VANI - NASDAQ

Greetings, and welcome to the Q1 2019 Results Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session.[Operator Instructions] As a reminder, this call is being recorded, Wednesday, May 15, 2019. I would now like to turn the call over to Lisa Wilson, Investor Relations with Second Sight. Please, go ahead.

Thank you, Ash. Good afternoon, and welcome to Second Sight's First Quarter 2019 Results 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. After the close of market, the company issued a press release detailing financial results for the 3 months ended March 31, 2019. 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 SEC -- 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 2 weeks. You'll find dial-in information in today's press release. The archived webcast will be available for 1 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 May 15, 2019. 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 all for joining our call this afternoon. This afternoon, we announced that Second Sight would accelerate development of the Orion platform. On this call, I'd like to share our rationale and our plans going forward. Our ultimate goal is to deliver a useful artificial vision to virtually all blind individuals. And we now believe, Orion offers the best and fastest path to do so. The strategy increases the organizational focus on Orion, which should ultimately lead to treating more people sooner while creating substantial value for shareholders. There are several reasons we believe now is the right time to accelerate our path forward for Orion. First, as we continue to evaluate the data from our Orion early feasibility study, we are increasingly encouraged of what we have observed and the progress our subjects have made. We presented results at the 5th Annual BRAIN Initiative Investigators Meeting in Washington, D.C. on April 11, in which 5 out of 5 subjects were rated by certified orientation and mobility specialists as having received positive or mild positive benefit from Orion in terms of functional vision and well-being 6 months post-implant. We're very encouraged by these results and view this as a testament to the potential impact Orion can have on the lives of blind individuals as they demonstrate the ability to perform daily task they previously could not without the Orion system. Observations from rehabilitation sessions include that subjects were able to use Orion to visually detect parked cars, identify the direction of motion of a person walking by, short light from dark laundry and visually order small objects by size. Recently, one subject reported walking around the block in their neighborhood alone without anyone's assistance for the first time since becoming blind. The 6th subject who was implanted in January at Baylor is progressing nicely and was just cleared for home use. We expect additional Orion feasibility study data to be presented later this year at various scientific forms such as the meeting of the World Society for Stereotactic and Functional Neurosurgery on June 25 in New York City. Second, as outlined in past calls, we believe Orion holds the potential to help individual's blind from almost all forms of blindness. Orion bypasses the eye and the optic nerve allowing us to directly stimulate the visual cortex and provide useful artificial vision to those blind for most causes including glaucoma, eye injury, diabetic retinopathy, optic nerve disease or injury and RP. Our market research indicates that over 500,000 people in the U.S. alone are legally blind from these causes with a far greater number of blind individuals from the same causes outside the U.S. We are now convinced that the better and faster way to treat all blindness, including RP population that is now addressed by Argus II is to more quickly transition to the Orion platform. Finally, we believe Orion is the more attractive platform for continued investment and technological improvement that will extend our leadership position in artificial vision. As a result, to support the development and expansion of our Orion programs, we are in the process of adding key capabilities to the organization. This includes filling more than 25 positions with top talent that will enable us to move current programs forward, while also supporting next-generation technologies, such as stimulation strategy advances, much higher electrode count devices, new cortical array designs and a bilateral cortical implants. We believe that outcome of these advances could include more useful vision, higher acuity vision and a greater field of view as well as the ability to help an increasing percentage of the millions of legally blind individuals around the world. In addition, our patent portfolio consists of an estimated 85 U.S. patents applicable to Orion or cortical simulation that protect our continued investment in this exciting technology. On the regulatory front, we remain encouraged by our discussions with the FDA regarding Orion and expect to have additional meetings with the agency in the coming months. As we reach agreement with the FDA on key aspects of the regulatory strategy, we will share more details with investors. I'm also pleased by recent developments with CMS regarding reimbursement for breakthrough devices such as Orion. CMS recently released a proposed rule that would waive the requirement on substantial clinical improvement evidence for FDA-designated breakthrough medical devices for 2 years and automatically qualify them for a new technology add-on payments. This means that breakthrough devices would automatically get new tech add-on payments upon regulatory approval. I expect that we will initiate formal discussions with CMS during the second half of 2019 concerning the path for Orion reimbursement and explore opportunities to coordinate the gathering of clinical data to meet regulatory and reimbursement approval requirements. To support our transition to Orion, we are evaluating our supply chain manufacturing capabilities and quality assurance processes to identify areas for improvements. Upgrades will certainly be required as we continue to wrap up manufacturing of Orion devices to support additional clinical work and future sales volumes that we believe could be orders of magnitude greater than Argus II. Accordingly, we intend to suspend Argus II production in the near future. We have a sizable inventory of Argus II devices and plan to continue performing new implants for the foreseeable future. We anticipate that some potential RP patients may choose to wait for the newer Orion platform. It is also possible that depending upon the speed of clinical enrollment, regulatory approval, reimbursement approval and other factors, there could be a gap in treating RP patients with Orion. Please note, that at some point, we may decide to suspend new Argus II implants due to business considerations even if inventory is still available. On the commercial front, we intend to further reduce and eliminate overtime our commercial spend dedicated to driving new Argus II implants, both in the U.S. as well as outside the U.S. I want to be very clear about one thing. Second Sight is committed to supporting our existing Argus II users throughout the world. This means that we will maintain capabilities in our organization to support Argus II users, including field personnel to troubleshoot issues as well as inventories of replacement or warranty parts. We also intend to keep most of our artificial vision rehab team intact, as they play a key role training Orion's subjects to get the most from their system. As a demonstration of our commitment to Argus users, we will continue with our plans to submit Argus IIs for regulatory approval. Upon approval, these next-generation externals would then be made available on a limited basis to existing and potentially new Argus users at some implanting centers as regulatory constraints inventory and other factors allow. Our commitment to the field of artificial vision is further demonstrated by our continued investment in multiple research projects designed to enhance the artificial vision user experience. We've talked about these before. They include, the integration of object and facial recognition, thermal imaging, distance filtering and eye tracking technologies. Our plan is to have multiple prototype systems ready for human testing later this year. It's quite easy to get excited about a future that includes high electrode count cortical devices with capabilities integrated into the system such as object or facial recognition and thermal imaging. In closing, the acceleration of our Orion efforts is a calculated move to extend our leadership position in artificial vision. The Argus II experience has been invaluable and paving the way for success with Orion. Our ability to design and build miniature, high-channel count neuromodulation devices that last for years in the human body is unmatched. We will also leverage our extensive learning and success in the critical areas of patient outreach, customized patient programming and individualized artificial vision rehabilitation. In short, now is the right time to fully commit our resources to ensure in Orion's success. The data continues to be encouraging, our discussions with the FDA are promising. The market opportunity is huge. And the technology offers an exciting platform for future advances. With that, John will now review our first quarter 2019 financial results. John?

Thank you, Will. Net sales were $1.1 million in the first quarter of 2019 as compared to $1 million in the same period in 2018. Revenue was recognized for 9 units in both periods. Revenue recognized per implant was approximately $125,000 in the first quarter of 2019 and was $108,000 in the same period of 2018. We expect our net sales to decline as we sell through our existing inventory of Argus II. We implanted a total of 10 Argus II units during the first quarter of 2019 compared to 16 in the first quarter of 2018. Of these, 6 implants were in North America, 4 implants were in EMEA in the first quarter of 2019, while 10 implants were in North America and 6 were in EMEA in the first quarter of 2018. Gross profit for the first quarter of 2019 was $0.4 million compared to a gross profit of $0.3 million in the first quarter of 2018. Cost of sales was $0.7 million in both periods. Cost of sales in the first quarter of 2019 consisted primarily of cost of products implanted and unabsorbed production costs of $0.7 million in the quarter. In the first quarter of 2018, the cost of sales included approximately $0.8 million for the cost of products implanted and unabsorbed production costs, partially offset by an adjustment of $0.1 million for the reduction in the reserve for excess inventory. We expect to record cost of sales for any remaining Argus II inventory that we sell and the majority of our production expenses and fixed overhead to be reported as research and development expense in future periods. Research and development expense net of funding received from grants decreased by $0.3 million from $2.5 million in the first quarter of 2018 to $2.2 million in the first quarter of 2019. In the first quarter of 2019, we utilized $0.6 million of grant funds from NIH to offset costs as compared to none in 2018. The cost before the grant revenue offset increased from the prior year, primarily due to verification and validation activities related to Argus IIs. We expect our research and development expenses to increase in future periods as we transition to Orion, including aforementioned costs previously related to cost of goods sold. Clinical and regulatory expense decreased $0.3 million from $1.3 million in the first quarter of 2018 to $1 million in the first quarter of 2019. This decrease is primarily attributable to decreased costs associated with the Orion feasibility study. We expect clinical and regulatory cost to increase as we conduct additional clinical trials to assess new product such as Orion and related enhancements to our user experience. Selling and marketing expense decreased $0.9 million from $3 million in the first quarter of 2018 to $2.1 million in the first quarter of 2019. The decrease in cost was primarily the result of decreased use of outside services, reduced headcount and related compensation expenses. We anticipate annual selling and marketing expense will decline by approximately $2.3 million in 2019 and decline further by approximately $2.7 million in 2020 as we reduce our Argus II commercial activities and sell-through our existing inventory. General and administrative expense decreased $0.8 million from $3.2 million in the first quarter of '18 to $2.4 million in the same period of 2019. This decrease is primarily attributable to the $0.5 million in lower compensation costs and reduced outside service cost of $0.2 million. We also recorded a $2.4 million noncash impairment charge to our reserve for excess inventory in the first quarter of 2019 related to our plans to sustain Argus II production. Net loss for the first quarter of 2019 was $9.7 million or a loss of $0.10 per share compared to a net loss of $9.8 million or a net loss of $0.17 per share in the first quarter of 2018. The non-GAAP net loss for the first quarter of 2019, excluding certain noncash items was $6.4 million or $0.07 per share compared to a non-GAAP net loss of $8.5 million or $0.14 per share in the first quarter of 2018. For a full reconciliation of non-GAAP financial measures to the most comparable GAAP financial measures, please refer to the tables included with this press release. As of March 31, 2019, we had $31.7 million in cash and cash equivalents. In February 2019, we completed a rights offering that provided approximately $34.6 million of gross proceeds. We continue to expect this cash to fund operations into the second quarter of 2020. In connection with the revised strategy, we expect to record a restructuring charge of $0.7 million in the second quarter of 2019 related to severance and related benefits. With that, I'll open the call up for questions. Operator, please go ahead.

Thank you. [Operator Instructions] And our first question comes from the line of Sameer Joshi with H.C. Wainwright. Your line is open. Please go ahead.

Good afternoon, Will, John. Thank for taking my questions. First thing, what is the level of available inventory for the Argus plans that you plan to do over the next few quarters?

Yes, Sameer, this is John. So we disclosed the inventory value of $1.6 million after the impairment charge. We haven't disclosed the number of units, although judging by the amount of our write-down, you can see we took a pretty conservative position. Well, that certainly doesn't preclude us from selling through all of the inventory. This is just the accounting that we did in light of the ability to start contacting customers after today's announcement.

Okay. And just a clarification on the change in strategy of -- is there any work being done on the better-sighted RP patients under Argus? Or that has been suspended as well?

Hi, Sameer, this is Will. I'll take that. No, we are not going to do any further work either from a development or from a clinical perspective for the better vision RP patients that we were considering and doing some with Argus. Anything that we would do in the future with these better vision RP patients would be done with the Orion platform. We think Orion will be a very good platform for not only treating diabetic retinopathy and glaucoma, optic nerve disease and eye injury, but we think also it's going to be applicable to retinitis pigmentosa as well. So any work would be done there. And I would think looking down the path, we would be interested not only looking at better vision RP patients but better vision patients overall from these other causes of blindness, which would be a much, much larger patient population.

Understood. And this -- and the next question may have been addressed in the past. But would you remind us, if patients for Orion or other existing patients with Argus are eligible or can be implanted with Orion going forward? Or how does that work?

Was the question, are -- would Argus patients be eligible? So I think if they already have an Argus implant, they would not be eligible. Any patients that are in our database though that meet the vision level criteria would be eligible assuming they pass certain screening for -- optimally for a clinical trial and ultimately for a commercial product. We would not think anyone that currently has Argus would proceed in getting an Orion. But certainly, there may be some patients out there who are considering Argus who would make the decision now to wait and get more information and more data on the Orion platform and maybe go forward with that instead.

Okay. So in terms of -- you mentioned your reimbursement strategy for -- and I think I may have misheard, but is there automatic reimbursement upon regulatory approval under the new rule?

Yes. So let me address that. I'd say a couple of things. First, what CMS did was they put in their proposed rule, so it's not yet final. But they put in their proposed rule that devices that are approved under the FDA's breakthrough device designation would get automatic add-on payment -- have a new technology add-on payment. And so what that does is it addresses the payment portion of reimbursement. It -- they also dropped a requirement for a certain level of clinical evidence as well. So what they're doing is they're making it easier and more straightforward for a device approved as a breakthrough device to get a payment upon approval. What hasn't been done yet and what is still being lobbied for, would be the second parter, another part that's required and that is to get coverage as well. And so that's not in the proposed rule. There is some legislation that has been introduced in the past in the house and we think something similar will be introduced later this year, which would not only require breakthrough devices get automatic payment but they also get automatic coverage for a period of time. Now as far as our strategy, there's a couple of things. #1, our reimbursement strategy is not final. We're really waiting to advance our FDA discussions and get close to kind of a final decision on what our clinical trial will look like, how many patients and how much data. And then, we'll engage CMS on a more formal basis as we stated in the prepared remarks. And there's probably 2 or 3 potential outcomes then with CMS. One would be, we would go down a path in which we'd have a parallel review with both FDA and CMS at the same time. So think of it as potentially gathering data that would be used both for regulatory as well as for reimbursement decision. So that's one path. The second path is a program that's called coverage with evidence development. And in that case, we would reach an agreement with CMS that we would gather a certain amount of data for regulatory approval in -- or in the regulatory approval process. And then upon regulatory approval, we would then go to a second phase with CMS in which we would have an agreement to enroll a certain number of additional patients, get certain data on those subjects and then use that data for ultimately a national reimbursement decision. And in that coverage with evidence development program, the -- all of the implants and everything is paid for by CMS. So we're in a kind of a CMS-sponsored trial in which you reach agreement with CMS on what the endpoints should be in order for you to move to a permanent national reimbursement decision. And then the final possibility is along the lines of what we're talking about with this proposed rule with CMS and that could be that legislation -- further legislation is passed in which upon approval as long as you get regulatory approval and you have a breakthrough device designation, you automatically would get reimbursement for a period of time. And during that period of time, you would -- in a post-market setting, you collect additional data that would then be used to support an ongoing reimbursement or permanent reimbursement. Hopefully that answers your question, Sameer.

Okay. Yes, yes, no, it does. This -- in the last case, the period of time is that expected to be around 2 years or shorter than that?

That's exactly right. Yes. What was proposed by CMS, I believe was 2 years. So they would -- the payment would be in place for 2 years. I think the legislation that has been introduced in the past was 3 years. So hopefully, it will be somewhere in 2- to 3-year timeframe where you have payment and hopefully coverage and then you collect the additional data to support the permanent reimbursement decision.

Understood. Okay. Moving to the actual effect on -- impact on people like -- there must be some overall in terms of personnel. Can you give us some more color on that?

Sure. Yes. As far as the physicians impacted negatively with our decision here, there is a total of 21 physicians that will eventually be eliminated. Some of them are now, some will occur over time. Not everything happens immediately. And think about that -- of that 21, think about -- over half of them are in the commercial arena. So really individuals that are supporting new Argus II implants, and then a little less than half are in the production area as we are not going to be producing Argus. We'll not have a need for as many production personnel. On the other side of it, Sameer, if you look at what we're adding to support moving to Orion R&D programs and clinical programs forward, that's over 25. I think it's 26 or 27 actually and about half of that is individuals in R&D. So directly supporting R&D development, trying to reduce timelines, et cetera, et cetera. And another half or the other half is approximately split between clinical and regulatory process development and quality assurance people. So we're adding R&D. We need the associated clinical and regulatory folks to move things down the pathway. We're doing process development -- additional process development work so that we can manufacture in higher quantities. And then, as we said in the remarks, also looking at our quality assurance processes and adding people and capabilities there as we think necessary.

Understood. And John alluded to during his commentary, increases in various buckets R&D and sales and marketing. Can you give us a little bit more color on the -- your cash runway and expenses expected during the remainder of the year and going forward?

Sure. Yes, that's an important point. So number one, we reaffirmed our guidance for our cash runway into Q2 2020. So a lot of what we are going to see come through the P&L over the next year or so is more or less consistent with where we thought we'd be in prior quarters. And that's going to be -- and a combination of selling and marketing expenses that will increase as I mentioned about $2.3 million for the full year 2019 and an additional $2.7 million in 2020. We do expect about $4.9 million of our expenses related to our manufacturing capabilities, will then be reported as additional R&D expense in future quarters, that's an annual figure. So a lot of the new positions that Will mentioned are also factored into this runway. So some of the puts and takes are all baked in for the runway guidance that we have.

Okay. And just one last one. In 2Q or -- what is the severance related charges that we should expect in 2Q and later?

Yes, that's approximately $700,000.

Okay, got it. Thanks.

Thank you.

Thanks, Sameer.

[Operator Instructions] Our next question comes from the line of Kyle Bauser with Dougherty & Company. Your line is open. Please go ahead.

Hi, good afternoon. Can you hear me okay.

Yes. Very well.

Great. Thanks for that update today. I just had 2 quick questions on Orion. First, the feasibility study there looked very encouraging. But it is only based on 6 patients. So can you speak to your level of confidence on moving forward to focus exclusively on the Orion product?

Sure. This is Will. Yes, I think that's a fair question, and I think probably one that we discussed internally for a while as well. So I'd say a couple. First of all, I'd say, yes, we are confident. But a couple of comments on that. Number one, keep in mind that at the end of May, we will have 5 subjects that are out to the 1-year mark. So it's not short-term data, we're getting 5 out of 1 year. The 6th subject is probably at about the what 3- or 4-month mark right now. So we're getting a pretty good understanding of the performance and we're also seeing how their performance has evolved over time and we're very pleased with that. One other comment is as opposed to some other clinical trials, where you get -- you only get data from the subjects that may be 6-month or a 9-month or a 12-month mark, we do have our artificial vision rehab teams that are with these subjects on a somewhat regular basis. So we see them quite often. We know how they're improving and how they're performing month to month. So there's a lot of data that we're taking in there on kind of regular basis. So we're feeling pretty good. And an example would be -- of the improvement would be, if you look at the data that was presented at the BRAIN Investigators Meeting, I think most of the news releases out there picked up on the 6-month data and a couple of points there on the square localization at 6 months. We had 3 out of 5 subjects that were significantly better with the system on versus off. But since that point, that has increased to 4 out of 5. So we're continuing to learn how to do this -- use the system and get better results. Same for directional motion where they're looking at a screen and trying to identify how a line moves across the screen. At the 6-month mark, 2 out of 5 were significantly better with the system on versus off. But now we're looking at 4 out of 5. So again, we're getting really good performance there. And then the FLORA has remained the same, which is we're getting 5 out of 5, who are showing benefit or mild benefit with the system. So we think those results are good. As we said, some of the subjects are even getting better with more practice. And I would say one other thing that's a little bit different here if you were to compare it to Argus. The typical Argus subject would get activated in maybe 3 weeks, and they could start their artificial vision rehab literally at that point or several weeks thereafter. So within a month, they maybe doing artificial vision rehab. And it's quite different for the Orion subjects and that -- it's taking us -- because it's new, it takes us months sometimes 3 or 4 months to do all the initial programming and the special mapping and things like that. So that's why often at the 6-month mark, we're not seeing the same results that we're seeing at 9 months or 12 months and that's because they just haven't had much practice or much training with the system. And one final thing, as we look at this data, we're not looking at it and evaluating in a vacuum. We've got over 300 Argus users out in the world today, and we're familiar with their performance and how they've evolved over time. So that maybe more than you bargained for but that's...

Great. That's helpful. I appreciate that. And then secondly, can you just provide an update to the extent that you can share on where you stand on FDA communications with respect to Orion?

Sure. So we have somewhat regular communications with them. We've talked about this a few times in the past, kind of a hallmark of the breakthrough devices program is that we are able to get -- are able to have these frequent interactions and get responses fairly quickly sometimes in days or a week, we can get responses to questions. But looking forward, I think we have some critical meetings coming up. I would say over the next 2 or 3 months, I would expect us to have 2 to 3 meetings and/or conference calls with the FDA. And what we're hoping to do over these next 2 or 3 months is really start getting to a final stage, if you will, in the negotiations on what the regulatory path looks like. So trying to get to a decision of what the endpoints will be, efficacy endpoints, safety endpoints, how many subjects linked to follow up and things like that. So we certainly have had discussions. We've had some proposals and some comments back and forth. But we're hoping that if things go as expected, we would like to by the end of Q3 to maybe be near the end of these discussions and negotiations and have something that we could share with you and other potential investors.

Okay. Got it. That’s it from me. Thanks for taking the questions.

Yes. Thank you.

At this time, I would like to go ahead and turn the call back over to Mr. Will McGuire.

Yes, I'd like to thank all of the Second Sight team and also thank all of you for joining us on the call today. I look forward to updating you on our progress in future calls. Have a great day.