Condensed
Consolidated Balance Sheets
(In
thousands)
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
763
|
|
|
$
|
539
|
|
Money market funds
|
|
|
17,366
|
|
|
|
10,336
|
|
Accounts receivable, net
|
|
|
926
|
|
|
|
274
|
|
Inventories, net
|
|
|
3,052
|
|
|
|
3,416
|
|
Prepaid expenses and other current assets
|
|
|
702
|
|
|
|
717
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
22,809
|
|
|
|
15,282
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
1,414
|
|
|
|
1,489
|
|
Deposits and other assets
|
|
|
44
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
24,267
|
|
|
$
|
16,810
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
558
|
|
|
$
|
1,156
|
|
Accrued expenses
|
|
|
2,304
|
|
|
|
2,088
|
|
Accrued compensation expense
|
|
|
1,823
|
|
|
|
1,600
|
|
Accrued clinical trial expenses
|
|
|
632
|
|
|
|
629
|
|
Deferred revenue
|
|
|
147
|
|
|
|
85
|
|
Deferred grant revenue
|
|
|
—
|
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
5,464
|
|
|
|
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: 56,794 and 42,701 at June 30, 2017 and December 31, 2016, respectively
|
|
|
200,867
|
|
|
|
186,769
|
|
Common stock to be issued
|
|
|
21
|
|
|
|
153
|
|
Additional paid-in capital
|
|
|
38,654
|
|
|
|
30,697
|
|
Notes receivable to finance stock option exercises
|
|
|
(1
|
)
|
|
|
(2
|
)
|
Accumulated other comprehensive loss
|
|
|
(486
|
)
|
|
|
(608
|
)
|
Accumulated deficit
|
|
|
(220,252
|
)
|
|
|
(205,861
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
18,803
|
|
|
|
11,148
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
24,267
|
|
|
$
|
16,810
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
SECOND
SIGHT MEDICAL PRODUCTS, INC.
AND
SUBSIDIARY
Condensed
Consolidated Statements of Operations (Unaudited)
(In
thousands, except per share data)
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,236
|
|
|
$
|
1,037
|
|
|
$
|
3,245
|
|
|
$
|
2,090
|
|
Cost of sales
|
|
|
1,127
|
|
|
|
3,241
|
|
|
|
2,254
|
|
|
|
4,153
|
|
Gross profit (loss)
|
|
|
1,109
|
|
|
|
(2,204
|
)
|
|
|
991
|
|
|
|
(2,063
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net of grants
|
|
|
1,949
|
|
|
|
916
|
|
|
|
3,796
|
|
|
|
1,678
|
|
Clinical and regulatory
|
|
|
684
|
|
|
|
568
|
|
|
|
1,298
|
|
|
|
1,346
|
|
Selling and marketing
|
|
|
2,447
|
|
|
|
2,199
|
|
|
|
4,682
|
|
|
|
4,211
|
|
General and administrative
|
|
|
2,901
|
|
|
|
2,620
|
|
|
|
5,642
|
|
|
|
5,030
|
|
Total operating expenses
|
|
|
7,981
|
|
|
|
6,303
|
|
|
|
15,418
|
|
|
|
12,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(6,872
|
)
|
|
|
(8,507
|
)
|
|
|
(14,427
|
)
|
|
|
(14,328
|
)
|
Interest income
|
|
|
29
|
|
|
|
3
|
|
|
|
36
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,843
|
)
|
|
$
|
(8,504
|
)
|
|
$
|
(14,391
|
)
|
|
$
|
(14,320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share – basic and diluted
|
|
$
|
(0.12
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – basic and diluted
|
|
|
56,513
|
|
|
|
37,540
|
|
|
|
51,380
|
|
|
|
36,756
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements
SECOND
SIGHT MEDICAL PRODUCTS, INC.
AND
SUBSIDIARY
Condensed
Consolidated Statements of Comprehensive Loss (Unaudited)
(In
thousands)
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,843
|
)
|
|
$
|
(8,504
|
)
|
|
$
|
(14,391
|
)
|
|
$
|
(14,320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
92
|
|
|
|
(30
|
)
|
|
|
122
|
|
|
|
23
|
|
Comprehensive loss
|
|
$
|
(6,751
|
)
|
|
$
|
(8,534
|
)
|
|
$
|
(14,269
|
)
|
|
$
|
(14,297
|
)
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
SECOND
SIGHT MEDICAL PRODUCTS, INC.
AND
SUBSIDIARY
Condensed
Consolidated Statements of Stockholders’ Equity (Unaudited)
(In
thousands)
|
|
Common
Stock
|
|
|
Common
Stock
Issuable
|
|
|
Additional
Paid-in
|
|
|
Notes
Receivable
for Stock
Option
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Accumulated
|
|
|
Total
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
common stock in connection with rights offering, net of expenses
|
|
|
5,978
|
|
|
|
19,430
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,430
|
|
Exercise
of stock options
|
|
|
95
|
|
|
|
478
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
480
|
|
Stock-based
compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,682
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,682
|
|
Fair
value of stock options issued for services in connection with rights offering
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
53
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
53
|
|
Stock
issued or issuable for professional services
|
|
|
82
|
|
|
|
324
|
|
|
|
(27
|
)
|
|
|
(183
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
141
|
|
Issuance
of common stock in connection with Employee Stock Purchase Plan
|
|
|
102
|
|
|
|
337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
337
|
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(14,320
|
)
|
|
|
(14,320
|
)
|
Foreign
currency translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
23
|
|
|
|
—
|
|
|
|
23
|
|
Comprehensive
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
23
|
|
|
|
(14,320
|
)
|
|
|
(14,297
|
)
|
Balance,
June 30, 2016
|
|
|
42,199
|
|
|
$
|
186,618
|
|
|
|
6
|
|
|
$
|
22
|
|
|
$
|
29,012
|
|
|
$
|
(3
|
)
|
|
$
|
(558
|
)
|
|
$
|
(187,002
|
)
|
|
$
|
28,089
|
|
|
|
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, 2016
|
|
|
42,701
|
|
|
$
|
186,769
|
|
|
|
77
|
|
|
$
|
153
|
|
|
$
|
30,697
|
|
|
$
|
(2
|
)
|
|
$
|
(608
|
)
|
|
$
|
(205,861
|
)
|
|
$
|
11,148
|
|
Issuance
of shares 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
|
|
|
|
(59
|
)
|
|
|
(132
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
130
|
|
Issuance
of RSUs
|
|
|
24
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Stock-based
compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,916
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,916
|
|
Repayment
of notes receivable for stock option exercises
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(14,391
|
)
|
|
|
(14,391
|
)
|
Foreign
currency translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
122
|
|
|
|
—
|
|
|
|
122
|
|
Comprehensive
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
122
|
|
|
|
(14,391
|
)
|
|
|
(14,269
|
)
|
Balance,
June 30, 2017
|
|
|
56,794
|
|
|
$
|
200,867
|
|
|
|
18
|
|
|
$
|
21
|
|
|
$
|
38,654
|
|
|
$
|
(1
|
)
|
|
$
|
(486
|
)
|
|
$
|
(220,252
|
)
|
|
$
|
18,803
|
|
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)
(In
thousands)
|
|
Six
Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(14,391
|
)
|
|
$
|
(14,320
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization of property and equipment
|
|
|
229
|
|
|
|
203
|
|
Stock-based
compensation
|
|
|
1,916
|
|
|
|
1,682
|
|
Bad
debt (recovery) expense
|
|
|
(36
|
)
|
|
|
191
|
|
Excess
inventory (recovery) reserve
|
|
|
(1,456
|
)
|
|
|
1,523
|
|
Common
stock issuable for services
|
|
|
130
|
|
|
|
141
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(704
|
)
|
|
|
627
|
|
Inventories
|
|
|
1,887
|
|
|
|
(659
|
)
|
Prepaid
expenses and other assets
|
|
|
13
|
|
|
|
469
|
|
Accounts
payable
|
|
|
(528
|
)
|
|
|
(39
|
)
|
Accrued
expenses
|
|
|
206
|
|
|
|
(313
|
)
|
Accrued
compensation expenses
|
|
|
224
|
|
|
|
(394
|
)
|
Accrued
clinical trial expenses
|
|
|
3
|
|
|
|
(65
|
)
|
Deferred
revenue
|
|
|
56
|
|
|
|
(61
|
)
|
Deferred
grant revenue
|
|
|
(104
|
)
|
|
|
(1,092
|
)
|
Net
cash used in operating activities
|
|
|
(12,555
|
)
|
|
|
(12,107
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(151
|
)
|
|
|
(295
|
)
|
Investment
in money market funds
|
|
|
(7,022
|
)
|
|
|
(7,968
|
)
|
Net
cash used in investing activities
|
|
|
(7,173
|
)
|
|
|
(8,263
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
proceeds from rights offering
|
|
|
19,688
|
|
|
|
19,483
|
|
Proceeds
from repayment of note receivable
|
|
|
1
|
|
|
|
—
|
|
Proceeds
from exercise of options and employee stock plan purchases
|
|
|
189
|
|
|
|
816
|
|
Net
cash provided by financing activities
|
|
|
19,878
|
|
|
|
20,299
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
74
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
Cash:
|
|
|
|
|
|
|
|
|
Net
increase (decrease)
|
|
|
224
|
|
|
|
(55
|
)
|
Balance
at beginning of period
|
|
|
539
|
|
|
|
239
|
|
Balance
at end of period
|
|
$
|
763
|
|
|
$
|
184
|
|
|
|
|
|
|
|
|
|
|
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.
SECOND
SIGHT MEDICAL PRODUCTS, INC.
AND
SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements (Unaudited)
Three
and Six Months Ended June 30, 2017 and 2016
1.
Organization and Business Operations
Second
Sight Medical Products, Inc. (“Second Sight” or “the Company”), formerly Second Sight LLC, was founded
in 1998 as a limited liability company and was subsequently incorporated in the State of California in 2003. Second Sight develops,
manufactures and markets implantable prosthetic devices that can restore some functional vision to patients blinded by outer retinal
degenerations, such as Retinitis Pigmentosa.
In
2007, Second Sight formed Second Sight (Switzerland) Sarl, initially to manage clinical trials for its products in Europe,
and later to manage sales and marketing in Europe, the Middle East and Asia. As the laws of Switzerland require at least two
corporate stockholders, Second Sight (Switzerland) Sarl is 99.5% owned directly by the Company and 0.5% is owned by an
executive of Second Sight, who is acting as a nominee of the Company. Accordingly, Second Sight (Switzerland) Sarl is
considered 100% owned for financial statement purposes and is consolidated with Second Sight for all periods
presented.
Since
its inception, the Company has generated limited revenues from the sale of products and has financed its operations primarily
through the issuance of common stock, convertible debt (which has been converted into common stock), and grants primarily from
government agencies.
On
March 6, 2017, the Company successfully completed a registered Rights Offering to existing stockholders raising net proceeds
of approximately $19.7 million in which it sold 13.7 million Units at $1.47 per Unit, which was the closing price of the
Company’s common stock on that date. Each Unit consisted of a share of the Company’s common stock and a warrant
to purchase an additional share of the Company’s stock for $1.47. The warrants have a five-year life and trade on
Nasdaq under the symbol EYESW. At the Company’s discretion, the warrants are redeemable on 30 days’ notice (i) at
any time 24 months after the date of issuance, (ii) if the shares of its common stock are trading at 200% or higher than the Subscription Price for 15 consecutive trading days and (iii) if all of the independent directors vote in favor of
redeeming the warrants. Holders may be able to sell or exercise warrants prior to any announced redemption date and the
Company will redeem outstanding warrants not exercised by the announced redemption date for a nominal amount of $0.01 per
Warrant. The Company deemed it appropriate not to record the liability for this warrant redemption amount as the
probability of any redemptions was deemed remote based upon its terms. For purposes of recording this transaction, the
Company allocated the proceeds from the offering between the common stock and warrants issued based on their relative fair
values on the date of issuance. The fair value used for the common stock was the closing price of the stock of $1.47 on March
6, 2017. The fair value used for the warrants was their Black-Scholes value of $0.64 per warrant, calculated as of March
6, 2017. Accordingly, the relative fair value assigned to the common stock was $1.02 per share and the relative fair
value assigned to the warrants was $0.45 per warrant. The Company is using these proceeds to invest in its business to expand
sales and marketing efforts, enhance current products, gain regulatory approvals for additional indications, and continue
research and development into next generation technology.
The
Company evaluated the financial impact of FASB ASC 260, “Earnings per Share,” which states, among other things, that
if a rights issue is offered to all existing stockholders at an exercise price that is less than the fair value of the stock,
then the weighted average shares outstanding and basic and diluted earnings per share shall be adjusted retroactively to reflect
the bonus element of the rights offering for all periods presented. The Company determined that the application of this specific
provision of ASC 260 was immaterial to previously issued financial statements and, therefore, did not retroactively adjust previously
reported weighted average shares outstanding and basic and diluted earnings per share.
The
Company’s financial statements have been presented on the basis that its business is a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company is
subject to the risks and uncertainties associated with a business with one product line and limited commercial product
revenues, including limitations on its operating capital resources and uncertain demand for its products. The Company has
incurred recurring operating losses and negative operating cash flows since inception, and expects to continue to incur
operating losses and negative operating cash flows for at least the next several years as a result of which, management has
concluded that there is substantial doubt about the Company’s ability to continue as a going concern.
The Company’s independent registered
public accounting firm, in its report on the Company’s 2016
consolidated financial statements, has also raised substantial doubt about the Company’s ability to continue as a going
concern.
The
Company believes that it has sufficient funds to last into the second 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 second 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 trails, or obtain funds, if available (although
there can be no certainty), through strategic alliances that may require the Company to relinquish rights to its products, or
to discontinue its operations entirely.
2.
Basis of Presentation, Significant Accounting Policies and Recent Accounting Pronouncements
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations
of the Securities and Exchange Commission for Form 10-Q. Accordingly, certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations. The condensed consolidated balance sheet at December 31, 2016 has been derived from the Company’s
audited consolidated financial statements.
In
the opinion of management, these financial statements reflect all normal recurring and other adjustments necessary for a fair
presentation. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements
included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. Operating results for interim
periods are not necessarily indicative of operating results for an entire fiscal year or any other future periods.
Significant
Accounting Policies
The
Company’s significant accounting policies are set forth in Note 2 of the financial statements in its Annual Report on Form
10-K for the year ended December 31, 2016.
Net
Operating Loss Carryforward
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.
Recent
Accounting Pronouncements
Management
does not believe that any recently issued, but not yet effective, accounting standards, if adopted, will have a material effect
on the financial statements.
3.
Concentration of Risk
Credit
Risk
Financial
instruments that subject the Company to concentrations of credit risk consist primarily of cash, money market funds, and trade
accounts receivable. The Company maintains cash and money market funds with financial institutions that management deems reputable,
and at times, cash balances may be in excess of Federal Deposit Insurance Corporation and Securities Investor Protection Corporation
insurance limits. The Company extends differing levels of credit to customers, and typically does not require collateral.
The
Company also maintains a cash balance at a bank in Switzerland, which is insured up to an amount specified by the deposit insurance
agency of Switzerland.
Customer
Concentration
During
the three and six months ended June 30, 2017 and 2016, the following customers comprised more than 10% of revenues
(unaudited)
:
|
|
|
Three Months
Ended
June 30, 2017
|
|
|
Three Months
Ended
June 30, 2016
|
|
|
Six Months
Ended
June 30, 2017
|
|
|
Six Months
Ended
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer 1
|
|
|
|
14
|
%
|
|
|
0
|
%
|
|
|
9
|
%
|
|
|
0
|
%
|
Customer 2
|
|
|
|
13
|
%
|
|
|
9
|
%
|
|
|
9
|
%
|
|
|
4
|
%
|
Customer 3
|
|
|
|
12
|
%
|
|
|
9
|
%
|
|
|
12
|
%
|
|
|
4
|
%
|
Customer 4
|
|
|
|
11
|
%
|
|
|
0
|
%
|
|
|
11
|
%
|
|
|
0
|
%
|
Customer 5
|
|
|
|
10
|
%
|
|
|
0
|
%
|
|
|
7
|
%
|
|
|
0
|
%
|
Customer 6
|
|
|
|
7
|
%
|
|
|
13
|
%
|
|
|
5
|
%
|
|
|
6
|
%
|
Customer 7
|
|
|
|
0
|
%
|
|
|
17
|
%
|
|
|
0
|
%
|
|
|
9
|
%
|
Customer 8
|
|
|
|
0
|
%
|
|
|
13
|
%
|
|
|
0
|
%
|
|
|
18
|
%
|
Customer 9
|
|
|
|
0
|
%
|
|
|
13
|
%
|
|
|
0
|
%
|
|
|
6
|
%
|
Customer 10
|
|
|
|
0
|
%
|
|
|
9
|
%
|
|
|
0
|
%
|
|
|
16
|
%
|
As
of June 30, 2017 and December 31, 2016, the following customers comprised more than 10% of accounts receivable:
|
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
Customer 1
|
|
|
|
17
|
%
|
|
|
0
|
%
|
|
Customer 2
|
|
|
|
17
|
%
|
|
|
0
|
%
|
|
Customer 3
|
|
|
|
15
|
%
|
|
|
0
|
%
|
|
Customer 4
|
|
|
|
15
|
%
|
|
|
0
|
%
|
|
Customer 5
|
|
|
|
14
|
%
|
|
|
0
|
%
|
|
Customer 6
|
|
|
|
11
|
%
|
|
|
0
|
%
|
|
Customer 7
|
|
|
|
11
|
%
|
|
|
0
|
%
|
|
Customer 8
|
|
|
|
0
|
%
|
|
|
34
|
%
|
|
Customer 9
|
|
|
|
0
|
%
|
|
|
34
|
%
|
|
Customer 10
|
|
|
|
0
|
%
|
|
|
29
|
%
|
Geographic
Concentration
During
the three and six months ended June 30, 2017 and 2016, regional revenue, based on customer locations which comprised
more than 10% of revenues, consisted of the following (unaudited)
:
|
|
Three Months
Ended
June 30, 2017
|
|
|
Three Months
Ended
June 30, 2016
|
|
|
Six Months
Ended
June 30, 2017
|
|
|
Six Months
Ended
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
50
|
%
|
|
|
61
|
%
|
|
|
52
|
%
|
|
|
48
|
%
|
Taiwan
|
|
|
14
|
%
|
|
|
0
|
%
|
|
|
9
|
%
|
|
|
0
|
%
|
Italy
|
|
|
11
|
%
|
|
|
29
|
%
|
|
|
11
|
%
|
|
|
27
|
%
|
France
|
|
|
11
|
%
|
|
|
8
|
%
|
|
|
10
|
%
|
|
|
8
|
%
|
Korea
|
|
|
10
|
%
|
|
|
0
|
%
|
|
|
7
|
%
|
|
|
0
|
%
|
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 June 30, 2017 (unaudited) and December 31, 2016 include assets
amounting to $2.4 million and $1.7 million, respectively, relating to operations of the Company’s subsidiary based in Switzerland.
It is possible that unanticipated events in foreign countries could disrupt the Company’s operations.
4.
Money Market Funds
The
authoritative guidance with respect to fair value establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three levels, and requires that assets and liabilities carried at fair value be classified
and disclosed in one of three categories, as presented below.
Level
1. Observable inputs such as quoted prices in active markets for an identical asset or liability that the Company has the ability
to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active-exchange traded
securities and exchange-based derivatives.
Level
2. Inputs, other than quoted prices included within Level 1, which are directly observable for the asset or liability or indirectly
observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include
fixed income securities, non-exchange based derivatives, mutual funds, and fair-value hedges.
Level
3. Unobservable inputs in which there is little or no market data for the asset or liability which requires the reporting entity
to develop its own assumptions. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded non-exchange-based
derivatives and commingled investment funds, and are measured using present value pricing models.
Money
market funds are the only financial instrument measured and recorded at fair value on the Company’s balance sheet, and they
are considered Level 1 valuation securities. The following table presents money market funds at their level within the fair value
hierarchy at June 30, 2017 and December 31, 2016 (in thousands):
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017 (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
17,366
|
|
|
$
|
17,366
|
|
|
$
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
10,336
|
|
|
$
|
10,336
|
|
|
$
|
—
|
|
|
$
|
—
|
|
5.
Selected Balance Sheet Detail
Accounts
receivable, net
Accounts
receivable consisted of the following at (in thousands):
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Accounts receivable
|
|
$
|
1,108
|
|
|
$
|
487
|
|
Allowance for doubtful accounts
|
|
|
(182
|
)
|
|
|
(213
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
926
|
|
|
$
|
274
|
|
Inventories,
net
Inventories
consisted of the following at (in thousands):
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Raw materials
|
|
$
|
401
|
|
|
$
|
477
|
|
Work in process
|
|
|
4,045
|
|
|
|
5,032
|
|
Finished goods
|
|
|
2,527
|
|
|
|
3,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,973
|
|
|
|
8,793
|
|
|
|
|
|
|
|
|
|
|
Allowance for excess and obsolescence
|
|
|
(3,921
|
)
|
|
|
(5,377
|
)
|
Inventories, net
|
|
$
|
3,052
|
|
|
$
|
3,416
|
|
Property
and equipment, net of accumulated depreciation and amortization
Property
and equipment consisted of the following at (in thousands):
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Laboratory equipment
|
|
$
|
2,393
|
|
|
$
|
2,300
|
|
Computer hardware and software
|
|
|
1,273
|
|
|
|
1,220
|
|
Leasehold improvements
|
|
|
299
|
|
|
|
288
|
|
Furniture, fixtures and equipment
|
|
|
46
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,011
|
|
|
|
3,853
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation and amortization
|
|
|
(2,597
|
)
|
|
|
(2,364
|
)
|
Property and equipment, net
|
|
$
|
1,414
|
|
|
$
|
1,489
|
|
6.
Equity Securities
Common
Stock Issuable
Non-employee
members of the Board of Directors are paid for their services in common stock on June 1 of each year based on the average closing
prices for the immediately preceding twenty trading days. As of June 30, 2017, the Company accrued $21,000 for these services,
which equates to 18,000 shares. These shares have not yet been issued and are excluded from the calculation of weighted average
common shares outstanding for EPS purposes.
Potentially
Dilutive Common Stock Equivalents
At
June 30, 2017 and 2016, the Company excluded the outstanding securities summarized below, which entitle the holders
thereof to ultimately acquire shares of common stock, from its calculations of earnings per share and weighted average shares
outstanding, as their effect would have been anti-dilutive (in thousands), as follows (unaudited):
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Long Term Investor Rights
|
|
|
—
|
|
|
|
343
|
|
Underwriter’s warrants
|
|
|
802
|
|
|
|
802
|
|
Warrants associated with convertible debt
|
|
|
1,038
|
|
|
|
1,038
|
|
Warrants associated with March 2017 Rights Offering
|
|
|
13,652
|
|
|
|
—
|
|
Common stock options
|
|
|
5,536
|
|
|
|
3,588
|
|
Restricted stock units
|
|
|
107
|
|
|
|
190
|
|
Employee stock purchase plan
|
|
|
222
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
21,357
|
|
|
|
6,082
|
|
7.
Warrants
A
summary of warrant activity for the six months ended June 30, 2017 is presented below (in thousands, except per share
and contractual life data) (unaudited).
|
|
|
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
Number
of
|
|
|
Average
|
|
|
Contractual
|
|
|
|
Shares
|
|
|
Exercise
Price
|
|
|
Life
(in Years)
|
|
Warrants outstanding at December
31, 2016
|
|
|
1,840
|
|
|
$
|
7.72
|
|
|
|
1.80
|
|
Issued
|
|
|
13,652
|
|
|
$
|
1.47
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding
at June 30, 2017
|
|
|
15,492
|
|
|
$
|
2.21
|
|
|
|
4.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercisable
at June 30, 2017
|
|
|
15,492
|
|
|
$
|
2.21
|
|
|
|
4.31
|
|
The
intrinsic value of warrants outstanding at June 30, 2017 was $0.
8.
Stock-Based Compensation
Effective
June 1, 2011, the Company adopted the 2011 Equity Incentive Plan (the “2011 Plan”). On June 6, 2017,
the shareholders approved amendments to the 2011 Plan increasing the maximum number of shares of common stock that may be
issued from 7,500,000 to 9,500,000, which is offset and reduced by options previously granted under previous plans. The
option price is determined by the Board of Directors but cannot be less than the fair value of the shares at the grant date.
Generally, the options vest ratably over either four or five years and expire ten years from the grant date. In the event of
a change of control, as defined in the 2011 Plan, vesting is accelerated.
A
summary of stock option activity for the six months ended June 30, 2017 is presented below (in thousands, except per
share and contractual life data) (unaudited) .
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
Number of
|
|
|
Average
|
|
|
Contractual
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Life (in Years)
|
|
Options outstanding at December 31, 2016
|
|
|
3,667
|
|
|
$
|
7.23
|
|
|
|
6.27
|
|
Granted
|
|
|
2,382
|
|
|
$
|
1.88
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Forfeited or expired
|
|
|
(513
|
)
|
|
$
|
5.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2017
|
|
|
5,536
|
|
|
$
|
5.07
|
|
|
|
7.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at June 30, 2017
|
|
|
1,882
|
|
|
$
|
6.93
|
|
|
|
5.12
|
|
The
estimated aggregate intrinsic value of stock options exercisable at June 30, 2017 was $0. As of June 30, 2017, there was $6.5
million of total unrecognized compensation cost related to outstanding stock options that will be recognized over a weighted average
period of 3.0 years.
During
the six months ended June 30, 2017, the Company granted stock options to purchase 2,342,150 shares of common stock to certain
employees. The options are exercisable for a period of ten years from the date of grant at prices ranging from $1.13 to $1.97
per share, which was the fair value of the Company’s common stock on the respective grant dates. The options vest over a
period of four years. The fair value of these options, as calculated pursuant to the Black-Scholes option-pricing model, was determined
to be $2,151,000 ($0.55 to $0.96 per share). Assumptions used in the model were an expected term of 6.25 years, volatility of
48.0%, a risk-free interest rate of 1.92% to 2.14%, and an expected dividend rate of 0%.
In
March 2017, the Company granted stock options to purchase 40,000 shares of common stock to an outside attorney in connection
with his services relating to the Company’s March, 2017 rights offering to stockholders. The options are
exercisable for a period of four years from the date of grant at a price of $1.76 per share, which was 120% of the fair value
of the Company’s common stock on the grant date of March 6, 2017. The options vested as of the date of grant. The fair
value of these options, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $19,640 ($0.49
per share). Assumptions used in the model were an expected term of 4.0 years, volatility of 48.0%, a risk-free interest rate
of 1.81%, and an expected dividend rate of 0%. The cost of these shares was treated as an issuance cost of the offering and
was deducted from the gross proceeds from the offering.
The
Company adopted an employee stock purchase plan (“ESPP”) starting in June 2015 for all eligible employees. On
June 6, 2017, the shareholders approved an amendment to the ESPP increasing the maximum number of shares of common stock
that may be issued from 250,000 to 750,000. Under the ESPP, shares of the Company’s common stock may be purchased
at six-month intervals at 85% of the lower of the closing fair market value of the common stock (i) on the first trading day
of the offering period or (ii) on the last trading day of the purchase period. An employee may purchase in any one calendar
year shares of common stock having an aggregate fair market value of up to $25,000 determined as of the first trading day of
the offering period. Additionally, a participating employee may not purchase more than 100,000 shares of common stock in any
one offering period. At June 30, 2017, 435,139 shares had been purchased under the ESPP.
The
following table summarizes Restricted Stock Unit (RSU) activity (unaudited) for the six months ended June 30, 2017 (in thousands,
except per share data):
|
|
|
Number
of Awards
|
|
|
Weighted
Average Grant
Date Fair Value
Per Share
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
|
|
|
131
|
|
|
$
|
12.43
|
|
Awarded
|
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
|
(24
|
)
|
|
|
12.43
|
|
Forfeited/canceled
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding as of June 30, 2017
|
|
|
|
107
|
|
|
$
|
12.43
|
|
As
of June 30, 2017, there was $1.3 million of total unrecognized compensation cost related to the outstanding RSUs that will be
recognized over a weighted average period of 2.1 years.
Stock-based
compensation expense recognized for stock-based awards granted under the 2011 Plan and the ESPP in the condensed consolidated
statements of operations for the three and six months ended June 30, 2017 and 2016 is as follows (in thousands) (unaudited):
|
|
Three
Months
Ended
June
30, 2017
|
|
|
Three
Months
Ended
June
30, 2016
|
|
|
Six
Months
Ended
June
30, 2017
|
|
|
Six
Months
Ended
June
30, 2016
|
|
Cost of sales
|
|
$
|
67
|
|
|
$
|
87
|
|
|
$
|
148
|
|
|
$
|
165
|
|
Research and development
|
|
|
75
|
|
|
|
83
|
|
|
|
132
|
|
|
|
160
|
|
Clinical and regulatory
|
|
|
44
|
|
|
|
45
|
|
|
|
93
|
|
|
|
93
|
|
Selling and marketing
|
|
|
112
|
|
|
|
(124
|
)
|
|
|
206
|
|
|
|
(15
|
)
|
General and administrative
|
|
|
637
|
|
|
|
645
|
|
|
|
1,337
|
|
|
|
1,279
|
|
Total
|
|
$
|
935
|
|
|
$
|
736
|
|
|
$
|
1,916
|
|
|
$
|
1,682
|
|
9.
Litigation, Claims and Assessments
Eighteen
oppositions have been filed by a third-party in the European Patent Office each challenging the validity of a European patent
owned or exclusively licensed by the Company. The outcome of the challenges is not certain, however, if successful, they may
affect the Company’s ability to block competitors from utilizing some of its patented technology in Europe. Management
of the Company does not believe that a successful challenge will have a material effect on the Company’s ability
to manufacture and sell its products, or otherwise have a material effect on the Company’s operations.
The
Company is party to litigation arising in the ordinary course of business. It is management’s opinion that the outcome of
such matters will not have a material effect on the Company’s financial statements.
|
Item 2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
|
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with the
unaudited condensed financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q as well as
our audited 2016 financial statements and related notes included in our Annual Report on Form 10-K, which was filed with the Securities
and Exchange Commission on March 16, 2017. In addition to historical information, the discussion and analysis here and throughout
this Form 10-Q contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ
materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited,
to those set forth under “Risk Factors” in Part II, Item 1A of this report.
Second
Sight was founded in 1998 with a mission to develop, manufacture, and market prosthetic devices that restore some useful vision
to blind individuals. Our principal offices are located in Sylmar, California, approximately 25 miles northwest of downtown Los
Angeles. We also have an office in Lausanne, Switzerland, that manages our commercial and clinical operations in Europe, the Middle
East and Asia.
Our
current product, the Argus
®
II System, treats outer retinal degenerations, such as retinitis pigmentosa, which
we refer to as RP. RP is a hereditary disease, affecting an estimated 1.5 million people worldwide including about 100,000 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 restoring some useful vision
in patients who otherwise have total sight loss, the Argus II System can provide benefits which include:
|
●
|
improving
patients’ orientation and mobility, such as locating doors and windows, avoiding
obstacles, and following the lines of a crosswalk,
|
|
●
|
allowing
patients to feel more connected with people in their surroundings, such as seeing when
someone is approaching or moving away,
|
|
●
|
providing
patients with enjoyment from being “visual” again, such as locating
the moon, tracking groups of players as they move around a field, and watching the moving
streams of lights from fireworks, and
|
|
●
|
improving
patients’ well-being and ability to perform activities of daily living.
|
The
Argus II System provides an artificial form of vision that differs from the vision of people with normal sight. It does not restore
normal vision and it does not slow or reverse the progression of the disease. Results vary among patients and while the majority
of patients receive a significant benefit from the Argus II, some patients report receiving little or no benefit.
Our
major corporate, clinical and regulatory milestones include:
|
●
|
In
1998, Second Sight was founded.
|
|
●
|
In
2002, we commenced clinical trials in the US for our prototype product, the Argus I retinal
prosthesis.
|
|
●
|
In
2007, we commenced clinical trials in the US for the Argus II System, which later became
our first commercial product.
|
|
●
|
In
2011, we received marketing approval in Europe (CE Mark) for the Argus II System.
|
|
●
|
In
2013, we received marketing approval in the United States (FDA) for the Argus II System.
|
|
●
|
In
2014, we launched the Argus II in the US, completed our initial public offering (“IPO”),
and began trading on NASDAQ under the symbol “EYES.”
|
|
●
|
In
2015, we commenced a clinical trial in the UK for an expanded indication for the Argus
II System in individuals with dry AMD.
|
We
began selling the Argus II System in Europe at the end of 2011, Saudi Arabia in 2012, the United States and Canada in 2014,
Turkey in 2015, and Taiwan, South Korea and Russia in 2017. With the exception of Taiwan and Russia, we have full regulatory
approval to sell in these regions. In Taiwan and Russia we have limited regulatory approval but we are working to obtain full
regulatory approval in both countries. We sell primarily through our direct sales force, but use distributors in
certain countries.
Going
Concern
From
inception, our operations have been funded primarily through the sales of our common stock, as well as from the issuance of convertible
debt, research and clinical grants, and product revenue generated by the sale of our Argus II System. During the years ended December
31, 2016 and 2015 and the six months ended June 30, 2017, we funded our business primarily through:
|
●
|
Revenue
of $3.2 million in the first six months of 2017, and $4.0 million and $8.9 million in
fiscal years 2016 and 2015, respectively, generated by sales of our Argus II System,
|
|
●
|
Issuance
of common stock in our Rights Offering in June 2016, which generated net proceeds of
$19.5 million after offering expenses,
|
|
●
|
Issuance
of common stock and warrants in our Rights Offering in March 2017, which generated
net proceeds of $19.7 million after offering expenses.
|
Our
financial statements have been presented on the basis that our business is a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course of business. We are subject to the risks and
uncertainties associated with a business with one product line and limited commercial product revenues, including limitations
on our operating capital resources and uncertain demand for our products. We have incurred operating losses and negative
operating cash flows since inception, and we expect to continue to incur operating losses and negative operating cash flows
for at least the next few years, as a result of which, management has concluded that there is substantial doubt about the
Company’s ability to continue as a going concern. The Company’s independent registered public accounting firm, in its
report on the Company’s 2016 consolidated financial statements, has also raised substantial doubt about the
Company’s ability to continue as a going concern.
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 into
the second 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 second 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
FFS patients
– Coverage is determined by Medicare Administrative Contractors
(MACs) that administer various geographic regions of the US. Positive coverage decisions
for the Argus II are effective in seven of 12 MAC jurisdictions (comprising 28 states).
Effective January 1, 2017, the Centers for Medicare and Medicaid Services (CMS) established
a 2017 payment rate of $150,000 for both the procedure and the Argus II Retinal Prosthesis
System. On July 13, 2017, CMS posted a proposed preliminary 2018 payment rate of approximately
$122,000 for both the procedure and the Argus II Retinal Prosthesis System. The final
rate for 2018 will be set later in the year after a comment period, during which the
Company may lobby CMS for a higher reimbursement rate for 2018.
|
|
●
|
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. In 2015 and 2016 combined, 93% of all Medicare Advantage
pre-authorization requests for Argus II procedures were granted.
|
|
●
|
Commercial
insurer patients
– Commercial insurance plans make coverage and payment rate
decisions independent of Medicare, and contracts are individually negotiated with facility
and physician providers.
|
During
the six months ended June 30, 2017, 17 individuals in the US and Canada were implanted with the Argus II technology. Of these
patients, ten were Medicare FFS patients, one was a Medicare Advantage patient, one was a Veteran’s Administration patient
and the remaining five were privately funded patients in Canada.
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.
We
are seeking reimbursement approval in other countries including Belgium and Turkey and we are also seeking reimbursement approval
in additional regions 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 Commissioning through Evaluation (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.
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 in 2017 will focus on media advertisements dedicated to RP patients and their families. These advertisements
will be placed in geographic areas where we have Centers of Excellence committed to Argus II.
Product
and Clinical Development Plans
The
Argus II System is currently approved for RP patients with bare or no light perception in the US, and in Europe for severe to
profound vision loss due to outer retinal degeneration, such as from retinitis pigmentosa (RP), choroideremia, and other similar
conditions. The number of people who are legally blind due to RP is estimated to be about 25,000 in the US, 42,000 in Europe,
and about 375,000 total worldwide. A subset of these patients would be eligible for the Argus II System since the approved baseline
vision for the Argus II System is worse than legally blind (20/200).
The
Company believes an opportunity exists to expand the use of its Argus II technology to better sighted individuals with RP who
are currently not being treated. To achieve this market expansion, the Company is undertaking multiple clinical data collection
efforts and product development efforts to improve the technology’s performance, including:
|
●
|
Clinical trials
with better-sighted individuals;
|
|
●
|
Development of retinal
stimulation protocols that we believe can achieve improved resolution by adjusting electronic retinal stimulation methods;
|
|
●
|
Redesigns of the
externals (glasses, camera, and video processing unit) that will possess processing power many times greater than the current
Argus II system, which will enable enhanced image processing support for the commercial implementation of the new retina stimulation
protocols, possibly by 2018.
|
We
believe we can further expand our market to include nearly all profoundly blind individuals, other than those who are blind due
to preventable diseases or due to brain damage, by developing a visual cortical prosthesis. We refer to this product as the Orion
I visual prosthesis system. We estimate that there are approximately 5.8 million people worldwide who are legally blind due to
causes other than preventable conditions, RP or AMD. If approved for marketing, the FDA and other regulatory agencies will determine
the subset of these patients who are eligible for the Orion I based on our clinical trial and the associated results.
Our
objective in designing and developing the Orion I visual prosthesis system is to bypass the optic nerve and directly stimulate
the part of the brain responsible for vision. On July 17, 2017, we submitted an IDE application to the FDA to begin a human feasibility
study of the Orion I visual prosthesis system. This study will confirm initial findings in our human pilot study we announced
in the fourth quarter of 2016 and provide the first human data of a fully functional wireless visual cortical stimulator system
including the external video camera system. We expect to implant and activate our Orion I visual prosthesis system in human
subjects later this year. This study will provide the first human data of a fully functional wireless visual cortical stimulator
system including an external video camera system. This initial study in a small number of subjects, if successful, should also
form the basis for an expansion to a pivotal clinical trial in 2018.
We
began a five-subject pilot study in the United Kingdom in June 2015, to determine the utility of the Argus II System for use in
persons suffering from dry AMD. In the second quarter of 2016 we completed enrollment and continue to track the subjects via the
site in Manchester. The subjects have reported the ability to integrate their native peripheral vision with their artificial central
vision. Subjects also report that they enjoy using their Argus system. To date, however, the subjects have not demonstrated significant
objective benefit over their residual vision when using the Argus II. We plan to continue testing these subjects and will submit
a revised clinical protocol in 2017. Our approaches to improving the effective resolution in RP patients may also work in AMD
patients, which could help us demonstrate objective benefit over their residual vision. The revised protocol will request approval
to test new retinal stimulation techniques with the existing subjects with the belief they may benefit. If this clinical testing
is successful, we plan to enroll additional patients in our pursuit of a solution for this large patient population.
Critical
Accounting Policies
The
preparation of our condensed consolidated financial statements in conformity with generally accepted accounting principles in
the United States, or GAAP, requires management to make estimates and assumptions that affect the amounts reported in the financial
statements and the notes to the financial statements. Some of those judgments can be subjective and complex, and therefore, actual
results could differ materially from those estimates under different assumptions 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. There have
been no material changes to our critical accounting policies during the six months ended June 30, 2017.
Results
of Operations
Net
sales.
Our net sales are derived primarily from the sale of our Argus II System. We began selling our products in Europe
in 2011, Saudi Arabia in 2012, 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 commercialization of our product, as our
product becomes more well-known and accepted in the market, and as insurance coverage becomes more widespread.
Cost
of sales.
Cost of sales includes the salaries, benefits, material, overhead, third party costs, warranty, charges
for excess inventory, and other costs required to make our Argus II System at our Sylmar, California facility. In the second
quarter of 2016, due to lower implant rates and revenue, we decreased production output and increased our reserve for
slow-moving inventory. As a result of the lower production levels, we have been incurring expenses for unabsorbed overhead
charges. Beginning in the first quarter of 2017, based on our rolling 12-month sales forecasts, we have been reducing our
reserve for slow moving inventory, which has the effect of offsetting the cost of goods shipped for revenue in the period. We
expect to work through our slow-moving inventory and resume normal production when sales orders increase. Our ability
to generate a gross profit in future periods will depend on our ability to (i) generate higher revenues and (ii) to produce
our product in sufficient quantities that will allow us to absorb all production costs in a given period by spreading our
costs over a larger production base, which will lower our cost per unit.
Operating
Expenses.
We generally recognize our operating expenses as we incur them in four general operational categories: 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 to research and development, clinical
and regulatory, sales and marketing and general and administrative personnel. From time to time we have received grants from institutions
or agencies, such as the National Institutes of Health, to help fund some of the cost of our development efforts. We have recorded
these grants as offsets to the costs as they are incurred to complete the related work.
|
●
|
Research
and development expenses consist primarily of employee compensation, materials, and consulting
costs related to the design, development, and enhancements of our current and potential
future products, offset by grant revenue received in support of specific research projects.
We expense our research and development costs as incurred. We expect research and development
expenses to increase in the future as we pursue further enhancements of our existing
product and develop technology for our potential future products, such as the Orion I
visual cortical prosthesis. We also expect to receive additional grants in the future
that will be offset primarily against research and development costs.
|
|
●
|
Clinical
and regulatory expenses consist primarily of salaries, travel and related expenses for
personnel engaged in clinical and regulatory functions, as well as internal and external
costs associated with conducting clinical trials and maintaining relationships with regulatory
agencies. We expect clinical and regulatory expenses to increase as we assess the safety
and efficacy of enhancements to our current Argus II System, seek to expand the indications
for the Argus II System, such as AMD, and prepare to initiate clinical studies of potential
future products such as the Orion I visual cortical prosthesis.
|
|
●
|
Sales
and marketing expenses consist primarily of salaries, commissions, travel and related
expenses for personnel engaged in sales, marketing and business development functions,
as well as costs associated with promotional and other marketing activities. We expect
sales and marketing expenses to increase as we hire additional sales personnel, initiate
additional marketing programs, develop relationships with new distributors, and expand
the number of medical centers that buy and implant our Argus II System and any future
products.
|
|
●
|
General
and administrative expenses consist primarily of salaries and related expenses for executive,
legal, finance, human resources, information technology and administrative personnel,
as well as recruiting and professional fees, patent filing costs, insurance costs and
other general corporate expenses, including rent. We expect general and administrative
expenses to increase as we add personnel and incur additional costs related to the growth
of our business and operate as a public company.
|
Comparison
of the Three Months Ended June 30, 2017 and 2016
Worldwide
commercial implant volume for the three and six months ended June 30, 2017 was as follows:
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe and the Middle East
|
|
|
7
|
|
|
|
7
|
|
|
|
12
|
|
|
|
15
|
|
Asia
|
|
|
3
|
|
|
|
—
|
|
|
|
4
|
|
|
|
—
|
|
Canada
|
|
|
2
|
|
|
|
—
|
|
|
|
5
|
|
|
|
1
|
|
United States
|
|
|
7
|
|
|
|
4
|
|
|
|
12
|
|
|
|
5
|
|
Total
|
|
|
19
|
|
|
|
11
|
|
|
|
33
|
|
|
|
21
|
|
Net
Sales.
Net sales increased by $1,199,000, or 116%, from $1,037,000 in the second quarter of 2016 to $2,236,000 in the
second quarter of 2017, driven by both a higher number of implants and a higher amount of revenue per implant in the
current year quarter.
While
second quarter 2017 implant volume in Europe and the Middle East (EMEA) was flat with the prior year, we saw growth in Asia, Canada
and the U.S. markets compared to the second quarter of 2016. Building on our first Asian implant in Taiwan in the first quarter
of 2017, we followed up with three implants in the second quarter of 2017, which consisted of two implants in South Korea and
a second implant in Taiwan. We had two implants in Canada in the second quarter of 2017 compared to none in the prior year quarter
as we continued the momentum we experienced in Canada in the first quarter of 2017. In the U.S., we had seven implants in the
second quarter of 2017 compared to four in the second quarter of 2016, as our Centers of Excellence strategy continued to gain
traction.
Revenue
recognized per implant was $118,000 in the second quarter of 2017 compared to $94,000 in the second quarter of 2016. The
higher revenue per implant is due mainly to (i) a higher mix of implants in the U.S. and Asia where the prices tend to
be higher, and (ii) the higher U.S. Medicare reimbursement level in 2017 compared to 2016. We expect our average revenue
per implant for the remainder of 2017 to be in a range of $100,000 to $120,000, depending on the geographic mix
of implants.
Cost
of sales.
Cost of sales decreased by approximately $2,114,000, or 65%, from $3,241,000 in the second quarter 2016 to
$1,127,000 in the second quarter of 2017. Cost of sales in the second quarter of 2017 included a charge of $579,000 for
unabsorbed production costs and a credit of $743,000 for the reversal of a reserve for slow moving inventory. Cost of sales
in the second quarter of 2016 included a charges of $973,000 for unabsorbed production costs and approximately $1.5 million
to increase the reserve for slow moving inventory. Excluding these costs, cost of goods sold increased by
approximately $590,000, or 77%, from $763,000 in the second quarter of 2016 to $1,353,000 in the second quarter of 2017. The
increase in costs of goods sold, excluding the impact unabsorbed production costs and inventory reserves, is consistent with
the 73% increase in implants from 11 in the second quarter of 2016 to 19 in the second quarter of 2016. For the next few
quarters we expect that we will continue to keep our production levels low which will result in the generation of significant
unabsorbed production costs. We also expect that we will continue to reverse our reserve for excess inventory, as we
sell our existing supply of Argus II systems, which will offset the cost of products that we ship.
Research
and development expense.
Research and development expense increased by $1,033,000, or 113%, to $1,949,000 in the second
quarter of 2017 as compared to $916,000 in the second quarter of 2016. These expense amounts include $24,000 of offsetting
grant revenue in the second quarter of 2017 and $706,000 of offsetting grant revenue in the second quarter of 2016. Excluding
the impact of grant revenues, research and development expense increased by $351,000, or 22%, from $1,622,000 in the second
quarter of 2016 to $1,973,000 in the second quarter of 2017. This increase from the prior year is primarily attributable to
$273,000 of higher compensation costs and $110,000 of higher costs for outside services, including consultants, in the
current year. While we expect research and development expense to remain fairly constant for the remainder of the year, we
expect that research and development costs will increase in future periods as we continue to enhance our current products and
develop new products.
Clinical
and regulatory expense.
Clinical and regulatory expense increased $116,000, or 20%, from $568,000 in the second quarter of
2016 to $684,000 in the second quarter of 2017. This increase is primarily attributable to higher new enrollment in post-market
studies due to the higher level of implants in 2017. We expect clinical and regulatory costs to increase in the future as (i)
we increase our implant run rate and enroll more patients in post-market clinical studies for regulatory authorities, and (ii)
we conduct new clinical trials to assess new products such as the Orion I, test further enhancements to our existing product,
and begin new trials for better sighted patients.
Selling
and marketing expense.
Selling and marketing expense increased $248,000, or 11%, from $2,199,000 in the second quarter of
2016 to $2,447,000 in the second quarter of 2017. This increase in costs was primarily the result of $404,000 more in people related
costs, including salaries, stock based compensation, travel and commissions partially offset by $130,000 in lower costs for consultants
related to items such as customer outreach programs and marketing strategies in the U.S. and foreign markets. While we expect
these costs to increase in the future as we increase our selling and marketing resources to accelerate the commercialization of
our product, we expect selling and marketing expense to decrease over time when expressed as a percentage of product revenue.
General
and administrative expense.
General and administrative expense increased $281,000, or 11%, from $2,620,000 in the
second quarter of 2016 to $2,901,000 in the second quarter of 2017. This increase is primarily attributable to $184,000 in
higher compensation costs, including bonus, salaries and stock-based compensation charges, and $251,000 in higher payments
for outside services, including legal and recruiting services, partially offset by a decrease of $116,000 in bad debt
expense due to the collection of previously written off amounts.
Comparison
of the Six Months Ended June 30, 2017 and 2016
Net
Sales.
Our net sales increased from $2,090,000 in the first six months of 2016 to $3,245,000 in the first six months of
2017, an increase of $1,155,000, or 55%. This increase in net sales was due to a higher number of implants in 2017
coupled with a relatively flat average revenue per implant.
In
the first six months of 2017 implant volume in EMEA was down by three compared to the first six months of 2016, mainly due
to declines in Italy and Turkey, which were partially offset by growth in France. In the first six months of 2017 there were
four implants is Asia compared to none in the first six months of 2016, as we opened up the Asian market for the first
time with two implants in Taiwan and two in South Korea. We had five implants in Canada in the first six months of 2017
compared to one in the first six months of 2016. In the U.S., we had 12 implants in the first six months of 2017 compared
to five implants in the first six months of 2016, as our Centers of Excellence strategy continued to gain
momentum.
In
the first six months of 2017, revenue recognized per implant of $98,000 was essentially flat compared to $100,000 in first six
months of 2016. For the remainder of 2017, we expect average revenue per implant of $100,000 to $120,000, as we expect to see
a higher mix of revenue from the United States and other markets with higher prices.
Cost
of sales.
Cost of sales decreased by approximately $1,899,000, or 46%, from $4,153,000 in the first six months of 2016 to
$2,254,000 in the first six months of of 2017. Cost of sales in the first six months of 2017 included charges
of $1,529,000 for unabsorbed production costs and a credit of $1,456,000 for the reversal of a reserve for slow
moving inventory. Cost of sales in the first six months of 2016 included charges of $1,434,000 for unabsorbed production
costs and approximately $1.5 million to increase the reserve for slow moving inventory. Excluding these costs, cost of goods
sold increased by approximately $967,000 or 80%, from $1,214,000 in the first six months of 2016 to $2,181,000 in the first
six months of 2017. The increase in costs of goods sold, excluding the impact of unabsorbed production costs and inventory
reserves, compares to the 57% increase in implants from 21 in the first six months of 2016 to 33 in the first six months of
2017. For the next few quarters we expect that we will continue to keep our production levels low which will result in the
generation of significant unabsorbed production costs. We also expect that we will continue to reverse our reserve for
excess inventory, as we sell our existing supply of Argus II systems, which will offset the cost of products that we
ship.
Research
and development expense.
Research and development expense, net of grant revenue, increased by $2,118,000, or 126%, from
$1,678,000 in the first six months of 2016 to $3,796,000 in the first six months of 2017. In the first six months of 2017, we
utilized $128,000 of grant funds to offset costs versus $1,272,000 of grant funds utilized in the first six months of 2016.
Excluding this grant revenue offset, there was an increase in research and development expense of $974,000, or 33%, from
$2,950,000 in the first six months of 2016 to $3,924,000 in the first six months of 2017. This increase is primarily the
result of increased expenditures of $498,000 for compensation costs and $383,000 for outside services, including consultants. We expect to see research and development costs remain at the 2017, or higher, levels as we continue to
invest in improvements to our Argus II product and development of our new Orion cortical implant.
Clinical
and regulatory expense.
Clinical and regulatory expense decreased by $48,000, or 4%, from $1,346,000 in the first
six months of 2016 to $1,298,000 in the six months of 2017. We expect clinical and regulatory costs to increase in upcoming quarters as we (i) conduct
clinical trials to assess new products such as the Orion cortical implant, (ii) test enhancements to our existing products,
(iii) continue to assess the safety and efficacy of our current product for treating blindness due to age related macular
degeneration, and (iv) conduct clinical trials to determine whether better-sighted patients would benefit from our current
product.
Selling
and marketing expense.
Selling and marketing expense increased by $471,000, or 11%, from $4,211,000 in the first six
months of 2016 to $4,682,000 in the first six months of 2017. This increase was primarily due to $497,000 in higher people
related costs in 2017 as compared to 2016, including higher salaries, stock based compensation, travel and commissions. While
we expect these costs to increase in the future as we increase our selling and marketing resources to accelerate
the commercialization of our product, we expect selling and marketing expense to decrease over time when expressed as
a percentage of product revenue.
General
and administrative expense.
General and administrative expense increased by $612,000, or 12%, from $5,030,000 in the
first six months of 2016 to $5,642,000 in the first six months of 2017. This increase is primarily attributable
to $400,000 of higher personnel costs in 2017 and $378,000 more for outside services, including legal
and consulting costs, partially offset by a $225,000 decrease in bad debt expense.
Liquidity
and Capital Resources
Our
consolidated financial statements have been presented on the basis of our being a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of business. We have experienced recurring
operating losses and negative operating cash flows since inception, and have financed our working capital requirements
through the recurring sale of our equity securities in both public and private offerings. As a result, our independent
registered public accounting firm, in its report on our 2016 consolidated financial statements, has raised substantial doubt
about our ability to continue as a going concern (see “Going Concern” above). In March 2017, the Company
successfully completed a Rights Offering to existing shareholders, raising proceeds of $19.7 million net of cash offering
costs, and selling 13.7 million Units at $1.47 per Unit. Each Unit consisted of a share of common stock and a five-year
warrant with an exercise price of $1.47. Based upon this funding, management believes it has sufficient funds to last into
the second quarter of 2018. In order to continue business operations past that point, we will need to raise additional debt
and/or equity capital. However, there can be no assurances that we will be able to secure any such additional financing on
acceptable terms and conditions, or at all. If cash resources become insufficient to satisfy our ongoing cash requirements,
then we would be required to scale back or discontinue our 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 us
to relinquish rights to our products, or to discontinue our operations entirely.
Cash
and money market funds increased by $7.2 million, or 66%, from $10.9 million at December 31, 2016 to $18.1 million at June 30,
2017. Working capital was $17.3 million at June 30, 2017, as compared to $9.6 million at December 31, 2016, an increase of $7.7
million, or 80%. We use our cash, money market funds and working capital to fund our operating activities.
Cash
Flows from Operating Activities
During
the first six months of 2017, we used $12.6 million of cash in operating activities, consisting primarily of a net loss of $14.4
million, offset by non-cash charges of $0.8 million for depreciation and amortization of property and equipment, stock-based compensation,
excess inventory reserve, bad debt recovery and common stock issuable and increased by a net change in operating assets and liabilities
of $1.0 million. During the first six months of 2016, we used $12.1 million of cash in operating activities, consisting
primarily of a net loss of $14.3 million, offset by non-cash charges of $3.7 million for depreciation and amortization of property
and equipment, stock-based compensation, bad debt expense, excess inventory reserves and common stock issuable, and decreased
by a net change in operating assets and liabilities of $1.5 million.
Cash
Flows from Investing Activities
During
the first six months of 2017, investing activities used $7.2 million of cash, reflecting $7.0 million used by the purchase of
money market investments and $0.2 million used for the purchase of equipment. This compares to the first six months of 2016
when investing activities used $8.3 million, reflecting $8.0 million used by the purchase of money market investments and
$0.3 million used for the purchase of equipment.
Cash
Flows from Financing Activities
During
the first six months of 2017, finance activities provided $19.9 million of cash, of which $19.7 million was from the
Rights Offering and $0.2 million was from employee stock plan purchases. Financing activities provided $20.3 million of cash
in first six months of 2016, of which $19.5 million was provided by a Rights Offering and $0.8 million from the exercise of
stock options and employee stock plan purchases.
Off-Balance
Sheet Arrangements
We
do not have any off-balance sheet arrangements.