Notes
to Condensed Consolidated Financial Statements
(unaudited)
| 1. | Organization
and Business Operations |
Second
Sight Medical Products, Inc. (“Second Sight,” the “Company,” “we,” “us,” “our”
or similar terms) has developed, manufactured and marketed implantable visual prosthetics that are intended to deliver useful
artificial vision to blind individuals. We are a recognized global leader in neuromodulation devices for blindness, and are committed
to developing new technologies to treat the broadest population of sight-impaired individuals.
Agreement
and Plan of Merger with Nano Precision Medical, Inc.
As
disclosed in the Company’s Current Report on Form 8-K filed with the SEC on February 8, 2022, on February 4,
2022, Second Sight entered into the agreement and plan of merger (the “Merger Agreement”) with Nano Precision
Medical, Inc., a California corporation (“NPM”), and, upon and subject to the execution of a joinder, NPM
Acquisition Corp., a California corporation and a wholly-owned subsidiary of the Company (“Merger Sub”). Pursuant
to the Merger Agreement and subject to the terms and conditions set forth therein, NPM will merge with and into Merger Sub
(the “Merger”), and upon consummation of the Merger, Merger Sub will cease to exist and NPM will become a
wholly-owned subsidiary of the Company. Upon completion of the Merger and subject to shareholder approval, the Company will
change its name as the Company and NPM may agree in the future and change its trading symbol as NPM requests in writing
following consultation with Nasdaq. Subject to the terms and conditions of the Merger Agreement, if the Merger is completed,
the securities of NPM will be converted into the right to receive an aggregate of approximately 134,349,464 shares of the Company’s common stock (the “Merger Shares”) representing approximately 77.32%
of the total issued and outstanding shares of common stock of the Company on a fully converted basis, including, without
limitation, giving effect to the conversion of all options, warrants, and any and all other convertible securities. The
Merger will involve change of control and may be consummated only following the approval of the Company’s shareholders.
The Company filed a Registration Statement on Form S-4 on May 13, 2022 in connection with the Merger to register the
Merger Shares.
SAFE Agreement
On
February 4, 2022, in connection with the Merger, Second Sight and NPM also entered into a Simple Agreement
for Future Equity (“SAFE”) whereby Second Sight would provide to NPM, pending closing of the Merger, an
investment advance of $8 million which, effective upon the termination date of the Merger Agreement without completion of the
Merger, will result in NPM’s issuing to Second Sight that number of shares of NPM common stock which following that
issuance will equal not less than 2.133% of the issued and outstanding shares of NPM common stock assuming exercise or
conversion of all outstanding vested and unvested options, warrants, and convertible securities. In the event NPM completes
an equity financing at a lower valuation, Second Sight may be eligible to receive additional shares of NPM common stock as
set forth in the SAFE. If the Merger is completed, the SAFE will terminate. The SAFE is classified as a marked-to-market
asset pursuant to ASC 480, Distinguishing Liabilities from Equity, due to the potential variability at the time of
share settlement. The carrying value of the SAFE as of March 31, 2022 was determined to approximate fair value due to
proximity to the issuance date and current probability of a successful merger.
Product
and Clinical Development Plans
Leveraging
our 20 years of experience in neuromodulation for vision, we are developing the Orion® Visual Cortical Prosthesis
System (“Orion”), an implanted cortical stimulation device intended to provide useful artificial vision to individuals
who are blind due to a wide range of causes, including glaucoma, diabetic retinopathy, optic nerve injury or disease and eye injury.
Orion is intended to convert images captured by a miniature video camera mounted on glasses into a series of small electrical
pulses. The device is designed to bypass diseased or injured eye anatomy and to transmit these electrical pulses wirelessly to
an array of electrodes implanted on the surface of the brain’s visual cortex, where it is intended to provide the perception
of patterns of light. We are conducting an Early Feasibility Study of the Orion device at the Ronald Reagan UCLA Medical
Center in Los Angeles (“UCLA”) and Baylor College of Medicine in Houston (“Baylor”). Regularly scheduled
visits at both sites were paused in mid-March 2020 due to the coronavirus outbreak, however visits at UCLA resumed mid-September
2020 and Baylor resumed in December 2020. Our 36-month results, all of which were measured after the study resumed, indicate to
us that:
| ● | We
have a good safety profile. Five subjects experienced a total of fourteen adverse
events (AEs) related to the device or to the surgery, through February 2022. One was
considered a serious adverse event (SAE), and all of the adverse events were in the expected
category. The one SAE occurred at about three months post-implant, was resolved quickly,
and did not require a hospital stay. There have been no serious adverse events due to
the device or surgery since June 2018. |
| ● | The
efficacy data is encouraging. We measure efficacy by looking at three measures of
visual function: The first is square localization, where Orion subjects sit in front
of a touch screen and are asked to touch within the boundaries of a square when it appears.
The second is direction of motion, where subjects are asked to identify the direction
and motion of lines on a screen. The third is grating visual acuity, a measure of visual
acuity that is adapted for very low vision. Five subjects have completed these tests
at 36-months. For these 36-month results, on square localization, five of five subjects
tested in our feasibility study performed significantly better with the system on than
off. On direction of motion, five of five performed better with the system on than off.
On grating visual acuity, two of five tested had measurable visual acuity on the scale
of this test (versus none who can do it with the device off). Another efficacy measurement
of day-to-day functionality and benefit is FLORA, an acronym for Functional Low-Vision
Observer Rated Assessment. FLORA is an assessment performed by an independent, third-party
low vision orientation and mobility specialist who spends time with each of the subjects
in their homes. The specialist asks each of the subjects a series of questions and also
observes them performing 15 or more daily living tasks, such as finding light sources,
following a sidewalk, or sorting laundry. The specialist then determines if the system
is providing a benefit, if it is neutral, or if it is actually hurting the abilities
of subjects to perform these tasks. FLORA results to date show that 4 out of 4 completing
the FLORA at 36 months had positive or mild positive results indicating the Orion system
is providing benefit. We reached agreement with the FDA in the fourth quarter of 2019
to utilize a revised version of FLORA as our primary efficacy endpoint in our pivotal
trial for Orion, pending successful validation of the instrument. |
No
peer-reviewed data is available yet for the Orion system. We are currently negotiating the clinical and regulatory pathway to
commercialization with the FDA as part of the Breakthrough Devices Program.
In
November 2017, the FDA granted Breakthrough Devices Program designation for the Orion. This designation is given to a few select
medical devices in order to provide more effective treatment of life-threatening or irreversibly debilitating diseases or conditions.
This program is intended to help patients have more timely access to these medical devices by expediting their development, assessment,
and review.
On
February 26, 2021, the U.S. Food and Drug Administration (FDA) approved the Argus 2s Retinal Prosthesis System, a redesigned set
of external hardware (glasses and video processing unit) initially for use in combination with previously implanted Argus II systems
for the treatment of retinitis pigmentosa (RP). The Company expects that the Argus 2s will be adapted to be the external system
for the next generation Orion Visual Cortical Prosthesis System currently under development. In addition to ergonomic improvements,
the Argus 2s system offers significantly more processing power, potentially allowing for improved video processing.
Our
principal offices are located in Los Angeles, California.
In
2007, Second Sight formed Second Sight Medical Products (Switzerland) Sàrl, initially to manage clinical trials and sales
and marketing in Europe, the Middle East and Asia-Pacific, and more recently for the research of future technologies. As the laws
of Switzerland require at least two corporate stockholders, Second Sight Medical Products (Switzerland) Sàrl is 99.5%
owned directly by us and 0.5% owned by an executive of Second Sight as of March
31, 2022. Accordingly, Second Sight Medical Products (Switzerland) Sàrl is considered 100%
owned for financial statement purposes and is consolidated with Second Sight for all periods presented. We have closed our foreign
operations and expect final dissolution of this entity in 2023.
Market
Development Plans
Orion.
By further developing our visual cortical prosthesis, Orion, we believe we may be able to significantly expand our market
to include nearly all profoundly blind individuals. The only notable exceptions for potential use of the Orion are those who are
blind due to otherwise currently treatable diseases, individuals who are born blind, or blindness due to direct damage of the
visual cortex, which is rare. However, of the estimated 36 million blind people worldwide, there are approximately 5.8 million
people who are legally blind due to causes that are not otherwise treatable. We continue to develop and refine our estimates of
the potential addressable market size as we evaluate the commercial prospects for Orion using a combination of published sources,
third party market research, and physician feedback. We currently estimate over 500,000 individuals in the US are legally blind
due to retinitis pigmentosa, glaucoma, diabetic retinopathy, optic nerve disease and eye injury. Of this population, we estimate
the potential US addressable market is between 50,000 and 100,000 individuals with bi-lateral blindness at the light-perception
level or worse. Our marketing approvals by the FDA and other regulatory agencies will ultimately determine the subset of these
patients who are eligible for the Orion based on our clinical trials and the associated results.
Our
objective in designing and developing the Orion visual prosthesis system is to bypass the optic nerve and directly stimulate the
part of the brain responsible for human vision. An Early Feasibility Study of the Orion device is currently underway
at UCLA and Baylor College of Medicine. Regularly scheduled visits at both sites were placed on hold in mid-March due to Covid-19,
however visits at UCLA resumed mid-September 2020 and Baylor resumed in December 2020. Our 36-month results an
indicate a good safety profile with encouraging efficacy data and benefits in helping subjects perform their daily living tasks.
We believe these data are encouraging and support advancement of Orion into a larger pivotal clinical study. Early promising results
are not necessarily indicative of results which may be obtained in large clinical trials. No assurance can be given that we will
achieve similar results in our larger Orion clinical trials. No peer-reviewed data is available yet for the Orion system.
COVID-19
Pandemic
We
are requiring our employees to adhere to the local and state guidelines regarding the COVID-19 pandemic, and use their best judgement
to work remotely or work in the office. While many of our employees are accustomed to working remotely, much of our workforce
has not historically been remote. Although we continue to monitor the situation and may adjust our current policies as more information
and public health guidance becomes available, restricting the ability to do business in person may create operational or other
challenges, any of which could harm our business, financial condition and results of operations.
In
addition, our clinical trials have been affected by the COVID-19 outbreak. Patient visits in ongoing clinical trials were paused,
for example, due to prioritization of hospital resources toward the COVID-19 outbreak, travel restrictions imposed by governments,
and the inability to access sites for initiation and monitoring. Also, some of our suppliers of certain materials used in the
development of our product candidates are located in areas impacted by COVID-19 which could limit our ability to obtain sufficient
materials for our product candidates. COVID-19 has and will continue to adversely affect global economies and financial markets,
and may result in an economic downturn that could affect demand for our product candidates, if approved, and impact our operating
results. Even after the COVID-19 pandemic has subsided, we may continue to experience an adverse impact to our business as a result
of the continued global economic impact of the pandemic. We cannot anticipate all of the ways in which health epidemics such as
COVID-19 could adversely impact our business. Although we are continuing to monitor and assess the effects of the COVID-19 pandemic
on our business, the ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to
change. See the Risk Factors section for further discussion of the possible impact of the COVID-19 pandemic on our business.
Liquidity
From
inception, our operations have been funded primarily through the sales of our common stock and warrants, as well as from the issuance
of convertible debt, research and clinical grants, and limited product revenue generated from the sale of our Argus II product.
We have funded our business since 2020 primarily through the following transactions:
| ● | On
June 25, 2021, we closed an underwritten public offering of 11,500,000 shares of common
stock at a price of $5.00 per share for aggregate net proceeds of $53.3 million |
| ● | On
March 23, 2021, we closed our private placement to seven institutional investors of 4,650,000
shares of common stock at a price of $6.00 per share for aggregate net proceeds of approximately
$24.5 million |
We were awarded a $1.6 million grant (with the intent to fund $6.4 million over five years subject to annual review and approval) from the National Institutes of Health (NIH) to fund the “Early Feasibility Clinical Trial of a Visual Cortical Prosthesis” that commenced in January 2018. Our second year grant of $1.4 million was approved on April 6, 2021 and our third year grant of $1.4 million was approved on May 12, 2021. As of March 31, 2022 we recorded $0.2 million of grant costs receivable, included in prepaid expenses and other current assets.
On
September 17, 2019, we received a $2.4 million, four-year grant from the National Institutes of Health (NIH) to develop spatial
localization and mapping technology (“SLAM”). This grant involves a joint collaboration with the Johns Hopkins University
Applied Physics Laboratory and is intended to speed the integration of SLAM into future generations of Orion. The goal is to give
Orion users the ability to localize objects and navigate landmarks in unfamiliar surroundings in real time. APL is the primary
recipient of the grant. We have suspended our activities on the project until we clarify our future plans.
Our
financial statements have been presented on the basis that our business is a going concern, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. We are subject to the risks and uncertainties
associated with a business with no revenue that is developing a novel medical device, including limitations on our operating capital
resources. We have incurred recurring operating losses and negative operating cash flows since inception, and we expect to continue
to incur operating losses and negative operating cash flows for the foreseeable future.
2.
Basis of Presentation, Significant Accounting Policies and Recent Accounting Pronouncements
Basis
of Presentation
These
unaudited interim financial statements have been prepared in accordance with United States generally accepted accounting principles
(“GAAP”) and following the requirements of the United States Securities and Exchange Commission (“SEC”)
for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required
by GAAP can be condensed or omitted. In our opinion, the unaudited interim financial statements have been prepared on the same
basis as the audited financial statements and include all adjustments, which include only normal recurring adjustments, necessary
for the fair presentation of our financial position and our results of operations and cash flows for periods presented. These
statements do not include all disclosures required by GAAP and should be read in conjunction with our financial statements and
accompanying notes for the fiscal year ended December 31, 2021, contained in our Annual Report on Form 10-K filed with the SEC
on March 29, 2022. The results of the interim periods are not necessarily indicative of the results expected for the full fiscal
year or any other interim period or any future year or period.
Significant
Accounting Policies
On
March 31, 2020, due to the COVID-19 pandemic and related inability to secure additional funding, we laid off the majority of our
employees and reduced our operating expenses significantly to allow for our continuing business operations. We continue to
advance the development of our Orion technology and are exploring various strategic options for this
technology.
Our
significant accounting policies are set forth in Note 2 of the financial statements in our Annual Report on Form 10-K for the
year ended December 31, 2021.
Recently
Issued Accounting Pronouncements
We
do not believe that any recently issued, but not yet effective, accounting standards, if adopted, will have a material effect
on the financial statements.
3.
Concentration of Risk
Credit
Risk
Financial
instruments that subject us to concentrations of credit risk consist primarily of cash and money market funds. We maintain cash
and money market funds with financial institutions that we deem reputable.
Foreign
Operations
The
accompanying condensed consolidated financial statements as of March 31, 2022 and December 31, 2021 include gross assets amounting
to $0.1 million and $0.1 million, respectively,
relating to operations of our subsidiary based in Switzerland.
4.
Fair Value Measurements
The
authoritative guidance with respect to fair value establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three levels, and requires that assets and liabilities carried at fair value be classified
and disclosed in one of three categories, as presented below. Disclosure as to transfers in and out of Levels 1 and 2, and activity
in Level 3 fair value measurements, is also required.
Level
1. Observable inputs such as quoted prices in active markets for an identical asset or liability that we have the ability to access
as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active-exchange traded securities
and exchange-based derivatives.
Level
2. Inputs, other than quoted prices included within Level 1, which are directly observable for the asset or liability or indirectly
observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include
fixed income securities, non-exchange based derivatives, mutual funds, and fair-value hedges.
Level
3. Unobservable inputs in which there is little or no market data for the asset or liability which requires the reporting entity
to develop its own assumptions. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded non-exchange-based
derivatives and commingled investment funds, and are measured using present value pricing models.
Cash
equivalents, which includes money market funds, are the only financial instrument measured and recorded at fair value on our consolidated
balance sheet, and they are valued using Level 1 inputs.
Assets
measured at fair value on a recurring basis are as follows (in thousands):
| |
Total | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
March 31, 2022 (unaudited): | |
| | | |
| | | |
| | | |
| | |
Money market funds | |
$ | 59,461 | | |
$ | 59,461 | | |
$ | — | | |
$ | — | |
December 31, 2021: | |
| | | |
| | | |
| | | |
| | |
Money market funds | |
$ | 69,487 | | |
$ | 69,487 | | |
$ | — | | |
$ | — | |
5.
Selected Balance Sheet Detail
Property
and equipment
Property
and equipment consisted of the following (in thousands):
| |
March 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Laboratory equipment | |
$ | 584 | | |
$ | 584 | |
Computer hardware and software | |
| 100 | | |
| 82 | |
| |
| 684 | | |
| 666 | |
Accumulated depreciation and amortization | |
| (565 | ) | |
| (549 | ) |
Property and equipment, net | |
$ | 119 | | |
$ | 117 | |
Contract
Liabilities
Contract
liabilities which are included in accrued expenses consisted of the following (in thousands):
Beginning balance as of December 31, 2021 | |
$ | 335 | |
Consideration received in advance of revenue recognition | |
| — | |
Revenue recognized | |
| — | |
Ending balance as of March 31, 2022 | |
$ | 335 | |
Product
Warranties
A
summary of activity of our warranty liabilities, which are included in accrued expenses, for the period ended March 31, 2022 is
presented below:
Beginning balance as of December 31, 2021 | |
$ | 50 | |
Additions | |
| — | |
Settlements | |
| — | |
Adjustments and other | |
| — | |
Ending balance as of March 31, 2022 | |
$ | 50 | |
Right-of-use
assets and operating lease liabilities
We
lease certain office space and equipment for our use. Leases with an initial term of 12 months or less are not recorded on the
balance sheet. Lease costs are recognized in the income statement over the lease term on a straight-line basis. Depreciation is
computed using the straight-line method over the estimated useful life of the respective assets. The depreciable life of assets
and leasehold improvements are limited by the expected lease term. Our lease agreements do not contain any material residual value
guarantees or restrictive covenants. As most of our leases do not provide an implicit rate, we used our estimated incremental
borrowing rate of 10% based on the information available at commencement date in
determining the present value of lease payments.
On
January 22, 2021, we entered into a lease agreement, effective February 1, 2021, to sub-lease office space to replace our existing
headquarters. We will pay $17,000 per month, increasing to $17,500
per month on February 1, 2022, plus operating expenses, to lease 17,290 square
feet of office space at 13170 Telfair Avenue, Sylmar CA 91342. Additionally, we received full rent abatement for March
2021, and half rent abatement for March 2022. The sub-lease is for two years and two months. We
nor any affiliates are related to, or otherwise have any other relationship with, the other parties, other than the lease.
Schedule
of right of use assets and operating lease liabilties
Assets | |
Classification | |
March
31, 2022 | | |
December 31, 2021 | |
Non-current assets | |
Right-of-use assets | |
$ | 184 | | |
$ | 228 | |
Liabilities | |
| |
| | | |
| | |
Current | |
Current operating lease liabilities | |
$ | 199 | | |
$ | 185 | |
Long term | |
Long term operating lease liabilities | |
$ | — | | |
$ | 52 | |
The
components of lease expense for the three months ended March 31, 2022 and 2021 were as follows (unaudited):
| |
For the three months ended March 31, 2022 | | |
For the three months ended March 31, 2021 | |
Lease expense: | |
| | | |
| | |
Operating lease expense | |
$ | 49 | | |
$ | 22 | |
Short-term lease expense | |
| — | | |
| — | |
Total lease expense | |
$ | 49 | | |
$ | 22 | |
Cash
paid for lease amounts included in the measurement of lease liabilities amounted to $43,000
and $17,000, respectively, during the three months ended March 31, 2022 and
2021.
6.
Equity Securities
Potentially
Dilutive Common Stock Equivalents
As
of March 31, 2022 and 2021, we excluded the potentially dilutive securities summarized below, which entitle the holders thereof
to potentially acquire shares of common stock, from our calculations of net loss per share and weighted average common shares
outstanding, as their effect would have been anti-dilutive (in thousands).
| |
March 31, | |
| |
2022 | | |
2021 | |
Common stock warrants issued to underwriter | |
| 10 | | |
| 10 | |
Common stock warrants issued in rights offerings | |
| 7,681 | | |
| 7,682 | |
Common stock options | |
| 180 | | |
| 182 | |
| |
| 7,871 | | |
| 7,874 | |
7.
Warrants
On
February 22, 2019, we completed a registered rights offering to existing stockholders in which we sold approximately 5,976,000
units at $5.792 per unit, which was the adjusted closing price of our common stock on that date. Each Unit consisted of a share
of our common stock and a warrant to purchase an additional share of our stock for $11.76. The warrants have a five-year life
and trade on Nasdaq under the symbol EYESW.
On
March 6, 2017, we completed a registered rights offering to existing stockholders in which we sold approximately 1,706,000 units
at $11.76 per unit, which was the adjusted closing price of our common stock on that date. Each unit consisted of a share of our
comm11.76 on stock and a warrant to purchase an additional share of our stock for $11.76. The warrants had a five-year life but
were extended to expire in February, 2024 to coincide with the February 22, 2019 warrants.
As
a component of the funding underwriting fee of our May 5, 2020 public underwriting offer, we granted 375,000 warrants at
an exercise price of $1.25 which expire on May 5, 2025. At March 31, 2022, 10,125 of the warrants are still outstanding.
A
summary of warrants activity for the three months ended March 31, 2022 is presented below (in thousands, except per share and
contractual life data).
| |
Number of Shares | | |
Weighted Average Exercise Price Per Share | | |
Weighted Average Remaining Contractual Life (in Years) | |
Warrants outstanding as of December 31, 2021 | |
| 7,691 | | |
$ | 11.75 | | |
| 2.21 | |
Issued | |
| — | | |
| | | |
| | |
Exercised | |
| — | | |
| | | |
| | |
Forfeited or expired | |
| — | | |
| | | |
| | |
Warrants outstanding as of March 31, 2022 | |
| 7,691 | | |
$ | 11.75 | | |
| 1.96 | |
Warrants exercisable as of March 31, 2022 | |
| 7,691 | | |
$ | 11.75 | | |
| 1.96 | |
The
warrants outstanding as of March 31, 2022 had $2,000 in intrinsic value.
8.
Stock-Based Compensation
A
summary of stock option activity under our 2011 Equity Incentive Plan (“2011 Plan”) for the three months ended March
31, 2022 is presented below (in thousands, except per share and contractual life data).
| |
Number of Shares | | |
Weighted Average Exercise Price Per Share | | |
Weighted Average Remaining Contractual Life (in Years) | |
Options outstanding as of December 31, 2021 | |
| 182 | | |
$ | 15.68 | | |
| 6.59 | |
Granted | |
| — | | |
$ | — | | |
| | |
Exercised | |
| — | | |
$ | — | | |
| | |
Forfeited or expired | |
| (2 | ) | |
$ | 40.00 | | |
| | |
Options outstanding as of March 31, 2022 | |
| 180 | | |
$ | 15.47 | | |
| 6.40 | |
Options exercisable as of March 31, 2022 | |
| 151 | | |
$ | 17.76 | | |
| 6.11 | |
The
estimated aggregate intrinsic value of stock options exercisable as of March 31, 2022 was $5,000. As of March 31, 2022, there
was $0.1 million of total unrecognized compensation cost related to outstanding stock
options that will be recognized over a weighted average period of 0.86 years.
We
adopted an employee stock purchase plan in June 2015 for all eligible employees. At March 31, 2022 the available number of shares
that may be issued under the plan is 77,031.
Stock-based
compensation expense recognized for stock-based awards in the condensed consolidated statements of operations for the three months
ended March 31, 2022 and 2021 was as follows (in thousands):
| |
Three
Months Ended March
31, |
| |
2022 | |
2021 |
Research
and development | |
| 5 | | |
| 5 | |
Clinical and regulatory | |
| 3 | | |
| 9 | |
General
and administrative | |
| 5 | | |
| 5 | |
Total | |
$ | 13 | | |
$ | 19 | |
9.
Risk and Uncertainties
COVID-19
has directly and indirectly adversely affected Second Sight and will likely continue to do so for an uncertain period of time.
We are asking our employees to adhere to local and state guidelines regarding the COVID-19 pandemic and use their best judgement
to work remotely or work in the office. While many of our employees are accustomed to working remotely, much of our workforce
has not historically been remote. Although we continue to monitor the situation and may adjust our current policies as more information
and public health guidance becomes available, restricting the ability to do business in person may create operational or other
challenges, any of which could harm our business, financial condition and results of operations.
In
addition, our clinical trials have been affected by the COVID-19 outbreak. Patient visits in ongoing clinical trials were paused,
for example, due to prioritization of hospital resources toward the COVID-19 outbreak, travel restrictions imposed by governments,
and the inability to access sites for initiation and monitoring. Also, some of our suppliers of certain materials used in the
development of our product candidates are located in areas impacted by COVID-19 which could limit our ability to obtain sufficient
materials for our product candidates. COVID-19 has and will continue to adversely affect global economies and financial markets
and may result in an economic downturn that could affect demand for our product candidates, if approved, and impact our operating
results. Even after the COVID-19 pandemic has subsided, we may continue to experience an adverse impact to our business as a result
of the continued global economic impact of the pandemic. We cannot anticipate all of the ways in which health epidemics such as
COVID-19 could adversely impact our business. Although we are continuing to monitor and assess the effects of the COVID-19 pandemic
on our business, the ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to
change.
10.
Litigation, Claims and Assessments
Three
oppositions filed by Pixium Vision SA (“Pixium”) are pending in the European Patent Office, each challenging the validity of a European patent
owned by us. The outcomes of the challenges are not certain, however, if successful, they may affect our ability to block competitors
from utilizing our patented technology. We believe a successful challenge will not have a material effect on our ability to manufacture
and sell our products, or otherwise have a material effect on our operations.
As
described in the Company’s 10-K for the year ended December 31, 2020, the Company had entered into a Memorandum of Understanding
(“MOU”) for a proposed business combination with Pixium. In response to a press release
by Pixium dated March 24, 2021, and subsequent communications between us and Pixium, our Board of Directors determined that the
business combination with Pixium was not in the best interest of our shareholders. On April 1, 2021, we gave notice to Pixium
that we were terminating the MOU between the parties and seeking an amicable resolution of termination amounts that may be due,
however no assurance can be given that an amicable resolution will be reached. We accrued $1,000,000 of liquidated damages as
contemplated by the MOU in accounts payable as of March 31, 2021 and remitted that amount to Pixium in April 2021. Pixium indicated
that it considered this termination wrongful, rejected the Company’s offers, but retained the $1,000,000 payment. On May
19, 2021, Pixium filed suit in the Paris Commercial Court, and currently claim damages of approximately €5.1 million or about
$5.6 million. We believe we have fulfilled our obligations to Pixium with the liquidated damages payment of $1,000,000 and thus
the Company does not believe any further loss accrual is necessary.
In
November 2020, we and Pixium retained Oppenheimer & Co. Inc. as placement agent for a proposed private placement of securities
in connection with the Business Combination. On April 1, 2021, we received an invoice from Oppenheimer for more than $1.86 million.
This amount includes a requested commission of 6.5% on $27.9 million raised in the private placement. We believe that claims for
payment presented by this invoice are without merit.
On
or about July 19, 2021, Martin Sumichrast filed a complaint with the Superior Court of the State of California, County of
Los Angeles—Central District, claiming that he is entitled to compensation for services, as well as exemplary and other
damages in an amount to be determined at trial but not less than $2
million, which arise from his allegedly arranging and securing financing that the Company obtained in May 2020 via a
registered underwritten public offering of common stock. The complaint was dismissed by the court on January 18, 2022. Mr.
Sumichrast appealed the dismissal, however the appeal was subsequently abandoned on March 1, 2022.
We
are party to litigation arising in the ordinary course of business. It is our opinion that the outcome of such matters will not
have a material effect on our results of operations, however, the results of litigation and claims are inherently unpredictable.
Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management
resources and other factors