Notes to Condensed Consolidated Financial
Statements
(unaudited)
|
1. |
Organization and Business Operations |
Vivani
Medical, Inc. (“Vivani,” the “Company,” “we,” “us,” “our” or similar
terms) is a clinical-stage, biopharmaceutical company developing therapeutic implants to treat conditions with high unmet medical need. Vivani’s
Biopharm Division, which is the main focus of the company, develops miniaturized, subdermal drug implants utilizing its proprietary
NanoPortal™ technology to enable long-term, near constant-rate delivery of a broad range of medicines to treat chronic diseases.
An alarmingly significant 50% of patients are non-adherent to their medicines, contributing to more than $500 billion in avoidable
healthcare costs and approximately 125,000 potentially preventable deaths per year in the US alone. Vivani’s portfolio of tiny, sub-dermal drug implants
seeks to address medication non-adherence by providing steady levels of medication over a target duration of six months or longer.
Vivani’s lead product, NPM-119, is a 6-month implant candidate under investigation for the treatment of Type 2 diabetes.
Medication non-adherence is a primary reason why Type 2 diabetes treatments face significant challenges in achieving positive
real-world effectiveness. Vivani’s Neuromodulation Division is developing the Orion® Visual Cortical Prosthesis
System (“Orion”), an implanted cortical stimulation device intended to provide useful artificial vision to individuals
who are blind due to a wide range of causes, including glaucoma, diabetic retinopathy, optic nerve injury or disease and eye injury.
Orion is intended to convert images captured by a miniature video camera mounted on glasses into a series of small electrical
pulses. The device is designed to bypass diseased or injured eye anatomy and to transmit these electrical pulses wirelessly to
an array of electrodes implanted on the surface of the brain’s visual cortex, where it is intended to provide the perception
of patterns of light. We are conducting an Early Feasibility Study of the Orion device at the Ronald Reagan UCLA Medical Center
in Los Angeles (“UCLA”) and Baylor College of Medicine in Houston (“Baylor”).
The
Biopharm Division and Neuromodulation Division represent business segments as determined by our chief operating decision
maker, the chief executive officer (“CEO”), who reviews financial information for the purposes of making
operating decisions, assessing financial performance and allocating resources. Operating expenses were allocated $12.8
million to the Biopharm Division and $0.6
million to the Neuromodulation Division. Property and equipment, net and operating lease right-of-use
assets were allocated $2.3
million to the Biopharm Division and $0.2 million
to the Neuromodulation Division.
Agreement and Plan of Merger with Nano
Precision Medical, Inc.
On February 4, 2022, Second Sight Medical
Products, Inc. (“Second Sight”) entered into an agreement and plan of merger (the “Merger Agreement”) with
Nano Precision Medical, Inc. (“NPM”). The Merger was approved by the shareholders of Second Sight on July 27, 2022
and closed on August 30, 2022. Upon consummation of the Merger, NPM became a wholly-owned subsidiary of Second Sight. Concurrent
with to the Merger, Second Sight changed its name to Vivani Medical, Inc. and changed its trading symbol from EYES to VANI, and
trades under the ticker VANI on the NASDAQ market. Certain investors and members of the NPM board of directors are also investors
and members of the board of directors of Second Sight.
Under the terms and conditions of the Merger
Agreement, the securities of NPM converted into the right to receive shares of Second Sight’s common stock representing 77.32%
of the total issued and outstanding shares of common stock of Second Sight on a fully converted basis, including, without limitation,
giving effect to the conversion of all options, warrants, and any and all other convertible securities assuming net settlement.
Second Sight filed a Registration Statement on Form S-4 on May 13, 2022 in connection with the Merger to register the merger shares
effective June 24, 2022.
On February 4, 2022, in connection with
the Merger, Second Sight and NPM also entered into a Simple Agreement for Future Equity (“SAFE”) whereby Second Sight
provided to NPM an investment advance of $8 million. The Merger Agreement provided that the SAFE would terminate if the Merger
were to be successfully completed. Under the terms of the SAFE, upon successfully completion of the Merger on August 30, 2022,
the investment advance was eliminated. Under the accounting for a business combination, the $8 million adjusted the purchase consideration.
The Merger involved a change of control
and was accounted for as a reverse merger in accordance with accounting principles generally accepted in the United States of America
(“GAAP”). Under this method of accounting, Second Sight was treated as the “acquired” company for financial
reporting purposes with NPM as the acquirer. The assets acquired and liabilities assumed by NPM were recorded at fair value under
Accounting Codification Standard (“ASC 805”), Business Combinations. Accordingly, on August 30, 2022 (the “Acquisition
Date”), NPM (a calendar year-end entity) was deemed to have acquired 100% of the outstanding common shares and voting interest
of Second Sight, Medical, Inc. The results of Second Sight’s operations have been included in the consolidated financial
statements since that date.
The acquisition-date fair value of consideration
transferred totaled $54.4 million, which consisted of the fair value of the 13,136 common shares deemed issued to Second Sight
shareholders, was determined based on the per share closing price of the Company’s common shares on the acquisition date
of $4.14.
The following table summarizes the fair
values of the assets acquired and liabilities assumed at the acquisition date (in thousands):
At August 30, 2022 | |
|
|
| |
|
Cash | |
$ | 55,374 | |
Property and equipment | |
| 99 | |
Prepaid expenses | |
| 1,657 | |
Right of use assets | |
| 140 | |
Other assets | |
| 56 | |
Total identifiable assets acquired | |
| 57,326 | |
Current liabilities | |
| (3,913 | ) |
Right of use liabilities | |
| (151 | ) |
Total liabilities assumed | |
| 4,064 | |
Net identifiable assets acquired | |
$ | 53,262 | |
The SAFE loan of $8.0
million was cancelled in the Merger which adjusted the fair value of net assets acquired.
The following table summarizes the calculation
of the gain on bargain purchase (in thousands):
| |
| | |
Total consideration | |
$ | 54,385 | |
SAFE loan forgiven | |
| (8,000 | ) |
Less net identifiable assets acquired | |
| (53,262 | ) |
Gain on bargain purchase | |
$ | 6,877 | |
Because NPM purchased 100% of Second
Sight and the fair value of identifiable assets acquired and liabilities assumed exceeded the fair value of the consideration,
we reassessed the recognition and measurement of identifiable assets acquired and liabilities assumed and concluded that all acquired
assets and assumed liabilities were properly recognized and that the valuation procedures and resulting measures were appropriate.
As a result, we recognized a gain of $6.9 million. The gain is included in the line item “Other income (expense)” in
the consolidated income statement.
We recognized $0.7
million of acquisition related costs that were expensed in the nine months ended September 30, 2022. These costs are included
in the consolidated income statement in the line item entitled “General and administrative costs.”
Operating expenses of Second Sight included
in the consolidated income statement from the acquisition date August 30, 2022 to the period ending September 30, 2022 were $0.5
million. Pro forma consolidated net loss as if Second Sight had been included in the consolidated results was $21.7 million for
the year ended December 31, 2021, and $20.6 million for the nine months ended September 30, 2022.
SAFE
On February 4, 2022, in connection with
the Merger, Second Sight and NPM also entered into a Simple Agreement for Future Equity (“SAFE”) whereby Second Sight
provided to NPM an investment advance of $8 million. The agreement provided that the SAFE would terminate if the Merger were to be successfully completed.
Under the terms of the SAFE, upon successfully
completion of the Merger on August 30, 2022, the investment advance was eliminated. Under the accounting for a business combination,
the $8.0 million adjusted the purchase consideration.
Liquidity
From inception,
our operations have been funded primarily through the sales of our common stock and warrants. The completion of our reverse merger
with Second Sight Medical Products, Inc. provided $53.3 million in net assets including approximately $55.4 million in cash.
Our
financial statements have been presented on the basis that our business is a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course of business. We are subject to the risks and
uncertainties associated with a business with no revenue that is developing novel medical devices, including limitations on
our operating capital resources. We have incurred recurring operating losses and negative operating cash flows since
inception, and we expect to continue to incur operating losses and negative operating cash flows for the foreseeable future.
We estimate that currently available cash will provide sufficient funds to enable the Company to meet its planned obligations
for at least the next twenty-four months.
2. Basis of Presentation, Significant
Accounting Policies and Recent Accounting Pronouncements
Basis of Presentation
These unaudited interim
financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”)
and following the requirements of the United States Securities and Exchange Commission (“SEC”) for interim reporting.
As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed
or omitted. In our opinion, the unaudited interim financial statements have been prepared on the same basis as the audited financial
statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of
our financial position and our results of operations and cash flows for periods presented. These statements do not include all
disclosures required by GAAP and should be read in conjunction with our financial statements and accompanying notes for the fiscal
year ended December 31, 2021. The results of the interim periods are not necessarily indicative of the results expected for the
full fiscal year or any other interim period or any future year or period.
Income taxes - interim periods
In calculating the provision for interim
income taxes, in accordance with ASC 740, Income Taxes, an estimated annual effective tax rate is applied to year-to-date
ordinary income. At the end of each interim period, we estimate the effective tax rate expected to be applicable for the full fiscal
year. This differs from the method utilized at the end of an annual period.
Use of estimates
The preparation of financial statements
requires management to make a number of estimates and assumptions related to the reported amount of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of expenses
during the period. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable
under the circumstances. Some of the more significant estimates include the purchase price of net assets acquired in the Merger,
useful lives of long-lived assets, the fair value of equity-based compensation and evaluation of going concern. Actual results
could differ materially from those estimates.
Net income/loss per share
Basic net income/loss per share is
computed using net income/loss from operations divided by the weighted-average number of shares of common stock outstanding
during the period.
Diluted net income/loss per share
represents net income/loss from operations divided by the weighted- average number of common shares outstanding during the
period, including all potentially dilutive common stock equivalents. Common stock equivalents consist of shares subject to
warrants and share-based awards with exercise prices less than the average market price of common stock for the period, to
the extent their inclusion would be dilutive.
The computation of the weighted-average
shares of common stock outstanding for diluted EPS excludes the following potential common shares as of September 30, 2022 and
2021 (in thousands):
|
|
|
September 30, |
|
|
|
September 30, |
|
|
2022 |
|
|
2021 |
Shares underlying warrants outstanding |
|
|
10,311 |
|
|
|
7,731 |
Shares underlying stock options outstanding |
|
|
4,515 |
|
|
|
6,387 |
The shares underlying the SAFE obligation
were issuable only if the Merger were to be terminated. These contingently issuable shares were excluded from the dilutive computation
because conversion was not “probable” as defined in the accounting literature. However, if the evaluation met the probability
threshold, the shares would be excluded from diluted EPS since their inclusion would have an anti-dilutive effect.
Significant Accounting
Policies
Our significant accounting
policies are set forth in our financial statements for the year ended December 31, 2021 as filed in the prospectus.
Recently Issued
Accounting Pronouncements
We do not believe
that any recently issued, but not yet effective, accounting standards, if adopted, will have a material effect on the financial
statements.
3. Concentration of Risk
Credit Risk
Financial instruments
that subject us to concentrations of credit risk consist primarily of cash and money market funds. We maintain cash and money market
funds with financial institutions that we deem reputable.
Foreign Operations
The accompanying condensed
consolidated financial statements as of September 30, 2022 include gross assets amounting to $0.1 million relating to operations
of our subsidiary based in Switzerland.
4. Fair Value Measurements
The authoritative
guidance with respect to fair value establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used
to measure fair value into three levels and requires that assets and liabilities carried at fair value be classified and disclosed
in one of three categories, as presented below. Disclosure as to transfers in and out of Levels 1 and 2, and activity in Level
3 fair value measurements, is also required.
Level 1. Observable
inputs such as quoted prices in active markets for an identical asset or liability that we have the ability to access as of the
measurement date. Financial assets and liabilities utilizing Level 1 inputs include active-exchange traded securities and exchange-based
derivatives.
Level 2. Inputs, other
than quoted prices included within Level 1, which are directly observable for the asset or liability or indirectly observable through
corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include fixed income securities,
non-exchange-based derivatives, mutual funds, and fair-value hedges.
Level 3. Unobservable
inputs in which there is little or no market data for the asset or liability which requires the reporting entity to develop its
own assumptions. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded non-exchange-based derivatives
and commingled investment funds, and are measured using present value pricing models.
Cash equivalents,
which includes money market funds, are the only financial instrument measured and recorded at fair value on our consolidated balance
sheet, and they are valued using Level 1 inputs.
Assets measured at
fair value on a recurring basis are as follows (in thousands):
| |
Total | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
September 30, 2022 (unaudited): | |
| | | |
| | | |
| | | |
| | |
Money market funds | |
$ | 50,427 | | |
$ | 50,427 | | |
$ | — | | |
$ | — | |
December 31, 2021: | |
| | | |
| | | |
| | | |
| | |
Money market funds | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
5. Selected Balance Sheet Detail
Property and equipment
Property and equipment
consisted of the following (in thousands):
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Equipment | |
$ | 3,481 | | |
$ | 3,174 | |
Furniture and fixtures | |
| 10 | | |
| 10 | |
Software | |
| 49 | | |
| 8 | |
Leasehold improvements | |
| 12 | | |
| 12 | |
| |
| 3,552 | | |
| 3,204 | |
Accumulated depreciation and amortization | |
| (2,302 | ) | |
| (2,031 | ) |
Property and equipment, net | |
$ | 1,250 | | |
$ | 1,173 | |
Right-of-use assets
and operating lease liabilities
We lease certain office
space and equipment for our use. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease
costs are recognized in the income statement over the lease term on a straight-line basis. Depreciation is computed using the straight-line
method over the estimated useful life of the respective assets. The depreciable life of assets and leasehold improvements are limited
by the expected lease term. Our lease agreements do not contain any material residual value guarantees or restrictive covenants.
As most of our leases do not provide an implicit rate, we used our estimated incremental borrowing rate based on the information
available at commencement date in determining the present value of lease payments.
We are presently
negotiating for new lease sites for both of our current offices and expect to enter into new agreements in the last quarter
of 2022.
Schedule
of right of use assets and operating lease liabilties
Assets | |
Classification | |
September 30, 2022 (in thousands) | | |
December 31, 2021 (in
thousands) | |
Non-current assets | |
Right-of-use assets | |
$ | 1,050 | | |
$ | 1,611 | |
Liabilities | |
| |
| | | |
| | |
Current | |
Current operating lease liabilities | |
$ | 1,243 | | |
$ | 910 | |
Long term | |
Long term operating lease liabilities | |
$ | 42 | | |
$ | 902 | |
Schedule
of lease liabilities
| |
For the three | | |
For the three | | |
For the nine | | |
For the nine | |
| |
months ended | | |
months ended | | |
months ended | | |
months ended | |
| |
September 30, | | |
September 30, | | |
September 30, | | |
September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Cash paid for operating lease liabilities in thousands: | |
$ | 241 | | |
$ | 207 | | |
| 766 | | |
| 616 | |
Rent expense, including common area maintenance
charges, was $0.2 million and $0.2 million and $0.7 million and $0.6 million during the three and nine-month periods ended September
30, 2022 and 2021, respectively.
6. Equity Securities
We are authorized to issue 300,000,000 shares of common stock
with 50,735,770 issued as of September 30, 2022. In addition, we are authorized to issue 10,000,000 shares of preferred stock with
none issued. On August 19, 2022 the Company initiated a reverse stock split of one share for every three shares. All share numbers
have been retroactively adjusted for the split. On August 30, 2022, 13,136,362 shares were deemed issued for the merger acquisition.
7. Warrants
NPM, prior to the
Merger, issued common stock and warrants (collectively, the “unit” or “units”) in 2019, 2020 and 2021 for
$3.147 per unit. Outstanding warrants to purchase common stock are shown in the table below and generally expire 5 years from the
date of issuance at $3.147 per share, are transferable into one share of common stock and may be exercised on a cashless basis.
The warrants qualified for an exception to derivative accounting and, accordingly, their value was not bifurcated from the total
purchase price.
The other adjustment
for 2,563,688 warrants in the table below were outstanding Second Sight warrants exchanged as part of the Merger for VIVANI warrants
on a like-for-like basis. The warrants are tradeable on the open market. Under accounting standards in a business combination,
these warrants were measured at fair value as of the Merger date; however, the warrants were substantially out-of-the-money and
were assigned no value.
A summary of warrant activity for the nine months ended September 30, 2022 is presented below (in thousands, except per share and contractual life data).
| |
Number of Shares | | |
Weighted Average Exercise Price Per Share | | |
Weighted Average Remaining Contractual Life (in Years) | |
Warrants outstanding as of December 31, 2021 | |
| 9,074 | | |
$ | 3.147 | | |
| 2.93 | |
Issued | |
| — | | |
| — | | |
| — | |
Exercised | |
| (1,327 | ) | |
$ | 3,147 | | |
| | |
Forfeited or expired | |
| — | | |
| | | |
| | |
Other adjustment | |
| 2,564 | | |
$ | 11.75 | | |
| 1.46 | |
Warrants outstanding as of September 30, 2022 | |
| 10,311 | | |
$ | 5.29 | | |
| 2.56 | |
Warrants exercisable as of September 30, 2022 | |
| 10,311 | | |
$ | 5.29 | | |
| 2.56 | |
The warrants outstanding
as of September 30, 2022 had no intrinsic value.
8. Stock-Based Compensation
A summary of stock
option activity for the nine months ended September 30, 2022 is presented below (in thousands, except per share and contractual
life data).
| |
Number
of Shares | | |
Weighted Average Exercise Price Per
Share | | |
Weighted Average Remaining Contractual Life
(in Years) | |
Options outstanding as of December 31, 2021 | |
| 4,542 | | |
$ | 2.89 | | |
| 6.49 | |
Granted | |
| 454 | | |
$ | 2.80 | | |
| | |
Exercised | |
| (73 | ) | |
$ | 1.66 | | |
| | |
Forfeited or expired | |
| (168 | ) | |
$ | 5.19 | | |
| | |
Other adjustment | |
| 272 | | |
$ | 12.84 | | |
| | |
Options outstanding, vested and expected to vest as of September 30,
2022 | |
| 5,027 | | |
$ | 3.21 | | |
| 6.99 | |
Options exercisable as of September 30, 2022 | |
| 3,816 | | |
$ | 3.27 | | |
| 6.51 | |
The estimated
aggregate intrinsic value of stock options exercisable as of September 30, 2022 was $0.9
million. As of September 30, 2022, there was $1.9
million of total unrecognized compensation cost related to outstanding stock options that will be recognized over a
weighted average period of 1.16
years. In connection with the Merger, 272 options presented in the table above were outstanding Second Sight options exchanged as part of the Merger for VIVANI options on a like-for-like basis. Under accounting standards in a business combination, these options have been measured at fair value as of the Merger date; however, the options were substantially out-of-the-money and were assigned no value.
During the quarter
ended September 30, 2022, we granted stock options to purchase 453,576 shares of common stock to certain employees and board members.
The options are exercisable for a period of ten years from the date of grant at a price of $2.80 per share, which was the fair
value of our common stock on the respective grant date. The options generally vest over a period of four years. The fair value
of these options, calculated using the Black-Scholes option-pricing model, was determined to be $1.0 million ($2.01 to $2.20 per
share) using the following assumptions: expected term of 4.25 to 5.58 years, volatility of 100%, risk-free interest rate of 3.42%
to 3.60%, and expected dividend rate of 0.0%.
Stock-based compensation
expense recognized for stock-based awards in the condensed consolidated statements of operations for the three and nine months
ended September 30, 2022 and 2021 was as follows (in thousands):
| |
Three Months Ended | | |
Nine Months Ended | |
| |
September 30, | | |
September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Research and development | |
$ | 274 | | |
$ | 341 | | |
$ | 788 | | |
$ | 989 | |
General and administrative | |
| 118 | | |
| 49 | | |
| 338 | | |
| 244 | |
Total | |
$ | 392 | | |
$ | 390 | | |
$ | 1,125 | | |
$ | 1,233 | |
9. Risk and Uncertainties
We continue to monitor the ongoing COVID-19
global pandemic which has resulted in travel and other restrictions to reduce the spread of the disease. We presently are not experiencing
any significant disruptions from the ongoing COVID-19 pandemic. All clinical and chemistry, manufacturing and control activities
are currently active.
The safety, health and well-being of all
patients, medical staff and internal and external teams is the paramount and primary focus. As the pandemic and its resulting restrictions
evolve in jurisdictions across the country, the potential exists for further disruptions to projected timelines. We are in close
communication with clinical teams and key vendors and are prepared to take action should the pandemic worsen and impact the business
in the future.
10. Litigation, Claims and Assessments
Three
oppositions filed by Pixium Vision SA (“Pixium”) are pending in the European Patent Office, each challenging
the validity of a European patent owned by us. The outcomes of the challenges are not certain, however, if successful, they
may affect our ability to block competitors from utilizing our patented technology. We do not believe a successful challenge
will have a material effect on our ability to manufacture and sell our products, or otherwise have a material effect on
our operations.
Second Sight entered
into a Memorandum of Understanding (“MOU”) for a proposed business combination with Pixium. In response to a press
release by Pixium dated March 24, 2021, and subsequent communications between Second Sight and Pixium, Second Sight’s Board
of Directors determined that the business combination with Pixium was not in the best interest of their shareholders. On April
1, 2021, Second Sight gave notice to Pixium that they were terminating the MOU between the parties and seeking an amicable resolution
of termination amounts that may be due, however no assurance can be given that an amicable resolution will be reached. Second Sight
accrued $1,000,000 of liquidated damages as contemplated by the MOU in accounts payable and remitted that amount to Pixium in April
2021. Pixium indicated that it considered this termination wrongful, rejected the Company’s offers, but retained the $1,000,000
payment. On May 19, 2021, Pixium filed suit in the Paris Commercial Court, and currently claims damages of approximately €5.1
million or about $5.1 million at current exchange rates. We believe we have fulfilled our obligations to Pixium with the liquidated
damages payment of $1,000,000 and thus the Company does not believe any further loss accrual is necessary.
In November
2020, Second Sight and Pixium retained Oppenheimer & Co. Inc. as placement agent for a proposed private placement of
securities in connection with the Pixium Business Combination. On April 1, 2021, Second Sight received an invoice from
Oppenheimer for more than $1.86
million. This amount includes a requested commission of 6.5%
on $27.9
million raised in the private placement. We believe that claims for payment presented by this invoice are without
merit.
We are party to litigation
arising in the ordinary course of business. It is our opinion that the outcome of such matters will not have a material effect
on our results of operations, however, the results of litigation and claims are inherently unpredictable. Regardless of the outcome,
litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other
factors.