Second Sight Medical
Annual Report 2018

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549 FORM 10-K (Mark One) ☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended December 31, 2018 OR ☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission File Number 001-36747 Second Sight Medical Products, Inc.(Exact name of Registrant as specified in its charter) California02-0692322(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.) 12744 San Fernando Road, Suite 400, Sylmar, CA 91342(Address of principal executive offices, including zip code) Registrant’s telephone number, including area code: (818) 833-5000 Securities registered pursuant to Section 12(b) of the Act: Title of Each ClassName of Each Exchange on Which RegisteredCommon Stock, without par valueThe Nasdaq Stock Market, LLC Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes ☒ No ☐ Indicate by check mark whether the Registrant has submitted electronically on its corporate website, if any, every Interactive Data File required to be submitted and pursuant to Rule405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit). Yes ☒ No ☐ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 232.405 of this chapter) is not contained herein, and will not be contained, to thebest of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒ Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “largeaccelerated filer,” “accelerated filer,” “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐Accelerated filer ☐Non-accelerated filer ☐Smaller reporting company ☒Emerging growth company ☒(Do not check if a smaller reporting company) If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financialaccounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒ Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒ The aggregate market value of the shares of the Registrant’s Common Stock held by non-affiliates of the Registrant as of June 30, 2018, computed by reference to the closing salesprice on the Nasdaq Capital Market on that date, was approximately $59.0 million. As of March 12, 2019, the number of shares of the Registrant’s common stock outstanding was 124,197,961. DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s Proxy Statement for the 2018 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to theextent stated herein. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 31, 2018.  SECOND SIGHT MEDICAL PRODUCTS INC.FORM 10-KTABLE OF CONTENTS Page PART I Item 1.Business3Item 1A.Risk Factors14Item 1B.Unresolved Staff Comments33Item 2.Properties33Item 3.Legal Proceedings33Item 4.Mine Safety Disclosures33 PART II Item 5.Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities34Item 6.Selected Financial Data36Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations37Item 7A.Quantitative and Qualitative Disclosures About Market Risk50Item 8.Financial Statements and Supplementary Data50Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure50Item 9A.Controls and Procedures50Item 9B.Other Information52 PART III Item 10.Directors, Executive Officers and Corporate Governance53Item 11.Executive Compensation53Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters53Item 13.Certain Relationships and Related Transactions, and Director Independence53Item 14.Principal Accounting Fees and Services53 PART IV Item 15.Exhibits, Financial Statement Schedules53 SIGNATURES56 2PART I Item 1. Business Our Company Overview Second Sight Medical Products, Inc. (NASDAQ: EYES) develops, manufactures and markets implantable visual prosthetics that are intended to deliveruseful artificial vision to blind individuals. We are a recognized global leader in neuromodulation devices for blindness, and are committed to developingnew technologies to treat the broadest population of sight-impaired individuals. Leveraging our 20 years of experience in neuromodulation for vision, we are developing the Orion® Visual Cortical Prosthesis System (“Orion”), animplanted cortical stimulation device intended to provide useful artificial vision to individuals who are blind due to a wide range of causes, includingglaucoma, diabetic retinopathy, optic nerve injury or disease and eye injury. Orion is intended to convert images captured by a miniature video cameramounted on glasses into a series of small electrical pulses. The device is designed to bypass diseased or injured eye anatomy and to transmit these electricalpulses 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 oflight. A six-subject early feasibility study of the Orion device is currently underway at the Ronald Reagan UCLA Medical Center in Los Angeles (“UCLA”)and Baylor College of Medicine in Houston (“Baylor”). No published in-human data is available yet for the Orion system. We anticipate enrolling additionalfeasibility subjects in 2019 while simultaneously negotiating the clinical and regulatory pathway to commercialization with the FDA as part of theBreakthrough Devices Program. Our principal offices are located in Los Angeles, California. We also have an office in Lausanne, Switzerland, that manages our commercial and clinicaloperations in Europe, the Middle East and Asia. Our current product, the Argus ® II Retinal Prosthesis System (“Argus II”), treats outer retinal degenerations, such as retinitis pigmentosa, also referred toas RP. RP is a hereditary disease, affecting an estimated 1.5 million people worldwide including about 100,000 people in the United States, that causes aprogressive degeneration of the light-sensitive cells of the retina, leading to significant visual impairment and ultimately blindness. The Argus II is the onlyretinal prosthesis approved in the United States by the Food and Drug Administration (“FDA”), and was the first approved retinal prosthesis in the world. Asubset of these patients would be eligible for the Argus II since the approved baseline vision for the Argus II is worse than legally blind (20/200). Wecommissioned 3rd party market research to estimate the size of the RP market that resulted in an estimate of approximately 1,500 patients in the US withadvanced RP that could be treated with the Argus II given the eligibility criteria of our label. The Argus II system provides an artificial form of vision that differs from the vision of people with normal sight. It does not restore normal vision andthere is no evidence that it can slow or reverse the progression of the disease. The majority of patients receive a significant benefit from the Argus II, howeverresults can vary and some patients report receiving little or no benefit. By creating an artificial form of useful vision in patients who otherwise have totalsight loss, the Argus II can provide benefits that include: ●restoring independence through a renewed ability to navigate independently in unfamiliar environments; ●improving patients’ orientation and mobility, such as locating doors and windows, avoiding obstacles, and following the lines of a crosswalk; ●allowing patients to feel more connected with people in their surroundings, such as seeing when someone is approaching or moving away; ●providing patients with enjoyment from being “visual” again, such as locating the moon, tracking groups of players as they move around afield, and watching moving streams of lights from fireworks; ●enabling some patients to re-enter the workforce through multiple vocations that become possible because of Argus II; and ●improving patients’ well-being and ability to perform activities of daily living. 3 We began selling the Argus II System in Europe at the end of 2011, Saudi Arabia in 2012, the United States and Canada in 2014, Turkey in 2015, Iran,Taiwan, South Korea and Russia in 2017, and Singapore in 2018. Given the limited addressable market of Argus II, we made the decision in 2018 tomaximize capital efficiency with our Argus commercial and clinical activities and increase our investment of resources with our Orion clinical and R&Dprograms. In October 2018, we announced a restructuring of our international commercial activities and personnel. This restructuring resulted in a decision tono longer support new implants of Argus II in Turkey, Iran, Singapore and Russia. We retained a team that continues to support existing Argus II patients andCenters of Excellence in the remaining international markets. We anticipate that the annual savings from the restructuring will amount to approximately $3.0million per year and we plan to reallocate savings to the Orion program and other related projects. We recognized approximately $0.6 million of pre-taxrestructuring charges in the fourth quarter of fiscal year 2018 in connection with this restructuring, consisting of severance and other employee terminationbenefits, substantially all of which were settled in cash during the fourth quarter of 2018.We will continue to monitor the efficiency and effectiveness of commercial activities for Argus II and make further changes as needed to ensuresufficient payback on commercial spending while maximizing capital available to support Orion programs.We are actively developing multiple technologies that we believe to be complimentary to artificial vision and could potentially provide significantenhancements to the the Argus II or Orion user experience. In most cases, we collaborate with 3rd party firms to advance and integrate these innovativetechnologies with our artificial vision systems. Examples of technologies that are currently researching include: eye tracking, object recognition andlocalization, thermal imaging and depth-based decluttering. We expect to advance several of these technologies to the point having prototype eyewearsuitable for clinical testing in 2019. Currently, after more than 20 years of research and development, more than $200 million of investment and over $34 million of grants awarded insupport of our technology development, we employ over 120 people in the development (research, engineering and clinical), manufacture, andcommercialization of the Argus II System and future products such as Orion. Our Technology Both the Orion and Argus II systems work by converting video images captured by a miniature camera housed in a patient’s glasses into a series ofsmall electrical pulses that are transmitted wirelessly to an array of electrodes. The array is implanted on the visual cortex of brain with the Orion systembypassing the eye and optic nerve and directly stimulating the region of the brain responsible for vision. The array is implanted on the surface of the retinawith the Argus II system and directly stimulates the retina to bypass degenerated photoreceptor cells and to stimulate remaining viable retinal cells. Thepulses generated by both systems are intended to create a perception of patterns of light in the brain. Following the implant surgery, patients learn to interpretthese visual patterns as artificial vision, allowing them to detect shapes of people and objects in their surroundings. We believe both the Orion system and Argus II system (including their implantable components) possess several unique technological advancementscompared to other neurostimulation devices including a hermetic package with the smallest size and largest number of individually programmableelectrodes, and a patented electrode material that allows high charge densities and small electrode size. Several other engineering challenges, includingdevice reliability, extended lifetime, and a safe and effective bio-interface, were overcome during the development of the products and these solutions havebeen protected both by patents and by trade secrets. Most of the technology developed for Argus II is also used in Orion. As of December 31, 2018, we haveover 380 issued patents and approximately 58 pending patent applications worldwide. Additionally, from a competitive standpoint, the Argus II Systempossesses attractive technical and other features that include: ●a unique patented design that allows for a demonstrated lifetime and benefit of over 10.7 years, ●surgical implantation that can be performed in three to four hours using standard vitreoretinal techniques, ●a relatively large field of view (20 degrees), ●implanted patients can undergo MRI procedures, and ●individually programmable electrodes on the prosthesis which can permit further optimization of the device after implantation. 4We have demonstrated the ability to design products with long-term reliability. The Argus I retinal prosthesis, a proof of concept device that was apredecessor to the Argus II, was implanted in six patients in the United States. Argus I patients were implanted an average of almost six years, with one patienthaving used the device for over 10 years. The Argus II System has been implanted in over 300 patients. The average implant duration for these patients isnearly four years with several users continuing to use the system 10 years following implantation. In November 2017, the FDA granted Breakthrough Devices Program designation for the Orion. This designation is given to a few select medicaldevices in order to provide more effective treatment of life-threatening or irreversibly debilitating diseases or conditions. This program is intended to helppatients have more timely access to these medical devices by expediting their development, assessment, and review. With this designation, we believe theOrion will have the following advantages during the FDA review process: ●More interactive review both for the Investigational Device Exemption and Premarket Approval application; ●Greater reliance on post-market data collection and greater acceptance of uncertainty in the benefit-risk profile at the time of approval; ●Priority review (i.e., review of the submission is placed at the top of the review queue and receives additional review resources); and, ●Senior FDA management involvement and assignment of a cross-disciplinary case manager. It is our belief that inclusion in the Breakthrough Devices Program may shorten the timeline required to bring the Orion to market as a commercialproduct. We are currently evaluating our pivotal trial design for Orion and expect to reach consensus with the FDA on design specifics during early 2019.Major elements of our clinical trial design include the number of patients, study duration, and the endpoints suitable for assessing visual function, functionalvision, and quality of life. While negotiations with the FDA are ongoing, we believe the study design will require a minimum sample population of 30subjects with at least 6 months of follow-up data for each patient prior to submittal of a premarket approval (PMA) application. Our Markets According to the World Health Organization (WHO)1, 253 million people suffer from moderate to severe vision impairment worldwide. Of these, 36million people are considered legally blind. The WHO further estimates that 80% of legal blindness is avoidable, leaving 7.8 million legally blindindividuals, including those blind due to AMD and RP, or 5.8 million excluding AMD and RP. In the US, 1.3 million people are legally blind2, of whom weestimate 44%, or 575,900, are legally blind due to causes other than preventable/treatable conditions, RP or AMD3. We estimate 1.13 million individuals arelegally blind in Europe due to causes other than currently treatable conditions (including RP) or AMD. Retinitis Pigmentosa (RP) RP is a group of inherited disorders that affect the retina. The retina is a layer of nerve cells at the back of the eye. RP is a disease that gradually robsrelatively young people of their vision over time. Onset of RP is often noted in the teen years or early twenties, typically as night blindness. This is followedby a period of peripheral vision loss, until the patient is left with a tunnel of vision and then no remaining sight. Although there are various genetic causes(over 100) and thus variability in the disease progression, many people with advanced RP have lost all functional vision by their 40s or 50s. The Argus IISystem, bypasses rods and cones which are largely defunct in these patients, by sending electrical signals directly to the retina’s remaining healthy cells. Although there are reported trials for other treatments underway, to our knowledge the Argus II System remains the only approved therapeutic optionfor end-stage RP in the US, and to our knowledge it is the only treatment option generally available to commercial patients anywhere in the world. 5Worldwide, an estimated 1.5 million people suffer from RP4, which includes about 100,000 in the US5. Pan-European data is not readily available, butwe believe it is reasonable to estimate that the average prevalence throughout Europe is similar to the average prevalence within the US, and so the ratio ofpopulations could be used to estimate the number of Europeans affected as 167,000 in the 28 EU countries6,7. Approximately 25% of people with RP in theUS have vision that is 20/200 or worse (legally blind)8. Since the bare light perception or worse vision criterion (in both eyes) for the US indication is worsethan 20/200, we estimate the subset of patients that can be treated by the Argus II System is less than 25,000 in the US. Reliable market data estimating theactual number of patients with bare light perception or worse vision is unavailable. We believe the majority of patients with vision 20/200 or worse havevision that is better than bare light perception and thus, are not currently candidates for Argus II. In Europe, the indicated vision loss for Argus II patients issevere to profound which, while better than bare light perception, remains somewhat worse than 20/200. An estimated 42,000 patients in Europe with RPhave vision worse than 20/200 and we estimate the subset of RP patients that can be treated in Europe to be somewhat smaller than this number. As in the US,reliable market data estimating the actual number of patients with severe to profound vision loss or worse is unavailable. We believe that the majority ofpatients with vision 20/200 or worse in Europe have vision that is too good to be considered a candidate for Argus II with current clinical indications andphysician practice. Worldwide, we estimate that 375,000 people are legally blind due to RP. A subset of these patients would be eligible for the Argus II sincethe approved baseline vision for the Argus II is worse than legally blind (20/200). We commissioned 3rd party market research to estimate the size of the RPmarket that resulted in an estimate of approximately 1,500 patients in the US with advanced RP that could be treated with the Argus II given the eligibilitycriteria of our label. 1 WHO Fact Sheet, updated October 11, 2018. 2 National Eye Institute (http://www.nei.nih.gov/eyedata/blind.asp).3 Congdon N, O’Colmain B, Klaver CC, et al. Causes and prevalence of visual impairment among adults in the United States. Arch Ophthalmol. Apr2004;122(4):477-485. This percent amount was derived from the rates of different causes of blindness by different races and racial demographic data from2010 US Census data.4 Weleber, R.G. and Gregory-Evans, K. (2001) ‘Retinitis Pigmentosa and allied disorders.’ In Ryan, S.J. (ed.), Retina. Mosby, St. Louis, pp, 362-470.5 Foundation Fighting Blindness estimates that about 100,000 Americans are affected by RP or similar diseases.(http://www.ffb.ca/documents/File/rp_guide/Guide_to_RP_and_Other_Related_Diseases.pdf)6 Eurostat. Retrieved 1 January 2013.7 Haim M. Epidemiology of Retinitis Pigmentosa in Denmark. Acta Ophthalmol Scand Suppl 2002; 1-34.8 Grover et al., ‘Visual Acuity Impairment in Patients with Retinitis Pigmentosa at Age 45 Years or Older’, Ophthalmology. 1999 Sept; 106(9):1780-5. Other diseases resulting in blindness that may be treated by Orion We commissioned 3rd party market research for the potential market for Orion that resulted in initial estimates of over 500,000 individuals in the USwho are legally blind due to glaucoma, diabetic retinopathy, optic nerve disease and eye injury. Of this population, the potential US addressable market ismore than 70,000 individuals with vision defined as bare light or no light perception. Our marketing approvals by the FDA and other regulatory agencies willultimately determine the subset of these patients who are eligible for the Orion.Many other diseases can also cause blindness. Many of the largest causes of visual impairment (i.e. refractive error and cataracts) are avoidable orcurable, and their prolonged or untreated impact on vision is largely observed in developing nations and are not part of our target market. Some other causesof blindness, such as brain trauma to the visual cortex, may also not be suitable for treatment by a cortical stimulator. However, the remaining causes of severevision loss which include glaucoma, diabetic retinopathy, eye trauma, optic nerve disease or injury and many others can result in severe visual impairmentthat could potentially be treatable by an Orion visual prosthesis system. We believe that, if approved by the FDA, the Orion will initially treat a subset of these legally blind individuals, likely starting with the ones who arecompletely blind. If this is the case, we anticipate that if we are further able to collect additional clinical data demonstrating the efficacy of the Orion forpatients with better vision, we will be able to expand the approved indications and addressable market of the Orion to include a larger subset of these 5.8million individuals for whom no effective treatment currently exists. 6Our Strategy Our strategy can be summarized as follows: ●Leverage proven Argus technology to develop the Orion visual cortical stimulator and significantly expand our addressable market to include aportion of the almost 6 million patients who are blind from eye trauma, optic nerve disease and injury, diabetic retinopathy, glaucoma and otheruntreatable causes, ● Invest in research and development of technologies intended to enhance the Argus or Orion user experience including eye tracking, distancefiltering/decluttering, object and facial recognition and thermal imaging, ● Maintain an emphasis on capital efficiency with Argus II commercial activities by focusing on key markets and centers of excellence in thosemarkets. The goal is ultimately a positive cash contribution to the company that supports continued investment in Orion programs. 7 Commercial Overview and Centers of Excellence Strategy in US As of December 31, 2018, we have 20 qualified centers in the United States and Canada that are actively implanting the Argus II. Outside of NorthAmerica we are focusing on 14 active centers in 6 countries between Europe and Asia Pacific. To date, we have employed direct sales and vision rehabilitation specialists to service our markets in the US and Canada. The majority of our marketsin Europe are also serviced by a direct sales and vision specialist team. As of January 31, 2019, the sales/vision specialist team for North America numberedseven persons and the sales team for Europe and Asia Pacific numbered seven persons. Our COE strategy in the US market is designed to help our exclusive regional partners to more effectively manage Argus II patients and achieveinspiring patient outcomes. The COE strategy consists of four major initiatives: (1) financial, (2) patient recruitment, education and screening, (3) post-surgery programming, and (4) patient support and artificial vision rehabilitation. ●First, there are the financial considerations. As reported, effective January 1, 2019 the CMS hospital outpatient final rule assigned an averagepayment rate of $152,500 for the Argus II and the associated surgical procedure beginning January 1, 2019. The rate for calendar years 2018,2017, 2016 was $122,500, $150,000 and $95,000, respectively. Physician fees continue to be reimbursed separately. We expect that our currentpricing strategy should generally ensure full reimbursement coverage of hospital surgical procedure costs including the Argus II system.Effective July 1, 2017, CPT codes for post-surgery programming became available. We believe that these developments ought to ensure afavorable economic analysis for any center evaluating an Argus II program. ●Second, regarding patient recruitment, education and screening, we focus extensive outreach efforts to identify those blind individuals who mayqualify for Argus II. When identified those individuals are entered into a CRM database, supported by interactive marketing automationprograms, with the intent of providing a funnel of patients for each of our strategic sites as patient candidates decide to move forward. Weseparately clear patient candidates with a team of experienced healthcare professionals, providing our COEs with a streamlined path of higherprobability patient candidates. ●Third, in terms of the post-surgery programming, our recent and future product improvements are aimed at simplifying the programmingprocedure for the site and for the patient. We’ve reduced the expected time to program our system from two days down to a half day. As with thesurgery, repetition will make the programming more routine for the institution. Further, as mentioned above, we have secured CPT codes to allowsites to submit for reimbursement when they program an Argus system. ●Fourth, patient support and artificial vision rehabilitation are an important tool to managing consistent, positive outcomes across all treatedpatients. Beginning on day-one of initial activation, the brain works to make sense of the entirely new sensory input from Argus. Eachindividual patient needs guidance on the activities and tasks he or she can engage in, especially early on, that can best guide the brain to createthese important new connections. As we have come to understand the important training curriculum of artificial vision rehabilitation, we aredeploying today full-time vision rehabilitation specialists who are experts in all the ways Argus has enabled patients to: regain independencewith the world around them; enhance social interactions with the people they associate with; and to enjoy the many aesthetic experiences thatderive from visual interactivity. Our objective is to deliver outstanding patient outcomes, while building the know-how and infrastructure ofvision rehabilitation for a substantially larger patient population in the near future. In summary, the aim of the COE program is to establish implanting centers and physician clinics that are more intimately knowledgeable, self-sufficient, and confident, enabling them to be able to treat a higher volume of artificial vision patients. We believe the COE program is the ideal platform forthe important development work to serve the expanded patient populations in the near future.8Global Reimbursement Obtaining reimbursement from governmental and private insurance companies is critical to our commercial success. Due to the cost of the Argus IISystem, our sales would be limited without the availability of third party reimbursement. In the US, coding, coverage, and payment are necessary for thesurgical procedure and Argus II system to be reimbursed by payers. Coding has been established for the device and the surgical procedure. Coverage andpayment vary by payer. The majority of Argus II patients are eligible for Medicare, and coverage is primarily provided through traditional Medicare,sometimes referred to as Medicare Fee-for-Service (FFS) or Medicare Advantage. A small percentage of patients are covered by commercial insurers. ●Medicare FFS patients – Coverage is determined by Medicare Administrative Contractors (MACs) that administer various geographic regions ofthe US. Positive coverage decisions for the Argus II are effective in eight of 12 MAC jurisdictions (comprising 31 states, two territories and theDistrict of Columbia). Effective January 1, 2019, the Centers for Medicare and Medicaid Services (CMS) established a 2019 average paymentrate of $152,500 for both the procedure and the Argus II Retinal Prosthesis System. ●Medicare Advantage patients – Medicare Advantage plans are required to cover the same benefits as those covered by the MAC in thatjurisdiction. For example, if a MAC in a jurisdiction has favorable coverage for the Argus II, then typically Medicare Advantage plans in thatMAC jurisdiction offer the same coverage for the Argus II. Individual hospitals and ASCs may negotiate contracts specific to that individualfacility, which may include additional separate payment for the Argus II implant system. In addition, procedural payment is variable and can bebased on a percentage of billed charges, payment groupings or other individually negotiated payment methodologies. Medicare Advantageplans also allow providers to confirm coverage and payment for the Argus II procedure in advance of implantation. Over the last several years alarge majority of all Medicare Advantage pre-authorization requests for Argus II procedures were granted. ●Commercial insurer patients – Commercial insurance plans make coverage and payment rate decisions independent of Medicare, and contractsare individually negotiated with facility and physician providers. During the year ended December 31, 2018, 38 individuals in the US and Canada were implanted with the Argus II technology. Of these patients, 34were in the US primarily covered by Medicare FFS or Medicare Advantage plans and the remainder had private commercial, Veteran’s Administration orother insurance plan coverage. Four patients in Canada were covered by regional public reimbursement or private funding. Second Sight employs dedicated employees and consultants with insurance reimbursement expertise engaged to expand and enhance coveragedecisions. Currently, eight of 12 Medicare jurisdictions provide coverage of the Argus II in 31 states, two territories and the District of Columbia whenmedically necessary, including: ●CGS (J15 -- Ohio and Kentucky), ●Palmetto GBA (JM -- Virginia, (excluding Part B for Arlington and Fairfax counties), West Virginia, North Carolina and South Carolina), ●Palmetto GBA (JJ – Alabama, Georgia and Tennessee), ●NGS (J6 -- Minnesota, Illinois and Wisconsin), ●NGS (JK -- Connecticut, New York, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont), ●FCSO (JN -- Florida, Puerto Rico and the US Virgin Islands), ●Novitas (JH-- Arkansas, Colorado, Louisiana, Mississippi, New Mexico, Oklahoma, and Texas) and ●Novitas (JL -- Delaware, District of Columbia, Maryland, New Jersey and Pennsylvania). 9We are actively engaged with the remaining four Medicare jurisdictions covered by two contractors and are committed to supporting their requests foradditional information and clinical evidence. We expect that additional positive coverage decisions will be issued over time but cannot predict timing orultimate success with each MAC. Within Europe, we have obtained reimbursement approval or funding in Germany and one region of Italy. In France, we were selected to receive the first “Forfait Innovation” (Innovation Bundle) from the Ministry of Health, which is a special fundingprogram for breakthrough procedures to be introduced into clinical practice. As part of this program, we conducted a post-market study in France whichenrolled a total of 18 subjects who were followed for two years. The French program also funded implantation of 18 additional subjects who were not part ofthe post-market study. We submitted the final clinical report of the Forfait Innovation study late last year and the outcomes of the study are still under reviewby the French National Health Authority (HAS). Subject to a successful and positive completion of HAS’ review of the outcomes of French study, our aim isfor Argus II therapy to be covered and funded through the standard payment system in France. However, we can provide no assurance that the Frenchgovernment will make a positive decision to continue to fund the Argus II in future. In December 2016, NHS England announced it would cover 10 Argus implantations as part of a CtE program. The CtE program is especially designedfor treatments that show significant promise for the future, while new clinical and patient experience data are collected within a formal evaluation program.This program is similar to the Forfait Innovation program in France. We are actively and closely working with NHS England to finalize the final details of theprogram that is expected to be kicked off within next few months. To date, our marketing activities have focused on raising awareness of the Argus II System with potential patients, implanting physicians, and referringphysicians. Our marketing activities include exhibiting, sponsoring symposia, and securing podium presence at professional and trade shows, securingjournalist coverage in popular and trade media, attending patient meetings focused on educating patients about existing and future treatments, andsponsoring information sessions for the Argus II System. In the United States advertisements are placed in geographic areas where we have Centers ofExcellence committed to Argus II. Leverage proven Argus technology to restore some vision with cortical stimulation to a broader market of blind individuals We are in the process of developing a visual cortical prosthesis for a significantly larger market to include profoundly blind individuals, other thanthose who are blind due to currently treatable diseases or due to direct brain damage of the visual cortex. We refer to this product as Orion. We estimate thatthere are approximately 5.8 million people worldwide who are legally blind due to causes other than currently treatable conditions (including RP) or AMD. Ifapproved for marketing, the FDA and other regulatory agencies will determine which of these patients are eligible for Orion. Orion is designed to bypass the eye and optic nerve and directly stimulate the part of the brain responsible for vision. The system is based ontechnology that we utilize in our Argus II system, thereby reducing engineering investment costs and risks, and leveraging the reliability of the Argus IIplatform. In November 2017, we received full FDA approval to begin the first human clinical feasibility study of the Orion visual prosthesis system. During 2018,we implanted and activated the first five subjects in the study, four subjects at UCLA and one subject at Baylor. To date, clinical results have been positive.In addition, during the second quarter of 2018, we submitted and received approval from the FDA to enroll a sixth subject. We implanted the sixth subject atBaylor in January 2019. We anticipate enrolling additional feasibility subjects in 2019 while simultaneously negotiating the clinical and regulatory pathwayto commercialization with the FDA as part of the Breakthrough Devices Program. Our Competition The US life sciences industry is highly competitive. The treatment of blindness is a significant clinically unmet need and others continue to makeprogress. There are several approaches to treating blindness including: 10 ●Retinal Prostheses (including the Argus II): aimed at giving more visual ability to a blind patient via implanting a device in the eye to stimulateremaining retina cells. Electrical neurostimulation technology has seen growing use in recent years for numerous applications– such as chronicpain, Parkinson’s disease, essential tremor, epilepsy, and others. ●Visual Cortical Prosthesis (Orion) – We are developing a visual cortical prosthesis and, to our knowledge, the only company pursuing thedevelopment of such technology as a potential therapeutic modality. As we continue to demonstrate the potential benefits and safety profile ofOrion, we may face competition from other entities seeking to develop a visual cortical prosthesis. While we are currently precluded by theexclusion criteria in our early feasibility study from testing Orion in any indication where a current therapeutic option exists, such as with RPusing Argus, we or others may ultimately seek to demonstrate the potential benefits and safety profile of a visual cortical prosthesis for RP. ●Transplants: transplanting retinal tissue to stimulate remaining retina cells. 11 ●Stem Cells: generally involves implanting immature retinal support cells aimed at slowing retinal degeneration. A single patient in London,England with wet AMD was reportedly implanted in 2015 with an embryonic stem cell line in a study sponsored by Pfizer. This study has beensuspended. Patients with dry AMD are also being recruited in Los Angeles for a similar study. No data is yet available as to safety or efficacy ofthese implantations. A patient in Japan with AMD was implanted with induced pluripotent stem (ips) cells. These are mature cells reprogramed tobe stem cells. ●Genetics and Gene Therapy: involves identifying a specific gene that is causing retinal problems (there are over 120 for retinitis pigmentosaalone) resulting in visual impairments and blindness and inserting healthy genes into an individual’s cells using a virus to treat the diseases. Acompany completed a phase 3 study in 21 patients with a median age of 11 for a gene that affects a very small percentage of retinitis pigmentosapatients, RPE65. That company applied for and received FDA approval in 2018. We believe that there is virtually no overlap with our currentmarket since our patients generally are older (Argus II is indicated for an age minimum of 25 in the US). The other company also injects bettersighted patients since its treatment is aimed at improving residual vision. In contrast, Argus II seeks to create artificial vision where vision iscompletely lost. Pricing for these injections is reported to be approximately $850,000 for both eyes. ●Optogenetics Therapy: aimed at slowing down, reversing, and/or eliminating the process by which photoreceptors in the eye are compromised.This therapy also requires infecting the patient’s cells with a virus. However, instead of fixing a gene defect, this approach would cause cellswithin the eye to become light sensitive. Animal work has shown that these cells are not sensitive enough to respond to ambient light, so thisapproach currently also requires a light amplifier outside the body to increase light delivered to the retina. The regulatory body in the UK, theMedicines and Healthcare products Regulatory Agency, has recently cleared optogenetic clinical trials to begin. ●Nutritional Therapy: involves diets or supplements that are thought to prevent or slow the progress of vision loss. ●Implantable Telescope: VisionCare, Ophthalmic Technologies, Inc. offers an FDA approved implantable miniature telescope for AMD, amagnifying device that is implanted in the eye. The VisionCare telescope is approved for use in patients with severe to profound visionimpairment (best corrected visual acuity of 20/160 to 20/800) due to dry AMD. ●Wicab’s The BrainPort® V100 includes a video camera mounted on a pair of sunglasses, a hand-held controller, and tongue array. The tonguearray contains 400 electrodes and is connected to the glasses via a flexible cable. White pixels from the camera are felt on the tongue as strongstimulation, black pixels as no stimulation, and gray levels as medium levels of stimulation. This device is indicated for the profoundly blind. ●There are currently no known treatments for AMD after the disease has caused severe to profound vision loss nor are there any establishedtreatments that delay or reverse the progression of Dry AMD other than supplements. ●Therapies exist for Wet AMD that delay the progression of visual impairment or slightly improve the vision, rather than completely curing orreversing its course. These therapies are approved in many regions throughout the world, including the US and EU. Commercial efforts to develop retinal implants by others include: ●Retina Implant AG: A privately held German company that is developing the Alpha IMS/Alpha AMS, a wireless sub-retinal implant. Althoughthis company obtained a CE Mark in 2013 and was expected to begin commercialization during 2015 in the EU, to our knowledge this productis still not generally available to commercial patients. Retina Implant has also announced plans for a FDA trial in the US but has not announcedany U.S. implants in this trial.12 ●Pixium Vision S.A.: A publicly held French company that is developing the PRIMA (sub-retinal implant) for Dry-AMD patients. In 2017,Pixium announced approval for two feasibility studies of PRIMA in Dry-AMD patients. One study reportedly is in Paris with five sugjects, and asecond study is planned in Pittsburgh, Pennsylvania with five subjects. To date Pixium has announced the successful implantation andactivation of devices in Paris, but to our knowledge no performance data has yet been reported. ●NanoRetina Inc., a company based in Israel, and several other early stage companies are reported to have developed intellectual property ortechnology that may improve retinal prostheses in the future, but to our knowledge none of these efforts has resulted in a completed system thathas been tested clinically in patients. ●Academic entities are also working on vision restoring implants. These include Bionic Vision Australia (an early prototype device has beendeveloped and to our knowledge implanted in three human subjects), Boston Retinal Implant project (preclinical phase), Monash Vision Group(preclinical phase), and the Illinois Institute of Technology (preclinical phase). Of these projects, we believe most have not yet demonstrated aworking implant, only one has reportedly begun long-term clinical work in humans, and to our knowledge none has received FDA approval tobegin clinical trials in the US. To our knowledge, no other retinal prosthesis has been successful in long-term human trials, with the Argus II System currently the sole implantgenerally available to commercial patients for treating RP in the US, Canada, EU, and elsewhere. We anticipate that our competitors are unlikely to obtainsignificant commercial traction in EU until they have developed in depth clinical data showing the reliability and functionality of their products. Warranty We generally provide a standard limited warranty for the Argus II System covering replacement over the following periods after implant: ●three years on implanted epiretinal prosthesis, ●two years on external components other than batteries and chargers, and ●three months on batteries and chargers. Based on our experience to date, the Argus II System has proven to be a reliable device generally performing as intended. We have accrued warrantyexpense of $1.6 million as of December 31, 2018, which is based upon our historical experience rate. Our Manufacturing and Quality Assurance We have a single manufacturing facility, located at our principal office in Los Angeles, California. The manufacturing areas at this location are housedin a single building, and include approximately 10,000 square feet of controlled environment rooms (CERs) suitable for implant manufacturing. We currentlyutilize less than half of this space for Argus II implant production. At the same site we maintain spaces for assembling the external (non-implantable)components of our system and for the labeling, receiving and shipping, and stockroom functions. Finished goods are held at this location and at ourcontracted logistics partner in Europe. We rely on many suppliers to provide materials and services necessary to produce and test our products. Many of these materials or services arecurrently provided by sole source suppliers. In a number of instances we maintain sole source suppliers because our current purchasing volumes do notwarrant developing more than one supplier. We expect to secure additional providers as our production volumes increase. If we experience a loss of a solesupplier before confirming an alternative, we risk possible disruptions in our operations. We attempt to mitigate the sole source risk by, among other things,increasing parts inventory as a partial hedge against interruptions in parts supply and by actively seeking to develop alternative suppler sources beforeexperiencing any such disruptions. 13Our manufacturing department currently employs 28 persons and the quality assurance department has an additional nine members. We operate a dayshift and smaller swing shift, and at this staffing level we can manufacture approximately 10 devices per month. We believe that the space available at thecurrent facility when fully utilized and operating at two full shifts will prove sufficient to build and assemble a combined total of approximately 100 Argus IIor Orion devices per month. Employees As of December 31, 2018, we had 123 employees, including approximately 49 in operations; 27 in selling, marketing and distribution; 31 in clinical,regulatory and research and development; and 16 in administration. Of these persons, we employed 108 in the United States and 15 in Europe. We believethat the continued success of our business will depend, in part, on our ability to attract and retain qualified personnel, and we are committed to developingour people and providing them with opportunities to contribute to our growth and success. None of these employees is covered by a collective bargainingagreement, and we believe our relationship with our employees is good to excellent. Properties Our principal office and facilities are located at 12744 San Fernando Road, Suite 400, Sylmar, California 91342, and consists of approximately 45,351rentable square feet at a current base rent of about $36,600 per month. Our lease expires in February 2022 and grants us an option to extend the lease term foran additional 60 months. We believe that the terms of this lease are at least as favorable as those that may have been obtained from a non-affiliated thirdparty. We believe that these premises are adequate for our foreseeable needs. Our European office is located on the Innovation Park at École Polytechnique Fédérale de Lausanne (EPFL), Rue Jean-Daniel Colladon, CH 1015Lausanne, Switzerland. These premises consist of 180 square meters at a base rent of about 8,200 CHF per month, or currently about $8,161 per month basedupon current exchange rates. As part of our restructuring and staffing reductions we have renegotiated this lease to 94 square meters at a base rent of 3,147CHF or about $3,131 starting on January 1, 2019 based upon current exchange rates. Legal Proceedings We are not a party to any pending legal proceedings other than those involving Pixium Vision described in “Risk Factors—Risks Related toIntellectual Property and Other Legal Matters.” Available Information Our website address is www.secondsight.com. We make available free of charge through a link provided at such website our Forms 10-K, 10-Q and 8-Kas well as any amendments thereto. Such reports are available as soon as reasonably practicable after they are filed with the Securities and ExchangeCommission. Item 1A. Risk Factors The statements that are not historical facts contained in this Form 10-K are forward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995. These statements reflect the current belief, expectations or intent of our management and are subject to and involve certainrisks and uncertainties. Many of these risks and uncertainties are outside of our control and are difficult for us to forecast or mitigate. An investment in ourcommon stock is speculative and involves a high degree of risk. In addition to the risks described elsewhere in this Form 10-K and in certain of our otherfilings with the US Securities and Exchange Commission, the following important factors, among others, could cause our actual results to differ materiallyfrom those expressed or implied by us in any forward-looking statements contained herein or made elsewhere by or on behalf of us. The risks describedbelow are not the only risks we face. If any of the events described in the following risk factors actually occurs, or if additional risks and uncertainties latermaterialize, that are not presently known to us or that we currently deem immaterial, then our business, prospects, results of operations and financialcondition could be materially adversely affected. In that event, the trading price of our common stock or our warrants could decline, and you may lose all orpart of your investment in our shares or in our warrants.14 Risks Related to Dependence on Our Commercial Products We depend on the success of our first commercial product, the Argus II System, which received European market clearance (CE Mark) in February2011 and FDA approval in February 2013, in the United States for RP; and on the regulatory approval of our current product and a new device underdevelopment, the Orion visual prosthesis (a modified version of the Argus II System), to treat other causes of blindness, in the US and other countries, whichmay never occur. Our future success depends upon building a commercial operation in the US and expanding growth in Europe as well as entering additional markets tocommercialize our Argus II System for RP. We believe our expanded growth will depend on the further development, regulatory approval andcommercialization of the Orion product, which we anticipate can be used by nearly all profoundly blind individuals. If we fail to expand the use of the ArgusII System in a timely manner for other forms of retinal degeneration in addition to RP, or to develop the Orion product and penetrate the available marketswhich those applications are intended to serve, we may not be able to expand our markets or to grow our revenue, our stock values could decline andinvestors may lose money. Our revenue from sales of Argus II System and potential future products such as Orion is dependent upon the pricing and reimbursement guidelinesadopted in each country and if pricing and reimbursement levels are inadequate to achieve profitability our operations will suffer. Our financial success depends on our ability to price our products in a manner acceptable to government and private payers while still maintaining ourprofit margins. Numerous factors that may be beyond our control may ultimately impact our pricing of Argus II System and determine whether we are able toobtain reimbursement or reimbursement at adequate levels from governmental programs and private insurance. If we are unable to obtain reimbursement orour product is not adequately reimbursed, we will experience reduced sales, our revenues likely will be adversely affected, and we may not become profitable. Obtaining reimbursement approvals is time consuming, requires substantial management attention, and is expensive. Our business will be materiallyadversely affected if we do not receive approval for reimbursement of the Argus II System under government programs and from private insurers on a timelyor satisfactory basis. Limitations on coverage could also be imposed at the local Medicare Administrative Contractor level or by fiscal intermediaries in theUS and by regional, or national funding agencies in Europe. Our business could be materially adversely affected if the Medicare program, local MedicareAdministrative Contractors or fiscal intermediaries were to make such a determination and deny, restrict or limit the reimbursement of Argus II System. Similarly in Europe these governmental and other agencies could deny, restrict or limit the reimbursement of Argus II System at the hospital, regionalor national level. Our business also could be adversely affected if retinal specialists and the facilities within which they operate are not adequatelyreimbursed by Medicare and other funding agencies for the cost of the procedure in which they implant the Argus II System on a basis satisfactory to theadministering retinal specialists and their facilities. If the local contractors that administer the Medicare program and other funding agencies are slow toreimburse retinal specialists or provider facilities for the Argus II System, the retinal specialists may delay their payments to us, which would adversely affectour working capital requirements. If the funding agencies delay reimbursement payments to the hospitals, any increase to their working capital requirementscould reduce their willingness to treat blind patients who wish to have our devices implanted. If reimbursement for our products is unavailable, limited inscope or amount, or if pricing is set at unsatisfactory levels, our business will be materially harmed. Our commercial and financial success depends on our products being accepted in the market, and if not achieved will result in our not being able togenerate revenues to support our operations. Even if we are able to obtain favorable reimbursement within the markets that we serve, commercial success of our products will depend, among otherthings, on their acceptance by retinal specialists, ophthalmologists, general practitioners, low vision therapists and mobility experts, hospital purchasing andcontrolling departments, patients, and other members of the medical community. The degree of market acceptance of any of our product candidates willdepend on factors that include: •cost of treatment, •pricing and availability of future alternative products, •the extent of available third-party coverage or reimbursement, •perceived efficacy of the Argus II System relative to other future products and medical solutions, and •prevalence and severity of adverse side effects associated with treatment.15The activities of competitive medical device companies, or others, may limit the Argus II System’s revenue.Our commercial opportunities for the Argus II System may be reduced if our competitors develop or market products that are more effective, are bettertolerated, receive better reimbursement terms, are more accepted by physicians, have better distribution channels, or are less costly.Currently, to our knowledge, no other medical devices comparable to the Argus II System have been approved by regulatory agencies, in the US orEurope, to restore some functional vision in persons who have become blind due to RP. Other visual prosthesis companies such as Retina Implant AG andPixium Vision S.A., both based in Europe, are developing retinal implant technologies to partially restore some vision in blind patients. Retina Implant hasobtained a CE mark for its Alpha AMS product but has not yet sold it to our knowledge. Pixium Vision has obtained CE Mark for its IRIS II product but haswithdrawn it from the market. Neither Retina Implant nor Pixium has filed for market approval with the FDA. Retina Implant has not to our knowledgeobtained an Investigational Device Exemption (IDE) to begin the required clinical trials in the US, and Pixium Vision has not obtained an IDE for its IRIS IIproduct to begin the required clinical trials in the US. Pixium Vision has obtained an IDE for its PRIMA product. This IDE trial is directed toward AMD, notRP. These competitive therapies if or when developed or brought to market may result in pricing and market access pressure even if Argus II System isotherwise viewed as a preferable therapy.Many privately and publicly funded universities and other organizations are engaged in research and development of potentially competitive productsand therapies, such as stem cell and gene therapies, some of which may target RP and other indications as our product candidates. These organizationsinclude pharmaceutical companies, biotechnology companies, public and private universities, hospital centers, government agencies and researchorganizations. Our competitors include large and small medical device and biotechnology companies that may have significant access to capital resources,competitive product pipelines, substantial research and development staffs and facilities, and substantial experience in medical device development.We may face substantial competition in the future and may not be able to keep pace with the rapid technological changes which may result fromothers discovering, developing or commercializing products before or more successfully than we do.In general the development and commercialization of new medical devices is highly competitive and is characterized by extensive research anddevelopment and rapid technological change. Our customers consider many factors including product reliability, clinical outcomes, product availability,inventory consignment, price, and product services provided by the manufacturer. Market share can shift as a result of technological innovation and otherbusiness factors. We believe these risk factors are partially mitigated by the Argus II System being the sole product that is currently available for commercialimplantation in the US and Europe. Major shifts in industry market share have occurred in connection with product problems, physician advisories and safetyalerts, reflecting the importance of product quality in the medical device industry, and any quality problems with our processes, goods and services couldharm our reputation for producing high-quality products and would erode our competitive advantage, sales and market share. Our competitors may developproducts or other novel technologies that are more effective, safer or less costly than any that we are developing and if those products gain market acceptanceour revenue and financial results could be adversely affected.If we fail to develop new products or enhance existing products, our leadership in the markets we serve could erode, and our business, financialcondition and results of operations may be adversely affected.Risks Related to Our Common StockWe have not been profitable to date and expect our operating losses to continue for the foreseeable future; we may never be profitable.We have incurred operating losses and generated negative cash flows since our inception and have financed our operations principally through equityinvestments and borrowings. Our ability to generate sufficient revenues to fund operations is uncertain. For the fiscal year ended December 31, 2018, we hadnet revenue of $6.9 million and incurred a net loss of $35.1 million. Our total accumulated deficit through December 31, 2018, was $269.5 million.As a result of our limited commercial operating history, revenue is difficult to predict with certainty. Current and projected expense levels are basedlargely on estimates of future revenue. We expect expenses to increase in the future16as we expand our activities in connection with the further development of Orion and complete planned enhancements of Argus II. We cannot assure you thatwe will be profitable in the future. Accordingly, the extent of our future losses and the time required to achieve profitability, if ever, is uncertain. Failure toachieve profitability could materially and adversely affect our value and our ability to effect additional financings. The success of the business depends onour ability to increase revenues to offset expenses. If we do not achieve profitability, or otherwise fall short of projections, our business, financial conditionand operating results will be materially adversely affected.Our financial statements have been prepared assuming no going concern qualification by our auditors.Our ability to continue as a going concern is dependent upon our ability to obtain additional financing, obtain further operating efficiencies, reduceexpenditures, attain favorable gross margins and ultimately, generate greater sales and create profitable operations. Such financings may not be available ormay not be available on reasonable terms. A “going concern” opinion from our auditors may negatively affect the price of our common stock. Our forecast ofthe period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks anduncertainties, and actual results could vary materially.Sales, or the availability for sale, of substantial amounts of our common stock could adversely affect the value of our common stock.We cannot predict the effect, if any, that future sales of our common stock, or the availability of our common stock for future sales, will have on themarket price of our common stock. Sales of substantial amounts of our common stock in the public market and the availability of shares for future sale couldadversely affect the prevailing market price of our common stock. This in turn could impair our future ability to raise capital through an offering of our equitysecurities.There may be future sales or other dilution of our equity, which may adversely affect the market price of our common stock.We are not restricted from issuing additional shares of common stock. The market price of our common stock could decline as a result of sales of ourcommon stock and warrants or the perception that such sales could occur. We may issue and sell additional shares of our common stock in private placementsor registered offerings in the future. We also may conduct additional registered rights offerings in the future pursuant to which we may issue shares of ourcommon stock or other securities.The warrants we issued in our recent rights offering to shareholders may create an overhang on the market and have a negative effect on the marketprice for our common stock.We issued 13,652,341 warrants in connection with a completed rights offering in 2017 and an additional 47,812,371 warrants in connection with acompleted rights offering of shares and warrants in February 2019. These warrants expire on March 14, 2024. These warrants may be used in arbitragetransactions and can cause the price of our common stock to remain below the warrant exercise price of $1.47 regardless of our performance.We have identified and reported on weaknesses in our internal control over financial reporting in past periods and if our internal control overfinancial reporting were again to become ineffective, investor confidence in our Company may be adversely affected.In response to identified and reported material weaknesses in our internal control over financial reporting in prior years, we updated and improved oursystem and process documentation necessary to perform the evaluation needed to comply with Section 404 of the Sarbanes-Oxley Act. In connection with theaudit of our consolidated financial statements in past years, our independent registered public accounting firm identified material weaknesses in our internalcontrol over financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such thatthere is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.We have remediated these reported weaknesses and have completed written documentation of our internal control policies, procedures and controls andfully completed testing of our key controls. We evaluated and tested these key controls and procedures and have concluded that our internal control overfinancial reporting was effective as of the end of the period covered by this Annual Report on Form 10-K.17If we were in the future unable to conclude that our internal control over financial reporting is effective, or if our independent registered publicaccounting firm were unable to express an opinion on the effectiveness of our internal controls when it is required to do so by the applicable rules, we couldcause investors to lose confidence in the accuracy and completeness of our financial reports, which could cause the price of our common stock to decline, andwe may be subject to investigation or sanctions by the regulatory authorities.Our remediation efforts while effective at present may not enable us to avoid a material weakness in the future.Materials necessary to manufacture Argus II may not be available on commercially reasonable terms, or at all, which may delay development,manufacturing and commercialization of our products.We rely on numerous suppliers to provide materials, components and services necessary to produce the Argus II System and next generation productcandidates. Certain suppliers are currently sole source because of our low manufacturing volumes and our need for specialty technical or other engineeringexpertise. Our suppliers may be unable or unwilling to deliver these materials and services to us timely as needed or on commercially reasonable terms.Should this occur, we would seek to qualify alternative suppliers or develop in-house manufacturing capability but may be unable to do so. Substantialdesign or manufacturing process modifications and regulatory approval might be required to facilitate or qualify an alternate supplier. Even where we couldqualify alternative suppliers the substitution of suppliers may be at a higher cost and cause time delays including delays associated with additional possibleFDA review, that impede the commercial production of the Argus II System, reduce gross profit margins and impact our abilities to deliver our products asmay be timely required to meet demand.Any failure or delay in completing clinical trials or studies for new product candidates or next generation of our products and the expense of thosetrials could adversely affect our business.Preclinical studies and clinical trials required to demonstrate the safety and efficacy of incremental changes for the next generation of the Argus IISystem, including new externals and software enhancements and for new product candidates such as Orion are time consuming and expensive. If we arerequired to conduct additional clinical trials or other studies with respect to any of our product candidates beyond those that we have contemplated, if we areunable to successfully complete our clinical trials or other studies or if the results of these trials or studies are not positive or are only modestly positive, wemay be delayed in obtaining marketing approval for those product candidates, we may not be able to obtain marketing approval or we may obtain approvalfor indications that are not as broad as intended. Our product development costs also will increase if we experience delays in testing or approvals.The completion of clinical trials for our product candidates could be delayed because of our inability to manufacture or obtain from third-partiesmaterials sufficient for use in preclinical studies and clinical trials; delays in patient enrollment and variability in the number and types of patients availablefor clinical trials; difficulty in maintaining contact with patients after treatment, resulting in incomplete data; poor effectiveness of product candidates duringclinical trials; unforeseen safety issues or side effects; and governmental or regulatory delays and changes in regulatory requirements and guidelines.If we incur significant delays in our clinical trials, our competitors may be able to bring their products to market before we do which could result inharming our ability to commercialize our products or potential products. If we experience any of these occurrences our business will be materially harmed. If we lose key management personnel, or if we fail to recruit additional highly skilled personnel, our ability to identify, develop and commercializenew or next generation product candidates will be impaired, could result in loss of markets or market share and could make us less competitive.Our executives have significant medical device, regulatory, sales and marketing, operational, and/or corporate finance experience. The loss of anymanagement executive or any other principal member of our management team could impair our ability to identify, develop and market new products oreffectively deal with regulatory and reimbursement matters.18We could be adversely affected by violations of the US Foreign Corrupt Practices Act and similar worldwide anti-bribery laws.The US Foreign Corrupt Practices Act and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries from makingimproper payments to non-US officials for the purpose of obtaining or retaining business. We intend to adopt policies for compliance with these anti-briberylaws, which often carry substantial penalties. We cannot assure you that our internal control policies and procedures always will protect us from reckless orother inappropriate acts committed by our affiliates, employees or agents. Violations of these laws, or allegations of such violations, could have a materialadverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline.Risks Related to Intellectual Property and Other Legal MattersIf we or our licensors are unable to protect our/their intellectual property, then our financial condition, results of operations and the value of ourtechnology and products could be adversely affected.Patents and other proprietary rights are essential to our business and our ability to compete effectively with other companies is dependent upon theproprietary nature of our technologies. We also rely upon trade secrets, know-how, continuing technological innovations and licensing opportunities todevelop, maintain and strengthen our competitive position. We seek to protect these, in part, through confidentiality agreements with certain employees,consultants and other parties. Our success will depend in part on the ability of our licensors to obtain, maintain (including making periodic filings andpayments) and enforce patent protection for their intellectual property, in particular, those patents to which we have secured exclusive rights. Our licensorsmay not successfully prosecute or continue to prosecute the patent applications which we have licensed. Even if patents are issued in respect of these patentapplications, we or our licensors may fail to maintain these patents, may determine not to pursue litigation against entities that are infringing upon thesepatents, or may pursue such enforcement less aggressively than we ordinarily would. Without adequate protection for the intellectual property that we own orlicense, other companies might be able to offer substantially identical products for sale, which could unfavorably affect our competitive business positionand harm our business prospects. Two patents licensed from the John Hopkins University (the JHU Patents) expired in 2018, along with our LicenseAgreement with the Johns Hopkins University. The expiration of the JHU Patents removes a barrier to entry for competitors who may be interested in sellinga product competitive with Argus II. The JHU Patents are specific to retinal stimulation and have no effect on Orion technology.Even if issued, patents may be challenged, invalidated, or circumvented, which could limit our ability to stop competitors from marketing similarproducts or limit the length of term of patent protection that we may have for our products.Litigation or third-party claims of intellectual property infringement or challenges to the validity of our patents would require us to use resources toprotect our technology and may prevent or delay our development, regulatory approval or commercialization of improvements in the Argus II System ornew product candidates. Further, the validity of some of our patents has been challenged.Pixium Vision (Pixium) has filed oppositions in the European Patent Office (EPO) challenging the validity of 22 European patents owned orexclusively licensed by Second Sight. Retina Implant AG has joined Pixium Vision in one opposition, and filed one separate opposition. Two of thesepatents are owned by Johns Hopkins University (JHU) and exclusively licensed to Second Sight, while 20 of these patents are owned by Second Sight.Second Sight has opposed one Pixium patent. These EPO proceedings involving Pixium, Retina Implant, and Second Sight include: •EP1061874 Visual Prosthesis – upheld by the opposition and appellate divisions. No further appeal is available in the EPO. This patent hasrecently expired. •EP1061996 Apparatus for Preferential Outer Retinal Stimulation – upheld by the opposition division, cancelled in the appellate division. Nofurther appeal is available in the EPO. •EP1171188 Retinal Color Prosthesis for Color Sight Restoration – cancelled in the Opposition Division, we have withdrawn our appeal due tothe patent’s impending expiration. •EP2219728 Electrode Array for Even Neural Pressure Having Multiple Attachment Points –upheld in the Opposition Division, pending beforethe Board of Appeal. •EP1937352 Sub-threshold Stimulation to Precondition Neurons for Supra-threshold Stimulation – cancelled in the Opposition Division,pending before the Board of Appeal.19 •EP2192949 – Return Electrode for a Flexible Circuit Electrode Array – cancelled in the Opposition Division, Pending before the Board ofAppeal. •EP1949437 - Implantable Microelectronic Device and Method of Manufacture –Upheld in the Opposition Division, appeal withdrawn. •EP1945835 – Platinum Electrode Surface Coating and Method for Manufacturing the Same – (Pixium joined by Retina Implant) cancelled inthe Opposition Division, We have not appealed in favor of pursuing claims in a divisional application. •EP1986733 (Pixium’s Patent opposed by Second Sight) – Device with Flexible Multilayer System for Contacting or Electro-stimulation ofLiving Tissue Cells or Nerves –significantly narrowed in the Opposition Division, pending before the Board of Appeal. •EP1562672 – Field Focusing and Mapping in an Electrode Array – cancelled in the Opposition Division, we did not appeal. •EP1497483 – Platinum Electrode – Upheld in the Opposition Division, no appeal has been filed. •EP2077892 – Automatic Fitting for a Visual Prosthesis – Upheld in the Opposition Division, pending before the Board of Appeal. •EP2061549 – Package for an Implantable Neural Stimulation Device - Cancelled in the Opposition Division, pending before the Board ofAppeal. •EP2155327 – System for Providing Stimulation Inputs to a Visual Prosthesis – Upheld in the Opposition Division. No appeal has been filed. •EP2114514 – Flexible Electrode Array with Film Support - Opposition filed. •EP2089100 – Flexible Circuit Electrode Array – Upheld in the Opposition Division, no appeal has been filed. •EP2185236 – Implantable Device for the Brain – Upheld in the Opposition Division. Pending before the board of appeal. •EP1843816 – Micro-Miniature Implantable Coated Device – Opposition filed, a hearing is scheduled for February 5, 2020. Opposed by RetinaImplant. •EP2364179 – Techniques and Functional Electrical Stimulation to Eliminate Discomfort during Electrical Stimulation of the Retina –Cancelled in the Opposition Division. Appeal is withdrawn. •EP1874397 – Flexible Circuit Electrode Array – Upheld in modified form in the Opposition Division, we have appeal to restore the originalpatent. •EP2136876 – Saliency-Based Apparatus for Visual Prosthesis – Cancelled in the Opposition Division, we did not appeal. •EP2421602 – Visual Prosthesis Fitting System – Cancelled in the Opposition Division, we did not appeal. •EP2167186 – Video Processing System for a Visual Prosthetic Apparatus – Opposition filed, a hearing is scheduled for March 19, 2019.If we are the target of claims by third parties asserting that our products or intellectual property infringe upon the rights of others we may be forced toincur substantial expenses or divert substantial employee resources from our business and, if successful, those claims could result in our having to paysubstantial damages or prevent us from developing one or more product candidates. Further, if a patent infringement suit were brought against us or ourcollaborators, we or they could be forced to stop or delay research, development, manufacturing or sales of the product or product candidate that is thesubject of the suit.The validity of some of our patents has been challenged. If we experience patent infringement claims, or if we elect to avoid potential claims othersmay be able to assert, we or our collaborators may choose to seek, or be required to seek, a license from the third-party and would most likely be required topay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we or our collaborators were able to obtain alicense, the rights may be nonexclusive, which would give our competitors access to the same intellectual property. Ultimately, we could be prevented fromcommercializing a product, or be forced to cease some aspect of our business operations if, as a result of actual or threatened patent infringement claims, we orour collaborators are unable to enter into licenses on acceptable terms. This could harm our business significantly. The cost to us of any litigation or otherproceeding, regardless of its merit, even if resolved in our favor, could be substantial. Some of our competitors may be able to bear the costs of such litigationor proceedings more effectively than we can because of their having greater financial resources. Uncertainties resulting from the initiation and continuationof patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Intellectual property litigation andother proceedings may, regardless of their merit, also absorb significant management time and employee resources.20If we fail to comply with our obligations in the agreements under which we license development or commercialization rights to products ortechnology from third-parties, we could lose license rights that are important to our business.We hold an exclusive license from the Doheny Eye Institute (DEI) to intellectual property relating to the Argus II visual prosthesis, and Orion corticalvisual prosthesis. This license imposes various commercialization, milestone payment, profit sharing, insurance and other obligations on us. If we fail tocomply with any material obligations, DEI will have the right to terminate the license, which covers part of the Argus and Orion systems. The existing orfuture patents to which we have rights based on our agreements with DEI may be too narrow to prevent third-parties from developing or designing aroundthese patents. Additionally, we may lose our exclusive rights to the patents and patent applications we license in the event of a breach or termination of thelicense agreement. The license expires with the expiration of the last of the licensed patents on August 8, 2033. The royalty in the agreement is 0.25% of thepatented portion of Argus II System sales. All of the patents in the DEI agreement are co-owned by Second Sight and DEI. We license DEI’s interest in thepatents to maintain our exclusive use on that intellectual property. Should the license terminate, we retain the right to utilize the intellectual property, butmay not be able to prevent others from doing so, in which case we may lose a competitive advantage.If we are unable to protect the intellectual property used in our products, others may be able to copy our innovations which may impair our ability tocompete effectively in our markets.The strength of our patents involves complex legal and scientific questions and can be uncertain. We have 384 issued patents and 58 pending patentapplications worldwide as of December 31, 2018. Our patent applications may be challenged or fail to result in issued patents and our existing or futurepatents may be too narrow to prevent third-parties from developing or designing around our intellectual property and in that event we may lose competitiveadvantage and our business may suffer.Further, the patent applications that we license or have filed may fail to result in issued patents. The claims may need to be amended. Even afteramendment, a patent may not issue and in that event we may not obtain the exclusive use of the intellectual property that we seek and may lose competitiveadvantage which could result in harm to our business.Third-party claims of intellectual property infringement may prevent or delay expanded commercialization efforts for Argus II and our developmentand commercialization activities for other product candidates including Orion.Although we are not currently aware of any litigation or other proceedings or third-party claims of intellectual property infringement related to theArgus II System, the medical device industry is characterized by many litigation cases regarding patents and other intellectual property rights. Other partiesmay in the future allege that our activities infringe their patents or that we are employing their proprietary technology without authorization. We may nothave identified all the patents, patent applications or published literature that affect our business either by blocking our ability to commercialize our product,by preventing the patentability of one or more aspects of our products or those of our licensors or by covering the same or similar technologies that mayaffect our ability to market our product.In addition, even in the absence of litigation, we may need to obtain licenses from third-parties to advance our research or allow commercialization ofour product candidates, and we have done so from time to time. We may fail to obtain future licenses at a reasonable cost or on reasonable terms, if at all. Inthat event, we may be unable to further develop and commercialize one or more of our product candidates, which could harm our business significantly.We may become involved in future lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, timeconsuming and unsuccessful.Competitors may infringe our patents or the patents of our licensors. To counter infringement or unauthorized use, we may file infringement claims,which can be expensive and time consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours or of our licensors is notvalid or is unenforceable or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technologyin question. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpretednarrowly and could put our patent applications at risk of not issuing.21The US Patent and Trademark Office may initiate interference proceedings to determine the priority of inventions described in or otherwise affectingour patents and patent applications or those of our collaborators or licensors. An unfavorable outcome could require us to cease using the technology or toattempt to license rights to it from the prevailing party. Our business could be harmed if a prevailing party does not offer us a license on terms that areacceptable to us. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distraction of our managementand other employees. We may not be able to prevent, alone or with our licensors, misappropriation of our proprietary rights, particularly in countries wherethe laws may not protect those rights as fully as in the US.Product liability lawsuits could divert our resources, result in substantial liabilities and reduce the commercial potential of our products.We face a risk of product liability claims arising from the prosthesis being inserted into the eye, and it is possible that we may be held liable for injuriesof patients who receive our product. These lawsuits may divert our management from pursuing our business strategy and may be costly to defend. In addition,if we are held liable in any of these lawsuits, we may incur substantial liabilities and may be forced to limit or forego further commercialization of one ormore of our products. We maintain product liability insurance relating to our clinical trials and commercial sales, with an aggregate coverage limit underthese insurance policies of $10,000,000, and while we believe this amount of insurance currently is sufficient to cover our product liability exposure, theselimits may not prove adequate to fully cover potential liabilities. In addition, we may not be able to obtain or maintain sufficient insurance coverage at anacceptable cost or otherwise to protect against potential product liability claims, which could prevent or inhibit the commercial production and sale of ourproducts. If the use of our products harm or are alleged to harm people, we may be subject to costly and damaging product liability claims that exceed ourpolicy limits and cause us significant losses that could seriously harm our financial condition or reputation.Legislative or regulatory reform of the health care system in the US and foreign jurisdictions may adversely impact our business, operations orfinancial results.Our industry is highly regulated and changes in law may adversely impact our business, operations or financial results. In March 2010, the PatientProtection and Affordable Care Act, and a related reconciliation bill were signed into law. This legislation changes the current system of healthcare insuranceand benefits intended to broaden coverage and control costs. The law also contains provisions that will affect companies in the medical device industry andother healthcare related industries by imposing additional costs and changes to business practices.Moreover, in some foreign countries, including countries in Europe and Canada, the pricing of approved medical devices is subject to governmentalcontrol. In these countries, pricing negotiations with governmental authorities can take 12 months or longer after the receipt of regulatory approval andproduct launch. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. Our business could be materially harmed if reimbursement of our products is unavailableor limited in scope or amount or if pricing is set at unsatisfactory levels.We cannot predict what healthcare reform initiatives may be adopted in the future. Further federal and state legislative and regulatory developmentsappear likely, and we expect ongoing initiatives in the US and Europe. These reforms could have an adverse effect on our ability to obtain timely regulatoryapproval for new products and on anticipated revenues from the Argus II System and other product candidates, both of which may affect our overall financialcondition.We are an “emerging growth company,” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companieswill make our common stock less attractive to investors.For so long as we remain an “emerging growth company” as defined in the JOBS Act, we may take advantage of certain exemptions from variousrequirements that are applicable to public companies that are not “emerging growth companies,” including not being required to comply with theindependent auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation inour periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation andstockholder approval of any golden parachute payments not previously approved. We may take advantage of these exemptions for as long as we are an“emerging growth company,” which could be as long as five years from November 14, 2014, the date of our initial public offering. Investors may find ourcommon stock less attractive because we rely on these exemptions. If some investors find our common stock less attractive as22a result, there may be a less active trading market for our common stock, and our stock price may be more volatile or may decline.In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of an extended transition period forcomplying with new or revised accounting standards. However, we chose to “opt out” of this extended transition period, and as a result, we intend to complywith new or revised accounting standards on the relevant dates that adoption of those standards may be required for non-emerging growth companies. Ourdecision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.We are required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, and any adverseresults from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish a report by our management on our internal control over financialreporting. The report contains, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of ourfiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of anymaterial weaknesses in our internal control over financial reporting identified by management. If we are unable to assert that our internal control overfinancial reporting is effective, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverseeffect on our stock price.Risks Relating to Our Financial Results and Need for FinancingFluctuations in our quarterly operating results and cash flows could adversely affect the price of our common stock.The revenues we generate and our operating results will be affected by numerous factors such as: •the general commercial success of the Argus II System, •our ability to improve performance and significantly expand the use of Argus II in the larger RP population by treating better-sighted RP patients, •our ability to obtain regulatory approval of the Argus II System in additional jurisdictions, •the emergence of products that compete with our product candidates, •our ability to leverage Argus II technology to restore useful vision with cortical stimulation, •the status of our preclinical and clinical development programs, variations in the level of expenses related to our existing product candidates orpreclinical and clinical development programs, •execution of collaborative, licensing or other arrangements, and the timing of payments received or made under those arrangements, •any intellectual property infringement lawsuits to which we may become a party, •our ability to obtain reimbursement from government or private payers at levels we deem adequate to sustain our operations.If our quarterly operating results fall below the expectations of investors or securities analysts, the price of our common stock could declinesubstantially. Any quarterly fluctuations in our operating results and cash flows may cause the price of our stock to fluctuate substantially. We believe that,in the near term, quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of our futureperformance. We will need additional capital to support our operations and growth. Additional capital may be difficult to obtain restricting our operations andresulting in additional dilution to our stockholders.Our business requires additional capital for implementation of our long term business plan. We believe our cash, cash equivalents and otherinvestments, along with the proceeds of approximately $34.6 million from our completed shareholder rights offering of securities in February 2019, togetherwith revenue generated from the sale of Argus II units, may be sufficient to fund our operations for at least twelve months from the date of issuance of thisreport. The23actual amount of funds that we will need for our business will be determined by many factors, some of which are beyond our control, and we may need fundssooner than currently anticipated. These factors include: •the amount of our future operating losses, •third party expenses relating to the ongoing commercialization of Argus II System, •the need and cost of conducting additional clinical trials of the Argus II System for other applications, •the amount of our research and development, including research and development for Orion visual prosthesis, marketing and general andadministrative expenses, and •regulatory changes and technological developments in our markets.In November 2017, we entered into an At-the-Market sales agreement (the “Sales Agreement”) with B. Riley FBR Inc. and H.C. Wainwright & Co.,LLC, as agents (“Agents”) pursuant to which the we may offer and sell, from time to time through either of the Agents, shares of our common stock having anaggregate offering price as set forth in the Sales Agreement and a related prospectus supplement filed with the Securities and Exchange Commission. Weagreed to pay the Agents a cash commission of 3.0% of the aggregate gross proceeds from each sale of shares under the Sales Agreement. Through December31, 2017 we sold 598,276 shares of common stock and received net proceeds of $1.1 million under the Sales Agreement and thereafter during January andFebruary 2018 we sold 2.2 million shares of common stock for additional net proceeds of $4.0 million. During 2018 we also sold privately in at the markettransactions an aggregate of 15,725,291 shares of common stock for gross proceeds of approximately $22.0 million.As we require additional funds, we may seek to fund our operations through the sale of additional equity securities, debt financing and strategiccollaboration agreements. We cannot be sure that additional financing from any of these sources will be available when needed or that, if available, theadditional financing will be obtained on terms favorable to us or our stockholders. If we raise additional funds by selling shares of our capital stock, theownership interest of our current stockholders will be diluted. If we are unable to obtain additional funds on a timely basis or on terms favorable to us, wemay be required to cease or reduce further commercialization of the Argus II System, to cease or reduce certain research and development projects, to sellsome or all of our technology or assets or business units or to merge all or a portion of our business with another entity.Risks Related to Our Business and IndustryWe have incurred operating losses since inception and may continue to incur losses for the foreseeable future.We have had a history of operating losses and we expect that operating losses will continue into the near term. Although we have had sales of the ArgusII product, these limited sales have not been sufficient to cover our operating expenses. Our ability to generate positive cash flow will also hinge on ourability to correctly price our product to our markets, expand the use of the Argus II System, develop the Orion visual prosthesis and obtain government andprivate insurance reimbursement. As of December 31, 2018 we had total stockholders’ equity of $3.1 million and an accumulated deficit of $269.5 million.We cannot assure you that we will be profitable even if we successfully commercialize our products. Failure to become and remain profitable may adverselyaffect the market price of our common stock and our ability to raise capital and continue operations.Our business is subject to international economic, political and other risks that could negatively affect our results of operations or financial position.We derive a significant portion of our revenues from Europe, and we anticipate that revenue from Europe and other countries outside the US willincrease. Accordingly, our operations are subject to risks associated with doing business internationally, including: •currency exchange variations, •extended collection timelines for accounts receivable, •greater working capital requirements, •multiple legal frameworks and unexpected changes in legal and regulatory requirements, •the need to ensure compliance with the numerous regulatory and legal requirements applicable to our business in each of these jurisdictions andto maintain an effective compliance program to ensure compliance with these requirements,24 •political changes in the foreign governments impacting health policy and trade, •tariffs, export restrictions, trade barriers and other regulatory or contractual limitations that could impact our ability to sell or develop ourproducts in certain foreign markets, •trade laws and business practices favoring local competition, and •adverse economic conditions, including the stability and solvency of business financial markets, financial institutions and sovereign nations andthe healthcare expenditure of domestic or foreign nations.The realization of any of these or other risks associated with operating in Europe or other non-US countries could have a material adverse effect on ourbusiness, results of operations or financial condition.We are subject to stringent domestic and foreign medical device regulation and any unfavorable regulatory action may materially and adverselyaffect our financial condition and business operations.Our products, development activities and manufacturing processes are subject to extensive and rigorous regulation by numerous government agencies,including the FDA and comparable foreign agencies. To varying degrees, each of these agencies monitors and enforces our compliance with laws andregulations governing the development, testing, manufacturing, labeling, marketing, distribution, and the safety and effectiveness of our medical devices.The process of obtaining marketing approval or clearance from the FDA and comparable foreign bodies for new products, or for enhancements, expansion ofthe indications or modifications to existing products, could: •take a significant, indeterminate amount of time, •result in product shortages due to regulatory delays, •require the expenditure of substantial resources, •involve rigorous pre-clinical and clinical testing, and possibly post-market surveillance, •involve modifications, repairs or replacements of our products, •require design changes of our products, •result in limitations on the indicated uses of our products, and •result in our never being granted the regulatory approval we seek.Any of these occurrences that we might experience will cause our operations to suffer, harm our competitive standing and result in further losses thatadversely affect our financial condition.We have ongoing responsibilities under FDA and international regulations, both before and after a product is commercially released. For example, weare required to comply with the FDA’s Quality System Regulation (QSR), which mandates that manufacturers of medical devices adhere to certain qualityassurance requirements pertaining among other things to validation of manufacturing processes, controls for purchasing product components, anddocumentation practices. As another example, the Medical Device Reporting regulation requires us to provide information to the FDA whenever there isevidence that reasonably suggests that a device may have caused or contributed to a death or serious injury or, that a malfunction occurred which would belikely to cause or contribute to a death or serious injury upon recurrence. Compliance with applicable regulatory requirements is subject to continual reviewand is monitored rigorously through periodic inspections by the FDA. If the FDA were to conclude that we are not in compliance with applicable laws orregulations, or that any of our medical devices are ineffective or pose an unreasonable health risk, the FDA could ban such medical devices, detain or seizesuch medical devices, order a recall, repair, replacement, or refund of such devices, or require us to notify health professionals and others that the devicespresent unreasonable risks of substantial harm to the public health. The FDA has been increasing its scrutiny of the medical device industry and thegovernment is expected to continue to scrutinize the industry closely with inspections and possibly enforcement actions by the FDA or other agencies.Additionally, the FDA may restrict manufacturing and impose other operating restrictions, enjoin and restrain certain violations of applicable law pertainingto medical devices and assess civil or criminal penalties against our officers, employees, or us. Any adverse regulatory action, depending on its magnitude,may restrict us from effectively manufacturing, marketing and selling our products. In addition, negative publicity and product liability claims resulting fromany adverse regulatory action could have a material adverse effect on our financial condition and results of operations.The number of preclinical and clinical tests that will be required for regulatory approval varies depending on the disease or condition to be treated, thejurisdiction in which we are seeking approval and the regulations applicable to25that particular medical device. Regulatory agencies, including those in the US, Canada, Europe and other countries where medical devices are regulated, candelay, limit or deny approval of a product for many reasons. For example, •a medical device may not be safe or effective, •regulatory agencies may interpret data from preclinical and clinical testing differently than we do, •regulatory agencies may not approve our manufacturing processes, •regulatory agencies may conclude that our device does not meet quality standards for durability, long-term reliability, biocompatibility,electromagnetic compatibility, electrical safety, and •regulatory agencies may change their approval policies or adopt new regulations.The FDA may make requests or suggestions regarding conduct of our clinical trials, resulting in an increased risk of difficulties or delays in obtainingregulatory approval in the US. Any of these occurrences could prove materially harmful to our operations and business.Our revenue from sales of Orion will be dependent upon the pricing and reimbursement guidelines adopted in each country and if pricing andreimbursement levels are inadequate to achieve profitability our operations will suffer.Our financial success is dependent on our ability to price our products in a manner acceptable to government and private payers while still maintainingour profit margins. Numerous factors that may be beyond our control may ultimately impact our pricing of Orion and determine whether we are able to obtainreimbursement or reimbursement at adequate levels from governmental programs and private insurance. If we are unable to obtain reimbursement or ourproduct is not adequately reimbursed, we will experience reduced sales, our revenues likely will be adversely affected, and we may not become profitable.Obtaining reimbursement approvals is time consuming, requires substantial management attention, and is expensive. Our business will be materiallyadversely affected if we do not receive approval for reimbursement of Orion under government programs and from private insurers on a timely or satisfactorybasis. Limitations on coverage could also be imposed at the local Medicare Administrative Contractor level or by fiscal intermediaries in the US and byregional, or national funding agencies in Europe. Our business could be materially adversely affected if the Medicare program, local Medicare AdministrativeContractors or fiscal intermediaries were to make such a determination and deny, restrict or limit the reimbursement of Orion. Similarly in Europe thesegovernmental and other agencies could deny, restrict or limit the reimbursement of Orion at the hospital, regional or national level. Our business also couldbe adversely affected if surgeons and the facilities within which they operate are not adequately reimbursed by Medicare and other funding agencies for thecost of the procedure in which they implant the Orion on a basis satisfactory to the administering surgeons and their facilities. If the local contractors thatadminister the Medicare program and other funding agencies are slow to reimburse surgeons or provider facilities for the Argus II System, the surgeons andfacilities may delay their payments to us, which would adversely affect our working capital requirements. Also if the funding agencies delay reimbursementpayments to the hospitals, any increase to their working capital requirements could reduce their willingness to treat blind patients who wish to have ourOrion devices implanted. If reimbursement for our products is unavailable, limited in scope or amount, or if pricing is set at unsatisfactory levels, our businesswill be materially harmed.Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limitthe commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any. In order to obtain marketing approval for Orion we must demonstrate the safety and efficacy of Orion through clinical trials as well as additionalsupporting data. If Orion is associated with undesirable side effects in clinical trials or have characteristics that are unexpected, we may need to interrupt,delay or abandon Orion’s development, cause it to have reduced functionality, or limit development to more narrow uses or subpopulations in which theundesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. We are conducting at UCLAand Baylor a six subject initial feasibility clinical study of Orion, but we cannot guarantee that any positive results in this limited trial will successfullytranslate to a pivotal clinical trial. It is not uncommon to observe results in human clinical trials that are unexpected based on limited trials testing, and manyproduct candidates fail in large clinical trials despite promising limited clinical trial results. Moreover, clinical data is often susceptible to varyinginterpretations and analyses, and many companies that have believed their product candidates performed26satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval for their products. No assurance can be given thatwe will not encounter similar results in our Orion trials. Human subjects in our clinical trials may suffer significant adverse events, tolerability issues or other side effects associated with the surgicalimplantation, chronic implantation, and chronic use of the Orion device. These events include, but are not limited to, the following (events that are alsoanticipated during or following explantation of the Orion device are identified with an asterisk (*)): intracranial hemorrhage*; subcutaneous hematoma*;vascular injury causing stroke or hemorrhage (e.g. injury to the superior sagittal sinus or posterior cerebral artery perforators)*; hydrocephalus*; intracranialhypotension or cerebrospinal fluid (CSF) leak*; headache or pain in the head, including deep pain*; tingling at the implant site*; brain edema*; infection*;meningitis*; implant site pain, swelling, discharge or effusion*; suture-related complications or stitch abscess*; skin erosion on and/or around the implantsite; adverse tissue reaction to the implant; tissue damage at the implant/explant site*; cranial defect/bone damage*; decline in residual vision*;dizziness/syncope*; foreign body sensation at the implant site*; activation of motor or sensory neurons (e.g., muscle twitch); clinically symptomaticseizure*; development of epilepsy; coma*; death*; psychiatric events, including but not limited to mood changes, depression, suicidality, and psychosis*;neurological deficit, including but not limited to language (dysphemia), dysesthesias, paresis, parestthesia, visual field, motor deficit (including apraxia), andmemory impairment*; drug hypersensitivity, adverse drug reaction, or therapeutic agent toxicity*; events related to any surgery and general anesthesiaincluding cardiac risks, including stroke/transient ischemic attack, arrhythmia, cardiac arrest, and myocardial infarction*, venous thromboembolic (VTE)disease*; pneumonia*, urinary tract infection*, post-operative delirium*, postoperative constipation*, post-operative vomiting or nausea*, or post-operativefever*; injuries due to falls or bumps; skin irritation or burns; Orion system failure or malfunction; array migration; damage to the Orion electronics case;device interaction including the Orion device may interfere with the proper functioning of other electronic devices and emissions from other electronicequipment may interfere with the proper functioning of the Orion device; and (explant only) inability to remove all or part of the Orion device due to fibrosisor other reason. No assurance can be given that we will not encounter adverse events in our Orion trials. The observed efficacy and extent of light perception and visionrestoration for subjects implanted with Orion in our feasibility study may not be observed in a larger pivotal clinical trial. If general clinical trials of Orionfail to demonstrate efficacy to the satisfaction of regulatory authorities or do not otherwise produce positive results, we may incur additional costs orexperience delays in completing, or ultimately be unable to complete, the development and commercialization of Orion. For example, in June 2018, one subject in our Early Feasibility Study for Orion (“EFS”) experienced a seizure while in the clinic when we wereevaluating a specific video stimulation algorithm. The seizure resolved quickly with medication and the subject was released from the clinic without need forhospitalization or further treatment. The subject was allowed to continue using the Orion device after the serious adverse event was reviewed by a safetycommittee for the study and clinicians at the implanting institution. In addition, for example, in January 2019 we observed higher impedance levels on 11 of 60 electrodes with the first EFS subject implanted with theOrion device in January 2018. As a result, some of these electrodes no longer generate a phosphene, or observable spot of light, for the subject. The subjectcontinues to use the device and is continuing to participate in the clinical study. Mechanical and software safeguards are built into the device to avoidexcessive electrical stimulation and, as a result, the higher impedance levels do not pose any known safety risks to the subject. We are currently investigatingthe possible cause(s) for the higher impedance levels, including any combination of the following: potential manufacturing defects, damage due to improperor excessive handling of the device, materials chosen for the design, and related processes. While our first subject has been implanted with the device for 12.5months, one subject for 11.5 months and 4 subjects have been implanted for 10 months or less, we currently have no indication that the issue exists with anyof the Orion devices implanted in each of the other five EFS subjects. Prior to initiation of EFS, we subjected six Orion implants to accelerated aging testsand had no failures for what was the equivalent of up to 6.5 years. We cannot provide any assurance that we will not experience similar or other issues withany of the implanted Orion devices, be able to determine the root cause of the issue or to ascertain whether the issue is isolated or systemic in nature.Additional testing, investigation, design changes or mitigation activities may delay our plans to conduct additional clinical studies for Orion and/or ourmarketing approval and may have a material adverse effect on our business. 27If device defects, significant adverse events or other side effects are observed in any of our future clinical trials, we may have difficulty recruitingsubjects to the clinical trial, subjects may drop out of our trial, or we may be required to abandon the trial or our development efforts of that productcandidate altogether. We, the FDA or other applicable regulatory authorities may suspend clinical trials of Orion at any time for various reasons, including abelief that subjects in such trials are being exposed to unacceptable health risks. Devices developed in the prosthesis industry that initially showed promisein early-stage studies have later been found to cause side effects that prevented their further development. Even if the side effects do not preclude Orion fromobtaining or maintaining marketing approval, undesirable side effects may inhibit market acceptance of the approved product due to its actual or perceivedsafety and tolerability profile. Any of these developments could materially harm our business, financial condition and prospects. Should Orion obtain marketing approval, adverse effects associated with it may also develop after such approval and could lead to requirements forconducting additional clinical safety trials, placing additional warnings in the labeling, imposing significant restrictions on Orion, or withdrawing the Orionfrom the market while further incurring attendant costs of explants and exposure to litigation. We cannot predict whether Orion will cause significant adverseeffects in humans that would preclude or lead to the revocation of regulatory approval. However, any such event, were it to occur, would cause substantialharm to our business and financial condition and would result in the diversion of our management’s attention.We are also subject to stringent government regulation in European and other foreign countries, which could delay or prevent our ability to sell ourproducts in those jurisdictions.We intend to pursue market authorizations for the Argus II System and other product candidates in additional jurisdictions. For us to market ourproducts in Europe and some other international jurisdictions, we and our distributors and agents must obtain required regulatory registrations or approvals.The approval procedure varies among countries and jurisdictions and can involve additional testing, and the time and costs required to obtain approval maydiffer from that required to obtain an approval by the FDA. Approval by the FDA does not ensure approval by regulatory authorities in other countries orjurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or jurisdictionsor by the FDA. Violations of foreign laws governing use of medical devices may lead to actions against us by the FDA as well as by foreign authorities. Wemust also comply with extensive regulations regarding safety, efficacy and quality in those jurisdictions. We may not be able to obtain all the requiredregulatory registrations or approvals, or we may be required to incur significant costs in obtaining or maintaining any regulatory registrations or approvals wereceive. Delays in obtaining any registrations or approvals required for marketing our products, failure to receive these registrations or approvals, or futureloss of previously obtained registrations or approvals would limit our ability to sell our products internationally. For example, international regulatorybodies have adopted various regulations governing product standards, packaging requirements, labeling requirements, import restrictions, tariff regulations,duties and tax requirements. These regulations vary from country to country. In order to sell our products in Europe, we must maintain our ISO 13485:2003certification and CE mark certification, which is an international symbol of quality and compliance with applicable European medical device directives.Failure to maintain the ISO 13485:2003 certification or CE mark certification or other international regulatory approvals would prevent us from selling insome countries in Europe and elsewhere. The failure to obtain these approvals could harm our business materially.Even if we obtain clearance or approval to sell our products, we are subject to ongoing requirements and inspections that could lead to therestriction, suspension or revocation of our clearance.We, as well as any potential collaborative partners such as distributors, will be required to adhere to applicable FDA regulations regarding goodmanufacturing practice, which include testing, control, and documentation requirements. We are subject to similar regulations in foreign countries. Even ifregulatory approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to theconditions of approval or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. Ongoingcompliance with good manufacturing practice and other applicable regulatory requirements is strictly enforced in the United States through periodicinspections by state and federal agencies, including the FDA, and in international jurisdictions by comparable agencies. Failure to comply with theseregulatory requirements could result in, among other things, warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partialsuspension of production, failure to obtain premarket clearance or premarket28approval for devices, withdrawal of approvals previously obtained, and criminal prosecution. The restriction, suspension or revocation of regulatoryapprovals or any other failure to comply with regulatory requirements would limit our ability to operate and could increase our costs.The CE marking regulations are subject to a significant effort to strengthen the regulatory regime for medical devices which, if adopted, will makeclearance process more time consuming and costly for us to obtain access to and continue to market within the European markets.We are subject to an annual audit of compliance with the rules necessary to support our CE Mark. In April 2017 the European Commission adopted anew regulatory scheme that imposes significant additional obligations on medical device companies. As such, devices with a current CE marking have tocomply with additional, more challenging regulatory obligations. The changes being made to the regulations include stricter requirements for clinicalevidence and pre-market assessment of safety and performance, new classifications to indicate risk levels, requirements for third party testing by governmentaccredited groups for some types of medical devices, and tightened and streamlined quality management system assessment procedures. With the additionalprovisions adopted by the European Parliament, the European Medicines Agency (EMA) may be involved in regulation of some types of medical devices inthe qualification and monitoring of notified bodies (NBs), and enhancing the roles of other bodies, including a new Medical Devices Coordination Group(MDCG). The European Parliament’s revisions also impose enhanced competence requirements for NBs and “special notified bodies” (SNBs) for specificcategories of devices, such as implantable devices. These changes are anticipated to result in stricter conformity assessment procedures. The medical deviceindustry anticipates that there will be significant changes under these initiatives to the regulation of medical devices which will increase the time and costsfor obtaining CE marking. We will be audited to this new standard in 2020.Our CE Mark registration must be renewed on a periodic basis. Our current CE Mark registration will expire on September 1, 2019, if not renewed. Ifwe fail to successfully renew our CE Mark registration, we will not be able to sell Argus II in most international markets after September 1, 2019. Further, theMedical Device Single Audit Program (MDSAP) is a new multi-national standard adopted by Australia, Brazil, Canada, Japan and the European Union.MDSAP may impose a higher compliance burden than CE Mark through more rigorous audit requirements. If we do not comply with the new MDSAPstandard, we will not be able to sell Argus II in Canada after December 31, 2019.We have no large-scale manufacturing experience, which could limit our growth.Our limited manufacturing experience may not enable us to make products in the volumes that would be necessary for us to achieve a significantamount of commercial sales. Our product involves new and technologically complex materials and processes and we currently experience low yields on ourmanufacturing process. As we move from making small quantities of our product for clinical trials to larger quantities for greater commercial distribution, wemust develop new manufacturing techniques and processes that allow us to scale production. We may not be able to establish and maintain reliable, efficient,full scale manufacturing at commercially reasonable costs in a timely fashion. Difficulties we encounter in manufacturing scale-up, or our failure toimplement and maintain our manufacturing facilities in accordance with good manufacturing practice regulations, international quality standards or otherregulatory requirements, could result in a delay or termination of production. To date, our manufacturing activities have largely been to provide units forclinical testing and commercial sales of the Argus II System. We may face substantial difficulties in establishing and maintaining manufacturing for ourproducts at a larger commercial scale and those difficulties may impact the quality of our products and adversely affect our ability to increase sales.To establish our sales and marketing infrastructure, we will need to grow the size of our organization, and we may experience delays or otherdifficulties in managing this growth.As our development and commercialization plans and strategies evolve, we will need to expand the size of our employee base for managerial,operational, sales, marketing, financial and other resources. Future growth would impose significant added responsibilities on members of management,including the need to identify, recruit, maintain, motivate and integrate additional employees. Our management team may have to use a substantial amountof time to manage these growth activities. Our future financial performance and our ability to commercialize the Argus II System and our other productcandidates and compete effectively will depend, in part, on our ability timely and effectively to manage any future growth and related costs. We may not beable to effectively manage a rapid pace of growth and timely implement improvements to our management infrastructure and control systems.29We may acquire additional businesses or form strategic alliances in the future, and we may not realize the benefits of such acquisitions or alliances.We may acquire additional businesses or products, form strategic alliances or create joint ventures with third-parties that we believe will complement oraugment our existing business. If we acquire businesses with promising markets or technologies, we may not be able to realize the benefit of acquiring suchbusinesses if we are unable to successfully integrate them with our existing operations and company culture. We may have difficulty in developing,manufacturing and marketing the products of a newly acquired company that enhances the performance of our combined businesses or product lines torealize value from expected synergies. We cannot assure that, following an acquisition, we will achieve the revenues or specific net income that justifies theacquisition.Our ability to utilize and benefit from our net operating loss carryforwards and certain other tax attributes may be limited.As of December 31, 2018, we had federal and state of California income tax net operating loss carryforwards, which may be applied to future taxableincome, of approximately $69.4 million and $42.5 million, respectively. To the extent that we continue to generate taxable losses, unused losses will carryforward to offset future taxable income, if any, until these unused losses expire. However, we may be unable to use these losses to offset taxable incomebefore our unused losses expire at various dates that range from 2035 through 2038 for federal net operating losses and from 2033 through 2038 for state netoperating losses. Under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change,”generally defined as a greater than 50 percentage point change (by value) in its equity ownership over a three-year period, the corporation’s ability to use itspre-change net operating loss, or NOL, carryforwards to offset its post-change taxable income may be limited. Limitations may also apply to the utilization ofother pre-change tax attributes as a result of an ownership change.We experienced an “ownership change” within the meaning of Section 382(g) of the Internal Revenue Code of 1986, as amended, during the secondquarter of 2017. The ownership change will subject our net operating loss carryforwards to an annual limitation, which will significantly restrict its ability touse them to offset taxable income in periods following the ownership change. In general, the annual use limitation equals the aggregate value of our stock atthe time of the ownership change multiplied by a tax-exempt interest rate specified by the Internal Revenue Service. We have analyzed the availableinformation to determine the amount of the annual limitation. Based on information available us, the 2017 limitation is estimated to range between be $1.4million and $3.7 million annually. In total, we estimate that the 2017 ownership change will result in approximately $120 million and $56 million of federaland state net operating loss carryforwards expiring unused.Risks Related to the Securities Market, and Ownership of Our Common StockThe price of our common stock has been and may continue to be volatile and the value of your investment could decline.Medical technology stocks have historically experienced high levels of volatility. The trading prices of our common stock have fluctuated and maycontinue to fluctuate substantially. The market price of our common stock may be higher or lower than the price you pay, depending on many factors, someof which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose substantially all or part ofyour investment in our common stock. Factors that could cause fluctuations in the trading price of our common stock include: •announcements of new offerings, products, services, therapies, treatments or technologies, commercial relationships, acquisitions or other eventsby us or our competitors, •challenges to our patents and the patents and intellectual property that we license, •United States and European approvals or denials of our products, •price and volume fluctuations in the overall stock market from time to time, •significant volatility in the market price and trading volume of medical device or technology companies in general, •fluctuations in the trading volume of our shares or the size of our public float, •actual or anticipated changes or fluctuations in our results of operations, •whether our results of operations meet the expectations of securities analysts or investors, •actual or anticipated changes in the expectations of investors or securities analysts, •litigation involving us, our industry, or both, •regulatory developments in the United States, foreign countries, or both, •general economic conditions and trends,30 •major catastrophic events, •sales of large blocks of our common stock, •departures of key employees, or •an adverse impact on our business from any of the other risks cited herein.In addition, if the market for medical technology stocks or the stock market, in general, experiences a loss of investor confidence, the trading price ofour common stock could decline for reasons unrelated to our business, results of operations or financial condition. The trading price of our common stockmight also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. In the past, following periodsof volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. If our stock price isvolatile, we may become the target of securities litigation. Securities litigation could result in substantial costs and divert our management’s attention andresources from our business. This could have a material adverse effect on our business, results of operations and financial condition.We may be unable to comply with the applicable continued listing requirements of The Nasdaq Capital Market. Our common stock is currently listed on The Nasdaq Capital Market, or Nasdaq. In order to maintain this listing, we must satisfy minimum financialand other continued listing requirements and standards, including a minimum closing bid price requirement for our common stock of $1.00 per share. InJanuary 2019, we received a letter from The Nasdaq Stock Market advising us that for 30 consecutive trading days preceding the date of the letter, the bidprice of our common stock had closed below the $1.00 per share minimum required for continued listing on The Nasdaq Capital Market pursuant to listingrules, and therefore we could become subject to delisting if we did not regain compliance within the compliance period (or the compliance period as may beextended). There can be no assurance that we will continue to be able to comply with the applicable listing standards. Although Nasdaq may provide us witha compliance period in which to regain compliance with the minimum bid price requirement, we cannot assure you that we would be able to regaincompliance within the period provided by Nasdaq. In order to regain compliance with such requirement, the closing bid price of our common stock wouldneed to meet or exceed $1.00 per share for at least 10 consecutive business days during the compliance period. If we were not able to regain compliancewithin the allotted compliance period for this requirement or any other applicable listing standard, including any extensions that may be granted by Nasdaq,our shares of common stock would be subject to delisting. In the event that our common stock is delisted from Nasdaq and is not eligible for quotation orlisting on another market or exchange, trading of our common stock could be conducted only in the over-the-counter market or on an electronic bulletinboard established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, our ability to fund our business plan may beadversely affected and it could become more difficult to dispose of or obtain accurate price quotations for our common stock and there would likely also be areduction in our coverage by securities analysts and the news media, which could cause the price of our common stock to decline further.Sales of substantial amounts of our common stock in the public or private markets could reduce the price of our common stock and may dilute yourvoting power and ownership interest in us.Sales of a substantial number of shares of our common stock in the public or private markets, or the perception that these sales could occur, as well assales of shares by directors or officers, which have occurred or which may occur from time to time, could adversely affect the market price of our commonstock and may make it more difficult for you to sell your common stock at a time and price that you deem appropriate. Entities controlled by Gregg Williams, our Chairman of the Board, have the ability to influence or control the outcome of matters submitted forstockholder approval, may limit your ability to influence outcomes of director elections and may have interests that differ from those of our otherstockholders. As of February 22, 2019, entities controlled and beneficially owned by Gregg Williams, our Chairman of the Board, own of record an aggregate ofapproximately 62.6% of the outstanding shares of our common stock (or 73.0% after giving effect to Mr. Williams’ right to acquire beneficial ownership of48,239,184 shares of common stock upon exercise of options or warrants). As a result, Mr. Williams is able to exercise substantial influence over all mattersrequiring stockholder approval, including the election of directors and the approval of significant corporate transactions. Mr. Williams may also haveinterests that differ from other stockholders and he may vote in a manner that is or could be deemed as adverse to interests of other stockholders. His majoritystock ownership could discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company, which in turncould reduce our stock price or prevent our stockholders from realizing a premium over our31stock price. This concentration of voting power may have the effect of deterring, delaying or impeding actions that could be beneficial to other stockholders. We have obtained significant invested amounts from entities affiliated with Mr. Williams, our Chairman of the Board, and if as we seek additionalfunding to support our business Mr. Williams does not participate in our future offerings, we may not be able to raise needed amounts and ouroperations may be adversely affected. During 2016, 2017, 2018 and 2019, we funded our business primarily through the issuance and sale of our securities. We obtainedapproximate proceeds of $9,000,000 in 2016, $10,000,000 in 2017, $10,000,000 in May 2018, $5,000,000 in August 2018, $4,000,000 in October 2018,$3,000,000 in December 2018 and $30,000,000 in February 2019 from the sale of our securities to entities affiliated with Mr. Williams, our Chairman of theBoard, constituting 45.5%, 49.8%, 100%, 100%, 100%, 100% and 86.7% respectively, of amounts received in the offerings we completed. To the extent thatwe may need additional capital we expect that we will seek to fund our operations through public or private equity or debt financings, grants, collaborations,strategic partnerships or other sources. No assurance can be given that Mr. Williams or entities affiliated with him will continue to participate in any offeringsof our securities or that we will be able to obtain additional capital from him. If we are unable to obtain funding on a timely basis, our business and operationsmay be materially and adversely affected.We do not intend to pay dividends for the foreseeable future and, consequently, your ability to achieve a return on your investment will depend onappreciation in the price of our common stock.We have never declared or paid any dividends on our common stock. We intend to retain any earnings to finance the operation and expansion of ourbusiness, and we do not anticipate paying any cash dividends in the future. As a result, you may only receive a return on your investment in our commonstock if the market price of our common stock increases.Future sales and issuances of our equity securities or rights to purchase our equity securities, including pursuant to our equity incentive plans, wouldresult in dilution of the percentage ownership of our stockholders and could cause our stock price to fall.To the extent we raise additional capital by issuing equity securities; our stockholders may experience substantial dilution. We may sell commonstock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell commonstock, convertible securities or other equity securities in more than one transaction, investors may be diluted by subsequent sales. Such sales may also resultin material dilution to our existing stockholders, and new investors could gain rights superior to existing stockholders.The public market for our common stock has been volatile since completion of our initial public offering in November 2014. This volatility mayaffect the ability of our investors to sell their shares as well as the price at which they sell their shares.We completed our initial public offering in November 2014. Since that time, closing prices of our shares have ranged from $0.69 per share to $23.60per share and day-to-day trading often has been volatile. This volatility may continue or increase in the future. The market price for the shares may besignificantly affected by factors such as progress in the development of our technology, progress in our pre-clinical and clinical trials, agreements withresearch facilities or co-development partners, commercialization of our technology, coverage by third party payers, variations in quarterly and yearlyoperating results, general trends in the medical device industry, and changes in FDA and foreign regulations affecting us and our industry. Furthermore, inrecent years the stock market has experienced extreme price and volume fluctuations that are unrelated or disproportionate to the operating performance ofthe affected companies. Those broad market fluctuations may adversely affect the market price of our common stock.Substantial future sales of shares of our common stock in the public market could cause our stock price to fall.If our common stockholders (including those persons who may become common stockholders upon exercise of our options or warrants) sell substantialamounts of our common stock, or the public market perceives that stockholders might sell substantial amounts of our common stock, the market price of ourcommon stock could decline significantly. Such sales also might make it more difficult for us to sell equity or equity-related securities in the future at a timeand price that our management deems appropriate.32We have the right to issue shares of preferred stock. If we were to issue preferred stock, it is likely to have rights, preferences and privileges that mayadversely affect the common stock.We are authorized to issue 10,000,000 shares of “blank check” preferred stock, with such rights, preferences and privileges as may be determined fromtime-to-time by our board of directors. Our board of directors is empowered, without stockholder approval, to issue preferred stock in one or more series, andto fix for any series the dividend rights, dissolution or liquidation preferences, redemption prices, conversion rights, voting rights, and other rights,preferences and privileges for the preferred stock. No shares of preferred stock are presently issued and outstanding and we have no immediate plans to issueshares of preferred stock. The issuance of shares of preferred stock, depending on the rights, preferences and privileges attributable to the preferred stock,could adversely reduce the voting rights and powers of the common stock and the portion of our assets allocated for distribution to common stockholders in aliquidation event, and could also result in dilution in the book value per share of our common stock. The preferred stock could also be utilized, under certaincircumstances, as a method for raising additional capital or discouraging, delaying or preventing a change in control of our Company, to the detriment of theholders of our common stock. We cannot assure you that we will not, under certain circumstances, issue shares of our preferred stock.Item 1B. Unresolved Staff CommentsNot applicable.Item 2. PropertiesOur principal office and facilities are located at 12744 San Fernando Road, Suite 400, Sylmar, California 91342, and consists of approximately 45,351rentable square feet at a base rent of approximately $36,600 per month. Our lease expires in February 2022 and grants us an option to extend the lease termfor an additional 60 months period. We believe that these premises are adequate for our foreseeable needs.Our European office is located on the Innovation Park at EPFL, Rue Jean-Daniel Colladon, CH 1015 Lausanne. The lease consists of 180 square metersat a base rent of 8,200 CHF per month, or about $8,161 per month based upon current exchange rates. Our lease is currently monthly with a six month noticerequired for termination, with the Foundation for the Innovation Park at EPFL. As part of our restructuring and staffing reductions we have renegotiated thislease to 94 square meters at a base rent of 3,147 CHF or $3,131 starting on January 1, 2019 based upon current exchange rates.Item 3. Legal ProceedingsWe are not a party to threatened or pending material legal proceedings other than those involving Pixium Vision described in “Risk Factors—RisksRelated to Intellectual Property and Other Legal Matters”.Item 4. Mine Safety DisclosuresNot applicable. 33PART IIItem 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities(a) Market Price, Dividends and Related MattersSecond Sight’s common stock is traded on the Nasdaq Capital Market under the symbol “EYES.” The following table sets forth the high and lowclosing sales prices of our common stock as reported on the Nasdaq Capital Market for the following time periods. High Low Fiscal Year Ended December 31, 2018 First quarter $2.31 $1.49 Second quarter $2.23 $1.48 Third quarter $1.97 $1.51 Fourth quarter $1.82 $0.73 Fiscal Year Ended December 31, 2017 First quarter $2.76 $1.11 Second quarter $1.31 $1.10 Third quarter $1.35 $0.96 Fourth quarter $2.35 $1.06 On March 12, 2019, the closing sales price reported for our common stock was $0.8189 per share, and as of that date there were approximately 106shareholders of record.We have never declared or paid cash dividends on our common stock and do not anticipate paying any dividends in the foreseeable future.The performance graph below compares the cumulative total stockholder return on our common stock with that of the Nasdaq Composite index and theNasdaq Medical Equipment index. The initial public offering price of our common stock was $9.00 per share and the closing price was $19.97 per share onNovember 19, 2014 (the date our common stock first commenced trading on Nasdaq). The chart assumes $100 was invested at the close of the market onNovember 19, 2014 in our common stock, the Nasdaq Composite index and the Nasdaq Medical Equipment index.34Second Sight Medical Products, Inc. Comparison of Total ReturnAmong Second Sight, the Nasdaq Composite Index and the Nasdaq Medical Equipment Index 11/19/14 12/31/14 12/31/15 12/31/16 12/31/17 12/31/18 Second Sight $100.00 $51.38 $29.49 $9.86 $9.56 $4.44 Nasdaq Composite $100.00 $101.39 $108.45 $118.07 $153.06 $147.12 Medical Equipment $100.00 $102.89 $112.51 $119.97 $153.57 $175.95 Use of Proceeds from Financings In March 2017 we completed a Rights Offering to existing stockholders (File No. 333-215463), raising proceeds of approximately $19.7 million net ofcash offering costs, and selling 13,652,341 units, each consisting of one share of common stock and one warrant, at $1.47 per unit. We have used theproceeds to further develop and enhance our products, support operations and for general corporate purposes. In November 2017, we entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley FBR Inc. and H.C. Wainwright &Co., LLC, as agents (“Agents”) pursuant to which we may offer and sell, from time to time through either of the Agents, shares of our common stock having anaggregate offering price as set forth in the Sales Agreement and a related prospectus supplement filed with the Securities and Exchange Commission (File No.333-221228). We agreed to pay the Agents a cash commission of 3.0% of the aggregate gross proceeds from each sale of shares under the Sales Agreement.Through December 31, 2017 we sold 598,276 shares of common stock and received net proceeds of $1.1 million under the Sales Agreement and thereafterduring January and February 2018 we sold 2.2 million shares of common stock for additional net proceeds of $4.0 million. We used these proceeds to furtherdevelop and enhance our products, support operations and for general corporate purposes. We entered into stock purchase agreements on December 12, 2018, October 18, 2018, August 14, 2018 and May 3, 2018 with entities beneficiallyowned by Gregg Williams for the purchase of 3,275,100, 2,467,727, 3,225,807 and 6,756,757 shares respectively of common stock priced at $0.916, $1.62,$1.55 and $1.48 per share respectively, the last reported sale price of the common stock on each purchase date. Gregg Williams is Chairman of the Board ofDirectors of Second Sight. These placements of common stock provided net proceeds of $3.0 million, $4.0 million, $5.0 million and $10.0 millionrespectively. We used these proceeds to further develop and enhance our products, support operations and for general corporate purposes. 35Item 6. Selected Financial DataThe following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” and our consolidated financial statements and the notes to those consolidated financial statements. The consolidated statementsof operations data set forth below for the years ended December 31, 2018, 2017, and 2016 and the consolidated balance sheet data as of December 31, 2018and 2017 are derived from, and are qualified in their entirety by reference to, our audited consolidated financial statements included elsewhere in this Form10-K. The consolidated balance sheet data as of December 31, 2016 and 2015 and the consolidated statements of operations data for the year endedDecember 31, 2015 is derived from the audited consolidated financial statements not included herein, but which were previously filed with the Securities andExchange Commission. Fiscal Years Ended December 31, (in thousands, except per share data) 2018 2017 2016 2015 Net sales $6,896 $7,964 $3,985 $8,950 Cost of sales 4,888 5,117 10,076 5,293 Gross profit (loss) 2,008 2,847 (6,091) 3,657 Operating expenses: Research and development, net of grants 10,005 7,893 5,347 3,036 Clinical and regulatory 4,600 3,062 2,703 3,510 Selling and marketing 11,336 9,569 8,989 8,935 General and administrative 10,692 10,932 10,080 8,223 Restructuring charges 555 — — — Total operating expenses 37,188 31,456 27,119 23,704 Loss from operations (35,680) (28,609) (33,210) (20,047)Interest income 86 93 31 2 Other income, net — — — 27 Net loss $(35,094) $(28,516) $(33,179) $(20,018)Net loss per common share – Basic and diluted $(0.53) $(0.53) $(0.84) $(0.56)Weighted average shares outstanding – Basic and diluted 66,378 54,152 39,554 35,637 As of December 31, (in thousands) 2018 2017 2016 2015 Cash and cash equivalents $4,471 $7,839 $10,875 $15,960 Working capital $2,022 $6,550 $9,620 $18,782 Total assets $10,682 $14,497 $16,810 $28,245 Stockholders’ equity $3,084 $7,882 $11,148 $20,263 36Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from thoseanticipated in these forward-looking statements as a result of many factors. The consolidated results of operations for the years ended December 31, 2018,2017 and 2016 are not necessarily indicative of the results that may be expected for any future period. The following discussion should be read inconjunction with the consolidated financial statements and the notes thereto included in Part IV, Item 15 of this Form 10-K and in conjunction with the “RiskFactors” included in Part I, Item 1A of this Form 10-K.Business OverviewSecond Sight Medical Products, Inc. (NASDAQ: EYES) was founded in 1998 and develops, manufactures and markets implantable visual prostheticsthat are intended to deliver useful artificial vision to blind individuals. We are a recognized global leader in neuromodulation devices for blindness, and arecommitted to developing new technologies to treat the broadest population of sight-impaired individuals.Leveraging our 20 years of experience in neuromodulation for vision, we are developing the Orion® Visual Cortical Prosthesis System (“Orion”), animplanted cortical stimulation device intended to provide useful artificial vision to individuals who are blind due to a wide range of causes, includingglaucoma, diabetic retinopathy, optic nerve injury or disease and eye injury. Orion is intended to convert images captured by a miniature video cameramounted on glasses into a series of small electrical pulses. The device is designed to bypass diseased or injured eye anatomy and to transmit these electricalpulses 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 oflight. A six-subject early feasibility study of the Orion device is currently underway at the Ronald Reagan UCLA Medical Center in Los Angeles (“UCLA”)and Baylor College of Medicine in Houston (“Baylor”). No published in-human data is available yet for the Orion system. We anticipate enrolling additionalfeasibility subjects in 2019 while simultaneously negotiating the clinical and regulatory pathway to commercialization with the FDA as part of theBreakthrough Devices Program. Our principal offices are located in Los Angeles, California. We also have an office in Lausanne, Switzerland, that manages our commercial and clinicaloperations in Europe, the Middle East and Asia. Our major corporate, clinical and regulatory milestones include: ●In 1998, Second Sight was founded. ●In 2002, we commenced clinical trials in the US for our prototype product, the Argus I retinal prosthesis. ●In 2007, we commenced clinical trials in the US for the Argus II, which later became our first commercial product. ●In 2011, we received marketing approval in Europe (CE Mark) for the Argus II. ●In 2013, we received marketing approval from the FDA in the U.S. for the Argus II. ●In 2014, we launched the Argus II in the US, completed our initial public offering (“IPO”), and began trading on NASDAQ under the symbol“EYES.” ●In January 2016, we successfully implanted and activated a wireless visual cortical prosthesis in a human. ●In November 2017, the FDA granted Breakthrough Devices Program designation for the Orion ●In 2018, we reached a milestone by implanting our 300th patient with the Argus II. ●In the first quarter of 2018, first-in-human Orion was successfully implanted, activated and is being tested at the Ronald Reagan UCLAMedical Center. ●In September 2018, we were awarded a $1.6 million grant from National Institutes of Health to support Orion clinical development (with theintent to fund $6.3 million over five years subject to annual review and approval). Our current product, the Argus ® II Retinal Prosthesis System (“Argus II”), treats outer retinal degenerations, such as retinitis pigmentosa, also referredto as RP. RP is a hereditary disease, affecting an estimated 1.5 million people worldwide including about 100,000 people in the United States, that causes aprogressive degeneration of the light-sensitive cells of the retina, leading to significant visual impairment and ultimately blindness. The Argus II is the onlyretinal prosthesis approved in the United States by the Food and Drug Administration (“FDA”), and was the first approved retinal prosthesis in the world. Asubset of these patients would be eligible for the Argus II since the approved baseline vision for the Argus II is worse than legally blind (20/200). Wecommissioned 3rd party market37research to estimate the size of the RP market that resulted in an estimate of approximately 1,500 patients in the US with advanced RP that could be treatedwith the Argus II given the eligibility criteria of our label. The Argus II system provides an artificial form of vision that differs from the vision of people with normal sight. It does not restore normal vision andthere is no clear evidence that it can slow or reverse the progression of the disease. The majority of patients receive a significant benefit from the Argus II,however results can vary and some patients report receiving little or no benefit. By creating an artificial form of useful vision in patients who otherwise havetotal sight loss, the Argus II can provide benefits that include: ●restoring independence through a renewed ability to navigate independently in unfamiliar environments; ●improving patients’ orientation and mobility, such as locating doors and windows, avoiding obstacles, and following the lines of a crosswalk; ●allowing patients to feel more connected with people in their surroundings, such as seeing when someone is approaching or moving away; ●providing patients with enjoyment from being “visual” again, such as locating the moon, tracking groups of players as they move around afield, and watching moving streams of lights from fireworks; ●enabling some patients to re-enter the workforce through multiple vocations that become possible because of Argus II; and ●improving patients’ well-being and ability to perform activities of daily living. We began selling the Argus II System in Europe at the end of 2011, Saudi Arabia in 2012, the United States and Canada in 2014, Turkey in 2015, Iran,Taiwan, South Korea and Russia in 2017, and Singapore in 2018. Given the limited addressable market of Argus II, we made the decision in 2018 tomaximize capital efficiency with our Argus commercial and clinical activities and increase our investment of resources with our Orion clinical and R&Dprograms. In October 2018, we announced a restructuring of our international commercial activities and personnel. This restructuring resulted in a decision tono longer support new implants of Argus II in Turkey, Iran, Singapore and Russia. We retained a team that continues to support existing Argus II patients andCenters of Excellence in the remaining international markets. We anticipate that the annual savings from the restructuring will amount to approximately $3.0million per year and we plan to reallocate savings to the Orion program and other related projects. We recognized approximately $0.6 million of pre-taxrestructuring charges in the fourth quarter of fiscal year 2018 in connection with this restructuring, consisting of severance and other employee terminationbenefits, substantially all of which are were settled in cash during the fourth quarter of 2018.We will continue to monitor the efficiency and effectiveness of commercial activities for Argus II and make further changes as needed to ensuresufficient payback on commercial spending while maximizing capital available to support Orion programs. We are actively developing multiple technologies that we believe to be complimentary to artificial vision and could potentially significantly enhancethe Argus II or Orion user experience. In most cases, we collaborate with 3rd party firms to advance and integrate these innovative technologies with ourartificial vision systems. Examples of technologies that are currently researching include: eye tracking, object recognition and localization, thermal imagingand depth-based decluttering. We expect to advance several of these technologies to prototype eyewear suitable for clinical testing in 2019.Currently, after more than 20 years of research and development, more than $200 million of investment and over $34 million of grants awarded insupport of our technology development, we employ over 120 people in the development (research, engineering and clinical), manufacture, andcommercialization of the Argus II System and future products such as Orion.38Capital FundingFrom inception, our operations have been funded primarily through the sales of our common stock and warrants, as well as from the issuance ofconvertible debt, research and clinical grants, and limited product revenue generated from the sale of our Argus II product. During 2016 and 2017 and 2018,we funded our business primarily through: •Issuance of common stock in our rights offering in June 2016, which provided net cash proceeds of $19.5 million. •Issuance of common stock and warrants in our rights offering in March 2017, which provided net cash proceeds of $19.7 million. •Issuance of common stock through our At Market Issuance Sales Agreement during the fourth quarter of 2017 and first quarter of 2018, whichprovided $5.1 million of net cash proceeds. •Issuance of common stock in a stock purchase agreement in May 2018, which provided net cash proceeds of $10.0 million. •Issuance of common stock in a stock purchase agreement in August 2018, which provided net cash proceeds of $5.0 million. •Issuance of common stock in a stock purchase agreement in October 2018, which provided net cash proceeds of $4.0 million. •Issuance of common stock in a stock purchase agreement in December 2018, which provided net cash proceeds of $3.0 million. •Revenue of $6.9 million, $8.0 million and $4.0 million, for the years ended December 31, 2018, 2017 and 2016, respectively, generated by salesof our Argus II product. We entered into stock purchase agreements on December 12, 2018, October 18, 2018, August 14, 2018 and May 3, 2018 with entities beneficiallyowned by Gregg Williams for the purchase of 3,275,100, 2,467,727, 3,225,807 and 6,756,757 shares respectively of common stock priced at $0.916, $1.62,$1.55 and $1.48 per share respectively, the last reported sale price of the common stock on each purchase date. Gregg Williams is Chairman of the Board ofDirectors of Second Sight. These placements of common stock provided net proceeds of $3.0 million, $4.0 million, $5.0 million and $10.0 millionrespectively. No warrants or discounts were provided and no placement agent or investment banking fees were incurred in connection with these transactions.The shares issuable to the purchasers under the Securities Purchase Agreements were issued pursuant to an exemption from registration under Rule 506 ofRegulation D, which is promulgated under the Securities Act of 1933. We relied on this exemption from registration based in part on representations made bythe purchasers. In a Rights Offering completed on February 22, 2019 we sold approximately 47.8 million units, each priced at $0.724 for gross proceeds ofapproximately $34.6 million. Each unit consisted of one share and one immediately exercisable warrant having a strike price of $1.47 per share. Entitiescontrolled by Gregg Williams, our Chairman of the Board of Directors, acquired approximately 41.4 million units in the offering for an aggregate investmentof approximately $30 million. In November 2017, we entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley FBR Inc. and H.C. Wainwright &Co., LLC, as agents (“Agents”) pursuant to which we may offer and sell, from time to time through either of the Agents, shares of our common stock having anaggregate offering price as set forth in the Sales Agreement and a related prospectus supplement filed with the SEC. We agreed to pay the Agents a cashcommission of 3.0% of the aggregate gross proceeds from each sale of shares under the Sales Agreement. During December 2017, we issued 598,276 shares ofcommon stock for gross proceeds of approximately $1.2 million as part of our Sales Agreement. During January and February 2018, we sold 2.2 millionshares of common stock which provided net proceeds of $4.0 million under the Sales Agreement. No shares have been sold since February 2018 under theSales Agreement.We are subject to the risks and uncertainties associated with a business with one product line and limited commercial product revenues, includinglimitations on our operating capital resources and uncertain demand for our products. We have incurred recurring operating losses and negative operatingcash flows since inception, and we expect to continue to incur operating losses and negative operating cash flows for the foreseeable future. Based on ourcurrent plans, we have sufficient funds to continue operating our business at current levels for at least twelve months from the date of issuance of this report.However, our operating plan may change as a result of many factors currently39unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity offerings or debt financings, grants,collaborations, strategic partnerships or other sources. However, we may be unable to raise additional capital or enter into such other arrangements whenneeded on favorable terms or at all. If we are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay or discontinue oneor more of our research or development programs or the commercialization Argus II or any other approved product candidates, or we may be unable to expandour operations, maintain our current organization and employee base or otherwise capitalize on our business opportunities, as desired, which could materiallyaffect our business, financial condition and results of operations.Insurance ReimbursementObtaining reimbursement from governmental and private insurance companies is critical to our commercial success. Due to the price of the Argus IIsystem, our sales would be limited without the availability of third party reimbursement. In the US, coding, coverage, and payment are necessary for thesurgical procedure and Argus II system to be reimbursed by payers. Coding has been established for the device and the surgical procedure. Coverage andpayment vary by payer. The majority of Argus II patients are eligible for Medicare, and coverage is primarily provided through traditional Medicare,sometimes referred to as Medicare Fee-for-Service (“FFS”) or Medicare Advantage. A small percentage of patients are covered by commercial insurers. •Medicare FFS patients – Coverage is determined by Medicare Administrative Contractors (“MACs”) that administer various geographic regionsof the US The Argus II is authorized for coverage, when medically necessary in eight of 12 MAC jurisdictions (comprising 31 states). EffectiveJanuary 1, 2018, the Centers for Medicare and Medicaid Services (“CMS”) established a 2018 national average payment rate of $122,500 forboth the procedure and the Argus II retinal prosthesis system when furnished in a hospital outpatient department. On July 25, 2018 the Centers forMedicare and Medicaid Services (CMS) posted the proposed rule and related proposed rates for the calendar year (CY) 2019. Medicare HospitalOutpatient Prospective Payment Systems (OPPS) and the CY 2019 Ambulatory Surgical Center (ASC) payment system. In these postings, CMSproposed a national average Medicare hospital outpatient rate for CY 2019 of $137,501 for Argus II and the associated surgical implantationprocedure, and a proposed national average ASC rate of approximately $134,225 for the Argus II and related implantation procedure. OnNovember 2, 2018 CMS established a final rule OPPS payment rate of $152,500 and ASC payment rate of $134,051. •Medicare Advantage patients – Medicare Advantage plans are required to cover the same benefits as those covered by the MAC in thatjurisdiction. For example, if a MAC in a jurisdiction has favorable coverage for the Argus II, then all Medicare Advantage plans in that MACjurisdiction are required to offer the same coverage for the Argus II. Individual hospitals and ASCs may negotiate contracts specific to thatindividual facility, which may include additional separate payment for the Argus II implant system. In addition, procedural payment is variableand can be based on a percentage of billed charges, payment groupings or other individually negotiated payment methodologies. MedicareAdvantage plans may allow providers to confirm coverage and payment for the Argus II procedure in advance of implantation. Since 2015 a largemajority of all Medicare Advantage pre-authorization requests for Argus II procedures were granted. •Commercial insurer patients – Commercial insurance plans make coverage and payment rate decisions independent of Medicare, and contractsare individually negotiated with facility and physician providers. During the year ended December 31, 2018, 38 individuals in the US and Canada were implanted with the Argus II technology. Of these patients, 34were in the US primarily covered by Medicare FFS or Medicare Advantage plans and the remainder had private commercial, Veteran’s Administration orother insurance plan coverage. Four patients in Canada were covered by regional public reimbursement or private funding.We retain employees and utilize consultants with insurance reimbursement expertise dedicated to expanding and enhancing coverage decisions.Currently, eight of 12 Medicare jurisdictions authorize coverage of the Argus II in 31 states, two territories and the District of Columbia when medicallynecessary, including: •CGS (J15 -- Ohio and Kentucky), •Palmetto GBA (JM -- Virginia, (excluding Part B for Arlington and Fairfax counties), West Virginia, North Carolina and South Carolina), •Palmetto GBA (JJ – Alabama, Georgia and Tennessee), 40 •NGS (J6 -- Minnesota, Illinois and Wisconsin), •NGS (JK -- Connecticut, New York, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont), •FCSO (JN -- Florida, Puerto Rico and the US Virgin Islands), •Novitas (JH-- Arkansas, Colorado, Louisiana, Mississippi, New Mexico, Oklahoma, and Texas) and •Novitas (JL -- Delaware, District of Columbia, Maryland, New Jersey and Pennsylvania) We are actively engaged with the remaining MACs and are committed to supporting their requests for additional information and clinical evidence. Weexpect that additional positive coverage decisions will be issued over time but cannot predict timing or ultimate success with each MAC. Within Europe, we have obtained reimbursement approval or funding in Germany, France, one region of Italy, and a Commissioning throughEvaluation (“CtE”) program in England.We are seeking additional reimbursement approvals in other countries in Europe and international markets.In France, we were selected to receive the first “Forfait Innovation” (Innovation Bundle) from the Ministry of Health, which is a special fundingprogram for breakthrough procedures to be introduced into clinical practice. As part of this program, we conducted a post-market study in France whichenrolled a total of 18 subjects who were followed for two years. The French program also funded implantation of 18 additional patients who were not part ofthe post-market study. We submitted the final clinical report of the Forfait Innovation study late last year and the outcomes of the study are still under reviewby the National health reimbursement authority (HAS). Subject to a successful and positive completion of HAS’ review of the outcomes of French study, weanticipate that Argus II therapy may be covered and funded through the standard payment system in France, however, we can provide no assurance that theFrench government will make a positive decision to continue to fund the Argus II in future. In December 2016, NHS England announced it would cover 10 Argus implantations as part of a CtE program. The CtE program is especially designedfor treatments that show significant promise for the future, while new clinical and patient experience data are collected within a formal evaluation program.This program is similar to the Forfait Innovation program in France. We are actively and closely working with NHS England to finalize the final details of theprogram that is expected to be kicked off within next few months. To date, our marketing activities have focused on raising awareness of the Argus II with potential patients, implanting physicians, and referringphysicians. Our marketing activities include exhibiting, sponsoring symposia, and securing podium presence at professional and trade shows, securingjournalist coverage in popular and trade media, attending patient meetings focused on educating patients about existing and future treatments, andsponsoring information sessions for the Argus II. In the United States, our efforts will focus on media advertisements dedicated to RP patients and theirfamilies. These advertisements will be placed in geographic areas where we have Centers of Excellence committed to Argus II.Currently, we are in process of evaluating potential reimbursement pathways for Orion. Compared to Argus II, which is largely catering to Medicarepatient population, Orion is expected to address patient population with diverse and more balanced payer mix due to our potential indications profile andexpected younger average patient population. As Orion is a part of the FDA’s Breakthrough Devices program, we are closely evaluating a variety of fast trackreimbursement programs catering to promising breakthrough treatments. If feasible, we also plan to approach some of the key payers during the second half of2019 and get their feedback to ensure our pivotal clinical trial design will be able to cater to their key coverage requirements.Product and Clinical Development PlansArgus II. The Argus II is currently approved for RP patients with bare or no light perception in the US, and in Europe for severe to profound vision lossdue to outer retinal degeneration, such as from RP, choroideremia, and other similar conditions. The number of people who are legally blind due to RP isestimated to be about 25,000 in the US, 42,000 in Europe, and about 375,000 total worldwide. A subset of these patients would be eligible for the Argus IIsince the approved baseline vision for the Argus II is worse than legally blind (20/200). We commissioned 3rd party market research for the size of the RPmarket that resulted in an estimate of approximately 1,500 patients in the US with advanced RP that could be treated with the Argus II given the eligibilitycriteria of our label. Given the limited addressable market of Argus II, we made the decision to maximize capital efficiency with our Argus commercial and clinical activitiesand increase our investment of resources with our Orion clinical and R&D41programs. As a result, we evaluate the short-term financial payback to enter new Argus markets or expand geographically; have increased focus on ourstrongest markets and the top centers of excellence in those markets allowing for more efficient deployment of field resources. In October 2018, we announced a restructuring of our international commercial activities and personnel. We will maintain a team that will continuesupport of existing Argus II patients and centers of excellence in our international markets. We anticipate that the annual savings from the restructuring willamount to approximately $3.0 million per year and we plan to reallocate savings to the Orion program and other related projects. We recognizedapproximately $0.6 million of pre-tax restructuring charges in the fourth quarter of fiscal year 2018 in connection with this restructuring, consisting ofseverance and other employee termination benefits, substantially all of which were settled in cash during the fourth quarter of 2018.Orion. By further developing our visual cortical prosthesis, Orion, we believe we will significantly expand our market to include nearly all profoundlyblind individuals. The only notable exceptions for potential use of the Orion are those who are blind due to otherwise currently treatable diseases (e.g. RP orcataracts), individuals who are born blind, or blindness due to direct damage of the visual cortex, which is rare. However, of the estimated 36 million blindpeople worldwide, there are approximately 5.8 million people who are legally blind due to causes that are not otherwise treatable (including RP) or age-related macular degeneration (“AMD”). If approved for marketing, the FDA and other regulatory agencies will determine the subset of these patients who areeligible 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 brainresponsible for human vision. A six-subject early feasibility study of the Orion device is currently underway at the Ronald Reagan UCLA Medical Center inLos Angeles (“UCLA”) and Baylor College of Medicine in Houston (“Baylor”). No published in-human data is available yet for the Orion system.In November 2017, the FDA granted Breakthrough Devices Program designation for the Orion. This designation is given to a few select medicaldevices in order to provide more effective treatment of life-threatening or irreversibly debilitating diseases or conditions. This program is intended to helppatients have more timely access to these medical devices by expediting their development, assessment, and review. With this designation, we believe theOrion will have the following advantages during the FDA review process: •Greater interactive review both for the Investigational Device Exemption and Premarket Approval application; •Greater reliance on post-market vs. pre-market data collection and greater acceptance of uncertainty in the benefit-risk profile at the time ofapproval; •Priority review (i.e., review of the submission is placed at the top of the review queue and receives additional review resources); and, •Senior FDA management involvement and assignment of a cross-disciplinary case manager. It is our expectation that inclusion in the Breakthrough Devices Program may shorten the timeline required to bring the Orion to market as acommercial product. We are currently evaluating our pivotal trial design for Orion and expect to reach consensus with the FDA on design specifics during2019. Major elements of our clinical trial design include the number of patients, study duration, and the endpoints suitable for assessing visual function,functional vision and quality of life. While negotiations with the FDA are ongoing, we believe the study design will require a minimum sample population of30 subjects with at least 6 months of follow-up data for each patient prior to submittal of a premarket (PMA) application.Recently Adopted Accounting Standards In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contractswith Customers (Topic 606). This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transferof goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. We adopted thisASU on January 1, 2018 retrospectively, the cumulative effect of the initial application on our accumulated deficit on that date was immaterial. 42 We generate our revenue from sales of our Argus II retinal prosthesis systems, which include the implant and external components. Our product salesgenerally consist of the implant and related surgical supplies and may include a performance obligation related to post-surgical support. We sell our products through two main sales channels: 1) directly to customers who use our products (the “Direct Channel”) and 2) to distributionpartners who resell our products (the “Indirect Channel”). Under the Direct Channel, we sell our systems to and we receive payment directly from customers who implant our products. Under our IndirectChannel, we have entered into distribution agreements that allow the distributors to sell our systems and fulfill performance obligations for surgical supportand post-surgical support. We determine revenue recognition through the following steps: •Identification of the contract, or contracts, with a customer •Identification of the performance obligations in the contract •Determination of the transaction price •Allocation of the transaction price to the performance obligations in the contract •Recognition of revenue when, or as, we satisfy a performance obligation Revenue is generally recognized upon surgical implant, unless we have a significant performance obligation for post-surgical support. We recognizerevenue when a material reversal is no longer probable. Conditions that preclude us from recognizing revenue generally involve new customers with noreimbursement or reimbursement history, and depends on third-party behavior beyond our control, uncertain payment cycles over an extended period of time,and our limited historical experience with these arrangements.Recent Accounting PronouncementsIn February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which sets out the principles for the recognition,measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dualapproach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by thelessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term ofthe lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardlessof their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. ASU 2016-02(Accounting Standards Codification (“ASC”) Topic 842) supersedes the previous leases standard, ASC 840, Leases. The standard is effective for publicentities for annual periods beginning after December 15, 2018 and for interim periods within those fiscal years. Subsequently, in July of 2018, the FASBissued ASU No. 2018-10, Codification Improvements to Topic 842, Leases (“ASU 2018-10”), and ASU No. 2018-11, Leases (Topic 842): TargetedImprovements (“ASU 2018-11”), both of which clarify and enhance the certain amendments made in ASU 2016-02 and will be adopted in conjunction withASU 2016-02. ASU 2016-02 is required to be applied with a modified retrospective approach to each prior reporting period presented with various optionalpractical expedients. We generally do not finance purchases of equipment or other capital but do lease our facilities. We expect most of our leasecommitments will be subject to the updated standard and recognized as lease liabilities and right-of-use assets upon adoption.43We believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would not have a material impact on ourfinancial statement presentation or disclosures.Critical Accounting Policies and EstimatesThe following discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which havebeen prepared in conformity with accounting principles generally accepted in the United States of America. Certain accounting policies and estimates areparticularly important to the understanding of our financial position and results of operations and require the application of significant judgment by ourmanagement or can be materially affected by changes from period to period in economic factors or conditions that are outside of our control. As a result, theyare subject to an inherent degree of uncertainty. In applying these policies, our management uses their judgment to determine the appropriate assumptions tobe used in the determination of certain estimates. Those estimates are based on our historical operations, our future business plans and projected financialresults, the terms of existing contracts, our observance of trends in the industry, information provided by our customers and information available from otheroutside sources, as appropriate. See Note 2 of notes to our consolidated financial statements for a more complete description of our significant accountingpolicies.Revenue Recognition.  We generate our revenue from sales of our Argus II retinal prosthesis systems, which include the implant and externalcomponents. Our product sales generally consist of the implant and related surgical supplies and may include a performance obligation related to post-surgical support. We sell our products through two main sales channels: 1) directly to customers who use our products (the “Direct Channel”) and 2) to distributionpartners who resell our products (the “Indirect Channel”). Under the Direct Channel, we sell our systems to and we receive payment directly from customers who implant our products. Under our IndirectChannel, we have entered into distribution agreements that allow the distributors to sell our systems and fulfill performance obligations for surgical supportand post-surgical support. We determine revenue recognition through the following steps: •Identification of the contract, or contracts, with a customer •Identification of the performance obligations in the contract •Determination of the transaction price •Allocation of the transaction price to the performance obligations in the contract •Recognition of revenue when, or as, we satisfy a performance obligation Revenue is generally recognized upon surgical implant, unless we have a significant performance obligation for post-surgical support. We recognizerevenue when a material reversal is no longer probable. Conditions that preclude us from recognizing revenue generally involve new customers with noreimbursement or reimbursement history, and depends on third-party behavior beyond our control, uncertain payment cycles over an extended period of time,and our limited historical experience with these arrangements.Stock-Based Compensation. Pursuant to Financial Accounting Standards Board ASC 718 Share-Based Payment (“ASC 718”), we record stock-basedcompensation expense for all stock-based awards. Under ASC 718, we estimate the fair value of stock options granted using the Black-Scholes option pricingmodel. The fair value for awards that are expected to vest is then amortized on a straight-line basis over the requisite service period of the award, which isgenerally the option vesting term. •The grant price of the issuances is determined based on the fair value of the shares at the date of grant. •The risk free interest rate for periods within the contractual life of the option is based on the US treasury yield in effect at the time of grant. •We calculate the expected term of options using a weighted average of option vesting periods and an estimate of one-half of the period betweenvesting and expiration of the option. •Volatility is determined based on our average historical volatilities and supplemented with average historical volatilities of comparablecompanies in similar industry.44 •Expected dividend yield is based on current yield at the grant date or the average dividend yield over the historical period. We have neverdeclared or paid dividends and have no plans to do so in the foreseeable future.Patent Costs. We have over 380 domestic and foreign patents. Due to the uncertainty associated with the successful development of one or morecommercially viable products based on our research efforts and any related patent applications, all patent costs, including patent-related legal, filing fees andother costs, including internally generated costs, are expensed as incurred. Patent costs are included in general and administrative expenses in theconsolidated statements of operations.Results of OperationsNet sales. Our net sales are derived primarily from the sale of our Argus II product. We began selling the Argus II in Europe at the end of 2011, SaudiArabia in 2012, the United States and Canada in 2014, Turkey in 2015, Iran, Taiwan, South Korea and Russia in 2017, and Singapore in 2018. Given thelimited addressable market of Argus II, we made the decision in 2018 to maximize capital efficiency with our Argus commercial and clinical activities andincrease our investment of resources with our Orion clinical and R&D programs. In October 2018, we announced a restructuring of our internationalcommercial activities and personnel. This restructuring resulted in a decision to no longer support new implants of Argus II in Turkey, Iran, Singapore andRussia. We retain a team that continues to support existing Argus II patients and Centers of Excellence in the remaining international markets.Cost of sales. Cost of sales includes the salaries, benefits, material, overhead, third party costs, warranty, charges for excess and obsolete inventory,and other costs required to make our Argus II system at our Los Angeles, California facility. Our product involves technologically complex materials andprocesses. While we are currently experiencing low yields on our manufacturing process, we expect that over the next few years we will be able to refine ourprocesses and improve our manufacturing yields. We are also producing at less than our capacity which results in unabsorbed overhead costs. In future years,we expect to produce in greater quantities and improve our manufacturing yields and we expect that we will more consistently generate positive grossmargins. We record cost of sales when products are implanted, which may differ from the period we are able to record revenue. Such timing differences maycause our reported results of operations to be difficult to compare from period to period.Operating Expenses. We generally recognize our operating expenses as incurred in four general operational categories: research and development,clinical and regulatory, sales and marketing, and general and administrative. Our operating expenses also include a non-cash component related to theamortization of stock-based compensation for research and development, clinical and regulatory, sales and marketing and general and administrativepersonnel. From time-to-time we have received grants from institutions or agencies, such as the National Institutes of Health, to help fund the some of the costof our development efforts. We have recorded these grants as reductions to operating expenses. •Research and development expenses consist primarily of employee compensation and consulting costs related to the design, development, andenhancements of our current and potential future products, offset by grant revenue received in support of specific research projects. We expenseour research and development costs as they are incurred. We expect research and development expenses to increase in the future as we pursuefurther enhancements of our existing product and develop technology for our potential future products, such as the Orion visual corticalprosthesis. We also expect to receive additional grants in the future that will be offset primarily against research and development costs. •Clinical and regulatory expenses consist primarily of salaries, travel and related expenses for personnel engaged in clinical and regulatoryfunctions, as well as internal and external costs associated with conducting clinical trials and maintaining relationships with regulatory agencies.We expect clinical and regulatory expenses to increase as we conduct clinical studies of potential future products such as the Orion visualcortical prosthesis. •Sales and marketing expenses consist primarily of salaries, commissions, travel and related expenses for personnel engaged in sales, marketingand business development functions, as well as costs associated with promotional and other marketing activities including the cost of unitsconsumed as demos or samples. We expect sales and marketing expenses to increase as we hire additional sales personnel, initiate additionalmarketing programs, develop relationships with new distributors, and expand the number of doctors and medical centers that buy and implant ourArgus II product and any future products.45 •General and administrative expenses consist primarily of salaries and related expenses for executive, legal, finance, human resources, informationtechnology and administrative personnel, as well as recruiting and professional fees, patent filing and annuity costs, insurance costs and othergeneral corporate expenses, including rent. We expect general and administrative expenses to increase as we add personnel and incur additionalcosts related to the growth of our business and operate as a public company.Comparison of the Years Ended December 31, 2018 and 2017Worldwide commercial implant volume for the years ended December 31, 2018, 2017 and 2016 was as follows: Years Ended December 31, 2018 2017 2016 Europe and the Middle East 19 30 30 Asia 12 7 — Canada 4 7 1 United States 34 31 11 Total 69 75 42 Net Sales. Our net sales decreased from $8.0 million in 2017 to $6.9 million in 2018, a decrease of $1.1 million, or 14%. This decrease in net saleswas due to a lower international sales as we restructured our international commercial activities and a lower average revenue per implant in 2018, due to alower reimbursement rate set by CMS. In 2018 there were 64 implants recognized compared to 67 in 2017, and the amount of revenue recognized per implantdecreased from $119,000 in 2017 to $108,000 in 2018 given the lower 2018 CMS rate as compared to the 2017 CMS rate in the US. The difference betweenreimbursement rates set by payers and our average selling prices primarily relate to the procedure costs retained by our hospital customers. The amount of revenue recognized per implant in a period depends on several factors, including reimbursement policies set by private and governmentpayers, the mix of implants between North America and the rest of the world, exchange rates, payment terms that may affect revenue recognition, and sales ofancillary products, such as clinical start-up kits and surgical supplies. We expect our average revenue recognized per implant unit for 2019 to be in a range of$120,000 to $130,000, depending on the geographic mix of implants. In the United States, the amount of sales revenue recognized per unit has been limited in some situations due to the uncertainties of the reimbursementenvironment and payment terms. Favorable claims outcomes and the development of positive coverage policies in the United States may eventually result ingreater and earlier revenue recognition. Cost of sales. Cost of sales decreased from $5.1 million in 2017 to $4.9 million in 2018, a decrease of $0.2 million or 4%, resulting in a gross margin of29% in 2018 compared to a gross margin of 36% in 2017. In 2018, cost of sales were impacted by decreased production volumes which increased per unitproduction costs. In 2017, cost of sales included a $3.1 million decrease in the inventory reserve for slow-moving inventory and a $2.8 million charge relatedto unabsorbed overhead costs. At lower volumes, we experience lower gross margins due to our fixed costs of production. Research and development expense. Research and development expense increased from $7.9 million in 2017 to $10.0 million in 2018, an increase of$2.1 million, or 27%. The increase from the prior year was primarily due to verification and validation activities related to Argus 2s and consists of increasedheadcount, outside services, and costs for internally produced prototypes partially offset by $0.5 million of costs deferred that are expected to be funded byan NIH grant. Clinical and regulatory expense. Clinical and regulatory expense increased from $3.1 million in 2017 to $4.6 million in 2018, an increase of $1.5million, or 48%. The increase of $1.5 million primarily related to costs associated with the Orion feasibility study. We expect clinical and regulatory costs toincrease in the future as it conducts additional clinical trials such as with our intent to enroll additional feasibility subjects and to conduct a future pivotalstudy with Orion.46 Selling and marketing expense. Selling and marketing expense increased from $9.6 million in 2017 to $11.3 million in 2018, an increase of $1.7million or 18%. This increase in spending represents an increase of $0.8 million in personnel related costs, such as salaries, benefits, and stock-basedcompensation, a $0.5 million increase in expenditures on consultants and outside services for items such as legal services, public relations and customeroutreach programs and a $0.5 million increase in travel costs. We will continue to monitor the efficiency and effectiveness of commercial activities for ArgusII and make further changes as needed to ensure sufficient payback on commercial spending while maximizing capital available to support Orion programs. General and administrative expense. General and administrative expense decreased from $10.9 million in 2017 to $10.7 million in 2018, a decrease of$0.2 million, or 2%. The decrease is primarily related to reduced non-cash stock compensation expense due to executive transitions. Restructuring charges. We incurred $0.6 million in restructuring charges in 2018, consisting of severance and other employee termination benefits,substantially all of which were settled in cash during the fourth quarter of 2018. Net loss. The net loss was $35.1 million in 2018, as compared to $28.5 million in 2017. The $6.6 million increase in net loss from 2017 to 2018 wasprimarily attributable to a $5.7 million increase operating expenses and a decrease in gross profit from reduced volumes. Comparison of the Years Ended December 31, 2017 and 2016 Net Sales. Our net sales increased from $4.0 million in 2016 to $8.0 million in 2017, an increase of $4.0 million, or 100%. This increase in net saleswas due to a higher number of implants in 2017 versus 2016 as well as a higher level of revenue per implant. In 2017 there were 75 implants compared to 42in 2016, and the amount of revenue recognized per implant increased from $95,000 in 2016 to $106,000 in 2017.In both 2017 and 2016, there were 30 implants in Europe and the Middle East (EMEA). With the addition of new centers in South Korea and Taiwan,there were seven implants in Asia, compared to none in the prior year. In the North American market, which includes the United States and Canada, implantsincreased to 38 in 2017 compared to 12 in 2016.The amount of revenue recognized per implant in a period depends on several factors, including reimbursement policies set by private and governmentpayers, the mix of implants between North America and the rest of the world, exchange rates, payment terms that may affect revenue recognition, and sales ofancillary products, such as clinical start-up kits and surgical supplies. Given the higher 2017 CMS rate in the US, as discussed above, and the higher relativegrowth in North America compared to the rest of the world, where average selling prices are generally lower than in North America, the overall revenue perimplant grew from $95,000 in 2016 to $106,000 in 2017.Cost of sales. Cost of sales decreased to $5.1 million in 2017 from $10.1 million in 2016, a decrease of $5.0 million or 50%, resulting in a positivegross margin of 36% in 2017 compared to a negative gross margin of 153% in 2016. In 2017, cost of sales included a $3.1 million credit related to thereduction of a reserve for slow-moving inventory and a $2.8 million charge related to unabsorbed overhead costs, which combined nets to a $0.3 millioncredit. In 2016, cost of sales included a $4.7 million charge to increase a reserve for slow-moving inventory and a $2.8 million charge related to unabsorbedoverhead costs, which combined totals to a $7.5 million charge.47Research and development expense. Research and development expense increased from $5.3 million in 2016 to $7.9 million in 2017, an increase of$2.6 million, or 49%. The increase is mainly attributable to a $2.0 million, or 83%, decrease of grant revenues which are used to offset research anddevelopment expenses. Grant revenues decreased from $2.4 million in 2016 to $0.4 million in 2017. This decrease in grant revenue relates to a 2014 grantfrom Johns Hopkins University that had been almost completely utilized in prior years was fully applied by the end of the first quarter of 2017. Excludingthe offsetting effect of grant revenue, research and development expense increased by $0.5 million, or 6%, from $7.7 million in 2016 to $8.2 million in 2017.This increase in research and development expenditures relates to $0.9 million of higher spending for people related costs and $0.2 million more spent onconsultants and outside services, which was partially offset by $0.6 million in lower expenditures related to supplies and materials used for prototypedevelopment.Clinical and regulatory expense. Clinical and regulatory expense increased from $2.7 million in 2016 to $3.1 million in 2017, an increase of $0.4million, or 15%. This increase is primarily attributable to higher spending on staff and consultants as we prepared to start new clinical trials for better- visionpatients and for the Orion cortical implant.Selling and marketing expense. Selling and marketing expense increased from $9.0 million in 2016 to $9.6 million in 2017, an increase of $0.6 millionor 7%. This increase in spending represents an increase of $1.1 million in personnel costs, such as salaries, benefits, travel and stock-based compensation,partially offset by a $0.4 million decrease in expenditures on consultants and outside services for items such as legal services, public relations and customeroutreach programs.General and administrative expense. General and administrative expense increased from $10.1 million in 2016 to $10.9 million in 2017, an increase of$0.8 million, or 8%. This increase is primarily attributable to $0.7 million of higher people related costs, primarily higher salaries, bonuses and stock-basedcompensation, and $0.5 million of higher expenditures on outside services for items such as legal and recruiting services. Partially offsetting this was a $0.4million swing in bad debt expense, which dropped from an expense of $0.3 million in 2016 to a net recovery of previously written off receivables of $0.1million in 2017.Net loss. The net loss was $28.5 million in 2017, as compared to $33.2 million in 2016. The $4.7 million decrease in net loss from 2016 to 2017 wasprimarily attributable to an $8.9 million increase in gross profit, (from a loss in 2016 to a gross margin in 2017), caused mainly by higher revenues and thereversal of charges for excess inventory, offset by $4.3 million in increased operating expenses.Liquidity and Capital ResourcesWe have experienced recurring operating losses and negative operating cash flows since inception and have financed our working capital requirementsthrough the recurring sale of our equity securities in both public and private offerings. In March 2017, we successfully completed an additional Rights Offering to existing shareholders, raising proceeds of approximately $19.7 million netof cash offering costs, and selling 13,652,341 units at $1.47 per unit. Each unit consists of a share of common stock and a five-year warrant with an exerciseprice of $1.47.During December 2017, we issued 598,276 shares of common stock for gross proceeds of approximately $1.2 million as part of our At Market IssuanceSales Agreement with two different investment banks. We paid expenses of approximately $0.1 million resulting in net proceeds of $1.1 million. In theperiod from January 1, 2018 to February 28, 2018, we sold approximately 2.2 million additional shares through our Sales Agreement, raising gross proceedsof approximately $4.1 million and net proceeds of approximately $4.0 million after expenses. No shares have been sold under the Sales Agreement sinceFebruary 2018.We entered into stock purchase agreements on December 12, 2018, October 18, 2018, August 14, 2018 and May 3, 2018 with entities beneficiallyowned by Gregg Williams for the purchase of 3,275,100, 2,467,727, 3,225,807 and 6,756,757 shares respectively of common stock priced at $0.916, $1.62,$1.55 and $1.48 per share respectively, the last reported sale price of the common stock on each purchase date. Gregg Williams is Chairman of the Board ofDirectors of Second Sight. These placements of common stock provided net proceeds of $3.0 million, $4.0 million, $5.0 million and $10.0 millionrespectively. No warrants or discounts were provided and no placement agent or investment banking fees were incurred in connection with these transactions.The shares issuable to the purchasers48under the Securities Purchase Agreements were issued pursuant to an exemption from registration under Rule 506 of Regulation D, which is promulgatedunder the Securities Act of 1933. We relied on this exemption from registration based in part on representations made by the purchasers. In a Rights Offering completed on February 22, 2019 we sold approximately 47.8 million units, each priced at $0.724 for gross proceeds ofapproximately $34.6 million. Each unit consisted of one share and one immediately exercisable warrant having a strike price of $1.47 per share. Entitiescontrolled by Gregg Williams, our Chairman of the Board of Directors, acquired approximately 41.4 million units in the offering for an aggregate investmentof approximately $30 million.Working capital was $2.0 million at December 31, 2018, as compared to $6.5 million at December 31, 2017, a decrease of $4.5 million. Workingcapital was $6.5 million at December 31, 2017, as compared to $9.6 million at December 31, 2016, a decrease of $3.1 million. We use our cash, cashequivalents and working capital to fund our operating activities.Cash Flows from Operating ActivitiesDuring 2018, we used $29.8 million of cash in operating activities, consisting primarily of a net loss of $35.1 million, offset by non-cash charges of$4.9 million for depreciation and amortization of property and equipment, stock-based compensation, common stock issuable, bad debt recovery and excessinventory reserve, and used $0.4 million from a net change in operating assets and liabilities.During 2017, we used $23.9 million of cash in operating activities, consisting primarily of a net loss of $28.5 million, offset by non-cash charges of$1.3 million for depreciation and amortization of property and equipment, stock-based compensation, common stock issuable, bad debt recovery and excessinventory reserve, and used $3.3 million from a net change in operating assets and liabilities.During 2016, we used $25.1 million of cash in operating activities, consisting primarily of a net loss of $33.2 million, offset by non-cash charges of$9.1 million for depreciation and amortization of property and equipment, stock-based compensation, common stock issuable, bad debt expense, excessinventory reserve, and loss on disposal of property and equipment and generated $1.0 million from a net change in operating assets and liabilities.Cash Flows from Investing ActivitiesInvesting activities in 2018, 2017 and 2016 used $0.2 million, $0.3 million and $0.5 million, respectively, of cash for the purchase of equipment.Cash Flows from Financing ActivitiesFinancing activities provided $26.6 million of cash in 2018, including $25.9 million from the net proceeds from the issuance of common stock, $0.5million from the issuance of common stock for ESPP purchases and $0.2 million from stock option and warrant exercises.Financing activities provided $21.2 million of cash in 2017, including $20.8 million from the net proceeds from the issuance of common stock andwarrants and $0.4 million from the issuance of common stock for ESPP purchases.Financing activities provided $20.5 million of cash in 2016, including $19.5 million from the net proceeds from the issuance of common stock, $0.5million from stock option and warrant exercises and issuance of common stock for ESPP purchases of $0.5 million. Financial CommitmentsEffective August 2012, we entered into a lease agreement with a company owned by the former major stockholder of us for office space for a term offive years that was to expire on February 28, 2017. The lease included rental of additional space commencing January 1, 2013 and a five year option torenew. The lease requires us to pay real estate taxes, insurance and common area maintenance each year, and is subject to periodic cost of living adjustments.In April 2014, the lease was renegotiated with the term ending on February 28, 2022, and a five year option to renew. The new lease also requires us to payreal estate taxes, insurance and common area maintenance each year and includes49automatic increases in base rent each year. In November 2014, the industrial center in which our premises are located was sold to an independent third party.Our Swiss subsidiary rents office space in Switzerland on a month-to-month basis for CHF 8,200 (approximately $8,161 based on current exchangerates) per month.Future minimum rental payments required under the operating leases are as follows for the years ended December 31 (in thousands). Years Amount 2019 $884 2020 910 2021 937 2022 158 Total $2,889 Off-Balance Sheet ArrangementsAt December 31, 2018, we did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.Item 7A. Quantitative and Qualitative Disclosures about Market RiskInterest Rate SensitivityThe primary objective of our investment activities is to maintain the safety of principal and preserve liquidity without incurring significant risk. Weinvest cash in excess of our current needs in money market funds. In general, money market funds are not considered to be subject to interest rate risk becausethe interest paid on such funds fluctuates with the prevailing interest rate. As of December 31, 2018, our cash equivalents consisted solely of money marketfunds.Exchange Rate SensitivityDuring 2018, approximately 65% of our revenue was denominated in US dollars, 32% in Euros, and 3% in Canadian dollars. This compares with 2017when approximately 58% of our revenue was denominated in US dollars, 35% in Euros, and 7% in Canadian dollars. For 2018, 2017 and 2016, the majorityof our operating expenses were denominated in US dollars. We have not entered into foreign currency forward contracts to hedge our operating expenseexposure to foreign currencies, but we may do so in the future.Item 8. Financial Statements and Supplementary DataOur financial statements and supplementary data required by this Item are provided in the consolidated financial statements included in this Form 10-Kas listed in Item 15(a) of this Form 10-K.Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A. Controls and ProceduresEvaluation of Disclosure Controls and ProceduresDisclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports filed or submitted under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in theSEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information requiredto be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to50management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow fortimely decisions regarding required disclosure. Due to inherent limitations, internal control over financial reporting may not prevent or detect misstatements.Further, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes inconditions, or that degree of compliance with the policies and procedures may deteriorate. Accordingly, even effective disclosure controls and procedurescan only provide reasonable assurance of achieving their control objectives.As of December 31, 2018, management has concluded that our disclosure controls and procedures were effective based upon testing of our key internalcontrols. Our management, including our CEO and CFO, has concluded that the consolidated financial statements included in this Annual Report on Form10-K fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in this Annual Report onForm 10-K in conformity with GAAP.This annual report does not include an attestation report from our independent registered public accounting firm regarding internal control overfinancial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to the Jumpstart OurBusiness Startups Act (the “JOBS Act”). Under the JOBS Act, we are not required to comply with Section 404(b) because we are an “emerging growthcompany.”Management’s Report on Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Ourinternal control over financial reporting includes those policies and procedures that:1. Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of ourassets;2. Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordancewith GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors;and3. Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets thatcould have a material effect on the financial statements.As of December 31, 2018, based on the criteria established in “Internal Control — Integrated Framework” (2013 Framework) issued by the Committeeof Sponsoring Organizations of the Treadway Commission, management has completed written documentation of its internal control policies, procedures andcontrols and has completed its testing of its key controls. Based upon the results of this testing we have concluded that our internal control over financialreporting was effective as of the end of the period covered by this Annual Report on Form 10-K.Changes in Internal Control over Financial ReportingThere has been no change in our internal control over financial reporting that occurred during or subsequent to our fourth quarter of the year endedDecember 31, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.Inherent Limitations on Effectiveness of ControlsThe design of any system of control is based upon certain assumptions about the likelihood of future events. There can be no assurance that any designwill succeed in achieving its stated objectives under all future events, no matter how remote, or that the degree of compliance with the policies or proceduresmay not deteriorate. Because of its inherent limitations, disclosure controls and procedures may not prevent or detect all misstatements. Accordingly, eveneffective disclosure controls and procedures can provide only reasonable assurance of achieving their control51objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management isrequired to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith policies and procedures may deteriorate.Item 9B. Other InformationNone.52PART IIICertain information required by Part III is omitted from this Annual Report on Form 10-K and is incorporated by reference from our definitive proxystatement relating to our 2018 annual meeting of stockholders, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, also referredto in this Annual Report on Form 10-K as our 2019 Proxy Statement, which we will file with the SEC not later than 120 days after the end of the fiscal yearcovered by this Annual Report on Form 10-K.Item 10. Directors, Executive Officers and Corporate GovernanceInformation regarding our directors, including the audit committee and audit committee financial experts, and executive officers and compliance withSection 16(a) of the Exchange Act will be included in an amendment to this Form 10-K or in our 2019 Proxy Statement and is incorporated herein byreference.Item 11. Executive CompensationThe information required by this item regarding executive compensation will be included in an amendment to this Form 10-K or in our 2019 ProxyStatement and is incorporated herein by reference.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required by this item regarding security ownership of certain beneficial owners and management will be included in an amendment tothis Form 10-K or in our 2019 Proxy Statement and is incorporated herein by reference.Item 13. Certain Relationships and Related Transactions, and Director IndependenceThe information required by this item regarding certain relationships and related transactions and director independence will be included in anamendment to this Form 10-K or in our 2019 Proxy Statement and is incorporated herein by reference.Item 14. Principal Accounting Fees and ServicesThe information required by this item regarding principal accounting fees and services will be included in an amendment to this Form 10-K or in our2019 Proxy Statement and is incorporated herein by reference. PART IVItem 15. Exhibits, Financial Statement Schedules (a)The following documents are included in this Annual Report on Form 10-K: 1.The consolidated financial statements listed in the accompanying Index to Consolidated Financial Statements are filed as part of this report. 2.All financial schedules have been omitted because the required information is either presented in the consolidated financial statements or thenotes thereto or is not applicable or required. 3.The exhibits required by Item 601 of Regulation S-K and Item 15(b) of this Annual Report on Form 10-K are listed in the Exhibit Indeximmediately preceding the exhibits and are incorporated herein. We have identified in the Exhibit Index each management contract andcompensation plan filed as an exhibit to this Annual Report on Form 10-K in response to Item 15(a)(3) of Form 10-K. 53EXHIBIT INDEX Exhibit No. Exhibit Description1.1 Form of Underwriting Agreement.(1)3.1 Restated Articles of Incorporation of the Registrant(1)3.2 Amended and Restated Bylaws of the Registrant, as currently in effect.(1)4.1 Form of the Registrant’s common stock certificate.(1)4.2 Form of Underwriter’s Warrant.(1)4.3 Form of Warrant Agreement and Form of Warrant Certificate(2)4.4 Form of Amendment No.1 to Warrant Agreement(3)10.1 Form of Indemnification Agreement between Registrant and each of its directors and officers.(1)+10.2 2003 Equity Incentive Plan.(1)+10.3 2003 Form of Employee Option Agreement.(1)+10.4 2011 Equity Incentive Plan.(1)+10.5 2011 Form of Employee Option Agreement.(1)+10.6 Standard Multi-Tenant Office Lease – Net, dated April 15, 2014, between Registrant and Mann Biomedical Park LLC.(1)10.7 Cost Reimbursement Consortium Research Agreement between Registrant and Doheny Eye Institute.(1)10.8 Joint Research and Development Agreement between Johns Hopkins University Applied Physics Laboratory and Registrant.(1)10.9 Second Sight Medical Product, Inc. 2015 Employee Stock Purchase Plan (3)+10.10 Executive Employment Agreement between Registrant and Will McGuire (4)+10.11 Executive Employment Agreement between Registrant and John Blake (5)(+)10.12 Securities Purchase Agreement among Registrant, Gregg G. Williams 2006 Trust and Sam B. William 1995 Generation-Skipping Trust datedMay 3, 2018(6)10.13Securities Purchase Agreement among Registrant, Gregg G. Williams 2006 Trust and Sam B. William 1995 Generation-Skipping Trust datedAugust 14, 2018(7)10.14 Executive Employment Agreement between Registrant and William Patrick Ryan(8)(+)10.15 Securities Purchase Agreement among Registrant, Gregg G. Williams 2006 Trust and Sam B. William 1995 Generation-Skipping Trust datedOctober 18, 2018(9)10.16 Securities Purchase Agreement among Registrant, Gregg G. Williams 2006 Trust and Sam B. William 1995 Generation-Skipping Trust datedDecember 12, 2018(10)21.1 List of subsidiaries of the Registrant.(1)24.1 Power of Attorney (include on signature page)31.1* Certification of Principal Executive Officer of Second Sight Medical Products, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of2002.31.2* Certification of Principal Financial and Accounting Officer of Second Sight Medical Products, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1* Certifications of Principal Executive Officer and Principal Financial and Accounting Officer of Second Sight Medical Products, Inc.pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct of 2002.Included herein +Indicates management contract or compensatory plan (1)Incorporated by reference to the registrant’s registration statement on Form S-1, file no. 333-198073, originally filedwith the Securities and Exchange Commission on August 12, 2014, as amended. (2)Incorporated by reference to the registrant’s registration statement on Form S-1, file no. 333-215463, originally filedwith the Securities and Exchange Commission on January 9, 2017, as amended.(3)Incorporated by reference toregistrant’s current report on Form 8-K filed with the Securities and Exchange Commission on February 22, 2019.(4)Incorporated by reference to registrant’s definitive proxy statement on Schedule 14A, filed with the Securities andExchange Commission on April 16, 2015. (5)Incorporated by reference to registrant’s current report on Form 8-K filed with the Securities and ExchangeCommission on June 25, 2015.(6)Incorporated by reference to registrant’s current report on Form 8-K filed with theSecurities and Exchange Commission on March 27, 2018.(7)Incorporated by reference to registrant’s current report onForm 8-K filed with the Securities and Exchange Commission on May 8, 2018.(8)Incorporated by reference to registrant’scurrent report on Form 8-K filed with the Securities and Exchange Commission on August 16, 2018.(9)Incorporated byreference to registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on September 4,2018.(10)Incorporated by reference to registrant’s current report on Form 8-K filed with the Securities and ExchangeCommission on October 22, 2018.(11)Incorporated by reference to registrant’s current report on Form 8-K filed with theSecurities and Exchange Commission on December 14, 2018. 54SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized. Dated: March 18, 2019 Second Sight Medical Products, Inc. /s/ Jonathan Will McGuire Jonathan Will McGuire Chief Executive Officer POWER OF ATTORNEY AND SIGNATURESThe undersigned officers and directors of Second Sight Medical Products, Inc., each hereby severally constitutes and appoints Jonathan Will McGuireand John T. Blake, or either of them, jointly and severally, as his true and lawful attorney-in-fact and agent, with full power of substitution, each with powerto act alone, to sign and execute on behalf of the undersigned any and all amendments to this Annual Report on Form 10-K, and to perform any actsnecessary in order to file the same, with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission,granting unto each said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requested and necessary to bedone in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or their or his or her substitutes, shall do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the dates indicated. Name Title Date /s/ Jonathan Will McGuire Chief Executive Officer and Director March 18, 2019Jonathan Will McGuire (Principal Executive Officer) /s/ John T. Blake Chief Financial Officer March 18, 2019John T. Blake (Principal Financial and Accounting Officer) /s/ Gregg Williams Chairman of the Board March 18, 2019Gregg Williams /s/ William J. Link Director March 18, 2019William J. Link /s/ Aaron Mendelsohn Director March 18, 2019Aaron Mendelsohn /s/ Matthew Pfeffer Director March 18, 2019Matthew Pfeffer 55SECOND SIGHT MEDICAL PRODUCTS, INC.AND SUBSIDIARYINDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm58Consolidated Balance Sheets as of December 31, 2018 and 201759Consolidated Statements of Operations for the Years Ended December 31, 2018, 2017 and 201660Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2018, 2017 and 201661Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2018, 2017 and 201662Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 201665Notes to Consolidated Financial Statements for the Years Ended December 31, 2018, 2017 and 201667 56REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Stockholders ofSecond Sight Medical Products, Inc. and SubsidiaryOpinion on the Consolidated Financial StatementsWe have audited the accompanying consolidated balance sheets of Second Sight Medical Products, Inc. and Subsidiary (the “Company”) as of December 31,2018 and 2017, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows, for each of the three years inthe period ended December 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, theconsolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and theresults of their operations and their cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principlesgenerally accepted in the United States of America.Basis for OpinionThese consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’sconsolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and theapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, norwere we engaged to perform an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding ofinternal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control overfinancial reporting. Accordingly, we express no such opinion.Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud,and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosuresin the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.LiquidityThe Company is subject to the risks and uncertainties associated with a business with one product line and limited revenues. The Company has incurredrecurring operating losses and negative operating cash flows since inception. The Company’s continued operations are dependent upon its ability to raiseadditional funds through equity or debt financing. There can be no assurances that the Company will be able to secure any such additional financing onacceptable terms and conditions, or at all./s/ Gumbiner Savett Inc.We have served as the Company’s auditor since 2014Santa Monica, CaliforniaMarch 18, 201957SECOND SIGHT MEDICAL PRODUCTS, INC.AND SUBSIDIARYConsolidated Balance Sheets(In thousands) December 31, 2018 2017 ASSETS Current assets: Cash and cash equivalents $4,471 $7,839 Accounts receivable, net 504 1,831 Inventories, net 3,250 2,700 Prepaid expenses and other current assets 1,395 795 Total current assets 9,620 13,165 Property and equipment, net 1,025 1,299 Deposits and other assets 37 33 Total assets $10,682 $14,497 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $1,305 $752 Accrued expenses 2,503 2,425 Accrued compensation expense 2,690 2,611 Accrued clinical trial expenses 933 779 Contract liabilities 167 48 Total current liabilities 7,598 6,615 Commitments and contingencies Stockholders’ equity: Preferred stock, no par value, 10,000 shares authorized; none outstanding — — Common stock, no par value; 200,000 shares authorized; shares issued and outstanding: 76,336 and57,630 at December 31, 2018 and December 31, 2017, respectively 229,019 202,156 Common stock issuable — 153 Additional paid-in capital 44,111 40,522 Accumulated other comprehensive loss (575) (572)Accumulated deficit (269,471) (234,377) Total stockholders’ equity 3,084 7,882 Total liabilities and stockholders’ equity $10,682 $14,497 See accompanying notes to consolidated financial statements.58SECOND SIGHT MEDICAL PRODUCTS, INC.AND SUBSIDIARYConsolidated Statements of Operations(In thousands, except per share data) Years Ended December 31, 2018 2017 2016 Net sales $6,896 $7,964 $3,985 Cost of sales 4,888 5,117 10,076 Gross profit (loss) 2,008 2,847 (6,091) Operating expenses: Research and development, net of grants 10,005 7,893 5,347 Clinical and regulatory 4,600 3,062 2,703 Selling and marketing 11,336 9,569 8,989 General and administrative 10,692 10,932 10,080 Restructuring charges 555 — — Total operating expenses 37,188 31,456 27,119 Loss from operations (35,180) (28,609) (33,210) Interest income 86 93 31 Net loss $(35,094) $(28,516) $(33,179) Net loss per common share – basic and diluted $(0.53) $(0.53) $(0.84) Weighted average shares outstanding – basic and diluted 66,378 54,152 39,554 See accompanying notes to consolidated financial statements.59SECOND SIGHT MEDICAL PRODUCTS, INC.AND SUBSIDIARYConsolidated Statements of Comprehensive Loss(In thousands) Years Ended December 31, 2018 2017 2016 Net loss $(35,094) $(28,516) $(33,179)Other comprehensive income (loss): Foreign currency translation adjustments (3) 36 (27)Comprehensive loss $(35,097) $(28,480) $(33,206) See accompanying notes to consolidated financial statements.60SECOND SIGHT MEDICAL PRODUCTS, INC.AND SUBSIDIARYConsolidated Statements of Stockholders’ Equity(In thousands) Common Stock Common StockIssuable AdditionalPaid-in NotesReceivable forStock Option AccumulatedOtherComprehensive Accumulated TotalStockholders’ Shares Amount Shares Amount Capital Exercises Loss Deficit Equity Balance, December 31, 2015 35,942 $166,049 33 $205 $27,277 $(5) $(581) $(172,682) $20,263 Issuance of common stock and options in connection with rights offering, net of issuance costs 5,978 19,430 — — 53 — — — 19,483 Issuance of shares under long-term investor right 355 — — — — — — — — Issuance of common stock in connection with employee stock purchase plan 189 488 — — — — — — 488 Exercise of stock options 96 478 — — — 3 — — 481 Stock-based compensation expense — — — — 3,367 — — — 3,367 Stock issued in connection with professional services 82 324 44 (52) — — — — 272 Release of restricted stock units 59 — — — — — — — — Comprehensive loss: Net loss — — — — — — — (33,179) (33,179)Foreign currency translation adjustment — — — — — — (27) — (27)Comprehensive loss — — — — — — (27) (33,179) (33,206)Balance, December 31, 2016 42,701 $186,769 77 $153 $30,697 $(2) $(608) $(205,861) $11,148 61SECOND SIGHT MEDICAL PRODUCTS, INC.AND SUBSIDIARYConsolidated Statements of Stockholders’ Equity(In thousands)(Continued) Common Stock Common StockIssuable AdditionalPaid-in NotesReceivablefor StockOption AccumulatedOtherComprehensive Accumulated TotalStockholders’ Shares Amount Shares Amount Capital Exercises Loss Deficit Equity Issuance of common stock and warrants in connection with rights offering, net of issuance costs 13,653 13,647 — — 6,021 — — — 19,668 Issuance of common stock in connection with employee stock purchase plan 407 394 — — — — — — 394 Repayment of notes receivable for stock option exercises — — — — — 2 — — 2 Stock-based compensation expense — — — — 3,784 — — — 3,784 Issuance of shares of common stock, net of issuance costs 598 1,084 — — — — — — 1,084 Fair value of stock options issued for services — — — — 20 — — — 20 Common stock issuance for services 223 262 5 — — — — — 262 Release of restricted stock units 48 — — — — — — — — Comprehensive loss: Net loss — — — — — — — (28,516) (28,516)Foreign currency translation adjustment — — — — — — 36 — 36 Comprehensive loss — — — — — — 36 (28,516) (28,480)Balance, December 31, 2017 57,630 $202,156 82 $153 $40,522 $— $(572) $(234,377) $7,882 62SECOND SIGHT MEDICAL PRODUCTS, INC.AND SUBSIDIARYConsolidated Statements of Stockholders’ Equity(In thousands)(Continued) Common Stock Common StockIssuable AdditionalPaid-in AccumulatedOtherComprehensive Accumulated TotalStockholders’ Shares Amount Shares Amount Capital Loss Deficit Equity Issuance of shares common stock, net of issuance costs 17,949 25,936 — — — — — 25,936 Issuance of common stock in connection with employee stock purchase plan 494 508 — — — — — 508 Exercise of stock options 76 149 — — — — — 149 Stock-based compensation expense — — — — 3,589 — — 3,589 Issuance of common stock in connection with warrant exercise 6 8 — — — — — 8 Common stock issuance for services 133 262 (82) (153) — — — 109 Release of restricted stock units 48 — — — — — — — Comprehensive loss: Net loss — — — — — — (35,094) (35,094)Foreign currency translation adjustment — — — — — (3) — (3)Comprehensive loss — — — — — (3) (35,094) (35,097)Balance, December 31, 2018 76,336 $229,019 — $— $44,111 $(575) $(269,471) $3,084 See accompanying notes to consolidated financial statements.63SECOND SIGHT MEDICAL PRODUCTS, INC.AND SUBSIDIARY Consolidated Statements of Cash Flows (In thousands) Years Ended December 31, 2018 2017 2016 Cash flows from operating activities: Net loss $(35,094) $(28,516) $(33,179)Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization of property and equipment 435 457 432 Loss on disposal of property and equipment — — 2 Stock-based compensation 3,589 3,784 3,367 Bad debt (recovery) expense 107 (142) 258 Excess inventory (recovery) reserve 619 (3,106) 4,728 Common stock issued for services 109 262 272 Changes in operating assets and liabilities: Accounts receivable 1,220 (1,413) 955 Inventories (1,178) 3,868 10 Prepaid expenses and other assets (605) (71) 378 Accounts payable 554 (419) 446 Accrued expenses 80 331 44 Accrued compensation expenses 80 1,013 (469)Accrued clinical trial expenses 153 150 13 Contract liabilities 121 (41) (234)Deferred grant revenue — (104) (2,093)Net cash used in operating activities (29,810) (23,947) (25,070)Cash flows from investing activities: Purchases of property and equipment (163) (265) (490)Net cash used in investing activities (163) (265) (490)Cash flows from financing activities: Net proceeds from sale of common stock 25,936 20,772 19,483 Proceeds from exercise of options, warrants and employee stock purchase plan options 665 396 969 Net cash provided by financing activities 26,601 21,168 20,452 Effect of exchange rate changes on cash and cash equivalents 4 8 23 Cash and cash equivalents: Net decrease (3,368) (3,036) (5,085)Balance at beginning of year 7,839 10,875 15,960 Balance at end of year $4,471 $7,839 $10,875 See accompanying notes to consolidated financial statements.64SECOND SIGHT MEDICAL PRODUCTS, INC.AND SUBSIDIARYConsolidated Statements of Cash Flows (In thousands) Years Ended December 31, 2018 2017 2016 Supplemental cash flow information: Non-cash financing and investing activities: Fair value of stock options issued for services rendered in connection with rights offering $— $20 $53 See accompanying notes to consolidated financial statements.65SECOND SIGHT MEDICAL PRODUCTS, INC.AND SUBSIDIARYNotes to Consolidated Financial Statements1. Organization and Business OperationsSecond Sight Medical Products, Inc. (“Second Sight” or “the Company”), was incorporated in the State of California in 2003. We develop, manufactureand market implantable visual prosthetics that are intended to deliver useful artificial vision to blind individuals. We are a recognized global leader inneuromodulation devices for blindness, and are committed to developing new technologies to treat the broadest population of sight-impairedIn 2007, Second Sight formed Second Sight (Switzerland) Sàrl, initially to manage clinical trials for its products in Europe, and later to manage salesand marketing in Europe, the Middle East and Asia Pacific. As the laws of Switzerland require at least two corporate stockholders, Second Sight (Switzerland)Sàrl is 99.5% owned directly by us and 0.5% owned by an executive of Second Sight, who is acting as our nominee. Accordingly, Second Sight (Switzerland)Sàrl, is considered 100% owned for financial statement purposes and is consolidated with Second Sight for all periods presented.Our current product, the Argus II system, entered clinical trials in 2006, received CE Mark approval for marketing and sales in the European Union(“EU”) in 2011, and approval by the United States Food and Drug Administration (“FDA”) for marketing and sales in the United States in 2013. We beganselling the Argus II system in Europe at the end of 2011, Saudi Arabia in 2012, the United States and Canada in 2014, Turkey in 2015, Iran, Taiwan, SouthKorea and Russia in 2017, and Singapore in 2018.Capital FundingFrom inception, our operations have been funded primarily through the sales of our common stock and warrants, as well as from the issuance ofconvertible debt, research and clinical grants, and limited product revenue generated from the sale of our Argus II product. During 2016 and 2017 and 2018,we funded our business primarily through: ●Issuance of common stock in our rights offering in June 2016, which provided net cash proceeds of $19.5 million. ●Issuance of common stock and warrants in our rights offering in March 2017, which provided net cash proceeds of $19.7 million. ●Issuance of common stock through our At Market Issuance Sales Agreement during the fourth quarter of 2017 and first quarter of 2018, whichprovided $5.1 million of net cash proceeds. ●Issuance of common stock in a stock purchase agreement in May, August, October and December 2018, which provided net cash proceeds of$22.0 million. ●Revenue of $6.9 million, $8.0 million and $4.0 million, for the years ended December 31, 2018, 2017 and 2016, respectively, generated by salesof our Argus II product. We entered into stock purchase agreements on December 12, 2018, October 18, 2018, August 14, 2018 and May 3, 2018 with entities beneficiallyowned by Gregg Williams for the purchase of 3,275,100, 2,467,727, 3,225,807 and 6,756,757 shares respectively of common stock priced at $0.916, $1.62,$1.55 and $1.48 per share respectively, the last reported sale price of the common stock on each purchase date. Gregg Williams is Chairman of the Board ofDirectors of Second Sight. These placements of common stock provided net proceeds of $3.0 million, $4.0 million, $5.0 million and $10.0 million,respectively. No warrants or discounts were provided and no placement agent or investment banking fees were incurred in connection with these transactions.The shares issuable to the purchasers under the Securities Purchase Agreements were issued pursuant to an exemption from registration under Rule 506 ofRegulation D, which is promulgated under the Securities Act of 1933. We relied on this exemption from registration based in part on representations made bythe purchasers. In a Rights Offering completed on February 22, 2019 we sold approximately 47.8 million units, each priced at $0.724 for gross proceeds ofapproximately $34.6 million. Each unit consisted of one share and one immediately exercisable warrant having a strike price of $1.47 per share. Entitiescontrolled by Gregg Williams, our Chairman of66the Board of Directors, acquired approximately 41.4 million units in the offering for an aggregate investment of approximately $30 million. In November 2017, we entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley FBR Inc. and H.C. Wainwright &Co., LLC, as agents (“Agents”) pursuant to which we may offer and sell, from time to time through either of the Agents, shares of our common stock having anaggregate offering price as set forth in the Sales Agreement and a related prospectus supplement filed with the SEC. We agreed to pay the Agents a cashcommission of 3.0% of the aggregate gross proceeds from each sale of shares under the Sales Agreement. During December 2017, we issued 598,276 shares ofcommon stock for gross proceeds of approximately $1.2 million as part of our At Market Issuance Sales Agreement. During January and February 2018, wesold 2.2 million shares of common stock which provided net proceeds of $4.0 million under the Sales Agreement. No shares have been sold since February2018 under the Sales Agreement. We are subject to the risks and uncertainties associated with a business with one product line and limited commercial product revenues, includinglimitations on our operating capital resources and uncertain demand for our products. We have incurred recurring operating losses and negative operatingcash flows since inception, and we expect to continue to incur operating losses and negative operating cash flows for at least the next few years. On January25, 2019, we received a letter from The Nasdaq Stock Market advising us that for 30 consecutive trading days preceding the date of the letter, the bid price ofour common stock had closed below the $1.00 per share minimum required for continued listing on The Nasdaq Capital Market pursuant to listing rules, andtherefore we could become subject to delisting if we did not regain compliance within the compliance period (or the compliance period as may be extended).Based on our current plans, we have sufficient funds to continue operating our business at current levels for at least twelve months from the date ofissuance of these financial statements. However, our operating plan may change as a result of many factors currently unknown to us, and we may need to seekadditional funds sooner than planned, through public or private equity offerings or debt financings, grants, collaborations, strategic partnerships or othersources. However, we may be unable to raise additional capital or enter into such other arrangements when needed on favorable terms or at all. If we areunable to obtain funding on a timely basis, we may be required to significantly curtail, delay or discontinue one or more of our research or developmentprograms or the commercialization Argus II or any other approved product candidates, or we may be unable to expand our operations, maintain our currentorganization and employee base or otherwise capitalize on our business opportunities, as desired, which could materially affect our business, financialcondition and results of operations.2. Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles(“GAAP”) and include the financial statements of Second Sight and Second Sight Switzerland. Intercompany balances and transactions have been eliminatedin consolidation. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. We base ourestimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole underthe circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparentfrom other sources. Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information,changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates areadjusted accordingly. Actual results could differ from those estimates. Significant estimates include those related to assumptions used in accruals forpotential liabilities, valuing equity instruments issued for services, and the realization of deferred tax assets. Actual results could differ from those estimates 67Cash and Cash EquivalentsWe consider all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents. Cash is carried at cost,which approximates fair value, and cash equivalents are carried at fair value. We generally invests funds that are in excess of current needs in high creditquality instruments such as money market funds. Accounts receivableTrade accounts receivable are stated net of an allowance for doubtful accounts. We perform ongoing credit evaluations of our customers’ financialcondition and generally require no collateral from our customers or interest on past due amounts. We estimate the allowance for doubtful accounts based onreview and analysis of specific customer balances that may not be collectible and how recently payments have been received. Accounts are considered forwrite-off when they become past due and when it is determined that the probability of collection is remote. Allowance for doubtful accounts amounted toapproximately $0.2 million and $0.1 million at December 31, 2018 and 2017, respectively. InventoriesInventories are stated at the lower of cost or net realizable value determined by the first-in, first-out method. Inventories consist primarily of rawmaterials, work in progress and finished goods, which includes all direct material, labor and other overhead costs. We establish a reserve to mark down ourinventory for estimated unmarketable inventory equal to the difference between the cost of inventory and the estimated net realizable value based onassumptions about the usability of the inventory, future demand and market conditions. If actual market conditions are less favorable than those projected bymanagement, additional inventory reserve may be required.Property and EquipmentProperty and equipment are recorded at historical cost less accumulated depreciation and amortization. Improvements are capitalized, whileexpenditures for maintenance and repairs are charged to expense as incurred. Upon disposal of depreciable property, the appropriate property accounts arereduced by the related costs and accumulated depreciation. The resulting gains and losses are reflected in the consolidated statements of operations.Depreciation is provided for using the straight-line method in amounts sufficient to relate the cost of assets to operations over their estimated servicelives. Leasehold improvements are amortized over the shorter of the life of the asset or the related lease term. Estimated useful lives of the principal classes ofassets are as follows: Lab equipment5 – 7 yearsComputer hardware and software3 – 7 yearsLeasehold improvements2 – 5 years or the term of the lease, if shorterFurniture, fixtures and equipment5 – 10 years We review our property and equipment for impairment annually or whenever events or changes in circumstances indicate that the carrying value ofsuch assets may not be recoverable. There were no impairment losses recognized in 2018, 2017, and 2016. Depreciation and amortization of property and equipment amounted to $0.4 million, $0.5 million and $0.4 million for the years ended December 31,2018, 2017 and 2016, respectively. Research and Development Research and development costs are charged to operations in the period incurred and amounted to $10.0 million, $7.9 million and $5.3 million net ofgrant revenue, for the years ended December 31, 2018, 2017 and 2016, respectively. Patent Costs 68 Due to the uncertainty associated with the successful development of one or more commercially viable products based on our research efforts and anyrelated patent applications, all patent costs, including patent-related legal, filing fees and other costs, including internally generated costs, are expensed asincurred. Patent costs were $0.6 million, $0.7 million and $0.7 million for the years ended December 31, 2018, 2017 and 2016, respectively, and are includedin general and administrative expenses in the consolidated statements of operations. Revenue Recognition We generate our revenue from the sale of our Argus II retinal prosthesis systems, which include the implant and external components. Our product salesgenerally consist of the implant and related surgical supplies and may include a performance obligation related to post-surgical support.We sell our products through two main sales channels: 1) directly to customers who use our products (the “Direct Channel”) and 2) to distributionpartners who resell our products (the “Indirect Channel”). Under the Direct Channel, we sell our systems to and we receive payment directly from customers who implant our products. Under our IndirectChannel, we have entered into distribution agreements that allow the distributors to sell our systems and fulfill performance obligations for surgicalsupport and post-surgical support. We determine revenue recognition through the following steps: •Identification of the contract, or contracts, with a customer •Identification of the performance obligations in the contract •Determination of the transaction price •Allocation of the transaction price to the performance obligations in the contract •Recognition of revenue when, or as, we satisfy a performance obligation Revenue is generally recognized upon surgical implant, unless we have a significant performance obligation for post-surgical support. We recognizerevenue when a material reversal is no longer probable. Conditions that preclude us from recognizing revenue generally involve new customers with noreimbursement or reimbursement history, and depends on third-party behavior beyond our control, uncertain payment cycles over an extended period oftime, and our limited historical experience with these arrangements. Grant Receipts and Liabilities From time to time, we receive grants that help fund specific development programs. Any amounts received pursuant to grants are offset against therelated operating expenses as the costs are incurred. During the years ended December 31, 2018, 2017 and 2016 grants offset against operating expenses were$0.2 million, $0.4 million and $2.4 million, respectively. Concentration of Risk Credit Risk Financial instruments that subject us to concentrations of credit risk consist primarily of cash, money market funds, and trade accounts receivable. Wemaintain cash and money market funds with financial institutions that management deems reputable, and at times, cash balances may be in excess of FDICand SIPC insurance limits of $250,000 and $500,000 (including cash of $250,000), respectively. We extend differing levels of credit to customers, andtypically do not require collateral. We also maintain a cash balance at a bank in Switzerland. Accounts at such bank are insured up to an amount specified by the deposit insurance agencyof Switzerland. 69Customer Concentration The following tables provide information about disaggregated revenue by service type, customer and geographical market. The following table shows our revenues by customer type during the years ended December 31, 2018, 2017 and 2016 (in thousands): 2018 2017 2016 Direct customers $5,694 $6,727 $3,822 Indirect channel 1,202 1,237 163 Total $6,896 $7,964 $3,985 During the year ended December 31, 2018 two customers represented 10% of revenue. During the years ended December 31, 2017 and 2016 onecustomer represented 10% and 13% of revenue respectively. No other customer represented 10% or more of revenue in any year. As of December 31, 2018 and 2017, the following customers comprised more than 10% accounts receivable: 2018 2017 Customer 1 55% —%Customer 2 22% 8%Customer 3 21% 8%Customer 4 —% 17%Customer 5 —% 16%Customer 6 —% 11% Geographic Concentration During the years ended December 31, 2018, 2017 and 2016, regional revenue, based on customer locations which comprised more than 10% ofrevenues, consisted of the following: 2018 2017 2016 United States 56% 53% 47%Italy 10% 13% 17%France 10% 8% 9%Germany 4% 3% 12% Sources of Supply Several of the components, materials and services used in our current Argus II product are available from only one supplier, and substitutes for theseitems cannot be obtained easily or would require substantial design or manufacturing modifications. Any significant problem experienced by one of our solesource suppliers could result in a delay or interruption in the supply of components to us until that supplier cures the problem or an alternative source of thecomponent is located and qualified. Even where we could qualify alternative suppliers, the substitution of suppliers may be at a higher cost and cause timedelays that impede the commercial production of the Argus II, reduce gross profit margins and impact our ability to deliver our products as may be timelyrequired to meet demand. Foreign Operations The accompanying consolidated financial statements as of December 31, 2018 and 2017 include assets amounting to approximately $1.5 million and$2.7 million, respectively, relating to our operations in Switzerland. It is always possible unanticipated events in foreign countries could disrupt ouroperations.70 Fair Value of Financial Instruments The authoritative guidance with respect to fair value establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used tomeasure fair value into three levels and requires that assets and liabilities carried at fair value be classified and disclosed in one of three categories, aspresented 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 themeasurement 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 observablethrough corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include fixed income securities, non-exchangebased 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 ownassumptions. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded non-exchange-based derivatives and commingledinvestment funds, and are measured using present value pricing models. We determine the level in the fair value hierarchy within which each fair value measurement falls in its entirety, based on the lowest level input that issignificant to the fair value measurement in its entirety. In determining the appropriate levels, we perform an analysis of the assets and liabilities at eachreporting period end. Cash equivalents which includes money market funds are the only financial instrument measured and recorded at fair value in assets or liabilities onour consolidated balance sheet, and they are valued using Level 1 inputs. Stock-Based Compensation Pursuant to FASB ASC 718 Share-Based Payment (“ASC 718”), we record stock-based compensation expense for all stock-based awards. Under ASC 718, we estimate the fair value of stock options granted using the Black-Scholes option pricing model. The fair value for awards that areexpected to vest is then amortized on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option valuation model. The assumptions used inthe Black-Scholes valuation model are as follows: •The grant price of the issuances, is determined based on the fair value of the shares at the date of grant. •The risk free interest rate for periods within the contractual life of the option is based on the US treasury yield in effect at the time of grant. •We calculate the expected term of options using a weighted average of option vesting periods and an estimate of one-half of the period betweenvesting and expiration of the option. •Volatility is determined based on our average historical volatilities supplemented with average historical volatilities of comparable companies insimilar industry. •Expected dividend yield is based on current yield at the grant date or the average dividend yield over the historical period. We have neverdeclared or paid dividends and have no plans to do so in the foreseeable future. 71Comprehensive Income or Loss We comply with provisions of FASB ASC 220, Comprehensive Income, which requires companies to report all changes in equity during a period,except those resulting from investment by owners and distributions to owners, for the period in which they are recognized. Comprehensive income is definedas the change in equity during a period from transactions and other events from non-owner sources. Comprehensive and other comprehensive income (loss) is reported on the face of the financial statements. For the years ended December 31, 2018,2017 and 2016 comprehensive income (loss) is the total of net income (loss) and other comprehensive income (loss) which, for us, consists entirely of foreigncurrency translation adjustments and there were no material reclassifications from other comprehensive loss to net loss during the years ended December 31,2018, 2017 and 2016. Foreign Currency Translation and Transactions The financial statements and transactions of the subsidiary’s operations are reported in the local (functional) currency of Swiss francs (CHF) andtranslated into US dollars in accordance with US GAAP. Assets and liabilities of those operations are translated at exchange rates in effect at the balance sheetdate. The resulting gains and losses from translating foreign currency financial statements are recorded as other comprehensive income (loss). Revenues andexpenses are translated at the average exchange rate for the reporting period. Foreign currency transaction gains (losses) resulting from exchange ratefluctuations on transactions denominated in a currency other than the foreign operations’ functional currencies are included in expenses in the consolidatedstatements of operations. Income Taxes We account for income taxes under an asset and liability approach for financial accounting and reporting for income taxes. Accordingly, we recognizedeferred tax assets and liabilities for the expected impact of differences between the financial statements and the tax basis of assets and liabilities. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. In the event we were todetermine that we would be able to realize our deferred tax assets in the future in excess of our recorded amount, an adjustment to the deferred tax assetswould be credited to operations in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part ofour deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to operations in the period such determination was made. Wehave incurred losses for tax purposes since inception and have significant tax losses and tax credit carryforwards. As of December 31, 2018, we had federal and state of California income tax net operating loss carryforwards, which may be applied to future taxableincome, of approximately $69.4 million and $42.5 million, respectively. To the extent that we continue to generate taxable losses, unused losses will carryforward to offset future taxable income, if any, until these unused losses expire. However, we may be unable to use these losses to offset taxable incomebefore our unused losses expire at various dates that range from 2035 through 2038 for federal net operating losses and from 2033 through 2038 for state netoperating losses. Under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change,”generally defined as a greater than 50 percentage point change (by value) in its equity ownership over a three-year period, the corporation’s ability to use itspre-change net operating loss, or NOL, carryforwards to offset its post-change taxable income may be limited. Limitations may also apply to the utilization ofother pre-change tax attributes as a result of an ownership change.We experienced an “ownership change” within the meaning of Section 382(g) of the Internal Revenue Code of 1986, as amended, during the secondquarter of 2017. The ownership change will subject our net operating loss carryforwards to an annual limitation, which will significantly restrict our ability touse them to offset taxable income in periods following the ownership change. In general, the annual use limitation equals the aggregate value of our stock atthe time of the ownership change multiplied by a tax-exempt interest rate specified by the Internal Revenue Service. We have analyzed the availableinformation to determine the amount of the annual limitation. Based on information available us, the 2017 limitation is estimated to range between be $1.4million and $3.7 million annually. In total, we estimate that the 2017 ownership change will result in approximately $120 million and $56 million of federaland state net operating loss carryforwards expiring unused. On December 22, 2017, the United States government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "TaxAct"). The Tax Act significantly revises the existing tax law by, among72other things, lowering the United States corporate income tax rate from 35% to 21% beginning in 2018. We reviewed and incorporated the impact of the TaxAct in our tax calculations and disclosures. The primary impact stems from the re-measurement of our deferred taxes at the new corporate tax rate of 21%,which reduced the our net deferred tax assets, before valuation allowance, by $7.5 million at December 31, 2017. Due to the full valuation allowance, thechange in deferred taxes was fully offset by the change in valuation allowance. The Tax Act did not have a significant impact on our consolidated financialstatements for the year ended December 31, 2018. Product Warranties Our policy is to warrant all shipped products against defects in materials and workmanship for up to two years by replacing failed parts. We alsoprovide a three-year manufacturer’s warranty covering implant failure by providing a functionally-equivalent replacement implant. Accruals for productwarranties are estimated based on historical warranty experience and current product performance trends and are recorded at the time revenue is recognized asa component of cost of sales. The warranty liabilities are reduced by material and labor costs used to replace parts over the warranty period in the periods inwhich the costs are incurred. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary. Although any suchadjustments were not material in the years ended December 31, 2018, 2017 and 2016, any such adjustments could be material in the future if estimates differsignificantly from actual warranty expense. The warranty liabilities are included in accrued expenses in the consolidated balance sheets. Presentation of sales and value added taxes We collect value added tax on our sales in Europe and certain states in the United Sates impose a sales tax on our sales to nonexempt customers. Wecollect that valued added and sales tax from customers and remit the entire amount to the respective authorities. Our accounting policy is to exclude the taxcollected and remitted to the authorities from revenues and cost of revenues. Net Loss per Share Our computation of earnings per share (“EPS”) includes basic and diluted EPS. Basic EPS is measured as the income (loss) available to commonshareholders divided by the weighted average number of common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents thedilutive effect on a per share basis of potential common shares (e.g., convertible notes payable, convertible preferred stock, preferred stock warrants andcommon stock options) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that havean anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. Loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the respectiveperiods. Basic and diluted loss per common share is the same for all periods presented because all common stock warrants and common stock optionsoutstanding were anti-dilutive. At December 31, 2018, 2017 and 2016, we excluded the outstanding securities summarized below, which entitle the holders thereof to ultimatelyacquire shares of common stock, from our calculation of earnings per share, as their effect would have been anti-dilutive (in thousands). 2018 2017 2016 Underwriter’s warrants 802 802 802 Warrants issued with convertible debt — 676 1,039 Warrants issued with 2017 Rights Offering 13,647 13,652 — Common stock options 7,120 5,675 3,667 Common stock issuable — 82 77 Restricted stock units 35 83 131 Employee stock purchase plan 405 271 206 Total 22,009 21,241 5,922 73 Restructuring Charges In October 2018, we announced a restructuring of our international commercial activities and personnel. This restructuring resulted in a decision to nolonger support new implants of Argus II in Turkey, Iran, Singapore and Russia. We retained a team that continues to support existing Argus II patients andCenters of Excellence in the remaining international markets. We recognized approximately $0.6 million of pre-tax restructuring charges in the fourth quarterof fiscal year 2018 in connection with this restructuring, consisting of severance and other employee termination benefits, substantially all of which weresettled in cash during the fourth quarter of 2018. Reclassifications Certain items in prior period financial statements have been reclassified to conform to the presentation in the current period financial statements. Suchreclassification did not impact our previously-reported net loss on financial position. Recently Adopted Accounting Standards In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU is acomprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at anamount that reflects the consideration it expects to receive in exchange for those goods or services. We adopted this ASU on January 1, 2018 retrospectively,the cumulative effect of the initial application on our accumulated deficit on that date was immaterial. We generate our revenue from the sale of our Argus II retinal prosthesis systems, which include the implant and external components. Our product salesgenerally consist of the implant and related surgical supplies and may include a performance obligation related to post-surgical support. We sell our products through two main sales channels: 1) directly to customers who use our products (the “Direct Channel”) and 2) to distributionpartners who resell our products (the “Indirect Channel”). Under the Direct Channel, we sell our systems to and we receive payment directly from customers who implant our products. Under our IndirectChannel, we have entered into distribution agreements that allow the distributors to sell our systems and fulfill performance obligations for surgical supportand post-surgical support. We determine revenue recognition through the following steps: •Identification of the contract, or contracts, with a customer •Identification of the performance obligations in the contract •Determination of the transaction price •Allocation of the transaction price to the performance obligations in the contract •Recognition of revenue when, or as, we satisfy a performance obligation Revenue is generally recognized upon surgical implant, unless we have a significant performance obligation for post-surgical support. We recognizerevenue when a material reversal is no longer probable. Conditions that preclude us from recognizing revenue generally involve new customers with noreimbursement or reimbursement history, and depends on third-party behavior beyond our control, uncertain payment cycles over an extended period of time,and our limited historical experience with these arrangements. In August 2014, the FASB issued Accounting Standards Update No. 2014-15 (ASU 2014-15), Presentation of Financial Statements — Going Concern(Subtopic 205-10). ASU 2014-15 provided guidance as to management’s responsibility to evaluate whether there is substantial doubt about an entity’sability to continue as a going concern and to provide related footnote disclosures. In connection with preparing these financial statements managementevaluated whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concernwithin one year after the date that the financial statements are issued. As fully described in Note 1, we believe that we have sufficient funds to support ouroperations for at least twelve months. 74Recent Accounting Pronouncements In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which sets out the principles for the recognition,measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dualapproach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by thelessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term ofthe lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardlessof their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. ASU 2016-02(Accounting Standards Codification (“ASC”) Topic 842) supersedes the previous leases standard, ASC 840, Leases. The standard is effective for publicentities for annual periods beginning after December 15, 2018 and for interim periods within those fiscal years. Subsequently, in July of 2018, the FASBissued ASU No. 2018-10, Codification Improvements to Topic 842, Leases (“ASU 2018-10”), and ASU No. 2018-11, Leases (Topic 842): TargetedImprovements (“ASU 2018-11”), both of which clarify and enhance certain amendments made in ASU 2016-02 and will be adopted in conjunction with ASU2016-02. ASU 2016-02 is required to be applied with a modified retrospective approach to each prior reporting period presented with various optionalpractical expedients. We generally do not finance purchases of equipment or other capital but do lease our facilities. Our lease commitments are subject to theupdated standard and will be recognized as lease liabilities and right-of-use assets.We believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would not have a material impact on ourfinancial statement presentation or disclosures.3. Money Market FundsMoney market funds included in cash equivalents at December 31, 2018 totaled $4.2 million, and include $0.2 million held in a deposit account inSwitzerland as security for the performance of contracts. Money market funds included in cash equivalents at December 31, 2017 totaled $7.2 million andconsisted of $0.7 million in the City National Rochdale Government Fund Class S, $6.3 million in the FFI Institutional Fund, and $0.2 million held in adeposit account in Switzerland as security for the performance of contracts. The following table presents money market funds at their level within the fair value hierarchy at December 31, 2018 and 2017 (in thousands). Total Level 1 Level 2 Level 3 December 31, 2018: Money market funds $4,156 $4,156 $— $— December 31, 2017: Money market funds $7,235 $7,235 $— $— 4. Selected Balance Sheet DetailInventories, netInventories consisted of the following at December 31, 2018 and 2017 (in thousands): 2018 2017 Raw materials $791 $485 Work in process 3,055 2,620 Finished goods 2,089 1,660 5,935 4,765 Allowance for excess and obsolescence (2,685) (2,065)Inventories, net $3,250 $2,700 During the year-ended December 31, 2017, we reversed $ 3.1 million of the 2016 charge for excess inventory based upon increased sales volumes in2017.75Property and equipment, net of accumulated depreciation and amortization Property and equipment consisted of the following at December 31, 2018 and 2017 (in thousands): 2018 2017 Laboratory equipment $2,482 $2,450 Computer hardware and software 1,456 1,329 Leasehold improvements 298 298 Furniture, fixtures and equipment 46 46 4,282 4,123 Accumulated depreciation and amortization (3,257) (2,824)Property and equipment, net $1,025 $1,299 Contract Liabilities Contract liabilities consisted of the following at December 31, 2018 and 2017 (in thousands): 2018 2017 Beginning Balance $ 48 $ 85 Consideration received in advance of revenue recognition 551 769 Revenue recognized (432) (806)Ending Balance $ 167 $ 48 Allowance for Doubtful Accounts Allowance for doubtful accounts consisted of the following at December 31, 2018 and 2017 (in thousands): 2018 2017 Beginning Balance $ 74 $ 212 Additions 107 — (Write-offs)Recoveries — (138)Ending Balance $ 181 $ 74 76 5. Grants In September 2014, we entered into a Joint Research and Development Agreement or JRDA with The Johns Hopkins University Applied PhysicsLaboratory (‘APL”). The JRDA includes a subcontract to do research under a grant received by APL. Under the JRDA, we have agreed to perform researchregarding integration of APL research in to a visual prosthesis system. In October 2014, APL paid us $4.1 million in one lump sum to conduct its portion ofthe research. The JRDA also includes a license from APL to us, for the life of any patents resulting from APL’s portion of the research. The APL portion of theresearch includes image processing enhancements for a visual prosthesis. In exchange for the license, we issued 1,000 shares of our common stock to APL,have agreed to pay APL patent prosecution costs, and to pay APL a royalty of 0.25% of net sales of licensed products. We recorded funding under the grant asan offset to research and development expenses of zero in 2018, $0.1 million in 2017, and $2.1 million in 2016. We received an award for $1.6 million grant (with the intent to fund $6.4 million over five years subject to annual review and approval) from the NationalInstitutes of Health (NIH) to fund the “Early Feasibility Clinical Trial of a Visual Cortical Prosthesis” that commenced in January 2018.The NIH grant fundsongoing and planned clinical activities and will be used to conduct and support clinical testing of five subjects implanted with the Orion™ Cortical VisualProsthesis (Orion), submit and obtain Investigational Device Exemption approval from the U.S Food and Drug Administration (FDA), and fund anInstitutional Review Board approval for a larger and final clinical study as approved by FDA. As of December 31, 2018 we recorded $0.5 million of deferredgrant costs associated with this grant which will be offset with the related grant funds when received in 2019. 6. Warrants Warrants Issued with Convertible Debt During 2012 and 2013, we borrowed money primarily from then existing investors through the issuance of convertible promissory notes (collectively,the “Convertible Notes”) totaling $29.5 million. The Convertible Notes accrued interest at the rate of 7.5% per annum, which was added to the principalamounts. At the time of our November 2014 IPO, and in accordance with their original terms, the Convertible Notes were converted into 6.6 million shares ofour common stock. In connection with the Convertible Notes, we issued warrants to purchase 1.2 million shares of our common stock at a price of $5.00 per share. Untiltheir expiration date, the warrants could be exercised at any time, and from time to time, in whole or in part. In accordance with their amended terms, thewarrants expired on the earlier of their expiration dates or upon a change in control event. The 361,909 warrants associated with the Convertible Notes issuedin 2012 expired on July 31, 2017. The 676,494 warrants associated with the Convertible Notes issued in 2013 expired on February 28, 2018. Underwriter’s Warrant As a component of the IPO underwriting fee, we granted the underwriter a warrant to purchase 805,000 shares of our common stock at an exercise priceof $11.25 per share, which was 25 percent above the offering price to the investors. The warrant is exercisable, in whole or in part, for a period commencing180 days after the effective date of the registration statement (November 18, 2014) and ending on the fifth anniversary date of the effective date of theregistration statement. Underwriter’s warrants to purchase 802,000 of our common stock are still outstanding at December 31, 2018. Warrants Issued in March 2017 Rights Offering On March 6, 2017, we completed a registered Rights Offering to existing stockholders in which we sold 13.7 million Units at $1.47 per Unit, which wasthe closing price of our common stock on that date. Each Unit consisted77of a share of our common stock and a warrant to purchase an additional share of our stock for $1.47. The warrants have a five-year life and have beenapproved for trading on Nasdaq under the symbol EYESW. 5,055 of the warrants associated with the Rights Offering had been exercised as of December 31,2018. (See Rights Offerings in Note 8.) A summary of warrant activity for the years ended December 31, 2018, 2017 and 2016 is presented below (in thousands, except per share andcontractual life data): Number of Shares Weighted AverageExercise Price Weighted AverageRemainingContractual Life(in Years) Warrants outstanding at December 31, 2015 1,840 $7.72 Granted — — Exercised — — Forfeited or expired — — Warrants outstanding at December 31, 2016 1,840 $7.72 Granted 13,652 1.47 Exercised — — Forfeited or expired (362) 5.00 Warrants outstanding at December 31, 2017 15,130 $2.15 Granted — — Exercised (5) 1.47 Forfeited or expired (676) 5.00 Warrants outstanding at December 31, 2018 14,449 $2.01 3.10 Warrants exercisable at December 31, 2018 14,449 $2.01 3.10 Warrants exercisable at December 31, 2018 had no intrinsic value. 7. Employee Benefit PlansWe have a 401(k) Savings Retirement Plan that covers substantially all full-time employees who meet the plan’s eligibility requirements and providesfor an employee elective contribution. The Plan provides for employer matching contributions. Employer contributions are discretionary and determinedannually by the Board of Directors. For the years ended December 31, 2018, 2017 and 2016, employer contributions to the Plan totaled $0.2 million, $0.1million and $0.1 million, respectively.We are required to contribute to a government-sponsored pension plan for the employees of our Switzerland-based subsidiary. For the years endedDecember 31, 2018, 2017 and 2016, the employer’s portion of the amounts contributed to the subsidiary’s pension plan on behalf of those employees was$0.1 million, $0.1 million and $0.1 million, respectively.8. Equity SecuritiesIn June 2014, our articles of incorporation were amended to increase authorized common shares to 200,000,000, no par value, and to authorize10,000,000 shares of preferred stock, no par value. The Board of Directors has the authority to establish the rights, preferences, privileges and restrictionsgranted to and imposed upon the holders of preferred stock and common stock.78Common Stock IssuableNon-employee members of our Board of Directors have been paid for their services in common stock on June 1 of each year and the number of sharesissued was based on the average closing prices for the immediately preceding twenty trading days. For 2018, we issued a total of 132,996 shares of commonstock with a value of $0.3 million for annual service through May 31, 2018. Our Director Compensation Policy was amended in December 2017 and boardmembers receive compensation in cash and stock options, effective with the annual period commencing June 1, 2018. For the seven months ended December31, 2018 our board members were compensated $0.1 million and also received stock options valued at $0.1 million.For 2017, for these services we issued 223,000 shares with a value of $0.3 million and accrued $0.2 million, which equates to 82,000 shares based onthe average closing price of $1.86 for our common stock during last 20 trading days as of December 31, 2017. For 2016, for these services we issued 82,000shares with a value of $0.3 million and accrued $0.2 million, which equates to 77,000 shares based on the average closing price of $1.98 for our commonstock during last 20 trading days as of December 31, 2016. The shares, which had not yet been issued, were excluded from the calculation of weightedaverage common shares outstanding for EPS purposes.Rights OfferingsIn June 2016, we completed a Rights Offering to existing stockholders, raising proceeds of $19.5 million net of cash offering costs, and selling5,978,465 shares of common stock at $3.315 per share, representing 85% of our stock price at the close of the rights offering. We evaluated the financialimpact of FASB ASC 260, “Earnings per Share,” which states, among other things, that if a rights issue is offered to all existing stockholders at an exerciseprice that is less than the fair value of the stock, then the weighted average shares outstanding and basic and diluted earnings per share shall be adjustedretroactively to reflect the bonus element of the rights offering for all periods presented. We determined that the application of this specific provision of ASC260 was immaterial to previously issued financial statements and, therefore, did not retroactively adjust previously reported weighted average sharesoutstanding and basic and diluted earnings per share. On March 6, 2017, we completed a registered Rights Offering to existing stockholders in which we sold 13.7 million units at $1.47 per unit, which wasthe 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 ourstock for $1.47. The warrants have a five-year life and have been approved for trading on Nasdaq under the symbol EYESW. At our discretion, the warrantsare redeemable on 30 days’ notice (i) at any time 24 months after the date of issuance, (ii) if the shares of our common stock are trading at $2.94, which is200% of the Subscription Price, for 15 consecutive trading days and (iii) if all of the independent directors vote in favor of redeeming the warrants. Holdersmay be able to sell or exercise warrants prior to any announced redemption date and we may redeem outstanding warrants not exercised by the announcedredemption date, at our option, for a nominal amount of $0.01 per warrant. (See Note14 about new warrant terms)At-the-Market Sales AgreementDuring December 2017, we issued 598,276 shares of common stock for gross proceeds of approximately $1.2 million as part of our At Market IssuanceSales Agreement with two different investment banks. We paid expenses of approximately $0.1 million resulting in net proceeds of $1.1 million. In theperiod from January 1, 2018 to February 28, 2018, we sold approximately 2.2 million additional shares through our Sales Agreement, raising gross proceedsof approximately $4.1 million and net proceeds of approximately $4.0 million after expenses. Stock Purchase Agreements We entered into stock purchase agreements on December 12, 2018, October 18, 2018, August 14, 2018 and May 3, 2018 with entities beneficiallyowned by Gregg Williams for the purchase of 3,275,100, 2,467,727, 3,225,807 and 6,756,757 shares respectively of common stock priced at $0.916, $1.62,$1.55 and $1.48 per share respectively, the last reported sale price of the common stock on each purchase date. Gregg Williams is Chairman of the Board ofDirectors of Second Sight. These placements of common stock provided net proceeds of $3.0 million, $4.0 million, $5.0 million and $10.0 million,respectively. 79No warrants or discounts were provided and no placement agent or investment banking fees were incurred in connection with these transactions. Theshares issuable to the purchasers under the Securities Purchase Agreements were issued pursuant to an exemption from registration under Rule 506 ofRegulation D, which is promulgated under the Securities Act of 1933. We relied on this exemption from registration based in part on representations made bythe purchasers. See Note 14- Subsequent Events for information about February 2019 Rights Offering. 9. Stock-Based CompensationUnder the 2003 Plan, as restated in June 2011, we were authorized to issue options covering up to 3,500,000 shares of common stock. Effective June 1,2011, we adopted the 2011 Equity Incentive Plan (the “2011 Plan”). The maximum number of shares with respect to which options could be granted underthe 2011 Plan was 7,500,000 shares, which is offset and reduced by options previously granted under the 2003 Plan. The option price is determined by theBoard of Directors but cannot be less than the fair value of the shares at the grant date. Generally, the options vest ratably over either four or five years andexpire ten years from the grant date. Both plans provide for accelerated vesting if there is a change of control, as defined in the plans.The Plan was further amended in 2015, 2016, 2017 and 2018 bringing the number of shares issuable under the Plan to 12,000,000.No option shall be granted under the 2011 Plan after May 31, 2021.We recognized stock-based compensation cost of $3.6 million, $3.8 million and $3.4 million during 2018, 2017 and 2016, respectively. The calculatedvalue of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: 2018 2017 2016 Risk-free interest rate 2.32% – 3.05% 1.92% – 2.25% 1.40%–2.03% Expected dividend yield 0% 0% 0% Expected volatility 67.0% 48.0% 47.6%–48.2% Expected term 5.50-6.11 years 6.25 years 6.25 years Weighted-average grant date calculated fair value $1.20 $0.90 $1.97 .80A summary of stock option activity for the years ended December 31, 2018, 2017 and 2016 is presented below (in thousands, except per share andcontractual life data): NumberofShares WeightedAverageExercisePrice WeightedAverageRemainingContractualLife (in Years) Options outstanding at December 31, 2015 3,472 $8.01 Granted 745 4.18 Exercised (96) 5.00 Forfeited or expired (454) 8.66 Options outstanding at December 31, 2016 3,667 $7.23 Granted 2,701 1.80 Exercised — — Forfeited or expired (693) 5.38 Options outstanding at December 31, 2017 5,675 $4.87 Granted 3,178 1.94 Exercised (76) 1.95 Forfeited or expired (1,657) 3.83 Options outstanding at December 31, 2018 7,120 $3.83 6.81 Options exercisable at December 31, 2018 2,978 $5.94 4.42 The exercise prices of common stock options outstanding and exercisable are as follows at December 31, 2018 (in thousands): Exercise Price OptionsOutstanding(Shares) OptionsExercisable(Shares) $0.91 to 1.97 3,455 953 $2.01 to 2.06 1,305 — $2.07 to 5.00 898 751 $5.16 to 9.00 792 724 $9.01 to 13.90 670 550 7,120 2,978 Stock options exercisable at December 31, 2018 had no intrinsic value. As of December 31, 2018, there was $4.0 million of total unrecognizedcompensation cost related to the outstanding stock options that will be recognized over a weighted average period of 2.60 years.During the year ended December 31, 2018, we granted stock options to purchase 3,148,252 shares of common stock to certain employees and directors.The options are exercisable for a period of ten years from the date of grant at prices ranging from $0.92 to $2.07 per share, which was the fair value of ourcommon stock on the respective grant dates. The options vest over a period of four years. The fair value of these options, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $3.8 million ($0.57 to $1.30 per share). Assumptions used in the model were an expected term of 5.50to 6.11 years, volatility of 67.0%, a risk-free interest rate of 2.32% to 3.05%, and an expected dividend rate of 0%. During the year ended December 31, 2018, we recorded $0.4 million of stock-based compensation expense related to stock option modifications forexecutive transitions.81In March 2017, we granted stock options to purchase 40,000 shares of common stock to an outside attorney in connection with his services relating toour March, 2017 rights offering to stockholders. The options are exercisable for a period of four years from the date of grant at a price of $1.76 per share,which was 120% of the fair value of our common stock on the grant date of March 6, 2017. The options vested as of the date of grant. The fair value of theseoptions, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $19,640 ($0.49 per share). Assumptions used in the modelwere an expected term of 4.0 years, volatility of 48.0%, a risk-free interest rate of 1.81%, and an expected dividend rate of 0%. The cost of these shares wastreated as an issuance cost of the offering and was deducted from the gross proceeds from the offering.In October 2017 and in January 2018 we granted stock options to purchase 150,000 and 30,000 shares of common stock respectively, to an outsidecontractor in connection with his services. The options are exercisable for a period of ten years from the date of grant at a price of $1.21 and $2.06respectively, per share, which was the fair value of our common stock on each grant date. The options vest over a four year period. The unvested portion ofthese stock options is re-measured by us at each reporting period. For the years ended December 31, 2018 and 2017, $43,000 and $11,000 respectively, hasbeen expensed for these grants respectively.We adopted an employee stock purchase plan in June 2015 for all eligible employees. As of December 31, 2018, the maximum number of shares thatmay be issued under the plan is 1,550,000. Under the plan, shares of our common stock may be purchased at six-month intervals at 85% of the lower of theclosing fair market value of the common stock (i) on the first trading day of the offering period or (ii) on the last trading day of the purchase period. Anemployee may purchase in any one calendar year shares of common stock having an aggregate fair market value of up to $25,000 determined as of the firsttrading day of the offering period. Additionally, a participating employee may not purchase more than 100,000 shares of common stock in any one offeringperiod. At December 31, 2018, 1,143,112 shares were issued under the stock purchase plan.The following table presented below summarizes Restricted Stock Unit (RSU) activity for the years ended December 31, 2018, 2017 and 2016 (inthousands, except per share data): Numberof Awards WeightedAverageGrant DateFair ValuePer Share Outstanding as of December 31, 2015 190 $12.43 Awarded — — Vested 59 12.43 Forfeited/canceled — — Outstanding as of December 31, 2016 131 $12.43 Awarded — — Vested 48 12.43 Forfeited/canceled — — Outstanding as of December 31, 2017 83 $12.43 Awarded — — Vested 48 12.43 Forfeited/canceled — — Outstanding as of December 31, 2018 35 $12.43 As of December 31, 2018, there was $0.4 million of total unrecognized compensation cost related to the outstanding RSUs that will be recognized overa weighted average period of 0.63 years.82The total stock-based compensation recognized for stock-based awards granted in the consolidated statements of operations for the years endedDecember 31, 2018, 2017 and 2016 is as follows (in thousands): 2018 2017 2016 Cost of sales $279 $235 $312 Research and development 382 288 303 Clinical and regulatory 152 329 173 Selling and marketing 505 339 104 General and administrative 2,271 2,593 2,475 Total $3,589 $3,784 $3,367 10. Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reportingpurposes and the amounts used for income tax purposes. Significant components of our deferred tax assets as of December 31, 2018 and 2017 are summarizedbelow (in thousands): 2018 2017 Stock-based compensation $4,297 $3,346 Research credits 7,003 5,858 Depreciation (48) (41)Net operating loss carryforwards 20,315 14,088 Inventory reserve 651 467 Other 643 466 Total deferred tax assets 32,861 24,184 Valuation allowance (32,861) (24,184)Net deferred tax assets $— $— In assessing the potential realization of these deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferredtax assets will be realized. The ultimate realization of deferred tax assets is dependent upon us attaining future taxable income during the periods in whichthose temporary differences become deductible. As of December 31, 2018 and 2017, management was unable to determine if it is more likely than not thatour deferred tax assets will be realized, and has therefore recorded an appropriate valuation allowance against deferred tax assets at such dates. No federal tax provision has been provided for the years ended December 31, 2018, 2017 and 2016 due to the losses incurred during such periods. Oureffective tax rate is different from the federal statutory rate of 21% due primarily to operating losses that receive no tax benefit as a result of a valuationallowance recorded for such losses. We experienced an “ownership change” within the meaning of Section 382(g) of the Internal Revenue Code of 1986, as amended, during the secondquarter of 2017. The ownership change will subject our net operating loss carryforwards to an annual limitation, which will significantly restrict our ability touse them to offset taxable income in periods following the ownership change. In general, the annual use limitation equals the aggregate value of the our stockat the time of the ownership change multiplied by a tax-exempt interest rate specified by the Internal Revenue Service. We analyzed the availableinformation to determinetax the amount of the annual limitation. Based on information available to us, the 2017 limitation is estimated to range between$1.4 million and $3.7 million annually.83In total, we estimate that the 2017 ownership change will result in approximately $120 million and $56 million of federal and state net operating losscarryforwards, respectively, expiring unused. As of December 31, 2018, after the ownership change under Section 382(g), we had federal and state income tax net operating loss carryforwards, whichmay be applied to future taxable income, of approximately $69.4 million and $42.5 million, respectively. The federal net operating loss carryforwards willexpire at various dates from 2035 through 2038. The state net operating loss carryforwards began to expire at various dates from 2033 through 2038. We alsohave a federal and state research and development tax credit carryforwards totaling approximately $3,801,000 and $3,202,000, respectively. The federalresearch and development tax credit carryforwards will expire at various dates from 2023 through 2038. The state research and development tax creditcarryforwards do not expire. We file income tax returns in the U.S. federal jurisdiction and various states and are subject to income tax examinations by federal tax authorities fortax years ended 2015 and later and by state authorities for tax years ended 2014 and later. We currently are not under examination by any tax authority. Ourpolicy is to record interest and penalties on uncertain tax positions as income tax expense. As of December 31, 2018,and 2017, we have no accrued interest orpenalties related to uncertain tax positions. Second Sight Switzerland, our foreign subsidiary, has not had any taxable income in the prior and current years.On December 22, 2017, the United States government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the"Tax Act"). The Tax Act significantly revises the existing tax law by, among other things, lowering the United States corporate income tax rate from 35% to21% beginning in 2018. We reviewed and incorporated the impact of the Tax Act in our tax calculations and disclosures. The primary impact stems from there-measurement of our deferred taxes at the new corporate tax rate of 21%, which reduced our net deferred tax assets, before valuation allowance, by $7.5million at December 31, 2017. Due to the full valuation allowance, the change in deferred taxes was fully offset by the change in valuation allowance. TheTax Act did not have a significant impact on our consolidated financial statements for the year ended December 31, 2018. . 11. Product WarrantiesA summary of activity of our warranty liabilities, which are included in accrued expenses in the accompanying consolidated balance sheets, for theyears ended December 31, 2018, 2017 and 2016 is presented below (in thousands): 2018 2017 2016 Balance, beginning of year $1,456 $1,525 $1,066 Additions 193 470 727 Settlements (264) (236) (268)Adjustments and other 187 (303) — Total $1,572 $1,456 $1,525 8412. Commitments and ContingenciesLease CommitmentEffective August 2012, we entered into a lease agreement with a company owned by the former major stockholder for office space for a term of fiveyears that was initially set to expire on February 28, 2017. The lease included rental of additional space commencing January 1, 2013 and a five year optionto renew. The lease requires us to pay real estate taxes, insurance and common area maintenance each year, and is subject to periodic cost of livingadjustments. In April 2014, the lease was renegotiated with the term ending on February 28, 2022, and a five year option to renew. The new lease alsorequires us to pay real estate taxes, insurance and common area maintenance each year and includes automatic increases in base rent each year. In November2014, the property underlying the lease was sold to an unrelated party. The current base rent at this facility is $36,600 per month.Second Sight Switzerland rents office space in Switzerland on a month-to-month basis for CHF 8,200 (approximately $8,161, at current exchange rates)per month.Total rent expense was approximately $1.0 million, $1.0 million and $1.1 million for the years ended December 31, 2018, 2017 and 2016, respectively,and is allocated based on square footage to general and administrative and manufacturing costs in the accompanying consolidated statement of operations.Future minimum rental payments required under the operating leases are as follows for the years ended December 31 (in thousands)Years Amount 2019 $884 2020 910 2021 937 2022 158 Total $2,889 License Agreements We have exclusive licensing agreements to utilize certain patents, related to the technology for visual prostheses. We have determined that only theagreement with Doheny Eye Institute (“DEI”) applies to Argus II requiring future royalty payments. We have agreed to pay to DEI royalties for licensedproducts sold or leased by us. The royalty rate is 0.5%, based on related net sales of the patented portion of licensed products.In the past we have paid royalties under a license agreement with the Johns Hopkins University (“JHU”). The JHU agreement expired, along with theunderlying patents, in 2018. Pursuant to these agreements, DEI and JHU, we have incurred costs of approximately $0.1 million , $0.1 million and $0.1million for the years ended December 31, 2018, 2017 and 2016, respectively. Indemnification Agreements We maintain indemnification agreements with our directors and officers that may require us to indemnify them against liabilities that arise by reason oftheir status or service as directors or officers, except as prohibited by applicable law.Employment AgreementsWe have entered into employment agreements and have an approved Change in Control Plan for three of our executive officers which provides fortwelve months of severance benefits including salary, bonus and COBRA benefits in the event of a termination in connection with a change in control,subject to the terms in these agreements. Our Change in Control Plan also provides, for certain other officers, six months of salary, bonus, and COBRAbenefits in the event of a termination in connection with a change in control, subject to the terms of the Change in Control Plan.85 Clinical Trial AgreementsBased upon FDA approval, which was obtained in February 2013, we are required to collect follow-up data from subjects enrolled in our pre-approvaltrial for a period of up to ten years post-implant, which extends this trial through the year 2019. In addition, we are conducting three post-market studies tocomply with US FDA, French, and European post-market surveillance regulations and requirements. We have contracted with various universities, hospitals,and medical practices to provide these services. Payments are based on procedures performed for each subject and are charged to clinical and regulatoryexpense as incurred. Total amounts charged to expense for the years ended December 31, 2018, 2017 and 2016 were $1.8 million, $0.8 million and $0.8million, respectively.Litigation, Claims and AssessmentsTwenty-two oppositions have been filed by third-parties in the European Patent Office, each challenging the validity of a European patent owned orexclusively licensed by us. The outcome of the challenges is not certain, however, if successful, they may affect our ability to block competitors fromutilizing our patented technology. We believe a successful challenge will not have a material effect on our ability to manufacture and sell our products, orotherwise have a material effect on our operations.We are party to litigation arising in the ordinary course of business. It is our opinion that the outcome of such matters will have not have a materialeffect on our financial statements, however the results of litigation and claims are inherently unpredictable. Regardless of outcome, litigation can have anadverse impact on the company because of defense and settlement costs, diversion of management resources and other factors.13. Quarterly Financial Summary (unaudited) Quarters Ended (in thousands, except per share data) December 31,2018 September 30,2018 June 30,2018 March 31,2018 Product sales $1,767 $2,246 $1,907 $976 Gross profit $167 $462 $1,071 $308 Operating loss $(8,877) $(8,546) $(7,988) $(9,769)Net loss $(8,858) $(8,522) $(7,961) $(9,753)Net loss per share – basic and diluted $(0.12) $(0.12) $(0.12) $(0.17) Quarters Ended December 31,2017 September 30,2017 June 30,2017 March 31,2017 Product sales $3,109 $1,610 $2,236 $1,009 Gross profit (loss) $1,247 $609 $(1,109) $(118)Operating loss $(7,433) $(6,749) $(6,872) $(7,555)Net loss $(7,409) $(6,716) $(6,843) $(7,548)Net loss per share – basic and diluted $(0.13) $(0.12) $(0.12) $(0.16) 14. Subsequent EventsStock Option GrantsIn January and February 2019, we granted long term incentive stock options to our current employees to purchase 1,893,862 shares of common stock,including 975,000 options that were granted to senior management. The options are exercisable for a period of ten years from the date of grant with exerciseprices ranging from $0.74 to $0.82 per share. The options vest over a four year term, on an equal monthly basis. In addition, senior management wasawarded 489,000 RSU’s which were valued on the grant date at a fair value of $0.4 million. These RSUs vest annually over a four year period from the date ofthe grant.86 2019 Rights Offering In a Rights Offering completed on February 22, 2019 we sold approximately 47.8 million units, each priced at $0.724 for gross proceeds ofapproximately $34.6 million. Each unit consisted of one share and one immediately exercisable warrant having a strike price of $1.47 per share. Entitiescontrolled by Gregg Williams, our Chairman of the Board of Directors, acquired approximately 41.4 million units in the offering for an aggregate investmentof approximately $30 million. The expiration date of the warrants being issued pursuant to this Rights Offering is March 14, 2024, and the expiration date ofall outstanding warrants listed for trading under the symbol “EYESW” were extended to March 14, 2024. Nasdaq Deficiency Letter On January 25, 2019, we received a letter from The Nasdaq Stock Market advising us that for 30 consecutive trading days preceding the date of the letter,the bid price of our common stock had closed below the $1.00 per share minimum required for continued listing on The Nasdaq Capital Market pursuant tolisting rules, and therefore we could become subject to delisting if we did not regain compliance within the compliance period (or the compliance period asmay be extended). 87Exhibit 31.1CERTIFICATION OF THE CHIEF EXECUTIVE OFFICERPURSUANT TO RULE 13a-14(a) AND 15d-14(a) OF THE SECURITIES EXCHANGE ACT, AS ADOPTED PURSUANTTO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, Jonathan Will McGuire, hereby certify that:1.I have reviewed this Annual Report on Form 10-K of Second Sight Medical Products, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have: (a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; (b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; (c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting. Date: March 18, 2019 /s/ Jonathan Will McGuire Jonathan Will McGuire Chief Executive Officer (Principal Executive Officer) Exhibit 31.2CERTIFICATION OF THE CHIEF FINANCIAL OFFICERPURSUANT TO RULE 13a-14(a) AND 15d-14(a) OF THE SECURITIES EXCHANGE ACT, AS ADOPTED PURSUANTTO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, John T. Blake, certify that:1.I have reviewed this Annual Report on Form 10-K of Second Sight Medical Products, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have: (a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; (b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; (c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting. Date: March 18, 2019 /s/ John T. Blake John T. Blake Chief Financial Officer (Principal Financial and Accounting Officer) Exhibit 32.1Certifications of Principal Executive Officer and Principal Financial OfficerPursuant to 18 U.S.C. Section 1350, As Adopted Pursuant ToSection 906 of the Sarbanes-Oxley Act of 2002Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350), Jonathan Will McGuire, Chief Executive Officer (Principal ExecutiveOfficer) and John T. Blake, Chief Financial Officer (Principal Financial and Accounting Officer) of Second Sight Medical Products, Inc. (the “Company”),each hereby certifies that, to the best of his knowledge:1.The Annual Report of the Company on Form 10-K (the “Report”) for the fiscal year ended December 31, 2018, to which this Certification is attached asExhibit 32.1, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 18, 2019 /s/ Jonathan Will McGuire Jonathan Will McGuire Chief Executive Officer (Principal Executive Officer) /s/ John T. Blake John T. Blake Chief Financial Officer (Principal Financial and Accounting Officer) This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to beincorporated by reference into any filing of Second Sight Medical Products, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Actof 1934, as amended (whether made before or after the date of the Form 10-K), irrespective of any general incorporation language contained in such filing.

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