10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended: September 30, 2018

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission File Number: 000-51030

TearLab Corporation

(Exact name of registrant as

specified in its charter)

Delaware	59 343 4771
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

150 La Terraza Blvd., Suite 101, Escondido, CA 92025

(Address of principal executive offices)

(858) 455-6006

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes [X] No [  ]

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

Large accelerated filer [  ]	Accelerated filer [  ]
Non-accelerated filer [  ]	Smaller reporting company [X]
Emerging growth company [  ]

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 11,296,998 as of November 5, 2018.

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	27
Item 4.	Controls and Procedures	28
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 3.	Defaults Upon Senior Securities	41
Item 4.	Mine Safety Disclosures	41
Item 5.	Other Information	41
Item 6.	Exhibits	41

2 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

● Our ability to continue as a going concern;

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

● Our future strategy, structure, and business prospects and the ability to identify and execute any strategic alternatives;

● Our ability to obtain additional financing for working capital on acceptable terms and in a timely manner while our common stock is traded on the OTCQB market;

● The planned continued commercialization of our current product;

● Our ability to expand into next generation products, including our expectations regarding the resubmission of our 510(k) application and the timeline for commencing commercial sales of the TearLab Discovery^TM Platform;

● Our ability to meet the financial covenants under our credit facilities;

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

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

● The effect of our strategy to streamline our organization and lower our costs, including the impact of our new business model adopted in December 2017;

● The adequacy of current, and the development of new distributor, reseller, and supplier relationships, and our efforts to expand relationships with distributors and resellers in additional countries;

● Our anticipated expansion of international sales and operations;

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

● The results of our clinical trials;

● Our ability to maintain reimbursement for our product and support our pricing strategies;

● Our ability to execute our marketing strategy to ensure visibility and evidence-based positioning of the TearLab® Osmolarity System among eye care professionals given our reduced commercial resources;

● Our ability to attract and retain a sufficient number of scientists, clinicians, sales personnel and other key personnel with extensive experience in medical technology, who are in short supply;

● Our beliefs about our employee relations;

● Our efforts to assist our customers in obtaining their CLIA waiver or providing them with support from certified professionals; and

● The impact of our delisting from the NASDAQ Capital Market and our common stock being traded on the OTCQB.

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

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

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TearLab Corporation

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

TearLab Corporation

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(Unaudited)

	September 30, 2018			December 31, 2017
ASSETS
Current assets
Cash	$	8,240		$	7,272
Accounts receivable, net		1,319			1,536
Inventory		1,752			1,998
Prepaid expenses and other current assets		398			690
Total current assets		11,709			11,496
Fixed assets, net		1,894			2,739
Intangible assets, net		3			10
Other non-current assets		150			100
Total assets	$	13,756		$	14,345
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities
Accounts payable	$	1,053		$	1,720
Accrued liabilities		2,129			2,859
Deferred rent and revenue		17			42
Current portion of long-term debt		11,221			-
Total current liabilities		14,420			4,621
Long-term debt, net of current portion		19,526			28,290
Total liabilities		33,946			32,911
Commitments and contingencies (Note 8)
Stockholders’ deficit
Capital stock
Preferred stock, $0.001 par value, 10,000,000 authorized, 556 and 2,012 issued and outstanding at September 30, 2018 and December 31, 2017, respectively		-			-
Common stock, $0.001 par value, 40,000,000 authorized, 11,296,998 and 7,986,998 issued and outstanding at September 30, 2018 and December 31, 2017, respectively		11			8
Additional paid-in capital		510,346			510,235
Accumulated deficit		(530,547	)		(528,809	)
Total stockholders’ deficit		(20,190	)		(18,566	)
Total liabilities and stockholders’ deficit	$	13,756		$	14,345

See accompanying notes to interim condensed consolidated financial statements

4 

TearLab Corporation

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

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

(Unaudited)

	Three months ended
	September 30,
	2018			2017
Revenue
Product sales	$	5,424		$	5,733
Reader equipment rentals		728			790
Total revenue		6,152			6,523
Cost of goods sold
Cost of goods sold (excluding amortization of intangible assets)		2,161			3,028
Cost of goods sold – reader equipment depreciation		222			415
Gross profit		3,769			3,080
Operating expenses
Sales and marketing		759			2,659
Clinical, regulatory and research & development		728			898
General and administrative		1,284			2,260
Total operating expenses		2,771			5,817
Income (loss) from operations		998			(2,737	)
Other income (expense)
Interest income (expense)		(1,193	)		(1,069	)
Other, net		-			(15	)
Total other income (expense)		(1,193	)		(1,084	)
Net loss and comprehensive loss	$	(195	)	$	(3,821	)
Weighted average shares outstanding - basic and fully diluted		11,005,789			5,742,234
Net loss per share – basic and fully diluted		(0.02	)		(0.67	)

See accompanying notes to interim condensed consolidated financial statements

5 

TearLab Corporation

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

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

(Unaudited)

	Nine months ended
	September 30,
	2018			2017
Revenue
Product sales	$	16,878		$	17,949
Reader equipment rentals		2,133			2,289
Total revenue		19,011			20,238
Cost of goods sold
Cost of goods sold (excluding amortization of intangible assets)		6,351			8,252
Cost of goods sold - reader equipment depreciation		775			1,328
Gross profit		11,885			10,658
Operating expenses
Sales and marketing		2,738			9,294
Clinical, regulatory and research & development		2,766			3,572
General and administrative		4,668			6,755
Total operating expenses		10,172			19,621
Income (loss) from operations		1,713			(8,963	)
Other income (expense)
Interest income (expense)		(3,447	)		(3,145	)
Other, net		(5	)		(27	)
Total other income (expense)		(3,452	)		(3,172	)
Net loss and comprehensive loss	$	(1,739	)	$	(12,135	)
Weighted average shares outstanding - basic and fully diluted		10,385,828			5,615,903
Net loss per share – basic and fully diluted	$	(0.17	)	$	(2.16	)

See accompanying notes to interim condensed consolidated financial statements

6 

TearLab Corporation

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(expressed in thousands of U.S. dollars)

(Unaudited)

	Nine months ended
	September 30,
	2018			2017
OPERATING ACTIVITIES
Net loss for the period	$	(1,739	)	$	(12,135	)
Adjustments to reconcile net loss to cash used in operating activities:
Stock-based compensation		117			661
Depreciation of fixed assets		957			1,490
Amortization of intangible assets		8			45
Deferred interest on long-term debt		2,799			928
Amortization of debt discount		655			466
Loss on disposal of fixed assets		16			-
Changes in operating assets and liabilities:
Accounts receivable, net		217			624
Inventory		245			603
Prepaid expenses and other assets		293			451
Other non-current assets		(50	)		(70	)
Accounts payable		(666	)		51
Accrued liabilities		(730	)		(103	)
Deferred rent/revenue		(25	)		(34	)
Cash provided by (used in) operating activities		2,097			(7,023	)
INVESTING ACTIVITIES
Additions to fixed assets		(129	)		(744	)
Cash used in investing activities		(129	)		(744	)
FINANCING ACTIVITIES
Payment on term loan		(1,000	)		-
Repurchase of fractional shares upon reverse stock split		-			(3	)
Proceeds from the issuance of employee stock purchase plan shares		-			45
Deferred financing fees and capital costs for equity transactions		-			(33	)
Cash (used in) provided by financing activities		(1,000	)		9
Increase (Decrease) in cash and cash equivalents during the period		968			(7,758	)
Cash, beginning of period		7,272			15,471
Cash, end of period	$	8,240		$	7,713
Supplemental cash flow information
Cash paid for interest	$	-		$	1,155

See accompanying notes to interim condensed consolidated financial statements

7 

TearLab Corporation

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

1. BASIS OF PRESENTATION

Nature of Operations

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

The accompanying condensed consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated on consolidation.

Liquidity and Going Concern

The accompanying Condensed Consolidated Financial Statements have been prepared on the going concern basis, which assumes that the Company will continue to operate as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has sustained substantial losses of $1,739 and $12,135 for the nine months ended September 30, 2018 and 2017, respectively. Based on the Company’s expected rate of cash consumption in the last quarter of 2018, the Company estimates it will need additional capital in the first quarter of 2019 and its prospects for obtaining that capital are uncertain. The Company may be able to raise either additional debt financing or additional equity financing. However, the Company can make no assurances that it will be able to raise the required additional capital, either through debt or equity financing, on acceptable terms or at all. Unless the Company succeeds in raising additional capital, the Company anticipates that it will be unable to continue operations through the end of the first quarter of 2019 without violating an existing covenant on the Term Loan Agreement, including the inability to make our debt payments due within twelve months (see Note 5). As a result of the Company’s historical losses and financial condition, there is substantial doubt about the Company’s ability to continue as a going concern.

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TearLab Corporation

2. SIGNIFICANT ACCOUNTING POLICIES

The Condensed Consolidated Balance Sheet at December 31, 2017 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States (“U.S. GAAP”) for complete financial statements. These unaudited interim Condensed Consolidated Financial Statements have been prepared using significant accounting policies that are consistent with the policies used in preparing the Company’s audited consolidated financial statements for the year ended December 31, 2017. The audited financial statements for the year ended December 31, 2017, filed with the SEC with the Company’s annual report on Form 10-K on March 5, 2018 include a summary of significant accounting policies and should be read in conjunction with this Form 10-Q. Management believes that all adjustments necessary for the fair presentation of results, consisting of normally recurring items, have been included in the unaudited Condensed Consolidated Financial Statements for the interim periods presented.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The principal areas of judgment relate to revenue and inventory reserves, allowance for doubtful accounts, impairment of long-lived and intangible assets, and the fair value of stock options and warrants.

Revenue Recognition

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

There was no net reduction to opening retained earnings as a result of adopting Topic 606 and no impact to revenues for the three or nine months ended September 30, 2018.

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

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

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

9 

Use, Masters, and Flex Agreements

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

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

Purchase Agreements

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

Amounts billed to customers for shipping and handling of a sales transaction are included as revenue. The Company recognized revenue from shipping and handling of $35 and $40 for the three months ended September 30, 2018 and 2017, respectively. The Company recognized revenue from shipping and handling of $113 and $128 for the nine months ended September 30, 2018 and 2017, respectively.

10 

TearLab Corporation

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

	Three months ended				Nine months ended
	September 30,				September 30,
	2018		2017		2018		2017
Product Sales	$	5,424	$	5,733	$	16,878	$	17,949
Reader Equipment Rentals		728		790		2,133		2,289
	$	6,152	$	6,523	$	19,011	$	20,238

Arrangements with Multiple Performance Obligations

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

Return Reserve

Although the Company has a no return policy for its products, the Company has established a return reserve for product sales that contain an implicit right of return. The Company reserves for estimated returns or refunds by reducing revenue at the time of shipment based on historical experience. The reserve of $7 and $9 as of September 30, 2018 and December 31, 2017, respectively, has been recorded as a reduction of revenue and is included in accounts receivable.

Practical Expedients and Exemptions

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

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

Recent Accounting Pronouncements

In June 2018, the FASB issued Accounting Standards Update (“ASU”) No. 2018-07, “Compensation – Stock Compensation (Topic 718).” ASU 2018-07 simplifies the accounting for nonemployee share-based payment transactions. This ASU is effective for public entities for interim and annual reporting periods beginning after December 15, 2018. The Company is currently evaluating the potential impact of this guidance and does not believe that it will have a material impact on the Company’s financial statements.

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

In December 2017, the United States (“U.S.”) enacted the Tax Cuts and Jobs Act (the “2017 Act”), which changes existing U.S. tax law and includes various provisions that are expected to affect public companies. The 2017 Act (i) changes U.S. corporate tax rates, (ii) generally reduces a company’s ability to utilize accumulated net operating losses, and (iii) requires the calculation of a one-time transition tax on certain previously unrepatriated foreign earnings and profits (“E&P”). The 2017 Act will also impact estimates of a company’s deferred tax assets and liabilities. On December 22, 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act (“U.S. Tax Cuts and Jobs Act of 2017”). This new law did not have a significant impact on our consolidated financial statements for the year ended December 31, 2017 because we maintain a valuation allowance on the entirety of our deferred tax assets. However, the reduction of the U.S. federal corporate tax rate from 34% to 21% resulted in a remeasurement of our deferred tax assets.

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

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 establishes a right-of-use model that requires a lessee to record an asset and liability on the balance sheet for all leases with terms longer than twelve months. In July 2018, the FASB issued ASU 2018-10, Codification improvements to Topic 842 (leases), which provides narrow amendments to clarify how to apply certain aspects of the new lease standard. In July 2018, the FASB also issued ASU 2018-11, Leases (Topic 842): Targeted improvements, which provides an optional transition method that allows entities to elect to apply the standard prospectively at its effective date, versus recasting the prior periods presented. The Company is currently evaluating the impact of the new standard on its financial statements.

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TearLab Corporation

3. BALANCE SHEET DETAILS

Accounts Receivable

	September 30, 2018			December 31, 2017
Trade receivables	$	1,602		$	2,044
Allowance for doubtful accounts		(283	)		(508	)
	$	1,319		$	1,536

Inventory

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

	September 30, 2018			December 31, 2017
Finished goods	$	1,753		$	2,125
Inventory reserves		(1	)		(127	)
	$	1,752		$	1,998

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

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TearLab Corporation

Prepaid Expenses and Other Current Assets

	September 30, 2018		December 31, 2017
Prepaid trade shows	$	-	$	14
Prepaid insurance		103		313
Manufacturing deposits		170		-
Subscriptions		75		311
Other fees and services		50		52
	$	398	$	690

Fixed Assets, Net

	September 30, 2018			December 31, 2017
Capitalized TearLab equipment	$	6,994		$	8,437
Leasehold improvements		13			60
Computer equipment and software		843			915
Furniture and office equipment		368			436
Medical equipment		1,261			1,180
	$	9,479		$	11,028
Less accumulated depreciation		(7,585	)		(8,289	)
	$	1,894		$	2,739

Depreciation expense was $957 and $1,490 for the nine months ended September 30, 2018 and 2017, respectively, and $278 and $464, for the three months ended September 30, 2018 and 2017, respectively.

Accrued Liabilities

	September 30, 2018		December 31, 2017
Due to professionals	$	26	$	193
Due to employees and directors		990		944
Sales and use tax liabilities		252		253
Royalty liability		284		447
Warranty		84		131
Restructuring		-		200
Other		493		691
	$	2,129	$	2,859

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

4. INTANGIBLE ASSETS

The Company’s intangible assets consist of the value of TearLab® Technology acquired in the acquisition of TearLab Research, Inc., a wholly-owned subsidiary of the Company and a prescriber list. The TearLab Technology, which consists of a disposable lab card and card reader, supported by an array of patents and patent applications that are either held or in-licensed by the Company. Amortization expense for the three months ended September 30, 2018 and 2017 was $2 and $15, respectively. Amortization expense for the nine months ended September 30, 2018 and 2017 was $8 and $45, respectively.

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TearLab Corporation

Intangible assets subject to amortization consist of the following:

	Remaining		Gross					Net Book
	Useful Life		Value at		Accumulated			Value at
	(Years)		September 30, 2018		Amortization			September 30, 2018
TearLab® technology		0	$	12,172	$	(12,172	)	$	-
Patents and trademarks		1		271		(268	)		3
Prescriber list		0		90		(90	)		-
Total			$	12,533	$	(12,530	)	$	3

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

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

	Amortization
	of intangible
	assets
Remainder of 2018	$	1
Thereafter		2
	$	3

5. TERM LOAN

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

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TearLab Corporation

As part of Amendment No. 2 to the Term Loan Agreement, and funding of the second tranche, CRG received 35,000 warrants dated as of October 6, 2015 to purchase common shares of the Company at a price of $50.00 per share (the “2015 CRG Warrants”). The 2015 CRG Warrants have a five-year life. The 2015 CRG Warrants are classified as equity on the Condensed Consolidated Balance Sheets as of September 30, 2018 and 2017. The 2015 CRG Warrants were valued at their issuance date using the Black-Scholes Merton model. The related reduction of the long-term debt will be amortized over the life of the debt. On April 7, 2016, the Company entered into Amendment No. 4 the Term Loan Agreement and the Company issued CRG additional warrants to purchase 35,000 common shares of the Company’s stock at $15.00 per share (the “2016 CRG Warrants”) and together with the 2015 CRG Warrants, the “CRG Warrants”, expire 5 years after issuance.

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

On April 4, 2018 with an effective date of March 31, 2018, the Company entered into Amendment No. 6 to the Term Loan Agreement. Pursuant to the terms of this amendment, the cash interest payments due in 2018 will be deferred and added to the principal balance under the Loan Agreement at the end of each quarter. This amendment also provided for an additional facility fee equal to 3% of the sum of the aggregate amount of the principal drawn under the Term Loan Agreement and any PIK loans issued, so that the total facility fee shall be 9.5%, applicable to the entire balance, (the “Facility Fee”). The Facility Fee is being accrued to interest expense using the effective interest method. In addition, this amendment reduced the minimum liquidity covenant to $3 million. Concurrent with the reduction of the liquidity covenant the Company agreed to repay CRG $1.0 million of principal on the Term Loan Agreement in April 2018. Lastly, this amendment reduced the strike price of the existing CRG Warrants to $0.44 per share (see Note 6). The Amendment was accounted for as a modification in accordance with U.S. GAAP.

The loan is collateralized by all assets of the Company. Additionally, the terms of the Term Loan Agreement contain various affirmative and negative covenants agreed to by the Company. Among them, the Company must attain minimum certain annual revenue and minimum cash threshold levels. As part of Amendment No. 5 to the Term Loan Agreement, discussed above, and Company and CRG agreed to change the required minimum revenue levels. The amended minimum revenue is $25,000 for 2018, $38,000 for 2019 and $45,000 for 2020.

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

At September 30, 2018, the Company was in compliance with all of the covenants.

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

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

15 

The following is a summary of the Term Loan Agreement as of September 30, 2018 and related maturities of outstanding principal:

Principal balance outstanding	$	24,000
PIK interest		5,923
Facility fee		1,234
less discount on term loan:
deferred financing fees, net		(218	)
detachable warrants, net		(192	)
	$	30,747
Less, current portion of term loan		(11,221	)
Total term loan		19,526

Principal due for each of the next 3 years and in the aggregate:

TearLab Corporation

2018		-
2019		14,962
2020		16,196
Total principal due		31,158
Less: discount on term loan		(411	)
Total term loan	$	30,747

6. STOCKHOLDERS’ EQUITY

(a) Authorized Share Capital

On October 12, 2017, the stockholders of the Company approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 9,500,000 to 40,000,000. Each share of common stock has a par value of $0.001 per share. The total number of authorized shares of preferred stock of the Company is 10,000,000. Each share of preferred stock has a par value of $0.001 per share.

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

(b) Common and Preferred Shares

On December 8, 2017, the Company issued 2,013,636 shares of common stock, 2,114 shares of Series A Convertible Preferred Stock (“Preferred Stock”), Series A warrants to purchase 6,818,181 shares of common Stock (“Series A Warrants”) and Series B warrants to purchase 6,818,181 shares of common stock (“Series B Warrants”) for gross proceeds of $3,000, less issuance costs of $596. Additionally, the Company granted the placement agent compensation warrants to purchase 477,273 shares of common stock. The Preferred Stock is convertible, subject to certain limitations, into an aggregate of 4,804,545 shares of common stock, contains no voting rights, participates in any common stock dividends and is treated as if converted upon any ordinary liquidation event. The common stock, Preferred Stock and the Series A Warrants and Series B Warrants are all included in equity in the Company’s consolidated balance sheets as of September 30, 2018 and December 31, 2017. The net proceeds were allocated to common stock, Preferred Stock, Series A Warrants and Series B Warrants based on their relative fair values as follows:

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

As of September 30, 2018, 1,558 shares of Series A Preferred Stock have been converted into 3,540,909 shares of common stock. As of September 30, 2018 all Series B warrants expired with no warrants exercised.

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TearLab Corporation

(c) Stock Incentive Plan

On June 23, 2017 the Company’s stockholders approved an amendment to the 2002 Stock Incentive Plan (the “Stock Incentive Plan”), to increase the total number of shares reserved for issuance to 1,070,000 from 720,000. Stock Incentive Plan shares are available for grant to employees, directors and consultants. Shares granted under the Stock Incentive Plan may be incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock or restricted share units. Under the terms of the Stock Incentive Plan, the exercise price per share for an incentive stock option shall not be less than the fair market value of a share of stock on the effective date of grant and the exercise price per share for non-statutory stock options shall not be less than 85% of the fair market value of a share of stock on the date of grant. No option granted to a holder of more than 10% of the Company’s common stock shall have an exercise price per share less than 110% of the fair market value of a share of stock on the effective date of grant.

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

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

The following table sets forth the total stock-based compensation expense resulting from stock options and the employee stock purchase plan included in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2018		2017		2018		2017
Sales and marketing	$	9	$	61	$	49	$	317
Clinical, regulatory and research and development		5		14		21		98
General and administrative		23		52		47		246
Stock-based compensation expense before income taxes	$	37	$	127	$	117	$	661

(d) Employee Stock Purchase Plan

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

The price at which stock is purchased under the ESPP is equal to 90% of the fair market value of the common stock on the first or the last day of the offering period, whichever is lower. Generally, each offering under the ESPP will be for a period of six months as determined by the Company’s Board of Directors. Employees may invest up to 20% of their gross compensation through payroll deductions. In no event may an employee invest more than $25 worth of stock in the plan during each calendar year or purchase more than 500 shares per offering period. During the three months ended September 30, 2018 and 2017, the Company recorded $0 and $2 of expense, respectively, under the ESPP. During the nine months ended September 30, 2018 and 2017, the Company recorded $0 and $6 of expense, respectively, under the ESPP. During the nine months ended September 30, 2018 and 2017, the Company issued 0 and 14,233 shares of common stock, respectively, under the ESPP. In early 2018, the Company terminated the Employee Stock Purchase Plan.

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TearLab Corporation

(e) Warrants

On October 8, 2015, as part of Amendment No. 2 to the Term Loan Agreement and funding of the $10,000 tranche, CRG received warrants to purchase 35,000 common shares in the Company at a price of $50.00 per share (the “2015 CRG Warrants”). The 2015 CRG Warrants are exercisable any time prior to October 8, 2020. The 2015 CRG Warrants are classified as equity on the Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017. The 2015 CRG Warrants were valued at $290 upon issuance using the Black-Scholes Merton model assuming volatility of 73%, an expected life of 5.0 years, a risk-free interest rate of 1.71%, and 0% dividend yield. No CRG Warrants were exercised during the nine months ended September 30, 2018 or 2017.

On April 8, 2016, as part of Amendment No. 4 to the Term Loan Agreement, the exercise price of the 2015 CRG Warrants was changed to allow the holder to purchase 35,000 common shares in the Company at a price of $15.00 per share and CRG was issued an additional 35,000 warrants to purchase common shares at an exercise price of $15.00 (the “2016 CRG Warrants” and, together with the 2015 CRG Warrants, the “CRG Warrants”). The modification to the terms of the 2015 CRG Warrants resulted in a change in fair value of $54 which was included as interest expense. The change in fair value was calculated using the Black-Scholes Merton model with both exercise prices, assuming volatility of 76%, an expected life of 4.5 years, a risk-free interest rate of 1.06%, and 0% dividend yield. The 2016 CRG Warrants were valued at $106 upon issuance using the Black-Scholes Merton model assuming volatility of 76%, an expected life of 5.0 years, a risk-free interest rate of 1.30% and 0% dividend yield.

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

On October 12, 2017, as part of Amendment No. 5 to the Term Loan Agreement, the exercise price of the CRG Warrants was changed to allow the holder to purchase common shares in the Company at a price of $1.50 per share as well as provide broad anti-dilution protection such that the CRG Warrants shall maintain the same 1.22% ownership following any capital raises the Company completed through March 31, 2018. The modification to the terms of the CRG Warrants resulted in a change in fair value of $44 which was included as interest expense. The 2015 CRG Warrants change in fair value was calculated using the Black-Scholes Merton model with both exercise prices, assuming volatility of 94%, an expected life of 2.99 years, a risk-free interest rate of 1.70% and 0% dividend yield. The 2016 CRG Warrants change in fair value was calculated using the Black-Scholes Merton model with both exercise prices, assuming volatility of 90%, an expected life of 3.48 years, a risk-free interest rate of 1.80% and 0% dividend yield.

On December 8, 2017, the Company issued Series A Warrants to purchase 6,818,181 shares of common stock for $0.44 per share and Series B Warrants to purchase 6,818,181 shares of common stock for $0.44 per share in conjunction with shares of common stock and Series A Convertible Preferred stock issued on that same date. The Series A Warrants were exercisable immediately and expire 5 years after the issuance date. Fair Value of the Series A Warrants, for purposes of allocating the net proceeds of the equity offering, was determined using the Black-Scholes Merton model assuming volatility of 88%, an expected life of 5 years, a risk free interest rate of 2.14% and a 0% dividend yield and are classified as equity on the Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017. The Series B Warrants were exercisable immediately and expired 6 months after the issuance date. Fair value of the Series B Warrants for purposes of allocating the net proceeds of the equity offering, was determined using the Black-Scholes Merton model assuming a volatility of 158.6%, an expected life of 6 months, a risk free rate of 1.45% and a 0% dividend yield and are classified as equity on the Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017. All Series B Warrants expired on June 7, 2018 with no warrants exercised. In addition, we granted the placement agent compensation warrants to purchase 477,273 shares of common stock at $0.55 per share. The compensation warrants are in the same form as Series A Warrants, excluding the exercise price, and will terminate on the five year anniversary date. The placement agent warrants are classified as equity on the Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017.

In connection with the December 2017 offering the Company issued CRG additional warrants to purchase 83,240 shares of common stock at an exercise price of $1.50 (“2017 CRG Warrants”) as a result of triggering the anti-dilution clause of Amendment No. 5 to the Term Loan Agreement (see Footnote 5 for additional information). The anti-dilution clause is considered down-round protection, however the Company early adopted ASU 2017-11 and therefore the down-round feature is excluded from the consideration of whether the 2017 CRG Warrants are indexed to the Company’s own stock and therefore the 2017 CRG Warrants are not required to be liabilities under the guidance. The 2017 CRG Warrants are classified as equity on the Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017 and were valued at $30 upon issuance using the Black-Scholes Merton model assuming volatility of 88%, an expected life of 5 years, a risk-free interest rate of 2.14% and 0% dividend yield.

In March 2018, in connection with Amendment No. 6 to the Term Loan Agreement, the CRG warrants and the 2017 CRG Warrants had a change in strike price to $0.44. The modification to the terms of the CRG Warrants and the 2017 CRG Warrants resulted in a change in fair value of $10 which was included as interest expense.

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TearLab Corporation

7. NET INCOME (LOSS) PER SHARE

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

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

(in thousands of shares)	As of September 30,
	2018		2017
Stock options		1,018		682
Warrants		8,702		1,323
ESPP shares		-		6
Convertible preferred shares		1		-
Total		9,721		2,011

8. COMMITMENTS AND CONTINGENCIES

Commitments

The Company has commitments relating to operating leases recognized on a straight line basis over the term of the lease for rental of office space and equipment from unrelated parties, expiring at various times through December 30, 2023. The Company leases office facilities under an operating lease agreement. The initial term of the lease is five years and includes periodic rent increases and a renewal option.

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

Effective October 1, 2006, the Company entered into a second 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.

Future minimum royalty payments under this agreement as of September 30, 2018 are as follows:

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

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TearLab Corporation

On March 7, 2016, the Company, through its subsidiary, TearLab Research, Inc., entered into a supply and development agreement (“Supply Agreement”) with MiniFAB (Aust) Pty Ltd (“MiniFAB”). The agreement is an exclusive supply agreement through June 2021, for the purchase and delivery of individual osmolarity test cards with the freight costs borne by MiniFab. The Company has the benefit of a lower purchase price and certain savings from freight costs will remain in place throughout the agreement. The Supply Agreement requires, in any given 6 calendar months, the Company must place aggregate purchase orders equal to at least 50% of the orders forecasted for that 6 month period at its onset. The Supply Agreement can be extended by either party for a term of five years with the option for the Company to buyout the exclusive supply provision during any extended term. This Supply Agreement replaces the August 2011 agreement between MiniFAB and the Company. On August 9, 2018 the Company entered into an addendum to the 2016 Manufacturing and Supply and Development Agreement with MiniFab. The amendment fixes the price of the osmolarity test cards at their current price until the earlier of: the average monthly order volume of osmolarity cards on a rolling six month average falls below 20,000 cards; or the aggregate product volume in the calendar year commencing 12 months after the launch of the Discovery^TM product is below 2.4 million cards; or the aggregate product volume in any calendar year after 24 months after the launch of the Discovery^TM product is below 3.0 million cards at which point the Company and MiniFab will renegotiate pricing.

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

Contingencies

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

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

9. RESTRUCTURING COSTS

On December 15, 2017 the Company approved a new business model to maintain its current customer and annuity revenue base, focus resources on the development and generation of clinical data for our next generation TearLab Discovery^TM Platform and reduce the Company’s cash burn rate. In connection with the restructuring the Company recorded restructuring expenses of $322 primarily related to employee cost and one-time contract termination costs at December 31, 2017. Liabilities related to the restructuring are included in accrued liabilities in the Condensed Consolidated Balance Sheet. The following table summarizes the activity related to the restructuring during the nine months ended September 30, 2018:

	Employee Costs			Other Costs			Total
Accrued obligations as of December 31, 2017	$	97		$	103		$	200
Settlement of obligations		(97	)		(103	)		(200	)
Accrued obligations as of September 30, 2018	$	0		$	0		$	0

10. RELATED PARTY

The Company has an agreement with the Chief Scientific Officer whereas if the Company enters into an agreement with UCSD to reduce the overall royalty rate the Company shall pay to the Chief Scientific Officer a royalty on net sales equal to one and a half percent of the percent change in the UCSD royalty rate. The restated UCSD patent license and royalty agreement (see Note 8) resulted in a royalty due at a rate of 0.68%. As of September 30, 2018 the Company recorded a related party royalty of $219, covering the period of July 1, 2017 to September 30, 2018.

11. SUBSEQUENT EVENTS

On October 10, 2018, the Company announced that the FDA determined that the TearLab Discovery^TM MMP-9 test had not met the criteria for substantial equivalence based upon data and information submitted by the Company. The Company plans to utilize the guidance provided by the FDA to compile the additional information necessary to resubmit for 510(k) clearance. After securing FDA clearance, the Company intends to pursue a CLIA waiver in an effort to prepare for commercialization in the US market.

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TearLab Corporation

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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

Overview

We are an in-vitro diagnostic company that has commercialized a proprietary tear testing platform, the TearLab® Osmolarity System that enables eye care practitioners to test for 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, or DED.

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

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

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

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

In October 2008, the TearLab® Osmolarity System received CE mark approval, clearing the way for sales in the European Union and all countries recognizing the CE mark. In connection with the CE mark clearance, we have entered into multi-year agreements with numerous distributors for distribution of the TearLab® Osmolarity System. Currently, we have signed distribution agreements in Central and South America, Europe, Asia, Canada, and Australia. We sell directly to the customer in the United States.

On January 4, 2018, we announced that we had submitted a 510(k) application to the FDA for the potential clearance of the TearLab Discovery^TM Platform. The submission covers Discovery and the MMP-9 biomarker. On February 14, 2018, we announced that the application had successfully passed the acceptance review phase with the FDA. On April 11, 2018 we announced that we received written feedback from the FDA, requesting that we provide additional information to establish correlation to the FDA-cleared predicate chosen to establish 510(k) substantial equivalence. On September 4, 2018, we submitted, and the FDA accepted, our response to the FDA’s comments regarding the 510(k) application for the Discovery Platform. On October 10, 2018, we announced that the FDA determined that the TearLab Discovery™ MMP-9 test, had not met the criteria for substantial equivalence based upon data and information submitted by TearLab. We plan to utilize the guidance provided by the FDA to compile the additional information necessary to resubmit for 510(k) clearance. After securing FDA clearance, TearLab intends to pursue a CLIA waiver in an effort to prepare for commercialization in the US market.

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TearLab Corporation

RESULTS OF OPERATIONS

Revenue, Cost of Sales and Gross Profit

Revenue

(in thousands)	Three months ended September 30,									Nine months ended September 30,
	2018			2017			Change			2018			2017			Change
TearLab revenue	$	6,152		$	6,523		$	(371	)	$	19,011		$	20,238		$	(1,227	)
TearLab – cost of sales		2,383			3,443			(1,060	)		7,126			9,580			(2,454	)
TearLab gross profit		3,769			3,080			689			11,885			10,658			1,227
Gross profit percentage		61	%		47	%					63	%		53	%

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

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

Having received 510(K) approval from the FDA in the United States, we sell to customers in the United States who hold CLIA moderate and high complexity certificates and actively support and assist our customers to obtain their certificates or provide them with support from certified professionals. This CLIA waiver documentation allows us to sell our product to the approximately 40,000 eye care practitioners in the United States that are candidates to operate under a CLIA waiver certification.

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

TearLab revenue decreased $0.4 million or 6% for the three months ended September 30, 2018 and $1.2 million or 6% for the nine months ended September 30, 2018 as compared to the three and nine months ended September 30, 2017, respectively. This decrease was driven by the decrease of both reader and test card revenue as well as the termination of the PRN Physicians Recommended Nutriceuticals, LLC cooperative marketing agreement in June 2017.

Cost of Sales

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

TearLab cost of sales for the three months ended September 30, 2018 decreased $1.1 million or 31%, compared to the three months ended September 30, 2017. In addition, cost of sales decreased $2.5 million or 26% for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The Company entered into a restated patent license and royalty agreement with the University of California San Diego (“UCSD”) with an effective date of July 1, 2017 that reduced cost of sales for the nine months ended September 30, 2018 by $0.5 million with $0.3 million due to a reduction in 2017 royalties (Note 8).

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Gross Profit

TearLab gross profit for the three months ended September 30, 2018 was $3.8 million, as compared to $3.1 million for the three months ended September 30, 2017. The gross profit percentage of revenue for the three months ended September 30, 2018 was 61% as compared to 47% for the three months ended September 30, 2017. The improvement in gross profit percentage was driven by the restated patent license and royalty agreement with UCSD (Note 8). Additionally, the change in gross profit was driven by the third quarter of 2017 impact of a $0.7 million settlement with one of our suppliers for raw materials purchased by the supplier in excess of needed demand related to the cancellation of purchase orders as well as reduced reader depreciation related to fixed asset impairment at December 2017.

TearLab gross profit for the nine months ended September 30, 2018 was $11.9 million compared to $10.7 million for the nine months ended September 30, 2017. Gross profit as a percentage of revenue for the nine months ended September 30, 2018 was 63% as compared to 53% for the nine months ended September 30, 2017. The improvement in gross profit percentage was driven by the restated patent license and royalty agreement with UCSD (Note 8). Excluding the impact of the $0.2 million related party royalty adjustment and the 2017 impact of the restated agreement the gross profit percentage would have been 62% for the nine months ended September 30, 2018.

Additionally, the change in gross profit was driven by the third quarter of 2017 impact of a $0.7 million settlement with one of our suppliers for raw materials purchased by the supplier in excess of needed demand related to the cancellation of purchase orders as well as reduced reader depreciation related to fixed asset impairment at December 2017.

Operating Expenses

(in thousands)	Three months ended September 30,							Nine months ended September 30,
	2018		2017		Change			2018		2017		Change
Sales and marketing	$	759	$	2,659	$	(1,900	)	$	2,738	$	9,294	$	(6,556	)
Clinical, regulatory and research and development		728		898		(170	)		2,766		3,572		(806	)
General and administrative		1,284		2,260		(976	)		4,668		6,755		(2,087	)
Operating expenses	$	2,771	$	5,817	$	(3,046	)	$	10,172	$	19,621	$	(9,449	)

Sales and Marketing Expense

Sales and marketing expenses decreased by $1.9 million or 71% in the three months ended September 30, 2018, as compared with the three months ended September 30, 2017. In addition, sales and marketing expenses decreased by $6.6 million or 71% for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The reduction in sales and marketing expenses is attributable to cost savings from our December 2017 organizational restructuring and the launch of our new business model aimed at reducing costs.

Clinical, Regulatory and Research and Development Expenses

Total clinical, regulatory and research and development expenses decreased $0.2 million or 19% in the three months ended September 30, 2018 as compared with the three months ended September 30, 2017.

Total clinical, regulatory and research and development expenses decreased $0.8 million or 23% during the nine months ended September 30, 2018 as compared with the nine months ended September 30, 2017. The decrease was primarily due to a decrease in product development costs of the TearLab Discovery™ platform.

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General and Administrative Expenses

Total general and administrative expenses decreased $1.0 million or 43% in the three months ended September 30, 2018 as compared with the three months ended September 30, 2017 and $2.1 million or 31% for the nine months ended September 30, 2018 as compared with the nine months ended September 30, 2017. The decrease was primarily due to the launch of our new business model that is aimed at reducing costs.

Other Income (Expense)

(in thousands)	Three Months Ended September 30,									Nine Months Ended September 30,
	2018			2017			Change			2018			2017			Change
Interest income (expense)	$	(1,193	)	$	(1,069	)	$	(124	)	$	(3,447	)	$	(3,145	)	$	(302	)
Other, net		0			(15	)		15			(5	)		(27	)		22
Other income (expense)	$	(1,193	)	$	(1,084	)	$	(109	)	$	(3,452	)	$	(3,172	)	$	(280	)

Interest Income (Expense)

Interest expense for the three months ended September 30, 2018 and 2017 was from our long-term debt under the Term Loan Agreement. Interest expense increased $0.1 million for the three months and $0.3 for the nine months ended September 30, 2018 when compared to the nine months ended September 30, 2017 based on larger average balances of long-term debt outstanding, the impact of the updated strike price of the warrants issued to the lenders, and changes to the facility fees.

Other, Net

Other income (loss) for the three and nine months ended September 30, 2018 consists primarily of foreign exchange transaction gains and losses, based on fluctuations of the Company’s foreign denominated currencies.

Liquidity and Capital Resources

(in thousands)	September 30, 2018			December 31, 2017			Change
Cash and cash equivalents	$	8,240		$	7,272		$	968
Percentage of total assets		59.9	%		50.7	%
Working capital	$	(2,711	)	$	6,875		$	(9,586	)

Financial Condition

In December 2017 TearLab raised $3 million in gross proceeds through a registered direct offering to support our operations and regulatory expenses. In addition, in April 2018, with an effective date of March 31, 2018, we renegotiated our Term Loan Agreement with CRG. This new agreement lowers the minimum liquidity requirement from an end of the day cash balance of $5 million to $3 million and it defers cash interest payments due in 2018. These changes will allow our current funding to provide us with the time needed to gain our 510(k) approval for the Discovery™ Platform from the FDA as the Discovery™ Platform is critical to our success moving forward. Based on our current rate of cash consumption in addition to our projections, we estimate we will need additional capital in the first quarter of 2019 and our prospects for obtaining that capital are uncertain. The Company may be able to raise either additional debt financing or additional equity financing; however, the Company can make no assurances that it will be able to raise the required additional capital, either through debt or equity financing, on acceptable terms or at all. Due to the Company’s historical losses and financial condition, there is substantial doubt about the Company’s ability to continue as a going concern.

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

● Our ability to execute our commercial strategy with our current resources, under our new business model;

● the cost and results of continuing development of our next generation TearLab Discovery™ Platform including the cost of suppliers and service providers that require advance payment;

● whether government and third-party payers agree to continue reimbursement of the TearLab® Osmolarity System at current levels;

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

● the effect of competing technological and market developments.

At the present time, our only product is the TearLab Osmolarity System, and although we have received 510(k) approval from the FDA and a CLIA waiver approval from the FDA, at this time we do not know when we will generate revenue from the TearLab Osmolarity System in the United States sufficient to fully fund our operations. If events or circumstances occur such that we do not meet our plans to fund the business, we may be required to reduce operating expenses and reduce the planned levels of inventory and fixed assets which could have an adverse impact on our ability to achieve our intended business objectives and/or continue the development of the TearLab Discovery™ Platform.

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Indebtedness

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

As part of Amendment No. 2 to the Term Loan Agreement, and funding of the second tranche, CRG received 35,000 warrants dated as of October 6, 2015 to purchase common shares of the Company at a price of $50.00 per share (the “2015 CRG Warrants”). The 2015 CRG Warrants have a five-year life. The 2015 CRG Warrants are classified as equity on the Condensed Consolidated Balance Sheets as of September 30, 2018 and 2017. The 2015 CRG Warrants were valued at their issuance date using the Black-Scholes Merton model. The related reduction of the long-term debt will be amortized over the life of the debt. On April 7, 2016, the Company entered into Amendment No. 4 the Term Loan Agreement and the Company issued CRG additional warrants to purchase 35,000 common shares of the Company’s stock at $15.00 per share (the “2016 CRG Warrants” and together with the 2015 CRG Warrants, the “CRG Warrants”), which expires 5 years after issuance.

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

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

On April 4, 2018 with an effective date of March 31, 2018, the Company entered into Amendment No. 6 to the Term Loan Agreement. Pursuant to the terms of this amendment, the cash interest payments due in 2018 will be deferred and added to the principal balance under the Loan Agreement at the end of each quarter. This amendment also provides for an additional facility fee equal to 3% of the sum of the aggregate amount of the principal drawn under the Term Loan Agreement and any PIK loans issued, so that the total facility fee shall be 9.5%, applicable to the entire balance. In addition, this amendment reduces the minimum liquidity covenant to $3 million. Concurrent with the reduction of the liquidity covenant the Company agreed to repay CRG $1.0 million of principal on the Term Loan Agreement in April 2018. Lastly, this amendment reduced the strike price of the existing CRG Warrants and the 2017 CRG Warrants to $0.44 per share (see Note 6). This amendment was accounted for as a modification in accordance with U.S. GAAP.

The loan is collateralized by all assets of the Company. Additionally, the terms of the Term Loan Agreement contain various affirmative and negative covenants agreed to by the Company. Among them, the Company must attain minimum certain annual revenue and minimum cash threshold levels. On October 12, 2017, the Company entered into Amendment No. 5 to the Term Loan Agreement to change the required minimum revenue levels. The amended minimum revenue is $25,000 for 2018, $38,000 for 2019 and $45,000 for 2020.

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

Ongoing Sources and Uses of Cash

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

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

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Changes in Cash Flows

Cash Provided by (Used In) Operating Activities

Net cash provided by operating activities during the nine months ended September 30, 2018 was $2.1 million compared to net cash used in operating activities of $7.0 million during the nine months ended September 30, 2017. Net cash provided by operating activities during the nine month period was more than our net loss of $1.7 million primarily due to the depreciation of fixed assets, interest deferred on our long-term debt and stock based compensation in the aggregate total of $4.5 million, offset by a $0.7 million net decrease in our working capital accounts.

The net change in working capital and non-current asset balances related to operations for the nine months ended September 30, 2018 and 2017 consists of the following:

	Nine Months Ended
	September 30,
(in thousands)	2018			2017
Changes in operating assets and liabilities:
Accounts receivable, net	$	217		$	624
Inventory		245			603
Prepaid expenses and other assets		293			451
Other non-current assets		(50	)		(70)
Accounts payable		(666	)		51
Accrued liabilities		(730	)		(103	)
Deferred rent/revenue		(25	)		(34	)
	$	(716	)	$	1,522

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

● Accounts receivable decreased to $1.3 million on September 30, 2018 from $1.5 million on December 31, 2017.

● Inventory decreased 12% from December 31, 2017 to September 30, 2018 as the company continues to manage the inventory on hand.

● Accounts payable and accrued liabilities had a net decrease during the nine months ended September 30, 2018 primarily due to the continued management of spending subsequent to the restructuring in December 2017 as well as the restated patent license and royalty agreement with the University of California San Diego.

Cash Used in Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2018 and 2017 was $0.1 million and $0.7 million respectively, to acquire fixed assets.

Cash (Used In) Provided by Financing Activities

Net cash used in financing activities during the nine months ended September 30, 2018 was $1.0 million due to the $1.0 million CRG principal payment paid in April 2018. For the nine months ended September 30, 2017 there was $0.01 million provided by financing activities.

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Off-Balance-Sheet Arrangements

As of September 30, 2018, we did not have any material off-balance-sheet arrangements as defined in Item 303(1)(4)(ii) of SEC Regulation S-K.

Critical Accounting Policies and Estimates

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

There were no significant changes during the three and nine months ended September 30, 2018 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. For further clarification with regards to the Company’s specific policies for revenue recognition, see Note 2 of the Notes to the Unaudited Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2018 included in Item 1.

Recent Accounting Pronouncements

For information on the recent accounting pronouncements impacting our business, see Note 2 of the Notes to the unaudited Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2018 included in Item 1.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Currency Fluctuations and Exchange Risk

Our sales are denominated primarily in U.S. dollars with minimal sales in euros and pound sterling. Most of our expenses are denominated in U.S. dollars, however, some of the development work on new products is in Australian dollars and a minor portion of our other expenses are in Canadian dollars, euros, 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 a bank account in Canadian dollars to meet short term operating requirements. We do not engage in any hedging or other transactions intended to manage these risks. In the future, we may undertake hedging or other similar transactions or invest in market risk sensitive instruments if we determine that it is advisable to offset these risks.

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Interest Rate Risk

Our interest payments to CRG are based on a fixed contractual interest rate of 13%. A decrease in market interest rates would increase the fair value of our long-term debt.

ITEM 4. CONTROLS AND PROCEDURES.

(a) Disclosure Controls and Procedures.

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

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, our chief executive officer and chief financial officer concluded that, as of September 30, 2018 our disclosure controls and procedures were effective at the reasonable assurance level.

(b) Changes in Internal Control over Financial Reporting.

During the third quarter of 2018, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

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

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

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ITEM 1A. RISK FACTORS.

Risks Relating to Our Financial Condition

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

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

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

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

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

We have incurred losses in each year since our inception. As of September 30, 2018, we had an accumulated deficit of $530.5 million. Our losses have resulted primarily from expenses incurred in research and development of our product candidates from the former retina and glaucoma business divisions. We do not know when or if we will successfully commercialize the TearLab® Osmolarity System in the United States or in international markets or receive approval to commercialize our next generation TearLab Discovery^TM Platform on a scale that will allow us to achieve and sustain profitability. As a result, and because of the numerous risks and uncertainties facing us, it is difficult to provide the extent of any future losses or the time required to achieve profitability, if at all. Any failure to become and remain profitable would require us to undertake a review of the potential business alternatives discussed above.

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

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

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

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

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

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

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

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

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TearLab Corporation

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

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

● fluctuations in demand for our products;

● changes in customer budget cycles and capital spending;

● seasonal variations in customer operations that could occur during holiday or summer vacation periods;

● tendencies among some customers to defer purchase decisions until the end of the quarter or fiscal year;

● the unit value of our systems;

● changes in our pricing and sales policies or the pricing and sales policies of our competitors;

● changes in reimbursement levels that might negatively impact our pricing policies;

● our ability to design, manufacture and deliver products to our customers in a timely and cost effective manner;

● quality control or yield problems in our manufacturing suppliers;

● our ability to timely obtain adequate quantities of the components used in our products;

● new product introductions or enhancements by us and our competitors;

● unanticipated increases in costs or expenses;

● our complex, variable and, at times, lengthy sales cycle;

● global economic conditions; and

● fluctuations in foreign currency exchange rates.

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

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TearLab Corporation

Risks Related to Our Business

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

The TearLab® Osmolarity System is currently our only commercialized product. Our product is currently sold outside of the United States pursuant to CE mark approval; in Canada pursuant to a Health Canada Medical Device License; and in the United States as a result of having received 510(k) approval from the FDA to market the TearLab® Osmolarity System to those reference and physician operated laboratories with CLIA waiver certifications. Even though the TearLab® Osmolarity System has received all regulatory approvals in the United States, it may never generate sufficient sales to achieve profitability. If the TearLab® Osmolarity System is not as successfully commercialized as expected, we may not be able to generate sufficient revenue to become profitable or continue our operations. Any failure of the TearLab® Osmolarity System to be successfully commercialized in the United States would have a material adverse effect on our business, operating results, financial condition and cash flows and could result in a substantial decline in the price of our common stock.

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

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

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

As of September 30, 2018, our total liabilities were $33.9 million including $11.2 million short-term and $19.5 million long-term obligations under our Term Loan Agreement. Our significant liability service requirements could adversely affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities. For example, our liabilities present the following risks:

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

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

● our liabilities could cause our suppliers to change their payment terms, require us to pay for needed goods or services in advance or choose not to do business with us at all which could negatively impact our cash flows, supply chain and our ability to supply products to our customers when needed; and

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

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

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TearLab Corporation

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

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

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

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

● We may be unable to achieve widespread acceptance of the TearLab® Osmolarity System among physicians as a result of our inability to establish adequate sales and marketing capabilities, address competition effectively, obtain and enforce patents to protect proprietary rights from use by would-be competitors, retain key personnel, maintain adequate reimbursement for our product to support our pricing policies and ensure sufficient manufacturing capacity and inventory to support commercialization plans.

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

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

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

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TearLab Corporation

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

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

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

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

● operating restrictions or partial suspension or total shutdown of production;

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

● refusal to grant export approval for our products;

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

● criminal prosecution.

If the government initiated any of these enforcement actions, our business could be harmed.

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

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

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

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TearLab Corporation

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

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

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

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

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

Patents issued or licensed to us may be infringed by the products or processes of others. The cost of enforcing patent rights against infringers, if such enforcement is required, could be significant and the time demands could interfere with our normal operations. There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical, biotechnology and medical technology industries. For example, we have recently been involved in litigation defending our patent rights in Canada. Efforts to defend our rights could incur significant costs and may or may not be resolved in our favor. We could become a party to additional patent litigation and other proceedings. The cost to us of any patent litigation, even if resolved in our favor, could be substantial. Some of our would-be competitors may sustain the costs of such litigation more effectively than we can because of their greater financial resources. Litigation also may absorb significant management time.

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TearLab Corporation

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

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

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

We may face future product liability claims.

The testing, manufacturing, marketing and sale of therapeutic and diagnostic products entail significant inherent risks of allegations of product liability. Our past use of the RHEO System and the components of the SOLX Glaucoma System in clinical trials and the commercial sale of those products may have exposed us to potential liability claims. Our use of the TearLab® Osmolarity System and its commercial sale could also expose us to liability claims. All of such claims might be made directly by patients, health care providers or others selling the products. We carry clinical trials and product liability insurance to cover certain claims that could arise, or that could have arisen, during our clinical trials or during the commercial use of our products. We currently maintain clinical trials and product liability insurance with aggregate annual coverage limits of $2.0 million. Such coverage, and any coverage obtained in the future, may be inadequate to protect us in the event of successful product liability claims, and we may not increase the amount of such insurance coverage or even renew it. A successful product liability claim could materially harm our business. In addition, substantial, complex or extended litigation could result in the incurrence of large expenditures and the diversion of significant resources.

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

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

● evolving customer needs;

● the introduction of new products and technologies; and

● evolving industry standards.

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TearLab Corporation

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

● properly identify and anticipate customer needs;

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

● manufacture and deliver products in sufficient volumes on time;

● obtain and maintain regulatory approval for such new products;

● differentiate our offerings from competitors’ offerings;

● achieve positive clinical outcomes; and

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

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

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

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

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

We face intense competition in the markets for ophthalmic products and these markets are subject to rapid and significant technological change. Although we have no direct competitors, we have numerous potential competitors in the United States and abroad. We face potential competition from industry participants marketing conventional technologies for the measurement of osmolarity and other in-lab testing technologies, and commercially available methods, such as the Schirmer Test and ocular surface staining. Many of our potential competitors have substantially more resources and a greater marketing scale than we do. If we are unable to develop and produce or market our products to effectively compete against our competitors, our operating results will materially suffer.

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TearLab Corporation

If we lose key personnel, or we do not attract and retain highly qualified personnel on a cost-effective basis, it would be more difficult for us to manage our existing business operations and to identify and pursue new growth opportunities.

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

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

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

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

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

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

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

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

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TearLab Corporation

Risks Related to Our Common Stock

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

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

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

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

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

The trading price of our common stock may be volatile.

The market prices for, and the trading volumes of, securities of medical device companies, such as ours, have been historically volatile. The market has experienced, from time to time, significant price and volume fluctuations unrelated to the operating performance of particular companies. In addition, the fact that our common stock now trades on the OTCQB market could contribute to trading volumes in our shares being sporadic and volatility in the share price. If adverse market conditions exist, you may have difficulty selling your shares. The market price of our common shares may fluctuate significantly due to a variety of factors, including:

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

● technological innovations or new diagnostic products;

● governmental regulations;

● developments in patent or other proprietary rights;

● litigation;

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

● comments by securities analysts;

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

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

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

● the impact of our delisting from The Nasdaq Capital Market.

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

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TearLab Corporation

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

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

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

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

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

Our certificate of incorporation authorizes us to issue up to 10.0 million shares of preferred stock with designations, rights, and preferences determined from time to time by our board of directors. Accordingly, our board of directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights superior to those of holders of our common stock. For example, an issuance of shares of preferred stock could:

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

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

● discourage bids for our common stock at a premium;

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

● otherwise adversely affect the market price or our common stock.

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TearLab Corporation

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS

Exhibit Number	Exhibit Description	Incorporated by Reference
10.1	Manufacturing Supply and Development Agreement by and between TearLab Research, Inc. and MiniFab AB (Aust) Pty Ltd. Dated August 9, 2018. (Portions of this exhibit have been omitted pursuant to a request for confidential treatment).
10.2	Addendum dated August 9, 2018 to the Manufacturing, Supply and Development Agreement by and between TearLab Research, Inc. and MiniFab AB (Aust) Pty Ltd. Dated August 9, 2018. (Portions of this exhibit have been omitted pursuant to a request for confidential treatment).
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

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

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

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TearLab Corporation

SIGNATURE

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

	TearLab Corp.
	(Registrant)
Date: November 8, 2018	/s/ Joseph Jensen
	Joseph Jensen
	Chief Executive Officer

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EX-10.1

CONFIDENTIAL TREATMENT REQUESTED

CONFIDENTIAL PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. INFORMATION THAT WAS OMITTED IN THE EDGAR VERSION HAS BEEN NOTED IN THIS DOCUMENT WITH A PLACEHOLDER IDENTIFIED BY THE MARK “[***]”.

Dated

Manufacturing, Supply and Development Agreement

Parties

MiniFAB (Aust) Pty Ltd

ACN 100 768 474

TearLab Research, Inc.

Contact

Andrew Perry

Norton Rose Fulbright Australia

Level 15, RACV Tower, 485 Bourke Street, Melbourne, Victoria 3000

Tel: +61 (0)3 8686 6488

www.nortonrosefulbright.com

Our ref: 2626784

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

Contents

1.	Definitions and interpretation	1
2.	not used	6
3.	Manufacture of Product	6
4.	Capex, NRE and Tooling	8
5.	Forecasting and ordering	10
6.	Delivery	12
7.	Price	13
8.	Disaster Recovery Planning	15
9.	Development of New Products	15
10.	Intellectual Property	20
11.	Obligations of MiniFAB	22
12.	Meeting	23
13.	Amendments to Specifications	24
14.	Registrations, safety and Product liability	25
15.	Insurance	25
16.	Warranties	26
17.	Sub-Contractors	26
18.	Term, breach and termination	27
19.	Liability and indemnity	29
20.	Confidentiality	31
21.	Disputes	32
22.	Force Majeure	34
23.	Notices	34
24.	General	35
Schedule 1 - Pricing Schedule		38
Pricing Schedule - Discovery Test Card: Discovery Dry Eye Panel Osmolarity & MMP9		38
Schedule 2 Finished Product		40
Annexure A Requirement Definitions of Product		41
Annexure B Specifications for Product		42

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

Agreement dated           August 2018

Parties	MiniFAB (Aust) Pty Ltd ACN 100 768 474 of 9 The Centreway, Mount Waverley, Victoria 3149,
	Australia
	(MiniFAB)
	TearLab Research, Inc.
	of 150 La Terraza Blvd., Suite 101, Escondido, CA 92025, U.S.A.
	(TearLab)

Introduction

A. MiniFAB and TearLab entered into a manufacturing and development agreement on 19 July 2011 which was subsequently varied by a deed executed in or about May 2013 and a further subsequent variation about March 2016 (the agreement, as amended, being the Original Agreement).

B. The parties have agreed to enter into this new Agreement to provide for:

(1) the manufacture and supply of certain products, being initially the first Discovery product developed under the Original Agreement;

(2) the terms and conditions governing the development of future products or variations to the Discovery products;

It is agreed

1. Definitions and interpretation

1.1 Definitions

In this Agreement:

(1)	Affiliate means with respect to any person, any other person controlling, controlled by or under direct or indirect common control with such person. A person will be deemed to control a corporation (or other entity) if such person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such corporation (or other entity), whether through the ownership of voting securities, by contract or otherwise.
(2)	Agreement means this document, including any schedule or annexure to it;
(3)	Base Cost has the meaning given in clause 7.6(2);
(4)	Business Day means a day that is not a Saturday, Sunday or any other day which is a public holiday or a bank holiday in Melbourne, Australia or California, United States;
(5)	cGMP means current Good Manufacturing Practices, as established by the FDA;

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

1

(6)	Commercially Reasonable Efforts means the exercise of such efforts and commitment of such resources by MiniFAB as would be expended on, or committed by MiniFAB for, a comparable development or manufacturing program of a similar scope and at a similar stage in development or product lifecycle, comparable profit margin and potential, competitive landscape, and risk profile, in each case with due regard to the nature of efforts and cost required for such development or manufacturing and taking into account payments made by TearLab, or obligated to be made by TearLab, under this Agreement;
(7)	Confidential Information of a party means any Information (and all of its tangible and intangible embodiments of any kind whatsoever) provided by that party or its Representatives to the other party or its Representatives whether provided orally or in any form and is marked, identified as or otherwise acknowledged to be confidential at the time of disclosure to the other party; provided, however, that information, data and results generated by MiniFAB in the course of performing activities under this Agreement, that relate to TearLab’s technology or to the development of Product or prototypes thereof shall be deemed the Confidential Information of TearLab;
(8)	Dedicated Improvements has the meaning given in clause 10.3;
(9)	Default Rate means the aggregate of 5% per annum and the average mid rate per cent per annum calculated to the nearest 4 decimal places of the 3 month Australian Bank Bill Swap Reference Rate as determined by reference to Reuters Monitor Service page BBSW at or about 10.00 am (Sydney time) on the first Business Day of each month. If that page is replaced, the service ceases to be available, or the basis on which that rate is calculated or displayed is changed and in the opinion of the MiniFAB (after consultation with TearLab) it ceases to reflect MiniFAB’s cost of funding to the same extent as at the date of this Agreement, MiniFAB may specify another page or service displaying the appropriate rate after consultation with TearLab;
(10)	Delivery Point means the TearLab’s nominated warehouse in California, or such other place as may be agreed from time to time;
(11)	Effective Date means the date of execution of this Agreement by the last party signing it;
(12)	End Date means 30 August 2028;
(13)	FDA means the United States Food and Drug Administration;
(14)	Force Majeure means any cause which is not within the reasonable control of the party affected by it including, acts of God, war declared or undeclared, civil disturbance, acts or omissions of government or other competent authority, fire, lightning, explosion or flood, but excludes any cause due to lack of demand or market success for the Products;
(15)	Governmental Agency means any court, administrative agency or commission or other governmental agency, body or instrumentality, domestic or foreign;
(16)	Information means any information or know-how pertaining to, or in the possession or control of, a party including, information concerning its business, systems, technology and affairs, such as:

(a)	financial, technological, strategic or business information, concepts, plans, strategies, directions or systems;
(b)	research, development, operational, legal, marketing or accounting information, concepts, plans, strategies, directions or systems;

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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(c)	technology, source and object codes for computer software, Intellectual Property rights and technical and historical information relating thereto;
(d)	customer and supplier information; and
(e)	information relating to the Product.

(17) Insolvency Event in the context of:

(a) MiniFAB means:

(i)	a receiver, receiver and manager, official manager, trustee, administrator, other controller (as defined in the Corporations Act 2001 (Cth)) or similar official is appointed, or steps are taken for such appointment, over any of the equipment or undertaking of MiniFAB;
(ii)	MiniFAB is or becomes unable to pay its debts when they are due or is or becomes unable to pay its debts within the meaning of the Corporations Act 2001 (Cth) or is presumed to be insolvent under the Corporations Act 2001 (Cth);
(iii)	MiniFAB ceases to carry on business; or
(iv)	an application or order is made for the liquidation of MiniFAB or a resolution is passed or any steps are taken to liquidate or pass a resolution for the liquidation of MiniFAB otherwise than for the purpose of an amalgamation or reconstruction; and

(b) TearLab means:

(i)	a receiver, receiver and manager, controller, managing controller, administrator, official manager, trustee or provisional or official liquidator is appointed over the assets or undertaking of TearLab ;
(ii)	TearLab :

(A)	suspends payments of its debts generally;
(B)	enters into or resolves to enter into any arrangement, composition or compromise with, or assignment for the benefit of, its creditors or any class of them;
(C)	files a petition in Chapter 7 bankruptcy under the U.S. Bankruptcy Code; or
(D)	ceases to carry on business; or

(iii)	an order is made or resolution passed for the winding up or dissolution of TearLab other than for the purposes of solvent reconstruction or amalgamation; or
(iv)	in the case of TearLab, if TearLab Corporation suffers an ‘Event of Default’ under clause 11.01(i) of the ‘Term Loan Agreement’ (dated March 4, 2015 between TearLab Corporation, as borrower, and Capital Royalty Partners II L.P. and others (CRG), as lenders) and that default is not waived by the lenders.

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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(18)	Intellectual Property means any copyright, design (whether registered or unregistered), trademark (whether registered or unregistered), patent or patent application or invention, circuit layout, know-how, confidential information (whether such information is in writing or recorded in any other form) and other proprietary or personal rights arising from intellectual activity in the business, industrial, scientific or artistic fields;
(19)	Loss means any loss, damage, cost, interest, expense, fee, penalty, fine, forfeiture, assessment, demand, liability or damages incurred by a person to the extent resulting from any action, suit, claim, proceeding or cause of action brought against such party by a third party.
(20)	Manufacture means all the activities required to produce Product which complies with the Specifications including the manufacture, packaging, labelling, storage, handling and shipment of the Product;
(21)	MiniFAB Facility means the facility at 1 Dalmore Drive, Caribbean Business Park, Scoresby, Victoria, Australia;
(22)	Monthly Manufacturing Limit means initially 417,000 units of Product per month as varied in accordance with clause 5.2;
(23)	Phase 1 and Phase 2 have the meanings given in clause 4.3;
(24)	Price means the price payable by TearLab to MiniFAB for the supply of the Product, inclusive of all packaging, labelling, freight, insurance and all other shipping and handling charges, as set out in the Pricing Schedule;
(25)	Pricing Schedule means the Pricing Schedule set out in Schedule 1;
(26)	Product means the Discovery Test Card, together with the Reagents, capsule and applicable packaging, all as further described in Schedule 2;
(27)	Purchase Order means an order for Product as provided for in clause 5.1(2);
(28)	Quarter means each period of 3 months beginning 1 January, 1 April, 1 July and 1 October;
(29)	Reagent means all components required to formulate:

(a)	running buffer;
(b)	capture antibodies;
(c)	control antibodies; and
(d)	conjugate solution,

(30)	Reagent Cost means all costs associated with Reagents, including procurement efforts, shipping costs and import duties, and includes costs associated with quality control of Reagents and storage costs of Reagents after receipt in stores;
(31)	Registrations means all registrations or approvals required from the relevant Regulatory Authority or Authorities for the export, import, storage, promotion, supply, sale or other distribution in the Product;
(32)	Regulatory Authority means any Governmental Agency having responsibility for the regulation of, oversight of or whose approval is required for the manufacture, marketing, sale or supply of the Product or the facilities in which they are manufactured, processed or stored;

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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(33) Regulatory Requirements means, collectively:

(a)

all laws and regulations and any and all other requirements of the FDA or any other Regulatory Authority that are mandatory to the manufacture, packaging, labelling, storage, handling and shipment of the Product by MiniFAB and, subject to clause 11.3, includes cGMP; and

(b)

all standards set by the International Organization for Standardization (ISO) that are mandatory to the manufacture, packaging, labelling, storage, handling and shipment of the Product by MiniFAB, including ISO 13485 (Medical Devices Quality Management System), ISO 10993-1 (Biocompatibility), ISO 10993-5 (Biocompatibility: Cytotoxicity), and ISO 10993-10 (Biocompatibility: Sensitization and Irritation),

but excludes any law, regulation, requirement or standards that apply to the design, trials, marketing, sales or supply of the Product (and which do not also apply to the manufacture of the Product and/or to MiniFAB’s supply to TearLab hereunder);

(34)	Representative of a party means the employees, directors, agents or advisors of that party;
(35)	Requirement Definitions or PRD means the written documentation guiding MiniFAB’s development of the Product, including detailed requirement definitions for the Product, as agreed by the parties. The Requirement Definitions may be modified from time to time by mutual agreement of TearLab and MiniFAB in the course of ongoing development work for such Product, and MiniFAB agrees to use Commercially Reasonable Efforts to accommodate changes to the Requirement Definitions as TearLab may from time to time request;
(36)	Specifications means, with respect to a Product, the Procurement Specification, being the definitive written documentation guiding the manufacture, packaging, labelling, storage and handling of such product, prepared and agreed in accordance with clause 3.1, and as modified from time to time by mutual agreement of TearLab and MiniFAB in accordance with clause 13;
(37)	TearLab IP has the meaning given in clause 10.2;
(38)	Technical Agreement means the technical agreement entered into between MiniFAB and TearLab with respect to the Product, as may be amended or replaced from time to time, which specifies their respective responsibilities for quality control and quality assurance and related activities and qualifications with respect to the Product;
(39)	Term means the term of this Agreement, including any extended term under clause 18.1; and
(40)	Volume Threshold means the sales by TearLab of the Product to end user customers exceed 1.075 million units over a period of 3 consecutive 3 month periods, that is months: 1, 2 and 3; 2, 3 and 4: and 3, 4 and 5.

1.2 Interpretation

(1) Reference to:

(a)	one gender includes the others;
(b)	a person includes a body corporate;
(c)	a party includes the party’s executors, administrators, successors and permitted assigns;

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

5

(d) a statute, regulation, code or other law or a provision of any of them includes:

(i)	any amendment or replacement of it; and
(ii)	another regulation or other statutory instrument made under it, or made under it as amended or replaced; and

(e) dollars means US dollars unless otherwise stated.

(2)	“Including” and similar expressions are not words of limitation.
(3)	Where a capitalized word or expression is given a particular meaning, other parts of speech and grammatical forms of that capitalized word or expression have a corresponding meaning.
(4)	Headings and any table of contents or index are for convenience only and do not form part of this Agreement or affect its interpretation.
(5)	A provision of this Agreement must not be construed to the disadvantage of a party merely because that party was responsible for the preparation of the Agreement or the inclusion of the provision in the Agreement.
(6)	If an act must be done on a specified day which is not a Business Day, it must be done instead on the next Business Day.

2. not used

3. Manufacture of Product

3.1 Development of Specifications

The Specifications may be modified or amended by mutual written agreement of the Parties. In the event that TearLab requests changes to the Specifications MiniFAB agrees to use Commercially Reasonable Efforts to accommodate such requested changes.

3.2 Product compliance

MiniFAB shall set up the manufacturing process, manufacture the Product, and assemble and package the Product, all in accordance with the Specifications and all Regulatory Requirements. MiniFAB shall label the Product with such labels, tradenames, and trademarks as directed by TearLab.

3.3 Reagents and other third party components

(1) The parties acknowledge that in producing the Product, MiniFAB will procure and incorporated Reagents and other components sourced from third party suppliers. While MiniFAB will use all reasonable efforts to quality assure those third party components, MiniFAB will not be liable on any basis (including under clause 19.2) for any Product failing to meet the Specifications, including any related delay, where that failure is due to a defect in:

(a)	a Reagent; or
(b)	any other ‘excluded third party component’ as agreed by the parties (Excluded Third Party Component);

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

6

(2)	A failure to comply with the Specifications that results from a defect in a third party component will not constitute a breach of any warranty given by MiniFAB under this Agreement.
(3)	To the extent that a defect in relation to the Reagent or Excluded Third Party Component results in an additional cost in the production or supply of a Product, that additional cost will be added to the cost of goods in relation to the relevant Product.
(4)	TearLab has the right to approve the selection of Reagent suppliers and any other Excluded Third Party Component’ suppliers. TearLab has the right to approve terms and specifications with such suppliers regarding Inspection, Quality Control, and Nonconforming Product. MiniFAB will be liable for any Reagent or Excluded Third Party Components failing to meet the Specifications, including any related delay, where that failure is due to:

(a)	a defect in Reagents or Excluded Third Party Components supplied by a non-approved supplier; or
(b)	a failure of MiniFAB to comply with approved terms regarding Inspection, Quality Control, and Nonconforming Product.

TearLab’s rights to approve, under clause 3.3(4), shall not be unreasonably withheld. If TearLab have not responded to a request from MiniFAB to approve a Reagents or Excluded Third Party Components supplier or the terms and specifications with such suppliers within 15 days then the request will be considered approved.

3.4 Supply and Purchase Obligations

(1)	MiniFAB shall manufacture the Product exclusively for TearLab; and MiniFAB shall sell the Product exclusively to TearLab or its designee; and unless the Parties otherwise agree MiniFAB shall not otherwise manufacture, sell, or distribute the Product to any third party.
(2)	TearLab must exclusively order the Product from MiniFAB unless there are Exceptional Circumstances or clause 3.4(6) applies. For the purposes of this Agreement, Exceptional Circumstances mean:

(a)	an inability by MiniFAB to provide the Product for 60 days; or
(b)	a 3 month period in which each delivery of Product has at least 10% of the Product failing to meet the Supply Requirements, and MiniFAB being unable to supply conforming replacement Product such that MiniFAB would have to exceed the Monthly Manufacturing Limit in the following two months in order to ensure that it was able to supply the forecast requirements of Product in those two months.

In the case that there are Exceptional Circumstances, MiniFAB may notify TearLab when the Exceptional Circumstances have been overcome and TearLab will be required, from 60 days after such notification, to be supplied exclusively with Product from MiniFAB; provided that TearLab shall have the right to fully honour any supply commitments incurred by TearLab resulting from the Exceptional Circumstances, to the extent that such commitment are not inconsistent with this Agreement.

(3) Without limiting clause 3.4(2) and for the avoidance of doubt, TearLab may not assign or licence any of the TearLab IP (as defined in clause 10.4(1)) to anyone else with the intention or effect of allowing someone else to manufacture the Product except as expressly permitted under this Agreement (including without limitation if there are Exceptional Circumstances or clause 3.4(6) applies).

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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(4) MiniFAB hereby acknowledges that TearLab needs to obtain a reliable supply of the Product that meet certain quality, quantity and timing requirements, and agrees to comply with the following Supply Requirements:

(a)	ensure that each batch of Product is in full compliance with the Specifications (allowing for any failure rates specified in the Specifications); and
(b)	ensure that it does not for 3 successive months deliver to TearLab less than 95% of quantity of Product ordered by TearLab for delivery in those months in accordance with this agreement, after taking account of replacement Product.

(5) If MiniFAB fails to comply with the Supply Requirements then:

(a)	MiniFAB must provide TearLab with the reasons for the non-compliance;
(b)	the parties must meet and discuss the reasons given by MiniFAB;
(c)	the parties must, acting reasonably, negotiate a mutually agreed remedy plan to address the reasons for the non-compliance; and
(d)	MiniFAB must implement the agreed remedy plan.

(6) If MiniFAB:

(a)	gives notice to TearLab of Exceptional Circumstances or TearLab reasonably determines that the Exceptional Circumstances have occurred; or
(b)	fails to meet Supply Requirements

more than 3 times in any 18 month period and is unable to satisfy TearLab (acting reasonably) that it will be able to maintain a reliable supply of the Product that meet the Specification, quantity and timing requirements, then TearLab may order the Product from an alternative supplier.

(7) MiniFAB acknowledges and agrees that in consideration for Customer’s agreement to purchase the Product exclusively from MiniFAB, TearLab shall be entitled to all remedies (which remedies shall be cumulative) available under this Agreement and under applicable law, including without limitation the reasonable cover remedy, subject to TearLab duty to reasonably mitigate any losses it may incur.

4. Capex, NRE and Tooling

4.1 Capex

(1)

The parties will invest the capital expenditure (capex) necessary to develop production capacity for the Product to be supplied in accordance with this Agreement and in the proportions set out in clause 4.1(2).

(2)

TearLab will pay for 65% of capex as incurred. MiniFAB will pay for the remaining 35% of capex, which will be recoverable from TearLab in accordance with clause 4.1(3). Any capex amount incurred by MiniFAB in excess of the 35% will be recoverable from TearLab by monthly invoice. The parties’ obligations with respect to contributions to the capex amount are limited to an aggregate capex of $1 million AUD for Phase 1. Total contributions to the capex amount in respect of Phase 2 are subject to agreement but anticipated to be in the vicinity of $3 million AUD.

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

8

(3)	MiniFAB will recover the cost of its capex contributions through an amortised cost component in the Price for the Product charged to TearLab. The amortised amount will become payable once the monthly card volumes reach 200,000 per month. When all capex has been recovered, that cost component will be deleted. An amortised cost component will be reintroduced to cover any future capex as and when required.
(4)	The total amount of capex outstanding at any time will accrue interest at the Default Rate, with interest calculated and capitalised at the end of each month.
(5)	While any capex is outstanding to the account of MiniFAB the amortised amount repayable by TearLab in each Quarter will be the aggregate of the ‘amortised amounts’ specified in the then-current Pricing Schedule.
(6)	If the project does not proceed to Phase 2 by 1 January 2020 or is terminated by TearLab, TearLab will pay to MiniFAB all capex expended by MiniFAB on the project to date.
(7)	Despite anything to the contrary in clause 4.1(3), if monthly card volumes have not reached 200,000 per month within three and a half years of the beginning of Phase 2, TearLab will commence payment of the amortised amount at the rate of $0.30 per card on the basis of the actual number of cards purchased from MiniFAB, unless otherwise agreed.

4.2 NRE and Tooling

(1)	TearLab will be responsible for the payment or reimbursement of all non-recurrent expenditure (NRE and Tooling).
(2)	TearLab’s obligation with respect to the NRE and Tooling amount is limited to $1.2 million AUD for Phase 1 and is subject to agreement in respect of Phase 2 but is anticipated to be in the vicinity of $2 million AUD.
(3)	MiniFAB will give a discount of 20% from its standard rates in respect of the labour component of the NRE for Phase 1.
(4)	Any future NRE and Tooling will be paid or reimbursed to MiniFAB by TearLab.
(5)	MiniFAB will invoice TearLab monthly to recover NRE and Tooling expended by MiniFAB.

4.3 Production phases

(1) The parties acknowledge that development and production of the Product will proceed in two phases:

(a)	Phase 1 is the initial development and production up to the point where a viable Product is produced and is ready for market at volumes of 10,000 cards per month.
(b)	Phase 2 is the further investment of production capacity.

(2) Phase two will not commence until MiniFAB is satisfied that there is a commercially viable Product and a route to market.

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

9

(3) In reaching agreement in respect of capex and NRE for Phase 2, the parties expect that an open book approach to costs will be adopted (or such other risk control as agreed).

5. Forecasting and ordering

5.1 Basic Forecast

(1)	15 Business Days before the 1st day of each calendar month, TearLab must submit to the Supplier a forecast of the quantity of the Product that TearLab expects to take delivery of in each of the next 12 months. This will be on the basis that:
(2)	Month 1, 2 and 3 – will be a firm order for Product (Purchase Order), which the Supplier must accept and comply with, provided it is no more than 120% of the quantity specified in Month 2 of the prior forecast, does not breach the Upper Limit Rule below and is no more than the Monthly Manufacturing Limit;
(3)	Months 4 and 5 are constrained forecasts and cannot be more than 120% of the quantity specified in Months 3 and 4 respectively of the prior forecast;
(4)	Months 6 through 12 are best efforts forecasts by TearLab but are not binding in any way; and
(5)	The total of months 1 through to 6 multiplied by 1.2 represents an aggregate upper limit on the total orders for Product that the Supplier can be required to manufacture and deliver in that 6 month period (the Upper Limit Rule).
(6)	A Purchase Order constitutes an irrevocable offer in respect of the relevant month made by TearLab to the Supplier for the Product for the delivery of the Product to the Delivery Point all in accordance with the terms and conditions of this Agreement. Once received by the Supplier, the Purchase Order is firm and may not be cancelled or modified without the Supplier’s prior written consent.
(7)	Subject to clauses 5.1(8) and 5.2, MiniFAB must accept a Purchase Order if the quantity of the Product the subject of the Purchase Order is no more than 120% of the most recent forecast for that month, it does not breach the Upper Limit Rule and is no more than the Monthly Manufacturing Limit (Complying Order). In addition, MiniFAB agrees to use Commercially Reasonable Efforts to accept and satisfy an order which is not a Complying Order. In the event that TearLab places an order which is not a Complying Order, MiniFAB shall:

(a)	accept the Purchase Order with respect to quantities that would mean the order is a Complying Order; and
(b)	notify TearLab in writing of those quantities (if any) exceeding such quantity as MiniFAB is prepared to deliver, which together with the quantities accepted under clause 5.1(7)(a) will be taken to comprise the Purchase Order.

(8) If MiniFAB believes, on reasonable grounds, that a Purchase Order is materially incorrect or, to the extent a Purchase Order is not a Complying Order, MiniFAB is not capable of satisfying the Purchase Order to the extent of such excess, MiniFAB must notify TearLab as soon as possible. If MiniFAB does not reject a Purchase Order to the extent of such excess within 5 Business Days of receipt of the Purchase Order, then MiniFAB is deemed to have accepted the Purchase Order in full. Any rejection by MiniFAB of a Purchase Order that is not provided for in this clause 5.1(8) is deemed to be a material breach of this Agreement for the purposes of clause 18.2(1).

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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5.2 Capacity increase

(1)	When the Volume Threshold is reached, provided that there is at least two years remaining in the Term, upon request by TearLab MiniFAB and TearLab will meet in good faith to determine whether the projected manufacturing volume requirements for the remainder of the Term warrant investment in an increase in its annual production capacity of Product to 10 million units (or some other capacity increase that is economically viable).
(2)	If the parties determine that an increase in its annual production capacity is warranted (including TearLab being satisfied that the capital expenditure is proportionate to the economic value likely to be derived), then MiniFAB will initiate an increase in its annual production capacity of Product to 10 million units per annum (or such other capacity increase as is agreed). MiniFAB will use Commercially Reasonable Efforts to have such increased capacity online within 18 months of such event occurring. When such increased capacity is on-line MiniFAB will advise TearLab and advise the new Monthly Manufacturing Limit.
(3)	When MiniFAB advises TearLab of the new Monthly Manufacturing Limit under clause 5.2(1), the increased capacity will be deemed to be a Requested Capacity Increase of 5 million Product units per annum for the purposes of clause 5.3(2).

5.3 Manufacturing Limit

(1)

TearLab may, at any time initiate discussions to determine whether the projected manufacturing volume requirements for the remainder of the Term warrant investment in an increase in MiniFAB’s annual production capacity (noting that on the basis of current manufacturing technology, economical increases will be in steps of 5 million Product units per annum). If the parties determine that an increase in annual production capacity is warranted, then TearLab may request that the production capacity be increased (Requested Capacity Increase).

(2)

If new facilities are required to meet the Requested Capacity Increase, there will be an 18 month lead time for the Requested Capacity Increase to come on-line. Otherwise, there will be a 12 month lead time for the Requested Capacity Increase to come on-line. Once the Requested Capacity Increase comes on-line MiniFAB will advise TearLab of the new Monthly Manufacturing Limit.

5.4 Management of stock levels of Product

(1) TearLab will use all reasonable endeavours to order sufficient quantities of Product to ensure that, subject to MiniFAB performing its obligations under this Agreement, TearLab maintains on hand in the United States a sufficient stock of Product which has been delivered by MiniFAB to satisfy three months expected demand (Target Stock).

5.5 Minimum Order Requirement

In any given period of 6 calendar months, TearLab must place in those 6 months aggregate Purchase Orders equal to 50% of the aggregate of the forecast orders for Product provided in the respect of the first month of that period (the Minimum Orders). If TearLab fails to do so, then it must pay to MiniFAB an amount equal to the Price (as set out in the Pricing Schedule) multiplied by the difference between the Minimum Orders and the actual aggregate Purchase Orders. Unless otherwise agreed, such amount, if any, will be calculated and invoiced by MiniFAB within 60 days of the end of the relevant 6 month period, and be payable by TearLab within 40 days of invoice. Where any such sum is paid, it will be deemed to be equivalent to a Purchase Order of the relevant number of Products in the month in which it is paid, and be taken into account in any further calculation under this clause in respect of that month.

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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6. Delivery

6.1 Product

MiniFAB will manufacture the Product ordered in respect of a month and deliver it CIP (Incoterms 2010) for no delivery charge to the Delivery Point by the end of the relevant month. In the event that any two or more consecutive monthly orders by TearLab in accordance with clause 4 are delivered more than forty-five (45) day after the end of the month to which they relate (unless some later date has been agreed), then TearLab shall be entitled to a five percent (5%) discount on the Price of the Products which were not delivered at the end of that 45 day period. Provided that the Products are delivered within 90 days after the end of the relevant month, then the discount set out above is the sole and exclusive remedy of TearLab for any loss, damage or liability suffered or incurred by TearLab in connection with the delay. To avoid doubt, delivery occurs when the Products are available for inspection at the Delivery Point.

6.2 Inspection and Nonconforming Product

(1)	TearLab has the right to enter the MiniFAB Facility and inspect the Product within 14 days after delivery (or such longer time as provided in the Technical Agreement) and must accept the Product if they meet the Specifications. The Product will be deemed accepted if TearLab does not inspect the Product within such 14 day period. If TearLab fails to object in writing within the applicable period, then TearLab must accept the delivered Product. TearLab may reject the delivered Product only if the Product fail to meet the Specifications. If TearLab rejects the delivered Product, TearLab must provide MiniFAB in writing the reasons for the rejection and the reasonably available evidence to substantiate those reasons.
(2)	If TearLab rejects any Product, then MiniFAB shall promptly supply conforming replacement Product as soon as possible, whether or not MiniFAB agrees that TearLab properly rejected such Product. MiniFAB agrees to notify TearLab in writing if such replacement Product cannot be despatched from the MiniFAB Facility within five (5) Business Days.
(3)	If TearLab properly rejected the original Product, then:

(a)

TearLab’s payment for the rejected Product shall be deemed payment for the replacement Product; and

(b)

If it takes MiniFAB more than 1 month after the original required delivery date to deliver the replacement Product, then TearLab shall be entitled to a 5 percent (5%) discount on the Price of the rejected Product, and provided the replacement Product are delivered within 2 months of the original required delivery date then that discount is the sole and exclusive remedy of TearLab for any loss, damage or liability suffered or incurred by TearLab in connection with the rejected Product.

(4)

If TearLab was not entitled to reject the original Product in accordance with clause 6.2(1) then TearLab shall pay for both the rejected Product and the replacement Product.

(5)

If the parties disagree whether TearLab properly rejected the original Product, then the parties shall refer such matter to a mutually acceptable, independent testing laboratory (the Testing Lab) to determine whether such Product were properly rejected. The fees and costs of the Testing Lab shall be borne by TearLab if the Testing Lab determines that the Product were improperly rejected and by MiniFAB if the Testing Lab determines that the Product were properly rejected. If the Testing Lab is unable to determine whether the rejected Product met the Specifications, then either party may submit the matter to the dispute resolution process in clause 21.

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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(6) TearLab may withhold payment for any rejected Product (and only the rejected Product) until:

(a)	MiniFAB delivers conforming Product, or
(b)	the Testing Lab or dispute resolution process determines that the Product rejected by TearLab met the Specifications.

6.3 Risk and title

(1)	Risk in the Product will remain with MiniFAB until the Product is provided at the Delivery Point.
(2)	Property in the Product supplied by MiniFAB to TearLab under this Agreement does not pass to TearLab until the money owing for the Product has been paid in full. If TearLab in the meantime takes custody of the Product, TearLab retains them as bailee of MiniFAB. Once title to Products passes to TearLab, MiniFAB retains a lien on them in respect of other monies payable to it by TearLab.

6.4 Quality Control

MiniFAB shall conduct all quality control testing of the Product supplied under this Agreement prior to delivery in accordance with the relevant Technical Agreement and applicable Laws. MiniFAB shall, and shall cause its subcontractors to, retain records and samples of Product relating to such testing, and samples (identified by batch number) of the Product supplied to TearLab, in each case in conditions and for times as required by applicable Law (collectively, Delivery Samples), and shall provide TearLab with reasonable access to the Delivery Samples for testing and other purposes on TearLab’s request. If TearLab conducts quality control testing of Product after their delivery to TearLab, TearLab must use the same analytical methodology as used by MiniFAB. Upon written request from TearLab, MiniFAB shall provide a reasonably detailed description of the analytical methodology used by MiniFAB for quality control testing of the Product.

7. Price

7.1 Pricing Schedule

The Price for the Product is set out in the Pricing Schedule.

7.2 Provisions of the Pricing Schedule

To the extent the Pricing Schedule contains any provisions inconsistent with the body of this Agreement the provisions of the Pricing Schedule apply.

7.3 Invoicing

MiniFAB will invoice TearLab the Price for Product after shipment to the Delivery Point.

7.4 Payment

TearLab must pay all undisputed invoices within 40 days after date of the invoice.

7.5 Interest

If TearLab fails to pay an amount on the due date for any undisputed payment, TearLab must additionally pay interest at the Default Rate on the amount outstanding. Interest will be calculated and payable monthly, computed on the last day of each month on the maximum outstanding during that month, from the due date until all amounts are paid in full. MiniFAB may apply any payments received from TearLab against the interest on outstanding amounts first.

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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7.6 Price adjustments

(1)	The Price of the Product includes an identified component in respect of Reagents (Reagent Cost). The Reagent Cost is a pass-through cost, and the Price (cost of goods) may be varied by notice to TearLab to reflect any increase or decrease in the Reagent Cost.
(2)	The Price of the Product includes certain assumed supply cost components in respect of manufacturing and delivery of the Product (Base Cost). The Base Cost is the aggregate of the costs comprised of the items set out in the costing assumptions in the Specification. The Price (cost of goods) will be varied to reflect any increase or decrease in the Base Cost in accordance with clauses 7.6(3) to 7.6(6).
(3)	If the Base Cost increases up to 10% the Price may be varied by notice to TearLab to reflect any increase in the Base Cost. If Base Cost subsequently decreases within this range then, subject to subclause 7.6(8), the Price will be reduced to TearLab, limited to original Base Cost.
(4)	Subject to clause 7.6(6), if the Base Cost increases by more than 10% the Price will increase by 50% of the amount of the increase that is greater than the increase in the Base Cost calculated in clause 7.6(3). If Base Cost subsequently decreases within this range then, subject to subclause (8), the Price will be reduced 50% limited to original Base Cost plus 10%.
(5)	If the Base Cost decreases below original Base Cost then, subject to subclause (8), the Price will be reduced by 50% of the amount of the decrease in the Base Cost. If Base Cost subsequently increases, the Price will be increased 50% up to original Base cost.
(6)	If the Base Cost increases by more than 20% the parties will negotiate in good faith to set a new Price to reflect the amount of the increase in the Base Cost.
(7)	If labour costs increase by more than 15% the parties will negotiate in good faith to set a new Price to reflect the amount of the increase in the Base Cost.
(8)	The parties acknowledge that by an addendum to the Original Agreement (referred to in clause 12.3) the price for the ‘TCI cards’ produced under that agreement was varied to the detriment of MiniFAB, and the parties have agreed to value that detriment to at $[***]. The parties have agree that $[***] is the value of a discount pool (Pool Value) to which the value of any Price reduction that TearLab would otherwise be entitled to receive under clauses 7.6(3), (4) or (5) (savings) will first be applied. If TearLab would otherwise be entitled to receive a reduced Price under clauses 7.6(3), (4) or (5), the savings will be applied against the Pool Value and TearLab will continue to pay the same (unreduced) Price until the aggregate of the savings exceeds the Pool Value.

7.7 Exchange rate variation

(1)	Without limiting any other provision in relation to pricing, for so long as the exchange rate for the Australian dollar remains within the range of 0.7 to 0.8 US dollars (Review Range), the price remains firm. If the exchange rate moves outside of that range either party may initiate a price review.
(2)	If a party initiates a price review under this clause 7.7, the parties will, in good faith, agree a new review range, being a ten-cent US range to reflect where the Australian dollar is then currently trading. That new review range, when agreed, will then be the Review Range for the purposes of clause 7.7(1), which will be varied accordingly and continue to apply as varied.

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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(3) If a new Review Range is agreed under clause 7.7(2), the Price (excluding the Reagent Cost) will be amended to reflect the proportional change in the Review Range.

7.8 Discounted initial cards and recovery

(1)	MiniFAB will give TearLab a discount on the Price of the first [***] cards sold to TearLab. The card Price for the first [***] cards will be $[***] (a discount of $[***]per card).
(2)	The amount of the discount on each card ($[***] in total) will be treated in the same way as the capex outstanding to the account of MiniFAB and added to the outstanding capex amount, and will be recoverable from the amortised amount payable by TearLab in respect of each card in accordance with clause 4.1.

8. Disaster Recovery Planning

8.1 Duplicate final assembly Cell

Once the Volume Threshold is reached, provided there is at least 2 years remaining on the Term, MiniFAB and TearLab will meet in good faith to determine whether the projected manufacturing volume requirements for the remainder of the Term warrant investment in a duplicate final assembly and packaging cell at an alternative and separate secured location within the MiniFAB Facility.

9. Development of New Products

9.1 R&D Services

(1) R&D Services for New Products include:

(a)	project management services relating to the development of the New Product;
(b)	assisting TearLab in the development, validation and finalisation of the Requirement Definitions for the New Product;
(c)	assisting TearLab in the development, validation and finalisation of the Specifications for the New Product;
(d)	using Commercially Reasonable Efforts to develop processes, methodology and technology to manufacture the New Product;
(e)	using Commercially Reasonable Efforts to evaluate and recommend appropriate technology necessary to manufacture the New Product;
(f)	using Commercially Reasonable Efforts to develop and construct plant and equipment necessary to manufacture the New Product; and
(g)	such other services as specified in a Development Order.

(2) R&D Services exclude:

(a) the initial formulation of and research on the Requirement Definitions for the New Product;

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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(b)	carrying out experiments, clinical tests or other validation methodologies in relation to the New Product;
(c)	preparations or filings relating to obtaining Registration for the New Product;
(d)	sales, distribution, marketing or public release of the New Product;
(e)	patent review; and
(f)	legal or other professional advisory services.

9.2 Request for development

(1)	TearLab may, from time to time, request MiniFAB in writing to provide R&D Services to develop a New Product (Development Request).
(2)	Subject to clause 9.2(4), if and when TearLab elects, in its discretion, to develop a New Product, TearLab agrees that it will provide an opportunity for MiniFAB to provide the R&D Services with respect to the New Product, as follows:

(a)	TearLab shall provide a written Development Request for the New Product pursuant to clauses 9.2(1) and 9.2(3);
(b)	the parties shall discuss in good faith the anticipated activities under the Development Request and capabilities required to perform such activities;
(c)	if MiniFAB does not wish to undertake to perform the applicable R&D Services for the New Product, MiniFAB agrees to promptly notify TearLab in writing;
(d)	if MiniFAB wishes to perform the applicable R&D Activities for the New Product, MiniFAB shall propose the financial terms under which it is willing to undertake the R&D Services specified in the Development Request; and
(e)	if MiniFAB has appropriate capability (with respect to technical approach and development schedule) to perform such R&D Activities for the New Product as set forth in the Development Request, and offers to perform such activities on terms taken as a whole (including without limitation financial terms that are at least as favorable to TearLab as the terms proposed by a third party, as well as other material terms including but not limited to, scope , and intellectual property rights) that are at least as favorable to TearLab as other bids for conducting such R&D Services TearLab receives from third parties with capability of performing such R&D Services, then TearLab shall engage MiniFAB for the conduct of such R&D Services for the New Product. In such event, the parties shall prepare and sign a mutually agreed written Development Order, which shall set forth the activities to be conducted, timelines, deliverables, financial terms, and other mutually agreed terms and conditions regarding such R&D Services. Such Development Order shall be consistent with the intellectual property provisions and other applicable terms and conditions of this Agreement.

(3) A Development Request must include:

(a)	a detailed description of the New Product;
(b)	draft Requirement Definitions for the New Product; and
(c)	a draft project plan including a proposed timetable.

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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(4)

MiniFAB will consider a Development Request and notify TearLab in writing whether or not MiniFAB accepts the Development Request within 20 Business Days of receipt of the request. If MiniFAB fails to respond within that time period, then it is deemed to have rejected the Development Request. To avoid doubt, MiniFAB is not required to provide any reason for rejecting a Development Request. It is understood that the Development Request is intended as an opportunity for the parties to negotiate terms and conditions on which MiniFAB may conduct the applicable R&D Services for TearLab. Accordingly, (i) MiniFAB shall not be obligated to accept any Development Request, and (ii) except as expressly set forth in clause 9.2(2)(e) with respect to the New Product, TearLab shall not be obligated to engage MiniFAB to conduct R&D Services Without limiting the foregoing, if MiniFAB rejects (or is deemed to have rejected) the Development Request for the New Product, then despite clause 9.2(2), TearLab may engage another service provider to provide R&D Services in respect of that Development Request. TearLab shall have no obligation to offer to MiniFAB any further opportunity, or to engage MiniFAB, to perform any R&D Services except as expressly set forth under clause 9.2(2).

(5)

Without limiting anything else in this clause 9, if TearLab wishes to develop any New Product that is relevant to MiniFAB’s technology, it must provide MiniFAB with the opportunity to submit a proposal for the performance of the work by providing a Development Request. TearLab may also tender the development work in respect of the New Product to any other person, but it must give MiniFAB a final opportunity to quote on the work before offering the job to someone else.

9.3 Development Order

(1) If MiniFAB accepts a Development Request, then:

(a)	MiniFAB will provide TearLab with a revised draft project plan including proposed milestones and payment milestones; and
(b)	the parties must meet within 20 Business Days of the acceptance to meet and discuss the Development Request with the intent to finalise a Development Order.
(c)	The project plan shall identify the specific expertise to be applied to the development and clear deliverables for each phase of the project. A list of assumptions and risks should be identified.

(2)	The parties will act reasonably in negotiating the terms of the Development Order.
(3)	To avoid doubt, neither party is bound by a Development Request, a Development Order or any obligations to develop a New Product until the relevant Development Order is signed by both parties.

9.4 Provision of R&D Services

(1)	MiniFAB will provide the R&D Services in accordance with the relevant Development Order in a diligent and ethical manner, with due care and skill and to a high professional standard, in accordance with this Agreement, and all applicable Regulatory Requirements.
(2)	MiniFAB will use Commercially Reasonable Efforts to meet any milestones agreed in the relevant Development Order. Each Development Order may specify the agreed-upon remedies that shall apply for any failure by MiniFAB to meet such milestones, or otherwise fail to perform the R&D Services in accordance with clause 9.4(1).

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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9.5 Responsibilities of each party

(1) MiniFAB is responsible for and will bear the costs and expenses associated with:

(a)	the provision of the R&D Services in accordance with the relevant Development Order (Development Expenses); and
(b)	the construction and acquisition of any plant and equipment and other related capital expenditures relating to the R&D Services.

(2)	TearLab will develop, validate and finalise the Requirement Definitions and the Specifications of the New Product in consultation with MiniFAB. MiniFAB will assist TearLab in accordance with the R&D Services.
(3)	TearLab is solely responsible for and will bear all costs and expenses associated with all activities relating to the research and development of the New Product that are not expressly included as part of R&D Services as identified in the project plan or that are expressly excluded from the R&D Services.

9.6 Ownership of Requirement Definitions and Specifications

The Requirement Definitions and the Specifications of any Product or New Product and all Intellectual Property rights relating to any Product or New Product, the Requirement Definitions and the Specifications therefor are and will remain to be owned solely by TearLab. MiniFAB hereby assigns all Intellectual Property subsisting in the foregoing to TearLab. Project design including drawings and procedures that are created as a result of the R&D services, shall be provided to TearLab upon request and TearLab at their discretion may request changes that shall be mutually agreed upon. Manufacturing documentation including procedures shall be made available for TearLab to review.

9.7 Payment for R&D Services

TearLab will pay MiniFAB for the provision of the R&D Services in accordance with payment milestones specified in the relevant Development Order.

9.8 Other matters relating to Development Order

Prior to the Successful Completion of a New Product, the parties will meet and negotiate (acting reasonably) the following items relating to the New Product:

(1)	the Pricing Schedule for the New Product;
(2)	the Manufacturing and Ordering Schedule (including the Annual Production Capacity) for the New Product, if any; and
(3)	if the New Product is a replacement or successor of an existing Product, variations to the Manufacturing and Ordering Schedule of the existing product (including the Annual Production Capacity and Expected Limit) for that existing Product.

9.9 Prototype Acceptance Testing

(1)

If required under the relevant Development Order, the parties will conduct acceptance testing of the New Product in accordance with this clause 9.9.

(2)

Promptly upon completion of the development of the New Product, MiniFAB shall manufacture and supply to TearLab a reasonable number of prototype units for the purposes of TearLab’s testing and evaluation, together with such documentation (including without limitation the QA test report), materials and equipment reasonably necessary for TearLab to perform testing and evaluation of the prototype. It is understood that the mutually agreed Development Order may provide for the supply and testing of multiple sets of prototype units for the New Product at different stages of development (such as, for example, alpha prototypes and beta prototypes).

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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(3)	TearLab may reject the prototype of the New Product only if it does not conform to the Requirement Definitions. TearLab must accept the prototype of the New Product if it conforms to the Requirement Definitions.
(4)	If TearLab rejects the prototype then TearLab must notify MiniFAB of the reasons for such rejection and MiniFAB will have a mutually agreed upon time not to exceed 30 days days to cure such defect or non-conformance or dispute TearLab’s rejection pursuant to the dispute resolution process under clause 19. TearLab may require MiniFAB to resubmit revised prototype units to TearLab for testing and evaluation until the prototype fully conforms to the Requirement Definitions of the Product.
(5)	Upon TearLab’s acceptance of the New Product (“Acceptance”), TearLab shall promptly inform MiniFAB in writing.

9.10 Successful Completion

Successful Completion in relation to a New Product means:

(1)	if the relevant Development Order provides a definition – the meaning ascribed to that term in the Development Order; or
(2)	the Acceptance of a New Product by TearLab, as such term is defined in clause 9.9.

9.11 Discontinuance – Unable to finalise Requirement Definitions

If the parties are unable to finalise the Requirement Definitions for the New Products by the deadline specified in the relevant Development Order (or after a reasonable time if no such deadline is specified), then either party may discontinue the relevant Development Order by notifying the other party in writing, in which case TearLab will be solely responsible for all Development Expenses incurred up to that point in time and any other unavoidable costs reasonably incurred by MiniFAB in connection with the discontinuance.

9.12 Discontinuance – TearLab

TearLab may discontinue the development of any New Product at any time upon written notice, in which case MiniFAB will invoice, and TearLab must pay, all outstanding amounts that are payable in accordance with the payment milestones specified in the Development Order for the R&D Services actually rendered by MiniFAB prior to the termination of the relevant Development Order. It is understood and agreed that any R&D Services with respect to the New Product will be undertaken in reasonable stages as per the product plan, in order to provide TearLab an opportunity to evaluate the results of the R&D Services in each such stage and to determine whether TearLab, in its discretion, wishes to cease development of the New Product. In the event that TearLab unilaterally discontinues development of the New Product and terminates the corresponding R&D Services (other than as a result of MiniFAB’s inability or unwillingness to conduct such R&D Services, or as set forth in clause 18.2) prior to MiniFAB’s shipment of beta prototypes, then TearLab agrees that it will provide an opportunity for MiniFAB to provide the R&D Services with respect to development of its next subsequent New Product (excluding any New Products then already under contract for development by third parties) as set forth in clause 9.2(2), subject to the terms of clause 9.2(4).

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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9.13 Definitions used in this clause

(1) New Products means any test cards other than the Product, as specified in Schedule 2;

10. Intellectual Property

10.1 Ownership of Requirement Definitions and Specifications

The Requirement Definitions and the Specifications of the Product and all Intellectual Property rights relating to the Product, the Requirement Definitions and the Specifications are and will remain owned solely by TearLab.

10.2 TearLab Background IP

TearLab shall retain ownership of any pre-existing Intellectual Property rights in materials, information, tools and methodologies provided by TearLab to MiniFAB for use by MiniFAB for the purposes of undertaking activities under this Agreement and any improvements to them.

10.3 MiniFAB Background IP

(1)

MiniFAB shall retain ownership of any pre-existing Intellectual Property rights in materials, information, tools and methodologies provided by MiniFAB for the purposes of undertaking activities under this Agreement, and any improvements to them (except to the extent that those improvements relate solely to the Product (Dedicated Improvements)) (collectively, “MiniFAB Background IP”) and MiniFAB hereby grants TearLab a worldwide, non-exclusive, royalty-free license (with the right to grant and authorize sublicenses) to make, have made, use, offer for sale, sell and otherwise exploit MiniFAB Background IP as may be required to make, have made, use, offer for sale, sell and otherwise exploit the Product or incorporated into processes or procedures for manufacturing or testing the Product in accordance this Agreement.

(2)

All MiniFAB Background IP shall be treated by TearLab and its sublicensees and their third party manufacturers as Confidential Information of MiniFAB; provided, however, that

(a)	TearLab may disclose the MiniFAB Background IP to actual and potential investors, sublicensees, advisors and/or contract manufacturers of Base Cards or finished Products, in each case under reasonable and customary terms of confidentiality; and
(b)	TearLab and its sublicensees and contract manufacturers may disclose such information as is reasonably necessary in seeking regulatory approvals in connection with the manufacture, clinical development, use or commercialization of Product.

10.4 Limited licences

(1) Subject to the terms and conditions of this Agreement, TearLab grants a non-exclusive licence (TearLab Licence) in respect of any Intellectual Property, know-how and technical information owned (or licensed with the right to sublicense) by TearLab relating to the Manufacture or final assembly of the finished Product (TearLab IP) to:

(a) MiniFAB to perform MiniFAB’s obligations under this Agreement, which licence may not be sublicensed (except to the extent necessary to allow MiniFAB to subcontract as permitted under clause 17), is royalty free and continues only during the Term;

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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(b) MiniFAB to reproduce, use and modify the TearLab IP solely for the purposes of manufacturing, marketing, distributing and selling the Product in accordance with clause 18.5, which licence may be sublicensed, is royalty bearing in accordance with clause 18.6(2)(e), and continues for the term provided in clause 18.6(2)(b), and is irrevocable.

(2) Under the licences granted in clauses 10.4(1)(a) MiniFAB may only use the TearLab IP to the extent necessary or desirable to perform their obligations under this Agreement.

10.5 Provision of TearLab IP materials

TearLab will provide or otherwise make available all information and materials relating to the TearLab IP known to or possessed by TearLab that are reasonably necessary to enable MiniFAB to perform their obligations under this Agreement.

10.6 Ownership of TearLab IP and Improvements to TearLab IP

(1)	All TearLab IP, together with all improvements to TearLab IP, including any modifications and developments made thereto by MiniFAB, and any Dedicated Improvements (collectively, TearLab Improvements), shall be the sole property of TearLab. MiniFAB hereby assign to TearLab their entire right, title and interest in TearLab Improvements. TearLab Improvements will be included in TearLab IP and covered by the TearLab Licence.
(2)	All TearLab IP shall be treated by MiniFAB as Confidential Information of TearLab.
(3)	MiniFAB shall promptly disclose to TearLab all TearLab Improvements, and provide TearLab with copies of all information available to MiniFAB regarding TearLab Improvements.
(4)	To the extent any of the rights that the parties intend to be assigned by MiniFAB to TearLab (as set forth in clause 10.1 and this clause 10.6) cannot be assigned by MiniFAB to TearLab, MiniFAB (as relevant) hereby grant to TearLab an exclusive, royalty-free, transferable, irrevocable, worldwide license (with rights to sublicense through multiple tiers of sub-licensees) to practice such non-assignable rights, title and interest. To the extent any of such rights can be neither assigned nor licensed by MiniFAB to TearLab, MiniFAB hereby irrevocably waive and agree never to assert such non-assignable and non-licensable rights, title and interest against TearLab or any of TearLab’s licensees or successors in interest to such non-assignable and non-licensable rights.

10.7 IP Warranties and indemnity

(1)

TearLab warrants that TearLab has the right and authority to grant the TearLab Licence.

(2)

TearLab shall indemnify and at all times holds harmless MiniFAB against any Losses resulting from a third person’s claim against MiniFAB alleging that the use of TearLab IP by MiniFAB constitutes an infringement of any Intellectual Property of that third person; provided, however, that TearLab shall not be obligated to indemnify MiniFAB, and MiniFAB shall indemnify and at all times hold harmless TearLab against any such Losses (i.e., Losses arising from third party claims of infringement), to the extent the alleged infringement results from any modifications and developments made to TearLab IP by MiniFAB other than in accordance with instructions contained in any Specifications.

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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10.8 Assurance of TearLab Licence

MiniFAB acknowledges that certain parts of the TearLab IP may incorporate or exploit Intellectual Property that is licensed from University of California, San Diego (UCSD IP). If MiniFAB’s rights under clause 18.5 take effect, TearLab will (providing MiniFAB remains within the licensure requirements):

(1)	provide MiniFAB with all information and materials relating to the UCSD IP, including explanations on which parts of the TearLab IP incorporate or exploit the UCSD IP;
(2)	use its best endeavours to procure a sub-licensable licence direct to MiniFAB to allow MiniFAB reproduce, use and modify the UCSD IP solely for the purposes of manufacturing, marketing, distributing and selling the Product in accordance with clause 18.5, which licence is only to take effect from the date as provided in clause 18.5; and
(3)	facilitate, and provide all reasonable assistance to MiniFAB in relation to, any negotiations for a direct licence between MiniFAB and the University of California, San Diego in respect of the UCSD IP.

10.9 Infringement and protection of TearLab IP

TearLab is solely responsible for the protection, defence and maintenance of the TearLab IP. However, MiniFAB will promptly notify TearLab if they are aware of any infringement of the TearLab IP by any third person.

10.10 Product Moulds

(1)	Notwithstanding the previous provisions of this clause 10, all injection moulds directed to the Product that are paid for directly by TearLab and invoiced as a separate item or amortized in the cost of the Product (after full cost recovery) will belong to TearLab, otherwise they will be owned by MiniFAB.
(2)	All rights in and to such injection moulds, shall be owned by MiniFAB and are not part of TearLab IP. MiniFAB will cooperate with TearLab in good faith to assist TearLab in such manner as TearLab may reasonably request if such moulds are required to be duplicated.
(3)	In the event that this Agreement is terminated for any reason, MiniFAB will still provide reasonable assistance to TearLab under clause 10.10(2) on reasonable commercial terms as agreed between MiniFAB and TearLab.

11. Obligations of MiniFAB

11.1 Cooperation with TearLab

MiniFAB will: (a) make documentation appropriately redacted as mutually agreed (excluding background IP) for the Product supplied under this Agreement available to TearLab for inspection, review, retention and approval, as appropriate, including analytical and product design documentation, internal progress reports, regulatory compliance files and quality assurance files, as requested by TearLab and agreed by MiniFAB. Manufacturing documentation and other relevant information, as agreed between the parties and appropriately redacted, will be made available remotely to TearLab for inspection and review only; (b) reasonably cooperate with TearLab in responding to all requests for information from customers and the relevant Regulatory Authorities having jurisdiction to make such requests; and (c) on a quarterly basis, prepare and submit to TearLab a production capacity development plan addressing MiniFAB’s efforts to increase production capacity to meet TearLab’s forecasts, and participate in a review thereof with TearLab. TearLab must bear any reasonable pre-approved out-of-pocket costs incurred by MiniFAB pursuant to this clause 11.1. If TearLab refuses to pre-approve any such reasonable costs described in the preceding sentence on request by MiniFAB, then MiniFAB is released from its obligations under this clause 11.1 in respect of the obligations that are subject of, and to the extent subject of, those costs that TearLab refused to pre-approve.

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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11.2 Regulatory licences

MiniFAB must at its own cost obtain and comply with all necessary licences, consents, permits and regulations which may from time to time be required by the relevant Regulatory Authorities to carry out their obligations under this Agreement. Where necessary, TearLab is responsible for obtaining all Registrations and approvals for the export of the Products from Australia or supply of the Products anywhere in the world.

11.3 Regulatory approvals and exemptions

As between the parties, TearLab shall be responsible, in its discretion, for activities in seeking Registrations and other regulatory approvals from applicable Regulatory Authorities with respect to the Product (including any CLIA waiver from the FDA in respect of the FDA 510(k) application for the TearLab system which uses the Product developed under the Original Agreement).

11.4 Lot records

Without limiting the generality of clause 11.1, on a monthly basis, MiniFAB must retain and furnish to TearLab for analysis by TearLab’s Quality Department quality control records, to the extent required by the Specifications and all applicable Regulatory Requirements.

11.5 Facility Audits

TearLab shall have the right, during normal business hours and upon reasonable notice, to audit MiniFAB’s facility (or any one of such facilities) at which the Products are manufactured for compliance with the Specifications, the Regulatory Requirements, and the terms and conditions of this Agreement. MiniFAB shall give TearLab prior written notice (whenever reasonably feasible) of any Governmental Agency inspection of any facility, and shall permit a representative of TearLab to be present at such inspection. MiniFAB shall promptly provide to TearLab copies of all notices, correspondence and other materials delivered to or received from the Governmental Agency regarding such facility or the Products.

12. Meeting

12.1	During the Term, MiniFAB and TearLab will endeavour to meet at least every 6 months to discuss and review the state of the relationship between them. Each of them must ensure that at least one of its senior representatives attend each meeting. Any such meeting may be teleconferenced.
12.2	MiniFAB and TearLab will alternate to organise the meeting. The person responsible for organising the meeting must prepare a formal agenda prior to the meeting and organise formal minutes to be taken and distributed to all attendees after the meeting takes place. Each party may provide its suggest agenda items. The compulsory topics for the agenda are as follows:

(1)	review of previous minutes; and
(2)	progress of any development and registration.

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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12.3 The parties acknowledge that the Pricing Schedule is based on various assumptions relating to demands, pricing and profitability of the Product. If either MiniFAB or TearLab reasonably considers that these assumptions are not valid, then they will, on request from the other party, discuss the impact of these invalid assumptions on the Pricing Schedule. The parties may (but are not obliged to) agree to amend the Pricing Schedule in accordance with the process set out in clause 24.4, inclusive of the minimum order amount. The parties also acknowledge that, by an addendum dated [date], the Original Agreement was varied to provide for renegotiation of the price for the ‘TCI cards’ produced under that agreement, if orders fall below minimum order quantities for the aggregate of the TCI cards and the Product ordered under this Agreement.

13. Amendments to Specifications

13.1 Compliance with Regulatory Requirements

In the event that TearLab or MiniFAB becomes aware of any changes or any pending changes in any applicable Regulatory Requirements which could affect the manufacture of the Product, TearLab or MiniFAB, as applicable must promptly notify the other in writing of any such change or proposed change and the Specifications of the Product must then, if necessary be amended by mutual written agreement of the MiniFAB and TearLab. Such change will become effective and binding on MiniFAB from a date agreed by MiniFAB and TearLab. Costs and expenses reasonably incurred by MiniFAB to implement the amendments to the Specifications required under this clause 13.1 may be reflected in the Price of Product as set forth in clause 13.3.

13.2 Voluntary changes

Either MiniFAB or TearLab may suggest changes in the Specifications by notifying the other in writing in reasonable detail of such suggested changes. MiniFAB and TearLab must negotiate in good faith with a view to agreeing to the suggested changes and who will bear the cost of the same. If they agree in writing upon the suggested changes, including the lead-time for implementing such changes, the relevant Specifications must be amended accordingly, and any such change will become effective and binding on MiniFAB from a date agreed by them. Notwithstanding the foregoing, TearLab shall not be obligated to agree to any change to Specifications proposed by MiniFAB.

13.3 Cost of amendments to Specifications or changes in Regulatory Requirements

Unless otherwise agreed by the parties, it is understood that the Price of the Product will be adjusted up or down by an amount equal to the increase or decrease in MiniFAB’s costs (as determined by the parties’ mutually agreed cost model, which shall not include amounts allocable to other products or to facilities or equipment not utilized for Product) as a result of changes in Regulatory Requirements and/or changes in the Specifications. Subject to clauses 13.1 and 13.2, TearLab is responsible for all pre-approved reasonable out-of-pocket costs and expenses incurred by MiniFAB to implement any changes to the Specifications under this clause 13. It is understood and agreed that if TearLab pays for the purchase of capital equipment under this clause 13.3, then (i) TearLab shall be the owner of such equipment, (ii) such equipment shall not be used in the manufacture or testing of any products other than the Product, and (iii) and the parties shall reasonably cooperate to execute and file such documents as are reasonably required to evidence and protect TearLab’s ownership interest in such equipment. In the event MiniFAB proposes an upward adjustment in the Price of Product under this clause 13.3, TearLab shall have the right, at its sole cost, to designate an independent accounting firm reasonably acceptable to MiniFAB to audit MiniFAB’s books and records to verify the amount of the cost increase claimed by MiniFAB to determine the rights of the parties as described above in this clause 13.3.

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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14. Registrations, safety and Product liability

14.1 Registrations of Products

TearLab is responsible for the sales, marketing and distribution of the Product, and is also responsible for:

(1)	obtaining all necessary Registrations for the Product; and
(2)	maintaining records of all sales of Product sufficient to adequately administer a recall, market withdrawal or correction for such period as is required under applicable regulations.

MiniFAB agrees to maintain all applicable records relating to the Manufacture of Product supplied hereunder for a period of 5 years after they are supplied hereunder, as more particularly set forth in the relevant Technical Agreement. Thereafter, MiniFAB shall notify TearLab in writing before destroying any such records and, if requested by TearLab, agrees to transfer all such records to TearLab or its designee at TearLab’s expense.

14.2 Adverse events

TearLab must promptly disclose to MiniFAB during the Term any information it acquires which relates to the safety of the Product, including, inter alia, all side effects, injury, toxicity or sensitivity reactions including unexpected or increased incidence and severity thereof. All such information will be treated as Confidential Information of TearLab.

14.3 Notification of defects

In the event MiniFAB becomes aware of any defect in the Product it will immediately notify TearLab in writing and provide it with a full disclosure of the defect or non-compliance.

14.4 Recalls

(1)	The parties each must notify the other promptly and in writing if any Product is requested or required to be the subject of a recall, market withdrawal or correction (Recall).
(2)	TearLab is solely responsible for the handling and disposition of any Recall and will assume all regulatory responsibility for such matters, including responsibility for all communications with the relevant Governmental Agencies. MiniFAB shall diligently cooperate with TearLab in the administration of any recall.
(3)	If a Recall is necessary because the Product does not comply with the relevant Requirements, and that non-compliance is caused by the fault of MiniFAB then MiniFAB will bear the reasonable cost of the Recall. In all other cases TearLab is solely responsible for the cost of the Recall.
(4)	For the purposes of clause 14.4(3), ‘reasonable cost’ means those costs incurred as a direct result of the non-compliance, and which costs are to be reduced to the extent that TearLab contributed to or failed to reasonably mitigate such costs.

15. Insurance

15.1 Required Insurance from MiniFAB

MiniFAB must take out and maintain during the Term:

(1)	all insurances required by law, including workers compensation insurance in accordance with relevant law; and
(2)	public liability insurance for an amount of not less than A$2 Million per claim and in the aggregate.

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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15.2 Required Insurance from TearLab

TearLab must take out and maintain during the Term:

(1)	all insurances required by law, including workers compensation insurance in accordance with relevant law; and
(2)	product liability insurance for an amount of not less than US$2 Million per claim in the aggregate.

15.3 Evidence of insurance

Each party must, if reasonably requested by the other party, provide the other party with evidence that the each insurance required to be taken out by the party pursuant to this clause 15 exists and is current.

16. Warranties

16.1 Product warranties

MiniFAB warrants that

(1)	the Product Manufactured under this Agreement will comply with the Specifications and shall be free from defects in material and workmanship;
(2)	the facilities for Manufacture of the Product shall be maintained and operated in compliance with all applicable Regulatory Requirements; and
(3)	all Product shall be Manufactured in compliance with the Specifications.

17. Sub-Contractors

(1)	MiniFAB may engage sub-contractors to perform MiniFAB’s obligations for the assembly of Product under this Agreement upon express prior written consent of TearLab, which consent shall not be unreasonably withheld.
(2)	Without limitation, it is agreed that if TearLab is not comfortable that a proposed sub-contractor has the requisite capabilities and that such proposed sub-contractor will protect TearLab’s Intellectual Property rights and that such proposed sub-contractor will comply with the terms and conditions set forth in this Agreement (including assignment of intellectual property), or if such proposed sub-contractor is involved in the manufacture, development or commercialization of products competing with the Product, then it shall be reasonable for TearLab to withhold approval of such proposed sub-contractor.
(3)	The appointment of sub-contractors shall not affect or diminish MiniFAB’s responsibilities and obligations under this Agreement, and MiniFAB shall ensure the compliance of each such subcontractor with the confidentiality obligations and other obligations of MiniFAB set forth in this Agreement.

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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18. Term, breach and termination

18.1 Term

(1)	This Agreement commences on the Effective Date and continues for an initial period ending on the End Date.
(2)	At the end of each term this Agreement shall automatically renew for an additional term of five (5) years, unless either party provides the other party with a written notice of non-renewal at least 6 months prior to the end of the then current term.

18.2 Termination for cause - MiniFAB

Notwithstanding clause 18.1, MiniFAB may terminate this Agreement effective immediately upon the giving of written notice to TearLab if:

(1)	TearLab commits a material breach of this Agreement and fails to correct the breach within 60 days after written notice to do so;
(2)	TearLab fails to carry out any material provision of this Agreement and the failure is not capable of remedy; or
(3)	an Insolvency Event occurs in relation to TearLab.

18.3 Termination for cause - TearLab

Notwithstanding clause 18.1, TearLab may terminate this Agreement effective immediately upon the giving of written notice to MiniFAB (Defaulting Party) if:

(1)	MiniFAB commits a material breach of this Agreement and fails to correct the breach within 60 days after written notice to do so;
(2)	MiniFAB fails to carry out any material provision of this Agreement and the failure is not capable of remedy; or
(3)	an Insolvency Event occurs in relation to the MiniFAB .

18.4 Effect of termination

(1) Upon termination or expiry of this Agreement for any reason other than due to an Insolvency Event in relation to TearLab or breach by TearLab:

(a)	MiniFAB will complete the delivery of all outstanding Purchase Orders;
(b)	TearLab will be bound to purchase and MiniFAB will be bound to manufacture into Product, sell and supply, the whole of its stock of cards held by it. This is subject to an upper limit equal to the then outstanding limit on total orders created by the Upper Limit Rule, with TearLab having an option to purchase any excess quantity that may be available.

MiniFAB will invoice and TearLab will pay for the Product in accordance with the usual terms of this Agreement.

(2) Upon termination or expiry of this Agreement for any reason:

(a)	TearLab must pay all outstanding undisputed invoices for all completed Purchase Orders; and
(b)	each party must immediately return the Confidential Information of the other party to the other party.

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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(3) In the event of any termination of this Agreement other than a termination for cause by MiniFAB under clause 18.2, TearLab shall have the right, subject to clause 18.5, to require MiniFAB:

(a)

to provide all reasonable assistance as requested by TearLab, including transfer of technology, materials, information and documentation, to enable TearLab to manufacture the Product internally or to secure the production and supply of the Product by a third party contractor (whether or not all or part of such technology, materials, information and documentation falls within the MiniFAB Background IP owned by MiniFAB); and

(b)

to provide TearLab with the consultancy services of all key engineering personnel of MiniFAB to effect or support such transfer of technology and/or the license to MiniFAB Background IP.

TearLab shall pay MiniFAB for the time spent by MiniFAB’s key personnel in conducting such technology transfer activities as may be requested by TearLab, at MiniFAB’s reasonable and customary rates for similar consultancy, and shall reimburse MiniFAB’s out-of-pocket expenses incurred in conducting such technology transfer.

(4) Except as provided in clause 18.5, termination is without prejudice to the rights of either party for any prior breach.

18.5 Licence of MiniFAB IP on termination

(1) If after termination of this Agreement, TearLab wishes to manufacture the Product internally or to secure the production and supply of the Product by a third party contractor:

(a) MiniFAB:

(i)	in the circumstances described in clause 18.4(3), will; or
(ii)	otherwise, may,

grant a licence to TearLab (including a right to sublicense to a third party contractor) to use such technology, materials, information and documentation as falls within the MiniFAB Background IP; and

(b) TearLab will pay to MiniFAB a licence fee (which may be in the form of a one off payment) to be negotiated by the parties in good faith. TearLab (or a third party contractor) cannot manufacture the Product until the parties have agreed a licence fee.

18.6 Continuing right to manufacture

(1) The parties acknowledge that if this Agreement is terminated by MiniFAB prior to the End Date as a result of TearLab being the subject of an Insolvency Event or breach by TearLab or TearLab’s inability to supply the market, such premature termination deprives MiniFAB of the opportunity to earn an appropriate return on its investment in the Products and its expected return from the full expected performance of this Agreement through its expected term. Accordingly, this clause provides certain rights to MiniFAB under these scenarios. Both parties recognize that a significant portion of TearLab’s ability to market and sell its products is subject to a license and royalty agreement with the University of California at San Diego (UCSD). Both parties also acknowledge that no rights conferred in this Agreement can conflict or go beyond the rights granted to TearLab under its current agreement with UCSD and as amended.

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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(2) In recognition of the above, it is agreed that if TearLab ceases to trade or otherwise ceases to supply the Product to the market for a period of at least 60 days for reasons other than (1) lack of supply of product, or (2) a regulatory recall or action which prohibits supply into the market, and no new party acquires the assets to allow it to supply the Product to the market, then MiniFAB will have the right to make and supply the Product to the existing users in the global market, and the following provisions will apply from the termination of this Agreement:

(a)	MiniFAB’s obligation under clause 3.4(1) to manufacture the Product exclusively for TearLab and to sell the Product exclusively to TearLab or its designee, and not otherwise to manufacture, sell, warehouse or distribute the Product to any third party shall terminate;
(b)	TearLab irrevocably appoints MiniFAB as its worldwide, non-exclusive distributor to market, distribute and sell the Product, for the period through to 5 years after the End Date commencing from the effective date of termination of this Agreement;
(c)	Unless otherwise agreed by MiniFAB, TearLab must maintain the regulatory approvals for the Product, and MiniFAB will reimburse TearLab for the costs and expenses reasonably incurred by TearLab in maintaining the regulatory approvals;
(d)	MiniFAB will manufacture the Product on behalf of TearLab in accordance with the Regulatory Requirements, and may market, distribute and sell the Product anywhere in the world, subject to regulatory approvals; and
(e)	MiniFAB will pay TearLab a royalty in respect of the ongoing use of the TearLab IP and reliance on the regulatory approvals for the Product equal to 5% of the price received by MiniFAB for the Product, net of any tax (excluding income tax), excise or other governmental charge upon or in relation to the sale of the Product (less any amounts payable to UCSD under the licence contemplated in clause 10.8(2)), plus an amount equivalent to any amount payable by TearLab to UCSD in respect of the sales of the Product by MiniFAB, such royalty to be calculated and paid on a monthly in arrears basis.

18.7 Survival

All clauses that by their nature survive expiration or termination of this Agreement will remain in force. For the avoidance of doubt, clauses 1, 1.1, 10.1, 10.6, 10.7(2), 10.8, 14.1, 14.4, 16, 10.2, 18, 19, 20, 21, 23 and 24 survive termination.

19. Liability and indemnity

19.1 Indemnity by TearLab

TearLab shall indemnify MiniFAB and its Representatives against all Losses incurred by any of them as result of claims by third persons against any of them arising directly or indirectly as a result of:

(1)	any grossly negligent, unlawful, fraudulent or wilful misconduct committed by TearLab or its Representatives in the performance of this Agreement;
(2)	the marketing, promotion, sale or supply of the Product by TearLab; or
(3)	TearLab’s failure to obtain, maintain or comply in any respect with any Registrations, except, in each case, to the extent Losses result from any event described in clause 19.2.

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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19.2 Indemnity by MiniFAB

MiniFAB shall indemnify TearLab and its Representatives against all Losses incurred by them as a result of claims by third persons against TearLab arising directly or indirectly, to the extent resulting from:

(1)	any grossly negligent, unlawful, fraudulent or wilful misconduct committed by the MiniFAB or their Representatives in the performance of this Agreement;
(2)	any manufacturing defect in any Product supplied to TearLab, or any failure of any Product to conform to the Specifications; or
(3)	the failure to obtain and maintain all necessary governmental permits for the development and manufacture of Product hereunder, except, in each case, to the extent Losses result from any event described in clause 19.1.

19.3 General provisions applicable to indemnities

(1)	A party (the “Indemnitee”) that intends to claim indemnification under this clause 19 shall promptly notify the other party (the “Indemnitor”) of any claim, demand, action or other proceeding for which the Indemnitee intends to claim such indemnification.
(2)	The Indemnitor shall have the right to assume and control the defense thereof with counsel selected by the Indemnitor; provided, however, that the Indemnitee shall have the right to retain its own counsel to participate in the defense, subject to Indemnitor’s right to control the defense.
(3)	The indemnity obligations under this clause 19 shall not apply to amounts paid in settlement of any Loss if such settlement is effected without the prior express written consent of the Indemnitor, which consent shall not be unreasonably withheld or delayed.
(4)	The failure to deliver notice to the Indemnitor within a reasonable time after notice of any relevant claim, or the commencement of any such action or other proceeding shall not relieve such Indemnitor of all liability to the Indemnitee under this clause 19 with respect thereto, but if such failure is prejudicial to the Indemnitor’s ability to defend such claim, and if such prejudice results in Losses that otherwise would likely have been avoided or reduced if timely notice had been given, then the Indemnitor shall be relieved of said part of the Losses.
(5)	The Indemnitor may not settle or otherwise consent to an adverse judgment in any such claim, that diminishes the rights or interests of the Indemnitee without the prior express written consent of the Indemnitee, which consent shall not be unreasonably withheld or delayed (it being understood that no consent by the Indemnitee is required for the Indemnitor to obtain a full release of all claims by a third person against an Indemnitee in exchange solely for the payment of a settlement amount by Indemnitor).
(6)	The Indemnitee, its employees and agents, shall reasonably cooperate with the Indemnitor and its legal representatives in the investigation of any claim covered by this clause 19.
(7)	The indemnities contained in this clause 19 do not negate the obligation of the party having the benefit of such indemnity to mitigate its Losses; and are continuing obligations on each party, separate and independent of any other obligation.

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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19.4 No consequential damages

Except for any liability under clause 20 or the indemnity provided under clauses 19.1 or 19.2, to the extent permitted by law, neither party will be liable to the other party in any circumstances for any special, incidental, punitive, exemplary, consequential or any other indirect loss or damage, or in any event for any loss of revenue, loss of production, loss of profit or loss of data.

20. Confidentiality

20.1 Prohibited acts

Neither party may, without the other party’s prior written consent, copy or disclose or cause to be copied or disclosed any Confidential Information of the other party other than to the extent that such Confidential Information must be disclosed:

(1)	to the party’s sub-contractors, employees, legal advisers, auditors, investors or other consultants in order for this Agreement to be performed, provided that the recipients of the information undertake in writing to the party to keep that information strictly confidential; or
(2)	to Regulatory Authorities as required to obtain or maintain any regulatory approvals.

20.2 Permitted uses

Each party may only make use of Confidential Information of the other party to the extent necessary to enable the party to perform its obligations or exercise its rights under this Agreement.

20.3 Excluded information

For the purposes of this clause, Confidential Information does not include any information which the receiving party can establish:

(1)	was in the public domain when it was disclosed to the receiving party;
(2)	becomes, after being disclosed to the receiving party, part of the public domain, except through disclosure contrary to this Agreement;
(3)	was already in the receiving party’s possession when it was disclosed to the receiving party and was not otherwise acquired from the other party directly or indirectly; or
(4)	was lawfully disclosed to the receiving party by a third party having the unrestricted legal right to disclose that information without requiring the maintenance of confidentiality.

Prior to making a disclosure of information which the receiving party alleges is no longer or never was Confidential Information by virtue of falling within one of the above exceptions, the receiving party must give to the other party 10 Business Days’ notice of the proposed disclosure and the reasons for the exception applying.

20.4 Compulsory disclosures

The obligations of confidentiality in this clause do not apply to a receiving party where the receiving party is required under the lawful compulsion of any court, tribunal, authority or regulatory body to disclose any Confidential Information of the other party. Provided that before a party discloses any Confidential Information pursuant to the foregoing it must provide the other party with reasonable notice to enable it to seek a protective court order or other remedy in respect of the Confidential Information, and it must provide the other party with all assistance and co-operation which the other party considers necessary to obtain such protective court order or other remedy.

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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20.5 Protection of information

Each party must notify the other party in writing immediately upon the discovery of any apparent unauthorised use or disclosure of any Confidential Information and take all reasonable steps to enforce the confidentiality obligations imposed or required to be imposed by this clause 20 including diligently prosecuting at its cost any breach or threatened breach of any such confidentiality obligations by any person to whom it has disclosed or allowed access to the Confidential Information or at the other party’s option making all reasonable efforts to assist the other party to help regain possession of the Confidential Information and prevent any further unauthorised disclosure or use.

20.6 Confidentiality of agreement

The parties must maintain absolute confidentiality concerning the existence and subject matter of this Agreement and no public announcement or communication relating to the negotiations of the parties or the existence, subject matter or terms of this Agreement may be made or authorised by a party without the prior written approval of the other party except that the following disclosures may be made in relation to this Agreement:

(1)	by either party to its sub-contractors, employees, auditors, consultants, professional advisers, bankers, financial advisers, financiers, investors and potential investors upon those persons undertaking to keep confidential any information so disclosed; or
(2)	to comply with any applicable law or requirement of any Governmental Agency or of any public stock exchange on which shares of the disclosing party are listed.

20.7 Return of Confidential Information

Each party agrees that on termination or expiration of this Agreement it will deliver to that other party any and all materials containing or embodying that other party’s Confidential Information and any copies thereof; provided that each party shall be entitled to retain one (1) copy of the other party’s Confidential Information, to be kept at such party’s legal files for use solely for the purpose of ensuring continued compliance with the terms of this Agreement.

21. Disputes

21.1 Attempt to Settle

If a dispute arises between the parties in connection with this Agreement then the parties must use all reasonable endeavours acting in good faith to settle the dispute as soon as practicable.

21.2 Limitations on Court Proceedings

A party must not commence court proceedings in relation to a dispute arising in connection with this Agreement until it has exhausted the procedures in this clause 21, unless the party seeks urgent interlocutory relief.

21.3 Disputes relating to Products

If the dispute relates to whether or not a particular Product meets the relevant Specifications and the Regulatory Requirements, then the parties must submit the dispute to an independent laboratory, which will act as an expert in determining whether or not the Product meets the relevant Specifications and the Regulatory Requirements; provided, however, that if it is not technically feasible to make such independent laboratory determination in connection with a particular dispute (e.g., if insufficient number of samples of a relevant lot of Product is available), then such dispute shall be determined by arbitration under clause 21.5

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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21.4 Other disputes

If a dispute does not relate to whether or not a particular Product meets the relevant Specifications and the Regulatory Requirements and the parties are unable in good faith to settle the dispute within 20 Business Days after the dispute arose, then either party may submit the matter to arbitration under clause 21.5.

21.5 Arbitration

(1)

If any dispute arises under, or in connection with, this Agreement and/or in connection with any breach or alleged breach of this Agreement, and such matter is not resolved pursuant to clause 21.1 or 21.3 or by other agreement of the parties, such matter shall be finally resolved through binding arbitration as set forth in this clause 21.5. Either party may initiate arbitration of such a matter, and the party initiating arbitration of such dispute must give to the other party or parties to the dispute notice specifying the dispute and requiring its resolution under this clause 21.5 (Notice of Dispute). Such Notice of Dispute shall be given in accordance with the arbitration rules specified under this clause 21.5.

(2)

Each such dispute is by this clause 21.5 referred to binding arbitration for final resolution. The arbitration must be conducted in:

(a)	Melbourne, Australia if the Notice of Dispute is given by TearLab; and
(b)	San Diego California, USA, if the Notice of Dispute is given by MiniFAB.

(3)	If the parties have not agreed upon the arbitrator within 7 days after the Notice of Dispute is given, the arbitrator will be appointed in accordance with the then-current rules of the International Centre for Dispute Resolution.
(4)	The arbitrator must not be a present or former member, officer, employee or agent of a party to the dispute or a person who has acted as a mediator or advised any party in connection with the dispute.
(5)	The arbitration shall be conducted in accordance with the then-current rules of the International Centre for Dispute Resolution by one (1) arbitrator appointed in accordance with such rules. The arbitrator shall determine what discovery will be permitted, consistent with the goal of limiting the cost and time which the parties must expend for discovery; provided the arbitrator shall permit such discovery as the arbitrator deems necessary to permit an equitable resolution of the dispute. The arbitrator shall not order or require discovery against either party of a type or scope that is not permitted against the other party. The costs of the arbitration, including administrative and arbitrators’ fees, shall be shared equally by the parties, and each party shall bear its own costs and attorneys’ and witness’ fees incurred in connection with the arbitration. Any arbitration subject to this clause shall be completed within one (1) year from the filing of notice of a request for such arbitration. No punitive damages may be granted by the arbitrator. The arbitration proceedings and the decision shall not be made public without the joint consent of the parties, and each party shall maintain the confidentiality of such proceedings and decision unless otherwise permitted by the other party, except to the extent (and solely to the extent) either party is required to disclose such information by applicable securities or other laws. The parties agree that the decision shall be the sole, exclusive and binding remedy between them regarding any and all disputes, controversies, claims and counterclaims presented to the arbitrator. Any award may be entered in a court of competent jurisdiction for a judicial recognition of the decision and applicable orders of enforcement, and either party may apply to any court of competent jurisdiction for appropriate temporary injunctive relief pending resolution of any arbitration proceeding. The arbitrator shall provide a written arbitration award setting forth the arbitrator’s findings on material questions of law and of fact, including references to the evidence on which the findings of fact were based. Each party may be represented by a qualified legal practitioner or other representative.

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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(6) This clause 21.5 applies even where the Agreement is otherwise void or voidable.

21.6 Continuing Obligations

Except as specifically provided in this Agreement, the parties must continue to perform their obligations under this Agreement despite the existence of a dispute or any steps being taken under this clause 21.

22. Force Majeure

22.1 Party not liable

Where a party is required under this Agreement to perform an obligation or do any act or thing by a designated time or date (Obligation), the party is not liable for any delay in performing or for failure to perform an Obligation where the delay or failure arises from Force Majeure and that party has complied with this clause.

22.2 Notice of Force Majeure

A party who claims Force Majeure must:

(1) give the other party prompt notice of the Force Majeure with reasonably full particulars and an estimate of the extent and duration of its delay in performance, or inability to perform; and

(2) use all possible diligence to resume normal performance of the delayed obligations as quickly as possible.

22.3 Termination in case of Force Majeure

If the delay continues beyond 30 days after the notice given under clause 22.2, the parties must meet to discuss in good faith a mutually satisfactory resolution of the problem and, if unable to achieve such a resolution within a further 60 days, either party may elect to terminate this Agreement by 30 days’ prior written notice to the other.

23. Notices

23.1 A notice or other communication connected with this Agreement (Notice) has no legal effect unless it is in writing.

23.2 In addition to any other method of service provided by law, the Notice may be:

(1)	sent by prepaid post to the address of the addressee set out in this Agreement or subsequently notified;
(2)	sent by facsimile to the facsimile number of the addressee;
(3)	sent via email to the email address of the addressee; or

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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(4) delivered at the address of the addressee set out in this Agreement or subsequently notified.

23.3 If the Notice is sent or delivered in a manner provided by clause 23.2, it must be treated as given to and received by the party to which it is addressed:

(1)	if sent by facsimile or email, on the next Business Day at the place of receipt, unless a transmission failure notice is received by the sender; or
(2)	if sent by post or otherwise, upon receipt by the addressee.

23.4 Despite clause 23.3(1):

(1)	a facsimile is not treated as given or received unless at the end of the transmission the sender’s facsimile machine issues a report confirming the transmission of the number of pages in the Notice;
(2)	a facsimile is not treated as given or received if it is not received in full and in legible form and the addressee notifies the sender of that fact by the close of the Business Day on which it would otherwise be treated as given and received.

24. General

24.1 Communication

Each party will on an ongoing basis by fully responsive to requests from the other for approvals or the provision of information relevant to the first party’s activities under the Agreement.

24.2 Further assurance

Each party must promptly at its own cost do all things (including executing and if necessary delivering all documents) necessary or desirable to give full effect to this Agreement, to the extent commercially reasonable to do so.

24.3 Entire understanding

This Agreement is the entire agreement and understanding between the parties on everything connected with the subject matter of this Agreement and supersedes any prior agreement or understanding on anything connected with that subject matter on the going-forward basis from the Effective Date.

24.4 Variation

An amendment or variation to this Agreement is not effective unless it is in writing and signed by the parties.

24.5 Assignment within corporate structure

Neither party may assign its right or obligations under this Agreement without the consent of the other party, except where the assignee is related body corporate to the assignor. In this clause, where a body corporate is: (a) a holding company of another body corporate; or (b) a subsidiary of another body corporate; or (c) a subsidiary of a holding company of another body corporate; the first-mentioned body and the other body are related to each other.

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

35

24.6 No assignment of bare IP

TearLab may not assign the benefit of any Intellectual Property rights granted by MiniFAB under this Agreement independent of the obligations of this Agreement without the written consent of MiniFAB, which may be given on such terms as it reasonably considers necessary to protect its right under this Agreement.

24.7 Waiver

A party’s failure or delay to exercise a power or right does not operate as a waiver of that power or right. The exercise of a power or right does not preclude either its exercise in the future or the exercise of any other power or right. A waiver is not effective unless it is in writing. Waiver of a power or right is effective only in respect of the specific instance to which it relates and for the specific purpose for which it is given.

24.8 Costs and outlays

Each party must pay its own costs and outlays connected with the negotiation, preparation and execution of this Agreement.

24.9 Governing law and jurisdiction

This Agreement shall be governed and construed in accordance with the laws of England, United Kingdom.

24.10 Affiliates Actions

Each party will ensure that none of its affiliates takes any action which is inconsistent with that Party’s obligations under this Agreement, or which if it was done or not done under this Agreement by that party would amount to a breach of this Agreement by that party.

[Signature page follows]

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

36

Executed as an agreement.

Executed by MiniFAB (Aust) Pty Ltd in accordance with section 127 of the Corporations Act 2001:
/s/ Michael Wilkinson	/s/ Erol Harvey
Director/company secretary	Director
MICHAEL WILKINSON	EROL HARVEY
Name of director/company secretary (BLOCK LETTERS)	Name of director (BLOCK LETTERS)

Signed for and on behalf of TearLab Research, Inc. by its authorised representative in the presence of:
/s/ Michael Marquez	/s/ Seph Jensen
Signature of witness	Signature of authorised representative
MICHAEL MARQUEZ	SEPH JENSEN
Name of witness (BLOCK LETTERS)	Name of authorised representative (BLOCK LETTERS)
940 S. Kimball, Southlake, TX USA
Address of witness

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

37

Schedule 1 - Pricing Schedule

Pricing Schedule - Discovery Test Card: Discovery Dry Eye Panel Osmolarity & MMP9

2. Price

The Price for each Product is the greater of:

(1)	the Fixed Price Amount per Product plus any applicable amortization amount, in US Dollars; or
(2)	the Net Selling Price Amount (which does not include any amortization amount), which will be calculated on an quarterly basis. any amortization amount will apply to the unamortized balance,

Where

(3)	the Fixed Price Amount per Product is the amount determined from the table below, by reference to volume of Product being supplied and excludes any local United States of America taxes which may be imposed on the sale of the Product, and which are payable by TearLab; and
(4)	the Net Selling Price Amount is the Average Adjusted Selling Price per Product (as defined below) multiplied by the Net Sales Amount Percentage for the relevant Quarter as set out in the table below.

3. Fixed Price Amount

Monthly card volume*	Price – COGS (USD)	Reagent Cost inc.	Min Volumes(per month)	Amortised amount***	Net Sales Amount Percentage
Completion of Phase 1
up to [***]	[***]**	[***]	[***]	[***]	[***]
Completion of Phase 2
[***]-[***]	[***]	[***]		[***]	[***]
[***]-[***]	[***]	[***]		[***]	[***]
[***]-[***]	[***]	[***]		[***]	[***]

*	The order levels are those of Product. Accordingly the Fixed Price Amount per Product will be determined Quarterly based on the total number of Products ordered in the prior Quarter.
**	The price per card will be subject to the agreed discount for the first [***] cards only (per clause 7.8).
***	Subject to clause 4.1(7), after three years.

4. Average Adjusted Selling Price

The Average Adjusted Selling Price is equal to the Net Sales Income for all Products sold or supplied by TearLab or its affiliates in the relevant Quarter, divided by the total number of Products sold or supplied by TearLab or its affiliates in that Quarter, calculated in USD, excluding any amortised amounts payable in respect of that Quarter.

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

38

For the purposes of the above calculation:

(1)	A Product will be deemed sold at the earlier of the date it is invoiced, payment is received for it or it is shipped to the buyer.
(2)	Product supplied as free samples will not be included in the quantity of Product sold or supplied.
(3)	If Product is supplied on other than an arm’s length basis, other than by way of free sample, then such Product and their associated Net Sales Income will be ignored for the purposes of the calculation.
(4)	If the Product was invoiced or paid for in a currency other than USD then the selling price will be converted to USD at the exchange rate published on the day of the sale. TearLab must include the exchange rate used for the conversion in its report.

5. Invoicing and reporting

(1) Within 20 Business Days after the end of each Quarter, TearLab must provide MiniFAB a written report detailing:

(a)	the number of units of Product held in stock at the start of each month of that Quarter;
(b)	the number of units of Product delivered by the Supplier under this Agreement during each month of that year;
(c)	the number of units of Product sold by TearLab in each month of that Quarter;
(d)	the gross amount invoiced for the Product sold by TearLab in each month of that Quarter;
(e)	the calculation of Net Sales Income for the relevant Quarter and the number of units of Product to which it relates, with details of any adjustments made pursuant to paragraphs 4(2) or 4(3) above; and
(f)	the aggregate Net Sales Amount for the Product sold by TearLab in that Quarter.

(2) If the Net Selling Price Amount for a Quarter is greater than the Fixed Price Amount applicable in that Quarter then within 10 Business Days after receiving the report of TearLab in relation to a particular Quarter, MiniFAB will invoice TearLab an amount equal to the Net Selling Price Amount minus the applicable Fixed Price Amount with the result multiplied by the number of Units of Product sold by TearLab in the relevant Quarter.

6. Record keeping and audit

(1)	TearLab must keep and retain true and particular accounts and records of all sales of Product sufficient to verify TearLab’s calculation and reports provided under the provisions set out above. TearLab must retain records for a minimum of 7 years after the transaction to which they relate occurred.
(2)	During the term of this Agreement and for a period of 2 years thereafter, MiniFAB may appoint an independent qualified accountant to inspect and audit from time to time the accounts and records of TearLab referred to in paragraph (1) above and such other matters as are directly relevant to the calculation of the Average Adjusted Selling Price or Net Sales Amount.
(3)	If any discrepancy is found by the accountant pursuant to an audit conducted in accordance with paragraph (2), then the amount determined due and payable will be adjusted in the report and payment shall be adjusted for the next year together with any applicable interest payable under clause 7.5.
(4)	No findings of the audit are considered final until both parties acting in good faith agree. An ongoing disagreement will be a dispute, and subject to resolution in accordance with clause 21 of the Agreement.
(5)	MiniFAB will bear the cost of any such audit unless a discrepancy of 10% or more in the Net Sales Amount is detected in which event TearLab must bear the cost of the audit

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

39

Schedule 2

Finished Product

Name

Discovery Dry Eye Panel (Osmolarity and MMP9)

Description

A Discovery Test Card for measuring osmolarity and MMP9, as more particularly described in the applicable Specification.

Discovery Test Card: Osmolarity and MMP9 means the tear collection device developed by MiniFAB and TearLab to measure osmolarity and MMP9. The Discovery Test Card: Osmolarity and MMP9 is described in the specification (A copy of which is annexed to this Agreement).

All price and cost information is based on a tested and packaged Discovery Test Card: Osmolarity and MMP9, packaged and configured as mutually agreed.

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

40

Annexure A

Requirement Definitions of Product

[#To be inserted]

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

41

Annexure B

Specifications for Product

[#To be inserted]

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

42

EX-10.2

CONFIDENTIAL TREATMENT REQUESTED

CONFIDENTIAL PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. INFORMATION THAT WAS OMITTED IN THE EDGAR VERSION HAS BEEN NOTED IN THIS DOCUMENT WITH A PLACEHOLDER IDENTIFIED BY THE MARK “[***]”.

Addendum to the Manufacturing, Supply and Development Agreement of 2016

entered into between

MiniFAB (Aust) Pty Ltd

ACN 100 768 474

and

TearLab Research, Inc.

Date of this Addendum: August 9, 2018

1	Glossary
	In this addendum, unless the context otherwise requires, the terms in the first column below have the meaning given to them in the second column. Terms that are capitalised in this Addendum but not defined below, have the meanings used in the Agreement.

Addendum	this addendum to the Agreement
Agreement	the Manufacturing, Supply and Development between the parties dated March 2016 for the manufacture of the ‘Product’ described as the TCI card
New Agreement	the Manufacturing, Supply and Development between the parties dated August 9, 2018 for the manufacture of the ‘Product’ described as “Discovery Test Card, together with the Reagents, capsule and applicable packaging …”
Aggregate Product Volume	The aggregate of the order volumes for the TCI cards and the Discovery Test Card, under both the Agreement and the New Agreement, respectively
Discovery Test Card	the ‘Discovery Test Card’ as described in schedule 2 of the New Agreement
TCI Card	the ‘Base TCI card’ (or ‘Base Card’) as described in schedule 2 of the Agreement

2	Volumes and pricing
2.1	TCI Card pricing will remain fixed at the current price of [***], except as provided under 2.2 below.

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 -2-

2.2 Without limiting clause 11.3 of the Agreement, if:

(1)	the average monthly order volume of TCI Cards, on a rolling six month average, falls below [***] cards per month; or
(2)	the Aggregate Product Volume in the calendar year commencing 12 months after the launch of the ‘Discovery’ product under the New Agreement is below [***] cards; or
(3)	the Aggregate Product Volume in any calendar year after 24 months after the launch of the ‘Discovery’ product under the New Agreement falls below [***] cards, then the parties will renegotiate the pricing for the supply of TCI Cards under the Agreement.

3	Operative effect
	By executing this addendum the parties agree that the terms of this Addendum are incorporated into the Agreement, which is varied accordingly, with effect from the date of execution.

Executed by MiniFAB (Aust) Pty Ltd in accordance with section 127 of the Corporations Act 2001:
/s/ Michael Wilkinson	/s/ Erol Harvey
Director/company secretary	Director
MICHAEL WILKINSON	EROL HARVEY
Name of director/company secretary (BLOCK LETTERS)	Name of director (BLOCK LETTERS)

Signed for and on behalf of TearLab Research, Inc. by its authorised representative in the presence of:
/s/ Michael Marquez	/s/ Seph Jensen
Signature of witness	Signature of authorised representative
MICHAEL MARQUEZ	SEPH JENSEN
Name of witness (BLOCK LETTERS)	Name of authorised representative (BLOCK LETTERS)
940 S. Kimball, Southlake, TX USA
Address of witness

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Joseph Jensen, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of TearLab Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4.	The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under the Company’s supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under the Company’s supervision, 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;
c)	evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report the Company’s conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5.	The Registrant’s other certifying officer and I have disclosed, based on the Company’s most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent function):
a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Dated: November 8, 2018
	/s/ Joseph Jensen
	Joseph Jensen
	Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael Marquez, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of TearLab Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4.	The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under the Company’s supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under the Company’s supervision, 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;
c)	evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report the Company’s conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5.	The Registrant’s other certifying officer and I have disclosed, based on the Company’s most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent function):
a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Dated: November 8, 2018
	/s/ Michael Marquez
	Michael Marquez
	Interim Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of TearLab Corporation (the “Company”) for the quarter ended September 30, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joseph Jensen, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

1.	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	By:	/s/ Joseph Jensen
		Joseph Jensen
		Chief Executive Officer
Dated: November 8, 2018

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of TearLab Corporation (the “Company”) for the quarter ended September 30, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael Marquez, Interim Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

1.	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	By:	/s/ Michael Marquez
		Michael Marquez
		Interim Chief Financial Officer
Dated: November 8, 2018

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2018	Nov. 05, 2018
Document And Entity Information
Entity Registrant Name	TearLab Corp
Entity Central Index Key	0001299139
Document Type	10-Q
Document Period End Date	Sep. 30, 2018
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Entity Small Business Flag	true
Entity Emerging Growth Company	false
Entity Ex Transition Period	false
Entity Common Stock, Shares Outstanding		11,296,998
Trading Symbol	TEAR
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2018

XML

Condensed Consolidated Balance Sheets (Unaudited) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Current assets
Cash	$ 8,240	$ 7,272
Accounts receivable, net	1,319	1,536
Inventory	1,752	1,998
Prepaid expenses and other current assets	398	690
Total current assets	11,709	11,496
Fixed assets, net	1,894	2,739
Intangible assets, net	3	10
Other non-current assets	150	100
Total assets	13,756	14,345
Current liabilities
Accounts payable	1,053	1,720
Accrued liabilities	2,129	2,859
Deferred rent and revenue	17	42
Current portion of long-term debt	11,221
Total current liabilities	14,420	4,621
Long-term debt, net of current portion	19,526	28,290
Total liabilities	33,946	32,911
Commitments and contingencies (Note 8)
Stockholders' deficit
Capital stock
Preferred stock, $0.001 par value, 10,000,000 authorized, 556 and 2,012 issued and outstanding at September 30, 2018 and December 31, 2017, respectively
Common stock, $0.001 par value, 40,000,000 authorized, 11,296,998 and 7,986,998 issued and outstanding at September 30, 2018 and December 31, 2017, respectively	11	8
Additional paid-in capital	510,346	510,235
Accumulated deficit	(530,547)	(528,809)
Total stockholders' deficit	(20,190)	(18,566)
Total liabilities and stockholders' deficit	$ 13,756	$ 14,345

XML

Condensed Consolidated Balance Sheets (Unaudited) (Parenthetical) - $ / shares	Sep. 30, 2018	Dec. 31, 2017
Statement of Financial Position [Abstract]
Preferred stock, par value	$ 0.001	$ 0.001
Preferred stock, shares authorized	10,000,000	10,000,000
Preferred stock, shares issued	556	2,012
Preferred stock, shares outstanding	556	2,012
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	40,000,000	40,000,000
Common stock, shares issued	11,296,998	7,986,998
Common stock, shares outstanding	11,296,998	7,986,998

XML

Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Revenue
Product sales	$ 5,424	$ 5,733	$ 16,878	$ 17,949
Reader equipment rentals	728	790	2,133	2,289
Total revenue	6,152	6,523	19,011	20,238
Cost of goods sold
Cost of goods sold (excluding amortization of intangible assets)	2,161	3,028	6,351	8,252
Cost of goods sold - reader equipment depreciation	222	415	775	1,328
Gross profit	3,769	3,080	11,885	10,658
Operating expenses
Sales and marketing	759	2,659	2,738	9,294
Clinical, regulatory and research & development	728	898	2,766	3,572
General and administrative	1,284	2,260	4,668	6,755
Total operating expenses	2,771	5,817	10,172	19,621
Income (loss) from operations	998	(2,737)	1,713	(8,963)
Other income (expense)
Interest income (expense)	(1,193)	(1,069)	(3,447)	(3,145)
Other, net		(15)	(5)	(27)
Total other income (expense)	(1,193)	(1,084)	(3,452)	(3,172)
Net loss and comprehensive loss	$ (195)	$ (3,821)	$ (1,739)	$ (12,135)
Weighted average shares outstanding - basic and fully diluted	11,005,789	5,742,234	10,385,828	5,615,903
Net loss per share - basic and fully diluted	$ (0.02)	$ (0.67)	$ (0.17)	$ (2.16)

XML

Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
OPERATING ACTIVITIES
Net loss for the period	$ (1,739)	$ (12,135)
Adjustments to reconcile net loss to cash used in operating activities:
Stock-based compensation	117	661
Depreciation of fixed assets	957	1,490
Amortization of intangible assets	8	45
Deferred interest on long-term debt	2,799	928
Amortization of debt discount	655	466
Loss on disposal of fixed assets	16
Changes in operating assets and liabilities:
Accounts receivable, net	217	624
Inventory	245	603
Prepaid expenses and other assets	293	451
Other non-current assets	(50)	(70)
Accounts payable	(666)	51
Accrued liabilities	(730)	(103)
Deferred rent/revenue	(25)	(34)
Cash provided by (used in) operating activities	2,097	(7,023)
INVESTING ACTIVITIES
Additions to fixed assets	(129)	(744)
Cash used in investing activities	(129)	(744)
FINANCING ACTIVITIES
Payment on term loan	(1,000)
Repurchase of fractional shares upon reverse stock split		(3)
Proceeds from the issuance of employee stock purchase plan shares		45
Deferred financing fees and capital costs for equity transactions		(33)
Cash (used in) provided by financing activities	(1,000)	9
Increase (Decrease) in cash and cash equivalents during the period	968	(7,758)
Cash, beginning of period	7,272	15,471
Cash, end of period	8,240	7,713
Supplemental cash flow information
Cash paid for interest		$ 1,155

XML

Basis of Presentation

9 Months Ended

Sep. 30, 2018

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Basis of Presentation

1. BASIS OF PRESENTATION

Nature of Operations

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

The accompanying condensed consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated on consolidation.

Liquidity and Going Concern

The accompanying Condensed Consolidated Financial Statements have been prepared on the going concern basis, which assumes that the Company will continue to operate as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has sustained substantial losses of $1,739 and $12,135 for the nine months ended September 30, 2018 and 2017, respectively. Based on the Company’s expected rate of cash consumption in the last quarter of 2018, the Company estimates it will need additional capital in the first quarter of 2019 and its prospects for obtaining that capital are uncertain. The Company may be able to raise either additional debt financing or additional equity financing. However, the Company can make no assurances that it will be able to raise the required additional capital, either through debt or equity financing, on acceptable terms or at all. Unless the Company succeeds in raising additional capital, the Company anticipates that it will be unable to continue operations through the end of the first quarter of 2019 without violating an existing covenant on the Term Loan Agreement, including the inability to make our debt payments due within twelve months (see Note 5). As a result of the Company’s historical losses and financial condition, there is substantial doubt about the Company’s ability to continue as a going concern.

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Significant Accounting Policies

9 Months Ended

Sep. 30, 2018

Accounting Policies [Abstract]

Significant Accounting Policies

2. SIGNIFICANT ACCOUNTING POLICIES

The Condensed Consolidated Balance Sheet at December 31, 2017 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States (“U.S. GAAP”) for complete financial statements. These unaudited interim Condensed Consolidated Financial Statements have been prepared using significant accounting policies that are consistent with the policies used in preparing the Company’s audited consolidated financial statements for the year ended December 31, 2017. The audited financial statements for the year ended December 31, 2017, filed with the SEC with the Company’s annual report on Form 10-K on March 5, 2018 include a summary of significant accounting policies and should be read in conjunction with this Form 10-Q. Management believes that all adjustments necessary for the fair presentation of results, consisting of normally recurring items, have been included in the unaudited Condensed Consolidated Financial Statements for the interim periods presented.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The principal areas of judgment relate to revenue and inventory reserves, allowance for doubtful accounts, impairment of long-lived and intangible assets, and the fair value of stock options and warrants.

Revenue Recognition

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

There was no net reduction to opening retained earnings as a result of adopting Topic 606 and no impact to revenues for the three or nine months ended September 30, 2018.

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

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

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

Use, Masters, and Flex Agreements

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

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

Purchase Agreements

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

Amounts billed to customers for shipping and handling of a sales transaction are included as revenue. The Company recognized revenue from shipping and handling of $35 and $40 for the three months ended September 30, 2018 and 2017, respectively. The Company recognized revenue from shipping and handling of $113 and $128 for the nine months ended September 30, 2018 and 2017, respectively.

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

	Three months ended				Nine months ended
	September 30,				September 30,
	2018		2017		2018		2017
Product Sales	$	5,424	$	5,733	$	16,878	$	17,949
Reader Equipment Rentals		728		790		2,133		2,289
	$	6,152	$	6,523	$	19,011	$	20,238

Arrangements with Multiple Performance Obligations

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

Return Reserve

Although the Company has a no return policy for its products, the Company has established a return reserve for product sales that contain an implicit right of return. The Company reserves for estimated returns or refunds by reducing revenue at the time of shipment based on historical experience. The reserve of $7 and $9 as of September 30, 2018 and December 31, 2017, respectively, has been recorded as a reduction of revenue and is included in accounts receivable.

Practical Expedients and Exemptions

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

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

Recent Accounting Pronouncements

In June 2018, the FASB issued Accounting Standards Update (“ASU”) No. 2018-07, “Compensation – Stock Compensation (Topic 718).” ASU 2018-07 simplifies the accounting for nonemployee share-based payment transactions. This ASU is effective for public entities for interim and annual reporting periods beginning after December 15, 2018. The Company is currently evaluating the potential impact of this guidance and does not believe that it will have a material impact on the Company’s financial statements.

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

In December 2017, the United States (“U.S.”) enacted the Tax Cuts and Jobs Act (the “2017 Act”), which changes existing U.S. tax law and includes various provisions that are expected to affect public companies. The 2017 Act (i) changes U.S. corporate tax rates, (ii) generally reduces a company’s ability to utilize accumulated net operating losses, and (iii) requires the calculation of a one-time transition tax on certain previously unrepatriated foreign earnings and profits (“E&P”). The 2017 Act will also impact estimates of a company’s deferred tax assets and liabilities. On December 22, 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act (“U.S. Tax Cuts and Jobs Act of 2017”). This new law did not have a significant impact on our consolidated financial statements for the year ended December 31, 2017 because we maintain a valuation allowance on the entirety of our deferred tax assets. However, the reduction of the U.S. federal corporate tax rate from 34% to 21% resulted in a remeasurement of our deferred tax assets.

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

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 establishes a right-of-use model that requires a lessee to record an asset and liability on the balance sheet for all leases with terms longer than twelve months. In July 2018, the FASB issued ASU 2018-10, Codification improvements to Topic 842 (leases), which provides narrow amendments to clarify how to apply certain aspects of the new lease standard. In July 2018, the FASB also issued ASU 2018-11, Leases (Topic 842): Targeted improvements, which provides an optional transition method that allows entities to elect to apply the standard prospectively at its effective date, versus recasting the prior periods presented. The Company is currently evaluating the impact of the new standard on its financial statements.

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Balance Sheet Details

9 Months Ended

Sep. 30, 2018

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Balance Sheet Details

3. BALANCE SHEET DETAILS

Accounts Receivable

	September 30, 2018			December 31, 2017
Trade receivables	$	1,602		$	2,044
Allowance for doubtful accounts		(283	)		(508	)
	$	1,319		$	1,536

Inventory

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

	September 30, 2018			December 31, 2017
Finished goods	$	1,753		$	2,125
Inventory reserves		(1	)		(127	)
	$	1,752		$	1,998

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

Prepaid Expenses and Other Current Assets

	September 30, 2018		December 31, 2017
Prepaid trade shows	$	-	$	14
Prepaid insurance		103		313
Manufacturing deposits		170		-
Subscriptions		75		311
Other fees and services		50		52
	$	398	$	690

Fixed Assets, Net

	September 30, 2018			December 31, 2017
Capitalized TearLab equipment	$	6,994		$	8,437
Leasehold improvements		13			60
Computer equipment and software		843			915
Furniture and office equipment		368			436
Medical equipment		1,261			1,180
	$	9,479		$	11,028
Less accumulated depreciation		(7,585	)		(8,289	)
	$	1,894		$	2,739

Depreciation expense was $957 and $1,490 for the nine months ended September 30, 2018 and 2017, respectively, and $278 and $464, for the three months ended September 30, 2018 and 2017, respectively.

Accrued Liabilities

	September 30, 2018		December 31, 2017
Due to professionals	$	26	$	193
Due to employees and directors		990		944
Sales and use tax liabilities		252		253
Royalty liability		284		447
Warranty		84		131
Restructuring		-		200
Other		493		691
	$	2,129	$	2,859

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

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Intangible Assets

9 Months Ended

Sep. 30, 2018

Goodwill and Intangible Assets Disclosure [Abstract]

Intangible Assets

4. INTANGIBLE ASSETS

The Company’s intangible assets consist of the value of TearLab® Technology acquired in the acquisition of TearLab Research, Inc., a wholly-owned subsidiary of the Company and a prescriber list. The TearLab Technology, which consists of a disposable lab card and card reader, supported by an array of patents and patent applications that are either held or in-licensed by the Company. Amortization expense for the three months ended September 30, 2018 and 2017 was $2 and $15, respectively. Amortization expense for the nine months ended September 30, 2018 and 2017 was $8 and $45, respectively.

Intangible assets subject to amortization consist of the following:

	Remaining		Gross					Net Book
	Useful Life		Value at		Accumulated			Value at
	(Years)		September 30, 2018		Amortization			September 30, 2018
TearLab® technology		0	$	12,172	$	(12,172	)	$	-
Patents and trademarks		1		271		(268	)		3
Prescriber list		0		90		(90	)		-
Total			$	12,533	$	(12,530	)	$	3

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

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

	Amortization
	of intangible
	assets
Remainder of 2018	$	1
Thereafter		2
	$	3

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Term Loan

9 Months Ended

Sep. 30, 2018

Debt Disclosure [Abstract]

Term Loan

5. TERM LOAN

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

As part of Amendment No. 2 to the Term Loan Agreement, and funding of the second tranche, CRG received 35,000 warrants dated as of October 6, 2015 to purchase common shares of the Company at a price of $50.00 per share (the “2015 CRG Warrants”). The 2015 CRG Warrants have a five-year life. The 2015 CRG Warrants are classified as equity on the Condensed Consolidated Balance Sheets as of September 30, 2018 and 2017. The 2015 CRG Warrants were valued at their issuance date using the Black-Scholes Merton model. The related reduction of the long-term debt will be amortized over the life of the debt. On April 7, 2016, the Company entered into Amendment No. 4 the Term Loan Agreement and the Company issued CRG additional warrants to purchase 35,000 common shares of the Company’s stock at $15.00 per share (the “2016 CRG Warrants”) and together with the 2015 CRG Warrants, the “CRG Warrants”, expire 5 years after issuance.

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

On April 4, 2018 with an effective date of March 31, 2018, the Company entered into Amendment No. 6 to the Term Loan Agreement. Pursuant to the terms of this amendment, the cash interest payments due in 2018 will be deferred and added to the principal balance under the Loan Agreement at the end of each quarter. This amendment also provided for an additional facility fee equal to 3% of the sum of the aggregate amount of the principal drawn under the Term Loan Agreement and any PIK loans issued, so that the total facility fee shall be 9.5%, applicable to the entire balance, (the “Facility Fee”). The Facility Fee is being accrued to interest expense using the effective interest method. In addition, this amendment reduced the minimum liquidity covenant to $3 million. Concurrent with the reduction of the liquidity covenant the Company agreed to repay CRG $1.0 million of principal on the Term Loan Agreement in April 2018. Lastly, this amendment reduced the strike price of the existing CRG Warrants to $0.44 per share (see Note 6). The Amendment was accounted for as a modification in accordance with U.S. GAAP.

The loan is collateralized by all assets of the Company. Additionally, the terms of the Term Loan Agreement contain various affirmative and negative covenants agreed to by the Company. Among them, the Company must attain minimum certain annual revenue and minimum cash threshold levels. As part of Amendment No. 5 to the Term Loan Agreement, discussed above, and Company and CRG agreed to change the required minimum revenue levels. The amended minimum revenue is $25,000 for 2018, $38,000 for 2019 and $45,000 for 2020.

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

At September 30, 2018, the Company was in compliance with all of the covenants.

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

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

The following is a summary of the Term Loan Agreement as of September 30, 2018 and related maturities of outstanding principal:

Principal balance outstanding	$	24,000
PIK interest		5,923
Facility fee		1,234
less discount on term loan:
deferred financing fees, net		(218	)
detachable warrants, net		(192	)
	$	30,747
Less, current portion of term loan		(11,221	)
Total term loan		19,526

Principal due for each of the next 3 years and in the aggregate:

2018		-
2019		14,962
2020		16,196
Total principal due		31,158
Less: discount on term loan		(411	)
Total term loan	$	30,747

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Stockholders' Equity

9 Months Ended

Sep. 30, 2018

Equity [Abstract]

Stockholders' Equity

6. STOCKHOLDERS’ EQUITY

(a) Authorized Share Capital

On October 12, 2017, the stockholders of the Company approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 9,500,000 to 40,000,000. Each share of common stock has a par value of $0.001 per share. The total number of authorized shares of preferred stock of the Company is 10,000,000. Each share of preferred stock has a par value of $0.001 per share.

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

(b) Common and Preferred Shares

On December 8, 2017, the Company issued 2,013,636 shares of common stock, 2,114 shares of Series A Convertible Preferred Stock (“Preferred Stock”), Series A warrants to purchase 6,818,181 shares of common Stock (“Series A Warrants”) and Series B warrants to purchase 6,818,181 shares of common stock (“Series B Warrants”) for gross proceeds of $3,000, less issuance costs of $596. Additionally, the Company granted the placement agent compensation warrants to purchase 477,273 shares of common stock. The Preferred Stock is convertible, subject to certain limitations, into an aggregate of 4,804,545 shares of common stock, contains no voting rights, participates in any common stock dividends and is treated as if converted upon any ordinary liquidation event. The common stock, Preferred Stock and the Series A Warrants and Series B Warrants are all included in equity in the Company’s consolidated balance sheets as of September 30, 2018 and December 31, 2017. The net proceeds were allocated to common stock, Preferred Stock, Series A Warrants and Series B Warrants based on their relative fair values as follows:

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

As of September 30, 2018, 1,558 shares of Series A Preferred Stock have been converted into 3,540,909 shares of common stock. As of September 30, 2018 all Series B warrants expired with no warrants exercised.

(c) Stock Incentive Plan

On June 23, 2017 the Company’s stockholders approved an amendment to the 2002 Stock Incentive Plan (the “Stock Incentive Plan”), to increase the total number of shares reserved for issuance to 1,070,000 from 720,000. Stock Incentive Plan shares are available for grant to employees, directors and consultants. Shares granted under the Stock Incentive Plan may be incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock or restricted share units. Under the terms of the Stock Incentive Plan, the exercise price per share for an incentive stock option shall not be less than the fair market value of a share of stock on the effective date of grant and the exercise price per share for non-statutory stock options shall not be less than 85% of the fair market value of a share of stock on the date of grant. No option granted to a holder of more than 10% of the Company’s common stock shall have an exercise price per share less than 110% of the fair market value of a share of stock on the effective date of grant.

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

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

The following table sets forth the total stock-based compensation expense resulting from stock options and the employee stock purchase plan included in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2018		2017		2018		2017
Sales and marketing	$	9	$	61	$	49	$	317
Clinical, regulatory and research and development		5		14		21		98
General and administrative		23		52		47		246
Stock-based compensation expense before income taxes	$	37	$	127	$	117	$	661

(d) Employee Stock Purchase Plan

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

The price at which stock is purchased under the ESPP is equal to 90% of the fair market value of the common stock on the first or the last day of the offering period, whichever is lower. Generally, each offering under the ESPP will be for a period of six months as determined by the Company’s Board of Directors. Employees may invest up to 20% of their gross compensation through payroll deductions. In no event may an employee invest more than $25 worth of stock in the plan during each calendar year or purchase more than 500 shares per offering period. During the three months ended September 30, 2018 and 2017, the Company recorded $0 and $2 of expense, respectively, under the ESPP. During the nine months ended September 30, 2018 and 2017, the Company recorded $0 and $6 of expense, respectively, under the ESPP. During the nine months ended September 30, 2018 and 2017, the Company issued 0 and 14,233 shares of common stock, respectively, under the ESPP. In early 2018, the Company terminated the Employee Stock Purchase Plan.

(e) Warrants

On October 8, 2015, as part of Amendment No. 2 to the Term Loan Agreement and funding of the $10,000 tranche, CRG received warrants to purchase 35,000 common shares in the Company at a price of $50.00 per share (the “2015 CRG Warrants”). The 2015 CRG Warrants are exercisable any time prior to October 8, 2020. The 2015 CRG Warrants are classified as equity on the Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017. The 2015 CRG Warrants were valued at $290 upon issuance using the Black-Scholes Merton model assuming volatility of 73%, an expected life of 5.0 years, a risk-free interest rate of 1.71%, and 0% dividend yield. No CRG Warrants were exercised during the nine months ended September 30, 2018 or 2017.

On April 8, 2016, as part of Amendment No. 4 to the Term Loan Agreement, the exercise price of the 2015 CRG Warrants was changed to allow the holder to purchase 35,000 common shares in the Company at a price of $15.00 per share and CRG was issued an additional 35,000 warrants to purchase common shares at an exercise price of $15.00 (the “2016 CRG Warrants” and, together with the 2015 CRG Warrants, the “CRG Warrants”). The modification to the terms of the 2015 CRG Warrants resulted in a change in fair value of $54 which was included as interest expense. The change in fair value was calculated using the Black-Scholes Merton model with both exercise prices, assuming volatility of 76%, an expected life of 4.5 years, a risk-free interest rate of 1.06%, and 0% dividend yield. The 2016 CRG Warrants were valued at $106 upon issuance using the Black-Scholes Merton model assuming volatility of 76%, an expected life of 5.0 years, a risk-free interest rate of 1.30% and 0% dividend yield.

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

On October 12, 2017, as part of Amendment No. 5 to the Term Loan Agreement, the exercise price of the CRG Warrants was changed to allow the holder to purchase common shares in the Company at a price of $1.50 per share as well as provide broad anti-dilution protection such that the CRG Warrants shall maintain the same 1.22% ownership following any capital raises the Company completed through March 31, 2018. The modification to the terms of the CRG Warrants resulted in a change in fair value of $44 which was included as interest expense. The 2015 CRG Warrants change in fair value was calculated using the Black-Scholes Merton model with both exercise prices, assuming volatility of 94%, an expected life of 2.99 years, a risk-free interest rate of 1.70% and 0% dividend yield. The 2016 CRG Warrants change in fair value was calculated using the Black-Scholes Merton model with both exercise prices, assuming volatility of 90%, an expected life of 3.48 years, a risk-free interest rate of 1.80% and 0% dividend yield.

On December 8, 2017, the Company issued Series A Warrants to purchase 6,818,181 shares of common stock for $0.44 per share and Series B Warrants to purchase 6,818,181 shares of common stock for $0.44 per share in conjunction with shares of common stock and Series A Convertible Preferred stock issued on that same date. The Series A Warrants were exercisable immediately and expire 5 years after the issuance date. Fair Value of the Series A Warrants, for purposes of allocating the net proceeds of the equity offering, was determined using the Black-Scholes Merton model assuming volatility of 88%, an expected life of 5 years, a risk free interest rate of 2.14% and a 0% dividend yield and are classified as equity on the Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017. The Series B Warrants were exercisable immediately and expired 6 months after the issuance date. Fair value of the Series B Warrants for purposes of allocating the net proceeds of the equity offering, was determined using the Black-Scholes Merton model assuming a volatility of 158.6%, an expected life of 6 months, a risk free rate of 1.45% and a 0% dividend yield and are classified as equity on the Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017. All Series B Warrants expired on June 7, 2018 with no warrants exercised. In addition, we granted the placement agent compensation warrants to purchase 477,273 shares of common stock at $0.55 per share. The compensation warrants are in the same form as Series A Warrants, excluding the exercise price, and will terminate on the five year anniversary date. The placement agent warrants are classified as equity on the Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017.

In connection with the December 2017 offering the Company issued CRG additional warrants to purchase 83,240 shares of common stock at an exercise price of $1.50 (“2017 CRG Warrants”) as a result of triggering the anti-dilution clause of Amendment No. 5 to the Term Loan Agreement (see Footnote 5 for additional information). The anti-dilution clause is considered down-round protection, however the Company early adopted ASU 2017-11 and therefore the down-round feature is excluded from the consideration of whether the 2017 CRG Warrants are indexed to the Company’s own stock and therefore the 2017 CRG Warrants are not required to be liabilities under the guidance. The 2017 CRG Warrants are classified as equity on the Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017 and were valued at $30 upon issuance using the Black-Scholes Merton model assuming volatility of 88%, an expected life of 5 years, a risk-free interest rate of 2.14% and 0% dividend yield.

In March 2018, in connection with Amendment No. 6 to the Term Loan Agreement, the CRG warrants and the 2017 CRG Warrants had a change in strike price to $0.44. The modification to the terms of the CRG Warrants and the 2017 CRG Warrants resulted in a change in fair value of $10 which was included as interest expense.

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Net Income (Loss) Per Share

9 Months Ended

Sep. 30, 2018

Earnings Per Share [Abstract]

Net Income (Loss) Per Share

7. NET INCOME (LOSS) PER SHARE

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

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

(in thousands of shares)	As of September 30,
	2018		2017
Stock options		1,018		682
Warrants		8,702		1,323
ESPP shares		-		6
Convertible preferred shares		1		-
Total		9,721		2,011

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2018

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

8. COMMITMENTS AND CONTINGENCIES

Commitments

The Company has commitments relating to operating leases recognized on a straight line basis over the term of the lease for rental of office space and equipment from unrelated parties, expiring at various times through December 30, 2023. The Company leases office facilities under an operating lease agreement. The initial term of the lease is five years and includes periodic rent increases and a renewal option.

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

Effective October 1, 2006, the Company entered into a second 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.

Future minimum royalty payments under this agreement as of September 30, 2018 are as follows:

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

On March 7, 2016, the Company, through its subsidiary, TearLab Research, Inc., entered into a supply and development agreement (“Supply Agreement”) with MiniFAB (Aust) Pty Ltd (“MiniFAB”). The agreement is an exclusive supply agreement through June 2021, for the purchase and delivery of individual osmolarity test cards with the freight costs borne by MiniFab. The Company has the benefit of a lower purchase price and certain savings from freight costs will remain in place throughout the agreement. The Supply Agreement requires, in any given 6 calendar months, the Company must place aggregate purchase orders equal to at least 50% of the orders forecasted for that 6 month period at its onset. The Supply Agreement can be extended by either party for a term of five years with the option for the Company to buyout the exclusive supply provision during any extended term. This Supply Agreement replaces the August 2011 agreement between MiniFAB and the Company. On August 9, 2018 the Company entered into an addendum to the 2016 Manufacturing and Supply and Development Agreement with MiniFab. The amendment fixes the price of the osmolarity test cards at their current price until the earlier of: the average monthly order volume of osmolarity cards on a rolling six month average falls below 20,000 cards; or the aggregate product volume in the calendar year commencing 12 months after the launch of the Discovery^TM product is below 2.4 million cards; or the aggregate product volume in any calendar year after 24 months after the launch of the Discovery^TM product is below 3.0 million cards at which point the Company and MiniFab will renegotiate pricing.

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

Contingencies

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

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

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Restructuring Costs

9 Months Ended

Sep. 30, 2018

Restructuring and Related Activities [Abstract]

Restructuring Costs

9. RESTRUCTURING COSTS

On December 15, 2017 the Company approved a new business model to maintain its current customer and annuity revenue base, focus resources on the development and generation of clinical data for our next generation TearLab Discovery^TM Platform and reduce the Company’s cash burn rate. In connection with the restructuring the Company recorded restructuring expenses of $322 primarily related to employee cost and one-time contract termination costs at December 31, 2017. Liabilities related to the restructuring are included in accrued liabilities in the Condensed Consolidated Balance Sheet. The following table summarizes the activity related to the restructuring during the nine months ended September 30, 2018:

	Employee Costs			Other Costs			Total
Accrued obligations as of December 31, 2017	$	97		$	103		$	200
Settlement of obligations		(97	)		(103	)		(200	)
Accrued obligations as of September 30, 2018	$	0		$	0		$	0

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Related Party

9 Months Ended

Sep. 30, 2018

Related Party Transactions [Abstract]

Related Party

10. RELATED PARTY

The Company has an agreement with the Chief Scientific Officer whereas if the Company enters into an agreement with UCSD to reduce the overall royalty rate the Company shall pay to the Chief Scientific Officer a royalty on net sales equal to one and a half percent of the percent change in the UCSD royalty rate. The restated UCSD patent license and royalty agreement (see Note 8) resulted in a royalty due at a rate of 0.68%. As of September 30, 2018 the Company recorded a related party royalty of $219, covering the period of July 1, 2017 to September 30, 2018.

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Subsequent Events

9 Months Ended

Sep. 30, 2018

Subsequent Events [Abstract]

Subsequent Events

11. SUBSEQUENT EVENTS

On October 10, 2018, the Company announced that the FDA determined that the TearLab Discovery^TM MMP-9 test had not met the criteria for substantial equivalence based upon data and information submitted by the Company. The Company plans to utilize the guidance provided by the FDA to compile the additional information necessary to resubmit for 510(k) clearance. After securing FDA clearance, the Company intends to pursue a CLIA waiver in an effort to prepare for commercialization in the US market.

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Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2018

Accounting Policies [Abstract]

Use of Estimates

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The principal areas of judgment relate to revenue and inventory reserves, allowance for doubtful accounts, impairment of long-lived and intangible assets, and the fair value of stock options and warrants.

Revenue Recognition

Revenue Recognition

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

There was no net reduction to opening retained earnings as a result of adopting Topic 606 and no impact to revenues for the three or nine months ended September 30, 2018.

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

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

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

Use, Masters, and Flex Agreements

Use, Masters, and Flex Agreements

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

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

Purchase Agreements

Purchase Agreements

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

Amounts billed to customers for shipping and handling of a sales transaction are included as revenue. The Company recognized revenue from shipping and handling of $35 and $40 for the three months ended September 30, 2018 and 2017, respectively. The Company recognized revenue from shipping and handling of $113 and $128 for the nine months ended September 30, 2018 and 2017, respectively.

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

	Three months ended				Nine months ended
	September 30,				September 30,
	2018		2017		2018		2017
Product Sales	$	5,424	$	5,733	$	16,878	$	17,949
Reader Equipment Rentals		728		790		2,133		2,289
	$	6,152	$	6,523	$	19,011	$	20,238

Arrangements with Multiple Performance Obligations

Arrangements with Multiple Performance Obligations

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

Return Reserve

Return Reserve

Although the Company has a no return policy for its products, the Company has established a return reserve for product sales that contain an implicit right of return. The Company reserves for estimated returns or refunds by reducing revenue at the time of shipment based on historical experience. The reserve of $7 and $9 as of September 30, 2018 and December 31, 2017, respectively, has been recorded as a reduction of revenue and is included in accounts receivable.

Practical Expedients and Exemptions

Practical Expedients and Exemptions

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

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

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In June 2018, the FASB issued Accounting Standards Update (“ASU”) No. 2018-07, “Compensation – Stock Compensation (Topic 718).” ASU 2018-07 simplifies the accounting for nonemployee share-based payment transactions. This ASU is effective for public entities for interim and annual reporting periods beginning after December 15, 2018. The Company is currently evaluating the potential impact of this guidance and does not believe that it will have a material impact on the Company’s financial statements.

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

In December 2017, the United States (“U.S.”) enacted the Tax Cuts and Jobs Act (the “2017 Act”), which changes existing U.S. tax law and includes various provisions that are expected to affect public companies. The 2017 Act (i) changes U.S. corporate tax rates, (ii) generally reduces a company’s ability to utilize accumulated net operating losses, and (iii) requires the calculation of a one-time transition tax on certain previously unrepatriated foreign earnings and profits (“E&P”). The 2017 Act will also impact estimates of a company’s deferred tax assets and liabilities. On December 22, 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act (“U.S. Tax Cuts and Jobs Act of 2017”). This new law did not have a significant impact on our consolidated financial statements for the year ended December 31, 2017 because we maintain a valuation allowance on the entirety of our deferred tax assets. However, the reduction of the U.S. federal corporate tax rate from 34% to 21% resulted in a remeasurement of our deferred tax assets.

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

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 establishes a right-of-use model that requires a lessee to record an asset and liability on the balance sheet for all leases with terms longer than twelve months. In July 2018, the FASB issued ASU 2018-10, Codification improvements to Topic 842 (leases), which provides narrow amendments to clarify how to apply certain aspects of the new lease standard. In July 2018, the FASB also issued ASU 2018-11, Leases (Topic 842): Targeted improvements, which provides an optional transition method that allows entities to elect to apply the standard prospectively at its effective date, versus recasting the prior periods presented. The Company is currently evaluating the impact of the new standard on its financial statements.

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Significant Accounting Policies (Tables)

9 Months Ended

Sep. 30, 2018

Accounting Policies [Abstract]

Schedule of Disaggregated Revenues

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

	Three months ended				Nine months ended
	September 30,				September 30,
	2018		2017		2018		2017
Product Sales	$	5,424	$	5,733	$	16,878	$	17,949
Reader Equipment Rentals		728		790		2,133		2,289
	$	6,152	$	6,523	$	19,011	$	20,238

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Balance Sheet Details (Tables)

9 Months Ended

Sep. 30, 2018

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Schedule of Accounts Receivable

Accounts Receivable

	September 30, 2018			December 31, 2017
Trade receivables	$	1,602		$	2,044
Allowance for doubtful accounts		(283	)		(508	)
	$	1,319		$	1,536

Schedule of Inventory

Inventory

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

	September 30, 2018			December 31, 2017
Finished goods	$	1,753		$	2,125
Inventory reserves		(1	)		(127	)
	$	1,752		$	1,998

Summary of Prepaid Expenses and Other Current Assets

Prepaid Expenses and Other Current Assets

	September 30, 2018		December 31, 2017
Prepaid trade shows	$	-	$	14
Prepaid insurance		103		313
Manufacturing deposits		170		-
Subscriptions		75		311
Other fees and services		50		52
	$	398	$	690

Schedule of Fixed Assets

Fixed Assets, Net

	September 30, 2018			December 31, 2017
Capitalized TearLab equipment	$	6,994		$	8,437
Leasehold improvements		13			60
Computer equipment and software		843			915
Furniture and office equipment		368			436
Medical equipment		1,261			1,180
	$	9,479		$	11,028
Less accumulated depreciation		(7,585	)		(8,289	)
	$	1,894		$	2,739

Schedule of Accrued Liabilities

Accrued Liabilities

	September 30, 2018		December 31, 2017
Due to professionals	$	26	$	193
Due to employees and directors		990		944
Sales and use tax liabilities		252		253
Royalty liability		284		447
Warranty		84		131
Restructuring		-		200
Other		493		691
	$	2,129	$	2,859

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Intangible Assets (Tables)

9 Months Ended

Sep. 30, 2018

Goodwill and Intangible Assets Disclosure [Abstract]

Schedule of Amortization of Intangible Assets

Intangible assets subject to amortization consist of the following:

	Remaining		Gross					Net Book
	Useful Life		Value at		Accumulated			Value at
	(Years)		September 30, 2018		Amortization			September 30, 2018
TearLab® technology		0	$	12,172	$	(12,172	)	$	-
Patents and trademarks		1		271		(268	)		3
Prescriber list		0		90		(90	)		-
Total			$	12,533	$	(12,530	)	$	3

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

Schedule of Estimated Amortization Expense of Intangible Assets

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

	Amortization
	of intangible
	assets
Remainder of 2018	$	1
Thereafter		2
	$	3

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Term Loan (Tables)

9 Months Ended

Sep. 30, 2018

Debt Disclosure [Abstract]

Schedule of Term Loan

The following is a summary of the Term Loan Agreement as of September 30, 2018 and related maturities of outstanding principal:

Principal balance outstanding	$	24,000
PIK interest		5,923
Facility fee		1,234
less discount on term loan:
deferred financing fees, net		(218	)
detachable warrants, net		(192	)
	$	30,747
Less, current portion of term loan		(11,221	)
Total term loan		19,526

Schedule of Maturities of Outstanding Principal of Term Loan

Principal due for each of the next 3 years and in the aggregate:

2018		-
2019		14,962
2020		16,196
Total principal due		31,158
Less: discount on term loan		(411	)
Total term loan	$	30,747

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Stockholders' Equity (Tables)

9 Months Ended

Sep. 30, 2018

Equity [Abstract]

Schedule of Common and Preferred Shares

The net proceeds were allocated to common stock, Preferred Stock, Series A Warrants and Series B Warrants based on their relative fair values as follows:

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

Schedule of Stock-Based Compensation Expense

The following table sets forth the total stock-based compensation expense resulting from stock options and the employee stock purchase plan included in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2018		2017		2018		2017
Sales and marketing	$	9	$	61	$	49	$	317
Clinical, regulatory and research and development		5		14		21		98
General and administrative		23		52		47		246
Stock-based compensation expense before income taxes	$	37	$	127	$	117	$	661

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Net Income (Loss) Per Share (Tables)

9 Months Ended

Sep. 30, 2018

Earnings Per Share [Abstract]

Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share

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

(in thousands of shares)	As of September 30,
	2018		2017
Stock options		1,018		682
Warrants		8,702		1,323
ESPP shares		-		6
Convertible preferred shares		1		-
Total		9,721		2,011

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Commitments and Contingencies (Tables)

9 Months Ended

Sep. 30, 2018

Commitments and Contingencies Disclosure [Abstract]

Schedule of Future Minimum Payments

Future minimum royalty payments under this agreement as of September 30, 2018 are as follows:

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

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Restructuring Costs (Tables)

9 Months Ended

Sep. 30, 2018

Restructuring and Related Activities [Abstract]

Schedule of Expenses Related to Restructuring

The following table summarizes the activity related to the restructuring during the nine months ended September 30, 2018:

	Employee Costs			Other Costs			Total
Accrued obligations as of December 31, 2017	$	97		$	103		$	200
Settlement of obligations		(97	)		(103	)		(200	)
Accrued obligations as of September 30, 2018	$	0		$	0		$	0

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Basis of Presentation (Details Narrative) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Organization, Consolidation and Presentation of Financial Statements [Abstract]
Net income (loss)	$ 195	$ 3,821	$ 1,739	$ 12,135

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Significant Accounting Policies (Details Narrative) - USD ($) $ in Thousands		3 Months Ended		9 Months Ended		12 Months Ended
	Dec. 22, 2017	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2017
Shipping and handling fee		$ 2,161	$ 3,028	$ 6,351	$ 8,252
Reserve of product sales				$ 7		$ 9
Income tax reconciliation description	The Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act ("U.S. Tax Cuts and Jobs Act of 2017"). This new law did not have a significant impact on our consolidated financial statements for the year ended December 31, 2017 because we maintain a valuation allowance on the entirety of our deferred tax assets. However, the reduction of the U.S. federal corporate tax rate from 34% to 21% resulted in a remeasurement of our deferred tax assets.
Percentage on statutory rate				21.00%
Shipping and Handling [Member]
Shipping and handling fee		$ 35	$ 40	$ 113	$ 128

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Significant Accounting Policies - Schedule of Disaggregated Revenues (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Accounting Policies [Abstract]
Product sales	$ 5,424	$ 5,733	$ 16,878	$ 17,949
Reader equipment rentals	728	790	2,133	2,289
Total revenue	$ 6,152	$ 6,523	$ 19,011	$ 20,238

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Balance Sheet Details (Details Narrative) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Depreciation expense	$ 278	$ 464	$ 957	$ 1,490
Minimum [Member]
Royalty percentage			3.00%
Maximum [Member]
Royalty percentage			5.50%

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Balance Sheet Details - Schedule of Accounts Receivable (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Organization, Consolidation and Presentation of Financial Statements [Abstract]
Trade receivables	$ 1,602	$ 2,044
Allowance for doubtful accounts	(283)	(508)
Accounts receivable net	$ 1,319	$ 1,536

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Balance Sheet Details - Schedule of Inventory (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Organization, Consolidation and Presentation of Financial Statements [Abstract]
Finished goods	$ 1,753	$ 2,125
Inventory reserves	(1)	(127)
Inventory net	$ 1,752	$ 1,998

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Balance Sheet Details - Summary of Prepaid Expenses and Other Current Assets (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Organization, Consolidation and Presentation of Financial Statements [Abstract]
Prepaid trade shows		$ 14
Prepaid insurance	103	313
Manufacturing deposits	170
Subscriptions	75	311
Other fees and services	50	52
Prepaid expense and other current assets	$ 398	$ 690

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Balance Sheet Details - Schedule of Fixed Assets (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Property plant and equipment, gross	$ 9,479	$ 11,028
Less accumulated depreciation	(7,585)	(8,289)
Property plant and equipment net	1,894	2,739
Capitalized TearLab Equipment [Member]
Property plant and equipment, gross	6,994	8,437
Leasehold Improvements [Member]
Property plant and equipment, gross	13	60
Computer Equipment and Software [Member]
Property plant and equipment, gross	843	915
Furniture and Office Equipment [Member]
Property plant and equipment, gross	368	436
Medical Equipment [Member]
Property plant and equipment, gross	$ 1,261	$ 1,180

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Balance Sheet Details - Schedule of Accrued Liabilities (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Organization, Consolidation and Presentation of Financial Statements [Abstract]
Due to professionals	$ 26	$ 193
Due to employees and directors	990	944
Sales and use tax liabilities	252	253
Royalty liability	284	447
Warranty	84	131
Restructuring		200
Other	493	691
Accrued liabilities current	$ 2,129	$ 2,859

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Intangible Assets (Details Narrative) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Goodwill and Intangible Assets Disclosure [Abstract]
Amortization expense	$ 2	$ 15	$ 8	$ 45

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Intangible Assets - Schedule of Amortization of Intangible Assets (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2018	Dec. 31, 2017
Gross Value	$ 12,533	$ 12,533
Accumulated Amortization	(12,530)	(12,523)
Net Book Value	$ 3	10
TearLab Technology [Member]
Remaining Useful Life (Years)	0 years
Gross Value	$ 12,172	12,172
Accumulated Amortization	(12,172)	(12,172)
Net Book Value
Patents and Trademarks [Member]
Remaining Useful Life (Years)	1 year
Gross Value	$ 271	271
Accumulated Amortization	(268)	(261)
Net Book Value	$ 3	10
Prescriber List [Member]
Remaining Useful Life (Years)	0 years
Gross Value	$ 90	90
Accumulated Amortization	(90)	(90)
Net Book Value

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Intangible Assets - Schedule of Estimated Amortization Expense of Intangible Assets (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Total	$ 3	$ 10
Indefinite-lived Intangible Assets [Member]
Remainder of 2018	1
Thereafter	2
Total	$ 3

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Term Loan (Details Narrative) - USD ($) $ / shares in Units, $ in Thousands				9 Months Ended
	Apr. 04, 2018	Oct. 06, 2015	Mar. 04, 2015	Sep. 30, 2018	Mar. 31, 2018	Dec. 31, 2017	Oct. 12, 2017	Apr. 08, 2016	Apr. 07, 2016	Mar. 31, 2016	Oct. 08, 2015
Long-term debt				$ 19,526		$ 28,290
Financing and legal fees to long-term debt				1,234
Term Loan Agreement [Member]
Warrants exercise price					$ 0.44
CRG Warrants [Member]
Warrants to purchase common shares								35,000			35,000
Warrants exercise price								$ 15.00			$ 50.00
Term Loan Agreement [Member] | CRG LP Additional Warrants [Member]
Warrants to purchase common shares								35,000	35,000
Warrants exercise price							$ 1.50	$ 15.00	$ 15.00
Warrants term									5 years
Ownership percentage							1.22%
CRG LP [Member] | Term Loan Agreement [Member]
Additional facility fee percentage on principal	3.00%
Facility fee percentage on principal	9.50%
Minimum liquidity covenant amount	$ 3,000
Payment of liquidity covenant	$ 1,000
CRG LP [Member] | CRG Warrants [Member] | Term Loan Agreement [Member]
Warrants exercise price	$ 0.44
Term Loan Agreement [Member] | CRG LP [Member]
Long-term debt			$ 35,000
Proceeds from issuance of long-term debt			$ 15,000
Debt instrument date			Dec. 31, 2020
Debt instrument interest rate percentage			13.00%
Warrants to purchase common shares		35,000
Warrants exercise price		$ 50.00
Warrants term		5 years
Ownership percentage							1.22%
Financing and legal fees to long-term debt				606
Percentage of prepayment fee										5.00%
Percentage of reduction in annual prepayment fee										1.00%
Term Loan Agreement [Member] | CRG LP [Member] | Maximum [Member]
Warrants exercise price							$ 15.00
Term Loan Agreement [Member] | CRG LP [Member] | Minimum [Member]
Warrants exercise price							$ 1.50
Term Loan Agreement [Member] | CRG LP [Member] | 2018 [Member]
Term loan minimum annual revenue threshold				25,000
Term Loan Agreement [Member] | CRG LP [Member] | 2019 [Member]
Term loan minimum annual revenue threshold				38,000
Term Loan Agreement [Member] | CRG LP [Member] | 2020 [Member]
Term loan minimum annual revenue threshold				$ 45,000
Term Loan Agreement [Member] | CRG LP [Member] | Interest-Only Payment [Member]
Debt instrument interest rate percentage			8.50%
Term Loan Agreement [Member] | CRG LP [Member] | Unpaid Interest With Principal [Member]
Debt instrument interest rate percentage			4.50%
Term Loan Agreement [Member] | CRG LP [Member] | Second Tranche [Member]
Proceeds from issuance of long-term debt		$ 10,000

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Term Loan - Schedule of Term Loan (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Debt Disclosure [Abstract]
Principal balance outstanding	$ 24,000
PIK interest	5,923
Facility fee	1,234
Deferred financing fees, net	(218)
Detachable warrants, net	(192)
Total	30,747
Less, current portion of term loan	11,221
Total term loan	$ 19,526	$ 28,290

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Term Loan - Schedule of Maturities of Outstanding Principal of Term Loan (Details) $ in Thousands	Sep. 30, 2018 USD ($)
Debt Disclosure [Abstract]
2018
2019	14,962
2020	16,196
Total principal due	31,158
Less: discount on term loan	(411)
Total term loan	$ 30,747

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Stockholders' Equity (Details Narrative) - USD ($) $ / shares in Units, $ in Thousands								1 Months Ended	3 Months Ended		9 Months Ended		12 Months Ended
	Dec. 08, 2017	Oct. 12, 2017	Jun. 23, 2017	Feb. 27, 2017	May 09, 2016	Apr. 08, 2016	Oct. 08, 2015	Mar. 31, 2018	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2017	Apr. 07, 2016
Common stock shares authorized									40,000,000		40,000,000		40,000,000
Common stock par value		$ 0.001							$ 0.001		$ 0.001		$ 0.001
Preferred stock shares authorized		10,000,000							10,000,000		10,000,000		10,000,000
Preferred stock par value		$ 0.001							$ 0.001		$ 0.001		$ 0.001
Reserve stock split				1-for-10 reverse stock split
Stock issued during period, shares new issue	2,013,636
Preferred stock, issued									556		556		2,012
Proceeds from issuance or sale of equity											$ 2,404
Allocated share-based compensation expense									$ 37	$ 127	117	$ 661
Common Stock [Member]
Proceeds from issuance or sale of equity											$ 327
Common stock, conversion basis											3,540,909
2002 Stock Incentive Plan [Member]
Share-based compensation common stock purchase price percentage											10.00%
Share-based compensation expiration period											10 years
Expected weighted-average period											5 years
2002 Stock Incentive Plan [Member] | Employees, Directors and Consultants [Member]
Share-based compensation number of shares reserved for issuance			720,000
Employee Stock Purchase Plan 2014 [Member]
Share-based compensation common stock purchase price percentage											90.00%
Common stock capital shares reserved for future issuance									28,601		28,601
Employee stock purchase plan offering period											6 months
Share-based compensation employee stock purchase plan contribution percentage											20.00%
Share-based compensation employee stock purchase plan contribution maximum amount											$ 25
Share-based compensation employee stock purchase plan contribution maximum number of shares											500
Allocated share-based compensation expense									$ 0	$ 2	$ 0	$ 6
Stock issued during period number of shares of employee stock purchase plans											0	14,233
Term Loan Agreement [Member]
Class of warrant or right exercise price of warrants or rights								$ 0.44
Fair value of warrants								$ 10
Term Loan Agreement [Member] | Tranche One [Member]
Proceeds from issuance of long-term debt							$ 10,000
Series A Convertible Preferred Stock [Member]
Preferred stock, issued	2,114
Common stock, conversion basis											1,558
Series A Warrants [Member]
Preferred stock, issued	6,818,181
Series A Warrants [Member] | Black-Scholes Merton Model [Member]
Class of warrant or right number of securities called by warrants or rights	6,818,181				1,253,500
Expected weighted-average period	5 years				6 years
Class of warrant or right exercise price of warrants or rights	$ 0.44				$ 11.25
Fair value assumptions, volatility percentage	88.00%				76.00%
Fair value assumptions, risk-free interest rate	2.14%				1.30%
Fair value assumptions, dividend yield	0.00%				0.00%
Warrant expiration date, description	Expire 5 years after the issuance date				Expire 5 years after the Initial Exercise Date
Series B Warrants [Member]
Preferred stock, issued	6,818,181
Proceeds from issuance or sale of equity	$ 3,000
Payments of stock issuance costs	$ 596
Series B Warrants [Member] | Black-Scholes Merton Model [Member]
Class of warrant or right number of securities called by warrants or rights	6,818,181
Expected weighted-average period	6 months
Class of warrant or right exercise price of warrants or rights	$ 0.44
Fair value assumptions, volatility percentage	158.60%
Fair value assumptions, risk-free interest rate	1.45%
Fair value assumptions, dividend yield	0.00%
Warrant expiration date, description	Expire 6 months after the issuance date
Placement Agent Warrants [Member]
Class of warrant or right number of securities called by warrants or rights	477,273
Common Stock [Member]
Common stock, conversion basis	4,804,545
CRG Warrants [Member]
Class of warrant or right number of securities called by warrants or rights						35,000	35,000
Expected weighted-average period							5 years
Class of warrant or right exercise price of warrants or rights						$ 15.00	$ 50.00
Warrants exercisable date							Oct. 08, 2020
Fair value of warrants							$ 290
Fair value assumptions, volatility percentage							73.00%
Fair value assumptions, risk-free interest rate							1.71%
Fair value assumptions, dividend yield							0.00%
CRG Warrants [Member] | Black-Scholes Merton Model [Member]
Class of warrant or right number of securities called by warrants or rights									83,240		83,240
Expected weighted-average period											5 years		5 years
Class of warrant or right exercise price of warrants or rights									$ 1.50		$ 1.50
Fair value of warrants											$ 30		$ 30
Fair value assumptions, volatility percentage											88.00%		88.00%
Fair value assumptions, risk-free interest rate											2.14%		2.14%
Fair value assumptions, dividend yield											0.00%		0.00%
CRG Warrants [Member] | Black-Scholes Merton Model [Member] | Term Loan Agreement [Member]
Expected weighted-average period		3 years 5 months 23 days				5 years
Fair value of warrants						$ 106
Fair value assumptions, volatility percentage		90.00%				76.00%
Fair value assumptions, risk-free interest rate		1.80%				1.30%
Fair value assumptions, dividend yield		0.00%				0.00%
CRG LP Additional Warrants [Member] | Term Loan Agreement [Member]
Class of warrant or right number of securities called by warrants or rights						35,000								35,000
Expected weighted-average period		2 years 11 months 26 days
Class of warrant or right exercise price of warrants or rights		$ 1.50				$ 15.00								$ 15.00
Fair value of warrants		$ 44
Fair value assumptions, volatility percentage		94.00%
Fair value assumptions, risk-free interest rate		1.70%
Fair value assumptions, dividend yield		0.00%
Ownership percentage		1.22%
CRG LP Additional Warrants [Member] | Black-Scholes Merton Model [Member] | Term Loan Agreement [Member]
Expected weighted-average period						4 years 6 months
Fair value of warrants						$ 54
Fair value assumptions, volatility percentage						76.00%
Fair value assumptions, risk-free interest rate						1.06%
Fair value assumptions, dividend yield						0.00%
Warrants [Member] | Black-Scholes Merton Model [Member]
Class of warrant or right number of securities called by warrants or rights									477,273		477,273
Class of warrant or right exercise price of warrants or rights									$ 0.55		$ 0.55
Warrants [Member] | Black-Scholes Merton Model [Member] | Valuation Technique, Option Pricing Model [Member]
Expected weighted-average period											5 years
Minimum [Member]
Common stock shares authorized		9,500,000
Minimum [Member] | 2002 Stock Incentive Plan [Member]
Share-based compensation common stock purchase price percentage			10.00%
Maximum [Member]
Common stock shares authorized		40,000,000
Maximum [Member] | 2002 Stock Incentive Plan [Member]
Share-based compensation common stock purchase price percentage			110.00%
Maximum [Member] | 2002 Stock Incentive Plan [Member] | Officer Director Or Consultant [Member]
Percentage of options exercisable at a rate									20.00%		20.00%
Maximum [Member] | 2002 Stock Incentive Plan [Member] | Non-Statutory Stock Options [Member]
Share-based compensation common stock purchase price percentage			85.00%
Maximum [Member] | 2002 Stock Incentive Plan [Member] | Employees, Directors and Consultants [Member]
Share-based compensation number of shares reserved for issuance			1,070,000

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Stockholders' Equity - Schedule of Common and Preferred Shares (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2018 USD ($)
Proceeds from issuance or sale of equity	$ 2,404
Common Stock [Member]
Proceeds from issuance or sale of equity	327
Preferred Stock [Member]
Proceeds from issuance or sale of equity	781
Series A Warrants [Member]
Proceeds from issuance or sale of equity	804
Series B Warrants [Member]
Proceeds from issuance or sale of equity	$ 492

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Stockholders' Equity - Schedule of Stock-Based Compensation Expense (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Stock-based compensation expense before income taxes	$ 37	$ 127	$ 117	$ 661
Sales and Marketing [Member]
Stock-based compensation expense before income taxes	9	61	49	317
Clinical, Regulatory and Research and Development [Member]
Stock-based compensation expense before income taxes	5	14	21	98
General and Administrative [Member]
Stock-based compensation expense before income taxes	$ 23	$ 52	$ 47	$ 246

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Net Income (Loss) Per Share - Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share (Details) - shares	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Antidilutive securities number of shares	9,721,000	2,011,000
Stock Options [Member]
Antidilutive securities number of shares	1,018,000	682,000
Warrant [Member]
Antidilutive securities number of shares	8,702,000	1,323,000
ESPP Shares [Member]
Antidilutive securities number of shares		6,000
Convertible Preferred Shares [Member]
Antidilutive securities number of shares	1,000

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Commitments and Contingencies (Details Narrative) - USD ($) $ in Thousands				1 Months Ended		9 Months Ended
	May 01, 2018	Mar. 07, 2016	Oct. 01, 2006	Apr. 30, 2018	Feb. 28, 2018	Sep. 30, 2018
Royalty payment, percentage			30.00%
Royalty payments			$ 35
Maximum royalty payable on sale of combined products			5.50%
Royalty payment, description			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.
i-Med Pharma, Inc. [Member]
Loss contingency damages paid				$ 200	$ 500
Restated License Agreement [Member]
Royalty payment, percentage	20.00%
Revenue milestone payments						$ 500
Revenue milestone payment percentage						1.25%
Restated License Agreement [Member] | Minimum [Member]
Royalty payment, percentage	3.00%					3.50%
Restated License Agreement [Member] | Maximum [Member]
Royalty payment, percentage	4.25%					4.75%
Supply Agreement [Member] | MiniFAB [Member]
Minimum percentage of purchase		50.00%

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Commitments and Contingencies - Schedule of Future Minimum Payments (Details) $ in Thousands	Sep. 30, 2018 USD ($)
Commitments and Contingencies Disclosure [Abstract]
2018	$ 35
2019	35
2020	35
2021	35
2022	35
Thereafter	210
Total	$ 385

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Restructuring Costs (Details Narrative) $ in Thousands	Dec. 15, 2017 USD ($)
Restructuring and Related Activities [Abstract]
Restructuring expenses	$ 322

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Restructuring Costs - Schedule of Expenses Related to Restructuring (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2018 USD ($)
Accrued obligations, beginning balance	$ 200
Settlement of obligations	(200)
Accrued obligations, ending balance	0
Employee Costs [Member]
Accrued obligations, beginning balance	97
Settlement of obligations	(97)
Accrued obligations, ending balance	0
Other Costs [Member]
Accrued obligations, beginning balance	103
Settlement of obligations	(103)
Accrued obligations, ending balance	$ 0

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Related Party (Details Narrative) $ in Thousands	9 Months Ended
	Sep. 30, 2018 USD ($)
Related Party Transactions [Abstract]
Royalty rate	0.68%
Payments for Royalties	$ 219