VANI - NASDAQ

Greetings, and welcome to the Second Sight Second Quarter 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 conference is being recorded, Tuesday, August 6, 2019.I would now like to turn the conference over to Lisa Wilson, Investor Relations for Second Sight. Please, go ahead.

Good afternoon, and welcome to Second Sight's Second 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. At the close of market, the Company issued a press release detailing financial results for the three months ended June 30, 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 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 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 August 6, 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. On this call, I would like to provide an update on the progress we are making with the development of our Orion platform as we execute the strategy laid out in our Q1 call. We made great strides developing the overall clinical and regulatory strategy for Orion during the past 90 days.We completed a pre-submission to the FDA as part of the Breakthrough Devices program, held an in-person meeting with the FDA in Maryland and most recently developed – I am sorry, received a written response to our pre-submission from the agency. We also remain on track with our Orion programs while adding key talent to support our R&D and clinical teams.Finally, the Orion subjects in our early feasibility study are performing well and lastly, CMS created a payment pathway for devices with a breakthrough designation. I look forward to sharing more details on these topics during the call today.Let me begin with an update on our early feasibility study. We continue to be encouraged by the performance of our six subjects. Five of the six subjects have now had their implants for more than a year and they continue to show improvement across multiple measures. Most importantly, subjects are finding success with Orion for everyday visual test.On June 25th, the study’s principal investigators from UCLA and Baylor presented top-line 12 months results at the World Society for Stereotactic and Functional Neurosurgery Annual Meeting. The primary outcome measure of the study is safety.Secondary outcome measures include the ability produced phosphenes, assess the long-term functionality of the device and evaluate the benefit to subjects in terms of visual function, functional vision and quality of life.The clinical team has done a fantastic job executing this study and I am pleased to say that for both the primary safety and secondary outcome measures the results have been positive. Current safety and performance data are as follows: first, from a safety perspective, a total of six adverse events or AEs related to the device or surgery have been reported at the one-year mark for the first five subjects.These six events have been experienced by two of the study participants with the other three subjects experiencing no such events in the first year. Only one AE was classified as serious or an SAE. By comparison, in the first five of this two feasibility subjects, four subjects experienced the total of 25 AEs related to the device or surgery in the first year with two of those classified as SAEs.Now, let’s talk about the three efficacy endpoints. First, and we think most importantly, the FLORA or Functional Low-vision Observer Rated Assessment utilizes independent and certified orientation and mobility specialist to assess the impact of Orion on each subject’s functional vision and well-being in their home environment.At various time points the independent specialists assess Orion’s impact on each subject’s daily living and assign a rating of negative impact, mild negative impact, neutral impact, mild positive impact, or positive impact.I am very pleased to report that all of the first five subjects received a benefit from using this system in daily living at 12 months. Four out of five subjects received benefit rated as positive and the fifth subject received benefit rated as mild positive. Remember, the sixth subject has not yet reached the one year point.Next, four out of the first five Orion subjects demonstrated the ability to locate a high contrast target, significantly better with the system on, then with the system off as measured by square localization. As a reminder, this test requires each subject to repeatedly locate a square on a screen by touching within the boundaries of the square in the given period.Lastly, four out of the first five subjects demonstrated the ability to determine the direction emotion of a high contrast target significantly better with the system on and with the system off. This test requires each subject to repeatedly identify the direction of motion of lines moving across the screen in front of them.We expect that Orion data will be presented at additional meetings and major scientific forums throughout the remainder of the year. If you like to know what the study participants think of Orion, I would encourage you to read a recent press release by Baylor College of Medicine in Houston dated June 27th, 2019 or see an article in the Daily Mail dated July 12, 2019 that quotes one of our six participants.A 35 year old father of three, blinded by pediatric glaucoma at the age of nine, who describes his joy at seeing his wife and three daughters for the first time with our device. Stories like this truly motivate the team at Second Sight and provide a reminder of the impact we can have on people’s lives.Let’s turn to R&D. Much of our work is centered on changes to the current Orion implants and externals that we believe to be necessary for commercialization. Changed our focus on the implants electronics case to reduce the thickness and improve impact resistance. We are not planning to change the electrode array design or the materials.Improvements to the Orion externals focused on a faster processor and more memory aligned for expanded capabilities and future softer visions, improved water and impact resistance and improved ergonomics. None of the proposed changes to the implant or the externals impact functionality and the teams are confident in our ability to complete the work next year.We also continue to advance multiple research projects with partners that are intended to enhance the artificial vision provided by Argus or Orion, we’ve recently completed a prototype stereo system that utilizes two cameras and allows distance filtering and advanced obstacle detection capabilities. By the end of the year, we also aim to develop prototype systems for eye tracking and thermal imaging.Ultimately, all of these technologies could be integrated with our artificial vision technologies and we remain very excited about their potential to significantly improve the user experience. I look forward to reporting our progress in future calls.Turning to our discussions with the FDA, we made great progress during the past few months defining the overall clinical and regulatory strategy for Orion in the U.S. In mid-June, we completed a pre-submission our proposed clinical trial and regulatory path to the FDA and received written feedback from the agency last week.To clarify, a pre-submission is a mechanism by which a manufacturer can obtain FDA feedback prior to an actual premarket submission for approval. We also held an in-person meeting with the FDA in early July to update the agency on our early feasibility study progress, specifically the safety and efficacy data on the six Orion subjects.As discussed earlier, we believe this data to be very positive and supportive towards advancing to a pivotal study. The in-person meeting and the written response to our submission was very helpful in informing our clinical and regulatory strategy.Broadly speaking, we are evaluating two different paths for Orion, path number one is a pre-market approval or PMA trial. The projected start of the pivotal study is still to be determined pending resolution of various aspects of the study and post-approval requirements. Depending upon the timing of the pivotal study, it is possible that we would expand our early feasibility study in order to collect additional data before proceeding to a pivotal study.Path number two would involve first obtaining a Humanitarian Device Exemption or HDE approval followed by a PMA approval. This path will become preferable if the PMA requirements push the start of the pivotal study too far into the future.Our focus over the next 90 days is to understand the specific requirements for each regulatory path as well as the related commercial implications in order to finalize Orion’s clinical and regulatory strategy.On the reimbursement front, CMS released its fiscal year 2020 in-patient prospective payment system or IPPS final rule last week. In this rule, CMS finalized its proposal to create an alternate payment pathway for innovative technologies with an FDA breakthrough device designation.We commend CMS for this truly significant step to improve patient access to transformative devices. This decision has the potential to significantly shorten the path to reimbursement for Orion and ultimately improve our ability to commercialize after regulatory approval.As part of the finalized rule, CMS will weigh the requirement on substantial clinical improvement evidence for FDA designated breakthrough medical devices for at least two years, and qualify them for new technology add-on payments as long as they meet cost criteria. This means that breakthrough devices such as Orion would likely get new tech add-on payments upon regulatory approval.I believe our market access team has proven themselves to be a leader in advocating for reimbursement of breakthrough devices. And in conjunction with industry groups including the Medical Device Manufacturers Association or MDA and AdvaMed who will continue working towards further improvements in payer policies for transformative devices such as Orion.We are also continuing our work internally and with top-tier consultants to develop a comprehensive reimbursement strategy for Orion, not only will we engage with CMS, but in parallel we are conducting outreach and discussions with private payers to understand their expectations for data supporting reimbursement of Orion.We expect that a much larger percentage of the Orion population compared to the Argus population will have private insurance coverage which driven primarily by the younger average age of Orion patients and the related fact that some may still be working, or how as fast as that are working. Our readiness with private payers will be a critical driver of value as we commercialize in the significantly larger markets.Also, we would like to sincerely thank and applaud CMS for its decision to continue using multiple years of claims data to determine the appropriate payment rate for the procedure with our commercially approved artificial division device Argus II.This rate setting methodology allows for a more stable payment rate for low volume procedures performed in a outpatient setting. For calendar year of 2020, CMS has proposed a Medicare hospital average outpatient rate of $152,500 for the Argus II and associated surgical procedure, the same as for calendar year 2019.In a moment, John will review the company’s second quarter financial performance in detail. Before he does, I would like to note that during the second quarter, we implanted eleven Argus II devices, seven in the U.S. and four outside the U.S. All of our Argus implanting centers have been notified of our intent to start manufacturing the product over the course of the year.Some centers are understandably disappointed in our decision given the lack of options for individuals who are blind from RP. Going forward, some centers have elected to stop performing Argus implants, while others will continue for a period of time.Finally, I’d like to outline key objectives for the second half of 2019. Number one, execute Orion R&D implant and externals projects; number two, finalize agreement with the FDA regarding Orion’s clinical and regulatory path; number three, engage and expand discussions with CMS and private payers, while developing a comprehensive reimbursement strategy for Orion in the U.S.; number four, submit Argus 2s, our next-generation externals to the FDA for U.S. regulatory approval; and number five add key talent to support our Orion program and develop a plan for high volume manufacturing.I want to again emphasize that we remain committed to supporting our Argus-2 users around the globe and I want to thank the team at Second Sight for their continued hard work and dedication.With that, John will now review our second quarter 2019 financial results. John?

Thank you, Will. Our financial results for the second quarter are in line with expectations as we shift our organizational focus to Orion. Net sales were $1.3 million in the second quarter of 2019 compared to $1.9 million in the same period in 2018. Revenue was recognized for ten implants on a GAAP basis with an average selling price of $128,000 in the second quarter of 2019 as compared with 17 devices with an ASP of $112,000 in the same period of 2018.We expect our net sales to decline as we sell through our existing inventory of Argus II. Research and development expense net of funding received from grants was $3.4 million in the second quarter of 2019 as compared to $2.4 million in the second quarter of 2018. The increase primarily reflects additional headcount and costs to make internally produced prototypes.We expect our research and development expenses to increase as we accelerate our transition to the Orion platform. Clinical and regulatory expense, net of funding from grants decreased $0.6 million from $1.1 million in the second quarter of 2018 to $0.5 million in the second quarter of 2019. This decrease is attributable to both decreased cost associated with the Orion feasibility study and grant funds from the NIH that offset costs in the period.We expect clinical and regulatory cost to increase in the future as we conduct additional clinical trials for Orion and related enhancements to our user experience.Selling and marketing expense was $1.7 million in the second quarter of 2019 compared to $2.9 million in the second quarter of 2018. We expect selling and marketing expense to decrease as we reduce our Argus II commercial activities and sell through our existing inventory.General and administrative expense was $2.3 million in the second quarter of 2019 compared to $2.6 million in the second quarter of 2018 and is expected to remain consistent for the remainder of 2019.During the second quarter of 2019, we recorded a restructuring charge of $0.9 million consisting of $0.7 million related to severance and other employee termination benefits, as well as $0.2 million on cash inventory impairment charges in connection with our plans to suspend Argus II.As of June 30, 2019, we had cash and cash equivalents of $25.2 million. Our cash burn for the second quarter of 2019 was $6.5 million and we continue to expect our cash on hand to fund operations into the second quarter of 2020.With that, I’ll open the call to questions. Operator, please go ahead with the introductions.

[Operator Instructions] And our first question is from Amit Dayal with H.C. Wainwright. Please go ahead.

Thank you. Hi guys. Thank you for taking my question.

Hi, Amit.

Just start with what exactly are you discussing and negotiating with the FDA?

Sure, Amit. This is Will. I’ll take that. Number one, and probably most importantly, we are just working through the specifics of the pivotal study. And so, items such as what are the primary efficacy and safety endpoints, how do we define those?What type of validation is needed for those endpoints, as well as themes such as the number of subjects, the follow-up and some other things like our ability, can we pool data from the Orion – current Orion system when we are applying for approval for the Orion system that’s currently in R&D right now. So, are we able to pool data from two different systems?Those type of things as well as some of the post market study requirements. So, what type of data do we need to collect, post-market, after approval, how many subjects, and how long do we follow-up those subjects as well.And that’s pretty important in a breakthrough devices program, because as we’ve talked in the past, the agency looks at both the pre-market as well as the post-market data collection plans as a whole to determine if you are collecting enough for the right data. Hopefully that answers your question, Amit.

Yes, so just also in regards to the two paths do you have options actually you are considering.

Yes.

Is that also being discussed with the FDA or is that more internal in terms of how you might approach the FDA.

We’ve discussed it at a high level with the FDA absolutely in our in-person meeting. We discussed it. We also – we’ve also submitted some questions to them relative to both paths. To be clear, the majority of our discussions – the overwhelming majority of our discussions and interfaces with the FDA have been relative to the PMA path.So, in which we would go from where we are today to a pivotal trial or a pivotal study and ask only to a PMA approval. That’s been the majority. But as I said, only recently have we started exploring what an HDE followed by a PMA would look like from a timing and requirement standpoint.

So, in terms of this process with what is sort of the next catalyst or steps that we should be looking for?

Yes, so, good question. We – as we stated in the prepared remarks, we received a written response to our last pre-submission that response came, I guess, the second half of last week. So we are still working through that response and a next step would be for us to probably then respond back to the FDA with a written response of our own.But could include answers to questions that they posed as well as us asking additional clarifying questions and giving additional information from the agency. We also – so there could be some back and forth – written back and forth like that, Amit. We also may decide to – at some point to request a conference call or request another in-person meeting.So, I’d say, it’s probably going to end up being a combination of written correspondence back and forth, as well as then sometime on the phone and or sometime face-to-face to make sure we completely understand the requirements for each of the options and make the best decision for the company.

Understood. And then, with respect to the technology that you are developing with partners for distance filtering et cetera, how soon can patients, kind of experience all the new features?

Sure. Good question. Yes, so, I expect that we can conduct some human testing with the distance filtering technology, sometime during the second half of this year towards the end of this year and we would do that with current Argus users once the Argus 2s is available. So, we can take this technology.It’s going to be able to compatible and integrated with Argus 2s and we’d start doing some testing with current Argus users. The human testing for the thermal imaging and eye tracking, that would probably start sometime near the end of this year or maybe first quarter of next year, assuming that, we keep those projects on track.And again, we would do that testing with current Argus users utilizing the Argus 2s or next-gen externals. So, hopefully, for all three of these technologies within a six to nine months from now, we would have test data and performance data that we could start sharing and describing what we see is the benefit.

And with respect to the CMS ruling on the reimbursement for breakthrough devices is this already in effect or is this going to have effects then?

Yes, I think it goes on their fiscal year. So I believe it becomes in effect on October 1 of this year. So, it was announced. So it is the final rule and then it would go in effect on October 1st of this year. So just around the corner.

Understood. Just one final one for me in regards to the NIH grant. How big is this grant if you could remind us? And how much has been already used and what is remaining?

Hi, Amit. This is John. I’ll take that one. So, yes, thanks. On the NIH grant, this year we expect to receive approximately $1.1 million for calendar year 2019 and we are eligible for approximately $5 million of additional funding on that grant and that’s subject to annual approval by the NIH.

Understood. Thank you so much. That’s all I have.

Thank you.

Alright. Thank you.

No further questions from the phone. So I’ll turn the call back to you.

So, thanks again for joining our call today and we look forward to providing further updates later this year. Have a good day.