See accompanying notes.
Fair value of warrants issued in connection with issuance of common stock $280 $—
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Organization and Business Operations
Second Sight Medical Products, Inc. (“Second Sight,” “we,” “us,” or “the Company”) was incorporated in the State of California in 2003. Second Sight develops implantable visual prosthetics to potentially enable blind individuals to achieve greater independence.
In 2007, Second Sight formed Second Sight Medical Products (Switzerland) Sàrl, initially to manage clinical trials and sales and marketing in Europe, the Middle East and 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) Sàrl is 99.5% owned directly by us and 0.5% owned by an executive of Second Sight as of June 30, 2020. Accordingly, Second Sight Medical Products (Switzerland) Sàrl is considered 100% owned for financial statement purposes and is consolidated with Second Sight for all periods presented. In June 2020, we commenced a process to dissolve our Swiss subsidiary which is expected to take approximately one year.
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”).
Our first commercially approved product, the Argus® II retinal prosthesis system (“Argus II”), entered clinical trials in 2006, received CE Mark approval for marketing and sales in the European Union (“EU”) in 2011, and received approval by the United States Food and Drug Administration (“FDA”) for marketing and sales in the United States in 2013. We began selling the Argus II in Europe at the end of 2011, Saudi Arabia in 2012, the United States and Canada in 2014, Turkey in 2015, Iran, Taiwan, South Korea and Russia in 2017, and Singapore in 2018. Given the limited addressable market of Argus II, we 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 sales of our common stock and warrants, as well as from the issuance of convertible debt, research and clinical grants, and limited product revenue generated from the sale of our Argus II product. Funding of our business since 2017 has been primarily provided by:
|
•
|
Issuance of shares of common stock on May 5, 2020 which provided net proceeds of approximately $6.7 million.
|
|
•
|
Issuance 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, 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 $6.7 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 June 30, 2020 we recorded $0.3 million of deferred grant costs which will be offset with the related grant funds when received. During the six months ended June 30, 2020, we received a total of $0.4 million of grant funds primarily from this grant.
8
On September 17, 2019, we received a $2.4 million, four-year grant from the National Institutes of Health (NIH) to develop spatial localization and mapping technology (“SLAM”). This grant involves a joint collaboration with the Johns Hopkins University Applied Physics Laboratory (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 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 million units, each priced at $5.792 for net 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 million units in the offering for an aggregate investment of approximately $30 million.
In November 2017, we entered into an At Market Issuance Sales Agreement (“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 common stock having an aggregate offering price as set forth in the Sales Agreement and a related prospectus supplement filed with the SEC. We agreed to pay the Agents a cash commission of 3.0% of the aggregate gross proceeds from each sale of shares under the Sales Agreement. During January and February 2018, we sold approximately 278,000 shares 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.
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 no revenue that is developing a novel medical device, including limitations on our operating capital resources. 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.
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 12 months from the date of issuance of these financial statements. Accordingly, these and other related factors raise substantial doubt about our ability to continue as a going concern. We anticipate that we will seek to additionally fund our operations through public or private equity or debt financings, grants, collaborations, strategic partnerships or other sources. However, we may be unable to raise additional capital or enter into such other arrangements when needed on favorable terms or at all. If we are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay or discontinue one or more of our research or development programs or 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 accompanying 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 our 2019 consolidated financial statements, has raised substantial doubt about our ability to continue as a going concern.
2. Basis of Presentation, Significant Accounting Policies and Recent Accounting Pronouncements
Basis of Presentation
These unaudited interim financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) and following the requirements of the United States Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted. In our opinion, the unaudited interim financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of our financial position and our results of operations and cash flows for periods presented. These statements do not include all disclosures required by GAAP and should be read in conjunction with our financial statements and accompanying notes for the fiscal year ended December 31, 2019, contained in our Annual Report on Form 10-K filed with the SEC on March 19, 2020. The results of the interim periods are not necessarily indicative of the results expected for the full fiscal year or any other interim period or any future year or period.
9
Reverse Stok Split
On 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 accompanying 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 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 $2.6 million related to inventory of Argus II in the six months ended June 30, 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 and $0.7 million to our fixed assets used primarily for Argus activities. We also incurred $1.0 million in severance payments and other costs associated with the wind down, all of which were substantially paid by June 30, 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 our Annual Report on Form 10-K for the year ended December 31, 2019.
Recently Issued Accounting Pronouncements
We do 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 us to concentrations of credit risk consist primarily of cash, money market funds, and trade accounts receivable. We maintain cash and money market funds with financial institutions that we deem reputable. We extended differing levels of credit to our customers, and typically did not require collateral.
Customer Concentration
The following tables provide information about disaggregated revenue by service type, customer and geographical market.
The following table shows our revenues by customer type during the three and six months ended June 30, 2020 and 2019:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
Direct customers
|
|
$
|
—
|
|
|
$
|
1,006
|
|
|
$
|
—
|
|
|
$
|
1,952
|
Indirect customers (distributors)
|
|
|
—
|
|
|
|
276
|
|
|
|
—
|
|
|
|
458
|
Total
|
|
$
|
—
|
|
|
$
|
1,282
|
|
|
$
|
—
|
|
|
$
|
2,410
|
10
During the three and six months ended June 30, 2020 and 2019, the following customers each comprised greater than 10% of our total revenues:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Customer 1
|
|
|
—
|
%
|
|
|
26
|
%
|
|
|
—
|
%
|
|
|
14
|
%
|
Customer 2
|
|
|
—
|
%
|
|
|
21
|
%
|
|
|
—
|
%
|
|
|
11
|
%
|
Customer 3
|
|
|
—
|
%
|
|
|
13
|
%
|
|
|
—
|
%
|
|
|
14
|
%
|
Customer 4
|
|
|
—
|
%
|
|
|
13
|
%
|
|
|
—
|
%
|
|
|
7
|
%
|
Customer 5
|
|
|
—
|
%
|
|
|
10
|
%
|
|
|
—
|
%
|
|
|
16
|
%
|
Customer 6
|
|
|
—
|
%
|
|
|
10
|
%
|
|
|
—
|
%
|
|
|
10
|
%
|
As of June 30, 2020 and December 31, 2019, the following customers each comprised greater than 10% of our total accounts receivable:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Customer 1
|
|
|
—
|
%
|
|
|
35
|
%
|
Customer 2
|
|
|
—
|
%
|
|
|
33
|
%
|
Customer 3
|
|
|
—
|
%
|
|
|
32
|
%
|
Geographic Concentration
During the three and six months ended June 30, 2020 and 2019, regional revenue based on customer locations which each comprised greater than 10% of our total revenues, consisted of the following:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
United States
|
|
|
—
|
%
|
|
|
68
|
%
|
|
|
—
|
%
|
|
|
65
|
%
|
China
|
|
|
—
|
%
|
|
|
13
|
%
|
|
|
—
|
%
|
|
|
7
|
%
|
Italy
|
|
|
—
|
%
|
|
|
10
|
%
|
|
|
—
|
%
|
|
|
16
|
%
|
Foreign Operations
The accompanying condensed consolidated financial statements as of June 30, 2020 and December 31, 2019 include gross assets amounting to $0.9 million and $1.3 million, respectively, relating to operations of our subsidiary based in Switzerland. It is possible that unanticipated events in foreign countries could disrupt our operations. The assets of the subsidiary, net of reserves and allowances amounted to approximately $0.1 million at June 30, 2020.
4. Fair Value Measurements
The authoritative guidance with respect to fair value establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels, and requires that assets and liabilities carried at fair value be classified and disclosed in one of three categories, as presented below. Disclosure as to transfers in and out of Levels 1 and 2, and activity in Level 3 fair value measurements, is also required.
Level 1. Observable inputs such as quoted prices in active markets for an identical asset or liability that we have the ability to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active-exchange traded securities and exchange-based derivatives.
Level 2. Inputs, other than quoted prices included within Level 1, which are directly observable for the asset or liability or indirectly observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include fixed income securities, non-exchange based derivatives, mutual funds, and fair-value hedges.
Level 3. Unobservable inputs in which there is little or no market data for the asset or liability which requires the reporting entity to develop its own assumptions. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded non-exchange-based derivatives and commingled investment funds, and are measured using present value pricing models.
Cash equivalents, which includes money market funds, are the only financial instrument measured and recorded at fair value on our consolidated balance sheet, and they are valued using Level 1 inputs.
11
Assets measured at fair value on a recurring basis are as follows (in thousands):
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
June 30, 2020 (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
3,437
|
|
|
$
|
3,437
|
|
|
$
|
—
|
|
|
$
|
—
|
|
December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
11,307
|
|
|
$
|
11,307
|
|
|
$
|
—
|
|
|
$
|
—
|
|
5. Selected Balance Sheet Detail
Inventories, net
Inventories consisted of the following (in thousands):
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Raw materials
|
|
$
|
741
|
|
|
$
|
803
|
|
Work in process
|
|
|
1,461
|
|
|
|
1,716
|
|
Finished goods
|
|
|
1,290
|
|
|
|
2,069
|
|
|
|
|
3,492
|
|
|
|
4,588
|
|
Allowance for excess and obsolete inventory and impairment charge
|
|
|
(3,492
|
)
|
|
|
(3,559
|
)
|
Inventories, net
|
|
$
|
—
|
|
|
$
|
1,029
|
|
We recorded $2.6 million as an impairment charge during the six months ended June 30, 2019, related to our plans to suspend Argus II production. We recorded further impairment charges to our inventory of $0.5 million in the first six months of 2020. Additionally, finished goods inventory amounting to approximately $0.4 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
Property and equipment consisted of the following (in thousands):
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Laboratory equipment
|
|
$
|
584
|
|
|
$
|
2,724
|
|
Computer hardware and software
|
|
|
69
|
|
|
|
1,672
|
|
Leasehold improvements
|
|
|
—
|
|
|
|
304
|
|
Furniture, fixtures and equipment
|
|
|
—
|
|
|
|
78
|
|
|
|
|
653
|
|
|
|
4,778
|
|
Accumulated depreciation and amortization
|
|
|
(441
|
)
|
|
|
(3,656
|
)
|
Property and equipment, net
|
|
$
|
212
|
|
|
$
|
1,122
|
|
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 sold. Proceeds from the sales which were received in July 2020 approximated the estimated recorded fair value of assets held-for-sale at June 30, 2020.
12
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 June 30, 2020
|
|
$
|
335
|
|
Product Warranties
A summary of activity of our warranty liabilities, which are included in accrued expenses, for the period ended June 30, 2020 is presented below:
Beginning balance as of December 31, 2019
|
|
$
|
1,575
|
Additions
|
|
|
—
|
Settlements
|
|
|
(419)
|
Adjustments and other
|
|
|
—
|
Total
|
|
|
1,156
|
Less: Finished goods inventory expected to be used for future warranty claims
|
|
|
(399)
|
Ending balance as of June 30, 2020
|
|
$
|
757
|
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 June 30, 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 paid an early termination fee of $150,000 which was expensed in our restructuring charges for the six months ended June 30, 2020. Due to the termination of this lease there are no right-of-use assets or current or long term lease liabilities at June 30, 2020.
13
On July 7, 2020, we entered into a lease with Sylmar Biomedical Park, LLC, to lease a smaller portion of our present facility. The new lease allows us to significantly reduce our rent while maintaining operations and our current address. The term of the lease is from June 16, 2020 until December 31, 2020 and automatically renews monthly thereafter unless terminated by either party with 30 day notice. The monthly rent is $16,000 inclusive of a proportionate share of the building’s maintenance cost. The facility will support the Company’s current staff and operations, including continuation of its Orion early feasibility study, with six subjects at UCLA and Baylor College of Medicine, and other Orion research.
Assets
|
Classification
|
|
December 31,
2019
|
|
|
|
|
Non-current assets
|
Right-of-use assets
|
|
|
$
|
2,342
|
|
Liabilities
|
|
|
|
|
|
|
|
Current
|
Current operating lease liabilities
|
|
|
$
|
237
|
|
Long term
|
Long term operating lease liabilities
|
|
|
$
|
2,365
|
|
The components of lease expense for the three and six months ended June 30, 2020 and 2019 were as follows (unaudited):
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
Lease expense:
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
Operating lease expense
|
|
$
|
106
|
|
|
$
|
123
|
|
|
$
|
229
|
|
|
$
|
246
|
Short-term expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
Total lease expense
|
|
$
|
106
|
|
|
$
|
123
|
|
|
$
|
229
|
|
|
$
|
246
|
Cash paid for lease amounts included in the measurement of lease liabilities amounted to $227,000 and $237,000, respectively, during the six months ended June 30, 2020 and 2019.
6. Equity Securities
Increase in Authorized Shares of Common Stock
On June 4, 2019, our shareholders approved an amendment to our restated articles of incorporation increasing our authorized no par value shares of common stock from 200 million to 300 million shares.
Potentially Dilutive Common Stock Equivalents
As of June 30, 2020 and 2019, we excluded the potentially dilutive securities summarized below, which entitle the holders thereof to potentially acquire shares of common stock, from our calculations of net loss per share and weighted average common shares outstanding, as their effect would have been anti-dilutive (in thousands).
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Common stock warrants issued to underwriters
|
|
|
375
|
|
|
|
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
|
|
|
304
|
|
|
|
1,115
|
|
Restricted stock units
|
|
|
8
|
|
|
|
62
|
|
Employee stock purchase plan
|
|
|
—
|
|
|
|
56
|
|
|
|
|
8,369
|
|
|
|
9,015
|
|
14
7. Warrants
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 $6.7 million. Direct cost of this offering consisted of an 8.5% underwriting fee and reimbursable expenses of $90,000 and other costs incurred by us of $100,000. Also, for cash consideration of $100, we granted to the underwriters warrants to purchase 375,000 shares of the Company’s common stock at an exercise price of $1.25 per share, which was 25 percent above the offering price to the investors. The warrant is exercisable, in whole or in part, for a period commencing 180 days after the effective date of the underwriting agreement (April 30, 2020) and ending on the fifth anniversary date of the effective date of the underwriting agreement. The fair value of these warrants, calculated using the Black-Scholes option-pricing model, was determined to be $280,000 ($0.75 per share) using the following assumptions: expected term of 5.0 years, volatility of 94.0%, risk-free interest rate of 0.67% and expected dividend rate of 0.0%. The fair value of these warrants reduced the amounts included in common stock from the offering and were offset by an increase in additional paid in capital.
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 June 30, 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.
A summary of warrants activity for the six months ended June 30, 2020 is presented below (in thousands, except per share and contractual life data).
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
Per Share
|
|
|
Weighted
Average
Remaining
Contractual
Life (in Years)
|
|
Warrants outstanding as of December 31, 2019
|
|
|
7,682
|
|
|
$
|
11.76
|
|
|
|
4.21
|
|
Issued
|
|
|
375
|
|
|
|
1.25
|
|
|
|
4.85
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Warrants outstanding as of June 30, 2020
|
|
|
8,057
|
|
|
$
|
11.27
|
|
|
|
3.76
|
|
Warrants exercisable as of June 30, 2020
|
|
|
8,057
|
|
|
$
|
11.27
|
|
|
|
3.76
|
|
The warrants outstanding as of June 30, 2020 had no intrinsic value.
15
8. Stock-Based Compensation
A summary of stock option activity under our 2011 Equity Incentive Plan (“2011 Plan”) for the six months ended June 30, 2020 is presented below (in thousands, except per share and contractual life data).
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
Per Share
|
|
|
Weighted
Average
Remaining
Contractual
Life (in Years)
|
|
Options outstanding as of December 31, 2019
|
|
|
984
|
|
|
$
|
21.78
|
|
|
|
7.70
|
|
Granted
|
|
|
206
|
|
|
$
|
5.98
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
$
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(886
|
)
|
|
$
|
20.50
|
|
|
|
|
|
Options outstanding as of June 30, 2020
|
|
|
304
|
|
|
$
|
14.82
|
|
|
|
8.05
|
|
Options exercisable as of June 30, 2020
|
|
|
181
|
|
|
$
|
18.90
|
|
|
|
7.56
|
|
The estimated aggregate intrinsic value of stock options exercisable as of June 30, 2020 was zero. As of June 30, 2020, there was $0.7 million of total unrecognized compensation cost related to outstanding stock options that will be recognized over a weighted average period of 2.76 years.
During the six months ended June 30, 2020, we granted stock options to purchase 205,701 shares of common stock to certain employees. The options are exercisable for a period of ten years from the date of grant at $5.98 per share, which was the fair value of our common stock on the respective grant date. The options generally vest over a period of four years . The fair value of these options, calculated using the Black-Scholes option-pricing model, was determined to be $0.8 million ($4.05 per share) using the following assumptions: expected term of 6.02 years, volatility of 78.0%, risk-free interest rate of 1.50% and expected dividend rate of 0.0%.
During the three and six months ended June 30, 2020, approximately 586,000 and 886,000 options were cancelled or expired resulting in a reduction of stock option expense of approximately $88,000 and $255,000, respectively.
The following table summarizes restricted stock unit (“RSU”) activity for the six months ended June 30, 2020 (in thousands, except per share data):
|
|
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
|
|
|
(38
|
)
|
|
|
5.92
|
|
Outstanding as of June 30, 2020
|
|
|
8
|
|
|
$
|
5.92
|
|
As of June 30, 2020, there was $40,000 of total unrecognized compensation cost related to the outstanding RSUs that will be recognized over a weighted average period of 2.64 years.
We adopted an employee stock purchase plan in June 2015 for all eligible employees. At June 30, 2020 the available number of shares that may be issued under the plan is 77,031.
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.
16
Stock-based compensation expense recognized for stock-based awards in the condensed consolidated statements of operations for the three and six months ended June 30, 2020 and 2019 was as follows (in thousands):
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
Cost of sales
|
|
$
|
—
|
|
|
$
|
43
|
|
|
$
|
—
|
|
|
$
|
90
|
Research and development
|
|
|
7
|
|
|
|
134
|
|
|
|
109
|
|
|
|
321
|
Clinical and regulatory
|
|
|
12
|
|
|
|
31
|
|
|
|
27
|
|
|
|
65
|
Selling and marketing
|
|
|
—
|
|
|
|
131
|
|
|
|
41
|
|
|
|
261
|
General and administrative
|
|
|
69
|
|
|
|
520
|
|
|
|
190
|
|
|
|
1,020
|
Total
|
|
$
|
88
|
|
|
$
|
859
|
|
|
$
|
367
|
|
|
$
|
1,757
|
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 have been affected by the COVID-19 outbreak. Patient visits in ongoing clinical trials have been 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. Although regularly scheduled visits are on hold due to the coronavirus outbreak, sites continue to see patients if needed for any potential medical issues that may arise including any suspected adverse events. 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.
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;
|
17
|
•
|
inability to satisfy Nasdaq’s continued listing requirements and possible delisting; and
|
|
•
|
other uncertain events that may have negative impact on our operations.
|
10. Litigation, Claims and Assessments
Ten oppositions filed by Pixium Vision are pending in the European Patent Office, each challenging the validity of a European patent owned by us. We have filed one opposition that is currently pending in the European Patent Office challenging the validity of a patent owned by Pixium Vision. The outcome of the challenges are not certain, however, if successful, they may affect our ability to block competitors from utilizing our patented technology. We believe a successful challenge will not have a material effect on our ability to manufacture and sell our products, or otherwise have a material effect on our operations.
By letters received on June 23, 2020 and July 21, 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. Although the Company does not believe a lawsuit will be filed imminently, the claim is 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 our opinion that the outcome of such matters will not have a material effect on our results of operations, however, the results of litigation and claims are inherently unpredictable. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors
11. Subsequent Events
Nasdaq
Letter from Nasdaq dated July 23, 2020
On July 23, 2020, Nasdaq notified us that we no longer met Listing Rule 5550(b)(2) (the “Rule”) requiring the Company to maintain a minimum market value of listed securities (“MVLS”) of $35 million. Nasdaq’s notice was based on a review of our MVLS for the prior 30 business days. Nasdaq’s letter also noted that we do not meet the requirements under Listing Rules 5550(b)(1) and 5550(b)(3) which require stockholders’ equity of at least $2.5 million, or net income from continuing operations of $500,000 in the most recently completed, or in two of the three most recently completed, fiscal years, respectively. However, Nasdaq’s listing rules provide us a compliance period of 180 calendar days, or until January 19, 2021, in which to regain compliance.
In the event we do not regain compliance with the Rule prior to the expiration of the compliance period, we will receive written notification that our securities are subject to delisting. At that time, we may appeal the delisting determination to a Nasdaq Hearings Panel.
In the event we do not regain compliance with the Rule prior to the expiration of the compliance period, we will receive written notification that our securities are subject to delisting. At that time, we may appeal the delisting determination to a Nasdaq Hearings Panel.
Letter from Nasdaq dated July 21, 2020
On July 21, 2020, Nasdaq notified us, based on our submitted information that the board of directors had appointed an independent director to our compensation committee, that we currently comply with Rule 5605(d)(2) (the “Rule”), and this matter is now closed.
As previously disclosed prior to that remediation, Nasdaq had notified us on June 2, 2020 that we did not comply with the compensation committee requirement for continued listing on Nasdaq set forth in the Rule.
Separately from the foregoing, Nasdaq had notified us on July 15, 2020 that we again qualified for a cure period to meet listing rules brought into question due to changes in board of directors. We previously reported in Forms 8-K filed with the SEC regarding letters from Nasdaq dated April 15, 2020, June 1, 2020, and June 2, 2020.
As previously disclosed, Nasdaq notified us on April 15, 2020, after the appointment of Matthew Pfeffer, one of our then independent directors, as our acting Chief Executive Officer effective March 27, 2020, that we no longer complied with Nasdaq’s independent director and audit committee requirements as set forth in Listing Rule 5605 (the “Listing Rules”). On June 1, 2020, Nasdaq notified us that following the resignation of William J. Link as a director effective May 31, 2020, our noncompliance with the Listing Rules was then due to more than one vacancy on our board and audit committee. As a result, Nasdaq advised the Company that we were no longer eligible for the cure period set forth in our Form 8-K filed June 4, 2020 and that a plan of compliance was required to be submitted to Nasdaq no later than July 16, 2020.
18
Our board of directors has concluded that our non-executive Chair, Gregg Williams, meets the criteria of an independent director and has appointed Mr. Williams to be a member of the Audit Committee as of June 22, 2020, as a result of which the Company has only one vacancy on its board and committees. In the July 15, 2020 letter, Nasdaq acknowledged our conclusion regarding Mr. Williams’ independent director status and appointment to the Audit Committee. As a result, Nasdaq confirmed that we again are eligible for the cure period provided in Nasdaq’s Listing Rules. As such, Nasdaq reiterated that consistent with Listing Rules 5605(b)(1)(A) and 5605(c)(4), our cure period to regain compliance is as follows:
|
|
|
|
•
|
until the earlier of the Company’s next annual shareholders’ meeting or March 27, 2021;
|
or
|
|
|
|
•
|
if the next annual shareholders’ meeting is held before September 23, 2020, then the Company must evidence compliance no later than September 23, 2020.
|
Nasdaq requires us to submit 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 us written notification that our securities will be delisted, at which time we may appeal the delisting determination to a Nasdaq Hearing Panel.
19