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, 2018

 

[  ]	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.)

 

9980 Huennekens Street, Suite 100, 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 [  ]

 

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 [X] No [  ]

 

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

 

Large accelerated filer [  ]	Accelerated filer [  ]
Non-accelerated filer [  ] (Do not check if a smaller reporting company)	Smaller reporting company [X]
Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 10,438,998 as of May 7, 2018.

 

 

 

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	26
Item 4.	Controls and Procedures	26
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3.	Defaults Upon Senior Securities	40
Item 4.	Mine Safety Disclosures	40
Item 5.	Other Information	40
Item 6.	Exhibits	40

 

 

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,” “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 ability to continue as a going concern;
●	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;
●	Our future strategy, structure, and business prospects and the ability to identify and execute any strategic alternatives;
●	Our ability to obtain additional financing for working capital on acceptable terms and in a timely manner while our common stock is traded on the OTCQB market;
●	The planned continued commercialization of our current product;
●	Our ability to expand into next generation products, including our expectations regarding the TearLab DiscoveryTM Platform and the 510(k) application process;
●	Our ability to meet the financial covenants under our credit facilities;
●	Use of cash, cash needs and ability to raise capital;
●	The size and growth of the potential markets for our product and technology;
●	The effect of our strategy to streamline our organization and lower our costs, including the impact of our new business model adopted in December 2017;
●	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 additional countries;
●	Our anticipated expansion of United States and international sales and operations;
●	Our ability to obtain and protect our intellectual property and proprietary rights;
●	The results of our clinical trials;
●	Our ability to maintain reimbursement for our product and support our pricing strategies;
●	Our ability to execute our marketing strategy to ensure visibility and evidence-based positioning of the TearLab® Osmolarity System among eye care professionals given our reduced commercial resources;
●	Our ability to attract and retain a sufficient number of scientists, clinicians, sales personnel and other key personnel with extensive experience in medical technology, who are in short supply;
●	Our beliefs about our employee relations;
●	Our efforts to assist our customers in obtaining their CLIA waiver or providing them with support from certified professionals; and
●	The impact of our delisting from the NASDAQ Capital Market and our common stock being traded on the OTCQB.

 

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.

 

 

TearLab Corporation

 

PART I.	FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS (Unaudited)

 

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(Unaudited)

 

		March 31, 2018				December 31, 2017
ASSETS
Current assets
Cash		$	7,431			$	7,272
Accounts receivable, net			1,452				1,536
Inventory			1,683				1,998
Prepaid expenses and other current assets			629				690
Total current assets			11,195				11,496
Fixed assets, net			2,460				2,739
Intangible assets, net			7				10
Other non-current assets			50				100
Total assets		$	13,712			$	14,345
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities
Accounts payable		$	1,073			$	1,720
Accrued liabilities			2,649				2,859
Deferred rent			34				42
Current portion of long-term debt			3,630				-
Total current liabilities			7,386				4,621
Long-term debt, net of current portion			25,770				28,290
Total liabilities			33,156				32,911
Commitments and contingencies (Note 8)
Stockholders’ deficit
Capital stock
Preferred Stock, $0.001 par value, 10,000,000 authorized, 934 and 2,012 issued and outstanding at March 31, 2018 and December 31, 2017, respectively			-				-
Common stock, $0.001 par value, 40,000,000 authorized, 10,438,998 and 7,986,998 issued and outstanding at March 31, 2018 and December 31, 2017, respectively			10				8
Additional paid-in capital			510,238				510,235
Accumulated deficit			(529,692	)			(528,809	)
Total stockholders’ deficit			(19,444	)			(18,566	)
Total liabilities and stockholders’ deficit		$	13,712			$	14,345

 

See accompanying notes to interim condensed consolidated financial statements

 

 

TearLab Corporation

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(expressed in thousands of U.S. dollars except shares and per share amounts)

(Unaudited)

 

		Three months ended
		March 31,
		2018				2017
Revenue
Product sales		$	5,775			$	5,987
Reader equipment rentals			671				714
Total revenue			6,446				6,701
Cost of goods sold
Cost of goods sold (excluding amortization of intangible assets)			1,836				2,542
Cost of goods sold - reader equipment depreciation			288				466
Gross profit			4,322				3,693
Operating expenses
Sales and marketing			1,020				3,332
Clinical, regulatory and research & development			1,041				1,564
General and administrative			2,044				2,187
Total operating expenses			4,105				7,083
Income (loss) from operations			217				(3,390	)
Other income (expense)
Interest income (expense)			(1,105	)			(1,028	)
Other, net			5				(3	)
Total other income (expense)			(1,100	)			(1,031	)
Net loss and comprehensive loss		$	(883	)		$	(4,421	)
Weighted average shares outstanding - basic and fully diluted			9,562,122				5,367,311
Net loss per share		$	(0.09	)		$	(0.82	)

 

See accompanying notes to interim condensed consolidated financial statements

 

 

TearLab Corporation

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(expressed in thousands of U.S. dollars)

(Unaudited)

 

		Three months ended
		March 31,
		2018				2017
OPERATING ACTIVITIES
Net loss for the period		$	(883	)		$	(4,421	)
Adjustments to reconcile net loss to cash used in operating activities:
Stock-based compensation			8				289
Depreciation of fixed assets			353				521
Amortization of intangible assets			3				15
Deferred interest on long-term debt			914				302
Amortization of debt discount			193				154
Changes in operating assets and liabilities:
Accounts receivable, net			84				13
Inventory			314				(131	)
Prepaid expenses and other assets			111				10
Accounts payable			(647	)			889
Accrued liabilities			(210	)			123
Deferred rent/revenue			(8	)			(12	)
Cash provided by (used in) operating activities			232				(2,248	)
INVESTING ACTIVITIES
Additions to fixed assets			(73	)			(223	)
Cash used in investing activities			(73	)			(223	)
FINANCING ACTIVITIES
Repurchase of fractional shares upon reverse stock split			-				(3	)
Proceeds from the issuance of employee stock purchase plan shares			-				35
Cash provided by financing activities			-				32
Increase (decrease) in cash and cash equivalents during the period			159				(2,439	)
Cash, beginning of period			7,272				15,471
Cash, end of period		$	7,431			$	13,032
Supplemental cash flow information
Cash paid for interest		$	-			$	571

 

See accompanying notes to interim condensed consolidated financial statements

 

 

TearLab Corporation

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

 

1. BASIS OF PRESENTATION

 

Nature of Operations

 

TearLab Corporation (“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 condensed consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated on consolidation.

 

Liquidity and Going Concern

 

The accompanying condensed consolidated financial statements have been prepared on the going concern basis, which assumes that the Company will continue to operate as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has sustained substantial losses of $883 and $4,421 for the three months ended March 31, 2018 and 2017, respectively. Based on the Company’s expected rate of cash consumption in the latter quarters of 2018, the Company estimates it will need additional capital in the first quarter of 2019 and its prospects for obtaining that capital are uncertain. The Company may be able to raise either additional debt financing or additional equity financing. However, the Company can make no assurances that it will be able to raise the required additional capital, either through debt or equity financing, on acceptable terms or at all. Unless the Company succeeds in raising additional capital or significantly reduces the cash consumed in the operations of the Company, the Company anticipates that it will be unable to continue operations through the end of the first quarter of 2019 without violating an existing covenant on the Term Loan Agreement (see Note 5). As a result of the Company’s historical losses and financial condition, there is substantial doubt about the Company’s ability to continue as a going concern.

 

2. SIGNIFICANT ACCOUNTING POLICIES

 

The Condensed Consolidated Balance Sheet at December 31, 2017 has been derived from the audited consolidated 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 (“U.S. GAAP”) for complete financial statements. These unaudited interim condensed 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, 2017. The audited financial statements for the year ended December 31, 2017, filed with the SEC with the Company’s annual report on Form 10-K on March 5, 2018 include a summary of significant accounting policies and should be read in conjunction with this Form 10-Q. Management believes that all adjustments necessary for the fair presentation of results, consisting of normal recurring items, have been included in the unaudited condensed consolidated financial statements for the interim periods presented.

 

 

TearLab Corporation

 

Use of Estimates

 

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, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The principal areas of judgment relate to revenue and inventory reserves, allowance for doubtful accounts, impairment of long-lived and intangible assets, and the fair value of stock options and warrants.

 

Revenue recognition

 

On January 1, 2018 the Company adopted Topic 606 – Revenue from Contracts with Customers using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605 – Revenue Recognition.

 

There was no net reduction to opening retained earnings as a result of adopting Topic 606 and no impact to revenues for the three months ended March 31, 2018.

 

Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of control of our products or services. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services which includes estimates of variable consideration that results from returns, rebates or test card replacements. The Company records allowances for returns or rebates and reports revenue net of such amounts, which was immaterial for the three months ended March 31, 2018. Sales and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. The Company’s payment terms are typically upon shipment or net 30.

 

The Company sells its proprietary TearLab® Osmolality System and related test cards to external customers, who are primarily eye care professionals, for use in osmolality testing procedures. Revenue is primarily derived from the sale of disposable test cards. Products are generally shipped from a distribution and warehousing facility located in San Diego, California. The Company’s sales are currently direct to customers in the United States and to distributors in the rest of the world.

 

The Company enters into contracts where revenue is derived either from agreements whereby the customer is provided the right to use the TearLab®Osmolarity System (reader equipment) at no separate cost to the customer in consideration for a minimum or implied purchase commitment of disposable test cards over the related contract term (referred to as either “Use Agreements”, “Masters Agreements” or “Flex Agreements”), or from agreements to sell the reader equipment and disposable test cards at their stand-alone selling price with no contractual future purchase commitment (referred to as “Purchase Agreements”).

 

Use, Masters, and Flex Agreements

 

Purchase commitments for Use Agreements and Flex Agreements are expressed in the agreement for a specified period of time (generally one to three years). The purchase commitment for Masters Agreements is implied for large physician practices with an expectation of purchasing certain levels of test cards. The Company recovers the cost of providing the reader equipment in the amount charged for disposable test cards. Two performance obligations exist under these contracts, related to the customers’ right to use the reader equipment and orders of test cards. As the customer has the ability and right to operate the reader equipment in a manner it determines as well as obtain the output from using the reader equipment, the revenue related to the reader equipment use performance obligation is recognized in accordance with ASC 840 – Leases, wherein revenue related to the reader equipment is recognized over the defined contract term. Revenue related to disposable test cards is recognized as the disposable test cards are shipped. Based on the nature of these contracts, which provide terms for the future purchase of test cards but do not contractually obligate the customer to do so, each purchase of test cards is treated as its own distinct contract with a performance obligation to provide the test cards ordered, memorialized by the customers’ purchase order/request. Revenue under such agreements is allocated between the lease of the reader equipment and the sale of the disposables based upon each component’s relative standalone selling price, which is estimated using the selling prices of the reader device and test cards under Purchase Agreements, discussed further below.

 

When reader equipment is placed with a customer at no separate cost, the Company retains title to the equipment and it remains capitalized on the Company’s Consolidated Balance Sheet as equipment classified within fixed assets, net. The equipment is depreciated on a straight-line basis once shipped to a customer location over its estimated useful life and depreciation expense is included in cost of goods sold within the Consolidated Statements of Operations and Comprehensive Loss.

 

Purchase Agreements

 

Revenue recognition for Purchase Agreements is based on the individual performance obligations determined to exist in the contract. Since the reader equipment and the test cards are separate and distinct delivered items, the delivery of each are considered separate performance obligations. The reader equipment and test cards are separately identified under the Purchase Agreements and are sold at their standalone selling price. The Company recognizes revenue for each of the performance obligations only when it determines that all applicable recognition criteria have been met, which is usually upon shipment to the customer. Under Purchase Agreements, the customer is not contractually obligated to purchase additional test cards, and each subsequent order of test cards represents a separate and distinct contract with the performance obligation to provide the test cards ordered.

 

Amounts billed to customers for shipping and handling of a sales transaction are included as revenue. For the three months ended March 31, 2018 and 2017, the Company recognized revenue from shipping and handling of $39 and $44, respectively.

 

 

The following table presents our revenues disaggregated by revenue source. Sales and usage-based taxes are excluded from revenues:

 

		Three months ended March 31,
		2018				2017
Product Sales		$	5,775			$	5,987
Reader Equipment Rentals			671				714
		$	6,446			$	6,701

 

Arrangements with Multiple Performance Obligations

 

Our contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenue to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the separate prices charged to customers for the reader device and test cards under Purchase Agreements.

 

Return Reserve

 

Although the Company has a no return policy for its products, the Company has established a return reserve for product sales that contain an implicit right of return. The Company reserves for estimated returns or refunds by reducing revenue at the time of shipment based on historical experience. The reserve of $7 and $9 as of March 31, 2018 and December 31, 2017, respectively, has been recorded as a reduction of revenue and is included in accounts receivable.

 

Practical Expedients and Exemptions

 

We generally expense outside sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses.

 

We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

 

Recent accounting pronouncements

 

In July 2017, the FASB issued Accounting Standards Update No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815) Part I. Accounting for Certain Financial Instruments with Down Round Features Part II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable non-controlling interests. ASU 2017-11 is effective for fiscal years and interim periods after December 31, 2018. The Company early adopted ASU 2017-11 effective December 31, 2017.

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 establishes a right-of-use model that requires a lessee to record an asset and liability on the balance sheet for all leases with terms longer than twelve months. ASU 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating the impact of the new standard on its financial statements.

 

On January 1, 2018, we adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605. Additionally, accounting for leased reader equipment is outside the scope of Topic 606, therefore our leased reader equipment revenue is recognized under ASC 840, Leases.

 

 

TearLab Corporation

 

3. BALANCE SHEET DETAILS

 

Accounts receivable

 

		March 31, 2018				December 31, 2017
Trade receivables		$	1,869			$	2,044
Allowance for doubtful accounts			(417	)			(508	)
		$	1,452			$	1,536

 

Inventory

 

Inventory is recorded at the lower of cost and net realizable value and consists of finished goods. Inventory is accounted for on a first-in, first-out basis.

 

		March 31, 2018				December 31, 2017
Finished goods		$	1,684			$	2,125
Inventory reserves			(1	)			(127	)
		$	1,683			$	1,998

 

The Company evaluates inventory for estimated excess quantities and obsolescence, based on expected future sales levels and projections of future demand, and establishes inventory reserves for obsolete and excess inventories. In addition, the Company assesses the impact of changing technology and market conditions. The Company has entered into a long term purchase commitment to buy the test cards from MiniFAB (Note 8). As part of its analysis of excess or obsolete inventories, the Company considers future annual minimum purchases, estimated future usage and the expiry dating of the cards to determine if any inventory reserve is needed.

 

Prepaid expenses and other current assets

 

		March 31, 2018				December 31, 2017
Prepaid trade shows		$	-			$	14
Prepaid insurance			213				313
Manufacturing deposits			230				-
Subscriptions			133				311
Other fees and services			53				52
		$	629			$	690

 

 

TearLab Corporation

 

Fixed assets

 

		March 31, 2018				December 31, 2017
Capitalized TearLab equipment		$	7,213			$	8,437
Leasehold improvements			60				60
Computer equipment and software			895				915
Furniture and office equipment			437				436
Medical equipment			1,220				1,180
		$	9,825			$	11,028
Less accumulated depreciation			(7,365	)			(8,289	)
		$	2,460			$	2,739

 

Depreciation expense was $353 and $521 during the three months ended March 31, 2018 and 2017, respectively.

 

Accrued liabilities

 

		March 31, 2018				December 31, 2017
Due to professionals		$	414			$	193
Due to employees and directors			1,018				944
Sales and use tax liabilities			235				253
Royalty liability			227				447
Warranty			129				131
Restructuring			44				200
Other			582				691
		$	2,649			$	2,859

 

The change in royalty liability is attributable to an amended patent license and royalty agreement with the University of California San Diego with an effective date of July 1, 2017, which reduced the royalty to 3% from 5.5% (see Note 8).

 

 

TearLab Corporation

 

4. INTANGIBLE ASSETS

 

The Company’s intangible assets consist of the value of TearLab® Technology acquired in the acquisition of TearLab Research, Inc., a wholly-owned subsidiary of the Company and a prescriber list. The TearLab Technology, which 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. Amortization expense for the three months ended March 31, 2018 and 2017 was $3 and $15, respectively.

 

Intangible assets subject to amortization consist of the following:

 

		Remaining Useful Life				Gross Value at				Accumulated				Net Book Value at
		(Years)				March 31, 2018				Amortization				March 31, 2018
TearLab® technology			0			$	12,172			$	(12,172	)		$	-
Patents and trademarks			1				271				(264	)			7
Prescriber list			0				90				(90	)			-
Total						$	12,533			$	(12,526	)		$	7

 

		Gross Value at				Accumulated				Net Book Value at
		December 31, 2017				Amortization				December 31, 2017
TearLab® technology		$	12,172			$	(12,172	)		$	-
Patents and trademarks			271				(261	)			10
Prescriber list			90				(90	)			-
Total		$	12,533			$	(12,523	)		$	10

 

The estimated amortization expense for the intangible assets for the remainder of 2018 and thereafter is as follows:

 

		Amortization
		of intangible
		assets
Remainder of 2018		$	5
Thereafter			2
		$	7

 

5. TERM LOAN

 

On March 4, 2015, the Company executed a term loan agreement (the “Term Loan Agreement”) with CRG LP and certain of its affiliate funds (“CRG”) as lenders providing the Company with access of up to $35,000 under the arrangement. The Company received $15,000 in gross proceeds under the arrangement on March 4, 2015, and an additional $10,000 on October 6, 2015. The Term Loan Agreement matures on December 31, 2020 and bears interest at 13% per annum, with quarterly payments of interest only for the first four years. While interest on the loan is accrued at 13% per annum, the Company may elect to make interest-only payments at 8.5% per annum. The unpaid interest of 4.5% is added to the principle of the loan and is subject to additional accrued interest (“PIK interest”). The accrued interest can be deferred and paid together with the principle in the fifth and sixth years.

 

As part of the amended Term Loan Agreement, and funding of the second tranche, CRG received 35,000 warrants dated as of October 6, 2015 to purchase common shares of the Company at a price of $50.00 per share (the “CRG Warrants”). The CRG Warrants have a five-year life. The CRG Warrants are classified as equity on the Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017. The CRG Warrants were valued at their issuance date using the Black-Scholes Merton model. The related reduction of the long-term debt will be amortized over the life of the debt. On April 7, 2017, the Company amended the Term Loan Agreement and the Company issued CRG additional warrants to purchase 35,000 common shares of the Company’s stock at $15.00 per share, which expires 5 years after issuance.

 

On April 4, 2018 with an effective date of March 31, 2018, the Company entered into an Amendment to the Term Loan Agreement. Pursuant to the terms of the Amendment, the cash interest payments due in 2018 will be deferred and added to the principal balance under the Loan Agreement at the end of each quarter. The Amendment also provides for an additional facility fee equal to 3% of the sum of the aggregate amount of the principal drawn under the Term Loan Agreement and any PIK loans issued, so that the total facility fee shall be 9.5%, applicable to the entire balance. In addition, the Amendment reduces the minimum liquidity covenant to $3 million. Concurrent with the reduction of the liquidity covenant the Company agreed to repay CRG $1.0 million of principal on the Term Loan Agreement in April 2018. Lastly, this amendment reduced the strike price of the existing CRG Warrants to $0.44 per share (see Note 6). The Amendment was accounted for as a modification in accordance with U.S. GAAP.

 

 

TearLab Corporation

 

The loan is collateralized by all assets of the Company. Additionally, the terms of the Term Loan Agreement contain various affirmative and negative covenants agreed to by the Company. Among them, the Company must attain minimum certain annual revenue and minimum cash threshold levels. On October 12, 2017, the Company amended the Term Loan Agreement to change the required minimum revenue levels. The amended minimum revenue is $25,000 for 2018, $38,000 for 2019 and $45,000 for 2020. The amendment also reduced the exercise price of all of the CRG Warrants from $15.00 per share to $1.50 per share as well as provide broad anti-dilution protection such that the CRG Warrants shall maintain the same 1.22% ownership following any capital raises the Company completed through March 31, 2018. The minimum cash balance required was reduced to $3,000, subject to certain conditions.

 

If the Company does not have annual revenue greater or equal to the annual revenue covenant in a calendar year, the Company will have the right within 90 days of the end of the respective calendar year to raise subordinated debt or equity (the “CRG Equity Cure”) equal to twice the difference between the annual revenue and the revenue covenant, with the total proceeds from this financing to be used to reduce the principal of the Term Loan Agreement. In the event of a default, the Company may be required to repay any outstanding amounts earlier than anticipated, and CRG may foreclose on their security interest in the Company’s assets.

 

At March 31, 2018, the Company was in compliance with all of the covenants.

 

As part of the amended Term Loan Agreement, on the earlier of the maturity date or the date the term loan is paid off in full, the Company will pay a facility fee equal to 9.5% of the aggregate principal amount of the loan, including accrued PIK interest (the “Facility Fee”). The Facility Fee is being accrued to interest expense using the effective interest method.

 

The Company incurred financing and legal fees associated with the debt of $606, which were recorded as a direct discount to the debt and are being amortized using the effective interest method. The Company presents the debt issuance costs related to the recognized debt liability on the Consolidated Balance Sheet as a reduction of the liability.

 

The Term Loan Agreement provided for prepayment fees of 5% of the outstanding balance of the loan if the loan was repaid prior to March 31, 2016. The prepayment fee is reduced 1% per year for each subsequent year until maturity.

 

The following is a summary of the Term Loan Agreement as of March 31, 2018 and related maturities of outstanding principal:

 

Principal balance outstanding		$	25,000
PIK interest			4,038
Facility fee			880
less discount on term loan:
deferred financing fees, net			(284	)
detachable warrants, net			(234	)
		$	29,400
Less, current portion of Term loan			3,630
Total Term Loan		$	25,770

 

 

TearLab Corporation

 

Principal due for each of the next 3 years:

 

2018		$	-
2019			14,519
2020			15,399
Total principal due			29,918
Less: discount on term loan			(518	)
Total term loan		$	29,400

 

6. STOCKHOLDERS’ EQUITY

 

(a) Authorized share capital

 

On October 12, 2017, the stockholders of the Company approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 9,500,000 to 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.

 

On February 23, 2017, the Company’s stockholders authorized the board of directors to implement a reverse stock split, along with a corresponding reduction in the number of shares authorized. On February 27, 2017, the Company effected a 1-for-10 reverse stock split of its common stock. All common stock share amounts and prices per share of common stock have been retroactively adjusted to reflect the reverse stock split.

 

(b) Common and preferred shares

 

On December 8, 2017, the Company issued 2,013,636 shares of common stock, 2,114 shares of Series A Convertible Preferred Stock (“Preferred Stock”), Series A warrants to purchase 6,818,181 shares of common Stock (“Series A Warrants”) and Series B warrants to purchase 6,818,181 shares of common stock (“Series B Warrants”) for gross proceeds of $3,000, less issuance costs of $596. Additionally, the Company granted the placement agent compensation warrants to purchase 477,273 shares of common stock. The Preferred Stock is convertible, subject to certain limitations, into an aggregate of 4,804,545 shares of common stock, contains no voting rights, participates in any common stock dividends and is treated as if converted upon any ordinary liquidation event. The common stock, Preferred Stock, and the Series A Warrants and Series B Warrants are all included in equity in the Company’s consolidated balance sheets as of March 31, 2018 and December 31, 2017. The net proceeds were allocated to common stock, Preferred Stock, Series A Warrants and Series B Warrants based on their relative fair values as follows:

 

Common stock		$	327
Preferred stock			781
Series A warrants			804
Series B warrants			492
Net proceeds		$	2,404

 

As of March 31, 2018, 1,180 shares of Series A Preferred Stock have been converted into 2,682,909 shares of common stock.

 

 

TearLab Corporation

 

(c) Stock Incentive Plan

 

On June 23, 2017, the Company’s stockholders approved an amendment to the 2002 Stock Incentive Plan (the “Stock Incentive Plan”), to increase the total number of shares reserved for issuance to 1,070,000 from 720,000. Stock Incentive Plan shares are available for grant to employees, directors and consultants. Shares granted under the Stock Incentive Plan may be either incentive stock options or non-statutory stock options. Under the terms of the Stock Incentive 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 has been granted to a prospective employee, prospective consultant or prospective director 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 incentive 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.

 

Share-based payment transactions with employees are recognized in the condensed consolidated 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 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 and the employee stock purchase plan included in the Company’s condensed consolidated statements of operations and comprehensive loss (in thousands):

 

		Three months ended
		March 31,
		2018				2017
Sales and marketing		$	18			$	146
Clinical, regulatory and research and development			8				43
General and administrative			(18	)			100
Stock-based compensation expense before income taxes		$	8			$	289

 

 

TearLab Corporation

 

(d) Employee Stock Purchase Plan

 

In July 2014, the Company’s Board of Directors adopted the 2014 Employee Stock Purchase Plan (the “ESPP”) which was approved by the Company’s stockholders in June 2014 at the Company’s Annual Meeting of Stockholders. A total of 28,601 shares of the Company’s common stock are reserved for issuance under the plan, which permits eligible employees to purchase common stock at a discount through payroll deductions.

 

The price at which stock is purchased under the ESPP is equal to 90% of the fair market value of the common stock on the first or the last day of the offering period, whichever is lower. Generally, each offering under the ESPP will be for a period of six months as determined by the Company’s Board of Directors. Employees may invest up to 20% of their gross compensation through payroll deductions. In no event may an employee purchase more than $25 worth of stock in the plan during each calendar year or purchase more than 500 shares per offering period. During the three months ended March 31, 2018 and 2017, the Company recorded $0 and $3 of expense, respectively, under the ESPP. During the three months ended March 31, 2018 and 2017, the Company issued 0 and 7,512 shares of common stock under the ESPP, respectively. In early 2018, the Company terminated the Employee Stock Purchase Plan.

 

(e) Warrants

 

On October 8, 2015, as part of the second amendment to the Term Loan Agreement and funding of the $10,000 tranche, CRG received warrants to purchase 35,000 common shares in the Company at a price of $50.00 per share (the “CRG Warrants”). The CRG Warrants are exercisable any time prior to October 8, 2020. The CRG Warrants are classified as equity on the Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017. The CRG Warrants were valued at $290 upon issuance using the Black-Scholes Merton model assuming volatility of 73%, an expected life of 5.0 years, a risk-free interest rate of 1.71%, and 0% dividend yield. No CRG Warrants were exercised during the three months ended March 31, 2018 or 2017.

 

On April 8, 2016, the Company further amended its Term Loan Agreement. As part of the amendment, the exercise price of the CRG Warrants was changed to allow the holder to purchase 35,000 common shares in the Company at a price of $15.00 per share and CRG was issued an additional 35,000 warrants to purchase common shares at an exercise price of $15.00 (the “2016 CRG Warrants”). The modification to the terms of the CRG Warrants resulted in a change in fair value of $54 which was included as interest expense. The change in fair value was calculated using the Black-Scholes Merton model with both exercise prices, assuming volatility of 76%, an expected life of 4.5 years, a risk-free interest rate of 1.06%, and 0% dividend yield. The 2016 CRG Warrants were valued at $106 upon issuance using the Black-Scholes Merton model assuming volatility of 76%, an expected life of 5.0 years, a risk-free interest rate of 1.30% and 0% dividend yield.

 

On May 9, 2016, the Company issued Series A Warrants to purchase 1,253,500 shares of common stock for $11.25 per common share attached to shares of common and Series A Convertible Preferred Stock issued on the same date. The Series A Warrants can be exercised after May 9, 2017 (the “Initial Exercise Date”) and expire 5 years after the Initial Exercise Date. Fair value of the Series A Warrants, for purposes of allocating the net proceeds of the equity offering, was determined using the Black-Scholes Merton model assuming volatility of 76%, an expected life of 6.0 years, a risk-free interest rate of 1.30%, and 0% dividend yield.

 

On October 12, 2017, the Company further amended its Term Loan Agreement. As part of the amendment, the exercise price of the CRG warrants was changed to allow the holder to purchase common shares in the Company at a price of $1.50 per share as well as provide broad anti-dilution protection such that the CRG Warrants shall maintain the same 1.22% ownership following any capital raises the Company completed through March 31, 2018. The modification to the terms of the CRG Warrants and 2016 CRG Warrants resulted in a change in fair value of $44 which was included as interest expense. The CRG Warrants change in fair value was calculated using the Black-Scholes Merton model with both exercise prices, assuming volatility of 94%, an expected life of 2.99 years, a risk-free interest rate of 1.70% and 0% dividend yield. The 2016 CRG Warrants change in fair value was calculated using the Black-Scholes Merton model with both exercise prices, assuming volatility of 90%, an expected life of 3.48 years, a risk-free interest rate of 1.80% and 0% dividend yield.

 

On December 8, 2017, the Company issued Series A Warrants to purchase 6,818,181 shares of common stock for $0.44 per share and Series B Warrants to purchase 6,818,181 shares of common stock for $0.44 per share in conjunction with shares of common stock and Series A Convertible Preferred stock issued on that same date. The Series A Warrants can be exercised immediately and expire 5 years after the issuance date. Fair Value of the Series A Warrants, for purposes of allocating the net proceeds of the equity offering, was determined using the Black-Scholes Merton model assuming volatility of 88%, an expected life of 5 years, a risk free interest rate of 2.14% and a 0% dividend yield and are classified as equity on the Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017. The Series B Warrants can be exercised immediately and expire 6 months after the issuance date. Fair value of the Series B Warrants for purposes of allocating the net proceeds of the equity offering, was determined using the Black-Scholes Merton model assuming a volatility of 158.6%, an expected life of 6 months, a risk free rate of 1.45% and a 0% dividend yield and are classified as equity on the Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017. In addition, we granted the placement agent compensation warrants to purchase 477,273 shares of common stock at $0.55 per share. The compensation warrants are in the same form as Series A Warrants, excluding the exercise price, and will terminate on the five year anniversary date. The placement agent warrants are classified as equity on the Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017.

 

In connection with the offering the Company issued CRG warrants to purchase 83,240 shares of common stock at an exercise price of $1.50 (“2017 CRG Warrants”) as a result of triggering the anti-dilution clause of the debt amendment (see Footnote 5 for additional information). The anti-dilution clause is considered down-round protection, however the Company early adopted ASU 2017-11 and therefore the down-round feature is excluded from the consideration of whether the warrants are indexed to the Company’s own stock and therefore the warrants are not required to be liabilities under the guidance. The 2017 CRG Warrants are classified as equity on the Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017 and were valued at $30 upon issuance using the Black-Scholes Merton model assuming volatility of 88%, an expected life of 5 years, a risk-free interest rate of 2.14% and 0% dividend yield.

 

In March 2018, in connection with the amended Term Loan Agreement, the existing CRG warrants had a change in strike price to $0.44. The modification to the terms of the CRG Warrants resulted in a change in fair value of $10 which was included as interest expense.

 

 

TearLab Corporation

 

7. NET INCOME (LOSS) PER SHARE

 

Basic earnings per share (“EPS”) excludes dilutive securities and is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding for the year. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted and the resulting additional shares are dilutive because their inclusion decreases the amount of EPS.

 

The following securities were not included in the calculation of diluted earnings per share because their effects were anti-dilutive:

 

(in thousands of shares)		As of March 31,
		2018				2017
Stock options			629				706
Warrants			15,520				1,324
ESPP shares			-				3
Convertible preferred shares			1				102
Total			16,150				2,135

 

8. COMMITMENTS AND CONTINGENCIES

 

Commitments

 

The Company has commitments relating to operating leases recognized on a straight line basis over the term of the lease for rental of office space and equipment from unrelated parties, expiring at various times through December 31, 2018. The Company leases office facilities under an operating lease agreement. The initial term of the lease is five years and includes periodic rent increases and a renewal option.

 

On May 1, 2018 with an effective date of July 1, 2017 the Company entered into a Restated License Agreement (the “Agreement”) to its exclusive license agreement for the commercial development of the invention disclosed in UCSD Disclosure Docket No. SD2002-180 and titled “Volume Independent Tear Film Osmometer” (UCSD License Agreement #2003-03-0433), dated as of March 12, 2003, as amended by Amendment 1, dated as of June 9, 2003, Amendment 2, dated as of September 5, 2005, Amendment 3, dated as of July 7, 2006, Amendment 4, dated as of October 9, 2006, and Amendment 5, dated as of July 9, 2007, by and among the Company and The Regents of the University of California (collectively the “Existing License”) to amend certain terms related to royalties under the Agreement and treatment upon a change of control transaction. The Company is required to make royalty payments of anywhere from 3% to 4.25% based on quarterly net sales. Additionally, the Company is required to pay a royalty of 20% of any sublicense fees it receives. Should a change of control transaction occur during the term of the agreement the royalty rates would range anywhere from 3.5% to 4.75% based on quarterly net sales and the Company would have to make a milestone payment of $0.5 million. In addition, if the Company has not commenced commercial sales of the TearLab Discovery^TM Platform on or before July 1, 2019 the Company will be required to pay a milestone payment of 1.25% of cumulative net sales for the two year period following the effective date of the amendment.

 

 

TearLab Corporation

 

Effective October 1, 2006 the Company entered into a second patent license and royalty agreement with the University of California San Diego to obtain an exclusive license to make, use, sell, offer for sale, and import TearLab technology in development. Starting in 2009, the Company was required to make minimum royalty payments of $35 or 5.5% of gross sales per year, whichever is higher. However, if this new technology is combined with existing technology, the maximum royalty payable on the sale of the combined products would be 5.5% of gross sales per year. As the new technology is currently in development, there is no revenue and the minimum royalty payment of $35 is applicable.

 

Future minimum royalty payments under this agreement as of March 31, 2018 are as follows:

 

2018		$	35
2019			35
2020			35
2021			35
2022			35
Thereafter			210
Total		$	385

 

On March 7, 2016, the Company, through its subsidiary, TearLab Research, Inc., entered into a supply and development agreement (“Supply Agreement”) with MiniFAB (Aust) Pty Ltd (“MiniFAB”). The agreement is an exclusive supply agreement through June 2021, for the purchase and delivery of individual osmolarity test cards with the freight costs borne by MiniFab. The Company has the benefit of a lower purchase price that will remain in place until the earlier of, the Company reaches an annual volume of 4.5 million test cards or March 31, 2018. Certain savings from freight costs will remain in place throughout the agreement. The Supply Agreement requires, in any given 6 calendar months, the Company must place aggregate purchase orders equal to at least 50% of the orders forecasted for that 6 month period at its onset. The Supply Agreement can be extended by either party for a term of five years with the option for the Company to buyout the exclusive supply provision during any extended term. This Supply Agreement replaces the August 2011 agreement between MiniFAB and the Company.

 

In the normal course of business, the Company enters into purchase obligations for future goods and services needed for the operations of the business. Such commitments are not in excess of expected requirements and are not reasonably likely to result in performance penalties or payments that would have a material adverse effect on the Company’s liquidity.

 

Contingencies

 

We are not currently a party to any litigation, nor are we aware of any pending or threatened litigation against us, that we believe would materially affect our business, operating results, financial condition or cash flows. Our industry is characterized by frequent claims and litigation including securities litigation, claims regarding patent and other intellectual property rights and claims for product liability. As a result, in the future, we may be involved in various legal proceedings from time to time.

 

We initiated a patent infringement lawsuit against i-Med Pharma, Inc. in February 2016 alleging infringement of our Canadian patent. In February 2018, the Federal Court of Canada issued a ruling in favor of i-Med Pharma, Inc. which invalidated specific claims in our Canadian patent which were alleged to be infringed. We are appealing this ruling to the Canadian Federal Appellate Court. As part of the ruling, the Federal Court ruling awarded costs to i-Med Pharma, Inc., for $0.5 million. The final $0.2 million was paid in April 2018. We do not believe the outcome of this litigation will materially affect our business, operating results, financial condition or cash flows.

 

9. RESTRUCTURING COSTS

 

On December 15, 2017 the Company approved a new business model to maintain its current customer and annuity revenue base, focus resources on the development and generation of clinical data for our next generation TearLab Discovery^TM Platform and reduce the Company’s cash burn rate. In connection with the restructuring the Company recorded restructuring expenses of $322 primarily related to employee cost and one-time contract termination costs at December 31, 2017. Liabilities related to the restructuring are included in accrued liabilities in the Condensed Consolidated Balance Sheet. The following table summarizes the activity related to the restructuring during the three months ended March 31, 2018:

 

		Employee Costs				Other Costs				Total
Accrued obligations as of December 31, 2017		$	97			$	103			$	200
Settlement of obligations			(75	)			(59	)			(134	)
Accrued obligations as of March 31, 2018		$	22			$	44			$	66

 

 

TearLab Corporation

 

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 condensed consolidated financial statements and related notes, included in Item 1 of this Report. Unless otherwise specified, all dollar amounts are U.S. dollars.

 

Overview

 

We are an in-vitro diagnostic company that has commercialized a proprietary tear testing platform, the TearLab® Osmolarity System that enables eye care practitioners to test for a highly sensitive and specific biomarker using nanoliters of tear film at the point-of-care. Our first product measures tear film osmolarity for the diagnosis of Dry Eye Disease or DED.

 

We develop technologies to enable eye care practitioners to test a wide range of biomarkers (chemistries, metabolites, genes and proteins) at the point-of-care. Commercializing and further development of that tear testing platform is now the focus of our business.

 

Our product, the TearLab® Osmolarity System, enables the rapid measurement of tear osmolarity in the doctor’s office. Osmolarity is a quantitative and highly specific biomarker that has been shown to assist in the diagnosis and disease management of DED. Based on the Beaver Dam Offspring Study (2005-2008), prevalence of DED was 14.5% across an adult population aged 21-84, impacting 17.9% of women and 10.5% of men in the study. The innovation of the TearLab® Osmolarity System is its ability to precisely and rapidly measure osmolarity in nanoliter volumes of tear samples, using a highly efficient and novel tear collection system at the point of care. Historically, eye care researchers have relied on expensive instruments to perform tear biomarker analysis. In addition to their cost, these conventional systems are slow, highly variable in their measurement readings, and not categorized as waived by the United States Food and Drug Administration, or the FDA, under regulations promulgated under the Clinical Laboratory Improvement Amendments, or CLIA.

 

The TearLab® Osmolarity System consists of the following three components: (1) the TearLab disposable, which is a single-use microfluidic microchip; (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 Pen and provides a quantitative reading for the operator.

 

We enter into contracts where revenue is derived either from agreements whereby the customer is provided the right to use the TearLab® Osmolarity System at no separate cost to the customer in consideration for a minimum purchase commitment or implied minimum purchase commitment of disposable test cards over the related contract term (which we refer to as either “Use Agreements”, “Masters Agreements” or “Flex Agreements”), or from agreements with separate sales of the reader equipment and disposable test cards (“Purchase Agreements”).

 

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 Central and South America, Europe, Asia, Canada, and Australia. We sell directly to the customer in the United States.

 

On January 4, 2018, we announced that we had submitted a 510(k) application to the FDA for the potential clearance of the TearLab Discovery^TM Platform. The submission covers Discovery and the MMP-9 biomarker. On February 14, 2018, we announced that the application had successfully passed the acceptance review phase with the FDA. On April 11, 2018 we announced that we received written feedback from the FDA, requesting that we provide additional information to establish correlation to the FDA-cleared predicate chosen to establish 510(k) substantial equivalence. We plan to submit our response to the FDA’s comments sometime in the third quarter of 2018, within the allowed 180-day timeframe. After securing FDA clearance, TearLab intends to pursue a CLIA waiver in an effort to prepare for commercialization in the US market.

 

 

TearLab Corporation

 

RESULTS OF OPERATIONS

 

Revenue, Cost of Sales and Gross Margin

 

(in thousands)		Three months ended March 31,
		2018				2017				Change
TearLab revenue		$	6,446			$	6,701			$	(255	)
TearLab – cost of sales			2,124				3,008				(884	)
TearLab gross profit			4,322				3,693				629
Gross profit percentage			67	%			55	%

 

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 dry eye disease (“DED”).

 

The TearLab® Osmolarity System consists of the following three components: (1) the TearLab disposable, which is a single-use microfluidic lab test card; (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.

 

Having received 510(K) clearance and a CLIA waiver from the FDA in the United States, we sell to customers in the United States who hold CLIA licenses and actively support and assist our customers to obtain their licenses or provide them with support from certified professionals. This CLIA waiver documentation allows us to sell our product to the approximately 50,000 eye care practitioners in the United States that are candidates to operate under a CLIA waiver certification.

 

We are working with our established distributors in Central and South America, Europe, Asia, Canada, and Australia to increase sales. The ability for reimbursement to be obtained in many of the countries where we have distributors will facilitate our ability to increase sales and stimulate the commercialization process. In countries where we have distributors, we are supporting physicians in local clinical trials and providing them with the required guidance to understand the relationship between DED and osmolarity and how to manage their patients with objective diagnostic data.

 

TearLab revenue for the three months ended March 31, 2018 was $6.4 million compared to $6.7 million for the three months ended March 31, 2017. This decrease was driven by the decrease in reader revenue compared to first quarter of 2017 as well as the termination of the PRN Physicians Recommended Nutriceuticals, LLC, cooperative marketing agreement in June 2017 and partially offset by a slight increase in test card utilization.

 

 

TearLab Corporation

 

Cost of Sales

 

TearLab cost of sales includes costs of goods sold, depreciation of reader systems, warranty, and royalty costs. Our cost of goods sold consists primarily of costs for the manufacture of the TearLab® Osmolarity System, 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 cost of sales for the three months ended March 31, 2018 decreased $0.9 million or 29% for the three months ended March 31, 2018 compared to March 31, 2017. The Company entered into a restated patent license and royalty agreement with the University of California San Diego with an effective date of July 1, 2017 that reduced cost of sales by $0.5 million. In addition, the decrease in cost of sales was driven by reduced reader deprecation related to fixed asset impairment recorded in December 2017 and lower revenue volume.

 

Gross Profit

 

TearLab gross profit for the three months ended March 31, 2018 was $4.3 million compared to the $3.7 million for the three months ended March 31, 2017. The gross profit percentage of revenue for the three months ended March 31, 2018 was 67% compared to 55% for the three months ended March 31, 2017. The improvement in gross profit percentage was driven by the restated patent license and royalty agreement with the University of California San Diego, discussed in Note 8 of the Notes to the Unaudited Condensed Consolidated Financial Statements for the three months ended March 31, 2018 and included in Item 1. Excluding the $0.5 million impact of the restated agreement, gross profit percentage would have been 59% for the three months ended March 31, 2018. Additionally, the change in gross profit was driven by the reduced depreciation due to fixed asset impairment of reader systems recorded in fourth quarter of 2017.

 

Operating Expenses

 

(in thousands)		Three months ended March 31,
		2018				2017				Change
Sales and marketing		$	1,020			$	3,332			$	(2,312	)
Clinical, regulatory and research and development			1,041				1,564				(523	)
General and administrative			2,044				2,187				(143	)
Operating expenses		$	4,105			$	7,083			$	(2,978	)

 

Sales and Marketing Expense

 

Sales and marketing expenses decreased by $2.3 million or 69% in the three months ended March 31, 2018, as compared with the three months ended March 31, 2017. The reduction in sales and marketing expenses is attributable to cost savings from our December 2017 organizational restructuring and the launch of our new business model aimed at reducing costs.

 

Clinical, Regulatory and Research and Development Expenses

 

Total clinical, regulatory and research and development expenses decreased $0.5 million or 33.4% in the three months ended March 31, 2018 as compared with the three months ended March 31, 2017. The decrease in expense was primarily due to lower development cost of the TearLab Discovery^TM Platform.

 

General and Administrative Expenses

 

Total general and administrative expenses decreased $0.1 million or 6.5% in the three months ended March 31, 2018 as compared with the three months ended March 31, 2017. The decrease was primarily due to the launch of our new business model that is aimed at reducing costs.

 

 

TearLab Corporation

 

Other Income (Expense)

 

(in thousands)		Three Months Ended March 31,
		2018				2017				Change
Interest income (expense)		$	(1,105	)		$	(1,028	)		$	(77	)
Other (net)			5				(3	)			8
Other income		$	(1,100	)		$	(1,031	)		$	(69	)

 

Interest Income (Expense)

 

Interest expense for the three months ended March 31, 2018 and 2017 was from our long-term debt under the Term Loan Agreement. Interest expense increased for the three months ended March 31, 2018 when compared to the same period in the previous fiscal year based on larger average balances of long-term debt outstanding, the impact of the updated strike price of the warrants issued to the lenders, and changes to the facility fee.

 

Other (net)

 

Other income (loss) for the three months ended March 31, 2018 and 2017 consists primarily of foreign exchange transaction gains and losses, based on fluctuations of the Company’s foreign denominated currencies.

 

 

Liquidity and Capital Resources

 

(in thousands)		March 31, 2018				December 31, 2017				Change
Cash and cash equivalents		$	7,431			$	7,272			$	159
Percentage of total assets			54.2	%			50.7	%
Working capital		$	3,809			$	6,875			$	(3,066	)

 

Financial Condition

 

In December 2017 TearLab raised $3 million in gross proceeds through a registered direct offering to support our operations and regulatory expenses. In addition, in April 2018, with an effective date of March 31, 2018, we renegotiated our Term Loan Agreement with CRG. This new agreement lowers the minimum liquidity requirement from an end of the day cash balance of $5 million to $3 million and it defers cash interest payments due in 2018. These changes will allow our current funding to provide us with the time needed to gain our 510(k) approval for the Discovery™ Platform from the FDA as the Discovery™ Platform is critical to our success moving forward. Based on our current rate of cash consumption in addition to our projections, we estimate we will need additional capital in the first quarter of 2019. Our prospects for obtaining that capital are uncertain. Due to the Company’s historical losses and financial condition, there is substantial doubt about the Company’s ability to continue as a going concern.

 

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. 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:

 

	●	Our ability to execute our commercial strategy with our current resources, under our new business model
	●	the cost and results of continuing development of our next generation TearLab Discovery™ Platform including the cost of suppliers and service providers that require advance payment;
	●	whether government and third-party payers agree to continue reimbursement of the TearLab ® Osmolarity System at current levels;
	●	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 although we have received 510(k) approval from the FDA and a CLIA waiver approval from the FDA, at this time we do not know when we will generate revenue from the TearLab Osmolarity System in the United States sufficient to fully fund our operations. If events or circumstances occur such that we do not meet our plans to fund the business, we may be required to reduce operating expenses and reduce the planned levels of inventory and fixed assets which could have an adverse impact on our ability to achieve our intended business objectives and/or continue the development of the TearLab Discovery™ Platform.

 

 

TearLab Corporation

 

Indebtedness

 

On March 4, 2015, the Company executed the Term Loan Agreement with CRG as lenders providing the Company with access of up to $35.0 million under the Term Loan Agreement. The Company entered into a second amendment to the Term Loan Agreement with CRG on August 6, 2015. The Company received $15.0 million in gross proceeds under the Term Loan Agreement on March 4, 2015, and an additional $10.0 million on October 6, 2015. We were unable to access a third tranche of $10.0 million because we did not attain at least $38.0 million in trailing twelve-month revenue prior to June 30, 2016, as required to access the third tranche. As part of the second amendment to the Term Loan Agreement, CRG received warrants to purchase 35,000 common shares in the Company at a price of $50.00 per share (as adjusted for a 1-for-10 reverse stock split). The warrants have a life of five years. On April 7, 2016, the Term Loan Agreement was further amended, under the fourth amendment, to change the required minimum revenue levels. In addition, the fourth amendment reduced the exercise price of the warrants CRG received under the second amendment to $15.00 per share and granted CRG additional warrants to purchase an additional 35,000 common shares in the Company at a price of $15.00 per share.

 

On October 12, 2017, the Term Loan Agreement was further amended, under the fifth amendment, to change the required minimum revenue levels to $25 million for 2017 and 2018. In addition, subject to the condition of raising net equity proceeds of at least $7 million by March 31, 2018, the Amendment changes the definition of “Interest-only Period” and “PIK Period” from the sixteenth payment date to the twentieth payment date following the first borrowing date, which has the effect of extending the “Interest-only Period” and the “PIK” period throughout the calendar year 2019. Also, pursuant to the Amendment, the Company agreed to amend the warrants previously issued by the Company to CRG to (i) reduce the strike price to $1.50 per share and (ii) to include broad based anti-dilution protection such that the warrants shall maintain the same 1.22% ownership percentage following any capital raises the Company may complete through March 31, 2018.

 

On April 4, 2018, effective March 31, 2018, the Term Loan Agreement was further amended, under the sixth amendment to reduce the minimum liquidity covenant to $3 million, defer 2018 cash interest payments and add them to the outstanding principal amount of the loan and increase the facility fee by 3% to 9.5% and apply to the entire balance. In addition, CRG will now be able to designate a non-voting observer to attend all meetings and receive the same documents as other directors. This amendment also states that the exercise price of the warrants CRG received will be reduced to $0.44 cents per share and the borrower must repay $1 million of its principal.

 

The Term Loan Agreement is collateralized by all assets of the Company. Additionally, the terms of the Term Loan Agreement contain various affirmative and negative covenants agreed to by the Company. Among them, the Company must attain minimum certain annual revenue and minimum cash threshold levels. The minimum annual revenue threshold level required by the Term Loan Agreement for calendar year 2018 is $25.0 million. The minimum cash balance required is $3.0 million, subject to certain conditions.

 

If the Company does not have annual revenue greater or equal to the annual revenue covenant in a calendar year, the Company will have to raise subordinated debt or equity (the “CRG Equity Cure”) equal to twice the difference between the annual revenue and the revenue covenant, with the total proceeds from this financing to be used to reduce the principal of the Term Loan Agreement. In the event the Company does not achieve the minimum revenue threshold and it cannot complete the CRG Equity Cure, it may be in default of the Term Loan Agreement. In the event of a default, we may be required to repay any outstanding amounts earlier than anticipated, and the lenders may foreclose on their security interest in our assets.

 

Ongoing Sources and Uses of Cash

 

We anticipate that our cash and cash equivalents and cash generated from revenue will be sufficient to sustain our operations into the first quarter of 2019. We continually evaluate various financing possibilities but we typically expect our primary sources of cash will be related to the collection of accounts receivable. Our accounts receivable collections will be impacted by our ability to maintain current customers and annuity revenue base, while reducing costs as per our new business model.

 

We expect our primary uses of cash will be to fund our operating expenses and the development and generation of clinical data for our next generation platform.

 

Changes in Cash Flows

 

Cash Provided by Operating Activities

 

Net cash provided by operating activities during the three months ended March 31, 2018 was $0.2 million. Net cash provided by operating activities during the three month period was more than our net loss of $0.9 million primarily due to the depreciation of fixed assets, and deferred interest and the amortization of the discount on our long-term debt. In aggregate, these non-cash items totaled $1.5 million.

 

 

TearLab Corporation

 

The net change in working capital and non-current asset balances related to operations for the three months ended March 31, 2018 and 2017 consists of the following:

 

		Three Months Ended
(in thousands)		March 31,
		2018				2017
Changes in operating assets and liabilities:
Accounts receivable, net		$	84			$	13
Inventory			314				(131	)
Prepaid expenses and other assets			111				10
Accounts payable			(647	)			889
Accrued liabilities			(210	)			123
Deferred rent/revenue			(8	)			(12	)
		$	(356	)		$	892

 

Explanations of the more significant net changes in working capital and non-current asset balances are as follows:

 

●	Inventory levels of test cards on hand decreased in the three months ended March 31, 2018 due to the management of on hand inventory based on 2018 projections; and
●	Accounts payable and accrued liabilities had a net decrease during the three months ended March 31, 2018 due to the management of spending based on our new business model as well as the amended patent license and royalty agreement with the University of California San Diego that reduced accounts payable and accrued liabilities by $0.5 million for the three months ended March 31, 2018.

 

Cash Used in Investing Activities

 

Net cash used in investing activities for the three months ended March 31, 2018 and 2017 was $0.1 million and $0.2 million, respectively, to acquire fixed assets.

 

Cash Provided by Financing Activities

 

There was $0 in net cash provided by financing activities during the three months ended March 31, 2018. For the three months ended March 31, 2017, there was $0.03 million net cash provided by financing activities.

 

Off-Balance-Sheet Arrangements

 

As of March 31, 2018, we did not have any material off-balance-sheet arrangements as defined in Item 303(1)(4)(ii) of SEC Regulation S-K.

 

 

TearLab Corporation

 

Critical Accounting Policies and Estimates

 

Management’s discussion and analysis of our financial condition and results of operations are based upon our condensed 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, 2018 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, 2017. For further clarification with regards to the Company’s specific policies for revenue recognition, see Note 2 of the Notes to the Unaudited Condensed Consolidated Financial Statements for the three months ended March 31, 2018 included in Item 1.

 

Recent Accounting Pronouncements

 

For information on the recent accounting pronouncements impacting our business, see Note 2 of the Notes to the Unaudited Condensed Consolidated Financial Statements for the three months ended March 31, 2018 included in Item 1.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Currency Fluctuations and Exchange Risk

 

Our sales are denominated primarily in U.S. dollars. Most of our expenses are denominated in U.S. dollars, however, a minor portion of our other expenses are in Canadian dollars, Australian dollars, Euro and pounds sterling. We cannot predict any future trends in the exchange rate of the Canadian dollar, Australian dollar, euro or pound sterling against the U.S. dollar. Any strengthening of the Canadian dollar, Australian dollar, euro or pound sterling 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 Canadian dollars to meet short term operating requirements. 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

 

Our long-term debt carries a fixed rate of 13% interest. A decrease in market interest rates would increase the fair value of our long-term debt.

 

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.

 

 

TearLab Corporation

 

As of the end of the period covered by this 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, 2018 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 2018, 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.

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

We are not currently a party to any litigation, nor are we aware of any pending or threatened litigation against us that we believe would materially affect our business, operating results, financial condition or cash flows. However, our industry is characterized by frequent claims and litigation including securities litigation, claims regarding patent and other intellectual property rights and claims for product liability. As a result, in the future, we may be involved in various legal proceedings from time to time.

 

We initiated a patent infringement lawsuit against i-Med Pharma, Inc. in February 2016 alleging infringement of our Canadian patent. In February 2018, the Federal Court of Canada issued a ruling in favor of i-Med Pharma, Inc. which invalidated specific claims in our Canadian patent which were alleged to be infringed. We are appealing this ruling to the Canadian Federal Appellate Court. As part of the ruling, the Federal Court ruling awarded costs to i-Med Pharma, Inc., for $0.5 million. The final $0.2 million was paid in April 2018. We do not believe that the outcome of this litigation will materially affect our business, operating results, financial condition or cash flows.

 

 

TearLab Corporation

 

ITEM 1A. RISK FACTORS.

 

Risks Relating to Our Financial Condition

 

We may need to raise additional capital in the future. Such capital, may not be available to us on reasonable terms, if at all, when or as we require additional funding. If we issue additional shares of our common stock or other securities that may be convertible into or exercisable or exchangeable for our common stock, our existing stockholders would experience further dilution.

 

Based on a revised operating model that we implemented in December 2017, we expect that we will need to raise additional capital prior to the end of the first quarter of 2019. This estimate is subject to risk based primarily on our success in implementing the revised operating model, maintaining certain revenue levels despite a reduction in our commercial resources that was made in order to reduce our cash burn and accurately forecasting the remaining development expenses required to gain FDA clearance of our next generation diagnostic platform, and we cannot assure you that we will be successful in implementing this new model. Any financings undertaken to raise needed capital may involve the issuance of debt, equity and/or securities convertible into or exercisable or exchangeable for our equity securities. These financings may not be available to us on reasonable terms or at all when and as we require funding. Any failure to obtain additional working capital when required would have a material adverse effect on our business and financial condition, our ability to continue as a going concern and would be expected to result in a decline in our stock price. If we consummate such financings, the terms of such financings may adversely affect the interests of our existing stockholders. Any issuances of our common stock, preferred stock, or securities such as warrants or notes that are convertible into, exercisable or exchangeable for our capital stock, would have a dilutive effect on the voting and economic interest of our existing stockholders. If access to sufficient capital is not available as and when needed, our business will be materially impaired and we may be required to cease operations, curtail product development, manufacturing improvements, or sales generation programs, attempt to obtain funds through licensing certain technologies or products, or we may be required to significantly reduce expense, sell assets, seek a merger or joint venture partner, file for protection from creditors, liquidate all our assets or cease operations and wind down our business.

 

We have limited working capital and a history of losses that raise substantial doubts as to whether we will be able to continue as a going concern.

 

We have prepared our condensed consolidated financial statements on the basis that we would continue as a going concern. However, we have incurred losses in each year since our inception and there is substantial doubt about our ability to continue as a going concern. We do not currently have any available borrowing under our term loan or credit facility. Our condensed 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. If we are unable to generate positive cash flows from operations, we would need to undertake a review of potential business alternatives, which may include, but are not limited to, a merger or sale of the company or ceasing operations and winding down the business.

 

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, 2018, we had an accumulated deficit of $529.7 million. 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 successfully commercialize the TearLab® Osmolarity System in the United States or in international markets or receive approval to commercialize our next generation TearLab Discovery^TM Platform on a scale that will allow us to achieve and sustain profitability. 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 to become and remain profitable would require us to undertake a review of the potential business alternatives discussed above.

 

 

TearLab Corporation

 

We may not be able to generate sufficient cash to service our indebtedness, which currently consists of our credit facility with CRG. We may not be able to satisfy our minimum revenue and cash covenants, as required by the CRG term loan. If our annual sales revenue levels do not meet or exceed the levels required by the CRG covenants, we will be required to raise additional equity or subordinated debt, with the proceeds paid to reduce the outstanding principal of the CRG term loan. This financing could dilute existing shareholders and impact the value of their investment.

 

On March 4, 2015, we executed a term loan agreement with CRG as lenders (the “Term Loan Agreement”) providing us with access of up to $35.0 million under the Term Loan Agreement. We entered into an amendment of the Term Loan Agreement with CRG on August 6, 2015. We received $25.0 million in gross proceeds during 2015. We can make no assurance that we will be able to raise either additional debt financing or additional equity capital. There can be no assurances that there will be adequate financing available to us on acceptable terms or at all.

 

Our ability to make scheduled payments or to refinance our debt obligations depends on numerous factors, including the amount of our cash reserves and our actual and projected financial and operating performance. These amounts and our performance are subject to certain financial and business factors, as well as prevailing economic and competitive conditions, some of which may be beyond our control. We cannot assure you that we will maintain a level of cash reserves or cash flows from operating activities sufficient to permit us to pay the principal, facility fee, and interest on our existing or future indebtedness. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness. We cannot assure you that we would be able to take any of these actions, or that these actions would permit us to meet our scheduled debt service obligations. In addition, in the event of our breach of the Term Loan Agreement, we may be required to repay any outstanding amounts earlier than anticipated, and the lenders may foreclose on their security interest in our assets.

 

The CRG loan is collateralized by all our assets. Additionally, the Term Loan Agreement contains various affirmative and negative covenants agreed to by the Company. Among them, we must attain minimum annual revenue and minimum cash threshold levels. The minimum annual revenue threshold levels required by the Term Loan Agreement are $25.0 million, $38.0 million and $45.0 million for calendar years 2018, 2019 and 2020, respectively. The minimum cash balance required is $3.0 million, subject to certain conditions.

 

If we do not have annual revenue greater or equal to the annual revenue covenant in a calendar year, we will have the right to cure by raising subordinated debt or equity equal to twice the difference between the annual revenue and the revenue covenant, with the total proceeds from this financing to be used to reduce the principal of the Term Loan Agreement. We cannot assure you that we will be able to achieve the annual revenue thresholds and the daily cash threshold. We cannot assure you that we would be able to raise the financing described above, if required. In addition, in the event of our breach of the Term Loan Agreement, we may not be allowed to draw additional amounts under the Term Loan Agreement, we may be required to repay any outstanding amounts earlier than anticipated, and the lenders may foreclose on their security interest in our assets.

 

Borrowings under the Term Loan Agreement are subject to certain conditions, including the non-occurrence of a material adverse change in our business or operations (financial or otherwise), or a material impairment of the prospect of repayment of obligations.

 

Our existing Term Loan Agreement contains restrictive and financial covenants that may limit our operating flexibility.

 

Our existing Term Loan Agreement contains certain restrictive covenants that limit our ability to incur additional indebtedness and liens, merge with other companies or consummate certain changes of control, acquire other companies, engage in new lines of business, make certain investments, pay dividends, transfer or dispose of assets, amend certain material agreements or enter into various specified transactions. We therefore may not be able to engage in any of the foregoing transactions unless we obtain the consent of the lender or terminate the Term Loan Agreement. There is no guarantee that we will be able to generate sufficient cash flow or sales to meet the financial covenants or pay the principal and interest under the agreement. Furthermore, there is no guarantee that future working capital, borrowings or equity financing will be available to repay or refinance the amounts outstanding under the Term Loan Agreement.

 

 

TearLab Corporation

 

Our financial results may vary significantly from year-to-year and quarter-to-quarter due to a number of factors, which may lead to volatility in the trading price of our common stock.

 

Our annual and quarterly revenue and results of operations have varied in the past and may continue to vary significantly from year-to-year and quarter-to-quarter. The variability in our annual and quarterly results of operations may lead to volatility in our stock price as research analysts and investors respond to these annual fluctuations. These fluctuations are due to numerous factors that are difficult to forecast, including:

 

	●	fluctuations in demand for our products;
	●	changes in customer budget cycles and capital spending;
	●	seasonal variations in customer operations that could occur during holiday or summer vacation periods;
	●	tendencies among some customers to defer purchase decisions until the end of the quarter or fiscal year;
	●	the unit value of our systems;
	●	changes in our pricing and sales policies or the pricing and sales policies of our competitors;
	●	changes in reimbursement levels that might negatively impact our pricing policies
	●	our ability to design, manufacture and deliver products to our customers in a timely and cost effective manner;
	●	quality control or yield problems in our manufacturing suppliers;
	●	our ability to timely obtain adequate quantities of the components used in our products;
	●	new product introductions or enhancements by us and our competitors;
	●	unanticipated increases in costs or expenses;
	●	our complex, variable and, at times, lengthy sales cycle;
	●	global economic conditions; and
	●	fluctuations in foreign currency exchange rates.

 

The foregoing factors, as well as other factors, could materially and adversely affect our quarterly and annual results of operations. In addition, a significant amount of our operating expenses are relatively fixed due to our manufacturing, research and development, and sales and general administrative efforts. Any failure to adjust spending quickly enough to compensate for a revenue shortfall could magnify the adverse impact of such revenue shortfall on our results of operations. We expect that our sales will continue to fluctuate on a quarterly basis and our financial results for some periods may differ from those projected by securities analysts, which could significantly decrease the price of our common stock.

 

 

TearLab Corporation

 

Risks Related 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 be successfully commercialized in the United States.

 

The TearLab® Osmolarity System is currently our only commercialized 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 CLIA waiver certifications. Even though the TearLab® Osmolarity System has received all regulatory approvals in the United States, it may never generate sufficient sales to achieve profitability. If the TearLab® Osmolarity System is not as successfully commercialized as expected, we may not be able to generate sufficient revenue to become profitable or continue our operations. Any failure of the TearLab® Osmolarity System 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.

 

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. 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.

 

We have outstanding liabilities, 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, 2018, our total liabilities were $33.2 million including $25.8 million of long-term obligations under our Term Loan Agreement. Our significant liability 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 liabilities present the following risks:

 

	●	our liabilities increase 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;
	●	our liabilities 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 money for operations or capital in the future and implement our business strategies;
	●	our liabilities could cause our suppliers to change their payment terms, require us to pay for needed goods or services in advance or choose not to do business with us at all which could negatively impact our cash flows, supply chain and our ability to supply products to our customers when needed; and
	●	our liabilities may restrict us from raising additional funds 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 liabilities when payment is due, we may be required to attempt to renegotiate the terms of the instruments relating to the liabilities, seek to refinance all or a portion of the liabilities or obtain 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.

 

 

TearLab Corporation

 

We continue to 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:

 

	●	The TearLab® Osmolarity System is rated under a CLIA waiver certification which requires our customers to be certified under the CLIA waiver requirements to be reimbursed under Medicare, including certain parallel state requirements. If our customers are unwilling or unable to comply with such requirements, it could have an adverse effect on their acceptance of and on our ability to market the TearLab® Osmolarity System in the United States.
	●	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.
	●	We may be unable to achieve widespread acceptance of the TearLab® Osmolarity System among physicians as a result of our inability to establish adequate sales and marketing capabilities, address competition effectively, obtain and enforce patents to protect proprietary rights from use by would-be competitors, retain key personnel, maintain adequate reimbursement for our product to support our pricing policies and ensure sufficient manufacturing capacity and inventory to support commercialization plans.

 

Our business is subject to health care industry cost-containment measures that could result in reduced sales of our TearLab® Osmolarity System.

 

Most of our customers rely on third-party payers, including government programs and private health insurance plans, to reimburse some or all of the cost of the procedures which use our TearLab® Osmolarity System. The continuing efforts of governmental authorities, insurance companies, and other health care payers to contain or reduce these costs could lead to patients being unable to obtain approval for payment from these third-party payers. If patients cannot obtain third-party payer payment approval, the use of our TearLab® Osmolarity System may decline significantly and our customers may reduce or eliminate the use of our system. The cost-containment measures that health care providers are instituting, both in the U.S. and internationally, could harm our ability to operate profitably. For example, managed care organizations have successfully negotiated volume discounts for pharmaceuticals. While this type of discount pricing does not currently exist for the medical systems we supply, if managed care or other organizations were able to affect discount pricing for such systems, it could result in lower prices to our customers from their customers and, in turn, reduce the amounts we can charge our customers for our products.

 

In addition to general health care industry cost-containment, the Centers for Medicare and Medicaid Services (CMS) released its final rule implementing section 216(a) of the Protecting Access to Medicare Act of 2014 (PAMA) that will require reporting entities to report private payer rates paid to laboratories for lab tests, which will be used to calculate Medicare payment rates. This final rule announced CMS’ decision to move the implementation date for the private payer rate-based fee schedule to January 1, 2018. Reporting entities, which would primarily be certain qualifying customers in the U.S. that derive a certain percentage and volume of their revenue from laboratory tests from Medicare, will report private payer rates for our laboratory tests which will serve under the act as a baseline for future reimbursement. Our product was only minimally impacted by PAMA for the year 2018 through 2020. However, should reimbursement for our products be reduced as a result of PAMA or other cost savings initiatives, this could negatively impact our pricing and commercialization of our products in the U.S.

 

 

TearLab Corporation

 

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 and CLIA waiver 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:

 

	●	adverse publicity, warning letters, fines, injunctions, consent decrees and civil penalties;
	●	repair, replacement, refunds, recall or seizure of our product;
	●	operating restrictions or partial suspension or total shutdown of production
	●	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;
	●	refusal to grant export approval for our products;
	●	withdrawing 510(k) clearances or premarket approvals that have already been granted; and
	●	criminal prosecution.

 

If the government initiated any of these enforcement actions, 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. The FDA has not yet inspected our facilities, 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.

 

If we are unable to fully comply with federal and state “fraud and abuse laws,” we could face substantial penalties, which may adversely affect our business, financial condition and results of operations.

 

We are subject to various laws pertaining to health care fraud and abuse, including the U.S. Anti- Kickback Statute, physician self-referral laws (the “Stark Law”), the U.S. False Claims Act, the U.S. False Statements Statute, the Physician Payment Sunshine Act, and state law equivalents to these U.S. federal laws, which may not be limited to government-reimbursed items and may not contain identical exceptions. Violations of these laws are punishable by criminal and civil sanctions, including, in some instances, civil and criminal penalties, damages, fines, exclusion from participation in U.S. federal and state health care programs, including Medicare and Medicaid, and the curtailment or restructuring of operations. Any action against us for violation of these laws could have a significant impact on our business. In addition, we are subject to the U.S. Foreign Corrupt Practices Act. Any action against us for violation by us or our agents or distributors of this act could have a significant impact on our business.

 

 

TearLab Corporation

 

If we fail to comply with contractual obligations and applicable laws and regulations governing the handling of patient identifiable medical information, we could suffer material losses or be adversely affected by exposure to material penalties and liabilities.

 

Many, if not all of our customers, are covered entities under the Health Insurance Portability and Accountability Act of August 1996 or HIPAA. As part of the operation of our business, we provide reimbursement assistance to certain of our customers and as a result we act in the capacity of a business associate with respect to any patient-identifiable medical information, or PHI, we receive in connection with these services. We and our customers must comply with a variety of requirements related to the handling of patient information, including laws and regulations protecting the privacy, confidentiality and security of PHI. The provisions of HIPAA require our customers to have business associate agreements with us under which we are required to appropriately safeguard the PHI we create or receive on their behalf. Further, we and our customers are required to comply with HIPAA security regulations that require us and them to implement certain administrative, physical and technical safeguards to ensure the confidentiality, integrity and availability of electronic PHI, or EPHI. We are required by regulation and contract to protect the security of EPHI that we create, receive, maintain or transmit for our customers consistent with these regulations. To comply with our regulatory and contractual obligations, we may have to reorganize processes and invest in new technologies. We also are required to train personnel regarding HIPAA requirements. If we, or any of our employees or consultants, are unable to maintain the privacy, confidentiality and security of the PHI that is entrusted to us, we and/or our customers could be subject to civil and criminal fines and sanctions and we could be found to have breached our contracts with our customers. Under the Health Information Technology for Economic and Clinical Health Act, or HITECH Act, and recent omnibus revisions to the HIPAA regulations, we are directly subject to HIPAA’s criminal and civil penalties for breaches of our privacy and security obligations and are required to comply with security breach notification requirements. The direct applicability of the HIPAA privacy and security provisions and compliance with the notification requirements requires us to incur additional costs and may restrict our business operations.

 

Our patents may not be valid, and we may not obtain and enforce patents to protect our proprietary rights from use by would-be competitors. Companies with other patents 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 obtain and enforce patents 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. For example, we have recently been involved in litigation defending our patent rights in Canada. Efforts to defend our rights could incur significant costs and may or may not be resolved in our favor. We could become a party to additional 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 sustain the costs of such litigation more effectively than we can because of their greater financial resources. Litigation also may absorb significant management time.

 

 

TearLab Corporation

 

Unpatented trade secrets, improvements, confidential know-how and continuing technological innovation are important to our future scientific and commercial success. Although we attempt, 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 aggregate annual coverage limits of $2.0 million. 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 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.

 

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:

 

	●	evolving customer needs;
	●	the introduction of new products and technologies; and
	●	evolving industry standards.

 

 

TearLab Corporation

 

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:

 

	●	properly identify and anticipate customer needs;
	●	commercialize new products in a cost-effective and timely manner;
	●	manufacture and deliver products in sufficient volumes on time;
	●	obtain and maintain regulatory approval for such new products;
	●	differentiate our offerings from competitors’ offerings;
	●	achieve positive clinical outcomes; and
	●	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 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.

 

We rely on a limited number of suppliers 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 a limited number of third-party suppliers. Our suppliers 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 suppliers 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, 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.

 

 

TearLab Corporation

 

If we lose key personnel, or we do not 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 in 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 effectively recruit, train and retain additional qualified personnel. If we do not retain key personnel or manage our growth effectively, we may not implement our business plan effectively.

 

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 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 control deficiencies 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 any changes in processes and procedures can be completed 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.

 

 

TearLab Corporation

 

Risks Related to Our Common Stock

 

Our common stock was delisted from The Nasdaq Capital Market, which could make trading in our common stock more difficult for investors, potentially leading to declines in our share price and liquidity and could limit our ability to raise additional capital.

 

Effective at the open of business on November 9, 2017, our common stock was suspended and effectively delisted from The Nasdaq Capital Market and began trading on the OTCQB. The delisting was the result of our non-compliance with Nasdaq Listing Rule 5550(b).

 

Our delisting from The Nasdaq Capital Market could make trading in our common stock more difficult for investors, potentially leading to declines in our share price and liquidity. Without The Nasdaq Capital Market listing, stockholders may have a difficult time getting a quote for the sale or purchase of our stock, the sale or purchase of our stock will likely be made more difficult and the trading volume and liquidity of our stock could decline. Our delisting from The Nasdaq Capital Market could also result in negative publicity and could also make it more difficult for us to raise additional capital. The absence of such a listing may adversely impact the acceptance of our common stock as currency or the value accorded by other parties. Further, following our delisting, we will also incur additional costs under state blue sky laws in connection with any sales of our securities. These requirements could severely limit the market liquidity of our common stock and the ability of our stockholders to sell our common stock in the secondary market.

 

Now that our common stock is traded on an over the counter quotation system, an investor may find it more difficult to sell our stock or obtain accurate quotations as to the market value of our common stock.

 

Following the delisting of our common stock, our common stock now falls within the definition of a “penny stock” as defined in the Securities Exchange Act of 1934, or the Exchange Act, and is covered by Rule 15g-9 of the Exchange Act. Rule 15g-9 imposes additional sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited investors. For transactions covered by Rule 15g-9, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser’s written agreement to the transaction prior to the sale. Consequently, Rule 15g-9 will affect the ability or willingness of broker-dealers to sell our securities, and accordingly will affect the ability of stockholders to sell their securities in the public market. These additional procedures could also limit our ability to raise additional capital in the future.

 

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. In addition, the fact that our common stock now trades on the OTCQB market could contribute to trading volumes in our shares being sporadic and volatility in the share price. If adverse market conditions exist, you may have difficulty selling your shares. The market price of our common shares may fluctuate significantly due to a variety of factors, including:

 

	●	the results of pre-clinical testing and clinical trials by us, our collaborators and/or our competitors;
	●	technological innovations or new diagnostic products;
	●	governmental regulations;
	●	developments in patent or other proprietary rights;
	●	litigation;
	●	public concern regarding the safety of products developed by us or others;
	●	comments by securities analysts;
	●	the issuance of additional shares to obtain financing or for acquisitions;
	●	general market conditions in our industry or in the economy as a whole;
	●	political instability, natural disasters, war and/or events of terrorism; and
	●	the impact of our delisting from The Nasdaq Capital Market.

 

In addition, the stock market in general 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 our stock, regardless of actual operating performance. In the past, securities class action litigation often follows periods of volatility in the overall market and market price of a particular company’s securities. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

 

 

TearLab Corporation

 

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 may not earn sufficient revenue to meet all operating cash needs. 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 a proposed amendment to our charter or bylaws requires stockholder approval and the record date for determining the stockholders of record entitled to vote on the amendment occurs prior to the date that 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.

 

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 10.0 million 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:

 

	●	adversely affect the voting power of the holders of our common stock;
	●	make it more difficult for a third party to gain control of us;
	●	discourage bids for our common stock at a premium;
	●	limit or eliminate any payments that the holders of our common stock could expect to receive upon our liquidation; or
	●	otherwise adversely affect the market price or our common stock.

 

 

TearLab Corporation

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

Not applicable.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

ITEM 6.EXHIBITS

 

Exhibit Number		Exhibit Description		Incorporated by Reference
10.1		Amendment to the Term Loan Agreement, dated as of March 4, 2015 as amended by the Omnibus Amendment Agreement, dated as of April 2, 2015, Amendment 2, dated August 6, 2015, Amendment 3, dated December 31, 2015, and Amendment 4, dated April 7, 2016, Amendment 5, dated October 12, 2017 by and among TearLab Corporation, certain of its subsidiaries from time to time party thereto as guarantors and CRG LP (formerly known as Capital Royalty) and certain of its affiliate funds, as lenders, dated as of March 31, 2018.
10.2#		Employment Agreement, dated as of March 30, 2018 by and between the Registrant and Michael Marquez.
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 Section 906 of the Sarbanes-Oxley Act of 2002, U.S.C. Section 1350.
32.2+		CFO’s Certification of periodic financial reports pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, U.S.C. Section 1350.
101.INS*		XBRL Instance
101.SCH*		XBRL Taxonomy Schema
101.CAL*		XBRL Taxonomy Extension Calculation
101.DEF*		XBRL Taxonomy Extension Definition
101.LAB*		XBRL Taxonomy Extension Labels
101.PRE*		SXBRL Taxonomy Extension Presentation

 

# Management compensatory plan, contracts or arrangement.

 

*XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section.

 

+In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished pursuant to this item will not be deemed “filed” for purposes of Section 18 of the Exchange Act (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference

 

 

TearLab Corporation

 

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 11, 2018	/s/ Joseph Jensen
	Joseph Jensen
	Chief Executive Officer