to avoid excessive electrical stimulation and, as a result, the higher impedance levels do not pose any known safety risks to the subject. Given the pattern of high impedances, we took the precaution of disabling half of the electrodes on the array to ensure that other potentially affected electrodes are not used. Root cause(s) for the higher impedance levels cannot be conclusively determined while the device remains implanted but could include any combination of the following: potential manufacturing defects, damage due to improper or excessive handling of the device, materials chosen for the design, and related processes. The first subject has been implanted with the device for 21 months, four subjects have been implanted for 17-19 months, and one subject for nine months. We currently have no indication that the issue exists with any of the Orion devices implanted in each of the other five EFS subjects. Prior to initiation of EFS, we subjected six Orion implants to accelerated aging tests and had no failures for what was the equivalent of up to 6.5 years.

In October 2019, we also observed changes to impedances (higher and lower) on most electrodes with the sixth EFS subject implanted with the device in January 2019. These impedance changes were coincident with a loss of most perception from the device, though there is no indication of a medical adverse event or a device defect. When examined again in November 2019 this sixth EFS subject showed improved perception and more normal impedances. We are currently investigating the possible root cause(s) for these changes, which may or may not be device related (i.e., may be subject related) and may or may not be permanent.

We cannot provide any assurance that we will not experience similar or other issues with any of the implanted Orion devices, be able to determine the root cause of the issue or to ascertain whether the issue is isolated or systemic in nature. Additional testing, investigation, design changes or mitigation activities may delay our plans to conduct additional clinical studies for Orion and/or our marketing approval and may have a material adverse effect on our business.

If device defects, significant adverse events or other side effects are observed in any of our future clinical trials, we may have difficulty recruiting subjects to the clinical trial, subjects may drop out of our trial, or we may be required to abandon the trial or our development efforts of that product candidate altogether. We, the FDA or other applicable regulatory authorities may suspend clinical trials of Orion at any time for various reasons, including a belief that subjects in such trials are being exposed to unacceptable health risks. Devices developed in the prosthesis industry that initially showed promise in early-stage studies have later been found to cause side effects that prevented their further development. Even if the side effects do not preclude Orion from obtaining or maintaining marketing approval, undesirable side effects may inhibit market acceptance of the approved product due to its actual or perceived safety and tolerability profile. Any of these developments could materially harm our business, financial condition and prospects.

Should Orion obtain marketing approval, adverse effects associated with it may also develop after such approval and could lead to requirements for conducting additional clinical safety trials, placing additional warnings in the labeling, imposing significant restrictions on Orion, or withdrawing the Orion from the market while further incurring attendant costs of explants and exposure to litigation. We cannot predict whether Orion will cause significant adverse effects in humans that would preclude or lead to the revocation of regulatory approval. However, any such event, were it to occur, would cause substantial harm to our business and financial condition and would result in the diversion of our management’s attention.

If we fail to maintain listing of our common stock on a national securities exchange, the price of our common stock and our ability to access the capital markets may be harmed.

Although we meet all other continued listing requirements, if we cannot demonstrate compliance with Nasdaq’s minimum $1.00 bid price per share requirement by January 20, 2020, Nasdaq will proceed with their process of delisting our securities. While we intend to maintain the listing of our common stock for trading on a national securities exchange, there can be no assurance that we will be able to do so without effecting a reverse split of our common stock.

If our common stock is delisted from a national securities exchange trading in our shares may likely be reduced or impaired, not only in the number of shares which could be purchased and sold, but also through possible delays in the timing of market transactions. We may also experience a reduction in our coverage by security analysts, a more limited following at investor conferences and by the news media, thereby resulting in lower demand for our shares, adverse publicity and a reduced interest in our company from investors, analysts and other market participants.

Securities that delist from national securities exchanges may continue to trade on the over-the-counter market but are generally less liquid than investments in securities trading on a national securities exchange. In addition, the trading of our common shares on the over-the-counter markets could have other negative implications, including the potential loss of confidence in us by suppliers, customers and employees and the loss of institutional investor interest in our common shares. These circumstances could further depress the trading price of our common shares and could also have a long-term adverse effect on our ability to raise capital which could impair our ability to fund Orion development through commercialization.

If shares of our common stock cease to be listed on a national exchange we will not be subject to compliance with rules requiring the adoption of certain corporate governance measures and as a result our stockholders may experience reduced protections.

Each of the New York Stock Exchange and the Nasdaq Stock Market LLC require the implementation of various measures relating to corporate governance for listed companies. These quantitative and qualitative measures are designed to enhance the integrity of corporate management and the securities markets and apply to securities which are listed on those stock exchanges. While we have adopted these measures, we will not be required to comply with many of the corporate governance provisions if our common stock is not listed on a national securities exchange. As a result, if we cease to be listed on national exchange and elect to cease compliance with any of the corporate governance measures required by national exchanges, our stockholders may lose protections afforded to listed companies.

If shares of our common stock cease to be listed on a national exchange they will become subject to the “penny stock” rules of the SEC and the trading market in our securities may become limited, which will make transactions in our stock cumbersome and may reduce the value of an investment in the stock.

Rule 15g-9 under the Exchange Act establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that is no longer trading on a national exchange and has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: (a) that a broker or dealer approve a person’s account for transactions in penny stocks; and (b) the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

In order to approve a person’s account for transactions in penny stocks, the broker or dealer must: (a) obtain financial information and investment experience objectives of the person and (b) make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form: (a) sets forth the basis on which the broker or dealer made the suitability determination; and (b) confirms that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our common stock.

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker or dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

If shares of our common stock cease to be listed on a national exchange our securities will not be eligible for federal preemption rights and be subject to state “blue sky” laws which may affect our capabilities of raising capital.

Each state has its own securities laws, often called “blue sky” laws, which (i) limit sales of securities to a state’s residents unless the securities are registered in that state or qualify for an exemption from registration, and (ii) govern the reporting requirements for broker-dealers doing business directly or indirectly in the state. Before a security is sold in a state, there must be a registration in place to cover the transaction, or the transaction must be exempt from registration. The applicable broker must be registered in that state. We do not know whether securities will be registered or exempt from registration under the laws of any state. If our securities cease to be listed on the national exchange, a determination regarding registration will be made by those broker-dealers, if any, who agree to serve as the market-makers for our common stock. Registering or qualifying shares with states can be time consuming. Compliance and regulatory costs may vary from state to state and may adversely affect future financings and our ability to raise capital.

If our common stock is delisted from national exchange some institutional investors may not be allowed to purchase our shares and may be required to liquidate their current positions in our stock which could negatively affect the price and volatility of our shares.

Institutional investors may be restricted by their investment policies from investing in shares of companies that are not listed on a national exchange and may be required to liquidate their positions if our securities are delisted from a national exchange. Liquidations, should they occur, may increase volatility and cause wide fluctuations and further declines in the prices of our securities.

Delisting of our common stock from national exchange can cause material dilution of our stock in future financings which can erode shareholder value.

If we are not able to maintain listing of our securities on Nasdaq, the trading prices of our securities may decline and we may need to sell larger amounts of our securities to obtain needed operating capital, possibly at prices which are at further discounts to the market or upon other terms that are less favorable to us, subjecting our shareholders to material dilution and losses to their investment.

Other Risk Factors

We incorporate herein by reference the risk factors ~~included~~described 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.~~19, 2019.

Item 2.

Unregistered Sales of ~~Equity~~Equity Securities and Use of Proceeds

None

~~Not applicable.~~

Item 3.

Defaults upon Senior Securities

None.

~~Not applicable.~~

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

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.

Item 6.~~Item 6.~~

Exhibits

EXHIBIT INDEX

Exhibit No.		Exhibit Description
~~3.1~~		~~Restated Articles of Incorporation of the Registrant. (1)~~
~~3.2~~		~~Amended and Restated Bylaws of the Registrant, as currently in effect. (1)~~
31.1		Certification of Principal Executive Officer of Second Sight Medical Products, Inc. pursuant to Section 302 of Sarbanes-Oxley Act of 2002.*
~~31.2~~
31.2		Certification of Principal Financial and Accounting Officer of Second Sight Medical Products, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
~~32.1~~
32.1		Certifications of Principal Executive Officer and Principal Financial and Accounting Officer of Second Sight Medical Products, Inc. pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
~~101.INS~~
101.INS		XBRL Instant Document.*
~~101.SCH~~
101.SCH		XBRL Taxonomy Extension Schema Document.*
~~101.CAL~~
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.*
~~101.DEF~~
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.*
~~101.LAB~~
101.LAB		XBRL Taxonomy Extension Label Linkbase Document.*

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.*

*	~~Included herein.~~

(1) Incorporated by reference to the registrant’s registration statement on Form S-1, file no. 333-198073, originally filed with the Securities and Exchange Commission on August 12, 2014, as amended.

28 *	Included herein.

~~SIGNATURES~~

SIGNATURES

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

Name	Title	Date

/s/ J~~Jonathan Will McGuire~~onathan Will McGuire	Chief Executive Officer and Director	November 3,~~2017~~14 , 2019
Jonathan Will McGuire	(Principal Executive Officer)

/s/ J~~Thomas B. Miller~~ohn T. Blake	Chief Financial Officer	November 314 ,~~2017~~ 2019
~~Thomas B. Miller~~ John T. Blake	(Principal Financial and Accounting Officer)

Large accelerated filer ☐	☐	Accelerated filer ☒	☐
Non-accelerated filer ☐	~~(Do not check if a smaller reporting company)~~ ☐	Smaller reporting company ☐	☒
Emerging growth company	☒

	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

	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

Beginning balance as of December 31, 2018

Consideration received in advance of revenue recognition

Revenue recognized

Ending balance as of September 30, 2019