UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)


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





For the quarterly period
ended:September
30,2009





 ̈
            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.)





11025 Roselle Street, Suite
100, San Diego, CA 92121


(Address
of principal executive offices)





(858)
455-6006


(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  ý  No  o





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  o  No  o





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  o
            
            Accelerated
      filer  oNon-accelerated
      filer  o (Do not check if
      a smaller reporting company)
            
            Smaller
      reporting company  ý







1


Indicate
by check mark whether the registrant is a shell company as defined in Rule 12b-2
of the Exchange Act:YesoNoý





Indicate the number of shares
outstanding of each of the issuer’s classes of common stock, as of the latest
practicable date.9,866,685
as of November 11, 2009








PART I.
            
            FINANCIAL
      INFORMATIONItem
      1.
            
            Consolidated Financial StatementsItem
      2.
            
            Management’s Discussion and Analysis of Financial Condition
      and Results of OperationsItem
      3.
            
            Quantitative and Qualitative Disclosures about Market
      RiskItem
      4.
            
            Controls and ProceduresPART
      II.
            
            OTHER
      INFORMATIONItem
      1.
            
            Legal ProceedingsItem
      2.
            
            Unregistered Sales of Equity Securities and Use of
      ProceedsItem
      3.
            
            Defaults upon Senior SecuritiesItem
      4.
            
            Submission of Matters to a Vote of Security
      HoldersItem
      5.
            
            Other InformationItem
      6.
            
            Exhibits


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," “pursue,” "potential" and similar
expressions intended to identify forward-looking statements.  These
forward-looking statements include, without limitation, statements relating to
future events, future results, and future economic conditions in general and
statements about:




·
            Our 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 North American, 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;


·
            The results of our clinical
      trials;


·
            Our anticipated sales to
      additional customers in the United States if a CLIA waiver categorization
      is obtained;


·
            The adequacy
      of our funding, 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
 Table of Contents


OccuLogix,
Inc.





PART
      I.
            FINANCIAL
      INFORMATIONITEM 1.
            CONSOLIDATED
      FINANCIAL STATEMENTS


4
 Table of Contents


OccuLogix,
Inc.





CONSOLIDATED
BALANCE SHEETS


(expressed
in U.S. dollars)





September
      30,
              2009
            
            
            December
      31,
              2008(Unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
            
            $
            967,389
            
            
            $
            2,565,277Accounts
      receivable, net
            
            
            92,307
            
            
            
            333,056Inventory,
      net
            
            
            195,613
            
            
            
            148,201Prepaid
      expenses
            
            
            293,565
            
            
            
            316,058Deferred
      finance charges
            
            
            28,107
            
            
            
            —Other
      current assets
            
            
            37,216
            
            
            
            21,680Total
      current assets
            
            
            1,614,197
            
            
            
            3,384,272Fixed
      assets, net
            
            
            156,046
            
            
            
            183,384Patents
      and trademarks, net
            
            
            246,969
            
            
            
            269,398Intangible
      assets, net
            
            
            8,657,131
            
            
            
            9,568,023Total
      assets
            
            $
            10,674,343
            
            
            $
            13,405,077LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesAccounts
      payable
            
            $
            248,669
            
            
            $
            314,680Accrued
      liabilities
            
            
            888,543
            
            
            
            1,201,793Due
      to stockholders
            
            
            38,422
            
            
            
            23,152Deferred
      revenue
            
            
            169,340
            
            
            
            237,400Obligations
      under warrants
            
            
            13,590
            
            
            
            57,666Short-term
      liabilities and accrued interest
            
            
            1,031,061
            
            
            
            —Total
      current liabilities
            
            
            2,389,625
            
            
            
            1,834,691Deferred
      income tax liability
            
            
            —
            
            
            
            1,611,502Contingently
      redeemable common stock, 119,629 shares issued and outstanding at both
      September 30, 2009 and December 31, 2008
            
            
            250,000
            
            
            
            250,000Stockholders’
      equityCapital
      stockPreferred
      Stock, par value $0.001, authorized 10,000,000, zero issued and
      outstanding at both September 30, 2009 and December 31,
    2008
            
            
            —
            
            
            
            —Common
      stock, par value $0.001 per share, authorized 40,000,000, issued and
      outstanding: September 30, 2009 – 9,747,056; December 31, 2008 –
      9,708,780
            
            
            9,747
            
            
            
            9,708Additional
      paid-in capital
            
            
            378,360,594
            
            
            
            377,356,547Accumulated
      deficit
            
            
            (370,335,623
            )
            
            
            (367,657,371
            )Total
      stockholders’ equity
            
            
            8,034,718
            
            
            
            9,708,884Total
      liabilities and stockholders’ equity
            
            $
            10,674,343
            
            
            $
            13,405,077





See
accompanying notes to interim consolidated financial statements


5
 Table of Contents


OccuLogix,
Inc.





CONSOLIDATED
STATEMENTS OF OPERATIONS


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


(Unaudited)





Three
      months endedSeptember
      30,2009
            
            
            2008RevenueTearLab
            
            $
            263,221
            
            
            $
            —Retina
            
            
            —
            
            
            
            23,900Total
      revenue
            
            
            263,221
            
            
            
            23,900Cost
      of goods soldTearLab
      – product cost
            
            
            138,831
            
            
            
            —Retina
      – product cost
            
            
            —
            
            
            
            1,945Total
      cost of goods sold
            
            
            138,831
            
            
            
            1,945124,389
            
            
            
            21,955Operating
      expensesAmortization
      of intangible assets
            
            
            303,631
            
            
            
            317,377General
      and administrative
            
            
            566,435
            
            
            
            630,453Clinical
      , regulatory and research & development
            
            
            228,796
            
            
            
            671,612Sales
      and marketing
            
            
            117,381
            
            
            
            218,895Restructuring
      charges
            
            
            —
            
            
            
            74,1281,216,243
            
            
            
            1,912,465Loss
      from operations
            
            
            (1,091,854
            )
            
            
            (1,890,510
            )Other
      income (expense)Interest
      income
            
            
            8
            
            
            
            17,946Changes
      in fair value of warrant obligation
            
            
            12,639
            
            
            
            —Impairment
      of investments
            
            
            —
            
            
            
            (68,281
            )Interest
      expense
            
            
            (40,752
            )
            
            
            (169,540
            )Amortization
      of deferred financing charges, warrants & beneficial conversion
      values
            
            
            (135,245
            )
            
            
            (48,000
            )Other
            
            
            (17,820
            )
            
            
            131,655Total
      other income (expense)
            
            
            (181,170
            )
            
            
            (136,220
            )Loss
      from continuing operations before income taxes
            
            
            (1,273,024
            )
            
            
            (2,026,730
            )Income
      tax recovery (expense)
            
            
            618,371
            
            
            
            (1,649,632
            )Net
      loss for the period
            
            
            (654,653
            )
            
            
            (3,676,362
            )Net
      loss attributable to non-controlling interest, net of tax
            
            
            —
            
            
            
            1,393,410Net
      loss attributable to OccuLogix, Inc.
            
            $
            (654,653
            )
            
            $
            (2,282,952
            )Weighted
      average number of shares outstanding attributable to OccuLogix, Inc. -
      basic and diluted
            
            
            9,866,685
            
            
            
            2,292,280Loss
      per share attributable to OccuLogix, Inc. – basic and
    diluted
            
            $
            (0.07
            )
            
            $
            (1.00
            )





See
accompanying notes to interim consolidated financial statements


6
 Table of Contents


OccuLogix,
Inc.





CONSOLIDATED
STATEMENTS OF OPERATIONS


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


(Unaudited)





Nine
      months endedSeptember
      30,2009
            
            
            2008RevenueTearLab
            
            $
            603,328
            
            
            $
            —Retina
            
            
            —
            
            
            
            158,300Total
      revenue
            
            
            603,328
            
            
            
            158,300Cost
      of goods soldTearLab
      – product cost
            
            
            388,648
            
            
            
            —Retina
      – product cost
            
            
            —
            
            
            
            26,501Total
      cost of goods sold
            
            
            388,648
            
            
            
            26,501214,680
            
            
            
            131,799Operating
      expensesAmortization
      of intangible assets
            
            
            910,892
            
            
            
            903,399General
      and administrative
            
            
            2,459,766
            
            
            
            2,914,487Clinical
      , regulatory and research & development
            
            
            867,727
            
            
            
            2,502,792Sales
      and marketing
            
            
            500,235
            
            
            
            629,337Restructuring
      charges
            
            
            —
            
            
            
            1,029,6464,738,620
            
            
            
            7,979,661Loss
      from operations
            
            
            (4,523,940
            )
            
            
            (7,847,862
            )Other
      income (expense)Interest
      income
            
            
            2,277
            
            
            
            68,495Changes
      in fair value of warrant obligation
            
            
            44,076
            
            
            
            (68,281
            )Impairment
      of investments
            
            
            —
            
            
            
            (450,072
            )Interest
      expense
            
            
            (40,752
            )
            
            
            (305,256
            )Amortization
      of deferred financing charges, warrants & beneficial conversion
      values
            
            
            (135,245
            )
            
            
            (180,000
            )Other
            
            
            7,749
            
            
            
            151,893Total
      other income (expense)
            
            
            (121,895
            )
            
            
            (783,221
            )Loss
      from continuing operations before income taxes
            
            
            (4,645,835
            )
            
            
            (8,631,083
            )Income
      tax recovery (expense)
            
            
            1,967,583
            
            
            
            (430,465
            )Net
      loss for the period
            
            
            (2,678,252
            )
            
            
            (9,061,548
            )Net
      loss attributable to non-controlling interest, net of tax
            
            
            —
            
            
            
            1,964,540Net
      loss attributable to OccuLogix, Inc.
            
            $
            (2,678,252
            )
            
            $
            (7,097,008
            )Weighted
      average number of shares outstanding attributable to OccuLogix, Inc. -
      basic and diluted
            
            
            9,845,155
            
            
            
            2,292,280Loss
      per share attributable to OccuLogix, Inc. – basic and
    diluted
            
            $
            (0.27
            )
            
            $
            (3.10
            )





See
accompanying notes to interim consolidated financial statements


7
 Table of Contents


OccuLogix,
Inc.





CONSOLIDATED
STATEMENTS OF CASH FLOWS


(expressed
in U.S. dollars)


(Unaudited)





Nine
      months ended
              September
      30,2009
            
            
            2008OPERATING
      ACTIVITIESNet
      loss for the period
            
            $
            (2,678,252
            )
            
            $
            (7,097,008
            )Adjustments
      to reconcile net loss to cash used in operating
activities:Stock-based
      compensation and stock-based restructuring charges
            
            
            394,050
            
            
            
            85,442Depreciation
      of fixed assets
            
            
            54,700
            
            
            
            42,296Amortization
      and write-down of patents and trademarks
            
            
            22,429
            
            
            
            16,174Amortization
      of intangible asset
            
            
            910,892
            
            
            
            903,400Amortization
      of deferred financing charges, warrants and beneficial conversion
      values
            
            
            135,245
            
            
            
            180,000Changes
      in fair value of warrant obligation
            
            
            (44,076
            )
            
            
            68,281Impairment
      of investments
            
            
            —
            
            
            
            450,072Deferred
      tax liability, net
            
            
            (1,967,583
            )
            
            
            430,465Non-controlling
      interest
            
            
            —
            
            
            
            (1,964,540
            )(Gain)
      Loss on disposal of fixed assets
            
            
            (3,519
            )
            
            
            7,584Net
      change in non-cash working capital balances related to
      operations
            
            
            (81,001
            )
            
            
            572,692Cash
      used in operating activities
            
            
            (3,257,115
            )
            
            
            (6,305,142
            )INVESTING
      ACTIVITIESAdditions
      to fixed assets, net of proceeds
            
            
            (23,842
            )
            
            
            (50,686
            )Additions
      to patents and trademarks
            
            
            —
            
            
            
            (95,571
            )Cash
      restricted in use
            
            
            —
            
            
            
            (200,000
            )Cash
      used in investing activities
            
            
            (23,842
            )
            
            
            (346,257
            )FINANCING
      ACTIVITIESProceeds
      from issuance of convertible debt funding
            
            
            1,750,077
            
            
            
            6,703,500Costs
      of issuance of convertible debt funding
            
            
            (67,008
            )
            
            
            (180,000
            )Cash
      provided by financing activities
            
            
            1,683,069
            
            
            
            6,523,500Net
      decrease in cash and cash equivalents during the period
            
            
            (1,597,888
            )
            
            
            (127,899
            )Cash
      and cash equivalents, beginning of period
            
            
            2,565,277
            
            
            
            2,235,832Cash
      and cash equivalents, end of period
            
            $
            967,389
            
            
            $
            2,107,933





See
accompanying notes to interim consolidated financial statements


8
 Table of Contents


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 September 30, 2009 and the results of its
operations for the three and nine months ended September 30, 2009 and 2008.
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 10-K 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. Further in connection with
the preparation of the interim consolidated financial statements and in
accordance with the FASB’s recently issued authoritative guidance on subsequent
events, the Company evaluated subsequent events after the balance sheet date of
September 30, 2009 through November 13, 2009, the date of the filing of the
unaudited financial statements.





Reclassifications





Effective
January 1, 2009, the Company implemented the FASB’s authoritative guidance on
non-controlling interests. 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 this new guidance.





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
$2,678,252 and $7,097,008 for the nine months ended September 30, 2009 and 2008,
respectively. The Company’s working capital deficit at September 30, 2009 is
$775,428, which represents a $2,325,009 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 as of September 30, 2009 will be sufficient to cover
its operating and other cash demands only until the end of December 2009, if it
does not successfully complete additional fund raising activities.




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 equity 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 2010, 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
unaudited interim 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.





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.


9
 Table of Contents


OccuLogix,
Inc.





Recent
Accounting Pronouncements





On June
3, 2009, the FASB approved the FASB Accounting Standards
Codification, or the Codification, as the single source of authoritative
nongovernmental Generally Accepted Accounting Principles, or GAAP, in the United
States. The Codification is effective for interim and annual periods ending
after September 15, 2009. Upon the effective date, the Codification will be the
single source of authoritative accounting principles to be applied by all
nongovernmental U.S. entities. All other accounting literature not included in
the Codification will be nonauthoritative. The Codification does not change or
alter existing GAAP and there was no impact on our consolidated financial
position or results of operations.





The FASB
issued authoritative guidance on subsequent events on May 28, 2009, which we
adopted on a prospective basis beginning April 1, 2009. The guidance is intended
to establish general standards of accounting and disclosure of events that occur
after the balance sheet date but before financial statements are issued or are
available to be issued. It requires the disclosure of the date through which an
entity has evaluated subsequent events and the basis for selecting that date.
The application did not have an impact on our consolidated financial position,
results of operations or cash flows. We evaluated all events or transactions
that occurred through November 13, 2009, the date we issued these financial
statements. During this period we did not have any material recognizable
subsequent events.





In
December 2007, the FASB issued authoritative guidance, 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.  The new guidance also
establishes disclosure requirements to separately identify the interests of the
parent and the interests of the non-controlling owners.  This new
guidance became effective for all fiscal years beginning after December 15,
2008. The Company adopted the provisions of the new guidance in the first
quarter of 2009. The adoption of the guidance 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.





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 net balance of $195,613 as at
September 30, 2009 represents production materials held for the TearLabTM activities. At September 30,
2009 and December 31, 2008, the Company had set up provisions for excess
inventory of $124,402 and $68,062, respectively.





As a
result 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 Octo Nova 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
Octo Nova pumps prior to their expiration dates, in the case of the treatment
sets, or before the technologies become outdated.  In the nine months
ended September 30, 2008, the Company sold 123 treatment sets.  The
sale of these treatment sets generated revenues of $18,500. Additionally the
Company sold 115 Octo Nova Pumps, resulting in revenues of
$139,800.  All RHEOTM System inventory was sold or disposed of during
2008.


4.
            FIXED
    ASSETS





Fixed
assets consist of the following:




September
      30, 2009
            
            
            December
      31, 2008Furniture
      and office equipment
            
            $
            24,812
            
            
            $
            24,539Computer
      equipment and software
            
            
            145,134
            
            
            
            254,846Medical
      equipment
            
            
            330,219
            
            
            
            315,779500,165
            
            
            
            595,164Less
      accumulated depreciation
            
            
            344,119
            
            
            
            411,780$
            156,046
            
            
            $
            183,384


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OccuLogix,
Inc.





Depreciation
expense was $54,700 and $42,296 during the nine months ended September 30, 2009
and 2008, respectively.




5.
            PATENTS
      AND TRADEMARKS




Patents
and trademarks consist of the following:




September
      30, 2009
            
            
            December
      31, 2008Patents
            
            $
            260,340
            
            
            $
            373,361Trademarks
            
            
            32,152
            
            
            
            136,767292,492
            
            
            
            510,128Less
      accumulated amortization
            
            
            45,523
            
            
            
            240,730$
            246,969
            
            
            $
            269,398





Amortization
expense was $22,429 and $16,174 during the nine months ended September 30, 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 September 30, 2009Cost
            
            
            Accumulated
              AmortizationTearLabTM
      technology
            
            $
            12,172,054
            
            
            $
            3,514,923





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
            
            $
            303,6312010
            
            
            1,214,5232011
            
            
            1,214,5232012
            
            
            1,214,5232013
            
            
            1,214,523Thereafter
            
            
            3,495,408$
            8,657,131





Amortization
expense of $910,892 and $903,400 for the nine months ended September 30, 2009
and 2008, respectively are attributable to the TearLabTM technology.





The
Company determined that, as of September 30, 2009, there have been no
significant events which may affect the carrying value of TearLab, Inc.’s
(formerly OcuSense, Inc.) (“TearLab”) 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 September 30, 2009.
Based on management’s estimates of forecasted undiscounted cash flows as at
September 30, 2009, the Company concluded that there is no indication of an
impairment of TearLab's TearLabTM technology. Therefore, no impairment charge was
recorded during the three and nine months ended September 30,
2009.


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OccuLogix,
Inc.





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.





(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 TearLab, 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 FASB guidelines.





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 TearLab, 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 TearLab,
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 TearLab, 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.


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Inc.





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.





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.





On
October 6, 2008, as part of the acquisition of the remaining ownership interest
in TearLab, Inc., the Company agreed to assume the 673,034 outstanding options
that were part of the TearLab, Inc. Stock Option Plan. The assumption of these
options was approved by the board of directors and is exerciseable into shares
of the Company.





The
Company accounts for stock-based compensation under the provisions of FASB
guidance which 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.


13
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OccuLogix,
Inc.





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:





Nine
      months ended
              September
      30,2009
            
            
            2008General
      and administrative
            
            $
            242,379
            
            
            $
            32,223Clinical
      and regulatory
            
            
            113,689
            
            
            
            3,292Sales
      and marketing
            
            
            37,982
            
            
            
            (24,201
            )Restructuring
            
            
            —
            
            
            
            74,128Stock-based
      compensation expense before income taxes
            
            $
            394,050
            
            
            $
            85,442




There
were no common stock options that were exercised for the nine months ended
September 30, 2009 and 2008, respectively. As such, no income tax benefit was
realized from stock option exercises during the nine months ended September 30,
2009 and 2008. In accordance with FASB guidance, the Company presents excess tax
benefits from the exercise of stock options, if any, as financing cash flows
rather than operating cash flows.





The
weighted-average fair value of stock options granted during the nine months
ended September 30, 2009 and 2008 was $1.07 and $2.63
respectively.  The estimated fair value was determined using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:




Nine
      months ended
              September
      30,2009
            
            
            2008Volatility
            
            
            102
            %
            
            
            107
            %.Expected
      life of options
            
            5.6
      years
            
            
            6.84
      years.Risk-free
      interest rate
            
            
            1.80
            %
            
            
            3.26
            %.Dividend
      yield
            
            
            0
            %
            
            
            0
            %.




The
Company’s computation of expected volatility for the nine months ended September
30, 2009 and 2008 were based on the Company’s historical stock prices since its
initial public offering in December 2004. The expected life of the options
represents the period of time that awards granted are expected to be
outstanding. The expected term is calculated as the average of the contractual
term and the vesting period.  The risk-free interest rate for an award
is based on the U.S. Treasury yield curve with a term equal to the expected life
of the award on the date of grant.





A summary
of the option transactions during the nine months ended September 30, 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
            
            
            852,894
            
            
            
            1.45
            
            
            
            —Exercised
            
            
            —
            
            
            
            —
            
            
            
            —Forfeited
            
            
            122,840
            
            
            
            5.07
            
            
            
            —Outstanding,  September
      30, 2009
            
            
            3,008,537
            
            
            
            3.87
            
            
            
            8.00
            
            
            
            289,640Vested
      or expected to vest September 30, 2009
            
            
            2,143,856
            
            
            
            4.62
            
            
            
            7.87
            
            
            
            289,640Exercisable,
      September 30, 2009
            
            
            2,030,049
            
            
            $
            4.28
            
            
            
            7.80
            
            
            $
            289,640





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 September 30, 2009 of $1.22 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 September 30, 2009.  As
of September 30, 2009, $1,948,722 of total unrecognized compensation cost
related to stock options is expected to be recognized over a weighted average
period of 2.77 years.


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OccuLogix,
Inc.





(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 immediately 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
applicable guidance from FASB which 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.  Also
based on the applicable guidance from FASB, 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 September 30, 2009 and December 31,
2008, respectively.





The
estimated fair value of the Warrants and the Cowen Warrant as of September 30,
2009 was determined using the Black-Scholes option-pricing model with the
following assumptions:




Volatility
            
            
            127
            %Remaining
      term of Warrants
            
            2.33
      yearsRisk-free
      interest rate
            
            
            1.12
            %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, FASB guidance 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 September 30, 2009
and determined the aggregate fair value to be $13,590, a decrease of
approximately $44,076 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 nine months ended September 30, 2008 was
an increase of $68,281.





Accordingly,
the Company recognized a gain of $44,076 in its consolidated statement of
operations for the nine months ended September 30, 2009 which reflects the
decrease in the fair value of the warrants at September 30, 2009 compared to
December 31, 2008.




A summary
of the Warrants issued during the nine months ended September 30, 2009 and the
total number of warrants outstanding as of that date is set forth
below:




Number
      of warrants outstanding
            
            
            Weighted
      average exercise priceOutstanding,
      December 31, 2008
            
            
            110,578
            
            
            $
            46.25Granted
            
            
            —
            
            
            
            —Forfeited
            
            
            —
            
            
            
            —Outstanding,
      September 30, 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.


15
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OccuLogix,
Inc.





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





Nine
      months ended September 30,2009
            
            
            2008Stock
      options
            
            
            3,008,537
            
            
            
            164,787Warrants
            
            
            110,578
            
            
            
            110,578Total
            
            
            3,119,115
            
            
            
            275,365





On
February 11, 2009, the Company 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 was declared
effective by the SEC on July 20, 2009.





9.
            RELATED
      PARTY TRANSACTIONS




The
following are the Company’s related party transactions:




TLC
Vision





TLC
Vision Corporation held a 7.61% and 7.68% ownership interest in the Company, on
an issued and outstanding basis, on September 30, 2009 and December 31, 2008,
respectively. TLC provided computer and administrative support to the Company in
the nine months ended September 30, 2009 and 2008, respectively, for which the
Company recorded expense of $18,270 and $81,767, respectively.





The
Company reported amounts due to TLC Vision Corporation as amounts Due to
Shareholders of $38,422 and $23,152 for the nine months ended September 30, 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 nine months ended September 30, 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 TearLab'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 agreed to a 30%
reduction in fees, effective June 1, 2009 to assist the Company’s efforts to
reduce its cash requirements.  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 $64,169 and $77,671 for the nine months ended September
30, 2009 and 2008, respectively.  There were $5,616 and zero $
balances due at September 30, 2009 and September 30, 2008
respectively.




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 $1,967,583 for the nine months
ended September 30, 2009 of which $1,551,055 represented deferred tax assets
reported for losses incurred in the nine months ended September 30, 2009 and
$416,528 represented amortization of deferred tax liabilities in the nine months
ended September 30, 2009.


16
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OccuLogix,
Inc.





The
Company reported an income tax expense of $430,465 for the nine months ended
September 30, 2008 of which $791,825 represented a net reversal of income tax
benefits previously reported, offset by $361,360 which represented amortization
of deferred tax liabilities in the nine months ended September 30,
2008.





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 the FASB’s authoritative
guidance for uncertain tax positions.  The Company accounts for
uncertain income tax positions using a benefit recognition model with a two-step
approach, a more-likely-than-not recognition criterion and a measurement
attribute that measures the position as the largest amount of tax benefit that
is greater than 50% likely of being realized upon ultimate
settlement.  If it is not more likely than not that the benefit will
be sustained on its technical merits, no benefit will be recorded. Uncertain tax
positions that relate only to timing of when an item is included on a tax return
are considered to have met the recognition threshold.  The standard
also provides guidance on derecognition, classification, interest and penalties
on income taxes and accounting in interim periods and requires increased
disclosure.




As a
result of the implementation of the provisions of authoritative guidance, 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





September
      30, 2009
            
            
            December
      31, 2008Prepaid
      insurance
            
            $
            81,892
            
            
            $
            236,369Prepaid
      financing costs
            
            
            93,543
            
            
            
            —Prepaid
      regulatory fees
            
            
            10,300
            
            
            
            6,424Deferred
      royalty costs
            
            
            43,500
            
            
            
            43,500Other
      fees and services
            
            
            64,330
            
            
            
            29,765$
            293,565
            
            
            $
            316,058


17
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OccuLogix,
Inc.





12.
            ACCRUED
      LIABILITIES





September
      30, 2009
            
            
            December
      31, 2008Due
      to professionals
            
            $
            314,714
            
            
            $
            274,206Due
      to clinical trial sites
            
            
            145,188
            
            
            
            120,247Due
      to clinical trial specialists
            
            
            67,734
            
            
            
            104,133Product
      development costs
            
            
            27,633
            
            
            
            96,359Legal
      settlement payment
            
            
            —
            
            
            
            125,000Corporate
      compliance
            
            
            66,305
            
            
            
            102,907Obligation
      to repay advances received
            
            
            68,410
            
            
            
            127,301Severance
      liability
            
            
            38,500
            
            
            
            —Vacation
      pay entitlements
            
            
            73,096
            
            
            
            53,361Goods
      received but not invoiced
            
            
            13,452
            
            
            
            58,530Miscellaneous
            
            
            73,511
            
            
            
            139,749$
            888,543
            
            
            $
            1,201,793





13.
            SHORT-TERM
      LIABILITIES AND ACCRUED INTEREST





On
July 15, 2009, the Company announced that it had entered into and closed an
agreement with certain investors whereby the investors agreed to provide
financing (the “Financing”) to the Company through the purchase of convertible
secured notes, in the aggregate amount of $1.55 million.  On August
31, 2009, an additional $200,000 of financing was received by the Company to
bring the aggregate total funding received to $1.75 million. The convertible
secured notes (the “Notes”) evidencing the Financing, mature on the second
anniversary of their issuance (“the Maturity Date”), bear interest at a rate of
12% per annum and are convertible into shares of the Company’s common stock upon
the request of holders of 51% or more of the outstanding principal amount of the
Notes at any time after August 31, 2009 and prior to the Maturity
Date.  The conversion price of the Notes (the “Discount Price”) is
$1.3186 determined on August 31, 2009 and represents 80% of the volume weighted
average price on the NASDAQ stock market for the ten trading days prior to
August 31, 2009.  Any such conversion is limited to prevent the number
of shares issued upon conversion of the Notes from exceeding 19.9% of the
outstanding common stock of the Company, measured prior to the date of the
Financing.  The Notes are secured by substantially all of the assets
of the Company and the financing is subject to customary conditions to
closing.





In
connection with the Financing, the Company will issue warrants with a life of
five years to purchase shares of common stock equal in value to ten percent of
the aggregate principal amount of the notes (the “Warrants”).  The
exercise price of the Warrants is $1.60 per common share representing the price
per share equal to the closing bid price per share of the Company’s common stock
on the NASDAQ stock market on July 15, 2009.  The warrants will not be
issued until the convertible secured notes are converted to common shares of the
Company. The Company has recorded $162,621 representing the fair value of the
warrants in additional paid-in capital which has been calculated using the
Black-Scholes value model. The value of the warrant is being accreted over the
two year term of the convertible secured debt and in the three and nine month
periods ending September 30, 2009, an accreted amount of $23,550 is included in
other income (expense).





As the
conversion price of the convertible secured debt, reflects a price discounted
from the fair market value of the Company’s common stock, there is a deemed
beneficial conversion feature associated with the Financing. The Company has
recorded $727,582 representing the value of the beneficial conversion feature in
additional paid-in capital which has been determined by calculating the fair
value of shares that could be acquired as the difference between the discounted
conversion price and the fair value on the date of funding. The value of the
beneficial conversion is being accreted over the two year term of the
convertible secured debt and in the three and nine month periods ending
September 30, 2009, an accreted amount of $106,879 is included in other income
(expense).





The
Company incurred $67,008 in expenses related to the Financing which was
allocated to deferred finance charges ($32,923) and cost of equity ($34,085) in
proportion to the allocation of the Financing amount between equity and
liabilities.  The value of the deferred financing is being accreted
over the two year term of the convertible secured debt and in the three and nine
month periods ending September 30, 2009, an accreted expense amount of $4,816 is
included in other income (expense).


18
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OccuLogix,
Inc.





Richard
Lindstrom, M.D. and Tom Davidson, both of whom are directors of the Company,
invested $100,000 each in the Financing.  Greybrook Corporation, an
entity controlled by Elias Vamvakas, Chairman and Interim CEO of the Company, or
members of his family, invested $310,000 in the Financing.  NASDAQ
Listing Rule 5635(c) states that any sale of discounted stock to employees,
officers or directors constitutes “equity compensation,” and therefore requires
stockholder consent prior to issuance.  In connection with the
investment, the Company has entered into letter agreements with Dr. Lindstrom
and Messrs. Vamvakas and Davidson pursuant to which they each agreed not to
convert their Note into shares of common stock of the Company unless and until
the stockholders have approved such conversion in accordance with NASDAQ
rules.





Prior to
closing the Financing, the Company entered into agreements with all salaried
members of the management team where they agreed to reductions of up to
one-third in their salaries.  These salary reductions are part of a
number of cost cutting measures put in place by the management
team.





As both
the conversion price of the convertible secured notes and the exercise price of
the warrants were known at August 31, 2009, it was possible to determine the
value of the short-term liability as $859,874 representing the funding received
of $1.75 million reduced by the value of the warrants and the beneficial
conversion feature. The amount of warrants and beneficial conversion feature
accreted since the closing of the offering are added to the value of the
short-term liabilities.





Accrued
interest of $40,752 has been reported in the three and nine months ended
September 30, 2009 and is included in short-term liabilities.





14.
            NON-CONTROLLING
      INTEREST





The
adoption of the FASB’s authoritative guidance for non-controlling interests
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.





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,





Nine
      months ended September 302009
            
            
            2008Non-controlling
      interest at the beginning of  period
            
            $
            —
            
            
            $
            4,953,960Non-controlling
      share of loss from operations in the period
            
            
            —
            
            
            
            (1,964,540
            )Fair
      value of stock-based compensation
            
            
            —
            
            
            
            135,538Investment
      to acquire minority interest
            
            
            —
            
            
            
            —Non-controlling
      interest at the end of period
            
            $
            —
            
            
            $
            3,124,958




15.
            CONSOLIDATED
      STATEMENTS OF CASH FLOWS




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


Nine
      months ended September 30,2009
            
            
            2008Accounts
      receivable, net
            
            $
            240,749
            
            
            $
            345,606Inventory
            
            
            (47,412
            )
            
            
            —Prepaid
      expenses
            
            
            22,493
            
            
            
            271,908Other
      current assets
            
            
            (15,537
            )
            
            
            (260,742
            )Accounts
      payable
            
            
            (66,012
            )
            
            
            (758,156
            )Accrued
      liabilities
            
            
            (203,250
            )
            
            
            588,674Deferred
      revenue
            
            
            (68,060
            )
            
            
            97,444Due
      to stockholders
            
            
            15,276
            
            
            
            (17,297
            )Short
      term liabilities
            
            
            40,752
            
            
            
            305,255$
            (81,001
            )
            
            $
            572,692


19
 Table of Contents


OccuLogix,
Inc.





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:





Nine
      months ended September 30,2009
            
            
            2008Non-cash
      investing activitiesAccrued
      fixed assets additions
            
            $
            (15,840
            )
            
            $
            —Additional
      cash flow informationCash
      paid for taxes
            
            
            —
            
            
            
            —Interest
      paid
            
            $
            —
            
            
            $
            —




16.
            FINANCIAL
      INSTRUMENTS





Currency
risk





The
Company's activities which result in exposure to fluctuations in foreign
currency exchange rates consist of the purchase of inventory 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.




During
the first nine months of fiscal 2009, the Company derived 100% of its revenue
from the sale of the new TearLab product.  17% of this revenue from
the TearLab product was from a single distributor and two distributors
represented an additional 12% and 11% of the revenue, respectively from the
TearLab product.  The Company has recognized the risk and is engaging
additional distributors in Europe, Asia, Canada and South America to broaden its
customer base and reduce exposure. Currently, there is only one supplier for
each of the reader and pen components of the TearLab Osmolarity System and the
test cards.  The Company recognizes the risk of having single source
suppliers and it is identifying potential solutions to mitigate this
exposure.




17.
            FAIR
      VALUE MEASUREMENTS





The
Company accounts for the methods of measuring fair value in accordance with the
provisions of the FASB’s authoritative guidance on fair value measurement. As
defined in the guidance, 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, the guidance
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
September 30, 2009, the Company has a
liability for convertible secured notes which arose on the current quarter and
is reported at
a carrying value of $990,309.  As a result of the proximity of the
completion of the convertible secured note offering to the end of the quarter,
the Company determined the carrying value to be a reasonable estimate of fair
value.





At
September 30, 2009, the Company has a liability for warrants to purchase 110,578
shares of common stock at an exercise price of $46.25 that are valued at $13,590
under the level 3 hierarchy.





Fair
Value Measurements Using Significant Unobservable Inputs (Level 3)





Obligations
      Under WarrantsBeginning
      balance at January 1, 2009
            
            
            57,666Transfer
      to Level 3
            
            
            -Change
      in fair value included in other (income) / expense
            
            
            (44,076
            )Purchases,
      issuances and settlements
            
            
            -Ending
      balance at September 30, 2009
            
            
            13,590


20
 Table of Contents


OccuLogix,
Inc.





18.
            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 September 30, 2009Retina
            
            
            Point-of-care
            
            
            TotalRevenue
            
            $
            —
            
            
            $
            263,221
            
            
            $
            263,221Expenses:Cost
      of goods sold
            
            
            —
            
            
            
            138,831
            
            
            
            138,831Operating
            
            
            484
            
            
            
            886,803
            
            
            
            887,287Depreciation
      and amortization
            
            
            —
            
            
            
            328,957
            
            
            
            328,957Loss
      from continuing operations
            
            
            (484
            )
            
            
            (1,091,370
            )
            
            
            (1,091,854
            )Interest
      income
            
            
            —
            
            
            
            8
            
            
            
            8Interest
      expense
            
            
            —
            
            
            
            (40,752
            )
            
            
            (40,752
            )Changes
      in fair value of warrant obligation
            
            
            —
            
            
            
            12,639
            
            
            
            12,639Amortization
      of deferred financing charges
            
            
            —
            
            
            
            (135,245
            )
            
            
            (135,245
            )Other
      income (expense), net
            
            
            —
            
            
            
            (17,820
            )
            
            
            (17,820
            )Recovery
      of income taxes
            
            
            —
            
            
            
            618.371
            
            
            
            618,371Net
      loss attributable to OccuLogix, Inc.
            
            $
            (484
            )
            
            $
            (654,169
            )
            
            $
            (654,653
            )Total
      assets
            
            $
            11,822
            
            
            $
            10,662,521
            
            
            $
            10,647,343








Nine
      months ended September 30, 2009Retina
            
            
            Point-of-care
            
            
            TotalRevenue
            
            $
            —
            
            
            $
            603,328
            
            
            $
            603,328Expenses:Cost
      of goods sold
            
            
            —
            
            
            
            388,648
            
            
            
            388,648Operating
            
            
            (1,709
            )
            
            
            3,752,308
            
            
            
            3,750,599Depreciation
      and amortization
            
            
            —
            
            
            
            988,021
            
            
            
            988,021Loss
      from continuing operations
            
            
            1,709
            
            
            
            (4,525,649
            )
            
            
            (4,523,940
            )Interest
      income
            
            
            —
            
            
            
            2,277
            
            
            
            2,277Interest
      expense
            
            
            —
            
            
            
            (40,752
            )
            
            
            (40,752
            )Changes
      in fair value of warrant obligation
            
            
            —
            
            
            
            44,076
            
            
            
            44,076Amortization
      of deferred financing charges
            
            
            —
            
            
            
            (135,245
            )
            
            
            (135,245
            )Other
      income (expense), net
            
            
            —
            
            
            
            7,749
            
            
            
            7,749Recovery
      of income taxes
            
            
            —
            
            
            
            1,967,583
            
            
            
            1,967,583Net
      loss attributable OccuLogix, Inc.
            
            $
            1,709
            
            
            $
            (2,679,961
            )
            
            $
            (2,678,252
            )Total
      assets
            
            $
            11,822
            
            
            $
            10,662,521
            
            
            $
            10,647,343


21
 Table of Contents


OccuLogix,
Inc.





Three
      months ended September 30, 2008Retina
            
            
            Point-of-care
            
            
            TotalRevenue
            
            $
            23,900
            
            
            $
            —
            
            
            $
            23,900Expenses:Cost
      of goods sold
            
            
            1,945
            
            
            
            —
            
            
            
            1,945Operating
            
            
            191,226
            
            
            
            1,311,935
            
            
            
            1,503,161Restructuring
      Charges
            
            
            74,128
            
            
            
            —
            
            
            
            74,128Depreciation
      and amortization
            
            
            776
            
            
            
            334,400
            
            
            
            335,176Loss
      from continuing operations
            
            
            (244,175
            )
            
            
            (1,646,335
            )
            
            
            (1,890,510
            )Interest
      income
            
            
            16,200
            
            
            
            1,746
            
            
            
            17,946Interest
      expense
            
            
            (169,540
            )
            
            
            —
            
            
            
            (169,540
            )Amortization
      of finance costs
            
            
            (48,000
            )
            
            
            —
            
            
            
            (48,000
            )Changes
      in fair value of warrant obligation
            
            
            (68,281
            )
            
            
            —
            
            
            
            (68,281
            )Other
      income (expense), net
            
            
            93,999
            
            
            
            37,656
            
            
            
            131,655Recovery
      of income taxes
            
            
            —
            
            
            
            (1,649,632
            )
            
            
            (1,649,632
            )Net
      loss for the period
            
            
            (419,797
            )
            
            
            (3,256,565
            )
            
            
            (3,676,362
            )Net
      loss attributable to non-controlling interest, net of tax
            
            
            —
            
            
            
            1,393,410
            
            
            
            1,393,410Net
      loss attributable OccuLogix, Inc.
            
            $
            (419,797
            )
            
            $
            (1,863,155
            )
            
            $
            (2,282,952
            )Total
      assets
            
            $
            1,915,285
            
            
            $
            1,529,513
            
            
            $
            3,444,798








Nine
      months ended September 30, 2008Retina
            
            
            Point-of-care
            
            
            TotalRevenue
            
            $
            158,300
            
            
            $
            —
            
            
            $
            158,300Expenses:Cost
      of goods sold
            
            
            26,501
            
            
            
            —
            
            
            
            26,501Operating
            
            
            2,242,124
            
            
            
            3,745,071
            
            
            
            5,988,145Restructuring
      Charges
            
            
            1,029,646
            
            
            
            —
            
            
            
            1,029,646Depreciation
      and amortization
            
            
            16,209
            
            
            
            946,611
            
            
            
            961,870Loss
      from continuing operations
            
            
            (3,156,180
            )
            
            
            (4,691,682
            )
            
            
            (7,847,862
            )Interest
      income
            
            
            63,782
            
            
            
            4,713
            
            
            
            68,495Interest
      expense
            
            
            (305,256
            )
            
            
            —
            
            
            
            (305,256
            )Amortization
      of finance costs
            
            
            (180,000
            )
            
            
            —
            
            
            
            (180,000
            )Changes
      in fair value of warrant obligation
            
            
            (68,281
            )
            
            
            —
            
            
            
            (68,281
            )Impairment
      of investments
            
            
            (450,072
            )
            
            
            —
            
            
            
            (450,072
            )Other
      income (expense), net
            
            
            114,163
            
            
            
            37,730
            
            
            
            151,893Recovery
      of income taxes
            
            
            —
            
            
            
            (430,465
            )
            
            
            (430,465
            )Net
      loss for the period
            
            
            (3,981,844
            )
            
            
            (5,079,704
            )
            
            
            (9,061,548
            )Net
      loss attributable to non-controlling interest, net of tax
            
            
            —
            
            
            
            1,964,540
            
            
            
            1,964,540Net
      loss attributable OccuLogix, Inc.
            
            $
            (3,981,844
            )
            
            $
            (3,115,164
            )
            
            $
            (7,097,008
            )Total
      assets
            
            $
            1,915,285
            
            
            $
            1,529,513
            
            
            $
            3,444,798


22
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OccuLogix,
Inc.





19.
            COMPREHENSIVE
      LOSS





Comprehensive
income (loss) is defined as the change in equity of a business enterprise during
a period from transactions and other events, including foreign currency
translation adjustments and unrealized gains (losses) on available for sale
investments. For the three and nine months ended September 30, 2009 and 2008,
Comprehensive loss and Net loss are the same.





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
assisting in the diagnosis and treatment 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 TearLab business
division in the discussion of our operating results
below.  Commercializing our TearLab 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
over 17 countries globally.




We
received 510(k) clearance of the TearLabTM Osmolarity System from the United
States Food and Drug Administration, or FDA.  The 510(k) allows 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 first half of 2010.  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 currently
operate with moderate and high complexity CLIA certifications.




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 diagnosis and treat 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) clearance and CLIA waiver approvals
from the FDA as well as the implementing a successful awareness campaign. While
we obtained the 510(k) clearance from the FDA earlier this year we are still
pursuing the CLIA waiver approval and 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 the 510(k)
clearance from the FDA and on obtaining receipt of both the 510(k) clearance and
a CLIA waiver which 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.  Including the
financing received in July and August 2009, we have sufficient cash to fund our
operations at current levels through approximately the end of December
2009.  We are actively evaluating and pursuing various financing
possibilities at this time.


23
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OccuLogix,
Inc.





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 some time 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, once the
registration statement was 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 offerings up to a total
dollar value of $30,000,000.  The registration statement was declared
effective by the SEC on July 20, 2009.





On July
15, 2009, the Company announced that it had entered into and closed an agreement
with certain investors whereby the investors agreed to provide financing (the
“Financing”) to the Company through the purchase of convertible secured notes,
in the aggregate amount of $1.55 million.  On August 31, 2009, an
additional $200,000 of financing was received by the Company to bring the total
funding received to $1.75 million. The convertible secured notes (the “Notes”)
evidencing the Financing, mature on the second anniversary of their issuance
(“the Maturity Date”), bear interest at a rate of 12% per annum and are
convertible into shares of the Company’s common stock upon the request of
holders of 51% or more of the outstanding principal amount of the Notes at any
time after August 31, 2009 and prior to the Maturity Date.  The
conversion price of the Notes (the “Discount Price”) is $1.3186 determined on
August 31, 2009 and represents 80% of the volume weighted average price on the
NASDAQ stock market for the ten trading days prior to August 31,
2009.  Any such conversion is limited to prevent the number of shares
issued upon conversion of the Notes from exceeding 19.9% of the outstanding
common stock of the Company, measured prior to the date of the
Financing.  The Notes are secured by substantially all of the assets
of the Company and the financing is subject to customary conditions to
closing.





RESULTS
OF OPERATIONS





Revenue,
Cost of Sales and Gross Margin





Three
      Months Ended September 30,
              (in
      thousands)
            
            
            Nine
      Months Ended September 30,
              (in
      thousands)2009
            
            
            2008
            
            
            Change
            
            
            2009
            
            
            2008
            
            
            Change$
            
            
            $
            
            
            $
            
            
            $
            
            
            $
            
            
            $TearLab
      revenue
            
            
            263
            
            
            
            —
            
            
            
            263
            
            
            
            603
            
            
            
            —
            
            
            
            603Retina
      revenue
            
            
            —
            
            
            
            24
            
            
            
            (24
            )
            
            
            —
            
            
            
            158
            
            
            
            (158
            )TearLab
      – cost of sales
            
            
            139
            
            
            
            —
            
            
            
            139
            
            
            
            389
            
            
            
            —
            
            
            
            389Retina
      cost of sales
            
            
            —
            
            
            
            2
            
            
            
            (2
            )
            
            
            —
            
            
            
            27
            
            
            
            (27
            )TearLab
      gross margin (loss)
            
            
            124
            
            
            
            —
            
            
            
            124
            
            
            
            214
            
            
            
            —
            
            
            
            214Percentage
      of TearLab revenue
            
            
            47
            %
            
            
            —
            
            
            
            N/M
            *
            
            
            35
            %
            
            
            —
            
            
            
            N/M
            *Retina
      gross margin (loss)
            
            
            —
            
            
            
            22
            
            
            
            22
            
            
            
            —
            
            
            
            131
            
            
            
            (131
            )Percentage
      of retina revenue
            
            
            —
            
            
            
            92
            %
            
            
            N/M
            *
            
            
            —
            
            
            
            83
            %
            
            
            N/M
            *





*N/M –
Not meaningful


24
 Table of Contents


OccuLogix,
Inc.





Revenues




TearLab
Revenue





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





The
TearLab Osmolarity System consists of the following three components: (1) the
TearLab disposable, which is a single-use microfluidic 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 distributors for exclusive distribution of TearLab
Osmolarity System in over 17 countries including the United Kingdom, the
Republic of Ireland, Germany, Spain, Switzerland, France, Turkey, Benelux,
Russia, Ukraine, Korea, Australia, Austria, Hungary, Greece, Canada 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 and 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. In May 2009, the Company received 510(k)
approval from the FDA which allows us to market our TearLab Osmolarity System to
those reference and physician operated laboratories with certifications under
the regulations of CLIA, allowing them to perform moderate and high complexity
tests. The Company completed the required updating of its labeling to reflect
the 510(k) approval and began selling in the United States in the third quarter
of 2009.  The Company recognized revenue of $603,328 and $0 in the
nine months ended September 30, 2009 and 2008, respectively.





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 nine months ended
September 30, 2008, Macumed consumed a total of 123 treatment sets, at a
negotiated price of $150 per treatment set, resulting in revenue of
$18,500.  Also during the nine months ended September 30, 2008, Diamed
Medizintechnik GmbH, or Diamed purchased 115 Octo Nova Pumps at $1,200 per pump,
resulting in $139,800 in revenue.





There was
no revenue from retina sales in the nine months ended September 30, 2009 as all
RHEO System inventory had been sold or disposed of in 2008.





TearLab Cost of
Sales





TearLab
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. Also included in TearLab cost of
sales for the nine month period ended September 30, 2009 were costs for excess
inventory of $56,340.





Retina Cost of
Sales




Cost of
sales includes costs of goods sold and royalty costs. Our cost of goods sold for
the nine months ended September 30, 2008 includes royalty fees of $25,000, and
shipping and handling costs of $1,500.  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 nine months ended September 30, 2008.





TearLab Gross
Margin





During
the nine months ended September 30, 2009, gross margin was $214,000 or 35% of
revenue; largely impacted by the provision recorded for excess inventory of
$56,340. There was no gross margin from TearLab sales in the nine months ended
September 30, 2008 as the TearLab Osmolarity System did not receive CE mark
approval until October 2008.





Retina Gross
Margin


25
 Table of Contents


OccuLogix,
Inc.





During
the nine months ended September 30, 2008, gross margin was $131,000 or 83% of
revenue, reflecting nil-value inventory items sold and royalty and shipping fees
of $25,000 and $1,500 respectively.





There was
no gross margin from retina sales in the nine months ended September 30, 2009 as
all RHEO System inventory had been sold or disposed of in 2008.




Operating
Expenses




Three
      months ended September 30
              (in
      thousands)
            
            
            Nine
      months ended September 30
              (in
      thousands)2009
            
            
            2008
            
            
            Change
            
            
            2009
            
            
            2008
            
            
            Change$
            
            
            $
            
            
            $
            
            
            $
            
            
            $
            
            
            $Amortization
      of intangible assets
            
            
            304
            
            
            
            317
            
            
            
            (13
            )
            
            
            911
            
            
            
            903
            
            
            
            8General
      and administrative
            
            
            566
            
            
            
            630
            
            
            
            (64
            )
            
            
            2,460
            
            
            
            2,914
            
            
            
            (454
            )Clinical
      and regulatory
            
            
            229
            
            
            
            672
            
            
            
            (443
            )
            
            
            868
            
            
            
            2,503
            
            
            
            (1,635
            )Sales
      and marketing
            
            
            117
            
            
            
            219
            
            
            
            (102
            )
            
            
            500
            
            
            
            629
            
            
            
            (129
            )Restructuring
      charges
            
            
            —
            
            
            
            74
            
            
            
            (74
            )
            
            
            —
            
            
            
            1,030
            
            
            
            (1,030
            )Operating
      expense
            
            
            1,216
            
            
            
            1,912
            
            
            
            (696
            )
            
            
            4,739
            
            
            
            7,979
            
            
            
            (3,240
            )





Amortization
of Intangible Assets





Amortization
of intangible assets decreased by $13,000 or 4% during the three months ended
September 30, 2009, as compared with the corresponding fiscal period in fiscal
2008 and amortization of intangible assets increased by $8,000 or 1% during the
nine months ended September 30, 2009, as compared with the corresponding fiscal
period in fiscal 2008. Variances in the amortization amounts arose from
adjustments to Section 382 losses benefitted and capitalized from January
through October of 2008.





General
and Administrative Expenses





General
and administrative expenses decreased by $64,000 or 10% during the three months
ended September 30, 2009, as compared with the corresponding period in fiscal
2008, primarily due to a $118,000 reduction in audit, tax, and Sarbanes-Oxley
compliance costs.  In addition, executive costs and Board of Directors
fees have been reduced by $150,000.  Finally legal and administration
costs have been reduced by $93,000 as a result of management headcount
reductions and reduced occupancy costs.





These
decreases were offset by a $263,000 increase in public company costs as a result
of an adjustment to accruals in 2008, and a $40,000 increase in employee-related
costs which reflects an increase in administrative headcount as our operations
have substantially shifted to San Diego, CA.





General
and administrative expenses decreased by $454,000 or 16% during the nine months
ended September 30, 2009, as compared with the corresponding period in fiscal
2008, due in part to a $411,000 reduction in audit, tax, compliance and
franchise tax costs.  Legal department costs decreased by $280,000
reflecting reduced department headcount and settlement costs incurred
2008.  Executive and administrative costs were reduced by $171,000 and
$98,000 respectively due to reduced management headcount and consolidation of
operations.





These
decreases were offset by a $310,000 increase in manufacturing and operations
department costs as our operations have substantially shifted to San Diego, CA
and increased investor relations expenses of $210,000 as a result of an
adjustment to accruals in 2008.





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 $443,000 or 66% during the three
months ended September 30, 2009, as compared with the corresponding prior year
period.  Research and development expenditures specific to TearLab
product for the three months ended September 30, 2009 and 2008 were $87,000 and
$580,000 respectively.  The decrease of $493,000 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.  This decrease was offset by a $15,000
increase in labor expense in the current year for on-going engineering
support.


26
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OccuLogix,
Inc.





An
additional decrease of $25,000 relates to the indefinite suspension of our RHEOTM
System clinical development program. This is offset by a $60,000 increase in
clinical trial expenses related to FDA 510K and CLIA certification. These
achievements allowed the Company to move forward with clinical trials and attain
the CE Mark in Europe and 510(k) approval from the FDA in the US, in advance of
commercialization but resulted in a reduced need for development
activities.





For the
nine months ended September 30, 2009 total clinical and regulatory expenses
decreased by $1,635,000 or 65%, as compared with the corresponding prior year
period.  Research and development expenditures specific to the TearLab
product for the nine months ended September 30, 2009 and 2008 were $277,000 and
$1,997,000, respectively. The decrease of $1,720,000 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.  This decrease was offset by a $121,000 increase
in labor expense in the current year for on-going engineering
support.





An
additional decrease of $107,000 relates to the indefinite suspension of our
RHEOTM System clinical development program.  This is offset by a
$71,000 increase in clinical trial expenses related to FDA 510K and CLIA
certification. These achievements allowed the Company to move forward with
clinical trials and attain the CE Mark in Europe and 510(k) approval from the
FDA in the US, in advance of commercialization but resulted in a reduced need
for development activities.





Sales
and Marketing Expense




Sales and
marketing expenses decreased by $102,000 or 47% during the three months ended
September 30, 2009, as compared with the prior period in fiscal 2008. The
decrease in TearLab marketing costs primarily reflects a $176,000 reduction in
advertising and trade show costs in the current year, offset by a $74,000
increase in stock compensation expense after a one-time adjustment in
2008.  These cost reductions have been achieved as the Company has
used fewer financial resources following the launch of the TearLab product in
Europe, Asia and the U.S.A.





Sales and
marketing expenses decreased by $129,000 or 21% during the nine months ended
September 30, 2009, as compared with the prior period in fiscal 2008. The
decrease in TearLab marketing costs primarily reflects a reduction in
advertising and trade show costs.  These costs reductions have been
achieved as the Company has used fewer financial resources following the launch
of the TearLab product in Europe, Asia and the U.S.A.





The
cornerstone of our sales and marketing strategy to date has been to increase
awareness of our products among eye care professionals and, in particular, the
key opinion leaders in the eye care professions. We assist key opinion leaders
in performing clinical trials to generate increased data to provide an increased
understanding in the use of the TearLab Osmolarity System for diagnostic,
treatment and monitoring of patients.  Presently we are primarily
focused on commercialization in Europe and developing plans to do the same in
North America when we receive the CLIA waiver. 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.





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. 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. 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.





The
Company incurred restructuring expenses of $74,128 and $1,029,646 in the three
and nine months ended September 30, 2008, respectively. There were no similar
costs incurred in 2009.




Other
Income (Expense)


27
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OccuLogix,
Inc.





Three
      Months Ended September 30,
              (in
      thousands)
            
            
            Nine
      Months Ended September 30,
              (in
      thousands)2009
            
            
            2008
            
            
            Change
            
            
            2009
            
            
            2008
            
            
            Change$
            
            
            $
            
            
            $
            
            
            $
            
            
            $
            
            
            $Interest
      income
            
            
            ―
            
            
            
            18
            
            
            
            (18
            )
            
            
            2
            
            
            
            68
            
            
            
            (66
            )Changes
      in fair value of warrant obligation
            
            
            13
            
            
            
            ―
            
            
            
            13
            
            
            
            44
            
            
            
            (68
            )
            
            
            112Interest
      expense
            
            
            (41
            )
            
            
            (170
            )
            
            
            129
            
            
            
            (41
            )
            
            
            (305
            )
            
            
            264Amortization
      of finance costs
            
            
            (135
            )
            
            
            (48
            )
            
            
            (87
            )
            
            
            (135
            )
            
            
            (180
            )
            
            
            45Impairment
      of investments
            
            
            ―
            
            
            
            (68
            )
            
            
            68
            
            
            
            ―
            
            
            
            (450
            )
            
            
            450Other
            
            
            (18
            )
            
            
            132
            
            
            
            (150
            )
            
            
            8
            
            
            
            152
            
            
            
            (144
            )(181
            )
            
            
            (136
            )
            
            
            (45
            )
            
            
            (122
            )
            
            
            (783
            )
            
            
            661





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 in the three and nine month periods ended September
30, 2009 and 2008 is indicative of the Company’s liquidation of its short-term
investment positions.





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 applicable FASB provisions.Based on these
applicable provisions, 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. The estimated fair value was determined using the
Black-Scholes option-pricing model. In addition, applicable FASB guidance
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 of September 30, 2009 and determined the aggregate fair value to be $13,590,
a decrease of $44,076 from the nominal value calculated as at December 31,
2008.





Interest
Expense





On July
15, 2009, the Company announced that it had entered into and closed an agreement
with certain investors whereby the investors agreed to provide financing (the
“Financing”) to the Company through the purchase of convertible secured notes,
in the aggregate amount of $1.55 million.  On August 31, 2009, an
additional $200,000 of financing was received by the Company to bring the total
funding received to $1.75 million. The convertible secured notes (the “Notes”)
evidencing the Financing, mature on the second anniversary of their issuance
(“the Maturity Date”), bear interest at a rate of 12% per annum and are
convertible into shares of the Company’s common stock upon the request of
holders of 51% or more of the outstanding principal amount of the Notes at any
time after August 31, 2009 and prior to the Maturity Date.  Accrued
interest of $40,752 has been reported in the three and nine months ended
September 30, 2009 and is included in short-term liabilities.





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 which was
converted into equity in October 2008, 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 due to lenders for the three
and nine months ended September 30, 2008 was $169,540 and $305,256,
respectively.


28
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OccuLogix,
Inc.





Amortization
of Deferred Finance Charges, Warrants and Beneficial Conversion
values





As a
result of the Financing that the Company entered into and which resulted in the
purchase of $1.75 million in convertible secured notes by the investors,
investors were in a position to convert the notes at a conversion price of
$1.3186 per share at a time when the common shares of the Company were trading
at $1.75 (July 15th) and
$1.70 (August 31st)
providing them with a beneficial conversion feature. The Company has valued this
feature as $727,528 and the accretion of this amount as an expense over the two
year life of the convertible secured notes in the three and nine months ended
September 30, 2009 was $106,879 and $106,879, respectively. No similar expense
was reported in the three and nine months ended September 30, 2008.





Investors
in the Financing will receive warrants at an exercise price of $1.60 upon
conversion of the convertible secured notes. The Company has valued these
warrants using the Black-Scholes value model at a value of $162,621. The
accretion of this amount as an expense over the two year life of the convertible
secured notes in the three and nine months ended September 30, 2009 was $23,550
and $23,550, respectively. No similar expense was reported in the three and nine
months ended September 30, 2008.





Issuance
costs of the Financing totaled $67,008 and have been allocated to cost of equity
and to deferred finance charges. The amortization of the deferred finance
charges as an expense over the two year life of the convertible secured notes in
the three and nine months ended September 30, 2009 was $4,816 and $4,816,
respectively.





Finance
costs for the three and nine months ended September 30, 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 $48,000 and $180,000 for the three and nine months
ended September 30, 2008, respectively.





Impairment
of Investments




As of
September 30, 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 auction rate securities, 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 was 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.   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.





Impairment
costs of $68,281 and $450,072 for the three and nine months ended September 30,
2008 were reported as an expense.  As the ARS were liquidated in late
2008, no similar expense was incurred in the three and nine months ended
September 30, 2009.





Other




Other
income for the nine months ended September 30, 2008 was $152,000 including a
foreign exchange gain of $107,000 and a gain of $48,000 reflecting prior RHEO
system royalty commitments which were not paid.




Other
income for the nine months ended September 30, 2009 was $8,000 including a
foreign exchange gain of $4,000, and a gain of $4,000 on the disposal of fixed
assets.




Recovery
of Income Taxes





Recovery
of income taxes increased by $2,398,000 to $1,968,000 during the nine months
ended September 30, 2009, as compared with an income tax expense of $430,000 in
the nine months ended September 30, 2008. The recovery of income taxes for the
three months ended September 30, 2009 increased by $2,268,000 to $618,000 as
compared to an income tax expense of $1,650,000 reported in the three months
ended September 30, 2008. As a result of the completion of the reorganization
transactions on October 6, 2008, TearLab, Inc.’s tax filings can be consolidated
with those of the Company’s. Accordingly, income tax benefits were reported on
losses incurred both by OccuLogix and TearLab, Inc. in the three and nine months
ended September 30, 2009 while in the three and nine months ended September 30,
2008, the reorganization transactions reflected a change of control for tax
purposes making Section 382 provisions of the Income Tax Code applicable and
resulted in the reversal of a large portion of tax losses previously benefitted
and reported.





To date,
the Company has recognized income tax benefits in the aggregate amount of $3.8
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.


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Inc.





Recovery
of income taxes for the three and nine months ended September 30, 2009 and 2008,
respectively 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 nine months ended
September 30, 2009 were $417,000, as compared with amortization of $361,000 for
the nine months ended September 30, 2008. The amounts recorded for the three
months ended September 30, 2009 and September 30, 2008 were $174,000 and
121,000, respectively.





The
deferred tax liability recorded upon the acquisition of TearLab, Inc. of $5.2
million represents the difference between the fair value of the intangible
assets acquired by the Company upon its acquisition of TearLab, Inc. 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.





The
deferred tax liability recorded upon the closing of the Financing of $0.4
million represents the difference between the value of the funding received from
investors in the Financing and the book value recorded after allocating value to
the warrants and beneficial conversion feature associated with the Financing.
The deferred tax liability is being amortized over an average period of two
years, the term of the short-term liabilities if not converted.





Non-controlling
Interest




Minority
stockholder’s share of net losses from TearLab operations for the three and nine
months ended September 30, 2008 was $1,393,000 and $1,965,000, respectively. 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 and nine months ended September 30, 2009.





Liquidity
and Capital Resources


(in
thousands)





September
      30,
            
            
            December
      31,2009
            
            
            2008
            
            
            ChangeCash
      and cash equivalents
            
            $
            967
            
            
            $
            2,565
            
            
            $
            (1,598
            )Percentage
      of total assets
            
            
            9%
            
            
            
            19%Working
      capital
            
            $
            (775
            )
            
            $
            1,550
            
            
            $
            (2,325
            )




Financial
Condition





Management
believes that our cash, cash equivalents and short-term will be sufficient to
meet our operating activities and other demands until approximately the end of
December 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 approval from the
  FDA;





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


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OccuLogix,
Inc.





·
            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 while we
have received 510(k) approval from the FDA which allows us to commercialize our
product in the United States, we are currently limited to selling to facilities
that have moderate and high complexity CLIA certifications.  Obtaining
a CLIA waiver approval from the FDA will enable us to market our product to the
approximately 50,000 eye care practitioners that do not operate with moderate
and high complexity CLIA certifications.  At this time, we do not know
when we can expect to begin to generate significant revenues from the TearLab
Osmolarity System in the United States.





We will
need additional capital in approximately December 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 December 2009.





Ongoing
Sources and Uses of Cash





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.




Changes
in Cash Flows





Nine
      months ended September 30, (in thousands)2009
            
            
            2008
            
            
            ChangeCash
      used in operating activities
            
            $
            (3,257
            )
            
            $
            (6,305
            )
            
            $
            3,048Cash
      used in investing activities
            
            
            (24
            )
            
            
            (346
            )
            
            
            322Cash
      provided by financing activities
            
            
            1,683
            
            
            
            6,523
            
            
            
            (4,840
            )Net
      decrease in cash and cash equivalents  period
            
            $
            (1,598
            )
            
            $
            (128
            )
            
            $
            (1,470
            )





Cash
Used in Operating Activities




Net cash
used to fund our operating activities during the nine months ended September 30,
2009 was $3,257,000.  Net loss during the nine month period was
$2,678,000. 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,
stock-based compensation, amortization of prepaid or deferred finance charges,
accretion of warrant and beneficial conversion values and accrued interest from
the convertible secured note financing in the aggregate total of $1,474,000.
Offsetting additional non-cash amounts which comprise a portion of the net loss
during that period include deferred tax charges of $1,968,000 and gain on
disposal of fixed assets of $4,000.





The net
change in non-cash working capital balances related to operations for the six
months ended June 30, 2009 and 2008 consists of the following:




Cash
      provided (used)
            
            Nine
      months ended
              September
      30, (in thousands)2009
            
            
            2008$
            
            
            $Amounts
      receivable, net
            
            
            241
            
            
            
            346Inventory
            
            
            (47
            )
            
            
            (31
            )Prepaid
      expenses
            
            
            22
            
            
            
            303Other
      current assets
            
            
            (16
            )
            
            
            (261
            )Accounts
      payable
            
            
            (66
            )
            
            
            (758
            )Accrued
      liabilities
            
            
            (203
            )
            
            
            589Deferred
      revenue
            
            
            (68
            )
            
            
            97Due
      to stockholders
            
            
            15
            
            
            
            (17
            )Short
      term liabilities
            
            
            41
            
            
            
            305(81
            )
            
            
            573




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Inc.





·
            Accounts
      receivable decreased due to receipts of TearLab distributor fees and
      recovery of amounts due for sales
taxes.


·
            Inventory
      increased, reflecting sales of the TearLabTMOsmolarity
      System at a slower rate than production inventory
      acquired.


·
            Prepaid
      expenses decreased primarily due to the amortization of prepaid
      insurance.


·
            Other
      current assets increased due to deferred finance charges associated with
      the Financing.


·
            Accounts
      payable decreased 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.


·
            Deferred
      revenue decreased, reflecting the shipment of TearLab products for which
      customers had paid in advance.


·
            Amounts
      due to stockholders increased, reflecting unpaid amounts related to
      administrative services provided by TLC Vision
  Corporation.





Cash
Used in Investing Activities




Net cash
used in investing activities for the nine months ended September 30, 2009 was
$24,000. Cash used in investing activities during the period consists of $28,000
used to acquire fixed assets, net of proceeds of $4,000 on sale of fixed
assets.





Net cash
used in investing activities for the nine months ended September 30, 2008 was
$346,000. Cash used in investing activities during the period consisted of cash
in the amount of $51,000 used to acquire fixed assets, cash in the amount of
$95,000 used for capitalizable patents and trademark costs and restricted funds
at quarter end of $200,000.





Cash
Provided by Financing Activities




During
the first nine months ended September 30, 2009, the Company issued convertible
secured notes in a principal amount of $1,750,000, offset by costs of $67,000.
The notes have a two year term. During the first nine months ended September 30,
2008, the Company secured bridge financing in a principal amount of $6,703,500,
offset by costs of $180,000. The debt was prepaid in full on October 6,
2008.





Critical
Accounting Policies and Estimates





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





There
were no significant changes during the nine months ended September 30, 2009 to
the items that we disclosed as our critical accounting policies and estimates in
Management’s Discussion and Analysis of Financial Condition and Results of
Operations in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2008.





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
nine months ended September 30, 2009 included in Item 1.


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Inc.





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 operating requirements.  Based
on the balances in the Canadian dollar and Australian dollar denominated bank
accounts at September 30, 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
nine months ended September 30, 2009 would reduce interest income by under
$10,000 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 nine-month period ended September 30, 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 September 30, 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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Inc.





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
TearLabTM Osmolarity System is currently our only product.  Our product
is currently sold outside of the United States pursuant to CE mark approval and
in the United States as a result of having received 510(k) approval from the FDA
to market the TearLabTM Osmolarity System to those reference and physician
operated laboratories with moderate and high complexity CLIA
certifications.  We intend to seek a CLIA waiver, from the U.S. Food
and Drug Administration, or the FDA which will allow us to sell to those eye
care professionals who do not have Clinical Laboratory Improvement Act, or CLIA
certifications to perform moderate and high complexity tests.  Even if
the TearLab Osmolarity System receives all regulatory approvals in the United
States, it may never be successfully commercialized.  If the TearLab
Osmolarity System does not receive all regulatory approvals 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 approvals 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. 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
deficit at September 30, 2009 was $775,428, which represents a $2,325,009
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.  On August 31, 2009, we completed
a convertible secured debt funding for gross proceeds of $1,750,000. 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 as well as the proceeds received from the July 15, 2009 and
August 31, 2009 convertible secured debt financing will be sufficient to meet
our operating activities and other demands only until approximately December
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.


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OccuLogix,
Inc.





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.  Our losses in the nine months ended September 30, 2009
were $2.7 million and as of September 30, 2009, we had an accumulated deficit of
$370.7 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
CLIA waiver approval from the FDA 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.




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




As of
September 30, 2009, our total indebtedness was approximately $2.4
million.  Our significant debt and debt service requirements could
adversely affect our ability to operate our business and may limit our ability
to take advantage of potential business opportunities.  For example,
our high level of debt presents the following risks:





·
            our
      substantial leverage increases our vulnerability to economic downturns and
      adverse competitive and industry conditions and could place us at a
      competitive disadvantage compared to those of our competitors that are
      less leveraged;





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





·
            our
      level of debt may restrict us from raising additional financing on
      satisfactory terms to fund working capital, capital expenditures, product
      development efforts, strategic acquisitions, investments and alliances,
      and other general corporate
requirements.




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




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




Since
inception, we have funded our operations through debt and equity financings,
including 2008 common stock and debt bridge financings and 2009 convertible
secured debt financings.  We estimate that we have sufficient
resources to fund operations through December 2009, and our prospects for
obtaining additional financing are uncertain.  Our most recent
capital-raising efforts, the convertible secured debt financing consummated in
third quarter of 2009, 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 not be sufficient for us to continue as a going
concern and it may be on terms that adversely affect the interest of our
existing stockholders.  In addition, future financings could result in
significant dilution of existing stockholders and adversely affect the economic
interests of existing stockholders.  However, unless we succeed in
raising additional capital, we anticipate that we will be unable to continue our
operations beyond approximately December 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.


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OccuLogix,
Inc.





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




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




·
            We may not receive 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.




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




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




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




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




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




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




·
            refusal to grant export approval
      for our products;




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




·
            criminal
      prosecution.





If 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.


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OccuLogix,
Inc.





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.




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;


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OccuLogix,
Inc.





·
            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.




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.


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OccuLogix,
Inc.





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 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.




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;


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OccuLogix,
Inc.





·
            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.




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.





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





None.





ITEM3.
            DEFAULTS
      UPON SENIOR SECURITIES


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 Table of Contents


There has
not been any default upon our senior securities.





ITEM4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS





None.




ITEM
      5.
            OTHER
      INFORMATION





None.


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 Table of Contents


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, 2004.10.5
            
            Securities
      Purchase Agreement, dated July 15, 2009 (incorporated by reference to
      Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with
      the Commission on July 16, 2009).10.6
            
            Form
      of 12% Convertible Secured Note (incorporated by reference to Exhibit 10.2
      to the Registrant’s Current Report on Form 8-K, filed with the Commission
      on July 16, 2009).10.7
            
            Form
      of Warrant (incorporated by reference to Exhibit 10.3 to the Registrant’s
      Current Report on Form 8-K, filed with the Commission on July 16,
      2009).10.8
            
            Security
      Agreement, dated July 15, 2009 (incorporated by reference to Exhibit 10.4
      to the Registrant’s Current Report on Form 8-K, filed with the Commission
      on July 16, 2009).10.9
            
            Form
      of Director and Affiliate Letter Agreement (incorporated by reference to
      Exhibit 10.5 to the Registrant’s Current Report on Form 8-K, filed with
      the Commission on July 16, 2009).10.10
            
            Capital
      Advisory Agreement with Greybrook Capital Inc., dated November 3, 2009
      (incorporated by reference to Exhibit 10.1 to the Registrant’s Current
      Report on Form 8-K, filed with the Commission on November 3,
      2009).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:
      November 13, 2009
            /s/
      Elias VamvakasElias
      VamvakasChief
      Executive Officer





44