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Edited Transcript of EYES earnings conference call or presentation 7-Nov-18 9:30pm GMT

Q3 2018 Second Sight Medical Products Inc Earnings Call

Sylmar Dec 4, 2018 (Thomson StreetEvents) -- Edited Transcript of Second Sight Medical Products Inc earnings conference call or presentation Wednesday, November 7, 2018 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John T. Blake

Second Sight Medical Products, Inc. - CFO & Corporate Secretary

* Jonathan Will McGuire

Second Sight Medical Products, Inc. - CEO, President & Director

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Conference Call Participants

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* Amit Dayal

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst

* Lisa Wilson

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the Second Sight third quarter results call. (Operator Instructions) As a reminder, today's call is being recorded, Wednesday, November 7, 2018. I would now like to turn the conference over to Lisa Wilson, Investor Relations for Second Sight. Please go ahead.

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Lisa Wilson, [2]

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Thank you, Grant. Good afternoon, and welcome to Second Sight's Third Quarter 2018 Earnings 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 September 30, 2018. 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 2 weeks. You'll find the 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 November 7, 2018. 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.

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Jonathan Will McGuire, Second Sight Medical Products, Inc. - CEO, President & Director [3]

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Thank you, Lisa, and thank you all for joining our call this afternoon.

We made good progress during Q3, executing the revised strategy discussed during our Q2 call. As a reminder, I indicated that Second Sight will focus on 3 major objectives: number one, the execution of Orion development and clinical programs; number two, the efficient use of capital related to Argus commercial and R&D activities; and number three, the advancement of promising technologies that provide a richer, more powerful experience to our patients.

During the call, I will provide updates relative to all objectives. But first, I would like to thank Gregg Williams, Chairman of our Board, for his continued support of the company. During 2018, he has invested $19 million in the company via private placements. Gregg's continued financial commitment reflects a shared vision to develop innovative technologies that offer hope to individuals blind from almost any cause as well as a strong belief in the company's exciting future with Orion. John will talk more about our financial position later in the call.

Let's turn to Orion and an update on where we are with the program. Today, there are 5 individuals implanted with Orion as part of our early feasibility study, which we're conducting at Ronald Reagan UCLA Medical Center and Baylor College of Medicine in Houston. We are actively recruiting a sixth subject to be implanted at Baylor. All of the 5 implanted subjects are using the full Orion system, which creates artificial vision through video captured in real time by the camera embedded in their glasses. Four have been cleared for home use, which is an important milestone because it reflects a belief that we have identified stimulation parameters for subjects that are potentially effective, and more importantly, safe. All 4 subjects cleared for home use have begun the critical process of artificial vision training.

Each subject's training entails customized vision, rehabilitation to a system and reaching specific goals. The subjects are responding well to the artificial vision rehab, and we continue to be encouraged by the overall performance of Orion.

Observations from rehab sessions indicate that subjects have been able to do things with Orion they couldn't do without it, including locating people in front of them, identifying the dropoff of a curb, locating signs and sorting light from dark laundry. The rehab will continue on a regular basis and we look forward to providing more updates in the future. Although the anecdotal observations from the rehab sessions are exciting, the anticipated trial for Orion will require objective influence that measure visual function and quality-of-life improvements.

In order to finalize an agreement with the FDA concerning Orion endpoints, we need additional and more objective performance data from our feasibility study subjects. We are targeting the end of this year or early next year to gather the necessary performance data. Assuming the safety and performance data are good, we will then move forward with the FDA to finalize the clinical and regulatory pathway for Orion with the expectation of sharing this with investors in the first half of 2019.

I'd like to note that if we can't sufficiently quantify performance with the first 6 patients or if we decided to make significant changes to the system, additional feasibility patients could be enrolled before continuing to a pivotal trial. But to be clear, our goal is to move to a pivotal trial in 2019 without additional feasibility work.

Finally, I'm pleased to say there have been no additional significant adverse events or SAEs since the 1 SAE we discussed during our last call.

We were also delighted to have been awarded a $1.6 million grant from the National Institutes of Health or NIH with their intent to fund $6.3 million over 5 years for support of Orion's clinical development. I'm very pleased with the Orion team's tremendous progress over the past 3 years. Our confidence in the potential of creating artificial vision via direct cortical stimulation continues to grow, and I look forward to providing more updates in the coming months.

I'd like to now turn to our Argus business. We completed 20 Argus implants during the quarter, up sequentially from the prior quarter, resulting in $2.2 million of revenue, and year-over-year, we were up significantly from the 12 implants implanted in Q3 of 2017. In North America, we had 9 implants during the quarter with 8 of the 9 patients coming from our U.S. patient database.

As discussed many times, our strategy in North America is to focus on key centers of excellence in order to drive adoption. Outside of North America, we are executing a restructuring of the business, which will allow us to focus our support on our core direct markets in France, Germany, Italy, and eventually, England. We also intend to focus on our most promising indirect markets in which we have regulatory approval, high confidence of reimbursement of our funding and an infrastructure to support patients postsurgery.

By being more deliberate and selective concerning the accounts and geographies that we support, we anticipate annual operating expense savings totaling $3 million beginning in 2019. Importantly, please be assured that we will continue to support existing patients anywhere in the world.

On the reimbursement front, we are pleased to announce the recently finalized U.S. Medicare hospital outpatient payment rate of $152,500 for the Argus II and related procedural costs. This represents the highest average reimbursement rate to date for the Argus. I also applaud CMS for changes to the rate-setting methodology for low-volume devices such as Argus. CMS will now consider multiple years of historical data when setting the rate versus just 1 year. This change should temper future year-to-year fluctuations in the reimbursement rate. I really appreciate the hard work by our market access and reimbursement team over the past few years to successfully advance a host of U.S. reimbursement initiatives.

Turning outside the U.S. The Forfait Innovation process continues to move forward in France and we remain confident that we will receive a national reimbursement decision by early next year. Finally, in England, we have seen positive movement relative to the similar innovation reimbursement program, Commissioning through Evaluation or CtE for Argus II in England. We are in close contact with CtE's senior leadership team and other key stakeholders, and based on recent developments, we are optimistic that the first Argus II implants under this NHS England reimbursement program will occur in the first half of 2019.

With regards to Argus 2s, our next-gen externals, we identified a few issues during final testing over the past 90 days. We believe the issues have been sufficiently addressed and are preparing to begin clinical testing later this quarter with regulatory filings projected in early Q1 2019. As a reminder, the Argus 2s externals will also serve as the base externals for Orion in the pivotal trial.

Before closing, I'd like to say a few words concerning our research projects. As outlined in our last call, we are pursuing research in areas such as eye tracking, distance filtering, object and facial recognition and thermal imaging. We believe these technologies will benefit Argus users as well as Orion users ultimately. We are making good progress on all programs and we'll be prioritizing the most promising technology or technologies with a goal of moving them into clinical testing during 2019.

Finally, I would like to welcome Pat Ryan to the team. As previously announced, Pat joined Second Sight as our Chief Operating Officer. He brings many years of medical device experience to the company, along with great leadership skills and a proven ability to build and develop teams. With the additions of John Blake and Pat Ryan, I believe we have significantly strengthened our leadership team this year.

These changes, combined with the recent actions to realign the business, position the company to provide the greatest benefit to a larger number of patients while also providing the best possible return to shareholders.

With that, I would like to now turn the call over to John to review our third quarter financial results. John?

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John T. Blake, Second Sight Medical Products, Inc. - CFO & Corporate Secretary [4]

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Thank you, Will. Our implant volume during the third quarter 2018 was 20 units compared to 12 during the prior year quarter. During the quarter, 9 implants were performed in North America and 11 were in Europe, the Middle East and Asia or EMEA. During the third quarter of 2017, there were 7 implants in North America and 5 implants in EMEA.

Net sales were $2.2 million on a GAAP basis in the third quarter of 2018 compared to $1.6 million in the third quarter of 2017, an increase of 38%.

Revenue was recognized for 22 units in the current period while revenue from 12 units was recognized in the prior year quarter.

Revenue recognized per implant was approximately $102,000 in the third quarter of 2018 and was $133,000 in the same period of 2017. We continue to expect our average revenue recognized per implant unit sold for the remainder of 2018 to be in the range of $100,000 to $120,000, depending on the geographic mix of the implant.

Gross profit for the quarter was $0.5 million compared to a gross profit of $0.6 million in the third quarter of 2017.

Cost of sales in the third quarter of 2018 included an increase in our inventory reserve of $0.1 million while cost of sales in the third quarter of 2017 included a credit of $0.3 million. We expect cost of goods on a per-unit basis to stabilize, particularly related to overhead absorption and excess inventory reserve as we produce more units.

Research and development expense, net of funding received from grants, was $2.7 million during the third quarter of 2018 compared to $1.8 million in the prior year quarter. The increase of $0.9 million is primarily due to verification and validation activities related to Argus 2s and consists of increased headcount, outside services and cost for internally produced prototypes. In both the third quarter of 2018 and 2017, we utilized $0.1 million of grant funds to offset costs.

Clinical and regulatory expense increased during the third quarter of 2018 to $1 million compared to $0.6 million in the prior year quarter. This increase is primarily attributable to increased costs associated with the Orion feasibility study. We expect clinical and regulatory costs to increase in the future as we conduct additional clinical trials to assess new products such as Orion and enhancements to our existing product and while we enroll more patients in postmarket clinical studies for Argus II.

Selling and marketing expense was $3 million during the third quarter of 2018 compared to $2.4 million in the third quarter of 2017. The $0.6 million increase primarily related to increased market development activities, including compensation expenses. We expect selling and marketing expense to decrease over time when expressed as a percentage of product revenue.

General and administrative expense was $2.3 million in the third quarter of 2018 compared to $2.5 million in the third quarter of 2017. The decrease of $0.2 million is primarily due to lower noncash stock compensation costs from executive transitions.

As Will mentioned, we are executing a restructuring of our commercial business outside of North America. We anticipate this will result in an annual operating savings of about $3 million beginning in 2019, which we expect to reallocate to our Orion program.

Net loss for the third quarter of 2018 was $8.5 million or a loss of $0.12 per share. This compares to a net loss of $6.7 million and the same net loss of $0.12 per share in 2017. Our non-GAAP net loss, which excludes stock-based compensation and changes in our excess inventory reserve, both noncash items, was $0.11 per share for both the third quarter of 2018 and 2017.

A full reconciliation of our GAAP net loss to our non-GAAP net loss, including a per-share reconciliation can be found in the tables at the end of our earnings release.

Moving on to the balance sheet. As of September 30, 2018, we had $5 million of cash and cash equivalents and we carry no debt. In October, we completed a $4 million private placement of common stock with Gregg Williams, Chairman of our Board of Directors.

Given our current plans, we believe we have sufficient runway through early Q1 2019 and we continue to evaluate all of our financing options with our board. We expect to share additional details in Q1 2019.

With that, I will open the call for questions. Operator, please proceed with the instructions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from [John Francis].

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Unidentified Analyst, [2]

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Can you address the size of the market for Orion and what types of patients you expect? And additionally, can you give us a better sense of what you think the FDA is going to require with respect to your trial?

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Jonathan Will McGuire, Second Sight Medical Products, Inc. - CEO, President & Director [3]

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Sure, [John]. This is Will, I'll take that. So from the market perspective, let's talk about that first, we did conduct some market research with an outside firm. We talked about this a little bit in the last call, but I would like to go back through it again. First for all, we're looking at treating -- if you look at the feasibility study and the way the inclusion criteria/exclusion criteria is written, we can basically treat any type of blindness as long as it's not currently treatable by a commercial product. So in that case, it would exclude RP patients treated by Argus and also it can't be blindness caused by trauma to the visual cortex. But other than that, we're open to treat the patients. So when we did our market research, we basically identified 4 major buckets of patients to look at. Those were glaucoma -- I'm sorry, people blind from glaucoma, blind from diabetic retinopathy, blind from optic nerve disease or damage to the optic nerve and then blind from eye trauma or eye injury. And when you combine those 4 buckets, you end up in the U.S. with about 500,000 patients who are legally blind from those 4 buckets or 4 causes of blindness. We then further looked at the patient population and tried to refine it to a number that was -- actual number of patients that could be treated given what our expected indications for use would be. So we tried to eliminate patients that would be too sick for surgery, too many other complications and then we also reduced the level of vision from legally blind down to bare light or no-light perception. And so when we do that, we end up with a patient population of about 70,000. And, again, that compares to the same research that said our RP population is close to 1,500 patients. And to be very clear again, these numbers are only U.S. numbers. So we confined it to the U.S. So again, about 70,000 patients from the U.S. compared to an RP population of 1,500. And then we expect, if you look at Western Europe, the population would be similar, it actually would be somewhat larger in Western Europe when you consider a larger population there. So a very, very large population of patients for us there, John . And then let me address the question also concerning the FDA and our discussions there. As everyone probably knows, we are in active discussions and we haven't reached an agreement or our final agreement, with them. So we can't really say with certainty what the trial will look like, but I can certainly make some comments. First of all, we know that we're going to need to demonstrate a certain level of visual acuity or vision function with Orion. And we also know that we will have some measure of the quality-of-life improvement in the study. And those endpoints would all be somewhat similar to what we did with Argus. In Argus, we also had to have visual cue -- visual function measurements as well as the quality-of-life tool to measure changes in the quality of life. So similar type measurements there to what we experienced with Argus. As far as the number of patients, I would say you should be thinking that it would be at least 30 patients in the pivotal. It could be more, but certainly, I'd say 30 is the floor and the follow-up would be at least 6 months. So again, these are kind of the floor numbers for a number of patients and follow-up. And then there were also -- as a part of this breakthrough technology program you get to move some of the data collection into the postmarket settings. So there will be a defined agreed-to postmarket trial as well. Again, we don't know the number, but I think you should assume that one will be more than 30. Then maybe a final word, we are breaking some new ground here, so before we finalize these measurements and these numbers with the FDA, we really want to understand the Orion performance much better and that's why we've said we're going to give it to the end of the year or early next year to really understand what we think the Orion performance will be and then move forward with our discussions with the FDA and try to finalize a trial design. And then once we do that, we have committed this -- as soon as we're comfortable that we have agreement with the FDA, then that's something that we would, of course, want to share with investors or potential investors. Hopefully that answers your question, John .

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Operator [4]

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(Operator Instructions) The next question is from the line of Amit Dayal with H.C. Wainwright.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [5]

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In regards to these 5 patients, can you talk about -- with respect to Orion, could you talk about how many hours they are using this for per week or per day? Any color on these types of metrics, if you could share them?

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Jonathan Will McGuire, Second Sight Medical Products, Inc. - CEO, President & Director [6]

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Yes, I don't have the exact metrics for the patients, Amit. But what I can say is that, typically, the patients, especially the ones that are cleared for home use now, typically, they're going through rehabilitation on a regular basis. Certainly, before they took the device home, they were being tested and we were working with them on a weekly basis, almost all patients on a weekly basis. And so I think, going forward, you should assume if it's not weekly, every few weeks we do have someone that's working with them and going through the rehab process. And as a reminder, this rehab process is basically teaching them how to use the system better and how to get the most functionality and most use out of it. So we've learned a lot of things with our Argus patients to inform how someone can better use the system. And it's not just how to turn it on, how to potentially use any filters or any adjustments, it's how to move your head, how to take in data and then how to interpret this artificial vision because it is different than your vision or my vision. So a lot of work on how to interpret it and what it means and how to make the best use of it. And as I've said many times before, we certainly have learned with Argus that this is very important and we're able to make great progress typically with these patients by having them dedicated to this artificial vision rehab process. I'd say one other thing, a typical session probably in a day -- typical is probably not more than a couple of hours. It can be pretty tiring work for the subject sometimes. So just as a ballpark, probably not more than a couple of hours per session, Amit.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [7]

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The sixth patient from our last call, it seemed like you had identified and you were in the process of enrolling the sixth patient. Did that not materialize the..

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Jonathan Will McGuire, Second Sight Medical Products, Inc. - CEO, President & Director [8]

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Yes, we've had quite a few where the team at Baylor has chosen not to move forward with the patient. So they didn't feel that was exactly the right patient that met all the criteria as we wanted. So yes, honestly, I'm disappointed that we haven't enrolled that patient, I certainly would have expected it to happen before now. But on the flip side, I do know the team at Baylor is very diligent in their evaluation of the patients and are working very hard to find just the right patient and I'm sure we'll do that here very soon.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [9]

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And also from previous call, there was one incident or some -- an adverse event with the patient. Have you seen anything else that's...

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Jonathan Will McGuire, Second Sight Medical Products, Inc. - CEO, President & Director [10]

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No. No, we had -- yes, in the previous call, we did announce that we had 1 serious adverse event, and since that point, Amit, we have not had any additional serious adverse events or SAEs with any patients.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [11]

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Got it. Could you talk a little bit about the label expansion efforts for the better-sighted RP patients?

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Jonathan Will McGuire, Second Sight Medical Products, Inc. - CEO, President & Director [12]

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Yes, that's a good question. We didn't really talk about that in the script. We still consider that a very interesting patient population. It's significantly larger than the current RP population, that's bare light or no light. But we haven't, to be frank, we really haven't done much with that over the past 2 or 3 months. We are evaluating and looking for a way to get additional data, but we've not until an FDA IDE study. And so we have a few ideas, we're trying to chase down maybe a little more specifics on that to see if we can go back to the FDA with potentially a revised proposal that they would consider acceptable. But at this point, I don't really have any progress to report. We haven't dropped it and hopefully I'll have more to tell you in the next call, Amit. But I'll just say, with limited resources, much of our focus has been on Orion in the last 90 days.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [13]

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And regards to your sort of pullback in marketing and sales efforts abroad, the cost savings of $3 million that you talked about, will you realize those mostly, say, in second half of 2019 or will you see some benefits early in 2019 as well?

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John T. Blake, Second Sight Medical Products, Inc. - CFO & Corporate Secretary [14]

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Amit, this is John, I'll take that question. So we expect that those savings will kick in by year-end so that should be a full year impact for 2019. We are planning on reallocating a substantial portion of that savings to the Orion program.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [15]

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All right. With regards to this NIH grant, are there other grants that you could potentially access to support your efforts?

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Jonathan Will McGuire, Second Sight Medical Products, Inc. - CEO, President & Director [16]

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Yes, without going into specifics, I'd say we're always looking at the possibility of obtaining grant money from NIH or from other sources. So yes, we're constantly scanning and looking for sources of -- nondilutive sources of funding such as that. And I would just say that creating vision via cortical stimulation is an area that, I think, NIH finds very interesting. And so, hopefully, this won't be the last grant money we've obtained, but nothing to report other than that right now.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [17]

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Okay. And in terms of catalysts before the end of 2018, could you highlight any important catalysts that we should be keeping an eye on?

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Jonathan Will McGuire, Second Sight Medical Products, Inc. - CEO, President & Director [18]

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Yes, I think, probably the most important, if we're able to get there, is just being able to better quantify what we expect for Orion performance and the level of vision that we're going to provide Orion patients ultimately. We think that's probably the -- by far, the most important thing that we need to get our arms around over the next 90 to 120 days. So whether we have that by the end of the year or not, I'm not sure, but we certainly would like to. And as I said, we would -- at the appropriate time, we'll communicate that to the investment community and then we'd also take that understanding of performance and try to move forward our discussions with the FDA, so hopefully we could get a kind of a finalized clinical and regulatory pathway with the FDA. And then we'd also want to lay that out for investors as well. That certainly won't happen until the first half of next year sometime. But maybe by the end of the year, we've got more to say around patient performance.

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Operator [19]

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And I will now turn the conference back to Will McGuire.

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Jonathan Will McGuire, Second Sight Medical Products, Inc. - CEO, President & Director [20]

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Okay. Thanks, again, to the Second Sight team for all of their work over the past quarter. And thank you all for participation in our call today. Have a great night.

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Operator [21]

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Ladies and gentlemen, that does conclude today's conference. We thank you for your participation and ask that you please disconnect your line.