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…

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…

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…

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…

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.

That does conclude the call for today. We thank you all for your participation and ask that you please disconnect your lines.