VANI - NASDAQ

Thank you, ladies and gentlemen, for standing by and welcome to today's program entitled, Second Sight Medical Products’ Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program may be recorded.I would now like to introduce your host for today's program, Lisa Wilson, Investor Relations. Please go ahead.

Thank you, Jonathan. Good afternoon, and welcome to Second Sight's fourth quarter 2019 results call. This is Lisa Wilson of In-Site Communications, Investor Relations for Second Sight. With me on today's call are Will McGuire, President and Chief Executive Officer; Pat Ryan, Chief Operating 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 and 12 months ended December 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 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. The archived webcast of this call 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 March 19, 2020. 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. First, I'd like to address my impending departure from Second Sight. As was stated in the press release issued last week, I have accepted a similar position with a company that is much closer to my home and family in San Diego.To be clear, I am not leaving due to any disagreement with the Board and very much look forward to remaining involved with Second Sight as a member of the Board of Directors. I'm grateful for the support the Board has shown me over the past four-plus years, and I am honored to have led such a talented team at Second Sight. This is a company with a sense of purpose, unlike any I have been involved with in over 20 years in the medical device industry.We have continued to execute consistently against our goal since the last quarterly call and have made significant progress with our R&D efforts as well as our discussions with the FDA, our sixth subject in the Orion Early Feasibility Study reached the important 12-month milestone after the first subject has now been implanted for over two years. We also received a CE Mark Certification and conditional FDA approval for our next-generation wearables for Argus 2s and the team is now planning a limited market introduction of this key technology later this year.As on past calls, you will hear today from John Blake, our CFO. John will review our reimbursement efforts as well as the 2019 financial results. In addition, you will also hear from another member of our senior leadership team, Pat Ryan, our COO. Pat is a talented leader who was a naval officer before starting a 23-plus year career in medical devices. Pat has held several C-level positions at public medical device companies, while managing organizations that approach 6,000 employees. Pat will provide a number of updates, including our R&D progress, the status of the Orion Early Feasibility Study and our discussions with the FDA.Before turning the call over to Pat, I want to say that I have great confidence in the entire Second Sight team and fully expect the organization not to miss a beat under Greg Williams' strong leadership as Chairman and acting CEO. In meetings with Greg over the past few days, he has also expressed his confidence in the team and reiterated his full support for our efforts moving forward.With that, I will now turn the call over to Pat Ryan. Pat?

Thanks, Will. Today, as Will mentioned, I will share updates on our Early Feasibility Study for Orion, our ongoing discussions with the U.S. Food and Drug Administration concerning Orion's clinical regulatory path, recent approvals for the Argus 2s next-generation wearables as well as ongoing research and development initiatives.Let me begin with the Orion Early Feasibility Study. We completed the 12-month testing for the sixth and last subject in February 2020 and are pleased to report the results. As a reminder, this particular subject is the one who experienced a loss of perception in October 2019. Perception has returned for this individual, but not to pre-October 2019 levels. Despite the lower perception level, the results from 12-month testing are positive across multiple key measures. This individual scored significantly better with the device on than off on all three visual function measures, square localization, direction of motion and grading visual acuity.On the Functional Low Vision Observer Rated Assessment or FLORA, the impact of the Orion system on the patient's well-being and functional vision was rated as neutral, which is unchanged from the six-month time point before the change in perception. Now that the sixth subject has crossed the 12-month milestone, we can share overall results for the group.On square localization, 83% or five of six individuals scored significantly better with the device on than off. On direction of motion, 100% or six of six individuals, scored significantly better with the device on than off. On grading visual acuity, 50%, or three of six individuals scored on scale at 2.9 LogMAR or better vision. On FLORA, 83%, or five of six individuals were rated as receiving a positive or mild positive benefit of the Orion system on well-being and functional vision.From a safety perspective, as previously shared, there was one serious adverse event and six non-serious adverse events over the same time period. These results are extremely encouraging and we believe sufficient to support moving forward with a pivotal study in the U.S. As noted last quarter, we have agreement with the FDA regarding the primary efficacy endpoint for the pivotal trial, which will be FLORA 20, an update to the original FLORA used in the Argus II clinical trial.As a reminder, FLORA is an assessment performed by an independent third-party, low vision orientation and mobility specialists, who spends time with each subject in their home after the procedure. The specialists asks each subject a series of questions and observes in performing daily living tasks, such as finding light sources following the sidewalk or sorting laundry. The specialist then determines if the system is providing a benefit, if it is neutral or if it actually is hurting their ability to perform these tasks.Validation for FLORA 20 is underway. As part of the process, we are taking all the learning that we’ve accumulated over the years in focusing on the observer-related functional vision task section. This entails a certain number of tasks that the Orion user would be required to perform. The independent observer will then observe them performing these tasks and provide a rating as to how difficult the task was performed with and without the system. The difference in score with the system on versus off reflects the level of benefit the system provides on these functional vision tests.We believe FLORA 20 is the most appropriate way to measure the impact of our technology on how someone functions in their daily life. The validation is very important to the FDA because, among other things, it ensures that multiple independent experts can administer the tool and then provide consistent measurement of Orion’s impact. Through the validation process, we believe that we can prove that multiple observers to perform this assessment with consistent results and the FLORA 20 is the appropriate tool for demonstrating the real-world impact of the Orion technology. To date, three of 15 subjects have begun participation in the FLORA 20 validation.However, due to COVID-19 social distancing protocols, we have suspended validation efforts until further notice. We continue to actively engage with FDA about the primary safety endpoint for the pivotal trial. While we had hoped to resolve the safety endpoint by the end of last year, our discussions with the agency are ongoing. I want to emphasize here that this delay does not reflect any concerns relative to the Early Feasibility Study safety data. Rather, the issue we are working through is determining the parameters around what an acceptable serious adverse event break should be for a first-in-class technology like Orion. We now expect to have alignment on this by the end of the third quarter of this year.Turning now to research and development for Orion. We are continuing to work on the next-generation Orion implant and wearables. Our schedule has shifted out somewhat, reflecting additional work that we have identified as necessary. It’s not the result of any technical issues. Based on our current internal project schedules, we now expect an IDE filing to occur in the first half of 2021 versus our previous target at year-end 2020. We will continue to update you as we progress through the year. As a reminder, the improvements to the implant include reducing the thickness of the electronics case and improving impact resistance. For the wearables, improvements include ergonomics, aesthetics and robustness. None of the proposed changes to the implant or wearables affect functionality.Turning to Argus 2s. I’m pleased to share that, as announced earlier this week, we have received conditional approval from FDA for our next-generation of what we are now calling wearables. The conditional approval requires us to make some relatively straightforward changes to the product labeling and submit these to FDA before we can receive a full approval and start marketing the product.We also received a CE mark for the Argus 2s. This means that the new wearables conform with health, safety and environmental protection standards for products sold within the European Union and can, therefore, be marketed freely in that part of the world. These new wearables include a significantly more powerful video processing unit, or VPU, an improved camera and new glasses. The entire system is both more ergonomically and aesthetically pleasing. This new and improved technology will be introduced at a controlled pace and will serve as an important base technology for the next-generation Orion system that will be used in the U.S. pivotal study.With that, I will turn the call over to John, who will discuss our efforts to secure reimbursement for Orion as well as our fourth quarter 2019 financial results. John?

Thank you, Pat. Before turning to the financials, I have a few more business updates to share regarding our reimbursement activities. We have continued our ongoing dialogue with the Centers for Medicare and Medicaid Services, or CMS. A few weeks ago, we went to Baltimore and had another productive meeting with the CMS national coverage team.We took the opportunity to update this group on our progress with Orion, including the full 12-month Early Feasibility Study results, potential clinical endpoints for the pivotal study and even introduce CMS representatives to one of our Orion EFS subjects. This was an excellent opportunity for CMS to hear firsthand about the life-changing impact of Orion. Our main focus of CMS discussions moving forward will be determining the appropriate pathway for gaining national or widespread reimbursement coverage for the Medicare population upon Orion regulatory approval.We also approached private payers to understand their requirements and expectations for data supporting the reimbursement of Orion. Given the younger average age of Orion patient candidates, we expect that a sizable portion of the Orion population will have private insurance coverage. Preparing for private payers is an important aspect of how we will plan for commercialization.Finally, before moving on to the financials, as Will mentioned before, there are currently two pieces of legislation being proposed that would address coverage for breakthrough devices such as Orion. The house bill is H.R. 5333, Ensuring Patient Access to Critical Breakthrough Products Act of 2019, and the Senate bill is S.2326, new opportunities for value that Extend Lives Act of 2019. We were scheduled to return to Capitol Hill early next month with one of our Orion subjects to meet with various elected officials and – or their staff to discuss the importance of reimbursement certainty when it comes to innovative breakthrough technologies such as Orion. However, due to the coronavirus, our trip will be rescheduled to a later date.Turning now to the financials. In January, we executed a 1:8 reverse stock split to remain compliant with NASDAQ listing requirements. Our financial results for the fourth quarter and full year are in line with our expectations. Net sales were $0.5 million in the fourth quarter of 2019 compared to $1.8 million in the same period in 2018.Revenue was recognized for three implants on a GAAP basis, with an average selling price of $166,000 in the fourth quarter of 2019 compared with 16 devices with an ASP of $110,000 in the same period of 2018, reflecting an average higher reimbursement rate set by CMS in 2019 in the U.S.Research and development expense, net of funding from grants, was $4.1 million in the fourth quarter of 2019 compared to $2.4 million in the fourth quarter of 2018. The increase primarily reflects cost to produce Orion prototypes. We expect research and development expenses to increase in future periods, reflecting additional personnel and verification and validation of Orion prototypes, including costs previously related to production activities such as facilities and personnel that have transitioned to Orion development activities.Clinical and regulatory net of funding from grants, decreased slightly from $1.2 million in the fourth quarter of 2018 to $1 million in the fourth quarter of 2019. The decrease is attributable to lower costs from the Orion Early Feasibility Study. We expect clinical and regulatory costs to increase in the future as we conduct additional clinical trials to assess Orion and related enhancements to the user experience.Selling and marketing expense was $1 million in the fourth quarter of 2019 compared to $2.4 million in the fourth quarter of 2018. the decrease of $1.4 million is a result of deemphasizing commercial activities for Argus 2. General and administrative expense was $2.3 million in the froth quarter of 2019, compared to $2.5 million in the fourth quarter of 2018. The decrease of $0.2 million is primarily due to lower non-cash stock compensation costs from executive transition and our G&A expense is expected to remain flat going forward.As of December 31, 2019, we had cash and cash equivalents of $11.3 million. Our cash burn for the fourth quarter was $7.1 million, and we have a cash runway into the second quarter of 2020. We are currently in discussions around our financing strategy and expect to provide updates on that in the very near future.With that, I’ll open the call to questions. Operator, please go ahead with the instruction.

[Operator Instructions] Our first question comes from the line of Amit Dayal from H.C. Wainwright. Your question, please.

Will, I guess, see you in a different role, I guess, with the different company. But with respect to new CEO coming in at what stage of the search are you guys in? And do you think this will be filled sooner rather than later, the position?

I’d say we’re – Board is taking point on this – on our committee within the Board. And it’s in the early stages right now. So it’d be hard for me to say exactly when we would expect to have someone in the position. But as I said in the earlier comments, I feel really good about where we are with Greg taking over on the interim CEO position, but also with the entire team that’s there and especially with Pat and John in their roles. So I’m sure the next call, we’ll have an update, if not before. But right now, it would be hard for me to predict. But I do honestly believe the company is in really good hands right now.

Understood. Thank you for that. And then with respect to the safety endpoints, this – I guess, the discussions with the FDA, et cetera, have been pushed out. What aspects of these safety endpoints remain to be cleared? Could you provide any color on that?

This is Pat. I’ll take that one. So shortlist, you were trying to figure out the overall number of subjects that are going to be in the pivotal trial. The duration of follow-up, some of the secondary endpoints, confirmation at bench testing and other preclinical testing plans that we’ve developed are adequate and then some post-market study requirements, including, again, a number of subjects, endpoints and follow-up.

Amit, this is Will. I would just add to that, that from a safety endpoint perspective, I think we talked about this a little bit in the last call. We’re focused on serious adverse event rates – or the serious adverse event rate. So, we think the safety endpoint will be some form of serious adverse events. The real thing that we’re trying to work through now is what the – what is an acceptable rate for this type of procedure and what type of rate would prospective patient’s view as being acceptable. The issue we face and the issue that other people would face with any breakthrough technology like this is there’s no comparative technology out there that we could look at their rate and view that as acceptable.So, it’s really kind of working through to kind of get consensus with the agency on what is actually acceptable. So again, we think we’ll get there. It’s just taking a little more time than we had thought. But again, we think we’ll get there and be able to move forward.

Understood. Just one final one. In terms of your total cash operating expenses for the year, how much do you think you will need for 2020 and then getting into maybe early 2021?

Hi, Amit. This is John. I’ll answer that. So, our cash burn – our operating cash burn in 2019 was $27.6 million, and we’re on pace to go a little higher than that for 2020, given some of the heavier R&D development work and clinical work that we’ll be engaging in this year. And then on the financing side, we’ll be discussing those plans in the very near future, so I can’t comment on that at this time.

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

Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Kyle Bauser from Dougherty & Company. Your question, please.

Hi, good afternoon. Sorry to see you leave as CEO, Will, but congratulations on the new role. And…

Thank you.

Thank you, Pat and John for the prepared remarks. Just maybe first, I want to be clear, and correct me if I'm wrong, but I believe you're still contemplating one of two pathways to either the PMA approval or the HDE pathway, which is followed up by the PMA process. But since the HDE trials are typically focused on safety and it seems like the trial design for Orion will largely be driven by the safety endpoint anyways. It seems like, in theory, you should be able to just go straight to the pivotal PMA trial with that breakthrough designation. First, is that fair? And any thoughts there would be great.

Yes, I mean, I can take that first. I think that's a very accurate way of stating the way we view it, Kyle, given our continuing discussions on safety. We do think the overall trial size, and shall we say, will be driven by the safety endpoint, not the efficacy endpoint. And so by remaining on a PMA track and realizing the advantages of the breakthrough devices program, we don't – we see that is the best track for us. And it kind of eliminates any of the potential advantages, time advantages or other advantages we would have had by deciding to go down to HDE track. So for us, we think breakthrough PMA makes all the sense in the world right now.

Got it. Okay. And as you mentioned, you've reached the agreement on the efficacy endpoint and negotiating on the safety here, but also you'll need to work through the trial size and the post-market, kind of, endpoints and secondary endpoints. But once you agree on the safety endpoint, do you think the remaining items that I just mentioned should be able to fall rather quickly?

Yes. Because once we lock in on kind of a safety endpoint, which will be some sort of, most likely some sort of serious adverse event rate, then the statistics will or kind of guide what the overall trial size needs to be. And then also, it will be – there will be a negotiation with the FDA about what portion of the total number is premarket and which portion is post-market. But our belief is that the majority of the patients enrolled would be post-market and we would have some sort of performance goal for the premarket that kind of assures us of meeting the overall goal from a serious adverse event rate. So yes, once we, kind of, decide that rate, everything will fall into place after that. We should be able to move things forward quite quickly.

Okay. And Pat, you mentioned in the prepared remarks that you'll be able to submit that IDE application in the first half of next year. Is it safe to say that the change in time line, the slight push out is purely just a function of COVID-19 kind of slowing things down across the board?

No, COVID-19 isn't really impacting it yet. This is just due to the ongoing negotiations with the agency over what their requirements are going to be. So we are still working those technicalities out. And as each day goes by, it's just costing us a little more time. So we're just trying to be conservative in our estimate.

Sure. Yes. And it sounds like, I mean, even if it was ready to go, there'd be a delay in anyways for COVID-19. So it'd be pushed out inevitably.

I think so.

Got it. And then just lastly, some nice updates on externals, the CE mark and conditional FDA approval, which is great since they'll be used in the Orion trial. Will you kind of mentioned it, but will you be rolling Argus 2s out to the current installed base in Europe and the U.S.? Or is the key takeaway here that now you have approval of 2s and can kind of move forward in discussions with the FDA on the trial design for Orion, which includes 2s.

Yes, this is Will. I can take part of that. I think one of the most important things is that we've got it completed. We've got an approval. It won't be exactly the wearables that we use for Orion, but it's the base technology. So it will certainly make, I think it would make the FDA review of our submission, at least that portion of the submission for Orion should give us more confidence and that being positive. And a lot of what they see on the wearables will be familiar with them. So it's great from that point.As far as how we roll it out, it's going to be a pretty limited release here in the beginning. And I think one just probably from a supply perspective, but also it's a pretty complex product. We feel very good about all the work and all the testing, but my experience is usually you want to go pretty slow with something like this, get it into some users’ hands and then get some feedback on it before you go wide with it or deep with it. So, yes, I would expect it to be fairly limited, but we will be doing it to get some feedback and identifying the areas that need to be improved or addressed.

Okay. That makes sense. Okay, great. Well, thanks for the update here and for taking my questions.

Thank you.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Will McGuire for any further remarks.

Yes. Thank you all for joining our call today. Let me close by thanking all investors for their support and the team at Second Sight for their continued hard work and dedication. I also want to reiterate our commitment as a company to bringing this breakthrough technology to the large patient population of profoundly blind individuals. We derive great satisfaction from witnessing subjects gained independence and confidence when using the Orion device. Finally, our thoughts and prayers are with everyone around the globe as we navigate these uncertain times.