U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
T
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
|
For the
quarterly period ended:
March 31,
2008
£
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
|
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)
|
|
(IRS
Employer Identification No.)
|
2600 Skymark Avenue, Unit 9,
Suite 201, Mississauga, Ontario L4W 5B2
(Address
of principal executive offices)
(905)
602-0887
(Registrant’s
telephone number)
Check whether the registrant (1) filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes
T
No
£
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer
£
|
Accelerated
filer
T
|
Non-accelerated
filer
£
|
Indicate
by check mark whether the registrant is a shell company as defined in Rule 12b-2
of the Exchange Act. (Check one):
Yes
£
No
T
State the
number of shares outstanding of each of the registrant’s classes of common
equity, as of the latest practical date:
57,306,145 as of
May
12
, 2008
Spe
cial Note Regarding Forward-Looking Statements
PART
I.
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FINANCIAL
INFORMATION
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Item
1.
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Item
2.
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Item
3.
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Item
4.
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PART
II.
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OTHER
INFORMATION
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Item
1.
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Item
2.
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Item
3.
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Item
4.
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Item
5.
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Item
6.
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SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q contains forward-looking statements relating to
future events and our future performance within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. In some cases, you can identify
forward-looking statements by terms such as “may”, “will”, “should”, “could”,
“would”, “expects”, “plans”, “intends”, “anticipates”, “believes”, “estimates”,
“projects”, “predicts”, “potential” and similar expressions intended to identify
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from any future results, performance,
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 “$” or “dollars” shall mean U.S. dollars unless
otherwise indicated. References to “C$” shall mean Canadian
dollars.
OccuLogix,
Inc.
PART
I. FINANCIAL
INFORMATION
ITEM
1.
CONSOLIDATED
FINANCIAL STATEMENTS
OccuLogix,
Inc.
CONSOLIDATED
BALANCE SHEETS
(expressed
in U.S. dollars
)
(Unaudited)
(Going Concern Uncertainty – See Note
1)
|
|
March
31,
2008
|
|
|
December
31,
2007
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
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ASSETS
|
|
|
|
|
|
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Current
|
|
|
|
|
|
|
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Cash
and cash equivalents
|
|
|
2,329,718
|
|
|
|
2,235,832
|
|
Amounts
receivable, net
|
|
|
162,094
|
|
|
|
374,815
|
|
Inventory,
net
|
|
|
41,213
|
|
|
|
―
|
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Prepaid
expenses
|
|
|
445,296
|
|
|
|
481,121
|
|
Prepaid
finance costs
|
|
|
139,000
|
|
|
|
―
|
|
Deposits
|
|
|
13,334
|
|
|
|
10,442
|
|
Total current assets
|
|
|
3,130,655
|
|
|
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3,102,210
|
|
Fixed
assets, net
|
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|
113,966
|
|
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122,286
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Patents
and trademarks, net
|
|
|
168,496
|
|
|
|
139,437
|
|
Investments
|
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|
536,264
|
|
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863,750
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|
Intangible assets, net
|
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5,883,171
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5,770,677
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Total assets
|
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|
9,832,552
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9,998,360
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
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Current
|
|
|
|
|
|
|
|
|
Accounts
payable
|
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|
364,013
|
|
|
|
1,192,807
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Accrued
liabilities
|
|
|
2,933,396
|
|
|
|
2,873,451
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Due
to stockholders
|
|
|
74,053
|
|
|
|
32,814
|
|
Deferred
revenue
|
|
|
106,700
|
|
|
|
―
|
|
Short term liabilities and accrued
interest
|
|
|
3,040,438
|
|
|
|
―
|
|
Total
current liabilities
|
|
|
6,518,600
|
|
|
|
4,099,072
|
|
Minority interest
|
|
|
274,288
|
|
|
|
―
|
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Stockholders’
equity
|
|
|
|
|
|
|
|
|
Capital
stock
|
|
|
|
|
|
|
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Common
stock
|
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57,306
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57,306
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Par
value of $0.001 per share
|
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Authorized:
75,000,000; Issued and outstanding:
|
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March
31, 2008 – 57,306,145; December 31, 2007 – 57,306,145
|
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|
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Additional
paid-in capital
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362,486,775
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362,402,899
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Accumulated deficit
|
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(359,504,417
|
)
|
|
|
(356,560,917
|
)
|
Total stockholders’ equity
|
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3,039,664
|
|
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|
5,899,288
|
|
Total liabilities and stockholders’
equity
|
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9,832,552
|
|
|
|
9,998,360
|
|
See
accompanying notes to interim consolidated financial statements
OccuLogix,
Inc.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(expressed
in U.S. dollars except number of shares)
(Unaudited)
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|
Three
months ended
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March
31,
|
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|
2008
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|
2007
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$
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$
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Revenue
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Retina
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7,200
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|
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90,000
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Cost
of goods sold
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Retina
|
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Cost
of goods sold, net of goods recovered
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(444
|
)
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7,100
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Royalty costs
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25,000
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25,000
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24,556
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32,100
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(17,356
|
)
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57,900
|
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Operating
expenses
|
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General
and administrative
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1,365,484
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2,433,490
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Clinical
and regulatory
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1,022,987
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2,169,739
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Sales and marketing
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176,529
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472,536
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2,565,000
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5,075,765
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Loss from operations
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(2,582,356
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)
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(5,017,865
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)
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Other
income (expense)
|
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Interest
income
|
|
|
30,288
|
|
|
|
215,438
|
|
Changes
in fair value of warrant obligation and warrant
expense
|
|
|
―
|
|
|
|
(723,980
|
)
|
Impairment
of investments
|
|
|
(327,486
|
)
|
|
|
―
|
|
Interest
expense
|
|
|
(40,438
|
)
|
|
|
(16,641
|
)
|
Amortization
of finance costs
|
|
|
(41,000
|
)
|
|
|
―
|
|
Other
|
|
|
17,492
|
|
|
|
15,873
|
|
Minority interest
|
|
|
―
|
|
|
|
554,848
|
|
|
|
|
(361,144
|
)
|
|
|
45,538
|
|
Loss from continuing operations before income
taxes
|
|
|
(2,943,500
|
)
|
|
|
(4,972,327
|
)
|
Recovery of income taxes
|
|
|
―
|
|
|
|
1,981,325
|
|
Loss from continuing
operations
|
|
|
(2,943,500
|
)
|
|
|
(2,991,002
|
)
|
Loss from discontinued
operations
|
|
|
―
|
|
|
|
(1,281,742
|
)
|
Net loss for the period
|
|
|
(2,943,500
|
)
|
|
|
(4,272,744
|
)
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Weighted average number of shares outstanding -
basic and diluted
|
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|
57,306,145
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54,558,769
|
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Net loss per share – basic and
diluted
|
|
|
(0.05
|
)
|
|
|
(0.08
|
)
|
See accompanying notes to interim
consolidated financial statements
OccuLogix,
Inc.
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(expressed
in U.S. dollars)
(Unaudited)
|
|
Voting
common stock at
par
value
|
|
|
Additional
paid-in capital
|
|
|
Accumulated
deficit
|
|
|
Net
stockholders’ equity
|
|
|
|
shares issued
|
|
|
|
|
|
|
|
|
|
|
|
|
#
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2007
|
|
|
57,306,145
|
|
|
|
57,306
|
|
|
|
362,402,899
|
|
|
|
(356,560,917
|
)
|
|
|
5,899,288
|
|
Stock-based
compensation
|
|
|
―
|
|
|
|
―
|
|
|
|
38,124
|
|
|
|
―
|
|
|
|
38,124
|
|
Change
in OcuSense, Inc.’s stockholders’ equity, stock-based
compensation
|
|
|
―
|
|
|
|
―
|
|
|
|
45,752
|
|
|
|
―
|
|
|
|
45,752
|
|
Net loss for the period
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
(2,943,500
|
)
|
|
|
(2,943,500
|
)
|
Balance, March 31, 2008
|
|
|
57,306,145
|
|
|
|
57,306
|
|
|
|
362,486,775
|
|
|
|
(359,504,417
|
)
|
|
|
3,039,664
|
|
See
accompanying notes to interim consolidated financial statements
OccuLogix,
Inc.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(expressed
in U.S. dollars)
(Unaudited)
|
|
Three Months ended
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Net
loss for the period
|
|
|
(2,943,500
|
)
|
|
|
(4,272,744
|
)
|
Adjustments
to reconcile net loss to cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
83,876
|
|
|
|
609,503
|
|
Amortization of
fixed assets
|
|
|
17,638
|
|
|
|
94,321
|
|
Amortization
of patents and trademarks
|
|
|
4,814
|
|
|
|
520
|
|
Amortization
of intangible asset
|
|
|
161,795
|
|
|
|
1,291,802
|
|
Amortization
of prepaid finance costs
|
|
|
41,000
|
|
|
|
|
|
Impairment
of intangible asset
|
|
|
—
|
|
|
|
204,896
|
|
Changes
in fair value of warrant obligation and warrant expense
|
|
|
—
|
|
|
|
723,980
|
|
Deferred
tax liability, net
|
|
|
—
|
|
|
|
(2,879,350
|
)
|
Impairment
of investments
|
|
|
327,486
|
|
|
|
—
|
|
Minority
interest
|
|
|
—
|
|
|
|
(554,848
|
)
|
Net change in non-cash working capital balances
related to operations
|
|
|
(376,033
|
)
|
|
|
92,350
|
|
Cash used in operating
activities
|
|
|
(2,682,924
|
)
|
|
|
(4,689,570
|
)
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase
of short-term investments
|
|
|
—
|
|
|
|
(5,025,000
|
)
|
Additions
to fixed assets
|
|
|
(9,317
|
)
|
|
|
(71,189
|
)
|
Additions to patents and
trademarks
|
|
|
(33,873
|
)
|
|
|
(31,554
|
)
|
Cash used in investing
activities
|
|
|
(43,190
|
)
|
|
|
(5,127,743
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds
from the issuance of common stock
|
|
|
—
|
|
|
|
10,016,000
|
|
Share
issuance costs
|
|
|
—
|
|
|
|
(672,986
|
)
|
Proceeds
of bridge financing
|
|
|
3,000,000
|
|
|
|
—
|
|
Loan issuance costs
|
|
|
(180,000
|
)
|
|
|
—
|
|
Cash provided by financing
activities
|
|
|
2,820,000
|
|
|
|
9,343,014
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents during the
period
|
|
|
93,886
|
|
|
|
(474,299
|
)
|
Cash and cash equivalents, beginning of
period
|
|
|
2,235,832
|
|
|
|
5,740,697
|
|
Cash and cash equivalents, end of
period
|
|
|
2,329,718
|
|
|
|
5,266,398
|
1
|
(1)
|
As
at December 31, 2006, cash and cash equivalents of $5,740,697 included
cash and cash equivalents of discontinued operations of
$35,462.
|
See
accompanying notes to interim consolidated financial statements
OccuLogix,
Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(expressed
in U.S. dollars except as otherwise stated)
March 31,
2008
(Unaudited)
1.
|
BASIS
OF PRESENTATION, GOING CONCERN UNCERTAINTY AND ACCOUNTING
POLICIES
|
Basis
of presentation
The
accompanying unaudited interim consolidated financial statements have been
prepared in accordance with United States generally accepted accounting
principles (“US GAAP”). These unaudited interim consolidated financial
statements contain all normal recurring adjustments and estimates necessary to
present fairly the financial position of OccuLogix, Inc. (the “Company”) as
at March 31, 2008 and the results of its operations for the three months
then ended. These unaudited interim consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
included in the Company’s latest Annual Report on Form 10-K filed with the
U.S. Securities and Exchange Commission (the “SEC”) on March 17, 2008. Interim
results are not necessarily indicative of results for a full
year.
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 $68,139,314 for the year ended December 31, 2007 and
$2,943,500 and $4,272,744 for the three months ended March 31, 2008 and 2007,
respectively. The Company’s working capital deficiency at March 31, 2008 is
$3,387,945, which represents a $2,391,083 increase in its working capital
deficiency from $996,862 at December 31, 2007. 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.
On
February 19, 2008, the Company announced that it has secured a bridge loan in an
aggregate principal amount of $3,000,000 (less transaction costs
of $180,000) from a number of private parties. The loan bears
interest at a rate of 12% per annum and has a 180-day term, which may be
extended to 270 days under certain circumstances. The Company has pledged its
shares of the capital stock of OcuSense Inc. (“OcuSense”) as collateral for the
loan.
On May 5,
2008, subsequent to quarter end, the Company announced that it had secured a
bridge loan in an aggregate principal amount of $300,000 (less transaction costs
of approximately $18,000) from a number of private parties (“Additional Bridge
Loan”). The Additional Bridge Loan constitutes an increase to the principal
amount of the U.S.$3,000,000 principal amount bridge loan that the Company
announced on February 19, 2008 (the “Original Bridge Loan”) and was advanced on
substantially the same terms and conditions as the Original Bridge Loan,
pursuant to an amendment of the loan agreement for the Original Bridge Loan. The
Additional Bridge Loan bears interest at a rate of 12% per annum and will have
the same maturity date as the Original Bridge Loan. The Company has pledged its
shares of the capital stock of OcuSense as collateral for the loan.
Under the
terms of the Original Bridge Loan agreement, the Company has two pre-payment
options available to it, should it decide to not wait until the maturity date to
repay the loan. Under the first pre-payment option, the Company may repay the
Original Bridge Loan in full by paying the lenders, in cash, the amount of
outstanding principal and accrued interest and issuing to the lenders five-year
warrants in an aggregate amount equal to approximately 19.9% of the issued and
outstanding shares of the Company’s common stock (but not to exceed 20% of the
issued and outstanding shares of the Company’s common stock). The warrants would
be exercisable into shares of the Company’s common stock at an exercise price of
$0.10 per share and would not become exercisable until the 180th day following
their issuance. Under the second pre-payment option, provided that the Company
has closed a private placement of shares of its common stock for aggregate gross
proceeds of at least $4,000,000, the Company may repay the Original Bridge Loan
in full by issuing to the lenders shares of its common stock, in an aggregate
amount equal to the amount of outstanding principal and accrued interest, at a
15% discount to the price paid by the private placement investors. Any exercise
by the Company of the second pre-payment option would be subject to stockholder
and regulatory approval. Should the Company exercise either of these pre-payment
options, it will be obligated to pre-pay the Additional Bridge Loan in the same
manner, provided that the Company, in no event, shall be obligated to issue
warrants exercisable into shares in a number that exceeds 20% of the issued and
outstanding shares of the Company’s common stock on the date of
pre-payment.
Management
believes that these proceeds, together with the Company’s existing cash, will be
sufficient to cover its operating activities and other demands only until
approximately the middle of July 2008. The Company currently is not
generating cash from operations, and most of its cash has been, and is being,
utilized to fund its operations and to fund ongoing development activities at
OcuSense. The Company’s operating expenses in the three months ended March 31,
2008 have consisted mostly of expenses relating to the completion of
the product development of the TearLab™ test for dry eye disease, or
DED. Unless the Company raises additional capital, it will not have
sufficient cash to support its operations beyond approximately the middle of
July 2008.
On
October 9, 2007, the Company announced that its Board of Directors, (“the
Board”), had authorized management and the Company’s advisors to explore the
full range of strategic alternatives available to enhance shareholder value.
These alternatives may include, but are not limited to, the raising of capital
through the sale of securities, one or more strategic alliances and the
combination, sale or merger of all or part of OccuLogix. In making the
announcement, the Company stated that there can be no assurance that the
exploration of strategic alternatives will result in a transaction. To date, the
Company has not disclosed, nor does it intend to disclose, developments with
respect to its exploration of strategic alternatives unless and until the Board
has approved a specific transaction.
For some
time prior to the October 9, 2007 announcement, the Company had been seeking to
raise additional capital, with the objective of securing funding sufficient to
sustain its operations as it had been clear that, unless the Company was able to
raise additional capital, the Company would not have had sufficient cash to
support its operations beyond early 2008. The Board’s decisions to suspend the
Company’s RHEO™ System clinical development program and to dispose of SOLX were
made and implemented in order to conserve as much cash as possible while the
Company continued its capital-raising efforts.
On
January 9, 2008, the Company announced the departure, or pending departure, of
seven members of its executive team and, commencing on February 1, 2008, a 50%
reduction in the salary of each of Elias Vamvakas, its Chairman and Chief
Executive Officer, and Tom Reeves, its President and Chief Operating Officer. By
January 31, 2008, a total of 12 non-executive employees of the Company left the
Company’s employment.
As at
March 31, 2008, the Company had investments in the aggregate principal amount of
$1,900,000 which consist of investments in four separate asset-backed auction
rate securities yielding an average return of 3.94% per
annum. However, as a result of market conditions, all of these
investments have recently failed to settle on their respective settlement dates
and have been reset to be settled at future dates with an average maturity of 46
days. Due to the current lack of liquidity for asset-backed
securities of this type, the Company has concluded that the carrying value of
these investments was higher than its fair value as of March 31, 2008.
Accordingly, these auction rate securities have been recorded at their estimated
fair value of $536,264 which represents a decline of $1,363,736 in the carrying
value of these auction rate securities. The Company considers this to be an
other-than-temporary reduction in the value. Accordingly, the loss for the
period associated with these auction rate securities of $327,486 has been
included as an impairment of investments in the Company’s consolidated statement
of operations for the quarter ended March 31, 2008. Although the Company
continues to receive payment of interest earned on these securities, the Company
does not know at the present time when it will be able to convert these
investments into cash. Accordingly, management has classified these
investments as a non-current asset on its consolidated balance sheet as of March
31, 2008. Management will continue to monitor these investments closely for
future indications of further impairment. The illiquidity of these investments
may have an adverse impact on the length of time during which the Company
currently expects to be able to sustain its operations in the absence of an
additional capital raise by the Company as we do not have the cash reserves to
hold these auction rate securities until the market recovers nor can we hold
these securities until their contractual maturity dates.
The
unaudited interim 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 the Company were not able to continue its existence as a going
concern.
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, 2007 except as noted below.
Management
believes that all adjustments necessary for the fair presentation of results,
consisting of normally recurring items, have been included in the
unaudited financial statements for the interim periods presented. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 option and warrant programs.
Recent Accounting
Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements.” This standard defines fair value, establishes a framework for
measuring fair value in accounting principles generally accepted in the United
States of America, and expands disclosure about fair value measurements. This
pronouncement applies to other accounting standards that require or permit fair
value measurements. Accordingly, this statement does not require any new fair
value measurement. This statement is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. In
December of 2007, the FASB agreed to a one year deferral of SFAS No. 157’s fair
value measurement requirements for non-financial assets and liabilities that are
not required or permitted to be measured at fair value on a recurring basis. The
Company adopted SFAS No. 157 on January 1, 2008, which had no effect
on the Company’s consolidated financial statements. Refer to Note 8, “Fair value
measurements” for additional information related to the adoption of SFAS
No. 157.
In
February 2007, FASB issued Statement No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities—Including an amendment of FASB
Statement No. 115” (“SFAS No. 159”). SFAS No. 159 expands the use of fair
value accounting but does not affect existing standards which require assets or
liabilities to be carried at fair value. Under SFAS No. 159, a company may elect
to use fair value to measure accounts and loans receivable, available-for-sale
and held-to-maturity securities, equity method investments, accounts payable,
guarantees and issued debt. Other eligible items include firm commitments for
financial instruments that otherwise would not be recognized at inception and
non-cash warranty obligations where a warrantor is permitted to pay a third
party to provide the warranty goods or services. If the use of fair value is
elected, any upfront costs and fees related to the item must be recognized in
earnings and cannot be deferred (e.g., debt issue costs). The fair value
election is irrevocable and generally made on an instrument-by-instrument basis,
even if a company has similar instruments that it elects not to measure based on
fair value. At the adoption date, unrealized gains and losses on existing items
for which fair value has been elected are reported as a cumulative adjustment to
beginning retained earnings.
Subsequent
to the adoption of SFAS No. 159, changes in fair value are recognized in
earnings. SFAS No. 159 is effective for fiscal years beginning on or after
November 15, 2007 and is required to be adopted by the Company in the first
quarter of fiscal 2008. The adoption of SFAS No. 159 has not had a material
impact on the Company’s results of operations and financial
position.
On June
14, 2007, the Financial Accounting Standards Board ("FASB") ratified EITF 07-3,
"Accounting for Non-Refundable Advance Payments for Goods or Services to Be Used
in Future Research and Development Activities". EITF 07-3 requires that all
non-refundable advance payments for R&D activities that will be used in
future periods be capitalized until used. In addition, the deferred research and
development costs need to be assessed for recoverability. EITF 07-3 is
applicable for fiscal years beginning after December 15, 2007 and is to be
applied retroactively through a cumulative catch-up adjustment. The adoption
of EITF 07-3 has not had a material impact on the Company’s results
of operations and financial position.
In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities — An Amendment of FASB Statement
No. 133.” SFAS No. 161 enhances the required disclosures regarding
derivatives and hedging activities, including disclosures regarding how an
entity uses derivative instruments, how derivative instruments and related
hedged items are accounted for under SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” and how derivative instruments
and related hedged items affect an entity’s financial position, financial
performance, and cash flows. SFAS No. 161 is effective for fiscal years
beginning after November 15, 2008. Management is currently evaluating the
requirements of SFAS No. 161 and has not yet determined the impact, if any,
on the Company’s consolidated financial statements.
The
Company’s intangible assets consist of the value of the exclusive distribution
agreements that the Company has with its major suppliers and other
acquisition-related intangibles. The Company has no indefinite-lived intangible
assets. The distribution agreements and other acquisition-related intangible
assets are amortized using the straight-line method over an estimated useful
life of 15 and 10 years, respectively.
The
Company’s other intangible assets consist of the value of the exclusive
distribution agreements the Company has with Asahi Medical, the manufacturer of
the Rheofilter filters and the Plasmaflo filters, and Diamed and MeSys, the
designer and the manufacturer, respectively, of the OctoNova pumps. The
Rheofilter filter, the Plasmaflo filter and the OctoNova pump are components of
the RHEO™ System, the Company’s product for the treatment of Dry AMD. On
November 1, 2007, the Company announced an indefinite suspension of the RHEO™
System clinical development program for Dry AMD and is in the process of winding
down the RHEO-AMD study as there is no reasonable prospect that the RHEO™ System
clinical development program will be relaunched in the foreseeable
future. In accordance with SFAS No. 144, the Company concluded that
its indefinite suspension of the RHEO™ System clinical development program for
Dry AMD was a significant event which may affect the carrying value of its
distribution agreements. Accordingly, management was required to re-assess
whether the carrying value of the Company’s distribution agreements was
recoverable as at December 31, 2007. Based on management’s estimates of
undiscounted cash flows associated with the distribution agreements, the Company
concluded that the carrying value of the distribution agreements was not
recoverable as at December 31, 2007. Accordingly, the Company recorded an
impairment charge of $20,923,028 during the year ended December 31, 2007 to
record the distribution agreements at their fair value as at December 31, 2007
bringing the net balance to nil. As a result, amortization expense from
continuing operations for the three months ended March 31, 2008 in connection
with the distribution agreements is nil.
On
December 19, 2007, the Company sold to Solx Acquisition all of the issued and
outstanding shares of the capital stock of SOLX, which had been the Glaucoma
division of the Company prior to the completion of the transactions provided for
in the stock purchase agreement. The sale transaction established fair values
for the Company’s recorded goodwill and the Company’s shunt and laser technology
and regulatory and other intangible assets acquired upon the acquisition of SOLX
on September 1, 2006. Accordingly, management was required to re-assess whether
the carrying value of the Company’s shunt and laser technology and regulatory
and other intangible assets was recoverable as at December 1, 2007. Based on
management’s estimates of undiscounted cash flows associated with these
intangible assets, the Company concluded that the carrying value of these
intangible assets was not recoverable as at December 1, 2007. Accordingly, the
Company recorded an impairment charge of $22,286,383 during the year ended
December 31, 2007 to record the shunt and laser technology and regulatory and
other intangible assets at their fair value as at December 31, 2007 bringing the
net balance to nil. The results of operations of SOLX for the three months ended
March 31, 2007 are classified as results of discontinued operations in these
financial statements,
As
at March 31, 2008 and 2007, the remaining weighted average amortization
period for the distribution agreements intangible assets is nil and 8.46 years,
respectively
.
On
November 30, 2006, the Company acquired 50.1% of the capital stock of OcuSense,
measured on a fully diluted basis. OcuSense’s first product, which is currently
under development, is a hand-held tear film test for the measurement of
osmolarity, a quantitative and highly specific biomarker that has shown to
correlate with dry eye disease, or DED. The test is known as the TearLab™ test
for DED. The results of OcuSense’s operations have been included in the
Company’s consolidated financial statements since November 30, 2006.
Pursuant
to the terms of the Series A Preferred Stock Purchase Agreement (the “Series A
Preferred Stock Purchase Agreement”), dated as of November 30, 2006, between
OcuSense and the Company, the Company purchased 1,754,589 shares of OcuSense’s
Series A Preferred Stock, par value of $0.001 per share, representing 50.1% of
OcuSense’s capital stock on a fully diluted basis for an aggregate purchase
price of up to $8,000,000 (the “Purchase Price”). On the closing of the purchase
which took place on November 30, 2006, the Company paid $2,000,000 of the
Purchase Price. The Company paid another $2,000,000 installment of the Purchase
Price on January 3, 2007. In June 2007, the Company paid the third $2,000,000
installment of the Purchase Price upon the attainment by OcuSense of the first
of two pre-defined milestones. The Company paid a further final
$2,000,000 installment of the Purchase Price on March 31, 2008 upon the
attainment by OcuSense of the second of two pre-defined milestones.
Upon the
payment of the second pre-defined milestone amount in March 2008, the carrying
value of the TearLab™ technology acquired upon the acquisition of OcuSense was
increased by a further $274,228, which reflects the minority interest portion of
the $2,000,000 paid to OcuSense in the amount of $274,288 which is net of
the amount of previously unreported minority shareholders’ share of losses of
$723,712.
In
estimating the fair value of the intangible assets acquired, the Company
considered a number of factors, including the valuation calculation prepared
with the assistance of an independent third-party valuator that used the income
approach to value OcuSense’s TearLab™ technology. Intangible assets subject to
amortization consist of the following:
|
|
March 31,
2008
|
|
|
December 31,
2007
|
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TearLab™
technology
|
|
|
6,643,038
|
|
|
|
759,867
|
|
|
|
6,368,749
|
|
|
|
598,072
|
|
Less Accumulated
Depreciation
|
|
|
759,867
|
|
|
|
|
|
|
|
598,072
|
|
|
|
|
|
|
|
|
5,883,071
|
|
|
|
|
|
|
|
5,770,677
|
|
|
|
|
|
Estimated
amortization expense for the intangible assets for each of the fiscal years
ending December 31 is as follows:
|
|
$
|
|
|
|
|
|
|
Balance
of 2008
|
|
|
509,121
|
|
2009
|
|
|
678,827
|
|
2010
|
|
|
678,827
|
|
2011
|
|
|
678,827
|
|
2012 and thereafter
|
|
|
3,337,469
|
|
|
|
|
5,883,071
|
|
Amortization
expense of $161,795 from continuing operations for the three months ended March
31, 2008 is attributable to OcuSense. Amortization expense from continuing
operations for the three months ended March 31, 2007 of $546,802 was
derived from OcuSense and the RHEO
TM
distribution
agreements. Amortization expense from discontinued operations for the three
months ended March 31, 2008 and 2007 was nil and $745,000,
respectively.
The
Company determined that, as of March 31, 2008, there have been no significant
events which may affect the carrying value of its TearLab™ technology. However,
the Company’s prior history of losses and losses incurred during the current
fiscal year reflects a potential indication of impairment, thus requiring
management to assess whether the Company’s TearLab™ technology was impaired as
at March 31, 2008. Based on management’s estimates of forecasted undiscounted
cash flows as at March 31, 2008, the Company concluded that there is no
indication of an impairment of the Company’s TearLab™ technology. Therefore, no
impairment charge was recorded during the three month ended March 31,
2008.
3.
|
DISCONTINUED
OPERATIONS
|
On
December 19, 2007, the Company sold to Solx Acquisition, and Solx Acquisition
purchased from the Company, all of the issued and outstanding shares of the
capital stock of SOLX, which had been the Glaucoma division of the Company prior
to the completion of this transaction. The consideration for the purchase and
sale of all of the issued and outstanding shares of the capital stock of SOLX
consisted of: (i) on the closing date of the sale, the assumption by
Solx Acquisition of all of the liabilities of the Company related to SOLX’s
business, incurred on or after December 1, 2007, and the Company’s obligation to
make a $5,000,000 payment to the former stockholders of SOLX due on September 1,
2008 in satisfaction of the outstanding balance of the purchase price of SOLX;
(ii) on or prior to February 15, 2008, the payment by Solx Acquisition of all of
the expenses that the Company had paid to the closing date, as they related to
SOLX’s business during the period commencing on December 1, 2007; (iii) during
the period commencing on the closing date and ending on the date on which SOLX
achieves a positive cash flow, the payment by Solx Acquisition of a royalty
equal to 3% of the worldwide net sales of the SOLX 790 Laser and the SOLX Gold
Shunt, including next-generation or future models or versions of these products;
and (iv) following the date on which SOLX achieves a positive cash flow, the
payment by Solx Acquisition of a royalty equal to 5% of the worldwide net sales
of these products. In order to secure the obligation of Solx Acquisition to make
these royalty payments, SOLX granted to the Company a subordinated security
interest in certain of its intellectual property. No value was assigned to the
royalty payments as the determination of worldwide net sales of SOLX’s products
is subject to significant uncertainty.
The sale
transaction described above established fair values for certain of the Company’s
acquisition-related intangible assets and goodwill. Accordingly, the Company
performed an impairment test of these assets at December 1, 2007. Based on this
analysis, during the year ended December 31, 2007, the Company recognized a
non-cash goodwill impairment charge of $14,446,977 and an impairment charge of
$22,286,383 to record its acquisition-related intangible assets at their fair
value as of December 31, 2007.
The
Company’s results of operations related to discontinued operations for the three
months ended March 31, 2008 and 2007 are as follows:
|
|
Three
months ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
―
|
|
|
|
39,625
|
|
Cost
of goods sold
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
―
|
|
|
|
55,508
|
|
Royalty costs
|
|
|
―
|
|
|
|
8,734
|
|
Total cost of goods sold
|
|
|
―
|
|
|
|
64,242
|
|
|
|
|
|
|
|
|
(24,617
|
)
|
Operating
expenses
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
―
|
|
|
|
1,041,878
|
|
Clinical
and regulatory
|
|
|
―
|
|
|
|
628,098
|
|
Sales and marketing
|
|
|
―
|
|
|
|
280,250
|
|
|
|
|
―
|
|
|
|
1,950,226
|
|
|
|
|
―
|
|
|
|
(1,974,843
|
)
|
Other
income (expenses)
|
|
|
|
|
|
|
|
|
Interest
and accretion expense
|
|
|
―
|
|
|
|
(204,896
|
)
|
Other
|
|
|
―
|
|
|
|
(28
|
)
|
|
|
|
―
|
|
|
|
(204,924
|
)
|
Loss
from discontinued operations before income taxes
|
|
|
―
|
|
|
|
(2,179,767
|
)
|
Recovery of income taxes
|
|
|
―
|
|
|
|
898,025
|
|
Loss from discontinued
operations
|
|
|
―
|
|
|
|
(1,281,742
|
)
|
|
|
March 31,
2008
|
|
|
December 31,
2007
|
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture
and office equipment
|
|
|
77,085
|
|
|
|
40,696
|
|
|
|
101,903
|
|
|
|
50,854
|
|
Computer
equipment and software
|
|
|
201,012
|
|
|
|
164,638
|
|
|
|
197,317
|
|
|
|
155,928
|
|
Leasehold
improvements
|
|
|
6,335
|
|
|
|
1,232
|
|
|
|
6,335
|
|
|
|
704
|
|
Medical equipment
|
|
|
1,177,617
|
|
|
|
1,141,517
|
|
|
|
1,163,135
|
|
|
|
1,138,918
|
|
|
|
|
1,462,049
|
|
|
|
1,348,083
|
|
|
|
1,468,690
|
|
|
|
1,346,404
|
|
Less accumulated
amortization
|
|
|
1,348,083
|
|
|
|
|
|
|
|
1,346,404
|
|
|
|
|
|
|
|
|
113,966
|
|
|
|
|
|
|
|
122,286
|
|
|
|
|
|
Amortization
expense was $17,638, and $94,321 during the three months ended March 31,
2008 and 2007, respectively, of which nil and $58,084 is included as
amortization expense of discontinued operations for the three months ended March
31, 2008 and 2007, respectively.
On
November 1, 2007, the Company announced an indefinite suspension of the RHEO™
System clinical development program for Dry AMD and is in the process of winding
down the RHEO-AMD study as there is no reasonable prospect that the RHEO™ System
clinical development program will be relaunched in the foreseeable future. In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets” (“SFAS No. 144”), the Company determined that the carrying
value of certain of the Company’s medical equipment was not recoverable as at
December 31, 2007. Accordingly, during the year ended December 31, 2007, the
Company recorded a reduction to the carrying value of certain of its medical
equipment of $431,683 which reflects a write-down of the value of this medical
equipment to nil as at December 31, 2007 and March 31, 2008. The assets written
down were being used in the clinical trials of the RHEO™ System.
5.
|
PATENTS
AND TRADEMARKS
|
|
|
March 31,
2008
|
|
|
December 31,
2007
|
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
|
270,727
|
|
|
|
117,387
|
|
|
|
236,854
|
|
|
|
113,013
|
|
Trademarks
|
|
|
120,211
|
|
|
|
105,055
|
|
|
|
120,211
|
|
|
|
104,615
|
|
|
|
|
390,938
|
|
|
|
222,442
|
|
|
|
357,065
|
|
|
|
217,628
|
|
Less accumulated
amortization
|
|
|
222,442
|
|
|
|
|
|
|
|
217,628
|
|
|
|
|
|
|
|
|
168,496
|
|
|
|
|
|
|
|
139,437
|
|
|
|
|
|
Amortization
expense was $4,814 and $520 during the three months ended March 31, 2008 and
2007, respectively.
Patents
and trademarks are recorded at historical cost and amortized over a period not
exceeding 15 years.
Based on
the November 1, 2007 announcement and in accordance with SFAS No. 144, the
Company determined that the carrying value of certain of the Company’s patents
and trademarks was not recoverable as at December 31, 2007. Accordingly, during
the year ended December 31, 2007, the Company recorded a $190,873 reduction to
the carrying value of its patents and trademarks related to the RHEO™ System
which reflects a write-down of these patents and trademarks to a value of nil as
at March 31, 2008 and December 31, 2007.
Inventory
primarily consists of Tear Lab Samples and Laboratory cards which are consumed
during the company’s ongoing clinical tests.
The
Company evaluates its ending 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.
In light
of both the Company’s financial position as at September 30, 2007 and the
Company’s financial position, on November 1, 2007, the Company announced an
indefinite suspension of the RHEO™ 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 and, in particular, the fact that, if the Company is unable
to raise additional capital, it will not have sufficient cash to support its
operations beyond early 2008.
Accordingly, the Company
has written down the value of its treatment sets and OctoNova pumps, the
components of the
RHEO™ System
, to nil as at
December 31,
2007
since
the Company is not expected to be able to sell or utilize these treatment sets
and OctoNova pumps prior to their expiration dates, in the case of the treatment
sets, or before the technologies become outdated.
As at
March 31, 2008 and December 31, 2007 the Company had inventory reserves of
$7,295,545 and $7,295,545, respectively. During the three months ended March 31,
2008 and 2007, the Company recognized a provision related to inventory of nil
and nil, respectively, based on the above analysis.
As at
March 31, 2008 and December 31, 2007, the Company had investments in the
aggregate principal amount of $1,900,000 which consist of investments in four
separate asset-backed auction rate securities currently yielding an average
return of 3.94% per annum. Contractual maturities for these auction rate
securities are greater than eight years with an interest reset date
approximately every 46 days. Historically, the carrying value of auction
rate securities approximated fair value due to the frequent resetting of the
interest rates. With the liquidity issues experienced in the global credit and
capital markets, the Company’s auction rate securities have experienced multiple
failed auctions. While the Company continues to earn and receive interest on
these investments at the maximum contractual rate, the estimated fair value of
these auction rate securities no longer approximates par value. Refer to Note 8
for discussion on how the Company determines the fair value of its investment in
auction rate securities.
Although
the Company continues to receive payment of interest earned on these securities,
the Company does not know at the present time when it will be able to convert
these investments into cash. Accordingly, management has classified
these investments as a non-current asset on its consolidated balance sheet as at
December 31, 2007 and March 31, 2008. Management will continue to closely
monitor these investments for future indications of further impairment. The
illiquidity of these investments may have an adverse impact on the length of
time during which the Company currently expects to be able to sustain its
operations in the absence of an additional capital raise by the Company as we do
not have the cash reserves to hold these auction rate securities until the
market recovers nor can we hold these securities until their contractual
maturity dates.
The
Company concluded that the fair value of these auction rate securities at
March 31, 2008 was $536,264, a decline of $1,363,736 from par value
and $327,486 from the fair value as at December 31, 2007. The Company
considers this to be an other-than-temporary reduction in the value.
Accordingly, the loss associated with these auction rate securities of $327,486
for three months ended March 31, 2008 has been included as an impairment of
investments in the Company’s consolidated statement of operations for the three
months ended March 31, 2008.
8.
|
FAIR
VALUE MEASUREMENTS
|
As
described in Note 1, the Company adopted SFAS No. 157 on January 1,
2008. SFAS No. 157, among other things, defines fair value, establishes a
consistent framework for measuring fair value and expands disclosure for each
major asset and liability category measured at fair value on either a recurring
or nonrecurring basis. SFAS No. 157 clarifies that fair value is an exit
price, representing the amount that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants.
As such, fair value is a market-based measurement that should be determined
based on assumptions that market participants would use in pricing an asset or
liability. As a basis for considering such assumptions, SFAS No. 157
establishes a three-tier fair value hierarchy, which prioritizes the inputs used
in measuring fair value as follows:
Level
1.
|
Observable
inputs such as quoted prices in active
markets;
|
Level
2.
|
Inputs,
other than the quoted prices in active markets, that are observable either
directly or indirectly; and
|
Level
3.
|
Unobservable
inputs in which there is little or no market data, which require the
reporting entity to develop its own
assumptions.
|
Assets
measured at fair value on a recurring basis are as follows (in
millions):
|
|
Fair Value
March 31,
2008
|
|
|
Quoted Prices in
Active Markets for
Identical
Assets
(Level 1)
|
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Valuation
Technique
|
|
Investments
in marketable securities (non-current)
|
|
$
|
536,264
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
536,264
|
|
|
|
(1
|
)
|
(1)
|
The
Company estimated the fair value of these auction rate securities based on
the following: (i) the underlying structure of each security;
(ii) the present value of future principal and interest payments
discounted at rates considered to reflect current market conditions;
(iii) consideration of the probabilities of default, auction failure,
or repurchase at par for each period; and (iv) estimates of the recovery
rates in the event of default for each security. These estimated fair
values could change significantly based on future market conditions. Refer
to Note 7 for further discussion of the Company’s investments in auction
rate securities.
|
Assets
measured at fair value on a recurring basis using significant unobservable
inputs (Level 3) (in millions):
|
|
Investments in
Marketable
Securities
(Non-current)
|
|
Balance
as at December 31, 2007
|
|
$
|
863,750
|
|
|
|
|
|
|
Losses
deemed to be other than temporary charged to other non-operating expense,
net
|
|
|
327,486
|
|
|
|
|
|
|
Balance
as at March 31, 2008
|
|
$
|
536,264
|
|
9.
|
SHORT
TERM LIABILITIES AND ACCRUED
INTEREST
|
On
February 19, 2008, we announced that the Company secured a bridge loan in an
aggregate principal amount of $3,000,000 from a number of private
parties. Transaction costs, funded separately, were $180,000. The
loan bears interest at a rate of 12% per annum and has a 180-day term, which may
be extended to 270 days under certain circumstances. The repayment of the loan
is secured by a pledge by the Company of its shares of the capital stock of
OcuSense. Under the terms of the loan agreement, the Company has two pre-payment
options available to it, should it decide to not wait until the maturity date to
repay the loan. Under the first pre-payment option, the Company may repay the
loan in full by paying the lenders, in cash, the amount of outstanding principal
and accrued interest and issuing to the lenders five-year warrants in an
aggregate amount equal to approximately 19.9% of the issued and outstanding
shares of the Company’s common stock (but not to exceed 20% of the issued and
outstanding shares of the Company’s common stock). The warrants would be
exercisable into shares of the Company’s common stock at an exercise price of
$0.10 per share and would not become exercisable until the 180
th
day
following their issuance. Under the second pre-payment option, provided that the
Company has closed a private placement of shares of its common stock for
aggregate gross proceeds of at least $4,000,000, the Company may repay the loan
in full by issuing to the lenders, shares of its common stock, in an aggregate
amount equal to the amount of outstanding principal and accrued interest, at a
15% discount to the price paid by the private placement investors. Any exercise
by the Company of the second pre-payment option would be subject to stockholder
and regulatory approval.
Of the
$3,040,438 outstanding as at March 31, 2008, the principal portion of the loan
was $3,000,000 and the accrued interest was $40,438.
On
February 1, 2007, the Company entered into a Securities Purchase Agreement (the
“Securities Purchase Agreement”) with certain institutional investors, pursuant
to which the Company agreed to issue to those investors an aggregate of
6,677,333 shares of the Company’s common stock (the “Shares”) and five-year
warrants exercisable into an aggregate of 2,670,933 shares of the Company’s
common stock (the “Warrants”). The per unit purchase price of the
units was $1.50, and the per share exercise price of the Warrants is $2.20,
subject to adjustment. The Warrants will become exercisable on August
6, 2007. Pursuant to the Securities Purchase Agreement, on February 6, 2007, the
Company issued the Shares and the Warrants. The gross proceeds of the sale of
the Shares and 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 warrant exercisable into an aggregate of 93,483 shares of the Company’s
common stock (the “Cowen Warrant”) 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 sale of the Shares and the Warrants. All of the
terms and conditions of the Cowen Warrant (other than the number of shares of
the Company's common stock into which the Cowen Warrant is exercisable) are
identical to those of the Warrants. The estimated grant date fair value of the
Cowen Warrant of $97,222 is included in the transaction cost of
$871,215.
(b)
|
Stock-based
compensation
|
The
Company has a stock option plan, the 2002 Stock Option Plan (the “Stock Option
Plan”), which was most recently amended in June 2007 in order to, among other
things, increase the share reserve under the Stock Option Plan by 2,000,000.
Under the Stock Option Plan, up to 6,456,000 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. The vesting
of performance-based options is contingent upon meeting company-wide goals,
including obtaining FDA approval of the RHEO™ System and the achievement of a
minimum amount of sales over a specified period. 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 of directors of the Company (the “Board of Directors”).
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 of Directors and granted on terms and conditions similar to those
options issued under the Stock Option Plan.
On
January 1, 2006, the Company adopted the provisions of SFAS No. 123R,
“Share-Based Payments”, requiring the recognition of expense related to the fair
value of its stock-based compensation awards. The Company elected to use the
modified prospective transition method as permitted by SFAS No. 123R and
therefore has not restated its financial results for prior periods. Under this
transition method, stock-based compensation expense for each of the years ended
December 31, 2007 and 2006 includes compensation expense for all stock-based
compensation awards granted prior to, but not yet vested as of January 1, 2006
based on the grant date fair value estimated in accordance with the original
provisions of SFAS No. 123. Stock-based compensation expense for all stock-based
compensation awards granted subsequent to January 1, 2006 was based on the grant
date fair value estimated in accordance with the provisions of SFAS No. 123R.
The Company recognizes compensation expense for stock option awards on a
straight-line basis over the requisite service period of the award.
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 stockholder’s equity:
|
|
Three
months ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
43,788
|
|
|
|
357,089
|
|
Clinical
and regulatory
|
|
|
26,036
|
|
|
|
94,088
|
|
Sales and marketing
|
|
|
14,050
|
|
|
|
131,027
|
|
Total
expense from continuing operations
|
|
|
83,874
|
|
|
|
582,203
|
|
Expense from discontinued
operations
|
|
|
―
|
|
|
|
27,300
|
|
Stock-based compensation expense before income
taxes
|
|
|
83,874
|
|
|
|
609,503
|
|
The tax
benefit associated with the Company’s stock-based compensation expense for the
three months ended March 31, 2008 and 2007 is $32,024 and $219,421 respectively.
This amount has not been recognized in the Company’s consolidated financial
statements for the three months ended March 31, 2008 and 2007 as there is a low
probability that the Company will realize this benefit.
Net cash
proceeds from the exercise of common stock options were nil and nil for the
three months ended March 31, 2008 and 2007, respectively. No income tax benefit
was realized from stock option exercises during the three months ended March 31,
2008 and 2007. In accordance with SFAS No. 123R, the Company presents excess tax
benefits from the exercise of stock options, if any, as financing cash flows
rather than operating cash flows.
During
the three months ended March 31, 2008 there were no new stock options granted.
The weighted average fair value of stock options granted during the three months
ended March 31 2007 was $1.22. The estimated fair value was determined using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
|
Three
months ended March 31
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
Volatility
|
n.a.
|
|
0.765
|
|
Expected
life of options
|
n.a.
|
|
5.85
years
|
|
Risk-free
interest rate
|
n.a.
|
|
4.87%
|
|
Dividend
yield
|
n.a.
|
|
0%
|
|
A summary
of the options transaction during the three months ended March 31, 2008 is set
forth below:
|
|
Number
of Options Outstanding
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Life (years)
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
$
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2007
|
|
|
4,787,387
|
|
|
|
1.64
|
|
|
|
7.41
|
|
|
|
—
|
|
Granted
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
531,906
|
|
|
|
1.60
|
|
|
|
|
|
|
|
|
|
Outstanding,
March 31, 2008
|
|
|
4,255,481
|
|
|
|
1.64
|
|
|
|
6.48
|
|
|
|
—
|
|
Vested or expected to vest
March 31, 2008
|
|
|
3,116,214
|
|
|
|
1.58
|
|
|
|
6.23
|
|
|
|
—
|
|
Exercisable,
March 31, 2008
|
|
|
3,033,304
|
|
|
|
1.62
|
|
|
|
6.17
|
|
|
|
—
|
|
The
aggregate intrinsic value in the table above represents the total pre-tax
intrinsic value (i.e., the difference between the Company’s closing stock price
on the last trading day of March 31, 2008 of $0.06 and the exercise price,
multiplied by the number of shares that would have been received by the option
holders if the options had been exercised on March 31, 2008). This amount is nil
for all the periods presented as the exercise price of all options outstanding
as at March 31, 2008 and December 31, 2007 is higher than $0.06, the
Company’s closing stock price on the last trading day prior to March 31, 2008.
As at
March 31, 2008, $2,447,350 of total unrecognized compensation cost related to
stock options is expected to be recognized over a weighted-average period of
1.63 years.
On
February 6, 2007, pursuant to the Securities Purchase Agreement between the
Company and certain institutional investors, the Company issued the Warrants to
these investors. The Warrants are five-year warrants exercisable into
an aggregate of 2,670,933 shares of the Company’s common stock. On February 6,
2007, the Company also issued the Cowen Warrant 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 Shares and the Warrants pursuant to the Securities Purchase
Agreement. The Cowen Warrant is a five-year warrant exercisable into an
aggregate of 93,483 shares of the Company’s common stock. The per share exercise
price of the Warrants is $2.20, subject to adjustment, and the Warrants became
exercisable on August 6, 2007. All of the terms and conditions of the Cowen
Warrant (other than the number of shares of the Company's common stock into
which it is exercisable) are identical to those of the Warrants.
The
Company accounts for the Warrants and the Cowen Warrant in accordance with
the provisions of SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities” (“SFAS No. 133”), along with related interpretation EITF No.
00-19, “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock” (“EITF No. 00-19”). SFAS No. 133
requires every derivative instrument within its scope (including certain
derivative instruments embedded in other contracts) to be recorded on the
balance sheet as either an asset or liability measured at its fair value, with
changes in the derivative’s fair value recognized currently in earnings unless
specific hedge accounting criteria are met. Based on the provisions of EITF No.
00-19, the Company determined that the Warrants and the Cowen Warrant do not
meet the criteria for classification as equity. Accordingly, the Company has
classified the Warrants and the Cowen Warrant as a current liability at December
31, 2007 and March 31, 2008.
The
estimated fair value of the Warrants and the Cowen Warrant was determined using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
Volatility
|
|
|
50.6%
|
|
Expected
life of Warrants
|
|
3.83
years
|
|
Risk-free
interest rate
|
|
|
2.46%
|
|
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 obligation
under warrants which includes the fair value of the Cowen Warrant of $97,222.
In
addition, SFAS No. 133 requires the Company to record the outstanding warrants
at fair value at the end of each reporting period, resulting in an adjustment to
the recorded liability of the derivative, with any gain or loss recorded in
earnings of the applicable reporting period. The Company therefore, estimated
the fair value of the Warrants and the Cowen Warrant as at December
31, 2007 and determined the aggregate fair value to be a nominal amount, a
decrease of approximately $2,052,578 over the initial measurement of the
aggregate fair value of the warrants and the Cowen Warrant on the date of
issuance. Accordingly, the Company recognized a gain of $2,052,578 in its
consolidated statement of operations for the year ended December 31, 2007 which
reflects the decrease in the Company’s obligation to its warrant holders to its
nominal amount at December 31, 2007. The company revalued the
Warrants and the Cowan Warrants as at March 31, 2008 and determined the
aggregate fair value to be a nominal amount.
Transaction
costs associated with the issuance of the Warrants recorded as a warrant expense
in the Company’s consolidated statement of operations for the three months ended
March 31, 2008 and 2007 were nil and $170,081, respectively.
A summary
of the Warrants issued during the three months ended March 31, 2008 and the
total number of warrants outstanding as of that date are set forth
below:
|
|
Number of
Warrants Outstanding
|
|
|
Weighted
Average Exercise Price
|
|
Outstanding,
December 31, 2007
|
|
|
2,764,416
|
|
|
$
|
2.20
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Outstanding balance,
March 31, 2008
|
|
|
2,764,416
|
|
|
$
|
2.20
|
|
Loss per
share, basic and diluted, is computed using the treasury method. Potentially
dilutive shares issuable from warrants and stock options have not been used in
the calculation of loss per share as their inclusion would be
anti-dilutive.
12.
|
RELATED
PARTY TRANSACTIONS
|
The
following are the Company’s related party transactions:
TLC
Vision and Diamed
On June
25, 2003, the Company entered into agreements with TLC Vision Corporation (“TLC
Vision”) and Diamed to issue grid debentures in the maximum aggregate principal
amount of $12,000,000 in connection with the funding of the Company’s MIRA-1 and
related clinical trials. $7,000,000 of the aggregate principal amount was
convertible into shares of the Company’s common stock at a price of $0.98502 per
share, and $5,000,000 of the aggregate principal amount was
non-convertible.
The
$5,000,000 portion of the $12,000,000 commitment which was not convertible into
the Company’s common stock was not advanced and the commitment was terminated
prior to the completion of the Company’s initial public offering of shares of
its common stock. During the years ended December 31, 2004 and 2003, the Company
issued grid debentures in an aggregate principal amount of $4,350,000 and
$2,650,000 to TLC Vision and Diamed, respectively, under the convertible portion
of the grid debentures. On December 8, 2004, as part of the corporate
reorganization relating to the Company’s initial public offering, the Company
issued 7,106,454 shares of its common stock to TLC Vision and Diamed, upon
conversion of $7,000,000 of aggregate principal amount of convertible debentures
at a conversion price of $0.98502 per share. Collectively, at March 31, 2008,
the two companies have a combined 35.6% equity interest in the Company on a
fully diluted basis.
Asahi
Medical
The
Company entered into a distributorship agreement (the “Distribution Agreement”),
effective October 20, 2006, with Asahi Medical. The Distribution Agreement
replaced the 2001 distributorship agreement between Asahi Medical and the
Company, as supplemented and amended by the 2003, 2004 and 2005 Memoranda.
Pursuant to the Distribution Agreement, the Company had distributorship rights
to Asahi Medical's Plasmaflo filter and Asahi Medical's second generation
polysulfone Rheofilter filter on an exclusive basis in the United States, Mexico
and certain Caribbean countries (collectively, “Territory 1-a”), on an exclusive
basis in Canada, on an exclusive basis in Colombia, Venezuela, New Zealand and
Australia (collectively, “Territory 2”) and on a non-exclusive basis in
Italy.
On
January 28, 2008, the Company disclosed that it was engaged in discussions with
Asahi Medical to terminate the Distribution Agreement. The Company and Asahi
Medical have terminated substantially all of their obligations under the
Distribution Agreements of February 25, 2008 (the “Termination
Agreement”). Pursuant to the Termination Agreement, the Company and
Asahi Medical have agreed to a mutual release of claims relating to the
Distribution Agreement, other than any claims relating to certain provisions of
the Distribution Agreement which survived its
termination.
The
Company received free inventory from Asahi Medical for purposes of the RHEO-AMD
trial, the LEARN, or Long-term Efficacy in AMD from Rheopheresis in North
America, trials and related clinical studies. The Company has accounted for this
inventory at a value equivalent to the cost the Company has paid for the same
filters purchased from Asahi Medical for purposes of commercial sales to the
Company’s customers. The value of the free inventory received from Asahi Medical
was nil and $ 39,240 for the three months ended March 31, 2008 and 2007,
respectively.
Mr. Hans Stock
On
February 21, 2002, the Company entered into an agreement with Mr. Stock as
a result of his assistance in procuring a distributorship agreement for the
filter products used in the RHEO™ System from Asahi Medical. Mr. Stock
agreed to further assist the Company in procuring new product lines from Asahi
Medical for marketing and distribution by the Company. The agreement will remain
effective for a term consistent with the term of the distributorship agreement
with Asahi Medical, and Mr. Stock will receive a 5% royalty payment on the
purchase of the filters from Asahi Medical. The Company has not paid any amount
to Mr. Stock as royalty fees. Included in due to stockholders at March 31,
2008 and December 31, 2007 is $48,022 and $48,022, respectively, due to Mr.
Stock for filter products.
On June
25, 2002, the Company entered into a consulting agreement with Mr. Stock
for the purpose of procuring a patent license for the extracorporeal
applications in ophthalmic diseases for that period of time in which the patent
was effective. Mr. Stock was entitled to 1.0% of total net revenue from the
Company’s commercial sales of products sold in reliance and dependence upon the
validity of the patent’s claims and rights in the United States. The Company
agreed to make advance consulting payments to Mr. Stock of $50,000
annually, payable on a quarterly basis, to be credited against any and all
future consulting payments payable in accordance with this agreement. Due to the
uncertainty of future royalty payment requirements, all required payments to
date have been expensed.
On August
6, 2004, the Company entered into a patent license and royalty agreement with
Mr. Stock to obtain an exclusive license to U.S. Patent No. 6,245,038. The
Company is required to make royalty payments totaling 1.5% of product sales to
Mr. Stock, subject to minimum advance royalty payments of $12,500 per
quarter. The advance payments are credited against future royalty payments to be
made in accordance with the agreement. This agreement replaces the June 25, 2002
consulting agreement with Mr. Stock which provided for a royalty payment of
1% of product sales. Included in due to stockholders at March 31, 2008 and
December 31, 2007 is $25,000 and $12,500, respectively, due to Mr. Stock
for royalties.
Other
On June
25, 2003, the Company entered into a reimbursement agreement with Apheresis
Technologies, Inc. (“ATI”) pursuant to which employees of ATI, including Mr.
John Cornish, one of the Company’s stockholders and its former Vice President,
Operations, provided services to the Company and ATI is reimbursed for the
applicable percentage of time the employees spend working for the Company.
Effective April 1, 2005, the Company terminated its reimbursement agreement with
ATI, as a result of which termination the Company no longer compensated ATI in
respect of any salary paid to, or benefits provided to, Mr. Cornish by ATI.
Until April 1, 2005, Mr. Cornish did not have an employment contract with
the Company and received no direct compensation from the Company.
On April 1, 2005, Mr. Cornish entered into an employment
agreement with the Company under which he received an annual base salary of
$106,450, representing compensation to him for devoting 80% of his time to the
business and affairs of the Company. Effective June 1, 2005, the Company amended
its employment agreement with Mr. Cornish such that he began to receive an
annual base salary of $116,723, representing compensation to him for devoting
85% of his time to the business and affairs of the Company. Effective April 13,
2006, the Company further amended its employment agreement with Mr. Cornish
such that his annual base salary was decreased to $68,660 in consideration of
his devoting 50% of his time to the business and affairs of the Company. In
light of the Company's current financial situation, and in connection with the
indefinite suspension of its RHEO™ System clinical development program and the
sale of SOLX, the Company terminated the employment of Mr. Cornish
effective January 4, 2008.
During
the year three months ended March 31, 2008 and 2007, ATI made available to the
Company, upon request, the services of certain of ATI’s employees and
consultants on a per diem basis. During the three months ended March
31, 2008, the Company paid ATI $21,666 under this arrangement (2007 – $18,107).
Included in accounts payable and in accrued liabilities as at March 31, 2008 and
December 31, 2007 are $1,773 and $20,004, respectively, due to ATI.
In March
2008 the Company sold substantially all of its fixed assets located in Florida
to ATI for their book value of $8,000. Included in amounts receivable at March
31, 2008 is $8,000, due from ATI.
Effective
January 1, 2004, the Company entered into a rental agreement with Cornish
Properties Corporation, a company owned and managed by Mr. Cornish,
pursuant to which the Company leases space from Cornish Properties Corporation
at $2,745 per month. The original term of the lease extended to December 31,
2005. On November 8, 2005, as provided for in the rental agreement, the Company
extended the term of the rental agreement with Cornish Properties Corporation
for another year, ending December 31, 2006. On December 19, 2006, the Company
extended the term of the rental agreement with Cornish Properties Corporation
for another year, ending December 31, 2007, at a lease payment of $2,168 per
month. During the three months ended March 31, 2008 and 2007, the Company paid
Cornish Properties Corporation an amount of nil and $6,504, respectively, as
rent.
On
November 30, 2006, the Company announced that Mr. Elias Vamvakas, the Chairman,
Chief Executive Officer and Secretary of the Company, had agreed to provide the
Company with a standby commitment to purchase convertible debentures of the
Company (“Convertible Debentures”) in an aggregate maximum amount of $8,000,000
(the “Total Commitment Amount”). Pursuant to the Summary of Terms and
Conditions, executed and delivered as of November 30, 2006 by the Company and
Mr. Vamvakas, during the 12-month commitment term commencing on November 30,
2006, upon no less than 45 days’ written notice by the Company to Mr. Vamvakas,
Mr. Vamvakas was obligated to purchase Convertible Debentures in the aggregate
principal amount specified in such written notice. A commitment fee of 200 basis
points was payable by the Company on the undrawn portion of the Total Commitment
Amount. Any Convertible Debentures purchased by Mr. Vamvakas would have
carried an interest rate of 10% per annum and would have been convertible, at
Mr. Vamvakas’ option, into shares of the Company’s common stock at a
conversion price of $2.70 per share. The Summary of Terms and Conditions further
provided that if the Company closes a financing with a third party, whether by
way of debt, equity or otherwise and there are no Convertible Debentures
outstanding, then the Total Commitment Amount was to be reduced automatically
upon the closing of the financing by the lesser of: (i) the Total Commitment
Amount; and (ii) the net proceeds of the financing. On February 6, 2007, the
Company raised gross proceeds in the amount of $10,016,000 in a private
placement of shares of its common stock and warrants. The Total Commitment
Amount was therefore reduced to zero, thus effectively terminating
Mr. Vamvakas’ standby commitment. No portion of the standby commitment was
ever drawn down by the Company, and the Company paid Mr. Vamvakas a total
of $29,808 in commitment fees in February 2007.
Marchant
Securities Inc. (“Marchant”), a firm indirectly beneficially owned as to
approximately 32% by Mr. Vamvakas and members of his family, introduced the
Company to the lenders of the $3,000,000 aggregate principal amount bridge loan
that the Company secured and announced on February 19, 2008. For such service,
Marchant was paid a commission of $180,000, being 6% of the aggregate principal
amount of the loan. The Company also has retained Marchant in connection with
the proposed private placement of up to $6,500,000 of OccuLogix’s common stock,
announced by the Company on April 22, 2008, for which Marchant will be paid a
commission of 6% of the gross aggregate proceeds of such private
placement. Subject to obtaining any and all requisite stockholder and
regulatory approvals, 50% of the commission, plus $90,000 of the commission,
will be paid to Marchant in the form of equity securities of the
Company.
The
Company entered into a consultancy and non-competition agreement on July 1, 2003
with the Center for Clinical Research (“CCR”), then a significant shareholder of
the Company, which requires the Company to pay a fee of $5,000 per month. For
the year ended December 31, 2003, CCR agreed to forego the payment of $75,250
due to it in exchange for options to purchase 20,926 shares of the Company’s
common stock at an exercise price of $0.13 per share. In addition, CCR agreed to
the repayment of the balance of $150,500 due to it at a rate of $7,500 per month
beginning in July 2003. On August 22, 2005, the Company amended the consultancy
and non-competition agreement with CCR such that the fee payable to it was
increased from $5,000 to $15,000 per month effective January 1, 2005. The
monthly fee is fixed regardless of actual time incurred by CCR in performance of
the services rendered to the Company. The agreement allows either party to
convert the payment arrangement to a fee of $2,500 daily. In the event of such
conversion, CCR shall provide services on a daily basis as required by the
Company and will invoice the Company for the total number of days that services
were provided in that month. The amended consultancy and non-competition
agreement provides for the payment of a one-time bonus of $200,000 upon receipt
by the Company of FDA approval of the RHEO™ System and the grant of 60,000
options to CCR at an exercise price of $7.15 per share. The stockholders of the
Company approved the adjustment of the exercise price of these options to $2.05
per share on June 23, 2006. These options were scheduled to vest as to 100% when
and if the Company receives FDA approval of the RHEO™ System on or before
November 30, 2006, as to 80% when and if the Company receives FDA approval after
November 30, 2006 but on or before January 31, 2007 and as to 60% when and if
the Company receives FDA approval after January 31, 2007. In August 2006, by
letter agreement between the Company and CCR, it was agreed that the monthly fee
of $15,000 would be suspended at the end of August 2006 until CCR’s services are
required by the Company in the future. This resulted in a consulting expense,
included within clinical and regulatory expense for the three months ended March
31, 2008 and 2007, of nil and $11,594, respectively.
In March
2007, Veris negotiated new payment terms with the Company, and it was agreed
that payment for treatment sets shipped subsequent to March 2007 must be
received within 180 days of shipment. From April 2007 to December 31,
2007, the Company sold a total of 816 treatment sets to Veris, for a total
amount of $172,992, plus applicable taxes. The sale of these treatment sets was
not recognized as revenue during the year ended December 31, 2007 based on
Veris’ payment history with the Company and the new 180-day payment terms agreed
by Veris and the Company. In October 2007, the Company met with the management
of Veris and, based on discussions with Veris, the Company believes that Veris
will not be able to meet its financial obligations to the Company. Therefore,
during the year ended December 31, 2007, the Company recorded an allowance for
doubtful accounts of $172,992 against the total amount due from Veris for the
purchase of these treatment sets. As at March 31, 2008 and December
31, 2007 the allowance for doubtful accounts was $172,992.
During
the fourth quarter of 2004, the Company began a business relationship with
Innovasium Inc. Innovasium Inc. designed and built some of the Company’s
websites and also created some of the sales and marketing materials to reflect
the look of the Company’s websites. Daniel Hageman, who is the President
and one of the owners of Innovasium Inc., is the spouse of a former officer of
the Company. During the three months ended March 31, 2008 and 2007, the Company
paid Innovasium Inc. C$2,909 and C$13,737, respectively. Included in accounts
payable and accrued liabilities at March 31, 2008 and December 31, 2007 is
nil and nil, respectively, due to Innovasium Inc. These amounts are expensed in
the period incurred and paid when due.
On
January 25, 2007, the Company entered into a consulting agreement with Mr. Dr.
Micheal Lemp for the purpose of procuring consulting services as the
Ocusense’s Chief Medical Officer. Dr. Lemp is entitled to $100,000 per
annum to be paid at the end of each month and a $98.89 monthly expense
reimbursement stipend. Dr. Lemp will be available to Ocusense on
an average of 20 hours a week or 1,000 hours per year. Dr. Lemp also serves
as a member of the Board of Directors of OcuSense Inc.
On
January 1, 2007, the Company adopted the provisions of FASB Interpretation No.
48, “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB
Statement No. 109” (“FIN No. 48”). FIN No. 48 addresses the determination of
whether tax benefits claimed or expected to be claimed on a tax return should be
recorded in the financial statements. Under FIN No. 48, the Company
may recognize the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements
from such a position should be measured based on the largest benefit that has a
greater than fifty percent likelihood of being realized upon ultimate
settlement. FIN No. 48 also provides guidance on derecognition, classification,
interest and penalties on income taxes and accounting in interim periods and
requires increased disclosure.
As a
result of the implementation of the provisions of FIN No. 48, the Company
recognized a reduction to the January 1, 2007 deferred tax liability balance in
the amount of $4.6 million with a corresponding reduction to accumulated
deficit.
As of
January 1, 2007, the Company had unrecognized tax benefits of $24.8 million
which, if
recognized, would favorably affect the Company’s effective tax
rate.
When
applicable, the Company recognizes accrued interest and penalties related to
unrecognized tax benefits as other expense in its consolidated
statements of operations, which is consistent with the recognition of these
items in prior reporting periods. As of January 1, 2007, the Company did not
have any liability for the payment of interest and penalties.
The
Company does not expect a significant change in the amount of its unrecognized
tax benefits within the next 12 months. Therefore, it is not expected that the
change in the Company’s unrecognized tax benefits will have a significant impact
on the results of operations or financial position of the
Company.
However,
a portion of the Company’s net operating losses may be subject to annual
utilization 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.
All
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.
|
|
March 31,
2008
|
|
|
December
31,
2007
|
|
|
|
$
|
|
|
$
|
|
Due
(from)/to
|
|
|
|
|
|
|
|
|
TLC
Vision Corporation
|
|
|
1,000
|
|
|
|
(2,708
|
)
|
Other stockholders
|
|
|
73,053
|
|
|
|
35,522
|
|
|
|
|
74,053
|
|
|
|
32,814
|
|
The
balance due from TLC Vision is related to computer and administrative support
provided by TLC Vision. All amounts have been expensed during the three months
ended March 31, 2008 and 2007, respectively, and included in general and
administrative expenses. The balance due to other stockholders includes
outstanding royalty fees payable to Mr. Hans Stock..
|
|
March 31,
2008
|
|
|
December
31,
2007
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Prepaid
insurance
|
|
|
297,668
|
|
|
|
427,063
|
|
Regulatory
filing fees
|
|
|
46,514
|
|
|
|
—
|
|
Other fees and services
|
|
|
101,294
|
|
|
|
54,058
|
|
|
|
|
445,296
|
|
|
|
481,121
|
|
15.(b)
|
PREPAID
FINANCE EXPENSE
|
|
|
March 31,
2008
|
|
|
December
31,
2007
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Marchant Securities Inc - Financing
Fees
|
|
|
139,000
|
|
|
|
—
|
|
Financing
fees are being amortized over the 180 day term of the February 19, 2008 bridge
loan. The amount paid to Marchant Securities to introduce lenders of the
$3,000,000 aggregate principal amount of the bridge loan was
$180,000.
|
|
March 31,
2008
|
|
|
December
31,
2007
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Due
to professionals
|
|
|
570,442
|
|
|
|
475,044
|
|
Due
to clinical trial sites
|
|
|
151,150
|
|
|
|
136,681
|
|
Due
to clinical trial specialists
|
|
|
126,953
|
|
|
|
116,359
|
|
Product
development costs
|
|
|
331,090
|
|
|
|
277,521
|
|
Due
to employees and directors
|
|
|
32,054
|
|
|
|
66,804
|
|
Sales
tax and capital tax payable
|
|
|
35,664
|
|
|
|
26,820
|
|
Corporate
compliance
|
|
|
302,173
|
|
|
|
246,675
|
|
Obligation
to repay advances received
|
|
|
250,000
|
|
|
|
—
|
|
Severances
|
|
|
1,018,029
|
|
|
|
1,312,721
|
|
Litigation
settlement
|
|
|
40,000
|
|
|
|
—
|
|
Miscellaneous
|
|
|
75,841
|
|
|
|
214,826
|
|
|
|
|
2,933,396
|
|
|
|
2,873,451
|
|
17.
|
CONSOLIDATED
STATEMENTS OF CASH FLOW
|
The net
change in non-cash working capital balances related to operations consists of
the following:
|
|
Three
months ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
$
|
|
|
$
|
|
Amounts
receivable
|
|
|
212,721
|
|
|
|
(166,806
|
)
|
Inventory
|
|
|
(41,213
|
)
|
|
|
12,752
|
|
Prepaid
expenses
|
|
|
35,825
|
|
|
|
9,642
|
|
Deposits
|
|
|
(2,892
|
)
|
|
|
—
|
|
Other
current assets
|
|
|
—
|
|
|
|
(10,600
|
)
|
Accounts
payable
|
|
|
(828,795
|
)
|
|
|
43,365
|
|
Accrued
liabilities
|
|
|
59,945
|
|
|
|
252,626
|
|
Deferred
revenue
|
|
|
106,700
|
|
|
|
—
|
|
Due
to stockholders
|
|
|
41,238
|
|
|
|
(48,629
|
)
|
Short term liabilities
|
|
|
40,438
|
|
|
|
—
|
|
|
|
|
(376,033
|
)
|
|
|
92,350
|
|
The
following table lists those items that have been excluded from the consolidated
statements of cash flows as they relate to non-cash transactions and additional
cash flow information:
|
|
Three
months ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
$
|
|
|
$
|
|
Non-cash
financing activities
|
|
|
|
|
|
|
|
|
Warrant
issued in part payment of placement fee
|
|
|
—
|
|
|
|
97,222
|
|
Free inventory
|
|
|
—
|
|
|
|
39,240
|
|
|
|
|
|
|
|
|
|
|
Additional
cash flow information
|
|
|
|
|
|
|
|
|
Interest paid
|
|
|
—
|
|
|
|
11,180
|
|
18.
|
SEGMENTED
INFORMATION
|
As a
result of the acquisition of SOLX and OcuSense during 2006
,
the Company had three
reportable segments: retina, glaucoma and point-of-care. The retina segment was
in the business of commercializing the RHEO™ System which was used to perform
the Rheopheresis™ procedure, a procedure that selectively removes molecules from
plasma, which is designed to treat Dry AMD. The Company began limited
commercialization of the RHEO™ System in Canada in 2003 and provided support to
its sole customer in Canada, Veris, in its commercial activities in Canada. The
Company obtained investigational device exemption clearance from the FDA to
commence RHEO-AMD, its clinical study of the RHEO™ System. On November 1, 2007,
the Company announced an indefinite suspension of the RHEO™ 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 and, in particular, the
fact that, if the Company is unable to raise additional capital, it will not
have sufficient cash to support its operations beyond approximately the middle
of July 2008.
The
glaucoma segment of the Company was in the business of providing treatment for
glaucoma with the use of the components of the SOLX Glaucoma System which are
used to provide physicians with multiple options to manage intraocular pressure.
The Company was seeking to obtain 510(k) approval to market the components of
the SOLX Glaucoma System in the United States. The Company acquired the glaucoma
segment in the acquisition of SOLX on September 1, 2006; therefore, no amounts
are shown for the segment in periods prior to September 1, 2006. On December 19,
2007, the Company sold all of the issued and outstanding shares of the capital
stock of SOLX, which had been the glaucoma segment of the Company prior to the
completion of this sale. All revenue and expenses related to the Company’s
glaucoma segment, prior to the December 19, 2007 closing date, has therefore
been included in discontinued operations on its consolidated statements of
operations for the three months ended March 31, 2008 and 2007.
The
point-of-care segment is made up of the TearLab™ business which is currently
developing technologies that enable eye care practitioners to test, at the
point-of-care, for highly sensitive and specific biomarkers in tears using
nanoliters of tear film.
The
accounting policies of the segments are the same as those described in
significant accounting policies. Inter-segment sales and transfers are minimal
and are accounted for at current market prices, as if the sales or transfers
were to third parties.
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 Company’s business
units are acquired or developed as a unit, OcuSense was retained at the
time of acquisition.
The
Company’s business units are as follows:
|
|
Retina
|
|
|
Glaucoma
|
|
|
Point-of-care
|
|
|
Total
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Three
months ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
7,200
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,200
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
24,556
|
|
|
|
—
|
|
|
|
—
|
|
|
|
24,556
|
|
Operating
|
|
|
1,291,338
|
|
|
|
—
|
|
|
|
1,089,239
|
|
|
|
2,380,577
|
|
Depreciation
and amortization
|
|
|
9,778
|
|
|
|
—
|
|
|
|
174,645
|
|
|
|
184,423
|
|
Loss
from continuing operations
|
|
|
(1,318,472
|
)
|
|
|
—
|
|
|
|
(1,263,884
|
)
|
|
|
(2,582,356
|
)
|
Interest
income
|
|
|
35,282
|
|
|
|
—
|
|
|
|
1,170
|
|
|
|
36,452
|
|
Interest
expense
|
|
|
(40,438
|
)
|
|
|
—
|
|
|
|
(6,165
|
)
|
|
|
(46,603
|
)
|
Loss
on short-term investment
|
|
|
(327,486
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(327,486
|
)
|
Other
income (expense), net
|
|
|
(24,564
|
)
|
|
|
—
|
|
|
|
1,057
|
|
|
|
(23,507
|
)
|
Minority
interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Recovery
of income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loss
from continuing operations
|
|
|
(1,675,678
|
)
|
|
|
—
|
|
|
|
(1,267,822
|
)
|
|
|
(2,943,500
|
)
|
Loss
from discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Net
loss
|
|
|
(1,675,678
|
)
|
|
|
—
|
|
|
|
(1,267,822
|
)
|
|
|
(2,943,500
|
)
|
Total
assets As At March 31, 2008
|
|
|
1,759,222
|
|
|
|
—
|
|
|
|
8,073,330
|
|
|
|
9,832,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
90,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
90,000
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
32,100
|
|
|
|
—
|
|
|
|
—
|
|
|
|
32,100
|
|
Operating
|
|
|
3,385,329
|
|
|
|
—
|
|
|
|
1,004,404
|
|
|
|
4,389,733
|
|
Depreciation
and amortization
|
|
|
449,703
|
|
|
|
—
|
|
|
|
118,662
|
|
|
|
568,365
|
|
Loss
from continuing operations
|
|
|
(3,894,799
|
)
|
|
|
—
|
|
|
|
(1,123,066
|
)
|
|
|
(5,017,865
|
)
|
Interest
income
|
|
|
203,868
|
|
|
|
—
|
|
|
|
11,569
|
|
|
|
215,437
|
|
Interest
expense
|
|
|
(16,219
|
)
|
|
|
—
|
|
|
|
(422
|
)
|
|
|
(16,641
|
)
|
Loss
on short-term investment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
income (expense), net
|
|
|
(708,106
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(708,106
|
)
|
Minority
interest
|
|
|
—
|
|
|
|
—
|
|
|
|
554,848
|
|
|
|
554,848
|
|
Recovery
of income taxes
|
|
|
1,489,504
|
|
|
|
—
|
|
|
|
491,821
|
|
|
|
1,981,325
|
|
Loss
from continuing operations
|
|
|
(2,925,752
|
)
|
|
|
—
|
|
|
|
(65,250
|
)
|
|
|
(2,991,002
|
)
|
Loss
from discontinued operations
|
|
|
—
|
|
|
|
(1,281,472
|
)
|
|
|
—
|
|
|
|
(1,281,472
|
)
|
Net
loss
|
|
|
(2,925,752
|
)
|
|
|
(1,281,472
|
)
|
|
|
(65,250
|
)
|
|
|
(4,272,744
|
)
|
Total
assets As At December 31, 2007
|
|
|
3,672,542
|
|
|
|
—
|
|
|
|
6,325,818
|
|
|
|
9,998,360
|
|
(i) On
May 5, 2008, the Company announced that it had secured a bridge loan in an
aggregate principal amount of $300,000 (less transaction costs of approximately
$18,000) from a number of private parties (“Additional Bridge Loan”). The
Additional Bridge Loan constitutes an increase to the principal amount of the
U.S.$3,000,000 principal amount bridge loan that the Company announced on
February 19, 2008 (the “Original Bridge Loan”) and was advanced on substantially
the same terms and conditions as the Original Bridge Loan, pursuant to an
amendment of the loan agreement for the Original Bridge Loan. The Additional
Bridge Loan bears interest at a rate of 12% per annum and will have the same
maturity date as the Original Bridge Loan. The Company has pledged its shares of
the capital stock of OcuSense as collateral for the loan.
Under the
terms of the Original Bridge Loan agreement, the Company has two pre-payment
options available to it, should it decide to not wait until the maturity date to
repay the loan. Under the first pre-payment option, the Company may repay the
Original Bridge Loan in full by paying the lenders, in cash, the amount of
outstanding principal and accrued interest and issuing to the lenders five-year
warrants in an aggregate amount equal to approximately 19.9% of the issued and
outstanding shares of the Company’s common stock (but not to exceed 20% of the
issued and outstanding shares of the Company’s common stock). The warrants would
be exercisable into shares of the Company’s common stock at an exercise price of
$0.10 per share and would not become exercisable until the 180th day following
their issuance. Under the second pre-payment option, provided that the Company
has closed a private placement of shares of its common stock for aggregate gross
proceeds of at least $4,000,000, the Company may repay the Original Bridge Loan
in full by issuing to the lenders shares of its common stock, in an aggregate
amount equal to the amount of outstanding principal and accrued interest, at a
15% discount to the price paid by the private placement investors. Any exercise
by the Company of the second pre-payment option would be subject to stockholder
and regulatory approval. Should the Company exercise either of these pre-payment
options, it will be obligated to pre-pay the Additional Bridge Loan in the same
manner, provided that the Company, in no event, shall be obligated to issue
warrants exercisable into shares in a number that exceeds 20% of the issued and
outstanding shares of the Company’s common stock on the date of
pre-payment.
(ii) On
April 22, 2008, the Company announced that it has signed a definitive merger
agreement to acquire the minority ownership interest in San Diego-based
OcuSense, Inc. that it does not already own. Currently, OccuLogix
owns 50.1% of the capital stock of OcuSense on a fully diluted
basis.
Under the
terms of the merger agreement, OccuLogix will be acquiring the minority
ownership interest in OcuSense by way of a merger of OcuSense and a newly
incorporated, wholly-owned subsidiary of OccuLogix. As merger
consideration, the Company expects to issue an aggregate of approximately
79,200,000 shares of its common stock to the minority stockholders of
OcuSense. The transaction will be subject to the approval of
stockholders of both companies, as well as to customary closing conditions,
including approval by the Toronto Stock Exchange.
(iii) On
April 22, 2008 the Company announced that, subject to stockholder and regulatory
approval, it intends to effect a private placement of up to U.S.$6,500,000 of
common stock at a per share price that is the lower of (1) the average trading
price of OccuLogix’s common stock at the time of purchase and (2)
U.S.$0.10. The Company intends to file a preliminary proxy statement
and to call a meeting of stockholders as soon as practicable in order to obtain
stockholder approval of the merger and the private placement, among other
matters.
(iv) On
September 18, 2007, OccuLogix received a letter from The NASDAQ Stock Market, or
NASDAQ, indicating that, for the previous 30 consecutive business days, the bid
price of the Company’s common stock closed below the minimum $1.00 per share
requirement for continued inclusion under Marketplace Rule 4450(e)(5), or the
Minimum Bid Price Rule. Therefore, in accordance with Marketplace Rule
4450(e)(2), the Company was provided 180 calendar days, or until March 17, 2008,
to regain compliance. The NASDAQ letter stated that, if, at any time before
March 17, 2008, the bid price of the Company’s common stock closes at $1.00 per
share or more for a minimum of 10 consecutive business days, NASDAQ staff will
provide written notification that it has achieved compliance with the Minimum
Bid Price Rule. The NASDAQ letter also stated that, if the Company does not
regain compliance with the Minimum Bid Price Rule by March 17, 2008, NASDAQ
staff will provide written notification that the Company’s securities will be
delisted, at which time the Company may appeal the NASDAQ staff’s determination
to delist its securities to a NASDAQ Listing Qualifications Panel.
On
February 1, 2008, the Company received a letter from The NASDAQ Stock Market, or
NASDAQ, indicating that, for the previous 30 consecutive trading days, the
Company’s common stock did not maintain a minimum market value of publicly held
shares of $5,000,000 as required for continued inclusion by Marketplace Rule
4450(a)(2), or the MVPHS Rule. Therefore, in accordance with Marketplace Rule
4450(e)(1), the Company was provided 90 calendar days, or until May 1, 2008, to
regain compliance. The NASDAQ letter stated that, if at any time before May 1,
2008, the minimum market value of publicly held shares of the Company’s common
stock is $5,000,000 or greater for a minimum of 10 consecutive trading days,
NASDAQ staff will provide written notification that the Company complies with
the MVPHS Rule. The NASDAQ letter also stated that, if the Company does not
regain compliance with the MVPHS Rule by May 1, 2008, NASDAQ staff will provide
written notification that the Company’s securities will be delisted, at which
time the Company may appeal the NASDAQ staff’s determination to delist its
securities to a NASDAQ Listing Qualifications Panel. On May 6, 2008, the
Company received a letter from NASDAQ indicating that since the Company’s MVPHS
has been $5,000,000 or greater for at least 10 consecutive trading days the
Company has regained compliance with the MVPHS rule and the matter is now
closed.
The
Company was not compliant with the Minimum Bid Price Rule by March 17,
2008.
While the
Company has appealed any determination by NASDAQ staff to delist its common
stock to a NASDAQ Listing Qualifications Panel, the Company may not be
successful in its appeal, in which case its common stock may be transferred to
The NASDAQ Capital Market or be delisted altogether. Should either occur,
existing stockholders will suffer decreased liquidity.
These
NASDAQ notices have no effect on the listing of the Company's common stock on
the Toronto Stock Exchange.
ITEM
2.
|
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Overview
We are an
ophthalmic therapeutic company founded to commercialize innovative treatments
for age-related eye diseases. Until recently, the Company operated three
business divisions, being Retina, Glaucoma and Point-of-care. Until recently,
the Company’s Retina division was in the business of developing and
commercializing a treatment for dry age-related macular degeneration, or Dry
AMD. The Company’s product for Dry AMD, the RHEO™ System contains a pump that
circulates blood through two filters and is used to perform the Rheopheresis™
procedure, which is referred to under the Company’s trade name RHEO™ Therapy.
The Rheopheresis™ procedure is a blood filtration procedure that selectively
removes molecules from plasma, which is designed to treat Dry AMD, the most
common form of the disease.
We
conducted a pivotal clinical trial, called MIRA-1, or Multicenter Investigation
of Rheopheresis for AMD, which, if successful, was expected to support our
application to the U.S. Food and Drug Administration, or FDA, to obtain approval
to market the RHEO™ System in the United States. On February 3, 2006, we
announced that, based on a preliminary analysis of the data from MIRA-1, MIRA-1
did not meet its primary efficacy endpoint as it did not demonstrate a
statistically significant difference in the mean change of Best
Spectacle-Corrected Visual Acuity applying the Early Treatment Diabetic
Retinopathy Scale, or ETDRS BCVA, between the treated and placebo groups in
MIRA-1 at 12 months post-baseline. As expected, the treated group demonstrated a
positive result. An anomalous response of the control group is the principal
reason why the primary efficacy endpoint was not met. There were subgroups that
did demonstrate statistical significance in their mean change of
ETDRS BCVA.
Subsequent
to the February 3, 2006 announcement, the Company completed an in-depth analysis
of the MIRA-1 study data identifying subjects that were included in the
intent-to-treat, or ITT, population but who deviated from the MIRA-1 protocol as
well as those patients who had documented losses or gains in vision for reasons
not related to retinal disease such as cataracts. Those subjects in the ITT
population who met the protocol requirements, and who did not exhibit ophthalmic
changes unrelated to retinal disease, comprised the modified per-protocol
population.
In light
of the MIRA-1 study results, we also re-evaluated our Pre-market Approval
Application, or PMA, submission strategy and then met with representatives of
the FDA on June 8, 2006 in order to discuss the impact the MIRA-1 results would
have on our PMA to market the RHEO™ System in the United States. In
light of MIRA-1’s failure to meet its primary efficacy endpoint, the FDA advised
us that it will require an additional study of the RHEO™ System to be
performed.
On
January 29, 2007, the Company announced that it had obtained Investigational
Device Exemption clearance from the FDA to commence the new pivotal clinical
trial of the RHEO™ System, called RHEO-AMD, or Safety and Effectiveness in a
Multi-center, Randomized, Sham-controlled Investigation for Dry, Non-exudative
Age-Related Macular Degeneration (AMD) Using Rheopheresis.
However,
on November 1, 2007, the Company announced the indefinite suspension of its
RHEO™ System clinical development program. This 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 light of the
Company’s financial position. Between January 29, 2007 and November 1, 2007, the
Company had prepared the RHEO-AMD protocol and had been putting into place all
of the resources required for the conduct for the RHEO-AMD study, including the
securing of clinical trial site commitments. The Company is in the process of
winding down the RHEO-AMD study as there is no reasonable prospect that the
RHEO™ System clinical development program will be relaunched in the foreseeable
future. Subsequent to our fiscal 2007 year-end, as of February 25, 2008, we have
terminated our relationship with Asahi Kasei Kuraray Medical Co., Ltd. (formerly
Asahi Kasei Medical Co., Ltd.), or Asahi Medical. Asahi Medical manufactures,
and supplied us with, the Rheofilter filter and the Plasmaflo filter, both of
which are key components of the RHEO™ System. We also are engaged in discussions
with Diamed Medizintechnik GmbH, or Diamed, and MeSys GmbH, or MeSys, regarding
the termination of our relationship with each of them. Diamed is the
designer, and MeSys is the manufacturer, of the OctoNova pump, another key
component of the RHEO™ System.
As a
result of the announcement on February 3, 2006, the per share price of our
common stock as traded on the NASDAQ Global Market, or NASDAQ, decreased from
$12.75 on February 2, 2006 to close at $4.10 on February 3, 2006. The 10-day
average price of the stock immediately following the announcement was $3.65 and
reflected a decrease in our market capitalization from $536.6 million on
February 2, 2006 to $153.6 million based on the 10-day average share price
subsequent to the announcement. On June 12, 2006, we announced that the FDA will
require us to perform an additional study of the RHEO™ System. In addition, on
June 30, 2006, we announced that we had terminated negotiations with Sowood
Capital Management LP (“Sowood”) in connection with a proposed private purchase
of approximately $30,000,000 of zero-coupon convertible notes of the Company.
The per share price of our common stock decreased subsequent to the June 12,
2006 announcement and again after the June 30, 2006 announcement. Based on the
result of the analysis of the data from MIRA-1 and the events that occurred
during the second quarter of fiscal 2006, we concluded that there were
sufficient indicators of impairment leading to an analysis of our intangible
assets and goodwill and resulting in our reporting an impairment charge to
goodwill of $65,945,686 and $147,451,758 in the second quarter of 2006 and in
the fourth quarter of 2005, respectively.
We
considered our announcement of the indefinite suspension of the Company’s RHEO™
System clinical development program for Dry AMD to be a significant event which
may affect the carrying value of our intangible assets. This led to an analysis
of our intangible assets and resulted in our reporting an impairment charge to
intangible assets of $20,923,028 during the third quarter of 2007. We also
believe that we may not be able to sell or utilize the components of the RHEO™
System prior to their expiration dates or before the technologies become
outdated, as the case may be. Accordingly, we set up a provision for
obsolescence of $2,782,494 for treatment sets and OctoNova pumps that are
unlikely to be utilized prior to their expiration dates, in the case of
treatment sets, or before the technologies become outdated. In addition, we have
recorded a reduction to the carrying values of (i) certain of our medical
equipment used in the clinical trials of the RHEO™ System of $431,683 and (ii)
certain of our patents and trademarks related to the RHEO™ System of
$190,873.
Based on
our November 1, 2007 announcement of the indefinite suspension of our RHEO™
System clinical development program, we wrote down the value of our pumps and
clinical inventory by $2,782,494 to reflect their current nil net realizable
value as at December 31, 2007. The net value of our pumps and clinical
inventory as at March 31, 2008 and December 31, 2007 was nil. As at
March 31, 2008 and December 31, 2007, we had combined inventory
reserves of $7,295,545 and $7,295,545 respectively.
No other adjustments were
made as a result of the
November 1,
2007
announcement that impacts the financial results as of
December 31,
2007
or
March 31,
2008
.
We
entered into a distributorship agreement (the “Distribution Agreement”),
effective October 20, 2006, with Asahi Medical. The Distribution Agreement
replaced the 2001 distributorship agreement between Asahi Medical and us, as
supplemented and amended by the 2003, 2004 and 2005 Memoranda. Pursuant to the
Distribution Agreement, we had distributorship rights to Asahi Medical's
Plasmaflo filter and Asahi Medical's second generation polysulfone Rheofilter
filter on an exclusive basis in the United States, Mexico and certain Caribbean
countries, on an exclusive basis in Canada, on an exclusive basis in Colombia,
Venezuela, New Zealand, Australia and on a non-exclusive basis in
Italy.
On
January 28, 2008, the Company disclosed that it was engaged in discussions with
Asahi Medical to terminate the Distribution Agreement. Subsequent to our 2007
fiscal year end, the Company and Asahi Medical have entered into a termination
agreement to terminate substantially all of their obligations under the
Distribution Agreement on and as of February 25, 2008 (the “Termination
Agreement”). Pursuant to the Termination Agreement, the Company and
Asahi Medical have agreed to a mutual release of claims relating to the
Distribution Agreement, other than any claims relating to certain provisions of
the Distribution Agreement which survived its termination.
In
anticipation of the delay in the commercialization of the RHEO™ System in the
United States as a result of the MIRA-1 study’s failure to meet its primary
efficacy endpoint and the FDA’s requirement of us to conduct an additional study
of the RHEO™ System, the Company accelerated its diversification plans and, on
September 1, 2006, acquired SOLX, Inc., or SOLX, for a total purchase price of
$29,068,443 which included acquisition-related transaction costs of $851,279.
SOLX is a Boston University Photonics Center-incubated company that has
developed a system for the treatment of glaucoma, called the SOLX Glaucoma
System. The SOLX Glaucoma Treatment System is a next-generation treatment
platform designed to reduce intra-ocular pressure, or IOP, without a bleb, thus
avoiding its related complications. The SOLX Glaucoma System consists of the
SOLX 790 Laser, a titanium sapphire laser used in laser trabeculoplasty
procedures, and the SOLX Gold Shunt, a 24-karat gold, ultra-thin drainage device
designed to bridge the anterior chamber and the suprachoroidal space in the eye,
using the pressure differential that exists naturally in the eye in order to
reduce IOP.
On
December 20, 2007, we announced the sale of SOLX to Solx Acquisition, Inc., or
Solx Acquisition, a company wholly owned by Doug P. Adams, the founder of SOLX
and who, until the closing of the sale, had been serving as an executive officer
of the Company in the capacity of President & Founder, Glaucoma
Division. The results of operations of SOLX have been included in
discontinued operations in the Company’s consolidated statements of
operations.
The
consideration for the purchase and sale of all of the issued and outstanding
shares of the capital stock of SOLX consisted of: (i) on December 19,
2007, the closing date of the sale, the assumption by Solx Acquisition of all of
the liabilities of the Company, as they related to SOLX’s business, incurred on
or after December 1, 2007, and OccuLogix’s obligation to make a $5,000,000
payment to the former stockholders of SOLX due on September 1, 2008 in
satisfaction of the outstanding balance of the purchase price of SOLX; (ii) on
or prior to February 15, 2008, the payment by Solx Acquisition of all of the
expenses that the Company had paid to the closing date, as they related to
SOLX’s business during the period commencing on December 1, 2007; (iii) during
the period commencing on the closing date and ending on the date on which SOLX
achieves a positive cash flow, the payment by Solx Acquisition of a royalty
equal to 3% of the worldwide net sales of the SOLX 790 Laser and the SOLX Gold
Shunt, including next-generation or future models or versions of these products;
and (iv) following the date on which SOLX achieves a positive cash flow, the
payment by Solx Acquisition of a royalty equal to 5% of the worldwide net sales
of these products. In order to secure the obligation of Solx Acquisition to make
these royalty payments, SOLX granted to OccuLogix a subordinated security
interest in certain of its intellectual property. In connection with the sale of
SOLX, those employees of the Company, whose roles and responsibilities related
mainly to SOLX’s business, ceased to be employees of the Company and became
employees of Solx Acquisition or SOLX.
The sale
transaction established fair values for the Company’s recorded goodwill and the
Company’s shunt and laser technology and regulatory and other intangible assets
that had been acquired by the Company upon its acquisition of SOLX on September
1, 2006. Accordingly, management was required to re-assess whether the carrying
value of the Company’s shunt and laser technology and regulatory and other
intangible assets was recoverable as of December 1, 2007. Based on management’s
estimates of undiscounted cash flows associated with these intangible assets, we
concluded that the carrying value of these intangible assets was not recoverable
as of December 1, 2007. Accordingly, we recorded an impairment charge of
$22,286,383 during the year ended December 31, 2007 to record the shunt and
laser technology and regulatory and other intangible assets at their fair value
as of December 31, 2007.
As at
March 31, 2008 and December 31, 2007, the value of these intangible assets
associated with SOLX was nil and nil, respectively.
As well, the Company
performed an impairment test of its recorded goodwill to re-assess whether its
recorded goodwill was impaired as at December 1, 2007. Based on the goodwill
impairment analysis performed, the Company concluded that a goodwill impairment
charge of $14,446,977 should be recorded during the year ended December 31, 2007
to write down the value of its recorded goodwill to its fair value of nil. As at
March 31, 2008 and December 31, 2007, the value of the goodwill associated with
SOLX was nil and nil, respectively.
Both the
SOLX 790 Laser and the SOLX Gold Shunt are currently the subject of randomized,
multi-center clinical trials, the purposes of which are to demonstrate
equivalency to the argon laser, in the case of the SOLX 790 Laser, and to the
Ahmed Glaucoma Valve manufactured by the New World Medical, Inc., in the case of
the SOLX Gold Shunt. The results of these clinical trials will be used in
support of applications to the FDA for a 510(k) clearance for each of the SOLX
790 Laser and the SOLX Gold Shunt, the receipt of which, if any, will enable the
marketing and sale of these products in the United States.
As part
of our diversification plan, on November 30, 2006, we acquired 50.1% of the
capital stock of OcuSense, Inc., or OcuSense, measured on a fully diluted basis,
for an initial purchase price of $4,171,098 which includes acquisition-related
transaction costs of $171,098. The Company agreed to make additional payments
totaling $4,000,000 upon the attainment of two pre-defined milestones by
OcuSense prior to May 1, 2009. In June 2007 and March 2008, we paid OcuSense a
total of $4,000,000 upon the attainment of the the two pre-defined milestones.
The carrying value of the intangible asset acquired upon the acquisition of
OcuSense was increased by $1,937,621 which reflects the minority interest
portion of the $4,000,000 paid to OcuSense in the amount of $1,272,288 and the
additional deferred tax liability of $665,333 recorded based on the difference
between the increase in the carrying value of the intangible asset and its tax
basis.
OcuSense
is a San Diego-based company that is in the process of developing technologies
that will enable eye care practitioners to test, at the point-of-care, for
highly sensitive and specific biomarkers using nanoliters of tear film. The
results of OcuSense’s operations have been included in our consolidated
financial statements since November 30, 2006. OcuSense’s first product, which is
currently under development, is a hand-held tear film test for the measurement
of osmolarity, a quantitative and highly specific biomarker that has shown to
correlate with dry eye disease, or DED. The test is known as the TearLab™ test
for DED. The anticipated innovation of the TearLab™ test for DED will be its
ability to measure precisely and rapidly certain biomarkers in nanoliter volumes
of tear samples, using inexpensive hardware. Historically, eye care researchers
have relied on expensive instruments to perform tear biomarker analysis. In
addition to their cost, these conventional systems are slow, highly variable in
their measurement readings and not categorized as waived by the FDA under the
regulations promulgated under the Clinical Laboratory Improvement Amendments, or
CLIA.
The
TearLab™ test for DED will require the development 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. OcuSense
is currently engaged in industrial, electrical and software design efforts for
the three components of the TearLab™ test for DED and, to these ends, is working
with two engineering partners, both based in Melbourne, Australia, one of which
is a leader in biomedical instrument development and the other of which is a
leader of customized microfluidics.
OcuSense’s
objective is to complete product development of the TearLab™ test for DED during
the first half of 2008. Following the completion of product development and
subsequent clinical trials, OcuSense intends to seek a 510(k) clearance and a
CLIA waiver from the FDA for the TearLab™ test for DED. Currently, it
anticipates seeking the 510(k) clearance during the latter half of 2008 and the
CLIA waiver during the latter half of 2009. In addition, OcuSense intends to
seek CE Mark approval for the TearLab™ test for DED during the latter half of
2008.
On
November 30, 2006, we announced that Elias Vamvakas, our Chairman and Chief
Executive Officer, had agreed to provide us with a standby commitment to
purchase convertible debentures of the Company (“Convertible Debentures”) in an
aggregate maximum amount of $8,000,000 (the “Total Commitment
Amount”). Pursuant to the Summary of Terms and Conditions, executed
and delivered as of November 30, 2006 by the Company and Mr. Vamvakas, during
the 12-month commitment term commencing on November 30, 2006, upon no less than
45 days’ written notice by the Company to Mr. Vamvakas, Mr. Vamvakas was
obligated to purchase Convertible Debentures in the aggregate principal amount
specified in such written notice. A commitment fee of 200 basis points was
payable by the Company on the undrawn portion of the total $8,000,000 commitment
amount. Any Convertible Debentures purchased by Mr. Vamvakas would have carried
an interest rate of 10% per annum and would have been convertible, at Mr.
Vamvakas’ option, into shares of the Company’s common stock at a conversion
price of $2.70 per share. The Summary of Terms and Conditions of the standby
commitment further provided that if the Company closed a financing with a third
party, whether by way of debt, equity or otherwise and there are no Convertible
Debentures outstanding, then, the Total Commitment Amount was to be reduced
automatically upon the closing of the financing by the lesser of: (i) the Total
Commitment Amount; and (ii) the net proceeds of the financing. On February 6,
2007, the Company raised gross proceeds in the amount of $10,016,000 in a
private placement of shares of its common stock and warrants. The Total
Commitment Amount was therefore reduced to zero, thus effectively terminating
Mr. Vamvakas’ standby commitment. No portion of the standby commitment was ever
drawn down by the Company, and the Company paid Mr. Vamvakas a total of $29,808
in commitment fees in February 2007.
Our
results of operations for the three months ended March 31, 2008 and 2007 were
impacted by our adoption of Statement of Financial Accounting Standards (“SFAS”)
No. 123R (revised 2004), “Share-Based Payments” (“SFAS No. 123R”), on January 1,
2006 which requires us to recognize a non-cash expense related to the fair value
of our stock-based compensation awards. We elected to use the modified
prospective transition method of adoption requiring us to include this
stock-based compensation charge in our results of operations beginning on
January 1, 2006 without restating prior periods to include stock-based
compensation expense. The following table sets out the total stock based
compensation expense reflected in the consolidated statement of operations for
the three months ended March 31, 2008 and 2007.
|
|
Three
months ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
41,788
|
|
|
|
357,089
|
|
Clinical
and regulatory
|
|
|
26,036
|
|
|
|
94,088
|
|
Sales and marketing
|
|
|
14,050
|
|
|
|
131,027
|
|
Total
expense from continuing operations
|
|
|
83,874
|
|
|
|
582,203
|
|
Expense from discontinued
operations
|
|
|
—
|
|
|
|
27,300
|
|
Stock-based compensation expense before income
taxes
|
|
|
83,874
|
|
|
|
609,503
|
|
As at
March 31, 2008, $2,447,350 of total unrecognized compensation cost related to
stock options is expected to be recognized over a weighted-average period of
1.63 years.
On
February 1, 2007, we entered into a Securities Purchase Agreement (the
“Securities Purchase Agreement”) with certain institutional investors, pursuant
to which we agreed to issue to the investors an aggregate of 6,677,333 shares of
our common stock (the “Shares”) and five-year warrants exercisable into an
aggregate of 2,670,933 shares of our common stock (the
“Warrants”). The per share purchase price of the Shares is $1.50, and
the per share exercise price of the Warrants is $2.20, subject to
adjustment. The Warrants became exercisable on August 6, 2007.
Pursuant to the Securities Purchase Agreement, on February 6, 2007, we issued
the Shares and the Warrants. The gross proceeds of sale of the Shares and the
Warrants totaled $10,016,000 (less transaction costs of $871,215). On February
6, 2007, we also issued to Cowen and Company, LLC a five-year warrant
exercisable into an aggregate of 93,483 shares of our common stock (the “Cowen
Warrant”) 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
sale of the Shares and the Warrants. All of the terms and conditions of the
Cowen Warrant (other than the number of shares of our common stock into which it
is exercisable) are identical to those of the Warrants. The estimated grant date
fair value of the Cowen Warrant of $97,222 is included in the transaction cost
of $871,215.
We
account for the Warrants and the Cowen Warrant in accordance with the provisions
of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”
(“SFAS No. 133”) along with related interpretation Emerging Issues Task Force
(“EITF”) 00-19 “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”). SFAS No. 133
requires every derivative instrument within its scope (including certain
derivative instruments embedded in other contracts) to be recorded on the
balance sheet as either an asset or liability measured at its fair value, with
changes in the derivative’s fair value recognized currently in earnings unless
specific hedge accounting criteria are met. Based on the provisions of EITF
00-19, we determined that the Warrants and the Cowen Warrant do not meet the
criteria for classification as equity. Accordingly, we have classified the
Warrants and the Cowen Warrant as a current liability as of December 31, 2007.
The estimated fair value of the Warrants and the Cowen Warrant was determined
using the Black-Scholes options pricing model. We 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 the obligation under warrants which includes the
fair value of the Cowen Warrant of $97,222. SFAS No. 133 also 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 December 31, 2007 and determined the aggregate fair
value to be a nominal amount, a decrease of approximately $2,052,578 over the
initial measurement of the aggregate fair value of the Warrants and the Cowen
Warrant on the date of issuance. Accordingly, we recognized a gain of $2,052,578
in our consolidated statements of operations for the year ended December 31,
2007 to reflect the decrease in the Company’s obligation to its warrant holders
to a nominal amount at December 31, 2007. Transaction costs associated with the
issuance of the Warrants of $170,081 was recorded as an expense in the Company’s
consolidated statement of operations for the year ended December 31,
2007.
As at
March 31, 2008, the Company estimated the fair value of the Warrants and the
Cowen Warrant and determined the aggregate fair value to be a nominal amount.
The carrying value of these Warrants as at March 31, 2008 and December 31, 2007
was nil and nil, respectively.
On March
11, 2007, our Board of Directors approved the grant to the directors of the
Company, other than Mr. Vamvakas, of a total of 165,000 options under the
2002 Stock Option Plan. In exchange for these options, each of the directors of
the Company gave up the cash remuneration which he or she would have been
entitled to receive from us during the financial year ended December 31,
2007 in respect of (i) his or her annual director's fee of $15,000, (ii) in the
case of those directors who chair a committee of the board of directors of the
Company, his or her fee of $5,000 per annum for chairing such committee and
(iii) his or her fee of $2,500 per fiscal quarter for the quarterly in-person
meetings of the board of directors of the Company. The number of options granted
to each of the directors was determined to be 8% higher in value than the cash
remuneration to which the directors would have been entitled during the
financial year ended December 31, 2007 and was determined using the
Black-Scholes option pricing model. The number of options granted to each
director, calculated using this methodology, was then rounded up to the nearest
1,000. These options are exercisable immediately and will remain exercisable
until the tenth anniversary of the date of their grant, notwithstanding any
earlier disability or death of the holder thereof or any earlier termination of
his or her service to the Company. The exercise price of each option is set at
$1.82, which was the per share closing price of the Company's common stock on
NASDAQ on March 9, 2007, the last trading day prior to the date of
grant.
On May
30, 2007, TLC Vision Corporation (“TLC Vision”) and JEGC OCC Corp. (“JEGC”)
announced that JEGC had agreed to purchase TLC Vision’s ownership stake in the
Company, subject to certain minimum prices and regulatory limitations and
further subject to JEGC obtaining satisfactory financing and other customary
closing conditions. On June 22, 2007, JEGC purchased a portion of TLC Vision’s
ownership stake in the Company, consisting of 1,904,762 shares, at a price of
$1.05 per share. On July 3, 2007, we announced that we had entered into
discussions with JEGC for the private placement of approximately $30,000,000 of
shares of the Company’s common stock at a price based upon the average trading
price at the time of purchase, subject to compliance with regulatory
requirements and to a minimum purchase price of $1.05 per share. On October 15,
2007, TLC Vision announced that JEGC was not able to complete the purchase of
TLC Vision’s remaining ownership stake in the Company by October 12, 2007, being
the deadline previously agreed by TLC Vision and JEGC. In making that
announcement, TLC Vision also stated that JEGC retains a non-exclusive right to
purchase TLC Vision’s remaining ownership stake in the Company, subject to the
right of each of TLC Vision and JEGC to terminate the agreement between
them. It was anticipated that JEGC would have gained a control
position in the Company, if both of these transactions had been completed. Our
discussions with JEGC have not resulted in any agreement. JEGC is owned by
Jefferson EquiCorp Ltd. and by Greybrook Corporation, a firm controlled by
Mr. Vamvakas.
As at
March 31, 2008 and December 31, 2007, we had investments in the aggregate
principal amount of $1,900,000 which consist of investments in four separate
asset-backed auction rate securities currently yielding an average return of
3.94% per annum. However, as a result of market conditions, all of
these investments have recently failed to settle on their respective settlement
dates and have been reset to be settled at a future date with an average
maturity of 46 days. Due to the current lack of liquidity for
asset-backed securities of this type, we concluded that the carrying value of
these investments was higher than its fair value as of March 31, 2008 and
December 31, 2007. Accordingly, these auction rate securities have been recorded
at their estimated fair value of $536,264. We consider this to be an
other-than-temporary reduction in the fair value of these auction rate
securities. Accordingly, the loss associated with these auction rate securities
of $327,486 for the three months ended March 31, 2008 has been included as an
impairment of investments in our consolidated statement of operations for the
three months ended March 31, 2007. The auction rate securities were
liquid as at March 31, 2007. As a result, the loss associated with these auction
rate securities for the three months ended March 31, 2007 was nil.
Although
we continue to receive interest earned on these securities, we do not know at
the present time when we will be able to convert these investments into
cash. Accordingly, management has classified these investments as a
non-current asset on its consolidated balance sheet as of March 31, 2008.
Management will continue to monitor these investments closely for future
indications of further impairment. The illiquidity of these investments may have
an adverse impact on the length of time during which we currently expect to be
able to sustain our operations in the absence of an additional capital raise by
the Company as we do not have the cash reserves to hold these auction rate
securities until the market recovers nor can we hold these securities until
their contractual maturity dates.
On
September 18, 2007, OccuLogix received a letter from The NASDAQ Stock Market, or
NASDAQ, indicating that, for the previous 30 consecutive business days, the bid
price of the Company’s common stock closed below the minimum $1.00 per share
requirement for continued inclusion under Marketplace Rule 4450(e)(5), or the
Minimum Bid Price Rule. Therefore, in accordance with Marketplace Rule
4450(e)(2), the Company was provided 180 calendar days, or until March 17, 2008,
to regain compliance. The NASDAQ letter stated that, if, at any time before
March 17, 2008, the bid price of the Company’s common stock closes at $1.00 per
share or more for a minimum of 10 consecutive business days, NASDAQ staff will
provide written notification that it has achieved compliance with the Minimum
Bid Price Rule. The NASDAQ letter also stated that, if the Company does not
regain compliance with the Minimum Bid Price Rule by March 17, 2008, NASDAQ
staff will provide written notification that the Company’s securities will be
delisted, at which time the Company may appeal the NASDAQ staff’s determination
to delist its securities to a NASDAQ Listing Qualifications Panel.
On
February 1, 2008, OccuLogix received a letter from NASDAQ indicating that, for
the previous 30 consecutive trading days, the Company’s common stock did not
maintain a minimum market value of publicly held shares of $5,000,000 as
required for continued inclusion by Marketplace Rule 4450(a)(2), or the MVPHS
Rule. Therefore, in accordance with Marketplace Rule 4450(e)(1), the Company was
provided 90 calendar days, or until May 1, 2008, to regain compliance. The
NASDAQ letter stated that, if at any time before May 1, 2008, the minimum market
value of publicly held shares of the Company’s common stock is $5,000,000 or
greater for a minimum of ten consecutive trading days, NASDAQ staff will provide
written notification that the Company complies with the MVPHS Rule. The NASDAQ
letter also stated that, if the Company does not regain compliance with the
MVPHS Rule by May 1, 2008, NASDAQ staff will provide written notification that
the Company’s securities will be delisted, at which time the Company may appeal
the NASDAQ staff’s determination to delist its securities to a NASDAQ Listing
Qualifications Panel. On May 6, 2008, the Company received a letter from NASDAQ
indicating that since the Company’s MVPHS has been $5,000,000 or greater for at
least 10 consecutive trading days the Company has regained compliance with the
MVPHS rule and the matter is now closed.
The
Company was not compliant with the Minimum Bid Price Rule by March 17, 2008.
While the Company has appealed the determination by NASDAQ staff to delist our
common stock to a NASDAQ Listing Qualifications Panel, we may not be successful
in our appeal, in which case our common stock may be transferred to The NASDAQ
Capital Market or be delisted altogether. Should either occur, existing
stockholders will suffer decreased liquidity.
These
NASDAQ notices have no effect on the listing of the Company's common stock on
the Toronto Stock Exchange.
Recent
Developments
On
January 9, 2008, we announced the departure, or pending departure, of seven
members of our executive team and, commencing on February 1, 2008, a 50%
reduction in the salary of each of Elias Vamvakas, our Chairman and Chief
Executive Officer, and Tom Reeves, our President and Chief Operating Officer. By
January 31, 2008, a total of 12 non-executive employees of the Company left the
Company’s employment.
On
February 19, 2008, we announced that the Company secured a bridge loan in an
aggregate principal amount of $3,000,000, less transaction costs of
approximately $180,000, from a number of private parties. The loan bears
interest at a rate of 12% per annum and has a 180-day term, which may be
extended to 270 days under certain circumstances. The repayment of the loan is
secured by a pledge by the Company of its shares of the capital stock of
OcuSense. Under the terms of the loan agreement, the Company has two pre-payment
options available to it, should it decide to not wait until the maturity date to
repay the loan. Under the first pre-payment option, the Company may repay the
loan in full by paying the lenders, in cash, the amount of outstanding principal
and accrued interest and issuing to the lenders five-year warrants in an
aggregate amount equal to approximately 19.9% of the issued and outstanding
shares of the Company’s common stock (but not to exceed 20% of the issued and
outstanding shares of the Company’s common stock). The warrants would be
exercisable into shares of the Company’s common stock at an exercise price of
$0.10 per share and would not become exercisable until the 180
th
day
following their issuance. Under the second pre-payment option, provided that the
Company has closed a private placement of shares of its common stock for
aggregate gross proceeds of at least $4,000,000, the Company may repay the loan
in full by issuing to the lenders shares of its common stock, in an aggregate
amount equal to the amount of outstanding principal and accrued interest, at a
15% discount to the price paid by the private placement investors. Any exercise
by the Company of the second pre-payment option would be subject to stockholder
and regulatory approval.
If the
Company is successful in completing the merger transaction announced on April
22, 2008 in which the Company will acquire the minority ownership interest and
OcuSense will be come a wholly-owned subsidiary of the Company, the dependency
on the success of OcuSense will be increased.
If the
Company is successful in completing a private placement of up to U.S.$6,500,000
of common stock as announced on April 22, 2008, management believes that it will
have sufficient funds to meet its operating activities and other demands until
approximately the end of June 2009.
On May 5,
2008, the Company announced that it had secured a bridge loan in an aggregate
principal amount of $300,000 (less transaction costs of approximately $18,000)
from a number of private parties (“Additional Bridge Loan”). The Additional
Bridge Loan constitutes an increase to the principal amount of the U.S.
$3,000,000 principal amount bridge loan that the Company announced on February
19, 2008 and was advanced on substantially the same terms and conditions as the
February 19, 2008 bridge loan, pursuant to an amendment of the loan agreement
for the February 19, 2008 bridge loan. The Additional Bridge Loan bears interest
at a rate of 12% per annum and will have the same maturity date as the February
19, 2008 bridge loan. and is secured by the same collateral as secures the
February 19, 2008 bridge loan.
Should
the Company elect to prepay the February 19, 2008 bridge loan it will be
obligated to pre-pay the Additional Bridge Loan in the same manner, provided
that the Company, in no event, shall be obligated to issue warrants exercisable
into shares in a number that exceeds 20% of the issued and outstanding shares of
the Company’s common stock on the date of pre-payment.
Currently,
we anticipate that the net proceeds of the bridge loans, together with the
Company’s other cash and cash equivalents, will be sufficient to sustain the
Company’s operations only until approximately the middle of July
2008.
RESULTS
OF OPERATIONS
Continuing
and discontinued operations
On
December 20, 2007, we announced the sale of SOLX to Solx Acquisition, Inc., or
Solx Acquisition, a company wholly owned by Doug P. Adams, the founder of SOLX
and who, until the closing of the sale, had been serving as an executive officer
of the Company in the capacity of President & Founder, Glaucoma
Division. The results of operations of SOLX have been included in
discontinued operations in the Company’s consolidated statements of operations
for the three months ended March 31, 2008 and 2007.
Revenues,
Cost of sales and Gross margin from continuing operations
|
|
Three Months Ended March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
$
|
|
|
|
|
|
$
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
Retina revenue
|
|
|
7,200
|
|
|
|
90,000
|
|
|
|
(82,800
|
)
|
|
|
|
7,200
|
|
|
|
90,000
|
|
|
|
(82,800
|
)
|
Cost
of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Retina cost of sales
|
|
|
24,556
|
|
|
|
32,100
|
|
|
|
(7,544
|
)
|
|
|
|
24,556
|
|
|
|
32,100
|
|
|
|
(7,544
|
)
|
Gross
margin
|
|
|
|
|
|
|
|
|
|
|
|
|
Retina gross margin
|
|
|
(17,356
|
)
|
|
|
57,900
|
|
|
|
(75,256
|
)
|
Percentage
of retina revenue
|
|
|
N/M
|
|
|
|
64
|
%
|
|
|
N/M
|
|
Total gross margin (loss)
|
|
|
(17,356
|
)
|
|
|
57,900
|
|
|
|
(75,256
|
)
|
*N/M
– Not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
Retina
Revenue
The
Company owns a consignment inventory of 400 disposable treatment
sets, in the keeping of Macumed AG, a company based in
Switzerland. During the three months ended March 31, 2008, Macumed consumed
a total of 48 treatment sets at a negotiated price of $150 per treatment set,
resulting in $7,200 in revenue. In the three months ended March 31, 2007,
we sold a total of 600 treatment sets at a negotiated price of $150 per
treatment to Macumed AG, resulting in $90,000 of revenue.
Cost
of Sales
Cost of
sales includes costs of goods sold and royalty costs. Our cost of goods sold for
the three months ended March 31, 2007 consists primarily of costs for the
manufacture of the RHEO™ System, including the costs we incur for the purchase
of component parts from our suppliers, applicable freight and shipping costs,
logistics inventory management and recurring regulatory costs associated with
conducting business and ISO certification.
Retina Cost of
Sales
Cost of
sales for the three months ended March 31, 2008 and March 31, 2007 includes
royalty fees of $25,000 payable to Dr. Brunner and
Mr. Stock. March 31, 2008 sales were supplied from consignment
inventory located in Switzerland which have been fully reserved for in November
2007. During the first quarter 2008, the Company recovered some of the
associated freight costs that had been expensed in prior periods. Cost of sales
for the three months ended March 31, 2007 includes freight charges on the
treatment sets sold and delivered to Macumed AG during the period.
Retina Gross
Margin
During
the three months ended March 31, 2008, gross margin is negative $17,356
reflecting low sales and fixed royalty fees.
Operating
Expenses
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Variance
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
1,365,484
|
|
|
|
2,433,490
|
|
|
|
(1,068,006
|
)
|
Clinical
and regulatory
|
|
|
1,022,987
|
|
|
|
2,169,739
|
|
|
|
(1,146,752
|
)
|
Sales
and marketing
|
|
|
176,529
|
|
|
|
472,536
|
|
|
|
(296,007
|
)
|
Discontinued Operations
|
|
|
―
|
|
|
|
1,950,227
|
|
|
|
(1,950,227
|
)
|
|
|
|
2,565,000
|
|
|
|
7,025,992
|
|
|
|
(4,460,992
|
)
|
General
and Administrative Expenses
General
and administrative expenses decreased by $1,068,006 or 53% during the three
months ended March 31, 2008, as compared with the corresponding period in fiscal
2007, due to the indefinite suspension of our RHEO™ System clinical development
program. Stock-based compensation expense also declined by $313,301 from
$357,089 for the three months ended March 31, 2007 to $43,788 for the
three months ended March 31, 2008 which reflects the forfeiture of unvested
stock options previously granted to terminated employees.
We are
continuing to focus our efforts on achieving an orderly refocus on ongoing
activities by reviewing and improving upon our existing business processes and
cost structure.
Clinical
and Regulatory Expenses
Clinical
and regulatory expenses decreased by $1,146,752 during the three months ended
March 31, 2008, as compared with the corresponding prior year period, due to the
indefinite suspension of our RHEO™ System clinical development program. Clinical
expense for retina activity of $148,305 for the three months ended March 31,
2008 represents expenses to close clinics and support ongoing obligations for
patient support. Clinical expense for retina activity the three months ended
March 31, 2007 were $1,184,972.
OcuSense
clinical expenditures for the three months ended March 31, 2008 and 2007 were
$874,682 and $984,767, respectively. The decline of $110,085 or 11.2% reflects
the maturing stage of OcuSense technological development in that the development
in the three months ended March 31, 2008 was of a nature that could be carried
out in-house, whereas the development in the corresponding period was completed
primarily in contracted facilities.
In March
2008, OcuSense announced that it had validated the prototype of the TearLab
TM
test
for DED and received company-wide certification to ISO 13485:2003. These
achievements allow the Company to move forward with clinical trials and the
attainment of the CE Mark in Europe, in advance of
commercialization.
Sales
and Marketing Expense
Sales and
marketing expenses decreased by $296,007 during the three months ended March 31,
2008, as compared with the prior period in fiscal 2007. The retina sales and
marketing expense for the three months ended March 31, 2008 was $5,399 compared
to an expense of $457,090 the previous year. This decline is due in general the
indefinite suspension of our RHEO™ System clinical development program and, in
particular, to stock-based compensation expense which declined by $131,027 from
an expense of $131,027 for the three months ended March 31, 2007 to nil for the
three months ended March 31, 2008.
Sales and
marketing expense for OcuSense increased by $155,684 in the three months ended
March 31, 2008 when compared with the prior year period in fiscal 2007. This
increase reflects an increased focus on building awareness of the TearLab
TM
test
for DED prior to commercialization.
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 are presently primarily
focused on commercialization in Europe and developing plans to do the same in
North America. We will continue to develop and execute our conference and podium
strategy to ensure visibility and evidence-based positioning of the TearLab™
test for DED among eye care professionals.
Other
Income (Expenses)
|
|
Three Months Ended March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
$
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
30,288
|
|
|
|
215,438
|
|
|
|
(86
|
%)
|
Changes
in fair value of obligation under warrants
|
|
|
―
|
|
|
|
(723,980
|
)
|
|
|
100
|
%
|
Impairment
of investments
|
|
|
(327,486
|
)
|
|
|
―
|
|
|
|
N/M
|
|
Other
income
|
|
|
17,492
|
|
|
|
15,873
|
|
|
|
10
|
%
|
Interest
expense
|
|
|
(40,438
|
)
|
|
|
(16,641
|
)
|
|
|
(143
|
%)
|
Finance
costs
|
|
|
(41,000
|
)
|
|
|
―
|
|
|
|
N/M
|
|
Minority interest
|
|
|
―
|
|
|
|
554,848
|
|
|
|
N/M
|
|
|
|
|
(361,144
|
)
|
|
|
45,538
|
|
|
|
N/M
|
|
*N/M
– Not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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 2,670,933 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 93,483 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 $2.20, subject to adjustment, and the warrants will become
exercisable on August 6, 2007. All of the terms and conditions of the warrants
issued to Cowen and Company, LLC (other than the number of shares of the
Company's common stock into which the warrant is exercisable) are identical to
those of the warrants issued to the institutional investors. The Company
accounts for the warrants in accordance with the provisions of SFAS No. 133
along with related interpretation EITF 00-19. Based on the provisions of EITF
00-19, the Company determined that the warrants issued during the three months
ended March 31, 2007 do not meet the criteria for classification as equity.
Accordingly, the Company has classified the warrants as a current liability as
at March 31, 2007. The estimated fair value was determined using the
Black-Scholes option-pricing model. In addition, SFAS No. 133 requires the
Company to record the outstanding warrants at fair value at the end of each
reporting period resulting in an adjustment to the recorded liability of the
derivative, with any gain or loss recorded in earnings of the applicable
reporting period. The Company therefore estimated the fair value of the warrants
as at March 31, 2007 and determined the aggregate fair value to be $2,626,195,
an increase of $573,617 over the initial measurement of the fair value of the
warrants on the date of issuance.
Changes
in fair value of obligation under warrants and warrant expense of $723,980 for
the three months ended March 31, 2007 includes transaction costs associated with
the issuance of the warrants of $150,363 and a charge of $573,617 which reflects
the increase in the fair value of the warrants as at March 31, 2007 over
the initial measurement of the fair value of the warrants on the date of
issuance. There was no comparable expense in the three months ended March 31,
2008. As at March 31, 2008, the fair value of the warrants was
determined to be nominal and the warrants were assigned a nil value for
accounting purposes.
Change
in the fair value of investments
As at
March 31, 2008 and December 31, 2007, the Company had investments in the
aggregate principal amount of $1,900,000 which consist of investments in four
separate asset-backed auction rate securities yielding an average return of
3.94% per annum. However, as a result of market conditions, all of
these investments have recently failed to settle on their respective settlement
dates and have been reset to be settled at a future date with an average
maturity of 46 days. Due to the current lack of liquidity for
asset-backed securities of this type, the Company has concluded that the
carrying value of these investments was higher than its fair value as of
December 31, 2007 and March 31, 2008. Accordingly, these auction rate securities
have been recorded at their estimated fair value of $863,750 as at December 31,
2007 and $536,264 as at March 31, 2008.
The
Company considers this to be an other-than-temporary reduction in the value.
Accordingly, the loss associated with these auction rate securities of $327,486
for three months ended March 31, 2008 has been included as an impairment of
investments in the Company’s consolidated statement of operations for the three
months ended March 31, 2008. The investments were liquid as at March 31, 2007.
Accordingly, the corresponding charge for the three months ended March 31, 2007
is nil.
Although
the Company continues to receive payment of interest earned on these securities,
the Company does not know at the present time when it will be able to convert
these investments into cash. Accordingly, management has classified
these investments as a non-current asset on its consolidated balance sheet as of
December 31, 2007 and March 31, 2008. Management will continue to monitor these
investments closely for future indications of further impairment. The
illiquidity of these investments may have an adverse impact on the length of
time during which the Company currently expects to be able to sustain its
operations in the absence of an additional capital raise by the Company as we do
not have the cash reserves to hold these auction rate securities until the
market recovers nor can we hold these securities until their contractual
maturity dates.
Other
Income (Expense)
Other
income for the three months ended March 31, 2008 consists of amounts realized in
connection with the disposal of SOLX in excess of the amounts
recorded in fiscal 2007.
Other
income for the three months ended March 31, 2007 consists of foreign exchange
gain of $15,873 due to exchange rate fluctuations on the Company’s foreign
currency transactions. Other expense was $381 for the three months ended March
31, 2007 and consists of miscellaneous tax expense of $5,713 offset in part
by a foreign exchange gain of $5,332 during the period.
Interest
Expense
On
February 19, 2008, the Company announced that it has secured a bridge loan in an
aggregate principal amount of $3,000,000 (less transaction costs of
approximately $180,000) from a number of private parties. The loan bears
interest at a rate of 12% per annum and has a 180-day term, which may be
extended to 270 days under certain circumstances. The Company has pledged its
shares of the capital stock of OcuSense as collateral for the loan. Interest
expense for the three months ended March 31, 2008 of $40,438 is due to the
lenders.
On
November 30, 2006, the Company announced that Mr. Elias Vamvakas, the Chairman,
Chief Executive Officer and Secretary of the Company, had agreed to provide the
Company with a standby commitment to purchase convertible debentures of the
Company (“Convertible Debentures”) in an aggregate maximum amount of $8,000,000
(the “Total Commitment Amount”). On February 6, 2007, the Total
Commitment Amount was reduced to zero, thus effectively terminating Mr.
Vamvakas’ standby commitment. No portion of the standby commitment was ever
drawn down by the Company, and the Company recognized as interest expense a
total of $16,685 in commitment fees during the three months ended March 31,
2007.
Finance
Costs
Finance
costs reflect the $41,000 amortization of the $180,000 paid to secure
the February 19, 2008 bridge financing.
Minority
Interest
Minority
interest is from our acquisition of 50.1% of the capital stock of OcuSense, on a
fully diluted basis, on November 30, 2006. The results of OcuSense’s operations
have been included in our consolidated financial statements since that date.
Income from minority interest of nil and $554,848 for the three months ended
March 31, 2008 and 2007, respectively, relates to the loss reported by OcuSense
in which the Company has a shared interest with minority
stockholders.
Discontinued
Operations
On
December 19, 2007, the Company sold to Solx Acquisition, and Solx Acquisition
purchased from the Company, all of the issued and outstanding shares of the
capital stock of SOLX, which had been the Glaucoma division of the Company prior
to the completion of this transaction. The consideration for the purchase and
sale of all of the issued and outstanding shares of the capital stock of SOLX
consisted of: (i) on the closing date of the sale, the assumption by
Solx Acquisition of all of the liabilities of the Company related to SOLX’s
business, incurred on or after December 1, 2007, and the Company’s obligation to
make a $5,000,000 payment to the former stockholders of SOLX due on September 1,
2008 in satisfaction of the outstanding balance of the purchase price of SOLX;
(ii) on or prior to February 15, 2008, the payment by Solx Acquisition of all of
the expenses that the Company had paid to the closing date, as they related to
SOLX’s business during the period commencing on December 1, 2007; (iii) during
the period commencing on the closing date and ending on the date on which SOLX
achieves a positive cash flow, the payment by Solx Acquisition of a royalty
equal to 3% of the worldwide net sales of the SOLX 790 Laser and the SOLX Gold
Shunt, including next-generation or future models or versions of these products;
and (iv) following the date on which SOLX achieves a positive cash flow, the
payment by Solx Acquisition of a royalty equal to 5% of the worldwide net sales
of these products. In order to secure the obligation of Solx Acquisition to make
these royalty payments, SOLX granted to the Company a subordinated security
interest in certain of its intellectual property. No value was assigned to the
royalty payments as the determination of worldwide net sales of SOLX’s products
is subject to significant uncertainty.
The sale
transaction described above established fair values for certain of the Company’s
acquisition-related intangible assets and goodwill. Accordingly, the Company
performed an impairment test of these assets at December 1, 2007. Based on this
analysis, during the year ended December 31, 2007, the Company recognized a
non-cash goodwill impairment charge of $14,446,977 and an impairment charge of
$22,286,383 to record its acquisition-related intangible assets at their fair
value as of December 31, 2007. As at March 31, 2008 and December 31, 2007, the
value of both of these assets associated with SOLX was nil and nil,
respectively.
The
Company’s results of operations related to discontinued operations for the three
months ended March 31, 2008 and 2007 are as follows:
|
|
Three
months ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
―
|
|
|
|
39,625
|
|
Cost
of goods sold
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
―
|
|
|
|
55,508
|
|
Royalty costs
|
|
|
―
|
|
|
|
8,734
|
|
Total cost of goods sold
|
|
|
―
|
|
|
|
64,242
|
|
|
|
|
|
|
|
|
(24,617
|
)
|
Operating
expenses
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
―
|
|
|
|
1,041,878
|
|
Clinical
and regulatory
|
|
|
―
|
|
|
|
628,098
|
|
Sales and marketing
|
|
|
―
|
|
|
|
280,250
|
|
|
|
|
―
|
|
|
|
1,950,226
|
|
|
|
|
―
|
|
|
|
(1,974,843
|
)
|
Other
income (expenses)
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
|
|
|
|
|
|
Interest
and accretion expense
|
|
|
―
|
|
|
|
(204,896
|
)
|
Other
|
|
|
―
|
|
|
|
(28
|
)
|
|
|
|
―
|
|
|
|
(204,924
|
)
|
Loss
from discontinued operations before income taxes
|
|
|
―
|
|
|
|
(2,179,767
|
)
|
Recovery of income taxes
|
|
|
―
|
|
|
|
898,025
|
|
Loss from discontinued
operations
|
|
|
―
|
|
|
|
(1,281,742
|
)
|
Recovery
of income taxes
|
|
Three
months ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
$
|
|
|
$
|
|
Recovery
of income taxes from continuing operations
|
|
|
—
|
|
|
|
1,981,325
|
|
Recovery of income taxes from discontinued
operations
|
|
|
—
|
|
|
|
898,025
|
|
Recovery of income taxes
|
|
|
—
|
|
|
|
2,879,350
|
|
In the
three months ended March 31, 2007, the Company reported a recovery of income
taxes of $2,879,350 related to the amortization of deferred tax liabilities,
which were recorded based on the difference between the fair value of intangible
assets acquired and their tax basis, and to the recognition of tax losses in the
three months ended March 31, 2007. In addition, $2,368,156 reflects a deferred
tax recovery amount associated with the recognition of a deferred tax asset from
the availability of fiscal 2007 first quarter net operating losses in the United
States which may be utilized to reduced taxes in the future.
In 2008,
no additional deferred tax benefits were realized in the accounts.
LIQUIDITY
AND CAPITAL RESOURCES
(in
thousands)
|
|
March
31
|
|
|
December
31
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,330
|
|
|
$
|
2,236
|
|
|
$
|
94
|
|
Short-term investments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total cash and cash equivalents and short-term
investments
|
|
$
|
2,330
|
|
|
$
|
2,236
|
|
|
$
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
of total assets
|
|
|
20.7
|
%
|
|
|
22.4
|
%
|
|
|
(1.7
|
%)
|
Working capital
(deficiency)
|
|
$
|
(3,347
|
)
|
|
$
|
(997
|
)
|
|
$
|
(2,350
|
)
|
In
December 2004, the Company raised $67,200,000 of gross cash proceeds (less
issuance costs of $7,858,789) in an initial public offering of shares of its
common stock. Immediately prior to the offering, the primary source of the
Company’s liquidity was cash raised through the issuance of
debentures.
On
February 6, 2007, the Company raised gross proceeds in the amount of $10,016,000
(less issuance costs of $871,215) in a private placement of shares of
its common stock and warrants.
On
February 19, 2008, we announced that the Company secured a bridge loan in an
aggregate principal amount of $3,000,000 (less transaction costs of $180,000)
from a number of private parties. The loan bears interest at a rate of 12% per
annum and has a 180-day term, which may be extended to 270 days under certain
circumstances. The repayment of the loan is secured by a pledge by the Company
of its shares of the capital stock of OcuSense.
On May 5,
2008 we announced that the Company secured an additional bridge loan in an
aggregate principal amount of $300,000 (transaction costs of approximately
$18,000) from a number of private parties. The terms of the additional bridge
loan are substantially the same as those of the $3,000,000 bridge loan announced
February 19, 2008.
To the
first quarter of 2008, cash has been primarily utilized to finance increased
infrastructure costs, to accumulate inventory and to fund costs of the MIRA-1,
LEARN and RHEO-AMD trials and other clinical trials and to acquire SOLX and
OcuSense in line with our diversification strategy. With the suspension of the
Company’s RHEO™ System clinical trial development program, and the consequent
winding-down of the RHEO-AMD study, and the Company’s disposition of SOLX, we
expect that, in the future, we will use our cash resources to complete the
product development of OcuSense’s TearLab™ test for DED and to conduct the
clinical trials that will be required for the TearLab™ test for
DED.
Currently,
we anticipate that the net proceeds of the bridge loans, together with the
Company’s other cash and cash-equivalents, will be sufficient to sustain the
Company’s operations only until approximately the middle of July
2008.
As at
March 31, 2008 and December 31, 2007, we had investments in the aggregate
principal amount of $1,900,000 which consist of investments in four separate
asset-backed auction rate securities yielding an average return
of 3.94% per annum. Contractual maturities for these
auction rate securities range from 33 to 39 years, with an average interest
reset date of approximately 46 days. Historically, the carrying value of auction
rate securities approximated their fair value due to the frequent resetting of
interest rates. However, as a result of market conditions associated with the
liquidity issues experienced in the global credit and capital markets, all of
these investments have recently failed to settle on their respective settlement
dates and have been reset to be settled at a future date with an average
maturity of 46 days.
Due to
the current lack of liquidity for asset-backed securities of this type, we
concluded that the carrying value of these investments was higher than its fair
value as of March 31, 2008 and December 31, 2007. Accordingly, these auction
rate securities have been recorded at their estimated fair value of $536,264,
which represents a decline of $1,363,736 in the carrying value of these auction
rate securities. We estimated the fair value of these auction rate securities
based on the following: (i) the underlying structure of each security;
(ii) the present value of future principal and interest payments discounted
at rates considered to reflect current market conditions;
(iii) consideration of the probabilities of default, auction failure or
repurchase at par for each period; and (iv) estimates of the recovery rates
in the event of default for each security. This estimated fair value
could change significantly based on future market conditions.
We
determined the reduction in the value of these auction rate securities to be an
other-than-temporary reduction in value. Accordingly, the impairment associated
with these auction rate securities of $1,036,250 has been included as an
impairment of investments in our consolidated statement of operations for the
year ended December 31, 2007 and $327,486 has been included as an impairment of
investments in our consolidated statement of operations for the three months
ended March 31, 2008. Our conclusion for the other-than-temporary impairment is
based on the Company’s current liquidity position. Although we continue to
receive interest earned on these securities, we do not know at the present time
when we will be able to convert these investments into
cash. Accordingly, management has classified these investments as a
non-current asset on its consolidated balance sheet as at March 31, 2008
and December 31, 2007. Management will continue to monitor these
investments closely for future indications of further impairment. If the current
market conditions deteriorate further, or the anticipated recovery in market
values does not occur, we may be required to record additional impairment
charges in the remainder of fiscal 2008.
The
illiquidity of these investments may have an adverse impact on the length of
time during which we currently expect to be able to sustain our operations in
the absence of an additional capital raise by the Company as we do not have the
cash reserves to hold these auction rate securities until the market recovers
nor can we hold these securities until their contractual maturity
dates.
Changes
in Cash Flows
|
|
Three
Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
$
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
used in operating activities
|
|
|
(2,682,924
|
)
|
|
|
(4,689,570
|
)
|
|
|
2,006,646
|
|
Cash
used in investing activities
|
|
|
(43,190
|
)
|
|
|
(5,127,743
|
)
|
|
|
5,084,553
|
|
Cash provided by financing
activities
|
|
|
2,820,000
|
|
|
|
9,343,014
|
|
|
|
(6,523,014
|
)
|
Net (decrease) increase in cash and cash
equivalents period
|
|
|
93,886
|
|
|
|
(474,299
|
)
|
|
|
568,185
|
|
Cash
Used in Operating Activities
Net cash
used to fund our operating activities during the three months ended March 31,
2008 was $2,682,924. Net loss during the three-month period was
$2,943,500. The non-cash charges which comprise a portion of the net loss during
that period the amortization of intangible assets of $161,475, fixed assets of
$17,638, and impairment of investments of $327,486. Additional non-cash
charges consist of $83,876 in stock-based compensation charges.
The net
change in non-cash working capital balances related to operations for the three
months ended March 31, 2008 and 2007 consists of the following:
|
|
Three months ended
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Amounts
receivable (increase) decrease
|
|
|
212,721
|
|
|
|
(166,806
|
)
|
Inventory
(increase) decrease
|
|
|
(41,213
|
)
|
|
|
12,752
|
|
Prepaid
expenses (increase) decrease
|
|
|
35,825
|
|
|
|
9,642
|
|
Deposit
(increase) decrease
|
|
|
(2,892
|
)
|
|
|
—
|
|
Other
current assets (increase) decrease
|
|
|
—
|
|
|
|
(10,600
|
)
|
Accounts
payable (decrease) increase
|
|
|
(828,795
|
)
|
|
|
43,365
|
|
Accrued
liabilities (decrease) increase
|
|
|
59,945
|
|
|
|
252,626
|
|
Deferred
revenue (decrease) increase
|
|
|
106,700
|
|
|
|
—
|
|
Due
to stockholders (decrease) increase
|
|
|
41,238
|
|
|
|
(48,629
|
)
|
Short term liabilities (decrease)
increase
|
|
|
40,438
|
|
|
|
—
|
|
|
|
|
(376,033
|
)
|
|
|
92,350
|
|
·
|
Amounts
receivable decrease is due to receipts for matters related to the sale of
SOLX Inc..
|
·
|
Increase
in inventory reflects the acquisition of tears samples and lab cards
consumed in ongoing clinical tests.
|
·
|
Decrease
in prepaid expenses is primarily due to the decline in prepaid insurance
which has resulted from a decline in insurance costs attributable to
discontinued activities.
|
·
|
Accounts
payable decreased due primarily to payment for clinical test services
which were substantially stopped in the fourth quarter of 2007 and funded
in the first quarter of 2008.
|
·
|
Accrued
liabilities increased primarily to the receipt of a $250,000 advance to be
utilized to offset the cost of certain OcuSense TearLab
tests
|
·
|
Increase
in deferred revenue reflects $14,300 received from a customer for the
eventual proceeds on sale of consignment inventory and $92,400 received as
an advance payment for products.
|
·
|
Increase
in amounts due to stockholders is attributable to an increase of
$12,500 in the amount due to Hans Stock and the receipt of
$25,000 due from a minority shareholder of
OcuSense.
|
·
|
Increase
in short term liabilities reflects interest accrued on the bridge
financing.
|
Cash
(Used in) Provided by Investing Activities
Net cash
used in investing activities for the three months ended March 31, 2008 was
$43,190. Cash used in investing activities during the period consists of $9,317
used to acquire fixed assets and $33,873 used to protect and maintain patents
and trademarks.
Net cash
used in investing activities for the three months ended March 31, 2007 was
$5,127,743 and resulted from the purchase of short-term investments of
$5,025,000. Cash used in investing activities during the three months ended
March 31, 2007 also included $71,189 used to acquire fixed assets and $31,554
used to protect and maintain patents and trademarks.
Cash
Provided by Financing Activities
On
February 19, 2008, the Company announced that it has secured a bridge loan in an
aggregate principal amount of $3,000,000 (less transaction costs of $180,000)
from a number of private parties. The loan bears interest at a rate of 12% per
annum and has a 180-day term, which may be extended to 270 days under certain
circumstances. The Company has pledged its shares of the capital stock of
OcuSense as collateral for the loan.
Net cash
provided by financing activities for the three months ended March 31, 2007 was
$9,343,014 and is made up of gross proceeds received in the amount of
$10,016,000 from the private placement of shares of the Company’s common stock
and warrants less issuance costs of $672,986.
Financial
Condition
Management
believes that the existing cash and cash equivalents and short-term investments,
together with the net proceeds of the bridge loans, will be sufficient to fund
the Company’s anticipated level of operations and other demands and commitments
until approximately the middle of July 2008.
As at
December 31, 2007, we had investments in the aggregate principal amount of
$1,900,000 which consist of investments in four separate asset-backed auction
rate securities yielding an average return of 3.94% per
annum. However, as a result of market conditions, all of these
investments have recently failed to settle on their respective settlement dates
and have been reset to be settled at future dates with an average maturity of 46
days. Based on discussions with the Company’s advisors and the
current lack of liquidity for asset-backed securities of this type, we concluded
that the carrying value of these investments was higher than its fair value as
of March 31, 2008 and December 31, 2007. Accordingly, these auction rate
securities have been recorded at their estimated fair value of $536,264 as at
March 31, 2008 and $863,750 as at December 31, 2007.
We
consider this to be an other-than-temporary reduction in the value, accordingly,
the impairment associated with these auction rate securities of $1,036,250 for
the the ended December 31, 2008 and $327,486 for the three months ended March
31, 2008 (totaling $1,363,736) has been included as an impairment of investments
in our consolidated statement of operations for the year ended December 31, 2007
and March 31, 2008 respectively.
Although
we continue to receive interest earned on these securities, we do not know at
the present time when it will be able to convert these investments into
cash. Accordingly, management has classified these investments as a
non-current asset on its consolidated balance sheet as of December 31, 2007 and
March 31, 2008. Management will continue to monitor these investments closely
for future indications of further impairment. The illiquidity of these
investments may have an adverse impact on the length of time during which we
currently expect to be able to sustain its operations in the absence of an
additional capital raise by the Company as we do not have the cash reserves to
hold these auction rate securities until the market recovers nor can we hold
these securities until their contractual maturity dates.
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 development of OcuSense’s TearLab™ test for
DED;
|
|
·
|
the
cost and results, and the rate of progress, of the clinical trials of the
TearLab™ test for DED that will be required to support OcuSense’s
application to obtain 510(k) clearance and a CLIA waiver from the FDA to
market and sell the TearLab™ test for DED in the United
States;
|
|
·
|
OcuSense’s
ability to obtain 510(k) approval and a CLIA waiver from the FDA for the
TearLab™ test for DED and the timing of such approval, if
any;
|
|
·
|
whether
government and third-party payers agree to reimburse treatments using the
TearLab™ test for DED;
|
|
·
|
the
costs and timing of building the infrastructure to market and sell the
TearLab™ test for DED;
|
|
·
|
the
costs of filing, prosecuting, defending and enforcing any patent claims
and other intellectual property
rights;
|
|
·
|
the
effect of competing technological and market developments;
and
|
|
·
|
the
outcome of the Company’s appeal to a NASDAQ listings qualifications
hearing panel regarding the NASDAQ’s staff’s determination to
delist the Company’s common stock.
|
With the
suspension of the Company’s RHEO™ System clinical development program, and the
consequent winding-down of the RHEO-AMD study, and the Company’s disposition of
SOLX, the Company’s major asset is its 50.1% ownership stake, on a fully diluted
basis, in OcuSense. Accordingly, unless we acquire other businesses (which, in
light of the Company’s financial condition, is unlikely to occur), our ability
to generate any revenues will be dependent almost entirely upon the success of
OcuSense.
If the
Company is successful in completing the merger transaction announced on April
22, 2008 in which the Company will acquire the minority ownership interest and
OcuSense will be come a wholly-owned subsidiary of the Company, the dependency
on the success of OcuSense will be increased
We cannot
begin commercialization of the TearLab™ test for DED in the United States until
we receive FDA approval. At this time, we do not know when we can expect to
begin to generate revenues from the TearLab™ test for DED in the United
States.
We will
need additional capital in the future, and our prospects for obtaining it are
uncertain. On October 9, 2007, we announced that the Board had authorized
management and the Company’s advisors to explore the full range of strategic
alternatives available to enhance shareholder value, including, but not limited
to, the raising of capital through the sale of securities, one or more strategic
alliances and the combination, sale or merger of all or part of the Company. For
some time prior to the October 9, 2007 announcement, the Company had been
seeking to raise additional capital, with the objective of securing funding
sufficient to sustain its operations as it had been clear that, unless we were
able to raise additional capital, the Company would not have had sufficient cash
to support its operations beyond early 2008. The Company has secured a bridge
loan in an aggregate principal amount of $3,000,000 from a number of private
parties on February 19, 2008 and an additional bridge loan of $300,000 secured
on May 5, 2008. Management believes that these net proceeds, together with the
Company’s existing cash and cash-equivalents, will be sufficient to cover its
operating activities and other demands only until approximately the middle of
July 2008.
If the
Company is successful in completing a private placement of up to U.S.$6,500,000
of common stock as announced on April 22, 2008, management believes that it will
have sufficient funds to meet its operating activities and other demands until
approximately the end of June 2009.
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 will be unable to
continue our operations.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements.” This standard defines fair value, establishes a framework for
measuring fair value in accounting principles generally accepted in the United
States of America and expands disclosure about fair value measurements. This
pronouncement applies to other accounting standards that require or permit fair
value measurements. Accordingly, this statement does not require any new fair
value measurement. This statement is effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. In
December of 2007, FASB agreed to a one year deferral of SFAS No. 157’s fair
value measurement requirements for non-financial assets and liabilities that are
not required or permitted to be measured at fair value on a recurring basis. The
Company adopted SFAS No. 157 on January 1, 2008, which had no effect
on the Company’s consolidated financial statements. Refer to Note 8, “Fair value
measurements” for additional information related to the adoption of SFAS
No. 157.
In
February 2007, FASB issued Statement No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities—Including an amendment of FASB
Statement No. 115” (“SFAS No. 159”). SFAS No. 159 expands the use of fair
value accounting but does not affect existing standards which require assets or
liabilities to be carried at fair value. Under SFAS No. 159, a company may elect
to use fair value to measure accounts and loans receivable, available-for-sale
and held-to-maturity securities, equity method investments, accounts payable,
guarantees and issued debt. Other eligible items include firm commitments for
financial instruments that otherwise would not be recognized at inception and
non-cash warranty obligations where a warrantor is permitted to pay a third
party to provide the warranty goods or services. If the use of fair value is
elected, any upfront costs and fees related to the item must be recognized in
earnings and cannot be deferred (e.g., debt issue costs). The fair value
election is irrevocable and generally made on an instrument-by-instrument basis,
even if a company has similar instruments that it elects not to measure based on
fair value. At the adoption date, unrealized gains and losses on existing items
for which fair value has been elected are reported as a cumulative adjustment to
beginning retained earnings.
Subsequent
to the adoption of SFAS No. 159, changes in fair value are recognized in
earnings. SFAS No. 159 is effective for fiscal years beginning on or after
November 15, 2007 and is required to be adopted by the Company in the first
quarter of fiscal 2008. The adoption of SFAS No. 159 has not had a material
impact on the Company’s results of operations and financial
position.
On June
14, 2007, FASB ratified EITF 07-3, "Accounting for Non-Refundable Advance
Payments for Goods or Services to Be Used in Future Research and Development
Activities". EITF 07-3 requires that all non-refundable advance payments for
R&D activities that will be used in future periods be capitalized until
used. In addition, the deferred research and development costs need to be
assessed for recoverability. EITF 07-3 is applicable for fiscal years beginning
after December 15, 2007 and is to be applied prospectively without the option of
early application. The adoption of EITF 07-3 has not had a material
impact on the Company’s results of operations and financial
position.
In
March 2008, FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities — An Amendment of FASB Statement
No. 133”. SFAS No. 161 enhances the required disclosures regarding
derivatives and hedging activities, including disclosures regarding how an
entity uses derivative instruments, how derivative instruments and related
hedged items are accounted for under SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities” and how derivative instruments
and related hedged items affect an entity’s financial position, financial
performance and cash flows. SFAS No. 161 is effective for fiscal years
beginning after November 15, 2008. Management is currently evaluating the
requirements of SFAS No. 161 and has not yet determined the impact, if any,
on the Company’s financial statements.
ITEM 3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Currency
fluctuation and exchange risk
All of
our sales are in U.S. dollars or are linked to the U.S. dollar, while a portion
of our expenses are in Canadian dollars and euros. We cannot predict any future
trends in the exchange rate of the Canadian dollar or euro against the U.S.
dollar. Any strengthening of the Canadian dollar or euro in relation to the U.S.
dollar would increase the U.S. dollar cost of our operations and would affect
our U.S. dollar measured results of 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 would be 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.
As at
March 31, 2008 and December 31, 2007, we had investments in the aggregate
principal amount of $1,900,000 which consist of investments in four separate
asset-backed auction rate securities yielding an average return of 3.940% per
annum. However, as a result of market conditions, all of these
investments have recently failed to settle on their respective settlement dates
and have been reset to be settled at future dates with an average maturity of 46
days. Due to the current lack of liquidity for asset-backed
securities of this type, we concluded that the carrying value of these
investments was higher than its fair value as of March 31, 2008 and December 31,
2007. Accordingly, these auction rate securities have been recorded at their
estimated fair value of $536,264. We consider this to be an other-than-temporary
reduction in the fair value of these auction rate securities. Accordingly, the
loss associated with these auction rate securities of $327,486 for the three
months ended March 31, 2008 has been included as an impairment of investments in
our consolidated statement of operations for the three months ended March 31,
2007. The auction rate securities were liquid as at March 31, 2007.
As a result, the loss associated with these auction rate securities for the
three months ended March 31, 2007 was nil.
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
(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 (the “CEO”) and our principal financial officer (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.
The Company’s disclosure controls and procedures are designed to provide
reasonable assurance of achieving their desired objectives. As of the end of the
three-month period ended March 31, 2008, an evaluation of the effectiveness of
the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e)
of the Exchange Act) was carried out by the CEO and the CFO. Based on their
evaluation, the CEO and the CFO have concluded that, as of the end of that
fiscal period, the Company’s disclosure controls and procedures are effective to
provide reasonable assurance of achieving the desired control
objectives.
(b) Changes
in Internal Control over Financial Reporting. During the three-month period
ended March 31, 2008, the Company has undergone significant changes at the
Corporate level which included the termination / resignation of executives and
finance individuals. However, given the limited scope of the
Company's operations, our existing employees, combined with the services of
consultants, the Company still has appropriate design and operating
effectiveness of internal control over financial reporting.
PART
II.
|
OTHER
INFORMATION
|
ITEM 1.
|
LEGAL
PROCEEDINGS
|
We are
not aware of any material litigation involving us that is outstanding,
threatened or pending.
ITEM 2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
None
ITEM 3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
There has
not been any default upon our senior securities.
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None.
ITEM 5.
|
OTHER
INFORMATION
|
None.
Index to
Exhibits
|
Agreement
and Plan of Merger and Reorganization, dated April 22, 2008, by and among
the Registrant, OcuSense Acquireco, Inc. and OcuSense, Inc. (Exhibits have
been omitted pursuant to Item 601(b)(2) of Regulation S-K and will be
provided to the Securities and Exchange Commission upon
request.)
|
|
Amending
Agreement, dated as of May 5, 2008, by and among the Registrant, the
lenders listed on the Schedule of New Lenders attached there to as Exhibit
A, the lenders listed the Schedule of Required Lenders attached
thereto as Exhibit B and Marchant Securities Inc., amending the Loan
Agreement, dated as of February 19, 2008, by and among the Registrant, the
Lenders named therein and Marchant Securities Inc. and the Share Pledge
Agreement, dated as of February 19, 2008, by the Registrant in favor of
Marchant Securities Inc., as collateral
agent.
|
|
CEO’s
Certification required by Rule 13a-14(a) of the Securities Exchange Act of
1934.
|
|
CFO’s
Certification required by Rule 13a-14(a) of the Securities Exchange Act of
1934.
|
|
CEO’s
Certification of periodic financial reports pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, U.S.C. Section
1350.
|
|
CFO’s
Certification of periodic financial reports pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, U.S.C. Section
1350.
|
52
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