TearLab Corp - FORM 10-Q

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 - TearLab Corp	ex32_2.htm
EX-32.1 - EXHIBIT 32.1 - TearLab Corp	ex32_1.htm
EX-31.1 - EXHIBIT 31.1 - TearLab Corp	ex31_1.htm
EX-31.2 - EXHIBIT 31.2 - TearLab Corp	ex31_2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2011

o	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: 000-51030

TearLab Corporation

(Exact name of registrant as

specified in its charter)

Delaware		59 343 4771

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

7360 Carroll Road, Suite 200, San Diego, CA 92121

(Address of principal executive offices)

(858) 455-6006

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 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 and post such files).

Yes o No o

Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 14,939,300 as of May 5, 2011.

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PART I.	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24
Item 4.	Controls and Procedures	25

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	26
Item 1A.	Risk factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults upon Senior Securities	35
Item 4.	(Removed and Reserved)	35
Item 5.	Other Information	35
Item 6.	Exhibits	36

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements relating to future events and our future performance within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “hope,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “pursue,” “potential” and similar expressions intended to identify forward-looking statements. These forward-looking statements include, without limitation, statements relating to future events, future results, and future economic conditions in general and statements about:

●

Our future strategy, structure, and business prospects;

●

The planned commercialization of our current product;

●

The size and growth of the potential markets for our product and technology;

●

The adequacy of current, and the development of new distributor, reseller, and supplier relationships, and our efforts to expand relationships with distributors and resellers in North American, European, Asian and Latin American countries;

●

Our anticipated expansion of United Stated and international sales and operations;

●

Our ability to obtain and protect our intellectual property and proprietary rights;

●

Our efforts to obtain certain FDA approvals;

●

The results of our clinical trials;

●

Our plan to continue to develop and execute our conference and podium strategy to ensure visibility and evidence-based positioning of the TearLab™ Osmolarity System among eye care professionals;

●

Our anticipated sales to additional customers in the United States if a CLIA waiver categorization is obtained;

●

The adequacy of our funding and our forecast of the period of time through which our financial resources will be adequate to support our operations;

●

Use of cash, cash needs and ability to raise capital; and

●

Our ability to obtain reimbursement for patient testing with the TearLab™ System. [NOTE TO CLIENT: Fix alignment of the last bullet. For some reason I am unable to.]

These statements involve known and unknown risks, uncertainties and other factors, including the risks described in Part II, Item 1A. of this Quarterly Report on Form 10-Q, which may cause our actual results, performance or achievements to be materially different from any future results, performances, time frames or achievements expressed or implied by the forward-looking statements. Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Information regarding market and industry statistics contained in this Quarterly Report on Form 10-Q is included based on information available to us that we believe is accurate. It is generally based on academic and other publications that are not produced for purposes of securities offerings or economic analysis. We have not reviewed or included data from all sources and cannot assure you of the accuracy of the market and industry data we have included.

Unless the context indicates or requires otherwise, in this Quarterly Report on Form 10-Q, references to the “Company” shall mean TearLab Corporation or TearLab Corp. and its subsidiaries. References to “$” or “dollars” shall mean U.S. dollars unless otherwise indicated.

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TearLab Corp.

PART I.	FINANCIAL INFORMATION

ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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TearLab Corp.

CONSOLIDATED BALANCE SHEETS

(expressed in U.S. dollars)

($ 000’s)

	March 31, 2011			December 31, 2010
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	1,642		$	2,726
Accounts receivable, net		301			312
Due from related parties		71			130
Inventory, net		585			555
Prepaid expenses		271			322
Other current assets		25			33
Total current assets		2,895			4,078

Fixed assets, net		155			126
Patents and trademarks, net		185			192
Intangible assets, net		6,835			7,139
Total assets	$	10,070		$	11,535

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	420		$	353
Accrued liabilities		1,369			1,441
Due to stockholders		28			28
Deferred revenue		—			128
Obligations under warrants		—			39
Notes payable and accrued interest		1,876			1,669
Total current liabilities		3,693			3,658

Stockholders’ equity
Capital stock
Preferred Stock, $0.001 par value, authorized 10,000,000, none outstanding		—			—
Common stock, $0.001 par value, 40,000,000 authorized, 14,775,366 issued and outstanding at March 31, 2011 and December 31, 2010		15			15
Additional paid-in capital		386,755			386,588
Accumulated deficit		(380,393	)		(378,726	)
Total stockholders’ equity		6,377			7,877
Total liabilities and stockholders’ equity	$	10,070		$	11,535

See accompanying notes to interim consolidated financial statements

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TearLab Corp.

CONSOLIDATED STATEMENTS OF OPERATIONS

(expressed in U.S. dollars except number of shares)

(Unaudited)

($ 000’s)

	Three months ended
	March 31,
	2011			2010

Revenue	$	824		$	275
Cost of goods sold (excluding amortization of intangible assets)		412			189
Gross profit		412			86
Operating expenses
General and administrative		908			966
Clinical, regulatory and research & development		247			468
Sales and marketing		441			274
Amortization of intangible assets		304			304
Total operating expenses		1,900			2,012
Loss from operations		(1,488	)		(1,926	)
Other income (expense)
Interest income		2			1
Changes in fair value of warrant obligations		39			71
Interest expense		(52	)		(52	)
Amortization of deferred financing charges		(162	)		(154	)
Other income (loss)		(6	)		(20	)
Total other expense		(179	)		(154	)
Net loss	$	(1,667	)	$	(2,080	)
Weighted average shares outstanding - basic and diluted		14,775,366			12,053,262
Loss per share – basic and diluted	$	(0.11	)	$	(0.17	)

See accompanying notes to interim consolidated financial statements

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TearLab Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(expressed in U.S. dollars)

(Unaudited)

($ 000’s)

	Three months ended March 31,
	2011			2010

OPERATING ACTIVITIES
Net loss for the period	$	(1,667	)	$	(2,080	)
Adjustments to reconcile net loss to cash used in operating activities:
Stock-based compensation and stock-based restructuring charges		168			207
Depreciation of fixed assets		20			17
Amortization of patents and trademarks		7			7
Amortization of intangible assets		304			304
Amortization of deferred financing charges, warrants and beneficial conversion values		162			154
Changes in fair value of warrant obligations		(39	)		(71	)
Non-cash interest accrued on convertible debt funding		52			52
Net change in non-cash working capital balances related to operations		(42	)		218
Cash used in operating activities		(1,035	)		(1,192	)

INVESTING ACTIVITIES
Additions to fixed assets, net of proceeds		(49	)		(2	)
Cash used in investing activities		(49	)		(2	)

FINANCING ACTIVITIES
Proceeds from issuance of shares in a private placement financing		—			3,000
Proceeds from issuance of shares and warrants in a registered direct financing		—			5,000
Costs of issuance of shares in private placement and registered direct financings		—			(46	)
Cash provided by financing activities		—			7,954

Net (decrease) increase in cash and cash equivalents during the period		(1,084	)		6,760
Cash and cash equivalents, beginning of period		2,726			106
Cash and cash equivalents, end of period	$	1,642		$	6,866

See accompanying notes to interim consolidated financial statements

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TearLab Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(expressed in U.S. dollars except as otherwise stated)

(Unaudited)

1.	BASIS OF PRESENTATION

Nature of Operations

TearLab Corp. (formerly OccuLogix, Inc.) (“TearLab” or the “Company”), a Delaware corporation, is an ophthalmic device company that is commercializing a proprietary in vitro diagnostic tear testing platform, the TearLab® test for dry eye disease, or DED, which enables eye care practitioners to test for highly sensitive and specific biomarkers using nanoliters of tear film at the point-of-care.

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany accounts and transactions have been eliminated on consolidation. The Company currently operates in one segment.

The condensed consolidated balance sheet at December 31, 2010 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

Going concern uncertainty

The consolidated financial statements have been prepared on the basis that the Company will continue as a going concern. However, the Company has sustained substantial losses of $6.7 million for the year ended December 31, 2010, and $1.7 million for the three months ended March 31, 2011. The Company’s working capital deficit at March 31, 2011 is $0.8 million which represents a $1.2 million decrease in its working capital from $0.4 million at December 31, 2010. As a result of the Company’s history of losses and financial condition, there is substantial doubt about the ability of the Company to continue as a going concern. Management believes the Company’s existing cash will be sufficient to cover its operating and other cash demands until approximately July 2011 if the Company’s convertible note holders do not convert their convertible notes and accrued interest to common shares of the Company in July 2011 and approximately the fourth quarter of 2011 if the Company’s convertible note holders do convert their convertible notes and accrued interest to common shares of the Company in July 2011.

A successful transition to attaining profitable operations is dependent upon obtaining sufficient financing to fund the Company’s planned expenses and achieving a level of revenues adequate to support the Company’s cost structure. The Company has been seeking additional debt or equity financing to support its operations until it becomes cash flow positive. There can be no assurances that there will be adequate financing available to the Company on acceptable terms or at all. If the Company is unable to obtain additional financing, the Company would need to significantly curtail or reorient its operations during 2011, which could have a material adverse effect on the Company’s ability to achieve its business objectives and as a result may require the Company to review its ability to stay in business. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts classified as liabilities that might be necessary should the Company be forced to take any such actions.

2.	SIGNIFICANT ACCOUNTING POLICIES

These unaudited interim consolidated financial statements have been prepared using significant accounting policies that are consistent with the policies used in preparing the Company’s audited consolidated financial statements for the year ended December 31, 2010. Management believes that all adjustments necessary for the fair presentation of results, consisting of normally recurring items, have been included in the unaudited consolidated financial statements for the interim periods presented. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The principal areas of judgment relate to the impairment of long-lived and intangible assets and the value of stock options and warrants.

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TearLab Corp.

Recent Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board (“FASB”) issued an amendment to the accounting standards related to the accounting for revenue in arrangements with multiple deliverables including how the arrangement consideration is allocated among delivered and undelivered items of the arrangement. Among the amendments, this standard eliminates the use of the residual method for allocating arrangement consideration and requires an entity to allocate the overall consideration to each deliverable based on an estimated selling price of each individual deliverable in the arrangement in the absence of having vendor-specific objective evidence or other third party evidence of fair value of the undelivered items. This standard also provides further guidance on how to determine a separate unit of accounting in a multiple-deliverable revenue arrangement and expands the disclosure requirements about the judgments made in applying the estimated selling price method and how those judgments affect the timing or amount of revenue recognition. This standard, became effective for the Company on January 1, 2011and did not have a material impact on the Company’s financial statements.

3.	BALANCE SHEET DETAILS:

Accounts receivable

(in thousands)	March 31, 2011			December 31, 2010
Trade receivables	$	320		$	311
Allowance for doubtful accounts		(38	)		(13	)
Other receivables		19			14
	$	301		$	312

Inventory

Inventory is recorded at the lower of cost or market and consists of finished goods. Inventory is accounted for on a first-in, first-out basis. Deferred cost of sales (included in finished goods) consists of products shipped but not recognized as revenue because they did not meet the revenue recognition criteria.

(in thousands)	March 31, 2011			December 31, 2010
Finished goods	$	701		$	671
Inventory reserves		(116	)		(116	)
	$	585		$	555

The Company evaluates inventory for estimated excess quantities and obsolescence, based on expected future sales levels and projections of future demand, with the excess inventory provided for. In addition, the Company assesses the impact of changing technology and market conditions.

Prepaid Expenses

(in thousands)	March 31, 2011		December 31, 2010
Prepaid insurance	$	87	$	122
Prepaid financing costs		58		83
Prepaid regulatory fees		32		—
Deferred royalty costs		—		36
Other fees and services		94		81
	$	271	$	322

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TearLab Corp.

Fixed Assets

(in thousands)	March 31, 2010			December 31, 2010
Furniture and office equipment	$	47		$	48
Computer equipment and software		154			151
Demo equipment		39			33
Rental equipment		29			—
Medical equipment		329			317
		598			549
Less accumulated depreciation		(443	)		(423	)
	$	155		$	126

Depreciation expense was $20,000 and $17,000 during the three months ended March 31, 2011 and 2010, respectively.

Patents and trademarks

(in thousands)	March 31, 2011			December 31, 2010
Patents	$	236		$	236
Trademarks		32			32
		268			268
Accumulated amortization		(83	)		(76	)
	$	185		$	192

Amortization expense of patents and trademarks was $7,000 and $7,000 during the three months ended March 31, 2011 and 2010, respectively

Accrued liabilities

(in thousands)

	March 31,		December 31,
	2011		2010
Due to professionals	$	198	$	296
Due to employees and directors		360		332
Clinical trial accruals		174		174
Amounts due for provision of capital transaction advisory services		200		200
Accrued royalty payments		47		84
Corporate compliance		86		63
Product return reserve		37		73
Product warranties		62		51
Obligation to repay advances received		50		50
Other		155		118
	$	1,369	$	1,441

4. INTANGIBLE ASSETS

The Company’s intangible assets consist of the value of TearLab® Technology acquired in the acquisition of TearLab Research. The TearLab Technology consists of a disposable lab card and card reader, supported by an array of patents and patent applications that are either held or in-licensed by the Company. The TearLab Technology is being amortized using the straight-line method over an estimated useful life of 10 years. Amortization expense for the three months ended March 31, 2011 and 2010 was $304,000 and $304,000, respectively.

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TearLab Corp.

Intangible assets subject to amortization consist of the following:

	March 31, 2011				December 31, 2010
	Cost		Accumulated Amortization		Cost		Accumulated Amortization
TearLab® technology	$	12,172	$	5,337	$	12,172	$	5,033

Estimated amortization expense for the intangible assets for the balance of 2010 and each of the next four years and thereafter is as follows:

	Amortization of intangible assets ($ 000’s)
Remainder of 2011	$	911
2012		1,215
2013		1,215
2014		1,215
2015		1,215
Thereafter		1,064
	$	6,835

5. RELATED PARTY TRANSACTIONS

TLC Vision

TLC Vision Corporation (“TLC”) held a 2.9% ownership interest in the Company, on an issued and outstanding basis, as of both March 31, 2011 and December 31, 2010.

TLC provided computer and administrative support to the Company in the three months ended March 31, 2010, for which the Company recorded an expense of $3,000. TLC did not provide these services to the Company in 2011. The balances due to TLC Vision Corporation were $28,000 at each of March 31, 2011 and December 31, 2010, respectively.

Other

On August 20, 2009, the Company entered into a distribution agreement with Science with Vision, pursuant to which Science with Vision obtained exclusive Canadian distribution rights with respect to the Company’s products. The Company began selling products through the Canadian distributor in 2010. Sales to this distributor for the three months ended March 31, 2011 and 2010 were $38,000 and $47,000, respectively, and the outstanding accounts receivable balances due at March 31, 2011 and December 31, 2010 were $29,000 and $33,000, respectively. The Company’s chairman of the board of directors and chief executive officer has a material financial interest in Science with Vision.

Effective November 20, 2009, the Company entered into an agency agreement with Marchant Securities Inc. (“Marchant”). Pursuant to the terms of the agreement, Marchant acted as the Canadian placement agent in connection with the Company’s private placement of up to $3,000,000 of the Company’s common stock. As a result of the closing of the private placement financings in January 2010 and March 2010, under the Agency agreement, the Company issued an aggregate of 101,548 shares to Marchant. The Company’s chairman of the board of directors and chief executive officer has a material financial interest in Marchant.

The Company has also agreed to indemnify Marchant, its affiliates and their respective directors, officers, employees, shareholders and agents against all expenses, losses, claims, actions, damages or liabilities, and the reasonable fees and expenses of their counsel, arising out of the provision of the services pursuant to the agreement.

On November 2, 2009, the Company, entered into a capital advisory agreement for a minimum of two years with Greybrook Capital Inc., or Greybrook, which was amended on January 8, 2010. Pursuant to the terms of the agreement, as amended, Greybrook is entitled to elect to receive in consideration of its provision of capital advisory services to the Company, within 90 days of the agreement and again on November 2, 2010, compensation consisting of (i) $100,000 in cash or (ii) shares of the Company’s common stock equal to the quotient of (A) $100,000 and (B) $1.22, the closing consolidated bid price on the date of the original execution of the agreement. The calculation of the number of shares to be issued under ii) of the amending agreement was 81,967 shares of the Company’s common stock for each of the two years of service for a cumulative total of 163,934 common shares. No shares were issued and no payments were made under this agreement at March 31, 2011 and the Company has accrued $200,000 and $200,000 as a liability to Greybrook as of March 31, 2011 and December 31, 2010, respectively. Subsequent to March 31, 2011, The Company issued 163,934 common shares to Grey brook to satisfy the outstanding liability. The Company’s chairman of the board of directors and chief executive officer, is a principal with, and holds a material financial interest in Greybrook.

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TearLab Corp.

The Company currently has an employee who formerly served as a United States distributor of the Company’s products. This employee is no longer in control of the distributor; however the employee continues to hold a material financial interest in the distributing company. Sales to this distributor for the three months ended March 31, 2011 and 2010 were $9,000 and $8,000, respectively, and the outstanding accounts receivable balances at March 31, 2011 and December 31, 2010 were $42,000 and $98,000, respectively.

6.	CONVERTIBLE NOTES PAYABLE AND ACCRUED INTEREST

In July 2009, the Company entered into an agreement with certain investors whereby the investors agreed to provide financing (the “Financing”) to the Company through the purchase of convertible secured notes (“the Notes”), in the aggregate amount of $1.55 million. On August 31, 2009, an additional $200,000 of financing was received by the Company to bring the aggregate total funding received to $1.75 million. The Notes evidencing the Financing, mature on the second anniversary of their issuance (“the Maturity Date”), bear interest at a rate of 12% per annum and are convertible into shares of the Company’s common stock upon the request of holders of 51% or more of the outstanding principal amount of the Notes at any time after August 31, 2009 and prior to the Maturity Date. The conversion price of the Notes (the “Discount Price”) is $1.3186 determined on August 31, 2009 and represents 80% of the volume weighted average price on the NASDAQ stock market for the ten trading days prior to August 31, 2009. The Notes are secured by substantially all of the assets of the Company.

In connection with the Financing, the Company will issue warrants with a life of five years to purchase 109,389 shares of common stock (the “Warrants”). The exercise price of the Warrants is $1.60 per common share representing the price per share equal to the closing bid price per share of the Company’s common stock on the NASDAQ stock market on July 15, 2009. The warrants will not be issued until the Notes are converted to common shares of the Company. The Company has recorded $163,000 representing the fair value of the warrants in additional paid-in capital which has been calculated using the Black-Scholes value model. The value of the warrant is being accreted over the two year term of the Notes and an amortization charge of $28,000 and $27,000 for the three months ended March 31, 2011 and 2010, respectively, is included in other income (expense).

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As the conversion price of the Notes reflected a price discounted from the fair market value of the Company’s common stock, there is a deemed beneficial conversion feature associated with the Financing. The Company has recorded $728,000 representing the value of the beneficial conversion feature at the date of the Financing in additional paid-in capital. The value of the beneficial conversion is being amortized over the two year term of the Notes with a charge of $126,000 and $120,000 for the three months ended March 31, 2011 and 2010, respectively, included in other income (expense).

The Company incurred $87,000 in legal and consulting expenses related to the Financing which was allocated to deferred finance charges for $43,000 and cost of equity for $44,000 in proportion to the allocation of the Financing amount between equity and liabilities. The value of the deferred financing is being amortized over the two year term of the Notes and an expense of $8,000 and $8,000 for the three months ended March 31, 2011 and 2010, respectively, is included in other income (expense).

Richard Lindstrom, M.D. and Tom Davidson, both of whom are or were directors of the Company at the time of this agreement, invested $100,000 each in the Financing. Greybrook Corporation, an entity controlled by Elias Vamvakas, Chairman and Interim CEO of the Company, or members of his family, invested $310,000 in the Financing.

Accrued interest of $356,000 and $303,000 at March 31, 2011 and December 31, 2010, respectively, is included in the convertible notes payable and accrued interest balance on our balance sheet.

7. FAIR VALUE MEASUREMENTS

The Company measures certain assets and liabilities in accordance with authoritative guidance which requires fair value measurements be classified and disclosed in one of the following three categories:

●

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

●

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

●

Level 3: Unobservable inputs are used when little or no market data is available.

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. The Company did not have any assets or liabilities in Level 1 and Level 2 and no transfers to or from Level 3 of the fair value measurement hierarchy during the three months ended March 31, 2011.

At March 31, 2011, the Company has a liability for warrants to purchase 131,497 shares of common stock at an exercise price of $46.25 per share that are valued at $0, as well as a liability for warrants to purchase 621,118 shares of common stock at an exercise price of $4.00 per share that are valued at $0 (Note 9). Both liabilities are classified as level 3 fair value measurements.

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The following table provides a reconciliation for all liabilities measured at fair value using significant unobservable inputs (level 3) for the three months ended March 31, 2011 (in thousands):

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Balance of warrant liability at January 1, 2011	$	39
Change in fair value of warrant liability included in other (income) / expense		(39	)
Balance of warrant liability at March 31, 2011	$	—

8.	CAPITAL STOCK

(a) Authorized share capital

The total number of authorized shares of common stock of the Company is 40,000,000. Each share of common stock has a par value of $0.001 per share. The total number of authorized shares of preferred stock of the Company is 10,000,000. Each share of preferred stock has a par value of $0.001 per share.

(b) Common stock

On February 11, 2009, the Company filed with the Securities and Exchange Commission (“SEC”), a prospectus as part of a registration statement on Form S-3 using a “shelf” registration process. Under the shelf process, the Company may from time to time offer or sell any combination of common stock, preferred stock, debt securities, depository shares or warrants in one or more offering up to a total dollar value of $30,000,000. The registered direct financing which closed on March 18, 2010 was effected under this “shelf” registration.

On January 11, 2010, the Company sold 1,886,291 shares of its common stock for an aggregate of approximately $1,744,000. The Company also received commitments to purchase an additional 1,358,475 shares of its common stock for an aggregate of approximately $1,256,000 subject to obtaining stockholder approval which was received on March 3, 2010. The additional shares were issued on March 19, 2010. Related to this equity issuance transaction, the Company issued 101,548 shares to Marchant, a related party, for its placement services (Note 5)and incurred cash issuance costs of $260,000.

On March 18, 2010, the Company closed a registered direct financing in which it sold 1,552,795 shares of its common stock and warrants to purchase 621,118 shares of its common stock for gross proceeds of approximately $5,000,000 with associated cash issuance costs of $617,000. The investors agreed to purchase the shares and warrants for $3.22 per unit (each unit consisting of one share and a warrant to purchase 0.4 shares of common stock). The exercise price of the warrants is $4.00 per share. The warrants are exercisable at any time on or after the sixth-month anniversary of the closing date through and until the 18-month anniversary of the closing of the offering.

On April 14, 2011 pursuant to the capital advisory agreement (Note 5), as amended, the Company issued 163,934 shares of common stock to Greybrook. Elias Vamvakas, Chairman of the Company’s board of directors and acting Chief Executive Officer, is a principal with, and holds a material financial interest in, Greybrook.

The Company has a stock option plan, the 2002 Stock Option Plan (the “Stock Option Plan”), which was most recently amended on June 24, 2010 in order to increase the shares reserved under the Stock Option Plan by 800,000. Under the Stock Option Plan, up to 3,200,000 options are available for grant to employees, directors and consultants. Options granted under the Stock Option Plan may be either incentive stock options or non-statutory stock options. Under the terms of the Stock Option Plan, the exercise price per share for an incentive stock option shall not be less than the fair market value of a share of stock on the effective date of grant and the exercise price per share for non-statutory stock options shall not be less than 85% of the fair market value of a share of stock on the date of grant. No option granted to a holder of more than 10% of the Company’s common stock shall have an exercise price per share less than 110% of the fair market value of a share of stock on the effective date of grant.

Options granted are typically service-based options. Generally, options expire 10 years after the date of grant. No incentive stock options granted to a 10% owner optionee shall be exercisable after the expiration of five years after the effective date of grant of such option, no option granted to a prospective employee, prospective consultant or prospective director may become exercisable prior to the date on which such person commences service, and with the exception of an option granted to an officer, director or consultant, no option shall become exercisable at a rate less than 20% per annum over a period of five years from the effective date of grant of such option unless otherwise approved by the Board.

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TearLab Corp.

The Company accounts for stock-based compensation under the authoritative guidance which requires that share-based payment transactions with employees be recognized in the financial statements based on their fair value and recognized as compensation expense over the vesting period. The amount of expense recognized during the period is affected by many complex and subjective assumptions, including: estimates of the Company’s future volatility, the expected term for its stock options, option exercise behavior, the number of options expected to ultimately vest, and the timing of vesting for the Company’s share-based awards.

The following table sets forth the total stock-based compensation expense resulting from stock options included in the Company’s consolidated statements of operations (in thousands):

	Three months ended March 31,
	2011		2010
General and administrative	$	85	$	141
Clinical, regulatory and research and development		42		48
Sales and marketing		41		18
Stock-based compensation expense before income taxes	$	168	$	207

(d) Warrants

On February 6, 2007, pursuant to the 2007 Securities Purchase Agreement between the Company and certain institutional investors, the Company issued warrants to these investors (“2007 Warrants”). The 2007 Warrants are five-year warrants exercisable immediately into an aggregate of 127,050 shares of the Company’s common stock at $46.25 per common share. On February 6, 2007, the Company also issued a warrant, (“the Cowen Warrant”) to Cowen and Company, LLC in partial payment of the placement fee for the services it had rendered as the placement agent in connection with the private placement of the shares and the 2007 Warrants pursuant to the 2007 Securities Purchase Agreement. The Cowen Warrant is a five-year warrant exercisable into an aggregate of 4,447 shares of the Company’s common stock. The per share exercise price of the Cowen Warrant is $46.25, and the Cowen Warrant became exercisable on August 6, 2007.

The Company accounts for the 2007 Warrants and the Cowen Warrant in accordance with accounting guidance which requires every derivative instrument within its scope to be recorded on the balance sheet as either an asset or liability measured at its fair value, with changes in fair value recognized in earnings unless specific hedge accounting criteria are met. Based on guidance applicable to derivatives, the Company determined that the 2007 Warrants and the Cowen Warrant do not meet the criteria for classification as equity. Accordingly, the Company classified the 2007 Warrants and the Cowen Warrant as current liabilities at March 31, 2011 and December 31, 2010.

The estimated fair value of the 2007 Warrants and the Cowen Warrant at March 31, 2011 was determined using the Black-Scholes option-pricing model with the following weighted average assumptions:

Volatility		44	%
Expected life of Warrants	0.83 years
Risk-free interest rate		0.26	%
Dividend yield		0	%

The Company is required to record the outstanding warrants at fair value at the end of each reporting period, resulting in an adjustment to the recorded liability of the derivative, with any gain or loss recorded in earnings of the applicable reporting period. The Company, therefore, estimated the fair value of the 2007 Warrants and the Cowen Warrant as of March 31, 2011 and determined the aggregate fair value to be $0, as compared to $1,000 as of December 31, 2010. This decrease of $1,000 was recorded as a gain in other income (expense) in the consolidated statement of operations for the three months ended March 31, 2011.

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TearLab Corp.

On March 18, 2010, the Company closed a registered direct financing in which it sold approximately 1,552,796 shares of its common stock and warrants ( “2010 Warrants”) to purchase 621,118 shares of its common stock for gross proceeds of approximately $5,000,000. The investors agreed to purchase the shares and warrants for $3.22 per unit (each unit consisting of one share and a warrant to purchase 0.4 shares of common stock). The exercise price of the 2010 Warrants is $4.00 per share. The 2010 Warrants are exercisable through September 18, 2011.

The Company accounts for the 2010 Warrants in accordance with applicable guidance to derivatives. The Company determined that the 2010 Warrants do not meet the criteria for classification as equity. Accordingly, the Company classified the 2010 Warrants as current liabilities at March 31, 2011 and December 31, 2010.

The estimated fair value of the Warrants at March 31, 2011 was determined using the Black-Scholes option-pricing model with the following weighted average assumptions:

Volatility		32	%
Expected life of Warrants	0.50 years
Risk-free interest rate		0.17	%
Dividend yield		0	%

The Company is required to record the outstanding warrants at fair value at the end of each reporting period, resulting in an adjustment to the obligations under warranty, with any gain or loss recorded in earnings of the applicable reporting period. The Company, therefore, estimated the fair value of the 2010 Warrants as of March 31, 2011 and determined the aggregate fair value to be $0, with a decrease of approximately $38,000 over the measurement of the aggregate fair value of the 2010 Warrants on December 31, 2010. This decrease was recorded as a gain in other income (expense) in the consolidated statement of operations for the three months ended March 31, 2011.

The following table provides activity for the Warrants outstanding through March 31, 2011 (in thousands, except weighted average exercise prices):

	Number of warrants outstanding		Weighted average exercise price
Outstanding, December 31, 2010		753	$	11.38
Granted		—		—
Forfeited		—		—
Outstanding, March 31, 2011		753	$	11.38

In connection with the Financing which the Company was engaged in July and August 2009, the Company will issue 109,389 warrants (“Financing Warrants”) with a life of five years to purchase 109,389 shares of common stock if the aggregate principal amount of the notes issued in the Financing are converted to common shares of the Company. The exercise price of the Financing Warrants is $1.60 per common share representing the price per share equal to the closing bid price per share of the Company’s common stock on the NASDAQ stock market on July 15, 2009. The warrants will not be issued until the convertible secured notes are converted to common shares of the Company and will be exerciseable upon issuance. The Company has recorded $163,000 representing the fair value of the Financing Warrants at the issuance date which has been calculated using the Black-Scholes value model. The value of the Financing Warrants is being amortized over the two year term of the convertible secured debt and a charge of $28,000 and $27,000 is included in other income (expense) for the three months ended March 31, 2011 and 2010, respectively.

9. COMPREHENSIVE INCOME (LOSS)

For the three months ended March 31, 2011 and 2010, comprehensive loss was equal to net loss for each period.

10.	NET LOSS PER SHARE

Basic earnings per share (EPS) is calculated by dividing net income or loss by the weighted average number of common shares and vested restricted stock units outstanding. Diluted EPS is computed by dividing net income or loss by the weighted average number of common shares and vested restricted stock units outstanding and the weighted average number of dilutive common stock equivalents, including stock options and non-vested restricted stock units. Common stock equivalents are only included in the diluted earnings per share calculation when their effect is dilutive.

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TearLab Corp.

The following table is a summary of the potentially dilutive securities that were excluded from the calculation of diluted loss per share as the effect is anti-dilutive (in thousands):

	as of March 31,
	2011		2010
Stock options		3,615		3,395
Shares reserved for issuance on convertible debt obligations		1,327		1,327
Warrants		753		732
Warrants to be issued on conversion of debt obligations		109		—
Total		5,804		5,454

11.	CONSOLIDATED STATEMENTS OF CASH FLOWS

The net change in non-cash working capital balances related to operations consists of the following:

	Three months ended March 31, ($ 000’s)
	2011			2010
Accounts receivable, net	$	11		$	(36	)
Due from related parties		59			—
Inventory		(30	)		(48	)
Prepaid expenses		51			75
Other current assets		—			1
Other non-current assets		—			42
Accounts payable		67			240
Accrued liabilities		(72	)		(42	)
Deferred revenue		(128	)		(4	)
Due to stockholders		—			(10	)
	$	(42	)	$	218

The following table lists those items that have been excluded from the consolidated statements of cash flows as they relate to non-cash transactions and additional cash flow information:

	Three months ended March 31, ($000’s)
	2011		2010
Non-cash investing activities
Warrant issued in Registered Direct financing	$	—	$	737
Common stock issued to Marchant Securities Inc. for services provided in the equity issuance transaction.		—		155
Equity issuance costs accrued at March 31, 2010		—		707

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes, included in Item 1 of this Report. Unless otherwise specified, all dollar amounts are U.S. dollars.

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TearLab Corp.

Overview

We are an in vitro diagnostic company that has developed a proprietary tear testing platform, the TearLab® Osmolarity System. The TearLab test measures tear film osmolarity for diagnosis of Dry Eye Disease, or DED. Tear osmolarity is a quantitative and highly specific biomarker that has been shown to correlate with DED. The TearLab test enables the rapid measurement of tear osmolarity in a doctor’s office. We refer to the results of our TearLab testing platform as our Point-of-Care business division in the discussion of our operating results below. Commercializing our Point-of-Care tear testing platform is now the focus of our business.

In October 2008, the TearLab Osmolarity System received CE mark approval, clearing the way for sales in the European Union and all countries recognizing the CE mark. In connection with the CE mark clearance, we have entered into multi-year agreements with numerous distributors for distribution of the TearLab Osmolarity System. Currently, we have signed distribution agreements in each of the following countries: Spain, Portugal, Germany, France, Turkey, Ukraine, Bulgaria, Belgium, Netherlands, Switzerland, Finland, Sweden, South Korea, Australia, Russia, Hungary, Greece, Canada, Slovakia, Argentina, the Czech Republic and the United Kingdom and a sales representation agreement in Japan.

On May 19, 2009, we announced that we received 510(k) clearance from the U.S. Food and Drug Administration, or the FDA. The 510(k) clearance allows us to market the TearLab Osmolarity System to those reference and physician operated laboratories with CLIA certifications allowing them to perform moderate and high complexity tests. Considering that most of our target customers currently are eye care practitioners without such certifications, we intend to seek a CLIA waiver from the FDA for the TearLab Osmolarity System as well as assisting our customers in obtaining their moderate complexity CLIA certification or providing them with support from certified professionals. A CLIA waiver would greatly reduce the regulatory compliance for our future customers. Until we receive the CLIA Waiver Certification, doctors using the TearLab Osmolarity System must be certified under the moderate complexity CLIA certification.

On March 4, 2011, the Company announced that it was in receipt of a communication from the FDA indicating that the data submitted by the Company was not sufficient to gain approval of its CLIA Waiver categorization application for the TearLab® Osmolarity System. The Company is reviewing the comments made by the FDA and developing the necessary responses or strategies required to continue to pursue the CLIA waiver. The Company will also continue to pursue it strategy to assist its customers in obtaining moderate complexity CLIA certificates.

On December 8, 2009 we announced that Health Canada issued a Medical Device License for the TearLab Osmolarity System. The Health Canada license allowed us to immediately begin marketing the system in Canada. On August 20, 2009, we entered into an agreement with a distributor, Science with Vision, for exclusive distribution of the TearLab Osmolarity System in Canada. We began selling products through the Canadian distributor in 2010.

On October 19, 2010 we announced that a unique new Current Procedural Terminology, or CPT code that will apply to the TearLab Osmolarity test has now been be published by the American Medical Association. The new code will become effective January 1, 2011. The new CPT code for the TearLab Osmolarity test is: 83861; Microfluidic analysis utilizing an integrated collection and analysis device, tear osmolarity (For microfluidic tear osmolarity of both eyes, report 83861 twice). This code falls under the Chemistry sub-section of the Pathology and Laboratory section of the CPT Codebook and will be listed under the 2010 Clinical Laboratory Fee Schedule by the Centers for Medicare and Medicaid Services (CMS). Reimbursement by CMS has been set at $24.01 per eye and will only be available for offices that have a Moderate Complex CLIA certificate until TearLab receives a CLIA Waiver categorization from the FDA. Under the 2011 Clinical Laboratory Fee Schedule listed by CMS the reimbursement rate was reduced to $23.58 and was applicable to a majority of states in the United States.

Our success is highly dependent on our ability to increase sales of our testing platform in European and other countries recognizing the CE mark, in Canada where we have a Medical Device License and on our receipt of a CLIA waiver which will enable us to begin full commercialization efforts in the United States. Meeting these objectives requires that we have sufficient capital to fund our operations. Our working capital deficit of $800,000 as of March 31, 2011 is insufficient to fund our planned operations and our ability to generate increased revenues is uncertain. If our revenues do not increase sufficiently to meet operational needs we would be required to raise additional capital to fund our operations. We have sufficient cash to fund our operations at current levels through approximately July 2011 if our convertible note holders do not convert their convertible notes and accrued interest to common shares of the Company in July 2011 and only until the fourth quarter of 2011 if our convertible note holders do convert their convertible notes and accrued interest to common shares of the Company in July 2011. We continue to actively evaluate and pursue various financing possibilities at this time.

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TearLab Corp.

RESULTS OF OPERATIONS

Revenue, Cost of Sales and Gross Margin

	Three Months Ended March 31, (in thousands)
	2011			2010			Change


TearLab revenue	$	824		$	275		$	549

TearLab – cost of sales		412			189			223

TearLab gross profit	$	412		$	86		$	326

Gross profit percentage		50	%		31	%

Revenues

TearLab Revenue

TearLab revenue consists of sales of the TearLab® Osmolarity System, which is a hand-held tear film test for the measurement of tear osmolarity, a quantitative and highly specific biomarker that has shown to correlate with DED.

The TearLab Osmolarity System consists of the following three components: (1) the TearLab disposable, which is a single-use microfluidic labcard; (2) the TearLab pen, which is a hand-held device that interfaces with the TearLab disposable; and (3) the TearLab reader, which is a small desktop unit that allows for the docking of the TearLab disposable and the TearLab pen and provides a quantitative reading for the operator.

TearLab revenue increased by $549,000 or 200% for the three months ended March 31, 2011 as compared to the prior year quarter due to a higher level of North American sales volume at higher average sales prices over the prior year period.

TearLab Cost of Sales

TearLab cost of sales includes costs of goods sold, warranty, and royalty costs. Our cost of goods sold consists primarily of costs for the manufacture of the TearLab test, including the costs we incur for the purchase of component parts from our suppliers, applicable freight and shipping costs, fees related to warehousing and logistics inventory management.

TearLab costs of sales for the three months ended March 31, 2011 increased by $223,000 or 118% over the prior year fiscal period due to higher sales volumes in Europe, North America, and Asia, reflecting continued expansion of our business into North America and other global territories.

TearLab Gross Margin

TearLab gross margin for the three months ended March 31, 2011 increased by $326,000 or 379% compared to the prior year fiscal period due to higher sales volumes in Europe, North America, and Asia, reflecting continued expansion of our business into North America and other global territories

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TearLab Corp.

Operating Expenses

	Three months ended March 31, (in thousands)
	2011		2010		Change

General and administrative	$	908	$	966	$	(58	)
Clinical, regulatory and research and development		247		468		(221	)
Sales and marketing		441		274		167
Amortization of intangible assets		304		304		―
Operating expenses	$	1,900	$	2,012	$	(112	)

General and Administrative Expenses

General and administrative expenses decreased by $58,000 or 6% during the three months ended March 31, 2011, as compared with the corresponding period in 2010, primarily due to a $96,000 decrease in executive management bonus accruals and non-cash stock option and director fee expenses, offset by an $34,000 increase in public company expenses.

We are continuing to focus our efforts on controlling costs by reviewing and improving upon our existing business processes and cost structure.

Clinical, Regulatory and Research and Development Expenses

Total clinical, regulatory and research and development expenses decreased by $221,000 or 47% during the three months ended March 31, 2011, as compared with the corresponding prior year period. The decrease was due to a $135,000 decrease in employee related costs as compared to the prior year, which included executive bonus accruals for management. Additionally, the Company experienced an $87,000 decrease in costs related its CLIA waiver submission and clinical trial activities.

Sales and Marketing Expense

Sales and marketing expenses increased by $167,000 or 61% during the three months ended March 31, 2011, as compared with the comparable period in fiscal 2010. The increase is due to $141,000 in sales and business development costs that were not present in the prior year. Additionally there were increases in marketing and travel expense of $45,000 and $5,000, respectively, reflecting additional marketing production and trade show activity over the prior year period. The additional costs were offset by a $25,000 decrease in employee related costs over the prior year, which included an executive bonus accrual for management.

The cornerstone of our sales and marketing strategy to date has been to increase awareness of our products among eye care professionals and, in particular, the key opinion leaders in the eye care professions. We assist key opinion leaders in performing clinical trials to generate increased data to provide an increased understanding in the use of the TearLab Osmolarity System for diagnostic, treatment and monitoring of patients. Presently we are primarily focused on commercialization in North America and are working with our customers to assist them in receiving their moderate complexity CLIA certifications. We will continue to develop and execute our conference and podium strategy to ensure visibility and evidence-based positioning of the TearLab® Osmolarity System among eye care professionals.

Amortization of Intangible Assets

Amortization expense of intangible assets was unchanged for the three months ended March 31, 2011 and 2010, as there were no adjustments to the Company’s cost basis or estimated useful life of the underlying assets.

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TearLab Corp.

Other Income (Expense)

	Three Months Ended March 31, (in thousands)
	2011			2010			Change


Interest income	$	2		$	1		$	1
Changes in fair value of warrant obligations		39			71			(32	)
Interest expense		(52	)		(52	)		―
Amortization of deferred financing charges		(162	)		(154	)		(8	)
Other		(6	)		(20	)		14

Other income (expense)	$	(179	)	$	(154	)	$	(25	)

Interest Income

Interest income consists of interest earned as a result of the Company’s cash position following the raising of capital. The increase in interest income in the three months ended March 31, 2011, as compared to the three months ended March 31, 2010 is indicative of the Company earning interest from higher cash balances than in the prior year.

Changes in Fair Value of Warrants Obligations

The Company has a total of 752,615 warrants subject to fair value re-measurement. The decrease of $39,000 in the fair value of warrant obligations is recorded as a gain in other income for the three months ended March 31, 2011. In the three months ended March 31, 2010, a gain of $71,000 was reported.

Interest Expense

Interest expense of $52,000 has been recorded in each of the three month periods ended March 31, 2011 and 2010, arising from the notes payable issued in the third quarter of 2009.

Amortization of Deferred Financing Charges

As a result of the financing that the Company completed in July and August 2009, or the Financing, and which resulted in the purchase of $1.75 million in convertible secured notes by the investors, or the Notes, investors were in a position to convert the Notes at a conversion price of $1.3186 per share at a time when the common shares of the Company were trading at $1.75 (July 15th) and $1.70 (August 31st) providing them with a beneficial conversion feature. The Company has valued this feature as $728,000 and the amortization of this amount is expensed over the two year life of the Notes. This amortization expense was $126,000 and $120,000 for the three months ended March 31, 2011 and 2010, respectively.

Investors in the Financing will receive warrants at an exercise price of $1.60 upon conversion of the Notes. The Company has valued these warrants using the Black-Scholes value model at a value of $163,000. The amortization of this amount is recorded over the two year life of the Notes and amounted to $28,000 and $27,000 for the three months ended March 31, 2011 and 2010, respectively.

Issuance costs of the Financing totaled $87,000 and have been allocated to cost of equity and to deferred finance charges. The amortization of the deferred finance charges is recorded over the two year life of the Notes and amounted to $8,000 and $8,000 for the three months ended March 31, 2011 and 2010, respectively.

Other

Other income for the three months ended March 31, 2011 and 2010 consists primarily of foreign exchange gains and losses, based on fluctuations of the Company’s foreign denominated currencies.

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TearLab Corp.

Liquidity and Capital Resources

(in thousands)

	March 31,			December 31,
	2011			2010			Change

Cash and cash equivalents	$	1,642		$	2,726		$	(1,084	)
Percentage of total assets		16	%		24	%

Working capital	$	(798	)	$	420		$	(1,218	)

Financial Condition

Management believes that we have sufficient cash to fund our operations at current levels through approximately July 2011 if our convertible note holders do not convert their convertible notes and accrued interest to common shares of the Company in July 2011 and only until the fourth quarter of 2011 if our convertible note holders do convert their convertible notes and accrued interest to common shares of the Company in July 2011.

Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties. Actual results could vary as a result of a number of factors. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Our future funding requirements will depend on many factors, including but not limited to:

●

the cost and results, and the rate of progress, of the clinical trials of the TearLab Osmolarity System that will be required to support TearLab’s application to obtain a CLIA waiver from the FDA;

●

TearLab’s ability to obtain a CLIA waiver from the FDA for the TearLab Osmolarity System and the timing of such approval, if any;

●

whether government and third-party payers agree to reimburse the TearLab Osmolarity System;

●

whether eye care professionals engage in the process of obtaining their moderate complex CLIA certification;

●

the costs and timing of building the infrastructure to market and sell the TearLab® Osmolarity System;

●

the cost and results of continuing development of the TearLab Osmolarity System;

●

the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and

●

the effect of competing technological and market developments.

At the present time, our only product is the TearLab Osmolarity System, and while we have received 510(k) approval from the FDA which allows us to commercialize our product in the United States, we are currently limited to selling to facilities that have moderate and high complexity CLIA certifications. Obtaining a CLIA waiver approval from the FDA will enable us to market our product to the approximately 50,000 eye care practitioners that do not operate with moderate and high complexity CLIA certifications. At this time, we do not know when we can expect to begin to generate significant revenues from the TearLab Osmolarity System in the United States.

We will need additional capital in approximately July 2011 if our convertible note holders do not convert their convertible notes and accrued interest to common shares of the Company in July 2011 and approximately the fourth quarter of 2011 if our convertible note holders do convert their convertible notes and accrued interest to common shares of the Company in July 2011 and our prospects for obtaining that capital are uncertain. Additional capital may not be available on terms favorable to us, or at all. In addition, future financings could result in significant dilution of existing stockholders. However, unless we succeed in raising additional capital, we anticipate that we will be unable to continue our operations beyond approximately July 2011 if our convertible note holders do not convert their convertible notes and accrued interest to common shares of the Company in July 2011 and approximately the fourth quarter of 2011 if our convertible note holders do convert their convertible notes and accrued interest to common shares of the Company in July 2011.

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TearLab Corp.

Ongoing Sources and Uses of Cash

We anticipate that our cash and cash equivalents and cash generated from increased revenues, will be sufficient to sustain our operations until approximately July 2011 if our convertible note holders do not convert their convertible notes and accrued interest to common shares of the Company in July 2011 and approximately the fourth quarter of 2011 if our convertible note holders do convert their convertible notes and accrued interest to common shares of the Company in July 2011. We continually evaluate various financing possibilities but we typically expect our primary sources of cash will be related to the collection of accounts receivable and, to a lesser degree, interest income on our cash and investment balances. Our accounts receivable collections will be impacted by our ability to grow our point-of-care revenue.

We expect our primary uses of cash will be to fund our operating expenses and pursuing and maintaining our patents and trademarks. In addition, dependent on available funds, we expect to expend cash to improve production capability of the TearLab test, to further improve the performance of the TearLab test, and to pursue additional applications for the lab-on-a-chip technology.

Changes in Cash Flows

	Three months ended March 31, (in thousands)
	2011			2010			Change

Cash used in operating activities	$	(1,035	)	$	(1,192	)	$	157
Cash used in investing activities		(49	)		(2	)		(47	)
Cash provided by financing activities		―			7,954			(7,954	)

Net (decrease) in cash and cash equivalents during the period	$	(1,084	)	$	6,760		$	(7,844	)

Cash Used in Operating Activities

Net cash used to fund our operating activities during the three months ended March 31, 2011 was $1,035,000. Net loss during the three month period was $1,667,000. The non-cash items which comprise a portion of the net loss during that period consist primarily of the amortization of intangible assets, patents and trademarks, depreciation of fixed assets, stock-based compensation, amortization of prepaid or deferred finance charges, accretion of warrant and beneficial conversion values and accrued interest from the convertible secured note financing in the aggregate total of $713,000. Offsetting additional non-cash amounts which comprise a portion of the net loss during that period include changes in the fair value of warrant obligations $39,000.

The net change in non-cash working capital balances related to operations for the three months ended March 31, 2011 and 2010 consists of the following:

Cash provided (used)	Three months ended March 31, (in thousands)
	2011			2010
Amounts receivable, net	$	11		$	(36	)
Due from related parties		59			―
Inventory		(30	)		(48	)
Prepaid expenses		51			75
Other current assets		―			1
Other non-current assets		―			42
Accounts payable		67			240
Accrued liabilities		(72	)		(42	)
Deferred revenue		(128	)		(4	)
Due to stockholders		―			(10	)
	$	(42	)	$	218

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TearLab Corp.

Cash Used in Investing Activities

Net cash used in investing activities for the three months ended March 31, 2011 was $49,000. Cash used in investing activities during the period consists of cash in the amount of $49,000 used to acquire fixed assets.

Net cash used in investing activities for the three months ended March 31, 2010 was $2,000. Cash used in investing activities during the period consisted of cash in the amount of $2,000 used to acquire fixed assets.

Cash Provided by Financing Activities

During the three months ended March 31, 2010, the Company issued common stock in a private placement funding for $3,000,000 and in a registered direct funding for $5,000,000, offset by cash costs of $46,000. During the first three months ended March 31, 2011, the Company did not have any fundraising activities.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, related disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical of which are those related to revenue recognition and inventory valuation. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known.

There were no significant changes during the three months ended March 31, 2011 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Recent Accounting Pronouncements

For information on the recent accounting pronouncements impacting our business, see Note 2 of the Notes to the unaudited Consolidated Financial Statements for the three months ended March 30, 2011 included in Item 1.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Currency Fluctuations and Exchange Risk

All of our sales are in U.S. dollars, while a minor portion of our expenses are in Canadian dollars and Australian dollars. We cannot predict any future trends in the exchange rate of the Canadian dollar or Australian dollar against the U.S. dollar. Any strengthening of the Canadian dollar or Australian dollar in relation to the U.S. dollar would increase the U.S. dollar cost of our operations, and affect our U.S. dollar measured results of operations. We maintain bank accounts in both Canadian dollars and Australian dollars to meet short term operational operating requirements. Based on the balances in the Canadian dollar and Australian dollar denominated bank accounts at March 31, 2011, hypothetical increases of $0.01 in the value of the Canadian dollar and the Australian dollar in relation to the U.S. dollar would not have a material impact on our results of our operations. We do not engage in any hedging or other transactions intended to manage these risks. In the future, we may undertake hedging or other similar transactions or invest in market risk sensitive instruments if we determine that is advisable to offset these risks.

Interest Rate Risk

The primary objective of our investment activity is to preserve principal while maximizing interest income we receive from our investments, without increasing risk. We believe this will minimize our market risk. We do not use interest rate derivative transactions to manage our interest rate risk. We reduce our exposure to interest rate risk by investing in investment grade securities or money market accounts. Declines in interest rates over an extended period of time will reduce our interest income while an increase over an extended period of time will increase our interest income. A reduction of interest rate by 100 basis points over the three months ended March 31, 2011 would reduce interest income by under $1,000.

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ITEM 4.

CONTROLS AND PROCEDURES

(a)	Disclosure Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefit of controls must be considered relative to their costs. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of the end of the period covered by the report, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, our chief executive officer and chief financial officer concluded that, as at March 31, 2011 our disclosure controls and procedures were effective at the reasonable assurance level.

(b)	Changes in Internal Control over Financial Reporting.

During the first quarter of 2011, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II.

OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

We are not aware of any material litigation involving us that is outstanding, threatened or pending.

ITEM 1A.

RISK FACTORS

Risks Relating to our Business

Our near-term success is highly dependent on the success of the TearLab® Osmolarity System, and we cannot be certain that it will receive regulatory approval or be successfully commercialized in the United States.

The TearLab Osmolarity System is currently our only product. Our product is currently sold outside of the United States pursuant to CE mark approval; in Canada pursuant to a Health Canada Medical Device License; and in the United States as a result of having received 510(k) approval from the FDA, to market the TearLab Osmolarity System to those reference and physician operated laboratories with moderate and high complexity, Clinical Laboratory Improvement Act, or CLIA, certifications. We applying for a CLIA waiver from the U.S. Food and Drug Administration, or the FDA, which will allow us to sell to those eye care professionals in the United States who do not have CLIA certifications to perform moderate and high complexity tests. Even if the TearLab Osmolarity System receives all regulatory approvals in the United States, it may never be successfully commercialized. If the TearLab Osmolarity System does not receive all regulatory approvals or is not successfully commercialized, we may not be able to generate revenue, become profitable or continue our operations. Any failure of the TearLab Osmolarity System to receive regulatory approvals or to be successfully commercialized in the United States would have a material adverse effect on our business, operating results, financial condition and cash flows and could result in a substantial decline in the price of our common stock.

On March 4, 2011, the Company announced that it was in receipt of a communication from the U.S. Food and Drug Administration, or the FDA indicating that the data submitted by the Company was not sufficient to gain approval of its CLIA Waiver categorization application for the TearLab Osmolarity System. The Company is reviewing the comments made by the FDA and developing the necessary responses or strategies required to continue to pursue the CLIA waiver.

Our near-term success is highly dependent on increasing sales of the TearLab Osmolarity System outside the United States, and we cannot be certain that we will successfully increase such sales.

Our product is currently sold outside of the United States pursuant to CE mark approval and Health Canada Approval in Canada. Our near-term success is highly dependent on increasing our international sales. We may also be required to register our product with health departments in our foreign market countries. A failure to successfully register in such markets would negatively affect our sales in any such markets. In addition, import taxes are levied on our product in certain foreign markets. These foreign markets include Turkey, Spain, Italy and France. Other countries may adopt taxation codes on imported products. Increases in such taxes or other restrictions on our product could negatively affect our ability to import, distribute and price our product.

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Our limited working capital and history of losses have resulted in our auditors expressing doubts as to whether we will be able to continue as a going concern.

In the year ended December 31, 2010, and the three months ended March 31, 2011, we had prepared our consolidated financial statements on the basis that we would continue as a going concern. However, we have sustained substantial losses for each of the years ended December 31, 2005, 2006, 2007, 2008, 2009 and 2010 and also for the three months ended March 31, 2011. Our net working capital deficit at March 31, 2011 was $0.8 million which represents a $1.2 million decrease from our working capital balance of $0.4 million at December 31, 2010. During the year ended December 31, 2010, the Company raised gross proceeds of $8.0 million in private placement and registered direct financings. As a result of our history of losses and current financial condition, there is substantial doubt about our ability to continue as a going concern.

Included in the net working capital at March 31, 2011 is $1,876,000 in convertible notes payable and accrued interest which if not converted to common stock when it comes due for conversion in the third quarter of 2011 would utilize available cash resources. We believe that our cash and cash equivalents will be sufficient to meet our operating activities and other demands only until July 2011 if our convertible note holders do not convert their convertible notes and accrued interest to common shares of the Company in July 2011 and only until the fourth quarter of 2011 if our convertible note holders do convert their convertible notes and accrued interest to common shares of the Company in July 2011.

Our consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary if we were not able to continue as a going concern.

We have incurred losses since inception and anticipate that we will incur continued losses for the foreseeable future.

We have incurred losses in each year since our inception. As of March 31, 2011, we had an accumulated deficit of $380.4 million which includes a loss of $1.7 million for the three months ended March 31, 2011. Our losses have resulted primarily from expenses incurred in research and development of our product candidates from the former retina and glaucoma business divisions. We do not know when or if we will receive CLIA waiver approval from the FDA for the TearLab Osmolarity® System or successfully commercialize it in the United States. As a result, and because of the numerous risks and uncertainties facing us, it is difficult to provide the extent of any future losses or the time required to achieve profitability, if at all. Any failure of our product candidate to obtain regulatory approval and any failure to become and remain profitable would adversely affect the price of our common stock and our ability to raise capital and continue operations.

We are leveraged financially, which could adversely affect our ability to adjust our business to respond to competitive pressures and to obtain sufficient funds to satisfy our future research and development needs, and to defend our intellectual property.

As of March 31, 2011, our total indebtedness was approximately $3.7 million. Included in our total indebtedness is $1.9 million of convertible notes payable and accrued interest which comes due in the third quarter of 2011 and if not converted into common shares of the Company could adversely impact our cash reserves needed to operate the business. Our significant debt and debt service requirements could adversely affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities. For example, our high level of debt presents the following risks:

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our substantial leverage increases our vulnerability to economic downturns and adverse competitive and industry conditions and could place us at a competitive disadvantage compared to those of our competitors that are less leveraged;

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our debt service obligations could limit our flexibility in planning for, or reacting to, changes in our business and our industry and could limit our ability to pursue other business opportunities, borrow more money for operations or capital in the future and implement our business strategies; and

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our level of debt may restrict us from raising additional financing on satisfactory terms to fund working capital, capital expenditures, product development efforts, strategic acquisitions, investments and alliances, and other general corporate requirements.

If we are at any time unable to generate sufficient cash flow to service our indebtedness when payment is due, we may be required to attempt to renegotiate the terms of the instruments relating to the indebtedness, seek to refinance all or a portion of the indebtedness or obtain additional financing. There can be no assurance that we will be able to successfully renegotiate such terms, that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to us.

We may not be able to raise the capital necessary to fund our operations.

Since inception, we have funded our operations through debt and equity financings, including 2008 common stock and debt bridge financings, 2009 convertible secured debt financings and the 2010 private placement and registered direct common stock financings. As of the date of this annual report on Form 10-Q, we estimate that our cash and cash equivalents will be sufficient to meet our operating activities and other demands only until July 2011 if our convertible note holders do not convert their convertible notes and accrued interest to common shares of the Company in July 2011 and only until the fourth quarter of 2011 if our convertible note holders do convert their convertible notes and accrued interest to common shares of the Company in July 2011. However, our prospects for obtaining additional financing are uncertain. Additional capital may not be available on terms favorable to us, or at all. If financing is available, it may not be sufficient for us to continue as a going concern and it may be on terms that adversely affect the interest of our existing stockholders. In addition, future financings could result in significant dilution of existing stockholders and adversely affect the economic interests of existing stockholders.

We will face challenges in bringing the TearLab® Osmolarity System to market in the United States and may not succeed in executing our business plan.

There are numerous risks and uncertainties inherent in the development of new medical technologies. In addition to our requirement for additional capital, our ability to bring the TearLab Osmolarity System to market in the United States and to execute our business plan successfully is subject to the following risks, among others:

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Our clinical trials may not succeed. Clinical testing is expensive and can take longer than originally anticipated. The outcomes of clinical trials are uncertain, and failure can occur at any stage of the testing. We could encounter unexpected problems, which could result in a delay in the follow-up submission of our application for the sought-after CLIA waiver from the FDA or prevent its submission altogether.

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We may not receive the CLIA waiver for the TearLab Osmolarity System from the FDA, in which case our ability to market the TearLab Osmolarity System in the United States will be impacted.

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The TearLab Osmolarity System is rated under a moderately complex CLIA certification which requires our customers to be certified under the moderately complex CLIA requirements, including certain parallel state requirements. If our customers are unwilling or unable to comply with such requirements, it could have an adverse effect on our ability to market the TearLab Osmolarity System in the United States.

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Our suppliers and we will be subject to numerous FDA requirements covering the design, testing, manufacturing, quality control, labeling, advertising, promotion and export of the TearLab Osmolarity System and other matters. If our suppliers or we fail to comply with these regulatory requirements, the TearLab Osmolarity System could be subject to restrictions or withdrawals from the market and we could become subject to penalties.

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Even if we succeed in obtaining the sought-after FDA approvals, we may be unable to commercialize the TearLab® Osmolarity System successfully in the United States. Successful commercialization will depend on a number of factors, including, among other things, achieving widespread acceptance of the TearLab Osmolarity System among physicians, establishing adequate sales and marketing capabilities, addressing competition effectively, the ability to obtain and enforce patents to protect proprietary rights from use by would-be competitors, key personnel retention and ensuring sufficient manufacturing capacity and inventory to support commercialization plans.

If we are subject to regulatory enforcement action as a result of our failure to comply with regulatory requirements, our commercial operations would be harmed.

While we received the 510(k) clearance that we were seeking, we will be subject to significant ongoing regulatory requirements, and if we fail to comply with these requirements, we could be subject to enforcement action by the FDA or state agencies, including:

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adverse publicity, warning letters, fines, injunctions, consent decrees and civil penalties;

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repair, replacement, refunds, recall or seizure of our product;

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operating restrictions or partial suspension or total shutdown of production;

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delay or refusal of our requests for 510(k) clearance or premarket approval of new products or of new intended uses or modifications to our existing product;

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refusal to grant export approval for our products;

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withdrawing 510(k) clearances or premarket approvals that have already been granted; and

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criminal prosecution.

If any of these enforcement actions were to be taken by the government, our business could be harmed.

We are required to demonstrate and maintain compliance with the FDA’s Quality System Regulation, or the QSR. The QSR is a complex regulatory scheme that covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of our products. The FDA must determine that the facilities which manufacture and assemble our products that are intended for sale in the United States, as well as the manufacturing controls and specifications for these products, are compliant with applicable regulatory requirements, including the QSR. The FDA enforces the QSR through periodic unannounced inspections. Our facilities have not yet been inspected by the FDA, and we cannot assure you that we will pass any future FDA inspection. Our failure, or the failure of our suppliers, to take satisfactory corrective action in response to an adverse QSR inspection could result in enforcement actions, including a public warning letter, a shutdown of our manufacturing operations, a recall of our product, civil or criminal penalties or other sanctions, which would significantly harm our available inventory and sales and cause our business to suffer.

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Our patents may not be valid, and we may not be able to obtain and enforce patents to protect our proprietary rights from use by would-be competitors. Patents of other companies could require us to stop using or pay to use required technology.

Our owned and licensed patents may not be valid, and we may not be able to obtain and enforce patents and to maintain trade secret protection for our technology. The extent to which we are unable to do so could materially harm our business.

We have applied for, and intend to continue to apply for, patents relating to the TearLab® Osmolarity System and related technology and processes. Such applications may not result in the issuance of any patents, and any patents now held or that may be issued may not provide adequate protection from competition. Furthermore, it is possible that patents issued or licensed to us may be challenged successfully. In that event, if we have a preferred competitive position because of any such patents, any preferred position would be lost. If we are unable to secure or to continue to maintain a preferred position, the TearLab Osmolarity System could become subject to competition from the sale of generic products.

Patents issued or licensed to us may be infringed by the products or processes of others. The cost of enforcing patent rights against infringers, if such enforcement is required, could be significant and the time demands could interfere with our normal operations. There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical, biotechnology and medical technology industries. We could become a party to patent litigation and other proceedings. The cost to us of any patent litigation, even if resolved in our favor, could be substantial. Some of our would-be competitors may be able to sustain the costs of such litigation more effectively than we can because of their substantially greater financial resources. Litigation may also absorb significant management time.

Unpatented trade secrets, improvements, confidential know-how and continuing technological innovation are important to our future scientific and commercial success. Although we attempt to, and will continue to attempt to, protect our proprietary information through reliance on trade secret laws and the use of confidentiality agreements with corporate partners, collaborators, employees and consultants and other appropriate means, these measures may not effectively prevent disclosure of our proprietary information, and, in any event, others may develop independently, or obtain access to, the same or similar information.

Certain of our patent rights are licensed to us by third parties. If we fail to comply with the terms of these license agreements, our rights to those patents may be terminated, and we will be unable to conduct our business.

It is possible that a court may find us to be infringing upon validly issued patents of third parties. In that event, in addition to the cost of defending the underlying suit for infringement, we may have to pay license fees and/or damages and may be enjoined from conducting certain activities. Obtaining licenses under third-party patents can be costly, and such licenses may not be available at all.

We may face future product liability claims.

The testing, manufacturing, marketing and sale of therapeutic and diagnostic products entail significant inherent risks of allegations of product liability. Our past use of the RHEO™ System and the components of the SOLX Glaucoma System in clinical trials and the commercial sale of those products may have exposed us to potential liability claims. Our use of the TearLab® Osmolarity System and its commercial sale could also expose us to liability claims. All of such claims might be made directly by patients, health care providers or others selling the products. We carry clinical trials and product liability insurance to cover certain claims that could arise, or that could have arisen, during our clinical trials or during the commercial use of our products. We currently maintain clinical trials and product liability insurance with coverage limits of $2,000,000 in the aggregate annually. Such coverage, and any coverage obtained in the future, may be inadequate to protect us in the event of successful product liability claims, and we may not be able to increase the amount of such insurance coverage or even renew it. A successful product liability claim could materially harm our business. In addition, substantial, complex or extended litigation could result in the incurrence of large expenditures and the diversion of significant resources.

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We have entered into a number of related party transactions with suppliers, creditors, stockholders, officers and other parties, each of which may have interests which conflict with those of our public stockholders.

We have entered into several related party transactions with our suppliers, creditors, stockholders, officers and other parties, each of which may have interests which conflict with those of our public stockholders.

If we do not introduce new commercially successful products in a timely manner, our products may become obsolete over time, customers may not buy our products and our revenue and profitability may decline.

Demand for our products may change in ways we may not anticipate because of:

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evolving customer needs;

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the introduction of new products and technologies; and

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evolving industry standards.

Without the timely introduction of new commercially successful products and enhancements, our products may become obsolete over time, in which case our sales and operating results would suffer. The success of our new product offerings will depend on several factors, including our ability to:

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properly identify and anticipate customer needs;

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commercialize new products in a cost-effective and timely manner;

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manufacture and deliver products in sufficient volumes on time;

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obtain and maintain regulatory approval for such new products;

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differentiate our offerings from competitors’ offerings;

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achieve positive clinical outcomes; and

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provide adequate medical and/or consumer education relating to new products.

Moreover, innovations generally will require a substantial investment in research and development before we can determine the commercial viability of these innovations and we may not have the financial resources necessary to fund these innovations. In addition, even if we are able to successfully develop enhancements or new generations of our products, these enhancements or new generations of products may not produce revenue in excess of the costs of development and they may be quickly rendered obsolete by changing customer preferences or the introduction by our competitors of products embodying new technologies or features.

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We rely on a single supplier of each of the key components of the TearLab® Osmolarity System and are vulnerable to fluctuations in the availability and price of our suppliers’ products and services.

We purchase each of the key components of the TearLab Osmolarity System from single third-party suppliers. Our supplier may not provide the components or other products needed by us in the quantities requested, in a timely manner or at a price we are willing to pay. In the event we were unable to renew our agreements with our supplier or they were to become unable or unwilling to continue to provide important components in the required volumes and quality levels or in a timely manner, or if regulations affecting the components were to change, we would be required to identify and obtain acceptable replacement supply sources. We may not be able to obtain alternative suppliers or vendors on a timely basis, or at all, which could disrupt or delay, or halt altogether, our ability to manufacture or deliver the TearLab Osmolarity System. If any of these events should occur, our business, financial condition, cash flows and results of operations could be materially adversely affected.

We face intense competition, and our failure to compete effectively could have a material adverse effect on our results of operations.

We face intense competition in the markets for ophthalmic products and these markets are subject to rapid and significant technological change. Although we have no direct competitors, we have numerous potential competitors in the United States and abroad. We face potential competition from industry participants marketing conventional technologies for the measurement of osmolarity and other in-lab testing technologies, as well as industry participants developing and marketing point-of-care tests, such as the technology being developed by the Aborn Eye Clinic, which is reportedly able to measure the osmolarity of nanoliter tear samples, and commercially available methods, such as the Schirmer Test and ocular surface staining. Many of our potential competitors have substantially more resources and a greater marketing scale than we do. If we are unable to develop and produce or market our products to effectively compete against our competitors, our operating results will materially suffer.

If we lose key personnel, or we are unable to attract and retain highly qualified personnel on a cost-effective basis, it would be more difficult for us to manage our existing business operations and to identify and pursue new growth opportunities.

Our success depends, in large part, upon our ability to attract and retain highly qualified scientific, clinical, manufacturing and management personnel. In addition, any difficulties retaining key personnel or managing this growth could disrupt our operations. Future growth will require us to continue to implement and improve our managerial, operational and financial systems, and to continue to recruit, train and retain, additional qualified personnel, which may impose a strain on our administrative and operational infrastructure. The competition for qualified personnel in the medical technology field is intense. We are highly dependent on our continued ability to attract, motivate and retain highly qualified management, clinical and scientific personnel.

Due to our limited resources, we may not be able to effectively recruit, train and retain additional qualified personnel. If we are unable to retain key personnel or manage our growth effectively, we may not be able to implement our business plan.

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Furthermore, we have not entered into non-competition agreements with our key employees. In addition, we do not maintain “key person” life insurance on any of our officers, employees or consultants. The loss of the services of existing personnel, the failure to recruit additional key scientific, technical and managerial personnel in a timely manner, and the loss of our employees to our competitors would harm our research and development programs and our business.

If we fail to establish and maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired, which would adversely affect our consolidated operating results, our ability to operate our business and our stock price.

Ensuring that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Failure on our part to maintain effective internal financial and accounting controls would cause our financial reporting to be unreliable, could have a material adverse effect on our business, operating results, financial condition and cash flows, and could cause the trading price of our common stock to fall dramatically.

Maintaining proper and effective internal controls will require substantial management time and attention and may result in our incurring substantial incremental expenses, including with respect to increasing the breadth and depth of our finance organization to ensure that we have personnel with the appropriate qualifications and training in certain key accounting roles and adherence to certain control disciplines within the accounting and reporting function. Any failure in internal controls or any additional errors or delays in our financial reporting would have a material adverse effect on our business and results of operations and could have a substantial adverse impact on the trading price of our common stock.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our management does not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Our management has identified a control deficiency in the past and may identify additional deficiencies in the future.

We cannot be certain that the actions we are taking to improve our internal controls over financial reporting will be sufficient or that we will be able to implement our planned processes and procedures in a timely manner. In future periods, if the process required by Section 404 of the Sarbanes-Oxley Act of 2002 reveals material weaknesses or significant deficiencies, the correction of any such material weaknesses or significant deficiencies could require additional remedial measures which could be costly and time-consuming. In addition, we may be unable to produce accurate financial statements on a timely basis. Any of the foregoing could cause investors to lose confidence in the reliability of our consolidated financial statements, which could cause the market price of our common stock to decline and make it more difficult for us to finance our operations and growth.

The trading price of our common stock may be volatile.

The market prices for, and the trading volumes of, securities of medical device companies, such as ours, have been historically volatile. The market has experienced, from time to time, significant price and volume fluctuations unrelated to the operating performance of particular companies. The market price of our common shares may fluctuate significantly due to a variety of factors, including:

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the results of pre-clinical testing and clinical trials by us, our collaborators and/or our competitors;

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technological innovations or new diagnostic products;

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governmental regulations;

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developments in patent or other proprietary rights;

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litigation;

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public concern regarding the safety of products developed by us or others;

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comments by securities analysts;

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the issuance of additional shares to obtain financing or for acquisitions;

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general market conditions in our industry or in the economy as a whole; and

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political instability, natural disasters, war and/or events of terrorism.

In addition, the stock market has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of individual companies. Broad market and industry factors may seriously affect the market price of companies’ stock, including ours, regardless of actual operating performance. In the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

Because we do not expect to pay dividends on our common stock, stockholders will benefit from an investment in our common stock only if it appreciates in value.

We have never paid cash dividends on our common stock and have no present intention to pay any dividends in the future. We are not profitable and do not expect to earn any material revenues for at least several years, if at all. As a result, we intend to use all available cash and liquid assets in the development of our business. Any future determination about the payment of dividends will be made at the discretion of our board of directors and will depend upon our earnings, if any, our capital requirements, our operating and financial conditions and on such other factors as our board of directors may deem relevant. As a result, the success of an investment in our common stock will depend upon any future appreciation in its value. There is no guarantee that our common stock will appreciate in value or even maintain the price at which stockholders have purchased their shares.

Warrant holders will not be entitled to any of the rights of common stockholders, but will be subject to all changes made with respect thereto.

If you hold warrants, you will not be entitled to any rights with respect to our common stock (including, without limitation, voting rights and rights to receive any dividends or other distributions on our common stock), but you will be subject to all changes affecting our common stock. You will have rights with respect to our common stock only if you receive our common stock upon exercise of the warrants and only as of the date when you become a record owner of the shares of our common stock upon such exercise. For example, if an amendment is proposed to our charter or bylaws requiring stockholder approval and the record date for determining the stockholders of record entitled to vote on the amendment occurs prior to the date you are deemed to be the owner of the shares of our common stock due upon exercise of your warrants, you will not be entitled to vote on the amendment, although you will nevertheless be subject to any changes in the powers, preferences or special rights of our common stock.

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We can issue shares of preferred stock that may adversely affect the rights of holders of our common stock.

Our certificate of incorporation authorizes us to issue up to 10,000,000 shares of preferred stock with designations, rights, and preferences determined from time to time by our board of directors. Accordingly, our board of directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights superior to those of holders of our common stock. For example, an issuance of shares of preferred stock could:

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adversely affect the voting power of the holders of our common stock;

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make it more difficult for a third party to gain control of us;

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discourage bids for our common stock at a premium;

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limit or eliminate any payments that the holders of our common stock could expect to receive upon our liquidation; or

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otherwise adversely affect the market price or our common stock.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

There has not been any default upon our senior securities.

ITEM 4.

(REMOVED AND RESERVED)

ITEM 5.

OTHER INFORMATION

None.

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ITEM 6.

EXHIBITS

2.1	Form of Plan of Reorganization (incorporated by reference to Exhibit 2.1 to the Registrant’s Registration Statement on Form S-1/A No. 4, filed with the Commission on December 6, 2004 (file no. 333-118024)).

3.1	Restated Certificate of Incorporation of Registrant, filed with the Secretary of State of the State of Delaware on October 7, 2008 (incorporated by reference to Exhibit 3.3 to the Registrant’s Current Report on Form 8-K filed with the Commission on October 9, 2008 (file no. 000-51030)).

3.2	Certificate of Amendment of Registrant, filed with the Secretary of State of the State of Delaware on October 7, 2008 (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed with the Commission on October 9, 2008 (file no. 000-51030)).

3.3	Certificate of Amendment of Registrant, filed with the Secretary of State of the State of Delaware on May 18, 2010 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on May 19, 2010 (file no. 000-51030)).

3.4	Amended and Restated By-Laws of the Registrant as currently in effect (incorporated by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-1/A No. 3, filed with the Commission on November 16, 2004 (file no. 333-118024)).

10.1	2002 Stock Option Plan, as amended and restated on June 24, 2010.

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31.1	CEO’s Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934.

31.2	CFO’s Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934.

32.1	CEO’s Certification of periodic financial reports pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	CFO’s Certification of periodic financial reports pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		TearLab Corp.
		(Registrant)

Date: May 12, 2011		/s/ Elias Vamvakas
		Elias Vamvakas
		Chief Executive Officer

Attached files

TearLab Corp Reports

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