UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q




(Mark One)


T
QUARTERLY REPORTPURSUANT TOSECTION 13 OR 15(d) OF THESECURITIES EXCHANGE
ACT OF 1934





For the quarterly period ended:March 31,2009





£
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





OccuLogix, Inc.


(Exact name of registrant as


specified in its charter)








Delaware

59 343 4771(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)





12707 High Bluff Drive, Suite 200, San Diego, CA 92130


(Address of principal executive offices)





(858) 794-1400


(Registrant’s telephone number, including area code)





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


Yes  T   No  £





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during thepreceding 12 months (or for such shorter period that the registrant was required to submit and post such files).


Yes  £   No  £





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





Large accelerated filer £
Accelerated filer £





Non-accelerated filer   £ (Do not check if a smaller reporting company)
Smaller reporting company T





Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. (Check one):Yes£NoT







1




PART I.
FINANCIAL INFORMATION
PageItem 1.
Consolidated Financial Statements
5Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
20Item 3.
Quantitative and Qualitative Disclosures about Market Risk
28Item 4.
Controls and Procedures
29PART II.
OTHER INFORMATIONItem 1.
Legal Proceedings
30Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
36Item 3.
Defaults upon Senior Securities
36Item 4.
Submission of Matters to a Vote of Security Holders
36Item 5.
Other Information
36Item 6.
Exhibits
37





2
 Table of Contents





SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS





This Quarterly Report on Form 10-Q contains forward-looking statements relating to future events and our future performance within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  In some cases, you can identify forward-looking
statements by terms such as "may", "will", "should", "could", "would", “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 future strategy, structure, and business prospects;


·
The planned commercialization of our current product;


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


·
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 European, Asian and Latin American countries;


·
Our anticipated expansion of United Stated and international sales and operations;


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


·
Our efforts to obtain certain FDA approvals;


·
Our anticipated launch of customers in the United States;


·
The anticipated sufficiency of our current office space, and our ability to find additional space as needed; and


·
Use of cash, cash needs and ability to raise capital.




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




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





3
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OccuLogix, Inc.





PART I.
FINANCIAL INFORMATION





ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS





4
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OccuLogix, Inc.


CONSOLIDATED BALANCE SHEETS


(expressed in U.S. dollars)





March 31,
2009


December 31,
2008(Unaudited)ASSETSCurrent assetsCash and cash equivalents

$
1,256,493


$
2,565,277Accounts receivable, net


257,120



333,056Inventory, net


120,955



148,201Prepaid expenses


278,365



316,058Other current assets


26,419



21,680Total current assets


1,939,352



3,384,272Fixed assets, net


169,568



183,384Patents and trademarks, net


268,532



269,398Intangible assets, net


9,264,393



9,568,023Total assets

$
11,641,845


$
13,405,077LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilitiesAccounts payable

$
336,379


$
314,680Accrued liabilities


990,149



1,201,793Due to stockholders


27,787



23,152Deferred revenue


222,352



237,400Obligations under warrants


35,971



57,666Total current liabilities


1,612,638



1,834,691Deferred income tax liability


942,622



1,611,502Contingently redeemable common stock, 119,629 outstanding


250,000



250,000Stockholders’ equityCapital stockCommon stock


9,708



9,708Par value of $0.001 per shareAuthorized: 40,000,000; Issued and outstanding:March 31, 2009 – 9,708,780; December 31, 2008 – 9,708,780Additional paid-in capital


377,486,839



377,356,547Accumulated deficit


(368,659,962
)


(367,657,371
)Total stockholders’ equity

$
8,836,585


$
9,708,884Total liabilities and stockholders’ equity

$
11,641,845


$
13,405,077





See accompanying notes to interim consolidated financial statements





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OccuLogix, Inc.


CONSOLIDATED STATEMENTS OF OPERATIONS


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


(Unaudited)





Three months endedMarch 31,2009


2008RevenueTearLab

$
243,258


$
—Retina


—



7,200Total revenue


243,258



7,200Cost of goods soldTearLab – product cost


119,199



—Retina – product cost


—



24,556Total cost of goods sold


119,199



24,556124,059



(17,356
)Operating expensesGeneral and administrative


1,286,609



1,526,074Clinical , regulatory and research & development


332,306



1,022,987Sales and marketing


214,304



176,5291,833,219



2,725,590Loss from operations


(1,709,160
)


(2,742,946
)Other income (expense)Interest income


1,830



30,288Changes in fair value of warrant obligation


21,695



—Impairment of investments


—



(327,486
)Interest expense


—



(40,438
)Amortization of deferred financing charges


—



(41,000
)Other


14,163



17,49237,688



(361,144
)Loss from continuing operations before income taxes


(1,671,472
)


(3,104,090
)Income tax recovery


668,881



619,480Net loss for the period


(1,002,591
)


(2,484,610
)Net loss attributable to non-controlling interest, net of tax


—



207,535Net loss attributable to OccuLogix, Inc.

$
(1,002,591
)

$
(2,277,075
)Weighted average number of shares outstanding attributable to OccuLogix, Inc. - basic and diluted


9,828,409



2,292,280Loss per share attributable to OccuLogix, Inc. – basic and diluted

$
(0.10
)

$
(0.99
)





See accompanying notes to interim consolidated financial statements





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OccuLogix, Inc.


CONSOLIDATED STATEMENTS OF CASH FLOWS


(expressed in U.S. dollars)


(Unaudited)





Three months ended
March 31,2009


2008OPERATING ACTIVITIESNet loss for the period

$
(1,002,591
)

$
(2,277,075
)Adjustments to reconcile net loss to cash used in operating activities:Stock-based compensation


130,292



83,875Depreciation of fixed assets


19,700



17,638Amortization and write-down of patents and trademarks


7,419



4,815Amortization of intangible asset


303,630



322,385Amortization of deferred financing charges


—



41,000Changes in fair value of warrant obligation


(21,695
)


—Impairment of investments


—



327,486Deferred tax liability, net


(668,881
)


(619,480
)Non-controlling interest


—



(207,535
)(Gain) Loss on disposal of fixed assets


(3,119
)


—Net change in non-cash working capital balances related to operations


(64,221
)


(376,033
)Cash used in operating activities


(1,299,466
)


(2,682,924
)INVESTING ACTIVITIESAdditions to fixed assets, net of proceeds


(2,765
)


(9,317
)Additions to patents and trademarks


(6,553
)


(33,873
)Cash provided by (used in) investing activities


(9,318
)


(43,190
)FINANCING ACTIVITIESProceeds from issuance of bridge loans


—



3,000,000Cash paid for financing fees


—



(180,000
)Cash provided by financing activities


—



2,820,000Net increase (decrease) in cash and cash equivalents during the period


(1,308,784
)


93,886Cash and cash equivalents, beginning of period


2,565,277



2,235,832Cash and cash equivalents, end of period

$
1,256,493


$
2,329,718





See accompanying notes to interim consolidated financial statements





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OccuLogix, Inc.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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


(Unaudited)




1.
BASIS OF PRESENTATION AND GOING CONCERN UNCERTAINTY




Basis of presentation




The accompanying unaudited interim consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles, referred to as U.S. GAAP. These unaudited interim consolidated financial statements contain all normal recurring adjustments and estimates necessary to present fairly the financial
position of OccuLogix, Inc. , ( “OccuLogix” or the Company), as at March 31, 2009 and the results of its operations for the three months then ended. These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s latest Annual Report on Form 10K filed with the U.S. Securities and Exchange Commission, or the SEC, on March 31, 2009. Interim results are not necessarily indicative of results for
a full year.





Reclassifications





Effective January 1, 2009, the Company implemented Statement of Financial Accounting Standards No. 160, Non-controlling Interests in Consolidated Financial Statements, an amendment to ARB No. 51, or SFAS 160. This standard changed the accounting for and reporting of minority interest
(now called non-controlling interest) in the consolidated financial statements. Upon adoption, certain prior period amounts have been reclassified to conform to the current period financial statement presentation. These reclassifications have no effect on the previously reported financial position or results of operations, refer to Note 2 of this Form 10-Q for additional information on the adoption of SFAS 160.





Reverse Stock Split





On September 30, 2008, the Company’s Board of Directors approved a reverse stock split referred to as the Reverse Stock Split with an effective date of October 7, 2008 of the Company’s Common Stock utilizing a 1:25 consolidation ratio. As a result of the Reverse Stock Split, every twenty-five shares of the Company’s issued
and outstanding Common Stock were consolidated into one share of the Company’s Common Stock respectively. In addition, the exercise prices of the Company’s stock options and the conversion prices of the Company’s outstanding warrants have been adjusted, such that, the number of shares potentially issuable on the exercise of stock options and/or the exercise of warrants will reflect the 1:25 consolidation ratio.  Accordingly, all of the Company’s issued and outstanding Common
Stock and all outstanding stock options to purchase Common Stock and warrants to purchase Common Stock for all periods presented have been restated to reflect the Reverse Stock Split.





Going concern uncertainty




The consolidated financial statements have been prepared on the basis that the Company will continue as a going concern. However, the Company has sustained substantial losses of $14,181,433 for the year ended December 31, 2008 and $1,002,591 and $2,277,075 for the three months ended March 31, 2009 and 2008, respectively. The Company’s
working capital at March 31, 2009 is $326,714, which represents a $1,222,867 decrease in its working capital from $1,549,581 at December 31, 2008.  As a result of the Company’s history of losses and financial condition, there is substantial doubt about the ability of the Company to continue as a going concern.  Management believes the Company’s existing cash will be sufficient to cover its operating and other cash demands only until the beginning of June 2009, if it does not successfully
complete the first stage of its current fund raising activities by the beginning of June 2009.




A successful transition to attaining profitable operations is dependent upon obtaining additional financing adequate to fund its planned expenses and achieving a level of revenues adequate to support the Company’s cost structure.  The Company is seeking additional convertible debt financing to support its operations until it
becomes cash flow positive.  There can be no assurances that there will be adequate financing available to the Company on acceptable terms or at all.  If the Company is unable to obtain additional financing, the Company would need to significantly curtail or reorient its operations during 2009, which could have a material adverse effect on the Company’s ability to achieve its business objectives and as a result may require the Company to file for bankruptcy or cease operations.  The
consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts classified as liabilities that might be necessary should the Company be forced to take any such actions.





2.
SIGNIFICANT ACCOUNTING POLICIES




These unaudited interim consolidated financial statements have been prepared using significant accounting policies that are consistent with the policies used in preparing the Company’s audited consolidated financial statements for the year ended December 31, 2008.





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OccuLogix, Inc.


Management believes that all adjustments necessary for the fair presentation of results, consisting of normally recurring items, have been included in the unaudited consolidated financial statements for the interim periods presented. The preparation of financial statements in conformity with U.S. GAAP, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The principal areas of judgment relate to the impairment of long-lived and intangible assets, valuation of investments in marketable securities and the value of stock options and warrants.





Recent Accounting Pronouncements


Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements, which establishes a framework for measuring fair value in generally accepted accounting principles, clarifies the definition of fair value within that framework and expands disclosures about the use
of fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. However, in February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. 157-2, Effective Date of FASB Statement No. 157, which deferred the effective date of SFAS No. 157 for one year for non-financial assets and liabilities, except for certain items, such as the Company’scash
equivalents and investments, that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of SFAS No 157 for non-financial assets and non-financial liabilities on January 1, 2009 did not have a material impact on the Company’s consolidated financial statements.





In December 2007, the FASB issued SFAS No. 141(R) (revised 2007), Business Combinations, which replaces SFAS No 141. The statement retains the purchase method of accounting for acquisitions, but requires an acquiring company to measure all assets acquired and liabilities assumed, including
contingent considerations and contractual contingencies, at fair value as of the acquisition date. In addition, an acquiring company is required to capitalize in-process research and development and either amortize it over the life of the product, or expense it upon abandonment or impairment. SFAS No. 141(R) also requires expensing of acquisition-related costs as incurred. SFAS No. 141(R) is effective for the Company beginning January 1, 2009 and will apply to business combinations completed on or after that
date.





In December 2007, the FASB issued SFAS No. 160, which changes the accounting and reporting of ownership interests in subsidiaries held by parties other than the parent, and the allocation of net income attributable to the parent and the  non-controlling interest. SFAS No. 160 also establishes disclosure requirements to separately
identify the interests of the parent and the interests of the non-controlling owners. SFAS No. 160 became effective for all fiscal years beginning after December 15, 2008. The Company adopted the provisions of SFAS No. 160 in the first quarter of 2009. The adoption of SFAS 160 changed the presentation format of the Company’s consolidated statements of earnings and consolidated balance sheets, but did not have an impact on net earnings or equity attributable to the Company’s shareholders.





In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—An amendment of FASB Statement No. 133, which requires enhanced qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS No. 161 is effective for the Company beginning January 1, 2009. The adoption of SFAS No. 161 did not have a material impact on the Company’s consolidated financial statements.





In April 2008, the FASB issued FSP No. 142-3, Determination of Useful Life of Intangible Assets. FSP No. 142-3 amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS
No. 142, Goodwill and Other Intangible Assets. FSP No. 142-3 also requires expanded disclosure related to the determination of intangible asset useful lives. FSP 142-3 is effective for the Company beginning January 1, 2009. The adoption of FSP No. 142-3 did not have a material impact on the Company’s consolidated financial statements.





In April 2008, the FASB issued Emerging Issues Task Force (“EITF”) 07-05, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock. EITF 07-05 provides guidance on determining what types of instruments or embedded features in an instrument
held by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in paragraph 11(a) of SFAS No. 133. EITF 07-05 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and early application is not permitted. The adoption of EITF 07-5 did not have a material impact on the Company’s consolidated financial statements.





In May 2008, the FASB issued FSP Accounting Principals Board, (“APB”), Opinion No. 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion, which clarifies that convertible instruments that may be settled in cash are not addressed under
APB Opinion No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants. FSP APB No. 14-1 requires the liability and equity components of these types of instruments to be separately accounted for in a manner that will reflect the non-convertible debt interest rate when interest cost is recognized in subsequent periods. FSP APB No. 14-1 is effective for the Company for convertible debt instruments issued on or after January 1, 2009.
The Company does not have any instruments that are within the scope of FSP APB No. 14-1. The adoption of FSP APB No. 14-1 did not have a material impact on the Company’s consolidated financial statements.





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OccuLogix, Inc.


In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, which identifies the sources of accounting principles and provides entities with a framework for selecting the principles used in preparation of financial statements that are presented
in conformity with GAAP. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AICPA Codification of Auditing Standards, AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The adoption of SFAS No. 162 is not expected to have a material impact on the Company’s consolidated financial statements.





In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities. FSP EITF 03-6-1 clarifies that share-based payment awards that entitle their holders to receive non-forfeitable dividends or dividend
equivalents before vesting should be considered participating securities. The Company does not have grants of restricted stock that contain non-forfeitable rights to dividends. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008 on a retrospective basis. The adoption of EITF 03-6-1 did not have a material impact on the Company’s consolidated financial statements.





3.
INVENTORY




Inventory is recorded at the lower of cost and net realizable value and consists of finished goods. Cost is accounted for on a first-in, first-out basis. Deferred cost of sales (included in finished goods) consists of products shipped but not recognized as revenue because they did not meet the revenue recognition criteria.




The Company evaluates inventory for estimated excess quantities and obsolescence, based on expected future sales levels and projections of future demand, with the excess inventory provided for. In addition, the Company assesses the impact of changing technology and market conditions. The balance of $120,955 as at March 31, 2009 represents
production materials held for the TearLabTM activities.





In light of the Company's financial position at November 1, 2007, the Company announced an indefinite suspension of the RHEOTM System clinical development program for AMD.  That decision was made following a comprehensive review of the respective costs and development timelines associated with the products in the Company's
portfolio and in particular the fact that if the Company was unable to raise additional capital, it would not have had sufficient cash to support its operations beyond early 2008.  Accordingly, the Company wrote down the value of its treatment sets and OctoNova pumps, the components of the RHEOTM System, to zero as at December 31, 2007 since the Company did not expect to be able to sell or utilize these treatment sets and OctoNova pumps prior to their expiration dates, in the case of the treatment
sets, or before the technologies become outdated.  In the three months ended March 31, 2008, the Company sold  48 treatment sets.  The sale of these treatment sets generated revenues of $7,200. All RHEOTM System inventory was sold or disposed of during 2008.




4.
FIXED ASSETS





Fixed assets consist of the following:




March 31, 2009


December 31, 2008Furniture and office equipment

$
18,970


$
24,539Computer equipment and software


143,938



254,846Medical equipment


315,779



315,779478,687



595,164Less accumulated depreciation


309,119



411,780$
169,568


$
183,384





Depreciation expense was $19,700 and $17,638 during the three months ended March 31, 2009 and 2008, respectively.




5.
PATENTS AND TRADEMARKS




Patents and trademarks consist of the following:





March 31, 2009


December 31, 2008Patents

$
378,351


$
373,361Trademarks


138,330



136,767516,681



510,128Less accumulated amortization


248,149



240,730$
268,532


$
269,398





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OccuLogix, Inc.


Amortization expense was $7,419 and $4,815 during the three months ended March 31, 2009 and 2008, respectively.




Patents and trademarks are recorded at historical cost and amortized over a period not exceeding 10 years.




6.
INTANGIBLE ASSETS




The Company's intangible assets consist of the value of TearLabTM Technology acquired in the acquisition of Ocusense, Inc.  The TearLabTM Technology consists of a disposable lab card and card reader, supported by an array of patents and patent applications that are either held or in-licensed by the Company.  The
TearLabTM Technology is being amortized using the straight-line method over an estimated useful life of 10 years. The Company has no indefinite-lived intangible assets.




Intangible assets subject to amortization consist of the following:





As at March 31, 2009Cost


Accumulated
AmortizationTearLabTM technology

$
12,172,054


$
2,907,661





As at December 31, 2008Cost


Accumulated
AmortizationTearLabTM technology

$
12,172,054


$
2,604,031





Estimated amortization expense for the intangible assets for the balance of 2009 and each of the next four years and thereafter is as follows:





Amortization of intangible assetsRemainder of  2009

$
910,8932010


1,214,5232011


1,214,5232012


1,214,5232013


1,214,523Thereafter


3,495,408$
9,264,393





Amortization expense of $303,630 and $322,385 for the three months ended March 30, 2009 and 2008, respectively are attributable to the TearLabTM technology.





The Company determined that, as of March 31, 2009, there have been no significant events which may affect the carrying value of OcuSense's TearLabTM technology. However, the Company’s prior history of losses and losses incurred during the current fiscal year reflect a potential indication of impairment, thus requiring management
to assess whether the TearLabTM technology was impaired as at March 31, 2009. Based on management’s estimates of forecasted undiscounted cash flows as at March 31, 2009, the Company concluded that there is no indication of an impairment of OcuSense's TearLabTM technology. Therefore, no impairment charge was recorded during the three months ended March 31, 2009.





7.
CAPITAL STOCK




(a)  Authorized share capital




The total number of authorized shares of common stock of the Company is 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.





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OccuLogix, Inc.


(b)  Reverse Stock Split





On September 30, 2008, the Company's Board of Director's approved a reverse stock split referred to as the Reverse Stock Split, with an effective date of October 7, 2008, of the Company's common stock utilizing a 1:25 consolidation ratio.  As a result of the Reverse Stock Split, every twenty-five shares of the Company's issued and
outstanding common stock were consolidated into one share of the Company's common stock.  In addition, the exercise prices of the Company's stock options and the conversion prices of the Company's outstanding warrants have been adjusted, such that the number of shares potentially issuable on the exercise of stock options and/or the exercise of warrants will reflect the 1:25 consolidation ratio.  Accordingly, all the Company's issued and outstanding common stock and all outstanding stock options
to purchase common stock and warrants to purchase common stock for all periods presented have been restated to reflect the Reverse Stock Split.





(c)  Common stock





On February 1, 2007, the Company entered into a Securities Purchase Agreement (the "Securities Purchase Agreement 2007") with certain institutional investors, pursuant to which the Company agreed to issue to those investors an aggregate of 267,094 shares of the Company's common stock (the "Shares 2007") and five-year warrants exercisable into
an aggregate of 106,838 shares of the Company's common stock (the "Warrants").  The per share purchase price of the Shares 2007 was $37.50, and the per share exercise price of the Warrants is $46.25, subject to adjustment.  The Warrants became exercisable on August 6, 2007.  Pursuant to the Securities Purchase Agreement 2007, on February 6, 2007, the Company issued the Shares 2007 and the Warrants.  The gross proceeds of the sale of the Shares 2007 and the Warrants totaled
$10,016,000 (less transaction costs of $871,215).  On February 6, 2007, the Company also issued to Cowen and Company, LLC a five-year warrant exercisable into an aggregate of 37,400 shares of the Company's common stock (the "Cowen Warrant") in partial payment of the placement fee payable to Cowen and Company, LLC for the services it had rendered as the placement agent in connection with the sale of the Shares 2007 and the Warrants.  The estimated grant date fair value of the Cowen Warrant
of $97,222 is included in the transaction costs of $871,215.





On October 6, 2008, the Company issued 7,536,129 common shares resulting from the successful closing of a number of related transactions.  These transactions, a private placement resulting in the issuance of 869,200 common shares of the Company, the conversion of outstanding bridge loans into 3,304,511 common shares of the Company,
the issuance of 3,169,938 common shares of the Company to acquire the remaining ownership interest in Ocusense, Inc. that it did not already own and the issuance of 192,480 common shares of the Company to Marchant Securities Inc. ("Marchant Securities") as payment for services rendered, (the "Restructuring Transactions") are described in greater detail below.





On May 19, 2008 and amended on August 29, 2008, the Company, Marchant Securities and certain investors entered into a Securities Purchase Agreement (the "Securities Purchase Agreement 2008"), pursuant to which the Company agreed to issue to those investors an aggregate of 869,200 shares of the Company's common stock (the "Shares 2008").  The
per share purchase price of the Shares 2008 was $2.50.  The common shares were issued on October 6, 2008 subsequent to receiving the approval of shareholders and the successful completion of the related Restructuring Transactions.  The gross proceeds of the sale of the Shares totaled $2,173,000





On September 30, 2008, the stockholders of the Company approved the pre-payment by the Company of the aggregate outstanding bridge loans in the amount $6,703,500 and accrued interest of $318,478, transacted under the loan agreement, entered into on February 19, 2008, by the Company, the lenders and Marchant Securities Inc. (the "Loan Agreement")
pursuant to which the Company agreed to issue to those lendors an aggregate of 3,304,511 shares of the Company's common stock (the "Loan Shares").  The Company received funding under the Loan Agreement of $3,000,000 on February 19, 2008, $300,000 on May 5, 2008 and $3,403,500 on July 28, 2008 .  The date of the pre-payment of the outstanding bridge loans was October 6, 2008 at which time the accrued interest was $318,478.  The per share conversion price of the Loan Shares were $2.125
representing a 15% discount to the purchase price paid by the investors of the Securities Purchase Agreement 2008.  As a result of the discount the Company recorded beneficial conversion on bridge loan shares issued of $1,239,163 in accordance with EITF 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios".





On September 30, 2008, the shareholders of the Company approved and adopted the Agreement and Plan of Merger and Reorganization, dated April 22, 2008, by the Company, OcuSense Acquireco, Inc. and OcuSense, Inc., and as amended by the Amending Agreement, dated as of July 28, 2008, pursuant to which the Company acquired all of the issued and
outstanding shares of capital stock of OcuSense, Inc. that the Company did not already own in exchange for the issuance of an aggregate of 3,169,938 shares of its common stock (the "Merger Shares") to the minority stockholders of OcuSense, Inc..  The per share purchase price of the Merger Shares was $2.50.  The common shares were issued on October 6, 2008 subsequent to receiving the approval of shareholders and the successful completion of the related Restructuring Transactions.





Included in the Merger Shares issued to the minority stockholders were 119,629 common shares issued to a stockholder who invested in TearLab, Inc. as part of a licensing agreement between the stockholder and TearLab, Inc.  If the licensing agreement is terminated in 2009, at the Company’s option as a result of the stockholder
not meeting minimum order requirements as agreed between the stockholder and TearLab, Inc., the Company can be required to redeem the stockholder’s shares at the original purchase price of $250,000, at the stockholder’s option,. The value will be reclassified to stockholders’ equity if the contingency is not met. These shares have been reclassified and reported separately as contingently redeemable common stock.





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OccuLogix, Inc.


On September 30, 2008, the shareholders of the Company approved the issuance to Marchant Securities Inc. ("Marchant Securities") of 192,480 shares of the Company's common stock in payment of part of the commission remaining due for services rendered by Marchant Securities in connection with the Securities Purchase Agreement 2008 and the Loan
Agreement.  The common shares were issued on October 6, 2008 subsequent to receiving the approval of shareholders and the successful completion of the related Restructuring Transactions.  In addition, Marchant securities was paid cash of $180,000 upon the completion of the initial bridge loan on February 19, 2008 and paid additional cash of $88,800 upon the successful completion of the Restructuring Transactions.  In addition to the fees paid to Marchant Securities, the Company also
incurred $457,779 in costs related to the Restructuring Transactions for professional services. As the fees were paid through the issuance of common stock, the financing costs have been recorded as an increase to additional paid-in capital, and $130,672 was associated to the shares issued in private placement and $350,528 was associated to shares issued on conversion of the bridge loans based on the respective proceeds raised. These costs have been recorded as an offset to additional paid-in capital as share
issuance costs.





(d)  Stock Option Plan




The Company has a stock option plan, the 2002 Stock Option Plan (the "Stock Option Plan"), which was most recently amended in September 30, 2008 in order to, among other things, increase the share reserve under the Stock Option Plan by 2,141,760.  Under the Stock Option Plan, up to 2,400,000 options are available for grant to employees,
directors and consultants.  Options granted under the Stock Option Plan may be either incentive stock options or non-statutory stock options.  Under the terms of the Stock Option 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 may be time-based or performance-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 granted to a prospective
employee, prospective consultant or prospective director may become exercisable prior to the date on which such person commences service, and with the exception of an option granted to an officer, director or consultant, no option shall become exercisable at a rate less than 20% per annum over a period of five years from the effective date of grant of such option unless otherwise approved by the Board.





The Company has also issued options outside of the Stock Option Plan.  These options were issued before the establishment of the Stock Option Plan, when the authorized limit of the Stock Option Plan was exceeded or as permitted under stock exchange rules when the Company was recruiting executives.  In addition, options
issued to companies for the purpose of settling amounts owing were issued outside of the Stock Option Plan, as the Stock Option Plan prohibited the granting of options to companies.  The issuance of such options was approved by the Board and granted on terms and conditions similar to those options issued under the Stock Option Plan.





The Company accounts for stock-based compensation under the provisions of SFAS No. 123(R). SFAS No. 123(R) requires that share-based payment transactions with employees be 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 many complex and subjective assumptions, including: estimates of the Company’s future volatility, the expected term for its stock options, option exercise behavior, the number of options expected to ultimately vest, and the timing of vesting for the Company’s share-based awards.




The following table sets forth the total stock-based compensation expense resulting from stock options included in the Company’s consolidated statements of operations and changes in stockholders’ equity:





Three months ended
March 31,2009


2008General and administrative

$
72,645


$
43,789Clinical and regulatory


40,389



26,036Sales and marketing


17,258



14,050Stock-based compensation expense before income taxes

$
130,292


$
83,875




There were no common stock options that were exercised for the three months ended March 31, 2009 and 2008, respectively. As such, no income tax benefit was realized from stock option exercises during the three months ended March 31, 2009 and 2008. In accordance with SFAS No. 123(R), the Company presents excess tax benefits from the exercise
of stock options, if any, as financing cash flows rather than operating cash flows.





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OccuLogix, Inc.


The weighted-average fair value of stock options granted during the three months ended March 31, 2009 was $1.99. No options were issued during the three months ended March 31, 2008. The estimated fair value was determined using the Black-Scholes option-pricing model with the following weighted-average assumptions:




Three months ended
March 31,2009

2008Volatility


109
%
n.a.Expected life of options

4.83 years

n.a.Risk-free interest rate


1.82
%
n.a.Dividend yield


0
%
n.a.





The Company’s computation of expected volatility for the three months ended March 31, 2009 was based on the Company’s historical stock prices since its initial public offering in December 2004. The Company’s computation of expected life was estimated using the remaining useful life of the options. 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. If options are granted in the future, the Company’s computation of expected life will be based on either one of the following: a modeling or simulating exercise behavior based on a variety of stock price paths, estimating the expected term based on the period that previous options were outstanding, or an estimated term based on the expected terms of options granted by other similar
companies and other similarly structured awards.




A summary of the option transactions during the three months ended March 31, 2009 is set forth below:





Number of options outstanding


Weighted average exercise price


Weighted average remaining contractual life (years)


Aggregate intrinsic valueOutstanding, December 31, 2008


2,278,483


$
4.95



8.41


$
522,547Granted


159,000



1.99



9.92Exercised


—



—



—Forfeited


7,397



—



—Outstanding,  March 31, 2009


2,430,086



4.69



8.36



592,776Vested or expected to vest March 31, 2009


1,877,915



5.06



8.21



592,776Exercisable, March 31, 2009


1,848,266


$
6.18



9.10


$
592,776





The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (i.e., the difference between the Company’s closing stock price on the last trading day of March 31, 2009 of $2.15 and the exercise price, multiplied by the number of shares that would have been received by the option holders if the options
had been exercised on March 31, 2009.  As of March 31, 2009, $2,255,920 of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted average period of 3.15 years.




(e)  Warrants




On February 6, 2007, pursuant to the Securities Purchase Agreement 2007 between the Company and certain institutional investors, the Company issued warrants to these investors (the “Warrants”).  The Warrants are five-year warrants exercisable into an aggregate of 106,838 shares of the Company's common stock at $46.25
per common share.  On February 6, 2007, the Company also issued the warrants to Cowen and Company, LLC in partial payment of the placement fee payable for the services it had rendered as the placement agent in connection with the private placement of the Shares and the Warrants pursuant to the Securities Purchase Agreement 2007 (the “Cowan Warrant”).  The Cowen Warrant is a five-year warrant exercisable into an aggregate of 3,740 shares of the Company's common stock.  The
per share exercise price of the Cowen Warrants is $46.25, and the Cowen Warrants became exercisable on August 6, 2007.





The Company accounts for the Warrants and the Cowen Warrant in accordance with the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", along with related interpretation EITF No. 00-19, "Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock".  SFAS No. 133 requires every derivative instrument within its scope (including certain derivative instruments embedded in other contracts) to be recorded on the balance sheet as either an asset or liability measured at its fair value, with changes in the derivative's fair value recognized currently in earnings unless specific hedge accounting criteria are met.  Based on the provisions
of EITF No. 00-19, the Company determined that the Warrants and the Cowen Warrant do not meet the criteria for classification as equity.  Accordingly, the Company has classified the Warrants and the Cowen Warrant as a current liability at December 31, 2007 and 2008, respectively.





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OccuLogix, Inc.


The estimated fair value of the Warrants and the Cowen Warrant as of March 31, 2009 was determined using the Black-Scholes option-pricing model with the following weighted average assumptions:




Volatility


114
%Expected life of Warrants

2.83 yearsRisk-free interest rate


1.09
%Dividend yield


0
%





The Company initially allocated the total proceeds received, pursuant to the Securities Purchase Agreement, to the Shares and the Warrants based on their relative fair values. This resulted in an allocation of $2,052,578 to obligations under warrants, which includes the fair value of the Cowen Warrant of $97,222.




In addition, SFAS No. 133 requires the Company to record the outstanding warrants at fair value at the end of each reporting period, resulting in an adjustment to the recorded liability of the derivative, with any gain or loss recorded in earnings of the applicable reporting period. The Company, therefore, estimated the fair value of the Warrants
and the Cowen Warrant as at March 31, 2009 and determined the aggregate fair value to be $35,971, an decrease of approximately $21,695 over the measurement of the aggregate fair value of the Warrants and the Cowen Warrant on December 31, 2008.  The change in the fair value of the Warrants for the three months ended March 31, 2008 was $ 0.





Accordingly, the Company recognized a gain of $21,695 in its consolidated statement of operations for the three months ended March 31, 2009 which reflects the decrease in the fair value of the warrants at March 31, 2009 compared to December 31, 2008.




A summary of the Warrants issued during the three months ended March 31, 2009 and the total number of warrants outstanding as of that date are set forth below:




Number of warrants outstanding


Weighted average exercise priceOutstanding, December 31, 2008


110,578


$
46.25Granted


—



—Forfeited


—



—Outstanding, March 31, 2009


110,578


$
46.25





8.
LOSS PER SHARE




Loss per share, basic and diluted, is computed using the treasury method. Potentially dilutive shares have not been used in the calculation of loss per share as their inclusion would be anti-dilutive.




The following are potentially dilutive securities which have not been used in the calculation of diluted loss per share as they are anti-dilutive:





Three months ended March 31,2009


2008Stock options


2,430,086



170,225Warrants


110,578



110,578Total


2,540,664



280,803





9.
RELATED PARTY TRANSACTIONS




The following are the Company’s related party transactions:




TLC Vision


TLC Vision Corporation held a 7.68% ownership interest in the Company, on an issued and outstanding basis, on March 31, 2009 and December 31, 2008. TLC provided computer and administrative support to the Company in the three months ended March 31, 2009 and 2008, respectively, for which the Company recorded expense of $7,635 and $45,193, respectively.





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OccuLogix, Inc.


The Company reported amounts due to TLC Vision Corporation as amounts Due to Shareholders of $27,687 and $23,152 for the three months ended March 31, 2009 and the year ended December 31, 2008, respectively. The balance due from TLC Vision is related to computer and administrative support provided by TLC Vision. All amounts have been expensed
during the three months ended March 31, 2009 and 2008 and included in general and administrative expenses.





Other




Marchant, a firm beneficially owned as to approximately 32% by Mr. Elias Vamvakas, the Chairman, Chief Executive Officer and Secretary of the Company and members of his family, introduced the Company to the lenders of the (i) $3,000,000 aggregate principal amount Original Bridge Loan that the Company secured and announced on February 19, 2008;
(ii) the $300,000 aggregate principal amount Additional Bridge Loan I secured and announced on May 5, 2008; and (iii) the $3,403,500 aggregate principal amount Additional Bridge Loan II secured and announced on July 28, 2008.  The Company also has retained Marchant in connection with the proposed private placement of $2,173,000 of OccuLogix's common stock, announced by the Company on July 28, 2008, for which Marchant was paid $750,000 representing approximately 17% of the gross aggregate proceeds of
such private placement and bridge loans by Canadian investors.  Marchant has been paid $268,800 in cash and $481,200 in the form of equity securities of the Company.  As $570,000 of this balance was payable only upon the successful completion of the private placement, this amount was recorded as an offset to proceeds received.  The remaining $180,000 was paid in conjunction with the bridge loans and was recorded as finance costs.





On January 25, 2007, the Company entered into a consulting agreement with Dr. Michael Lemp, a former member of the board of OcuSense, Inc., for the purpose of procuring consulting services as OcuSense's Chief Medical Officer.  Dr. Lemp is entitled to $100,000 per annum to be paid at the end of each month and a $99 monthly expense
reimbursement stipend.  Dr. Lemp will be available to OcuSense on an average of 20 hours a week or 1,000 hours per year for which the Company recorded an expense of $25,297 and $25,297 for the three months ended March 31, 2009 and 2008, respectively.  There were no outstanding balances due at either March 31, 2009 or 2008.




10.
INCOME TAXES




The Company records tax benefits related to tax losses as deferred income tax assets to offset deferred income tax liabilities arising from its intangible assets.





The Company reported a recovery of income taxes of $668,881 and $619,480 for the three months ended March 31, 2009 and 2008, respectively of which $547,529 and $490,526 represented deferred tax assets reported for losses incurred in the three months ended March 31, 2009 and 2008, respectively, and $121,352 and $128,954 represented amortization
of deferred tax liabilities in the three months ended March 31, 2009 and 2008, respectively.




The October 6, 2008 closing of the private investment by certain investors, the acquisition of the remaining ownership interest in TearLab, Inc. and the conversion of the bridge loans combined to result in a change of control for tax purposes causing Section 382 and 383 restrictions on the use of tax losses to apply.  Utilization
of the net operating loss and capital loss carryforwards will be subject to a substantial annual limitation under Section 382 and 383 of the Internal Revenue Code of 1986, and similar state provisions due to ownership change limitations that have occurred. These ownership changes will limit the amount of net operating loss and capital loss carryforwards that can be utilized to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382 and 383, 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. Such limitations will result in approximately $42.3 million of tax benefits related to net operating loss and capital loss carryforwards that will expire unused. Accordingly, the related net operating loss and capital loss carryforwards have been removed from deferred tax assets accompanied by a corresponding reduction of the valuation allowance. Due to the
existence of the valuation allowance, limitations created by future ownership changes, if any, related to our operations in the U.S. will not impact our effective tax rate.





At December 31, 2008, we had federal net operating loss carryforwards of approximately $80.8 million, of which $60.3 million will expire due to the 382 limitation, and California net operating loss carryforwards of approximately $9.4 million, of which $8.8 million will expire due to 382 limitation. The federal net operating loss carryforwards
begin to expire in 2012, and the California net operating loss carryforwards begin to expire in 2015.




On January 1, 2007, the Company adopted the provisions of FIN No. 48, "Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109".  FIN No. 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements.  Under FIN No. 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.  The tax benefits recognized in the consolidated financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being
realized upon ultimate settlement.  FIN No. 48 also provides guidance on derecognition, classification, interest and penalties on income taxes and accounting in interim periods and requires increased disclosure.





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OccuLogix, Inc.


As a result of the implementation of the provisions of FIN No. 48, the Company recognized a reduction to the January 1, 2007 deferred tax liability balance in the amount of $4.6 million with a corresponding reduction to accumulated deficit.




As of January 1, 2007, the Company had unrecognized tax benefits of $24.8 million which, if recognized, would favorably affect the Company’s effective tax rate.




When applicable, the Company recognizes accrued interest and penalties related to unrecognized tax benefits as other expense in its consolidated statements of operations, which is consistent with the recognition of these items in prior reporting periods.  As of January 1, 2007, the Company did not have any liability for the payment
of interest and penalties.




The Company does not expect a significant change in the amount of its unrecognized tax benefits within the next 12 months.  Therefore, it is not expected that the change in the Company’s unrecognized tax benefits will have a significant impact on the Company’s results of operations or financial position.




All of the federal income tax returns for the Company and its subsidiaries remain open since their respective dates of incorporation due to the existence of net operating losses.  The Company and its subsidiaries have not been, nor are they currently, under examination by the Internal Revenue Service or the Canada Revenue Agency.





State and provincial income tax returns are generally subject to examination for a period of between three and five years after their filing.  However, due to the existence of net operating losses, all state income tax returns of the Company and its subsidiaries since their respective dates of incorporation are subject to re-assessment.  The
state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states.  The Company and its subsidiaries have not been, nor are they currently, under examination by any state tax authority.





11.
PREPAID EXPENSES





March 31,
2009


December 31,
2008Prepaid insurance

$
169,240


$
236,369Deferred royalty costs


43,500



43,500Prepaid regulatory fees


32,377



6,424Other fees and services


33,248



29,765$
278,365


$
316,058





12.
ACCRUED LIABILITIES





March 31,
2009


December 31,
2008Due to professionals

$
196,466


$
274,206Due to clinical trial sites


118,901



120,247Due to clinical trial specialists


67,734



104,133Product development costs


40,322



96,359Legal settlement payment


110,000



125,000Corporate compliance


134,290



102,907Obligation to repay advances received


99,546



127,301Miscellaneous


222,890



251,640$
990,149


$
1,201,793





13.
NON-CONTROLLING INTEREST





The adoption of SFAS 160 requires the reclassification of amounts previously attributable to minority interest (now referred to as non-controlling interest) to a separate component of Shareholders’ Equity. Additionally, net income attributable to non-controlling interests is shown separately from net income in the consolidated statements
of income. This reclassification had no effect on our previously reported financial position or results of operations.





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OccuLogix, Inc.


On October 6, 2008, the Company purchased that portion of the non-controlling shareholders ownership interest in TearLab, Inc. that it did not previously own. The following table reconciles equity attributable to non-controlling interest.





Three months ended March 312009


2008Non-controlling interest at the beginning of  period

$
—


$
4,953,960Non-controlling share of loss from operations in the period


—



(207,535
)Fair value of stock-based compensation


—



45,751Investment to acquire minority interest


—



—Non-controlling interest at the end of period

$
—


$
4,792,176





14.
CONSOLIDATED STATEMENTS OF CASH FLOWS




The net change in non-cash working capital balances related to operations consists of the following:




Three months ended
March 31,2009


2008Amounts receivable, net

$
75,936


$
212,721Inventory


27,246



(41,213
)Prepaid expenses


37,693



35,825Other current assets


(4,738
)


(2,892
)Accounts payable


21,699



(828,795
)Accrued liabilities


(211,644
)


59,945Deferred revenue


(15,048
)


106,700Due to stockholders


4,635



41,238Short term liabilities


—



40,438$
(64,221
)

$
(376,033
)





The following table lists those items that have been excluded from the consolidated statements of cash flows as they relate to non-cash transactions and additional cash flow information:





Three months ended
March 31,2009


2008Non-cash financing activities$
—


$
—Additional cash flow informationCash paid for taxes


—



—Interest paid

$
—


$
—





15.
FINANCIAL INSTRUMENTS





Currency risk


The Company's activities which result in exposure to fluctuations in foreign currency exchange rates consist of the purchase of equipment from suppliers billing in foreign currencies.  The Company does not use derivative financial instruments to reduce its currency risk.





Credit risk


The Company's financial instruments that are exposed to concentration of credit risk consist primarily of cash and cash equivalents and amounts receivable.  The Company maintains its accounts for cash with large low credit risk financial institutions in the United States and Canada in order to reduce its exposure.





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OccuLogix, Inc.


During the first quarter of fiscal 2009, the Company derived 100% of its revenue from the sale of the new TearLab product.  33% of this revenue from the TearLab product was from a single distributor while another distributor represented 22% of the revenue from the TearLab product.  The Company has recognized the risk and
is actively pursuing additional distributors in Europe, Asia and South America to broaden its customer base and reduce exposure.





16.
FAIR VALUE MEASUREMENTS





The Company accounts for the methods of measuring fair value in accordance with the provisions of Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS No. 157). As defined in SFAS No. 157, fair value is based on the prices that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, SFAS No. 157 establishes a three-tier fair value hierarchy that prioritizes the inputs used to measure fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly
observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions. At March 31, 2009, the Company has a liability for warrants to purchase 110,578 shares of common stock that are valued at $35,971 under the level 3 hierarchy.





17.
SEGMENTED INFORMATION





The Company had two reportable segments retina and point-of-care. The retina segment was in the business of commercializing the RHEOTM System which was used to perform the RheopheresisTM procedure, a procedure that selectively removes molecules from plasma, which is designed to treat Dry AMD. On November 1, 2007, the Company announced
an indefinite suspension of the RHEOTM System clinical development program for Dry AMD. That decision was made following a comprehensive review of the respective costs and development timelines associated with the products in the Company’s portfolio.  In the period subsequent to that decision, the Company has incurred costs to wind up RHEOTM System related outstanding clinical trials. As a result of the suspension of RHEO-AMD activities and the sale of the Company’s investment
in SOLX, the Company’s primary business segment is the TearLabTM business.





The point-of-care segment is made up of the TearLabTM business which is currently developing technologies that enable eyecare practitioners to test, at the point-of-care, for highly sensitive and specific biomarkers in tears using nanoliters of tear film.





Inter-segment sales and transfers are minimal.




The Company’s reportable units are strategic business units that offer different products and services. They are managed separately, because each business unit requires different technology and marketing strategies. The business units’ managements were acquired or developed individually. OcuSense’s management was retained
at the time of acquisition.





The Company’s business units are as follows:





Three months ended March 31, 2009Retina


Point-of-care


TotalRevenue

$
—


$
243,258


$
243,258Expenses:Cost of goods sold


—



119,199



119,199Operating


(2,193
)


1,504,663



1,502,470Depreciation and amortization


—



330,749



330,749Loss from continuing operations


2,193



(1,711,353
)


(1,709,160
)Interest income


—



1,830



1,830Changes in fair value of warrant obligation


—



21,695



21,695Gain (Loss) on short-term investment


—



—



—Beneficial conversion on bridge loan shares issued


—



—



—Other income (expense), net


—



14,163



14,163Recovery of income taxes


—



668,881



668,881Net loss attributable to Occulogix, Inc.

$
2,193


$
(1,004,784
)

$
(1,002,591
)Total assets

$
11,822


$
11,630,023


$
11,641,845





19
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OccuLogix, Inc.


Three months ended March 31, 2008Retina


Point-of-care


TotalRevenue

$
7,200


$
—


$
7,200Expenses:Cost of goods sold


24,556



—



24,556Operating


1,291,338



1,089,414



2,380,752Depreciation and amortization


9,778



335,060



344,838Loss from continuing operations


(1,318,472
)


(1,424,474
)


(2,742,946
)Interest income


35,282



(4,994
)


30,288Interest expense


(40,438
)


—



(40,438
)Loss on short-term investment


(327,486
)


—



(327,486
)Other income (expense), net


(24,564
)


1,056



(23,508
)Recovery of income taxes


—



619,480



619,480Net loss


(1,675,678
)


(808,932
)


(2,484,610
)Net loss attributable to non-controlling interest, net of tax


—



207,535



207,535Net loss attributable Occulogix, Inc.


(1,675,678
)


(601,397
)


(2,277,075
)Total assets

$
1,759,222


$
12,849,496


$
14,608,718




ITEM2.
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 restated consolidated financial statements and related notes, included in Item 1 of this Report.  Unless otherwise specified, all dollar amounts are U.S. dollars.





Overview





We are an in vitro diagnostic company that has developed a proprietary tear testing platform, the TearLabTM Osmolarity System.  The TearLab test measures tear film osmolarity for diagnosis of Dry Eye Disease, or 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.  We refer to the results of our TearLab testing platform as our Point-of-Care business division in the discussion of our operating results below.  Commercializing our Point-of-Care tear testing platform is now the focus of our business.





In the fourth quarter of 2008, we began to generate revenue from the sales of the TearLab point-of-care testing platform in Europe.  In October 2008, our testing platform received CE mark approval which allowed us to begin sales efforts in the European Union and other countries recognizing the CE mark.  We subsequently
entered into exclusive distribution agreements with distributors in 14 countries globally.





We have filed a 510(k) with the United States Food and Drug Administration, or FDA.  The 510(k) will allow us to market our TearLab Osmolarity System to those reference and physician operated laboratories with certifications under the regulations of the Clinical Laboratory Improvement Amendments, or CLIA, allowing them to perform
moderate and high complexity tests.  Considering that most of our target customers are eye care practitioners without such certifications, we intend to seek a CLIA waiver from the FDA for the TearLab Osmolarity System.  We anticipate receiving the CLIA waiver during the latter half of 2009.  A CLIA waiver would greatly reduce the regulatory compliance for our future customers and permit them to perform the TearLab Osmolarity test in their offices.  If we receive a CLIA
waiver, we will be able to market our product to the approximately 50,000 eye care practitioners that do not operate with CLIA certifications allowing them to perform moderate and high complexity tests.





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OccuLogix, Inc.


The Company’s strategy is to educate eye care practitioners everywhere that the TearLab Osmolarity System provides objective evidence of Hyperosmolarity, enabling them to effectively diagnose their patients with DED. The Company is partnering with key opinion leaders globally to generate local country data to increase awareness and educate
eye care professionals.  The Company will be presenting the results of the clinical trials at conferences and trade shows and will publish the data in peer-reviewed journals.





Management believes that the ability to generate increasing sales will require both obtaining the previously discussed 510(k) and CLIA waiver approvals from the FDA as well as the implementing a successful awareness campaign. Until both have been achieved, sales growth is expected to be modest.





Our success is highly dependent on our ability to increase sales of our testing platform in European and other countries recognizing the CE mark and on our receipt of the 510(k) approval and a CLIA waiver will enable us to begin full commercialization efforts in the United States.  Meeting either of these objectives requires that
we raise additional capital to fund our operations.  We have sufficient cash to fund our operations at current levels through approximately early June 2009.  We are actively evaluating and pursuing various financing possibilities at this time





Restructuring and Other





In 2006, due to unfavorable product trial results and other factors we began to restructure our operations, which were then focused on the commercialization of our RHEOTM System for treatment for age-related eye disease (our Retina business division), the SOLX Glaucoma System glaucoma treatment platform and the TearLab, Inc. (formerly
known as OcuSense, Inc.) testing platform.  During 2007, we indefinitely suspended our RHEO System clinical development program and disposed of our SOLX subsidiary.  We recognized restructuring charges of $2.4 million, $1.3 million and $820,000 in 2008, 2007 and 2006, respectively, primarily resulting from the cost of severance and benefits paid to terminated employees.  Also during 2007, we recognized an impairment of an intangible asset related to RHEO distribution agreements of
$20.9 million.





We do not expect to realize any revenue related to RHEO in the future.  The operating results of SOLX, referred to as our Glaucoma business division, are reflected as discontinued operations for all periods prior to its disposition in December 2007.


During 2008, we completed a number of restructuring transactions, collectively referred to as the Restructuring Transactions, including a private placement, or PIPE, the receipt and conversion of bridge loans, or the Bridge Loans, the acquisition of the minority shareholdings of TearLab, Inc.
(formerly known as OcuSense, Inc.) that we did not already own, and a reverse stock split of 25:1.  The successful completion of these Restructuring Transactions enabled us to focus our ongoing efforts on the commercialization and continued development of the TearLab testing platform.





Recent Developments





On January 16, 2009, we announced that we would begin to conduct business as TearLab Corporation.  We also changed our ticker symbols on the NASDAQ and Toronto Stock Exchange to TEAR and TLB, respectively.  We anticipate that the official name change will be effective after stockholder approval is received.




On February 11, 2009, we filed with the Securities and Exchange Commission, or the SEC, a prospectus as part of a registration statement on Form S-3 using a "shelf" registration process.  Under the shelf process, if the registration statement is declared effective by the SEC, we may from time to time offer or sell any combination
of common stock, preferred stock, debt securities, depository shares or warrants in one or more offering up to a total dollar value of $30,000,000.  The registration statement has not been declared effective by the SEC.





RESULTS OF OPERATIONS





Revenue, Cost of Sales and Gross Margin




Three Months Ended March 31,
(in thousands)2009


2008


Change$






$TearLab revenue

$
243


$
—


$
243Retina revenue


—



7



(7
)TearLab – cost of sales


119



—



119Retina cost of sales


—



24



(24
)TearLab gross margin


124



—



124Percentage of TearLab revenue


51
%


—



51
%Retina gross margin (loss)


—



(17
)


17Percentage of retina revenue


—



N/M
*


N/M
*Total gross margin (loss)

$
124


$
(17
)

$
141*N/M – Not meaningful





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Revenues




Retina Revenue




The key components of the RHEOTM System consist of (1) a Rheofilter filter, a Plasmaflo filter and tubing which, together, comprise a disposable treatment set and (2) an Octo Nova pump.





The Company owned consignment inventory of 400 disposable treatment sets held by Macumed AG, a company based in Switzerland. During the three months ended March 31, 2008, Macumed consumed a total of 48 treatment sets, at a negotiated price of $150 per treatment set, resulting in revenue of $7,200.





There was no revenue from retina sales in the three months ended March 31, 2009 as all RHEO System inventory had been sold or disposed of in 2008.





Point-of-Care


Point-of-Care revenue consists of sales of the TearLab Osmolarity System, which is a hand-held tear film test for the measurement of tear osmolarity, a quantitative and highly specific biomarker that has shown to correlate with DED.





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





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 eleven distributors for exclusive distribution of TearLab Osmolarity System
in the United Kingdom, the Republic of Ireland, Germany, Spain, Switzerland, France, Turkey, Belgium, Holland, Luxemburg and Italy.  We intend to expand our distribution network to include additional European, Asian and Latin American countries in the future.  The Company is supporting these distributors in local clinical trials and in providing them with the required guidance to understand the relationship between DED and osmolarity how to manage their patients with objective diagnostic data.
We recognized our first revenue from the sales of TearLab in October 2008 and recognized a total of $300,000 of revenue during the year ended December 31, 2008. The Company recognized revenue of $243,000 and $0 in the three months ended March 31, 2009 and 2008, respectively.





Retina Cost of Sales




Cost of sales includes costs of goods sold and royalty costs. Our cost of goods sold for the three months ended March 31, 2008 consists primarily of freight and shipping costs.





Cost of sales for the three months ended March 31, 2008 includes royalty fees of $25,000.  In 2007, all RHEO System inventory was written down to nil as a result of the decision to suspend all RHEOTM System-related activities.  Accordingly, there was no additional cost of sales recorded in the three months ended March
31, 2008.





Point-of-Care





Point-of-Care cost of sales includes costs of goods sold and royalty costs.  Our cost of goods sold consists primarily of costs for the manufacture of the TearLab test, including the costs we incur for the purchase of component parts from our suppliers, applicable freight and shipping costs, fees related to warehousing and logistics
inventory management.





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Retina Gross Margin




During the three months ended March 31, 2008, gross margin was a loss of $17,356, reflecting low sales, nil-value items sold and fixed royalty fees of $25,000.





There was no gross margin from retina sales in the three months ended March 31, 2009 as all RHEO System inventory had been sold or disposed of in 2008.





Point-of –Care Gross Margin





During the three months ended March 31, 2009, gross margin was $124,000 or 51% of revenue. There was no gross margin from point-of-care sales in the three months ended March 31, 2008 as the TearLab Osmolarity System did not receive CE mark approval until October 2008.





Operating Expenses





Three Months Ended March 31,
(in thousands)2009


2008


ChangeGeneral and administrative

$
1,287


$
1,526


$
(239
)Clinical and regulatory


332



1,023



(691
)Sales and marketing


214



177



37Operating expense

$
1,833


$
2,726


$
(893
)





General and Administrative Expenses





General and administrative expenses decreased by $239,000 or 16% during the three months ended March 31, 2009, as compared with the corresponding period in fiscal 2008, due to restructuring activities in 2008. Employee costs, other than stock-based compensation, decreased by $133,000 reflecting the impact of the restructuring activities in
2007 & 2008 reducing employee costs in 2009.  Public company costs decreased by $48,000 primarily due to reduced D&O insurance costs, administrative costs decreased by $50,000 reflecting the recovery of over-accrued franchise taxes in prior years and legal costs decreased by $55,000 primarily due to a legal settlement in 2008 for which a comparative cost did not occur in 2009.





These decreases were offset by an increase in stock-based compensation expense of $30,000 from $43,000 for the three months ended March 31, 2008 to $73,000 for the three months ended March 31, 2009 which reflects expense associated with new options issued post the 2008 restructuring transactions.





We are continuing to focus our efforts on controlling costs by reviewing and improving upon our existing business processes and cost structure.





Clinical, Regulatory and Research and Development Expenses




Total clinical and regulatory expenses decreased by $691,000 or 68% during the three months ended March 31, 2009, as compared with the corresponding prior year period. $139,000 of this decrease related to the indefinite suspension of our RHEOTM System clinical development program which included a decrease of $73,000 related to employee
costs incurred in 2008 not incurred in 2009 and $45,000 in fees for professional services incurred in 2008 but not in 2009. Clinical expenses for retina activity are significantly reduced in 2009 as final clinical trial closure expenses are being incurred..





Clinical, regulatory and research and development expenditures specific to the TearLab product for the three months ended March 31, 2009 and 2008 were $331,000 and $883,000, respectively. The decrease of $552,000 or 63% primarily reflects the maturing stage of TearLab technological development in that the development of the TearLab Osmolarity
System ended at the end of September 2008 and moved to a production or commercial focus.





In March 2008, we announced that TearLab had validated the prototype of the TearLabTM Osmolarity System and received company-wide certification to ISO 13485:2003. These achievements allowed the Company to move forward with clinical trials and attain the CE Mark
in Europe, in advance of commercialization but resulted in a reduced need for development activities..





Sales and Marketing Expense




Sales and marketing expenses increased by $37,000 or 21% during the three months ended March 31, 2009, as compared with the prior period in fiscal 2008. The increase in Tearlab marketing costs primarily reflects an increase in employee costs of $12,000 and travel costs of $22,000 as new distributors in Europe and Asia were being identified
and signed.





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The cornerstone of our sales and marketing strategy to date has been to increase awareness of our products among eye care professionals and, in particular, the key opinion leaders in the eye care professions. We assist key opinion in performing clinical trials to generate increased data to provide an increased understanding in the use of the
Tearlab Osmolarity System for diagnostic, treatment and monitoring of patients.  We are presently primarily focused on commercialization in Europe and developing plans to do the same in North America. We will continue to develop and execute our conference and podium strategy to ensure visibility and evidence-based positioning of the TearLabTM Osmolarity System among eye care professionals.





Other Income (Expense)





Three Months Ended March 31,
(in thousands)2009


2008


ChangeInterest income

$
2


$
30


$
(28
)Changes in fair value of warrant obligation


22



―



22Impairment of investments


―



(327
)


327Interest expense


―



(40
)


40Amortization of finance costs


―



(41
)


41Other


14



17



(3
)$
38


$
(361
)

$
399





Interest Income




Interest income consists of interest income earned in the current period and the corresponding prior period as a result of the Company’s cash and short-term investment position following the raising of capital and debt.  The decrease in interest income is indicative of the reduction in interest rates in the period from March
2008 to March 2009 and the reduced dollar amount of funds being invested.





Changes in Fair Value of Obligation under Warrants and Warrant Expense




On February 6, 2007, pursuant to the Securities Purchase Agreement between the Company and certain institutional investors, the Company issued five-year warrants exercisable into an aggregate of 106,838 shares of the Company’s common stock to these investors. On February 6, 2007, the Company also issued a five-year warrant exercisable
into an aggregate of 3,740 shares of the Company’s common stock to Cowen and Company, LLC in part payment of the placement fee payable to Cowen and Company, LLC for the services it had rendered as the placement agent in connection with the private placement of the Company’s shares of common stock and warrants. The per share exercise price of the warrants is $46.25, subject to adjustment, and the warrants became exercisable on August 6, 2007. All of the terms and conditions of the warrants issued to
Cowen and Company, LLC (other than the number of shares of the Company's common stock into which the warrant is exercisable) are identical to those of the warrants issued to the institutional investors. The Company accounts for the warrants in accordance with the provisions of SFAS No. 133 “ Accounting for derivative Instruments and Hedging Activities” along with related interpretation EITF 00-19 “Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” or  EITF 00-19.Based on the provisions of EITF 00-19, the Company determined that the warrants issued during the nine months ended September 30, 2007 do not meet the criteria for classification as equity. Accordingly, the Company has classified the warrants as a current liability as at September 30, 2007. The estimated fair
value was determined using the Black-Scholes option-pricing model. In addition, SFAS No. 133 requires the Company to record the outstanding warrants at fair value at the end of each reporting period resulting in an adjustment to the recorded liability of the derivative, with any gain or loss recorded in earnings of the applicable reporting period. The Company therefore estimated the fair value of the warrants as at March 31, 2009 and determined the aggregate fair value to be $35,971, a decrease of $21,695 from
the nominal value calculated as at December 31, 2008.





Impairment of Investments




As of March 31, 2009 and December 31, 2008, the Company had fully liquidated its prior investments in the aggregate principal amount of $1,900,000 consisting of investments in four separate asset-backed ARS, or ARS. As a result of liquidity issues experienced in the global credit and capital markets, the Company’s ARS experienced multiple
failed auctions. During 2008, prior to liquidating the ARS, the Company continued to earn and receive interest on these investments at the maximum contractual rate, but the estimated fair value of these ARS were no longer believed to approximate par value.





Although the Company continued to receive payment of interest earned on these securities, the Company did not previously know when it would be able to convert these investments into cash.  Accordingly, management had classified these investments as a non-current asset on its consolidated balance sheets as at December 31, 2007 and
at March 30, 2008 and June 30, 2008. In accordance with a settlement agreement among the New York Attorney General’s Office, the North American Securities Administrators Association and Credit Suisse, the financial institution through which the Company had purchased its ARS, subsequent to September 30, 2008, Credit Suisse purchased all of the Company’s ARS at the Company’s original cost of $1,900,000, plus accrued interest, when each of these securities came up for auction.





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The ARS investments are classified as Available for Sale under SFAS 115, “Accounting for Certain Investments in Debt and Equity” or SFAS 115 which states that where an impairment of an Available for Sale investment has been reported, this impairment can only be reversed when a recovery or gain of the amount reflected as an impairment
charge has been realized.At March 31, 2008, the Company had estimated the value of the ARS  $536,264 a decrease in value of $327,486 from the December 31, 2007 estimated value of $863,750. This decrease in value was reported as an expense in the three months ended March 31, 2008.  As the ARS were liquidated in late 2008, no similar expense was incurred in the three months ended March 31, 2009.





Interest Expense




On February 19, 2008, the Company announced that it had secured bridge loans in an aggregate principal amount of $3,000,000 (less transaction costs paid of approximately $180,000) from a number of private parties. The loan earned interest at a rate of 12% per annum and has a 180-day term initially, which subsequently was extended to 270 days.
The Company had pledged its shares of the capital stock of OcuSense as collateral for these bridge loans. Interest expense for the three months ended March 31, 2008 of $40,438, was due to the lenders.  No similar expense was incurred in the three months ended March 31, 2009.





Amortization of Finance Costs




Finance costs for the three months ended March 31, 2008 reflect amortization of a $180,000 fee paid to Marchant Securities Inc., or Marchant, a related party, for introducing the Company to the bridge loan lenders who participated in the February 19, 2008 bridge financing.  The finance costs were amortized over the initial 180 day
term of the bridge financing and resulted in an expense of $41,000 in the three months ended March 31, 2008. No similar expense was incurred in the three months ended March 31, 2009.




Other


Other income for the three months ended March 31, 2009 was $14,000 including a foreign exchange gain of $11,000 and a gain of $3,000 on the disposal of fixed assets.




Other income for the three months ended March 31, 2008 was $17,000 including a foreign exchange gain of $11,000.




Recovery of Income Taxes





Recovery of income taxes increased by $49,000 to $669,000 during the three months ended March 31, 2009, as compared with a recovery of $619,000 in the three months ended March 31, 2008. As a result of the completion of the reorganization transactions on October 6, 2008, TearLab tax filings could be consolidated with those of the Company’s.
Accordingly, income tax benefits were reported on losses incurred both by Occulogix and TearLab in the three months ended March 31, 2009 while in the three months ended March 31, 2008, only losses incurred by Tearlab were tax benefited.





To date, the Company has recognized income tax benefits in the aggregate amount of $2.7 million associated with the recognition of the deferred tax asset from the availability of net operating losses in the United States which may be utilized to reduce taxes in future years. The benefits associated with the balance of the net operating losses
are subject to a full valuation allowance since it is not more likely than not that these losses can not be utilized in future years. A portion of the Company’s net operating losses may, however, be subject to annual limitations as a result of the Company’s initial public offering and prior changes of control. Accordingly, until a formal analysis of the effect of the changes of control is performed, a portion of the income tax benefits recognized to date may be affected.





Recovery of income taxes for the three months ended March 31, 2009 and 2008 also includes the amortization of the deferred tax liability which was recorded based on the difference between the fair value of intangible assets acquired and their tax bases. The amounts recorded during the three months ended March 31, 2009 were $121,000, as compared
with amortization of $129,000 for the three months ended March 31, 2008. the difference representing the amortization of Sect. 382 losses previously benefited. The deferred tax recorded upon the acquisition of OcuSense of $5.2 million represents the difference between the fair value of the intangible assets acquired by the Company upon its acquisition of OcuSense and their respective tax bases. The deferred tax liability is being amortized over an average period of 10 years, the estimated weighted-average useful
life of the intangible assets.





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OccuLogix, Inc.


Non-controlling Interest




Minority stockholder’s share of net losses from Tearlab (formerly OcuSense) operations for the three months ended March 31, 2008 was $208,000. As a result of the Company’s acquisition of the remaining minority shareholders’ interest in TearLab on October 6, 2008, no similar amount was applicable to the three months ended
March 31, 2009.





Liquidity and capital resources


( in thousands)





March 31,


December 31,2009


2008


ChangeCash and cash equivalents

$
1,256


$
2,565


$
1,309Percentage of total assets


11%



19%Working capital

$
327


$
1,550


$
(1,223
)





Financial Condition





Management believes that our cash, cash equivalents and short-term investments will be sufficient to meet our operating activities and other demands until approximately June 2009.





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





·
the cost and results of continuing development of TearLab, Inc.'s TearLab Osmolarity System;





·
the cost and results, and the rate of progress, of the clinical trials of the TearLab Osmolarity System that will be required to support TearLab, Inc.'s application to obtain a CLIA waiver from the FDA;





·
TearLab, Inc.'s ability to obtain 510(k) approval and a CLIA waiver from the FDA for the TearLab Osmolarity System and the timing of such approval, if any;





·
whether government and third-party payers agree to reimburse the TearLab Osmolarity System;





·
the costs and timing of building the infrastructure to market and sell the TearLab Osmolarity System;





·
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 we cannot begin commercialization of our product in the United States until we receive 510(k) approval from the FDA.  At this time, we do not know when we can expect to begin to generate revenues from the TearLab Osmolarity System in the United States.





We will need additional capital in approximately June 2009, and our prospects for obtaining that capital are uncertain.  Additional capital may not be available on terms favorable to us, or at all.  In addition, future financings could result in significant dilution of existing stockholders.  However, unless we
succeed in raising additional capital, we anticipate that we will be unable to continue our operations beyond approximately June 2009.





Ongoing Sources and Uses of Cash





We anticipate that our cash and cash equivalents will only be sufficient to sustain our operations until approximately June 2009.





We are actively evaluating and pursuing various financing possibilities at this time.  We typically expect our primary sources of cash will be related to the collection of accounts receivable and, to a lesser degree, interest income on our cash and investment balances.  Our accounts receivable collections will be impacted
by our ability to grow our point-of-care revenue, any bad debts we experience and our overall collection rates on the related accounts receivable.





We expect our primary uses of cash will be to fund our operating expenses and pursuing and maintaining our patents and trademarks.  In addition, dependent on available funds, we expect to expend cash to improve production capability of the TearLab test, to further improve the performance of the TearLab test, and to pursue additional
applications for the lab-on-a-chip technology.





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Management believes the Company’s existing cash will only be sufficient to cover its operating and other cash demands only until the beginning of June 2009, if it does not successfully complete the first stage of its current fund raising activities by the beginning of June 2009.




Changes in Cash Flows





Three months ended March 31,
(in thousands)2009


2008


ChangeCash used in operating activities

$
(1,300
)

$
(2,683
)

$
1,383Cash provided (used) in investing activities


(9
)


(43
)


34Cash provided by financing activities


―



2,820



(2,820
)Net (decrease) increase in cash and cash equivalents  period

$
(1,309
)

$
94


$
(1,403
)





Cash Used in Operating Activities




Net cash used to fund our operating activities during the three months ended March 31, 2009 was $1,300,000.  Net loss during the three-month period was $1,003,000. The non-cash sources which comprise a portion of the net loss during that period consist primarily of the amortization of intangible assets, fixed assets, patents and
trademarks, the provision for obligation under warrants, the impairment of investments, stock-based compensation and prepaid finance charges in the aggregate total of $439,000. Additional non-cash amounts which comprise a portion of the net loss during that period include deferred tax charges of ($669,000) and gain on disposal of fixed assets of $3,000.





The net change in non-cash working capital balances related to operations for the three months ended March 31, 2009 and 2008 consists of the following:





Cash provided (used)

Three months ended
March 31,
(in thousands)2009


2008$


$Amounts receivable, net


76



213Inventory


27



(41
)Prepaid expenses


38



36Other current assets


(5
)


(3
)Accounts payable


22



(829
)Accrued liabilities


(212
)


60Deferred revenue


(15
)


107Due to stockholders


5



41Short term liabilities


―



40(64
)


(376
)





·
Amounts receivable decrease is due to receipts of TearLab distributor fees and recovery of amounts due for sales taxes.


·
The reduction in inventory reflects sales of the TearLabTMOsmolarity System in excess of production inventory acquired.


·
The decline in prepaid expenses results primarily from the amortization of prepaid insurance costs


·
Other current assets represent and increase in deposits for leased office space.


·
Accounts payable slightly increased due primarily to the timing of payment cycles in the monthly accounting process.


·
Accrued liabilities decreased primarily due to the payment of annual audit fees and payment of accrued Tearlab related royalty liabilities.


·
Decrease in deferred revenue reflects the shipment of TearLab products for which customers had paid in advance.


·
Decrease in amounts due to stockholders reflects reduced utilization of TLC Vision corporation for employee benefits.





Cash Used in Investing Activities




Net cash used in investing activities for the three months ended March 31, 2009 was $9,000. Cash used in investing activities during the period consists of $6,000 used to acquire fixed assets net of proceeds of $3,000 on sale of fixed assets and $7,000 used for capitalizable patents and trademark costs.





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Net cash provided by investing activities for the three months ended March 31, 2008 was $43,000. Cash used in investing activities during the period consisted of cash in the amount of $9,000 used to acquire fixed assets and cash in the amount of $34,000 used for capitalizable patents and trademark costs.





Cash Provided by Financing Activities




During the first three months ended March 31, 2008, the Company secured bridge financing in a principal amount of $3,000,000, net of costs of $180,000. The debt was prepaid in full on October 6, 2008. In the three months ended march 31, 2009, there were no financing activities.





RECENT ACCOUNTING PRONOUNCEMENTS





For information on the recent accounting pronouncements impacting our business, see Note 2 of the Notes to the unaudited Consolidated Financial Statements for the three months ended March 31, 2009 included in Item 1.





ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Currency Fluctuations and Exchange Risk


All of our sales are in U.S. dollars, while a portion of our expenses are in Canadian dollars and Australian dollars.  We cannot predict any future trends in the exchange rate of the Canadian dollar or Australian dollar against the U.S. dollar.  Any strengthening of the Canadian dollar or Australian dollar 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 both Canadian dollars and Australian dollars to meet short term operational operating requirements.  Based on the balances in the Canadian dollar and Australian dollar denominated bank accounts at March 31, 2009, hypothetical increases of $0.01 in the value of the Canadian dollar and the Australian dollar in relation to the U.S. dollar
would not have a material impact on the results of our operations.  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


The primary objective of our investment activity is to preserve principal while maximizing interest income we receive from our investments, without increasing risk.  We believe this will minimize our market risk.  We do not use interest rate derivative transactions to manage our interest rate risk.  We reduce
our exposure to interest rate risk by investing in investment grade securities or money market accounts.  Declines in interest rates over an extended period of time will reduce our interest income while an increase over an extended period of time will increase our interest income.  A reduction of interest rate by 100 basis points over the three months ended March 31, 2009 would reduce interest income by under $15,000 annually.





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OccuLogix, Inc.


ITEM 4.     CONTROLS AND PROCEDURES





(a)
Disclosure Controls and Procedures.


The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time reports specified in the SEC’s rules
and forms and that such information is accumulated and communicated to the Company’s management, including our principal executive officer, or the CEO, and our principal financial officer, or the CFO, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating 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 three-month period ended March 31, 2009, 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 Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the
Exchange Act) . Based on that evaluation, our chief executive officer and chief financial officer concluded that, as of the end of that fiscal period, the Company’s disclosure controls and procedures are effective to provide reasonable assurance of achieving the desired control objectives.





(b)
Changes in Internal Control over Financial Reporting.


During the three-month period ended March 31, 2009, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.





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PART II.
OTHER INFORMATION





ITEM1.
LEGAL PROCEEDINGS





We are not aware of any material litigation involving us that is outstanding, threatened or pending.





ITEM 1A.
RISK FACTORS





Risks Relating 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 receive regulatory approval or be successfully commercialized in the United States.




The TearLab Osmolarity System is currently our only product.  Our product is currently sold outside of the United States pursuant to CE mark approval; however, we have not received regulatory approval to sell our product in the United States.  We have filed a 510(k) clearance, and we intend to seek a CLIA waiver, from
the U.S. Food and Drug Administration, or the FDA.  Even if the TearLab Osmolarity System receives regulatory approval in the United States, it may never be successfully commercialized.  If the TearLab Osmolarity System does not receive regulatory approval or is not successfully commercialized, we may not be able to generate revenue, become profitable or continue our operations.  Any failure of the TearLab Osmolarity System to receive regulatory approval or 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.  Our near-term success is highly dependent on increasing our international sales.  If we do not receive a 510(k) certification from the FDA it may negatively affect our international sales efforts.  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.  These foreign markets include Turkey, Spain, Italy and France.  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.




Our financial condition and history of losses have caused our auditors to express doubt 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 will continue as a going concern.  However, we have sustained substantial losses for each of the years ended December 31, 2005, 2006, 2007 and 2008.  Our net working capital balance at December 31, 2008 was $1,549,581, which represents a $2,546,443
increase from our working capital deficiency of $996,862 at December 31, 2007.  Our net working capital balance at March 31, 2009 was $326,714, which represents a $1,222,867 decrease from our working capital at December 31, 2008. As a result of our history of losses and current financial condition, there is substantial doubt about our ability to continue as a going concern.




On October 6, 2008, we completed a private placement of 869,200 shares of our common stock for gross aggregate proceeds of $2,173,000, pre-paid in full our $6,703,500 aggregate principal amount bridge loan plus outstanding accrued interest by issuing to the lenders thereof an aggregate of 3,304,511 shares of our common stock, at a per share
price of $2.125, and paid $481,200 of the commission remaining owing for placement agency services by issuing aggregate of 192,480 shares of our common stock.  As a result of these transactions, and having received the principal of, and the accrued interest on, our asset-backed auction rate securities, we believe that our cash and cash equivalents will be sufficient to meet our operating activities and other demands only until approximately June 2009.





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.




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.  Our net losses for the fiscal years ended December 31, 2004, 2005, 2006, 2007 and 2008 were $21.8 million, $162.8 million, $82.2 million, $69.8 million and $9.4 million, respectively.  The losses in 2005, 2006 and 2007 include a charge for impairment of goodwill
of $147.5 million, $65.9 million and $14.4 million, respectively.  As of December 31, 2008, we had an accumulated deficit of $367.7 million.  Our losses have resulted primarily from expenses incurred in research and development of our product candidates from our discontinued businesses.  We do not know when or if we will receive regulatory approval for the TearLab Osmolarity System or successfully commercialize it in the United States.  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 of our product candidate to obtain regulatory approval and any failure to become and remain profitable would adversely affect the price of our common stock and our ability to raise capital and continue operations.





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We may not be able to raise the capital necessary to fund our operations.




Since inception, we have funded our operations through early private placements of our equity and debt securities, early stage revenues, a successful initial public offering, a private placement of shares of our common stock and warrants and, in 2008, bridge financing and another private placement of our common stock.  We will need
additional capital in approximately June 2009, and our prospects for obtaining it are uncertain.  Our most recent capital-raising efforts, which culminated in the bridge financing and private placement of 2008, took an amount of time, consumed our resources and required an effort on the part of management that was disproportionately large, relative to the total amount of the capital raise.




Additional capital may not be available on terms favorable to us, or at all.  If financing is available, it may be on terms that adversely affect the interest of our existing stockholders.  In addition, future financings could result in significant dilution of existing stockholders and adversely affect the economic interests
of existing stockholders.  However, unless we succeed in raising additional capital, we anticipate that we will be unable to continue our operations beyond approximately June 2009.  Our financial condition and history of losses have caused our auditors to express doubt as to whether we will be able to continue as a going concern.





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




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




·
Our clinical trials may not succeed.  Clinical testing is expensive and can take longer than originally anticipated.  The outcomes of clinical trials are uncertain, and failure can occur at any stage of the testing.  We could encounter unexpected problems, which could result in a delay in the submission of our application for the sought-after
CLIA waiver from the FDA or prevent its submission altogether.





·
We may not receive either the 510(k) clearance or the CLIA waiver for the TearLab Osmolarity System from the FDA, in which case our ability to market the TearLab Osmolarity System in the United States will be hindered severely, if not eliminated altogether.





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





·
Even if we succeed in obtaining the sought-after FDA approvals, we may be unable to commercialize the TearLab Osmolarity System successfully in the United States.  Successful commercialization will depend on a number of factors, including, among other things, achieving widespread acceptance of the TearLab Osmolarity System among physicians, establishing adequate
sales and marketing capabilities, addressing competition effectively, the ability to obtain and enforce patents to protect proprietary rights from use by would-be competitors, key personnel retention and ensuring sufficient manufacturing capacity and inventory to support commercialization plans.




If we fail to obtain FDA clearance for the TearLab Osmolarity System, or are subject to regulatory enforcement action as a result of our failure to comply with regulatory requirements, our commercial operations would be harmed.




We may not obtain 510(k) clearance for the TearLab Osmolarity System in a timely fashion, or at all.  Furthermore, any clearance of the TearLab Osmolarity System that we do receive may be conditioned upon certain limitations and restrictions as to the product's use or upon the completion of further studies.  If we do receive
the 510(k) clearance that we are seeking, we will be subject to significant ongoing regulatory requirements, and if we fail to comply with these requirements, we could be subject to enforcement action by the FDA or state agencies, including:





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





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





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





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





·
refusal to grant export approval for our products;





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





·
criminal prosecution.





If any of these enforcement actions were to be taken by the government, our business could be harmed.




In addition to receiving 510(k) clearance of the TearLab Osmolarity System, we will required to demonstrate and maintain compliance with the FDA's Quality System Regulation, or the QSR, prior to marketing the product in the United States.  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.  Our facilities have
not yet been inspected by the FDA, 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.




Our patents may not be valid, and we may not be able to obtain and enforce patents to protect our proprietary rights from use by would-be competitors.  Patents of other companies 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 be able to obtain and enforce patents and to maintain trade secret protection for our technology.  The extent to which we are unable to do so could materially harm our business.




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




Patents issued or licensed to us may be infringed by the products or processes of others.  The cost of enforcing patent rights against infringers, if such enforcement is required, could be significant and the time demands could interfere with our normal operations.  There has been substantial litigation and other proceedings
regarding patent and other intellectual property rights in the pharmaceutical, biotechnology and medical technology industries.  We could become a party to patent litigation and other proceedings.  The cost to us of any patent litigation, even if resolved in our favor, could be substantial.  Some of our would-be competitors may be able to sustain the costs of such litigation more effectively than we can because of their substantially greater financial resources.  Litigation
may also 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 to, 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.





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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 RHEOTM 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 coverage limits of $2,000,000 in the aggregate annually.  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 be able to 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.




We have entered into a number of related party transactions with suppliers, creditors, stockholders, officers and other parties, each of which may have interests which conflict with those of our public stockholders.




We have entered into several related party transactions with our suppliers, creditors, stockholders, officers and other parties, each of which may have interests which conflict with those of our public stockholders.




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 are able to 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.





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




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




We face intense competition in the markets for ophthalmic products and these markets are subject to rapid and significant technological change.  Although we have no direct competitors, we have numerous potential competitors in the United States and abroad.  We face potential competition from industry participants marketing
conventional technologies for the measurement of osmolarity and other in-lab testing technologies, as well as industry participants developing and marketing point-of-care tests, such as the technology being developed by the Aborn Eye Clinic, which is reportedly able to measure the osmolarity of nanoliter tear samples, 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 are unable to 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 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 be able to effectively recruit, train and retain additional qualified personnel.  If we are unable to retain key personnel or manage our growth effectively, we may not be able to implement our business plan.




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




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




Ensuring that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently.  Failure on our part to maintain effective internal financial and accounting controls would cause
our financial reporting to be unreliable, could have a material adverse effect on our business, operating results, financial condition and cash flows, and could cause the trading price of our common stock to fall dramatically.  Due to the failure to account for the consolidation of TearLab, Inc. under the variable interest entity model since our acquisition of a majority interest in TearLab, Inc. on November 30, 2006, there was a material weakness in our internal control over financial reporting as
of December 31, 2007.  As a result of this material weakness, our former chief executive officer and our chief financial officer determined that, as of December 31, 2007, our internal controls over financial reporting were not effective to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external reporting in accordance with U.S. GAAP.




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 additional 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 a control deficiency 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 we will be able to implement our planned processes and procedures in a timely manner.  In future periods, if the process required by Section 404 of the Sarbanes-Oxley Act of 2002 reveals further
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.




The trading price of our common stock may be volatile.




The market prices for, and the trading volumes of, securities of medical device companies, such as ours, have been historically volatile.  The market has experienced, from time to time, significant price and volume fluctuations unrelated to the operating performance of particular companies.  The market price of our common
shares may fluctuate significantly due to a variety of factors, including:




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





·
technological innovations or new diagnostic products;





·
governmental regulations;





·
developments in patent or other proprietary rights;





·
litigation;





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





·
comments by securities analysts;





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





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





·
political instability, natural disasters, war and/or events of terrorism.




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





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




We have never paid cash dividends on our common stock and have no present intention to pay any dividends in the future.  We are not profitable and do not expect to earn any material revenues for at least several years, if at all.  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.





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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 10,000,000 shares of preferred stock with designations, rights, and preferences determined from time to time by our board of directors.  Accordingly, our board of directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation,
conversion, voting or other rights superior to those of holders of our common stock.  For example, an issuance of shares of preferred stock could:




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





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





·
discourage bids for our common stock at a premium;





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





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




We may issue shares of authorized preferred stock at any time in the future.




ITEM2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





On April 21, 2009, we issued 38,276 shares of common stock to Dr. Thomas G. Hirose and his designee in connection with a settlement agreement dated as of December 4, 2008.  The issuance was exempt from registration under Section 3(a)(10) of the Securities Act because the court approved the fairness of the terms and conditions of
the issuance in connection with the settlement.





ITEM3.
DEFAULTS UPON SENIOR SECURITIES





There has not been any default upon our senior securities.





ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





None.





ITEM5.
OTHER INFORMATION





None.





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ITEM6.
EXHIBITS




2.1
Form of Plan of Reorganization (incorporated by reference to Exhibit 2.1 to the Registrant’s Registration Statement on Form S-1/A No. 4, filed with the Commission on December 6, 2004 (file no. 333-118024)).





3.1
Amended and Restated Certificate of Incorporation of the Registrant as currently in effect (incorporated by reference to Exhibit 10.4 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)).





3.2
Amended and Restated By-Laws of the Registrant as currently in effect (incorporated by reference to Exhibit 10.4 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)).





10.1
2002 Stock Option Plan, as amended and restated on September 30, 2008.





10.2
Amending Agreement, dated as of October 6, 2008, between the Registrant and William G. Dumencu, amending the Employment Agreement between the Registrant and William G. Dumencu dated as of February 25, 2008.





10.3
Termination Agreement, dated as of October 6, 2008, between Suh Kim and the Registrant, terminating the Employment Agreement between the Registrant and Suh Kim dated as of March 12, 2007.





10.4
Termination Agreement, dated as of October 6, 2008, between Elias Vamvakas and the Registrant, terminating the Employment Agreement between the Registrant and Elias Vamvakas dated as of September 1, 2004.





31.1
CEO’s Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934.





31.2
CFO’s Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934.





32.1
CEO’s Certification of periodic financial reports pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, U.S.C. Section 1350.





32.2
CFO’s Certification of periodic financial reports pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, U.S.C. Section 1350.





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SIGNATURE


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








OccuLogix, Inc.(Registrant)Date:           May 14, 2009
/s/ Eric DonskyEric DonskyChief Executive Officer






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