UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| [X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2019
Or
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________________ to _________________
Commission file number: 000-51030
TearLab Corp.
(Exact name of registrant as specified in its charter)
| Delaware | 59-3434771 | |
| (State
or other jurisdiction of incorporation or organization) |
(I.R.S.
Employer Identification Number) |
150 LaTerraza Blvd., Suite 101 Escondido, California |
92025 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (858) 455-6006
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
| N/A | N/A | N/A |
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common stock, $0.001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [X] No [ ]
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | [ ] | Accelerated filer | [ ] | |||
| Non-accelerated filer | [X] | Smaller reporting company | [X] | |||
| Emerging growth company | [ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark if the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] No [X]
The aggregate market value of the voting common stock held by non-affiliates of the Registrant, based on the closing sale price of the Registrant’s common stock on June 28, 2019, the last business day of the Registrant’s most recently completed second fiscal quarter, as reported on the OTCQB Venture Market was approximately $1.0 million. The Registrant has no non-voting common stock. Shares of common stock held by each executive officer and director and by each person who owns 10% or more of the outstanding common stock, based on filings with the Securities and Exchange Commission, have been excluded from this computation since such persons may be deemed to be affiliates of the Registrant. The determination of affiliate status for this purpose is not necessarily a conclusive determination for other purposes.
As of February 21, 2020, there were 12,560,635 shares of the Registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
The Registrant makes available free of charge on or through its website (http://www.tearlab.com) its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. The material is made available through the Registrant’s website as soon as reasonably practicable after the material is electronically filed with or furnished to the U.S. Securities and Exchange Commission, or SEC. All of the Registrant’s filings may be read or copied at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington D.C. 20549. Information on the hours of operation of the SEC’s Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website (http://www.sec.gov) that contains reports and proxy and information statements of issuers that file electronically.
TEARLAB CORPORATION
Form 10-K – ANNUAL REPORT
For the Fiscal Year Ended December 31, 2019
Table of Contents
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements relating to future events and our future performance within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In some cases, you can identify forward-looking statements by terms such as “may”, “will”, “should”, “could”, “would”, “hope”, “expects”, “plans”, “intends”, “anticipates”, “believes”, “estimates”, “projects”, “predicts”, “potential” and similar expressions intended to identify forward-looking statements. These forward-looking statements include, without limitation, statements relating to future events, future results, and future economic conditions in general and statements about:
| ● | 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 on the OTCQB market; | |
| ● | The planned continued commercialization of our current product; | |
| ● | Our ability to expand into next generation products, including our expectations regarding the resubmission of our 510(k) application and the timeline for commencing commercial sales of the TearLab DiscoveryTM Platform; | |
| ● | Our ability to meet the financial covenants under our credit facilities or cure any failure to satisfy such covenants, and/or the impact of our failure to meet or cure any breach of such covenants; | |
| ● | 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 our business model adopted in December 2017; | |
| ● | The adequacy of current, and the development of new distributor, reseller, and supplier relationships, and our efforts to expand relationships with distributors and resellers in additional countries; | |
| ● | Our anticipated expansion of United States and international sales and operations; | |
| ● | Our ability to obtain and protect our intellectual property and proprietary rights; | |
| ● | The results of our clinical trials; | |
| ● | Our ability to maintain reimbursement for our product and support our pricing strategies; | |
| ● | Our ability to execute our marketing strategy to ensure visibility and evidence-based positioning of the TearLab® Osmolarity System among eye care professionals given our reduced commercial resources; | |
| ● | Our ability to attract and retain a sufficient number of scientists, clinicians, sales personnel and other key personnel with extensive experience in medical technology, who are in short supply; | |
| ● | Our beliefs about our employee relations; | |
| ● | Our efforts to assist our customers in obtaining their CLIA waiver or providing them with support from certified professionals; and | |
| ● | The impact of 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 I, Item 1A of this Annual Report on Form 10-K, which may cause our actual results, performance or achievements to be materially different from any future results, performances, time frames or achievements expressed or implied by the forward-looking statements. Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Information regarding market and industry statistics contained in this Annual Report on Form 10-K is included based on information available to us that we believe is accurate. It is generally based on academic and other publications that are not produced for purposes of securities offerings or economic analysis.
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Corporate Information
TearLab Corporation was incorporated as OccuLogix, Inc. in Delaware in 2002. Unless the context requires otherwise, in this report the terms “the Company,” “we,” “us” and “our” refer to TearLab Corporation and our subsidiaries. References to “$” or “dollars” shall mean U.S. dollars unless otherwise indicated. References to “C$” shall mean Canadian dollars.
Overview
We are an in-vitro diagnostic company based in Escondido, California. We have commercialized a proprietary tear testing platform, the TearLab® Osmolarity System that enables eye care practitioners to test for highly sensitive and specific biomarkers using nanoliters of tear film at the point-of-care. Our first product measures tear film osmolarity for the diagnosis of Dry Eye Disease or DED. Our results are included in our financial statements, which are included under Item 8 to this Annual Report on Form 10-K.
TearLab Research, Inc.
TearLab Research, Inc. (“TearLab Research”), our wholly-owned subsidiary, develops technologies to enable eye care practitioners to test a wide range of biomarkers (chemistries, metabolites, genes and proteins) at the point-of-care. Commercializing that tear testing platform is now the focus of our business.
Our current product, the TearLab® Osmolarity System, enables the rapid measurement of tear osmolarity in the doctor’s office. Osmolarity is a quantitative and highly specific biomarker that has been shown to assist in the diagnosis and 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. A study published in 2018 (Gupta et al.) found that 80% of patients presenting for cataract surgery exhibit one or more signs of ocular surface disease (OSD), and that 57% of patients had abnormal osmolarity readings. The innovation of the TearLab® Osmolarity System is its ability to precisely and rapidly measure osmolarity in nanoliter volumes of tear samples, using a highly efficient and novel tear collection system at the point of care. Historically, eye care researchers have relied on expensive instruments to perform tear biomarker analysis. In addition to their cost, these conventional systems are slow, highly variable in their measurement readings, and not categorized as waived by the United States Food and Drug Administration (the “FDA”), under regulations promulgated under the Clinical Laboratory Improvement Amendments, (“CLIA”).
The TearLab® Osmolarity System consists of the following three components: (1) the TearLab disposable, which is a single-use microfluidic microchip; (2) the TearLab Pen, which is a hand-held device that interfaces with the TearLab disposable; and (3) the TearLab Reader, which is a small desktop unit that allows for the docking of the TearLab Pen and provides a quantitative reading for the operator.
In October 2008, the TearLab® Osmolarity System received CE mark approval, clearing the way for sales in the European Union and all countries recognizing the CE mark. On December 8, 2009, TearLab announced that Health Canada issued a Medical Device License for the TearLab® Osmolarity System.
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On May 19, 2009, we announced that we received 510(k) clearance from the FDA. On January 23, 2012, we announced the FDA had granted the waiver categorization under CLIA for the TearLab® Osmolarity System. The CLIA waiver reduces the regulatory paperwork and related administrative time for customers.
On January 4, 2018, we announced that we had submitted a 510(k) application to the FDA for the potential clearance of the TearLab DiscoveryTM 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 we had submitted. 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, we intend to pursue a CLIA waiver in an effort to prepare for commercialization in the U.S. market.
Currently, the TearLab® Osmolarity System is commercialized in over 40 countries. In the United States, the TearLab® Osmolarity System is sold direct. In markets outside of the U.S., the TearLab® Osmolarity System is sold through distributors.
Industry
Point-of-care Testing and DED
The market research firm, “Markets and Markets” reports the global market for point-of-care testing will reach $37.0 billion annually by 2021. Approximately 75% of all laboratory tests today are performed at centralized clinical laboratories. However, diagnostic testing is increasingly being performed at the point-of-care due to several factors, including a need for rapid testing in acute care situations, the benefits of patient monitoring and disease management, streamlining therapeutic decision making and the overall trend toward personalized medicine. We believe that advances in bio-detection technologies that can simplify and accelerate the rate of performing complex diagnostic tests at the point-of-care will drive utilization and overall point-of-care testing market growth.
Each time a person blinks, his or her eyes are resurfaced with a thin layer of a complex fluid known as the tear film. The tear film works to protect eyes from the outside world. Bacteria, viruses, sand, freezing winds and salt water (inclusive of most environmental factors) will not damage eyes when the tear film is intact. However, when compromised, a deficient tear film can be an exceedingly painful and disruptive condition. The tear film consists of three components: (i) an innermost mucin layer (produced by the surface goblet cells); (ii) the aqueous layer (the water in tears, produced by the lacrimal gland); and (iii) an oily lipid layer which limits evaporation of the tears (produced by the meibomian glands, located at the margins of the eyelids). The apparatus of the ocular surface forms an integrated unit. When working correctly, the tear film presents a smooth optical surface essential for clear vision and proper immunity. Androgen deficiency, contact lens wear and chronic inflammation of the lacrimal or meibomian glands may lead to the condition known as dry eye, which has been likened to arthritis of the eye, and results in a compromised, fragile tear film. In turn, the unstable tear film undermines vision, altering focus between every blink. An unstable tear film is the equivalent of a smudge atop the lens of a camera. It doesn’t matter how many megapixels your camera has, if the first lens is compromised, the image will be fuzzy.
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DED is often a result of aging, diabetes, cancer therapy, HIV, autoimmune diseases such as Sjögren’s syndrome and rheumatoid arthritis, LASIK surgery, contact lens wear, menopause and as a side effect of hormone replacement therapy. Numerous commonly prescribed and over-the-counter medications also can cause, or contribute to, the manifestation of DED.
Discomfort and dryness are the most commonly reported symptoms of contact lens wear. These symptoms can lead to contact lens drop out if severe and/or persistent. In 2010, Contact Lens Spectrum reported that 16% of contact lens wearers permanently dropout of contact lens wear each year. In addition, there are approximately 600,000 LASIK procedures performed in the U.S. each year with up to 60% reporting dry eye symptoms 1 month post-LASIK.
Diagnostic Alternatives for Dry Eye Disease
Existing diagnostic tools are highly subjective, do not correlate well with symptoms, are invasive for patients and may require up to an hour of operator time to perform. All of these factors have constrained the objective diagnosis and treatment of the DED patient population. As physicians have not had access to objective, quantitative diagnostic assays that correlate well with and the severity of DED disease, it has been difficult for them to objectively differentiate DED symptoms from other eye diseases that present with very similar symptoms, such as ocular allergies, conjunctivochalasis or infectious bacterial or viral diseases. To treat DED effectively and to mitigate the emotional and physical effects of this disease, it is important to equip physicians with objective, quantitative measurements of disease pathogenesis so they can determine more accurately the most efficacious treatments for their patients.
Osmolarity in DED presents itself as an increase in the salt concentration of the tear film. For over 50 years, studies have shown that tear film osmolarity is an ideal biomarker for diagnosing DED, providing an objective, quantitative measurement of disease pathogenesis. Measuring osmolarity also serves as an effective disease management tool by providing physicians with an ability to personalize therapeutic intervention and to track patient outcomes quantitatively. Osmolarity testing could also provide physicians with a tool to identify patients at risk for dropping out of contact lens wear early in disease progression, as well as an invaluable test to guide the type and duration of therapy prior to, and following refractive surgery.
The main challenge in measuring osmolarity at the point-of-care is the small volume of tear available for testing. Older laboratory osmometers require upwards of ten microliters of fluid to produce a single reading. In addition, these instruments are not particularly suitable for use in a physician’s office, since they require continual calibration, cleaning and maintenance. Existing osmometers currently are marketed primarily to reference and hospital laboratories for the measurement of osmolarity in blood, urine and other serum samples.
TearLab’s Product
Our TearLab® Osmolarity System is an integrated testing system comprised of: (1) the TearLab disposable, which is a single-use microfluidic microchip; (2) the TearLab Pen, which is a hand-held device that interfaces with the TearLab disposable; and (3) the TearLab Reader, which is a small desktop unit that allows for the docking of the TearLab Pen and provides a quantitative reading for the operator. The innovation of the TearLab® Osmolarity System is its ability to measure precisely, rapidly, and inexpensively biomarkers in nanoliter volumes of tear samples or approximately 1,000 times less volume than required for older laboratory devices.
The operator of the TearLab® Osmolarity System, most commonly a technician, collects the tear sample from the patient’s eye in the TearLab disposable, using the TearLab Pen. After the tear has been collected, the operator places the Pen into the Reader. The TearLab Reader then will display an osmolarity reading to the operator. Following the completion of the test, the TearLab disposable will be discarded and a new TearLab disposable will be readied for the next test. The entire process, from sample to answer, should require approximately two minutes or less to complete.
The TearLab Discovery™ System, (“Discovery”) is our next generation of comprehensive in-vitro diagnostic testing platform and, if approved, will offer eye care professionals the ability to assess multiple biomarkers in human tears with a single nanoliter volume tear collection. On January 4, 2018, we announced that we had submitted a 510(k) application to the FDA for the potential clearance of Discovery. 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 we submitted. 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, we intend to pursue a CLIA waiver in an effort to prepare for commercialization in the U.S. market.
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Competition
The medical device industry is highly competitive and we face potential competition from medical device companies worldwide. There are several laboratory technologies that claim to measure the osmolarity of nanoliter tear samples. The i-Pen manufactured by i-Med Pharma, Inc. has approval from Health Canada and a CE mark. i-Med Pharma, Inc. announced the filing of a 510(k) application for clearance in the United States of the i-Pen in December of 2017. The LacriPen, developed by LacriSciences, LLC (Washington, DC, US), does not have a CE Mark, FDA 510(k) clearance or a CLIA waiver, but has stated to be in clinical trials. Another investigational device aimed at dry eye diagnosis, the TeaRx, manufactured by DiagnosTear Ltd., a division of BioLight Life Sciences Investments of Tel Aviv, Israel, announced positive correlations between TeaRx diagnostic parameters and benchmarks used to test for dry eye syndrome. Another non-osmolarity based in vitro diagnostic test for dry eye was developed by Rapid Pathogen Screening, Inc. (RPS), of Sarasota Florida. RPS commercialized a tear test for dry eye that measures MMP-9, an inflammatory biomarker which was subsequently acquired by Quidel Corporation, a major American manufacturer of diagnostic healthcare products marketed globally. This test, which is currently marketed by the Quidel Corporation in the U.S. is FDA cleared and has obtained a CLIA waiver. Another company, ATD (Advanced Tear Diagnostics) has a CLIA classification of Moderately Complex in the United States, and markets products that measure lactoferrin and IgE in human tears for the diagnosis of aqueous deficient dry eye disease and ocular allergy, respectively.
Tear film break-up time, or TBUT, is a non-laboratory test performed to evaluate tear film stability during an examination of the ocular surface with a slit lamp by an eye care practitioner. However, it is subjective, requires a physician to instill a carefully controlled amount of fluorescein dye into the eye and requires a stopwatch to determine the endpoint. TBUT has been shown to be unreliable as a determinant of DED since shortened TBUT does not always correlate well with other signs or symptoms.
Other office-based tests performed during a standard eye care examination like impression cytology and corneal staining, although indicative of relatively late stage phenomena in DED, are subjective, qualitative and generally do not correlate to disease pathogenesis. We believe the Schirmer Test, to determine tear fluid volume, is an imprecise marker of tear function since its diagnostic results vary significantly.
Principal Suppliers
We rely on two suppliers based in the United States for the manufacture of the Readers and Pens which are key components of the TearLab® Osmolarity System. We also rely on a single supplier, MiniFAB (Aust) Pty Ltd. located in Australia, for the manufacture of the test cards which is also a key component of the TearLab® Osmolarity System.
Patents and Proprietary Rights
We own or have exclusive licenses to multiple patents and applications relating to the TearLab® Osmolarity System and related technology and processes:
| ● | thirteen issued U.S. patents; relating to the TearLab® Osmolarity System and related technology and processes and have applied for a number of other patents in the United States and other jurisdictions; | |
| ● | twelve granted patents in the rest of the world; and | |
| ● | eleven applications pending. |
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We intend to rely on know-how, continuing technological innovation and in-licensing opportunities to further develop our proprietary position. Our ability to obtain intellectual property protection for the TearLab® Osmolarity System, the TearLab DiscoveryTM System and related technology and processes, and our ability to operate without infringing on the intellectual property rights of others and to prevent others from infringing on our intellectual property rights, will have a substantial impact on our ability to succeed in our business. Although we intend to seek to protect our proprietary position by, among other methods, continuing to file patent applications, the patent position of companies like TearLab is generally uncertain and involves complex legal and factual questions. Our ability to maintain and solidify a proprietary position for our technology will depend on our success in obtaining effective claims and enforcing those claims once granted. We do not know whether any part of our patent applications will result in the issuance of any patents. Our issued patents, those that may be issued in the future or those licensed to us, may be challenged, invalidated or circumvented, which could limit our ability to stop would-be competitors from marketing tests identical to the TearLab® Osmolarity System. Specific to the market in Canada, the Company initiated a patent infringement lawsuit against i-Med Pharma, Inc. in February of 2016 alleging infringement of the Company’s 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 the Company’s Canadian patent which were alleged to be infringed. The Company appealed 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. In June 2019 the Canadian Federal Appellate Court dismissed the appeal.
In addition to patent protection, we have registered the TearLab trademark in the United States, the European Union, Korea, Mexico, Argentina, Columbia, India, Norway, Brazil, Australia, Canada, China and Turkey.
Government Regulation
Government authorities in the United States and other countries extensively regulate, among other things, the research, development, testing, manufacture, labeling, promotion, advertising, distribution and marketing of our product, which is a medical device. In the United States, the FDA regulates medical devices under the Federal Food, Drug, and Cosmetic Act and implementing regulations. Failure to comply with the applicable FDA requirements, both before and after approval, may subject us to administrative and judicial sanctions, such as a delay in approving or refusal by the FDA to approve pending applications, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, administrative fines or criminal prosecution.
Unless exempted by regulation, medical devices may not be commercially distributed in the United States until they have been cleared or approved by the FDA. Medical devices are classified into one of the three classes, Class I, II or III, on the basis of the controls necessary to reasonably assure their safety and effectiveness. Class I devices are subject to general controls, such as labeling, pre-market notification and adherence to good manufacturing practices. The TearLab® Osmolarity System is a Class I, non-exempt device and qualifies for the 510(k) procedure. Under the FDA’s Section 510(k) procedure, the manufacturer provides a pre-market notification that it intends to begin marketing the product, and shows that the product is substantially equivalent to another legally marketed product, that it has the same intended use and is as safe and effective as a legally marketed device and does not raise different questions of safety and effectiveness than does a legally marketed device. In some cases, the submission must include data from human clinical studies. Marketing may commence when the FDA issues a clearance letter finding substantial equivalence. On May 19, 2009, we announced that we received FDA 510(k) clearance of the TearLab® Osmolarity System.
After a device receives 510(k) clearance, any modification to the device that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, would require a new 510(k) clearance or an approval of a Premarket Approval, or PMA. A PMA is the FDA process of scientific or regulatory review to evaluate the safety and effectiveness of Class III medical devices which are those devices which support or sustain human life, are of substantial importance in preventing impairment of human health, or which present a potential, unreasonable risk of illness or injury. Although the FDA requires the manufacturer to make the initial determination regarding the effect of a modification to the device that is subject to 510(k) clearance, the FDA can review the manufacturer’s determination at any time and require the manufacturer to seek another 510(k) clearance or an approval of a PMA.
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CLIA is intended to ensure the quality and reliability of clinical laboratories in the United States by mandating specific standards in the areas of personnel qualifications, administration, and participation in proficiency testing, patient test management, quality control, quality assurance and inspections. The regulations promulgated under CLIA establish three levels of in vitro diagnostic tests: (1) waiver; (2) moderately complex; and (3) highly complex. The standards applicable to a clinical laboratory depend on the level of diagnostic tests it performs. A CLIA waiver is available to clinical laboratory test systems if they meet certain requirements established by the statute. Waived tests are simple laboratory examinations and procedures employing methodologies that are so simple and accurate as to render the likelihood of erroneous results negligible or to pose no reasonable risk of harm to patients if the examinations or procedures are performed incorrectly. These tests are waived from regulatory oversight of the user other than the requirement to follow the manufacturer’s labeling and directions for use. On January 23, 2012, we announced that the FDA had granted the waiver categorization under CLIA for the TearLab® Osmolarity System.
Regardless of whether a medical device requires FDA clearance or approval, a number of other FDA requirements apply to the device, its manufacturer and those who distribute it. Device manufacturers must be registered and their products listed with the FDA, and certain adverse events and product malfunctions must be reported to the FDA. The FDA also regulates the product labeling, promotion and, in some cases, advertising of medical devices. In addition, manufacturers and their suppliers must comply with the FDA’s quality system regulation which establishes extensive requirements for quality and manufacturing procedures. Thus, suppliers, manufacturers and distributors must continue to spend time, money and effort to maintain compliance, and failure to comply can lead to enforcement action. The FDA periodically inspects facilities to ascertain compliance with these and other requirements.
Clinical, Regulatory, Research and Development Expenditure
Our clinical, regulatory, research and development expense was $3.8 and $3.6 million for the years ended December 31, 2019 and 2018, respectively.
Employees
On December 31, 2019, we had 39 full-time employees and 1 part-time employee. None of our employees are covered by a collective bargaining agreement.
Available Information
Our corporate Internet address is www.tearlab.com. At the Investor Relations section of this website, we make available, free of charge, our Annual Report on Form 10-K, our Annual Proxy statement, our quarterly reports on Form 10-Q, any Current Reports on Form 8-K, and any amendments to these reports, as soon as reasonably practicable after we electronically file them with, or furnish them to, the U.S. Securities and Exchange Commission, or the SEC. The information found on our website is not part of this Annual Report on Form 10-K. In addition to our website, the SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding us and other issuers that file electronically with the SEC.
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Risks Relating to Our Financial Condition
We may not be able to generate sufficient cash to service our indebtedness, which currently consists of our credit facility with CRG. We did not satisfy our minimum revenue covenant, as required by the CRG term loan, for 2019. Because our annual sales revenue levels did not meet or exceed the levels required by the CRG covenant, we are required to raise additional equity or subordinated debt, with the proceeds paid to reduce the outstanding principal of the CRG term loan. Such financing may not be available to us on reasonable terms, or at all, and any such 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 which we refer to as the Term Loan Agreement, providing us with access of up to $35.0 million under the Term Loan Agreement. The CRG loan is collateralized by all our assets. Additionally, the Term Loan Agreement contains various affirmative and negative covenants that we agreed to. Among them are requirements that we must attain minimum annual revenue and minimum cash threshold levels. The minimum annual revenue threshold levels required by the Term Loan Agreement are $38.0 million and $45.0 million for calendar years 2019 and 2020, respectively. The minimum cash balance required is $3.0 million, subject to certain conditions. 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 Company is currently not in compliance with the 2019 revenue covenant and we will have to raise subordinated debt or equity, which we refer to as the CRG Equity Cure, equal to twice the difference between the annual 2019 revenue of $22.7 million and the 2019 revenue covenant of $38.0 million, or a total of $30.7 million, with the total proceeds from such financing to be used to reduce the principal of the Term Loan Agreement in accordance with the term loan agreement. We have 90 days to achieve this “Cure” unless a covenant waiver is given or the Term Loan Agreement is amended. In the event we cannot complete the CRG Equity Cure, the Company will remain in default of the Term Loan Agreement. In the event of a default, the lender has the option or right to require the Company to repay the current outstanding amount of $36.6 million earlier than anticipated, and if the Company cannot, the lender has the option to invoke the foreclosure on their security interest in our assets and all obligations will become due and payable immediately. We cannot assure you that we will be able to raise the financing for the CRG Equity Cure and to date, have not secured requisite financing in order to do so. We continue to explore financing strategies and alternative transactions or a restructuring of the Term Loan Agreement. In addition, even if we are able to satisfy the to achieve the CRG Equity Cure or otherwise satisfy the requirements of the Term Loan Agreement with respect to the 2019 revenue covenant, we cannot assure you that we will satisfy current or future revenue covenants and if we fail to do so we could face similar adverse effects.
In addition to the risks associated with the revenue covenant as set forth above and even if we are able to achieve the CRG Equity Cure related to the 2019 revenue covenant, 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.
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.
We will 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.
Other than the need to raise financing to achieve the CRG Equity Cure as set forth above, 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 2020 in order to fund our debt obligations. This estimate is subject to risk based primarily on our continued 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. 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 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 consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary if we were not able to continue as a going concern. If we are unable to generate positive cash flows from operations, we would need to undertake a review of potential business alternatives, which may include, but are not limited to, a merger or sale of the company or ceasing operations and winding down the business.
We have incurred losses since inception and anticipate that we will incur continued losses for the foreseeable future.
We have incurred losses in each year since our inception. As of December 31, 2019, we had an accumulated deficit of $536 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 DiscoveryTM System 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.
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Our existing Term Loan Agreement contains restrictive and financial covenants that may limit our operating flexibility.
The Term Loan Agreement contains certain restrictive covenants that limit our ability to incur additional indebtedness and liens, merge with other companies or consummate certain changes of control, acquire other companies, engage in new lines of business, make certain investments, pay dividends, transfer or dispose of assets, amend certain material agreements or enter into various specified transactions. We therefore may not be able to engage in any of the foregoing transactions unless we obtain the consent of CRG or terminate the Term Loan Agreement. There is no guarantee that we will be able to generate sufficient cash flow or sales to meet the financial covenants or pay the principal and interest under the agreement. Furthermore, there is no guarantee that future working capital, borrowings or equity financing will be available to repay or refinance the amounts outstanding under the Term Loan Agreement.
Our financial results may vary significantly from year-to-year or 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 fluctuations. These fluctuations are due to numerous factors that are difficult to forecast, including:
| ● | fluctuations in demand for our products; | |
| ● | changes in customer budget cycles and capital spending; | |
| ● | seasonal variations in customer operations that could occur during holiday or summer vacation periods; | |
| ● | tendencies among some customers to defer purchase decisions to the end of the quarter 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 and enhancements by us and our competitors; | |
| ● | unanticipated increases in costs or expenses; | |
| ● | our complex, variable and, at times, lengthy sales cycle; | |
| ● | global economic conditions; and | |
| ● | fluctuations in foreign currency exchange rates. |
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 is 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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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 December 31, 2019, our total liabilities were $40.3 million including $36.6 million of 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 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 or could require us to raise funds on unfavorable terms. |
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 additional financing. There can be no assurance that we will be able to successfully renegotiate such terms, that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to us.
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We continue to face challenges in commercializing the TearLab® Osmolarity System 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 successfully commercialize the TearLab® Osmolarity System 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 and government 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 successfully negotiate volume discounts for medical products, may choose not to reimburse certain products or reimburse products and a low amount sometimes below our selling price. This 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.
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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 also 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, 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.
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 510(k) clearance and CLIA waiver for our TearLab® Osmolarity System, we are 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, CLIA waiver 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.
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If we are unable to fully comply with federal and state “fraud and abuse laws,” we could face substantial penalties, which may adversely affect our business, financial condition and results of operations.
We are subject to various laws pertaining to health care fraud and abuse, including the U.S. Anti- Kickback Statute, physician self-referral laws (the “Stark Law”), the U.S. False Claims Act, the U.S. False Statements Statute, the Physician Payment Sunshine Act, and state law equivalents to these U.S. federal laws, which may not be limited to government-reimbursed items and may not contain identical exceptions. Violations of these laws are punishable by criminal and civil sanctions, including, in some instances, civil and criminal penalties, damages, fines, exclusion from participation in U.S. federal and state health care programs, including Medicare and Medicaid, and the curtailment or restructuring of operations. Any action against us for violation of these laws could have a significant impact on our business. In addition, we are subject to the U.S. Foreign Corrupt Practices Act. Any action against us for violation by us or our agents or distributors of this act could have a significant impact on our business.
If we fail to comply with contractual obligations and applicable laws and regulations governing the handling of patient identifiable medical information, we could suffer material losses or be adversely affected by exposure to material penalties and liabilities.
Many, if not all of our customers, are covered entities under the Health Insurance Portability and Accountability Act of August 1996 or HIPAA. As part of the operation of our business, we provide reimbursement assistance to certain of our customers and as a result we act in the capacity of a business associate with respect to any patient-identifiable medical information, or PHI, we receive in connection with these services. We and our customers must comply with a variety of requirements related to the handling of patient information, including laws and regulations protecting the privacy, confidentiality and security of PHI. The provisions of HIPAA require our customers to have business associate agreements with us under which we are required to appropriately safeguard the PHI we create or receive on their behalf. Further, we and our customers are required to comply with HIPAA security regulations that require us and them to implement certain administrative, physical and technical safeguards to ensure the confidentiality, integrity and availability of electronic PHI, or EPHI. We are required by regulation and contract to protect the security of EPHI that we create, receive, maintain or transmit for our customers consistent with these regulations. To comply with our regulatory and contractual obligations, we may have to reorganize processes and invest in new technologies. We also are required to train personnel regarding HIPAA requirements. If we, or any of our employees or consultants, are unable to maintain the privacy, confidentiality and security of the PHI that is entrusted to us, we and/or our customers could be subject to civil and criminal fines and sanctions and we could be found to have breached our contracts with our customers. Under the Health Information Technology for Economic and Clinical Health Act, or HITECH Act, and recent omnibus revisions to the HIPAA regulations, we are directly subject to HIPAA’s criminal and civil penalties for breaches of our privacy and security obligations and are required to comply with security breach notification requirements. The direct applicability of the HIPAA privacy and security provisions and compliance with the notification requirements requires us to incur additional costs and may restrict our business operations.
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.
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We have applied for, and intend to continue to apply for, patents relating to the TearLab® Osmolarity System and related technology and processes as well as the TearLab DiscoveryTM System. 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 similar competing products.
Patents issued or licensed to us may be infringed by the products or processes of others. The cost of enforcing patent rights against infringers, if such enforcement is required, could be significant and the time demands could interfere with our normal operations. There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical, biotechnology and medical technology industries. We 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.
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.
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If we do not introduce new commercially successful products in a timely manner, our products may become obsolete over time, customers may not buy our products and our revenue and profitability may decline.
Demand for our products may change in ways we may not anticipate because of:
| ● | evolving customer needs; | |
| ● | the introduction of new products and technologies; and | |
| ● | evolving industry standards. |
Without the timely introduction of new commercially successful products and enhancements, our products may become obsolete over time, in which case our sales and operating results would suffer. The success of our new product offerings will depend on several factors, including our ability to:
| ● | properly identify and anticipate customer needs; | |
| ● | commercialize new products in a cost-effective and timely manner; | |
| ● | manufacture and deliver products in sufficient volumes on time; | |
| ● | obtain and maintain regulatory approval for such new products; | |
| ● | differentiate our offerings from competitors’ offerings; | |
| ● | achieve positive clinical outcomes; and | |
| ● | provide adequate medical and/or consumer education relating to new products. |
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 are unable to renew our agreements with our suppliers or they 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 change, we may 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.
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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. We have numerous potential competitors in the United States and abroad, including one direct competitor in Canada. We face potential competition from industry participants marketing conventional technologies for the measurement of osmolarity and other in-lab testing technologies, and commercially available methods, such as the Schirmer Test and ocular surface staining. Many of our potential competitors have substantially more resources and a greater marketing scale than we do. If we are unable to develop and produce or market our products to effectively compete against our competitors, our operating results will materially suffer.
If we lose key personnel, or we do not attract and retain highly qualified personnel on a cost-effective basis, it would be more difficult for us to manage our existing business operations and to identify and pursue new growth opportunities.
Our success depends, in large part, upon our ability to attract and retain highly qualified scientific, clinical, manufacturing and management personnel. In addition, any difficulties in retaining key personnel or managing this growth could disrupt our operations. Future growth will require us to continue to implement and improve our managerial, operational and financial systems, and to continue to recruit, train and retain, additional qualified personnel, which may impose a strain on our administrative and operational infrastructure. The competition for qualified personnel in the medical technology field is intense. We are highly dependent on our continued ability to attract, motivate and retain highly qualified management, clinical and scientific personnel.
Due to our limited resources, we may not effectively recruit, train and retain additional qualified personnel. If we do not retain key personnel or manage our growth effectively, we may not implement our business plan effectively.
Furthermore, we have not entered into non-compete 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.
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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.
Risks Related to Our Common Stock
Our common stock was delisted from The Nasdaq Capital Market, which could make trading in our common stock more difficult for investors, potentially leading to declines in our share price and liquidity and could limit our ability to raise additional capital.
Effective at the open of business on November 9, 2017, our common stock was suspended and effectively delisted from The Nasdaq Capital Market and began trading on the OTCQB. The delisting was the result of our non-compliance with Nasdaq Listing Rule 5550(b).
Our delisting from The Nasdaq Capital Market could make trading in our common stock more difficult for investors, potentially leading to declines in our share price and liquidity. Without The Nasdaq Capital Market listing, stockholders may have a difficult time getting a quote for the sale or purchase of our stock, the sale or purchase of our stock will likely be made more difficult and the trading volume and liquidity of our stock could decline. Our delisting from The Nasdaq Capital Market could also result in negative publicity and could also make it more difficult for us to raise additional capital. The absence of such a listing may adversely impact the acceptance of our common stock as currency or the value accorded by other parties. Further, following our delisting, we will also incur additional costs under state blue sky laws in connection with any sales of our securities. These requirements could severely limit the market liquidity of our common stock and the ability of our stockholders to sell our common stock in the secondary market.
Because our common stock is traded on an over the counter quotation system, an investor may find it more difficult to sell our stock or obtain accurate quotations as to the market value of our common stock.
Following the delisting of our common stock, our common stock now falls within the definition of a “penny stock” as defined in the Securities Exchange Act of 1934, or the Exchange Act, and is covered by Rule 15g-9 of the Exchange Act. Rule 15g-9 imposes additional sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited investors. For transactions covered by Rule 15g-9, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser’s written agreement to the transaction prior to the sale. Consequently, Rule 15g-9 will affect the ability or willingness of broker-dealers to sell our securities, and accordingly will affect the ability of stockholders to sell their securities in the public market. These additional procedures could also limit our ability to raise additional capital in the future.
The trading price of our common stock may be volatile.
The market prices for, and the trading volumes of, securities of medical device companies, such as ours, have been historically volatile. The market has experienced, from time to time, significant price and volume fluctuations unrelated to the operating performance of particular companies. In addition, the fact that our common stock now trades on the OTCQB market could contribute to trading volumes in our shares being sporadic and volatility in the share price. If adverse market conditions exist, you may have difficulty selling your shares. The market price of our common shares may fluctuate significantly due to a variety of factors, including:
| ● | the results of pre-clinical testing and clinical trials by us, our collaborators and/or our competitors; | |
| ● | technological innovations or new diagnostic products; | |
| ● | governmental regulations and reimbursement levels; | |
| ● | developments in patent or other proprietary rights; | |
| ● | litigation; | |
| ● | public concern regarding the safety of products developed by us or others; | |
| ● | comments by securities analysts; | |
| ● | fluctuations in our annual and quarterly results; | |
| ● | 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 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.
| - 18 - |
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 of our common stock. |
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Our world-wide headquarters, located in Escondido, California, occupies 6,120 square feet of commercial and industrial space. We use this space for administrative, quality assurance, manufacturing, and research and development activities. The current arrangement extends to November 2023. The total future minimum obligation under this lease is $646,903 for the remaining term of the arrangement.
We also lease 7,700 square feet of commercial space in Southlake, Texas for our customer care, marketing, finance, and administrative functions. The lease has a term through September 2020. The total future minimum obligation under this lease is $109,169 for the remaining term of the arrangement.
We believe that the California and Texas facilities are suitable and adequate to support our current operations. We believe that if our existing facilities are not adequate to meet our business requirements long-term, additional space will be available on commercially reasonable terms.
We are not 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 of 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 appealed 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. In June 2019 the Canadian Federal Appellate Court dismissed the appeal.
ITEM 4. Mine Safety Disclosures.
Not applicable.
| - 20 - |
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Number of Record Stockholders
As of February 21, 2020, there were approximately 52 active stockholders of record of our common stock.
Dividend Policy
We have never declared or paid any cash dividends on shares of our capital stock. We currently intend to retain all available funds to support operations and to finance the growth and development of our business. Any determination related to payments of future dividends will be at the discretion of our board of directors after taking into account various factors that our board of directors deems relevant, including our financial condition, operating results, current and anticipated cash needs, plans for expansion and debt restrictions, if any.
Sales of Unregistered Securities
None.
ITEM 6. Selected Financial Data.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes, included in Item 8 of this Report. Unless otherwise specified, all dollar amounts are in U.S. dollars.
Overview
We are an in vitro diagnostic company that has developed a proprietary tear testing platform, the TearLab® Osmolarity System. The TearLab test measures tear film osmolarity for diagnosis of DED. Tear osmolarity is a quantitative and highly specific biomarker that has been shown to correlate with DED. The TearLab test enables the rapid measurement of tear osmolarity in a doctor’s office. Commercializing our Point-of-Care tear testing platform is the focus of our business.
In October 2008, the TearLab® Osmolarity System received CE mark approval, clearing the way for sales in the European Union and all countries recognizing the CE mark. In connection with the CE mark clearance, we have entered into multi-year agreements with numerous distributors for distribution of the TearLab® Osmolarity System. Currently, we have signed distribution agreements in Central and South America, Europe, Asia, Canada, and Australia. We sell directly to the customer in the United States.
On May 19, 2009, we announced that we received 510(k) clearance from the FDA. On January 23, 2012, we announced the FDA had granted the waiver categorization under CLIA for the TearLab® Osmolarity System. The CLIA waiver reduces the regulatory paperwork and related administrative time for customers.
On October 19, 2010 we announced that a unique, new Current Procedural Terminology, or CPT, code that applied to the TearLab Osmolarity test had been published by the American Medical Association, or AMA. The code became effective January 1, 2011. The CPT code for the TearLab Osmolarity test is: 83861; Microfluidic analysis utilizing an integrated collection and analysis device, tear osmolarity (For microfluidic tear osmolarity of both eyes, report 83861 twice). This code falls under the Chemistry sub-section of the Pathology and Laboratory section of the CPT Codebook and was listed under the 2010 Clinical Laboratory Fee Schedule by the Centers for Medicare and Medicaid Services, or CMS. At 2019 reimbursement rates, payment code 83861 would be reimbursed in every state by CMS at $22.48 per eye. This decision by CMS provides level reimbursement for and equal access to the TearLab Osmolarity Test across all of the United States. The current rate in effect January 1, 2020 is $22.48.
On January 4, 2018, we announced that we had submitted a 510(k) application to the FDA for the potential clearance of the TearLab DiscoveryTM 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 we submitted. We are utilizing the guidance provided by the FDA to compile the additional information necessary to resubmit for 510(k) clearance. After securing FDA clearance, we intend to pursue a CLIA waiver in an effort to prepare for commercialization in the U.S. market.
RESULTS OF OPERATIONS
Revenue, Cost of Goods Sold and Gross Profit (in thousands)
| For the years ended December 31, | ||||||||||||||||
| 2019 | % of Revenue | 2018 | % of Revenue | |||||||||||||
| Revenue | $ | 22,655 | 100.0 | % | $ | 24,999 | 100.0 | % | ||||||||
| Cost of goods sold | 8,356 | 36.9 | % | 9,456 | 37.8 | % | ||||||||||
| Gross profit | $ | 14,299 | 63.1 | % | $ | 15,543 | 62.2 | % | ||||||||
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Revenue
TearLab revenue consists primarily of sales of the TearLab® Osmolarity System, which is a hand-held tear film test for the measurement of tear osmolarity, a quantitative and highly specific biomarker that has shown to correlate with DED.
The TearLab® Osmolarity System consists of the following three components: (1) the TearLab disposable, which is a single-use microfluidic lab test card; (2) the TearLab pen, which is a hand-held device that interfaces with the TearLab disposable; and (3) the TearLab reader, which is a small desktop unit that allows for the docking of the TearLab disposable and the TearLab pen and provides a quantitative reading for the operator.
Having received 510(k) approval from the FDA in the United States, we sell to customers in the United States who hold CLIA certificates. The Company obtained a CLIA waiver categorization in early 2012, and continues to actively support customers in obtaining their CLIA waiver documentation which will allow the Company to sell product to the approximately 50,000 eye care practitioners in the United States that are candidates to operate under a CLIA waiver certification.
We are working with our established distributors in Canada, Europe, Central and South America, Australia and Asia to increase sales. The ability for re-imbursement to be obtained in many of those countries where we have distributors will facilitate our ability to increase sales and stimulate the commercialization process. In countries where we have distributors, we are supporting physicians in local clinical trials and providing them with the required guidance to understand the relationship between DED and osmolarity and how to manage their patients with objective diagnostic data.
TearLab revenue decreased $2.3 million or 9.4% for the year ended December 31, 2019 compared to the prior year. This decrease was driven by the decrease of both reader and test card revenue as compared to 2018.
Cost of Goods Sold
TearLab cost of sales includes costs of goods sold, depreciation of reader systems, warranty, and royalty costs. Our cost of goods sold consists primarily of costs for the manufacture of the TearLab® Osmolarity System, including the costs we incur for the purchase of component parts from our suppliers, applicable freight and shipping costs, fees related to merchant services, warehousing and logistics inventory management.
TearLab cost of sales for the year ended December 31, 2019 decreased $1.1 million or 11.6% compared to the prior year. The decrease was driven by lower revenue, reduced warranty costs, lower depreciation as our systems become fully amortized, a credit from one of our suppliers for inventory damaged in transit, as well as lower royalties due to lower revenue.
Gross Profit
TearLab gross profit for the year ended December 31, 2019 decreased by $1.2 million or 8.0% compared to the prior year. Gross profit was 63.1%, compared to 62.2% in the prior year. The change in gross profit was mainly driven by lower depreciation as our systems become fully amortized.
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Operating Expenses (in thousands)
| For the years ended December 31, | ||||||||||||||||
| % of | % of | |||||||||||||||
| 2019 | Revenue | 2018 | Revenue | |||||||||||||
| Sales and marketing | $ | 3,652 | 16.1 | % | 3,334 | 13.3 | % | |||||||||
| Clinical, regulatory and research and development | 3,817 | 16.8 | % | 3,587 | 14.3 | % | ||||||||||
| General and administrative | 6,555 | 28.9 | % | 6,160 | 24.6 | % | ||||||||||
| Total operating expenses | $ | 14,024 | 61.9 | % | $ | 13,081 | 52. 3 | % | ||||||||
Sales and Marketing Expenses
For the year ended December 31, 2019, sales and marketing expenses increased by $0.3 million or 9.5% as compared with the prior year. This increase in sales and marketing expenses is attributable to increased advertising and promotion to drive demand of the TearLab® Osmolarity System.
Clinical, Regulatory and Research and Development
For the year ended December 31, 2019, clinical, regulatory and research and development expenses increased by $0.2 million or 6.4%, as compared with the prior year. The increase was primarily due to the increase in product development costs related to the development and testing of the TearLab Discovery™ platform.
General and Administrative Expenses
General and administrative expenses increased $0.4 million or 6.4% for the year ended December 31, 2019 compared to 2018. The increase was primarily due to tax related costs and employee retention related payouts.
| - 24 - |
Other Income (Expense), Net (in thousands)
| For the years ended December 31, | ||||||||||||||||
| % of | % of | |||||||||||||||
| 2019 | Revenue | 2018 | Revenue | |||||||||||||
| Interest expense | $ | (5,703 | ) | -25.2 | % | $ | (4,709 | ) | -18.8 | % | ||||||
| Other, net | 12 | 0.1 | % | (4 | ) | 0.0 | % | |||||||||
| Total other income (expense) | $ | (5,691 | ) | -25.1 | % | $ | (4,713 | ) | -18.9 | % | ||||||
Interest Expense
Interest expense is generated from our long-term debt under the Term Loan Agreement, which was most recently amended on October 4, 2019. Interest expense increased $1.0 million in 2019 on larger average balances of long-term debt outstanding.
Other Income (Expense)
Other income for the year ended December 31, 2019 consists primarily of foreign exchange gains and losses, based on fluctuations of the Company’s foreign denominated currencies.
Liquidity and Capital Resources (in thousands)
| As of December 31, | ||||||||
| 2019 | 2018 | |||||||
| Cash and cash equivalents | $ | 7,108 | $ | 8,473 | ||||
| Percentage of total assets | 49.7 | % | 58.4 | % | ||||
| Working capital | $ | (27,899 | ) | $ | 9,279 | |||
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 were intended to 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. Additionally, in November of 2018, with amendment No. 6 CRG further extended the “Interest-only period,” which has the effect of pushing out the principal payments to 2020. In October 2019, the Company entered into Amendment No. 8 to the term loan agreement, which deferred our interest payment for the period ending on September 30, 2019 and added it the principal balance under the loan. In December 2019, the Company made a $1.1 million interest payment to CRG. The current Term Loan agreement is due December 31, 2020 with payments due at the end of each calendar quarter. In addition, because we did not satisfy the minimum revenue covenant for 2019 under the Term Loan Agreement, we are required to raise subordinated debt or equity, which we refer to as the CRG Equity Cure, equal to twice the difference between the annual 2019 revenue of $22.7 million and the 2019 revenue covenant of $38.0 million, or a total of $30.7 million, with the total proceeds from such financing to be used to reduce the principal of the Term Loan Agreement, within 90 days of the 2019 year end the Company would remain in default under the Term Loan Agreement. In the event of a default, the lender has the option or right to require the Company to repay the current outstanding amount of $36.6 million earlier than anticipated, and if the Company cannot, the lender has the option to invoke the foreclosure on their security interest in our assets and all obligations will become due and payable immediately. See the Risk Factor section of this Form 10-K for further discussion regarding the Term Loan Agreement and risks associated with the Term Loan Agreement and our failure to satisfy the 2019 revenue covenant thereunder. Based on our current rate of cash consumption, the potential for accelerated debt repayment requirements, in addition to our projections, we estimate we will need additional capital during the first quarter of 2020. Our prospects for obtaining that capital are uncertain. Due to the Company’s historical losses and financial condition, there is substantial doubt about the Company’s ability to continue as a going concern.
| - 25 - |
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:
●
● |
whether CRG offers a covenant waiver or an Equity Cure can be obtained within 90 days;
Our ability to execute our commercial strategy with our current resources; | |
| ● | whether government and third-party payers agree to continue reimbursement of the TearLab® Osmolarity System at current levels; | |
| ● | the cost and results of continuing development of our next generation TearLab DiscoveryTM Platform including the cost of suppliers and service providers that require advance payment; | |
| ● | 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) clearance 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 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 further 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.
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 $35.0 million under the Term Loan Agreement. The Company received $15.0 million in gross proceeds under the Term Loan Agreement on March 4, 2015, and an additional $10.0 million on October 6, 2015. We were unable to access a third tranche of $10.0 million because we did not attain at least $38.0 million in twelve-month revenue prior to June 30, 2016, as required to access the third tranche. 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 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 have a life of five years. On April 7, 2016, the Company entered into Amendment No. 4 to the Term Loan Agreement which reduced the exercise price of the 2015 CRG Warrants received under the second amendment to $15.00 per share and granted CRG warrants to purchase an additional 35,000 common shares in the Company at a price of $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. pursuant to the Amendment, the Company agreed to amend the warrants previously issued by the Company to CRG to (i) reduce the strike price to $1.50 per share and (ii) to include broad based anti-dilution protection such that the warrants shall maintain the same 1.22% ownership percentage following any capital raises the Company may complete through March 31, 2018.
In connection with the December 2017 offering the Company issued CRG additional warrants to purchase 83,240 shares of commons stock at an exercise price of $1.50 (“2017 CRG Warrants”).
On April 4, 2018 with an effective date of March 31, 2018, the Company entered into Amendment No. 6 to the Term Loan Agreement. Pursuant to the terms of this amendment, the cash interest payments due in 2018 were deferred and added to the principal balance under the Term Loan Agreement at the end of each quarter. This amendment also provided 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 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 and the 2017 CRG Warrants to $0.44 per share. This amendment was accounted for as a modification in accordance with U.S. GAAP.
On November 12, 2018 the Company entered into Amendment No. 7 to the Term Loan Agreement. Pursuant to the terms of the agreement, the Amendment extended the “Interest-Only Period” under the Term Loan Agreement from the sixteenth (16th) payment date to the twentieth (20th) payment date following the first borrowing date, which has the effect of pushing out the principal payments to 2020. In addition, the cash interest payments under the Term Loan Agreement for periods ending on March 31, 2019 and June 30, 2019 were deferred and added to the principal balance under the Term Loan Agreement at the end of each such quarter. Additionally, if the Federal Drug Administration (“FDA”) had received and accepted our application for review of our DiscoveryTM Platform on or before June 30, 2019 the Company would have been entitled to pay the interest on the outstanding principal amount of the loans under the Term Loan Agreement payable during the quarter ended September 30, 2019 entirely, in the form of a PIK Loan. Finally, the Amendment reduced the minimum required revenue for 2018 under the Term Loan Agreement from $25 million to $24 million.
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On October 4, 2019 with an effective date of September 30, 2019 the Company entered into Amendment No. 8 to the Term Loan Agreement. Pursuant to the terms of the agreement, the Amendment deferred the cash interest payment for the period ending September 30, 2019 and added it to the principal balance under the Term Loan Agreement.
The Term Loan Agreement is collateralized by all assets of the Company. Additionally, the terms of the Term Loan Agreement contain various affirmative and negative covenants agreed to by the Company. Among them, the Company must attain minimum certain annual revenue and minimum cash threshold levels through calendar year 2020. The minimum annual revenue threshold level required by the Term Loan Agreement, 2019 is $38.0 million and $45.0 million for 2020. The minimum cash balance required is $3.0 million, subject to certain conditions.
The Company is currently in default of the 2019 minimum revenue threshold of $38.0 million and, the Company will have to raise subordinated debt or equity (the “CRG Equity Cure”) of $30.7 million which is equal to twice the difference between the annual revenue and the revenue covenant with the total proceeds from this financing to be used to reduce the principal of the Term Loan Agreement which would cure the default in accordance with the terms of the loan. The Company has 90 days to achieve this “Cure” unless a covenant waiver is given or the Term Loan Agreement is amended. In the event the Company cannot complete the CRG Equity Cure and a covenant waiver is not received, the Company would remain in default of the Term Loan Agreement. In the event of a default, the lender has the option or right to require the Company to repay the current outstanding amount of $36.6 million earlier than anticipated, and if the Company cannot, the lender has the option to invoke the foreclosure on their security interest in our assets and all obligations will become due and payable immediately. See the Risk Factor section of this Form 10-K for further discussion regarding the Term Loan Agreement and risks associated with the Term Loan Agreement and our failure to satisfy the 2019 revenue covenant thereunder.
Ongoing Sources and Uses of Cash
We anticipate that our cash and cash equivalents and cash generated from business operations will be sufficient to sustain our operations into the first quarter of 2020. We continually evaluate various financing possibilities but we typically expect our primary source 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 business model.
We expect to use our cash primarily to fund our operating expenses and to pursue the development and generation of clinical data for our new generation platform.
Changes in Cash Flows (in thousands)
| Years ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Cash (used in) provided by operating activities | $ | (954 | ) | $ | 2,662 | |||
| Cash used in investing activities | (411 | ) | (461 | ) | ||||
| Cash used in financing activities | - | (1,000 | ) | |||||
| Net (decrease) increase in cash and cash equivalents during the year | $ | (1,365 | ) | $ | 1,201 | |||
Cash Used in Operating Activities
Net cash used in our operating activities for 2019 was $1.0 million compared to net cash gained of $2.7 million during the prior year. Net cash used in operating activities was less than our net loss for the year of $5.4 million primarily due to the depreciation of fixed assets, stock-based compensation expense, deferred interest, and the amortization of the discount on our long-term debt. In aggregate, these non-cash expenses totaled $5.4 million during the year reduced by a $1.0 million net increase in non-cash working capital.
| - 27 - |
The net change in non-cash working capital and non-current asset balances related to operations for the years ended December 31, 2019 and 2018 consists of the following (in thousands):
| Years ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Accounts receivable, net | $ | 269 | $ | 350 | ||||
| Inventory | (282 | ) | 11 | |||||
| Prepaid expenses and other assets | (872 | ) | - | |||||
| Other non-current assets | 31 | (50 | ) | |||||
| Accounts payable | (82 | ) | (1,039 | ) | ||||
| Accrued liabilities | (25 | ) | (497 | ) | ||||
| Deferred rent/revenue | 12 | (28 | ) | |||||
| $ | (949 | ) | $ | (1,253 | ) | |||
Explanations of the more significant net changes in working capital and non-current asset balances are as follows:
| ● | Accounts receivable decreased in 2019 due to improved collection on outstanding balances and a reduction in sales; | |
| ● | Inventory levels of test cards on hand increased in 2019 due to lower than expected sales volumes; | |
| ● | Prepaid expenses and other assets had an increase in 2019 due to the purchase of parts for the TearLab DiscoveryTM systems to be built upon FDA approval. |
Cash Used in Investing Activities
Net cash used in investing activities for the years ended December 31, 2019 and 2018 was $0.4 million and $0.5 million, respectively, which we used to acquire fixed assets.
Cash Used in Financing Activities
There was zero net cash provided by or used in financing activities for the year ended December 31, 2019. For the year ended December 31, 2018, cash used by financing activities was $1.0 million, which was used to reduce the principal of the CRG loan.
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The following table summarizes our contractual commitments as of December 31, 2019 and the effect those commitments are expected to have on liquidity and cash flow in future periods (in thousands):
| Less Than | 1 To 3 | More Than | ||||||||||||||
| Contractual obligation | Total | 1 Year | Years | 3 Years | ||||||||||||
| Operating leases | $ | 829 | $ | 311 | $ | 518 | $ | - | ||||||||
| Royalty payments | 385 | 35 | 105 | 245 | ||||||||||||
| Purchase obligations | 676 | 676 | - | - | ||||||||||||
| Long-term debt | 24,000 | 24,000 | - | - | ||||||||||||
| Interest payments | 16,160 | 16,160 | - | - | ||||||||||||
| Total contractual obligations | $ | 42,050 | $ | 41,182 | $ | 623 | $ | 245 | ||||||||
Off-Balance-Sheet Arrangements
As of December 31, 2019, we did not have any material off-balance-sheet arrangements.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations is based upon our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates and judgements, the most critical of which are those related to revenue recognition, inventory valuation and allowance for doubtful accounts. We base our estimates 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.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our audited consolidated financial statements.
Revenue Recognition
Revenue is recognized when 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 and rebates and reports revenue net of such amounts which was $103 and $60 for the twelve months ended December 31, 2019 and 2018, respectively. Sales and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. The Company’s payment terms are typically upon shipment or net 30.
The Company sells its proprietary TearLab® Osmolarity System and related test cards to external customers, who are primarily eye care professionals, for use in osmolarity testing procedures. Revenue is primarily derived from the sale of disposable test cards. Products are generally shipped from a distribution and warehousing facility located in Escondido, 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”).
| - 29 - |
Use, Masters, and Flex Agreements
Purchase commitments for Use Agreements and Flex Agreements are expressed in the agreement for a specified period of time (generally one to three years). The purchase commitment for Masters Agreements is implied for large physician practices with an expectation of purchasing certain levels of test cards. The Company recovers the cost of providing the reader equipment in the amount charged for disposable test cards. Two performance obligations exist under these contracts, related to the customers’ right to use the reader equipment and orders of test cards. As the customer has the ability and right to operate the reader equipment in a manner it determines as well as obtain the output from using the reader equipment, the revenue related to the reader equipment use performance obligation is recognized in accordance with ASC 842 – Leases, wherein revenue related to the reader equipment is recognized over the defined contract term. Revenue related to disposable test cards is recognized as the disposable test cards are shipped. Based on the nature of these contracts, which provide terms for the future purchase of test cards but do not contractually obligate the customer to do so, each purchase of test cards is treated as its own distinct contract with a performance obligation to provide the test cards ordered, memorialized by the customers’ purchase order/request. Revenue under such agreements is allocated between the lease of the reader equipment and the sale of the disposables based upon each component’s relative standalone selling price, which is estimated using the selling prices of the reader device and test cards under Purchase Agreements, discussed further below.
When reader equipment is placed with a customer at no separate cost, the Company retains title to the equipment and it remains capitalized on the Company’s 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.
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.
Valuation of Intangible and Other long-lived Assets
We periodically assess the carrying value of intangible and other long-lived assets, which requires us to make assumptions and judgments regarding the future cash flows of these assets. The assets are considered to be impaired if we determine that the carrying value may not be recoverable based upon our assessment of the following events or changes in circumstances:
| ● | the asset’s ability to continue to generate income from operations and positive cash flow in future periods; | |
| ● | loss of legal ownership or title to the asset; | |
| ● | significant changes in our strategic business objectives and utilization of the asset(s); and | |
| ● | the impact of significant negative industry or economic trends. |
| - 30 - |
If the assets are considered to be impaired, the impairment is the amount by which the carrying value of the assets exceeds the fair value of the assets. Fair value is determined by a combination of available third-party sources and discounted cash flows. In addition, we base the useful lives and related amortization or depreciation expense on our estimate of the period that the assets will generate revenue or otherwise be used by us. We also periodically review the lives assigned to our intangible assets to ensure that our initial estimates do not exceed any revised estimated periods from which we expect to realize cash flows from the technologies. If a change were to occur in any of the above-mentioned factors or estimates, the likelihood of a material change in our reported results would increase.
As of December 31, 2019, the net book value of fixed assets equaled $1.7 million.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts to reflect estimated losses resulting from our customers’ inability to make required payments. On an on-going basis, we evaluate the collectability of accounts receivable based on a combination of factors, including historical collection trends, current economic factors, and the assessment of collectability of specific accounts.
| - 31 - |
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.
Currency Fluctuations and Exchange Risk
Our sales are denominated primarily in U.S. dollars. Most of our expenses are denominated in U.S. dollars, however, some of our research and development expenses are in Australian dollars and a minor portion of our other expenses are in Canadian dollars, Australian dollars, euro, pounds sterling, and occasionally Swiss francs. 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, pound-sterling, or Swiss francs in relation to the U.S. dollar would increase the U.S. dollar cost of our operations, and affect our U.S. dollar measured results of operations. We maintain bank accounts in Canadian dollars to meet short term operating requirements. We do not engage in any hedging or other transactions intended to manage these risks. In the future, we may undertake hedging or other similar transactions or invest in market risk sensitive instruments if we determine that is advisable to offset these risks.
Interest Rate Risk
Our long-term debt carries a fixed rate of 13% interest. A decrease in market interest rates would increase the fair value of our long-term debt.
| - 32 - |
ITEM 8. Financial Statements and Supplementary Data
Consolidated Financial Statements
| - 33 - |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of TearLab Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of TearLab Corporation (“Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Uncertainty
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred recurring losses, debt covenant violations and is dependent on additional financing to fund operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 1 to the financial statements. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
Adoption of New Accounting Standard
As discussed in Note 2 to the financial statements, the Company changed its method of accounting for leases as a result of the adoption of Accounting Standards Codification Topic 842, Leases. Our opinion is not modified with respect to this matter.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
| We have served as the Company’s auditors since 2015. | |
| /s/ Mayer Hoffman McCann P.C. | |
| San Diego, CA | |
| March 6, 2020 |
| - 34 - |
TearLab Corporation
(in thousands, except share and per share data)
| December 31, 2019 | December 31, 2018 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 7,108 | $ | 8,473 | ||||
| Accounts receivable, net | 917 | 1,186 | ||||||
| Inventory | 2,269 | 1,987 | ||||||
| Prepaid expenses and other current assets | 1,562 | 690 | ||||||
| Total current assets | 11,856 | 12,336 | ||||||
| Fixed assets, net | 1,670 | 2,024 | ||||||
| Right of use assets | 645 | - | ||||||
| Intangible assets, net | 2 | 2 | ||||||
| Other non-current assets | 120 | 151 | ||||||
| Total assets | $ | 14,293 | $ | 14,513 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 599 | $ | 681 | ||||
| Accrued liabilities | 2,336 | 2,363 | ||||||
| Deferred revenue/rent | 2 | 13 | ||||||
| Current portion of lease liability | 240 | - | ||||||
| Current portion of long-term debt | 36,578 | - | ||||||
| Total current liabilities | 39,755 | 3,057 | ||||||
| Long-term debt, net of current portion | - | 32,014 | ||||||
| Long-term third party payable | 130 | 111 | ||||||
| Long-term lease liability, net of current portion | 429 | - | ||||||
| Total liabilities | 40,314 | 35,182 | ||||||
| Commitments and contingencies (Note 10) | ||||||||
| Stockholders’ deficit | ||||||||
| Capital stock | ||||||||
| Preferred Stock, $0.001 par value, 10,000,000 shares authorized, 0 and 556 issued and outstanding at December 31, 2019 and December 31, 2018, respectively | - | - | ||||||
| Common stock, $0.001 par value, 40,000,000 shares authorized, 12,560,635 and 11,296,998 issued and outstanding at December 31, 2019 and December 31, 2018, respectively | 13 | 11 | ||||||
| Additional paid-in capital | 510,442 | 510,380 | ||||||
| Accumulated deficit | (536,476 | ) | (531,060 | ) | ||||
| Total stockholders’ deficit | (26,021 | ) | (20,669 | ) | ||||
| Total liabilities and stockholders’ deficit | $ | 14,293 | $ | 14,513 | ||||
See accompanying notes to consolidated financial statements.
| - 35 - |
TearLab Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| Years Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Revenue | ||||||||
| Product sales | $ | 19,903 | $ | 22,153 | ||||
| Reader equipment rentals | 2,752 | 2,846 | ||||||
| Total revenue | 22,655 | 24,999 | ||||||
| Cost of goods sold | ||||||||
| Cost of goods sold (excluding amortization of intangible assets) | 7,909 | 8,495 | ||||||
| Cost of goods sold - reader equipment depreciation | 447 | 961 | ||||||
| Gross profit | 14,299 | 15,543 | ||||||
| Operating expenses | ||||||||
| Sales and marketing | 3,652 | 3,334 | ||||||
| Clinical, regulatory and research & development | 3,817 | 3,587 | ||||||
| General and administrative | 6,555 | 6,160 | ||||||
| Total operating expenses | 14,024 | 13,081 | ||||||
| Income from operations | 275 | 2,462 | ||||||
| Other income (expense) | ||||||||
| Interest expense | (5,703 | ) | (4,709 | ) | ||||
| Other, net | 12 | (4 | ) | |||||
| Total other income (expense) | (5,691 | ) | (4,713 | ) | ||||
| Net loss and comprehensive loss | $ | (5,416 | ) | $ | (2,251 | ) | ||
| Weighted average shares outstanding - basic and diluted | 12,178,565 | 10,615,513 | ||||||
| Net loss per share – basic and diluted | $ | (0.44 | ) | $ | (0.21 | ) | ||
See accompanying notes to consolidated financial statements.
| - 36 - |
TearLab Corporation
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(in thousands, except share data)
| Common stock | Series
A Convertible Preferred stock |
Additional paid-in | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance, December 31, 2017 | 7,986,998 | $ | 8 | 2,012 | $ | - | $ | 510,235 | $ | (528,809 | ) | $ | (18,566 | ) | ||||||||||||||
| Series A Convertible Preferred converted to common | 3,310,000 | 3 | (1,456 | ) | - | (3 | ) | - | - | |||||||||||||||||||
| Stock-based compensation | - | - | - | - | 151 | - | 151 | |||||||||||||||||||||
| Common Stock Warrants issued | - | - | - | - | (3 | ) | - | (3 | ) | |||||||||||||||||||
| Net loss and comprehensive loss | - | - | - | - | - | (2,251 | ) | (2,251 | ) | |||||||||||||||||||
| Balance, December 31, 2018 | 11,296,998 | $ | 11 | 556 | $ | - | $ | 510,380 | $ | (531,060 | ) | $ | (20,669 | ) | ||||||||||||||
| Series A Convertible Preferred converted to common | 1,263,637 | 2 | (556 | ) | - | (1 | ) | - | 1 | |||||||||||||||||||
| Stock-based compensation | - | - | - | - | 63 | - | 63 | |||||||||||||||||||||
| Net loss and comprehensive loss | - | - | - | - | - | (5,416 | ) | (5,416 | ) | |||||||||||||||||||
| Balance, December 31, 2019 | 12,560,635 | $ | 13 | - | $ | - | $ | 510,442 | $ | (536,476 | ) | $ | (26,021 | ) | ||||||||||||||
See accompanying notes to consolidated financial statements.
| - 37 - |
TearLab Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Years ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| OPERATING ACTIVITIES | ||||||||
| Net loss for the year | $ | (5,416 | ) | $ | (2,251 | ) | ||
| Adjustments to reconcile net loss to cash provided by (used in) operating activities: | ||||||||
| Stock-based compensation | 63 | 151 | ||||||
| Depreciation of fixed assets | 725 | 1,202 | ||||||
| Amortization of intangible assets | - | 9 | ||||||
| Loss on disposal of fixed assets | 40 | 84 | ||||||
| Deferred interest on long-term debt | 3,168 | 3,793 | ||||||
| Amortization of deferred financing charges | 1,415 | 927 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | 269 | 350 | ||||||
| Inventory | (282 | ) | 11 | |||||
| Prepaid expenses and other assets | (872 | ) | - | |||||
| Other non-current assets | 31 | (50 | ) | |||||
| Accounts payable | (82 | ) | (1,039 | ) | ||||
| Accrued liabilities | (25 | ) | (497 | ) | ||||
| Deferred rent/revenue | 12 | (28 | ) | |||||
| Cash (used in) provided by operating activities | (954 | ) | 2,662 | |||||
| INVESTING ACTIVITIES | ||||||||
| Additions to fixed assets | (411 | ) | (461 | ) | ||||
| Cash used in investing activities | (411 | ) | (461 | ) | ||||
| FINANCING ACTIVITIES | ||||||||
| Payment on long-term debt | - | (1,000 | ) | |||||
| Cash used in financing activities | - | (1,000 | ) | |||||
| Net increase (decrease) in cash and cash equivalents during the year | (1,365 | ) | 1,201 | |||||
| Cash and cash equivalents, beginning of year | 8,473 | 7,272 | ||||||
| Cash and cash equivalents, end of year | $ | 7,108 | $ | 8,473 | ||||
| Supplemental Cash flow information | ||||||||
| Cash paid for interest | $ | 1,132 | $ | - | ||||
| Cash paid for operating leases | 326 | - | ||||||
| Supplemental disclosure of noncash investing and financing activities | ||||||||
| Right-of-use assets acquired through operating leases | $ | 894 | $ | - | ||||
| Purchase of assets through third party payable | 11 | 111 | ||||||
See accompanying notes to consolidated financial statements.
| - 38 - |
TearLab Corporation
Notes to Consolidated Financial Statements
(expressed in thousands of U.S. dollars except per share amounts and as otherwise noted)
1. Basis of Presentation
Nature of Operations
TearLab Corporation (“TearLab” or the “Company”), a Delaware corporation, is an ophthalmic device company that is commercializing a proprietary in vitro diagnostic tear testing platform, the TearLab® Osmolarity System to test for dry eye disease, or DED, which enables eye care practitioners to test for a highly sensitive and specific biomarker using nanoliters of tear film at the point-of-care.
The accompanying consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries, TearLab Research, Inc. (“TearLab Research”) and Occulogix Canada Corporation. Intercompany accounts and transactions have been eliminated on consolidation.
Liquidity and Going Concern
The accompanying consolidated financial statements have been prepared on the going concern basis, which assumes that the Company will continue to operate as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has sustained substantial losses of $5,416 and $2,251 for the years ended December 31, 2019 and 2018, respectively. The Company had cash flow used in operations of $954 and cash flow provided by operations of $2,662 for the years ended December 31, 2019 and 2018, respectively. The Company is currently in default of the 2019 minimum revenue threshold of $38.0 million and in order to cure this default the Company must raise subordinated debt or equity (the “CRG Equity Cure”) of $30.7 million, which is equal to twice the difference between the annual revenue and the revenue covenant, with the total proceeds from this financing to be used to reduce the principal of the Term Loan Agreement in accordance with the terms of the loan. The Company has 90 days to achieve the CRG Equity Cure unless a covenant waiver is given or the Term Loan Agreement is amended. In the event the Company cannot complete the CRG Equity Cure and a covenant waiver is not received, the Company would remain in default of the Term Loan Agreement. In the event of a default, the lender has the option or right to require the Company to repay the current outstanding amount of $36.6 million earlier than anticipated, and if the Company cannot, the lender has the option to invoke the foreclosure on their security interest in our assets and all obligations will become due and payable immediately. Based on the Company’s current rate of cash consumption and the potential for the accelerated debt repayment requirements the Company estimates it will need additional capital prior to the end of the first quarter of 2020 and its prospects for obtaining that capital are uncertain. 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. 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.
| - 39 - |
2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. The principal areas of judgment relate to revenue and inventory reserves, allowance for doubtful accounts, impairment of long-lived assets, valuation allowance on deferred tax assets and the fair value of stock options and warrants.
Concentrations and Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and accounts receivable. The Company limits its exposure to credit loss by placing its cash with high credit quality financial institutions.
During 2019 and 2018, the Company derived its revenue from the sale of the TearLab® Osmolarity product. There were no customers representing revenue in excess of 10% in the years ended December 31, 2019 or 2018.
Currently, there are two suppliers for the reader and pen components of the TearLab® Osmolarity System and one supplier for the test cards. The Company expects to maintain the relationships with these suppliers.
Fair Value of Financial Instruments
The Company’s financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and term debt. The carrying amounts of financial instruments such as cash equivalents, accounts receivable, accounts payable and accrued expenses approximate the related fair values due to the short-term maturities of these instruments. The term debt is presented net of any unamortized premiums or discounts, which approximates fair value.
Cash and Cash Equivalents
The Company considers all highly liquid investments that are readily convertible into cash and have an original maturity of three months or less at the time of purchase to be cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
The Company’s accounts receivable consists primarily of trade receivables from customers and are generally unsecured and due within 30 days. The Company evaluates the collectability of its accounts receivable based on a combination of factors and calculates an allowance for doubtful accounts based on the estimated proportion of aged receivables deemed uncollectable. Expected credit losses related to trade receivables are recorded as an allowance for doubtful accounts. The allowance for doubtful accounts is charged to sales and marketing expense and accounts receivable are written off as uncollectible and deducted from the allowance after appropriate collection efforts have been exhausted. The activities in the allowance for doubtful accounts are as follows:
| Years ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Balance at the beginning of the year | $ | 138 | $ | 508 | ||||
| Charges to bad debt expense | 2 | (241 | ) | |||||
| Write-off and recoveries | (46 | ) | (129 | ) | ||||
| Balance at the end of the year | $ | 94 | $ | 138 | ||||
| - 40 - |
Inventory
Inventory is recorded at the lower of cost or net realizable value on a first-in, first-out basis and consists of purchased finished goods. Inventory is periodically reviewed for evidence of slow-moving or obsolete items, and the estimated reserve is based on management’s reviews of inventories on hand, compared to estimated future usage and sales, reviewing product shelf-life, and assumptions about the likelihood of obsolescence. Once written down, the adjustments are considered permanent and are not reversed until the related inventory is sold.
Fixed Assets
Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, ranging from three to fifteen years. Maintenance and repairs are expensed as incurred. The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss would be recognized when estimated future undiscounted cash flows relating to the asset are less than its carrying amount. An impairment loss is measured as the amount by which the carrying amount of an asset exceeds its fair value.
Impairment of Long-lived Assets
The Company periodically assesses the carrying value of intangible and other long-lived assets, and whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. The assets are considered to be impaired if the Company determines that the carrying value may not be recoverable based upon its assessment, which includes consideration of the following events or changes in circumstances:
| ● | the asset’s ability to continue to generate income from operations and positive cash flow in future periods; | |
| ● | loss of legal ownership or title to the asset; | |
| ● | significant changes in the Company’s strategic business objectives and utilization of the asset(s); and | |
| ● | the impact of significant negative industry or economic trends. |
If the assets are considered to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets. Fair value is determined by the application of discounted cash flow models to project cash flows from the asset. In addition, the Company bases the useful lives and related amortization or depreciation expense on an estimate of the period that the assets will generate revenue or otherwise be used. The Company also periodically reviews the lives assigned to long-lived assets to ensure that the initial estimates do not exceed any revised estimated periods from which the Company expects to realize cash flows from its assets.
Patents and Trademarks
Patents and trademarks are recorded at historical cost and are amortized using the straight-line method over their estimated useful lives, not to exceed 15 years.
| - 41 - |
Intangible Assets
Intangible assets are recorded at historical cost and are amortized using the straight-line method over their estimated useful life.
Product Warranties
The Company generally provides a one-year warranty on its TearLab® Osmolarity System and related disposables. The Company accrues the estimated cost of this warranty at the time revenue is recognized and charges warranty expense to cost of goods sold. Warranty reserves are established based on historical experience with failure rates and the number of systems covered by warranty. Warranty reserves are depleted as systems and disposables are replaced. The Company reviews warranty reserves quarterly and, if necessary, makes adjustments. The activities in the warranty reserve are as follows:
| Years ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Balance at the beginning of the year | $ | 74 | $ | 131 | ||||
| Charges to cost of goods sold | 3 | 17 | ||||||
| Costs applied to liability | (36 | ) | (74 | ) | ||||
| Balance at the end of the year | $ | 41 | $ | 74 | ||||
Income Taxes
A deferred tax asset or liability is determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized.
Revenue Recognition
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.
There was no net reduction to opening retained earnings as a result of adopting Topic 606 and no impact to revenues for the year ended December 31, 2018.
Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally, this occurs with the transfer of control of our products or services. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services which includes estimates of variable consideration that results from returns, rebates or test card replacements. The Company records allowances for returns or rebates and reports revenue net of such amounts, which were $103 and $60 for the twelve months ended December 31, 2019 and 2018, respectively. Sales and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. The Company’s payment terms are typically upon shipment or net 30.
The Company sells its proprietary TearLab® Osmolarity System and related test cards to external customers, who are primarily eye care professionals, for use in osmolarity testing procedures. Revenue is primarily derived from the sale of disposable test cards. Products are generally shipped from a distribution and warehousing facility located in San Diego, California. The Company’s sales are currently direct to customers in the United States and 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”).
| - 42 - |
Use, Masters, and Flex Agreements
Purchase commitments for Use Agreements and Flex Agreements are expressed in the agreement for a specified period of time (generally one to three years). The purchase commitment for Masters Agreements is implied for large physician practices with an expectation of purchasing certain levels of test cards. The Company recovers the cost of providing the reader equipment in the amount charged for disposable test cards. Two performance obligations exist under these contracts, related to the customers’ right to use the reader equipment and orders of test cards. As the customer has the ability and right to operate the reader equipment in a manner it determines as well as obtain the output from using the reader equipment, the revenue related to the reader equipment use performance obligation is recognized in accordance with ASC 842 – Leases, wherein revenue related to the reader equipment is recognized over the defined contract term. Revenue related to disposable test cards is recognized as the disposable test cards are shipped. Based on the nature of these contracts, which provide terms for the future purchase of test cards but do not contractually obligate the customer to do so, each purchase of test cards is treated as its own distinct contract with a performance obligation to provide the test cards ordered, memorialized by the customers’ purchase order/request. Revenue under such agreements is allocated between the lease of the reader equipment and the sale of the disposables based upon each component’s relative standalone selling price, which is estimated using the selling prices of the reader device and test cards under Purchase Agreements, discussed further below.
When reader equipment is placed with a customer at no separate cost, the Company retains title to the equipment and it remains capitalized on the Company’s 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.
Purchase Agreements
Revenue recognition for Purchase Agreements is based on the individual performance obligations determined to exist in the contract. Since the reader equipment and the test cards are separate and distinct delivered items, the delivery of each are considered separate performance obligations. The reader equipment and test cards are separately identified under the Purchase Agreements and are sold at their standalone selling price. The Company recognizes revenue for each of the performance obligations only when it determines that all applicable recognition criteria have been met, which is usually upon shipment to the customer. Under Purchase Agreements, the customer is not contractually obligated to purchase additional test cards, and each subsequent order of test cards represents a separate and distinct contract with the performance obligation to provide the test cards ordered.
Amounts billed to customers for shipping and handling of a sales transaction are included as revenue. For the years ended December 31, 2019 and 2018, the Company recognized revenue from shipping and handling of $127 and $148, respectively.
The following table presents our revenues disaggregated by revenue source. Sales and usage-based taxes are excluded from revenues:
| Years ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Product Sales | $ | 19,903 | $ | 22,153 | ||||
| Reader Equipment Rentals | 2,752 | 2,846 | ||||||
| $ | 22,655 | $ | 24,999 | |||||
Arrangements with Multiple Performance Obligations
Our contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenue to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the separate prices charged to customers for the reader device and test cards under Purchase Agreements.
Return Reserve
Although the Company has a no return policy for its products, the Company has established a return reserve for product sales that contain an implicit right of return. The Company reserves for estimated returns or refunds by reducing revenue at the time of shipment based on historical experience. The reserve of $4 and $6 as of December 31, 2019 and 2018, respectively, has been recorded as a reduction of revenue and is included in accounts receivable. The activities in the return reserve are as follows:
| Years ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Balance at the beginning of the year | $ | 6 | $ | 9 | ||||
| Provision | 54 | 64 | ||||||
| Write-off and recoveries | (56 | ) | (67 | ) | ||||
| Balance at the end of the year | $ | 4 | $ | 6 | ||||
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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.
Cost of Goods Sold
Cost of goods sold includes the costs the Company incurs for the purchase of the TearLab® Osmolarity Systems sold and related freight and shipping costs, royalties, fees related to merchant services, warehousing and logistics inventory management associated with conducting business and depreciation of reader equipment. The Company recorded $645 and $706 in shipping and handling fees for the years ended December 31, 2019 and 2018, respectively.
Clinical, Regulatory and Research & Development Costs
Clinical and regulatory costs attributable to the performance of contract services are recognized as an expense as the services are performed. Non-refundable, up-front fees paid in connection with these contracted services are deferred and recognized as an expense over the estimated term of the related contract.
Stock-based Compensation
The Company accounts for stock-based compensation expense for its directors and employees in accordance with U.S. GAAP guidance related to stock-based compensation. Under this guidance, stock-based compensation cost is estimated at the grant date based on the fair value of the award and is recognized as an expense ratably over the requisite service period of the award. The Company uses the Black-Scholes Merton option pricing model for determining the fair value for all its awards and will recognize compensation cost on a straight-line basis over the awards’ vesting periods.
Advertising Costs
Advertising costs are expensed as incurred. Total advertising costs for each of the years ended December 31, 2019 and 2018 were $162 and $43, respectively.
Foreign Currency Transactions
The Company’s functional and reporting currency is the U.S. dollar. The assets and liabilities of the Company’s Canadian operations are maintained in U.S. dollars. Monetary assets and liabilities denominated in foreign currencies are translated into U.S. dollars at exchange rates in effect at the consolidated balance sheet dates, and non-monetary assets and liabilities are translated at exchange rates in effect on the date of the transaction. Revenue and expenses are translated into U.S. dollars at average exchange rates prevailing during the year. Resulting exchange loss of $5 and gain of $7 are included in other income (expense) for the years ended December 31, 2019 and 2018, respectively.
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Geographic Information
The following table provides geographic information related to the Company’s revenue based on the geographic location to which it delivers the product:
| For the year ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| United States | $ | 21,289 | $ | 23,634 | ||||
| Rest of the world | 1,366 | 1,365 | ||||||
| Total | $ | 22,655 | $ | 24,999 | ||||
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income (loss) generally includes unrealized gains or losses on the Company’s marketable securities and foreign currency translation adjustments. In all the periods presented, the Company’s comprehensive loss equaled the net loss for the period.
Recent Accounting Pronouncements
In June 2018, the Financial Accounting Standard Board (“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 adopted ASU 2018-07 effective January 1, 2019 with an immaterial impact to the Company’s financial statements.
On January 1, 2018, the Company 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. 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, 2018 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) I. Accounting for Certain Financial Instruments with Down Round Features II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable non-controlling interests. ASU 2017-11 is effective for fiscal years and interim periods after December 31, 2018. The Company early adopted ASU 2017-11 effective December 31, 2017.
On January 1, 2019, the Company adopted ASU 2016-02, Leases, which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The original guidance required application on a modified retrospective basis with the earliest period presented. In August 2018, the FASB issued ASU 2018-11, Targeted Improvements to ASC 842, which included an option to not restate comparative periods in transition and elect to use the effective date of ASC 842, Leases, as the date of initial application of transition, which the Company elected. Lease arrangements are determined at the inception of the contract with and included in right-of-use (“ROU”) assets and long-term lease liabilities on the consolidated balance sheets. The adoption of ASC 842 had an immaterial impact on our Consolidated Statement of Operations and Consolidated Statement of Cash Flows for the twelve months ended December 31, 2019 and 2018. Additionally, the Company has elected the package practical expedient with respect to lease definition, classification and direct costs. In addition, the Company elected not to apply ASC Topic 842 to arrangements with lease terms of 12 month or less. Additional information and disclosures required by the new standard are contained in Note 10.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. This standard is effective for interim and annual periods in fiscal years beginning after December 15, 2020, and early adoption is permitted. We are currently assessing the timing and impacts of adopting this standard and do not expect it to have a material impact on the Company.
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3. BALANCE SHEET DETAILS
Accounts Receivable
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Trade receivables | $ | 1,011 | $ | 1,324 | ||||
| Allowance for doubtful accounts | (94 | ) | (138 | ) | ||||
| $ | 917 | $ | 1,186 | |||||
Inventory
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Finished goods | $ | 2,269 | $ | 1,987 | ||||
| Inventory reserves | - | - | ||||||
| $ | 2,269 | $ | 1,987 | |||||
The Company evaluates inventory for estimated excess quantities and obsolescence, based on expected future sales levels and projections of future demand and expiration dates of inventory, 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 10). 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
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Prepaid trade shows | $ | 17 | $ | 18 | ||||
| Prepaid insurance | 464 | 322 | ||||||
| Manufacturing deposits | 880 | 111 | ||||||
| Subscriptions | 155 | 140 | ||||||
| Other fees and services | 44 | 98 | ||||||
| Other current assets | 2 | 1 | ||||||
| $ | 1,562 | $ | 690 | |||||
Fixed Assets, net
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Capitalized TearLab equipment | $ | 6,892 | $ | 6,922 | ||||
| Manufacturing equipment | 317 | 317 | ||||||
| Leasehold improvements | 13 | 13 | ||||||
| Computer equipment and software | 310 | 846 | ||||||
| Furniture and office equipment | 368 | 368 | ||||||
| Medical equipment | 1,454 | 1,366 | ||||||
| $ | 9,354 | $ | 9,832 | |||||
| Less accumulated depreciation | (7,684 | ) | (7,808 | ) | ||||
| $ | 1,670 | $ | 2,024 | |||||
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Depreciation expense was $725 and $1,202 for the years ended December 31, 2019 and 2018, respectively.
Accrued Liabilities
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Due to professionals | $ | 62 | $ | 17 | ||||
| Due to employees and directors | 1,414 | 1,289 | ||||||
| Sales and use tax liabilities | 268 | 257 | ||||||
| Royalty liability | 245 | 290 | ||||||
| Warranty | 36 | 74 | ||||||
| Other | 311 | 436 | ||||||
| $ | 2,336 | $ | 2,363 | |||||
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. 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 was $0.3 and $9 for the years ended December 31, 2019 and 2018, respectively.
Intangible assets subject to amortization consist of the following:
| Remaining Useful Life (Years) | Gross Value at December 31, 2019 | Accumulated Amortization | Net Book Value at December 31, 2019 | |||||||||||||
| TearLab® technology | 0 | 12,172 | (12,172 | ) | - | |||||||||||
| Patents and trademarks | 1 | 271 | (269 | ) | 2 | |||||||||||
| Prescriber list | 0 | 90 | (90 | ) | - | |||||||||||
| Total | 12,533 | (12,531 | ) | 2 | ||||||||||||
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| Remaining Useful Life (Years) | Gross Value at December 31, 2018 | Accumulated Amortization | Net Book Value at December 31, 2018 | |||||||||||||
| TearLab® technology | 0 | $ | 12,172 | $ | (12,172 | ) | $ | - | ||||||||
| Patents and trademarks | 1 | 271 | (269 | ) | 2 | |||||||||||
| Prescriber list | 0 | 90 | (90 | ) | - | |||||||||||
| Total | $ | 12,533 | $ | (12,531 | ) | $ | 2 | |||||||||
Estimated future amortization expense related to intangible assets with finite lives at December 31, 2019 is as follows:
| Amortization of intangible assets | ||||
| 2020 | $ | 1 | ||
| Thereafter | 1 | |||
| $ | 2 | |||
5. TERM LOAN
On March 4, 2015, the Company executed a term loan agreement (the “Term Loan Agreement”) with CRG LP and certain of its affiliate funds (“CRG”) as lenders providing the Company with access of up to $35,000 under the arrangement. The Company received $15,000 in gross proceeds under the arrangement on March 4, 2015, and an additional $10,000 on October 6, 2015. The Term Loan Agreement matures on December 31, 2020 and bears interest at 13% per annum, with quarterly payments of interest only for the first four years. While interest on the loan is accrued at 13% per annum, the Company may elect to make interest-only payments at 8.5% per annum. The unpaid interest of 4.5% is added to the principal of the loan and is subject to additional accrued interest (“PIK interest”). The accrued interest can be deferred and paid together with the principal in the fifth and sixth years.
As part of Amendment No. 2 to the Term Loan Agreement, and funding of the second tranche, CRG received 35,000 warrants dated as of October 6, 2015 to purchase common shares of the Company at a price of $50.00 per share (the “2015 CRG Warrants”). The 2015 CRG Warrants have a five-year life and are classified as equity on the Consolidated Balance Sheets as of December 31, 2019 and 2018. 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, 2017, the Company entered into Amendment No. 4 to the Term Loan Agreement and the company issued CRG additional warrants to purchase 35,000 common shares of the Company’s stock at 15.00 per share (the “2016 CRG Warrants”) and together with the 2015 CRG Warrants, the “CRG Warrants”, 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 were deferred and added to the principal balance under the Loan Agreement at the end of each quarter. This amendment also provided for an additional facility fee equal to 3% of the sum of the aggregate amount of the principal drawn under the Term Loan Agreement and any PIK loans issued, so that the total facility fee shall be 9.5%, applicable to the entire balance, (the “Facility Fee”). The Facility Fee is being accrued to interest expense using the effective interest method. In addition, this amendment reduced the minimum liquidity covenant to $3 million. Concurrent with the reduction of the liquidity covenant the Company agreed to repay CRG $1.0 million of principal on the Term Loan Agreement in April 2018. Lastly, this amendment reduced the strike price of the existing CRG Warrants to $0.44 per share (see Note 6). The Amendment was accounted for as a modification in accordance with U.S. GAAP.
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On November 12, 2018 the Company entered into Amendment No. 7 to the Term Loan Agreement. Pursuant to the terms of the agreement, the Amendment extended the “Interest-Only Period” under the Term Loan Agreement from the sixteenth (16th) payment date to the twentieth (20th) payment date following the first borrowing date, which has the effect of pushing out the principal payments to 2020. In addition, the cash interest payments under the Term Loan Agreement for periods ending on March 31, 2019 and June 30, 2019 were deferred and added to the principal balance under the Term Loan Agreement at the end of each such quarter. The Company evaluated the amendment and it was accounted for as a modification in accordance with GAAP, with no incremental expense incurred. Additionally, if the Federal Drug Administration (“FDA”) had received and accepted our application for review of our DiscoveryTM Platform on or before June 30, 2019 the Company would have been entitled to pay the interest on the outstanding principal amount of the loans under the Term Loan Agreement payable during the quarter ended September 30, 2019 entirely in the form of a PIK Loan. Finally, the Amendment reduced the minimum required revenue for 2018 under the Term Loan Agreement from $25 million to $24 million.
On October 4, 2019 with an effective date of September 30, 2019 the Company entered into Amendment No. 8 to the Term Loan Agreement. Pursuant to the terms of the agreement, the Amendment deferred the cash interest payment for September 30, 2019 and added it to the principal balance under the Term Loan Agreement.
The Company is currently in default of the 2019 minimum revenue threshold of $38.0 million and, the Company will have to raise subordinated debt or equity (the “CRG Equity Cure”) of $30.7 million which is equal to twice the difference between the annual revenue and the revenue covenant with the total proceeds from this financing to be used to reduce the principal of the Term Loan Agreement in accordance with the terms of the Loan. The Company has 90 days to achieve this “Cure” unless a covenant waiver is given or the Term Loan Agreement is amended. In the event the Company cannot complete the CRG Equity Cure and a covenant waiver is not received, the Company would remain in default of the Term Loan Agreement. In the event of a default, the lender has the option or right to require the Company to repay the current outstanding amount of $36.6 million earlier than anticipated, and if the Company cannot, the lender has the option to invoke the foreclosure on their security interest in our assets and all obligations will become due and payable immediately. See the Risk Factor section of this Form 10-K for further discussion regarding the Term Loan Agreement and risks associated with the Term Loan Agreement and our failure to satisfy the 2019 revenue covenant thereunder.
The Company incurred financing and legal fees associated with the debt of $606, which were recorded as a direct discount to the debt and are being amortized using the effective interest method. The Company presents the debt issuance costs related to the recognized debt liability on the Consolidated Balance Sheet as a reduction of the liability.
The Term Loan Agreement provided for prepayment fees of 5% of the outstanding balance of the loan if the loan was repaid prior to March 31, 2016. The prepayment fee is reduced 1% per year for each subsequent year until maturity.
The following is a summary of the Term Loan Agreement as of December 31, 2019 and related maturities of outstanding principle:
| Principle balance outstanding | $ | 24,000 | ||
| PIK interest | 10,067 | |||
| Facility fee | 2,650 | |||
| less discount on term loan: | ||||
| deferred financing fees, net | (53 | ) | ||
| fair value of detachable warrants, net | (86 | ) | ||
| Total term loan | $ | 36,578 |
Principal due for each of the next 5 years and in the aggregate thereafter:
| 2020 | 36,717 | |||
| Total principal, PIK interest and facility fee due | 36,717 | |||
| Less: discount on term loan | (139 | ) | ||
| Total term loan | $ | 36,578 |
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.
| - 49 - |
(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, Series A Convertible Preferred Stock and the Series A and Series B Warrants are all included in equity in the Company’s Consolidated Balance Sheets as of December 31, 2019 and 2018. The net proceeds were allocated to common stock, Preferred Stock and Series A 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 December 31, 2019, all shares of Series A Convertible Preferred stock have been converted into 4,804,545 shares of common stock.
(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. There were no options granted during the year ended December 31, 2019. The weighted-average fair value of stock options granted during the year ended December 31, 2018 was $ 0.12.
| - 50 - |
The following table sets forth the total stock-based compensation expense resulting from stock options included in the Company’s Consolidated Statements of Operations (in thousands):
| Years ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| General and administrative | $ | 50 | $ | 71 | ||||
| Clinical, regulatory and research and development | 8 | 25 | ||||||
| Sales and marketing | 5 | 55 | ||||||
| Stock-based compensation expense before income taxes | $ | 63 | $ | 151 | ||||
The estimated fair value of stock options for the periods presented was determined using the Black-Scholes Merton option pricing model. There were no option granted during the period ending December 31, 2019. The fair value of the options for the period ending December 31, 2018 had the following weighted-average assumptions: Volatility 84%, weighted average expected live of 6 years, risk-free interest rate of 2.85% and dividend yield of 0.00%.
The Company’s computation of expected volatility is based on the historical volatility of the Company’s common stock over a period of time equal to the expected term of the stock options. The Company’s computation of weighted average expected life was estimated as the mid-point between the vesting date and the end of the contractual period. The risk-free interest rate for an award is based on the U.S. Treasury yield curve with a term equal to the expected life of the award on the date of grant.
A summary of the options issued during the years ended December 31, 2019 and 2018 and the total number of options outstanding as of that date are set forth below:
| Number of Options Outstanding | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||
| Outstanding, December 31, 2017 | 629,016 | $ | 32.35 | 4.29 | $ | - | ||||||||||
| Granted | 509,590 | 0.16 | ||||||||||||||
| Exercised | - | - | ||||||||||||||
| Forfeited/cancelled/expired | (239,487 | ) | 27.33 | |||||||||||||
| Outstanding, December 31, 2018 | 899,119 | $ | 15.45 | 7.26 | $ | - | ||||||||||
| Granted | - | - | ||||||||||||||
| Exercised | - | - | ||||||||||||||
| Forfeited/cancelled/expired | (116,279 | ) | 17.12 | |||||||||||||
| Outstanding, December 31, 2019 | 782,840 | 15.20 | 7.09 | $ | - | |||||||||||
| Vested or expected to vest, December 31, 2019 | 782,734 | $ | 15.20 | 7.05 | $ | - | ||||||||||
| Exercisable, December 31, 2019 | 629,828 | $ | 18.85 | 6.72 | $ | - | ||||||||||
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The aggregate intrinsic value at December 31, 2019 represents the total pre-tax intrinsic value, calculated as the difference between the Company’s closing stock price on the last trading day of the respective fiscal year and the exercise price, multiplied by the number of shares that would have been received by the option holders if the options that could be exercised had been exercised on such date.
Net cash proceeds from the exercise of common stock options were $0 for the years ended December 31, 2019 and 2018. No income tax benefit was realized from stock option exercises during the years ended December 31, 2019 and 2018. The Company presents excess tax benefits from the exercise of stock options, if any, as financing cash flows rather than operating cash flows.
The total intrinsic value of options exercised was $0 for the years ended December 31, 2019 and 2018. The total fair value of stock options vested during the years ended December 31, 2019 and 2018 was $60 and $76, respectively.
As of December 31, 2019, total unrecognized compensation cost related to stock options of $14 is expected to be recognized over a weighted-average period of 1.34 years.
As of December 31, 2019, the Company had 255,588 options remaining in the Stock Option Plan available for grant.
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(d) Warrants
On October 8, 2015, as part of Amendment No. 2 to the Term Loan Agreement, and funding of the $10,000 tranche, CRG received warrants to purchase 35,000 common shares in the Company at a price of $50.00 per share (the “2015 CRG Warrants”). The 2015 CRG Warrants are exercisable any time prior to October 8, 2020. The 2015 CRG Warrants are classified as equity on the Consolidated Balance Sheets as of December 31, 2019 and 2018, respectively. The CRG Warrants were valued at $290 upon issuance using the Black-Scholes Merton model assuming volatility of 73%, an expected life of 5.0 years, a risk-free interest rate of 1.71%, and 0% dividend yield. No CRG Warrants were exercised during the twelve months ended December 31, 2019 or 2018.
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 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 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 are classified as equity on the Consolidated Balance Sheets as of December 31, 2019 and 2018, respectively, and the 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 Consolidated Balance Sheets as of December 31, 2019 and 2018. 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 Consolidated Balance Sheet as of December 31, 2019 and 2018. All Series B warrants expired, unexercised, on June 7, 2018. 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 Consolidated Balance Sheets as of December 31, 2019 and 2018.
In connection with the December 2017 offering the Company issued CRG warrants to purchase 83,240 shares of common stock at an exercise price of $1.50 (the “2017 CRG Warrants”) as a result of triggering the anti-dilution clause of Amendment No. 5 to the Term Loan Agreement (see Note 5). The anti-dilution clause is considered down-round protection, however the Company early adopted ASU 2017-11 and therefore the down-round feature is excluded from the consideration of whether the warrants are indexed to the Company’s own stock and therefore the warrants are not required to be liabilities under the guidance. The 2017 CRG Warrants are classified as equity on the Consolidated Balance Sheets as of December 31, 2019 and 2018 and were valued at $30 upon issuance using the Black-Scholes Merton model assuming volatility of 88%, an expected life of 5 years, a risk-free interest rate of 2.14% and 0% dividend yield. On April 4, 2018, in connection with Amendment No. 6 to the Term Loan Agreement, the strike price of all existing CRG warrants was reduced to $0.44 per share (see Note 5).
The following table provides activity for warrants issued and outstanding during the two years ended December 31, 2019:
| Number of | Weighted average | ||||||||
| warrants | exercise | ||||||||
| outstanding | price | ||||||||
| Outstanding, December 31, 2017 | 15,520,375 | $ | 1.33 | ||||||
| Issued | - | - | |||||||
| Exercised | - | - | |||||||
| Expired | (6,818,181 | ) | 0.44 | ||||||
| Outstanding, December 31, 2018 | 8,702,194 | $ | 2.02 | ||||||
| Issued | - | - | |||||||
| Exercised | - | - | |||||||
| Expired | - | - | |||||||
| Outstanding, December 31, 2019 | 8,702,194 | 2.02 | |||||||
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7. INCOME TAXES
Geographic sources of loss from continuing operations before income tax are as follows:
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Domestic | $ | 5,323 | $ | 2,144 | ||||
| Foreign | 93 | 107 | ||||||
| Loss before income taxes | $ | 5,416 | $ | 2,251 | ||||
Significant components of the Company’s deferred tax assets and liabilities are as follows:
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Deferred tax assets | ||||||||
| Intangible assets | $ | - | $ | 33 | ||||
| Stock options | 3,073 | 3,067 | ||||||
| Accruals and others | 2,557 | 1,355 | ||||||
| Net operating loss carryforwards | 26,320 | 25,917 | ||||||
| 31,950 | 30,372 | |||||||
| Valuation allowance | (31,950 | ) | (30,372 | ) | ||||
| Deferred tax asset | $ | - | $ | - | ||||
| Deferred tax liability | ||||||||
| Fixed Assets | $ | - | $ | - | ||||
| Deferred tax liability | $ | - | $ | - | ||||
| Deferred taxes, net | $ | - | $ | - | ||||
The effective tax rate of the Company’s provision (benefit) for income taxes differs from the federal statutory rate as follows:
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Loss for the year before income taxes | $ | (5,416 | ) | $ | (2,251 | ) | ||
| Expected recovery of income taxes | $ | (1,137 | ) | $ | (473 | ) | ||
| State income tax, net of federal benefit | (128 | ) | (175 | ) | ||||
| Adjustments to deferred tax assets | (324 | ) | 2,336 | |||||
| Non-deductible expense and other | 11 | 9 | ||||||
| Change in valuation allowance | 1,578 | (1,697 | ) | |||||
| Total recovery of income taxes | $ | - | $ | - | ||||
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Income taxes are recorded in accordance with authoritative guidance for accounting for income taxes, which requires the recognition of deferred tax assets and liabilities to reflect the future tax consequences of the events that have been recognized in the Company’s consolidated financial statements or tax returns. Measurement of the deferred items is based on enacted tax laws. In the event of differences between the financial reporting bases and tax bases of the Company’s assets, an assessment regarding the Company’s ability to realize the future benefits of the deferred tax assets is required. The Company records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized. Management has considered future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance. In the event the Company were to determine that it would be able to realize the deferred tax assets in the future in excess of their net recorded amounts, an adjustment to the deferred tax assets would increase the income in the period such determination was made. Likewise, should the Company determine that it would not be able to realize all or part of the net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made.
In July 2006, the FASB issued additional guidance which requires the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, the provisions under this guidance also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted the provisions under this guidance on January 1, 2007. The adoption of these provisions had no impact on the Company’s consolidated financial position or results of operations. At December 31, 2019 and 2018, the Company has no unrecognized income tax benefits and no material uncertain tax positions.
During the year ended December 31, 2012, a change of ownership for tax purposes causing Section 382 restrictions on the utilization of net operating losses occurred. The ownership change in 2012, while limiting the annual utilization of net operating losses, will not cause the carryforwards generated subsequent to the Company’s last ownership change in October 2008 to expire unused. In general, an ownership change, as defined by Section 382, results from transactions increasing ownership of certain stockholders or public groups in the stock of the corporation by more than 50 percentage points over a three-year period. Utilization of net operating loss carryforwards are subject to annual limitations under Section 382 of the Internal Revenue Code of 1986, and similar state provisions whenever an ownership change has occurred. The ownership changes described above will limit the annual amount of net operating loss carryforwards that can be utilized to offset future taxable income.
At December 31, 2019, the Company had federal net operating loss carryforwards of approximately $114,173, of which $0 were incurred in 2018 and 2019. The remaining NOLs begin to expire in 2028 unless previously utilized. The Company had state net operating loss carryforwards of approximately $91,567 and begin to expire in 2028. The federal and state net operating loss carryovers reflected above do not include any net operating loss carryover which would expire unutilized solely as a result of Section 382 limitations arising in connection with the 2008 ownership change.
The Company’s policy is to recognize interest and penalties related to income tax matters in other expense. Because the Company has generated net operating losses since inception for both state and federal purposes, no additional tax liability, penalties or interest have been recognized for balance sheet or income statement purposes as of and for the two years ended December 31, 2019.
The Company does not expect a significant change in the amount of its unrecognized tax benefits within the next 12 months. Therefore, it is not expected that the change in the Company’s unrecognized tax benefits will have a significant impact on the Company’s results of operations or financial position.
All of the federal income tax returns for the Company and its subsidiaries remain open since their respective dates of incorporation due to the existence of net operating losses. The Company and its subsidiaries have not been, nor are they currently, under examination by the Internal Revenue Service or the Canada Revenue Agency.
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State and provincial income tax returns are generally subject to examination for a period of between three and five years after their filing. However, due to the existence of net operating losses, all state income tax returns of the Company and its subsidiaries since their respective dates of incorporation are subject to re-assessment. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. The Company and its subsidiaries have not been, nor are they currently, under examination by any state tax authority.
United States Tax Reform
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (“the Tax Act”) which significantly changed U.S. tax law. The Tax Act lowered the Company’s statutory federal income tax rate from 34% to 21% effective for the tax year beginning January 1, 2018. At December 31, 2017, the Company remeasured its deferred tax balances to reflect the new tax rate. The remeasurement reduced the company’s net deferred tax assets before valuation by $15.9 million with an offsetting decrease recorded in the valuation allowance.
8. 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 are potentially dilutive securities which have not been used in the calculation of diluted loss per share as they are anti-dilutive:
| Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| (in thousands of shares) | ||||||||
| Stock options | 783 | 899 | ||||||
| Warrants | 8,702 | 8,702 | ||||||
| Convertible preferred shares | - | 1 | ||||||
| Total | 9,485 | 9,602 | ||||||
The following table is a reconciliation of the weighted average shares outstanding used for basic and diluted loss per share:
| Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| (in thousands of shares) | ||||||||
| Weighted average shares outstanding - basic | 12,179 | 10,616 | ||||||
| Dilutive potential common shares | - | - | ||||||
| Weighted average shares outstanding - fully diluted | 12,179 | 10,616 | ||||||
9. EMPLOYEE RETIREMENT PLAN
The Company has a defined contribution, 401(k) retirement plan under which all full-time employees may contribute up to 90% of their annual salary, within IRS limits. The Company has not made any contributions to the retirement plan in the years ended December 31, 2019 and 2018.
10. COMMITMENTS AND CONTINGENCIES
Leases
Operating lease right-of-use (“ROU”) assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. As most leases do not provide an implicit rate, we use an incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
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The Company has commitments relating to operating leases recognized on a straight-line basis over the term of the lease for rental of two office spaces and various equipment from unrelated parties. Our California office lease was signed May 1, 2018, with a commencement date of July 1, 2018, expires on November 30, 2023 and has an option for a 5-year extension and escalating payments. In January 2020, the Company entered into a sixth amendment to our Texas office lease to extend the term of the lease until September 30, 2020, which is accounted for below. In addition, the Company has vehicle leases expiring at various times through January 2021, and an equipment lease expiring in December 2021.
The adoption of ASC Topic 842 resulted in the Company recognizing right of use assets of $738 and a lease liability of $739 with the difference due the write-off of prior recorded deferred rent.
The components of lease costs were as follows:
| Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Operating lease costs | $ | 351 | $ | - | ||||
| Short-term lease costs | - | - | ||||||
| Variable lease costs | - | - | ||||||
| $ | 351 | $ | - | |||||
Future minimum lease payments under non-cancellable leases as of December 31, 2019 were as follows:
| 2020 | 311 | |||
| 2021 | 184 | |||
| 2022 | 164 | |||
| 2023 | 170 | |||
| Total lease payments | 829 | |||
| Less: present value discount | (160 | ) | ||
| Present value of lease liabilities | $ | 669 | ||
Weighted average remaining lease term | 2.6 |
Commitments
On May 1, 2018 with an effective date of July 1, 2017 the Company entered into a Restated License Agreement (the “Restated UCSD 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 Restated UCSD 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 Restated UCSD Agreement the royalty rates would range anywhere from 3.5% to 4.75% based on quarterly net sales and the Company would have to make a milestone payment of $0.5 million. In addition, if the Company had not commenced commercial sales of the TearLab DiscoveryTM Platform on or before July 1, 2019, the Company would have been required to pay a milestone payment of 1.25% of cumulative net sales for the two-year period following the effective date of the amendment. The Company completed its first commercial sale of the TearLab DiscoveryTM Platform prior to the July 1, 2019 deadline.
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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 December 31, 2019 are as follows:
| 2020 | 35 | |||
| 2021 | 35 | |||
| 2022 | 35 | |||
| 2023 | 35 | |||
| 2024 | 35 | |||
| Thereafter | 210 | |||
| Total | $ | 385 |
The Company incurred fees of $634 and $414 under the UCSD agreements during the years ended December 31, 2019 and 2018, respectively. The Company had $204 and $247 in accrued royalties at December 31, 2019 and 2018, respectively.
On March 7, 2016, the Company, through its subsidiary, TearLab Research, Inc., entered into a supply and development agreement (“Supply Agreement”) with 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 had the benefit of a lower purchase price that remained in place until the earlier of, the Company reaches an annual volume of 4.5 million test cards or March 31, 2018. Certain savings from freight costs will remain in place throughout the agreement. The Supply Agreement requires, in any given 6 calendar months, the Company must place aggregate purchase orders equal to at least 50% of the orders forecasted for that 6-month period at its onset. The Supply Agreement can be extended by either party for a term of five years with the option for the Company to buyout the exclusive supply provision during any extended term. This Supply Agreement replaces the August 2011 agreement between MiniFAB and the Company. On August 9, 2018 the Company entered into an addendum to the Supply 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 DiscoveryTM product is below 2.4 million cards; or the aggregate product volume in any calendar year after 24 months after the launch of the DiscoveryTM product is below 3.0 million cards at which point the Company and MiniFAB will renegotiate pricing.
On August 9, 2018, the Company entered into a manufacturing, supply and development agreement (the “MiniFAB Agreement”) with MiniFAB. Pursuant to the terms of the MiniFAB Agreement, MiniFAB will manufacture and supply test cards for the Company’s next generation platform, the TearLab Discovery™ System. The MiniFAB Agreement is exclusive through the first term of 10 years and automatically renews for an additional term of 5 years unless either party cancels. TearLab will pay for 65% of the capital expenditures under the MiniFAB Agreement (“capex”) as incurred and MiniFAB will pay for the remaining 35% of capex, which will be recoverable from TearLab through an amortized cost component in the price for the product charged to TearLab once the monthly card volumes reach 200,000 per month. The capex amounts are limited to an aggregate of $1.0 million AUD for the initial development and production phase (“Phase 1”) and anticipated to be in the vicinity of $3.0 million AUD for further investment of production capacity (“Phase 2”). In addition, TearLab will be responsible for the payment or reimbursement of all non-recurrent expenditure and tooling, limited to $1.2 million AUD for Phase 1 and estimated at $2.0 million AUD for Phase 2. In December 2018, the Company made an initial capex investment of $317 for a machine that was placed into fixed assets and is being amortized over a 15-year period. In 2019 the Company made additional investments of $33. The Company has a corresponding $130 of long-term third-party payable for capex to be amortized through the card cost component for the twelve months ended December 31, 2019.
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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 generally 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
The Company is 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, the Company may be involved in various legal proceedings from time to time.
The Company initiated a patent infringement lawsuit against i-Med Pharma, Inc. in February of 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 the Company’s Canadian patent which were alleged to be infringed. The Company appealed 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. In June 2019 the Canadian Federal Appellate Court dismissed the appeal.
11. 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 10) resulted in a royalty due at a rate of 0.68%. Related party royalty expense was $152 and $259 as of December 31, 2019 and 2018, respectively. The Company had $37 and $40 in accrued royalties at December 31, 2019 and 2018, respectively for the related party.
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ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
ITEM 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefit of controls must be considered relative to their costs. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of the end of the period covered by the report, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, our chief executive officer and chief financial officer concluded that, as of December 31, 2019 our disclosure controls and procedures were effective at the reasonable assurance level.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
We conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on our evaluation under the framework, our management has concluded that the Company’s internal control over financial reporting was effective, at the reasonable assurance level, as of December 31, 2019.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
None
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ITEM 10. Directors, Executive Officers and Corporate Governance
The information set forth below for our director has been furnished to us by the directors:
| Name | Age as of 12/31/2019 | Position | ||||
| Elias Vamvakas | 61 | Executive Chairman of the Board | ||||
| Joseph Jensen | 47 | Chief Executive Officer and Director | ||||
| Anthony E. Altig | 64 | Director | ||||
| Paul M. Karpecki | 52 | Director | ||||
| Richard L. Lindstrom | 72 | Director | ||||
Elias Vamvakas has been the Chairman of the Board of Directors of TearLab Corporation, since June 2003, Secretary of the Company since June 2009 and was the Chief Executive Officer and Secretary of the Company from July 2004 to October 2008 and again from June 2009 to December 2015. Mr. Vamvakas co-founded TLC Vision, an eye care services company, where he was the Chairman from 1994 to June 2006 and was the Chief Executive Officer from 1994 to July 2004. Since November 2006, Mr. Vamvakas has been a member of the Board of Directors of TearLab Research, Inc. Mr. Vamvakas has been the Chairman of the Board for Greybrook Capital, a Toronto-based private equity firm. Mr. Vamvakas also serves on the board of several of Greybrook’s portfolio companies. Also, Mr. Vamvakas is the Chairman of Brandimensions Inc. and Nulogx Inc. Mr. Vamvakas was named to “Canada’s Top Forty Under Forty” in 1996. In 1999, he was named Ernst & Young’s Entrepreneur of the Year for Ontario in the Emerging Category and Canadian Entrepreneur of the Year for Innovative Partnering. In 2000, Mr. Vamvakas was recognized by Profit Magazine for managing one of Canada’s fastest growing companies. Mr. Vamvakas received a BSc degree from the University of Toronto in 1981. Mr. Vamvakas’ extensive business background and familiarity with TearLab qualifies him to serve on the Board.
Joseph Jensen has served as the Chief Executive Officer and a member of the Board of TearLab Corporation since January 2016. Mr. Jensen previously served as the Chief Operating Officer of TearLab Corporation from October 2013 to December 2015. Mr. Jensen has over twenty years of experience in pharmaceutical and medical device sectors spanning sales, sales management, marketing, and international positions. He is a proven leader with consistent performance and commensurate promotions at a Fortune 50 company. From 1996 to 2013, Mr. Jensen served in managerial roles, most recently as the head of surgical marketing of Alcon Laboratories, Inc. (“Alcon”), a division of Novartis. From 1995 to 1996, Mr. Jensen served as territory manager of Warner Lambert. From 1994 to 1995, Mr. Jensen served as district manager of Payroll Services. Mr. Jensen graduated from Flagler College with a BA in Business and Communications and a minor in Advertising. Mr. Jensen brings to the Board an in-depth knowledge and understanding of our business as an executive officer of the Company.
Anthony E. Altig has been a member of TearLab Corporation’s Board since January 2009. Mr. Altig was the Chief Financial Officer at Biotix Holdings, Inc., a company that manufactures microbiological and molecularbiological consumables up until his retirement in December 2017, after Biotex was acquired by Mettler-Toledo. From December 2004 to June 2007, Mr. Altig served as the Chief Financial Officer of Diversa Corporation (subsequently Verenium Corporation), a public company focused on enzyme technology. Prior to joining Diversa, Mr. Altig served as the Chief Financial Officer of Maxim Pharmaceuticals, Inc., a public biopharmaceutical company, from 2002 to 2004. From 2000 to 2001, Mr. Altig served as the Chief Financial Officer of NBC Internet, Inc., an internet portal company, which was acquired by General Electric. Mr. Altig’s additional experience includes his role as the Chief Accounting Officer at USWeb Corporation, as well as his experience serving biotechnology and other technology companies during his tenure at both PricewaterhouseCoopers and KPMG. In addition, Mr. Altig serves as a director for Assembly Biosciences. Mr. Altig is a former member of the Board of Directors of Optimer Pharmaceuticals and MultiCell Technologies, Inc. Mr. Altig received a BA degree from the University of Hawaii. Mr. Altig’s experience as Chief Financial Officer of several public companies brings to the Board perspective regarding financial and accounting issues.
Paul M. Karpecki, O.D., FAAO has been a member of TearLab Corporation’s Board since March 2010. Also, he has been a Director of Cornea and External Disease at Kentucky Eye Institute since September 2016 and prior to that the Director of Ocular Disease Research at Kentucky Eye Institute since September 2009. In 2007, Dr. Karpecki joined the Cincinnati Eye Institute in Corneal Services after spending five years as the Director of Research for the Moyes Eye Clinic in Kansas City. Dr. Karpecki serves as the Chair of the Refractive Surgery Advisory Committee to the American Ophthalmology Association (“AOA”) and on the AOA Meetings Executive Committee. He has lectured in more than three hundred symposia covering four continents and was the first optometrist to be invited to both the Delphi International Society at Wilmer-Johns Hopkins and the National Eye Institute’s dry eye committee. A noted educator and author, Dr. Karpecki is the Chief Clinical Editor for the Review of Optometry Journal. He is a past President of the Optometric Council on Refractive Technology and serves on the board for the charitable organization, Optometry Giving Sight. Dr. Karpecki received his Doctorate of Optometry from Indiana University and completed a Fellowship in Cornea and Refractive Surgery at Hunkeler Eye Centers in affiliation with the Pennsylvania College of Optometry in 1994. Dr. Karpecki’s experience in optometry and specialization in dry eye disease make him a valuable addition to the Board.
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Richard L. Lindstrom, M.D. has been a member of TearLab Corporation’s Board since September 2004. Since 1979, Dr. Lindstrom has been engaged in the private practice of ophthalmology and is a founder, a director, and an attending surgeon of Minnesota Eye Consultants P.A., a provider of eye care services. Dr. Lindstrom has served as Associate Director of the Minnesota Lions Eye Bank since 1987. He is also a medical advisor for several medical device and pharmaceutical manufacturers as well as a member of the board of directors of several private and public companies in the ophthalmology sector. Dr. Lindstrom is a past President of the International Society of Refractive Surgery, the International Intraocular Implant Society, the International Refractive Surgery Club, and the American Society of Cataract and Refractive Surgery. From 1980 to 1989, he served as a Professor of Ophthalmology at the University of Minnesota, and he is currently an Adjunct Professor Emeritus in the Department of Ophthalmology at the University of Minnesota. Dr. Lindstrom received his Doctor of Medicine, Bachelor of Arts, and Bachelor of Sciences degrees from the University of Minnesota. Dr. Lindstrom’s background in ophthalmology gives him a perspective that is helpful to the Board for understanding the Company’s product market.
Board Meetings
The Company’s board of directors (the “Board”) held six meetings during 2019. No director who served as a director during the past year attended fewer than 75% of the aggregate of the total number of meetings of the Board and the total number of meetings of committees of the Board on which he or she served.
Committees of the Board
The Board currently has, and appoints members to, two standing committees: our Compensation Committee and our Audit Committee. The current members of our committees are identified below:
| Director | Compensation | Audit | ||||||
| Anthony E. Altig (1) | [X] | [X] | ||||||
| Paul M. Karpecki | [X] | [X] | ||||||
| Richard L. Lindstrom (2) | [X] | [X] |
(1) Audit Committee Chair.
(2) Compensation Committee Chair.
Compensation Committee. The Compensation Committee currently consists of Dr. Karpecki, Mr. Altig, and Dr. Lindstrom, with Dr. Lindstrom serving as chairman. The Compensation Committee held two meetings during 2018. All members of the Compensation Committee are independent as determined under the various NASDAQ Stock Market, U.S. Securities and Exchange Commission, or SEC, and Internal Revenue Service qualification requirements. The Compensation Committee is governed by a written charter approved by the Board. The charter is available on our website at www.tearlab.com. The functions of this committee include, among other things:
| ● | to provide oversight of the development and implementation of the compensation policies, strategies, plans and programs for key employees and directors, including policies, strategies, plans and programs relating to long-term compensation for TearLab’s senior management, and the disclosure relating to these matters; | |
| ● | to make recommendations regarding the operation of and/or implementation of employee bonus plans and incentive compensation plans; | |
| ● | to review and approve the compensation of the Chief Executive Officer and the other executive officers of TearLab and the remuneration of TearLab’s directors; and | |
| ● | to provide oversight of the selection of officers, management, succession planning, the performance of individual executives and related matters. |
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Role and Authority of Compensation Committee
The Compensation Committee is responsible for discharging the responsibilities of the Board with respect to the compensation of our executive officers. The Compensation Committee approves all compensation of our executive officers without further Board action. The Compensation Committee reviews and approves each of the elements of our executive compensation program and continually assesses the effectiveness and competitiveness of our program. The Compensation Committee also periodically reviews director compensation.
The Role of our Executives in Setting Compensation
The Compensation Committee meets with our Chief Executive Officer, Mr. Jensen, and/or other executives at least once per year to obtain recommendations with respect to Company compensation programs, practices, and packages for executives, directors, and other employees. Management makes recommendations to the Compensation Committee on the base salary, bonus targets, and equity compensation for the executive team and other employees. The Compensation Committee considers, but is not bound by and does not always accept management’s recommendations with respect to executive compensation. The Compensation Committee has the ultimate authority to make decisions with respect to the compensation of our named executive officers, but may, if it chooses, delegate any of its responsibilities to subcommittees.
Mr. Jensen attends some of the Compensation Committee’s meetings, but the Compensation Committee also regularly holds executive sessions not attended by any members of management or non-independent directors. The Compensation Committee discusses Mr. Jensen’s compensation package with him, but makes decisions with respect to his compensation outside of his presence.
Audit Committee. The Audit Committee consists of Dr. Karpecki, Dr. Lindstrom, and Mr. Altig, with Mr. Altig serving as chairman. The Audit Committee held four meetings during 2019. All members of the Audit Committee are independent directors (as independence is currently defined in Rules 5605(a)(2) and 5605(c)(2) of the NASDAQ Listing Rules). Mr. Altig qualifies as an “audit committee financial expert” as that term is defined in the rules and regulations established by the SEC. The Audit Committee is governed by a written charter approved by the Board. The charter is available on our website at www.tearlab.com. The functions of this committee include, among other things:
| ● | to monitor the Company’s financial reporting process and internal control system; | |
| ● | to appoint and replace the Company’s independent outside auditors from time to time, to determine their compensation and other terms of engagement and to oversee their work; | |
| ● | to oversee the performance of the Company’s internal audit function; and | |
| ● | to oversee the Company’s compliance with legal, ethical and regulatory matters including cybersecurity risks. |
Both our independent auditors and internal financial personnel regularly meet privately with our Audit Committee and have unrestricted access to this committee. The Audit Committee has the power to investigate any matter brought to its attention within the scope of its duties. It also has the authority to retain counsel and advisors to fulfill its responsibilities and duties.
Director Nomination Process
Director Qualifications
In evaluating director nominees, the independent members of the Board consider, among others, the following factors:
| ● | experience, skills, and other qualifications in view of the specific needs of the Board and the Company; | |
| ● | diversity of background; and | |
| ● | demonstration of high ethical standards, integrity, and sound business judgment. |
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The Board’s goal is to assemble a Board that brings to the Company a variety of perspectives and skills derived from high quality business and professional experience which are well suited to further the Company’s objectives. In doing so, the independent members of the Board also consider candidates with appropriate non-business backgrounds.
Other than the foregoing, there are no stated minimum criteria for director nominees, although the independent members of the Board may also consider such other facts as it may deem are in the best interests of the Company and its stockholders. The Board does, however, believe it appropriate for at least one, and, preferably, several, members of the Board to meet the criteria for an “audit committee financial expert” as defined by SEC rules, and that a majority of the members of the Board meet the definition of an “independent director” under the NASDAQ Stock Market qualification standards.
Identification and Evaluation of Nominees for Directors
In January 2018, in connection with the resignations of members of the Board, the Board eliminated the Corporate Governance and Nominating Committee of the Board and assumed the responsibilities previously delegated to the Corporate Governance and Nominating Committee. As such, the Board no longer has a standing nominating committee and there is no formal nominating committee charter, although the Board has adopted a resolution addressing the director nominations process. Instead, the directors who are determined to be “independent” under the various relevant qualification requirements perform the functions of a nominating committee. The Board believes it is appropriate not to maintain a standing nominating committee primarily because the relatively small number of independent directors on the Board makes it unnecessary to separate the nominating function into a committee structure.
The independent members of the Board identify nominees for Board membership by first evaluating the current members of the Board willing to continue in service. Current members with qualifications and skills that are consistent with the Company’s criteria for Board service and who are willing to continue in service are considered for re-nomination, balancing the value of continuity of service by existing members of the Board with that of obtaining a new perspective. If any member of the Board does not wish to continue in service or if the Board decides not to re-nominate a member for re-election, the independent members of the Board identify the desired skills and experience of a new nominee in light of the criteria above including consultation with management. The independent members of the Board may also review the composition and qualification of the boards of directors of our competitors, and may seek input from industry experts or analysts. The independent members of the Board review the qualifications, experience, and background of the candidates. Final candidates are interviewed by our independent directors and Chief Executive Officer. In making its determinations, independent members of the Board evaluate each individual in the context of the Board as a whole, with the objective of assembling a group that can best attain success for the Company and represent stockholder interests through the exercise of sound judgment. After review and deliberation of all feedback and data, the independent members of the Board determine which candidates to nominate for election by the stockholders. Historically, the Board has not relied on third-party search firms to identify Board candidates. The independent members of the Company’s board of directors may in the future choose to do so in those situations where particular qualifications are required or where existing contacts are not sufficient to identify and acquire an appropriate candidate.
The Board has not received director candidate recommendations from our stockholders and does not have a formal policy regarding consideration of such recommendations since it believes that the process currently in place for the identification and evaluation of prospective members of the Board is adequate. Any recommendations received from stockholders will be evaluated in the same manner as potential nominees suggested by members of the Board or management. Stockholders wishing to suggest a candidate for director should write to the Company’s Chief Financial Officer.
Communications with the Board of Directors
Our stockholders may send written correspondence to non-management members of the Board to the Chief Financial Officer or Chief Executive Officer at 150 La Terraza Blvd., Suite 101, Escondido, California 92025. Our Chief Financial Officer or Chief Executive Officer will review the communication, and if the communication is determined to be relevant to our operations, policies, or procedures (and not vulgar, threatening, or of an inappropriate nature not relating to our business), the communication will be forwarded to the Chairman of the Board. If the communication requires a response, our Chief Financial Officer will assist the Chairman of the Board (or other directors) in preparing the response.
Code of Conduct and Code of Ethics
We have established a Code of Conduct and Code of Ethics that applies to our officers, directors and employees. The Code of Conduct and Code of Ethics contain general guidelines for conducting our business consistent with the highest standards of business ethics, and is intended to qualify as a “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and Item 406 of Regulation S-K. The Code of Conduct and Code of Ethics is available on our website at www.tearlab.com. If we make any substantive amendments to the Code of Conduct and Code of Ethics or grant any waiver from a provision of the Code to any executive officer or director, we will promptly disclose the nature of the amendment or waiver on our website.
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Corporate Governance Documents
Our corporate governance documents, including the Audit Committee Charter, Compensation Committee Charter, Code of Conduct and Code of Ethics are available free of charge on our website at www.tearlab.com. Please note, however, that the information contained on the website is not incorporated by reference in, or considered part of, this proxy statement. We will also provide copies of these documents free of charge to any stockholder upon written request to Investor Relations, TearLab Corporation, 150 La Terraza Blvd., Suite 101, Escondido, California 92025.
Director Attendance at Annual Meetings
Although the Company does not have a formal policy regarding attendance by members of the Board at our Annual Meeting, we encourage all of our directors to attend. There was no Annual Meeting held in 2019.
Director Independence
The Board has determined that each of the directors except Elias Vamvakas and Joseph Jensen are independent directors under the NASDAQ Stock Market qualification standards. In determining the independence of our directors, the Board considered all transactions in which the Company and any director had any interest, including those discussed under “Certain Relationships and Related Transactions” below.
Board Leadership Structure
The Board does not have a policy on whether or not the roles of Chief Executive Officer and Chairman of the Board should be separate and, if they are to be separate, whether the Chairman of the Board should be selected from the non-employee directors or be an employee. The offices of Chief Executive Officer and Chairman of the Board have been at times combined and at times separated, and the Board considers such combination or separation in conjunction with, among other things, its succession planning processes. The Board believes that it should be free to make a choice regarding the leadership structure from time to time in any manner that is in our and our stockholders’ best interests.
We currently have not combined the roles of Chairman of the Board and Chief Executive Officer. The Board does not have a lead independent director. We believe this is appropriate because the Board is relatively small and includes a number of seasoned independent directors.
Board Role in Risk Oversight
While each of the committees of the Board evaluate risk in their respective areas of responsibility, our full Board is responsible for overseeing the Company’s risk management processes. We believe that the Board size of five total directors and three independent directors is conducive and beneficial to monitor the Company’s risk management process given the increased importance of monitoring risks in the current economic and business climate. The Audit Committee discusses the Company’s risk profile related to financial reporting, and the Compensation Committee is responsible for overseeing the management of risks relating to our executive compensation plans and arrangements.
While the Board oversees the Company’s risk management, Company management is ultimately responsible for day-to-day risk management activities. We believe this division of responsibilities is the most effective approach for addressing the risks facing our Company and that the Board leadership structure supports this approach.
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ITEM 11. Executive Compensation
Our Executive Officers
The following table sets forth the name and position of each of the persons who were serving as our named executive officers as of December 31, 2019.
| Name | Age | Position | ||||
| Elias Vamvakas | 61 | Executive Chairman of the Board | ||||
| Joseph Jensen | 47 | Chief Executive Officer and Director | ||||
| Michael Marquez | 38 | Chief Financial Officer | ||||
A biography for Elias Vamvakas and Joseph Jensen can be found in the section entitled “Information Regarding Directors” above.
Michael Marquez has served as the Chief Financial Officer of TearLab Corporation since January 30, 2019. Most recently Mr. Marquez served as the Interim Chief Financial Officer of TearLab Corporation beginning April 1, 2018. Previously, Mr. Marquez served as the Senior Director of Finance for TearLab Corporation. From 2008 to 2015, Mr. Marquez held various positions at Alcon Laboratories, Inc. a global medical company focused on eye care, including commercial operations, strategic operation and global and financial planning. Prior to joining Alcon, Mr. Marquez held various positions at Price Waterhouse Coopers, an auditing and professional services company. Mr. Marquez holds a Masters’ of Science degree in Accounting from the University of Texas in Arlington, a Bachelors of Business Administration in Accounting from the University of Texas in Austin and is a certified public accountant.
Compensation Discussion and Analysis
The following discussion and analysis of compensation arrangements of our named executive officers should be read together with the compensation tables and related disclosures set forth below. This discussion contains forward-looking statements that are based on our current plans, considerations, expectations, and determinations regarding future compensation programs. The actual amount and form of compensation and the compensation programs that we adopt may differ materially from currently planned programs as summarized in this discussion.
Overview
The Compensation Committee of our Board is responsible for establishing, implementing, and monitoring adherence with our compensation philosophy. The compensation provided to our “Named Executive Officers” for fiscal year 2019 is set forth in detail in the Summary Compensation Table below and other tables and the accompanying footnotes and narrative that follow this section. This section explains our executive compensation philosophy, objectives, and design, our compensation-setting process, our executive compensation program components and the decisions made in relation to fiscal year 2019 for each of our named executive officers.
Executive Compensation Philosophy, Objective and Design
Philosophy.
As an ophthalmic device company, we operate in the professional health sector and medical laboratories and research industry. To succeed in this environment, we must hire experienced executives with specific skills in key functional areas who have worked in an environment similar to ours. We are primarily located in Escondido, California and the Dallas/Fort Worth, Texas areas, which have many life sciences technology companies who reward their executives with equity compensation. Our overall compensation philosophy, therefore, is to compensate seasoned executives in a manner that attracts the caliber of individuals needed to manage and staff a technical and government-regulated business and operate in an innovative and competitive industry yet drive a business with a capitalization of less than $100 million to grow.
Objectives and Design.
Our executive compensation program is designed to:
| ● | attract and retain talented and experienced executives; | |
| ● | motivate and reward executives whose knowledge, skills and performance are critical to our success; |
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| ● | ensure fairness among the executive management team by recognizing the contributions each executive makes to our success; and | |
| ● | incentivize our executives to manage our business to meet our long-term objectives and the long-term objectives of our stockholders. |
To maintain a competitive compensation program and meet our need to attract seasoned executives that have experience in our sector, we also offer cash compensation in the form of (1) base salaries to reward individual contributions and compensate for their day-to-day responsibilities and (2) annual bonuses to drive targeted corporate goals and individual short-term objectives. In addition, our size, industry, and primary location have led us in the past to include equity compensation as a major compensation element. Because of the limited liquidity in our stock and the need to pursue dilutive equity financings, the equity portion of our compensation program was de-emphasized in the fiscal year 2017.
Compensation-Setting Process
We formed our Compensation Committee in September 2005. For 2019, our Compensation Committee was responsible for reviewing and making recommendations to our Board regarding our CEO’s compensation and the components thereof. In 2019, our Compensation Committee reviewed and recommended to our Board Company goals and objectives relevant to our CEO, evaluated our CEO in light of those goals and objectives, and made recommendations regarding our CEO’s compensation based on that evaluation.
Our Compensation Committee also is responsible for reviewing and making recommendations to our Board on non-CEO executive officer compensation and making recommendations to our Board with respect to incentive compensations plans and equity-based plans. In 2019, our Compensation Committee reviewed and made recommendations to our Board regarding the compensation of our other executive officers, including the establishment and evaluation of performance goals.
Our CEO attends meetings of our Compensation Committee, except with respect to discussions involving his own compensation. Typically, our CEO makes recommendations regarding compensation matters for each named executive officer, including with respect to each key element of compensation (i.e., stock option awards, base salary and annual bonus).
In determining executive compensation for 2019, neither our Board nor our Compensation Committee met with a compensation consulting firm or considered market data presented by a compensation consulting firm in determining compensation. We did engage in internal benchmarking of specific levels of pay which led to a change in the base compensation of the executives as a whole in 2019.
In determining executive compensation for 2019, our Board and Compensation Committee considered a number of factors, including the following:
| ● | The scope of the named executive officer’s responsibilities, prior experience and qualifications; | |
| ● | The past individual performance of the named executive officer; | |
| ● | Competitive market conditions; | |
| ● | Existing employment agreement conditions, if any; | |
| ● | Recommendations of the CEO, other than with respect to his own compensation. |
Unless otherwise stated, the discussion and analysis below is in large measure based on decisions by our Board. Therefore, the philosophy of how we will compensate our named executive officers in the future may not be the same as how they have been compensated previously. We expect that our Board will continue to review, evaluate, and modify the executive compensation framework based on the recommendations of our Compensation Committee. Our compensation program may, over time, vary from our historical practices.
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Executive Compensation Program Components
Equity Compensation
We have historically used equity compensation as a principal component of our executive compensation program. Consistent with our compensation objectives, we believe this approach aligned our executive team’s contributions with our long-term interests by allowing our executive team to participate in any future appreciation in the Company’s stock. However, due to the limited liquidity of our stock and the need to pursue dilutive equity financings, we did not grant equity awards in 2019 or 2018 as part of our executive compensation program.
For 2020, we expect our Compensation Committee to continue their review process to determine whether to make a recommendation to our Board to approve any equity award grants for our named executive officers.
While we have not yet adopted a formal policy regarding the timing of stock option and other equity grants as a public company, it has been our practice, which we expect to continue, that stock option grants have been granted with an exercise price not less than the fair value of the underlying stock on the date of grant.
Other Compensation
With the limited ability to issue equity compensation as a component of our executive compensation program, the Compensation Committee put into place a company refinancing bonus with a goal to provide sufficient funding that supports full commercialization of TearLab DiscoveryTM and a path to profitability through M&A or additional capital, for fiscal year 2019 which remains in place in fiscal year 2020.
Base Salary
In determining base salaries for 2019, our Compensation Committee and our Board considered the overall compensation package of our executive officers and made corresponding adjustments in 2019.
In fiscal years 2019 and 2018, the base compensation for our named executive officers was as follows:
| Named Executive Officer | Fiscal Year 2019 Base Salary | Fiscal Year 2018 Base Salary | ||||||
| Elias Vamvakas, Executive Chairman | $ | 150,000 | $ | 150,000 | ||||
| Joseph Jensen, Chief Executive Officer | $ | 440,000 | 400,000 | |||||
| Michael Marquez, Chief Financial Officer (1) | $ | 240,000 | 185,001 | |||||
| (1) | Mr. Marquez was named Interim CFO on April 1, 2018. On January 30, 2019 the Board removed the “Interim” designation and appointed Mr. Marquez as the Chief Financial Officer. |
In 2020, our Compensation Committee and our Board may conduct a review of our executive officers’ base salaries and determine adjustments, if any.
2019 Bonus Plan
In early 2019, the Board adopted a cash bonus plan for 2019, which includes corporate performance objectives. The corporate performance objectives for the bonus continue to focus on the goals of maintaining revenues, adjusted operating profitability targets and cash balance each with equal weighting and the milestone driven bonus amounts are targeted at the achievement of specific corporate events designed to ensure the sustainability of the Company. In addition, the Board adopted a Company refinancing bonus plan for 2019 with a goal to provide sufficient funding that supports full commercialization of TearLab DiscoveryTM and a path to profitability through M&A or additional capital, as well as providing incentive to our employees to ensure strong performance, promote retention and align our executives’ interest with stockholders’ interest.
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During fiscal year 2019, our named executive officers were eligible to earn the following cash bonuses under our 2019 bonus plan:
| Named Executive Officer | Fiscal Year 2019 Target Cash Bonus Opportunity (as a Percentage of Base Salary) | Milestone Cash Bonus Opportunity | Fiscal Year 2019 Target Cash Bonus Opportunity ($) | |||||||||
| Mr. Vamvakas | 50 | % | – | $ | 75,000 | |||||||
| Mr. Jensen | 60 | % | $ | 260,000 | $ | 264,000 | ||||||
| Mr. Marquez | 50 | % | $ | 179,000 | $ | 120,000 | ||||||
2019 Bonus Plan Payments
In early 2020, our Board determined that corporate performance measures for 2019 had been achieved. The Board approved performance bonus payouts based on company performance in 2019 as well as the milestone bonus payouts. We paid the following cash bonuses under our 2019 bonus plan:
| Named Executive Officer | Fiscal 2019 Bonus Payment | |||
| Mr. Vamvakas | $ | 75,000 | ||
| Mr. Jensen | $ | 524,000 | ||
| Mr. Marquez | $ | 299,000 | ||
2020 Bonus Plan
In early 2020, the Board adopted a cash bonus plan for 2020, which includes corporate performance objectives. The corporate performance objectives for the bonus continue to focus on the goals of maintaining revenues, adjusted operating profitability targets and cash balance each with equal weighting and the milestone driven bonus amounts are targeted at the achievement of specific corporate events designed to ensure the sustainability of the Company. In addition, the Board adopted a Company refinancing bonus plan for 2020 with a goal to provide sufficient funding that supports full commercialization of TearLab DiscoveryTM and a path to profitability through M&A or additional capital.
Retirement and Health Benefits
We design our employee benefits programs to be affordable and competitive in relation to the market, as well as compliant with applicable laws and practices. We adjust our employee benefits programs as needed based upon regular monitoring of applicable laws and practices and the competitive market.
Our U.S. named executive officers are entitled to participate in the same employee benefit plans, and on the same terms and conditions, as all other U.S. full-time employees. U.S. employees, including named executive officers located in the U.S., are eligible to participate in a defined contribution 401(k) plan, but the Company does not make any matching or employer contributions to the 401(k) plan.
Our named executive officer located in Canada, Mr. Vamvakas, is entitled to participate in the same employee benefit plans, and on the same terms and conditions, as all other Canadian full-time employees, except that we provide Mr. Vamvakas with certain club membership benefits and with coverage under a critical illness insurance policy, which has been historically provided to Mr. Vamvakas since his commencement of service with us.
Post-Employment Compensation
We recognize that it is possible that we may be involved in a transaction involving a change of control of the Company and that this possibility could result in the departure or distraction of our executives to the detriment of our business. Our Compensation Committee believes that the prospect of such a change-of-control transaction would likely result in our executives facing uncertainties about their future employment and distractions from how the potential transaction might personally affect them.
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To allow our executives to focus solely on making decisions that are in the best interests of our stockholders in the event of a possible, threatened, or pending change-of-control transaction and to encourage them to remain with us despite the possibility that the change of control might affect them adversely, we have entered into an executive employment agreement with Mr. Vamvakas, and employment offer letters with our CEO and CFO that each provide the applicable named executive officer with certain payments and benefits in the event of certain terminations of his employment without regard to a change of control of the Company or within a certain period following a change of control of the Company. Our Compensation Committee believes that these agreements serve as an important retention tool to ensure that personal uncertainties do not dilute our executives’ complete focus on building stockholder value.
In June 2013, we entered into the executive employment agreement with Mr. Vamvakas, which provides that upon a qualifying termination of his employment, Mr. Vamvakas will receive (i) a lump sum payment equal to two times his then-current annual base salary plus two times the average of the bonus paid to him in the two years preceding the year of termination, and (ii) reimbursement of group health plan insurance premiums for up to eighteen months. The executive employment agreement with Mr. Vamvakas also requires that he provide three months’ advance notice period if he resigns and the resignation is not a qualifying termination. In December 2015, we approved compensation for Mr. Vamvakas as Executive Chairman. At that time, we also agreed to defer Mr. Vamvakas’ severance and change such severance to a lump sum of $700,000, payable upon his separation from the Company in cash or restricted stock, at his election.
Our CEO is party to an employment offer letter that was entered into in October 2013 when he was hired, and amended June 15, 2017 which provides that upon a qualifying termination of his employment, he will receive (i) a lump sum payment equal to one times his then-current annual base salary plus ones times the average of the bonus paid to him in the two years preceding the year of termination and (ii) reimbursement of group health plan insurance premiums for up to twelve months. The amendment also requires that our CEO provide thirty days advance notice if he resigns and the resignation is not a qualifying termination.
Our CFO is party to an employment offer letter that was entered into in April 2018 when he took the role of Interim CFO, which provides that upon a qualifying termination of his employment, he will receive (i) a lump sum payment equal to one times his then-current annual base salary plus one times the average of the bonus paid to him in the two years preceding the year of termination and (ii) reimbursement of group health plan insurance premiums for up to twelve months. The agreement also requires our CFO provide thirty days advance notice if he resigns and the resignation is not a qualifying termination.
In establishing the terms and conditions of our CEO’s and CFO’s employment offer letters, and our Executive Chairman’s executive employment agreement, our Board and our Compensation Committee evaluated the cost to us of these arrangements and the potential payout levels to each affected executive under various scenarios. In approving these arrangements, they determined that their cost to us and our stockholders was reasonable and not excessive, given the benefit conferred to us. Our Board and our Compensation Committee believe that these arrangements will help to maintain the continued focus and dedication of our named executive officers to their assigned duties without the distraction that could result from the possibility of a change of control of the Company.
For a detailed summary of the material terms and conditions of these agreements, see “Employment Contracts and Certain Transaction-based Contracts.”
Tax and Accounting Considerations
Taxation of “Parachute” Payments and Deferred Compensation
We did not provide any executive officer, including any named executive officer, with a “gross-up” or other reimbursement payment for any tax liability that he or she might owe as a result of the application of Code Sections 280G, 4999, or 409A, and we have not agreed and are not otherwise obligated to provide any named executive officers with such a “gross-up” or other reimbursement. Sections 280G and 4999 of the Code provide that executive officers and directors who hold significant equity interests and certain other service providers may be subject to an excise tax if they receive payments or benefits in connection with a change in control that exceeds certain prescribed limits and that the Company, or a successor, may forfeit a deduction on the amounts subject to this additional tax. Section 409A of the Code also imposes additional significant taxes on the individual in the event that an executive officer, director, or other service provider receives “nonqualified deferred compensation” that does not meet the requirements of Section 409A of the Code.
Accounting Treatment
Authoritative accounting guidance on stock compensation requires companies to measure the compensation expense for all share-based payment awards made to employees and directors, including stock options, based on the grant date “fair value” of these awards. This calculation is performed for accounting purposes and reported in the compensation tables below even though our executive officers may never realize any value from their awards. Authoritative accounting guidance also requires companies to recognize the compensation cost of their stock-based compensation awards in their income statements over the period that an executive officer is required to render service in exchange for the option or other award.
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Compensation Risk Assessment
As part of its review of the compensation to be paid to our executives and the compensation programs generally available to the Company’s employees, the Compensation Committee considers any potential risks arising from our compensation programs and the management of these risks in light of the Company’s overall business, strategy, and objectives.
As is the case with our employees generally, our named executive officers’ base salaries are fixed in amount and thus do not encourage risk-taking. Bonus amounts under the Company bonus plan are tied to the Company’s performance during the fiscal year compared to pre-established target levels for equally-weighted measures. Combined, we believe these measures limit the ability of an executive to be rewarded for taking excessive risk on behalf of the Company by, for example, seeking revenue-enhancing opportunities at the expense of profitability.
Additionally, the Company has implemented effective controls at various levels, including adoption of written codes of conduct and ethics, which each named executive officer signs and acknowledges each year, in order to mitigate the risk of unethical behavior.
Summary Compensation Table
The following table provides information regarding the compensation of our executive chairman, chief executive officer and chief financial officer, together referred to as our “named executive officers,” for 2019, 2018, and 2017.
| Name and Principal Position | Year | Salary ($) | Bonus ($) | Option Awards ($)(1) | Non-Equity Incentive Plan Compensation ($)(2) | All Other Compensation ($)(3) | Total ($) | |||||||||||||||||||||
| Elias Vamvakas | 2019 | 150,000 | — | — | 75,000 | 5,430 | 230,882 | |||||||||||||||||||||
| Executive Chairman | 2018 | 150,000 | — | — | 75,000 | 5,430 | 230,430 | |||||||||||||||||||||
| 2017 | 150,000 | — | — | — | 24,822 | 174,822 | ||||||||||||||||||||||
| Joseph Jensen | 2019 | 435,014 | — | — | 524,000 | 19,383 | 978,397 | |||||||||||||||||||||
| Chief Executive Officer | 2018 | 400,000 | — | — | 320,000 | 18,096 | 738,096 | |||||||||||||||||||||
| 2017 | 400,000 | — | — | 25,000 | 21,934 | 446,934 | ||||||||||||||||||||||
| Michael Marquez (4) | 2019 | 233,890 | — | — | 299,000 | 24,521 | 557,411 | |||||||||||||||||||||
| Chief Financial Officer | 2018 | 185,001 | 30,000 | — | 155,004 | 16,428 | 386,433 | |||||||||||||||||||||
| (1) | Amounts represent the aggregate grant date fair value of options granted in the year indicated to the named executive officer calculated in accordance with FASB ASC 718 without regard to estimated forfeitures. See Note 1 of the notes to our audited consolidated financial statements included in our Annual Report on Form 10-K for a discussion of assumptions made in determining the grant date fair value and compensation expense of our stock options. |
| (2) | The amounts in this column for 2019, 2018, and 2017 represent total performance-based bonuses earned for service rendered during 2019, 2018, and 2017, respectively, under our executive bonus plan for the applicable year. For a description of our executive bonus plan, please see the section entitled “2019 Bonus Plan” under “Compensation Discussion and Analysis”. |
| (3) | All Other Compensation includes health and welfare benefits for all named executive officers. Mr. Vamvakas’ also includes club membership benefits per his employment agreement. |
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| (4) | Mr. Marquez joined the Company in September 2015 and was appointed Interim Chief Financial Officer in April 2018. On January 30, 2019 the Board removed the “Interim” designation and appointed Mr. Marquez as the Chief Financial Officer |
Outstanding Equity Awards at Fiscal Year-End
The following table presents the outstanding equity awards held by each of the named executive officers as of the fiscal year ended December 31, 2019. As of December 31, 2019, our named executive officers had not been awarded any equity awards other than stock options.
| Name | Number of Securities Underlying Unexercised Options | Number of Securities Underlying Unexercised Options | Option Exercise Price | Option Expiration Date | ||||||||||
| (#) Exercisable | (#) Unexercisable | ($) | ||||||||||||
| Elias Vamvakas (1) | 12,500 | — | 64.30 | 3/6/2023 | ||||||||||
| Elias Vamvakas (2) | 5,000 | — | 6.90 | 6/24/2026 | ||||||||||
| Joseph Jensen (3) | 30,000 | — | 113.30 | 10/28/2023 | ||||||||||
| Joseph Jensen (4) | 5,000 | — | 48.20 | 6/11/2024 | ||||||||||
| Joseph Jensen (5) | 5,000 | — | 20.00 | 2/5/2025 | ||||||||||
| Joseph Jensen (6) | 12,500 | — | 6.90 | 6/24/2026 | ||||||||||
| Michael Marquez (7) | 2,000 | — | 22.40 | 09/16/2025 | ||||||||||
| Michael Marquez (8) | 2,000 | — | 6.90 | 09/24/2026 | ||||||||||
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| (1) | 12,500 post-split options were granted on March 6, 2013, under the Plan. These time-based options have fully vested. |
| (2) | 5,000 post-split options were granted on June 24, 2016, under the Plan. These time-based options have fully vested. |
| (3) | 30,000 post-split options were granted on October 21, 2013, outside of the Plan. These time-based options have fully vested. |
| (4) | 5,000 post-split options were granted on June 11, 2014, under the Plan. These time-based options have fully vested. |
| (5) | 5,000 post-split options were granted on February 5, 2015, under the Plan. These time-based options have fully vested. |
| (6) | 12,500 post-split options were granted on June 24, 2016, under the Plan. These time-based options have fully vested. |
| (7) | 2,000 options were granted on September 16, 2015, under the Plan. These time-based options have fully vested. |
| (8) | 2,000 options were granted on June 24, 2016, under the plan. These time-based options have fully vested. |
Employment Contracts and Certain Transaction-based Contracts
2002 Stock Incentive Plan, as amended
Our named executive officers hold awards granted under our 2002 Stock Incentive Plan (the “Incentive Plan”) that may be subject to vesting acceleration in connection with a Change in Control (as defined in the Incentive Plan) pursuant to the terms of the Incentive Plan. Under the Incentive Plan, any outstanding awards granted under the Incentive Plan will fully vest and become exercisable in connection with a Change in Control (as defined in the Incentive Plan) if (i) they are not assumed or substituted for by the Acquiring Corporation (as defined in the Incentive Plan) or (ii) they are assumed or substituted for by the Acquiring Corporation but the participant’s service is terminated by reason of an involuntary termination within 18 months following the effective date of a Change in Control.
Elias Vamvakas Change of Control and Severance Agreement
In December 2015, we approved compensation for Mr. Vamvakas as Executive Chairman. At that time, we also agreed to defer Mr. Vamvakas’ severance and change such severance to a lump sum of $700,000, payable upon his separation from the Company in cash or restricted stock, at his election.
Joseph Jensen Change of Control and Employment Agreement
In June 2017 we entered into an amended employment agreement with the CEO. Pursuant to this amendment, if our CEO’s employment is terminated by the Company at any time without cause (other than for death or disability) or our CEO resigns due to a material adverse change in the terms and conditions of his employment within twelve months of a Change in Control (provided that our CEO gives written notice within 30 days of the events constituting a material adverse change, provides a cure period of not less than 30 days for the Company to cure any such material adverse change, and resigns within 30 days following the end of such cure period), then subject to his timely execution of a release of claims, our CEO will be entitled to receive: (i) a lump sum payment equal to one times his then-current annual base salary plus one times the average of the bonus paid to him in the two years preceding the year of termination, and (ii) reimbursement of group health plan insurance premiums for up to twelve months.
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If our CEO intends to resign other than as described in the previous paragraph, his offer letter requires him to give the Company written notice of at least 30 days prior to his resignation. During the resignation notice period, the Company may, at its discretion, terminate our CEO’s employment before the resignation becomes effective by providing him with (i) continuing payments of his base salary for the remainder of the resignation notice period and (ii) a lump sum payment of his pro-rated bonus calculated as of the date his employment ceases.
Michael Marquez Change of Control and Employment Agreement
In April 2018 we entered into an amended employment agreement with the CFO. Pursuant to this amendment, if our CFO’s employment is terminated by the Company at any time without cause (other than for death or disability) or our CFO resigns due to a material adverse change in the terms and conditions of his employment within twelve months of a Change in Control (provided that our CFO gives written notice within 30 days of the events constituting a material adverse change, provides a cure period of not less than 30 days for the Company to cure any such material adverse change, and resigns within 30 days following the end of such cure period), then subject to his timely execution of a release of claims, our CFO will be entitled to receive: (i) a lump sum payment equal to one times his then-current annual base salary plus one times the average of the bonus paid to him in the two years preceding the year of termination and (ii) reimbursement of group health plan insurance premiums for up to twelve months.
If our CFO intends to resign other than as described in the previous paragraph, his offer letter requires him to give the Company written notice of at least 30 days prior to his resignation. During the resignation notice period, the Company may, at its discretion, terminate our CFO’s employment before the resignation becomes effective by providing him with (i) continuing payments of his base salary for the remainder of the resignation notice period and (ii) a lump sum payment of his pro-rated bonus calculated as of the date his employment ceases.
Estimated Payments Upon Termination or Change in Control
The following table provides information concerning the estimated payments and benefits that would be provided in the circumstances described above for each of the named executive officers. Payments and benefits are estimated assuming that the triggering event took place on the last business day of fiscal 2019 (December 31, 2019), and the price per share of TearLab’s common stock is the closing price on the OTCQB as of that date $0.04. There can be no assurance that a triggering event would produce the same or similar results as those estimated below if such event occurs on any other date or at any other price, of if any other assumption used to estimate potential payments and benefits is not correct. Due to the number of factors that affect the nature and amount of any potential payments or benefits, any actual payments and benefits may be different.
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| Potential Payments Upon: | ||||||||||||||||||
| Involuntary Termination Other Than For Cause | Voluntary Termination for Good Reason | |||||||||||||||||
| Not in Connection With a Change in Control | Within 12 Months of Change in Control | Not in Connection With a Change in Control | Within 12 Months of Change in Control | |||||||||||||||
| Name | Type of Benefit (1) | ($)(2) | ($)(3) | ($)(2) | ($)(3) | |||||||||||||
| Elias Vamvakas | Cash Severance Payments (2) | 700,000 | 700,000 | 700,000 | 700,000 | |||||||||||||
| Vesting Acceleration (4) | — | — | — | — | ||||||||||||||
| Continued Coverage of Employee Benefits (5) | 8,824 | 8,824 | — | 8,824 | ||||||||||||||
| Total Termination Benefits (6): | 708,824 | 708,824 | — | 708,824 | ||||||||||||||
| Joseph Jensen | Cash Severance Payments | 857,014 | 857,014 | — | 857,014 | |||||||||||||
| Vesting Acceleration (4) | — | — | — | — | ||||||||||||||
| Continued Coverage of Employee Benefits (5) | 22,518 | 22,518 | — | 22,518 | ||||||||||||||
| Total Termination Benefits (6): | 879,532 | 879,532 | — | 879,532 | ||||||||||||||
| Michael Marquez | Cash Severance Payments | 460,892 | 460,892 | — | 460,892 | |||||||||||||
| Vesting Acceleration (4) | — | — | — | — | ||||||||||||||
| Continued Coverage of Employee Benefits (5) | 28,527 | 28,527 | — | 28,527 | ||||||||||||||
| Total Termination Benefits (6): | 489,419 | 489,419 | — | 489,419 | ||||||||||||||
| (1) | Reflects the terms of: (i) the Change of Control and Severance Agreements and Employment Offer Letters, as applicable, between TearLab and the executive officers; and (ii) the terms of the Stock Incentive Plan. Mr. Vamvakas’ employment agreement provides for a $700,000 payment upon separation from the Company. All other employment agreements stipulate no payment under termination for cause or for Voluntary Termination for Good Reason not in connection with a change of control. |
| (2) | Reflects the terms of the Change of Control and Severance Agreements and Employment Offer Letters, as applicable, described above. |
| (3) | Reflects the terms of the Change of Control and Severance Agreements and Employment Offer Letters, as applicable, described above. |
| (4) | Reflects the aggregate market value of unvested option grants with exercise prices less than $0.04 (“in-the-money options”) and full value awards, which includes performance shares and restricted stock units. For unvested in-the-money option grants, aggregate market value is computed by multiplying (i) the number of shares underlying unvested in-the-money options at December 31, 2019, by (ii) the difference between $0.04 close price and the exercise price of such in-the-money option. Does not reflect any market value for options with exercise prices in excess of $0.04. None of the Named Executive Officers in this table held any unvested in-the-money options relative to the $0.04 closing price of TearLab common stock on December 31, 2019 (the last trading day of fiscal 2019). |
| (5) | For terminations under the Change of Control and Severance Agreements and Employment Offer Letters, as applicable, assumes continued coverage of employee benefits at the amounts paid by TearLab for fiscal 2019 for health, dental, vision, long-term disability and life insurance coverage. |
| (6) | In the event that the severance and other benefits provided would be subject to excise taxes imposed by Section 280G and Section 4999 of the Internal Revenue Code, such amount will either be delivered in full or reduced so as not to be subject to excise taxation, whichever amount is higher, pursuant to the terms of the Change of Control and Severance Agreements and Employment Offer Letters, as applicable. |
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information as of February 21, 2020 regarding the beneficial ownership of our common stock by (i) each person we know to be the beneficial owner of 5% or more of our common stock, (ii) each of our current executive officers, (iii) each of our directors, and (iv) all of our current executive officers and directors as a group. Information with respect to beneficial ownership has been furnished by each director, executive officer or 5% or more stockholder, as the case may be.
Percentage of beneficial ownership is calculated based on 12,560,635 shares of common stock outstanding as of February 21, 2020. Beneficial ownership is determined in accordance with the rules of the SEC which generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities and includes shares of our common stock issuable pursuant to the exercise of stock options, warrants or other securities that are immediately exercisable or convertible or exercisable or convertible within 60 days of February 21, 2020. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them. Unless otherwise noted, the address for each person set forth on the table below is c/o TearLab Corporation 150 La Terraza Blvd., Suite 101, Escondido, California 92025.
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| Name of Beneficial Owner | Shares Beneficially Owned | Percentage of Shares Beneficially Owned | ||||||
| 5% Stockholders: | ||||||||
| Perkins Capital Management (1) | 1,376,736 | 11.0 | % | |||||
| Executive Officers and Directors: | ||||||||
| Elias Vamvakas (2) | 200,453 | 1.6 | % | |||||
| Paul Karpecki (3) | 134,573 | 1.1 | ||||||
| Richard Lindstrom (4) | 55,714 | * | ||||||
| Anthony Altig (5) | 43,938 | * | ||||||
| Joseph Jensen (6) | 81,706 | * | ||||||
| Michael Marquez (7) | 4,500 | * | ||||||
| All directors and executive officers as a group (6 people) (9) | 520,884 | 4.1 | % | |||||
| (*) | Represents beneficial ownership of less than 1%. |
| (1) | Perkins Capital Management holds 96,00 common equivalents and 1,367,136 exercisable within 60 days for clients and has sole voting power over 9,600 of these Shares and sole dispositive power over 1,376,736 of these shares. Perkins Capital Management, Inc. is a Minnesota corporation and the address of Perkins Capital Management, Inc. is 730 Lake St. E, Wayzata, Minnesota 55391 |
| (2) | Includes (a) 17,500 shares subject to options exercisable within 60 days of February 21, 2020; (b) 126,411 shares held beneficially by Mr. Vamvakas through his relationship with Greybrook Capital Inc; (c) 4,402 shares held beneficially by Mr. Vamvakas through his relationship with Greybrook Securities Inc.; (d) 32,000 shares held beneficially by Mr. Vamvakas through his relationship with Greybrook Corp.; and (e) 20,140 shares held by Mr. Vamvakas. Mr. Vamvakas is the Chairman of Greybrook Capital, Inc., which is located at 890 Yonge St., Suite 700 Toronto, Ontario, Canada M4W 3P4. |
| (3) | Includes 32,373 shares subject to options exercisable within 60 days of February 21, 2020. |
| (4) | Includes (a) 31,534 shares subject to options exercisable within 60 days of February 21, 2020; (b) 6,666 shares subject to warrants exercisable within 60 days of February 21, 2020; and (c) 6,000 shares held beneficially by Mr. Lindstrom through his relationship with the Lindstrom Family #2 Limited Partnership. |
| (5) | Includes (a) 32,576 shares subject to options exercisable within 60 days of February 21, 2020, and (b) 1,666 shares subject to warrants exercisable within 60 days of February 21, 2020. |
| (6) | Includes (a) 52,500 shares subject to options exercisable within 60 days of February 21, 2020, and (b) 6,666 shares subject to warrants exercisable within 60 days of February 21, 2020 |
| (7) | Includes (a) 4,000 shares subject to options exercisable within 60 days of February 21, 2020 and (b) 500 shares purchased as part of the employee stock purchase plan in 2017. |
| (9) | Includes (a) 170,483 shares subject to options exercisable within 60 days of February 21, 2020, held on record by the current directors and executive officers; and (b) 14,998 shares subject to warrants exercisable within 60 days of February 21, 2020, held on record by the current directors and executive officers. |
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Equity Compensation Plan Information
The following table summarizes the number of outstanding options, warrants and rights granted to our employees, consultants, and directors, as well as the number of shares of common stock remaining available for future issuance, under our equity compensation plans as of December 31, 2019.
Number of Securities to be Issued Upon Exercise of Outstanding Options and Rights (a) | Weighted Average Exercise Price of Outstanding Options and Rights (b) | Reserved for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column(a)) | ||||||||||
| Equity compensation plans approved by security holders 2002 Stock Incentive Plan (1) | 752,840 | $ | 11.28 | 255,588 | ||||||||
| Equity compensation plans not approved by security holders (2) | 30,000 | $ | 113.30 | — | ||||||||
| Total | 782,840 | $ | 15.20 | 255,588 | ||||||||
| (1) | For discussion of the 2002 Stock Incentive Plan, which was approved by the security holders, please refer to footnote 6 to the consolidated financial statements included with this form 10-K. |
| (2) | Joseph Jensen was hired in October 2013, and as a material inducement for his hire, he was granted a stock option for 30,000 post-reverse split shares at a post-split exercise price of $113.30 not approved by security holders, which have fully vested. |
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
Since January 1, 2019, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we were or are a party in which the amount involved exceeds $120,000 and in which any director, executive officer or beneficial holder of more than 5% of any class of our voting securities or members of such person’s immediate family had or will have a direct or indirect material interest. All future transactions between us and any of our directors, executive officers or related parties will be subject to the review and approval of our Audit Committee. In accordance with its charter, the Audit Committee is responsible for reviewing and approving all related party transactions for potential conflicts of interest on an ongoing basis.
ITEM 14. Principal Accounting Fees and Services
In connection with the audit of the 2019 consolidated financial statements, the Company entered into an engagement agreement with Mayer Hoffman McCann, P.C., which sets forth the terms by which Mayer Hoffman McCann, P.C. has performed audit services for the Company.
Mayer Hoffman McCann, P.C. has advised the Company that Mayer Hoffman McCann, P.C., leases substantially all of its personnel, who work under the control of Mayer Hoffman McCann P.C.’s, shareholders, from wholly-owned subsidiaries of CBIZ, Inc, in an alternative practice structure. Accordingly, substantially all of the hours expended on Mayer Hoffman McCann P.C.’s engagement to audit the Company’s financial statements for its most recently completed fiscal year were attributed to work performed by persons other than Mayer Hoffman McCann P.C.’s full-time, permanent employees.
The following table sets forth the aggregate fees agreed to by the Company for the annual audits for the fiscal years ended December 31, 2019 and 2018, and all other fees paid by the Company to Mayer Hoffman McCann, P.C. during 2019 and 2018:
| For the years ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| (in thousands) | ||||||||
| Audit Fees | $ | 263.0 | $ | 275.0 | ||||
| Audit-Related Fees | — | — | ||||||
| All Other Fees | — | — | ||||||
| Totals | $ | 263.0 | $ | 275.0 | ||||
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Audit Fees. Audit fees for the fiscal years ended December 31, 2019 and 2018 were for professional services provided in connection with the annual audits of the Company’s consolidated financial statements, review of the Company’s quarterly consolidated financial statements, accounting matters directly related to the annual audits, professional services in connection with SEC registration statements, periodic reports (including Form 8-Ks), and other documents filed with the SEC or other documents issued in connection with securities offerings, and professional services provided in connection with other statutory or regulatory filings.
Audit Committee Policy Regarding Pre-Approval of Audit and Permissible Non-Audit Services of Our Independent Auditors
Our Audit Committee has established a policy that requires that all audit and permissible non-audit services provided by our independent auditors will be pre-approved by the Audit Committee. These services may include audit services, audit-related services, tax services, and other services. The Audit Committee considers whether the provision of each non-audit service is compatible with maintaining the independence of our auditors. Pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. Our independent auditors and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date.
All audit fees relating to the audit for the fiscal years ended December 31, 2019 and 2018, were approved in advance by the Audit Committee. All audit and non-audit services to be provided by our independent auditors were, and will continue to be, pre-approved by the Audit Committee.
Mayer Hoffman McCann has advised the Company that Mayer Hoffman McCann leases substantially all of its personnel, who work under the control of Mayer Hoffman McCann’s shareholders, from wholly-owned subsidiaries of CBIZ, Inc., in an alternative practice structure. Accordingly, substantially all of the hours expended on Mayer Hoffman McCann’s engagement to audit the Company’s financial statements for the fiscal year ended December 31, 2019, were attributed to work performed by persons other than Mayer Hoffman McCann’s full-time, permanent employees.
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ITEM 15. Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of the report:
| (1) | Financial Statements included in PART II of this report: |
| (2) | List of exhibits required by Item 601 of Regulation S-K. See part (b) below. | |
| (b) | Exhibits: The following exhibits are filed as a part of this report: |
All other financial statement schedules have been omitted because they are not applicable, not required or the information required is shown in the financial statements or the notes thereto.
| Exhibit Number | Exhibit Description | Incorporated by Reference | ||
| 3.1 | Amended and Restated Certificate of Incorporation of the Registrant currently in effect | Exhibit 3.3 to the Registrant’s Current Report on Form 8-K filed with the Commission on October 9, 2008 (file no. 000-51030) | ||
| 3.2 | Amended and Restated By-Laws of the Registrant currently in effect | Exhibit 3.4 to the Registrant’s Registration Statement on Form S-1/A No. 3, filed with the Commission on November 16, 2004 (file no. 333-118024) | ||
| 3.3 | Certificate of Amendment to Amended and Restated Certificate of Incorporation | Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed with the Commission on October 9, 2008 (file no. 000-51030) | ||
| 3.4 | Certificate of Amendment to Amended and Restated Certificate of Incorporation | Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on May 19, 2010 (file no. 000-51030) | ||
| 3.5 | Certificate of Amendment to Amended and Restated Certificate of Incorporation | Exhibit 3.4 to the Registrant’s Post Effective Amendment No. 1 to Form S-3 filed with the Commission on July 15, 2013 (file no. 333-189372) | ||
| 3.6 | Form of Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock | Exhibit 3.6 to the Registrant’s Registration Statement on Form S-1/A No. 2 filed with the Commission on April 29, 2016 (file no. 333-210326) |
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| Exhibit Number | Exhibit Description | Incorporated by Reference | ||
| 3.7 | Certificate of Amendment to Amended and Restated Certificate of Incorporation | Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on June 30, 2016 (file no. 000-51030) | ||
| 3.8 | Certificate of Amendment to Amended and Restated Certificate of Incorporation | Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on February 27, 2017 (file no. 000-51030) | ||
| 3.9 | Certificate of Amendment to Amended and Restated Certificate of Incorporation | Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on October 10, 2017 (file no. 000-51030) | ||
| 3.10 | Form of Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock | Exhibit 3.9 to the Registrant’s Registration Statement on Form S-1/A No. 3 filed with the Commission on November 22, 2017 (file no. 333-220080) | ||
| 4.1 | Form of Common Stock Purchase Warrant Agreement | Exhibit A to the Registrant’s free writing prospectus filed with the Commission on March 15, 2010 (file no. 333-157269) | ||
| 4.2 | Form of Common Stock Purchase Warrant Agreement | Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed with the Commission on July 16, 2009 (file no. 000-51030) | ||
| 4.3 | Form of Senior Indenture | Exhibit 4.1 to the Registrant’s Registration Statement on Form S-3 filed with the Commission on January 2, 2015 (file no. 333-201355) | ||
| 4.4 | Form of Subordinated Indenture | Exhibit 4.2 to the Registrant’s Registration Statement on Form S-3 filed with the Commission on January 2, 2015 (file no. 333-201355) | ||
| 4.5 | Form of warrant issued to certain affiliated funds of CRG LP (formerly known as Capital Royalty) pursuant to the terms of the Term Loan Agreement, dated as of March 4, 2015, as amended by the Omnibus Amendment Agreement, dated as of April 2, 2015, Amendment 2, dated August 6, 2015, Amendment 3, dated December 31, 2015, and Amendment 4, dated April 7, 2016, by and among TearLab Corporation, certain of its subsidiaries from time to time party thereto as guarantors and CRG LP (formerly known as Capital Royalty) and certain of its affiliate funds, as lenders, dated as of April 7, 2016 | Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on May 9, 2016 (file no. 000-51030) | ||
| 4.6 | Form of Series A Warrant | Exhibit 4.6 to the Registrant’s Registration Statement on Form S-1/A No. 2 filed with the Commission on April 29, 2016 (file no. 333-210326) | ||
| 4.7 | Form of Series A/Series B Warrant | Exhibit 4.7 to the Registrant’s Registration Statement on Form S-1/A No. 3 filed with the Commission on November 22, 2017 (file no. 333-220080) | ||
| 4.8 | Description of Securities | |||
| 10.1 | License Agreement between TearLab, Inc. and The Regents of the University of California dated March 12, 2003. | Exhibit 10.48 to the Registrant’s Annual Report on Form 10-K/A, filed with the Commission on March 29, 2007 (file no. 000-51030) (Portions of this exhibit have been omitted pursuant to a request for confidential treatment.) |
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| Exhibit Number | Exhibit Description | Incorporated by Reference | ||
| 10.12 | Purchase Agreement, dated as of April 11, 2012, by and between the Registrant and Craig-Hallum Capital Group LLC. | Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on April 11, 2012 (file no. 000-51030) | ||
| 10.13 | # | Form Change of Control Severance Agreement (for US executives). | Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on June 21, 2013 (file no. 000-51030) | |
| 10.14 | # | Form Change of Control Severance Agreement (for Canadian executives). | Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Commission on June 21, 2013 (file no. 000-51030) | |
| 10.15 | # | Offer Letter, dated September 24, 2013, by and between the Registrant and Joseph Jensen. | Exhibit 10.1# to the Registrant’s Current Report on Form 8-K filed with the Commission on October 1, 2013 (file no. 000-50789) | |
| 10.16 | # | Nonstatutory Stock Option Agreement, dated October 21, 2013, by and between the Company and Joseph Jensen. | Exhibit 10.1# to the Registrant’s Current Report on Form 8-K filed with the Commission on October 21, 2013 (file no. 000-50789) | |
| 10.17 | Asset Purchase Agreement, dated March 14, 2014 by and among AOA Excel, Inc., Occulogix LLC and TearLab Corporation. | Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on March 17, 2014 (file no. 000-51030) | ||
| 10.18 | Term Loan Agreement, dated as of March 4, 2015, by and among TearLab Corporation, certain of its subsidiaries from time to time party thereto as guarantors and CRG LP (formerly known as Capital Royalty) and certain of its affiliate funds, as lenders. | Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on March 10, 2015 (file no. 000-51030) | ||
| 10.19 | # | Nonstatutory Stock Option Agreement, dated April 21, 2014 by and between the Company and Paul Smith | Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on April 21, 2014 (file no. 000-51030) | |
| 10.20 | # | Offer Letter, dated May 15, 2015, by and between the Registrant and Wes Brazell | Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on July 6, 2015 (file no. 000-51030) | |
| 10.21 | # | 2002 Stock Option Plan, as amended effective as of February 5, 2015. | Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on August 7, 2015 (file no. 000-51030) | |
| 10.22 | # | OcuHub LLC 2015 Equity Incentive Plan | Exhibit 10.22 to Amendment No. 1 to the Registrant’s Annual Report on Form 10-K filed with the Commission on March 22, 2016 (file no. 000-51030) | |
| 10.23 | # | Option Agreement dated as of October 1, 2015 by and between OcuHub LLC and Elias Vamvakas | Exhibit 10.23 to Amendment No. 1 to the Registrant’s Annual Report on Form 10-K filed with the Commission on March 22, 2016 (file no. 000-51030) |
| - 82 - |
| - 83 - |
| - 84 - |
Exhibit Number |
Exhibit Description | Incorporated by Reference | ||
| 32.2 | CFO’s Certification of periodic financial reports pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, U.S.C. Section 1350. | |||
| 101.INS● | XBRL Instance. | |||
| 101.SCH● | XBRL Taxonomy Schema. | |||
| 101.CAL● | XBRL Taxonomy Extension Calculation. | |||
| 101.DEF● | XBRL Taxonomy Extension Definition. | |||
| 101.LAB● | XBRL Taxonomy Extension Labels. | |||
| 101.PRE● | XBRL Taxonomy Extension Presentation |
* * *
#Management compensatory plan, contract or arrangement
| * | Portions of the exhibit have been omitted pursuant to an order granted by the Securities and Exchange Commission for confidential treatment. |
| † | Portions of the exhibit have been omitted pursuant to a request for confidential treatment and the non-public information has been filed separately with the Securities and Exchange Commission. |
| ● | XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1924, as amended, and otherwise is not subject to liability under these sections. |
Copies of the exhibits filed with this Annual Report on Form 10-K or incorporated by reference herein do not accompany copies hereof for distribution to stockholders of the Registrant. The Registrant will furnish a copy of any of such exhibits to any stockholder requesting the same for a nominal charge to cover duplicating costs.
Not applicable.
The Registrant and each person whose signature appears below hereby appoint Elias Vamvakas, Joseph Jensen and Michael Marquez as attorney-in-fact with full power of substitution, severally, to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, one or more amendments to this Annual Report on Form 10-K, which amendments may make such changes in this Annual Report as the attorney-in-fact acting in the premises deems appropriate and to file any such amendments to this Annual Report on Form 10-K with the Securities and Exchange Commission.
| - 85 - |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned thereunto duly authorized.
| Dated: March 6, 2020 | TearLab Corp. | |
| By: | /s/ Joseph Jensen | |
| Joseph Jensen | ||
| Chief Executive Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Dated: March 6, 2020 | By: | /s/ Joseph Jensen |
| Joseph Jensen | ||
Chief Executive Officer and Director (principal executive officer) |
| Dated: March 6, 2020 | By: | /s/ Michael Marquez |
| Michael Marquez | ||
Chief Financial Officer (principal financial and accounting officer) |
| Dated: March 6, 2020 | By: | /s/ Elias Vamvakas |
| Elias Vamvakas | ||
| Chairman of Board of Directors |
| Dated: March 6, 2020 | By: | /s/ Anthony Altig |
| Anthony Altig | ||
| Director |
| Dated: March 6, 2020 | By: | /s/ Richard L. Lindstrom, M.D. |
| Richard L. Lindstrom, M.D. | ||
| Director |
| Dated: March 6, 2020 | By: | /s/ Paul Karpecki |
| Paul Karpecki | ||
| Director |
| - 86 - |
Exhibit 4.8
Description of capital stock
The following is a summary of information concerning capital stock of TearLab Corporation (“us,” “our,” “we” or the “Company”) and certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws currently in effect. This summary does not purport to be complete and is qualified in its entirety by the provisions of our amended and restated certificate of incorporation, including all amendments thereto, and our amended and restated bylaws, each previously filed with the Securities and Exchange Commission (“SEC”) and incorporated by reference as an exhibit to the Annual Report on Form 10-K of which this Exhibit 4.8 is a part, as well as to the applicable provisions of the Delaware General Corporation Law (the “DGCL”). We encourage you to read our certificate of incorporation, bylaws and the applicable portions of the DGCL carefully.
General
Our amended and restated certificate of incorporation authorizes two classes of stock, common stock and preferred stock. Our authorized capital stock consists of 40,000,000 shares of common stock, $0.001 par value per share, and 10,000,000 shares of preferred stock, $0.001 par value per share.
Common Stock
Voting Rights
Each holder of common stock is entitled to one vote for each share on all matters submitted to a vote of the stockholders, including the election of directors. Our amended and restated certificate of incorporation and amended and restated bylaws do not provide for cumulative voting rights. Because of this, the holders of a plurality of the shares of common stock entitled to vote in any election of directors can elect all of the directors standing for election, if they should so choose. With respect to matters other than the election of directors, at any meeting of the stockholders at which a quorum is present or represented, the affirmative vote of a majority of the voting power of the shares present in person or represented by proxy at such meeting and entitled to vote on the subject matter shall be the act of the stockholders, except as otherwise required by law. The holders of a majority of the stock issued and outstanding and entitled to vote, present in person or represented by proxy, shall constitute a quorum for the transaction of business at all meetings of the stockholders.
Dividends
Subject to preferences that may be applicable to any then outstanding preferred stock, holders of common stock are entitled to receive dividends, if any, as may be declared from time to time by the board of directors out of legally available funds.
Liquidation
In the event of our liquidation, dissolution or winding up, holders of common stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all of our debts and other liabilities and the satisfaction of any liquidation preference granted to the holders of any then outstanding shares of preferred stock.
Rights and Preferences
Holders of common stock have no preemptive, conversion, subscription or other rights, and there are no redemption or sinking fund provisions applicable to the common stock. The rights, preferences and privileges of the holders of common stock are subject to and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate in the future.
Preferred Stock
Our board of directors has the authority, without further action by our stockholders, to designate and issue up to 10,000,000 shares of preferred stock in one or more series. Our board of directors may also designate the rights, preferences and privileges of each such series of preferred stock, any or all of which may be greater than or senior to those of the common stock. Subject to the determination of our board of directors, any shares of our preferred stock that may be issued in the future would generally have preferences over our common stock with respect to the payment of dividends and the distribution of assets in the event of our liquidation, dissolution or winding up.
Transfer Agents
The transfer agent for our common stock is Computershare, P.O. Box 40378, Providence, RI 02940-3078, (888) 667-7671.
Listing
Our common stock is quoted on the OTCQB under the trading symbol “TEAR”.
Delaware Anti-Takeover Statute
Our restated certificate of incorporation provides that we have opted out of the provisions of Section 203 of the Delaware General Corporation Law, or the DGCL. Section 203 of the DGCL prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the time the person became an interested stockholder, unless the business combination, or the transaction in which the stockholder became an interested stockholder, is approved in a prescribed manner. Since we will have opted out in the manner permitted under the DGCL, these restrictions will not apply to us.
Other Anti-Takeover Provisions of Our Restated Certificate of Incorporation and Amended and Restated Bylaws
Our restated certificate of incorporation and amended and restated bylaws contains several provisions, in addition to those pertaining to the issuance of additional shares of our authorized common stock and preferred stock without the approval of the holders of our common stock, that could delay or make more difficult the acquisition of our company through a hostile tender offer, open market purchases, proxy contest, merger or other takeover attempt that a stockholder might consider to be in such holder’s best interest, including those attempts that might result in a premium over the market price of our common stock.
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements:
| (1) | Registration Statement (Form S-1 Nos. 333-210326 and 333-220080) of TearLab Corporation; and | |
| (2) | Registration Statement (Form S-1 MEF No. 333-211103) of TearLab Corporation; and | |
| (3) | Registration Statement (Form S-3 Nos. 333-189372, 333-190116, 333-215886, and 333-201355) of TearLab Corporation; and | |
| (4) | Registration Statement (Form S-8 Nos. 333-124505, 333-155163, 333-181949, 333-189205, 333-191838, 333-195667, 333-196984, 333-197467, 333-199201, 333-201932 and 333-206757) pertaining to the 2014 Employee Stock Purchase Plan, 2002 Stock Option Plan, as amended, and Nonstatutory Stock Option Agreement of TearLab Corporation (formerly OccuLogix, Inc. and formerly Vascular Sciences Corporation); |
of our report dated March 6, 2020, with respect to the consolidated financial statements of TearLab Corporation included in this Annual Report (Form 10-K) of TearLab Corporation for the year ended December 31, 2019.
| /s/ Mayer Hoffman McCann P.C. | |
| San Diego, California | |
| March 6, 2020 |
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 Annual Report on Form 10-K 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: | March 06, 2020 |
| /s/ Joseph Jensen | |
| Joseph Jensen | |
| Chief Executive Officer |
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 Annual Report on Form 10-K 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: | March 6, 2020 |
| /s/ Michael Marquez | |
| Michael Marquez | |
| Chief Financial Officer |
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 Annual Report on Form 10-K of TearLab Corporation (the “Company”) for the fiscal year ended December 31, 2019, 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: March 6, 2020
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 Annual Report on Form 10-K of TearLab Corporation (the “Company”) for the fiscal year ended December 31, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael Marquez, 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 | ||
| Chief Financial Officer |
Dated: March 6, 2020
Term Loan (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2019 | ||||||||||||||||||||||||||||||||||||
| Debt Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||
| Schedule of Term Loan |
The following is a summary of the Term Loan Agreement as of December 31, 2019 and related maturities of outstanding principle:
|
|||||||||||||||||||||||||||||||||||
| Schedule of Maturities of Outstanding Principal of Term Loan |
Principal due for each of the next 5 years and in the aggregate thereafter:
|
Commitments and Contingencies (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commitments and Contingencies Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Components of Lease Costs |
The components of lease costs were as follows:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Future Minimum Lease Payments Under Non-cancellable Leases |
Future minimum lease payments under non-cancellable leases as of December 31, 2019 were as follows:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Future Minimum Royalty Payments |
Future minimum royalty payments under this agreement as of December 31, 2019 are as follows:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stockholders' Equity - Schedule of Common and Preferred Shares (Details) $ in Thousands |
12 Months Ended |
|---|---|
|
Dec. 31, 2019
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 |
Commitments and Contingencies - Schedule of Future Minimum Lease Payments Under Non-cancellable Leases (Details) $ in Thousands |
Dec. 31, 2019
USD ($)
|
|---|---|
| Commitments and Contingencies Disclosure [Abstract] | |
| 2020 | $ 311 |
| 2021 | 184 |
| 2022 | 164 |
| 2023 | 170 |
| Total lease payments | 829 |
| Less: present value discount | (160) |
| Present value of lease liabilities | $ 669 |
| Weighted average remaining lease term | 2 years 7 months 6 days |
Income Taxes - Schedule of Loss from Continuing Operations Before Income Tax (Details) - USD ($) $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2019 |
Dec. 31, 2018 |
|
| Income Tax Disclosure [Abstract] | ||
| Domestic | $ 5,323 | $ 2,144 |
| Foreign | 93 | 107 |
| Loss before income taxes | $ 5,416 | $ 2,251 |
Net Income (Loss) Per Share - Schedule of Reconciliation of Weighted Average Shares Outstanding for Basic and Diluted Loss Per Share (Details) - shares shares in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2019 |
Dec. 31, 2018 |
|
| Earnings Per Share [Abstract] | ||
| Weighted average shares outstanding - basic | 12,179 | 10,616 |
| Dilutive potential common shares | ||
| Weighted average shares outstanding - fully diluted | 12,179 | 10,616 |
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