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, 2020

 

[  ]	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.)

 

150 La Terraza Blvd., Suite 101 Escondido, California		92025
(Address of principal executive offices)		(Zip Code)

 

Registrant’s telephone number, including area code: (858) 455-6006

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
N/A		N/A		N/A

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

Common stock, $0.001 par value

 

The Company does not have any securities registered pursuant to Section 12(b) of the Act. The Company’s common stock is registered pursuant to Section 12(g) of the Act and traded on the OTCQB under the symbol “TEAR”.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 every Interactive Data File required to be submitted 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 such files).

Yes [X] No [  ]

 

Indicate by check mark whether the 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 [X]	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 the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 24,410,766 as of June 19, 2020.

 

 

 

		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	22
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	30
Item 4.	Controls and Procedures	30
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3.	Defaults Upon Senior Securities	44
Item 4.	Mine Safety Disclosures	44
Item 5.	Other Information	44
Item 6.	Exhibits	44

 

 

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 likelihood of completing the Merger pursuant to the agreement with Accelmed Partners;
●	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 resubmission of our 510(k) application and the timeline for commencing commercial sales of the TearLab DiscoveryTM Platform;
●	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 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;
●	The impact of our common stock being traded on the OTCQB; and
●	The impact of COVID-19 on our sales and supply chain.

 

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, 2020				December 31, 2019
ASSETS
Current assets
Cash		$	7,335			$	7,108
Accounts receivable, net			936				917
Inventory			1,948				2,269
Prepaid expenses and other current assets			1,449				1,562
Total current assets			11,668				11,856
Fixed assets, net			1,732				1,670
Intangible assets, net			2				2
Right of Use assets			578				645
Other non-current assets			92				120
Total assets		$	14,072			$	14,293
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities
Accounts payable		$	1,197			$	599
Accrued liabilities			1,701				2,336
Deferred rent			1				2
Term Loan			38,017				36,578
Current portion of lease liability			208				240
Total current liabilities			41,124				39,755
Long-term lease liability, net of current portion			392				429
Long-term third-party payable			132				130
Total liabilities			41,648				40,314
Commitments and contingencies (Note 8)
Stockholders’ deficit
Capital stock
Preferred Stock, $0.001 par value, 10,000,000 shares authorized, 0 issued and outstanding at March 31, 2020 and December 31, 2019, respectively			-				-
Common stock, $0.001 par value, 40,000,000 shares authorized, 12,560,635 issued and outstanding at March 31, 2020 and December 31, 2019, respectively			13				13
Additional paid-in capital			510,453				510,442
Accumulated deficit			(538,042	)			(536,476	)
Total stockholders’ deficit			(27,576	)			(26,021	)
Total liabilities and stockholders’ deficit		$	14,072			$	14,293

 

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,
		2020				2019
Revenue
Product sales		$	4,432			$	4,996
Reader equipment rentals			659				687
Total revenue			5,091				5,683
Cost of goods sold
Cost of goods sold (excluding amortization of intangible assets)			1,795				1,930
Cost of goods sold - reader equipment depreciation			66				153
Gross profit			3,230				3,600
Operating expenses
Sales and marketing			817				875
Clinical, regulatory and research & development			916				874
General and administrative			1,637				1,844
Total operating expenses			3,370				3,593
Income (loss) from operations			(140	)			7
Other income (expense)
Interest income (expense)			(1,442	)			(1,350	)
Other, net			16				4
Total other income (expense)			(1,426	)			(1,346	)
Net loss and comprehensive loss		$	(1,566	)		$	(1,339	)
Weighted average shares outstanding - basic and fully diluted			12,560,635				11,559,220
Net loss per share		$	(0.12	)		$	(0.12	)

 

See accompanying notes to interim condensed consolidated financial statements

 

 

TearLab Corporation

 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(in thousands, except share data)

(Unaudited)

 

		Common stock								Series A Convertible Preferred stock								Additional paid-in				Accumulated				Stockholders’
		Shares				Amount				Shares				Amount				Capital				Deficit				Deficit
For the three months ended March 31, 2020
Balance, January 1, 2020			12,560,635			$	13				-			$	-			$	510,442			$	(536,476	)		$	(26,021	)
Stock-based compensation			-				-				-				-				11				-				11
Net loss and comprehensive loss			-				-				-				-				-				(1,566	)			(1,566	)
Balance, March 31, 2020			12,560,635			$	13				-			$	-			$	510,453			$	(538,042	)		$	(27,576	)
For the three months ended March 31, 2019
Balance, January 1, 2019			11,296,998			$	11				556			$	-			$	510,380			$	(531,060	)		$	(20,669	)
Series A Convertible Preferred stock converted to common			400,000				1				(176	)			-				-				-				1
Stock-based compensation			-				-				-				-				31				-				31
Net loss and comprehensive loss			-				-				-				-				-				(1,339	)			(1,339	)
Balance, March 31, 2019			11,696,998			$	12				380			$	-			$	510,411			$	(532,399	)		$	(21,976	)

 

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,
		2020				2019
OPERATING ACTIVITIES
Net loss for the period		$	(1,566	)		$	(1,339	)
Adjustments to reconcile net loss to cash used in operating activities:
Stock-based compensation			11				31
Depreciation of fixed assets			135				221
Deferred interest on long-term debt			1,114				1,007
Amortization of debt discount			328				343
Loss on disposal of equipment			1				17
Changes in operating assets and liabilities:
Accounts receivable, net			(19	)			88
Inventory			321				(220	)
Prepaid expenses and other assets			141				59
Accounts payable			598				638
Accrued liabilities			(636	)			(443	)
Deferred rent			(3	)			(4	)
Cash provided by operating activities			425				398
INVESTING ACTIVITIES
Additions to fixed assets			(198	)			(11	)
Cash used in investing activities			(198	)			(11	)
FINANCING ACTIVITIES
Cash provided by financing activities			-				-
Increase in cash during the period			227				387
Cash, beginning of period			7,108				8,473
Cash, end of period		$	7,335			$	8,860
Supplemental cash flow information
Right-of-use assets acquired through operating leases		$	-			$	801
Cash paid for operating leases			90				88

 

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”, the “Company”, or “we”), a Delaware corporation, is an ophthalmic device company that is commercializing a proprietary in vitro diagnostic tear testing platform, the TearLab® Osmolarity System to 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 $1,566 and $1,339 for the three months ended March 31, 2020 and 2019, respectively. Based on the Company’s expected rate of cash consumption, the Company estimates it will need additional capital in the third quarter of 2020 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 successfully increases cash generated from operations, the Company anticipates that it will be unable to continue operations through the end of the third quarter of 2020 without violating an existing covenant on the Term Loan Agreement, including the inability to make our debt payment due within twelve months (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.

 

On May 11, 2020, the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Accelmed Partners II LP, a Cayman Islands exempted limited partnership (“Buyer”), and Accelmed Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Buyer (“Merger Sub”). The Merger Agreement provides that, subject to the terms and conditions set forth therein, Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving the Merger and becoming a wholly owned subsidiary of Buyer. The completion of the Merger is subject to satisfaction of all conditions set forth in the Merger Agreement and cannot be guaranteed. See Note 10 for additional information related to the Merger.

 

COVID-19

 

The global outbreak of COVID-19 was declared a pandemic by the World Health Organization and a national emergency by the U.S. government in March 2020 and has negatively affected the U.S. and global economies, disrupted global supply chains, resulted in significant travel and transport restrictions, mandated closures and stay-at-home orders, and created significant disruption of the financial markets.

 

The continuing impact on the Company’s business, including the length and impact of stay-at-home orders and/or regional quarantines, labor shortages and employment trends, disruptions to supply chains, including its ability to obtain products from global suppliers, higher operating costs, the form and impact of economic stimulus and general overall economic instability, is uncertain at this time and could have a material adverse effect on the Company’s business, results of operations, financial condition and cash flows.

 

2. SIGNIFICANT ACCOUNTING POLICIES

 

The Condensed Consolidated Balance Sheet at December 31, 2019 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, 2019. The audited financial statements for the year ended December 31, 2019, filed with the SEC with the Company’s annual report on Form 10-K on March 6, 2020 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

 

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 were $19 and $34 for the three months ended March 31, 2020 and 2019, respectively. 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 842 – 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 Condensed 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 Condensed 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, 2020 and 2019, the Company recognized revenue from shipping and handling of $30 and $33, respectively.

 

 

TearLab Corporation

 

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

 

		Three months ended March 31,
		2020				2019
Product Sales		$	4,432			$	4,996
Reader Equipment Rentals			659				687
		$	5,091			$	5,683

 

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 $4 as of March 31, 2020 and December 31, 2019, 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.

 

Leases

 

The Company determines if an arrangement is a lease at inception. When recording operating leases, the Company records a lease liability based on the net present value of the lease payments over the lease term and a corresponding right-of-use asset. Operating leases are included in operating lease right-of-use assets, current portion of operating lease liabilities and operating lease liabilities, excluding current portion, on the balance sheet. Lease expense is recognized over the lease term on a straight-line basis. Lease terms include options to extend the lease when it is reasonably certain the Company will exercise the option. For leases with a term of twelve months or less, the Company does not record a right-of-use asset and a lease liability and records lease expense on a straight-line basis. See Note 8 to the condensed consolidated financial statements.

 

Recent accounting pronouncements

 

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update 2016-13 (“ASU 2016-13”), “Financial Instruments - Credit Losses (Topic 326).” The new standard was effective for public companies, excluding smaller reporting companies, for reporting periods beginning after December 15, 2019, including interim periods within those fiscal years. For smaller reporting companies the standard is effective for reporting periods beginning after December 15, 2022. The standard replaced the incurred loss impairment methodology under current U.S. GAAP with a methodology that reflects expected credit losses and requires the use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. The standard required a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company is currently assessing the impact of adopting this standard and does not expect it to have a material impact on the Company.

 

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. This standard is effective for interim and annual periods in fiscal years beginning after December 15, 2020, and early adoption is permitted. The Company is currently assessing the timing and impacts of adopting this standard and does not expect it to have a material impact on the Company.

 

 

TearLab Corporation

 

3. BALANCE SHEET DETAILS

 

Accounts receivable

 

		March 31, 2020				December 31, 2019
Trade receivables		$	998			$	1,011
Allowance for doubtful accounts			(62	)			(94	)
		$	936			$	917

 

Inventory

 

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

 

		March 31, 2020				December 31, 2019
Finished goods		$	1,948			$	2,269
Inventory reserves			-				-
		$	1,948			$	2,269

 

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, 2020				December 31, 2019
Prepaid trade shows		$	16			$	17
Prepaid insurance			401				464
Manufacturing deposits			880				880
Subscriptions			114				155
Other fees and services			37				44
Other current assets			1				2
		$	1,449			$	1,562

 

 

TearLab Corporation

 

Fixed assets

 

		March 31, 2020				December 31, 2019
Capitalized TearLab equipment		$	7,044			$	6,892
Manufacturing equipment			317				317
Leasehold improvements			13				13
Computer equipment and software			315				310
Furniture and office equipment			368				368
Medical equipment			1,454				1,454
		$	9,511			$	9,354
Less accumulated depreciation			(7,779	)			(7,684	)
		$	1,732			$	1,670

 

Depreciation expense was $135 and $221 during the three months ended March 31, 2020 and 2019, respectively.

 

Accrued liabilities

 

		March 31, 2020				December 31, 2019
Due to professionals		$	72			$	62
Due to employees and directors			691				1,414
Sales and use tax liabilities			235				268
Royalty liability			240				245
Warranty			34				36
Other			429				311
		$	1,701			$	2,336

 

 

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, 2020 and 2019 was $0.1.

 

Intangible assets subject to amortization consist of the following:

 

		Remaining Useful Life		Gross Value at				Accumulated				Net Book Value at
		(Years)		March 31, 2020				Amortization				March 31, 2020
TearLab® technology		0		$	12,172			$	(12,172	)		$	-
Patents and trademarks		1			271				(269	)			2
Prescriber list		0			90				(90	)			-
Total				$	12,533			$	(12,531	)		$	2

 

		Gross Value at				Accumulated				Net Book Value at
		December 31, 2019				Amortization				December 31, 2019
TearLab® technology		$	12,172			$	(12,172	)		$	-
Patents and trademarks			271				(269	)			2
Prescriber list			90				(90	)			-
Total		$	12,533			$	(12,531	)		$	2

 

The estimated amortization expense for the intangible assets for the remainder of 2020 and thereafter is as follows:

 

			Amortization
			of intangible
			assets
Remainder of 2020			$	1
Thereafter				1
			$	2

 

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 principal of the loan and is subject to additional accrued interest (“PIK interest”). The accrued interest can be deferred and paid together with the principal in the fifth and sixth years.

 

As part of Amendment No. 2 to the 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 “2015 CRG Warrants”). The 2015 CRG Warrants have a five-year life and are classified as equity on the Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019. The 2015 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, 2016, the Company entered into Amendment No. 4 to 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 (the “2016 CRG Warrants” and together with the 2015 CRG Warrants, the “CRG Warrants”), which expire five years after issuance.

 

On October 12, 2017, the Company entered into Amendment No. 5 to the Term Loan Agreement. This amendment reduced the exercise price of all of the CRG Warrants from $15.00 per share to $1.50 per share and provided broad anti-dilution protection such that the CRG Warrants maintained the same 1.22% ownership following any capital raises the Company completed through March 31, 2018.

 

 

On April 4, 2018 with an effective date of March 31, 2018, the Company entered into Amendment No. 6 to the Term Loan Agreement. Pursuant to the terms of this amendment, the cash interest payments due in 2018 were deferred and added to the principal balance under the Loan Agreement at the end of each quarter. This amendment also provided 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 (the “Facility Fee”). The Facility Fee is being accrued to interest expense using the effective interest method. In addition, this amendment reduced 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.

 

On November 12, 2018 the Company entered into Amendment No. 7 to the Term Loan Agreement. Pursuant to the terms of the agreement, the Amendment extended the “Interest-Only Period” under the Term Loan Agreement from the sixteenth (16^th) payment date to the twentieth (20^th) payment date following the first borrowing date, which has the effect of pushing out the principal payments to 2020. In addition, the cash interest payments under the Term Loan Agreement for periods ending on March 31, 2019 and June 30, 2019 were be deferred and added to the principal balance under the Term Loan Agreement at the end of each such quarter. The Company evaluated the amendment and it was accounted for as a modification in accordance with GAAP, with no incremental expense incurred. Additionally, if the Federal Drug Administration (“FDA”) had received and accepted our application for review of our Discovery^TM Platform on or before June 30, 2019 the Company could have elected to pay the interest on the outstanding principal amount of the loans under the Term Loan Agreement payable during the quarter ended September 30, 2019 entirely in the form of a PIK Loan. Finally, the Amendment reduced the minimum required revenue for 2018 under the Term Loan Agreement from $25 million to $24 million.

 

On October 4, 2019 with an effective date of September 30, 2019 the Company entered into Amendment No. 8 to the Term Loan Agreement. Pursuant to the terms of the agreement, the Amendment deferred the cash interest payment for September 30, 2019 and added it to the principal balance under the Term Loan Agreement.

 

As of December 31, 2019, the Company was in default of the 2019 minimum revenue threshold of $38.0 million and, the Company was required to raise subordinated debt or equity (the “CRG Equity Cure”) of $30.7 million which is 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 accordance with the terms of the Loan. Under the Term Loan Agreement, The Company had 90 days to achieve this “Cure” unless a covenant waiver was given or the Term Loan Agreement was amended. In the event the Company could not complete the CRG Equity Cure and a covenant waiver was not received, the Company would remain in default of the Term Loan Agreement. In the event of a default, the lender has the option or right to require the Company to repay the current outstanding amount of $36.6 million earlier than anticipated, and if the Company cannot, the lender has the option to invoke the foreclosure on their security interest in our assets and all obligations will become due and payable immediately.

 

On March 31, 2020, the Company entered into a Consent agreement that extended the date on which the principal and interest payments were due under the Loan Agreement from March 31, 2020 to May 31, 2020. Additionally, as of March 31, 2020 the Company was not in compliance with the minimum revenue covenant under the Term Loan Agreement and the Consent temporarily waived any related default until May 31, 2020.

 

On May 10, 2020, effective May 7, 2020, the Company entered into a Consent (the “Consent”) to its 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 as of August 6, 2015, Amendment 3, dated as of December 31, 2015, Amendment 4, dated as of April 7, 2016, Amendment 5, dated as of October 12, 2017, Amendment 6, dated as of April 4, 2018, Amendment 7, dated as of November 12, 2018, and Amendment 8, dated as of October 4, 2019, by and among the Company, certain of its subsidiaries from time to time party thereto as guarantors and certain affiliate funds of CRG as lenders. The Consent provides for the lenders’ consent to the Company’s receipt of the Paycheck Protection Program Loan (“PPP Loan”). See Note 10 for additional information related to the PPP loan.

 

On May 11, 2020, the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Accelmed Partners II LP, a Cayman Islands exempted limited partnership (“Buyer”), and Accelmed Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Buyer (“Merger Sub”). The Merger Agreement provides that, subject to the terms and conditions set forth therein, Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving the Merger and becoming a wholly owned subsidiary of Buyer. See Note 10 for additional information related to the Merger.

 

On May 11, 2020, in connection with the Merger Agreement filed with the SEC on May 11, 2020, the Company entered into a Consent and Amendment No. 9 to the Term Loan Agreement (“Amendment 9”). Amendment 9 provides for the consent to the transaction contemplated in the Merger Agreement. Pursuant to the Amendment and related Trigger Exchange agreement, the issuer prepaid on May 11, 2020 $694 thousand in aggregate principal of the loans outstanding under the Term Loan Agreement and by issuing to CRG an aggregate of 11,850,131 shares of Commons Stock in exchange for and satisfaction of such partial principal payment.

 

On May 28, 2020, the Company entered into a Consent agreement that extends the date on which the principal and interest payments due under the Loan agreement from May 31, 2020 and June 30, 2020 to July 31, 2020. Additionally, as of March 31, 2020 the Company was not in compliance with the minimum revenue covenant under the Loan Agreement and the Consent temporarily extends the waiver of any related default, which had previously been waived until May 31, 2020 until July 31, 2020. Failure by the Company to make the principal and interest payment on or before July 31, 2020 will result in an immediate event of default under the Loan Agreement.

 

 

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. The minimum revenue is $45.0 million for 2020.

 

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.

 

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 Condensed 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, 2020 and related maturities of outstanding principal:

 

Principal balance outstanding		$	24,000
PIK interest			11,179
Facility fee			2,935
less discount on term loan:
deferred financing fees, net			(32	)
detachable warrants, net			(65	)
Total Term Loan		$	38,017

 

 

TearLab Corporation

 

Principal due:

 

2020			38,114
Total principal due			38,114
Less: discount on term loan			(97	)
Total term loan		$	38,017

 

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.

 

(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.

 

As of December 31, 2019, all shares of Series A Convertible Preferred stock had been converted into 4,804,545 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,
		2020				2019
Sales and marketing		$	1			$	8
Clinical, regulatory and research and development			-				4
General and administrative			10				19
Stock-based compensation expense before income taxes		$	11			$	31

 

 

TearLab Corporation

 

(d) Warrants

 

On October 8, 2015, as part of Amendment No. 2 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 “2015 CRG Warrants”). The 2015 CRG Warrants are exercisable any time prior to October 8, 2020. The 2015 CRG Warrants are classified as equity on the Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019. The 2015 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, 2020 or 2019.

 

On April 7, 2016, as part of Amendment No. 4 to the Term Loan Agreement, the exercise price of the 2015 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” and, together with the 2015 CRG Warrants, the “CRG Warrants”). The modification to the terms of the 2015 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, as part of Amendment No. 5 to the Term Loan Agreement, 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 resulted in a change in fair value of $44 which was included as interest expense. The 2015 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 were exercisable 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, 2020 and December 31, 2019. The Series B Warrants were exercisable immediately and expired 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, 2020 and December 31, 2019. All Series B Warrants expired on June 7, 2018 with no warrants exercised. 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, 2020 and December 31, 2019.

 

In connection with the December 2017 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 Note 5). 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, 2020 and December 31, 2019 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. On April 4, 2018, in connection with Amendment No. 6 to the Term Loan Agreement, the strike price of all existing CRG warrants was reduced to $0.44 per share (see Note 5). The modification to the terms of the CRG Warrants and the 2017 CRG Warrants resulted in a change in fair value of $10 which was included as interest expense.

 

Prior to the effective time of the Merger, pursuant and subject to the terms of the Merger Agreement and related documents, TearLab shall have caused each warrant to have been cancelled and terminated and of no further force or effect.

 

 

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,
		2020				2019
Stock options			957				891
Warrants			8,702				8,702
Total			9,659				9,593

 

8. COMMITMENTS AND CONTINGENCIES

 

Leases

 

Operating lease right-of-use (“ROU”) assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, we use an incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

 

The Company has commitments relating to operating leases recognized on a straight-line basis over the term of the lease for rental of two office spaces and various equipment from unrelated parties. Our California office lease was signed May 1, 2018, with a commencement date of July 1, 2018, expires on November 30, 2023 and has an option for a 5-year extension and escalating payments. In January 2020, the Company entered into a sixth amendment to our Texas office lease to extend the term of the lease until September 30, 2020. In addition, the Company has vehicle leases expiring at various times through January 2021, and an equipment lease expiring in December 2021.

 

The adoption of ASC Topic 842 resulted in the Company recognizing right of use assets of $738 and a lease liability of $739, with the difference due the write-off of prior recorded deferred rent.

 

The components of lease costs were as follows:

 

		Three months ended
		March 31, 2020
Operating lease costs		$	88
Short-term lease costs			-
Variable lease costs			-
		$	88

 

Future minimum lease payments under non-cancellable leases as of March 31, 2020 were as follows:

 

2020				222
2021				184
2022				164
2023				169
Total lease payments				739
Less present value discount				139
Present value of lease liabilities			$	600
Weighted average remaining lease term				3.2
Weighted average discount rate				13	%

 

Commitments

 

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 had not commenced commercial sales of the TearLab Discovery^TM Platform on or before July 1, 2019, the Company would have been 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. The Company completed its first commercial sale of the TearLab Discovery^TM Platform prior to the July 1, 2019 deadline.

 

 

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, 2020 are as follows:

 

2020			35
2021			35
2022			35
2023			35
2024			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 and 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. On August 9, 2018 the Company entered into an addendum to the 2016 Manufacturing and Supply and Development Agreement with MiniFAB. The amendment fixes the price of the osmolarity test cards at their current price until the earlier of: the average monthly order volume of osmolarity cards on a rolling six month average falls below 20,000 cards; or the aggregate product volume in the calendar year commencing 12 months after the launch of the Discovery^TM product is below 2.4 million cards; or the aggregate product volume in any calendar year after 24 months after the launch of the Discovery^TM product is below 3.0 million cards at which point the Company and MiniFAB will renegotiate pricing.

 

On August 9, 2018, the Company entered into a manufacturing, supply and development agreement (the “MiniFAB Agreement”) with MiniFAB. Pursuant to the terms of the MiniFAB Agreement, MiniFAB will manufacture and supply test cards for the Company’s next generation platform, the TearLab Discovery™ System. The MiniFAB Agreement is exclusive through the first term of 10 years and automatically renews for an additional term of 5 years unless either party cancels. TearLab will pay for 65% of the capital expenditures (“capex”) under the MiniFAB Agreement as incurred and MiniFAB will pay for the remaining 35% of capex, which will be recoverable from TearLab through an amortized cost component in the price for the product charged to TearLab once the monthly card volumes reach 200,000 per month. The capex amounts are limited to an aggregate of $1.0 million Australian Dollar (“AUD”) for the initial development and production phase (“Phase 1”) and anticipated to be in the vicinity of $3.0 million AUD for further investment of production capacity (“Phase 2”). In addition, TearLab will be responsible for the payment or reimbursement of all non-recurrent expenditure and tooling, limited to $1.2 million AUD for Phase 1 and estimated at $2.0 million AUD for Phase 2. In December 2018, the Company made an initial capex investment of $317 thousand for a machine that was placed into fixed assets and is being amortized over a 15-year period. Through March 31, 2020 the Company had made additional investments of $33. The Company has a corresponding $132 of long-term third-party payable for capex to be amortized through the card cost component as of March 31, 2020.

 

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.

 

9. RELATED PARTY

 

The Company has an agreement with its Chief Scientific Officer whereas if the Company enters into an agreement with UCSD to reduce the overall royalty rate the Company shall pay to its Chief Scientific Officer a royalty on net sales equal to one and a half percent of the percent change in the UCSD royalty rate. The restated UCSD patent license and royalty agreement (see Note 8) resulted in a royalty due at a rate of 0.68%. Related party royalty expense was $34 and $38 as of March 31, 2020 and 2019, respectively. The Company had $71 and $37 in accrued royalties at March 31, 2020 and December 31, 2019, respectively for the related party royalty.

 

 

10. SUBSEQUENT EVENTS

 

On May 6, 2020, TearLab Corp. (the “Company”) entered into a loan agreement to receive funding under a United States Small Business Administration (“SBA”) loan (the “PPP Loan”) from a commercial bank under the SBA’s Payroll Protection Program (“PPP”). The Company received the funds on May 7, 2020. The principal loan amount was $801 thousand.

 

The PPP Loan has a two-year term, maturing on May 6, 2022. The interest rate on the PPP Loan is 1.0% per annum. Principal and interest are payable in monthly installments, beginning six months after the date of disbursement, until maturity with respect to any portion of the PPP Loan which is not forgiven as described below. The Company did not provide any collateral or guarantees for the PPP Loan, nor did the Company pay any facility charge to obtain the PPP Loan. The PPP Loan provides for customary events of default, including, among others, those relating to failure to make payment, bankruptcy, breaches of representations and material adverse effects. The Company is permitted to prepay or partially prepay the PPP Loan at any time with no prepayment penalties.

 

The PPP Loan may be partially or fully forgiven if the Company complies with the provisions of the CARES Act, including the use of PPP Loan proceeds for payroll costs, rent, utilities and other expenses. The PPP Loan is forgivable in its entirety if the Company supplies verifying documentation that it has used 60% of the PPP Loan proceeds for covered payroll costs and not more than 40% of the PPP Loan proceeds for SBA approved non-payroll costs incurred before February 15, 2020, over the twenty-four week period from the date of disbursement of the loan.

 

On May 10, 2020, effective May 7, 2020, the Company entered into a Consent (the “Consent”) to its 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 as of August 6, 2015, Amendment 3, dated as of December 31, 2015, Amendment 4, dated as of April 7, 2016, Amendment 5, dated as of October 12, 2017, Amendment 6, dated as of April 4, 2018, Amendment 7, dated as of November 12, 2018, and Amendment 8, dated as of October 4, 2019, by and among the Company, certain of its subsidiaries from time to time party thereto as guarantors and certain affiliate funds of CRG as lenders. The Consent provides for the lenders’ consent to the Company’s receipt of the PPP Loan.

 

On May 11, 2020, the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Accelmed Partners II LP, a Cayman Islands exempted limited partnership (“Buyer”), and Accelmed Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Buyer (“Merger Sub”). The Merger Agreement provides that, subject to the terms and conditions set forth therein, Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving the Merger and becoming a wholly owned subsidiary of Buyer. The Merger is subject to the satisfaction of certain closing conditions by the Company, including but not limited to the representations and warranties of the Company set forth in the Merger Agreement remaining true and correct in all material respects, the absence of any material adverse effect on the Company, the Company satisfying cash and transaction expense requirements, termination of all outstanding Company warrants, key employee agreements and resignations, and the performance and/or compliance by the Company of all additional agreements, covenants and conditions required by the Merger Agreement. See the Definitive Information Statement filed with the SEC on June 18, 2020 for additional information related to the proposed Merger, including but not limited to information regarding conditions of completing the Merger.

 

On May 11, 2020, in connection with the Merger Agreement filed with the SEC on May 11, 2020, the Company entered into a Consent and Amendment No. 9 to the Term Loan Agreement (“Amendment 9”). Amendment 9 provides for the consent to the transaction contemplated in the Merger Agreement. Pursuant to the Amendment and related Trigger Exchange agreement, the issuer prepaid on May 11, 2020 $694 thousand in aggregate principal of the loans outstanding under the Term Loan Agreement and by issuing to CRG an aggregate of 11,850,131 shares of Commons Stock in exchange for and satisfaction of such partial principal payment.

 

On May 11, 2020, the Company entered into Amendment No. 1 (“UCSD Amendment”) to the Restated License Agreement with UCSD. Pursuant to the UCSD Amendment, if the Company’s Debt financer, CRG with Accelmed Growth Partner L.P., (“Accelmed) enter into a definitive agreement to acquire greater than fifty percent (50%) of the Company’s outstanding shares of common stock prior to July 1, 2020 such transaction shall not be considered a fundamental transaction under the Agreement. To the extent any third party, or parties cumulatively, acquire greater than fifty percent (50%) of the Company’s outstanding shares of common stock after July 1, 2020, such transaction shall be deemed a Fundamental Transaction under the Agreement. All other terms of the Agreement remain unchanged.

 

On May 28, 2020, the Company entered into a Consent agreement that extends the date on which the principal and interest payments due under the Loan agreement from May 31, 2020 and June 30, 2020 to July 31, 2020. Additionally, as of March 31, 2020 the Company was not in compliance with the minimum revenue covenant under the Loan Agreement and the Consent temporarily extends the waiver of any related default, which had previously been waived until May 31, 2020 until July 31, 2020. Failure by the Company to make the principal and interest payment on or before July 31, 2020 will result in an immediate event of default under the Term Loan Agreement.

 

 

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 current 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 covered Discovery^TM 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. On September 4, 2018, we submitted, and the FDA accepted, our response to the FDA’s comments regarding the 510(k) application for the Discovery^TM Platform. On October 10, 2018, we announced that the FDA determined that the TearLab Discovery™ MMP-9 test, had not met the criteria for substantial equivalence based upon data and information we had submitted. On April 22, 2020, the Company announced the FDA had accepted the resubmission of its 510(k) application for the potential clearance of the TearLab Discovery^TM MMP-9 test. The submission covers the TearLab Discovery^TM Platform and its single-use, disposable Test Card measuring the inflammatory biomarker, matrix metalloproteinase 9 (MMP-9).

 

 

TearLab Corporation

 

RESULTS OF OPERATIONS

 

Revenue, Cost of Sales and Gross Margin

 

(in thousands)		Three months ended March 31,
		2020				2019				Change
TearLab revenue		$	5,091			$	5,683			$	(592	)
TearLab – cost of sales			1,861				2,083				(222	)
TearLab gross profit			3,230				3,600				(370	)
Gross profit percentage			63	%			63	%

 

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, 2020 was $5.1 million compared to $5.7 million for the three months ended March 31, 2019. This decrease was driven by the decrease in both reader revenue and test card revenue compared to the first quarter of 2019 due to the impact of COVID-19 in March 2020.

 

 

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 decreased 11% for the three months ended March 31, 2020 compared to March 31, 2019. The decrease was driven by lower depreciation as our systems become fully amortized, as well as lower royalty on lower revenue volume. Additionally, in 2019 we received a credit from one of our suppliers for inventory damaged in transit.

 

Gross Profit

 

TearLab gross profit for the three months ended March 31, 2020 was $3.2 million compared to the $3.6 million for the three months ended March 31, 2019. The gross profit percentage of revenue for the three months ended March 31, 2020 and 2019 was 63%. Excluding the impact of the 2019 credit from one of our suppliers for inventory damaged in transit, gross profit would have been 64% for the three months ended March 31, 2019.

 

Operating Expenses

 

(in thousands)		Three months ended March 31,
		2020				2019				Change
Sales and marketing		$	817			$	875			$	(58	)
Clinical, regulatory and research and development			916				874				42
General and administrative			1,637				1,844				(207	)
Operating expenses		$	3,370			$	3,593			$	(223	)

 

Sales and Marketing Expense

 

Sales and marketing expenses decreased by $0.1 million or 6.6% in the three months ended March 31, 2020, as compared with the three months ended March 31, 2019. The reduction in sales and marketing expenses is attributable to a reduction in employee related payments due to lower sales and the impact of COVID-19 in March 2020.

 

Clinical, Regulatory and Research and Development Expenses

 

Total clinical, regulatory and research and development expenses increased 4.8% in the three months ended March 31, 2020 as compared with the three months ended March 31, 2019. The increase was due to product development costs for the resubmittal of the 501(k) with the FDA for the TearLab Discovery^TM Platform.

 

General and Administrative Expenses

 

Total general and administrative expenses decreased $0.2 million or 11.2% in the three months ended March 31, 2020 as compared with the three months ended March 31, 2019. The decrease was primarily due to the impact of tax related costs and employee retention related payouts in Q1 of 2019, as well as the impact of COVID-19 in March 2020.

 

 

TearLab Corporation

 

Other Income (Expense)

 

(in thousands)		Three Months Ended March 31,
		2020				2019				Change
Interest income (expense)		$	(1,442	)		$	(1,350	)		$	(92	)
Other (net)			16				4				12
Other income		$	(1,426	)		$	(1,346	)		$	(80	)

 

Interest Income (Expense)

 

Interest expense for the three months ended March 31, 2020 and 2019 was from our long-term debt under the Term Loan Agreement. Interest expense increased for the three months ended March 31, 2020 when compared to the same period in the previous fiscal year based on larger average balances of long-term debt outstanding.

 

Other (net)

 

Other income (loss) for the three months ended March 31, 2020 and 2019 consists primarily of foreign exchange transaction gains and losses, based on fluctuations of the Company’s foreign denominated currencies.

 

 

TearLab Corporation

 

Liquidity and Capital Resources

 

(in thousands)		March 31, 2020				December 31, 2019				Change
Cash and cash equivalents		$	7,335			$	7,108			$	227
Percentage of total assets			52.1	%			49.7	%
Working capital		$	(29,456	)		$	(27,899	)		$	(1,557	)

 

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. In November 2018, with amendment No.6 CRG further extended our “Interest-only period,” which has the effect of pushing out the principal payments to 2020. Based on our current rate of cash consumption in addition to our projections, we estimate we will need additional capital in the third quarter of 2020. 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.

 

On May 11, 2020, the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Accelmed Partners II LP, a Cayman Islands exempted limited partnership (“Buyer”), and Accelmed Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Buyer (“Merger Sub”). The Merger Agreement provides that, subject to the terms and conditions set forth therein, Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving the Merger and becoming a wholly owned subsidiary of Buyer. The completion of the Merger is subject to satisfaction of all conditions set forth in the Merger Agreement and cannot be guaranteed. See Note 10 to the financial statements included in this Quarterly Report on Form 10-Q for additional information related to the Merger.

 

Absent the completion of the Merger, 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 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 principal of the loan and is subject to additional accrued interest (“PIK interest”). The accrued interest can be deferred and paid together with the principal in the fifth and sixth years.

 

As part of Amendment No. 2 to the 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 “2015 CRG Warrants”). The 2015 CRG Warrants have a five-year life and are classified as equity on the Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019. The 2015 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, 2016, the Company entered into Amendment No. 4 to 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 (the “2016 CRG Warrants” and together with the 2015 CRG Warrants, the “CRG Warrants”), which expire 5 years after issuance.

 

On October 12, 2017, the Company entered into Amendment No. 5 to the Term Loan Agreement. This amendment reduced the exercise price of all of the CRG Warrants from $15.00 per share to $1.50 per share and provided broad anti-dilution protection such that the CRG Warrants maintained the same 1.22% ownership following any capital raises the Company completed through March 31, 2018.

 

In connection with the December 2017 offering the Company issued CRG additional warrants to purchase 83,240 shares of commons stock at an exercise price of $1.50 (“2017 CRG Warrants”).

 

On April 4, 2018 with an effective date of March 31, 2018, the Company entered into Amendment No. 6 to the Term Loan Agreement. Pursuant to the terms of this amendment, the cash interest payments due in 2018 were deferred and added to the principal balance under the Term Loan Agreement at the end of each quarter. This 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, this 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 and the 2017 CRG Warrants to $0.44 per share. This amendment was accounted for as a modification in accordance with U.S. GAAP.

 

On November 12, 2018 the Company entered into Amendment No. 7 to the Term Loan Agreement. Pursuant to the terms of the agreement, the Amendment extends the “Interest-Only Period” under the Term Loan Agreement from the sixteenth (16^th) payment date to the twentieth (20^th) payment date following the first borrowing date, which has the effect of pushing out the principal payments to 2020. In addition, the cash interest payments under the Term Loan Agreement for periods ending on March 31, 2019 and June 30, 2019 were deferred and added to the principal balance under the Term Loan Agreement at the end of each such quarter. Additionally, if the Federal Drug Administration (“FDA”) had received and accepted our application for review of our Discovery^TM Platform on or before June 30, 2019 the Company could have elected to pay the interest on the outstanding principal amount of the loans under the Term Loan Agreement payable during the quarter ended September 30, 2019 entirely in the form of a PIK Loan. Finally, the Amendment reduced the minimum required revenue for 2018 under the Term Loan Agreement from $25 million to $24 million.

 

On October 4, 2019 with an effective date of September 30, 2019 the Company entered into Amendment No. 8 to the Term Loan Agreement. Pursuant to the terms of the agreement, the Amendment deferred the cash interest payment for the period ending September 30, 2019 and added it to the principal balance under the Term Loan Agreement.

 

 

TearLab Corporation

 

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 is $45 million for the calendar year 2020. The minimum cash balance required is $3.0 million, subject to certain conditions.

 

As of December 31, 2019, the Company was in default of the 2019 minimum revenue threshold of $38.0 million and, the Company will have to raise subordinated debt or equity (the “CRG Equity Cure”) of $30.7 million which is 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 which would cure the default in accordance with the terms of the loan. The Company has 90 days to achieve this “Cure” unless a covenant waiver is given or the Term Loan Agreement is amended. In the event the Company cannot complete the CRG Equity Cure and a covenant waiver is not received, the Company would remain in default of the Term Loan Agreement. In the event of a default, the lender has the option or right to require the Company to repay the current outstanding amount of $36.6 million earlier than anticipated, and if the Company cannot, the lender has the option to invoke the foreclosure on their security interest in our assets and all obligations will become due and payable immediately. See the Risk Factor section of this Form 10-Q for further discussion regarding the Term Loan Agreement and risks associated with the Term Loan Agreement and our failure to satisfy the 2019 revenue covenant thereunder.

 

On March 31, 2020, the Company entered into a Consent agreement that extends the date on which the principal and interest payments are due under the Term Loan Agreement from March 31, 2020 to May 31, 2020. Additionally, as of March 31, 2020 the Company was not in compliance with the minimum revenue covenant under the Loan Agreement and the Consent temporarily waives any related default until May 31, 2020.

 

On May 10, 2020, effective May 7, 2020, the Company entered into a Consent (the “Consent”) to its 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 as of August 6, 2015, Amendment 3, dated as of December 31, 2015, Amendment 4, dated as of April 7, 2016, Amendment 5, dated as of October 12, 2017, Amendment 6, dated as of April 4, 2018, Amendment 7, dated as of November 12, 2018, and Amendment 8, dated as of October 4, 2019, by and among the Company, certain of its subsidiaries from time to time party thereto as guarantors and certain affiliate funds of CRG as lenders. The Consent provides for the lenders’ consent to the Company’s receipt of the PPP Loan.

 

On May 11, 2020, the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Accelmed Partners II LP, a Cayman Islands exempted limited partnership (“Buyer”), and Accelmed Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Buyer (“Merger Sub”). The Merger Agreement provides that, subject to the terms and conditions set forth therein, Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving the Merger and becoming a wholly owned subsidiary of Buyer. See Note 10 to the financial statements included in this Quarterly Report on Form 10-Q for additional information related to the Merger.

 

On May 11, 2020, in connection with the Merger Agreement filed with the SEC on May 11, 2020, the Company entered into a Consent and Amendment No. 9 to the Term Loan Agreement (“Amendment 9”). Amendment 9 provides for the consent to the transaction contemplated in the Merger Agreement. Pursuant to the Amendment and related Trigger Exchange agreement, the issuer prepaid on May 11, 2020 $694 thousand in aggregate principal of the loans outstanding under the Term Loan Agreement and by issuing to CRG an aggregate of 11,850,131 shares of Commons Stock in exchange for and satisfaction of such partial principal payment.

 

On May 28, 2020, the Company entered into another Consent agreement that extends the date on which the principal and interest payments due under the Loan agreement from May 31, 2020 and June 30, 2020 to July 31, 2020. Additionally, as of March 31, 2020 the Company was not in compliance with the minimum revenue covenant under the Loan Agreement and the Consent temporarily extends the waiver of any related default, which had previously been waived until May 31, 2020 until July 31, 2020. Failure by the Company to make the principal and interest payment on or before July 31, 2020 will result in an immediate event of default under the Term Loan Agreement.

 

Ongoing Sources and Uses of Cash

 

Absent the completion of the Merger, we anticipate that our cash and cash equivalents and cash generated from revenue will be sufficient to sustain our operations into the third quarter of 2020. 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.

 

Absent the completion of the Merger, 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.

 

See Note 10 to the financial statements included in this Quarterly Report on Form 10-Q for additional information related to the Merger.

 

Changes in Cash Flows

 

Cash Provided by Operating Activities

 

Net cash provided by operating activities during the three months ended March 31, 2020 was $0.4 million. Net cash provided by operating activities during the three-month period was more than our net loss of $1.6 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, 2020 and 2019 consists of the following:

 

		Three Months Ended
(in thousands)		March 31,
		2020				2019
Changes in operating assets and liabilities:
Accounts receivable, net		$	(19	)		$	88
Inventory			321				(220	)
Prepaid expenses and other assets			141				59
Accounts payable			598				638
Accrued liabilities			(636	)			(443	)
Deferred rent			(3	)			(4	)
		$	402			$	118

 

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, 2020 due to the management of inventory levels during the quarter;
	●	Accounts payable had a net increase during the three months ended March 31, 2020 mostly due to invoices received for professional services and increase in work performed relating to the development of our next generation of product in addition to cash management; and
	●	Accrued liabilities had a net decrease during the three months ended March 31, 2020 primarily due to the payment of accrued compensation amounts.

 

Cash Used in Investing Activities

 

Net cash used in investing activities for the three months ended March 31, 2020 and 2019 was $0.2 million and $0.01 million, respectively, to acquire fixed assets.

 

Cash Provided by Financing Activities

 

There was zero in net cash provided by financing activities during the three months ended March 31, 2020 and 2019.

 

Off-Balance-Sheet Arrangements

 

As of March 31, 2020, 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, 2020 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, 2019. 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, 2020 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 Condensed Consolidated Financial Statements for the three months ended March 31, 2020 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, 2020 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 2020, 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.

 

 

TearLab Corporation

 

ITEM 1A. RISK FACTORS.

 

Risks Relating to Our Financial Condition

 

The Merger may not be completed and the Merger Agreement may be terminated in accordance with its terms.

 

The Merger is subject to a number of conditions that must be satisfied or waived (to the extent permissible) prior to the completion of the Merger, as specified in the Merger Agreement. These conditions to the completion of the Merger, some of which are beyond the control of us and the other parties to the Merger Agreement, may not be satisfied or waived in a timely manner or at all, and, accordingly, the Merger may be delayed or not completed. We may terminate the Merger Agreement under certain circumstances. Additionally, AccelMed may terminate the Merger Agreement under certain circumstances, including, among other reasons, if the Merger is not completed by August 31, 2020, the findings of AccelMed’s due diligence review of the affairs of the Company or any of its subsidiaries has revealed information that was not disclosed or conflicts with prior disclosure pursuant to the Merger Agreement and is materially adverse to the Company, if AccelMed determines that as a result of the effect of the COVID-19 pandemic on the Company and its business the transactions have become impracticable. See the Definitive Information Statement filed with the SEC on June 18, 2020 for additional information related to the proposed Merger, including but not limited to information regarding conditions of completing the Merger and the potential for termination of the Merger Agreement.

 

The termination of the Merger Agreement could negatively impact us.

 

If the Merger is not completed, our ongoing business may be adversely affected and, without realizing any of the benefits of having completed the Merger, we may experience certain negative effects, including the following

 

	●	negative reactions from the financial markets, including negative impacts on our stock price;
	●	negative reactions from our suppliers, customers and employees;
	●	we will be required to pay our costs relating to the Merger, such as financial advisory, legal and accounting costs and associated fees and expenses, whether or not the Merger is completed;
	●	the Merger Agreement places certain restrictions on the conduct of our business prior to completion of the Merger and such restrictions may prevent us taking certain other specified actions during the pendency of the Merger;
	●	matters relating to the Merger (including integration planning) will require substantial commitments of time and resources by our management, which could otherwise have been devoted to day-to-day operations or to other opportunities that may have been beneficial to us; and
	●	we will have a limited time, if any, to satisfy the terms and conditions of the Term Loan Agreement other than by completing the Merger and will be subject to the risk of default or foreclosure pursuant to the terms thereof if the Merger is not completed.

 

If we do not complete the Merger, 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, if we do not complete the Merger we expect that we will need to raise additional capital prior to the end of the third quarter of 2020. 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 and without giving effect to the completion of the Merger. 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, 2020, we had an accumulated deficit of $538.0 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 $45.0 million for calendar year 2020. 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.

 

The 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 CRG 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

 

War, terrorism, other acts of violence or natural or manmade disasters such as a global pandemic may affect the markets in which the Company operates, the Company’s customers, the Company’s delivery of products and customer service, and could have a material adverse impact on our business, results of operations, or financial condition.

 

The Company’s business may be adversely affected by instability, disruption or destruction in the geographic regions in which it operates, regardless of cause, including war, terrorism, riot, civil insurrection or social unrest, and natural or manmade disasters, including famine, food, fire, earthquake, storm or pandemic events and spread of disease (including the recent outbreak of the coronavirus commonly referred to as “COVID-19”). Such events may cause customers to suspend their decisions on using the Company’s products and otherwise affect their ability to meet their obligations to us by making payments on existing contracts, make it impossible to contact our customers and potential customers, and give rise to sudden significant changes in regional and global economic conditions and cycles that could interfere with our existing business.

 

These events also pose significant risks to the Company’s personnel and operations, which could materially adversely affect the Company’s financial results.

 

The ongoing circumstances resulting from the COVID-19 virus outbreak magnify the challenges faced from our continuing efforts to introduce and sell our product in a challenging environment and could have an impact on 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, 2020, our total liabilities were $41.6 million including $38.0 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.

 

Because 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.

 

ITEM 6. EXHIBITS

 

Exhibit Number		Exhibit Description		Incorporated by Reference
10.1		Consent dated March 31, 2020
10.2		Agreement and plan of merger, dated May 11, 2020 by and among Buyer, Merger Sub and the Company.		Exhibit 2.1 to the Registrants Current Report on Form 8K filed with the commission on May 11, 2020. (file no. 000-51030)
10.3		Consent and Amendment No. 9 to Term Loan Agreement dated May 11, 2020.		Exhibit 10.1 to the Registrants Current Report on Form 8K filed with the commission on May 11, 2020. (file no. 000-51030)
10.4		Trigger Exchange Agreement dated May 11, 2020.		Exhibit 10.2 to the Registrants Current Report on Form 8K filed with the commission on May 11, 2020. (file no. 000-51030)
10.5		Paycheck Protection Program Promissory Note and Agreement, dated as of May 6, 2020.		Exhibit 10.1 to the Registrants Current Report on Form 8K filed with the commission on May 11, 2020. (file no. 000-51030)
10.6		Consent dated May 10, 2020		Exhibit 10.2 to the Registrants Current Report on Form 8K filed with the commission on May 11, 2020. (file no. 000-51030)
10.7		Amendment No.1 to the Restated License Agreement No. 2018-04-0460 with the Regents of the University of California dated May 11, 2020		Exhibit 10.1 to the Registrants Current Report on Form 8K filed with the commission on May 12, 2020. (file no. 000-51030)
10.8		Consent dated May 29, 2020.		Exhibit 10.1 to the Registrants Current Report on Form 8K filed with the commission on May 29, 2020. (file no. 000-51030)
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

 

*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: June 26, 2020	/s/ Joseph Jensen
	Joseph Jensen
	Chief Executive Officer