VANI - NASDAQ

Ladies and gentlemen, thank you for standing by. Welcome to the Second Sight Third Quarter Results Call. [Operator Instructions]. As a reminder, this conference is being recorded, Wednesday, November 7, 2018. I would now like to turn the conference over to Lisa Wilson, Investor Relations for Second Sight. Please go ahead.

Thank you, Greg. Good afternoon and welcome to Second Sight's third quarter 2018 earnings call. This is Lisa Wilson, Investor Relations for Second Sight. With me on today's call are Will McGuire, President and Chief Executive Officer and John Blake, Chief Financial Officer of Second Sight. At the close of market, the company issued a press release detailing financial results for the three months ended September 30, 2018. The press release can be accessed through the Investor Relations section of the Second Sight website at secondsight.com. You can also access the webcast of this call from there. Before we get started, I would like to remind everyone that any statements made on today's conference call that express a belief, expectation, projection, forecast, anticipation, or intent regarding future events and the company's future performance, may be considered forward-looking statements as defined by the Private Securities Litigation Reform Act. These forward-looking statements are based on information available to Second Sight management as of today and involve risks and uncertainties, including those noted in this afternoon's press release and Second Sight's filings with the SEC. Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from those projected in the forward-looking statements. Second Sight specifically disclaims any intent or obligation to update these forward-looking statements except as required by law. A telephone replay of the call will be available shortly after completion of this call for the next two weeks. You'll find the dial-in information in today's press release. The archived webcast will be available for one month on the company's website, secondsight.com. For the benefit of those who may be listening to the replay or archived webcast, this call was held and recorded on November 7, 2018. Since then, Second Sight may have made announcements related to the topics discussed. So, please reference the company's most recent press releases and SEC filings. And with that, I'll turn the call over to Second Sight's CEO, Will McGuire.

Thank you, Lisa, and thank you all for joining our call this afternoon. We made good progress during Q3 executing the revised strategy discussed during our Q2 call. As a reminder, I indicated that Second Sight would focus on 3 major objectives; number one, the execution of Orion development and clinical programs; number 2, the efficient use of capital related to Argus commercial and R&D activities; and number 3, the advancement of promising technologies that provide a richer more powerful experience to our patients. During the call, I would provide updates relative to all objectives. But first I would like to thank Gregg Williams, Chairman of our Board, for his continued support of the company. During 2018, he has invested 19 million in the company via private placements. Gregg’s continued financial commitment reflects a shared vision to develop innovative technologies that offer hope to individuals blind from almost any cause as well as a strong belief in the company's exciting future with Orion. John will talk more about our financial position later in the call. Let's turn to Orion and an update on where we are with the program. Today, there are 5 individuals implanted with Orion as part of our early feasibility study which we're conducting at Ronald Reagan UCLA Medical Center and Baylor College of Medicine in Houston. We are actively recruiting a 6th subject to be implanted at Baylor. All of the 5 implanted subjects are using the full Orion system which creates artificial vision through video captured in real time by the camera embedded in their glasses. Four have been cleared for home use which is an important milestone because it reflects a belief that we have identified stimulation parameters for subjects that are potentially effective and more importantly safe. All four subjects cleared for home use have begun the critical process of artificial vision training. Each subject’s training entails customized vision rehabilitation to assist them in reaching specific goals. The subjects are responding well to the artificial vision rehab and we continue to be encouraged by the overall performance of Orion. Observations from rehab sessions indicate that subjects have been able to do things with Orion they couldn't do without it including locating people in front of them, identifying the drop off of the curb, locating signs, and sorting light from dark laundry. The rehab will continue on a regular basis and we look forward to providing more updates in the future. Although the anecdotal observations from the rehab sessions are exciting, the anticipated trial for Orion will require objective endpoints that measure visual function and quality of life improvements. In order to finalize an agreement with the FDA concerning Orion endpoints, we need additional and more objective performance data from our feasibility study subjects. We are targeting the end of this year or early next year to gather the necessary performance data. Assuming the safety and performance data are good, we would then move forward with the FDA to finalize the clinical and regulatory pathway for Orion with the expectation of sharing this with investors in the first half of 2019. I'd like to note that if we can't sufficiently quantify performance with the first six patients or if we decided to make significant changes to the system, additional feasibility patients could be enrolled before continuing to a pivotal trial. But to be clear, our goal is to move to a pivotal trial in 2019 without additional feasibility work. Finally, I'm pleased to say there have been no additional significant adverse events or SAEs since the one SAE we discussed during our last call. We were also delighted to have been awarded $1.6 million grant from the National Institutes of Health or NIH. With their intent to fund 6.3 million over 5 years for support of Orion’s clinical development. I'm very pleased with the Orion team's tremendous progress over the past 3 years. Our confidence in the potential of creating artificial vision via direct cortical stimulation continues to grow and I look forward to providing more updates in the coming months. I'd like to now turn to our Argus business. We completed 20 Argus implants during the quarter, up sequentially from the prior quarter resulting in 2.2 million of revenue and year-over-year, we were up significantly from the 12 implants implanted in Q3 of 2017. In North America, we had 9 implants during the quarter with 8 of the 9 patients coming from our U.S. patient database. As discussed many times, our strategy in North America is to focus on key centers of excellence in order to drive adoption. Outside of North America, we are executing a restructuring of the business which will allow us to focus our support on our core direct markets in France, Germany, Italy, and eventually England. We also intent to focus on our most promising indirect markets in which we have regulatory approval, high confidence of reimbursement our funding, and an infrastructure to support patients post-surgery. By being more deliberate and selective concerning accounts and geographies that we support, we anticipate annual operating expense savings totaling 3 million beginning in 2019. Importantly, please be assured that we will continue to support existing patients anywhere in the world. On the reimbursement front, we were pleased to announce the recently finalized U.S. Medicare hospital outpatient payment rate of $152,500 for the Argus II and related procedural cost. This represents the highest average reimbursement rate to date for the Argus. I also applaud CMS for changes to the rate setting methodology for low volume devices such as Argus. CMS will now consider multiple years of historical data with setting the rate versus just one year, this change should temper future year to year fluctuations in the reimbursement rate. I really appreciate the hard work by our market access and reimbursement team over the past few years to successfully advance a host of U.S. reimbursement initiatives. Turning outside the US, Forfait Innovation process continues to move forward in France and we remain confident that we will receive a national reimbursement decision by early next year. Finally, in England, we have seen positive movement relative to the similar innovation reimbursement program Commissioning Through Evaluation or CTE for Argus II in England. We were in close contact with CTE senior leadership team and other key stakeholders and based on recent developments, we are optimistic that the first Argus II implants under this NHS England reimbursement program will occur in the first half of 2019. With regard to Argus 2s, our next gen externals, we identified a few issues during final testing over the past 90 days. We believe the issues have been sufficiently addressed and are preparing to begin clinical testing later this quarter with regulatory filings projected in early Q1 2019. As a reminder, he Argus 2s externals will also serve as the base externals for Orion in the pivotal trial. Before closing, I'd like to say a few words concerning our research projects. As outlined in our last call, we are pursuing research in areas such as eye-tracking, distance filtering, object and facial recognition, and thermal imaging. We believe these technologies will benefit Argus users as well as Orion users, ultimately. We are making good progress on all programs and we'll be prioritizing the most promising technology or technologies with the goal of moving them into clinical testing here in 2019. Finally I'd like to welcome Pat Ryan to the team. As previously announced, Pat joined Second Sight as our Chief Operating Officer. He brings many years of medical device experience to the company along with great leadership skills and the proven ability to build and develop teams. With the additions of John Blake and Pat Ryan, I believe we have significantly strengthened our leadership team this year. These changes combined with the recent actions to realign the business position, the company to provide the greatest benefit to a larger number of patients while also providing the best possible return to shareholders. With that, I’d like to now turn the call over to John to review our third quarter financial results. John?

Thank you, Will. Our implant volume during the third quarter of 2018 was 20 units compared to 12 during the prior year quarter. During the quarter, nine implants were performed in North America and 11 were in Europe, the Middle East, and Asia or EMEA. During the third quarter of 2017, there were 7 implants in North America and 5 implants in EMEA. Net sales were $2.2 million on a GAAP basis in the third quarter of 2018 compared to $1.6 million in the third quarter of 2017, an increase of 38%. Revenue was recognized for 22 units in the current period, while revenue from 12 units was recognized in the prior year quarter. Revenue recognized per implant was approximately $102,000 in the third quarter of 2018 and was $133,000 in the same period of 2017. We continue to expect our average revenue recognized per implant unit sold for the remainder of 2018 to be in a range of $100,000-120,000 depending on the geographic mix of the implant. Gross profit for the quarter was $0.5 million compared to a gross profit of point $06 million in the third quarter of 2017. Cost of sales in the third quarter of 2018 included an increase in our inventory reserve of $0.1 million while cost of sales in the third quarter of 2017 included a credit of $0.3 million. We expect cost of goods on a per unit basis to stabilize particularly related to overhead absorption and excess inventory reserve as we produce more units. Research and development expense, net of funding received from grants was $2.7 million during the third quarter of 2018 compared to $1.8 million in the prior year quarter. The increase of $0.9 million is primarily due to verification and invalidation activities related to Argus 2s and consists of increased headcount outside services and costs for internally produced prototypes. In both the third quarter of 2018 and 2017, we utilized $0.1 million of grant funds to offset costs. Clinical and regulatory expense increased during the third quarter of 2018 to $1.0 million compared to $0.6 million in the prior year quarter. This increase is primarily attributable to increased costs associated with the Orion feasibility study. We expect clinical and regulatory cost to increase in the future as we conduct additional clinical trials to assess new products such as Orion and enhancements to our existing product and while we enroll more patients in post-market clinical studies for Argus II. Selling and marketing expense was $3.0 million in the third quarter of 2018 compared to $2.4 million in the third quarter of 2017. The $0.6 million increase primarily related to increased market development activities including compensation expenses. We expect selling and marketing expense to decrease over time when expressed as a percentage of product revenue. General and administrative expense was $2.3 million in the third quarter of 2018 compared to $2.5 million in the third quarter of 2017. The decrease of $0.2 million is primarily due to lower non-cash stock compensation costs from executive transitions. As Will mentioned, we are executing a restructuring of our commercial business outside of North America. We anticipate this will result in an annual operating savings of about $3.0 million beginning in 2019 which we expect to reallocate to our Orion program. Net loss for the third quarter of 2018 was $8.5 million or a loss of $0.12 per share. This compares to a net loss of $6.7 million and the same net loss of $0.12 per share in 2017. Our non-GAAP net loss which excludes stock-based compensation and changes in our excess inventory reserve both noncash items was $0.11 per share for both the third quarter of 2018 and 2017. The full reconciliation of our GAAP net loss to our non-GAAP net loss including a per share reconciliation can be found in the tables at the end of our earnings release. Moving on to the balance sheet, as of September 30, 2018, we had $5.0 million of cash and cash equivalents and we carry no debt. In October, we completed a $4.0 million private placement of common stock with Gregg Williams, Chairman of our Board of Directors. Given our current plans, we believe we have sufficient runway through early Q1 2019 and we continue to evaluate all of our financing options with our board. We expect to share additional details in Q 12019. With that, I will open the call for questions. Operator, please proceed with the instructions.

[Operator Instructions] And the first question comes from the line of John Francis, please proceed with your question.

Can you address the size of the market for Orion and what types of patients you expect, and additionally, can you give us a better sense of what you think the FDA is going to require with respect to your trial?

This is Will, I’ll take that. From the market perspective, let's talk about that first. We did conduct some market research with an outside firm. We talked about this a little bit in the last call, but I would like to go back to it again. First of all, we are looking at treating -- if you look at the -- if you look at the feasibility study and the way the inclusion criteria/exclusion criteria is written, we can basically treat any type of blindness as long as it's not currently treatable by a commercial product. So, in that case, it would exclude RP patients treated by Argus and also it can't be blindness caused by trauma to the visual cortex. But other than that we're open to treat patients. So, when we did our market research, we basically identified four major buckets of patients to look at those were glaucoma, sorry, people blind from glaucoma, blind from diabetic retinopathy, blind from optic nerve disease or damage to the optic nerve and then blind from eye trauma or eye injury. And when you combine those four buckets, you end up in the U.S. with about 500,000 patients who are legally blind from those four buckets or four causes of blindness. We then further looked at the patient population and try to refine it to a number that was actual number of patients that could be treated given what are expected indications for use would be. So we tried to eliminate patients that would be too sick for surgery, too many other complications, and then, we also reduced the level of vision from legally blind down to bare-light or no-light perception. So, when we do that, we end up with a patient population of about 70,000. And again that compares to the same research that said RP population is close to 1,500 patients. And to be very clear again, these numbers are only US numbers, so we confined it to the U.S. So, again, about 70,000 patients in the U.S. compared to an RP population of 1,500 and then we expect if you look at Western Europe, the population would be similar, it actually would be somewhat larger in Western Europe when you consider a larger population there. So, a very, very large population of patients for us there, John. And then let me address the question also concerning the FDA and our discussions there. As everyone probably noticed, we are in active discussions and we haven't reached an agreement or a final agreement with them, so we can't really say with certainty what the trial will look like, but I can certainly make some comments. First of all we know that we're going to need to demonstrate a certain level of visual acuity or visual function with Orion and we also know that we will have some measure of a quality of life improvement in the study. And those endpoints would all be somewhat similar to what we did with Argus. In Argus, we also had to have visual acuity, visual function measurements as well as a quality of life tool to measure changes in their quality of life. So, similar type measurements there to what we experienced with Argus. As far as the number of patients, I would say you should be thinking that it would be at least 30 patients in a pivotal, it could be more, but certainly I’d say 30 is the floor, and the follow up would be at least 6 months. So, again, these are kind of the floor numbers for number of patients and follow up. And then, there were also as a part of this breakthrough technology program, you get to move some of the data collection into the post market setting, so there will be a defined agree to post market trial as well. Again, we don't know the number, but I think you should assume that one will be more than -- more than 30. So may be a final word, you know, we are breaking some new ground here. So, before we finalize these measurements and these numbers with the FDA, we really want to understand the Orion performance much better and that's why we've said we're going to, you know, give it to the end of the year, early next year to really understand what we think the Orion performance will be and then move forward with our discussions with the FDA and try to finalize a trial design. And then, once we do that, we have committed as soon as we're comfortable that we have agreement with the FDA, then that's something that we would have course want to share with investors or potential investors. Hopefully that answers your question, John.

[Operator Instructions] The next question is from the line of Amit Dayal with H.C. Wainwright. Please proceed with your question.

In regard to these 5 patients, can you talk about -- with respect Orion, could you talk about how many hours they are using this for per week or per day. Any color on these types of metrics if you could share them?

I don't have the exact metrics for the patient, Amit. What I can say is that typically the patients especially the ones that are cleared for home use now, typically they're going through rehabilitation on a regular basis. Certainly, before they took the device home, they were -- they were being tested and we were working with them on a weekly basis on almost all patients on a weekly basis. And so I think going forward, you should assume if it is not weekly, every few weeks. We do have someone that's working with them and going through the -- through the rehab process. And as a reminder, this rehab process is basically teaching them how to use the system better and how to get the most functionality and most use out of it. So we've learned a lot of things with Argus patients to inform how someone can better use the system. And it's not just, you know, how to turn it on, how to potentially use any filters or any adjustments, it's how to -- how to move your head, how to take in data and then, how to interpret this artificial vision because it is different than your vision or my vision. So, a lot of work on how to -- how to interpret it and what it means and how to make the best use of it. And as I've said many times before, we certainly have learned with Argus that this is -- this is very important and we're able to make great progress typically with patients by having them dedicated to this artificial vision we have a process. I’d say one of the typical session probably in a day -- typically is probably not more than a couple of hours, it can be pretty, pretty tiring work for the subjects sometimes. So, just as a ballpark probably not more than a couple of hours per session, Amit.

The sixth patient from our last call, it seemed like you had identified and you were in the process enrolling the sixth patient. Did that not materialize…

We've had quite a few where the team at Baylor has chosen not to move forward with the patient. So they didn’t feel it was exactly the right patient that met all the criteria as we wanted. So, honestly, I'm disappointed that we haven't enrolled that patient, I certainly would have expected it to happen before now. But on the flip side, I do know the team at Baylor is very diligent in their evaluation of the patients and are working very hard to find just the right patient and I'm sure we'll do that here very soon.

And also from the previous call, there was one incident of [indiscernible] adverse event with the patient, I mean, have you seen anything else that…

No, we had -- yeah, in the previous call we did announce that we had one serious adverse event and since that point, Amit, we have not had any additional serious adverse events or SAEs with any patients.

Could you talk a bit about the label expansion efforts for the [indiscernible] RP patients?

That's a good question, we didn't really talk about that in the script. We still consider that a very interesting patient population, it’s significantly larger than the current RP population that's bare-light or no-light, but we haven’t -- to be -- to be frank, we really haven't done much with that over the past 2 or 3 months, we are evaluating and looking for a way to get additional data that would not until an FDA IDE study. And so we have a few ideas, we're trying to chase down maybe a little more specific on that to see if we can go back to the FDA with potentially a revised proposal that they would consider acceptable. But at this point I don't really have any progress to report. We haven't dropped it. And hopefully, I'll have more to tell you in the next call, but I'd just say with limited resources, much of our focus has been on Orion in the last 90 days.

Regards to your sort of pull back in marketing and sales efforts aboard, the cost savings of $3 million that you talked about. Will you realize those mostly say in the second half of 2019 or will you see some benefits early in 2018 as well?

Hi, Amit, this is John, I’ll pick that question. So we expected those savings will kick in by year end, so that should be a full year impact for 2019. We are planning on reallocating substantial portion of that savings to the Orion program.

In regard to this NIH grant, are there other grants that you could potentially access to support your efforts?

Without going into specifics, I'd say we're always looking at the possibility of obtaining grant money from NIH or from other sources. So, yes, we're constantly scanning and looking for sources of non-dilutive sources of funding such as that. And I would just say that creating vision via cortical stimulation is an area that I think NIH finds very interesting. And so hopefully this won't be the last grant money we've obtained, but nothing to report other than that right now.

And in terms of catalyst before the end of 2018, could you highlight any important catalysts that we should be keeping an eye on?

I think probably the most important if we're able to get there is just being able to better quantify what we expect for Orion performance and the level of vision that we're going to provide Orion patients, ultimately. We think that's probably the -- by far the most important thing that we need to get our arms around over the next 90 to 120 days. So, whether we have that by the end of the year or not, I'm not sure, but we certainly would like to [Technical Difficulty] and then we would also take that understanding of performance and try to move forward our discussions with the FDA. So, hopefully we could get a kind of a finalized clinical and regulatory pathway with the FDA and we’d also want to lay that out for investors as well. That certainly won't happen until the first half of next year sometime, but maybe by the end of the year, we've got more to say around patient performance.

Thank you, and I will now turn the conference back to Will Maguire.

Hey thanks again to the Second Sight team for all their work over the past quarter and thank you all for participation on our call today, have a great night.