UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017March 31, 2020
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to ________
Commission File Number 333-198073 001-36747
Second Sight Medical Products, Inc.
(Exact name of Registrant as specified in its charter)
California | 02-0692322 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
12744 San Fernando Road, Suite 400, Sylmar, CA 91342
(Address of principal executive offices, including zip code)
(818) 833-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock | EYES | NASDAQ | ||
Warrants | EYESW | NASDAQ |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ☐ | Accelerated filer | ☐ | |
Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐
As of November 3, 2017,June 25, 2020, the issuerregistrant had 56,806,35223,118,233 shares of common stock, issuedno par value per share and 7,682,244 warrants, outstanding.
As previously disclosed in the Current Report on Form 8-K filed by Second Sight Medical Products, Inc. (the “Company”) with the Securities and Exchange Commission (the “SEC”) on May 12, 2020, the filing of this Quarterly Report on Form 10-Q for the period ended March 31, 2020 (this “Form 10-Q”) was delayed due to circumstances related to the ongoing COVID-19 global pandemic. In compliance with local governmental “shelter in place” measures and to limit the risk of exposure to and transmission of the SARS-CoV-2 virus, which causes COVID-19, access to the Company’s facilities has been restricted and the Company’s employees have a minimal presence in its offices for essential activities. These restrictions caused limited access to the Company’s facilities and disrupted normal interactions among the Company’s accounting personnel and other staff, all of which slowed the completion of the Company’s quarterly review and preparation of the Form 10-Q. Accordingly, the Company’s ability to complete its quarterly review and to prepare and file the Form 10-Q by the original SEC filing deadline had been hampered. As a result, the Company relied on the “Order under Section 36 of the Securities Exchange Act of 1934 Modifying Exemptions From the Reporting and Proxy Delivery Requirements for Public Companies” dated March 25, 2020 (Release No. 34-88465) issued by the SEC to delay the filing of this Form 10-Q.
SECOND SIGHT MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
FormFORM 10-Q for the Quarter Ended September 30, 2017
INDEXTABLE OF CONTENTS
PART I | |||
Item 1. | |||
| |||
5 | |||
6 | |||
7 | |||
8 | |||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 20 | |
Item 3. | 27 | ||
Item 4. | 27 | ||
PART II | |||
Item 1. | 28 | ||
Item 1A. | 28 | ||
Item 2. | 32 | ||
Item 3. | 32 | ||
Item 4. | 32 | ||
Item 5. | 32 | ||
Item 6. | 33 | ||
34 |
3
SECOND SIGHT MEDICAL PRODUCTS, INC.
AND SUBSIDIARYPart I. Financial Statements
Condensed Consolidated Balance Sheets
(In thousands)
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 639 | $ | 539 | ||||
Money market funds | 12,705 | 10,336 | ||||||
Accounts receivable, net | 668 | 274 | ||||||
Inventories, net | 3,245 | 3,416 | ||||||
Prepaid expenses and other current assets | 462 | 717 | ||||||
Total current assets | 17,719 | 15,282 | ||||||
Property and equipment, net | 1,327 | 1,489 | ||||||
Deposits and other assets | 35 | 39 | ||||||
Total assets | $ | 19,081 | $ | 16,810 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 826 | $ | 1,156 | ||||
Accrued expenses | 2,330 | 2,088 | ||||||
Accrued compensation expense | 2,266 | 1,600 | ||||||
Accrued clinical trial expenses | 623 | 629 | ||||||
Deferred revenue | 64 | 85 | ||||||
Deferred grant revenue | — | 104 | ||||||
Total current liabilities | 6,109 | 5,662 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, no par value, 10,000 shares authorized; none outstanding | — | — | ||||||
Common stock, no par value; 200,000 shares authorized; shares issued and outstanding: 56,806 and 42,701 at September 30, 2017 and December 31, 2016, respectively | 200,867 | 186,769 | ||||||
Common stock to be issued | 86 | 153 | ||||||
Additional paid-in capital | 39,559 | 30,697 | ||||||
Notes receivable to finance stock option exercises | — | (2 | ) | |||||
Accumulated other comprehensive loss | (572 | ) | (608 | ) | ||||
Accumulated deficit | (226,968 | ) | (205,861 | ) | ||||
Total stockholders’ equity | 12,972 | 11,148 | ||||||
Total liabilities and stockholders’ equity | $ | 19,081 | $ | 16,810 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Item 1. Financial Statements
SECOND SIGHT MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(in thousands)
|
| March 31, |
|
| December 31, |
| ||
|
| 2020 |
|
| 2019 |
| ||
|
| (unaudited) |
|
|
|
|
| |
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 2,339 |
|
| $ | 11,327 |
|
Accounts receivable, net |
|
| — |
|
|
| 455 |
|
Inventories, net |
|
| — |
|
|
| 1,029 |
|
Assets held-for-sale |
|
| 400 |
|
|
| — |
|
Prepaid expenses and other current assets |
|
| 926 |
|
|
| 299 |
|
Total current assets |
|
| 3,665 |
|
|
| 13,110 |
|
Property and equipment, net |
|
| 232 |
|
|
| 1,122 |
|
Right-of-use assets |
|
| — |
|
|
| 2,342 |
|
Deposits and other assets |
|
| 7 |
|
|
| 25 |
|
Total assets |
| $ | 3,904 |
|
| $ | 16,599 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY) |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 1,588 |
|
| $ | 1,093 |
|
Accrued expenses |
|
| 1,575 |
|
|
| 1,889 |
|
Accrued compensation expense |
|
| 885 |
|
|
| 2,698 |
|
Accrued clinical trial expenses |
|
| 733 |
|
|
| 707 |
|
Current operating lease liabilities |
|
| 106 |
|
|
| 237 |
|
Contract liabilities |
|
| 335 |
|
|
| 335 |
|
Total current liabilities |
|
| 5,222 |
|
|
| 6,959 |
|
Long term operating lease liabilities |
|
| — |
|
|
| 2,365 |
|
Total liabilities |
|
| 5,222 |
|
|
| 9,324 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Stockholders’ equity (deficiency): |
|
|
|
|
|
|
|
|
Preferred stock, no par value, 10,000 shares authorized; none outstanding |
|
| — |
|
|
| — |
|
Common stock, no par value; 300,000 shares authorized; shares issued and outstanding: 15,657 and 15,643 as of March 31, 2020 and December 31, 2019, respectively |
|
| 264,003 |
|
|
| 264,008 |
|
Additional paid-in capital |
|
| 48,892 |
|
|
| 48,613 |
|
Accumulated other comprehensive loss |
|
| (543 | ) |
|
| (562 | ) |
Accumulated deficit |
|
| (313,670 | ) |
|
| (304,784 | ) |
Total stockholders’ equity (deficiency) |
|
| (1,318 | ) |
|
| 7,275 |
|
Total liabilities and stockholders’ equity (deficiency) |
| $ | 3,904 |
|
| $ | 16,599 |
|
See accompanying notes.
4
SECOND SIGHT MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
Condensed Consolidated Statements of Operations (Unaudited)(unaudited)
(Inin thousands, except per share data)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net sales | $ | 1,610 | $ | 1,180 | $ | 4,855 | $ | 3,270 | ||||||||
Cost of sales | 1,001 | 2,615 | 3,255 | 6,768 | ||||||||||||
Gross profit (loss) | 609 | (1,435 | ) | 1,600 | (3,498 | ) | ||||||||||
Operating expenses: | ||||||||||||||||
Research and development, net of grants | 1,826 | 1,588 | 5,622 | 3,266 | ||||||||||||
Clinical and regulatory | 629 | 609 | 1,927 | 1,955 | ||||||||||||
Selling and marketing | 2,375 | 2,262 | 7,057 | 6,473 | ||||||||||||
General and administrative | 2,528 | 2,605 | 8,170 | 7,635 | ||||||||||||
Total operating expenses | 7,358 | 7,064 | 22,776 | 19,329 | ||||||||||||
Loss from operations | (6,749 | ) | (8,499 | ) | (21,176 | ) | (22,827 | ) | ||||||||
Interest income | 33 | 10 | 69 | 18 | ||||||||||||
Net loss | $ | (6,716 | ) | $ | (8,489 | ) | $ | (21,107 | ) | $ | (22,809 | ) | ||||
Net loss per common share – basic and diluted | $ | (0.12 | ) | $ | (0.20 | ) | $ | (0.40 | ) | $ | (0.57 | ) | ||||
Weighted average common shares outstanding – basic and diluted | 56,799 | 42,220 | 53,206 | 39,929 |
The accompanying notes are an integral part of these condensed consolidated financial statements
|
| Three Months Ended March 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Net sales |
| $ | — |
|
| $ | 1,128 |
|
Cost of sales |
|
| — |
|
|
| 731 |
|
Gross profit |
|
| — |
|
|
| 397 |
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Research and development, net of grants |
|
| 3,887 |
|
|
| 2,183 |
|
Clinical and regulatory, net of grants |
|
| 914 |
|
|
| 1,006 |
|
Selling and marketing |
|
| 701 |
|
|
| 2,103 |
|
General and administrative |
|
| 2,021 |
|
|
| 2,449 |
|
Restructuring charges |
|
| 1,381 |
|
|
| 2,424 |
|
Total operating expenses |
|
| 8,904 |
|
|
| 10,165 |
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
| (8,904 | ) |
|
| (9,768 | ) |
Interest income |
|
| 18 |
|
|
| 68 |
|
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (8,886 | ) |
| $ | (9,700 | ) |
|
|
|
|
|
|
|
|
|
Net loss per common share – basic and diluted |
| $ | (0.57 | ) |
| $ | (0.80 | ) |
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – basic and diluted |
|
| 15,649 |
|
|
| 12,071 |
|
See accompanying notes.
5
SECOND SIGHT MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
Condensed Consolidated Statements of Comprehensive Loss (Unaudited)(unaudited)
(Inin thousands)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net loss | $ | (6,716 | ) | $ | (8,489 | ) | $ | (21,107 | ) | $ | (22,809 | ) | ||||
Other comprehensive income (loss): | ||||||||||||||||
Foreign currency translation adjustments | (86 | ) | 34 | 36 | 57 | |||||||||||
Comprehensive loss | $ | (6,802 | ) | $ | (8,455 | ) | $ | (21,071 | ) | $ | (22,752 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
|
| Three Months Ended March 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Net loss |
| $ | (8,886 | ) |
| $ | (9,700 | ) |
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
| 19 |
|
|
| (8 | ) |
Comprehensive loss |
| $ | (8,867 | ) |
| $ | (9,708 | ) |
See accompanying notes.
6
SECOND SIGHT MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)(Deficiency) (unaudited)
(Inin thousands)
|
|
| Common Stock |
|
|
| Additional Paid-in |
|
|
| Accumulated Other Comprehensive |
|
| Accumulated |
|
|
| Total Stockholders’ |
| |||||||||
|
|
| Shares |
| Amount |
|
|
| Capital |
|
|
| Loss |
|
| Deficit |
|
|
| Equity |
| |||||||
Balance, December 31, 2018 |
|
| 9,542 |
|
| $ | 229,019 |
|
| $ | 44,111 |
|
| $ | (575 | ) |
| $ | (269,471 | ) |
| $ | 3,084 |
| ||||
Adoption of ASC Topic 842-Leases |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (144 | ) |
|
| (144 | ) | ||||
Issuance of shares of common stock and warrants in connection with rights offering, net of issuance costs |
|
| 5,976 |
|
|
| 34,399 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 34,399 |
| ||||
Release of restricted stock units |
|
| 7 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||
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 |
|
| 15,525 |
|
| $ | 263,418 |
|
| $ | 46,586 |
|
| $ | (583 | ) |
| $ | (280,892 | ) |
| $ | 28,529 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
| Common Stock |
|
|
| Additional Paid-in |
|
|
| Accumulated Other Comprehensive |
|
| Accumulated |
|
|
| Total Stockholders’ |
| |||||||||
|
|
| Shares |
|
|
| Amount |
|
|
| Capital |
|
|
| Loss |
|
| Deficit |
|
|
| Equity(Deficiency) |
| |||||
Balance, December 31, 2019 |
|
| 15,643 |
|
| $ | 264,008 |
|
| $ | 48,613 |
|
| $ | (562 | ) |
| $ | (304,784 | ) |
| $ | 7,275 |
| ||||
Repurchase of fractional shares in connection with reverse stock split |
|
| (2 | ) |
|
| (11 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (11 | ) | ||||
Issuance of shares of common stock |
|
| 1 |
|
|
| 6 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6 |
| ||||
Release of restricted stock units |
|
| 15 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| 279 |
|
|
| — |
|
|
| — |
|
|
| 279 |
| ||||
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (8,886 | ) |
| (8,886 | ) | |||||
Foreign currency translation adjustment |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 19 |
|
|
| — |
|
|
| 19 |
| ||||
Balance, March 31, 2020 |
|
| 15,657 |
|
| $ | 264,003 |
|
| $ | 48,892 |
|
| $ | (543 | ) |
| $ | (313,670 | ) |
| $ | (1,318 | ) | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2017 and 2016See accompanying notes.
7
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 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
SECOND SIGHT MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Inin thousands)
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (21,107 | ) | $ | (22,809 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization of property and equipment | 345 | 311 | ||||||
Stock-based compensation | 2,821 | 2,581 | ||||||
Bad debt (recovery) expense | (128 | ) | 191 | |||||
Excess inventory (recovery) reserve | (1,731 | ) | 2,611 | |||||
Common stock issuable for services | 195 | 206 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (311 | ) | 874 | |||||
Inventories | 1,955 | (166 | ) | |||||
Prepaid expenses and other assets | 261 | 492 | ||||||
Accounts payable | (299 | ) | (16 | ) | ||||
Accrued expenses | 233 | (377 | ) | |||||
Accrued compensation expenses | 668 | (15 | ) | |||||
Accrued clinical trial expenses | (6 | ) | (61 | ) | ||||
Deferred revenue | (25 | ) | (135 | ) | ||||
Deferred grant revenue | (104 | ) | (1,741 | ) | ||||
Net cash used in operating activities | (17,233 | ) | (18,054 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchases of property and equipment | (181 | ) | (406 | ) | ||||
Investment in money market funds | (2,362 | ) | (1,820 | ) | ||||
Net cash used in investing activities | (2,543 | ) | (2,226 | ) | ||||
Cash flows from financing activities: | ||||||||
Net proceeds from rights offering | 19,688 | 19,483 | ||||||
Proceeds from repayment of note receivable | 2 | — | ||||||
Proceeds from exercise of options and employee stock plan purchases | 189 | 816 | ||||||
Net cash provided by financing activities | 19,879 | 20,299 | ||||||
Effect of exchange rate changes on cash | (3 | ) | 19 | |||||
Cash: | ||||||||
Net increase | 100 | 38 | ||||||
Balance at beginning of period | 539 | 239 | ||||||
Balance at end of period | $ | 639 | $ | 277 | ||||
Supplemental cash flow information: | ||||||||
Non-cash financing and investing activities: | ||||||||
Fair value of stock options issued for services rendered in connection with rights offering | $ | 20 | $ | 53 |
The accompanying notes are integral part of these condensed consolidated financial statements.
|
| Three Months Ended March 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
|
| (unaudited) |
| |||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
| $ | (8,886 | ) |
| $ | (9,700 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 106 |
|
|
| 99 |
|
Stock-based compensation |
|
| 279 |
|
|
| 898 |
|
Non-cash lease expense |
|
| 3 |
|
|
| 6 |
|
Restructuring charges-inventory and fixed asset impairment |
|
| 1,115 |
|
|
| 2,424 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| 455 |
|
|
| (95 | ) |
Inventories |
|
| (112 | ) |
|
| (786 | ) |
Prepaid expenses and other assets |
|
| (610 | ) |
|
| 236 |
|
Accounts payable |
|
| 497 |
|
|
| 297 |
|
Accrued expenses |
|
| 286 |
|
|
| (57 | ) |
Accrued compensation expenses |
|
| (1,813 | ) |
|
| (609 | ) |
Accrued clinical trial expenses |
|
| 26 |
|
|
| 84 |
|
Contract liabilities |
|
| — |
|
|
| 53 |
|
Net cash used in operating activities |
|
| (8,654 | ) |
|
| (7,150 | ) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
| (331 | ) |
|
| (37 | ) |
Net cash used in investing activities |
|
| (331 | ) |
|
| (37 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net proceeds from sale of common stock and/or warrants |
|
| 6 |
|
|
| 34,399 |
|
Repurchase of fractional shares in connection with reverse stock split |
|
| (11 | ) |
|
| — |
|
Net cash (used in) provided by financing activities |
|
| (5 | ) |
|
| 34,399 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
| 2 |
|
|
| (1 | ) |
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Net increase (decrease) |
|
| (8,988 | ) |
|
| 27,211 |
|
Balance at beginning of period |
|
| 11,327 |
|
|
| 4,471 |
|
Balance at end of period |
| $ | 2,339 |
|
| $ | 31,682 |
|
See accompanying notes.
8
SECOND SIGHT MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and Nine Months Ended September 30, 2017 and 2016(unaudited)
1. Organization and Business Operations
Second Sight Medical Products, Inc. (“Second Sight”Sight,” “we,” “us,” or “the Company”), formerly Second Sight LLC, was founded in 1998 as a limited liability company and was subsequently incorporated in the State of California in 2003. Second Sight develops manufactures and markets implantable prosthetic devices that can restore some functional visionvisual prosthetics to patients blinded by outer retinal degenerations, such as Retinitis Pigmentosa.
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, and more recently for the research of future technologies. As the laws of Switzerland require at least two corporate stockholders, Second Sight Medical Products (Switzerland) SarlSàrl is 99.5% owned directly by the Companyus and 0.5% is owned by an executive of Second Sight who is acting as a nominee of the Company.March 31, 2020. Accordingly, Second Sight Medical Products (Switzerland) SarlSàrl is considered 100% owned for financial statement purposes and is consolidated with Second Sight for all periods presented.
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. The FDA granted Breakthrough Devices Program designation for Orion. 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”).
SinceOur first product that was commercially approved, 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 no longer market the Argus II and have focused all of our resources on the development of Orion.
In March 2020, we were severely adversely impacted by the COVID-19 pandemic and its related effects on our ability to finance our planned activities. As a result, we significantly reduced our staff and expenses and conserved liquidity as we continue operations and explore strategic options. These options include securing additional funding and exploring business alternatives that may include partnering, acquiring, investing in or combining with businesses that may or may not be in a related industry. No assurances can be given that any of these initiatives will occur.
Liquidity and Going Concern
From inception, our operations have been funded primarily through the Company hassales 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 andour Argus II product. Funding of our business since 2017 has financed its operationsbeen primarily through the issuanceprovided by:
• | Issuance of shares of common stock on May 5, 2020 which provided net proceeds of approximately $6.6 million. |
Issuance of common stock convertible debt (which has been converted into common stock), and grants primarily from government agencies.
On March 6, 2017, the Company successfully completedwarrants in a registered Rights Offering to existing stockholders raisingin February 2019 which provided $34.4 million of net cash proceeds
Issuances of common stock through our At Market Issuance Sales Agreement during the fourth quarter of 2019 which provided $0.1 million of net cash proceeds
Issuances of common stock through our At Market Issuance Sales Agreement during the first quarter of 2018, which provided $4.0 million of net cash proceeds
Issuances of common stock via stock purchase agreements in May, August, October and December 2018, which provided net cash proceeds of $22.0 million
Revenue of $3.4 million and $6.9 million, for the years ended December 31, 2019 and 2018, respectively, generated by sales of our Argus II product
On May 5, 2020, we closed our underwritten public offering of 7,500,000 shares of common stock at an offering price of $1.00 per share for aggregate net proceeds of approximately $19.7$6.6 million.
We received an award for $1.6 million grant (with the intent to fund $6.4 million over five years subject to annual review and approval) from the National Institutes of Health (NIH) to fund the “Early Feasibility Clinical Trial of a Visual Cortical Prosthesis” that commenced in January 2018. Our second year grant was recently approved under this grant. As of March 31, 2020 we recorded $0.3 million of deferred grant costs, included in prepaid expenses and other current assets, associated with this grant which it sold 13.7were offset with the related grant funds when received in April 2020.
9
On September 17, 2019, we received a $2.4 million, Units at $1.47 per Unit, which wasfour-year grant from the closing priceNational 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 (APL), 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. APL is the primary recipient of the Company’s common stockgrant. We have suspended our activities on that date.the project until we clarify our future plans.
In a rights offering completed on February 22, 2019, we sold approximately 5,976,000 million units, each priced at $5.792 for net proceeds of approximately $34.4 million. Each Unitunit consisted of a share of the Company’s common stock and a warrant to purchase an additional share of the Company’s stock for $1.47. The warrants have a five-year life and trade on Nasdaq under the symbol EYESW. At the Company’s discretion, the warrants are redeemable on 30 days’ notice (i) at any time 24 months after the date of issuance, (ii) if the shares of its common stock are trading at 200% or higher than the Subscription Price for 15 consecutive trading days and (iii) if all of the independent directors vote in favor of redeeming the warrants. Holders may be able to sell or exercise warrants prior to any announced redemption date and the Company will redeem outstanding warrants not exercised by the announced redemption date for a nominal amount of $0.01 per Warrant. The Company deemed it appropriate not to record the liability for this warrant redemption amount as the probability of any redemptions was deemed remote based upon its terms. For purposes of recording this transaction, the Company allocated the proceeds from the offering between the common stock and warrants issued based on their relative fair values on the date of issuance. The fair value used for the common stock was the closing price of the stock of $1.47 on March 6, 2017. The fair value used for the warrants was their Black-Scholes value of $0.64 per warrant, calculated as of March 6, 2017. Accordingly, the relative fair value assigned to the common stock was $1.02 perone share and the relative fair value assigned 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 atone immediately exercisable warrant having an exercise price that is less than the fair valueof $11.76 per share. Entities controlled by Gregg Williams, our Chairman of the stock, thenBoard of Directors, acquired approximately 5,180,000 million units in the weighted average shares outstandingoffering for an aggregate investment of approximately $30 million.
In November 2017, we entered into an At Market Issuance Sales Agreement (“Sales Agreement”) with B. Riley FBR Inc. and basicH.C. Wainwright & Co., LLC, as agents (“Agents”) pursuant to which we offered and diluted earnings per share shall be adjusted retroactivelysold, from time to reflect the bonus elementtime through either of the rightsAgents, shares of our common stock having an aggregate offering for all periods presented. The Company determined thatprice as set forth in the applicationSales Agreement and a related prospectus supplement filed with the SEC. We agreed to pay the Agents a cash commission of this specific provision3.0% of ASC 260 was immaterial to previously issued financial statementsthe aggregate gross proceeds from each sale of shares under the Sales Agreement. During January and therefore, did not retroactively adjust previously reported weighted averageFebruary 2018, we sold approximately 278,000 shares outstanding and basic and diluted earnings per share.of common stock which provided net proceeds of $4.0 million under the Sales Agreement. During December 2019, we sold approximately 17,000 shares of common stock which provided net proceeds of $0.1 million under the Sales Agreement. In April 2020, we terminated the Sales Agreement with the Agents.
The Company’sOur financial statements have been presented on the basis that itsour business is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company isWe are subject to the risks and uncertainties associated with a business with one product line and limited commercial product revenues,no revenue that is developing a novel medical device, including limitations on itsour operating capital resources and uncertain demand for its products. The Company hasresources. We have incurred recurring operating losses and negative operating cash flows since inception, and expectswe expect to continue to incur operating losses and negative operating cash flows for at leastthe foreseeable future.
As more fully described in Note 11, we have been notified by the Nasdaq stock market regarding our non-compliance with the continued listing requirement on the Nasdaq capital market pursuant to its listing rules, and therefore we could be subject to delisting if we do not regain compliance within the compliance period (or the compliance period as may be extended).
Based upon our current plans we do not have sufficient funds to support our operations for the next several years as a result12 months from the date of which, management has concluded that there isissuance of these financial statements. Accordingly, these and other related factors raise substantial doubt about the Company’sour ability to continue as a going concern. We anticipate that we will seek to additionally fund our operations through public or private equity or debt financings, grants, collaborations, strategic partnerships or other sources. However, we may be unable to raise additional capital or enter into such other arrangements when needed on favorable terms or at all. If we are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay or discontinue one or more of our research or development programs or any other approved product candidates, or we may be unable to maintain our current limited operations, maintain our current organization and reduced employee base or otherwise capitalize on our business opportunities, as desired, which could materially and adversely affect our business, financial condition and results of operations. The Company’saccompanying financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
Our independent registered public accounting firm, in its report on the Company’s 2016our 2019 consolidated financial statements, has also raised substantial doubt about the Company’sour ability to continue as a going concern.
The Company believes that it has sufficient funds to last through the first quarter of 2018. To continue business operations beyond that point, the Company will need to raise additional debt and/or equity capital. However, there can be no assurances that the Company will be able to secure any such additional financing on acceptable terms and conditions, or at all so as to be able to continue operating its business at current levels past the first quarter of 2018. If cash resources become insufficient to satisfy the Company’s ongoing cash requirements, the Company would be required to scale back or discontinue its technology and product development programs and/or clinical trials, or obtain funds, if available (although there can be no certainty), through strategic alliances that may require the Company to relinquish rights to its products, or to discontinue its operations entirely.
2. Basis of Presentation, Significant Accounting Policies and Recent Accounting Pronouncements
Basis of Presentation
The accompanyingThese unaudited condensed consolidatedinterim financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) and following the rules and regulationsrequirements 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 disclosuresthat are normally included inrequired 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 fromprepared on the Company’ssame basis as the audited consolidated financial statements.
In the opinion of management, these financial statements reflectand 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 consolidatedour financial statements includedand accompanying notes for the fiscal year ended December 31, 2019, contained in the Company’sour Annual Report on Form 10-K forfiled with the year ended December 31, 2016. OperatingSEC on March 19, 2020. The results forof the interim periods are not necessarily indicative of operatingthe results expected for an entirethe full fiscal year or any other interim period or any future periods.year or period.
10
Significant Accounting PoliciesOn December 31, 2019 we effected a reverse stock split of the outstanding shares of our no par value common stock and outstanding warrants to purchase our common stock by a ratio of 1-for-8 (1:8). The common stock and warrants began trading on the Nasdaq Capital Market on a split-adjusted basis on January 6, 2020.
The Company’saccompanying consolidated financial statements and notes thereto give retrospective effect to the reverse stock split for all periods presented. All issued and outstanding common stock, options and warrants exercisable for common stock, restricted stock units, and per share amounts contained in our consolidated financial statements have been retrospectively adjusted.
Significant Accounting Policies
Segment Reporting. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. Our chief operating decision-maker reviews financial information presented on a consolidated basis. Accordingly, we consider ourselves to be in a single reporting segment, specifically the discovery, development and commercialization of visual cortical prosthetics for profoundly blind individuals. We historically managed our Argus II and Orion programs on a consolidated basis within this single operating segment and do not assess the performance of our product lines or geographic regions on other measures of income or expense, such as program expense, operating income or net income. Our underlying technology consists of hardware components (implanted and wearable) and software. A vast majority of this underlying technology is shared between our Argus II and Orion branded systems. While we have ceased marketing the Argus II product indicated for individuals with retinitis pigmentosa, we are developing Orion as a next generation product with potential to treat a broader market of blind individuals, including the retinitis pigmentosa market.
Based upon our decision on May 10, 2019 to accelerate our transition to the Orion platform and suspend production of Argus, we recorded impairment charges of $2.4 million related to inventory of Argus II in the three months ended March 31, 2019. As part of this transition we commenced a corporate restructuring plan to focus on development of Orion and other key research projects. On March 31, 2020, due to the COVID-19 pandemic and related inability to secure additional funding, we laid off the majority of our employees and reduced our operating expenses significantly to allow for our continuing business operations. Due to our focus on Orion and wind down of selling and marketing activities related to Argus II, we recorded further impairment charges to our inventory of $0.5 million. In addition, we recorded an impairment of $0.7 million to our fixed assets used primarily for Argus activities and $0.2 million in severance payments all of which were paid in May 2020. We continue to advance the development of our Orion technology and are exploring various strategic options, however we cannot assure that any of these endeavors will yield satisfactory results or that we will be able to maintain our operations.
Our significant accounting policies are set forth in Note 2 of the financial statements in itsour Annual Report on Form 10-K for the year ended December 31, 2016.2019.
Net Operating Loss Carryforwards
As of December 31, 2016 pursuant to an analysis done under Section 382, Limitations on Net Operating Losses, of the Internal Revenue Code of 1986, as amended, the Company had $142.3 million and $93.8 million of federal and state operating loss carryforwards, respectively, with which to offset any future taxable income. The federal and state net operating loss carryforwards will begin to expire at various dates from 2016 through 2036. If these loss carryforwards are unavailable for use in future periods, the Company’s results of operations and financial position may be adversely affected.
The Company experienced an “ownership change” within the meaning of Section 382(g) of the Internal Revenue Code of 1986, as amended, during the second quarter of 2017. The ownership change will subject the Company’s net operating loss carryforwards to an annual limitation, which will significantly restrict the Company’s ability to use them to offset taxable income in periods following the ownership change. In general, the annual use limitation equals the aggregate value of the Company’s 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.
RecentRecently Issued 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 deferred the effective date of ASU 2014-09, ASU No. 2016-08-Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net),ASU No. 2016-10-Revenue fromContracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, ASU No. 2016-12-Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, and ASU No. 2016-20-Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The above subsequent ASUsdid not change the core principle of the guidance in ASU 2014-09. The ASUs referred to above collectively will supersede and replace the revenue recognition requirements in ASC Topic 605-Revenue Recognition, and most of the related industry specific guidance and replace them with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”).
The core principle in ASC 606 is that revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:
Step 1: Identify the contract(s) with a customer
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
ASU 2014-09 also creates ASC Subtopic 340-40-Other Assets and Deferred Costs-Contracts with Customers (“ASC 340-40”), which requires an entity to recognize an asset for certain types of costs related to a contract with a customer within the scope of ASC 606 and amortize the asset over a period consistent with the transfer of the goods and services to which the asset relates. Specifically, the costs required to be capitalized are (a) incremental costs of obtaining a contract with a customer and (b) costs incurred in fulfilling a contract with a customer that are not in the scope of another ASC Topic.
ASC 606 and ASC 340-40 (the “new accounting standards”) require the Company to make significant judgments and estimates. The new accounting standards also require more extensive disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
The Company will adopt the new accounting standards as of January 1, 2018 using the modified retrospective transition method, in which the two new accounting standards are applied retrospectively with the cumulative effect of initially applying the new accounting standards as an adjustment to the opening balance of retained earnings at January 1, 2018, the date of initial adoption. In accordance with the modified retrospective transition method, the Company will apply the new guidance retrospectively only to contracts that are not completed contracts at January 1, 2018.
Also in accordance with the modified retrospective transition method, the Company will provide additional disclosures in its financial statements for each of the quarterly and annual reporting periods in 2018 of (a) the amount by which each financial statement line item is affected in the reporting period by the application of the new accounting standards as compared to the accounting guidance that was in effect before the change, and (b) an explanation of the reasons for significant changes identified.
The Company completed an initial assessment of adoption of ASC 606, and is currently in the process of updating that assessment to reflect changes in contractual terms and the Company’s customary business practices since completion of the initial assessment. The Company is also assessing the ASC 606 revenue recognition policy related to a new type of revenue arrangement the Company entered into subsequent to September 30, 2017 which is expected to generate revenue in the fourth quarter of 2017.
The Company has not yet estimated the financial statement impact of the expected changes due to the adoption of ASC 606. The Company expects to complete its assessment during the fourth quarter of 2017 and will adopt the new accounting standards effective January 1, 2018.
Management doesWe 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 Companyus to concentrations of credit risk consist primarily of cash, money market funds, and trade accounts receivable. The Company maintainsWe 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 extendswe deem reputable. We extended differing levels of credit to our customers, and typically doesdid not require collateral.
Customer Concentration
The Company also maintains a cash balance at a bank in Switzerland, which is insured up to an amount specifiedfollowing tables provide information about disaggregated revenue by service type, customer and geographical market.
11
The following table shows our revenues by customer type during the deposit insurance agency of Switzerland.three months ended March 31, 2020 and 2019:
Customer Concentration
|
| Three Months Ended March 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Direct customers |
| $ | — |
|
| $ | 946 |
|
Indirect customers (distributors) |
|
| — |
|
|
| 182 |
|
Total |
| $ | — |
|
| $ | 1,128 |
|
During the three and nine months ended September 30, 2017March 31, 2020 and 2016,2019, the following customers each comprised moregreater than 10% of our total revenues (unaudited):
Three Months September 30, 2017 | Three Months September 30, 2016 | Nine Months September 30, 2017 | Nine Months September 30, 2016 |
| Three Months Ended March 31, |
| |||||||||||||||||||
| 2020 |
|
| 2019 |
| ||||||||||||||||||||
Customer 1 | 18 | % | 0 | % | 8 | % | 0 | % |
|
| — | % |
|
| 23 | % | |||||||||
Customer 2 | 18 | % | 0 | % | 6 | % | 4 | % |
|
| — | % |
|
| 15 | % | |||||||||
Customer 3 | 18 | % | 0 | % | 6 | % | 0 | % |
|
| — | % |
|
| 13 | % | |||||||||
Customer 4 | 10 | % | 0 | % | 3 | % | 0 | % |
|
| — | % |
|
| 12 | % | |||||||||
Customer 5 | 9 | % | 0 | % | 11 | % | 0 | % |
|
| — | % |
|
| 12 | % | |||||||||
Customer 6 | 0 | % | 21 | % | 0 | % | 8 | % |
|
| — | % |
|
| 10 | % | |||||||||
Customer 7 | 0 | % | 12 | % | 3 | % | 3 | % |
|
| — | % |
|
| 10 | % | |||||||||
Customer 8 | 0 | % | 11 | % | 0 | % | 16 | % | |||||||||||||||||
Customer 9 | 0 | % | 0 | % | 0 | % | 10 | % | |||||||||||||||||
|
|
|
|
|
|
|
|
|
As of September 30, 2017March 31, 2020 and December 31, 2016,2019, the following customers each comprised moregreater 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 | % |
March 31, 2020 | December 31, 2019 | |||||||
Customer 1 | — | % | 35 | % | ||||
Customer 2 | — | % | 33 | % | ||||
Customer 3 | — | % | 32 | % | ||||
Geographic Concentration
During the three and nine months ended September 30, 2017March 31, 2020 and 2016,2019, regional revenue based on customer locations which each comprised moregreater than 10% of our total revenues, consisted of the following (unaudited):
Three Months September 30, 2017 | Three Months September 30, 2016 | Nine Months September 30, 2017 | Nine Months September 30, 2016 |
| Three Months Ended March 31, |
| ||||||||||||||||||
| 2020 |
|
| 2019 |
| |||||||||||||||||||
United States | 72 | % | 47 | % | 59 | % | 47 | % |
|
| — | % |
|
| 60 | % | ||||||||
Italy | 9 | % | 11 | % | 11 | % | 21 | % |
|
| — | % |
|
| 23 | % | ||||||||
Germany | 5 | % | 35 | % | 3 | % | 15 | % | ||||||||||||||||
Korea |
|
| — | % |
|
| 10 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
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)March 31, 2020 and December 31, 20162019 include gross assets amounting to $2.0$1.0 million and $1.7$1.3 million, respectively, relating to operations of the Company’sour subsidiary based in Switzerland. It is possible that unanticipated events in foreign countries could disrupt the Company’sour 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 haswe 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.
12
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.
MoneyCash equivalents, which includes money market funds, are the only financial instrument measured and recorded at fair value on the Company’sour consolidated balance sheet, and they are consideredvalued using Level 1 valuation securities. The following table presents money market fundsinputs.
Assets measured at their level within the fair value hierarchy at September 30, 2017 and December 31, 2016on 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): | ||||||||||||||||||||||||||||||||
March 31, 2020 (unaudited): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Money market funds | $ | 12,705 | $ | 12,705 | $ | $ | — |
| $ | 2,179 |
|
| $ | 2,179 |
|
| $ | — |
|
| $ | — |
| |||||||||
December 31, 2016: | ||||||||||||||||||||||||||||||||
December 31, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Money market funds | $ | 10,336 | $ | 10,336 | $ | — | $ | — |
| $ | 11,307 |
|
| $ | 11,307 |
|
| $ | — |
|
| $ | — |
|
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 |
| March 31, |
|
| December 31, |
| |||||||||
(Unaudited) |
| 2020 |
|
| 2019 |
| ||||||||||
Raw materials | $ | 390 | $ | 477 |
| $ | 823 |
|
| $ | 803 |
| ||||
Work in process | 3,378 | 5,032 |
|
| 1,699 |
|
|
| 1,716 |
| ||||||
Finished goods | 3,123 | 3,284 |
|
| 1,282 |
|
|
| 2,069 |
| ||||||
|
| 3,804 |
|
|
| 4,588 |
| |||||||||
6,891 | 8,793 | |||||||||||||||
Allowance for excess and obsolescence | (3,646 | ) | (5,377 | ) | ||||||||||||
Allowance for excess and obsolete inventory and impairment charge |
|
| (3,804 | ) |
|
| (3,559 | ) | ||||||||
Inventories, net | $ | 3,245 | $ | 3,416 |
| $ | — |
|
| $ | 1,029 |
|
We recorded $2.4 million as an impairment charge during the three months ended March 31, 2019, related to our plans to suspend Argus II production. We recorded further impairment charges to our inventory of $0.5 million in the first quarter of 2020. Additionally, finished goods inventory amounting to approximately $0.75 million that we expect to use for our future warranty claims has been offset with the warranty accrual which is included in accrued expenses.
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 |
| March 31, |
|
| December 31, |
| |||||||||
(Unaudited) |
| 2020 |
|
| 2019 |
| ||||||||||
Laboratory equipment | $ | 2,398 | $ | 2,300 |
| $ | 584 |
|
| $ | 2,724 |
| ||||
Computer hardware and software | 1,297 | 1,220 |
|
| 69 |
|
|
| 1,672 |
| ||||||
Leasehold improvements | 299 | 288 |
|
| — |
|
|
| 304 |
| ||||||
Furniture, fixtures and equipment | 46 | 45 |
|
| — |
|
|
| 78 |
| ||||||
|
| 653 |
|
|
| 4,778 |
| |||||||||
4,040 | 3,853 | |||||||||||||||
Accumulated depreciation and amortization | (2,713 | ) | (2,364 | ) |
|
| (421 | ) |
|
| (3,656 | ) | ||||
Property and equipment, net | $ | 1,327 | $ | 1,489 |
| $ | 232 |
|
| $ | 1,122 |
|
13
As a result of our decision to cease marketing of Argus II we recorded an impairment of $0.7 million related to our fixed assets used primarily for Argus activities. We have additionally reclassified $0.4 million as assets held-for-sale which represents the estimated fair value of fixed assets that we plan to sell through auction.
Contract Liabilities
Contract liabilities consisted of the following (in thousands):
Beginning balance as of December 31, 2019 |
| $ | 335 |
|
Consideration received in advance of revenue recognition |
|
| — |
|
Revenue recognized |
|
| — |
|
Ending balance as of March 31, 2020 |
| $ | 335 |
|
Product Warranties
A summary of activity of our warranty liabilities, which are included in accrued expenses, for the period ended March 31, 2020 is presented below:
Beginning balance as of December 31, 2019 |
| $ | 1,575 |
Additions |
|
| — |
Settlements |
|
| (60) |
Adjustments and other |
|
| — |
Total |
|
| 1,515 |
Less: Finished goods inventory expected to be used for future warranty claims |
|
| (750) |
Ending balance as of March 31, 2020 |
| $ | 765 |
Allowance for Doubtful Accounts
Allowance for doubtful accounts consisted of the following (in thousands):
| |||
Beginning balance as of December 31, 2019 |
| $ | 117 |
Additions |
|
| — |
Write-offs |
|
| (117) |
Ending balance as of March 31, 2020 |
| $ | — |
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. 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.
On May 18, 2020 we entered into a Letter Agreement with Sylmar Biomedical Park, LLC (the “Landlord”), pursuant to which the parties agreed to accelerate the expiration dates of our existing leases (the “Leases”), to a date not later than June 18, 2020 (“Accelerated Termination Date”). We agreed to pay the Landlord (i) $210,730 to bring the Leases current (the “Owed Rent”) and to remit (ii) a one-time early termination fee in the amount of $150,000 (the “Early Termination Amount”). Prior to the early termination agreed in this letter we were obligated to pay aggregate base rent of approximately $0.9 million and common area maintenance expenses for the term remaining under the Leases through the respective expiration dates in February 2022 and April 2023. The Landlord acknowledged that as of the date of the Letter Agreement the Owed Rent and the Early Termination Amount constituted all amounts owing to the Landlord under the Leases. As a result of the letter agreement, we wrote down the right-of-use assets and extinguished related lease liabilities in the amounts of $2.3 million and $2.4 million, respectively. We have accrued an early termination fee of $150,000 which is included in accrued expenses and restructuring charges as of and for the three months ended March 31, 2020.
Assets | Classification | March 31, 2020 |
| December 31, |
| |||
Non-current assets | Right-of-use assets | $ | — |
| $ | 2,342 |
| |
Liabilities |
|
|
|
|
|
|
| |
Current | Current operating lease liabilities | $ | 106 |
| $ | 237 |
| |
Long term | Long term operating lease liabilities | $ | — |
| $ | 2,365 |
|
14
The components of lease expense for the three months ended March 31, 2020 and 2019 were as follows (unaudited):
| For the three months ended March 31, 2020 |
| For the three months ended 2019 |
| |||
Lease expense: |
|
|
|
|
|
| |
Operating lease expense | $ | 123 |
| $ | 123 |
| |
Short-term lease expense |
| — |
|
| — |
| |
Total lease expense | $ | 123 |
| $ | 123 |
|
Cash paid for lease amounts included in the measurement of lease liabilities amounted to $121,000 and $117,000, respectively, during the three months ended March 31, 2020 and 2019.
6. Equity Securities
Increase in Authorized Shares of Common Stock Issuable
Non-employee membersOn June 4, 2019, our shareholders approved an amendment to our restated articles of the Boardincorporation 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 equatesfrom 200 million to 75,000300 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
At September 30, 2017As of March 31, 2020 and 2016, the Company2019, we excluded the outstandingpotentially dilutive securities summarized below, which entitle the holders thereof to ultimatelypotentially acquire shares of common stock, from itsour calculations of earningsnet 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 |
|
| March 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Common stock warrants issued to underwriter of initial public offering |
|
| — |
|
|
| 100 |
|
Common stock warrants issued in connection with March 2017 rights offering |
|
| 1,706 |
|
|
| 1,706 |
|
Common stock warrants issued in connection with February 2019 rights offering |
|
| 5,976 |
|
|
| 5,976 |
|
Common stock options |
|
| 890 |
|
|
| 1,073 |
|
Restricted stock units |
|
| 25 |
|
|
| 64 |
|
Employee stock purchase plan |
|
| — |
|
|
| 56 |
|
|
|
| 8,597 |
|
|
| 8,975 |
|
7. Warrants
On February 22, 2019, we completed a registered rights offering to existing stockholders in which we sold approximately 5,976,000 units at $5.792 per unit, which was the adjusted closing price of our common stock on that date. Each Unit consisted of a share of our common stock and a warrant to purchase an additional share of our stock for $11.76. The warrants had a five-year life and trade on Nasdaq under the symbol EYESW.
On March 6, 2017, we completed a registered rights offering to existing stockholders in which we sold approximately 1,706,000 units at $11.76 per unit, which was the adjusted closing price of our common stock on that date. Each unit consisted of a share of our common stock and a warrant to purchase an additional share of our stock for $11.76. The warrants have a five-year life and have been approved for trading on Nasdaq under the symbol EYESW. As of March 31, 2020, 632 of the warrants associated with the rights offering had been exercised.
We extended the term of 1.7 million warrants issued in our March 2017 rights offering 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.
15
A summary of warrantwarrants activity for the ninethree months ended September 30, 2017March 31, 2020 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, 2019 |
|
| 7,682 |
|
| $ | 11.76 |
|
|
| 4.21 |
| ||||||||||||
Issued | 13,652 | $ | 1.47 |
|
| — |
|
|
|
|
|
|
|
|
| |||||||||
Exercised | — |
|
| — |
|
|
|
|
|
|
|
|
| |||||||||||
Forfeited or expired | (362 | ) | $ | 5.00 |
|
| — |
|
|
|
|
|
|
|
|
| ||||||||
Warrants outstanding at September 30, 2017 | 15,130 | $ | 2.15 | 4.15 | ||||||||||||||||||||
Warrants exercisable at September 30, 2017 | 15,130 | $ | 2.15 | 4.15 | ||||||||||||||||||||
Warrants outstanding as of March 31, 2020 |
|
| 7,682 |
|
| $ | 11.76 |
|
|
| 3.96 |
| ||||||||||||
Warrants exercisable as of March 31, 2020 |
|
| 7,682 |
|
| $ | 11.76 |
|
|
| 3.96 |
|
The intrinsic value of warrants outstanding at September 30, 2017 was $0.
as of March 31, 2020 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 ninethree months ended September 30, 2017March 31, 2020 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, 2019 |
|
| 984 |
|
| $ | 21.78 |
|
|
| 7.70 |
| ||||||||||||
Granted | 2,504 | $ | 1.85 |
|
| 206 |
|
| $ | 5.98 |
|
|
|
|
| |||||||||
Exercised | — | — |
|
| — |
|
| $ |
|
|
|
|
|
| ||||||||||
Forfeited or expired | (641 | ) | $ | 5.58 |
|
| (300 | ) |
| $ | 12.45 |
|
|
|
|
| ||||||||
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 March 31, 2020 |
|
| 890 |
|
| $ | 21.27 |
|
|
| 3.12 |
| ||||||||||||
Options exercisable as of March 31, 2020 |
|
| 517 |
|
| $ | 30.34 |
|
|
| 2.01 |
|
The estimated aggregate intrinsic value of stock options exercisable at September 30, 2017as of March 31, 2020 was $0.zero. As of September 30, 2017,March 31, 2020, there was $5.7$1.8 million of total unrecognized compensation cost related to outstanding stock options that will be recognized over a weighted average period of 2.912.59 years.
During the ninethree months ended September 30, 2017, the CompanyMarch 31, 2020, we granted stock options to purchase 2,464,150205,701 shares of common stock to certain employees. The options are exercisable for a period of ten years from the date of grant at prices ranging from $1.13 to $1.97$5.98 per share, which was the fair value of the Company’sour common stock on the respective grant dates.date. The options generally vest over a period of four years.years . The fair value of these options, as calculated pursuant tousing the Black-Scholes option-pricing model, was determined to be $2,222,000$0.8 million ($0.55 to $0.964.05 per share). Assumptions used in using the model were anfollowing assumptions: expected term of 6.256.02 years, volatility of 48.0%78.0%, a risk-free interest rate of 1.92% to 2.14%,1.50% and an expected dividend rate of 0%0.0%.
In During the quarter ended March 2017,31, 2020 approximately 300,000 options were canceled and expired resulting in a reduction of stock option expense for the Company granted stock options to purchase 40,000 shares of common stock to an outside attorney in connection with his services relating to the Company’s March, 2017 rights offering to stockholders. The options are exercisable for a period of four years from the date of grant at a price of $1.76 per share, which was 120% of the fair value of the Company’s common stock on the grant date of March 6, 2017. The options vested as of the date of grant. The fair value of these options, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $19,640 ($0.49 per share). Assumptions used in the model were an expected term of 4.0 years, volatility of 48.0%, a risk-free interest rate of 1.81%, and an expected dividend rate of 0%. The cost of these shares was treated as an issuance cost of the offering and was deducted from the gross proceeds from the offering.approximately $167,000.
16
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 ninethree months ended September 30, 2017March 31, 2020 (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, 2019 |
|
| 61 |
|
| $ | 5.92 |
|
Awarded |
|
| — |
|
|
| — |
|
Vested and released |
|
| (15 | ) |
|
| 5.92 |
|
Forfeited/canceled |
|
| (21 | ) |
|
| 5.92 |
|
Outstanding as of March 31, 2019 |
|
| 25 |
|
| $ | 5.92 |
|
As of September 30, 2017,March 31, 2020, there was $1.1$0.1 million of total unrecognized compensation cost related to the outstanding RSUs that will be recognized over a weighted average period of 1.882.89 years.
We adopted an employee stock purchase plan in June 2015 for all eligible employees. At March 31, 2020 the available number of shares that may be issued under the plan is 77,031.
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, 2017March 31, 2020 and 2016 is2019 was as follows (in thousands) (unaudited):
Three Months September 30, 2017 | Three Months September 30, 2016 | Nine Months September 30, 2017 | Nine Months September 30, 2016 |
| Three Months Ended March 31, |
| ||||||||||||||||||
| 2020 |
|
| 2019 |
| |||||||||||||||||||
Cost of sales | $ | 36 | $ | 80 | $ | 184 | $ | 245 |
| $ | — |
|
| $ | 47 |
| ||||||||
Research and development | 71 | 77 | 203 | 238 |
|
| 102 |
|
|
| 187 |
| ||||||||||||
Clinical and regulatory | 42 | 43 | 135 | 136 |
|
| 15 |
|
|
| 34 |
| ||||||||||||
Selling and marketing | 116 | 74 | 321 | 59 |
|
| 41 |
|
|
| 130 |
| ||||||||||||
General and administrative | 641 | 624 | 1,978 | 1,903 |
|
| 121 |
|
|
| 500 |
| ||||||||||||
Total | $ | 906 | $ | 898 | $ | 2,821 | $ | 2,581 |
| $ | 279 |
|
| $ | 898 |
|
9. Risk and Uncertainties
In December 2019, an outbreak of a novel strain of coronavirus (COVID-19) originated in Wuhan, China and has since spread globally. On March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. In addition, most states in the U.S., including California, where we are headquartered, have declared a state of emergency. The pandemic has resulted in government authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place or stay-at-home orders, and business shutdowns.
In accordance with local and state guidelines regarding the COVID-19 pandemic, we are requiring all of our employees to work remotely unless they cannot perform their essential functions remotely, and have also suspended all non-essential travel for our employees. While a significant number of our employees may be accustomed to working remotely or working with other remote employees, much of our workforce has not historically been remote. Although we continue to monitor the situation and may adjust our current policies as more information and public health guidance becomes available, temporarily suspending travel and restricting the ability to do business in person may create operational or other challenges, any of which could harm our business, financial condition and results of operations.
In addition, our clinical trials may be affected by the COVID-19 outbreak. Patient visits in ongoing clinical trials may be delayed, for example, due to prioritization of hospital resources toward the COVID-19 outbreak, travel restrictions imposed by governments, and the inability to access sites for initiation and monitoring. For example, scheduled patient visits to our clinical sites at UCLA and Baylor were temporarily put on hold due to COVID-19 and we are in the process of planning to resume patient visits with the sites. In addition, the validation study for the revised FLORA assessment was paused due to travel requirements for its completion. Also, some of our suppliers of certain materials used in the development of our product candidates are located in areas impacted by COVID-19 which could limit our ability to obtain sufficient materials for our product candidates. COVID-19 has and will continue to adversely affect global economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our product candidates, if approved, and impact our operating results. Even after the COVID-19 pandemic has subsided, we may continue to experience an adverse impact to our business as a result of the continued global economic impact of the pandemic. We could experience further harm to our business and we cannot anticipate all of the ways in which health epidemics such as COVID-19 could adversely impact our business. Although we are continuing to monitor and assess the effects of the COVID-19 pandemic on our business, the ultimate impact of the COVID-19 outbreak or a similar health epidemic is highly uncertain and subject to change.
17
COVID-19 has directly and indirectly adversely affected Second Sight and will likely continue to do so for an uncertain period of time. In March and April 2020 we laid off a substantial majority of our employees as a result of COVID-19 and an inability to obtain financing. We retain approximately 10 of our employees to oversee current operations. The cumulative effects of COVID-19 on the Company cannot be predicted at this time, but could include, without limitation:
inability to meet warranty obligations for our Argus II products;
reputational damages of the Company and its products;
inability to raise additional funds to finance and continue our operations;
inability to maintain adequate office laboratory facilities;
inability to retain and hire experienced personnel;
inability to finalize our plan for and enroll patients into our proposed pivotal clinical trial;
material delays or inability to complete development and commercialization of Orion;
inability to satisfy Nasdaq’s continued listing requirements and possible delisting; and
other uncertain events that may have negative impact effect on our operations.
10. Litigation, Claims and Assessments
Twenty-oneTen oppositions have been filed by a third-partyPixium Vision are pending in the European Patent Office, each challenging the validity of a European patent owned or exclusively licensed by us. We have filed one opposition that is currently pending in the Company.European Patent Office challenging the validity of a patent owned by Pixium Vision. The outcome of the challenges isare not certain, however, if successful, they may affect the Company’sour ability to block competitors from utilizing some of itsour patented technology in Europe. Management of the Company does nottechnology. We believe that a successful challenge will not have a material effect on the Company’sour ability to manufacture and sell itsour products, or otherwise have a material effect on the Company’sour operations.
By letter received June 23, 2020 counsel for a participant in the Orion Early Feasibility Study has alleged claims against the Company for breach of contract, breach of the implied covenant of good faith and fair dealing, negligent misrepresentation, promissory estoppel and negligent infliction of emotional distress. Counsel in addition has alleged that Second Sight has violated the protocol established by the FDA for good clinical practice within this industry. As full compensation for damages arising from these claims the Company was presented with a demand for payment of $3,000,000. The Company believes that the claims asserted are without merit. The Company will seek to deter the filing of this claim. However, these claims are in the early stage and no assurance can be given that this matter will not result in litigation. To the extent a lawsuit is filed, the Company intends to vigorously defend it.
We are party to litigation arising in the ordinary course of business. It is management’sour opinion that the outcome of such matters will not have a material effect on 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
11. Subsequent Events
Work Force Reductions
After our work force reduction on March 31, 2020 we initiated a further reduction on April 17, 2020 to our current employment status of 10 employees. The costs for this reduction have been recorded in the quarter ended June 30, 2020.
Employment Agreements
On May 13, 2020 we entered into an agreement with John T. Blake, our Chief Financial Officer, for an amendment to Mr. Blake’s Executive Employment Agreement dated March 21, 2018 pursuant to which we agreed to pay Mr. Blake a one-time cash bonus of $100,000 (the “Bonus”) in recognition of his services. Under the Amendment, Mr. Blake will be entitled to receive all separation amounts due to him pursuant to the Employment Agreement less the amount of Bonus in the event that his employment is terminated without cause.
On May 8, 2020, our board of directors approved payment to Patrick Ryan, our former Chief Operating Officer, of approximately $471,000 and to reimburse up to 12 months of COBRA, if elected, pursuant to the terms of Mr. Ryan’s employment agreement. Mr. Ryan was separated effective April 17, 2020.
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In May 2020, we initiated the process to investigate the closure of our Swiss subsidiary due to our decision to cease marketing the Argus II product and to reduce operating expenses.
Nasdaq
On April 15, 2020, we received a letter from The Nasdaq Stock Market (“Nasdaq”) noting that as a result of Matthew Pfeffer, a member of the board and chair of the audit committee of the board, being appointed as Acting Chief Executive Officer, the Company no longer complies with Nasdaq’s independent director and audit committee requirements set forth in Nasdaq Listing Rule 5605. Consistent with Nasdaq Listing Rules 5605(b)(1)(A) and 5605(c)(4), Nasdaq will allow us a cure period in order to regain compliance as follows:
until the earlier of our next annual shareholders’ meeting or March 27, 2021; or
if the next annual shareholders’ meeting is held before September 23, 2020, then we must evidence compliance no later than September 23, 2020.
On June 1, 2020 (the “June Notification Date”), Nasdaq notified us that following the resignation of William J. Link, effective May 31, 2020, we are non-compliant with Nasdaq’s independent director and audit committee requirements as set forth in Listing Rule 5605 due to more than one vacancy on our board and audit committee. Nasdaq had previously notified us on April 15, 2020 that due to the appointment of Matt Pfeffer as Acting Chief Executive Officer of the Company, the Company no longer complied with the Listing Rules and that consistent with Listing Rules 5605(b)(1)(A) and 5605(c)(4) the Company was provided with a cure period described above in which to regain compliance. Nasdaq indicated that as a result of Mr. Link’s resignation we are no longer automatically eligible for the above described cure period and that the Company must submit a plan of compliance no later than July 16, 2020. If Nasdaq accepts our plan of compliance, we can be granted an extension of up to 180 calendar days from the June Notification Date to evidence compliance with the Listing Rules. If the plan is not accepted, we may appeal before a Nasdaq Hearing Panel.
On June 2, 2020, Nasdaq further notified us that as a result of Dr. Link’s resignation from the Company’s board and all committees thereof, effective May 31, 2020, we no longer comply with Nasdaq’s compensation committee requirements set forth in Listing Rule 5605.
However, consistent with Listing Rule 5605(d)(2) Nasdaq will provide us a cure period in order to regain compliance as follows:
until the earlier of our next annual shareholders’ meeting or May 31, 2021; or
if the next annual shareholders’ meeting is held before November 27, 2020, then we must evidence compliance no later than November 27, 2020.
We must submit to Nasdaq documentation, including biographies of any new directors, evidencing compliance with the rules no later than as described above. If we do not regain compliance by the dates set forth above, Nasdaq will provide written notification to us that our securities will be delisted, at which time we may appeal the delisting determination to a Nasdaq Hearing Panel.
The Notice has no effect on the listing of our common stock at this time, and our common stock continues to trade on The Nasdaq Capital Market under the symbol “EYES.” We intend to regain compliance with the independent director, audit committee and compensation committee requirements under the Listing Rules however no assurance can be given that we will be able to regain compliance.
Employee Stock Purchase Plan
We completed our offer to rescind certain purchases of shares under our ESPP plan on May 27, 2020. We voluntarily offered to rescind the sale of shares of our common stock to employees who purchased those shares under the ESPP and to reimburse any losses upon the sale of our shares of our common stock for certain purchase periods because these shares may not have been exempt from registration under the Securities Act of 1933. The rescission of these share purchases resulted in the repurchase and cancelation of 39,467 shares of our common stock. The total cost for the repurchase of these shares and the reimbursement of any losses from the sale of such shares totaled approximately $270,000.
Equity Offering
In May 2020, we completed an underwritten public offering of 7,500,000 shares of common stock at an offering price of $1.00 per share for aggregate gross proceeds of $7.5 million, and net proceeds of approximately $6.6 million after deducting underwriting discounts, commissions and other offering expenses.
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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunctiontogether with theour unaudited condensed financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q as well as our audited 20162019 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 historical19, 2020. Some of the information thecontained in this discussion and analysis here or set forth elsewhere in this Quarterly Report, including information with respect toourproducts,plansand throughout this Form 10-Qstrategy for our business and related financing, contains forward-looking statements that involve risks and uncertainties, including statements regarding our expected financial results in future periods. The words “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “projects,” “will,” “would,” “strategy” and assumptions. Our actualsimilar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.Examples of forward-looking statements include, among others, statements we make regarding expectations for revenues, liquidity, cash flows and financial performance, the anticipated results of our development efforts and the timing for receipt of required regulatory approvals, insurance reimbursements and product launches, our financing plans and future capital requirements,the materially adverse impact of the recent COVID-19 coronavirus pandemic and related public health measures on our business. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from those anticipatedthe plans, intentions and expectations disclosed in thesethe forward-looking statements as a result of certain factors, including, but not limited, to those set forth underthat we make. You should read “Risk Factors” in Part II, Item 1A of this report.
Quarterly Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. We assume no obligations to update these forward-looking statements to reflect events or circumstances after the date of this Quarterly Report or to reflect actual outcomes.
Second Sight was founded in 1998 with a missionMedical Products, Inc. (NASDAQ: EYES) develops implantable visual prosthetics that are intended to develop, manufacture, and market prosthetic devices that restore somedeliver 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. We are conducting a six-subject Early Feasibility Study of the Orion device at the Ronald Reagan UCLA Medical Center in Los Angeles (“UCLA”) and Baylor College of Medicine in Houston (“Baylor”). Our 12 month results for the subjects indicate to us that:
We have a good safety profile. Three subjects experienced a total of eight adverse events (AEs) through the latest independent medical safety monitor meeting in December 2019 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.
Our principal offices are located in Sylmar, California, approximately 25 miles northwest of downtown Los Angeles. We also have an office in Lausanne, Switzerland, that manages our commercial and clinical operations in Europe, the Middle East and Asia.Angeles, California.
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Our currentfirst commercially approved product, the Argus® II Retinal Prosthesis System (“Argus II”), treats outer retinal degenerations, such as retinitis pigmentosa, which we referalso referred to as RP. The Argus II was the only retinal prosthesis approved in the United States by the Food and Drug Administration (“FDA”), and was the first approved retinal prosthesis in the world. 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), and was the first approved retinal prosthesis in the world. By providing a useful formA subset of artificial vision inthese patients who otherwise have total sight loss,would be eligible for the Argus II System can provide benefits which include:
since the approved baseline vision for the Argus II is worse than legally blind (20/200). We commissioned 3rd party market research to estimate the size of the RP market that resulted in an estimate of approximately 1,500 patients in the US with advanced RP that could be treated with the Argus II given the eligibility criteria of our label. We no longer market the Argus II.
The Argus II Systemsystem 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 notcan slow or reverse the progression of the disease. Results vary among patients and while theThe majority of patients receive a significant benefit from the Argus II, however results can vary and some patients report receiving little or no benefit. By creating an artificial form of useful vision in patients who otherwise have total sight loss, the Argus II can provide benefits that include:
restoring independence through a renewed ability to navigate independently in unfamiliar environments;
Our major corporate, clinicalimproving patients’ orientation and regulatory milestones include:mobility, such as locating doors and windows, avoiding obstacles, and following the lines of a crosswalk;
allowing patients to feel more connected with people in their surroundings, such as seeing when someone is approaching or moving away;
providing patients with enjoyment from being “visual” again, such as locating the moon, tracking groups of players as they move around a field, and watching moving streams of lights from fireworks;
enabling some patients to re-enter the workforce through multiple vocations that become possible because of Argus II; and
improving patients’ well-being and ability to perform activities of daily living
We began selling the Argus II System in Europe at the end of 2011, Saudi Arabia in 2012, the United States and Canada in 2014, Turkey in 2015, andIran, Taiwan, South Korea and Russia in 2017. With2017, and Singapore in 2018. Given the exceptionlimited addressable market of TaiwanArgus II, we no longer market the Argus II and Russia,have focused all of our resources on the development of Orion.
We are also researching multiple technologies that we believe to be complimentary to artificial vision and could potentially provide significant enhancements to the Orion user experience. In most cases, we collaborate with 3rd party firms to advance and integrate these innovative technologies with our artificial vision systems. Examples of technologies that we believe will be complimentary to our products include: eye tracking, object recognition and localization, thermal imaging and depth-based decluttering.
Recent developments
In March 2020, we were severely adversely impacted by the unprecedented economic shock caused by the COVID-19 pandemic and its related effects on our ability to secure financing for our planned activities. As a result, we significantly reduced our staff and expenses and conserved liquidity as we continue operations and explore strategic options. These options include securing additional funding and exploring business alternatives that may include partnering, acquiring, investing in or combining with businesses that may or may not be in a related industry. We are actively seeking opportunities to develop partnerships or collaborations with others to advance further Orion development, conduct pivotal trials and bring the product to market for the treatment of blindness. No assurances can be given that any of these initiatives will occur.
In early March 2020, we commenced clinical validation activities for the FLORA-20 instrument, the primary efficacy endpoint we have full regulatory approvalselected for our future pivotal clinical trial of Orion. In mid-March 2020, our validation activities were suspended as a result of public health concerns and related social distancing due to sellCOVID-19. We are in these regions. the process of evaluating when activities related to the validation study can be resumed.
On March 27, 2020, the Board of Directors appointed Matthew Pfeffer, a member of our Board and Chairman of the Audit Committee of the Board, as acting Chief Executive Officer. As a result, in April 2020, The Nasdaq Stock Market informed us, we no longer comply with Nasdaq’s independent director and audit committee requirements set forth in Nasdaq Listing Rule 5605. Nasdaq has also advised that in order to regain compliance we must submit a plan of compliance no later than July 16, 2020.
In Taiwan and Russiafurtherance of our decision to withdraw Argus II from the market, we have limited regulatoryterminated two post-market studies for Argus II in Germany and the U.S., terminated an extended non-significant risk study in the U.S. for Argus 2s, suspended our technical support of Argus II worldwide, and withdrawn our submission to the FDA for market approval butof the Argus 2s wearables system. In addition, we arehave reported to our notified body that we do not intend to distribute the Argus 2s in Europe or other markets, and will therefore let our CE Mark lapse for that product.
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In May 2020, we completed an underwritten public offering of 7,500,000 shares of common stock at an offering price of $1.00 per share for aggregate gross proceeds of $7.5 million, and net proceeds of approximately $6.6 million after deducting underwriting discounts, commissions and other offering expenses. Based on our current plans, we believe the financing provides sufficient working capital to obtain full regulatory approvalsustain approximately six months of ongoing operations.
In May 2020, we entered into a Letter Agreement with Sylmar Biomedical Park, LLC (the “Landlord”) to terminate our facility leases in both countries. We sell primarily throughwhich we agreed to vacate the premises by June 18, 2020 and pay $210,730 to bring our direct sales force, but use distributorsleases current and pay a one-time early termination fee of $150,000. Prior to the early termination, we were obligated to pay aggregate base rent of approximately $0.9 million and common area maintenance expenses for the respective remaining terms of our leases in certain countries.February 2022 and April 2023.
As of June 10, 2020, we have reduced our employees to 10 individuals to focus on the advancement of Orion and sustain our ongoing operations.
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 byfrom the sale of our Argus II System. Duringproduct. Funding of our business since 2017 has been primarily provided by:
On May 5, 2020, we closed our underwritten public offering of 7,500,000 shares of common stock at an offering price of $1.00 per share for aggregate net proceeds of approximately $6.6 million.
Issuances of common stock and warrants in a Rights Offering in February 2019 which provided $34.4 million of net cash proceeds
Issuances of common stock through our At Market Issuance Sales Agreement during the fourth quarter of 2019 which provided $0.1 million of net cash proceeds
Issuances of common stock through our At Market Issuance Sales Agreement during the first quarter of 2018, which provided $4.0 million of net cash proceeds
Issuances of common stock via stock purchase agreements in May, August, October and December 2018, which provided net cash proceeds of $22.0 million
Revenue of $3.4 million and $6.9 million, for the years ended December 31, 20162019 and 20152018, respectively, generated by sales of our Argus II product
We received an award for $1.6 million grant (with the intent to fund $6.4 million over five years subject to annual review and approval) from the nine months endedNational Institutes of Health (NIH) to fund the “Early Feasibility Clinical Trial of a Visual Cortical Prosthesis” that commenced in January 2018. Our second year award was recently approved under this grant. As of March 31, 2020 we recorded $0.3 million of deferred grant costs associated with this grant which were offset with the related grant funds when received in April 2020.
On September 30,17, 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. APL is the primary recipient of the grant. We have suspended our activities on the project until we clarify our future plans.
In a rights offering completed on February 22, 2019 we sold approximately 5,976,000 units, each priced at $5.792 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 $11.76 per share. Entities controlled by Gregg Williams, our Chairman of the Board of Directors, acquired approximately 5,180,000 units in the offering for an aggregate investment of approximately $30 million.
In November 2017, we fundedentered 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 offered and sold, from time to time through either of the Agents, shares of our business primarily through:
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 liabilitiescommon stock having an aggregate offering price as set forth in the normal courseSales Agreement and a related prospectus supplement filed with the SEC. We agreed to pay the Agents a cash commission of business. 3.0% of the aggregate gross proceeds from each sale of shares under the Sales Agreement. During January and February 2018, we sold 278,000 shares of common stock for additional net proceeds of $4.0 million under the Sales Agreement. During December 2019, we sold approximately 17,000 shares of common stock which provided net proceeds of $0.1 million under the Sales Agreement. This agreement was terminated in April 2020.
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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.no revenue that is developing a novel medical device. 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 next few years,date of issuance of this report. To finance our operations beyond that point, we will need to raise additional capital, which cannot be assured. However, our operating plan may change as a result of many factors currently unknown to us, and we will need to seek additional funds during that period, 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 we may be unable to expand or maintain our operations, maintain our current organization and employee base or otherwise capitalize on our business opportunities, as desired, which management has concluded that there iscould materially and adversely affect our business, financial condition and results of operations. Accordingly, these factors among others raise substantial doubt about the Company’sour ability to continue as a going concern. The Company’sOur independent registered public accounting firm, in its report on the Company’s 2016our 2019 consolidated financial statements, has also raised substantial doubt about the Company’sour ability to continue as a going concern.
In June 2016, the Company successfully completed a Rights Offering to existing stockholders, raising 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. Each Unit consisted of one share of common stock and one warrant, with a five-year life, to buy an additional share of common stock at $1.47 per share. 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 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 its 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.
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.
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 subjects and will follow them for two years. The French program will fund implantation of up to 18 additional patients that will not be part of the post-market study. After review of the study’s results, we expect Argus II therapy to be covered 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:
We believe we can furthermay be able to significantly expand our market to include nearly all profoundly blind individuals, other thanindividuals. The only notable exceptions for potential use of the Orion are those who are blind due to preventableotherwise currently treatable diseases, individuals who are born blind, or blindness due to braindirect damage by developing aof the visual cortical prosthesis. We refer to this product ascortex, which is rare. However, of the Orion I visual prosthesis system. We estimate thatestimated 36 million blind people worldwide, there are approximately 5.8 million people worldwide who are legally blind due to causes other than preventable conditions, RPthat are not otherwise treatable (including RP) or AMD. If approvedage-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, third 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 I based on our clinical trialtrials 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 human vision. In October 2017, we received final IDE approval from the FDA to begin a human feasibility studyA six-subject Early Feasibility Study of the Orion I visual prosthesis system. This studydevice is currently underway at UCLA and Baylor. Our 12 month results for six of the subjects indicate a good safety profile with encouraging efficacy data and benefits in helping subjects perform their daily living tasks. We believe these data are encouraging and support advancement of Orion into a larger pivotal clinical study. 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 confirm initial findingsachieve similar results in our human pilot study we announced inlarger Orion clinical trials. No peer-reviewed data is available yet for the fourth quarter of 2016 and provideOrion system.
In November 2017, the first human data of a fully functional wireless visual cortical stimulator system includingFDA granted Breakthrough Devices Program designation for the external video camera system. We expect to implant and activate our Orion I visual prosthesis system in human subjects in late 2017.Orion. 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 expansiondesignation is given to a pivotal clinical trialfew select medical devices in 2018. 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.
We began a five-subject pilot study inCOVID-19 Pandemic
In accordance with local and state guidelines regarding the United Kingdom in June 2015,COVID-19 pandemic, we are requiring all of our employees to determine the utilitywork remotely unless they cannot perform their essential functions remotely, and have also suspended all non-essential travel for our employees. While many of the Argus II System for use in persons suffering from dry AMD. In the second quarterour employees are accustomed to working remotely, much of 2016our workforce has not historically been remote. Although we completed enrollment and continue to trackmonitor the subjects via the site in Manchester. The subjects have reportedsituation and may adjust our current policies as more information and public health guidance becomes available, temporarily suspending travel and restricting 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,do business in person may create operational or other challenges, any of which could harm our business, financial condition and results of operations.
In addition, our clinical trials have been affected by the subjectsCOVID-19 outbreak. Patient visits in ongoing clinical trials have not demonstrated significant objective benefit over their residual vision when usingbeen delayed, for example, due to prioritization of hospital resources toward the Argus II. We planCOVID-19 outbreak, travel restrictions imposed by governments, and the inability to continue testing these subjectsaccess sites for initiation and monitoring. Also, some of our suppliers of certain materials used in the development of our product candidates are located in areas impacted by COVID-19 which could limit our ability to obtain sufficient materials for our product candidates. COVID-19 has and will submitcontinue to adversely affect global economies and financial markets, and may result in an economic downturn that could affect demand for our product candidates, if approved, and impact our operating results. Even after the COVID-19 pandemic has subsided, we may continue to experience an adverse impact to our business as a revised clinical protocolresult of the continued global economic impact of the pandemic. We cannot anticipate all of the ways in 2017. Our approacheswhich health epidemics such as COVID-19 could adversely impact our business. Although we are continuing to improvingmonitor and assess 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 approvaleffects of the COVID-19 pandemic on our business, the ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to test new retinal stimulation programs withchange. See the existing subjects withRisk Factors section for further discussion of the belief they may benefit. If this clinical testing is successful, we plan to enroll additional patients inpossible impact of the COVID-19 pandemic on our pursuit of a solution for this large patient population.business.
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and Estimates
The preparation of our condensed consolidated financial statements in conformity with generally accepted accounting principles in the United States or GAAP, requires(“GAAP”) and the requirements of the United States Securities and Exchange Commission require management to make estimates, assumptions and assumptionsjudgments that affect the amounts, liabilities, revenue and expenses reported in the financial statements and the notes to the financial statements.On an ongoing basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions. A summary of our critical accounting policies is presented in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016. 2019.
Segment Reporting
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. Our chief operating decision-maker reviews financial information presented on a consolidated basis. Accordingly, we consider ourselves to be in a single reporting segment, specifically the discovery, development and commercialization of visual cortical prosthetics for profoundly blind individuals. We historically managed our Argus II and Orion programs on a consolidated basis within this single operating segment and do not assess the performance of our product lines or geographic regions on other measures of income or expense, such as program expense, operating income or net income. Our underlying technology consists of hardware components (implanted and wearable) and software. A vast majority of this underlying technology is shared between our Argus II and Orion branded systems. While we have ceased marketing the Argus II product indicated for individuals with retinitis pigmentosa, we are developing Orion as a next generation product with potential to treat a broader market of blind individuals, including the retinitis pigmentosa market.
Based upon our decision on May 10, 2019 to accelerate our transition to the Orion platform and suspend production of Argus, we recorded impairment charges of $2.4 million related to inventory of Argus II in the three months ended March 31, 2019. As part of this transition we commenced a corporate restructuring plan to focus on development of Orion and other key research projects. On March 31, 2020, due to the COVID-19 pandemic and related inability to secure additional funding, we laid off the majority of our employees and reduced our operating expenses significantly to allow for our continuing business operations. Due to our focus on Orion and wind down of selling and marketing activities related to Argus II, we recorded further impairment charges to our inventory of $0.5 million. In addition, we recorded an impairment of $0.7 million to our fixed assets used primarily for Argus activities and $0.2 million in severance payments all of which were paid in May 2020. We continue to advance the development of our Orion technology and are exploring various strategic options, however we cannot assure that any of these endeavors will yield satisfactory results or that we will be able to maintain our operations.
There have been no other material changes to our critical accounting policies during the ninethree months ended September 30, 2017.
March 31, 2020.
Results of Operations
Net sales.Our net sales are derivedconsists of revenue primarily from the sale of our Argus II System.product which is no longer marketed. We began selling our products in Europe in 2011, Saudi Arabia in 2012,do not expect future revenues from the United States and Canada in 2014, Turkey in 2015, Russia, South Korea and Taiwan in 2017. Our objective is to increase our product revenue over the next several years as we pursue commercializationsale of our product, as our product becomes more well-known and accepted in the market, and as insurance coverage becomes more widespread.Argus II.
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 ourthe Argus II Systemsystem at our Sylmar,Los Angeles, California facility. In the second quarter of 2016, due to lower implant ratesOur product involves technologically complex materials and revenue, we decreased production output and increased our reserve for slow-moving inventory. As a result of the lower production levels, we have been incurring expenses for unabsorbed overhead charges. Beginning in the first quarter of 2017, based on our rolling 12-month sales forecasts, we have been reducing our reserve for slow moving inventory, which has the effect of offsetting theprocesses. We record cost of goods shipped for revenue insales when products are implanted, which may differ from the period. We expectperiod we are able to work throughrecord revenue. Such timing differences may cause our slow-moving inventory and resume normal production when and if sales orders increase. Our abilityreported results of operations to generate a gross profit in future periods will depend on our abilitybe difficult to (i) generate higher revenues and (ii)compare from period 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.period.
Operating Expenses.We generally recognize our operating expenses as we incur themincurred in four general operational categories: research and development, clinical and regulatory, sales and marketing, and general and administrative. Our operating expenses also include a non-cash component related to the amortization of deferred stock-based compensation allocated tofor research and development, clinical and regulatory, sales and marketing, and general and administrative personnel. From time to time weWe 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 offsetsreductions to the costs as they are incurred to complete the related work.operating expenses.
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