eyes-10q_20200331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

 

Commission File Number 001-36747

Second Sight Medical Products, Inc.

(Exact name of Registrant as specified in its charter)

 

California

 

02-0692322

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

12744 San Fernando Road, Suite 400, Sylmar, CA 91342

(Address of principal executive offices, including zip code)

 

(818) 833-5000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock

 

EYES

 

NASDAQ

Warrants

 

EYESW

 

NASDAQ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    No 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     

 Yes    No 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.     Yes      No  

 

As of June 25, 2020, the registrant had 23,118,233 shares of common stock, no par value per share and 7,682,244 warrants, outstanding.

 


EXPLANATORY NOTE

As previously disclosed in the Current Report on Form 8-K filed by Second Sight Medical Products, Inc. (the “Company”) with the Securities and Exchange Commission (the “SEC”) on May 12, 2020, the filing of this Quarterly Report on Form 10-Q for the period ended March 31, 2020 (this “Form 10-Q”) was delayed due to circumstances related to the ongoing COVID-19 global pandemic. In compliance with local governmental “shelter in place” measures and to limit the risk of exposure to and transmission of the SARS-CoV-2 virus, which causes COVID-19, access to the Company’s facilities has been restricted and the Company’s employees have a minimal presence in its offices for essential activities. These restrictions caused limited access to the Company’s facilities and disrupted normal interactions among the Company’s accounting personnel and other staff, all of which slowed the completion of the Company’s quarterly review and preparation of the Form 10-Q. Accordingly, the Company’s ability to complete its quarterly review and to prepare and file the Form 10-Q by the original SEC filing deadline had been hampered. As a result, the Company relied on the “Order under Section 36 of the Securities Exchange Act of 1934 Modifying Exemptions From the Reporting and Proxy Delivery Requirements for Public Companies” dated March 25, 2020 (Release No. 34-88465) issued by the SEC to delay the filing of this Form 10-Q.

 

 


SECOND SIGHT MEDICAL PRODUCTS, INC.

AND SUBSIDIARY

 

FORM 10-Q

TABLE OF CONTENTS 

 

PART I

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2020 (unaudited) and December 31, 2019

4

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019 (unaudited)

5

 

Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2020 and 2019 (unaudited)

6

 

Condensed Consolidated Statements of Stockholders’ Equity (Deficiency) for each of the three-month periods ended March 31, 2020 and 2019 (unaudited)

7

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019 (unaudited)

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27

 

 

 

Item 4.

Controls and Procedures

27

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

28

 

 

 

Item 1A.

Risk Factors

28

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

 

 

 

Item 3.

Defaults Upon Senior Securities

32

 

 

 

Item 4.

Mine Safety Disclosures

32

 

 

 

Item 5.

Other Information

32

 

 

 

Item 6.

Exhibits

33

 

 

 

SIGNATURES

34

 

3


Part I. Financial Statements

Item 1. Financial Statements

SECOND SIGHT MEDICAL PRODUCTS, INC.

AND SUBSIDIARY

Condensed Consolidated Balance Sheets

(in thousands)

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,339

 

 

$

11,327

 

Accounts receivable, net

 

 

 

 

 

455

 

Inventories, net

 

 

 

 

 

1,029

 

Assets held-for-sale

 

 

400

 

 

 

 

Prepaid expenses and other current assets

 

 

926

 

 

 

299

 

Total current assets

 

 

3,665

 

 

 

13,110

 

Property and equipment, net

 

 

232

 

 

 

1,122

 

Right-of-use assets

 

 

 

 

 

2,342

 

Deposits and other assets

 

 

7

 

 

 

25

 

Total assets

 

$

3,904

 

 

$

16,599

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,588

 

 

$

1,093

 

Accrued expenses

 

 

1,575

 

 

 

1,889

 

Accrued compensation expense

 

 

885

 

 

 

2,698

 

Accrued clinical trial expenses

 

 

733

 

 

 

707

 

Current operating lease liabilities

 

 

106

 

 

 

237

 

Contract liabilities

 

 

335

 

 

 

335

 

Total current liabilities

 

 

5,222

 

 

 

6,959

 

Long term operating lease liabilities

 

 

 

 

 

2,365

 

Total liabilities

 

 

5,222

 

 

 

9,324

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity (deficiency):

 

 

 

 

 

 

 

 

Preferred stock, no par value, 10,000 shares authorized; none outstanding

 

 

 

 

 

 

Common stock, no par value; 300,000 shares authorized; shares issued and

   outstanding: 15,657 and 15,643 as of March 31, 2020 and December 31,

   2019, respectively

 

 

264,003

 

 

 

264,008

 

Additional paid-in capital

 

 

48,892

 

 

 

48,613

 

Accumulated other comprehensive loss

 

 

(543

)

 

 

(562

)

Accumulated deficit

 

 

(313,670

)

 

 

(304,784

)

Total stockholders’ equity (deficiency)

 

 

(1,318

)

 

 

7,275

 

Total liabilities and stockholders’ equity (deficiency)

 

$

3,904

 

 

$

16,599

 

 

See accompanying notes.

4


SECOND SIGHT MEDICAL PRODUCTS, INC.

AND SUBSIDIARY

Condensed Consolidated Statements of Operations (unaudited)

(in thousands, except per share data)

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Net sales

 

$

 

 

$

1,128

 

Cost of sales

 

 

 

 

 

731

 

Gross profit

 

 

 

 

 

397

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development, net of grants

 

 

3,887

 

 

 

2,183

 

Clinical and regulatory, net of grants

 

 

914

 

 

 

1,006

 

Selling and marketing

 

 

701

 

 

 

2,103

 

General and administrative

 

 

2,021

 

 

 

2,449

 

Restructuring charges

 

 

1,381

 

 

 

2,424

 

Total operating expenses

 

 

8,904

 

 

 

10,165

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(8,904

)

 

 

(9,768

)

Interest income

 

 

18

 

 

 

68

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(8,886

)

 

$

(9,700

)

 

 

 

 

 

 

 

 

 

Net loss per common share – basic and diluted

 

$

(0.57

)

 

$

(0.80

)

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding – basic and diluted

 

 

15,649

 

 

 

12,071

 

 

See accompanying notes.

5


SECOND SIGHT MEDICAL PRODUCTS, INC.

AND SUBSIDIARY

Condensed Consolidated Statements of Comprehensive Loss (unaudited)

(in thousands)

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Net loss

 

$

(8,886

)

 

$

(9,700

)

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

19

 

 

 

(8

)

Comprehensive loss

 

$

(8,867

)

 

$

(9,708

)

 

See accompanying notes.

6


SECOND SIGHT MEDICAL PRODUCTS, INC.

AND SUBSIDIARY

Condensed Consolidated Statements of Stockholders’ Equity (Deficiency) (unaudited)

(in thousands)

 

 

 

 

Common Stock

 

 

 

Additional

Paid-in

 

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

 

Total

Stockholders’

 

 

 

 

Shares

 

Amount

 

 

 

Capital

 

 

 

Loss

 

 

Deficit

 

 

 

Equity

 

Balance, December 31, 2018

 

 

9,542

 

 

$

229,019

 

 

$

44,111

 

 

$

(575

)

 

$

(269,471

)

 

$

3,084

 

Adoption of ASC Topic 842-Leases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(144

)

 

 

(144

)

Issuance of shares of common stock and

   warrants in connection with rights offering,

   net of issuance costs

 

 

5,976

 

 

 

34,399

 

 

 

 

 

 

 

 

 

 

 

 

34,399

 

Release of restricted stock units

 

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants modification (see note 7)

 

 

 

 

 

 

 

 

1,577

 

 

 

 

 

 

(1,577

)

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

898

 

 

 

 

 

 

 

 

 

898

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,700

)

 

(9,700)

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

(8

)

 

 

 

 

 

(8

)

Balance, March 31, 2019

 

 

15,525

 

 

$

263,418

 

 

$

46,586

 

 

$

(583

)

 

$

(280,892

)

 

$

28,529

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

Additional

Paid-in

 

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

 

Total

Stockholders’

 

 

 

 

Shares

 

 

 

Amount

 

 

 

Capital

 

 

 

Loss

 

 

Deficit

 

 

 

Equity(Deficiency)

 

Balance, December 31, 2019

 

 

15,643

 

 

$

264,008

 

 

$

48,613

 

 

$

(562

)

 

$

(304,784

)

 

$

7,275

 

Repurchase of fractional shares in connection

   with reverse stock split

 

 

(2

)

 

 

(11

)

 

 

 

 

 

 

 

 

 

 

 

(11

)

Issuance of shares of common stock

 

 

1

 

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

6

 

Release of restricted stock units

 

 

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

279

 

 

 

 

 

 

 

 

 

279

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,886

)

 

(8,886

)

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

19

 

 

 

 

 

 

19

 

Balance, March 31, 2020

 

 

15,657

 

 

$

264,003

 

 

$

48,892

 

 

$

(543

)

 

$

(313,670

)

 

$

(1,318

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

7


SECOND SIGHT MEDICAL PRODUCTS, INC.

AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

(unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(8,886

)

 

$

(9,700

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

106

 

 

 

99

 

Stock-based compensation

 

 

279

 

 

 

898

 

Non-cash lease expense

 

 

3

 

 

 

6

 

Restructuring charges-inventory and fixed asset impairment

 

 

1,115

 

 

 

2,424

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

455

 

 

 

(95

)

Inventories

 

 

(112

)

 

 

(786

)

Prepaid expenses and other assets

 

 

(610

)

 

 

236

 

Accounts payable

 

 

497

 

 

 

297

 

Accrued expenses

 

 

286

 

 

 

(57

)

Accrued compensation expenses

 

 

(1,813

)

 

 

(609

)

Accrued clinical trial expenses

 

 

26

 

 

 

84

 

Contract liabilities

 

 

 

 

 

53

 

Net cash used in operating activities

 

 

(8,654

)

 

 

(7,150

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(331

)

 

 

(37

)

Net cash used in investing activities

 

 

(331

)

 

 

(37

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net proceeds from sale of common stock and/or warrants

 

 

6

 

 

 

34,399

 

Repurchase of fractional shares in connection with reverse stock split

 

 

(11

)

 

 

 

Net cash (used in) provided by financing activities

 

 

(5

)

 

 

34,399

 

Effect of exchange rate changes on cash and cash equivalents

 

 

2

 

 

 

(1

)

Cash and cash equivalents:

 

 

 

 

 

 

 

 

Net increase (decrease)

 

 

(8,988

)

 

 

27,211

 

Balance at beginning of period

 

 

11,327

 

 

 

4,471

 

Balance at end of period

 

$

2,339

 

 

$

31,682

 

 

See accompanying notes.

8


SECOND SIGHT MEDICAL PRODUCTS, INC.

AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

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 March 31, 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.

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 product that was commercially approved, the Argus® II retinal prosthesis system (“Argus II”), entered clinical trials in 2006, received CE Mark approval for marketing and sales in the European Union (“EU”) in 2011, and received approval by the United States Food and Drug Administration (“FDA”) for marketing and sales in the United States in 2013. We began selling the Argus II in Europe at the end of 2011, Saudi Arabia in 2012, the United States and Canada in 2014, Turkey in 2015, Iran, Taiwan, South Korea and Russia in 2017, and Singapore in 2018. Given the limited addressable market of Argus II, we no longer market the Argus II and have focused all of our resources on the development of Orion.

In March 2020, we were severely adversely impacted by the COVID-19 pandemic and its related effects on our ability to finance our planned activities. As a result, we significantly reduced our staff and expenses and conserved liquidity as we continue operations and explore strategic options. These options include securing additional funding and exploring business alternatives that may include partnering, acquiring, investing in or combining with businesses that may or may not be in a related industry. No assurances can be given that any of these initiatives will occur.

Liquidity and Going Concern

From inception, our operations have been funded primarily through the 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 $6.6 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 $6.6 million.

We received an award for $1.6 million grant (with the intent to fund $6.4 million over five years subject to annual review and approval) from the National Institutes of Health (NIH) to fund the “Early Feasibility Clinical Trial of a Visual Cortical Prosthesis” that commenced in January 2018. Our second year grant was recently approved under this grant. As of March 31, 2020 we recorded $0.3 million of deferred grant costs, included in prepaid expenses and other current assets, associated with this grant which were offset with the related grant funds when received in April 2020.

9


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.

10


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 cortical prosthetics for profoundly blind individuals. We historically managed our Argus II and Orion programs on a consolidated basis within this single operating segment and do not assess the performance of our product lines or geographic regions on other measures of income or expense, such as program expense, operating income or net income. Our underlying technology consists of hardware components (implanted and wearable) and software. A vast majority of this underlying technology is shared between our Argus II and Orion branded systems. While we have ceased marketing the Argus II product indicated for individuals with retinitis pigmentosa, we are developing Orion as a next generation product with potential to treat a broader market of blind individuals, including the retinitis pigmentosa market.

 

Based upon our decision on May 10, 2019 to accelerate our transition to the Orion platform and suspend production of Argus, we recorded impairment charges of $2.4 million related to inventory of Argus II in the three months ended March 31, 2019. As part of this transition we commenced a corporate restructuring plan to focus on development of Orion and other key research projects. On March 31, 2020, due to the COVID-19 pandemic and related inability to secure additional funding, we laid off the majority of our employees and reduced our operating expenses significantly to allow for our continuing business operations. Due to our focus on Orion and wind down of selling and marketing activities related to Argus II, we recorded further impairment charges to our inventory of $0.5 million. In addition, we recorded an impairment of $0.7 million to our fixed assets used primarily for Argus activities and $0.2 million in severance payments all of which were paid in May 2020. We continue to advance the development of our Orion technology and are exploring various strategic options, however we cannot assure that any of these endeavors will yield satisfactory results or that we will be able to maintain our operations.

 

    

Our significant accounting policies are set forth in Note 2 of the financial statements in 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.

11


The following table shows our revenues by customer type during the three months ended March 31, 2020 and 2019:

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Direct customers

 

$

 

 

$

946

 

Indirect customers (distributors)

 

 

 

 

 

182

 

Total

 

$

 

 

$

1,128

 

 

During the three months ended March 31, 2020 and 2019, the following customers each comprised greater than 10% of our total revenues:

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Customer 1

 

 

%

 

 

23

%

Customer 2

 

 

%

 

 

15

%

Customer 3

 

 

%

 

 

13

%

Customer 4

 

 

%

 

 

12

%

Customer 5

 

 

%

 

 

12

%

Customer 6

 

 

%

 

 

10

%

Customer 7

 

 

%

 

 

10

%

 

 

 

 

 

 

 

 

 

 

As of March 31, 2020 and December 31, 2019, the following customers each comprised greater than 10% of our total accounts receivable:

 

 

 

March 31,

2020

 

 

December 31,

2019

 

Customer 1

 

 

%

 

 

35

%

Customer 2

 

 

%

 

 

33

%

Customer 3

 

 

%

 

 

32

%

 

 

 

 

 

 

 

 

Geographic Concentration

During the three months ended March 31, 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

March 31,

 

 

 

2020

 

 

2019

 

United States

 

 

%

 

 

60

%

Italy

 

 

%

 

 

23

%

Korea

 

 

%

 

 

10

%

 

 

 

 

 

 

 

 

 

 

Foreign Operations

The accompanying condensed consolidated financial statements as of March 31, 2020 and December 31, 2019 include gross assets amounting to $1.0 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.

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.

12


Level 2. Inputs, other than quoted prices included within Level 1, which are directly observable for the asset or liability or indirectly observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include fixed income securities, non-exchange based derivatives, mutual funds, and fair-value hedges.

Level 3. Unobservable inputs in which there is little or no market data for the asset or liability which requires the reporting entity to develop its own assumptions. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded non-exchange-based derivatives and commingled investment funds, and are measured using present value pricing models.

Cash equivalents, which includes money market funds, are the only financial instrument measured and recorded at fair value on our consolidated balance sheet, and they are valued using Level 1 inputs.

Assets measured at fair value on a recurring basis are as follows (in thousands):

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

March 31, 2020 (unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

2,179

 

 

$

2,179

 

 

$

 

 

$

 

December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

11,307

 

 

$

11,307

 

 

$

 

 

$

 

         

 

5. Selected Balance Sheet Detail

Inventories, net

Inventories consisted of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Raw materials

 

$

823

 

 

$

803

 

Work in process

 

 

1,699

 

 

 

1,716

 

Finished goods

 

 

1,282

 

 

 

2,069

 

 

 

 

3,804

 

 

 

4,588

 

Allowance for excess and obsolete inventory and impairment charge

 

 

(3,804

)

 

 

(3,559

)

Inventories, net

 

$

 

 

$

1,029

 

 

 

We recorded $2.4 million as an impairment charge during the three months ended March 31, 2019, related to our plans to suspend Argus II production. We recorded further impairment charges to our inventory of $0.5 million in the first quarter of 2020. Additionally, finished goods inventory amounting to approximately $0.75 million that we expect to use for our future warranty claims has been offset with the warranty accrual which is included in accrued expenses.

 

Property and equipment

Property and equipment consisted of the following (in thousands):

 

 

 

March 31,

 

 

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

 

 

(421

)

 

 

(3,656

)

Property and equipment, net

 

$

232

 

 

$

1,122

 

 

13


As a result of our decision to cease marketing of Argus II we recorded an impairment of $0.7 million related to our fixed assets used primarily for Argus activities. We have additionally reclassified $0.4 million as assets held-for-sale which represents the estimated fair value of fixed assets that we plan to sell through auction.

 

Contract Liabilities

Contract liabilities consisted of the following (in thousands):

 

Beginning balance as of December 31, 2019

 

$

335

 

        Consideration received in advance of revenue recognition

 

 

 

        Revenue recognized

 

 

 

Ending balance as of March 31, 2020

 

$

335

 

 

Product Warranties

 

A summary of activity of our warranty liabilities, which are included in accrued expenses, for the period ended March 31, 2020 is presented below:

 

Beginning balance as of December 31, 2019

 

$

1,575

         Additions

 

 

         Settlements

 

 

(60)

         Adjustments and other

 

 

        Total

 

 

1,515

        Less: Finished goods inventory expected to be used for future warranty claims

 

 

(750)

Ending balance as of March 31, 2020

 

$

765

 

Allowance for Doubtful Accounts

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

 

Beginning balance as of December 31, 2019

 

$

117

        Additions

 

 

        Write-offs

 

 

(117)

Ending balance as of March 31, 2020

 

$

 

Right-of-use assets and operating lease liabilities

 

We lease certain office space and equipment for our use. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease costs are recognized in the income statement over the lease term on a straight-line basis. Depreciation is computed using the straight-line method over the estimated useful life of the respective assets. The depreciable life of assets and leasehold improvements are limited by the expected lease term. Our lease agreements do not contain any material residual value guarantees or restrictive covenants. As most of our leases do not provide an implicit rate, we used our estimated incremental borrowing rate of 10% based on the information available at commencement date in determining the present value of lease payments.

 

 

On May 18, 2020 we entered into a Letter Agreement with Sylmar Biomedical Park, LLC (the “Landlord”), pursuant to which the parties agreed to accelerate the expiration dates of our existing leases (the “Leases”), to a date not later than June 18, 2020 (“Accelerated Termination Date”). We agreed to pay the Landlord (i) $210,730 to bring the Leases current (the “Owed Rent”) and to remit (ii) a one-time early termination fee in the amount of $150,000 (the “Early Termination Amount”). Prior to the early termination agreed in this letter we were obligated to pay aggregate base rent of approximately $0.9 million and common area maintenance expenses for the term remaining under the Leases through the respective expiration dates in February 2022 and April 2023.  The Landlord acknowledged that as of the date of the Letter Agreement the Owed Rent and the Early Termination Amount constituted all amounts owing to the Landlord under the Leases. As a result of the letter agreement, we wrote down the right-of-use assets and extinguished related lease liabilities in the amounts of $2.3 million and $2.4 million, respectively. We have accrued an early termination fee of $150,000 which is included in accrued expenses and restructuring charges as of and for the three months ended March 31, 2020.                

 

Assets

Classification

March 31,

2020

 

December 31,
2019

 

      Non-current assets

Right-of-use assets

$

 

$

2,342

 

Liabilities

 

 

 

 

 

 

 

  Current

Current operating lease liabilities

$

106

 

$

237

 

      Long term

Long term operating lease liabilities

$

 

$

2,365

 

 

14


The components of lease expense for the three months ended March 31, 2020 and 2019 were as follows (unaudited):

 

 

For the three

months ended

March 31,

2020

 

For the three

months ended
March 31,

2019

 

Lease expense:

 

  

 

  

 

 

Operating lease expense

$

123

 

$

123

 

Short-term lease expense

 

 

 

 

Total lease expense

$

123

 

$

123

 

 

Cash paid for lease amounts included in the measurement of lease liabilities amounted to $121,000 and $117,000, respectively, during the three months ended March 31, 2020 and 2019.

 

 

6. Equity Securities

 

 

Increase in Authorized Shares of Common Stock

 

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 March 31, 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).

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Common stock warrants issued to underwriter of initial public offering

 

 

 

 

 

100

 

Common stock warrants issued in connection with March 2017 rights offering

 

 

1,706

 

 

 

1,706

 

Common stock warrants issued in connection with February 2019 rights offering

 

 

5,976

 

 

 

5,976

 

Common stock options

 

 

890

 

 

 

1,073

 

Restricted stock units

 

 

25

 

 

 

64

 

Employee stock purchase plan

 

 

 

 

 

56

 

 

 

 

8,597

 

 

 

8,975

 

 

7. Warrants

On February 22, 2019, we completed a registered rights offering to existing stockholders in which we sold approximately 5,976,000 units at $5.792 per unit, which was the adjusted closing price of our common stock on that date. Each Unit consisted of a share of our common stock and a warrant to purchase an additional share of our stock for $11.76. The warrants had a five-year life and trade on Nasdaq under the symbol EYESW.

 

On March 6, 2017, we completed a registered rights offering to existing stockholders in which we sold approximately 1,706,000 units at $11.76 per unit, which was the adjusted closing price of our common stock on that date. Each unit consisted of a share of our common stock and a warrant to purchase an additional share of our stock for $11.76. The warrants have a five-year life and have been approved for trading on Nasdaq under the symbol EYESW. As of March 31, 2020, 632 of the warrants associated with the rights offering had been exercised.

We extended the term of 1.7 million warrants issued in our March 2017 rights offering by approximately two years effective as of February 15, 2019 as part of our February 2019 rights offering. We determined the fair value of the March 2017 Warrants immediately before and after the modification. The fair value of the March 2017 Warrants after the modification was increased by approximately $1.6 million, resulting in an accounting adjustment to additional paid-in capital and accumulated deficit in the consolidated statements of shareholders’ equity. The assumptions used in the determination of fair value of the warrants before and after the extension included a risk free interest rate of 2.50% and 2.49%, expected volatility of 81% and 82%, and expected lives of 3.08 years and 5.08 years, respectively and 0% dividend yields for both.

15


A summary of warrants activity for the three months ended March 31, 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

 

 

 

 

 

 

 

 

 

 

 

        Exercised

 

 

 

 

 

 

 

 

 

 

 

        Forfeited or expired

 

 

 

 

 

 

 

 

 

 

 

Warrants outstanding as of March 31, 2020

 

 

7,682

 

 

$

11.76

 

 

 

3.96

 

Warrants exercisable as of March 31, 2020

 

 

7,682

 

 

$

11.76

 

 

 

3.96

 

 

The warrants outstanding as of March 31, 2020 had no intrinsic value.

8. Stock-Based Compensation

A summary of stock option activity under our 2011 Equity Incentive Plan (“2011 Plan”) for the three months ended March 31, 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

 

 

(300

)

 

$

12.45

 

 

 

 

 

Options outstanding as of March 31, 2020

 

 

890

 

 

$

21.27

 

 

 

3.12

 

Options exercisable as of March 31, 2020

 

 

517

 

 

$

30.34

 

 

 

2.01

 

 

The estimated aggregate intrinsic value of stock options exercisable as of March 31, 2020 was zero. As of March 31, 2020, there was $1.8 million of total unrecognized compensation cost related to outstanding stock options that will be recognized over a weighted average period of 2.59 years.

During the three months ended March 31, 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 quarter ended March 31, 2020 approximately 300,000 options were canceled and expired resulting in a reduction of stock option expense for the period of approximately $167,000. 

16


The following table summarizes restricted stock unit (“RSU”) activity for the three months ended March 31, 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

 

 

(21

)

 

 

5.92

 

Outstanding as of March 31, 2019

 

 

25

 

 

$

5.92

 

 

As of March 31, 2020, there was $0.1 million of total unrecognized compensation cost related to the outstanding RSUs that will be recognized over a weighted average period of 2.89 years.

 

   

We adopted an employee stock purchase plan in June 2015 for all eligible employees. At March 31, 2020 the available number of shares that may be issued under the plan is 77,031.

Stock-based compensation expense recognized for stock-based awards in the condensed consolidated statements of operations for the three months ended March 31, 2020 and 2019 was as follows (in thousands):

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Cost of sales

 

$

 

 

$

47

 

Research and development

 

 

102

 

 

 

187

 

Clinical and regulatory

 

 

15

 

 

 

34

 

Selling and marketing