UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended: March 31, 2018

For the transition period from _______________ to ______________X_______________

Commission File Number: 000-51030

TearLab Corporation

(Exact name of registrant as

specified in its charter)

9980 Huennekens Street.,Street, Suite 100, San Diego, CA 92121

(Address of principal executive offices)

(858) 455-6006

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

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

Yes [X] No [  ]

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 5,742,45310,438,998 as of November 6, 2017.May 7, 2018.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

TearLab Corporation

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(Unaudited)

See accompanying notes to interim condensed consolidated financial statements

TearLab Corporation

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

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

(Unaudited)

See accompanying notes to interim condensed consolidated financial statements

TearLab Corporation

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

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

(Unaudited)

See accompanying notes to interim condensed consolidated financial statements

TearLab Corporation

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(expressed in thousands of U.S. dollars)

(Unaudited)

See accompanying notes to interim condensed consolidated financial statements

TearLab Corporation

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

1. BASIS OF PRESENTATION

Nature of Operations

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

The accompanying Condensed Consolidated Financial Statementscondensed consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. On April 8, 2016, OcuHub Holdings, Inc., a wholly-owned subsidiary of the Company, completed the sale of 10,167.5 units of OcuHub LLC (“OcuHub”), reducing OcuHub Holdings, Inc.’s ownership in OcuHub to 10.5% on a fully-diluted basis. Prior to the sale, the accounts of OcuHub were included in the Condensed Consolidated Financial Statements. In the nine months ended September 30, 2016, the Company recorded a gain on the sale of OcuHub of $75, included in Other income (expense) on the Condensed Consolidated Statement of Operations and Comprehensive Loss. Intercompany accounts and transactions have been eliminated on consolidation.

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

Liquidity and Going Concern

The accompanying Condensed Consolidated Financial Statementscondensed consolidated financial statements have been prepared on the going concern basis, which assumes that the Company will continue to operate as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has sustained substantial losses of $12,135$883 and $15,579$4,421 for the ninethree months ended September 30,March 31, 2018 and 2017, and 2016, respectively. Based on the Company’s currentexpected rate of cash consumption in the latter quarters of 2018, the Company estimates it will need additional capital either in the latter part of the fourth quarter of 2017 or by the first quarter of 20182019 and its prospects for obtaining that capital are uncertain. The Company is attemptingmay be able to raise either additional equitydebt financing and has currently on file an S-1 registration statement, filed with the SEC on August 21, 2017, amended on September 21, 2017 and amended on November 13, 2017, through which the Company is seeking to raise up to $5 million inor additional equity financing. However, the Company can make no assurances that it will be able to raise the required additional capital, either through equitydebt or debtequity financing, on acceptable terms or at all. Unless the Company succeeds in raising additional capital or significantly reduces the cash consumed in the operations of the Company, the Company anticipates that it will be unable to continue operations through the latter partend of the fourthfirst quarter of 20172019 without violating an existing covenant on the Term Loan Agreement (defined below)(see Note 5). As a result of the Company’s historical losses and financial condition, there is substantial doubt about the Company’s ability to continue as a going concern.

TearLab Corporation

2. SIGNIFICANT ACCOUNTING POLICIES

The Condensed Consolidated Balance Sheet at December 31, 20162017 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States (“U.S. GAAP”) for complete financial statements. These unaudited interim Condensed Consolidated Financial Statementscondensed 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, 2016.2017. The audited financial statements for the year ended December 31, 2016,2017, filed with the SEC with the Company’s annual report on Form 10-K on March 10, 20175, 2018 include a summary of significant accounting policies and should be read in conjunction with this Form 10-Q. Management believes that all adjustments necessary for the fair presentation of results, consisting of normallynormal recurring items, have been included in the unaudited Condensed Consolidated Financial Statementscondensed consolidated financial statements for the interim periods presented.

TearLab Corporation

Use of Estimates

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

Revenue recognition

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

There was no net reduction to opening retained earnings as a result of adopting Topic 606 and no impact to revenues for the three months ended March 31, 2018.

Revenue is recognized when all fourobligations under the terms of a contract with our customer are satisfied; generally this occurs with the following criteriatransfer of control of our products or services. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services which includes estimates of variable consideration that results from returns, rebates or test card replacements. The Company records allowances for returns or rebates and reports revenue net of such amounts, which was immaterial for the three months ended March 31, 2018. Sales and other taxes we collect concurrent with revenue-producing activities are met: (i) persuasive evidence that an arrangement exists; (ii) delivery of the products has occurred; (iii) the selling price is fixed or determinable; and (iv) collectability is reasonably assured.excluded from revenue. The Company’s timing of revenue recognition is impacted by factors such as passage of title, payments and customer acceptance. Amounts received in excess of revenue recognizablepayment terms are deferred.typically upon shipment or net 30.

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

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

Use, Masters, and Flex Agreements

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

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

TearLab CorporationPurchase Agreements

Revenue recognition for Purchase Agreements with multiple deliverables is based on the individual units of accountingperformance obligations determined to exist in the contract. A delivered item is considered a separate unit of accounting whenSince the delivered item has value toreader equipment and the customer on a stand-alone basis. Items are considered to have stand-alone value when they are sold separately by any vendor or when the customer could resell the item on a stand-alone basis. Considering that test cards are essential toseparate and distinct delivered items, the operationdelivery of a TearLabeach are considered separate performance obligations. The reader there is no alternative vendor for theequipment and test cards and no indication that a secondary market for the TearLab readers is established, the deliverablesare separately identified under the contracts do not meet criteria for separation under the multiple-element arrangements guidance. Consideration is allocatedPurchase Agreements and are sold at the inception of the contract to all deliverables based on their relativestandalone selling price as determined by the selling price of similar individual items on a stand-alone basis.price. The Company recognizes revenue for each of the elementsperformance obligations only when it determines that all applicable recognition criteria have been met.met, which is usually upon shipment to the customer. Under Purchase Agreements, the customer is not contractually obligated to purchase additional test cards, and each subsequent order of test cards represents a separate and distinct contract with the performance obligation to provide the test cards ordered.

Amounts billed to customers for shipping and handling of a sales transaction are included as revenue. For the three months ended March 31, 2018 and 2017, the Company recognized revenue from shipping and handling of $39 and $44, respectively.

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

Arrangements with Multiple Performance Obligations

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

Return Reserve

Although the Company typically has a no return policy for its products, the Company has established a return reserve for product sales that contain an implicit right of return. The Company reserves for estimated returns or refunds by reducing revenuesrevenue at the time of shipment based on historical experience. The reserve of $11$7 and $13$9 as of September 30, 2017March 31, 2018 and December 31, 2016,2017, respectively, has reducedbeen recorded as a reduction of revenue and is included in accounts receivable.

Practical Expedients and Exemptions

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

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

Recent accounting pronouncements

In August 2016, the Financial Accountings Standards Board (the “FASB”) issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (“ASU 2016-15”), to reduce diversity in practice of how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for fiscal and interim periods beginning after December 15, 2017. The Company is currently evaluating the impact the adoption of the new standard will have on its financial statements.

In March 2016,July 2017, the FASB issued Accounting Standards Update No. 2016-09 Compensation–Stock Compensation2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815) Part I. Accounting for Certain Financial Instruments with Down Round Features Part II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2016-09”2017-11”), which requires. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that excess tax benefits and tax deficiencies be recordedresult in the income statementstrike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as a reductionwarrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or increaseconversion option. Part II of income taxes when an award vests. It also requires excess tax benefits to be classified as an operating activitythis update addresses the difficulty of navigatingTopic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the statementFASB Accounting Standards Codification. This pending content is the result of cash flows. In addition, it simplifies other aspectsthe indefinite deferral of share-based payment transactions, including classificationaccounting requirements about mandatorily redeemable financial instruments of awards that permit repurchase to satisfy statutory tax withholding requirementscertain nonpublic entities and classification of tax payments on behalf of employees on the statement of cash flows.certain mandatorily redeemable non-controlling interests. ASU 2017-11 is effective for fiscal years and interim periods after December 31, 2018. The Company early adopted this guidance in the first quarter 2017, and it did not have a material effect on the Company’s Condensed Consolidated Financial Statements.ASU 2017-11 effective December 31, 2017.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 establishes a right-of-use model that requires a lessee to record an asset and liability on the balance sheet for all leases with terms longer than twelve months. ASU 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating the impact of the new standard on its financial statements.

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

TearLab Corporation

In July 2015, the FASB issued Accounting Standards Update No. 2015-11, Inventory- Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 became effective January 1, 2017. Under ASU 2015-11, the Company measures inventory at the lower of cost or net realizable value, where net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 was applied prospectively beginning January 1, 2017. The change to lower of cost or net realizable value had no impact on the Company’s financial statements.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) and amended by Accounting Standards Update No. 2017-13, Revenue Recognition (“ASU 2017-13”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Early application is not permitted. On April 1, 2015, the FASB voted to propose a deferral of the effective date of the standard by one year which would result in the new standard being effective for the Company at the beginning of its first quarter of fiscal year 2018. The Company has completed its assessment of the impact of the new standard on its financial statements in 2017 so it can implement ASU 2014-09, on a modified retrospective basis, in the first quarter of 2018. The Company does not expect the guidance to have a material impact on the amounts reported in the financial statements, but it will require enhanced footnote disclosures regarding the Company’s recognition of revenue.

3. BALANCE SHEET DETAILS

Accounts receivable

Inventory

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

TearLab Corporation

Inventory

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

Prepaid expenses and other current assets

TearLab Corporation

Fixed assets

Depreciation expense was $1,490$353 and $1,816 for the nine months ended September 30, 2017 and 2016, respectively, and $464 and $580, respectively, for$521 during the three months ended September 30,March 31, 2018 and 2017, and 2016.respectively.

TearLab Corporation

Accrued liabilities

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

TearLab Corporation

4. INTANGIBLE ASSETS

The Company’s intangible assets consist of the value of TearLab® Technology acquired in the acquisition of TearLab Research, Inc., a wholly-owned subsidiary of the Company and a prescriber list. The TearLab Technology, which consists of a disposable lab card and card reader, supported by an array of patents and patent applications that are either held or in-licensed by the Company, included in amortization of intangibles line item in the Condensed Consolidated Statements of Operations and Comprehensive Loss, was fully amortized in November 2016.Company. Amortization expense for the three months ended September 30,March 31, 2018 and 2017 was $3 and 2016 was $15, and $359, respectively. Amortization expense for the nine months ended September 30, 2017 and 2016 was $45 and $966, respectively.

Intangible assets subject to amortization consist of the following:

TearLab Corporation

The estimated amortization expense for the intangible assets for the remainder of 20172018 and thereafter is as follows:

5. TERM LOAN

On March 4, 2015, the Company executed a term loan agreement (the “Term Loan Agreement”) with CRG LP and certain of its affiliate funds (“CRG”) as lenders providing the Company with access of up to $35,000 under the arrangement. The Company received $15,000 in gross proceeds under the arrangement on March 4, 2015, and an additional $10,000 on October 6, 2015. The Term Loan Agreement matures on MarchDecember 31, 20212020 and bears interest at 13% per annum, with quarterly payments of interest only for the first four years. While interest on the loan is accrued at 13% per annum, the Company may elect to make interest-only payments at 8.5% per annum. The unpaid interest of 4.5% is added to the principalprinciple of the loan and is subject to additional accrued interest (“PIK interest”). The accrued interest can be deferred and paid together with the principalprinciple in the fifth and sixth years.

As part of the amended Term Loan Agreement, and funding of the second tranche, CRG received 35,000 warrants dated as of October 6, 2015 to purchase common shares of the Company at a price of $50.00 per share (the “CRG Warrants”). The CRG Warrants have a five-year life. The CRG Warrants are classified as equity on the Condensed Consolidated Balance Sheets as of September 30, 2017March 31, 2018 and December 31, 2016.2017. The CRG Warrants were valued at their issuance date using the Black-Scholes Merton model. The related reduction of the long-term debt will be amortized over the life of the debt. See Note 9 Subsequent Event Disclosure regarding an additional amendment ofOn April 7, 2017, the Company amended the Term Loan Agreement subsequentand the Company issued CRG additional warrants to September 30, 2017.purchase 35,000 common shares of the Company’s stock at $15.00 per share, which expires 5 years after issuance.

On April 4, 2018 with an effective date of March 31, 2018, the Company entered into an Amendment to the Term Loan Agreement. Pursuant to the terms of the Amendment, the cash interest payments due in 2018 will be deferred and added to the principal balance under the Loan Agreement at the end of each quarter. The Amendment also provides for an additional facility fee equal to 3% of the sum of the aggregate amount of the principal drawn under the Term Loan Agreement and any PIK loans issued, so that the total facility fee shall be 9.5%, applicable to the entire balance. In addition, the Amendment reduces the minimum liquidity covenant to $3 million. Concurrent with the reduction of the liquidity covenant the Company agreed to repay CRG $1.0 million of principal on the Term Loan Agreement in April 2018. Lastly, this amendment reduced the strike price of the existing CRG Warrants to $0.44 per share (see Note 6). The Amendment was accounted for as a modification in accordance with U.S. GAAP.

TearLab Corporation

The loan is collateralized by all assets of the Company. Additionally, the terms of the Term Loan Agreement contain various affirmative and negative covenants agreed to by the Company. Among them, the Company must attain minimum certain annual revenue and minimum cash threshold levels. On April 7, 2016,October 12, 2017, the Company amended the Term Loan Agreement to change the required minimum revenue levels. The amended minimum revenue is $31,000 for 2017, $36,000$25,000 for 2018, $45,000$38,000 for 2019 and $55,000$45,000 for 2020. The minimum cash balance required is $5,000 subject to certain conditions. The amendment also reduced the exercise price of all of the CRG Warrants from $50.00$15.00 per share to $15.00$1.50 per share andas well as provide broad anti-dilution protection such that the CRG Warrants shall maintain the same 1.22% ownership following any capital raises the Company issued CRG additional warrantscompleted through March 31, 2018. The minimum cash balance required was reduced to purchase 35,000 common shares of the Company’s stock at $15.00 per share, which expire 5 years after issuance.

TearLab Corporation$3,000, subject to certain conditions.

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

At September 30, 2017,March 31, 2018, the Company was in compliance with all of the covenants.

As part of the amended Term Loan Agreement, on the earlier of the maturity date or the date the term loan is paid off in full, the Company will pay a facility fee equal to 6.5%9.5% of the aggregate principal amount of the loan, excludingincluding accrued PIK interest (the “Facility Fee”). The Facility Fee is being accrued to interest expense using the effective interest method.

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

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

The following is a summary of the Term Loan Agreement as of September 30, 2017March 31, 2018 and related maturities of outstanding principal:

TearLab Corporation

Principal due for each of the next 5 years and in the aggregate:

3 years:

6. STOCKHOLDERS’ EQUITY

(a) Authorized share capital

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

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

(b) Common and preferred shares

On June 24, 2016,December 8, 2017, the Company’s stockholders approved an amendment to the Company’s certificate of incorporation to increase the total number of authorizedCompany issued 2,013,636 shares of common stock, of the Company to 9,500,000 from 6,500,000. Each share of common stock has a par value of $0.001 per share. The total number of authorized shares of preferred stock of the Company is 10,000,000. Each share of preferred stock has a par value of $0.001 per share. See Note 9 Subsequent Events disclosure regarding changes to authorized shares of common stock made subsequent to September 30, 2017.

(b) Common and preferred shares

On May 9, 2016 the Company issued 1,861,090 shares of common stock, 3,291.82,114 shares of Series A Convertible Preferred Stock (“Preferred Stock”) and, Series A warrants to purchase 1,150,0006,818,181 shares of common Stock (“Series A Warrants”) and Series B warrants to purchase 6,818,181 shares of common stock (“Series AB Warrants”) for gross proceeds of $17,250$3,000, less issuance costs of $1,793.$596. Additionally, the Company granted the placement agent compensation warrants to purchase 103,500477,273 shares of common stock. The Preferred Stock is convertible, subject to certain limitations, into an aggregate of 4,804,545 shares of common stock, with an exercise price of $11.25 per share. All the Preferred Stock converted into an aggregate of 438,910 shares ofcontains no voting rights, participates in any common stock prior to June 30, 2017.dividends and is treated as if converted upon any ordinary liquidation event. The common stock, the Series A Convertible Preferred Stock, and the Series A Warrants and Series B Warrants are all included in equity in the Company’s Condensed Consolidated Balance Sheetsconsolidated balance sheets as of September 30, 2017March 31, 2018 and December 31, 2016.2017. The net proceeds were allocated to common stock, Preferred Stock, Series A Warrants and Series AB Warrants based on their relative fair values as follows:

As of March 31, 2018, 1,180 shares of Series A Preferred Stock have been converted into 2,682,909 shares of common stock.

TearLab Corporation

(c) Stock incentive planIncentive Plan

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

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

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

The following table sets forth the total stock-based compensation expense resulting from stock options and the employee stock purchase plan included in the Company’s Condensed Consolidated Statementscondensed consolidated statements of Operationsoperations and Comprehensive Losscomprehensive loss (in thousands):

TearLab Corporation

(d) Employee Stock Purchase Plan

In July 2014, the Company’s boardBoard of directorsDirectors adopted the 2014 Employee Stock Purchase Plan (the “ESPP”) which was approved by the Company’s stockholders in June 2014 at the Company’s Annual Meeting of Stockholders. A total of 67,15028,601 shares of the Company’s common stock are reserved for issuance under the plan, which permits eligible employees to purchase common stock at a discount through payroll deductions.

The price at which stock is purchased under the ESPP is equal to 90% of the fair market value of the common stock on the first or the last day of the offering period, whichever is lower. Generally, each offering under the ESPP will be for a period of six months as determined by the Company’s boardBoard of directors.Directors. Employees may invest up to 20% of their gross compensation through payroll deductions. In no event may an employee investpurchase more than $25 worth of stock in the plan during each calendar year or purchase more than 500 shares per offering period. During both the three months ended September 30,March 31, 2018 and 2017, and 2016, the Company recorded $2$0 and $3 of expense, respectively, under the ESPP. During the ninethree months ended September 30,March 31, 2018 and 2017, and 2016, the Company recorded $6 and $8 of expense, respectively, under the ESPP. During the nine months ended September 30, 2017 and 2016, the Company issued 14,2330 and 14,1057,512 shares of common stock respectively, under the ESPP.

TearLab CorporationESPP, respectively. In early 2018, the Company terminated the Employee Stock Purchase Plan.

(e) Warrants

On October 8, 2015, as part of the second amendment to the Term Loan Agreement and funding of the $10,000 tranche, CRG received warrants to purchase 35,000 common shares in the Company at a price of $50.00 per share (the “CRG Warrants”). The CRG Warrants are exercisable any time prior to October 8, 2020. The CRG Warrants are classified as equity on the Condensed Consolidated Balance Sheets as of September 30, 2017March 31, 2018 and December 31, 2016.2017. The CRG Warrants were valued at $290 upon issuance using the Black-Scholes Merton model assuming volatility of 73%, an expected life of 5.0 years, a risk-free interest rate of 1.71%, and 0% dividend yield. No CRG Warrants were exercised during the ninethree months ended September 30, 2017March 31, 2018 or 2016.2017.

On April 8, 2016, the Company further amended its Term Loan Agreement. As part of the amendment, the exercise price of the CRG Warrants was changed to allow the holder to purchase 35,000 common shares in the Company at a price of $15.00 per share and CRG was issued an additional 35,000 warrants to purchase common shares at an exercise price of $15.00 (the “2016 CRG Warrants”). The modification to the terms of the CRG Warrants resulted in a change in fair value of $54 which was included as interest expense. The change in fair value was calculated using the Black-Scholes Merton model with both exercise prices, assuming volatility of 76%, an expected life of 4.5 years, a risk-free interest rate of 1.06%, and 0% dividend yield. The 2016 CRG Warrants were valued at $106 upon issuance using the Black-Scholes Merton model assuming volatility of 76%, an expected life of 5.0 years, a risk-free interest rate of 1.30% and 0% dividend yield. See Note 9 Subsequent Events disclosure regarding an additional amendment of the Term Loan Agreement and the CRG Warrants subsequent to September 30, 2017.

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

(f) Exchange RightOn October 12, 2017, the Company further amended its Term Loan Agreement. As part of the amendment, the exercise price of the CRG warrants was changed to allow the holder to purchase common shares in the Company at a price of $1.50 per share as well as provide broad anti-dilution protection such that the CRG Warrants shall maintain the same 1.22% ownership following any capital raises the Company completed through March 31, 2018. The modification to the terms of the CRG Warrants and 2016 CRG Warrants resulted in a change in fair value of $44 which was included as interest expense. The CRG Warrants change in fair value was calculated using the Black-Scholes Merton model with both exercise prices, assuming volatility of 94%, an expected life of 2.99 years, a risk-free interest rate of 1.70% and 0% dividend yield. The 2016 CRG Warrants change in fair value was calculated using the Black-Scholes Merton model with both exercise prices, assuming volatility of 90%, an expected life of 3.48 years, a risk-free interest rate of 1.80% and 0% dividend yield.

In August 2014,On December 8, 2017, the Company sold membership unitsissued Series A Warrants to purchase 6,818,181 shares of common stock for $0.44 per share and Series B Warrants to purchase 6,818,181 shares of common stock for $0.44 per share in OcuHubconjunction with shares of common stock and Series A Convertible Preferred stock issued on that same date. The Series A Warrants can be exercised immediately and expire 5 years after the issuance date. Fair Value of the Series A Warrants, for purposes of allocating the net proceeds of the equity offering, was determined using the Black-Scholes Merton model assuming volatility of 88%, an expected life of 5 years, a risk free interest rate of 2.14% and a 0% dividend yield and are classified as equity on the Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017. The Series B Warrants can be exercised immediately and expire 6 months after the issuance date. Fair value of the Series B Warrants for purposes of allocating the net proceeds of the equity offering, was determined using the Black-Scholes Merton model assuming a volatility of 158.6%, an expected life of 6 months, a risk free rate of 1.45% and a 0% dividend yield and are classified as equity on the Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017. In addition, we granted the placement agent compensation warrants to purchase 477,273 shares of common stock at $0.55 per share. The compensation warrants are in exchange for 2% ownershipthe same form as Series A Warrants, excluding the exercise price, and will terminate on the five year anniversary date. The placement agent warrants are classified as equity on the Condensed Consolidated Balance Sheets as of OcuHub LLC. March 31, 2018 and December 31, 2017.

In connection with the saleoffering the Company issued CRG warrants to purchase 83,240 shares of common stock at an exercise price of $1.50 (“2017 CRG Warrants”) as a result of triggering the anti-dilution clause of the membership units,debt amendment (see Footnote 5 for additional information). The anti-dilution clause is considered down-round protection, however the new members received an exchange right allowingCompany early adopted ASU 2017-11 and therefore the unitsdown-round feature is excluded from the consideration of whether the warrants are indexed to the Company’s own stock and therefore the warrants are not required to be exchanged upon written notice and during a specified exchange window for shares inliabilities under the Company’s common stock. Onguidance. The 2017 CRG Warrants are classified as equity on the Condensed Consolidated Balance Sheets as of March 31, 2016,2018 and December 31, 2017 and were valued at $30 upon issuance using the members exchangedBlack-Scholes Merton model assuming volatility of 88%, an expected life of 5 years, a risk-free interest rate of 2.14% and 0% dividend yield.

In March 2018, in connection with the ownership interestamended Term Loan Agreement, the existing CRG warrants had a change in OcuHub LLC for 385,800 sharesstrike price to $0.44. The modification to the terms of the Company’s common stock.CRG Warrants resulted in a change in fair value of $10 which was included as interest expense.

TearLab Corporation

7. NET INCOME(LOSS) PER SHARE

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

TearLab Corporation

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

8. COMMITMENTS AND CONTINGENCIES

Commitments

The Company has commitments relating to operating leases recognized on a straight line basis over the term of the lease for rental of office space and equipment from unrelated parties, expiring at various times through June 30,December 31, 2018. The Company leases office facilities under an operating lease agreement. The initial term of the lease is five years and includes periodic rent increases and a renewal option.

Effective OctoberOn May 1, 2006,2018 with an effective date of July 1, 2017 the Company entered into a patentRestated License Agreement (the “Agreement”) to its exclusive license agreement for the commercial development of the invention disclosed in UCSD Disclosure Docket No. SD2002-180 and royalty agreement withtitled “Volume Independent Tear Film Osmometer” (UCSD License Agreement #2003-03-0433), dated as of March 12, 2003, as amended by Amendment 1, dated as of June 9, 2003, Amendment 2, dated as of September 5, 2005, Amendment 3, dated as of July 7, 2006, Amendment 4, dated as of October 9, 2006, and Amendment 5, dated as of July 9, 2007, by and among the Company and The Regents of the University of California San Diego(collectively the “Existing License”) to obtainamend certain terms related to royalties under the Agreement and treatment upon a second exclusive license to make, use, sell, offer for sale, and import existing TearLab technology.change of control transaction. The Company is required to make royalty payments of $35 or 5.5% of gross sales per year, whichever is higher.anywhere from 3% to 4.25% based on quarterly net sales. Additionally, the Company is required to pay a royalty of 30%20% of any sublicense fees it receives priorreceives. Should a change of control transaction occur during the term of the agreement the royalty rates would range anywhere from 3.5% to receiving FDA approval4.75% based on quarterly net sales and 25%the Company would have to make a milestone payment of any sub-license fees it receives after FDA approval.$0.5 million. In addition, if the Company has not commenced commercial sales of the TearLab Discovery^TM Platform on or before July 1, 2019 the Company will be required to pay a milestone payment of 1.25% of cumulative net sales for the two year period following the effective date of the amendment.

Future minimum royalty payments under this agreement as of September 30, 2017 are as follows:TearLab Corporation

On March 12, 2003,Effective October 1, 2006 the Company entered into a second patent license and royalty agreement with the University of California San Diego to obtain an exclusive license to make, use, sell, offer for sale, and import TearLab technology in development. Starting in 2009, the Company was required to make minimum royalty payments of $35 or 5.5% of gross sales per year, whichever is higher. However, if this new technology is combined with existing technology, the maximum royalty payable on the sale of the combined products would be 5.5% of gross sales per year. As the new technology is currently in development, there is no revenue and the minimum royalty payment of $35 is applicable.

TearLab Corporation

Future minimum royalty payments under this agreement as of September 30, 2017March 31, 2018 are as follows:

On March 7, 2016, the Company, through its subsidiary, TearLab Research, Inc., entered into a supply and development agreement (“Supply Agreement”) with MiniFAB (Aust) Pty Ltd (“MiniFAB”). The agreement is an exclusive supply agreement through June 2021, for the purchase and delivery of individual osmolarity test cards with the freight costs borne by MiniFab. The Company has the benefit of a lower purchase price that will remain in place until the earlier of, the Company reaches an annual volume of 4.5 million test cards or March 31, 2018. Certain savings from freight costs will remain in place throughout the agreement. The Supply Agreement requires, in any given 6 calendar months, the Company must place aggregate purchase orders equal to at least 50% of the orders forecasted for that 6 month period at its onset. The Supply Agreement can be extended by either party for a term of five years with the option for the Company to buyout the exclusive supply provision during any extended term. This Supply Agreement replaces the JulyAugust 2011 agreement between MiniFAB and the Company.

In April 2014, the Company guaranteed a marketing agreement entered into by OcuHub. The underlying marketing agreement calls for an annual marketing fee of $100, with payments due quarterly through March 31, 2019. If OcuHub fails to perform its obligations under the terms of the marketing agreement, the Company would be required to make the $25 quarterly payments, through the March 31, 2019 initial term of the agreement. The Company has not accrued for any liability under the guarantee.

In the normal course of business, the Company enters into purchase obligations for future goods and services needed for the operations of the business. Such commitments generally are not in excess of expected requirements and are not reasonably likely to result in performance penalties or payments that would have a material adverse effect on the Company’s liquidity. However, in September 2017 we agreed to a $0.7 million settlement with one of our suppliers for raw materials purchased by the supplier in excess of needed demand related to the cancellation of purchase orders. The $0.7 million settlement was charged to cost of goods sold in the three months ended September 30, 2017.

Contingencies

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

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

9. SUBSEQUENT EVENTSRESTRUCTURING COSTS

On October 12,December 15, 2017 the stockholders of the Company approved an amendmenta new business model to maintain its current customer and annuity revenue base, focus resources on the development and generation of clinical data for our next generation TearLab Discovery^TM Platform and reduce the Company’s cash burn rate. In connection with the restructuring the Company recorded restructuring expenses of $322 primarily related to employee cost and one-time contract termination costs at December 31, 2017. Liabilities related to the Company’s Amended and Restated Certificate of Incorporation to increaserestructuring are included in accrued liabilities in the number of authorized shares of common stock from 9,500,000 to 40,000,000. In addition, onCondensed Consolidated Balance Sheet. The following table summarizes the same day the stockholders of the Company provided advanced approvalactivity related to the board of directors as required by NASDAQ Rule 5636(d) to enable the Company to issue shares of common stock in one or more capital raising transactions or debt for equity conversion transactions and to provide the board of directors with the flexibility to enter into and close such transactions on a timely basis withinrestructuring during the three month period commencing on the date of approval by the stockholders.months ended March 31, 2018:

TearLab Corporation

On October 12, 2017, the Company entered into an amendment (the “Amendment”) to the Term Loan Agreement. The Amendment changes the required minimum revenue levels under the Term Loan Agreement from $31 million to $25 million for 2017, from $36 million to $25 million for 2018, from $45 million to $38 million for 2019, and from $55 million to $45 million for 2020. In addition, subject to the condition of raising net equity proceeds of at least $7 million (net of bona fide costs incurred in connection with issuance of such equity) by March 31, 2018, the Amendment changes the definition of “Interest-only Period” and “PIK Period” from the sixteenth (16th) payment date to the twentieth (20th) payment date following the first borrowing date, which has the effect of extending the “Interest-only Period” and the “PIK” period through the calendar year 2019. Should the Company fail to raise net equity proceeds of $7 million on or before March 31, 2018, the “Interest-only Period” and “PIK” period will remain unchanged from their current dates. Also, pursuant to the Amendment, the Company agreed to amend the CRG Warrants to (i) reduce the strike price to $1.50 per share and (ii) to include broad based anti-dilution protection such that the CRG Warrants shall maintain the same 1.22% ownership percentage following any capital raises the Company may complete through March 31, 2018.

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

TearLab Corporation

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

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

Overview

We are anin-vitro diagnostic company based in San Diego, California. We havethat has commercialized a proprietary tear testing platform, the TearLab® Osmolarity System that enables eye care practitioners to test for a highly sensitive and specific biomarkersbiomarker using nanoliters of tear film at the point-of-care. Our first product measures tear film osmolarity for the diagnosis of Dry Eye Disease or DED.

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

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

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

We enter into contracts where revenue is derived either from agreements whereby the customer is provided the right to use the TearLab® Osmolarity System at no separate cost to the customer in consideration for a minimum purchase commitment or implied minimum purchase commitment of disposable test cards over the related contract term (referred(which we refer to as either “Use Agreements”, “Masters Agreements” or “Flex Agreements”), or from agreements with separate sales of the reader equipment and disposable test cards (“Purchase Agreements”). Purchase commitments for Use Agreements and Flex Agreements are expressed in the agreement for a specified period of time (generally one to three years). The purchase commitment for Masters Agreements is implied for large physician practices with an expectation of purchasing certain levels of test cards.

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

Based on our current rate of cash consumption,On January 4, 2018, we estimateannounced that we will need additional capital duringhad submitted a 510(k) application to the latter partFDA for the potential clearance of the fourth quarter of 2017 orTearLab Discovery^TM Platform. The submission covers Discovery and the firstMMP-9 biomarker. On February 14, 2018, we announced that the application had successfully passed the acceptance review phase with the FDA. On April 11, 2018 we announced that we received written feedback from the FDA, requesting that we provide additional information to establish correlation to the FDA-cleared predicate chosen to establish 510(k) substantial equivalence. We plan to submit our response to the FDA’s comments sometime in the third quarter of 2018, and our prospectuswithin the allowed 180-day timeframe. After securing FDA clearance, TearLab intends to pursue a CLIA waiver in an effort to prepare for obtaining that capital are uncertain. The Company is attempting to raise additional equity financing and has currently on file an S-1 registration statement, filed with the SEC on August 21, 2017, amended on September 21, 2017 and amended on November 13, 2017, through which the Company is seeking to raise up to $5 million in additional equity financing. However, the Company can make no assurances that it will be able to raise the required additional capital, either through equity or debt financing, on acceptable terms or at all. Unless we succeed in raising additional capital or we significantly reduce the cash consumedcommercialization in the operations of the Company, we anticipate that we will be unable to continue our operations through the latter part of the fourth quarter of 2017, without violating an existing covenant on the Term Loan Agreement. As a result of the Company’s historical losses and financial condition, there is substantial doubt about the Company’s ability to continue as a going concern.

US market.

TearLab Corporation

RESULTS OF OPERATIONS

Revenue, Cost of Sales and Gross ProfitMargin

Revenue

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

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

Having received 510(K) clearance and a CLIA waiver from the FDA in the United States, we sell to customers in the United States who hold CLIA licenses and actively support and assist our customers to obtain their licenses or provide them with support from certified professionals. This CLIA waiver documentation allows us to sell our product to the approximately 50,000 eye care practitioners in the United States that are candidates to operate under a CLIA waiver certification.

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

TearLab revenue decreased by $0.7 million or 10% for the three months ended September 30, 2017March 31, 2018 was $6.4 million compared to $6.7 million for the three months ended September 30, 2016. The decrease is the result of decreased volume of reader sales to new customers and a decline in test card utilization within existing customers.

TearLab revenue decreased by $0.7 million or 3% for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016. The decrease is driven by decreased volume of reader sales to new customers and a decline in test card utilization within existing customers.March 31, 2017. This decrease was partially offsetdriven by the decrease in reader revenue from a joint marketing agreement withcompared to first quarter of 2017 as well as the termination of the PRN Physicians Recommended Nutriceuticals, (“PRN”). TheLLC, cooperative marketing agreement with PRN was terminated effectivein June 23, 2017.2017 and partially offset by a slight increase in test card utilization.

TearLab Corporation

Cost of Sales

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

TearLab Corporation

TearLab costscost of sales for the three months ended September 30, 2017 increased $0.4March 31, 2018 decreased $0.9 million or 11%, compared to29% for the three months ended September 30, 2016. CostsMarch 31, 2018 compared to March 31, 2017. The Company entered into a restated patent license and royalty agreement with the University of California San Diego with an effective date of July 1, 2017 that reduced cost of sales by $0.5 million. In addition, the decrease in cost of sales was higher duedriven by reduced reader deprecation related to a $0.7 million impact of a settlement with one of our suppliers for inventory purchased by the supplierfixed asset impairment recorded in excess of needed demand as well as the cancellation of purchase orders offset by $0.1 million retirement of leased readers.

For the nine months ended September 30,December 2017 cost of sales increased $0.4 million, or 4%, compared to the three months ended September 30, 2016. Costs of sales was higher due to a $0.7 million impact of a settlement with one of our suppliers for inventory purchased by the supplier in excess of needed demand as well as the cancellation of purchase orders offset by $0.1 million retirement of leased readers.and lower revenue volume.

Gross Profit

TearLab gross profit for the three months ended September 30, 2017 decreased $1.1March 31, 2018 was $4.3 million or 25% when compared to the $3.7 million for the three months ended September 30, 2016.March 31, 2017. The gross profit percentage of revenue for the three months ended September 30, 2017March 31, 2018 was 47% as67% compared to 57%55% for the three months ended September 30, 2016.March 31, 2017. The improvement in gross profit percentage was driven by the restated patent license and royalty agreement with the University of California San Diego, discussed in Note 8 of the Notes to the Unaudited Condensed Consolidated Financial Statements for the three months ended September 30, 2017 was negatively impacted by the settlement with one of our suppliers for raw materials purchased by the supplierMarch 31, 2018 and included in excess of needed demand related to the cancellation of purchase orders, offset by a positive impact from the retirement of leased readers.Item 1. Excluding the $0.5 million net unfavorable impact of the restated agreement, gross profit percentage would have been 56%59% for the three months ended September 30, 2017

TearLabMarch 31, 2018. Additionally, the change in gross profit for the nine months ended September 30, 2017 decreased $1.0 million or 9% compared to the nine months ended September 30, 2016. Gross profit as a percentage of revenue for the nine months ended September 30, 2017 was 53% as compared to 56% for the nine months ended September 30, 2016. The gross profit percentage for the nine months ended was negatively impacteddriven by the settlement with onereduced depreciation due to fixed asset impairment of our suppliers for raw materials purchased by the supplierreader systems recorded in excessfourth quarter of needed demand related to the cancellation of purchase orders, offset by a positive impact from the retirement of leased readers. Excluding the $0.5 million net unfavorable impact, the gross profit percentage would have been 55% for the nine months ended September 30, 2017.

Operating Expenses

Sales and Marketing Expense

Sales and marketing expenses decreased by $0.5$2.3 million or 14%69% in the three months ended September 30, 2017,March 31, 2018, as compared towith the three months ended September 30, 2016.March 31, 2017. The reduction in sales and marketing expenses is attributable to a reduction in employee related costs.

Sales and marketing expenses decreased by $1.8 million or 16% for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016. The decrease in sales and marketing expenses is attributable to a reduction in employee related costs andcost savings from our February 2016December 2017 organizational restructuring.

TearLab Corporationrestructuring and the launch of our new business model aimed at reducing costs.

Clinical, Regulatory and Research and Development Expenses

Total clinical, regulatory and research and development expenses decreased $0.1$0.5 million or 11%33.4% in the three months ended September 30, 2017March 31, 2018 as compared with the three months ended September 30, 2016.March 31, 2017. The decrease when compared to the prior fiscal periodin expense was primarily due to a decrease in external productlower development costs related to the development and testingcost of the TearLab Discovery™ platform which is currently in product development.

Total clinical, regulatory and research and development expenses increased $0.8 million or 27% during the nine months ended September 30, 2017 as compared with the nine months ended September 30, 2016. The increase is due to an increase in external product development costs related to the development and testing of the TearLab Discovery™ platform which is currently in product development.Discovery^TM Platform.

General and Administrative Expenses

Total general and administrative expenses decreased $0.3$0.1 million or 13%6.5% in the three months ended September 30, 2017March 31, 2018 as compared with the three months ended September 30, 2016.March 31, 2017. The decrease was primarily due to reduced equity compensation in the current period related to the vestinglaunch of certain grants of options.our new business model that is aimed at reducing costs.

Amortization of Intangible AssetsTearLab Corporation

Amortization expense of intangible assets for the three and nine months ended September 30, 2017 was $0, compared to $0.4 million and $1.0 million in the three and nine months ended September 30, 2016, respectively. The TearLab® technology fully amortized during 2016 so there was no comparable expense for the three and nine month period ended September 30, 2017.

Other Income (Expense)

Interest Income (Expense)

Interest expense for the three months ended September 30,March 31, 2018 and 2017 and 2016 was from our long-term debt under the interest for the CRG term loan.Term Loan Agreement. Interest expense was flatincreased for the three months ended September 30, 2017March 31, 2018 when compared to September 30, 2016 and increased 6% for the nine months ended September 30, 2017 when compared to September 30, 2016same period in the previous fiscal year based on larger average balances of long-term debt outstanding, during the period, offset in part by $54,000 charged to interest expense in 2016 from the revaluationimpact of the CRG Warrants generated by an amendment to the exerciseupdated strike price of the CRG Warrants in April 2016.

TearLab Corporation

Changes in Fair Value of Warrants Obligations

The Company records outstanding warrants considered liabilities at fair value at the end of each reporting period, resulting in an adjustmentissued to the warrant obligations, with any gain or loss recorded in earnings forlenders, and changes to the applicable period. The Company had no warrants with liability treatment outstanding during the three and nine months ended September 30, 2017, and, accordingly, had no associated fair value adjustment during the period. For the three and nine months ended September 30, 2016, the Company recorded income related to a decrease in the fair value of warrant obligations of $0 and $29,000 respectively.facility fee.

Other (net)

Other income (loss) for the three and nine months ended September 30,March 31, 2018 and 2017 consists primarily of foreign exchange transaction gains and losses, based on fluctuations of the Company’s foreign denominated currencies and trade payables. For the three and nine months ended September 30, 2016 other income (loss) consists primarily of foreign exchange transaction gains and losses and a one-time gain of $75,000 on the sale of OcuHub.currencies.

Liquidity and Capital Resources

Financial Condition

In December 2017 TearLab raised $3 million in gross proceeds through a registered direct offering to support our operations and regulatory expenses. In addition, in April 2018, with an effective date of March 31, 2018, we renegotiated our Term Loan Agreement with CRG. This new agreement lowers the minimum liquidity requirement from an end of the day cash balance of $5 million to $3 million and it defers cash interest payments due in 2018. These changes will allow our current funding to provide us with the time needed to gain our 510(k) approval for the Discovery™ Platform from the FDA as the Discovery™ Platform is critical to our success moving forward. Based on our current rate of cash consumption in addition to our projections, we estimate we will need additional capital during the latter part of the fourth quarter of 2017 orin the first quarter of 2018 and our2019. Our prospects for obtaining that capital are uncertain. The Company is attemptingDue to raise additional equity financing and has currently on file an S-1 registration statement, filed with the SEC on August 21, 2017, amended on September 21, 2017 and amended on November 13, 2017, through which the Company is seeking to raise up to $5 million in additional equity financing. However, the Company can make no assurances that it will be able to raise the required additional capital, either through equity or debt financing, on acceptable terms or at all. Unless we succeed in raising additional capital or we significantly reduce the cash consumed in the operations of the Company, we anticipate that we will be unable to continue our operations through the latter part of the fourth quarter of 2017, without violating an existing covenant on the Term Loan Agreement. As a result of the Company’s historical losses and financial condition, there is substantial doubt about the Company’s ability to continue as a going concern.

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 wewrong. 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:

TearLab Corporation

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

TearLab Corporation

Indebtedness

On March 4, 2015, wethe Company executed the Term Loan Agreement with CRG as lenders providing usthe Company with access of up to $35.0 million under the Term Loan Agreement. WeThe Company entered into a second amendment to the Term Loan Agreement with CRG on August 6, 2015. The Company received $15.0 million in gross proceeds under the Term Loan Agreement on March 4, 2015, and an additional $10.0 million on October 6, 2015. We were unable to access a third tranche of $10.0 million because we did not attain at least $38.0 million in twelve monthtrailing twelve-month revenue prior to June 30, 2016, as required to access the third tranche. We entered into a second amendment to the Term Loan Agreement with CRG on August 6, 2015. As part of the second amendment to the Term Loan Agreement, and funding of the $10.0 million tranche, CRG received warrants to purchase 35,000 common shares in the Company at a price of $50.00 per share.share (as adjusted for a 1-for-10 reverse stock split). The warrants have a life of five years. On April 7, 2016, the Term Loan Agreement was further amended, under the fourth amendment, to change the required minimum revenue levels. In addition, the fourth amendment reduced the exercise price of the warrants CRG received under the second amendment to $15.00 per share and granted CRG additional warrants to purchase an additional 35,000 common shares in the Company at a price of $15.00 per share.

On October 12, 2017, the Term Loan Agreement was further amended, under the fifth amendment, to change the required minimum revenue levels under the Loan Agreement from $31 million to $25 million for 2017 from $36 million to $25 million for 2018, from $45 million to $38 million for 2019, and from $55 million to $45 million for 2020.2018. In addition, subject to the condition of raising net equity proceeds of at least $7 million (net of bona fide costs incurred in connection with issuance of such equity) by March 31, 2018, the Amendment changes the definition of “Interest-only Period” and “PIK Period” from the sixteenth (16th) payment date to the twentieth (20th) payment date following the first borrowing date, which has the effect of extending the “Interest-only Period” and the “PIK” period throughthroughout the calendar year 2019. Should the Company fail to raise net equity proceeds of $7 million on or before March 31, 2018, the “Interest-only Period” and “PIK” period will remain unchanged from their current dates. Also, pursuant to the Amendment, the Company agreed to amend the warrants previously issued by the Company to CRG to (i) reduce the strike price to $1.50 per share and (ii) to include broad based anti-dilution protection such that the warrants shall maintain the same 1.22% ownership percentage following any capital raises the Company may complete through March 31, 2018.

TearLab Corporation

TheOn April 4, 2018, effective March 31, 2018, the Term Loan Agreement has a term of six yearswas further amended, under the sixth amendment to reduce the minimum liquidity covenant to $3 million, defer 2018 cash interest payments and bears interest at 13% per annum, with quarterly payments of interest only foradd them to the first four years. At our option, during the first four years a portionoutstanding principal amount of the interest payments amountingloan and increase the facility fee by 3% to 9.5% and apply to the entire balance. In addition, CRG will now be able to designate a 4.5%non-voting observer to attend all meetings and receive the same documents as other directors. This amendment also states that the exercise price of the warrants CRG received will be reduced to $0.44 cents per annum rate may be deferredshare and paid together with the principal in the fifth and sixth years.borrower must repay $1 million of its principal.

The Term Loan Agreement is collateralized by all our assets.assets of the Company. Additionally, the terms of the Term Loan Agreement contain various affirmative and negative covenants.covenants agreed to by the Company. Among them, wethe Company must attain minimum certain annual revenue and minimum cash threshold levels. The minimum annual revenue threshold level required by the Term Loan Agreement as amended, for calendar year 20172018 is $25.0 million. The minimum cash balance required is $5.0$3.0 million, subject to certain conditions.

If we dothe Company does not have annual revenue greater or equal to the annual revenue covenant in a calendar year, wethe Company will have to raise subordinated debt or equity (the “CRG Equity Cure”) equal to twice the difference between the annual revenue and the revenue covenant, with the total proceeds from this financing to be used to reduce the principal of the Term Loan Agreement. In the event we dothe Company does not achieve the minimum revenue threshold and it cannot complete the CRG Equity Cure, weit may be in default of the Term Loan Agreement. In the event of a default, we may be required to repay any outstanding amounts earlier than anticipated, and the lenders may foreclose on their security interest in our assets.

Ongoing Sources and Uses of Cash

We anticipate that our cash on handand cash equivalents and cash generated from increased revenue will be sufficient to sustain our operations into the latter part of the fourth quarter of 2017 or the first quarter of 2018. During these timeframes, we will likely need to raise additional capital.2019. We continually evaluate various financing possibilities but we typically expect our primary sources of cash will be related to the collection of accounts receivable. Our accounts receivable collections will be impacted by our ability to growmaintain current customers and annuity revenue base, while reducing costs as per our point-of-care revenue.new business model.

We expect our primary uses of cash will be to fund our costs of sales, operating expenses and pursuingthe development and maintaininggeneration of clinical data for our patents and trademarks. In addition, dependent on available funds, we expect to expend cash to improve production capability of the TearLab test, to further improve the performance of the TearLab test, and to pursue next generation products using our lab-on-a-chip technology.platform.

Changes in Cash Flows

Cash Used inProvided by Operating Activities

Net cash used to fund ourprovided by operating activities during the ninethree months ended September 30, 2017March 31, 2018 was $7.0 million compared to $10.7 million during the nine months ended September 30, 2016.$0.2 million. Net cash used inprovided by operating activities during the nine months ended September 30, 2017three month period was lessmore than our net loss of $12.1$0.9 million primarily due to the depreciation of fixed assets, stock-based compensation and deferred interest deferredand the amortization of the discount on our long-term debt in thedebt. In aggregate, total of $3.6 million offset by athese non-cash items totaled $1.5 million net increase in our investment in working capital accounts. Net cash used in operating activities during the nine months ended September 30, 2016 was less than our net loss of $15.6 million due to the amortization of intangible assets, depreciation of fixed assets, stock-based compensation, interest deferred on our long-term debt and changes in the fair value of warrant obligations in the aggregate total of $6.1 million plus a $1.2 million net decrease in working capital accounts.million.

TearLab Corporation

The net change in working capital and non-current asset balances related to operations for the ninethree months ended September 30,March 31, 2018 and 2017 and 2016 consists of the following:

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

TearLab Corporation

Cash Used in Investing Activities

Net cash used in investing activities for the ninethree months ended September 30,March 31, 2018 and 2017 and 2016 was $0.7$0.1 million and $1.2$0.2 million, respectively, to acquire fixed assets, primarily TearLab Osmolarity systems.assets.

Cash Provided by Financing Activities

NetThere was $0 in net cash provided by financing activities during the ninethree months ended September 30,March 31, 2018. For the three months ended March 31, 2017, and 2016there was $9,000 and $15.6$0.03 million respectively, of proceeds from the issuance of equity.net cash provided by financing activities.

Off-Balance-Sheet Arrangements

As of September 30, 2017,March 31, 2018, we did not have any material off-balance-sheet arrangements as defined in Item 303(1)(4)(ii) of SEC Regulation S-K.

TearLab Corporation

Critical Accounting Policies and Estimates

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

There were no significant changes during the ninethree months ended September 30, 2017March 31, 2018 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2017. For further clarification with regards to the Company’s specific policies for revenue recognition, see Note 2 of the Notes to the Unaudited Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2017March 31, 2018 included in Item 1.

TearLab Corporation

Recent Developments

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

Recent Accounting Pronouncements

For information on the recent accounting pronouncements impacting our business, see Note 2 of the Notes to the unauditedUnaudited Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2017March 31, 2018 included in Item 1.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Currency Fluctuations and Exchange Risk

Our sales are denominated primarily in U.S. dollars with minimal sales in euros and pound sterling.dollars. Most of our expenses are denominated in U.S. dollars, however, some of the development work on new products is in Australian dollars and a minor portion of our other expenses are in Canadian dollars, Australian dollars, Euro and pounds sterling. We cannot predict any future trends in the exchange rate of the Canadian dollar, Australian dollar, euro or pound sterling against the U.S. dollar. Any strengthening of the Canadian dollar, Australian dollar, euro or pound sterling in relation to the U.S. dollar would increase the U.S. dollar cost of our operations, and affect our U.S. dollar measured results of operations. We maintain bank accounts in Canadian dollars to meet short term operating requirements. We do not engage in any hedging or other transactions intended to manage these risks. In the future, we may undertake hedging or other similar transactions or invest in market risk sensitive instruments if we determine that it is advisable to offset these risks.

Interest Rate Risk

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

TearLab Corporation

ITEM 4. CONTROLS AND PROCEDURES.

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

TearLab Corporation

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, our chief executive officer and chief financial officer concluded that, as at September 30, 2017March 31, 2018 our disclosure controls and procedures were effective at the reasonable assurance level.

During the thirdfirst quarter of 2017,2018, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

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

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

TearLab Corporation

ITEM 1A. RISK FACTORS.

Risks Relating to Our Financial Condition

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

WeBased on a revised operating model that we implemented in December 2017, we expect that we will need to raise additional capital prior to the end of the fourth quarter of 2017 or in first quarter of 2018. The Company2019. This estimate is attemptingsubject to risk based primarily on our success in implementing the revised operating model, maintaining certain revenue levels despite a reduction in our commercial resources that was made in order to reduce our cash burn and accurately forecasting the remaining development expenses required to gain FDA clearance of our next generation diagnostic platform, and we cannot assure you that we will be successful in implementing this new model. Any financings undertaken to raise additional equity financing and has currently on file an S-1 registration statement, filed with the SEC on August 21, 2017, amended on September 21, 2017 and amended on November 13, 2017, through which the Company is seeking to raise up to $5 million in additional equity financing. This or other such financingsneeded capital may involve the issuance of debt, equity debt and/or securities convertible into or exercisable or exchangeable for our equity securities. These financings may not be available to us on reasonable terms or at all when and as we require funding. Any failure to obtain additional working capital when required would have a material adverse effect on our business and financial condition, our ability to continue as a going concern and would be expected to result in a decline in our stock price. If we consummate such financings, the terms of such financings may adversely affect the interests of our existing stockholders. Any issuances of our common stock, preferred stock, or securities such as warrants or notes that are convertible into, exercisable or exchangeable for our capital stock, would have a dilutive effect on the voting and economic interest of our existing stockholders. If access to sufficient capital is not available as and when needed, our business will be materially impaired and we may be required to cease operations, curtail product development, manufacturing improvements, or sales generation programs, attempt to obtain funds through licensing certain technologies or products, or we may be required to significantly reduce expense, sell assets, seek a merger or joint venture partner, file for protection from creditors, or liquidate all our assets.

assets or cease operations and wind down our business.

TearLab Corporation 

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

We have prepared our Condensed Consolidated Financial Statementscondensed consolidated financial statements on the basis that we would continue as a going concern. However, we have incurred losses in each year since our inception and there is substantial doubt about our ability to continue as a going concern as it is uncertain presently how long our current cash will last. We currently anticipate that if we do not raise additional capital prior to the end of the fourth quarter or in the first quarter of 2018 we will not be in compliance with the financial covenants in our Term Loan Agreement (as defined below), and we cannot assure you that we will be able to raise such additional capital.concern. We do not currently have any available borrowing under our term loan or credit facility.

Our Condensed Consolidated Financial Statementscondensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary if we were not able to continue as a going concern. If we are unable to generate positive cash flows from operations, we would need to undertake a review of potential business alternatives, which may include, but are not limited to, a merger or sale of the company or ceasing operations and winding down the business.

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

We have incurred losses in each year since our inception. As of September 30, 2017,March 31, 2018, we had an accumulated deficit of $525.0$529.7 million. Our losses have resulted primarily from expenses incurred in research and development of our product candidates from the former retina and glaucoma business divisions. We do not know when or if we will successfully commercialize the TearLab® Osmolarity System in the United States or in international markets.markets or receive approval to commercialize our next generation TearLab Discovery^TMPlatform on a scale that will allow us to achieve and sustain profitability. As a result, and because of the numerous risks and uncertainties facing us, it is difficult to provide the extent of any future losses or the time required to achieve profitability, if at all. Any failure to become and remain profitable would require us to undertake a review of the potential business alternatives discussed above.

TearLab Corporation

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

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

TearLab Corporation 

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

The CRG loan is collateralized by all our assets. Additionally, the terms of the Term Loan Agreement containcontains various affirmative and negative covenants agreed to by the Company. Among them, we must attain minimum annual revenue and minimum cash threshold levels. Subsequent to September 30, 2017 the Company amended its Term Loan Agreement. The amendment changes theminimum annual revenue threshold levels required minimum revenue levels underby the Term Loan Agreement from $31are $25.0 million, to $25$38.0 million and $45.0 million for 2017, from $36 million to $25 million forcalendar years 2018, from $45 million to $38 million for 2019 and from $55 million to $45 million for 2020.2020, respectively. The minimum cash balance required is $5.0$3.0 million, subject to certain conditions.