UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| [X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the fiscal year ended December 31, 2015 | |
| Or | |
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from ___________ to ___________ |
Commission file number: 000-51030
TearLab Corp.
(Exact name of registrant as specified in its charter)
| Delaware | 59-3434771 |
| (State
or other jurisdiction of incorporation or organization) |
(I.R.S.
Employer |
9980 Huennekens St., Suite 100 San Diego, California (Address of principal executive offices) |
92121 (Zip Code) |
Registrant’s telephone number, including area code: (858) 455-6006
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
| Title of each class | Name of each exchange on which registered | |
| COMMON STOCK, $0.001 PAR VALUE | 1The Nasdaq Stock Market LLC | |
| (The Nasdaq Capital Market) |
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer [ ] | Accelerated filer [X] | Non-accelerated filer [ ] |
Smaller reporting company [ ] |
| (Do not check if a smaller reporting company) | |||
Indicate by check mark if the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the voting common stock held by non-affiliates of the Registrant, based on the closing sale price of the Registrant’s common stock on June 30, 2015, the last business day of the Registrant’s most recently completed second fiscal quarter, as reported on the NASDAQ Capital Market on June 30, 2015 was approximately $61.1 million. The Registrant has no non-voting common stock. Shares of common stock held by each executive officer and director and by each person who owns 10% or more of the outstanding common stock, based on filings with the Securities and Exchange Commission, have been excluded from this computation since such persons may be deemed to be affiliates of the Registrant. The determination of affiliate status for this purpose is not necessarily a conclusive determination for other purposes
As of March 4, 2016, there were 33,828,647 shares of the Registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for the 2016 Annual Meeting of Stockholders of the Registrant to be held on June 24, 2016 are incorporated by reference into Part III of this Form 10-K.
The Registrant makes available free of charge on or through its website (http://www.tearlab.com) its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. The material is made available through the Registrant’s website as soon as reasonably practicable after the material is electronically filed with or furnished to the U.S. Securities and Exchange Commission, or SEC. All of the Registrant’s filings may be read or copied at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington D.C. 20549. Information on the hours of operation of the SEC’s Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website (http://www.sec.gov) that contains reports and proxy and information statements of issuers that file electronically.
TEARLAB CORPORATION
Form 10-K – ANNUAL REPORT
For the Fiscal Year Ended December 31, 2015
Table of Contents
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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements relating to future events and our future performance within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In some cases, you can identify forward-looking statements by terms such as “may”, “will”, “should”, “could”, “would”, “hope”, “expects”, “plans”, “intends”, “anticipates”, “believes”, “estimates”, “projects”, “predicts”, “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:
| ● | 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; |
| ● | Our ability to continue as a going concern; |
| ● | Our ability to obtain additional financing for working capital on acceptable terms and in a timely manner; |
| ● | The planned commercialization of our current product; |
| ● | 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; |
| ● | 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 plan to continue to develop and execute our conference and podium strategy to ensure visibility and evidence-based positioning of the TearLab® Osmolarity System among eye care professionals; |
| ● | Our ability to obtain and retain reimbursement for patient testing with the TearLab System; |
| ● | 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; and |
| ● | Our efforts to assist our customers in obtaining their CLIA waiver or providing them with support from certified professionals. |
These statements involve known and unknown risks, uncertainties and other factors, including the risks described in Part I, Item 1A of this Annual Report on Form 10-K, 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 Annual Report on Form 10-K 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.
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Corporate Information
TearLab Corp. was incorporated as OccuLogix, Inc. in Delaware in 2002. Unless the context requires otherwise, in this report the terms “the Company,” “we,” “us” and “our” refer to TearLab Corp. and our subsidiaries. References to “$” or “dollars” shall mean U.S. dollars unless otherwise indicated. References to “C$” shall mean Canadian dollars.
Overview
We are an in-vitro diagnostic company based in San Diego, California. We have commercialized a proprietary tear testing platform, the TearLab® Osmolarity System that enables eye care practitioners to test for highly sensitive and specific biomarkers using nanoliters of tear film at the point-of-care. Our first product measures tear film osmolarity for the diagnosis of Dry Eye Disease (“DED”). Our results are included in our financial statements, which are included under Item 8 to this Annual Report on Form 10-K.
TearLab Research, Inc.
TearLab Research, Inc. (“TearLab Research”), our wholly-owned subsidiary, develops technologies to enable eye care practitioners to test a wide range of biomarkers (chemistries, metabolites, genes and proteins) at the point-of-care. Commercializing that tear testing platform is now the focus of our business.
Our product, the TearLab® Osmolarity System, enables the rapid measurement of tear osmolarity in the doctor’s office. Osmolarity is a quantitative and highly specific biomarker that has been shown to assist in the diagnosis and disease management of DED. Based on data from the largest studies of dry eye to date, the Women’s Health Study, and the Physicians’ Health Study, and other studies, it has been estimated that about 3.23 million women and 1.68 million men, for a total of 4.91 million Americans 50 years and older have dry eye. Tens of millions more have less severe symptoms and probably a more episodic manifestation of the disease that is notable only during contact with some adverse contributing factor(s), such as low humidity or contact lens wear. 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 (the “FDA”), under regulations promulgated under the Clinical Laboratory Improvement Amendments, (“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.
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. While our current focus is on developing our business in the United States, we do have agreements with numerous distributors for distribution of the TearLab® Osmolarity System in South America, Europe, Asia and Australia.
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On May 19, 2009, we announced that we received 510(k) clearance from the FDA. We submitted a CLIA waiver application for the TearLab® Osmolarity System to the FDA on May 27, 2010. On March 4, 2011, we announced that we had received a communication from the FDA that the data we submitted was not sufficient to gain approval of our CLIA waiver application. On December 5, 2011, we announced that we had received a communication from the FDA indicating that, based on a supervisory review of the Company’s appeal, the FDA had granted our petition for a waiver under CLIA for the TearLab Osmolarity System. On January 23, 2012, we announced that after reviewing and accepting labeling submitted to it by the Company, the FDA had granted the waiver categorization under CLIA for the TearLab® Osmolarity System. The CLIA waiver reduces the regulatory paperwork and related administrative time for customers. In the United States, we sell directly to our customers and do not utilize distributors.
On December 8, 2009, we announced that Health Canada issued a Medical Device License for the TearLab® Osmolarity System. The Health Canada license allowed us to immediately begin marketing the system in Canada. On August 20, 2009, we entered into an agreement with a distributor, Science with Vision, for exclusive distribution of the TearLab Osmolarity System in Canada. We began selling products through the Canadian distributor in 2010.
On September 3, 2013, the Company and Science with Vision Inc. agreed to terminate the distribution agreement including exclusive distribution rights of TearLab products and we began selling directly in Canada.
OcuHub LLC
On March 14, 2014, TearLab purchased the assets of the OcuHub business unit from AOAExcel, Inc., the for-profit subsidiary of the American Optometric Association (“AOA”). As of the close of the transaction, the OcuHub purchased assets and business were operated out of a wholly-owned subsidiary of TearLab and renamed OcuHub LLC (“OcuHub”). The purchase price was $1.4 million in cash and the assumption of net liabilities of $163,000.
In August 2014, the Company sold membership units in OcuHub. The membership units sold generated gross proceeds of $250,000 in exchange for 2% ownership of OcuHub. During 2014, OcuHub completed development of a digital integration platform with initial customer subscriptions beginning in December 2014.
In February 2016, the Company initiated a divestiture or wind-down of the OcuHub subsidiary. While we continue to explore a possible sale of OcuHub, if a divestiture transaction does not materialize, the wind-down of the OcuHub operations is expected to be completed by the end of the first quarter of 2016. During 2015, we incurred a charge of $1.4 million related to the impairment of the intangible and fixed assets of OcuHub. In the event of a wind-down, we estimate the restructuring will incur approximately $0.6 million of expense in the first quarter of 2016.
Current Status and Recent Financing
On March 4, 2015, the Company executed a term loan agreement with CRG LP and certain of its affiliates (the “Term Loan Agreement”) providing the Company access to $35.0 million under the arrangement. The Company received $15.0 million in gross proceeds under the loan agreement on March 4, 2015, and an additional $10.0 million on October 6, 2015, pursuant to the second amendment to the Term Loan Agreement. A third tranche of $10.0 million is available to the Company if the Company achieves at least $38.0 million in trailing twelve-month revenue prior to June 30, 2016 and satisfies other borrowing conditions. As part of the second amendment to the Term Loan Agreement and funding of the $10.0 million tranche, CRG received warrants to purchase 350,000 shares of common stock of the Company at a price of $5.00 per share. The warrants are exercisable any time prior to October 6, 2020. The Term Loan Agreement has a term of six years and bears interest at 13% per annum, with quarterly payments of interest only for the first four years. At the Company’s option, during the first four years a portion of the interest payments can be deferred and paid together with the principal in the fifth and sixth years.
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Industry
Point-of-care Testing and Dry Eye Disease, or DED
Markets and Markets reports the global market for point-of-care testing will reach $27.5 billion annually or 40% of what the Medical Device and Diagnostic Industry reports to be an expected $69.1 billion global market for in-vitro diagnostic products by 2017. Approximately 75% of all laboratory tests today are performed at centralized clinical laboratories. However, diagnostic testing is increasingly being performed at the point-of-care due to several factors, including a need for rapid testing in acute care situations, the benefits of patient monitoring and disease management, streamlining therapeutic decision making and the overall trend toward personalized medicine. We believe that advances in bio-detection technologies that can simplify and accelerate the rate of performing complex diagnostic tests at the point-of-care, will drive utilization and overall point-of-care testing market growth.
Our product is the TearLab® Osmolarity System. This test can be performed at the point-of-care for the measurement of osmolarity, a quantitative and highly specific biomarker that has shown to assist in the diagnosis and management of DED. We believe, based on a 2011 Comprehensive Report on the Global Dry Eye Products Market, there are approximately 25 million people with DED in the United States alone, and this condition is estimated to account for up to one-third of all visits to U.S. eye care professionals.
Each time a person blinks, his or her eyes are resurfaced with a thin layer of a complex fluid known as the tear film. The tear film works to protect eyes from the outside world. Bacteria, viruses, sand, freezing winds and salt water (inclusive of most environmental factors) will not damage eyes when the tear film is intact. However, when compromised, a deficient tear film can be an exceedingly painful and disruptive condition. The tear film consists of three components: (i) an innermost glycocalyx (produced by the surface cells); (ii) the aqueous layer (the water in tears, produced by the lacrimal gland); and (iii) an oily lipid layer which limits evaporation of the tears (produced by the meibomian glands, located at the margins of the eyelids). The apparatus of the ocular surface forms an integrated unit. When working correctly, the tear film presents a smooth optical surface essential for clear vision and proper immunity. Androgen deficiency, contact lens wear and chronic inflammation of the lacrimal or meibomian gland may lead to the condition known as dry eye, which has been likened to arthritis of the eye, and results in a compromised, fragile tear film. In turn, the unstable tear film undermines vision, altering focus between every blink. An unstable tear film is the equivalent of a smudge atop the lens of a camera. It doesn’t matter how many megapixels your camera has, if the first lens is compromised, the image will be fuzzy.
DED is often seen as a result of aging, diabetes, cancer therapy, HIV, autoimmune diseases such as Sjögren’s syndrome and rheumatoid arthritis, LASIK surgery, contact lens wear, menopause and as a side effect of hormone replacement therapy. Numerous commonly prescribed and over-the-counter medications also can cause, or contribute to, the manifestation of DED.
There are millions of Americans who suffer from contact lens-induced DED, and 10% to 15% of these patients revert to frame wear annually due to dryness and discomfort. There are between 500,000 and 1.5 million LASIK procedures performed in the U.S each year, and about 50% of patients experience DED post-operatively.
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Diagnostic Alternatives for Dry Eye Disease
Existing diagnostic assays are highly subjective, do not correlate well with symptoms, are invasive for patients and may require up to an hour of operator time to perform. All of these factors have constrained the diagnosis and treatment of the DED patient population. As physicians have not had access to objective, quantitative diagnostic assays that correlate well with and the severity of DED disease, it has been difficult for them to objectively differentiate DED symptoms from other eye diseases that present with very similar symptoms, such as ocular allergies, conjunctivochalasis or infectious bacterial or viral diseases. To treat DED effectively and to mitigate the emotional and physical effects of this disease, it is important to equip physicians with objective, quantitative measurements of disease pathogenesis so they can determine more accurately the most efficacious treatments for their patients.
Osmolarity in DED presents itself as an increase in the salt concentration of the tear film. For over 50 years, studies have shown that tear film osmolarity is the ideal clinical marker for diagnosing DED, providing an objective, quantitative measurement of disease pathogenesis. Measuring osmolarity also serves as an effective disease management tool by providing physicians with an ability to personalize therapeutic intervention and to track patient outcomes quantitatively. Osmolarity testing could also provide physicians with a tool to identify patients at risk for dropping out of contact lens wear early in disease progression, as well as an invaluable test to guide the type and duration of therapy prior to, and following refractive surgery.
The main challenge in measuring osmolarity at the point-of-care is the small volume of tear available for testing. Older laboratory osmometers require upwards of ten microliters of fluid to produce a single reading. In addition, these instruments are not particularly suitable for use in a physician’s office, since they require continual calibration, cleaning and maintenance. Existing osmometers currently are marketed primarily to reference and hospital laboratories for the measurement of osmolarity in blood, urine and other serum samples.
TearLab’s Product
Our TearLab® Osmolarity System is an integrated testing system comprised of: (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. The innovation of the TearLab® Osmolarity System is its ability to measure precisely, rapidly, and inexpensively biomarkers in nanoliter volumes of tear samples or approximately 1,000 times less volume than required for older laboratory devices.
The operator of the TearLab® Osmolarity System, most likely a technician, collects the tear sample from the patient’s eye in the TearLab disposable, using the TearLab Pen. After the tear has been collected, the operator places the Pen into the Reader. The TearLab Reader then will display an osmolarity reading to the operator. Following the completion of the test, the TearLab disposable will be discarded and a new TearLab disposable will be readied for the next test. The entire process, from sample to answer, should require approximately two minutes or less to complete.
We are currently engaged in commercial manufacturing of the TearLab® Osmolarity System. 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. In December 2009, Health Canada issued a Medical Device License for the TearLab® Osmolarity System allowing us to market our product in Canada.
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In May 2009, we received 510(k) approval from the FDA to aid in the diagnosis of patients with signs and symptoms of DED. The 510(k) enables us to sell our product to customers that have moderate or high complexity CLIA certificates in the United States. In addition, we have been awarded ISO 13485 certification for our quality management system. ISO 13485 is an internationally-accepted standard of quality management for medical device manufacturers.
On March 4, 2011, the Company announced that it was in receipt of a communication from the FDA indicating that the data submitted by the Company was not sufficient to gain approval of its CLIA waiver categorization application for the TearLab® Osmolarity System. The Company appealed to the FDA and on December 5, 2011, we announced that we had received a communication from the FDA indicating that, based on a supervisory review of the Company’s appeal, the FDA had granted our petition for a waiver under CLIA for the TearLab® Osmolarity System. On January 23, 2012, we announced that after reviewing and accepting labeling submitted to it by the Company, the FDA had granted the Waiver categorization under CLIA for the TearLab® Osmolarity System.
While our current focus is on building our business in the United States, we do have distributorship agreements in place in Europe, Asia, Australia and South America.
Competition
We have identified two laboratory technologies that claim to be able to measure the osmolarity of nanoliter tear samples. The first, LacriPen, is listed as “under development” by Lacrisciences, LLC (Washington, DC, US), does not have FDA 510(k) clearance or a CLIA waiver, and is not at the commercial stage at this time. Similarly, the i-Pen is listed on the i-Med Pharma website, claims to measure tear osmolarity, and is listed as being for professional in vivo diagnostic use only, but is not yet being sold to our knowledge and does not have FDA 510(k) or a CLIA waiver. Another investigational device aimed at dry eye diagnosis, the TeaRx, manufactured by DiagnosTear Ltd., a division of BioLight Life Sciences Investments of Tel Aviv, Israel, has recently announced positive correlations between TeaRx diagnostic parameters and benchmarks used to test for dry eye syndrome. Another non-osmolarity based in vitro diagnostic test for dry eye has recently been developed by RPS, Inc., of Sarasota Florida. RPS has commercialized a tear test for dry eye that measures MMP-9. This test is FDA cleared and has obtained a CLIA waiver. Another company, ATD (Advanced Tear Diagnostics) has a CLIA classification of Moderately Complex in the United States, and markets products that measure lactoferrin and IgE in human tears for the diagnosis of aqueous deficient dry eye disease and ocular allergy, respectively.
As there are no other commercially available instruments to measure tear film osmolarity at the point-of-care, we believe that existing DED diagnostic tests, such as the Schirmer Test and ocular surface staining, are our primary source of competition.
Tear film break-up time, or TBUT, is another test performed to evaluate tear film stability. However, it is subjective, requires a physician to instill a carefully controlled amount of fluorescein dye into the eye and requires a stopwatch to determine the endpoint. TBUT has been shown to be unreliable as a determinant of DED since shortened TBUT does not always correlate well with other signs or symptoms.
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Tests like impression cytology and corneal staining, although indicative of relatively late stage phenomena in DED, are subjective, qualitative and generally do not correlate to disease pathogenesis. We believe the Schirmer Test is an imprecise marker of tear function since its diagnostic results vary significantly.
Although, at the present time, there does not appear to be a direct competitor to the TearLab® Osmolarity System, many industry participants have substantially greater resources than we do. This means that those industry participants may be able to make greater investments in research and development, marketing, promotion and sales, than we are capable of right now or will be capable of during the foreseeable future.
Principal Suppliers
We rely on two suppliers based in the United States for the manufacture of the Readers and Pens which are key components of the TearLab® Osmolarity System. We also rely on a single supplier, MiniFAB (Aust) Pty Ltd. located in Australia, for the manufacture of the test cards which is also a key component of the TearLab® Osmolarity System.
Patents and Proprietary Rights
We own or have exclusive licenses to multiple patents and applications relating to the TearLab® Osmolarity System and related technology and processes:
| ● | eleven issued U.S. patents; relating to the TearLab® Osmolarity System and related technology and processes and have applied for a number of other patents in the United States and other jurisdictions; | |
| ● | twenty five issued patents in the rest of the world; and | |
| ● | eighteen applications pending. |
We intend to rely on know-how, continuing technological innovation and in-licensing opportunities to further develop our proprietary position. Our ability to obtain intellectual property protection for the TearLab® Osmolarity System and related technology and processes, and our ability to operate without infringing on the intellectual property rights of others and to prevent others from infringing on our intellectual property rights, will have a substantial impact on our ability to succeed in our business. Although we intend to seek to protect our proprietary position by, among other methods, continuing to file patent applications, the patent position of companies like TearLab is generally uncertain and involves complex legal and factual questions. Our ability to maintain and solidify a proprietary position for our technology will depend on our success in obtaining effective claims and enforcing those claims once granted. We do not know whether any part of our patent applications will result in the issuance of any patents. Our issued patents, those that may be issued in the future or those licensed to us, may be challenged, invalidated or circumvented, which could limit our ability to stop would-be competitors from marketing tests identical to the TearLab® Osmolarity System.
In addition to patent protection, we have registered the TearLab trademark in the United States, the European Union, Japan, Korea, Mexico, the Russian Federation and Turkey. Our TearLab trademark applications are pending in Australia, Canada and China.
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Government Regulation
Government authorities in the United States and other countries extensively regulate, among other things, the research, development, testing, manufacture, labeling, promotion, advertising, distribution and marketing of our product, which is a medical device. In the United States, the FDA regulates medical devices under the Federal Food, Drug, and Cosmetic Act and implementing regulations. Failure to comply with the applicable FDA requirements, both before and after approval, may subject us to administrative and judicial sanctions, such as a delay in approving or refusal by the FDA to approve pending applications, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, administrative fines or criminal prosecution.
Unless exempted by regulation, medical devices may not be commercially distributed in the United States unless they have been cleared or approved by the FDA. Medical devices are classified into one of the three classes, Class I, II or III, on the basis of the controls necessary to reasonably assure their safety and effectiveness. Class I devices are subject to general controls, such as labeling, pre-market notification and adherence to good manufacturing practices. The TearLab® Osmolarity System is a Class I, non-exempt device and qualifies for the 510(k) procedure. Under the FDA’s Section 510(k) procedure, the manufacturer provides a pre-market notification that it intends to begin marketing the product, and shows that the product is substantially equivalent to another legally marketed product, that it has the same intended use and is as safe and effective as a legally marketed device and does not raise different questions of safety and effectiveness than does a legally marketed device. In some cases, the submission must include data from human clinical studies. Marketing may commence when the FDA issues a clearance letter finding substantial equivalence. On May 19, 2009, we announced that we received FDA 510(k) clearance of the TearLab® Osmolarity System.
After a device receives 510(k) clearance, any modification to the device that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, would require a new 510(k) clearance or an approval of a Premarket Approval, or PMA. A PMA is the FDA process of scientific or regulatory review to evaluate the safety and effectiveness of Class III medical devices which are those devices which support or sustain human life, are of substantial importance in preventing impairment of human health, or which present a potential, unreasonable risk of illness or injury. Although the FDA requires the manufacturer to make the initial determination regarding the effect of a modification to the device that is subject to 510(k) clearance, the FDA can review the manufacturer’s determination at any time and require the manufacturer to seek another 510(k) clearance or an approval of a PMA.
CLIA is intended to ensure the quality and reliability of clinical laboratories in the United States by mandating specific standards in the areas of personnel qualifications, administration, and participation in proficiency testing, patient test management, quality control, quality assurance and inspections. The regulations promulgated under CLIA establish three levels of in vitro diagnostic tests: (1) waiver; (2) moderately complex; and (3) highly complex. The standards applicable to a clinical laboratory depend on the level of diagnostic tests it performs. A CLIA waiver is available to clinical laboratory test systems if they meet certain requirements established by the statute. Waived tests are simple laboratory examinations and procedures employing methodologies that are so simple and accurate as to render the likelihood of erroneous results negligible or to pose no reasonable risk of harm to patients if the examinations or procedures are performed incorrectly. These tests are waived from regulatory oversight of the user other than the requirement to follow the manufacturer’s labeling and directions for use.
On March 4, 2011, the Company announced that it was in receipt of a communication from the FDA indicating that the data submitted by the Company was not sufficient to gain approval of its CLIA waiver categorization application for the TearLab® Osmolarity System. The Company appealed to the FDA and on December 5, 2011, we announced that we had received a communication from the FDA indicating that, based on a supervisory review of the Company’s appeal, the FDA had granted our petition for a waiver under CLIA for the TearLab® Osmolarity System. On January 23, 2012, we announced that after reviewing and accepting labeling submitted to it by the Company, the FDA had granted the waiver categorization under CLIA for the TearLab® Osmolarity System.
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Regardless of whether a medical device requires FDA clearance or approval, a number of other FDA requirements apply to the device, its manufacturer and those who distribute it. Device manufacturers must be registered and their products listed with the FDA, and certain adverse events and product malfunctions must be reported to the FDA. The FDA also regulates the product labeling, promotion and, in some cases, advertising, of medical devices. In addition, manufacturers and their suppliers must comply with the FDA’s quality system regulation which establishes extensive requirements for quality and manufacturing procedures. Thus, suppliers, manufacturers and distributors must continue to spend time, money and effort to maintain compliance, and failure to comply can lead to enforcement action. The FDA periodically inspects facilities to ascertain compliance with these and other requirements.
Clinical, Regulatory, Research and Development Expenditure
Our clinical, regulatory, research and development expense was $7.0 million, $2.8 million and $1.1 million for the years ended December 31, 2015, 2014 and 2013, respectively.
Employees
On December 31, 2015, we had 118 full-time employees. We announced, on February 29, 2016, that we entered into a staff reduction plan, resulting in a workforce reduction of 54 full-time positions. None of our employees are covered by a collective bargaining agreement.
Available Information
Our corporate Internet address is www.tearlab.com. At the Investor Relations section of this website, we make available free of charge our Annual Report on Form 10-K, our Annual Proxy statement, our quarterly reports on Form 10-Q, any Current Reports on Form 8-K, and any amendments to these reports, as soon as reasonably practicable after we electronically file them with, or furnish them to, the U.S. Securities and Exchange Commission, or the SEC. The information found on our website is not part of this Annual Report on Form 10-K. In addition to our website, the SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding us and other issuers that file electronically with the SEC.
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Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below before making an investment decision. Our business could be harmed if any of these risks, as well as other risks not currently known to us or that we currently deem immaterial, materialize. The trading price of our common stock could decline due to the occurrence of any of these risks, and you may lose all or part of your investment. In assessing the risks described below, you should also refer to the other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes and schedules, and other filings with the SEC. This Annual Report on Form 10-K also contains forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from those discussed in this Annual Report on Form 10-K. These risks and uncertainties include the following:
Risks Related to Our Financial Condition
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 consolidated financial statements on the basis that we would continue as a going concern. However, we have incurred losses in each year since our inception. Our net working capital balance at December 31, 2015 was $14.1 million which represents a $2.2 million decrease in the balance from our working capital of $16.3 million at December 31, 2014. We do not currently have any available borrowing under our term loan or credit facility.
Although current levels of cash flows are negative, management believes the Company’s existing cash will be sufficient to cover its operating and other cash demands until the second quarter of 2016.
Our consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary if we were not able to continue as a going concern. 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 December 31, 2015, we had an accumulated deficit of $492.8 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. 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.
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We will need to raise additional capital in the near 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.
We expect that we will seek to raise additional capital from time to time in the future. Such financings 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.
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, the Company executed a term loan agreement with CRG as lenders (the “Term Loan Agreement”) providing the Company with access of up to $35.0 million under the Term Loan Agreement. The Company entered into an amendment of the Term Loan Agreement with CRG on August 6, 2015. The Company received $25.0 million in gross proceeds during 2015. A third tranche of $10.0 million is available to the Company only if we achieve at least $38.0 million in twelve-month sales revenue prior to June 30, 2016, and satisfy other borrowing conditions, and we may not be able to achieve these conditions. The Company can make no assurance that it 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 the Company 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, premium, if any, 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 with CRG, we may not be allowed to draw additional amounts under the 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 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 annual revenue and minimum cash threshold levels. The minimum annual revenue threshold levels required by the Term Loan are $25.0 million, $30.0 million, $45.0 million, $60.0 million, $75.0 million, and $85.0 million for calendar years 2015, 2016, 2017, 2018, 2019 and 2020, respectively. The minimum cash balance required is $5.0 million, subject to certain conditions.
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If the Company does not have annual revenue greater or equal to the annual revenue covenant in a calendar year, the Company will have to raise subordinated debt or equity (the “CRG Equity Cure”) equal to twice the difference between the annual revenue and the revenue covenant, with the total proceeds from this financing to be used to reduce the principal of the Term Loan Agreement. 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 for the CRG Equity Cure, if required. In addition, in the event of our breach of the Term Loan Agreement with CRG, we may not be allowed to draw additional amounts under the Term Loan Agreement, we may be required to repay any outstanding amounts earlier than anticipated, and the lenders may foreclose on their security interest in our assets.
Borrowings under the Term Loan Agreement are subject to certain conditions, including the non-occurrence of a material adverse change in our business or operations (financial or otherwise), or a material impairment of the prospect of repayment of obligations.
Our existing Term Loan Agreement contains restrictive and financial covenants that may limit our operating flexibility.
Our existing Term Loan Agreement with CRG contains certain restrictive covenants that limit our ability to incur additional indebtedness and liens, merge with other companies or consummate certain changes of control, acquire other companies, engage in new lines of business, make certain investments, pay dividends, transfer or dispose of assets, amend certain material agreements or enter into various specified transactions. We therefore may not be able to engage in any of the foregoing transactions unless we obtain the consent of the lender or terminate the Term Loan Agreement. There is no guarantee that we will be able to generate sufficient cash flow or sales to meet the financial covenants or pay the principal and interest under the agreement. Furthermore, there is no guarantee that future working capital, borrowings or equity financing will be available to repay or refinance the amounts outstanding under the Term Loan Agreement.
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 to the end of the quarter; |
| ● | the large unit value of our systems; |
| ● | changes in our pricing and sales policies or the pricing and sales policies of our competitors; |
| ● | 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 operations; |
| ● | our ability to timely obtain adequate quantities of the components used in our products; |
| ● | new product introductions and 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. |
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In addition, we may experience seasonal variations in our customer operations such as could occur during holiday vacation periods. For example, one of our principal target markets consists of private ophthalmic and optometric practices, and our operating results in the quarter ending September 30 of each fiscal year could be adversely affected by summer vacation periods. 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.
Risks Related to Our Business
Our near-term success is highly dependent on the success of the TearLab® Osmolarity System, and we cannot be certain that it will be successfully commercialized in the United States.
The TearLab® Osmolarity System is currently our only 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 be successfully commercialized. If the TearLab® Osmolarity System is not as successfully commercialized as expected, we may not be able to generate revenue, 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.
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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 December 31, 2015, our total liabilities were $32.3 million including $24.9 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; 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.
We may not be able to raise the capital necessary to fund our operations.
Since inception, we have funded our operations through debt and equity financings, including the exercise of warrants and options in 2013, the underwritten public offering in July 2013, as well as the Term Loan Agreement in March 2015. However, our prospects for obtaining additional financing are uncertain. Additional capital may not be available on terms favorable to us, or at all. If financing is available, it may not be sufficient for us to continue as a going concern and it may be on terms that adversely affect the interest of our existing stockholders. In addition, future financings could result in significant dilution of existing stockholders and adversely affect the economic interests of existing stockholders.
We will face challenges in bringing the TearLab® Osmolarity System to market in the United States and may not succeed in executing our business plan.
There are numerous risks and uncertainties inherent in the development of new medical technologies. In addition to our requirement for additional capital, our ability to bring the TearLab® Osmolarity System to market in the United States and to execute our business plan successfully is subject to the following risks, among others:
| ● | Our clinical trials may not succeed. Clinical testing is expensive and can take longer than originally anticipated. The outcomes of clinical trials are uncertain, and failure can occur at any stage of the testing. We could encounter unexpected problems, which could result in a delay in efforts to complete clinical trials supporting our commercialization efforts. |
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| ● | 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. |
| ● | Even though we successfully obtained the sought-after FDA approvals, we may be unable to commercialize the TearLab® Osmolarity System successfully in the United States. Successful commercialization will depend on a number of factors, including, among other things, achieving widespread acceptance of the TearLab® Osmolarity System among physicians, establishing adequate sales and marketing capabilities, addressing competition effectively, the ability to obtain and enforce patents to protect proprietary rights from use by would-be competitors, key personnel retention and ensuring sufficient manufacturing capacity and inventory to support commercialization plans. |
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.
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. |
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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.
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.
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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. We could become a party to patent litigation and other proceedings. The cost to us of any patent litigation, even if resolved in our favor, could be substantial. Some of our would-be competitors may sustain the costs of such litigation more effectively than we can because of their greater financial resources. Litigation also may absorb significant management time.
Unpatented trade secrets, improvements, confidential know-how and continuing technological innovation are important to our future scientific and commercial success. Although we attempt, 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.
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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. |
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. |
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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.
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.
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Furthermore, we have not entered into non-competition agreements with our key employees. In addition, we do not maintain “key person” life insurance on any of our officers, employees or consultants. The loss of the services of existing personnel, the failure to recruit additional key scientific, technical and managerial personnel in a timely manner, and the loss of our employees to our competitors would harm our research and development programs and our business.
If we fail to establish and maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired, which would adversely affect our consolidated operating results, our ability to operate our business and our stock price.
Ensuring that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Failure on our part to maintain effective internal financial and accounting controls would cause our financial reporting to be unreliable, could have a material adverse effect on our business, operating results, financial condition and cash flows, and could cause the trading price of our common stock to fall dramatically.
Maintaining proper and effective internal controls will require substantial management time and attention and may result in our incurring substantial incremental expenses, including with respect to increasing the breadth and depth of our finance organization to ensure that we have personnel with the appropriate qualifications and training in certain key accounting roles and adherence to certain control disciplines within the accounting and reporting function. Any failure in internal controls or any 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.
| -22- |
Risks Related to Our Common Stock
The trading price of our common stock may be volatile.
The market prices for, and the trading volumes of, securities of medical device companies, such as ours, have been historically volatile. The market has experienced, from time to time, significant price and volume fluctuations unrelated to the operating performance of particular companies. The market price of our common shares may fluctuate significantly due to a variety of factors, including:
| ● | 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; and | |
| ● | political instability, natural disasters, war and/or events of terrorism. |
In addition, the stock market has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of individual companies. Broad market and industry factors may seriously affect the market price of 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.
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.
| -23- |
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. |
Our common stock may be delisted from The NASDAQ Capital Market if we cannot maintain compliance with NASDAQ’s continued listing requirements.
In order to maintain our listing on NASDAQ, we are required to maintain a stockholders’ equity and minimum bid price requirement. There are no assurances that we will be able to sustain long-term compliance with NASDAQ’s stockholders’ equity requirement or minimum bid price requirement. In particular, we are required to maintain a minimum bid price of $1.00, and we have traded below that threshold since February 2, 2016. If we fail to maintain compliance with the applicable requirements, our stock may be delisted. Delisting from The NASDAQ Capital Market could make trading our common stock more difficult for investors, potentially leading to declines in our share price and liquidity. Without a 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 would likely be made more difficult and the trading volume and liquidity of our stock could decline. 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 affect the acceptance of our common stock as currency or the value accorded by other parties. Further, if we are delisted, we would 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. If our common stock is delisted by NASDAQ, our common stock may be eligible to trade on an over-the-counter quotation system, such as the OTCQB market, where an investor may find it more difficult to sell our stock or obtain accurate quotations as to the market value of our common stock. We cannot assure you that our common stock, if delisted from The NASDAQ Capital Market, will be listed on another national securities exchange or quoted on an over-the counter quotation system.
If we are delisted from The NASDAQ Capital Market, your ability to sell your shares of our common stock would also be limited by the penny stock restrictions, which could further limit the marketability of your shares.
If our common stock is delisted, it would come within the definition of “penny stock” as defined in the Securities Exchange Act of 1934, or the Exchange Act, and would be covered by Rule 15g-9 of the Exchange Act. That Rule 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, if it were to become applicable, would affect the ability or willingness of broker-dealers to sell our securities, and accordingly would 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.
| -24- |
Our world-wide headquarters, located in San Diego, California, occupies 14,700 square feet of commercial and industrial space. We use this space for administrative, sales, and research and development activities. The current arrangement extends to June 2018. The total future minimum obligation under this lease is $790,000 for the remaining term of the arrangement with the 2016 obligation being $310,000.
We also lease 7,700 square feet of commercial space in Southlake, Texas for our customer care, marketing, finance, and administrative functions. The lease has a term through February 2018, but we have the option to terminate any time after February 2016.
We believe that the California and Texas facilities are suitable and adequate to support our current operations. We believe that if our existing facilities are not adequate to meet our business requirements long-term, additional space will be available on commercially reasonable terms.
We are not aware of any material litigation involving us that is outstanding, threatened or pending.
ITEM 4. Mine Safety Disclosures.
Not applicable.
| -25- |
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market for Common Equity
Our common stock trades on the NASDAQ Capital Market (“NASDAQ”) under the symbol “TEAR” and the Toronto Stock Exchange (“TSX”) under the symbol “TLB”.
The following table sets forth the range of high and low sales prices per share of our common stock on both the NASDAQ and the TSX for the fiscal periods indicated.
| Common Stock Prices | ||||||||||||||||
| Fiscal 2015 | Fiscal 2014 | |||||||||||||||
| High | Low | High | Low | |||||||||||||
| NASDAQ Capital Market | ||||||||||||||||
| First Quarter | $ | 3.15 | $ | 1.50 | $ | 10.36 | $ | 6.00 | ||||||||
| Second Quarter | 2.60 | 1.96 | 7.16 | 3.80 | ||||||||||||
| Third Quarter | 3.03 | 1.80 | 5.97 | 3.29 | ||||||||||||
| Fourth Quarter | 2.25 | 1.15 | 3.71 | 2.05 | ||||||||||||
| TSX | ||||||||||||||||
| First Quarter | C$ | 4.00 | C$ | 1.92 | C$ | 10.95 | C$ | 6.69 | ||||||||
| Second Quarter | 3.23 | 2.50 | 7.74 | 4.20 | ||||||||||||
| Third Quarter | 3.79 | 2.43 | 6.34 | 3.61 | ||||||||||||
| Fourth Quarter | 2.92 | 1.61 | 4.07 | 2.50 | ||||||||||||
The closing share price for our common stock on March 4, 2016 as reported by NASDAQ, was $0.84. The closing share price for our common stock on March 4, 2016, as reported by TSX, was C$1.15.
As of March 4, 2016, there were approximately 75 active stockholders of record of our common stock.
Dividend Policy
We have never declared or paid any cash dividends on shares of our capital stock. We currently intend to retain all available funds to support operations and to finance the growth and development of our business. Any determination related to payments of future dividends will be at the discretion of our board of directors after taking into account various factors that our board of directors deems relevant, including our financial condition, operating results, current and anticipated cash needs, plans for expansion and debt restrictions, if any.
Sales of Unregistered Securities
None.
| -26- |
Stock Performance Graph
The following graph compares the cumulative total stockholder return data for our common stock to the cumulative return of (i) the NASDAQ Composite Index and (ii) the NASDAQ Medical Equipment Index for the period beginning December 31, 2010, and ending on December 31, 2015. The graph assumes that $100 was invested on December 31, 2010, and assumes reinvestment of dividends. The stock price performance on the following graph is not necessarily indicative of future stock price performance.
This performance graph shall not be deemed ‘‘filed’’ for purposes of Section 18 of the Exchange Act, or incorporated by reference into any filing of TearLab Corp. under the Securities Act, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
| -27- |
ITEM 6. Selected Financial Data.
The following selected financial data should be read in conjunction with our consolidated financial statements, the related notes thereto and the information contained in “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The consolidated statement of loss data, consolidated balance sheet data, and consolidated other data set forth below as of and for the years ended December 31, 2015, 2014, 2013, 2012 and 2011 have been derived from our audited consolidated financial statements. Historical results are not necessarily indicative of the results to be expected for future periods; the risk factors set forth in Part I, Item 1A, “Risk Factors,” of this report also discuss material uncertainties that could cause the data reflected below not to be indicative of our future financial condition or results of operations. We declared no cash dividends during the periods presented. Table is in thousands except per share data.
| Year Ended December 31, | ||||||||||||||||||||
| 2011 | 2012 | 2013 | 2014 | 2015 | ||||||||||||||||
| Consolidated Statements of Comprehensive Loss Data: | ||||||||||||||||||||
| Revenue | $ | 2,124 | $ | 3,960 | $ | 14,645 | $ | 19,718 | $ | 25,156 | ||||||||||
| Costs and operating expenses | ||||||||||||||||||||
| Cost of goods sold | 1,626 | 2,295 | 8,146 | 10,096 | 12,557 | |||||||||||||||
| Amortization of intangible assets | 1,215 | 1,215 | 1,215 | 1,462 | 1,501 | |||||||||||||||
| General and administrative | 3,842 | 4,770 | 8,942 | 13,555 | 14,935 | |||||||||||||||
| Clinical, regulatory and research and development | 1,304 | 2,241 | 1,095 | 2,792 | 6,951 | |||||||||||||||
| Sales and marketing | 2,195 | 5,471 | 13,021 | 16,817 | 19,349 | |||||||||||||||
| Impairment of long-lived assets | 0 | 0 | 0 | 0 | 1,372 | |||||||||||||||
| Total costs and operating expenses | 10,182 | 15,992 | 32,419 | 44,722 | 56,665 | |||||||||||||||
| Other income (expense), net | (751 | ) | (7,280 | ) | (11,216 | ) | 1,282 | (1,720 | ) | |||||||||||
| Loss from operations before income taxes | (8,809 | ) | (19,312 | ) | (28,990 | ) | (23,722 | ) | (33,229 | ) | ||||||||||
| Recovery of income taxes | - | - | - | - | - | |||||||||||||||
| Net loss | $ | (8,809 | ) | ($ | 19,312 | ) | $ | (28,990 | ) | $ | (23,722 | ) | $ | 33,229 | ) | |||||
| Per Share Data: | ||||||||||||||||||||
| Net loss per share — basic | $ | (0.50 | ) | ($ | 0.76 | ) | $ | (0.94 | ) | $ | (0.71 | ) | $ | 0.99 | ) | |||||
| Net loss per share — diluted | $ | (0.50 | ) | ($ | 0.76 | ) | $ | (0.94 | ) | $ | (0.74 | ) | $ | 0.99 | ) | |||||
| Weighted average number of shares used in per share calculations — basic | 17,745 | 25,490 | 30,759 | 33,579 | 33,698 | |||||||||||||||
| Weighted average number of shares used in per share calculations —diluted | 17,745 | 25,490 | 30,759 | 33,717 | 33,732 | |||||||||||||||
| As of December 31, | ||||||||||||||||||||
| 2011 | 2012 | 2013 | 2014 | 2015 | ||||||||||||||||
| Consolidated Balance Sheet Data: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 2,807 | $ | 15,437 | $ | 37,778 | $ | 16,338 | $ | 13,838 | ||||||||||
| Working capital (deficiency) | (767 | ) | 9,341 | 34,297 | 16,297 | 14,139 | ||||||||||||||
| Total assets | 10,538 | 24,139 | 49,957 | 31,031 | 28,351 | |||||||||||||||
| Current liabilities | 5,018 | 9,295 | 8,589 | 6,397 | 7,482 | |||||||||||||||
| Long-term debt, net of unamortized discount | - | - | - | - | 24,859 | |||||||||||||||
| Total liabilities | 5,018 | 9,295 | 8,589 | 6,397 | 32,341 | |||||||||||||||
| Exchange right | - | - | - | 250 | 250 | |||||||||||||||
| Common stock | 20 | 29 | 33 | 34 | 34 | |||||||||||||||
| Additional paid-in capital | 393,035 | 421,662 | 477,172 | 483,909 | 488,514 | |||||||||||||||
| Accumulated deficit | (387,535 | ) | (406,847 | ) | (435,837 | ) | (459,559 | ) | (492,788 | ) | ||||||||||
| Total stockholders' equity (deficit) | 5,520 | 14,844 | 41,368 | 24,384 | (4,240 | ) | ||||||||||||||
| -28- |
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes, included in Item 8 of this Report. Unless otherwise specified, all dollar amounts are in U.S. dollars.
Overview
We are an in vitro diagnostic company that has developed a proprietary tear testing platform, the TearLab® Osmolarity System. The TearLab test measures tear film osmolarity for diagnosis of DED. Tear osmolarity is a quantitative and highly specific biomarker that has been shown to correlate with DED. The TearLab test enables the rapid measurement of tear osmolarity in a doctor’s office. Commercializing our Point-of-Care tear testing platform is the focus of our business.
In October 2008, the TearLab® Osmolarity System received CE mark approval, clearing the way for sales in the European Union and all countries recognizing the CE mark. In connection with the CE mark clearance, we have entered into multi-year agreements with numerous distributors for distribution of the TearLab® Osmolarity System. Currently, we have signed distribution agreements in South America, Europe, Asia, and Australia. We sell directly to the customer in the United States and Canada.
On May 19, 2009, we announced that we received 510(k) clearance from the FDA. The 510(k) clearance allows us to market the TearLab® Osmolarity System to those reference and physician operated laboratories with CLIA certifications allowing them to perform moderate and high complexity tests. Considering that most of our target customers currently are eye care practitioners without such certifications, it was necessary that we obtained a CLIA waiver from the FDA for the TearLab® Osmolarity System as well as assisting our customers in obtaining their CLIA certification. A CLIA waiver greatly reduces the regulatory compliance burden for our customers.
On October 19, 2010 we announced that a unique, new Current Procedural Terminology, or CPT, code that will apply to the TearLab Osmolarity test had been published by the American Medical Association, or AMA. The new code became effective January 1, 2011. The new CPT code for the TearLab Osmolarity test is: 83861; Microfluidic analysis utilizing an integrated collection and analysis device, tear osmolarity (For microfluidic tear osmolarity of both eyes, report 83861 twice). This code falls under the Chemistry sub-section of the Pathology and Laboratory section of the CPT Codebook and was listed under the 2010 Clinical Laboratory Fee Schedule by the Centers for Medicare and Medicaid Services, or CMS. At current 2016 reimbursement rates, payment code 83861 would be reimbursed in every state by CMS at $22.50 per eye. This decision by CMS provides level reimbursement for and equal access to the TearLab Osmolarity Test across all of the United States.
On January 23, 2012, we announced that after we submitted labeling to the FDA, it reviewed and accepted such labeling, and granted the waiver categorization under CLIA for the TearLab® Osmolarity System.
In February 2016, we initiated a divestiture or wind-down of the OcuHub subsidiary. While we continue to explore a possible sale of OcuHub, if a divestiture transaction does not materialize, the wind down of the OcuHub operations is expected to be completed by the end of the first quarter of 2016. During 2015, we incurred a charge of $1.4 million related to the impairment of the intangible and fixed assets of OcuHub. We estimate the restructuring will incur approximately $600 of expense in the first quarter of 2016.
In February 2016, we announced a restructuring in order to improve the productivity of the business. The restructuring resulted in the elimination of 54 full-time positions, certain consulting agreements and other steps to reduce the Company’s annual operating expenses. We estimate severance and other costs of approximately $0.3 million will be incurred, recognized and paid in the first quarter of 2016. As a result of the restructuring, we expect to reduce annual operating expenses by approximately $9.4 million compared to the full year 2015.
| -29- |
RESULTS OF OPERATIONS
Revenue, Cost of Goods Sold and Gross Profit (in thousands)
| For the years ended December 31, | ||||||||||||||||||||||||
| % of | % of | % of | ||||||||||||||||||||||
| 2015 | Revenue | 2014 | Revenue | 2013 | Revenue | |||||||||||||||||||
| Revenue | $ | 25,156 | 100.0 | % | $ | 19,718 | 100.0 | % | $ | 14,645 | 100.0 | % | ||||||||||||
| Cost of goods sold | 12,557 | 49.9 | % | 10,096 | 51.2 | % | 8,146 | 55.6 | % | |||||||||||||||
| Gross profit | $ | 12,599 | 50.1 | % | $ | 9,622 | 48.8 | % | $ | 6,499 | 44.4 | % | ||||||||||||
Revenue
TearLab revenue consists of sales of the TearLab® Osmolarity System, which is a hand-held tear film test for the measurement of tear osmolarity, a quantitative and highly specific biomarker that has shown to correlate with DED.
The TearLab® Osmolarity System consists of the following three components: (1) the TearLab disposable, which is a single-use microfluidic 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) approval from the FDA in the United States, we have begun selling to customers in the United States who hold CLIA moderate and high complexity certificates and actively support and assist our customers to obtain their moderate complexity CLIA certificates or provide them with support from certified professionals. Having obtained a CLIA waiver certificate in early 2012, we continue to actively support our customers in obtaining their CLIA waiver documentation which will allow 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 Europe, South America and Asia to increase sales. The ability for re-imbursement to be obtained in many of those 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.
Revenue increased $5.4 million or 28% for the year ended December 31, 2015 compared to the prior year. The increase in 2015 was due in part to bringing in new accounts and converting existing accounts to our FLEX card program. This led to an increase in test card volume which represented $4.9 million of the increase in revenue.
Revenue increased by $5.1 million or 35% for the year ended December 31, 2014 as compared to the prior year. The increase is primarily driven from test card sales volume representing $5.0 million of the total increase. Test card volume increase is consistent with the increase in demand from new customers signed onto the various test card sales programs offered by the Company.
| -30- |
Cost of Goods Sold
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.
Our cost of sales for the year ended December 31, 2015 increased $2.5 million or 24% compared to the prior year. The increase in cost of sales is a function of higher revenue and test card sales volume and $0.3 million of costs of goods sold related to our OcuHub subsidiary, which did not occur in 2014, partially offset by a favorable impact on the pricing of our test card purchases.
Our cost of sales for the year ended December 31, 2014 increased by $2.0 million or 24% compared to the prior year primarily due to the increase in sales volume of TearLab test cards, as the Company focuses its sales activities to its domestic customers on its annual test card commitment programs and its high volume large multi-doctor practice programs.
Gross Profit
Gross profit for the year ended December 31, 2015 increased by $3.0 million or 31% compared to the prior year on higher revenue. Gross margin improved to 50%, compared to 49% in the prior year, as our test card purchases benefited from favorable pricing relative to the prior year.
Gross profit for the year ended December 31, 2014 increased by $3.1 million or 48% compared to the prior year, primarily due to higher sales volume. Gross margin for the year ended December 31, 2014 was 49% as compared to 44% for the prior year which is primarily due to lower cost associated with test cards sold during the year and due to a weakening Australian dollar at the time of purchasing test card inventory.
Operating Expenses (in thousands)
| For the years ended December 31, | ||||||||||||||||||||||||
| % of | % of | % of | ||||||||||||||||||||||
| 2015 | Revenue | 2014 | Revenue | 2013 | Revenue | |||||||||||||||||||
| Amortization of intangible assets | $ | 1,501 | 6.0 | % | $ | 1,462 | 7.4 | % | $ | 1,215 | 8.3 | % | ||||||||||||
| General and administrative | 14,935 | 59.4 | % | 13,555 | 68.7 | % | 8,942 | 61.1 | % | |||||||||||||||
| Clinical, regulatory and research and development | 6,951 | 27.6 | % | 2,792 | 14.2 | % | 1,095 | 7.5 | % | |||||||||||||||
| Sales and marketing | 19,349 | 76.9 | % | 16,817 | 85.3 | % | 13,021 | 88.9 | % | |||||||||||||||
| Impairment of long-lived assets | 1,372 | 5.5 | % | - | 0.0 | % | - | 0.0 | % | |||||||||||||||
| Total operating expenses | $ | 44,108 | 175.3 | % | $ | 34,626 | 175.6 | % | $ | 24,273 | 165.7 | % | ||||||||||||
Amortization of Intangible Assets
Amortization expense of intangible assets for the year ended December 31, 2015 increased $39,000 or 3% compared to 2014. The slight increase was because of a full year of amortization of the intangibles acquired with OcuHub in 2014, compared to a partial year in 2014. Amortization expense of intangible assets for the year ended December 31, 2014, as compared to the prior fiscal year increased $247,000 and was related to the intangible assets acquired in the OcuHub business unit purchase from AOA Excel, Inc. in March 2014.
| -31- |
General and Administrative Expenses
General and administrative expenses increased $1.4 million or 10% for the year ended December 31, 2015 compared to 2014. The increase in general and administrative expenses was due to $1.1 million of costs incurred in association with transitioning our office support team from California to Texas and an increase of $0.5 million of general and administrative costs attributed to a full year of OcuHub activities. These increases were offset in part by a $0.4 million decrease in stock compensation expense.
For the year ended December 31, 2014, general and administrative expenses increased by $4.6 million or 52% as compared with the prior year, primarily due to an increase of $2.4 million in employee salary expense driven by a 35% increase in headcount, an increase of $0.6 million in stock-based compensation expense related to options granted to new employees and the board of directors, an increase of $0.6 million in professional fees and legal costs, and an increase of $1.0 million in administrative expenses, travel and public company costs.
Clinical, Regulatory and Research and Development
For the year ended December 31, 2015, clinical, regulatory and research and development expenses increased by $4.2 million or 149%, as compared with the prior year. The increase was primarily due to research and product development associated with the next generation diagnostic products.
For the year ended December 31, 2014, clinical, regulatory and research and development expenses increased by $1.7 million or 155%, as compared with the prior year. The increase was mainly due to a $1.7 million increase in research and development costs and $0.1 million in professional and legal fees and travel. The increase was offset by $0.1 million lower employee, clinical trials and administrative costs over the prior year.
Sales and Marketing Expenses
For the year ended December 31, 2015, sales and marketing expenses increased by $2.5 million or 15% as compared with the prior year. The increase is due to an increase of $2.8 million of employee related costs, as we expanded our sales base and increased incentive compensation on higher sales performance against 2015 targets. The increase was partially offset by a $0.3 million reduction in costs incurred for marketing agency fees in 2015 compared to 2014.
For the year ended December 31, 2014, sales and marketing expenses increased by $3.8 million or 29% as compared with the prior year. The increase was attributable to a $3.0 million increase in employee costs including commissions, driven by an increase of 28% in headcount, 35% increase in revenue and an increase in business development costs, $0.7 million increase in travel costs associated with the increased market penetration of the TearLab product in the United States, $1.0 million increase in marketing and advertising expense and $0.2 million increase in professional services. The increase was offset by a $0.5 million decrease in stock-based compensation expense, $0.3 million decrease in bad debt expense and $0.3 million decrease in administrative costs.
The cornerstone of our sales and marketing strategy to date has been to increase awareness of our products among eye care professionals and, in particular, the key opinion leaders in the eye care professions. We assist key opinion leaders in performing clinical trials to generate increased data to provide an increased understanding in the use of the TearLab® Osmolarity System for diagnostic, treatment and monitoring of patients. Presently we are primarily focused on increasing sales in North America and we continue to develop and execute our conference and podium strategy to ensure visibility and evidence-based positioning of the TearLab® Osmolarity System among eye care professionals.
| -32- |
Impairment of Long-lived Assets
As more fully described in Note 4 to the Consolidated Financial Statements, the Company performs an evaluation of long-lived assets and intangible assets for impairment when certain indicators of impairment are present. During the year-ended December 31, 2015, the performance of the Company and the OcuHub subsidiary indicated potential impairment. Based on current projections regarding future cash flows of the OcuHub subsidiary, the evaluation resulted in an impairment of $1.4 million to the intangible and tangible long-lived assets of OcuHub, recorded to impairment of long-lived assets on the Consolidated Statements of Operations. There were no impairments during the years ended December 31, 2014 or 2013.
Other Income (Expense), Net (in thousands)
| For the years ended December 31, | ||||||||||||||||||||||||
| % of | % of | % of | ||||||||||||||||||||||
| 2015 | Revenue | 2014 | Revenue | 2013 | Revenue | |||||||||||||||||||
| Interest income (expense) | $ | (2,023 | ) | -8.0 | % | $ | 28 | 0.1 | % | $ | 35 | 0.2 | % | |||||||||||
| Changes in fair value of warrant obligations | 227 | 0.9 | % | 1,175 | 6.0 | % | (11,105 | ) | -75.8 | % | ||||||||||||||
| Other, net | 76 | 0.3 | % | 79 | 0.4 | % | (146 | ) | -1.0 | % | ||||||||||||||
| Total other income (expense) | $ | (1,720 | ) | -6.8 | % | $ | 1,282 | 6.5 | % | $ | (11,216 | ) | -76.6 | % | ||||||||||
Interest Income (Expense)
Interest expense is generated from our long-term debt under the Term Loan Agreement, which the Company entered into in March 2015. The Company did not carry long-term debt nor did we have interest expense in 2014 or 2013. Interest income consists of interest income earned on our cash and cash equivalents.
Changes in Fair Value of Warrant Obligation
During the year ended December 31, 2014 certain holders of 2011 Warrants exercised 304,945 warrants. The Company received no cash proceeds from these cashless exercises. The Company is required to record the outstanding warrants at fair value at the time of exercise, before moving the fair value into additional paid-in capital, resulting in an adjustment to the warrant obligations, with any gain or loss recorded in earnings of the applicable reporting period. The Company, therefore, estimated the fair value of the exercised 2011 Warrants at their respective exercise dates to be $2.6 million, an increase of $0.3 million from the previous value at December 31, 2013. The fair value was determined using the Black-Scholes Merton option pricing model and the increase was recorded as an expense in other income (expense) in the consolidated statement of operations and comprehensive loss for the year ended December 31, 2014.
During the year ended December 31, 2013 certain holders of 2011 Warrants exercised 1,571,136 warrants. The Company received $0.7 million in proceeds from these exercises. The Company was required to record the outstanding warrants at fair value at the time of exercise, before moving the fair value into additional paid-in capital, resulting in an adjustment to the warrant obligations, with any gain or loss recorded in earnings of the applicable reporting period. The Company, therefore, estimated the fair value of the exercised 2011 Warrants at their respective exercise dates to be $13.3 million, an increase of $8.6 million from the previous value at December 31, 2012. The fair value was determined using the Black-Scholes Merton option pricing model and the increase was recorded as an expense in other income (expense) in the consolidated statement of operations and comprehensive loss for the year ended December 31, 2013.
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In addition, the Company records the outstanding warrants presented as liabilities at their fair value as of the end of each reporting period, resulting in an adjustment to the warrant obligations, with any gain or loss recorded in earnings of the applicable reporting period. The Company estimated the fair value of the remaining warrant liability obligation as of December 31, 2015 and 2014 to be $29,000 and $0.3 million, respectively, a decrease of $0.2 million and $1.4 million from the previous valuations at December 31, 2014 and 2013. These amounts were recorded as a benefit to other income (expense) in the consolidated statement of operations and comprehensive loss for the year ended December 31, 2015 and 2014, respectively. An increase of $4.0 million at December 31, 2013 in the fair value of warrant obligations was recorded as a charge to other income expense for the year ended December 31, 2013.
Other Income (Expense)
Other expense for the years ended December 31, 2015, 2014 and 2013 consists primarily of foreign exchange gains and losses, based on fluctuations of the Company’s foreign denominated currencies.
Liquidity and Capital Resources (in thousands)
| As of December 31, | ||||||||
| 2015 | 2014 | |||||||
| Cash and cash equivalents | $ | 13,838 | $ | 16,338 | ||||
| Percentage of total assets | 48.8 | % | 52.7 | % | ||||
| Working capital | 14,139 | 16,297 | ||||||
Financial Condition
Based on our current rate of cash consumption, we estimate we will need additional capital in the second quarter of 2016 and our prospects for obtaining that capital are uncertain. The Company may be able to raise either additional debt financing or additional equity financing. The CRG Term Loan Agreement provides for an increase in the term loan of up to $10.0 million, provided we achieve trailing twelve-month revenue of at least $38.0 million prior to June 30, 2016. 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 we succeed in raising additional capital or significantly reduce the cash consumed in the operations of the Company, we anticipate that we will be unable to continue our operations through the end of the second quarter of 2016. 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.
Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties. Actual results could vary as a result of a number of factors. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Our future funding requirements will depend on many factors, including but not limited to:
| ● | whether government and third-party payers agree to reimburse the TearLab® Osmolarity System; | |
| ● | whether eye care professionals engage in the process of obtaining their CLIA waiver certification; |
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| ● | the costs and timing of building the infrastructure to market and sell the TearLab Osmolarity System; | |
| ● | the cost and results of continuing development of the TearLab® Osmolarity System; | |
| ● | the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; | |
| ● | the effect of competing technological and market developments and | |
| ● | Our purchases of test cards are in Australian dollars and fluctuations in the exchange rate between the U.S. dollar and Australian dollar may be material. For example, in 2015 we purchased Australian dollars to pay to our Australian supplier and the exchange rate between the U.S. and Australian dollar fluctuated from $0.82 USD to $0.69 USD per $1.00 AUD. |
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 can expect to begin to generate sufficient revenue from the TearLab® Osmolarity System in the United States to attain profitable operations.
Further, a successful transition to attaining profitable operations is dependent upon obtaining sufficient financing to fund the Company’s planned expenses and achieving a level of revenue adequate to support the Company’s cost structure. 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 in 2016 which could have an adverse impact on our ability to achieve our intended business objectives.
Indebtedness
On March 4, 2015, the Company executed the Term Loan Agreement with CRG as lenders providing the Company with access of up to $35.0 million under the Term Loan Agreement. The Company entered into a second amendment to the Term Loan Agreement with CRG on August 6, 2015. The Company received $15.0 million in gross proceeds under the Term Loan Agreement on March 4, 2015, and an additional $10.0 million on October 6, 2015. A third tranche of $10.0 million is available to the Company if the Company achieves at least $38.0 million in trailing twelve-month revenue prior to June 30, 2016, and satisfies other borrowing conditions. As part of the second amendment to the Term Loan Agreement and funding of the $10.0 million tranche, CRG received warrants to purchase 350,000 common shares in the Company at a price of $5.00 per share. The warrants have a life of five years. The Term Loan Agreement has a term of six years and bears interest at 13% per annum, with quarterly payments of interest only for the first four years. At the Company’s option, during the first four years a portion of the interest payments may be deferred and paid together with the principal in the fifth and sixth years.
The Term Loan Agreement is collateralized by all assets of the Company. Additionally, the terms of the Term Loan Agreement contain various affirmative and negative covenants agreed to by the Company. Among them, the Company must attain minimum certain annual revenue and minimum cash threshold levels. The minimum annual revenue threshold level required by the Term Loan Agreement for calendar year 2015 is $25.0 million. The minimum cash balance required is $5.0 million, subject to certain conditions.
If the Company does not have annual revenue greater or equal to the annual revenue covenant in a calendar year, the Company will have to raise subordinated debt or equity (the “CRG Equity Cure”) equal to twice the difference between the annual revenue and the revenue covenant, with the total proceeds from this financing to be used to reduce the principal of the Term Loan Agreement. In the event the Company does not achieve the minimum revenue threshold and it cannot complete the CRG Equity Cure, it may be in default of the Term Loan Agreement. In the event of a default, we may be required to repay any outstanding amounts earlier than anticipated, and the lenders may foreclose on their security interest in our assets.
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Ongoing Sources and Uses of Cash
We anticipate that our cash and cash equivalents and cash generated from business operations will be sufficient to sustain our operations until the second quarter of 2016. We continually evaluate various financing possibilities but we typically expect our primary sources of cash will be related to the collection of accounts receivable and, to a lesser degree, interest income on our cash balances. Our accounts receivable collections will be impacted by our ability to grow our point-of-care revenue.
We expect to use our cash primarily to fund our operating expenses and pursue and maintain our patents and trademarks. In addition, dependent on available funds, we expect to expend cash to improve production capability of the TearLab test, to further improve the performance of the TearLab test, and to pursue additional applications for the lab-on-a-chip technology.
Changes in Cash Flows (in thousands)
| Years ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Cash used in operating activities | $ | (23,703 | ) | $ | (18,172 | ) | $ | (13,234 | ) | |||
| Cash used in investing activities | (3,388 | ) | (3,816 | ) | (2,905 | ) | ||||||
| Cash provided by financing activities | 24,591 | 548 | 38,480 | |||||||||
| Net decrease in cash and cash equivalents during the period | $ | (2,500 | ) | $ | (21,440 | ) | $ | 22,341 | ||||
Cash Used in Operating Activities
Net cash used in our operating activities for 2015 was $23.7 million. Net cash used in operating activities was less than our net loss for the year of $33.2 million primarily due to stock compensation expense, depreciation and amortization, and an impairment to long-lived assets during the year. In aggregate, these non-cash expenses totaled $9.1 million during the year.
Net cash used to fund our operating activities during the year ended December 31, 2014 was $18.2 million which was lower than our net loss of $23.7 million primarily due to non-cash charges. The non-cash charges which comprise a portion of the net loss during that period consist primarily of the amortization and depreciation of intangible assets, fixed assets, patents and trademarks, warrant obligation expense and stock-based compensation expense in the aggregate total of $5.6 million.
Net cash used to fund our operating activities during the year ended December 31, 2013 was $13.2 million which was lower than our net loss of $29.0 million primarily due to non-cash charges. The non-cash charges which comprise a portion of the net loss during that period consist primarily of the amortization of intangible assets, fixed assets, patents and trademarks, warrant obligation expense and stock-based compensation expense in the aggregate total of $16.7 million.
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The net change in non-cash working capital and non-current asset balances related to operations for the years ended December 31, 2015, 2014 and 2013 consists of the following (in thousands):
| Years ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Accounts receivable, net | $ | (540 | ) | $ | 1,044 | $ | (2,635 | ) | ||||
| Inventory | (987 | ) | (2,101 | ) | 978 | |||||||
| Prepaid expenses and other assets | 100 | (162 | ) | (252 | ) | |||||||
| Other non-current assets | (24 | ) | (117 | ) | (12 | ) | ||||||
| Accounts payable | 90 | 1,340 | (436 | ) | ||||||||
| Accrued liabilities | 1,318 | (147 | ) | 1,329 | ||||||||
| Deferred interest | 681 | - | - | |||||||||
| Deferred rent/revenue | (60 | ) | 106 | 67 | ||||||||
| $ | 578 | $ | (37 | ) | $ | (961 | ) | |||||
Explanations of the more significant net changes in working capital and non-current asset balances are as follows:
| ● | Accounts receivable increased in 2015 on increased year-over-year revenue. Accounts receivable decreased in 2014 due to improved collection efforts and an increase in customers paying by credit card at the time of product shipment. Accounts receivable increased in 2013 as a result of increased revenue related to sales of the TearLab® Osmolarity System; | |
| ● | Inventory increased in 2015 as we built our inventory to a level to satisfy anticipated near-term demand. Inventory increased in 2014 from 2013 primarily due to minimum purchase commitments with contract manufacturers; | |
| ● | Accrued liabilities increased in 2015, primarily due to unbilled progress on the development associated with the next generation diagnostic products. Accrued liabilities decreased in 2014 due to the timing of invoices received from vendors. Accrued liabilities increased in 2013 as a result of royalties, commissions and sales related taxes due as a result of increasing sales. Amounts due to professionals, employees and inventory suppliers also increased in 2013; | |
| ● | Deferred interest in 2015 relates to the Company electing the option to defer a portion of the interest on the Term Loan Agreement and pay together with the principal in the fifth and sixth year of the Term Loan Agreement. |
Cash used in Investing Activities
Net cash used in investing activities for the years ended December 31, 2015, 2014 and 2013 was $3.4 million, $3.8 million and $2.9 million, respectively, which we used to acquire fixed assets, primarily the TearLab® Osmolarity System readers and the $1.4 million paid to acquire the assets of OcuHub in 2014.
Cash Provided by Financing Activities
Net cash provided by financing activities for the year ended December 31, 2015 was $24.6 million and relates to proceeds received during the year under our Term Loan Agreement. Net cash provided by financing activities for the year ended December 31, 2014 was $0.5 million and was comprised of $0.3 million provided by option and ESPP exercises and $0.3 million from the sale of OcuHub membership units. Net cash provided by financing activities for the year ended December 31, 2013 was $38.5 million and was made up of $40.4 million raised with the issuance common stock in a public offering, offset by costs incurred in these transactions of $3.0 million, as well as $1.2 million raised from the exercise of warrants and options.
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The following table summarizes our contractual commitments as of December 31, 2015 and the effect those commitments are expected to have on liquidity and cash flow in future periods (in thousands):
| Payments Due By Period | ||||||||||||||||
| Less Than | 1 To 3 | More Than | ||||||||||||||
| Contracutal obligation | Total | 1 Year | Years | 3 Years | ||||||||||||
| Operating leases | $ | 916 | $ | 381 | $ | 534 | $ | 1 | ||||||||
| Royalty payments | 840 | 70 | 140 | 630 | ||||||||||||
| Marketing service agreements | 325 | 100 | 200 | 25 | ||||||||||||
| Long-term debt | 25,681 | - | - | 25,681 | ||||||||||||
| Interest payments | 14,608 | 3,339 | 6,678 | 4,591 | ||||||||||||
| Total contractual obligations | $ | 42,370 | $ | 3,890 | $ | 7,552 | $ | 30,928 | ||||||||
Off-Balance-Sheet Arrangements
As of December 31, 2015, we did not have any material off-balance-sheet arrangements.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to our intangible assets, uncollectible receivables, inventories, debt and equity instruments and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Because this can vary in each situation, actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our audited consolidated financial statements.
Revenue recognition
Revenue is recognized when all four of the following criteria are met: (i) persuasive evidence that an arrangement exists; (ii) delivery of the products has occurred; (iii) the selling price is fixed or determinable; and (iv) collectability is reasonably assured. The Company records revenue when all of its obligations are completed, which is generally upon shipment of the Company’s products. Amounts received in excess of revenue recognizable are deferred.
Our revenue is primarily derived from the sale of disposable test cards. We sell our proprietary TearLab® Osmolarity System and related test cards to our customers, who are primarily eye care professionals, for use in osmolarity testing procedures. Our products are generally shipped from our primary distribution and warehousing operations facility located in San Diego, California. Sales are direct to customers in the United States and Canada and to distributors in South America, Europe, Asia and Australia.
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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 purchase commitment of disposables over the related contract term (referred to as either “Use Agreements”, “Masters Agreements” or “Flex Agreements”), or from agreements with sales of multiple deliverables, such as the reader equipment and disposable test cards (referred to as “Purchase Agreements”). On a limited basis, we will sell our reader equipment or disposable test cards on a stand-alone basis, primarily in academic settings.
Purchase commitments for Use Agreements and Flex Agreements are expressed in the agreement for a specified period of time (generally one to three years), and 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 disposables. These agreements are treated as operating leases as collectability of the minimum lease payments is not reasonably predictable at the outset of the arrangement. Accordingly, revenue is recognized over the defined contract term as disposable test cards are shipped. 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 fair value. When reader equipment is placed with a customer at no separate cost, the Company retains title to the equipment and it remains capitalized on the Company’s consolidated balance sheet as equipment classified within fixed assets, net. After it has been shipped to a customer location, equipment is depreciated on a straight-line basis over its estimated useful life and depreciation expense is included in cost of goods sold within the Consolidated Statement of Operations and Comprehensive Loss.
Revenue recognition for Purchase Agreements with multiple deliverables is based on the individual units of accounting determined to exist in the contract. A delivered item is considered a separate unit of accounting when the delivered item has value to the customer on a stand-alone basis. Items are considered to have stand-alone value when they are sold separately by any vendor or when the customer could resell the item on a stand-alone basis. Considering that test cards are essential to the operation of a TearLab reader, there is no alternative vendor for the test cards and no indication that a secondary market for the TearLab readers is established, the deliverables under the contracts entered into during 2015, 2014 and 2013 do not meet criteria for separation under the multiple-element arrangements guidance. Consideration is allocated at the inception of the contract to all deliverables based on their relative selling price, as determined by our selling price of similar individual items on a stand-alone basis. The Company recognizes revenue for each of the elements only when it determines that all applicable recognition criteria have been met.
Although the Company typically has a no return policy for its products, we have established a return reserve for product sales that contain an implicit right of return. Reserves for estimated returns or refunds are netted against accounts receivable and reduce revenue at the time of shipment based on historical experience.
Valuation of intangible and other long-lived assets.
We periodically assess the carrying value of intangible and other long-lived assets, which requires us to make assumptions and judgments regarding the future cash flows of these assets. The assets are considered to be impaired if we determine that the carrying value may not be recoverable based upon our assessment of the following events or changes in circumstances:
| ● | the asset’s ability to continue to generate income from operations and positive cash flow in future periods; |
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| ● | loss of legal ownership or title to the asset; | |
| ● | significant changes in our strategic business objectives and utilization of the asset(s); and | |
| ● | the impact of significant negative industry or economic trends. |
If the assets are considered to be impaired, the impairment is the amount by which the carrying value of the assets exceeds the fair value of the assets. Fair value is determined by a combination of available third party sources and discounted cash flows. In addition, we base the useful lives and related amortization or depreciation expense on our estimate of the period that the assets will generate revenue or otherwise be used by us. We also periodically review the lives assigned to our intangible assets to ensure that our initial estimates do not exceed any revised estimated periods from which we expect to realize cash flows from the technologies. If a change were to occur in any of the above-mentioned factors or estimates, the likelihood of a material change in our reported results would increase.
As of December 31, 2015, the net book value of identifiable intangible assets that are subject to amortization equaled $1.1 million and the net book value of fixed assets equaled $5.4 million.
Our prior history of losses and losses incurred for the year ended December 31, 2015 is a potential indication of impairment. Accordingly, we assessed whether the TearLab Research technology or the OcuHub platform technology was impaired as of December 31, 2015. Based on management’s estimates of forecasted undiscounted cash flows as of December 31, 2015, we concluded the OcuHub platform technology and related long-lived assets were impaired and recorded an impairment charge of $1.4 million on the Consolidated Statements of Operations and Comprehensive Loss. Our assessment based on the undiscounted cash flows of the TearLab Research technology for the years ended December 31, 2015, 2014 and 2013 concluded there was no impairment.
Warrant liabilities
The Company issued several rounds of warrants related to various debt and equity transactions that occurred in 2011. The Company accounts for its warrants issued in accordance with US GAAP accounting guidance applicable to derivative instruments, which requires every derivative instrument within its scope to be recorded on the balance sheet as either an asset or liability measured at its fair value, with changes in fair value recognized in earnings. Based on this guidance, the Company determined that these warrants did not meet the criteria for classification as equity. Accordingly, the Company classified the warrants as current liabilities. The warrants are subject to remeasurement at each balance sheet date, with any change in fair value recognized as a component of other income (expense), net in the statements of operations. We estimated the fair value of these warrants at the respective balance sheet dates using the Black-Scholes Merton option pricing model as described in the stock-based compensation section above, based on the estimated market value of the underlying common stock at the valuation measurement date, the remaining contractual term of the warrant, risk-free interest rates and expected dividends on and expected volatility of the price of the underlying common stock. Option pricing models employ subjective factors to estimate warrant liability; and, therefore, the assumptions used in the Black-Scholes Merton option pricing model are judgmental.
For information on the recent accounting pronouncements impacting our business, see Note 2 of the Notes to Consolidated Financial Statements included in Item 8.
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Allowance for doubtful accounts
We maintain an allowance for doubtful accounts to reflect estimated losses resulting from our customers’ inability to make required payments. On an on-going basis, we evaluate the collectability of accounts receivable based on a combination of factors, including historical collection trends, current economic factors, and the assessment of collectability of specific accounts.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.
Currency Fluctuations and Exchange Risk
Our sales are denominated primarily in U.S. dollars with minimal sales in euros and pound sterling. Most of our expenses are denominated in U.S. dollars, however, purchases of test cards are in Australian dollars and a minor portion of our other expenses are in Canadian dollars, Australian dollars 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, Australian dollars, euros and pounds sterling 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.
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ITEM 8. Financial Statements and Supplementary Data.
Consolidated Financial Statements
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
TearLab Corporation
We have audited the accompanying consolidated balance sheet of TearLab Corporation (the “Company”) as of December 31, 2015, and the related consolidated statement of operations and comprehensive loss, stockholders’ equity (deficit), and cash flows for the year then ended. Our audit also included the financial statement schedule for the year ended December 31, 2015 listed in the index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of TearLab Corporation as of December 31, 2015, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), TearLab Corporation’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 9, 2016 expressed an unqualified opinion thereon.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred recurring operating losses and is dependent on additional financing to fund operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 1 to the consolidated financial statements. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
/s/ Mayer Hoffman McCann P.C.
San Diego, California
March 9, 2016
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of TearLab Corp.
We have audited the accompanying consolidated balance sheet of TearLab Corp. as of December 31, 2014, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2014. Our audits also included the financial statement schedule for the two years in the period ended December 31, 2014 listed in the Index at Item 15(a). These consolidated financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of TearLab Corp. at December 31, 2014, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
| /s/ Ernst & Young |
San Diego, California
March 13, 2015
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TearLab Corporation
(in thousands, except share and per share data)
| December 31, 2015 | December 31, 2014 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 13,838 | $ | 16,338 | ||||
| Accounts receivable, net | 3,021 | 2,480 | ||||||
| Inventory | 3,972 | 2,986 | ||||||
| Prepaid expenses and other current assets | 790 | 890 | ||||||
| Total current assets | 21,621 | 22,694 | ||||||
| Fixed assets, net | 5,352 | 4,504 | ||||||
| Patents and trademarks, net | 52 | 80 | ||||||
| Intangible assets, net | 1,145 | 3,596 | ||||||
| Other non-current assets | 181 | 157 | ||||||
| Total assets | $ | 28,351 | $ | 31,031 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 2,292 | $ | 2,202 | ||||
| Accrued liabilities | 5,047 | 3,765 | ||||||
| Deferred Rent | 114 | 174 | ||||||
| Obligations under warrants | 29 | 256 | ||||||
| Total current liabilities | 7,482 | 6,397 | ||||||
| Long-term debt | 24,859 | - | ||||||
| Total liabilities | 32,341 | 6,397 | ||||||
| Exchange right | 250 | 250 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity (deficit) | ||||||||
| Capital stock | ||||||||
| Preferred Stock, $0.001 par value, authorized 10,000,000, none issued and outstanding | - | - | ||||||
| Common stock, $0.001 par value, 65,000,000 authorized, 33,760,904 and 33,641,302 issued and outstanding at December 31, 2015 and December 31, 2014, respectively | 34 | 34 | ||||||
| Additional paid-in capital | 488,514 | 483,909 | ||||||
| Accumulated deficit | (492,788 | ) | (459,559 | ) | ||||
| Total stockholders’ equity (deficit) | (4,240 | ) | 24,384 | |||||
| Total liabilities and stockholders’ equity (deficit) | $ | 28,351 | $ | 31,031 | ||||
See accompanying notes to consolidated financial statements.
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TearLab Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share data)
| Years Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Revenue | ||||||||||||
| Product sales | $ | 20,325 | $ | 16,086 | $ | 12,593 | ||||||
| Reader equipment rentals | 4,831 | 3,632 | 2,052 | |||||||||
| Total revenue | 25,156 | 19,718 | 14,645 | |||||||||
| Cost of goods sold | ||||||||||||
| Cost of goods sold (excluding amortization of intangible assets) | 10,825 | 8,804 | 7,607 | |||||||||
| Cost of goods sold - reader equipment depreciation | 1,732 | 1,292 | 539 | |||||||||
| Gross profit | 12,599 | 9,622 | 6,499 | |||||||||
| Operating expenses | ||||||||||||
| Amortization of intangible assets | 1,501 | 1,462 | 1,215 | |||||||||
| General and administrative | 14,935 | 13,555 | 8,942 | |||||||||
| Clinical, regulatory and research & development | 6,951 | 2,792 | 1,095 | |||||||||
| Sales and marketing | 19,349 | 16,817 | 13,021 | |||||||||
| Impairment of long-lived assets | 1,372 | - | - | |||||||||
| Total operating expenses | 44,108 | 34,626 | 24,273 | |||||||||
| Loss from operations | (31,509 | ) | (25,004 | ) | (17,774 | ) | ||||||
| Other income (expense) | ||||||||||||
| Interest income (expense) | (2,023 | ) | 28 | 35 | ||||||||
| Changes in fair value of warrant obligations | 227 | 1,175 | (11,105 | ) | ||||||||
| Other, net | 76 | 79 | (146 | ) | ||||||||
| Total other income (expense) | (1,720 | ) | 1,282 | (11,216 | ) | |||||||
| Net loss and comprehensive loss | $ | (33,229 | ) | $ | (23,722 | ) | $ | (28,990 | ) | |||
| Weighted average shares outstanding - basic | 33,698,086 | 33,578,820 | 30,759,305 | |||||||||
| Net loss per share – basic | $ | (0.99 | ) | $ | (0.71 | ) | $ | (0.94 | ) | |||
| Weighted average shares outstanding - diluted | 33,731,807 | 33,717,344 | 30,759,035 | |||||||||
| Net loss per share – diluted | $ | (0.99 | ) | $ | (0.74 | ) | $ | (0.94 | ) | |||
See accompanying notes to consolidated financial statements.
| -46- |
TearLab Corporation
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands, except share data)
| Additional | Stockholders’ | |||||||||||||||||||
| Common stock | paid-in | Accumulated | equity | |||||||||||||||||
| Shares | Amount | capital | deficit | (deficit) | ||||||||||||||||
| Balance, December 31, 2012 | 28,741,653 | $ | 29 | $ | 421,662 | $ | (406,847 | ) | $ | 14,844 | ||||||||||
| Stock-based compensation | - | - | 3,738 | - | 3,738 | |||||||||||||||
| Warrants exercised | 1,375,194 | 1 | 13,988 | - | 13,989 | |||||||||||||||
| Shares issued in public offerings and registered direct offerings | 2,990,000 | 3 | 40,362 | - | 40,365 | |||||||||||||||
| Issue costs of equity financings | - | - | (3,036 | ) | - | (3,036 | ) | |||||||||||||
| Options exercised | 181,854 | - | 458 | - | 458 | |||||||||||||||
| Net loss and comprehensive loss | - | - | - | (28,990 | ) | (28,990 | ) | |||||||||||||
| Balance, December 31, 2013 | 33,288,701 | 33 | 477,172 | (435,837 | ) | 41,368 | ||||||||||||||
| Stock-based compensation | - | - | 3,824 | - | 3,824 | |||||||||||||||
| Warrants exercised | 246,936 | 1 | 2,615 | - | 2,616 | |||||||||||||||
| Options exercised | 57,763 | - | 184 | - | 184 | |||||||||||||||
| Issuance of employee purchase plan shares | 47,902 | - | 114 | - | 114 | |||||||||||||||
| Net loss and comprehensive loss | - | - | - | (23,722 | ) | (23,722 | ) | |||||||||||||
| Balance, December 31, 2014 | 33,641,302 | 34 | 483,909 | (459,559 | ) | 24,384 | ||||||||||||||
| Stock-based compensation | - | - | 4,117 | - | 4,117 | |||||||||||||||
| Warrants issued | - | - | 290 | - | 290 | |||||||||||||||
| Options exercised | 65,391 | - | 99 | - | 99 | |||||||||||||||
| Issuance of employee purchase plan shares | 54,211 | - | 99 | - | 99 | |||||||||||||||
| Net loss and comprehensive loss | - | - | - | (33,229 | ) | (33,229 | ) | |||||||||||||
| Balance, December 31, 2015 | 33,760,904 | $ | 34 | $ | 488,514 | $ | (492,788 | ) | $ | (4,240 | ) | |||||||||
See accompanying notes to consolidated financial statements.
| -47- |
TearLab Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Years ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| OPERATING ACTIVITIES | ||||||||||||
| Net loss for the period | $ | (33,229 | ) | $ | (23,722 | ) | $ | (28,990 | ) | |||
| Adjustments to reconcile net loss to cash used in operating activities: | ||||||||||||
| Stock-based compensation | 4,117 | 3,824 | 3,738 | |||||||||
| Depreciation of fixed assets | 2,075 | 1,448 | 624 | |||||||||
| Amortization of patents and trademarks | 28 | 28 | 28 | |||||||||
| Amortization of intangible assets | 1,512 | 1,462 | 1,215 | |||||||||
| Impairment of long-lived assets | 1,372 | - | - | |||||||||
| Changes in fair value of warrant obligations | (227 | ) | (1,175 | ) | 11,105 | |||||||
| (Gain) loss on disposal of fixed assets | (3 | ) | - | 7 | ||||||||
| Amortization of deferred financing charges | 74 | - | - | |||||||||
| Net change in working capital and non-current asset balances related to operations | 578 | (37 | ) | (961 | ) | |||||||
| Cash used in operating activities | (23,703 | ) | (18,172 | ) | (13,234 | ) | ||||||
| INVESTING ACTIVITIES | ||||||||||||
| Additions to fixed assets, net of proceeds | (3,388 | ) | (2,416 | ) | (2,905 | ) | ||||||
| Cash paid for business acquisition | - | (1,400 | ) | - | ||||||||
| Cash used in investing activities | (3,388 | ) | (3,816 | ) | (2,905 | ) | ||||||
| FINANCING ACTIVITIES | ||||||||||||
| Proceeds from the issuance of term loan | 24,393 | - | - | |||||||||
| Proceeds from the issuance of shares in a public offering | - | - | 40,365 | |||||||||
| Proceeds from the issuance of employee stock purchase plan shares | 99 | 114 | - | |||||||||
| Proceeds from the exercise of options | 99 | 184 | 458 | |||||||||
| Proceeds from the exercise of warrants | - | - | 693 | |||||||||
| Exchange right | - | 250 | - | |||||||||
| Cost of issuance of shares | - | - | (3,036 | ) | ||||||||
| Cash provided by financing activities | 24,591 | 548 | 38,480 | |||||||||
| Net Increase (decrease) in cash and cash equivalents during the year | (2,500 | ) | (21,440 | ) | 22,341 | |||||||
| Cash and cash equivalents, beginning of year | 16,338 | 37,778 | 15,437 | |||||||||
| Cash and cash equivalents, end of year | $ | 13,838 | $ | 16,338 | $ | 37,778 | ||||||
See accompanying notes to consolidated financial statements.
| -48- |
TearLab Corporation
Notes to Consolidated Financial Statements
(expressed in thousands of U.S. dollars except per share amounts and as otherwise noted)
1. Basis of Presentation
Nature of Operations
TearLab Corporation (“TearLab” or the “Company”), a Delaware corporation, is an in vitro diagnostic company that has developed the TearLab® Osmolarity System, a proprietary tear testing platform for diagnosis of 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 and operates in one business segment.
The accompanying consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries TearLab Research, Inc. (“TearLab Research”), Occulogix Canada Corporation, and OcuHub Holdings, Inc. (formerly, Occulogix LLC) and all the accounts of its majority owned subsidiary, OcuHub LLC (“OcuHub”). Intercompany accounts and transactions have been eliminated on consolidation.
Liquidity and Going Concern
The accompanying 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. However, the Company has sustained substantial losses of $33,229, $23,722, and $28,990 for the years ended December 31, 2015, 2014, and 2013, respectively. The Company’s working capital surplus at December 31, 2015 is $14,139. As a result of the Company’s history of losses and financial condition, there is substantial doubt about the entity’s ability to continue as a going concern. The Company’s existing cash and cash equivalents of $13,838 at December 31, 2015 combined with anticipated cash flows provided by sales of its products in calendar year 2016 may not be sufficient to fund its cash requirements through the next twelve months if management is unsuccessful in completing additional fund raising activities including achievement of the third tranche revenue milestone to access an additional $10,000 of debt financing and decreasing the cash consumed by operating activities. Based on the Company’s current rate of cash consumption, management estimates cash and cash equivalents will go below $5,000 in the second quarter of 2016, violating a debt covenant, and the Company will need additional capital to remain compliant. These matters, among others, raise substantial doubt about the Company’s ability to continue as a going concern.
A successful transition to attaining profitable operations is dependent upon obtaining sufficient financing to fund the Company’s planned expenses and achieving a level of revenue adequate to support the Company’s cost structure. If events or circumstances occur that impact the Company’s access to funding, it may be required to reduce operating expenses, planned levels of inventory and capital expenditures which could have an adverse impact on its ability to achieve its intended business objectives. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
2. SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (‘‘GAAP’’) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. The principal areas of judgment relate to revenue returns reserve, allowance for doubtful accounts, slow-moving or obsolete inventory, impairment of long-lived and intangible assets, and the fair value of stock options and warrants.
| -49- |
Concentrations and risk
Credit risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and accounts receivable. The Company limits its exposure to credit loss by placing its cash with high credit quality financial institutions.
During 2015, 2014 and 2013, the Company derived its revenue from the sale of the TearLab® Osmolarity product. There were no customers representing revenue in excess of 10% in the years ended December 31, 2015, 2014 or 2013.
Currently, there are two suppliers for the reader and pen components of the TearLab® Osmolarity System and one supplier for the test cards. The Company expects to maintain the relationships with these suppliers.
Fair value of financial instruments
The Company’s financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and term debt. The carrying amounts of financial instruments such as cash equivalents, accounts receivable, accounts payable and accrued expenses approximate the related fair values due to the short-term maturities of these instruments. The term debt is presented net of any unamortized premiums or discounts, which approximates fair value.
Cash and cash equivalents
The Company considers all highly liquid investments that are readily convertible into cash and have an original maturity of three months or less at the time of purchase to be cash equivalents.
Accounts receivable and allowance for doubtful accounts
The Company’s accounts receivable consist primarily of trade receivables from customers and are generally unsecured and due within 30 days. The carrying value of accounts receivable approximates their fair value due to their short term nature. The Company evaluates the collectability of its accounts receivable based on a combination of factors and calculates an allowance for doubtful accounts based on the estimated proportion of aged receivables deemed uncollectable. Expected credit losses related to trade receivables are recorded as an allowance for doubtful accounts. The allowance for doubtful accounts is charged to sales and marketing expense and accounts receivable are written off as uncollectible and deducted from the allowance after appropriate collection efforts have been exhausted. The allowance for doubtful accounts was $589 and $424 at December 31, 2015 and 2014, respectively. Charges for bad debt expense have been $271, $121 and $377 for the years ended December 31, 2015, 2014 and 2013, respectively.
Inventory
Inventory is recorded at the lower of cost (based on first in, first out basis) or market and consists of purchased finished goods. Inventory is periodically reviewed for evidence of slow-moving or obsolete items, and the estimated reserve is based on management’s reviews of inventories on hand, compared to estimated future usage and sales, reviewing product shelf-life, and assumptions about the likelihood of obsolescence. Once written down, the adjustments are considered permanent and are not reversed until the related inventory is sold.
| -50- |
Fixed assets
Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, ranging from three to seven years. Maintenance and repairs are expensed as incurred. The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss would be recognized when estimated future undiscounted cash flows relating to the asset are less than its carrying amount. An impairment loss is measured as the amount by which the carrying amount of an asset exceeds its fair value.
Impairment of long-lived assets
The Company periodically assesses the carrying value of intangible and other long-lived assets, and whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. The assets are considered to be impaired if the Company determines that the carrying value may not be recoverable based upon its assessment, which includes consideration of the following events or changes in circumstances:
| ● | the asset’s ability to continue to generate income from operations and positive cash flow in future periods; | |
| ● | loss of legal ownership or title to the asset; | |
| ● | significant changes in the Company’s strategic business objectives and utilization of the asset(s); and | |
| ● | the impact of significant negative industry or economic trends. |
If the assets are considered to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets. Fair value is determined by the application of discounted cash flow models to project cash flows from the asset. In addition, the Company bases the useful lives and related amortization or depreciation expense on an estimate of the period that the assets will generate revenue or otherwise be used. The Company also periodically reviews the lives assigned to long-lived assets to ensure that the initial estimates do not exceed any revised estimated periods from which the Company expects to realize cash flows from its assets.
Patents and trademarks
Patents and trademarks are recorded at historical cost and are amortized using the straight-line method over their estimated useful lives, not to exceed 15 years.
Intangible Assets
Intangible assets are recorded at historical cost and are amortized using the straight-line method over their estimated useful life.
Product Warranties
The Company generally provides a one year warranty on its TearLab® Osmolarity System and related disposables. The Company accrues the estimated cost of this warranty at the time revenue is recognized and charges warranty expense to cost of goods sold. Warranty reserves are established based on historical experience with failure rates and the number of systems covered by warranty. Warranty reserves are depleted as systems and disposables are replaced. The Company reviews warranty reserves quarterly and, if necessary, make adjustments. The activities in the warranty reserve are as follows:
| -51- |
| Years ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Balance at the beginning of the year | $ | 121 | $ | 180 | $ | 107 | ||||||
| Charges to cost of goods sold | 73 | 79 | 271 | |||||||||
| Costs applied to liability | (100 | ) | (138 | ) | (198 | ) | ||||||
| Balance at the end of the year | $ | 94 | $ | 121 | $ | 180 | ||||||
Income Taxes
A deferred tax asset or liability is determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized.
Revenue recognition
Revenue is recognized when all four of the following criteria are met: (i) persuasive evidence that an arrangement exists; (ii) delivery of the products has occurred; (iii) the selling price is fixed or determinable; and (iv) collectability is reasonably assured. The Company records revenue when all of its obligations are completed, which is generally upon shipment of the Company’s products. Amounts received in excess of revenue recognizable are deferred.
The Company sells its proprietary TearLab® Osmolarity System and related test cards to external customers, who are primarily eye care professionals, for use in osmolarity 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 Canada and to distributors in South America, Europe, Asia and Australia.
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 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 with sales of multiple deliverables, such as the reader equipment and disposable test cards (referred to as “Purchase Agreements”). On a limited basis, the Company sells reader equipment or disposable test cards on a stand-alone basis, primarily in academic settings.
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. These agreements are treated as operating leases as collectability of the minimum lease payments is not reasonably predictable at the outset of the arrangement. Accordingly, revenue is recognized over the defined contract term as disposable test cards are shipped. 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 fair value. When reader equipment is placed with a customer at no separate cost, the Company retains title to the equipment and it remains capitalized on the Company’s Consolidated Balance Sheet as equipment classified within fixed assets, net. The equipment is depreciated on a straight-line basis once shipped to a customer location over its estimated useful life and depreciation expense is included in cost of goods sold within the Consolidated Statements of Operations and Comprehensive Loss.
| -52- |
Revenue recognition for Purchase Agreements with multiple deliverables is based on the individual units of accounting determined to exist in the contract. A delivered item is considered a separate unit of accounting when the delivered item has value to the customer on a stand-alone basis. Items are considered to have stand-alone value when they are sold separately by any vendor or when the customer could resell the item on a stand-alone basis. Considering that test cards are essential to the operation of a TearLab reader, there is no alternative vendor for the test cards and no indication that a secondary market for the TearLab readers is established, the deliverables under the contracts entered into during 2015, 2014 and 2013 do not meet criteria for separation under the multiple-element arrangements guidance. Consideration is allocated at the inception of the contract to all deliverables based on their relative selling price, as determined by the selling price of similar individual items on a stand-alone basis. The Company recognizes revenue for each of the elements only when it determines that all applicable recognition criteria have been met.
Amounts billed to customers for shipping and handling of a sales transaction are included as revenue. For the years ended December 31, 2015, 2014 and 2013, the Company recognized revenue from shipping and handling of $194, $190 and $187, respectively.
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 $67 and $77 as of December 31, 2015 and 2014, respectively, has been recorded as a reduction of revenue and is included in accounts receivable.
Cost of goods sold
Cost of goods sold includes the costs the Company incurs for the purchase of the TearLab® Systems sold and related freight and shipping costs, fees related to warehousing and logistics inventory management associated with conducting business and depreciation of reader equipment. The Company recorded $1,489, $1,109 and $912 in shipping and handling fees for the years ended December 31, 2015, 2014 and 2013, respectively.
Clinical, regulatory and research & development costs
Clinical and regulatory costs attributable to the performance of contract services are recognized as an expense as the services are performed. Non-refundable, up-front fees paid in connection with these contracted services are deferred and recognized as an expense over the estimated term of the related contract.
Stock-based compensation
The Company accounts for stock-based compensation expense for its directors and employees in accordance with US GAAP guidance related to stock-based compensation. Under this guidance, stock-based compensation cost is estimated at the grant date based on the fair value of the award and is recognized as an expense ratably over the requisite service period of the award. The Company uses the Black-Scholes Merton option pricing model for determining the fair value for all its awards and will recognize compensation cost on a straight-line basis over the awards’ vesting periods.
Advertising Costs
Advertising costs are expensed as incurred. Total advertising costs for each of the years ended December 31, 2015, 2014 and 2013 were $442, $325 and $386, respectively.
| -53- |
Warrant liabilities
The Company issued several rounds of warrants related to various debt and equity transactions which occurred in 2011. The Company accounts for its warrants issued in accordance with the US GAAP accounting guidance under Accounting Standards Codification (ASC) 815 applicable to derivative instruments, which requires every derivative instrument within its scope to be recorded on the balance sheet as either an asset or liability measured at its fair value, with changes in fair value recognized in earnings. Based on this guidance, the Company determined that the Company’s warrants do not meet the criteria for classification as equity. Accordingly, the Company classified the warrants as current liabilities. The warrants are subject to remeasurement at each balance sheet date with any change in fair value recognized as a component of other income (expense), in the statements of operations and comprehensive loss. Warrants are also remeasured at fair value immediately prior to being exercised, and the resulting fair value is reclassified into additional paid-in capital, net of any applicable exercise proceeds. The Company estimated the fair value of these warrants at the respective balance sheet dates using the Black-Scholes Merton option pricing model based on the estimated market value of the underlying common stock at the valuation measurement date, the remaining contractual term of the warrant, risk-free interest rates and expected dividends on and expected volatility of the price of the underlying common stock.
Foreign currency transactions
The Company’s functional and reporting currency is the U.S. dollar. The assets and liabilities of the Company’s Canadian operations are maintained in U.S. dollars. Monetary assets and liabilities denominated in foreign currencies are translated into U.S. dollars at exchange rates in effect at the consolidated balance sheet dates, and non-monetary assets and liabilities are translated at exchange rates in effect on the date of the transaction. Revenue and expenses are translated into U.S. dollars at average exchange rates prevailing during the year. Resulting exchange gains (losses) of $76, ($35) and ($131) are included in other income (expense) for the years ended December 31, 2015, 2014 and 2013, respectively.
Geographic information
The following table provides geographic information related to the Company’s revenue based on the geographic location to which we deliver the product:
| For the year ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| United States | $ | 23,597 | $ | 18,589 | $ | 13,844 | ||||||
| Canada | 268 | 200 | 121 | |||||||||
| Rest of the world | 1,291 | 929 | 680 | |||||||||
| Total | $ | 25,156 | $ | 19,718 | $ | 14,645 | ||||||
Comprehensive loss
Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income (loss) generally includes unrealized gains or losses on the Company’s marketable securities and foreign currency translation adjustments. In all the periods presented, the Company’s comprehensive loss equaled net loss for the period.
Net 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.
| -54- |
The following are potentially dilutive securities which have not been used in the calculation of diluted loss per share as they are anti-dilutive:
| December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Stock options | 6,919,102 | 6,363,126 | 5,536,795 | |||||||||
| Warrants | 424,063 | 74,063 | 598,612 | |||||||||
| Total | 7,343,165 | 6,437,189 | 6,135,407 | |||||||||
The following table is a reconciliation of the weighted average shares outstanding used for basic and diluted loss per share:
| December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Weighted average shares outstanding - basic | 33,698,086 | 33,578,820 | 30,759,305 | |||||||||
| Dilutive potential common shares | 33,721 | 138,524 | - | |||||||||
| Weighted average shares outstanding - fully diluted | 33,731,807 | 33,717,344 | 30,759,305 | |||||||||
Recent accounting pronouncements
In May 2014, the Financial Accountings Standards Board (the “FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2017 and early adoption is not permitted. Companies may use either a full retrospective or a modified retrospective approach to adopt the new guidance. The Company has not yet completed its assessment of the impact of the new standard, including selection of transition alternatives, on the Company’s financial statements.
In August 2014, the FASB issued guidance which requires management to assess an entity’s ability to continue as a going concern and to provide related disclosures in certain circumstances. Under the new guidance, disclosures are required when conditions give rise to substantial doubt about an entity’s ability to continue as a going concern within one year from the financial statement issuance date. The guidance is effective for annual periods ending after December 15, 2016, and all annual and interim periods thereafter. Early application is permitted. The adoption of this guidance will not have any impact on the Company’s financial position and results of operations.
In April 2015, the FASB issued authoritative guidance that requires debt issuance costs related to a recognized debt liability to be presented on the balance sheet as a direct deduction from the debt liability rather than as an asset. While adoption of this guidance is required for fiscal years beginning after December 15, 2015, the Company elected to adopt this guidance early, as of March 31, 2015.
In November 2015, the FASB issued new guidance on the balance sheet classification and presentation of deferred taxes. The guidance requires all deferred tax assets and liabilities, along with any valuation allowances, to be classified as noncurrent on the balance sheet. The guidance is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company elected to adopt this guidance prospectively as of December 31, 2015.
| -55- |
3. BALANCE SHEET DETAILS
Accounts receivable
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| Trade receivables | $ | 3,610 | $ | 2,904 | ||||
| Allowance for doubtful accounts | (589 | ) | (424 | ) | ||||
| $ | 3,021 | $ | 2,480 | |||||
Inventory
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| Finished goods | $ | 4,002 | $ | 2,990 | ||||
| Inventory reserves | (30 | ) | (4 | ) | ||||
| $ | 3,972 | $ | 2,986 | |||||
The Company evaluates inventory for estimated excess quantities and obsolescence, based on expected future sales levels and projections of future demand and expiration dates of inventory, with the excess inventory provided for. In addition, the Company assesses the impact of changing technology and market conditions.
Prepaid expenses and other current assets
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| Prepaid trade shows | $ | 246 | $ | 177 | ||||
| Prepaid insurance | 87 | 301 | ||||||
| Manufacturing deposits | 154 | 182 | ||||||
| Subscriptions | 128 | 82 | ||||||
| Other fees and services | 146 | 142 | ||||||
| Other current assets | 29 | 6 | ||||||
| $ | 790 | $ | 890 | |||||
Fixed assets, net
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| Capitalized TearLab equipment | $ | 8,349 | $ | 5,655 | ||||
| Leasehold improvements | 61 | 51 | ||||||
| Computer equipment and software | 1,023 | 819 | ||||||
| Furniture and office equipment | 278 | 267 | ||||||
| Medical equipment | 431 | 426 | ||||||
| $ | 10,142 | $ | 7,218 | |||||
| Less accumulated depreciation | (4,790 | ) | (2,714 | ) | ||||
| $ | 5,352 | $ | 4,504 | |||||
Depreciation expense was $2,075, $1,448 and $624 for the years ended December 31, 2015, 2014 and 2013, respectively. During the year ended December 31, 2015, the Company determined the assets of OcuHub were impaired and recorded a charge of $343 to fixed assets, which is included with the impairment of the OcuHub intangible assets and presented as an impairment of long-lived assets on the Consolidated Statements of Operations and Comprehensive Loss.
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Patents and trademarks
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| Patents | $ | 236 | $ | 236 | ||||
| Trademarks | 32 | 32 | ||||||
| 268 | 268 | |||||||
| Accumulated amortization | (216 | ) | (188 | ) | ||||
| $ | 52 | $ | 80 | |||||
Amortization expense was $28 for each of the years ended December 31, 2015, 2014 and 2013. Patents and trademarks are amortized, using the straight-line method, over an estimated useful life of 10 years from the date of approval of the patents and trademarks.
Estimated aggregate amortization expense for patents and trademarks at December 31, 2015 is as follows:
| 2016 | $ | 28 | ||
| 2017 | 24 | |||
| Total | $ | 52 |
Accrued liabilities
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| Due to professionals | $ | 256 | $ | 787 | ||||
| Due to employees and directors | 2,130 | 1,589 | ||||||
| Sales and use tax liabilities | 231 | 221 | ||||||
| Royalty liability | 753 | 330 | ||||||
| Warranty | 94 | 119 | ||||||
| Other | 1,583 | 719 | ||||||
| $ | 5,047 | $ | 3,765 | |||||
4. INTANGIBLE ASSETS
The Company’s intangible assets consist of the value of TearLab® Technology acquired in the acquisition of TearLab Research in November 2006, a prescriber list acquired in October 2015 and the value of the OcuHub platform technology acquired in the acquisition of the OcuHub business unit in March 2014. The TearLab Technology consists of a disposable lab card and card reader, supported by an array of patents and patent applications that are either held or in-licensed by the Company. The TearLab Technology is being amortized using the straight-line method over an estimated useful life of 10 years. The OcuHub platform technology consists of the right to access and commercialize the OcuHub cloud-based technology platform which facilitates an effective and efficient shared care model providing secure connectivity between doctors, patients, institutions and payers. Amortization expense was $1,512, $1,462 and $1,215 for the years ended December 31, 2015, 2014 and 2013, respectively.
Subsequent to December 31, 2015 the Company initiated steps to divest or wind down OcuHub. This determination subjected Management’s expectations of any future cash flows from OcuHub to increased risks and uncertainty, resulting in an impairment to the OcuHub platform technology of $1,029 in 2015. The impairment is included with the impairment of the OcuHub fixed assets and presented in the Consolidated Statements of Operations and Comprehensive Loss as an impairment of long-lived assets.
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Intangible assets subject to amortization consist of the following:
| Remaining | Gross Value | Gross Value | Accumulated Amortization | Accumulated Amortization | ||||||||||||||||||||||||||||||
| Useful Life | at Beginning | at End of | at Beginning | Amortization | at End of | Net Book | ||||||||||||||||||||||||||||
| (Years) | of Year | Additions | Impairments | Year | of Year | Expense | Year | Value | ||||||||||||||||||||||||||
| Year ended December 31, 2015 | ||||||||||||||||||||||||||||||||||
| TearLab® technology | 1 | $ | 12,172 | $ | - | $ | - | $ | 12,172 | $ | (9,892 | ) | $ | (1,214 | ) | $ | (11,106 | ) | $ | 1,066 | ||||||||||||||
| OcuHub platform technology | - | 1,564 | - | (1,029 | ) | 535 | (248 | ) | (287 | ) | (535 | ) | - | |||||||||||||||||||||
| Prescriber list | 2 | - | 90 | - | 90 | - | (11 | ) | (11 | ) | 79 | |||||||||||||||||||||||
| Total | $ | 13,736 | $ | 90 | $ | (1,029 | ) | $ | 12,797 | $ | (10,140 | ) | $ | (1,512 | ) | $ | (11,652 | ) | $ | 1,145 | ||||||||||||||
| Year ended December 31, 2014 | ||||||||||||||||||||||||||||||||||
| TearLab® technology | 2 | $ | 12,172 | $ | - | $ | - | $ | 12,172 | $ | (8,678 | ) | $ | (1,214 | ) | $ | (9,892 | ) | $ | 2,280 | ||||||||||||||
| OcuHub platform technology | 4 | - | 1,564 | - | 1,564 | - | (248 | ) | (248 | ) | 1,316 | |||||||||||||||||||||||
| Total | $ | 12,172 | $ | 1,564 | $ | - | $ | 13,736 | $ | (8,678 | ) | $ | (1,462 | ) | $ | (10,140 | ) | $ | 3,596 | |||||||||||||||
Estimated future amortization expense related to intangible assets with finite lives at December 31, 2015 is as follows:
| Amortization | ||||
| of intangible | ||||
| assets | ||||
| 2016 | $ | 1,111 | ||
| 2017 | 34 | |||
| $ | 1,145 | |||
5. RELATED PARTY TRANSACTIONS
On August 20, 2009, the Company entered into a distribution agreement with Science with Vision Inc., (“Science with Vision”) pursuant to which Science with Vision obtained exclusive Canadian distribution rights with respect to the Company’s products. The Company’s chairman of the board of directors has a material financial interest in Science with Vision. On September 3, 2013, the Company and Science with Vision agreed to terminate the distribution agreement including exclusive distribution rights of TearLab products in Canada. In consideration of the termination agreement, the Company agreed to a one-time payment to Science with Vision of C$200 Canadian dollars and a 5% royalty on all sales in Canada of products for which Science with Vision had exclusive distribution rights. The one-time payment resulted in a charge of $190 (U.S. dollars) during the year ended December 31, 2013 and is recorded within sales and marketing expense. The Company incurred $12 and $11 of royalty expense to Science with Vision during the years ended December 31, 2015 and 2014, respectively. Royalties are recorded as cost of goods sold in the income statement in the period in which revenue is recognized for the associated products sold.
6. INCOME TAXES
Geographic sources of loss from continuing operations before income tax are as follows:
| December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Domestic | $ | 32,099 | $ | 22,768 | $ | 28,155 | ||||||
| Foreign | 1,130 | 954 | 835 | |||||||||
| Loss before income taxes | $ | 33,229 | $ | 23,722 | $ | 28,990 | ||||||
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Significant components of the Company’s deferred tax assets and liabilities are as follows:
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| Deferred tax assets | ||||||||
| Intangible assets | $ | 1,307 | $ | 446 | ||||
| Stock options | 3,615 | 3,120 | ||||||
| Accruals and others | 1,060 | 848 | ||||||
| Net operating loss carryforwards | 30,200 | 21,345 | ||||||
| 36,182 | 25,759 | |||||||
| Valuation allowance | (36,182 | ) | (24,971 | ) | ||||
| Deferred tax asset | $ | - | $ | 788 | ||||
| Deferred tax liability | ||||||||
| Intangible assets | $ | - | $ | (788 | ) | |||
| Deferred tax liability | $ | - | $ | (788 | ) | |||
| Deferred taxes, net | $ | - | $ | - | ||||
The following is a reconciliation of the recovery of income taxes between those that are expected, based on enacted tax rates and laws, to those currently reported:
| December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Loss for the year before income taxes | $ | (33,229 | ) | $ | (23,722 | ) | $ | (28,990 | ) | |||
| Expected recovery of income taxes | $ | (11,298 | ) | $ | (8,064 | ) | $ | (9,856 | ) | |||
| State income tax, net of federal benefit | (518 | ) | (438 | ) | (440 | ) | ||||||
| Stock based compensation | 239 | 189 | 204 | |||||||||
| Warrants | (75 | ) | (400 | ) | 3,776 | |||||||
| Deferred state tax rate adjustment | (227 | ) | (151 | ) | 899 | |||||||
| Expiration of options | - | - | 3,761 | |||||||||
| Adjustments to deferred tax assets | 552 | 47 | 1,138 | |||||||||
| Non-deductible expense and other | 118 | 90 | 112 | |||||||||
| Change in valuation allowance | 11,209 | 8,727 | 406 | |||||||||
| Total recovery of income taxes | $ | - | $ | - | $ | - | ||||||
Income taxes are recorded in accordance with authoritative guidance for accounting for income taxes, which requires the recognition of deferred tax assets and liabilities to reflect the future tax consequences of the events that have been recognized in the Company’s consolidated financial statements or tax returns. Measurement of the deferred items is based on enacted tax laws. In the event of differences between the financial reporting bases and tax bases of the Company’s assets, an assessment regarding the Company’s ability to realize the future benefits of the deferred tax assets is required. The Company records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized. Management has considered future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance. In the event the Company were to determine that it would be able to realize the deferred tax assets in the future in excess of their net recorded amounts, an adjustment to the deferred tax assets would increase the income in the period such determination was made. Likewise, should the Company determine that it would not be able to realize all or part of the net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made.
The Company assesses its tax positions to determine the impact of uncertain income tax positions on the income tax return based on the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. At December 31, 2015 and 2014, the Company has no unrecognized income tax benefits and no material uncertain tax positions.
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During the year ended December 31, 2012, a change of ownership for tax purposes causing Section 382 restrictions on the utilization of net operating losses occurred. No additional ownership changes are expected to arise through 2015. The ownership change in 2012, while limiting the annual utilization of net operating losses, will not cause the carryforwards generated subsequent to the Company’s last ownership change in October 2008 to expire unused. In general, an ownership change, as defined by Section 382, results from transactions increasing ownership of certain stockholders or public groups in the stock of the corporation by more than 50 percentage points over a three-year period. Utilization of net operating loss carryforwards are subject to annual limitations under Section 382 of the Internal Revenue Code of 1986, and similar state provisions whenever an ownership change has occurred. The ownership changes described above will limit the annual amount of net operating loss carryforwards that can be utilized to offset future taxable income.
At December 31, 2015, the Company had federal net operating loss carryforwards of approximately $82,204, state net operating loss carryforwards of approximately $56,744 and Canadian net operating loss carryforwards of approximately $9,234. The federal net operating loss carryforwards and the state net operating loss carryforwards begin to expire in 2028, and the Canadian net operating loss carryforwards begin to expire in 2026. The federal and state net operating loss carryovers reflected above do not include any net operating loss carryover which would expire unutilized solely as a result of 382 limitations arising in connection with the 2008 ownership change. As of December 31, 2015, the Company has approximately $1,515 of net operating loss carryforwards related to stock option exercises which will result in an increase to additional paid-in capital and a decrease in income taxes payable at the time when the tax loss carryforwards are utilized.
The Company’s policy is to recognize interest and penalties related to income tax matters in other expense. Because the Company has generated net operating losses since inception for both state and federal purposes, no additional tax liability, penalties or interest have been recognized for balance sheet or income statement purposes as of and for the three years ended December 31, 2015.
The Company does not expect a significant change in the amount of its unrecognized tax benefits within the next 12 months. Therefore, it is not expected that the change in the Company’s unrecognized tax benefits will have a significant impact on the Company’s results of operations or financial position.
All of the federal income tax returns for the Company and its subsidiaries remain open since their respective dates of incorporation due to the existence of net operating losses. The Company and its subsidiaries have not been, nor are they currently, under examination by the Internal Revenue Service or the Canada Revenue Agency.
State and provincial income tax returns are generally subject to examination for a period of between three and five years after their filing. However, due to the existence of net operating losses, all state income tax returns of the Company and its subsidiaries since their respective dates of incorporation are subject to re-assessment. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. The Company and its subsidiaries have not been, nor are they currently, under examination by any state tax authority.
7. TERM LOAN
On March 4, 2015, the Company executed a term loan agreement with CRG as lenders providing the Company with access of up to $35,000 (the “Term Loan Agreement”). The Company entered into an amendment of the Term Loan Agreement with CRG on August 6, 2015. The Company received $15,000 in gross proceeds under the Term Loan Agreement on March 4, 2015, and an additional $10,000 on October 6, 2015. A third tranche of $10,000 is available to the Company if the Company achieves at least $38,000 in trailing twelve-month revenue prior to June 30, 2016 and satisfies other borrowing conditions.
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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. 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 of the Term Loan Agreement.
As part of the amended Term Loan Agreement and funding of the second tranche, CRG received 350,000 warrants dated as of October 6, 2015 to purchase common shares of the Company at a price of $5.00 per share. The warrants have a five-year life. The warrants are classified as equity on the Consolidated Balance Sheet as of December 31, 2015. The 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.
The Company incurred financing and legal fees associated with the debt of $606, which were recorded as a direct discount to the debt and is being amortized using the effective interest method. The Company presents the debt issuance costs related to the recognized debt liability on the balance sheet as a reduction of the liability.
The following is a summary of the Term Loan Agreement as of December 31, 2015 and related maturities of outstanding principle:
| Prinicple balance outstanding | $ | 25,000 | ||
| PIK interest | 681 | |||
| less discount on term loan: | ||||
| deferred financing fees, net | (532 | ) | ||
| fair value of detachable warrants, net | (290 | ) | ||
| Total term loan | $ | 24,859 |
Principal due for each of the next 5 years and in the aggregate thereafter:
| 2016 | $ | - | ||
| 2017 | - | |||
| 2018 | - | |||
| 2019 | 12,841 | |||
| 2020 | 12,840 | |||
| Total principal due | 25,681 | |||
| Less: discount on term loan | (822 | ) | ||
| Total term loan | $ | 24,859 |
The Term Loan Agreement provides for prepayment fees of 5% of the outstanding balance of the loan if the loan is repaid prior to March 31, 2016. The prepayment fee is reduced 1% per year for each subsequent year until maturity.
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 annual revenue and minimum cash threshold levels. The minimum annual revenue threshold level required by the term loan is $25,000 for calendar year 2015. The minimum cash balance required is $5,000 subject to certain conditions.
If the Company does not have annual revenue greater or equal to the annual minimum 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 the Company does not achieve the minimum revenue threshold and it cannot complete the CRG Equity Cure, it may be in default of the Term Loan Agreement In the event of a default, the Company may be required to repay any outstanding amounts earlier than anticipated, and the lenders may foreclose on their security interest in the Company’s assets.
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Borrowings under the Term Loan Agreement are subject to certain conditions, including the non-occurrence of a material adverse change in the business or operations (financial or otherwise), or a material impairment of the prospect of repayment of obligations.
As of December 31, 2015, the Company was in compliance with all of the covenants.
8. COMMITMENTS AND CONTINGENCIES
Commitments
The Company has commitments relating to operating leases recognized on a straight line basis over the term of the lease for rental of office space and equipment from unrelated parties, expiring at various times through June 30, 2018. The total future minimum obligation under these various leases for 2016, 2017 and 2018 are $381, $354 and $181, respectively. Rent expensed under these leases was $519, $344 and $223 for the years ended December 31, 2015, 2014 and 2013, respectively. The Company leases office facilities under an operating lease agreement. The initial term of the lease is five years and includes periodic rent increases and a renewal option.
Effective October 1, 2006, the Company entered into a patent license and royalty agreement with the University of California San Diego to obtain a second exclusive license to make, use, sell, offer for sale, and import existing TearLab technology. The Company is required to make royalty payments of $35 or 5.5% of gross sales per year, whichever is higher. Additionally, the Company is required to pay a royalty of 30% of any sublicense fees it receives prior to receiving FDA approval and 25% of any sub-license fees it receives after FDA approval. The Company incurred fees of $1,370, $1,088, and $807 under this agreement during the years ended December 31, 2015, 2014 and 2013, respectively. The Company had $734 and $330 in accrued royalties at December 31, 2015 and 2014, respectively. Future minimum royalty payments under this agreement as of December 31, 2015 are approximately as follows:
| 2016 | $ | 35 | ||
| 2017 | 35 | |||
| 2018 | 35 | |||
| 2019 | 35 | |||
| 2020 | 35 | |||
| Thereafter | 245 | |||
| Total | $ | 420 |
On March 12, 2003, the Company entered into a 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 December 31, 2015 are approximately as follows:
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| 2016 | $ | 35 | ||
| 2017 | 35 | |||
| 2018 | 35 | |||
| 2019 | 35 | |||
| 2020 | 35 | |||
| Thereafter | 245 | |||
| Total | $ | 420 |
On August 1, 2011, the Company, through its subsidiary, TearLab Research, entered into a manufacturing and development agreement, (the “Manufacturing Agreement”), with MiniFAB (Aust) Pty Ltd, (“MiniFAB”). Pursuant to the terms of the Manufacturing Agreement, MiniFAB will manufacture and supply test cards for the Company. The Manufacturing Agreement specifies minimum order quantities that required the Company to purchase approximately $24,600 (AUD$30,200) in test cards from MiniFAB from inception of the agreement through the end of 2015. The agreement is denominated in Australian dollars, so the actual amounts paid in U.S. dollars may vary. The agreement also has annual minimum order commitments under the Manufacturing Agreement. The Company did not meet the annual minimum order commitment for the year ended December 31, 2015, however, MiniFAB has agreed to waive any penalty as a result of ordering less than the minimum order volume of 3,715,000 test cards during 2015. The Manufacturing Agreement has a ten year initial term and may be terminated by either party if the other party is in breach or becomes insolvent. If terminated for any reason other than a default by MiniFAB, the Company will be obligated to pay a termination fee based on the cost of products manufactured by MiniFAB, but not yet invoiced, repayment of capital invested by MiniFAB, less depreciation calculated in accordance with Australian accounting standards, and the expected profit to MiniFAB had the remaining minimum order quantities been purchased by the Company. The Company renegotiated the Manufacturing Agreement in March 2016. See Note 13 to the Consolidated Financial Statements, Subsequent Events for additional information.
On April 1, 2014, the Company, through its subsidiary, Occulogix LLC, entered into a marketing agreement (the “Marketing Agreement”) with AOA Excel, Inc. (“AOA”). Under terms of the Marketing Agreement, the Company agreed to pay AOA guaranteed minimum payments of $25 per quarter for marketing and promotion activities through March 31, 2019. Future payments under the Marketing Agreement are as follows:
| 2016 | $ | 100 | ||
| 2017 | 100 | |||
| 2018 | 100 | |||
| 2019 | 25 | |||
| Total | $ | 325 |
Contingencies
During the ordinary course of business activities, the Company may be contingently liable for litigation and a party to claims. Currently the Company is not party to any litigation.
9. FAIR VALUE MEASUREMENTS
The Company measures certain assets and liabilities in accordance with authoritative guidance which requires fair value measurements be classified and disclosed in one of the following three categories:
| ● | Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities; | |
| ● | Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data; | |
| ● | Level 3: Unobservable inputs are used when little or no market data is available. |
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As of December 31, 2015 and 2014, assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. The Company did not have any transfers to or from Level 3 of the fair value measurement hierarchy during the years ended December 31, 2015 and 2014.
At December 31, 2015, the Company has a liability for warrants to purchase 219,604 shares of common stock at an exercise price of $1.86 per share valued at $29 (Note 10). All warrant liabilities are classified as Level 3 fair value measurements.
The following table provides a reconciliation for all liabilities measured at fair value using significant unobservable inputs (Level 3) for the years ending December 31, 2015 and 2014:
| Fair Value Measurements | ||||
| Using Significant | ||||
| Unobservable Inputs (Level 3) | ||||
| Balance of warrant liability at January 1, 2014 | $ | 4,047 | ||
| Reclassification of warrant liability to stockholders' equity upon exercise | (2,616 | ) | ||
| Change in fair value of warrant liability included in other (income)/expense | (1,175 | ) | ||
| Balance of warrant liability at December 31, 2014 | 256 | |||
| Change in fair value of warrant liability included in other (income)/expense | (227 | ) | ||
| Balance of warrant liability at December 31, 2015 | $ | 29 | ||
10. CAPITAL STOCK
(a) Authorized share capital
The total number of authorized shares of common stock of the Company is 65,000,000. 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) Stock Option Plan
The Company has a stock option plan, the 2002 Stock Incentive Plan (the “Stock Incentive Plan”), which was most recently amended on June 19, 2015 to increase the shares reserved under the Stock Incentive Plan by 1,000,000. Under the amended Stock Incentive Plan, up to 7,200,000 options are available for grant to employees, directors and consultants. Options 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 and generally expire 10 years after the date of grant. No incentive stock options granted to a 10% owner optionee shall be exercisable after the expiration of five years after the effective date of grant of such option, no option granted to a prospective employee, prospective consultant or prospective director may become exercisable prior to the date on which such person commences service, and with the exception of an option granted to an officer, director or consultant, no option shall become exercisable at a rate less than 20% per annum over a period of five years from the effective date of grant of such option unless otherwise approved by the Board. Shares issued upon option exercise result in new shares issued by the Company.
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The Company accounts for stock-based compensation based on the fair value of the transaction, recognized as compensation expense over the vesting period. The Company uses the Black-Scholes Merton option pricing model to calculate the fair value of the stock options. The weighted-average fair value of stock options granted during the years ended December 31, 2015, 2014 and 2013 was $1.34, $3.02 and $8.96, respectively.
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 consolidated statements of consolidated loss:
| Years ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| General and administrative | $ | 2,014 | $ | 2,437 | $ | 1,837 | ||||||
| Clinical, regulatory and research and development | 472 | 159 | 174 | |||||||||
| Sales and marketing | 1,634 | 1,228 | 1,727 | |||||||||
| Stock-based compensation expense before income taxes | $ | 4,120 | $ | 3,824 | $ | 3,738 | ||||||
The estimated fair value of stock options for the periods presented was determined using the Black-Scholes Merton option pricing model with the following weighted-average assumptions:
| Years ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Volatility | 89 | % | 87 | % | 101 | % | ||||||
| Weighted average expected life of the options | 5.39 years | 5.84 years | 5.89 years | |||||||||
| Risk-free interest rate | 1.60 | % | 1.57 | % | 1.43 | % | ||||||
| Dividend yield | 0.00 | % | 0.00 | % | 0.00 | % | ||||||
The Company’s computation of expected volatility is based on the historical volatility of the Company’s common stock over a period of time equal to the expected term of the stock options. Due to the lack of sufficient historical data, the Company’s computation of weighted average expected life was estimated as the mid-point between the vesting date and the end of the contractual period. The risk-free interest rate for an award is based on the U.S. Treasury yield curve with a term equal to the expected life of the award on the date of grant.
| -65- |
A summary of the options issued during the year ended December 31, 2015 and the total number of options outstanding as of that date and changes since December 31, 2012 are set forth below:
| Weighted | ||||||||||||||||
| Average | ||||||||||||||||
| Number of | Weighted | Remaining | Aggregate | |||||||||||||
| Options | Average | Contractual | Intrinsic Value | |||||||||||||
| Outstanding | Exercise Price | Life (years) | (in thousands) | |||||||||||||
| Outstanding, December 31, 2012 | 4,099,342 | $ | 3.54 | 7.14 | $ | 6,799 | ||||||||||
| Granted | 1,837,500 | 9.78 | ||||||||||||||
| Exercised | (181,854 | ) | 2.52 | |||||||||||||
| Forfeited/cancelled/expired | (218,193 | ) | 11.07 | |||||||||||||
| Outstanding, December 31, 2013 | 5,536,795 | 4.91 | 6.89 | 27,256 | ||||||||||||
| Granted | 1,412,500 | 4.63 | ||||||||||||||
| Exercised | (57,763 | ) | 3.18 | |||||||||||||
| Forfeited/cancelled/expired | (528,406 | ) | 11.10 | |||||||||||||
| Outstanding, December 31, 2014 | 6,363,126 | 4.76 | 6.57 | 2,155 | ||||||||||||
| Granted | 1,285,455 | 2.09 | ||||||||||||||
| Exercised | (65,391 | ) | 1.52 | |||||||||||||
| Forfeited/cancelled/expired | (664,088 | ) | 6.10 | |||||||||||||
| Outstanding, December 31, 2015 | 6,919,102 | $ | 4.16 | 6.08 | $ | 184 | ||||||||||
| Vested or expected to vest, December 31, 2015 | 5,278,889 | $ | 4.20 | 5.41 | $ | 184 | ||||||||||
| Exerciseable, December 31, 2015 | 4,948,032 | $ | 4.16 | 4.95 | $ | 184 | ||||||||||
The aggregate intrinsic value at December 31, 2015 represents the total pre-tax intrinsic value, calculated as the difference between the Company’s closing stock price on the last trading day of the respective fiscal year and the exercise price, multiplied by the number of shares that would have been received by the option holders if the options that could be exercised had been exercised on such date.
Net cash proceeds from the exercise of common stock options were $99, $184 and $458 for the years ended December 31, 2015, 2014 and 2013, respectively. No income tax benefit was realized from stock option exercises during the years ended December 31, 2015, 2014 and 2013. The Company presents excess tax benefits from the exercise of stock options, if any, as financing cash flows rather than operating cash flows.
The total intrinsic value of options exercised was $76, $15 and $2,038 for the years ended December 31, 2015, 2014 and 2013, respectively. The total fair value of stock options vested during the years ended December 31, 2015, 2014 and 2013 was $3,981, $3,408 and $720, respectively.
As of December 31, 2015, total unrecognized compensation cost related to stock options of $3,791 is expected to be recognized over a weighted-average period of 1.92 years.
As of December 31, 2015, the Company had 683,439 options remaining in the Stock Incentive Plan available for grant.
(c) Employee Stock Purchase Plan
In July 2014, the Company’s Board of Directors adopted the 2014 Employee Stock Purchase Plan, or the ESPP, which was approved by the Company’s stockholders in June 2014 at the Company’s Annual Meeting of Stockholders. A total of 671,500 shares of the Company’s common stock are reserved for issuance under the plan, which permits eligible employees to purchase common stock at a discount through payroll deductions.
The price at which stock is purchased under the ESPP is equal to 90% of the fair market value of the common stock on the first or the last day of the offering period, whichever is lower. Generally, each offering under the ESPP will be for a period of six months as determined by the Company’s Board of Directors. Employees may invest up to 20% of their gross compensation through payroll deductions. In no event may an employee invest more than $25 worth of stock in the plan during each calendar year or more than 5,000 shares per offering period. During the year ended December 31, 2015, the Company received employee contributions totaling $203, issued 54,211 shares of common stock in July 2015 and issued another 67,743 shares of common stock subsequent to year-end in January 2016. During the year ended December 31, 2014, the Company received employee contributions totaling $114 and issued 47,902 shares of common stock.
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As the ESPP is a compensatory plan, stock-based compensation expense of $39, $36 and $0 has been recorded during the years ended December 31, 2015, 2014 and 2013, respectively. The fair value of each purchase option under the ESPP is estimated at the beginning of each six-month offering period using the Black-Scholes model with the following weighted-average assumptions:
| Years ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Volatility | 73 | % | 64 | % | ||||
| Weighted average expected life of the options | 0.5 years | 0.5 years | ||||||
| Risk-free interest rate | 0.11 | % | 0.07 | % | ||||
| Dividend yield | 0.00 | % | 0.00 | % | ||||
(d) Warrants
On June 13, 2011, the Company issued 1,629,539 shares of its common stock as well as warrants (‘‘Financing Warrants’’) to purchase 109,375 shares of its common stock in consideration of conversion and retirement of the Company’s outstanding July and August 2009 debt obligations in the aggregate amount of $2,149 with associated costs of $41. The exercise price of the Financing Warrants is $1.60 per common share representing the price per share equal to the closing bid price per share of the Company’s common stock on the NASDAQ stock market on July 15, 2009. During the years ended December 31, 2015 and 2014, no Financing Warrants were exercised.
On June 30, 2011, the Company closed a private placement financing in which 3,846,154 shares of common stock and warrants (‘‘2011 Warrants’’) to purchase 3,846,154 shares of common stock for gross proceeds of approximately $7,000. The investors purchased the shares and warrants for $1.82 per unit (each unit consisting of one share and one warrant to purchase shares of common stock). The exercise price of the warrants is $1.86 per share. The warrants are exercisable at any time from the date of issuance until June 30, 2016. The Company estimated the fair value of the warrants at the date of issuance using the Black-Scholes Merton option pricing model with a 101% volatility, 5.0 years expected life and a risk-free interest rate of 1.76%. The fair value of $5,518 was classified as a current liability as the Company determined that these warrants do not meet the criteria for classification as equity.
The Company initially allocated the total proceeds received, pursuant to the Securities Purchase Agreement, to the shares of common stock and warrants issued based on their relative fair values. This resulted in an allocation of $3,012 of proceeds to warrant liability. Since under the derivative guidance the Company is required to record the derivatives at fair value, the Company therefore estimated the fair value of the warrants on the issuance date to be $5,518.
During 2015, none of the 2011 Warrants were exercised. During the year ended December 31, 2014 certain holders of the 2011 Warrants exercised 304,945 warrants. The Company received no cash proceeds from these exercises. The Company restated the outstanding warrants at fair value at the time of exercise before recording the exercise into additional paid-in capital, resulting in an adjustment to the warrant obligations, with any gain or loss recorded in earnings of the applicable reporting period. The Company estimated the fair value of the exercised 2011 Warrants at their respective exercise dates to be $2,616, an increase of $263 from the previous value at December 31, 2013 of $2,352. The fair value was determined using the Black-Scholes Merton option pricing model and the increase was recorded as an expense in other income (expense) in the consolidated statement of operations and comprehensive loss for the year ended December 31, 2014.
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During the year ended December 31, 2013 certain holders of the 2011 Warrants exercised 1,571,136 warrants. The Company received $693 in proceeds from these exercises. The Company restated the outstanding warrants at fair value at the time of exercise before recording the fair value into additional paid-in capital, resulting in an adjustment to the warrant obligations, with any gain or loss recorded in earnings of the applicable reporting period. The Company estimated the fair value of the exercised 2011 Warrants at their respective exercise dates to be $13,297, an increase of $8,620 from the previous value at December 31, 2012 of $4,014. The fair value was determined using the Black-Scholes Merton option pricing model and the increase was recorded as an expense in other income (expense) in the Consolidated Statements of Operations and Comprehensive Loss for the year ended December 31, 2013.
The Company is also required to record the outstanding warrants at fair value at the end of each reporting period, resulting in an adjustment to the warrant obligations, with any gain or loss recorded in earnings of the applicable reporting period. The Company estimated the fair value of the remaining warrants as of December 31, 2015 to be $29, a decrease of $227 from the previous value at December 31, 2014. This amount was recorded as a charge to other income (expense) in the consolidated statement of operations and comprehensive loss for the year ended December 31, 2015.
The estimated fair value of the 2011 Warrants at December 31, 2015 was determined using the Black-Scholes Merton option pricing model assuming volatility of 69%, an expected life of 0.50 years, a risk-free interest rate of 0.49%, and 0% dividend yield.
In October 2015, as part of the second amendment to the Term Loan Agreement and funding of the $10,000 tranche, CRG received warrants to purchase 350,000 common shares in the Company at a price of $5.00 per share (the “CRG Warrants”). The CRG Warrants are exercisable any time prior to October 6, 2020. The CRG Warrants are classified as equity on the Consolidated Balance Sheet as of December 31, 2015. The CRG Warrants were valued at 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 year ended December 31, 2015.
The following table provides activity for warrants issued and outstanding during the two years ended December 31, 2015:
| Number of | Weighted average | |||||||
| warrants | exercise | |||||||
| outstanding | price | |||||||
| Outstanding, December 31, 2013 | 598,612 | $ | 1.83 | |||||
| Exercised | (304,945 | ) | 1.86 | |||||
| Expired | - | - | ||||||
| Outstanding, December 31, 2014 | 293,667 | 1.79 | ||||||
| Issued | 350,000 | 5.00 | ||||||
| Exercised | - | - | ||||||
| Expired | - | - | ||||||
| Outstanding, December 31, 2015 | 643,667 | $ | 3.54 | |||||
(e) Exchange Right
In August 2014, the Company sold membership units in OcuHub. The membership units sold generated cash proceeds of $250 in exchange for 2% ownership of OcuHub. In connection with the sale of the membership units, the new members received an exchange right allowing the units to be exchanged upon written notice and during a specified exchange window for shares in our common stock. The first available exchange window follows the one year anniversary date of the purchase of membership units. The variable number of shares of common stock provided upon exchange is equal to the initial capital contribution amount received for the membership units sold divided by the closing sales price of TearLab Corporation common stock during the respective exchange window. Due to the exchange right option available to the membership unit holders, the entire loss from continuing operations related to OcuHub of $3,507 and $2,080 for the years ended December 31, 2015 and 2014, respectively, has been attributed to TearLab Corporation within the consolidated financial statements.
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11. CONSOLIDATED STATEMENTS OF CASH FLOWS
The net change in working capital and non-current asset balances related to operations consists of the following:
| Years ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Accounts receivable, net | $ | (540 | ) | $ | 1,044 | $ | (2,635 | ) | ||||
| Inventory | (987 | ) | (2,101 | ) | 978 | |||||||
| Prepaid expenses and other assets | 100 | (162 | ) | (252 | ) | |||||||
| Other non-current assets | (24 | ) | (117 | ) | (12 | ) | ||||||
| Accounts payable | 90 | 1,340 | (436 | ) | ||||||||
| Accrued liabilities | 1,318 | (147 | ) | 1,329 | ||||||||
| Deferred interest | 681 | - | - | |||||||||
| Deferred rent/revenue | (60 | ) | 106 | 67 | ||||||||
| $ | 578 | $ | (37 | ) | $ | (961 | ) | |||||
The Company paid $1,257 for interest during the year ended December 31, 2015. During the year ended December 31, 2015, the Company issued the CRG Warrants with a fair value of $290 to obtain debt financing. The Company reclassified $0, $2,616 and $13,297 of warrant liabilities to Stockholders Equity upon the cashless exercise of warrants during the years ended December 31, 2015, 2014, and 2013, respectively.
12. EMPLOYEE RETIREMENT PLAN
The Company has a defined contribution, 401(k) retirement plan under which all full-time employees may contribute up to 100% of their annual salary, within IRS limits. The Company has not made any contributions to these retirement plan in the years ended December 31, 2015, 2014 and 2013.
13. SUBSEQUENT EVENTS
In January 2016, the Company decided to initiate a divestiture or wind-down of its majority owned OcuHub subsidiary. The Company estimates that a wind-down will incur approximately $600 of expense in the first quarter of 2016.
In February 2016, the Company announced a restructuring of its osmolarity business designed to improve the Company’s overall cost structure, extend its cash runway and shorten the time required for it to achieve positive cash flow from operations. The restructuring resulted in the reduction of 54 full-time positions and is expected to cost approximately $0.3 million associated with personnel-related termination costs in the first quarter of 2016. The Company estimates the annualized decrease of operating expenses related to the restructuring will be $9,400.
On March 7, 2016, the Company signed a new supply and development agreement with the Company’s test card supplier, MiniFAB. The agreement is an exclusive supply agreement through June 2021, which will provide 16% savings on the purchase and delivery of individual osmolarity test cards following a transition period to account for ending inventory at December 31, 2015 and other elements of the prior agreement. The savings consist of lower prices for the purchase of the test cards and for freight costs to ship the cards to the Company’s distribution facility. The lower purchase price will remain in place until the earlier of, the Company reaches an annual volume of 4.5 million test cards or March 31, 2018. The savings from freight costs will remain in place throughout the agreement. The 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.
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14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables in the opinion of management, reflect all adjustments, consisting of normal recurring adjustments necessary for the fair presentation of results for the periods presented (in thousands, except per share data):
| Fiscal 2015 Quarter Ended | ||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | |||||||||||||
| Revenue | $ | 5,408 | $ | 6,345 | $ | 6,612 | $ | 6,791 | ||||||||
| Loss from operations | (8,071 | ) | (7,702 | ) | (7,543 | ) | (8,193 | ) | ||||||||
| Net loss | $ | (8,168 | ) | $ | (8,072 | ) | $ | (8,064 | ) | $ | (8,925 | ) | ||||
| Weighted average number of shares outstanding, basic | 33,643 | 33,658 | 33,729 | 33,761 | ||||||||||||
| Net loss per common share basic | $ | (0.24 | ) | $ | (0.24 | ) | $ | (0.24 | ) | $ | (0.26 | ) | ||||
| Weighted average number of shares outstanding diluted | 33,693 | 33,704 | 33,774 | 33,761 | ||||||||||||
| Net loss per common share diluted | $ | (0.25 | ) | $ | (0.24 | ) | $ | (0.24 | ) | $ | (0.26 | ) | ||||
| Fiscal 2014 Quarter Ended | ||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | |||||||||||||
| Revenue | $ | 4,211 | $ | 4,999 | $ | 5,212 | $ | 5,297 | ||||||||
| Loss from operations | (5,922 | ) | (5,885 | ) | (6,114 | ) | (7,083 | ) | ||||||||
| Net loss | $ | (5,557 | ) | $ | (5,439 | ) | $ | (5,785 | ) | $ | (6,941 | ) | ||||
| Weighted average number of shares outstanding, basic | 33,550 | 33,585 | 33,589 | 33,591 | ||||||||||||
| Net loss per common share basic | $ | (0.17 | ) | $ | (0.16 | ) | $ | (0.17 | ) | $ | (0.21 | ) | ||||
| Weighted average number of shares outstanding diluted | 33,732 | 33,721 | 33,712 | 33,662 | ||||||||||||
| Net loss per common share diluted | $ | (0.17 | ) | $ | (0.17 | ) | $ | (0.18 | ) | $ | (0.21 | ) | ||||
| (i) | Net loss per share basic and diluted are computed independently for the quarters presented. Therefore, the sum of the quarterly per share information may not be equal to the annual per share information. Also totals may not add to the financial statements due to rounding. |
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ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Not applicable.
ITEM 9A. Controls and Procedures.
Evaluation of 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 our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefit of controls must be considered relative to their costs. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of the end of the period covered by the report, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, our chief executive officer and chief financial officer concluded that, as of December 31, 2015 our disclosure controls and procedures were effective at the reasonable assurance level.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
We conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on our evaluation under the framework, our management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2015. Mayer Hoffman McCann, P.C., the Company’s independent registered public accounting firm, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting which is included herein.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
TearLab Corporation
We have audited TearLab Corporation’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). TearLab Corporation’s management is responsible for maintaining effective internal control over financial reporting and for their assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, TearLab Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2015, and the related statement of operations and comprehensive loss, stockholders’ equity (deficit), and cash flows of TearLab Corporation for the year ended December 31, 2015, and our report dated March 9, 2016, expressed an unqualified opinion thereon.
/s/ Mayer Hoffman McCann P.C.
San Diego, California
March 9, 2016
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On March 7, 2016, the Company signed a new supply and development agreement with the Company’s test card supplier, MiniFAB. The agreement is an exclusive supply agreement through June 2021, which will provide 16% savings on the purchase and delivery of individual osmolarity test cards following a transition period to account for ending inventory at December 31, 2015 and other elements of the prior agreement. The savings consist of lower prices for the purchase of the test cards and for freight costs to ship the cards to the Company’s distribution facility. The lower purchase price will remain in place until the earlier of, the Company reaches an annual volume of 4.5 million test cards or March 31, 2018. The savings from freight costs will remain in place throughout the agreement. The 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.
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ITEM 10. Directors, Executive Officers and Corporate Governance.
The information required by this item will be set forth in our 2016 Proxy Statement and is incorporated in this report by reference.
ITEM 11. Executive Compensation.
The information required by this item will be set forth in our 2016 Proxy Statement and is incorporated in this report by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item will be set forth in our 2016 Proxy Statement and is incorporated in this report by reference.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item will be set forth in our 2016 Proxy Statement and is incorporated in this report by reference.
ITEM 14. Principal Accountant Fees and Services.
The information required by this item will be set forth in our 2016 Proxy Statement and is incorporated in this report by reference.
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ITEM 15. Exhibits and Financial Statement Schedules.
(a) The following documents are filed as part of the report:
(1) Financial Statements included in PART II of this report:
(2) Financial Statement Schedules:
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
| Balance at | Balance at | |||||||||||||||
| beginning of | Write-off and | end of | ||||||||||||||
| the period | Provision | recoveries | the period | |||||||||||||
| Fiscal 2013: | ||||||||||||||||
| Bad debt reserves | $ | 36 | $ | 377 | $ | 2 | $ | 415 | ||||||||
| Product warranties | 107 | 271 | (198 | ) | 180 | |||||||||||
| Return reserves | 71 | 474 | (372 | ) | 173 | |||||||||||
| Fiscal 2014: | ||||||||||||||||
| Bad debt reserves | 415 | 121 | (112 | ) | 424 | |||||||||||
| Product warranties | 180 | 79 | (138 | ) | 121 | |||||||||||
| Return reserves | 173 | 126 | (376 | ) | 77 | |||||||||||
| Fiscal 2015: | ||||||||||||||||
| Bad debt reserves | 424 | 271 | (106 | ) | 589 | |||||||||||
| Product warranties | 121 | 73 | (100 | ) | 94 | |||||||||||
| Return reserves | 77 | 265 | (275 | ) | 67 | |||||||||||
(3) List of exhibits required by Item 601 of Regulation S-K. See part (b) below.
(b) Exhibits: The following exhibits are filed as a part of this report:
All other financial statement schedules have been omitted because they are not applicable, not required or the information required is shown in the financial statements or the notes thereto.
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| Exhibit Number |
Exhibit Description | Incorporated by Reference | ||
| 3.1 | Amended and Restated Certificate of Incorporation of the Registrant currently in effect | Exhibit 3.3 to the Registrant’s Current Report on Form 8-K filed with the Commission on October 9, 2008 (file no. 000-51030) | ||
| 3.2 | Amended and Restated By-Laws of the Registrant currently in effect | Exhibit 3.4 to the Registrant’s Registration Statement on Form S-1/A No. 3, filed with the Commission on November 16, 2004 (file no. 333-118024) | ||
| 3.3 | Certificate of Amendment to Amended and Restated Certificate of Incorporation | Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed with the Commission on October 9, 2008 (file no. 000-51030) | ||
| 3.4 | Certificate of Amendment to Amended and Restated Certificate of Incorporation | Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on May 19, 2010 (file no. 000-51030) | ||
| 3.5 | Certificate of Amendment to Amended and Restated Certificate of Incorporation | Exhibit 3.4 to the Registrant’s Post Effective Amendment No. 1 to Form S-3 filed with the Commission on July 15, 2013 (file no. 333-189372) | ||
| 4.1 | Form of Common Stock Purchase Warrant Agreement | Exhibit A to the Registrant’s free writing prospectus filed with the Commission on March 15, 2010 (file no. 333-157269) | ||
| 4.2 | Form of Common Stock Purchase Warrant Agreement | Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed with the Commission on July 16, 2009 (file no. 000-51030) | ||
| 4.3 | Form of Senior Indenture | Exhibit 4.1 to the Registrant’s Registration Statement on Form S-3 filed with the Commission on January 2, 2015 (file no. 333-201355) | ||
| 4.4 | Form of Subordinated Indenture | Exhibit 4.2 to the Registrant’s Registration Statement on Form S-3 filed with the Commission on January 2, 2015 (file no. 333-201355) | ||
| 4.5 | Form of warrant issued to certain affiliated funds of CRG LP (formerly known as Capital Royalty) pursuant to the terms of the Term Loan Agreement, dated as of March 4, 2015, as amended by the Omnibus Amendment Agreement, dated as of April 2, 2015, and Amendment 2, dated August 6, 2015, by and among TearLab Corporation, certain of its subsidiaries from time to time party thereto as guarantors and CRG LP (formerly known as Capital Royalty) and certain of its affiliate funds, as lenders. | Exhibit 4.01 to the Registrant’s Current Report on Form 10-K filed with the Commission on October 9, 2015 (file no. 000-51030) | ||
| 10.1 | License Agreement between TearLab, Inc. and The Regents of the University of California dated March 12, 2003. | Exhibit 10.48 to the Registrant’s Annual Report on Form 10-K/A, filed with the Commission on March 29, 2007 (file no. 000-51030) (Portions of this exhibit have been omitted pursuant to a request for confidential treatment.) |
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| Exhibit Number |
Exhibit Description | Incorporated by Reference | ||
| 10.2 | Amendment No. 1, dated June 9, 2003, to the License Agreement between TearLab, Inc. and The Regents of the University of California dated March 12, 2003. | Exhibit 10.49 to the Registrant’s Annual Report on Form 10-K/A, filed with the Commission on March 29, 2007 (file no. 000-51030) | ||
| 10.3 | Amendment No. 2, dated September 5, 2005, to the License Agreement between TearLab, Inc. and The Regents of the University of California dated March 12, 2003. | Exhibit 10.50 to the Registrant’s Annual Report on Form 10-K/A, filed with the Commission on March 29, 2007 (file no. 000-51030) (Portions of this exhibit have been omitted pursuant to a request for confidential treatment.) | ||
| 10.4 | Amendment No. 3, dated July 7, 2006, to the License Agreement between TearLab, Inc. and The Regents of the University of California dated March 12, 2003. | Exhibit 10.51 to the Registrant’s Annual Report on Form 10-K/A, filed with the Commission on March 29, 2007 (file no. 000-51030) | ||
| 10.5 | Amendment No. 4, dated October 9, 2006, to the License Agreement between TearLab, Inc. and The Regents of the University of California dated March 12, 2003. | Exhibit 10.52 to the Registrant’s Annual Report on Form 10-K/A, filed with the Commission on March 29, 2007 (file no. 000-51030) | ||
| 10.6 | Terms of Business, dated February 5, 2007, between Invetech Pty Ltd. and TearLab, Inc. | Exhibit 10.30 to the Registrant’s Annual Report on Form 10-K, filed with the Commission on March 17, 2008 (file no. 000-51030) | ||
| 10.7 | Amendment No. 5, dated June 29, 2007, to the License Agreement between TearLab, Inc. and The Regents of the University of California dated March 12, 2003. (Portions of this exhibit have been omitted pursuant to a request for confidential treatment). | Exhibit 10.31 to the Registrant’s Annual Report on Form 10-K, filed with the Commission on March 17, 2008 (file no. 000-51030) | ||
| 10.8 | # | Securities Purchase Agreement, dated as of March 14, 2010, by and between the Registrant and certain investors. | Registrant’s free writing prospectus filed with the Commission on March 15, 2010 (file no. 333-157269) | |
| 10.9 | Form of Director and Affiliate Letter Agreement | Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed with the Commission on July 16, 2009 (file no. 000-51030) | ||
| 10.10 | Deed and Amendment, dated December 22, 2011, to Manufacturing and Development Agreement by and between TearLab Research, Inc. and MiniFAB AB (Aust) Pty Ltd. Dated August 1, 2011 (Portions of this exhibit have been omitted pursuant to a request for confidential treatment). | Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on December 29, 2011 (file no. 000-51030) | ||
| 10.11 | Manufacturing and Development Agreement by and between TearLab Research, Inc. and MiniFAB (Aust) Pty Ltd, dated August 1, 2011. (Portions of this exhibit have been omitted pursuant to a request for confidential treatment). | Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on August 25, 2011 (file no. 000-51030) |
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| Exhibit Number |
Exhibit Description | Incorporated by Reference | ||
| 10.12 | Purchase Agreement, dated as of April 11, 2012, by and between the Registrant and Craig-Hallum Capital Group LLC. | Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on April 11, 2012 (file no. 000-51030) | ||
| 10.13 | # | Form Change of Control Severance Agreement (for US executives). | Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on June 21, 2013 (file no. 000-51030) | |
| 10.14 | # | Form Change of Control Severance Agreement (for Canadian executives). | Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Commission on June 21, 2013 (file no. 000-51030) | |
| 10.15 | # | Offer Letter, dated September 24, 2013, by and between the Registrant and Joseph Jensen. | Exhibit 10.1# to the Registrant’s Current Report on Form 8-K filed with the Commission on October 1, 2013 (file no. 000-50789) | |
| 10.16 | # | Nonstatutory Stock Option Agreement, dated October 21, 2013, by and between the Company and Joseph Jensen. | Exhibit 10.1# to the Registrant’s Current Report on Form 8-K filed with the Commission on October 21, 2013 (file no. 000-50789) | |
| 10.17 | Asset Purchase Agreement, dated March 14, 2014 by and among AOA Excel, Inc., Occulogix LLC and TearLab Corporation. | Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on March 17, 2014 (file no. 000-51030) | ||
| 10.18 | Term Loan Agreement, dated as of March 4, 2015, by and among TearLab Corporation, certain of its subsidiaries from time to time party thereto as guarantors and CRG LP (formerly known as Capital Royalty) and certain of its affiliate funds, as lenders. | Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on March 10, 2015 (file no. 000-51030) | ||
| 10.19 | # | Nonstatutory Stock Option Agreement, dated April 21, 2014 by and between the Company and Paul Smith | Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on April 21, 2014 (file no. 000-51030) | |
| 10.20 | # | Offer Letter, dated May 15, 2015, by and between the Registrant and Wes Brazell | Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on July 6, 2015 (file no. 000-51030) | |
| 10.21 | # | 2002 Stock Option Plan, as amended effective as of February 5, 2015. | Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on August 7, 2015 (file no. 000-51030) | |
| 10.22 | # | OcuHub LLC 2015 Equity Incentive Plan | Filed herewith | |
| 10.23 | # | Option Agreement dated as of October 1, 2015 by and between OcuHub LLC and Elias Vamvakas | Filed herewith | |
| 10.24 | # | Profits Interest Award Agreement dated as of October 1, 2015 by and between OcuHub LLC and Elias Vamvakas | Filed herewith |
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| Exhibit Number |
Exhibit Description | Incorporated by Reference | ||
| 10.25 | Amendment to Term Loan Agreement, dated as of March 4, 2015, as amended by the Omnibus Amendment Agreement, dated as of April 2, 2015, and Amendment 2, dated August 6, 2015, by and among the Registrant, certain of its subsidiaries from time to time party thereto as guarantors and CRG LP (formerly known as Capital Royalty) and certain of its affiliate funds, as lenders, dated as of December 31, 2015 | Filed herewith | ||
| 10.26 | # | Employment Agreement, dated as of December 31, 2015, by and between the Registrant and Elias Vamvakas | Filed herewith | |
| 21.1 | Subsidiaries of Registrant. | Exhibit 21.1 to the Registrant’s Registration Statement on Form S-1, filed with the Commission on July 28, 2011 (file no. 333-175861) | ||
| 23.1 | Consent of Ernst & Young, LLP, Independent Registered Public Accounting Firm. | |||
| 23.2 | Consent of Mayer Hoffman McCann, P.C., Independent Registered Public Accounting Firm. | |||
| 24.1 | Power of Attorney (included on signature page). | |||
| 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* | XBRL Taxonomy Extension Presentation |
* * *
#Management compensatory plan, contract or arrangement
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| ● | 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 18 of the Securities Exchange Act of 1924, as amended, and otherwise is not subject to liability under these sections. |
Copies of the exhibits filed with this Annual Report on Form 10-K or incorporated by reference herein do not accompany copies hereof for distribution to stockholders of the Registrant. The Registrant will furnish a copy of any of such exhibits to any stockholder requesting the same for a nominal charge to cover duplicating costs.
POWER OF ATTORNEY
The Registrant and each person whose signature appears below hereby appoint Elias Vamvakas, Joseph Jensen and Wes Brazell as attorney-in-fact with full power of substitution, severally, to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, one or more amendments to this Annual Report on Form 10-K, which amendments may make such changes in this Annual Report as the attorney-in-fact acting in the premises deems appropriate and to file any such amendments to this Annual Report on Form 10-K with the Securities and Exchange Commission.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned thereunto duly authorized.
| Dated: March 9, 2016 | TearLab Corp. | |
| By: | /s/ Joseph Jensen | |
| Joseph Jensen | ||
| Chief Executive Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Dated: March 9, 2016 | By: | /s/ Elias Vamvakas |
| Elias Vamvakas | ||
| Chairman of Board of Directors | ||
| Dated: March 9, 2016 | By: | /s/ Wes Brazell |
| Wes Brazell | ||
| Chief Financial Officer | ||
| Dated: March 9, 2016 | By: | /s/ Anthony Altig |
| Anthony Altig | ||
| Director | ||
| Dated: March 9, 2016 | By: | /s/ Thomas N. Davidson, Jr. |
| Thomas N. Davidson, Jr. | ||
| Director | ||
| Dated: March 9, 2016 | By: | /s/ Adrienne L. Graves |
| Adrienne L. Graves | ||
| Director | ||
| Dated: March 9, 2016 | By: | /s/ Joseph S. Jensen |
| Joseph S. Jensen | ||
| Director | ||
| Dated: March 9, 2016 | By: | /s/ Richard L. Lindstrom, M.D. |
| Richard L. Lindstrom, M.D. | ||
| Director | ||
| Dated: March 9, 2016 | By: | /s/ Donald Rindell |
| Donald Rindell | ||
| Director | ||
| Dated: March 9, 2016 | By: | /s/ Paul Karpecki |
| Paul Karpecki | ||
| Director | ||
| Dated: March 9, 2016 | By: | /s/ Brock Wright |
| Brock Wright | ||
| Director |
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