U.S. SECURITIES AND
EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q/A
Amendment No.1
(Mark One)
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
|
For the
quarterly period ended:
March
31, 2008
o
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
|
For the transition period from
_______________ to _______________
Commission file number:
000-51030
OccuLogix,
Inc.
(Exact name of registrant as
specified in its
charter)
Delaware
|
|
59 343
4771
|
|
|
|
(State or other jurisdiction of
incorporation or organization)
|
|
(IRS Employer Identification
No.)
|
2600 Skymark
Avenue, Unit 9, Suite 201, Mississauga, Ontario L4W 5B2
(Address of principal executive
offices)
(905)
602-0887
(Registrant’s telephone
number)
Check whether the registrant (1) filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes
x
No
o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of “accelerated filer” and
“large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer
o
|
Accelerated
filer
x
|
Non-accelerated
filer
o
|
Indicate by check mark
whether the registrant is a shell company as defined in Rule 12b-2 of the
Exchange Act. (Check one):
Ye
s
o
No
x
State the number of shares outstanding
of each of the registrant’s classes of common equity, as of the latest practical
date:
57,306,145
as of
May
9, 2008
EXPLANATORY
NOTE
OccuLogix,
Inc. (“OccuLogix”, the “Company”, “we”, “us” or “our”) is filing this Amendment
No. 1 to its Quarterly Report on Form 10-Q/A (this “Amended Report”) for the
three months ended March 31, 2008, originally filed with the U.S. Securities and
Exchange Commission (“SEC”) on May 12, 2008 (the “Original Filing”), to amend
and restate its consolidated balance sheets as of March 31, 2008 and December
31, 2007 and related consolidated statements of operations, stockholders’
equity, and cash flows for the three months ended March 31, 2008 and
2007. In addition, the Company is restating Item 2, “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations”. In connection with the restatements, we
re-evaluated the effectiveness of the Company’s controls and procedures and,
accordingly, include revised disclosure in this Amended Report
under Item 4, “Controls and Procedures.”
Since the
date of acquisition of our majority ownership interest in OcuSense, Inc.
(“OcuSense”) through the purchase of 1,754,589 shares of OcuSense’s Series A
Preferred Stock, the Company has consolidated OcuSense on the basis of a voting
control model. On June 18, 2008, the Audit Committee of our Board of
Directors concluded that the voting control model method of consolidation was
incorrect. After much consideration, the Company has determined that,
as a result of a voting agreement between OccuLogix and certain founding
stockholders of OcuSense, OccuLogix shares control of OcuSense’s board with
those founding stockholders of OcuSense and thus is not able to exercise voting
control in accordance with US generally accepted accounting principles (“U.S.
GAAP”). Although OccuLogix could gain exclusive control of OcuSense’s
board by converting its preferred shares, the Company is not aware of any
authoritative guidance under U.S. GAAP which would permit it to consider this
fact in assessing whether the Company exercises voting control over OcuSense
within the meaning of U.S. GAAP.
In
addition, the Company has determined that OcuSense is a Variable Interest Entity
(“VIE”) in accordance with FIN 46(R) “Consolidation of Variable Interest
Entities” (“FIN 46(R)”), and that OccuLogix is the primary
beneficiary. Since November 30, 2006, the Company has contributed
virtually all of OcuSense’s funding, the common stockholders having made only
nominal equity contributions since that date. Based primarily
on qualitative considerations, the Company believes that it is the primary
beneficiary of OcuSense and should consolidate OcuSense using the variable
interest model.
The
Company has noted that the initial measurement of assets, liabilities and
non-controlling interests under FIN 46(R) differs from that which is required
under FAS 141 “Business Combinations”. In particular, under paragraph
18 of FIN 46(R), assets, liabilities and non-controlling interest shall be
measured at their fair value. Because the Company previously recorded
non-controlling interest at historical carrying values, consolidation under FIN
46(R) has resulted in material revisions to the amounts previously reported in
the consolidated financial statements. The restatement corrects
intangible assets, minority interest, deferred tax liability, amortization
expense, income tax recovery and accumulated deficit for the periods
affected.
Except as
discussed above, we have not modified or updated disclosures presented in the
Original Filing, except as required to reflect the effects of the restatement,
in this Amended Report. Accordingly, this Amended Report does not reflect events
occurring after the Original Filing or modify or update those disclosures
affected by subsequent events, except as specifically referenced herein. Unless
indicated otherwise, information not affected by the restatement is unchanged
and reflects the disclosures made at the time of the Original Filing on May 12,
2008. References to this Amended Report on Form 10-Q/A herein shall refer to the
Quarterly Report on Form 10-Q originally filed on May 12, 2008, as amended by
this Amended Report. The following items have been amended as a
result of the restatement:
|
·
|
Part
I - Item 1 – Consolidated Financial
Statements
|
|
·
|
Part
I - Item 2 - Management’s Discussion and Analysis of Financial Condition
and Results of Operations; and
|
|
·
|
Part
I - Item 4 - Controls and
Procedures
|
We have
not amended, and we do not intend to amend, any of the Company’s other
previously filed Quarterly Reports.
Specia
l Note Regarding
Forward-Looking Statements
PART I.
|
FINANCIAL
INFORMATION
|
|
|
Item
1.
|
|
Item
2.
|
|
Item
3.
|
|
Item
4
.
|
|
|
|
|
|
PART II.
|
OTHER
INFORMATION
|
|
|
Item
1.
|
|
Item
2.
|
|
Item
3.
|
|
Item
4.
|
|
Item
5
.
|
|
Item
6
.
|
|
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS
This Amended Report contains
forward-looking statements relating to future events and our future performance
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. In some cases,
you can identify forward-looking statements by terms such as “may”, “will”,
“should”, “could”, “would”, “expects”, “plans”, “intends”, “anticipates”,
“believes”, “estimates”, “projects”, “predicts”, “potential” and similar
expressions intended to identify forward-looking statements. These statements
involve known and unknown risks, uncertainties and other factors that may cause
our actual results, performance or achievements to be materially different from
any future results, performance, time frames or achievements expressed or
implied by the forward-looking statements.
Given these risks, uncertainties and
other factors, you should not place undue reliance on these forward-looking
statements. Information regarding market and industry statistics contained in
this Amended Report 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 Amended Report, references to the “Company” shall mean
OccuLogix, Inc. and its subsidiaries. References to “$” or “dollars” shall mean
U.S. dollars unless otherwise indicated. References to “C$” shall mean Canadian
dollars.
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
ITEM
1.
|
CONSOLIDATED FINANCIAL
STATEMENTS
|
OccuLogix,
Inc.
CONSOLIDATED BALANCE
SHEETS
(expressed
in U.S. dollars
)
(Unaudited)
(Going Concern
Uncertainty – See Note 1)
|
|
March 31
,
200
8
|
|
|
December 31,
2007
|
|
|
|
$
|
|
|
$
|
|
|
|
A
s restated
Note 2
|
|
|
As restated
Note 2
|
|
ASSETS
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
|
2,329,718
|
|
|
|
2,235,832
|
|
Amounts receivable,
net
|
|
|
162,094
|
|
|
|
374,815
|
|
Inventory,
net
|
|
|
41,213
|
|
|
|
―
|
|
Prepaid
expenses
|
|
|
445
,296
|
|
|
|
481,121
|
|
Prepaid finance
costs
|
|
|
139,000
|
|
|
|
―
|
|
Deposit
s
|
|
|
13,334
|
|
|
|
10,442
|
|
Total current
assets
|
|
|
3
,
130
,
655
|
|
|
|
3,102,210
|
|
Fixed assets,
net
|
|
|
113,966
|
|
|
|
122,286
|
|
Patents and trademarks,
net
|
|
|
1
68
,
496
|
|
|
|
139,437
|
|
Investments
|
|
|
536,264
|
|
|
|
863,750
|
|
Intangible assets,
net
|
|
|
10,659,337
|
|
|
|
11
,
085
,
054
|
|
Total
assets
|
|
|
14,608,718
|
|
|
|
15
,
312
,
737
|
|
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
364,013
|
|
|
|
1,192,80
7
|
|
Accrued
liabilities
|
|
|
2,933,396
|
|
|
|
2,873,451
|
|
Due to
stockholders
|
|
|
74,05
3
|
|
|
|
32,814
|
|
Deferred
revenue
|
|
|
106,700
|
|
|
|
―
|
|
Short term liabilities and accrued
interest
|
|
|
3,040,438
|
|
|
|
―
|
|
Total current
liabilities
|
|
|
6,518,6
00
|
|
|
|
4,099,072
|
|
Deferred tax
liabilities
|
|
|
1,536,535
|
|
|
|
2,259,348
|
|
Total
liabilities
|
|
|
8,055,135
|
|
|
|
6,358,420
|
|
Minority
interest
|
|
|
4,792,176
|
|
|
|
4,953,960
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
Capital
stock
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
57,306
|
|
|
|
57,306
|
|
Par value of $0.001 per
share
|
|
|
|
|
|
|
|
|
Authorized: 75,000,000; Issued and
outstanding:
|
|
|
|
|
|
|
|
|
March 31, 2008 – 57,306,145;
December 31, 2007
–
5
7,306,145
|
|
|
|
|
|
|
|
|
Additional paid-in
capital
|
|
|
362,
270
,
156
|
|
|
|
362,
232
,
031
|
|
Accumulated
deficit
|
|
|
(360,566,055
|
)
|
|
|
(358,288,980
|
)
|
Total stockholders’
equity
|
|
|
1
,
761,407
|
|
|
|
4,000
,
357
|
|
Total liabilities and
stockholders’ equity
|
|
|
14,608,718
|
|
|
|
15
,
312
,
737
|
|
See accompanying notes to interim
consolidated financial statements
OccuLogix,
Inc.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(expressed in U.S. dollars except number
of shares)
(Unaudited)
|
|
Three months
ended
|
|
|
|
March 31
,
|
|
|
|
200
8
|
|
|
2007
|
|
|
|
$
|
|
|
$
|
|
|
|
As restated
Note 2
|
|
|
As restated
Note 2
|
|
Revenue
|
|
|
|
|
|
|
Retina
|
|
|
7,200
|
|
|
|
90,000
|
|
Cost of goods
sold
|
|
|
|
|
|
|
|
|
Retina
|
|
|
|
|
|
|
|
|
Cost of goods sold
, net of goods
recovered
|
|
|
(444
|
)
|
|
|
7,100
|
|
Royalty
costs
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
|
24,556
|
|
|
|
32,100
|
|
|
|
|
(17,356
|
)
|
|
|
57,900
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
General and
administrative
|
|
|
1,
526,074
|
|
|
|
2,654,840
|
|
Clinical and
regulatory
|
|
|
1,022,987
|
|
|
|
2,169,739
|
|
Sales and
marketing
|
|
|
176,529
|
|
|
|
472,536
|
|
|
|
|
2,
725,590
|
|
|
|
5,297,115
|
|
Loss from
operations
|
|
|
(2,
742,946
|
)
|
|
|
(
5,239,215
|
)
|
Other income
(expense)
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
30,288
|
|
|
|
215,438
|
|
Changes in fair value of warrant
obligation and warrant expense
|
|
|
―
|
|
|
|
(
723,980
|
)
|
Impairment of
investments
|
|
|
(327,486
|
)
|
|
|
―
|
|
Interest
expense
|
|
|
(40,438
|
)
|
|
|
(16
,
641
|
)
|
Amortization of finance
costs
|
|
|
(41,000
|
)
|
|
|
―
|
|
Other
|
|
|
17,492
|
|
|
|
15,8
73
|
|
Minority
interest
|
|
|
207,535
|
|
|
|
364,680
|
|
|
|
|
(153
,
609
|
)
|
|
|
(144,630
|
)
|
Loss
from continuing operations before income taxes
|
|
|
(
2
,
896,555
|
)
|
|
|
(5,383,845
|
)
|
Recovery of income
taxes
|
|
|
619,480
|
|
|
|
1,901,573
|
|
Loss
from continuing operations
|
|
|
(
2
,
277,075
|
)
|
|
|
(
3,482,272
|
)
|
Loss
from discontinued operations
|
|
|
―
|
|
|
|
(1,103,490
|
)
|
Net
loss for the period
|
|
|
(
2
,
277,075
|
)
|
|
|
(4,585,762
|
)
|
Weighted average number of shares
outstanding - basic and diluted
|
|
|
57,306,145
|
|
|
|
54,558,769
|
|
Net loss per share – basic and
diluted
|
|
|
(0.0
4
|
)
|
|
|
(0.
08
|
)
|
See
accompanying notes to interim consolidated financial
statements
OccuLogix,
Inc.
CONSOLIDATED STATEMENT
OF CHANGES IN STOCKHOLDERS’ EQUITY
(expressed in U.S.
dollars)
(Unaudited)
|
|
Voting common stock
at
par value
|
|
|
Additional paid-in
capital
|
|
|
Accumulated
deficit
|
|
|
Net stockholders’
equity
|
|
|
|
shares
issued
|
|
|
|
|
|
|
|
|
|
|
|
|
#
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2007
|
|
|
57,306,145
|
|
|
|
57,306
|
|
|
|
362,232,031
|
|
|
|
(358,288,980
|
)
|
|
|
4,000,357
|
|
Stock-based
compensation
|
|
|
―
|
|
|
|
―
|
|
|
|
38,124
|
|
|
|
―
|
|
|
|
38,124
|
|
Net
loss for the period
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
(2,
277
,
075
|
)
|
|
|
(2,
277
,
075
|
)
|
Balance,
March 31, 2008
|
|
|
57,306,145
|
|
|
|
57,306
|
|
|
|
362,270,156
|
|
|
|
(360,566,055
|
)
|
|
|
1,761,407
|
|
See accompanying notes
to interim consolidated financial statements
OccuLogix,
Inc.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(expressed in U.S.
dollars)
(Unaudited)
|
|
Three Months
ended
March 31
,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
$
|
|
|
$
|
|
|
|
A
s restated
Note 2
|
|
|
As restated
Note 2
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
Net loss for the
period
|
|
|
(
2
,
277,075
|
)
|
|
|
(
4,585,762
|
)
|
Adjustments to reconcile net loss
to cash used in operating activities:
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
38,124
|
|
|
|
562
,
817
|
|
Stock-based compensation of the
subsidiary
|
|
|
45,751
|
|
|
|
46,686
|
|
Amortization of fixed
assets
|
|
|
17,638
|
|
|
|
94,321
|
|
Amortization of patents and
trademarks
|
|
|
4,81
5
|
|
|
|
520
|
|
Amortization of intangible
asset
|
|
|
322
,
385
|
|
|
|
1,
496
,
551
|
|
Amortization of prepaid finance
costs
|
|
|
41,000
|
|
|
|
—
|
|
Amortization of premium discount
on short term investments
|
|
|
—
|
|
|
|
204,896
|
|
Changes in fair value of warrant
obligation
and
warrant expense
|
|
|
—
|
|
|
|
723,980
|
|
Deferred tax liability,
net
|
|
|
(
619,480
|
)
|
|
|
(2,
961
,
248
|
)
|
Impairment of
investments
|
|
|
327,486
|
|
|
|
—
|
|
Minority
interest
|
|
|
(
207,535
|
)
|
|
|
(
364,680
|
)
|
Net change in non-cash working
capital balances related to operations
|
|
|
(
376,033
|
)
|
|
|
92,3
49
|
|
Cash used in operating
activities
|
|
|
(2,
68
2,924
|
)
|
|
|
(4,689,570
|
)
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase
of short-term
investments
|
|
|
—
|
|
|
|
(5,025,000
|
)
|
Additions to fixed
assets
|
|
|
(9,317
|
)
|
|
|
(71,189
|
)
|
Additions to patents and
trademarks
|
|
|
(33,873
|
)
|
|
|
(31,554
|
)
|
Cash
used in
investing
activities
|
|
|
(43,190
|
)
|
|
|
(5,127,743
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of
common stock
|
|
|
—
|
|
|
|
10,016,000
|
|
Share issuance
costs
|
|
|
—
|
|
|
|
(672,986
|
)
|
Proceeds of
b
ridge
f
inancing
|
|
|
3
,000,000
|
|
|
|
—
|
|
Loan issuance
costs
|
|
|
(180,000
|
)
|
|
|
—
|
|
Cash provided by financing
activities
|
|
|
2
,
820
,000
|
|
|
|
9,343,014
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents during the period
|
|
|
93,886
|
|
|
|
(474,299
|
)
|
Cash and cash equivalents,
beginning of period
|
|
|
2,235,832
|
|
|
|
5,740,697
|
1
|
Cash and cash equivalents, end of
period
|
|
|
2,329,718
|
|
|
|
5,266,398
|
|
(1)
|
As at December 31, 2006, cash and
cash equivalents of $5,740,697 included cash and cash equivalents of
discontinued operations of
$35,462.
|
See accompanying notes to interim
consolidated financial statements
OccuLogix, Inc.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(expressed in U.S. dollars except as
otherwise stated)
March 31, 2008
as restated
(Unaudited)
1.
BASIS
OF PRESENTATION, GOING CONCERN UNCERTAINTY AND ACCOUNTING
POLICIES
The accompanying
restated
unaudited
interim
consolidated financial statements have
been prepared in accordance with United States generally accepted accounting
principles (“US GAAP”). These
unaudited interim
consolidated financial statements
contain all normal recurring adjustments and estimates necessary to present
fairly the financial position of OccuLogix, Inc. (the “Company”) as
at
March 31, 2008
and the results of its operations for
the three
months
then ended. These
unaudited interim consolidated financial statemen
t
s should be read in conjunction with the
consolidated financial statements and notes included in the Company’s latest
A
nnual
R
eport on Form 10
-
K
/A – Amendment No.2
filed with the U.S. Securities and
Exchange Commission (the “SEC”)
on July 18, 2008
. Interim results are not necessarily
indicative of results for a full year.
Going
concern uncertainty
The
consolidated financial statements have been prepared on the basis that the
Company will continue as a going concern. However, the Company has sustained
substantial losses of $69,829,983 for the year ended December 31, 2007 and
$2,277,075 and $4,585,763 for the three months ended March 31, 2008 and 2007,
respectively. The Company’s working capital deficiency at March 31, 2008 is
$3,387,945, which represents a $2,391,083 increase in its working capital
deficiency from $996,862 at December 31, 2007. As a result of the
Company’s history of losses and financial condition, there is substantial doubt
about the ability of the Company to continue as a going concern.
On
February 19, 2008, the Company announced that it has secured a bridge loan in an
aggregate principal amount of $3,000,000 (less transaction costs
of $180,000) from a number of private parties. The loan bears
interest at a rate of 12% per annum and has a 180-day term, which may be
extended to 270 days under certain circumstances. The Company has pledged its
shares of the capital stock of OcuSense Inc. (“OcuSense”) as collateral for the
loan.
On May 5, 2008, subsequent to quarter
end, the Company announced that it had secured a bridge loan in an aggregate
principal amount of $300,000 (less transaction costs of approximately $18,000)
from a number of private parties (“Additional Bridge Loan”).
The Additional Bridge Loan constitutes
an increase to the principal amount of the U.S.$3,000,000 principal amount
bridge loan that the Company announced on February 19, 2008 (the “Original
Bridge Loan”) and was advanced on substantially the same terms and conditions as
the Original Bridge Loan, pursuant to an amendment of the loan agreement for the
Original Bridge Loan.
The
Additional Bridge Loan bears interest at a rate of 12% per annum and will have
the same maturity date as the Original Bridge Loan.
The Company has pledged its shares of
the capital stock of OcuSense as collateral for the loan.
Under the terms of the Original Bridge
Loan agreement, the Company has two pre-payment options available to it, should
it decide to not wait until the maturity date to repay the loan. Under the first
pre-payment option, the Company may repay the Original Bridge Loan in full by
paying the lenders, in cash, the amount of outstanding principal and accrued
interest and issuing to the lenders five-year warrants in an aggregate amount
equal to approximately 19.9% of the issued and outstanding shares of the
Company’s common stock (but not to exceed 20% of the issued and outstanding
shares of the Company’s common stock). The warrants would be exercisable into
shares of the Company’s common stock at an exercise price of $0.10 per share and
would not become exercisable until the 180th day following their issuance. Under
the second pre-payment option, provided that the Company has closed a private
placement of shares of its common stock for aggregate gross proceeds of at least
$4,000,000, the Company may repay the Original Bridge Loan in full by issuing to
the lenders shares of its common stock, in an aggregate amount equal to the
amount of outstanding principal and accrued interest, at a 15% discount to the
price paid by the private placement investors. Any exercise by the Company of
the second pre-payment option would be subject to stockholder and regulatory
approval. Should the Company exercise either of these pre-payment options, it
will be obligated to pre-pay the Additional Bridge Loan in the same manner,
provided that the Company, in no event, shall be obligated to issue warrants
exercisable into shares in a number that exceeds 20% of the issued and
outstanding shares of the Company’s common stock on the date of
pre-payment.
Management
believes that these proceeds, together with the Company’s existing cash, will be
sufficient to cover its operating activities and other demands only until
approximately the middle of July 2008. The Company currently is not
generating cash from operations, and most of its cash has been, and is being,
utilized to fund its operations and to fund deferred acquisition payments. The
Company’s operating expenses in the three months ended March 31, 2008 have
consisted mostly of expenses relating to the completion of the
product development of the TearLab™ test for dry eye disease, or
DED. Unless the Company raises additional capital, it will not have
sufficient cash to support its operations beyond approximately the middle of
July 2008.
On
October 9, 2007, the Company announced that its Board of Directors, (“the
Board”), had authorized management and the Company’s advisors to explore the
full range of strategic alternatives available to enhance shareholder value.
These alternatives may include, but are not limited to, the raising of capital
through the sale of securities, one or more strategic alliances and the
combination, sale or merger of all or part of OccuLogix. In making the
announcement, the Company stated that there can be no assurance that the
exploration of strategic alternatives will result in a transaction. To date, the
Company has not disclosed, nor does it intend to disclose, developments with
respect to its exploration of strategic alternatives unless and until the Board
has approved a specific transaction.
For some
time prior to the October 9, 2007 announcement, the Company had been seeking to
raise additional capital, with the objective of securing funding sufficient to
sustain its operations as it had been clear that, unless the Company was able to
raise additional capital, the Company would not have had sufficient cash to
support its operations beyond early 2008. The Board’s decisions to suspend the
Company’s RHEO™ System clinical development program and to dispose of SOLX were
made and implemented in order to conserve as much cash as possible while the
Company continued its capital-raising efforts.
On
January 9, 2008, the Company announced the departure, or pending departure, of
seven members of its executive team and, commencing on February 1, 2008, a 50%
reduction in the salary of each of Elias Vamvakas, its Chairman and Chief
Executive Officer, and Tom Reeves, its President and Chief Operating Officer. By
January 31, 2008, a total of 12 non-executive employees of the Company left the
Company’s employment.
As at
March 31, 2008, the Company had investments in the aggregate principal amount of
$1,900,000 which consist of investments in four separate asset-backed auction
rate securities yielding an average return of 3.94% per
annum. However, as a result of market conditions, all of these
investments have recently failed to settle on their respective settlement dates
and have been reset to be settled at future dates with an average maturity of 46
days. Due to the current lack of liquidity for asset-backed
securities of this type, the Company has concluded that the carrying value of
these investments was higher than its fair value as of March 31, 2008.
Accordingly, these auction rate securities have been recorded at their estimated
fair value of $536,264 which represents a decline of $1,363,736 in the carrying
value of these auction rate securities. The Company considers this to be an
other-than-temporary reduction in the value. Accordingly, the loss associated
with these auction rate securities of $327,486 has been included as an
impairment of investments in the Company’s consolidated statement of operations
for the quarter ended March 31, 2008. Although the Company continues to receive
payment of interest earned on these securities, the Company does not know at the
present time when it will be able to convert these investments into
cash. Accordingly, management has classified these investments as a
non-current asset on its consolidated balance sheet as of March 31, 2008.
Management will continue to monitor these investments closely for future
indications of further impairment. The illiquidity of these investments may have
an adverse impact on the length of time during which the Company currently
expects to be able to sustain its operations in the absence of an additional
capital raise by the Company
as we
do not have the cash reserves to hold these auction rate securities until
the market recovers nor can we hold these securities until their contractual
maturity dates.
The unaudited interim consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary if the Company were not
able to continue in existence as a going concern.
Significant
accounting policies
These
unaudited
interim consolidated financial
statements have been prepared using
significant
accounting policies that are consistent
with the policies used in preparing the Company’s
restated
audited consolidated financial
statements for the year ended December
31, 200
7
.
Management believes that all adjustments
necessary for the fair presentation of results, consisting of normally recurring
items, have been included in the unaudited
financial statements for the interim
periods presented. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. The principal areas of judgment relate
to the
impairment of long-lived and intangible
assets, valuation of investments in marketable securities and the value of stock
option and warrant programs.
Recent Accounting
Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements.” This standard defines fair value, establishes a framework for
measuring fair value in accounting principles generally accepted in the United
States of America, and expands disclosure about fair value measurements. This
pronouncement applies to other accounting standards that require or permit fair
value measurements. Accordingly, this statement does not require any new fair
value measurement. This statement is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. In December of
2007, the FASB agreed to a one year deferral of SFAS No. 157’s fair value
measurement requirements for non-financial assets and liabilities that are not
required or permitted to be measured at fair value on a recurring basis. The
Company adopted SFAS No. 157 on January 1, 2008, which had no effect on the
Company’s consolidated financial statements. Refer to Note 8, “Fair value
measurements” for additional information related to the adoption of SFAS No.
157.
In February
2007, FASB issued Statement
No.
159, “The Fair Value Option for
Financial Assets and Financial Liabilities—Including an amendment of FASB
Statement No.
115” (“SFAS No. 159”). SFAS No. 159
expands the use of fair value accounting but does not affect existing standards
which require assets or liabilities to be carried at fair value. Under SFAS No.
159, a company may elect to use fair value to measure accounts and loans
receivable, available-for-sale and held-to-maturity securities, equity method
investments, accounts payable, guarantees and issued debt. Other eligible items
include firm commitments for financial instruments that otherwise would not be
recognized at inception and non-cash warranty obligations where a warrantor is
permitted to pay a third party to provide the warranty goods or services. If the
use of fair value is elected, any upfront costs and fees related to the item
must be recognized in earnings and cannot be deferred (e.g., debt issue costs).
The fair value election is irrevocable and generally made on an
instrument-by-instrument basis, even if a company has similar instruments that
it elects not to measure based on fair value. At the adoption date, unrealized
gains and losses on existing items for which fair value has been elected are
reported as a cumulative adjustment to beginning retained
earnings.
Subsequent to the adoption of SFAS No.
159, changes in fair value are recognized in earnings. SFAS No. 159 is effective
for fiscal years beginning on or after November
15, 2007 and is required to be adopted
by the Company in the first quarter of fiscal 2008. The adoption of SFAS No. 159
has not had a material impact on the Company’s results of operations and
financial position.
On June
14, 2007, the Financial Accounting Standards Board ("FASB") ratified EITF 07-3,
"Accounting for Non-Refundable Advance Payments for Goods or Services to Be Used
in Future Research and Development Activities". EITF 07-3 requires that all
non-refundable advance payments for R&D activities that will be used in
future periods be capitalized until used. In addition, the deferred research and
development costs need to be assessed for recoverability. EITF 07-3 is
applicable for fiscal years beginning after December 15, 2007 and is to be
applied prospectively without the option of early application.
The adoption of
EITF 07-3
has not had a material impact on the
Company’s results of operations and financial position.
In
March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities — An Amendment of FASB Statement No. 133.”
SFAS No. 161 enhances the required disclosures regarding derivatives and hedging
activities, including disclosures regarding how an entity uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities,” and how derivative instruments and related hedged items affect an
entity’s financial position, financial performance, and cash flows. SFAS No. 161
is effective for fiscal years beginning after November 15, 2008. Management is
currently evaluating the requirements of SFAS No. 161 and has not yet determined
the impact, if any, on the Company’s consolidated financial
statements.
2. RESTATEMENT OF
CONSOLIDATED FINANCIAL STATEMENTS
Correction of an error related to the
method of consolidation of OcuSense Inc.
Background
Information
On November 30, 2006, OccuLogix acquired
1,754,589 Series A preferred shares of OcuSense. The purchase price of these
shares was made up of two fixed payments of $2.0 million each to be made on the
date of the closing of the transaction (i.e. November 30, 2006) and on January
3, 2007. In addition, subject to OcuSense achieving certain
milestones, the Company was required to pay two additional milestone payments of
$2.0 million each.
Upon acquiring the Series A preferred
shares, OccuLogix and the existing common shareholders entered into a voting
agreement. The voting agreement provides the founding shareholders of
OcuSense, as defined in the voting agreement, with the right to appoint two
board members and OccuLogix with the right to also appoint two
directors. A selection of a fifth director is mutually agreed upon by
both OccuLogix and the founding stockholders, each voting as a separate
class. The voting agreement is subject to termination under the
following scenarios: a) a change of control; b) majority approval of each of
OccuLogix and the founding stockholders; and c) conversion of all outstanding
shares of the Company’s preferred shares to common shares. OccuLogix
has the ability to force the conversion of all of the preferred shares to common
shares and thus has the ability to effect a termination of the voting agreement,
but this would require conversion of its own preferred shares and the
relinquishment of the rights and obligations associated with the preferred
shares.
The rights and obligations of the Series
A preferred shareholders are as follows:
·
|
Voting – Holders of the Series A
preferred shares are entitled to vote on an as-converted
basis. Each Series A preferred share is entitled to one vote
per share.
|
·
|
Conversion features
– Series A preferred shares are convertible to common shares on
a one-for-one basis at the option of
OccuLogix.
|
·
|
Dividends – The preferred shares
are entitled to non-cumulative dividends at 8%, and additional dividends
would be shared between common and preferred shares on a per-share
basis.
|
·
|
Redemption features – Subsequent
to November 30, 2011, the preferred shares may be redeemed at the option
of OccuLogix, at the higher of the original issue price and the fair
market value of the common shares into which the preferred shares could be
converted, subject to available
cash.
|
·
|
Liquidation preferences – Series A
preferred shares have a liquidation preference over common shares up to
the original issue price of the preferred shares (including the milestone
payments).
|
Immediately after the OccuLogix
investment in OcuSense, OcuSense had the following capital
structure:
Description
|
Number
|
Common
shares
|
1,222,979
|
Series A preferred shares –
OccuLogix
|
1,754,589
|
Series A preferred shares – Other
unrelated parties
|
67,317
|
Total
|
3,044,885
|
Potentially dilutive
instruments
|
|
Warrants
|
89,965
|
Stock
options
|
367,311
|
Fully
diluted
|
3,502,161
|
Based on the above capital structure, on
a fully diluted basis, OccuLogix’s voting percentage was determined to be 50.1%.
On a current voting basis, OccuLogix’s voting interest is 57.62%. We previously
consolidated OcuSense based on an ownership percentage of
50.1%.
Interpretation
and Related Accounting Treatment
Since November 30, 2006, the date of the
acquisition, the Company has consolidated OcuSense on the basis of a voting
control model, as a result of the fact that it owns more than 50% of the voting
stock of OcuSense and that the Company has the ability to convert its Series A
preferred shares into common shares, which would result in termination of the
voting agreement between the founders and OccuLogix and which would result in
OccuLogix gaining control of the board of directors.
However, after further consideration,
the Company has now determined that, as a result of the voting agreement between
OccuLogix and certain founding stockholders of OcuSense, OccuLogix is not able
to exercise voting control as contemplated in ARB 51, “Consolidated Financial
Statements” (“ARB 51”) unless the Company converts its Series A preferred
shares. For purpose of assessing voting control in accordance with
ARB 51, accounting principals generally accepted in the United States (“U.S.
GAAP”) do not take into consideration such conversion rights. Accordingly
OccuLogix does not have the ability to exercise control of OcuSense, in light of
the voting agreement that currently exists between the founding stockholders and
OccuLogix.
In addition to the above consideration,
the Company also determined that OcuSense is a Variable Interest Entity and that
OccuLogix is the primary beneficiary based on the following:
·
|
OcuSense is a development stage
enterprise (as defined under FAS 7, “Accounting and Reporting by
Development Stage Enterprises”) and therefore is not considered to be a
business under U.S. GAAP. Accordingly, OcuSense is not subject
to the business scope
exception.
|
·
|
The Company noted that the holders
of the Series A preferred shares (including OccuLogix) have the ability to
redeem their shares at the greater of their original subscription price
and their fair value on an as-converted basis. As such, their
investment is not considered to be at-risk
equity.
|
·
|
Additionally, as a result of the
voting agreement between OccuLogix and the founding stockholders of
OcuSense, voting control of OcuSense is shared between OccuLogix and
OcuSense. Accordingly, the common stockholders, who represent
the sole class of at-risk equity, cannot make decisions about an entity’s
activities that have a significant effect on the success of the entity
without the concurrence of
OccuLogix.
|
FIN 46(R) requires that the enterprise
which consolidates the VIE be the primary beneficiary of that entity. The
primary beneficiary is the entity that will absorb a majority of the VIE’s
expected losses, receive a majority of the entity’s expected returns, or both.
At the time of acquisition, it was expected that the Company would contribute
virtually all of the required funding until commercialization through the
acquisition of the Series A preferred shares and future milestone payments as
described above. The common stockholders were expected to make
nominal equity contributions during this period. Therefore, based
primarily on qualitative considerations, the Company believes that it is the
primary beneficiary of OcuSense and should consolidate OcuSense using the
variable interest model.
The Company has noted that the initial
measurement of assets, liabilities and non-controlling interests under FIN 46(R)
differs from that which is required under FAS 141, “Business
Combinations”. In particular, under FIN 46(R), assets, liabilities
and non-controlling interest shall be measured initially at their fair value.
The Company previously recorded non-controlling interest based on the historical
carrying values of OcuSense’s assets and liabilities, and as a result
consolidation under FIN 46(R) will result in material revisions to the amounts
previously reported in the Company’s consolidated financial
statements.
Assets acquired and liabilities assumed
consisted solely of working capital and of a technology intangible asset
relating to patents owned by OcuSense. Before consideration of
deferred tax, the fair value of the assets acquired was greater than the fair
value of the liabilities assumed and the non-controlling
interest. Because OcuSense does not comprise a business, as defined
in Emerging Issues Task Force (“EITF”) 98-3, “Determining Whether a Nonmonetary
Transaction Involves Receipt of Productive Assets or of a Business”, the
Company applied the simultaneous equation method as per EITF 98-11,
“Accounting for Acquired Temporary Differences in Certain Purchase Transactions
That Are Not Accounted for as Business Combinations”, and adjusted the assigned
value of the non-monetary assets acquired (consisting solely of the technology
asset) to include the deferred tax liability.
The Company also considered the
appropriate accounting for the milestone payments, as a result of the fact that
it has determined that it should apply the initial measurement guidance in FIN
46(R). The Company notes that subsequent to initial consolidation,
the milestone payment liability represents a contingent liability to a
controlled subsidiary, and as such, the liability will eliminate on
consolidation. Previously, the Company adjusted the minority interest
at the date of each milestone payment to reflect the non-controlling interest’s
share in the additional cash of the subsidiary, with an offsetting increase to
the non-monetary assets acquired (consisting solely of the technology intangible
asset) reflecting the increased actual cost of obtaining those non-monetary
assets.
The Company notes that because the
non-controlling interest is required to be measured at fair value on acquisition
of OcuSense, the fair value of the milestone payments as of the date of
acquisition will be embedded in the initial measurement of non-controlling
interest. As such, it would be inappropriate to record additional
minority interest based on the full amount of the milestone payment applicable
to the minority interest. Accordingly, the Company has accounted for
the milestone payments as follows:
|
·
|
The Company determined the fair
value of the milestone payments on the date of acquisition, by
incorporating the probability that the milestone payments will be made, as
well as the time value associated with the planned settlement date of the
payments.
|
|
·
|
Upon payment of the milestone
payments, the Company recorded the minority interest portion of the change
in fair value of the milestone payment (i.e. the minority interest portion
of the ultimate value of the milestone payment less the initial fair value
determination) as an expense, with a corresponding increase to minority
interest, to reflect the additional value provided to the minority
interest in excess of that contemplated on the acquisition
date.
|
The
following is a summary of the significant effects of the restatements on our
consolidated balance sheets as of March 31, 2008 and December 31, 2007 and its
consolidated statements of operations and cash flows for the three months ended
March 31, 2008 and 2007.
|
|
Select
balances - consolidated balance sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
At March 31, 2008
|
|
|
As
at December 31, 2007
|
|
|
|
As
previously reported
|
|
|
Adjustment
|
|
|
As
restated
|
|
|
As
previously reported
|
|
|
Adjustment
|
|
|
As
restated
|
|
Consolidated
Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets
|
|
|
5,883,171
|
|
|
|
4,776,166
|
|
|
|
10,659,337
|
|
|
|
5,770,677
|
|
|
|
5,314,377
|
|
|
|
11,085,054
|
|
Deferred
tax liabilities
|
|
|
—
|
|
|
|
1,536,535
|
|
|
|
1,536,535
|
|
|
|
—
|
|
|
|
2,259,348
|
|
|
|
2,259,348
|
|
Minority
interest
|
|
|
274,288
|
|
|
|
4,517,888
|
|
|
|
4,792,176
|
|
|
|
—
|
|
|
|
4,953,960
|
|
|
|
4,953,960
|
|
Additional
paid-in capital
|
|
|
362,486,775
|
|
|
|
(216,619
|
)
|
|
|
362,270,156
|
|
|
|
362,402,899
|
|
|
|
(170.868
|
)
|
|
|
362,232,031
|
|
Accumulated
deficit
|
|
|
(359,504,417
|
)
|
|
|
(1,061,638
|
)
|
|
|
(360,566,055
|
)
|
|
|
(356,560,917
|
)
|
|
|
(1,728,063
|
)
|
|
|
(358,288,980
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative (i)
|
|
|
1,365,484
|
|
|
|
160,590
|
|
|
|
1,526,074
|
|
|
|
2,433,490
|
|
|
|
221,350
|
|
|
|
2,654,840
|
|
Minority
interest
|
|
|
—
|
|
|
|
207,535
|
|
|
|
207,535
|
|
|
|
554,848
|
|
|
|
(190,168
|
)
|
|
|
364,680
|
|
Income
tax recovery (i)
|
|
|
—
|
|
|
|
619,480
|
|
|
|
619,480
|
|
|
|
1,981,325
|
|
|
|
(79,752
|
)
|
|
|
1,901,573
|
|
Loss
from continuing operations (i)
|
|
|
2,943,500
|
|
|
|
(666,425
|
)
|
|
|
2,277,075
|
|
|
|
2,991,002
|
|
|
|
491,270
|
|
|
|
3,482,272
|
|
Discontinued
Operations (i)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,281,742
|
|
|
|
(178,252
|
)
|
|
|
1,103,490
|
|
Net
loss for the period
|
|
|
2,943,500
|
|
|
|
(666,425
|
)
|
|
|
2,277,075
|
|
|
|
4,272,744
|
|
|
|
313,018
|
|
|
|
4,585,762
|
|
Loss
per share
|
|
|
.05
|
|
|
|
(.01
|
)
|
|
|
.04
|
|
|
|
.08
|
|
|
|
-
|
|
|
|
.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
used in operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the year
|
|
|
(2,943,500
|
)
|
|
|
666,425
|
|
|
|
(2,277,075
|
)
|
|
|
(4,272,744
|
)
|
|
|
(313,018
|
)
|
|
|
(4,585,762
|
)
|
Amortization
of intangibles
|
|
|
161,795
|
|
|
|
160,590
|
|
|
|
322,385
|
|
|
|
1,291,802
|
|
|
|
204,749
|
|
|
|
1,496,551
|
|
Deferred
tax liability, net
|
|
|
-
|
|
|
|
(619,480
|
)
|
|
|
(619,480
|
)
|
|
|
(2,879,350
|
)
|
|
|
(81,898
|
)
|
|
|
(2,961,248
|
)
|
Minority
interest
|
|
|
-
|
|
|
|
(207,535
|
)
|
|
|
(207,535
|
)
|
|
|
(554,848
|
)
|
|
|
190,168
|
|
|
|
(364,680
|
)
|
(i) – includes a correction of
comparative amounts allocated to discontinued operations for the three months
ending March 31, 2007. Impact of correction: increase in general and
administrative expenses of $16,601, decrease in recovery of income taxes of
$161,652, increase in loss from continuing operations of $178,252 and decrease
in loss from discontinued operations of $178,252.
There was no net impact on cash flow
from operations.
The Company’s intangible assets consist
of the value of the exclusive distribution agreements that the Company has with
its major suppliers and other acquisition-related intangibles. The Company has
no indefinite-lived intangible assets. The distribution agreements and other
acquisition-related intangible assets are amortized using the straight-line
method over an estimated useful life of 15 and 10 years,
respectively.
The Company’s other intangible assets
consist of the value of the exclusive distribution agreements the Company has
with Asahi Medical, the manufacturer of the Rheofilter filters and the Plasmaflo
filters, and Diamed and MeSys, the designer and the manufacturer, respectively,
of the OctoNova pumps. The Rheofilter filter, the Plasmaflo filter and the
OctoNova pump are components of the RHEO™ System, the Company’s product for the
treatment of Dry AMD. On November 1, 2007, the Company announced an indefinite
suspension of the RHEO™ System clinical development program for Dry AMD and is
in the process of winding down the RHEO-AMD study as there is no reasonable
prospect that the RHEO™ System clinical development program will be relaunched
in the foreseeable future. In accordance with SFAS No. 144, the
Company concluded that its indefinite suspension of the RHEO™ System clinical
development program for Dry AMD was a significant event which may affect the
carrying value of its distribution agreements. Accordingly, management was
required to re-assess whether the carrying value of the Company’s distribution
agreements was recoverable as
at
December 31, 2007. Based on
management’s estimates of undiscounted cash flows associated with the
distribution agreements, the Company concluded that the carrying value of the
distribution agreements was not recoverable as
at
December 31, 2007. Accordingly, the
Company recorded an impairment charge of $20,923,028 during the year ended
December 31, 2007 to record the distribution agreements at their fair value as
at
December 31, 2007
bringing the net balance to nil. As a
result, amortization expense from continuing operations for the three months
ended March 31, 2008 in connection with the distribution agreements is
nil.
On
December 19, 2007, the Company sold to SOLX Acquisition all of the issued and
outstanding shares of the capital stock of SOLX, which had been the Glaucoma
division of the Company prior to the completion of the transactions provided for
in the stock purchase agreement. The sale transaction established fair values
for the Company’s recorded goodwill and the Company’s shunt and laser technology
and regulatory and other intangible assets acquired upon the acquisition of SOLX
on September 1, 2006. Accordingly, management was required to re-assess whether
the carrying value of the Company’s shunt and laser technology and regulatory
and other intangible assets was recoverable as at December 1, 2007. Based on
management’s estimates of undiscounted cash flows associated with these
intangible assets, the Company concluded that the carrying value of these
intangible assets was not recoverable as at December 1, 2007. Accordingly, the
Company recorded an impairment charge of $22,286,383 during the year ended
December 31, 2007 to record the shunt and laser technology and regulatory and
other intangible assets at their fair value as at December 31, 2007 bringing the
net balance to nil. The results of operations of SOLX for the three months ended
March 31, 2007 are classified as results of discontinued operations in these
financial statements,
As
at
March 31, 2008 and 2007
, the remaining weighted average
amortization period for the distribution agreements
intangible assets
is
nil
and
8.46
years
, respectively
.
On November 30, 2006, the Company
acquired 50.1% of the capital stock of OcuSense, measured on a fully diluted
basis
, and 57.62% of the
capital stock of OcuSense, measured on an issued and outstanding
basis
. OcuSense’s first
product, which is currently under development, is a hand-held tear film test for
the measurement of osmolarity, a quantitative and highly specific biomarker that
has shown to correlate with dry eye disease, or DED. The test is known as the
TearLab™ test for DED. The results of OcuSense’s operations have been included
in the Company’s consolidated financial statements since November 30, 2006.
Under FIN
46(R), assets, liabilities and non-controlling interest shall be measured at
their fair value. The Company previously recorded non-controlling interest at
their historical carrying values. As a result, consolidation under FIN
46(R) results in material revisions to the amounts previously
reported in the Company’s consolidated financial statements.
Assets
acquired and liabilities assumed consisted solely of working capital and of a
technology intangible asset relating to patents owned by
OcuSense. The Company anticipates that before consideration of
deferred tax, the fair value of the assets acquired will be greater than the
fair value of the liabilities assumed and the non-controlling
interest. Because OcuSense does not comprise a business, as defined
in EITF 98-3 “Determining Whether a Nonmonetary Transaction Involves Receipt of
Productive Assets or of a Business”, the Company applied the
simultaneous equation method as per EITF 98-11 “Accounting for Acquired
Temporary Differences in Certain Purchase Transactions That Are Not Accounted
for as Business Combinations” and adjusted the assigned value of the
non-monetary assets acquired (consisting solely of the technology asset) to
include the deferred tax liability.
In estimating the fair value of the
intangible assets acquired, the Company considered a number of factors,
including discussions with
OcuSense
management, review of historic
financial information, future revenue and expense estimates and a review of the
economic and competitive environment. As a result, the Company used the income
approach to value
OcuSense
’s
TearLab™
technology and the cost approach to
value the intangible assets acquired.
Intangible assets subject to
amortization consist of the following:
|
|
As
at March 31, 2008
|
|
|
|
Cost less tax loss
benefited
|
|
|
Accumulated
Amortization
|
|
|
|
$
|
|
|
$
|
|
TearLab™
technology
|
|
|
12,378
,
721
|
|
|
|
1,719,384
|
|
Less Accumulated
Depreciation
|
|
|
1,719,384
|
|
|
|
|
|
|
|
|
10,659,337
|
|
|
|
|
|
Intangible assets were reduced by
$103,333 in the three months ended March 31 2008 to reflect the effect of
acquired
tax losses benefited
which
became
unrestricted in the period
.
|
|
|
|
As
at December 31, 2007
|
|
|
|
Cost less tax loss
benefited
|
|
|
Accumulated
Amortization
|
|
|
|
$
|
|
|
$
|
|
TearLab™
technology
|
|
|
12,482,054
|
|
|
|
1,397,000
|
|
Less Accumulated
Depreciation
|
|
|
1,397,000
|
|
|
|
|
|
|
|
|
11,085,054
|
|
|
|
|
|
Intangible assets were reduced by
$413,333 in the year to reflect the effect of
acquired
tax losses benefited which became
unrestricted in the year.
|
|
Estimated amortization expense for the
intangible assets and
contemporaneous reduction in a
pre-existing valuation allowance
for each of the next four years and
thereafter is as follows:
|
|
Amortization of intangible
assets
|
|
|
|
|
|
|
|
$
|
|
Remainder
of
2008
|
|
|
967,154
|
|
2009
|
|
|
1,289,539
|
|
2010
|
|
|
1,289,539
|
|
2011
|
|
|
1,289,539
|
|
2012 and
thereafter
|
|
|
5,823,566
|
|
|
|
|
10,659,337
|
|
Amortization expense of $3
22
,
385
from continuing operations for the
three months ended March 31, 2008 is attributable to OcuSense. Amortization
expense from continuing operations for the three months ended March 31, 2007 of
$751,551 was derived from OcuSense and the RHEO
TM
distribution
agreements. Amortization expense from discontinued operations for the
three months ended March 31, 2008 and 2007 was nil and $745,000,
respectively.
The
Company determined that, as of March 31, 2008, there have been no significant
events which may affect the carrying value of its TearLab™ technology. However,
the Company’s prior history of losses and losses incurred during the current
fiscal year reflects a potential indication of impairment, thus requiring
management to assess whether the Company’s TearLab™ technology was impaired as
at March 31, 2008. Based on management’s estimates of forecasted undiscounted
cash flows as at March 31, 2008, the Company concluded that there is no
indication of an impairment of the Company’s TearLab™ technology. Therefore, no
impairment charge was recorded during the three month ended March 31,
2008.
4. DISCONTINUED
OPERATIONS
On December 19, 2007, the Company sold
to
SOLX
Acquisition, and
SOLX
Acquisition purchased from the
Company,
all of the issued and outstanding shares of the capital stock of
SOLX, which had been the Glaucoma division of the Company prior to the
completion of this transaction. The consideration for the purchase and sale of
all of the issued and outstanding shares of the capital stock of SOLX consisted
of: (i) on the closing date of the sale, the assumption by SOLX
Acquisition of all of the liabilities of the Company related to SOLX’s business,
incurred on or after December 1, 2007, and the Company’s obligation to make a
$5,000,000 payment to the former stockholders of SOLX due on September 1, 2008
in satisfaction of the outstanding balance of the purchase price of SOLX; (ii)
on or prior to February 15, 2008, the payment by SOLX Acquisition of all of the
expenses that the Company had paid to the closing date, as they related to
SOLX’s business during the period commencing on December 1, 2007; (iii) during
the period commencing on the closing date and ending on the date on which SOLX
achieves a positive cash flow, the payment by SOLX Acquisition of a royalty
equal to 3% of the worldwide net sales of the SOLX 790 Laser and the SOLX Gold
Shunt, including next-generation or future models or versions of these products;
and (iv) following the date on which SOLX achieves a positive cash flow, the
payment by SOLX Acquisition of a royalty equal to 5% of the worldwide net sales
of these products. In order to secure the obligation of SOLX Acquisition to make
these royalty payments, SOLX granted to the Company a subordinated security
interest in certain of its intellectual property.
No value was assigned to the
royalty payments as the determination of worldwide net sales of SOLX’s products
is subject to significant uncertainty.
The sale
transaction described above established fair values for certain of the Company’s
acquisition-related intangible assets and goodwill. Accordingly, the Company
performed an impairment test of these assets at December 1, 2007. Based on this
analysis, during the year ended December 31, 2007, the Company recognized a
non-cash goodwill impairment charge of $14,446,977 and an impairment charge of
$22,286,383 to record its acquisition-related intangible assets at their fair
value as of December 31, 2007.
The Company’s results of operations
related to disco
ntinued
operations for the three months ended March 31, 2008 and 2007
are as follows:
|
|
Three
months ended March 31,
|
|
|
|
2008
$
|
|
|
2007
$
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
―
|
|
|
|
39,625
|
|
Cost
of goods sold
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
―
|
|
|
|
55,508
|
|
Royalty
costs
|
|
|
―
|
|
|
|
8,734
|
|
Total
cost of goods sold
|
|
|
―
|
|
|
|
64,242
|
|
|
|
|
|
|
|
|
(24,617
|
)
|
Operating
expenses
|
|
|
|
|
|
|
|
|
General
and administrative
(i)
|
|
|
―
|
|
|
|
1,025,276
|
|
Clinical
and regulatory
|
|
|
―
|
|
|
|
628,098
|
|
Sales
and marketing
|
|
|
―
|
|
|
|
281,304
|
|
|
|
|
―
|
|
|
|
1,934,678
|
|
|
|
|
―
|
|
|
|
(1,959,295
|
)
|
Other
income (expenses)
|
|
|
|
|
|
|
|
|
Interest
and accretion expense
|
|
|
―
|
|
|
|
(204,896
|
)
|
Other
|
|
|
―
|
|
|
|
(28
|
)
|
|
|
|
―
|
|
|
|
(204,924
|
)
|
Loss
from discontinued operations before income taxes
|
|
|
―
|
|
|
|
(2,164,219
|
)
|
Recovery
of income taxes
(ii)
|
|
|
―
|
|
|
|
1,060,729
|
|
Loss
from discontinued operations
|
|
|
―
|
|
|
|
(1,103,490
|
)
|
(i)
|
corrected
by a decrease of $16,601 from amount previously
disclosed.
|
(ii)
|
corrected
by an increase of $161,652 from amount previously
disclosed
|
5. FIXED
ASSETS
|
|
March
31, 2008
|
|
|
December
31, 2007
|
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture
and office equipment
|
|
|
77,085
|
|
|
|
40,696
|
|
|
|
101,903
|
|
|
|
50,854
|
|
Computer
equipment and software
|
|
|
201,012
|
|
|
|
164,638
|
|
|
|
197,317
|
|
|
|
155,928
|
|
Leasehold
improvements
|
|
|
6,335
|
|
|
|
1,232
|
|
|
|
6,335
|
|
|
|
704
|
|
Medical
equipment
|
|
|
1,177,617
|
|
|
|
1,141,517
|
|
|
|
1,163,135
|
|
|
|
1,138,918
|
|
|
|
|
1,462,049
|
|
|
|
1,348,083
|
|
|
|
1,468,690
|
|
|
|
1,346,404
|
|
Less
accumulated amortization
|
|
|
1,348,083
|
|
|
|
|
|
|
|
1,346,404
|
|
|
|
|
|
|
|
|
113,966
|
|
|
|
|
|
|
|
122,286
|
|
|
|
|
|
A
mortization expense was
$17,638
, and $94,321 during
the
three months ended March 31, 2008
and
2007, respectively, of
which n
il and $
58,084
is included as amortization expense of
discontinued operations for the three months ended March 31, 2008 and 2007,
respectively.
On
November 1, 2007, the Company announced an indefinite suspension of the RHEO™
System clinical development program for Dry AMD and is in the process of winding
down the RHEO-AMD study as there is no reasonable prospect that the RHEO™ System
clinical development program will be relaunched in the foreseeable future. In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets” (“SFAS No. 144”), the Company determined that the carrying
value of certain of the Company’s medical equipment was not recoverable as at
December 31, 2007. Accordingly, during the year ended December 31, 2007, the
Company recorded a reduction to the carrying value of certain of its medical
equipment of $431,683 which reflects a write-down of the value of this medical
equipment to nil as at December 31, 2007 and March 31, 2008. The assets written
down were being used in the clinical trials of the RHEO™ System.
6
.
PATENTS AND
TRADEMARKS
|
|
March
31, 2008
|
|
|
December
31, 2007
|
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
|
270,727
|
|
|
|
117,387
|
|
|
|
236,854
|
|
|
|
113,013
|
|
Trademarks
|
|
|
120,211
|
|
|
|
105,055
|
|
|
|
120,211
|
|
|
|
104,615
|
|
|
|
|
390,938
|
|
|
|
222,442
|
|
|
|
357,065
|
|
|
|
217,628
|
|
Less
accumulated amortization
|
|
|
222,442
|
|
|
|
|
|
|
|
217,628
|
|
|
|
|
|
|
|
|
168,496
|
|
|
|
|
|
|
|
139,437
|
|
|
|
|
|
A
mortization expense was $4,815 and $520
during the three months ended March 31, 2008 and 2007
, respectively.
Patents and trademarks are
record
ed at historical cost
and amortized over a period not exceeding 15 years.
Based on the November 1, 2007
announcement and in accordance with SFAS No. 144, the Company determined that
the carrying value of certain of the Company’s patents and trademarks was not
recoverable as
at
December 31, 2007.
Accordingly, during the year ended December 31, 2007, the Company recorded a
$190,873 reduction to the carrying value of its patents and trademarks related
to the RHEO™ System which reflects a write-down of these patents and trademarks
to a value of nil as
at
March 31, 2008 and
December 31, 2007.
Inventory primarily consists Tear Lab
Samples and Laboratory cards which are consumed during the company’s ongoing
clinical tests.
The Company evaluates its ending
inventor
y
for estimated excess quantities and
obsolescence, based on expected future sales levels and projections of future
demand, with the excess inventory provided for. In addition, the Company
assesses the impact of changing technology and market
conditions.
In light of both the Company’s financial
position as at September 30, 2007 and the Company’s financial position, on
November 1, 2007, the Company announced an indefinite suspension of the RHEO™
System clinical development program for
Dry
AMD. That decision was made
following a comprehensive review of the respective costs and development
timelines associated with the products in the Company’s portfolio and, in
particular, the fact that, if the Company is unable to raise additional capital,
it will not have sufficient cash to support its operations beyond early
2008.
Accordingly,
the Company has written down the value of its treatment sets and OctoNova pumps,
the components of the
RHEO™
System
, to nil
as at December 31, 2007 since the Company is not expected to be able to sell or
utilize these treatment sets and OctoNova pumps prior to their expiration dates,
in the case of the treatment sets, or before the technologies become outdated.
As at
March 31, 2008 and December 31,
2007
the Company had
inventory reserves of
$7,295,545 and $7,295,545, respectively. During the three months ended March 31,
2008 and 2007
, the Company
recognized a provision re
lated to inventory of nil
and
nil
, respectively, based on the above
analysis.
8. INVESTMENTS
As at
March 31, 2008 and December 31, 2007, the Company had investments in the
aggregate principal amount of $1,900,000 which consist of investments in four
separate asset-backed auction rate securities currently yielding an average
return of 3.94% per annum. Contractual maturities for these auction rate
securities are greater than eight years with an interest reset date
approximately every 46 days. Historically, the carrying value of auction rate
securities approximated fair value due to the frequent resetting of the interest
rates. With the liquidity issues experienced in the global credit and capital
markets, the Company’s auction rate securities have experienced multiple failed
auctions. While the Company continues to earn and receive interest on these
investments at the maximum contractual rate, the estimated fair value of these
auction rate securities no longer approximates par value. Refer to Note 8 for
discussion on how the Company determines the fair value of its investment in
auction rate securities.
Although
the Company continues to receive payment of interest earned on these securities,
the Company does not know at the present time when it will be able to convert
these investments into cash. Accordingly, management has classified
these investments as a non-current asset on its consolidated balance sheet as at
December 31, 2007 and March 31, 2008. Management will continue to closely
monitor these investments for future indications of further impairment. The
illiquidity of these investments may have an adverse impact on the length of
time during which the Company currently expects to be able to sustain its
operations in the absence of an additional capital raise by the Company
as we
do not have the cash
reserves to hold these auction rate securities until the market recovers nor can
we hold these securities until their contractual maturity dates.
The
Company concluded that the fair value of these auction rate securities at March
31, 2008 was $536,264, a decline of $1,363,736 from par value and $327,486 from
the fair value as at December 31, 2007. The Company considers this to be an
other-than-temporary reduction in the value. Accordingly, the loss associated
with these auction rate securities of $327,486 for three months ended March 31,
2008 has been included as an impairment of investments in the Company’s
consolidated statement of operations for the three months ended March 31,
2008.
9. FAIR
VALUE MEASUREMENTS
As
described in Note 1, the Company adopted SFAS No. 157 on January 1, 2008. SFAS
No. 157, among other things, defines fair value, establishes a consistent
framework for measuring fair value and expands disclosure for each major asset
and liability category measured at fair value on either a recurring or
nonrecurring basis. SFAS No. 157 clarifies that fair value is an exit price,
representing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. As
such, fair value is a market-based measurement that should be determined based
on assumptions that market participants would use in pricing an asset or
liability. As a basis for considering such assumptions, SFAS No. 157 establishes
a three-tier fair value hierarchy, which prioritizes the inputs used in
measuring fair value as follows:
Level
1.
|
Observable
inputs such as quoted prices in active
markets;
|
Level
2.
|
Inputs,
other than the quoted prices in active markets, that are observable either
directly or indirectly; and
|
Level
3.
|
Unobservable
inputs in which there is little or no market data, which require the
reporting entity to develop its own
assumptions.
|
Assets
measured at fair value on a recurring basis are as follows:
|
|
|
|
|
Quoted
Prices in
|
|
Significant
Other
|
|
Significant
|
|
|
|
|
|
Fair
Value
|
|
|
Active
Markets for
|
|
Observable
|
|
Unobservable
|
|
|
|
|
|
March
31,
|
|
|
Identical
Assets
|
|
Inputs
|
|
Inputs
|
|
Valuation
|
|
|
|
2008
|
|
|
(Level
1)
|
|
(Level
2)
|
|
(Level
3)
|
|
Technique
|
|
Investments
in marketable securities (noncurrent)
|
|
$
|
536,264
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
536,264
|
|
|
|
(1
|
)
|
(1)
|
The
Company estimated the fair value of these auction rate securities based on
the following: (i) the underlying structure of each security; (ii) the
present value of future principal and interest payments discounted at
rates considered to reflect current market conditions; (iii) consideration
of the probabilities of default, auction failure, or repurchase at par for
each period; and (iv) estimates of the recovery rates in the event of
default for each security. These estimated fair values could change
significantly based on future market conditions. Refer to Note 7 for
further discussion of the Company’s investments in auction rate
securities.
|
Assets
measured at fair value on a recurring basis using significant unobservable
inputs (Level 3):
|
|
|
|
|
Investments
in
|
|
|
Marketable
|
|
|
Securities
|
|
|
(Non-current)
|
|
Balance
as at December 31, 2007
|
|
$
|
863,750
|
|
|
|
|
|
|
Losses
deemed to be other than temporary charged to other non-operating expense,
net
|
|
|
327,486
|
|
|
|
|
|
|
Balance
as at March 31, 2008
|
|
$
|
536,264
|
|
10
. S
HORT
TERM LIABILITIES AND ACCRUED
INTEREST
On
February 19, 2008, we announced that the Company secured a bridge loan in an
aggregate principal amount of $3,000,000 from a number of private
parties. Transaction costs, funded separately, were $180,000. The
loan bears interest at a rate of 12% per annum and has a 180-day term, which may
be extended to 270 days under certain circumstances. The repayment of the loan
is secured by a pledge by the Company of its shares of the capital stock of
OcuSense. Under the terms of the loan agreement, the Company has two pre-payment
options available to it, should it decide to not wait until the maturity date to
repay the loan. Under the first pre-payment option, the Company may repay the
loan in full by paying the lenders, in cash, the amount of outstanding principal
and accrued interest and issuing to the lenders five-year warrants in an
aggregate amount equal to approximately 19.9% of the issued and outstanding
shares of the Company’s common stock (but not to exceed 20% of the issued and
outstanding shares of the Company’s common stock). The warrants would be
exercisable into shares of the Company’s common stock at an exercise price of
$0.10 per share and would not become exercisable until the 180
th
day
following their issuance. Under the second pre-payment option, provided that the
Company has closed a private placement of shares of its common stock for
aggregate gross proceeds of at least $4,000,000, the Company may repay the loan
in full by issuing to the lenders, shares of its common stock, in an aggregate
amount equal to the amount of outstanding principal and accrued interest, at a
15% discount to the price paid by the private placement investors. Any exercise
by the Company of the second pre-payment option would be subject to stockholder
and regulatory approval.
Of the
$3,040,438 outstanding as at March 31, 2008, the principal portion of the loan
was $3,000,000 and the accrued interest was $40,438.
11.
MINORITY INTEREST
As
previously discussed in Note 2 OcuSense was determined to be a VIE and OccuLogix
was the primary beneficiary.
On
acquisition of OcuSense, FIN 46(R) requires that the non-controlling interest be
measured initially at fair value.
Minority
interest reflects the initial fair value of the minority’s 42.38% interest in
OcuSense’s net assets which are comprised of working capital and
intangible assets as at the November 30, 2006 acquisition date, less the
minority’s proportionate interest in losses incurred to date, plus the fair
value of all vested options and warrants issued to parties other than OccuLogix
as of the date of acquisition, as well as the value of options and warrants
vested and issued after the acquisition date..
In
addition, the Company has accounted for the milestone payments, made subsequent
to the acquisition date, as follows:
|
·
|
The
Company determined the fair value of the milestone payments on the date of
acquisition by incorporating the probability that the milestone payments
will be made, as well as the time value associated with the planned
settlement date of the payments.
|
|
·
|
Upon payment of the milestone
payments, the Company recorded the minority interest portion of the change
in fair value of the milestone payment (i.e., the minority interest
portion of the ultimate value of the milestone payment less the initial
fair value determination) as an expense, with a corresponding increase to
minority interest, to reflect the additional value provided to the
minority interest in excess of that contemplated on the acquisition
date.
|
|
|
Three
months ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
$
|
|
|
$
|
|
Minority
interest – beginning of the period
|
|
|
4,953,960
|
|
|
|
6,110,834
|
|
Minority
share of loss from operations in the period
|
|
|
(537,250
|
)
|
|
|
(471,185
|
)
|
Fair
value of stock based compensation
|
|
|
45,751
|
|
|
|
46,686
|
|
Increment
on completion milestone payments
|
|
|
203,819
|
|
|
|
|
|
Minority
share of amortization of intangible assets
|
|
|
(81,968
|
)
|
|
|
(81,968
|
)
|
Minority
share of tax losses benefitted
|
|
|
207,864
|
|
|
|
188,474
|
|
Minority
interest – end of period
|
|
|
4,792,176
|
|
|
|
5,792,841
|
|
On February 1, 2007, the Company entered
into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with
certain institutional investors, pursuant to which the Company agreed to issue
to those investors an aggregate of 6,677,333 shares of the Company’s common
stock (the “Shares”) and five-year warrants exercisable into an aggregate of
2,670,933 shares of the Company’s common stock (the “Warrants”). The
per share purchase price of the
units
was
$1.50, and the per share exercise price
of the Warrants is $2.20, subject to adjustment. The Warrants will
become exercisable on August 6, 2007. Pursuant to the Securities Purchase
Agreement, on February 6, 2007, the Company issued the Shares and the Warrants.
The gross proceeds of the
sale of the Shares and Warrants totaled $10,016,000 (less transaction costs of
$871,215).
On February 6,
2007, the Company also issued to Cowen and Company, LLC a warrant exercisable
into an aggregate of 93,483 shares of the Company’s common stock (the “Cowen
Warrant”) in part payment of the placement fee payable to Cowen and Company, LLC
for the services it had rendered as the placement agent in connection with the
sale of the Shares and the Warrants. All of the terms and conditions of the
Cowen Warrant (other than the number of shares of the Company's common stock
into which the Cowen Warrant is exercisable) are identical to those of the
Warrants.
The estimated
grant date fair value of the Cowen Warrant of $97,222 is included in the
transaction cost of $871,215.
(b)
|
Stock-based
compensation
|
The Company has a stock option plan, the
2002 Stock Option Plan (the “Stock Option Plan”), which was most recently
amended in June 2007 in order to, among other things, increase the share reserve
under the Stock Option Plan by 2,000,000. Under the Stock Option Plan, up to
6,456,000 options are available for grant to employees, directors and
consultants. Options granted under the Stock Option Plan may be either incentive
stock options or non-statutory stock options. Under the terms of the Stock
Option Plan, the exercise price per share for an incentive stock option shall
not be less than the fair market value of a share of stock on the effective date
of grant and the exercise price per share for non-statutory stock options shall
not be less than 85% of the fair market value of a share of stock on the date of
grant. No option granted to a holder of more than 10% of the Company’s common
stock shall have an exercise price per share less than 110% of the fair market
value of a share of stock on the effective date of grant.
Options granted may be time-based or
performance-based options. The vesting of performance-based options
is contingent upon meeting company-wide goals, including obtaining FDA approval
of the RHEO™ System and the achievement of a minimum amount of sales over a
specified period. Generally, options expire 10 years after the date of grant. No
incentive stock options granted to a 10% owner optionee shall be exercisable
after the expiration of five years after the effective date of grant of such
option, no option granted to a prospective employee, prospective consultant or
prospective director may become exercisable prior to the date on which such
person commences service, and with the exception of an option granted to an
officer, director or consultant, no option shall become exercisable at a rate
less than 20% per annum over a period of five years from the effective date of
grant of such option unless otherwise approved by the board of directors of the
Company (the “Board of Directors”).
The Company has also issued options
outside of the Stock Option Plan. These options were issued before the
establishment of the Stock Option Plan, when the authorized limit of the Stock
Option Plan was exceeded or as permitted under stock exchange rules when the
Company was recruiting executives. In addition, options issued to companies for
the purpose of settling amounts owing were issued outside of the Stock Option
Plan, as the Stock Option Plan prohibited the granting of options to companies.
The issuance of such options was approved by the Board of Directors and granted
on terms and conditions similar to those options issued under the Stock Option
Plan.
On January 1, 2006, the Company adopted
the provisions of SFAS No. 123R, “Share-Based Payments”, requiring the
recognition of expense related to the fair value of its stock-based compensation
awards. The Company elected to use the modified prospective transition method as
permitted by SFAS No. 123R and therefore has not restated its financial results
for prior periods. Under this transition method, stock-based compensation
expense for each of the years ended December 31, 2007 and 2006 includes
compensation expense for all stock-based compensation awards granted prior to,
but not yet vested as of January 1, 2006 based on the grant date fair value
estimated in accordance with the original provisions of SFAS No. 123.
Stock-based compensation expense for all stock-based compensation awards granted
subsequent to January 1, 2006 was based on the grant date fair value estimated
in accordance with the provisions of SFAS No. 123R. The Company recognizes
compensation expense for stock option awards on a straight-line basis over the
requisite service period of the award.
The following table sets forth the total
stock-based compensation expense resulting from stock options included in the
Company’s consolidated statements of operations
:
|
|
Three
months ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
43,789
|
|
|
|
357,088
|
|
Clinical
and regulatory
|
|
|
26,036
|
|
|
|
94,088
|
|
Sales
and marketing
|
|
|
14,050
|
|
|
|
131,027
|
|
Total
expense from continuing operations
|
|
|
83,875
|
|
|
|
582,203
|
|
Expense
from discontinued operations
|
|
|
―
|
|
|
|
27,300
|
|
Stock-based
compensation expense before income taxes
|
|
|
83,875
|
|
|
|
609,503
|
|
The tax benefit associated with the
Company’s stock-based compensation expense for the three months ended March 31,
2008 and 2007 is
$
32,024
and $219
,421
respectively. This amount has not been
recognized in the Company’s consolidated financial statements for the three
months ended March 31, 2008 and 2007 as there is a low probability that the
Company will realize this benefit.
Net cash proceeds from the exercise of
common stock options were
nil and nil for the three months ended March 31, 2008 and 2007
, respectively. No income tax benefit
was realized from stock option exercises during t
he three months ended March 31, 2008 and
2007
. In accordance with
SFAS No. 123R, the Company presents excess tax benefits from the exercise of
stock options, if any, as financing cash flows rather than operating cash
flows.
During the three months ended March 31,
2008 there were no new stock options granted.
The weighted average fair value of stock
options granted during the
three months ended March 31 2007 was $1.22
. The estimated fair value was
determined using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
|
Three
months ended March 31
|
|
2008
|
2007
|
Volatility
|
n.a.
|
0.765
|
Expected life of
options
|
n.a.
|
5.85
years
|
Risk-free interest
rate
|
n.a.
|
4.87%
|
Dividend
yield
|
n.a.
|
0%
|
A summary of the opti
ons transaction during the three months
ended March 31, 2008 is
set
forth below:
|
|
Number of Options
Outstanding
|
|
|
Weighted Average Exercise
Price
$
|
|
|
Weighted Average Remaining
Contractual Life (years)
|
|
|
Aggregate Intrinsic
Value
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31,
2007
|
|
|
4,787,387
|
|
|
|
1.64
|
|
|
|
7.41
|
|
|
|
—
|
|
Granted
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
531
,
906
|
|
|
|
1.60
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31,
2008
|
|
|
4,255,481
|
|
|
|
1.64
|
|
|
|
6.48
|
|
|
|
—
|
|
Vested or expected to vest March
31, 2008
|
|
|
3,
116
,
214
|
|
|
|
1.58
|
|
|
|
6.23
|
|
|
|
—
|
|
Exercisable, March 31,
2008
|
|
|
3,033,304
|
|
|
|
1.62
|
|
|
|
6.17
|
|
|
|
—
|
|
The aggregate intrinsic value in the
table above represents the total pre-tax intrinsic value (i.e., the difference
between the Company’s closing stock price on the
last trading day of March 31, 2008 of
$0.06
and the exercise
price, multiplied by the number of shares that would have been received by the
option holders if the options had bee
n exercised on March 31,
2008
). This amount is
n
il for all the
periods
presented as the
exercise price of all op
tions outstanding as at March 31,
2008
and
December 31, 2007 is higher than
$0.06
, the Company’s
closing stock price on the
last trading day prior to March 31, 2008
.
As at March 31, 2008, $
2,447,350
of total unrecognized compensation cost
related to stock options is expected to be recognized over a weighted-average
period of
1.63
years.
On February 6, 2007, pursuant to the
Securities Purchase Agreement between the Company and certain institutional
investors, the Company issued the Warrants to these investors. The
Warrants
are five-year warrants exercisable into
an aggregate of 2,670,933 shares of the Company’s common stock. On February 6,
2007, the Company also issued the Cowen Warrant to Cowen and Company, LLC in
part payment of the placement fee payable to Cowen and Company, LLC for the
services it had rendered as the placement agent in connection with the private
placement of the Shares and the
Warrants
pursuant to the Securities Purchase
Agreement. The Cowen Warrant is a five-year warrant exercisable into an
aggregate of 93,483 shares of the Company’s common stock. The per share exercise
price of the
Warrants
is $2.20, subject to adjustment, and
the
Warrants
became exercisable on August 6, 2007.
All of the terms and conditions of the Cowen Warrant (other than the number of
shares of the Company's common stock into which it is exercisable) are identical
to those of the
Warrants
.
The Company accounts for the
Warrants
and the Cowen Warrant in accordance
with the provisions of SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities” (“SFAS No. 133”), along with related interpretation EITF No.
00-19, “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock” (“EITF No. 00-19”). SFAS No. 133
requires every derivative instrument within its scope (including certain
derivative instruments embedded in other contracts) to be recorded on the
balance sheet as either an asset or liability measured at its fair value, with
changes in the derivative’s fair value recognized currently in earnings unless
specific hedge accounting criteria are met. Based on the provisions of EITF No.
00-19, the Company determined that the Warrants and the Cowen Warrant do not
meet the criteria for classification as equity. Accordingly, the Company has
classified the
Warrants
and the Cowen Warrant as a current
liability at December 31, 2007
and March 31, 2008
.
The estimated fair value of the Warrants
and the Cowen Warrant was determined using the Black-Scholes option-pricing
model with the following weighted-average assumptions:
Volatility
|
|
50.6
%
|
Expected life of
Warrants
|
|
3.83
years
|
Risk-free interest
rate
|
|
2.46
%
|
Dividend
yield
|
|
0%
|
The Company initially allocated the
total proceeds received, pursuant to the Securities Purchase Agreement, to the
Shares and the
Warrants
based on their
relative fair values. This resulted in an allocation of $2,052,578 to obligation
under warrants which includes the fair value of the Cowen Warrant of $97,222.
In addition, SFAS No. 133 requires the
Company to record the outstanding
warrants
at fair value at the end of each
reporting period, resulting in an adjustment to the recorded liability of the
derivative, with any gain or loss recorded in earnings of the applicable
reporting period. The Company therefore
,
estimated the fair value of
the
Warrants
and the Cowen Warrant as at
December 31, 2007 and determined the aggregate fair value to be a nominal
amount, a decrease of approximately $2,052,578 over the initial measurement of
the aggregate fair value of the
w
arrants and the Cowen Warrant on the
date of issuance. Accordingly, the Company recognized a gain of $2,052,578 in
its consolidated statement of operations for the year ended December 31, 2007
which reflects the decrease in the Company’s obligation to its warrant holders
to its nominal amount at December 31, 2007.
The company revalued the Warrants and
the Cowan Warrants as at March 31, 2008
and determined the aggregate fair value
to be a nominal amount
.
Transaction costs associated with the
issuance of the Warrants recorded as a warrant expense in the Company’s
consolidated statement of operations for the three months ended March 31, 2008
and 2007 were nil and $170,081
,
respect
ively
.
A summary of the Warrants issued
du
ring the three months
ended March 31, 2008
and
the total number of warrants outstanding as of that date are set forth
below:
|
|
Number
of Warrants
Outstanding
|
|
|
Weighted Average Exercise
Price
|
|
|
|
|
|
|
|
|
Outstanding, December 31,
2007
|
|
|
2,764,416
|
|
|
$
|
2.20
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Outstanding balance, March 31,
2008
|
|
|
2,764,416
|
|
|
$
|
2.20
|
|
Loss per share, basic and diluted, is
computed using the treasury method. Potentially dilutive shares have not been
used in the calculation of loss per share as their inclusion would be
anti-dilutive.
14. RELATED
PARTY TRANSACTIONS
The following are the Company’s related
party
transactions
:
TLC Vision and
Diamed
On June 25, 2003, the Company entered
into agreements with TLC Vision
Corporation (“TLC Vision”)
and Diamed to issue grid debentures in
the maximum aggregate principal amount of $12,000,000 in connection with the
funding of the Company’s MIRA-1 and related clinical trials. $7,000,000 of the
aggregate principal amount was convertible into shares of the Company’s common
stock at a price of $0.98502 per share, and $5,000,000 of the aggregate
principal amount was non-convertible.
The $5,000,000 portion of the
$12,000,000 commitment which was not convertible into the Company’s common stock
was not advanced and the commitment was terminated prior to the completion of
the Company’s initial public offering of shares of its common stock. During the
years ended December 31, 2004 and 2003, the Company issued grid debentures in an
aggregate principal amount of $4,350,000 and $2,650,000 to TLC Vision and
Diamed, respectively, under the convertible portion of the grid debentures. On
December 8, 2004, as part of the corporate reorganization relating to the
Company’s initial public offering, the Company issued 7,106,454 shares of its
common stock to TLC Vision and Diamed, upon conversion of $7,000,000 of
aggregate principal amount of convertible debentures at a conversion price of
$0.98502 per share. Collectively, at March 31, 2008, the two companies have a
combined 35.6% equity interest in the Company on a fully diluted
basis.
Asahi Medical
The Company entered into a
distributorship agreement (the “Distribution Agreement”), effective October 20,
2006, with Asahi Medical. The Distribution Agreement replaced the 2001
distributorship agreement between Asahi Medical and the Company, as supplemented
and amended by the 2003, 2004 and 2005 Memoranda. Pursuant to the Distribution
Agreement, the Company had distributorship rights to Asahi Medical's Plasmaflo
filter and Asahi Medical's second generation polysulfone Rheofilter filter on an
exclusive basis in the United States, Mexico and certain Caribbean countries
(collectively, “Territory 1-a”), on an exclusive basis in Canada, on an
exclusive basis in Colombia, Venezuela, New Zealand
and
Australia (collectively, “Territory 2”)
and on a non-exclusive basis in Italy.
On January 28, 2008, the Company
disclosed that it was engaged in discussions with Asahi Medical to terminate the
Distribution Agreement. The Company and Asahi Medical have terminated
substantially all of their obligations under the Distribution Agreements of
February 25, 2008 (the “Termination Agreement”). Pursuant to the
Termination Agreement, the Company and Asahi Medical have agreed to a mutual
release of claims relating to the Distribution Agreement, other than any claims
relating to certain provisions of the Distribution Agreement which survived its
termination.
The Company received free inventory from
Asahi Medical for purposes of the RHEO-AMD trial, the LEARN, or Long-term
Efficacy in AMD from Rheopheresis in North America, trials and related clinical
studies. The Company has accounted for this inventory at a value equivalent to
the cost the Company has paid for the same filters purchased from Asahi Medical
for purposes of commercial sales to the Company’s customers. The value of the
free inventory received from Asahi Medical was nil and
$ 39,240
for the three months ended March 31,
2008 and 2007, respectively.
Mr. Hans Stock
On February 21, 2002, the Company
entered into an agreement with Mr. Stock as a result of his assistance in
procuring a distributorship agreement for the filter products used in the RHEO™
System from Asahi Medical. Mr. Stock agreed to further assist the Company in
procuring new product lines from Asahi Medical for marketing and distribution by
the Company. The agreement will remain effective for a term consistent with the
term of the distributorship agreement with Asahi Medical, and Mr. Stock will
receive a 5% royalty payment on the purchase of the filters from Asahi Medical.
The Company has not paid any amount to Mr. Stock as royalty fees. Included in
due to stockholders at March 31, 2008 and December 31, 2007 is $48,022 and
$48,022, respectively, due to Mr. Stock
for filter products
.
On June 25, 2002, the Company entered
into a consulting agreement with Mr. Stock for the purpose of procuring a patent
license for the extracorporeal applications in ophthalmic diseases for that
period of time in which the patent was effective. Mr. Stock was entitled to 1.0%
of total net revenue from the Company’s commercial sales of products sold in
reliance and dependence upon the validity of the patent’s claims and rights in
the United States. The Company agreed to make advance consulting payments to Mr.
Stock of $50,000 annually, payable on a quarterly basis, to be credited against
any and all future consulting payments payable in accordance with this
agreement. Due to the uncertainty of future royalty payment requirements, all
required payments to date have been expensed.
On August 6, 2004, the Company entered
into a patent license and royalty agreement with Mr.
Stock to obtain an exclusive license to
U.S. Patent No. 6,245,038. The Company is required to make royalty payments
totaling 1.5% of product sales to Mr. Stock, subject to minimum advance royalty
payments of $12,500 per quarter. The advance payments are credited against
future royalty payments to be made in accordance with the agreement. This
agreement replaces the June 25, 2002 consulting agreement with Mr. Stock which
provided for a royalty payment of 1% of product sales. Included in due to
stockholders at March 31, 2008 and December 31, 2007 is $25,000 and $12,500,
respectively, due to Mr. Stock
for royalties
.
Other
On June 25, 2003, the Company entered
into a reimbursement agreement with Apheresis Technologies, Inc. (“ATI”)
pursuant to which employees of ATI, including Mr. John Cornish, one of the
Company’s stockholders and its former Vice President, Operations, provided
services to the Company and ATI is reimbursed for the applicable percentage of
time the employees spend working for the Company. Effective April 1, 2005, the
Company terminated its reimbursement agreement with ATI, as a result of which
termination the Company no longer compensated ATI in respect of any salary paid
to, or benefits provided to, Mr. Cornish by ATI. Until April 1, 2005, Mr.
Cornish did not have an employment contract with the Company and received no
direct compensation from the Company. On
April
1, 2005, Mr. Cornish entered into an
employment agreement with the Company under which he received an annual base
salary of $106,450, representing compensation to him for devoting 80% of his
time to the business and affairs of the Company. Effective June 1, 2005, the
Company amended its employment agreement with Mr. Cornish such that he began to
receive an annual base salary of $116,723, representing compensation to him for
devoting 85% of his time to the business and affairs of the Company. Effective
April 13, 2006, the Company further amended its employment agreement with Mr.
Cornish such that his annual base salary was decreased to $68,660 in
consideration of his devoting 50% of his time to the business and affairs of the
Company. In light of the Company's current financial situation, and in
connection with the indefinite suspension of its RHEO™ System clinical
development program and the sale of
SOLX
, the Company terminated the employment
of Mr. Cornish effective January 4, 2008.
During the year three months ended March
31, 2008 and
2007, ATI made
available to the Company, upon request, the services of certain of ATI’s
employees and consultants on a
per diem basis. During the
three months ended March 31, 2008
, the Company paid ATI
$21,666 under this arrangement (2007 –
$18,107
). I
ncluded in accounts payable and in
accrued liabilities as at March 31
,
2008 and December 31, 2007 are $1,773
and $20,004
, respectively,
due to ATI.
In March 2008 the Company sold
substantially all of its fixed assets located in Florida to ATI for their book
value of $8,000.
I
ncluded in amounts receivable at March
31
,
2008 is $8,000, due from
ATI.
Effective January 1, 2004, the Company
entered into a rental agreement with Cornish Properties Corporation, a company
owned and managed by Mr. Cornish, pursuant to which the Company leases space
from Cornish Properties Corporation at $2,745 per month. The original term of
the lease extended to December 31, 2005. On November 8, 2005, as provided for in
the rental agreement, the Company extended the term of the rental agreement with
Cornish Properties Corporation for another year, ending December 31, 2006. On
December 19, 2006, the Company extended the term of the rental agreement with
Cornish Properties Corporation for another year, ending December 31, 2007, at a
lease payment of $2,168 per mont
h.
During the three months ended March 31,
2008 and 2007, the Company paid Cornish Properties Corporation an amount of nil
and $6,504, respectively, as rent.
On November 30, 2006, the Company
announced that Mr. Elias Vamvakas, the Chairman, Chief Executive Officer and
Secretary of the Company, had agreed to provide the Company with a standby
commitment to purchase convertible debentures of the Company (“Convertible
Debentures”) in an aggregate maximum amount of $8,000,000 (the “Total Commitment
Amount”). Pursuant to the Summary of Terms and Conditions, executed
and delivered as of November 30, 2006 by the Company and Mr. Vamvakas, during
the 12-month commitment term commencing on November 30, 2006, upon no less than
45 days’ written notice by the Company to Mr. Vamvakas, Mr. Vamvakas was
obligated to purchase Convertible Debentures in the aggregate principal amount
specified in such written notice. A commitment fee of 200 basis points was
payable by the Company on the undrawn portion of the Total Commitment Amount.
Any Convertible Debentures purchased by Mr. Vamvakas would have carried an
interest rate of 10% per annum and would have been convertible, at Mr. Vamvakas’
option, into shares of the Company’s common stock at a conversion price of $2.70
per share. The Summary of Terms and Conditions further provided that if the
Company closes a financing with a third party, whether by way of debt, equity or
otherwise and there are no Convertible Debentures outstanding, then the Total
Commitment Amount was to be reduced automatically upon the closing of the
financing by the lesser of: (i) the Total Commitment Amount; and (ii) the net
proceeds of the financing. On February 6, 2007, the Company raised gross
proceeds in the amount of $10,016,000 in a private placement of shares of its
common stock and warrants. The Total Commitment Amount was therefore reduced to
zero, thus effectively terminating Mr. Vamvakas’ standby commitment. No portion
of the standby commitment was ever drawn down by the Company, and the Company
paid Mr. Vamvakas a total of $29,808 in commitment fees in February
2007.
Marchant
Securities Inc. (“Marchant”), a firm indirectly beneficially owned as to
approximately 32% by Mr. Vamvakas and members of his family, introduced the
Company to the lenders of the $3,000,000 aggregate principal amount bridge loan
that the Company secured and announced on February 19, 2008. For such service,
Marchant will was paid a commission of $180,000, being 6% of the aggregate
principal amount of the loan.
The
Company also has retained Marchant in connection with the proposed private
placement of up to $6,500,000 of OccuLogix’s common stock, announced by the
Company on April 22, 2008, for which Marchant will be paid a commission of 6% of
the gross aggregate proceeds of such private placement. Subject to
obtaining any and all requisite stockholder and regulatory approvals, 50% of the
commission, plus $90,000 of the commission, will be paid to Marchant in the form
of equity securities of the Company.
The Company entered into a consultancy
and non-competition agreement on July 1, 2003 with the Center for Clinical
Research (“CCR”), then a significant shareholder of the Company, which requires
the Company to pay a fee of $5,000 per month. For the year ended December 31,
2003, CCR agreed to forego the payment of $75,250 due to it in exchange for
options to purchase 20,926 shares of the Company’s common stock at an exercise
price of $0.13 per share. In addition, CCR agreed to the repayment of the
balance of $150,500 due to it at a rate of $7,500 per month beginning in July
2003. On August 22, 2005, the Company amended the consultancy and
non-competition agreement with CCR such that the fee payable to it was increased
from $5,000 to $15,000 per month effective January 1, 2005. The monthly fee is
fixed regardless of actual time incurred by CCR in performance of the services
rendered to the Company. The agreement allows either party to convert the
payment arrangement to a fee of $2,500 daily. In the event of such conversion,
CCR shall provide services on a daily basis as required by the Company and will
invoice the Company for the total number of days that services were provided in
that month. The amended consultancy and non-competition agreement provides for
the payment of a one-time bonus of $200,000 upon receipt by the Company of FDA
approval of the RHEO™ System and the grant of 60,000 options to CCR at an
exercise price of $7.15 per share. The stockholders of the Company approved the
adjustment of the exercise price of these options to $2.05 per share on June 23,
2006. These options were scheduled to vest as to 100% when and if the Company
receives FDA approval of the RHEO™ System on or before November 30, 2006, as to
80% when and if the Company receives FDA approval after November 30, 2006 but on
or before January 31, 2007 and as to 60% when and if the Company receives FDA
approval after January 31, 2007. In August 2006, by letter agreement between the
Company and CCR, it was agreed that the monthly fee of $15,000 would be
suspended at the end of August 2006 until CCR’s services are required by the
Company in the future. This resulted in a consulting expense, included within
clinical and
regulatory
expense for the three months ended March 31, 2008 and 2007, of nil and
$11,594
,
respectively
.
In March 2007, Veris negotiated new
payment terms with the Company, and it was agreed that payment for treatment
sets shipped subsequent to March 2007 must be received within 180 days of
shipment.
From April 2007
to
December 31, 2007, the
Company sold a total of 816 treatment sets to Veris, for a total amount of
$172,992, plus applicable taxes. The sale of these treatment sets was not
recognized as revenue during the year ended December 31, 2007 based on Veris’
payment history with the Company and the new 180-day payment terms agreed by
Veris and the Company. In October 2007, the Company met with the management of
Veris and, based on discussions with Veris, the Company believes that Veris will
not be able to meet its financial obligations to the Company. Therefore, during
the year ended December 31, 2007, the Company recorded an allowance for doubtful
accounts of $172,992 against the total amount due from Veris for the purchase of
these treatment sets.
As at March 31, 2008 and December 31,
2007 the allowance for doubtful accounts was
$172,992
.
During the fourth quarter of 2004, the
Company began a business relationship with Innovasium Inc. Innovasium Inc.
designed and built some of the Company’s websites and also created some of the
sales and marketing materials to reflect the look of the Company’s websites.
Daniel Hageman, who is the President and one of the owners of Innovasium Inc.,
is the spouse of a former officer
of the Company. During the three months
ended March 31, 2008 and 2007
, the Compa
ny paid Innovasium Inc. C$2,909 and
C$13,737
, respectively.
Included in accounts payable and accrued liabilities at
March 31, 2008 and
December 31, 2007 is nil and nil,
respectively, due to Innovasium Inc. These amounts are expensed in the period
incurred and paid when due.
On January 25, 2007, the Company entered
into a consulting agreement with Mr. Dr. Micheal Lemp for the purpose of
procuring consulting services as the Ocusense’s Chief Medical Of
ficer. Dr. Lemp is entitled to
$100,000 per annum
to be
paid at the end of each month and a
$98.89 monthly expense reimbursement stipend. Dr. Lemp will be
available to Ocusense on an average of 20 hours a week or 1,000 hours per year.
Dr. Lemp also serves as a member of the Board of Directors of OcuSense
Inc.
On January 1, 2007
,
the Company adopted the provisions of
FASB Interpretation No. 48,
“
Accounting for Uncertainty in Income
Taxes – An Interpretation of FASB Statement No. 109
”
(“FIN No. 48”). FIN No. 48
addresses the determination of whether
tax benefits claimed or expected to be claimed on a tax return should be
recorded in the financial statements. Under FIN
No.
48, the Company may recognize the tax
benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position should be measured
based on the largest benefit that has a greater than fifty percent likelihood of
being realized upon ultimate settlement. FIN
No.
48 also provides guidance on
derecognition, classification, interest and penalties on income
taxes
and
accounting in interim periods and
requires increased disclosure.
As a result of the implementation of the
provisions of FIN No. 48, the Company recognized a reduction to the January 1,
2007 deferred tax liability balance in the amount of $4.6 million with a
corresponding reduction to accumulated deficit.
As of January 1, 2007, the Company had
unrecognized tax benefits
of
$24.8 million
which
,
if recognized
, would favorably affect the Company’s
effective tax rate.
When applicable
,
the Company recognizes
accrued
interest
and penalties
related to unrecognized tax benefits
as
other
expense in
its
c
onsolidated
s
tatements of
operations
, which is consistent with the
recognition of these items in prior reporting periods. As of January 1, 2007,
the Company d
id
not have any liability for the payment
of interest and penalties.
The Company does not expect a
significant change in the amount of its unrecognized tax benefits within the
next 12 months. Therefore, it is not expected that the change in the Company’s
unrecognized tax benefits will have a significant impact on the results of
operations or financial position of the Company.
However, a portion of the Company’s net
operating losses may be subject to annual limitations as a result of the
Company’s initial public offering and prior changes of control. Accordingly,
until a formal analysis of the effect of the changes of control is performed, a
portion of the income tax benefits recognized to date may be
affected.
All federal income tax returns for
the Company
and its
subsidiaries
remain open since their
respective
date
s
of incorporation due to
the existence of
net operating loss
es
. The Company
and
its subsidiaries have not
been
,
n
or are
they
currently
,
under examination by the Internal
Revenue Service
or the
Canada Revenue Agency
.
State
and provincial
income tax returns are generally subject
to examination for a period of
between three and five
years after
their
filing.
However, due to the existence of
net operating losses, all
state income
tax
returns of the Company and its
subsidiaries
since
their respective dates of
incorporation
are subject to re-assessment
. The state impact of any
federal changes remains subject to examination by various states for a period of
up to one year after formal notification to the states.
The Company
and its subsidiaries have not
been
,
n
or are
they
currently
,
under examination by any state tax
authority.
|
|
March
31, 2008
$
|
|
|
December
31, 2007
$
|
|
Due
(from)/to
|
|
|
|
|
|
|
TLC
Vision Corporation
|
|
|
1,000
|
|
|
|
(2,708
|
)
|
Other
stockholders
|
|
|
73,053
|
|
|
|
35,522
|
|
|
|
|
74,053
|
|
|
|
32,814
|
|
T
he balance due from
TLC Vision is related to computer and
administrative support provided by TLC Visi
on
. All amounts hav
e been expensed during the three months
ended March 31, 2008 and 2007
, respectively, and included in general
and administrative expenses. The balance due to other stockholders includes
outstanding royalty fees payable to Mr. Hans Stock.
.
17
.
(a)
PREPAID EXPENSES
|
|
March
31, 2008
$
|
|
|
December
31, 2007
$
|
|
|
|
|
|
|
|
|
Prepaid
insurance
|
|
|
297,668
|
|
|
|
427,063
|
|
Regulatory
filing fees
|
|
|
46,514
|
|
|
|
—
|
|
Other
fees and services
|
|
|
101,114
|
|
|
|
54,058
|
|
|
|
|
445,296
|
|
|
|
481,121
|
|
17. (b) PREPAID
FINANCE EXPENSE
|
|
March
31, 2008
$
|
|
|
December
31, 2007
$
|
|
|
|
|
|
|
|
|
Marchant
Securities Inc - Financing Fees
|
|
|
139,000
|
|
|
|
—
|
|
Financing
fees are being amortized over the 180 day term of the February 19, 2008 bridge
loan. The amount paid to Marchant Securities to introduce lenders of the
$3,000,000 aggregate principal amount of the bridge loan was
$180,000.
18. ACCRUED
LIABILITIES
|
|
March
31, 2008
$
|
|
|
December
31, 2007
$
|
|
|
|
|
|
|
|
|
Due
to professionals
|
|
|
570,442
|
|
|
|
475,044
|
|
Due
to clinical trial sites
|
|
|
151,150
|
|
|
|
136,681
|
|
Due
to clinical trial specialists
|
|
|
126,953
|
|
|
|
116,359
|
|
Product
development costs
|
|
|
331,090
|
|
|
|
277,521
|
|
Due
to employees and directors
|
|
|
32,054
|
|
|
|
66,804
|
|
Sales
tax and capital tax payable
|
|
|
35,664
|
|
|
|
26,820
|
|
Corporate
compliance
|
|
|
302,173
|
|
|
|
246,675
|
|
Obligation
to repay advances received
|
|
|
250,000
|
|
|
|
—
|
|
Severances
|
|
|
1,018,029
|
|
|
|
1,312,721
|
|
Litigation
settlement
|
|
|
40,000
|
|
|
|
—
|
|
Miscellaneous
|
|
|
75,841
|
|
|
|
214,826
|
|
|
|
|
2,933,396
|
|
|
|
2,873,451
|
|
19. CONSOLIDATED
STATEMENTS OF CASH FLOW
The net change in non-cash working
capital balances related to operations consists of the
following:
|
|
Three months ended
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
$
|
|
|
$
|
|
Amounts
receivable
|
|
|
212,721
|
|
|
|
(166,806
|
)
|
Inventory
|
|
|
(41,213
|
)
|
|
|
12,752
|
|
Prepaid
expenses
|
|
|
35,825
|
|
|
|
9,642
|
|
Deposits
|
|
|
(2,892
|
)
|
|
|
—
|
|
Other current
assets
|
|
|
—
|
|
|
|
(10,600
|
)
|
Accounts
payable
|
|
|
(828,795
|
)
|
|
|
43,364
|
|
Accrued
liabilities
|
|
|
59,94
5
|
|
|
|
252,626
|
|
Deferred
revenue
|
|
|
106,700
|
|
|
|
—
|
|
Due to
stockholders
|
|
|
41,23
8
|
|
|
|
(48,629
|
)
|
Short term
liabilities
|
|
|
40,438
|
|
|
|
—
|
|
|
|
|
(
376
,0
3
3
|
)
|
|
|
92,349
|
|
The following table lists those items
that have been excluded from the consolidated statements of cash flows as they
relate to non-cash transactions and additional cash flow
information:
|
|
Three months ended March
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
$
|
|
$
|
|
Non-cash financing
activities
|
|
|
|
|
|
|
Warrant issued in part payment of
placement fee
|
|
|
—
|
|
|
|
97,222
|
|
Free
inventory
|
|
|
—
|
|
|
|
39,240
|
|
|
|
|
|
|
|
|
|
|
Additional cash flow
information
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
|
—
|
|
|
|
11,180
|
|
20. SEGMENTED
INFORMATION
As a result of the acquisition of SOLX
and OcuSense during 2006
,
the Company had three reportable
segments: retina, glaucoma and point-of-care. The retina segment was in the
business of commercializing the RHEO™ System which was used to perform the
Rheopheresis™ procedure, a procedure that selectively removes molecules from
plasma, which is designed to treat Dry AMD. The Company began limited
commercialization of the RHEO™ System in Canada in 2003 and provided support to
its sole customer in Canada, Veris, in its commercial activities in Canada. The
Company obtained investigational device exemption clearance from the FDA to
commence RHEO-AMD, its clinical study of the RHEO™ System. On November 1, 2007,
the Company announced an indefinite suspension of the RHEO™ System clinical
development program for Dry AMD. That decision was made following a
comprehensive review of the respective costs and development timelines
associated with the products in the Company’s portfolio and, in particular, the
fact that, if the Company is unable to raise additional capital, it will not
have sufficient cash to support its operations beyond approximately the middle
of July 2008.
The glaucoma segment of the Company was
in the business of providing treatment for glaucoma with the use of the
components of the SOLX Glaucoma System which are used to provide physicians with
multiple options to manage intraocular pressure. The Company was seeking to
obtain 510(k) approval to market the components of the SOLX Glaucoma System in
the United States. The Company acquired the glaucoma segment in the acquisition
of SOLX on September 1, 2006; therefore, no amounts are shown for the segment in
periods prior to September 1, 2006. On December 19, 2007, the Company sold
all of the issued and outstanding shares of the capital stock of SOLX,
which had been the glaucoma segment of the Company prior to the completion of
this sale. All revenue and expenses related to the Company’s glaucoma segment,
prior to the December 19, 2007 closing date, has therefore been included in
discontinued operations
on its
consolidated statements of operations for the three months ended March 31, 2008
and 2007
.
The point-of-care segment is made up of
the TearLab™ business which is currently developing technologies that enable eye
care practitioners to test, at the point-of-care, for highly sensitive and
specific biomarkers in tears using nanol
iters of tear film
.
The Company acquired the Tearlab™
business in the acquisition of 50.1% of the capital stock of OcuSense, on a
fully diluted basis, 57.62% on an issued and outstanding basis, on November 30,
2006; therefore, no amounts are shown in periods prior to November 30, 2006.
During the year ended December 31, 2006, the TearLab™ business did not meet the
quantitative criteria to be disclosed separately as a reportable segment and was
included as other.
The accounting policies of the segments
are the same as those described in significant accounting policies.
Inter
-
segment sales and transfers are minimal
and are accounted for at current market prices, as if the sales or transfers
were to third parties.
The Company’s reportable units are
strategic business units that offer different products and services. They are
managed separately, because each business unit requires different technology and
marketing strategies. The Company’s business units are acquired or developed as
a unit,
OcuSe
nse
was retained at the time of
acquisition.
The Company’s business units are as
follows:
|
|
Retina
|
|
|
Gl
a
ucoma
|
|
|
Point-of-care
|
|
|
Total
|
|
Three months ended March 31,
2008
As restated – note
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
7,200
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,200
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods
sold
|
|
|
24,556
|
|
|
|
—
|
|
|
|
—
|
|
|
|
24,556
|
|
Operating
|
|
|
1,291,338
|
|
|
|
—
|
|
|
|
1,089,
414
|
|
|
|
2,380,
752
|
|
Depreciation and
amortization
|
|
|
9,778
|
|
|
|
—
|
|
|
|
335,
060
|
|
|
|
344,838
|
|
Loss from continuing
operations
|
|
|
(1,318,472
|
)
|
|
|
—
|
|
|
|
(1,424,474
|
)
|
|
|
(2,742,946
|
)
|
Interest
income
|
|
|
35,282
|
|
|
|
—
|
|
|
|
(4,994
|
)
|
|
|
30,288
|
|
Interest
expense
|
|
|
(40,438
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(40,438
|
)
|
Loss on short-term
investment
|
|
|
(327,486
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(327,486
|
)
|
Other income (expense),
net
|
|
|
(24,564
|
)
|
|
|
—
|
|
|
|
1,056
|
|
|
|
(23,50
8
|
)
|
Minority
interest
|
|
|
—
|
|
|
|
—
|
|
|
|
207,535
|
|
|
|
207,535
|
|
Recovery of income
taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
619,480
|
|
|
|
619,480
|
|
Loss from continuing
operations
|
|
|
(1,675,678
|
)
|
|
|
—
|
|
|
|
(601,397
|
)
|
|
|
(2,277,075
|
)
|
Loss from discontinued
operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Net loss
|
|
|
(1,675,678
|
)
|
|
|
—
|
|
|
|
(601,397
|
)
|
|
|
(2,277,075
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
as
a
t March 31,
2008
|
|
|
1,759,222
|
|
|
|
—
|
|
|
|
12,849,496
|
|
|
|
14,608,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retina
|
|
|
Gl
a
ucoma
|
|
|
Point-of-care
|
|
|
Total
|
|
Three months ended March 31,
2007
As restated - noted
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
90,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
90,000
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods
sold
|
|
|
32,100
|
|
|
|
—
|
|
|
|
—
|
|
|
|
32,100
|
|
Operating
|
|
|
3,385,329
|
|
|
|
—
|
|
|
|
1,122,071
|
|
|
|
4,507,
400
|
|
Depreciation and
amortization
|
|
|
466,304
|
|
|
|
—
|
|
|
|
323,411
|
|
|
|
789,715
|
|
Loss from continuing
operations
|
|
|
(3,793,733
|
)
|
|
|
—
|
|
|
|
(1,445,482
|
)
|
|
|
(5,239,21
5
|
)
|
Interest
income
|
|
|
203,868
|
|
|
|
—
|
|
|
|
11,5
70
|
|
|
|
215,43
8
|
|
Interest
expense
|
|
|
(16,219
|
)
|
|
|
—
|
|
|
|
(422
|
)
|
|
|
(16,641
|
)
|
Loss on short-term
investment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other income (expense),
net
|
|
|
(708,10
7
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(708,10
7
|
)
|
Minority
interest
|
|
|
—
|
|
|
|
—
|
|
|
|
364,680
|
|
|
|
364,680
|
|
Recovery of income
taxes
|
|
|
1,327,852
|
|
|
|
—
|
|
|
|
573,721
|
|
|
|
1,901,573
|
|
Loss from continuing
operations
|
|
|
(2,986,339
|
)
|
|
|
—
|
|
|
|
(495,933
|
)
|
|
|
(3,482,272
|
)
|
Loss from discontinued
operations
|
|
|
—
|
|
|
|
(1,103,490
|
)
|
|
|
—
|
|
|
|
(1,103,490
|
)
|
Net loss
|
|
|
(2,986,339
|
)
|
|
|
(1,103,490
|
)
|
|
|
(495,933
|
)
|
|
|
(4,585,76
2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets As At December 31,
2007
|
|
|
3,672,542
|
|
|
|
—
|
|
|
|
11,640,195
|
|
|
|
15,312,737
|
|
21. SUBSEQUENT
EVENT
(i)
On
May 5, 2008, the Company announced that it had secured a bridge loan in an
aggregate principal amount of $300,000 (less transaction costs of approximately
$18,000) from a number of private parties (“Additional Bridge Loan”).
The Additional Bridge Loan
constitutes an increase to the principal amount of the U.S.$3,000,000 principal
amount bridge loan that the Company announced on February 19, 2008 (the
“Original Bridge Loan”) and was advanced on substantially the same terms and
conditions as the Original Bridge Loan, pursuant to an amendment of the loan
agreement for the Original Bridge Loan.
The Additional Bridge Loan bears
interest at a rate of 12% per annum and will have the same maturity date as the
Original Bridge Loan.
The
Company has pledged its shares of the capital stock of OcuSense as collateral
for the loan.
Under the terms of the Original Bridge
Loan agreement, the Company has two pre-payment options available to it, should
it decide to not wait until the maturity date to repay the loan. Under the first
pre-payment option, the Company may repay the Original Bridge Loan in full by
paying the lenders, in cash, the amount of outstanding principal and accrued
interest and issuing to the lenders five-year warrants in an aggregate amount
equal to approximately 19.9% of the issued and outstanding shares of the
Company’s common stock (but not to exceed 20% of the issued and outstanding
shares of the Company’s common stock). The warrants would be exercisable into
shares of the Company’s common stock at an exercise price of $0.10 per share and
would not become exercisable until the 180th day following their issuance. Under
the second pre-payment option, provided that the Company has closed a private
placement of shares of its common stock for aggregate gross proceeds of at least
$4,000,000, the Company may repay the Original Bridge Loan in full by issuing to
the lenders shares of its common stock, in an aggregate amount equal to the
amount of outstanding principal and accrued interest, at a 15% discount to the
price paid by the private placement investors. Any exercise by the Company of
the second pre-payment option would be subject to stockholder and regulatory
approval. Should the Company exercise either of these pre-payment options, it
will be obligated to pre-pay the Additional Bridge Loan in the same manner,
provided that the Company, in no event, shall be obligated to issue warrants
exercisable into shares in a number that exceeds 20% of the issued and
outstanding shares of the Company’s common stock on the date of
pre-payment.
(ii)
On April 22, 2008, the Company
announced that it has signed a definitive merger agreement to acquire the
minority ownership interest in San Diego-based OcuSense, Inc. that it does not
already own. Currently, OccuLogix owns 50.1% of the capital stock of
OcuSense on a fully diluted basis.
Under the
terms of the merger agreement, OccuLogix will be acquiring the minority
ownership interest in OcuSense by way of a merger of OcuSense and a newly
incorporated, wholly-owned subsidiary of OccuLogix. As merger
consideration, the Company expects to issue an aggregate of approximately
79,200,000 shares of its common stock to the minority stockholders of
OcuSense. The transaction will be subject to the approval of
stockholders of both companies, as well as to customary closing conditions,
including approval by the Toronto Stock Exchange.
(iii) On
April 22, 2008 the Company announced that, subject to stockholder and regulatory
approval, it intends to effect a private placement of up to U.S.$6,500,000 of
common stock at a per share price that is the lower of (1) the average trading
price of OccuLogix’s common stock at the time of purchase and (2)
U.S.$0.10. The Company intends to file a preliminary proxy statement
and to call a meeting of stockholders as soon as practicable in order to obtain
stockholder approval of the merger and the private placement, among other
matters.
(iv)
On September 18, 2007, OccuLogix
received a letter from The
NASDAQ
Stock Market, or
NASDAQ
, indicating that, for the previous 30
consecutive business days, the bid price of the Company’s common stock closed
below the minimum $1.00 per share requirement for continued inclusion under
Marketplace Rule 4450(e)(5), or the Minimum Bid Price Rule. Therefore, in
accordance with Marketplace Rule 4450(e)(2), the Company was provided 180
calendar days, or until March 17, 2008, to regain compliance. The
NASDAQ
letter stated that, if, at any time
before March 17, 2008, the bid price of the Company’s common stock closes at
$1.00 per share or more for a minimum of 10 consecutive business days,
NASDAQ
staff will provide written notification
that it has achieved compliance with the Minimum Bid Price Rule. The
NASDAQ
letter also stated that, if the Company
does not regain compliance with the Minimum Bid Price Rule by March 17, 2008,
NASDAQ
staff will provide written notification
that the Company’s securities will be delisted, at which time the Company may
appeal the
NASDAQ
staff’s determination to delist its
securities to a
NASDAQ
Listing Qualifications
Panel.
On February 1, 2008, the Company
received a letter from The
NASDAQ
Stock Market, or
NASDAQ
, indicating that, for the previous 30
consecutive trading days, the Company’s common stock did not maintain a minimum
market value of publicly held shares of $5,000,000 as required for continued
inclusion by Marketplace Rule 4450(a)(2), or the MVPHS Rule. Therefore, in
accordance with Marketplace Rule 4450(e)(1), the Company was provided 90
calendar days, or until May 1, 2008, to regain compliance. The
NASDAQ
letter stated that, if at any time
before May 1, 2008, the minimum market value of publicly held shares of the
Company’s common stock is $5,000,000 or greater for a minimum of 10 consecutive
trading days,
NASDAQ
staff will provide written notification
that the Company complies with the MVPHS Rule. The
NASDAQ
letter also stated that, if the Company
does not regain compliance with the MVPHS Rule by May 1, 2008,
NASDAQ
staff will provide written notification
that the Company’s securities will be delisted, at which time the Company may
appeal the
NASDAQ
staff’s determination to delist its
securities to a
NASDAQ
Listing Qualifications
Panel.
On May 6, 2008, the Compa
ny received a letter from
NASDAQ
indicating that
since the Company’s MVPHS has been $5,000,000 or greater for at least 10
consecutive trading days the Company has regained compliance with the MVPHS rule
and the matter is now closed.
The Company was not compliant with the
Minimum Bid Price Rule by March 17, 2008.
While the Company has appealed any
determination by
NASDAQ
staff to delist its common stock to a
NASDAQ
Listing Qualifications Panel, the
Company may not be successful in its appeal, in which case its common stock may
be transferred to The
NASDAQ
Capital Market or be delisted
altogether. Should either occur, existing stockholders will suffer decreased
liquidity.
These
NASDAQ
notices have no effect on the listing
of the Company's common stock on the Toronto Stock Exchange.
|
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Overview
We are
an ophthalmic therapeutic
company founded to commercialize innovative treatments for age-related eye
diseases. Until recently, the Company operated three business divisions, being
Retina, Glaucoma and Point-of-care. Until recently, the Company’s Retina
division was in the business of developing and commercializing a treatment for
dry age-related macular degeneration, or Dry AMD. The Company’s product for Dry
AMD, the RHEO™ System contains a pump that circulates blood through two filters
and is used to perform the Rheopheresis™ procedure, which is referred to under
the Company’s trade name RHEO™ Therapy. The Rheopheresis™ procedure is a blood
filtration procedure that selectively removes molecules from plasma, which is
designed to treat Dry AMD, the most common form of the disease.
We conducted a pivotal clinical trial,
called MIRA-1, or Multicenter Investigation of Rheopheresis for AMD, which, if
successful, was expected to support our application to the U.S. Food and Drug
Administration, or FDA, to obtain approval to market the RHEO™ System in the
United States. On February 3, 2006, we announced that, based on a preliminary
analysis of the data from MIRA-1, MIRA-1 did not meet its primary efficacy
endpoint as it did not demonstrate a statistically significant difference in the
mean change of Best Spectacle-Corrected Visual Acuity applying the Early
Treatment Diabetic Retinopathy Scale, or ETDRS BCVA, between the treated and
placebo groups in MIRA-1 at 12 months post-baseline. As expected, the treated
group demonstrated a positive result. An anomalous response of the control group
is the principal reason why the primary efficacy endpoint was not met. There
were subgroups that did demonstrate statistical significance in their mean
change of ETDRS BCVA.
Subsequent to the February 3, 2006
announcement, the Company completed an in-depth analysis of the MIRA-1 study
data identifying subjects that were included in the intent-to-treat, or ITT,
population but who deviated from the MIRA-1 protocol as well as those patients
who had documented losses or gains in vision for reasons not related to retinal
disease such as cataracts. Those subjects in the ITT population who met the
protocol requirements, and who did not exhibit ophthalmic changes unrelated to
retinal disease, comprised the modified per-protocol
population.
In light of the MIRA-1 study results, we
also re-evaluated our Pre-market Approval Application, or PMA, submission
strategy and then met with representatives of the FDA on June 8, 2006 in order
to discuss the impact the MIRA-1 results would have on our PMA to market the
RHEO™ System in the United States. In light of MIRA-1’s failure to
meet its primary efficacy endpoint, the FDA advised us that it will require an
additional study of the RHEO™ System to be performed.
On
January 29, 2007, the Company announced that it had obtained Investigational
Device Exemption clearance from the FDA to commence the new pivotal clinical
trial of the RHEO™ System, called RHEO-AMD, or Safety and Effectiveness in a
Multi-center, Randomized, Sham-controlled Investigation for Dry, Non-exudative
Age-Related Macular Degeneration (AMD) Using Rheopheresis.
However,
on November 1, 2007, the Company announced the indefinite suspension of its
RHEO™ System clinical development program. This decision was made following a
comprehensive review of the respective costs and development timelines
associated with the products in the Company’s portfolio and in light of the
Company’s financial position. Between January 29, 2007 and November 1, 2007, the
Company had prepared the RHEO-AMD protocol and had been putting into place all
of the resources required for the conduct for the RHEO-AMD study, including the
securing of clinical trial site commitments. The Company is in the process of
winding down the RHEO-AMD study as there is no reasonable prospect that the
RHEO™ System clinical development program will be relaunched in the foreseeable
future. Subsequent to our fiscal 2007 year-end, as of February 25, 2008, we have
terminated our relationship with Asahi Kasei Kuraray Medical Co., Ltd. (formerly
Asahi Kasei Medical Co., Ltd.), or Asahi Medical. Asahi Medical manufactures,
and supplied us with, the Rheofilter filter and the Plasmaflo filter, both of
which are key components of the RHEO™ System. We also are engaged in discussions
with Diamed Medizintechnik GmbH, or Diamed, and MeSys GmbH, or MeSys, regarding
the termination of our relationship with each of them. Diamed is the
designer, and MeSys is the manufacturer, of the OctoNova pump, another key
component of the RHEO™ System.
As a result of the announcement on
February 3, 2006, the per share price of our common stock as traded on the
NASDAQ Global Market, or NASDAQ, decreased from $12.75 on February 2, 2006 to
close at $4.10 on February 3, 2006. The 10-day average price of the stock
immediately following the announcement was $3.65 and reflected a decrease in our
market capitalization from $536.6 million on February 2, 2006 to $153.6 million
based on the 10-day average share price subsequent to the announcement. On June
12, 2006, we announced that the FDA will require us to perform an additional
study of the RHEO™ System. In addition, on June 30, 2006, we announced that we
had terminated negotiations with Sowood Capital Management LP (“Sowood”) in
connection with a proposed private purchase of approximately $30,000,000 of
zero-coupon convertible notes of the Company. The per share price of our common
stock decreased subsequent to the June 12, 2006 announcement and again after the
June 30, 2006 announcement. Based on the result of the analysis of the data from
MIRA-1 and the events that occurred during the second quarter of fiscal 2006, we
concluded that there were sufficient indicators of impairment leading to an
analysis of our intangible assets and goodwill and resulting in our reporting an
impairment charge to goodwill of $65,945,686 and $147,451,758 in the second
quarter of 2006 and in the fourth quarter of 2005,
respectively.
We considered our announcement of the
indefinite suspension of the Company’s RHEO™ System clinical development program
for Dry AMD to be a significant event which may affect the carrying value of our
intangible assets. This led to an analysis of our intangible assets and resulted
in our reporting an impairment charge to intangible assets of $20,923,028 during
the third quarter of 2007. We also believe that we may not be able to sell or
utilize the components of the RHEO™ System prior to their expiration dates or
before the technologies become outdated, as the case may be. Accordingly, we set
up a provision for obsolescence of $2,782,494 for treatment sets and OctoNova
pumps that are unlikely to be utilized prior to their expiration dates, in the
case of treatment sets, or before the technologies become outdated. In addition,
we have recorded a reduction to the carrying values of (i) certain of our
medical equipment used in the clinical trials of the RHEO™ System of $431,683
and (ii) certain of our patents and trademarks related to the RHEO™ System of
$190,873.
B
ased on our November 1, 2007
announcement of the indefinite suspension of our RHEO™ System clinical
development program, we wrote down the value of our pumps and clinical inventory
by $2,790,209 to reflect their current nil net realizable value as at December
31, 2007.
The net value of our pumps and clinical
inventory as at March 31, 2008 and December 31, 2007 was nil
. A
s at March 31, 2008
and
December
31, 2007, we had combined inventory
reserves of $7,295,545 and $7,295,545 respectively.
No other
adjustments were made as a result of the November 1, 2007 announcement that
impacts the financial results as of December 31, 2007 or March 31,
2008.
We entered into a distributorship
agreement (the “Distribution Agreement”), effective October 20, 2006, with Asahi
Medical. The Distribution Agreement replaced the 2001 distributorship agreement
between Asahi Medical and us, as supplemented and amended by the 2003, 2004 and
2005 Memoranda. Pursuant to the Distribution Agreement, we had distributorship
rights to Asahi Medical's Plasmaflo filter and Asahi Medical's second generation
polysulfone Rheofilter filter on an exclusive basis in the United States, Mexico
and certain Caribbean countries, on an exclusive basis in Canada, on an
exclusive basis in Colombia, Venezuela, New Zealand,
Australia and on a non-exclusive basis
in Italy.
On
January 28, 2008, the Company disclosed that it was engaged in discussions with
Asahi Medical to terminate the Distribution Agreement. Subsequent to our 2007
fiscal year end, the Company and Asahi Medical have entered into a termination
agreement to terminate substantially all of their obligations under the
Distribution Agreement on and as of February 25, 2008 (the “Termination
Agreement”). Pursuant to the Termination Agreement, the Company and
Asahi Medical have agreed to a mutual release of claims relating to the
Distribution Agreement, other than any claims relating to certain provisions of
the Distribution Agreement which survived its termination.
In anticipation of the delay in the
commercialization of the RHEO™ System in the United States as a result of the
MIRA-1 study’s failure to meet its primary efficacy endpoint and the FDA’s
requirement of us to conduct an additional study of the RHEO™ System, the
Company accelerated its diversification plans and, on September 1, 2006,
acquired SOLX, Inc., or SOLX, for a total purchase price of $29,068,443 which
included acquisition-related transaction costs of $851,279. SOLX is a Boston
University Photonics Center-incubated company that has developed a system for
the treatment of glaucoma, called the SOLX Glaucoma System. The SOLX Glaucoma
Treatment System is a next-generation treatment platform designed to reduce
intra-ocular pressure, or IOP, without a bleb, thus avoiding its related
complications. The SOLX Glaucoma System consists of the SOLX 790 Laser, a
titanium sapphire laser used in laser trabeculoplasty procedures, and the
SOLX
Gold Shunt, a 24-karat gold, ultra-thin drainage device designed to
bridge the anterior chamber and the suprachoroidal space in the eye, using the
pressure differential that exists naturally in the eye in order to reduce
IOP.
On
December 20, 2007, we announced the sale of SOLX to SOLX Acquisition, Inc., or
SOLX Acquisition, a company wholly owned by Doug P. Adams, the founder of SOLX
and who, until the closing of the sale, had been serving as an executive officer
of the Company in the capacity of President & Founder, Glaucoma
Division. The results of operations of SOLX have been included in
discontinued operations in the Company’s consolidated statements of
operations.
The
consideration for the purchase and sale of all of the issued and outstanding
shares of the capital stock of SOLX consisted of: (i) on December 19,
2007, the closing date of the sale, the assumption by SOLX Acquisition of all of
the liabilities of the Company, as they related to SOLX’s business, incurred on
or after December 1, 2007, and OccuLogix’s obligation to make a $5,000,000
payment to the former stockholders of SOLX due on September 1, 2008 in
satisfaction of the outstanding balance of the purchase price of SOLX; (ii) on
or prior to February 15, 2008, the payment by SOLX Acquisition of all of the
expenses that the Company had paid to the closing date, as they related to
SOLX’s business during the period commencing on December 1, 2007; (iii) during
the period commencing on the closing date and ending on the date on which SOLX
achieves a positive cash flow, the payment by SOLX Acquisition of a royalty
equal to 3% of the worldwide net sales of the SOLX 790 Laser and the SOLX Gold
Shunt, including next-generation or future models or versions of these products;
and (iv) following the date on which SOLX achieves a positive cash flow, the
payment by SOLX Acquisition of a royalty equal to 5% of the worldwide net sales
of these products. In order to secure the obligation of SOLX Acquisition to make
these royalty payments, SOLX granted to OccuLogix a subordinated security
interest in certain of its intellectual property. In connection with the sale of
SOLX, those employees of the Company, whose roles and responsibilities related
mainly to SOLX’s business, ceased to be employees of the Company and became
employees of SOLX Acquisition or SOLX.
The sale transaction established fair
values for the Company’s recorded goodwill and the Company’s shunt and laser
technology and regulatory and other intangible assets that had been acquired by
the Company upon its acquisition of
SOLX
on September 1, 2006.
Accordingly, management was required to
re-assess whether the carrying value of the Company’s
shunt and laser technology and
regulatory and other
intangible assets was recoverable as of December 1, 2007. Based on management’s
estimates of undiscounted cash flows associated with these intangible assets, we
concluded that the carrying value of these intangible assets was not recoverable
as of December 1, 2007. Accordingly, we recorded an impairment charge of
$22,286,383 during the year ended December 31, 2007 to record the
shunt and laser technology and
regulatory and other intangible assets at their fair value as of December 31,
2007.
As at March 31, 2008 and December 31,
2007
,
the value of these intangible assets
associated with
SOLX
was nil and nil
,
respectively.
As well, the Company performed an
impairment test of its recorded goodwill to re-assess whether its recorded
goodwill was impaired as at December 1, 2007. Based on the goodwill impairment
analysis performed,
the
Company concluded that a goodwill impairment charge of $14,446,977 should be
recorded during the year ended December 31, 2007 to write down the value of its
recorded goodwill to its fair value of nil. As at March 31, 2008 and December
31, 2007, the value of the goodwill associated with SOLX was nil and nil,
respectively.
Both the
SOLX 790 Laser and the SOLX Gold Shunt are currently the subject of randomized,
multi-center clinical trials, the purposes of which are to demonstrate
equivalency to the argon laser, in the case of the SOLX 790 Laser, and to the
Ahmed Glaucoma Valve manufactured by the New World Medical, Inc., in the case of
the SOLX Gold Shunt. The results of these clinical trials will be used in
support of applications to the FDA for a 510(k) clearance for each of the SOLX
790 Laser and the SOLX Gold Shunt, the receipt of which, if any, will enable the
marketing and sale of these products in the United States.
As part of our diversification plan, on
November 30, 2006, we acquired 50.1% of the capital stock of OcuSense, Inc., or
OcuSense, measured on a fully diluted basis, for a
n initial
purchase price of $4,171,098 which
includes acquisition-related transaction costs of $171,098. The Company agreed
to make additional payments totaling $4,000,000 upon the attainment of two
pre-defined milestones by OcuSense prior to May 1, 2009. In June 2007 and March
2008, we paid OcuSense a total of $4,000,000 upon the attainment of the the two
pre-defined milestones.
OcuSense is a San Diego-based company
that is in the process of developing technologies that will enable eye care
practitioners to test, at the point-of-care, for highly sensitive and specific
biomarkers using nanoliters of tear film. The results of OcuSense’s operations
have been included in our consolidated financial statements since November 30,
2006. OcuSense’s first product, which is currently under development, is a
hand-held tear film test for the measurement of osmolarity, a quantitative and
highly specific biomarker that has shown to correlate with dry eye disease, or
DED. The test is known as the TearLab™ test for DED. The anticipated innovation
of the TearLab™ test for DED will be its ability to measure precisely and
rapidly certain biomarkers in nanoliter volumes of tear samples, using
inexpensive hardware. Historically, eye care researchers have relied on
expensive instruments to perform tear biomarker analysis. In addition to their
cost, these conventional systems are slow, highly variable in their measurement
readings and not categorized as waived by the FDA under the regulations
promulgated under the Clinical Laboratory Improvement Amendments, or
CLIA.
The TearLab™ test for DED will require
the development of the following three components: (1) the TearLab™
disposable, which is a single-use microfluidic labcard; (2) the TearLab™ pen,
which is a hand-held device that interfaces with the TearLab™ disposable; and
(3) the TearLab™ reader, which is a small desktop unit that allows for the
docking of the TearLab™ disposable and the TearLab™ pen and provides a
quantitative reading for the operator. OcuSense is currently engaged in
industrial, electrical and software design efforts for the three components of
the TearLab™ test for DED and, to these ends, is working with two engineering
partners, both based in Melbourne, Australia, one of which is a leader in
biomedical instrument development and the other of which is a leader of
customized microfluidics.
OcuSense’s objective is to complete
product development of the TearLab™ test for DED during the first half of 2008.
Following the completion of product development and subsequent clinical trials,
OcuSense intends to seek a 510(k) clearance and a CLIA waiver from the FDA for
the TearLab™ test for DED. Currently, it anticipates seeking the 510(k)
clearance during the latter half of 2008 and the CLIA waiver during the latter
half of 2009. In addition, OcuSense intends to seek CE Mark approval for the
TearLab™ test for DED during the latter half of 2008.
OcuSense is a variable interest entity
in accordance with FIN 46(R) and OccuLogix is the primary beneficiary. Under FIN
46(R), assets, liabilities and non-controlling interest shall be measured at
their fair value at the time of acquisition.
Assets acquired and liabilities assumed
consisted solely of working capital and of a technology intangible asset
relating to patents owned by OcuSense. Before consideration of
deferred tax, the fair value of the assets acquired was greater than the fair
value of the liabilities assumed and the non-controlling
interest. Because OcuSense does not comprise a business, as defined
in EITF 98-3 “Determining Whether a Nonmonetary Transaction Involves Receipt of
Productive Assets or of a Business”, the Company applied the simultaneous
equation method as per EITF 98-11 “Accounting for Acquired Temporary Differences
in Certain Purchase Transactions That Are Not Accounted for as Business
Combinations”, and adjusted the assigned value of the non-monetary assets
acquired (consisting solely of the technology asset) to include the deferred tax
liability.
The fair values of
OcuSense’s assets, liabilities and minority interest, at the date of
acquisition, were as follows:
|
|
As at November
30
|
|
|
|
2006
|
|
|
|
|
|
Net tangible
assets
|
|
$
|
2,690,316
|
|
Intangible
assets
|
|
$
|
12,895,388
|
|
Deferred_taxes
|
|
$
|
(5,158,155
|
)
|
Minority
interest
|
|
$
|
(6,256,451
|
)
|
|
|
$
|
4,171,098
|
|
On November 30, 2006, we announced that
Elias Vamvakas, our Chairman and Chief Executive Officer, had agreed to provide
us with a standby commitment to purchase convertible debentures of the Company
(“Convertible Debentures”) in an aggregate maximum amount of $8,000,000 (the
“Total Commitment Amount”).
Pursuant to the Summary of Terms
and Conditions, executed and delivered as of November 30, 2006 by the Company
and Mr. Vamvakas, during the 12-month commitment term commencing on November 30,
2006, upon no less than 45 days’ written notice by the Company to Mr. Vamvakas,
Mr. Vamvakas was obligated to purchase Convertible Debentures in the aggregate
principal amount specified in such written notice. A commitment fee of 200 basis
points was payable by the Company on the undrawn portion of the total $8,000,000
commitment amount. Any Convertible Debentures purchased by Mr. Vamvakas would
have carried an interest rate of 10% per annum and would have been convertible,
at Mr. Vamvakas’ option, into shares of the Company’s common stock at a
conversion price of $2.70 per share. The Summary of Terms and Conditions of the
standby commitment further provided that if the Company closed a financing with
a third party, whether by way of debt, equity or otherwise and there are no
Convertible Debentures outstanding, then, the Total Commitment Amount was to be
reduced automatically upon the closing of the financing by the lesser of: (i)
the Total Commitment Amount; and (ii) the net proceeds of the financing. On
February 6, 2007, the Company raised gross proceeds in the amount of $10,016,000
in a private placement of shares of its common stock and warrants. The Total
Commitment Amount was therefore reduced to zero, thus effectively terminating
Mr. Vamvakas’ standby commitment. No portion of the standby commitment was ever
drawn down by the Company, and the Company paid Mr. Vamvakas a total of $29,808
in commitment fees in February 2007.
Our results of operations for the three
months ended March 31, 2008 and 2007 were impacted by our adoption of Statement
of Financial Accounting Standards (“SFAS”) No. 123R (revised 2004), “Share-Based
Payments” (“SFAS No. 123R”), on January 1, 2006 which requires us to recognize a
non-cash expense related to the fair value of our stock-based compensation
awards. We elected to use the modified prospective transition method of adoption
requiring us to include this stock-based compensation charge in our results of
operations beginning on January 1, 2006 without restating prior periods to
include stock-based compensation expense. The following table sets out the total
stock based compensation expense reflected in the consolidated statement of
operations for the three months ended March 31, 2008 and 200
7.
|
|
Three
months ended March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
43,789
|
|
|
|
357,089
|
|
Clinical
and regulatory
|
|
|
26,036
|
|
|
|
94,088
|
|
Sales
and marketing
|
|
|
14,050
|
|
|
|
131,027
|
|
Total
expense from continuing operations
|
|
|
83,875
|
|
|
|
582,203
|
|
Expense
from discontinued operations
|
|
|
—
|
|
|
|
27,300
|
|
Stock-based
compensation expense before income taxes
|
|
|
83,875
|
|
|
|
609,503
|
|
As at
March 31, 2008, $2,447,350 of total unrecognized compensation cost related to
stock options is expected to be recognized over a weighted-average period of
1.63 years.
On February 1, 2007, we entered into a
Securities Purchase Agreement (the “Securities Purchase Agreement”) with certain
institutional investors, pursuant to which we agreed to issue to the investors
an aggregate of 6,677,333 shares of our common stock (the “Shares”) and
five-year warrants exercisable into an aggregate of 2,670,933 shares of our
common stock (the “Warrants”). The per share purchase price of the
Shares is $1.50, and the per share exercise price of the Warrants is $2.20,
subject to adjustment. The Warrants became exercisable on August 6,
2007. Pursuant to the Securities Purchase Agreement, on February 6, 2007, we
issued the Shares and the Warrants. The gross proceeds of sale of the Shares and
the Warrants totaled $10,016,000 (less transaction costs of $871,215). On
February 6, 2007, we also issued to Cowen and Company, LLC a five-year warrant
exercisable into an aggregate of 93,483 shares of our common stock (the “Cowen
Warrant”) in part payment of the placement fee payable to Cowen and Company, LLC
for the services it had rendered as the placement agent in connection with the
sale of the Shares and the Warrants. All of the terms and conditions of the
Cowen Warrant (other than the number of shares of our common stock into which it
is exercisable) are identical to those of the Warrants. The estimated grant date
fair value of the Cowen Warrant of $97,222 is included in the transaction cost
of $871,215.
We account for the Warrants and the
Cowen Warrant in accordance with the provisions of SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities” (“SFAS No. 133”) along with
related interpretation
Emerging Issues Task Force
(“EITF”)
00-19 “Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock” (“EITF 00-19”). SFAS No. 133 requires every derivative
instrument within its scope (including certain derivative instruments embedded
in other contracts) to be recorded on the balance sheet as either an asset or
liability measured at its fair value, with changes in the derivative’s fair
value recognized currently in earnings unless specific hedge accounting criteria
are met. Based on the provisions of EITF 00-19, we determined that the Warrants
and the Cowen Warrant do not meet the criteria for classification as equity.
Accordingly, we have classified the Warrants and the Cowen Warrant as a current
liability as of December 31, 2007. The estimated fair value of the Warrants and
the Cowen Warrant was determined using the Black-Scholes options pricing model.
We initially allocated the total proceeds received, pursuant to the Securities
Purchase Agreement, to the Shares and the Warrants based on their relative fair
values. This resulted in an allocation of $2,052,578 to the obligation under
warrants which includes the fair value of the Cowen Warrant of $97,222. SFAS No.
133 also requires the Company to record the outstanding warrants at fair value
at the end of each reporting period resulting in an adjustment to the recorded
liability of the derivative, with any gain or loss recorded in earnings of the
applicable reporting period. The Company therefore estimated the fair value of
the Warrants and the Cowen Warrant as at December 31, 2007 and determined the
aggregate fair value to be a nominal amount, a decrease of approximately
$2,052,578 over the initial measurement of the aggregate fair value of the
Warrants and the Cowen Warrant on the date of issuance. Accordingly, we
recognized a gain of $2,052,578 in our consolidated statements of operations for
the year ended December 31, 2007 to reflect the decrease in the Company’s
obligation to its warrant holders to a nominal amount at December 31, 2007.
Transaction costs associated with the issuance of the Warrants of $170,081 was
recorded as an expense in the Company’s consolidated statement of operations for
the year ended December 31, 2007.
As at March 31, 2008
, t
he Company estimated the fair value of
the Warrants and the Cowen Warrant and determined the aggregate fair value to be
a nominal amount. The car
ryi
ng value of these Warrants as at March
31, 2008 and December 31, 2007 was nil and nil
,
respectively.
On March 11, 2007, our Board of
Directors approved the grant to the directors of the Company, other than Mr.
Vamvakas, of a total of 165,000 options under the 2002 Stock Option Plan. In
exchange for these options, each of the directors of the Company
gave up
the cash remuneration which he or she
would have been entitled to receive from us during the financial year
end
ed
December 31, 2007 in respect of (i) his
or her annual director's fee of $15,000, (ii) in the case of those directors who
chair a committee of the board of directors of the Company, his or her fee of
$5,000 per annum for chairing such committee and (iii) his or her fee of $2,500
per fiscal quarter for the quarterly in-person meetings of the board of
directors of the Company. The number of options granted to each of the directors
was determined to be 8% higher in value than the cash remuneration to which the
directors would have been entitled during the financial year end
ed
December 31, 2007 and was determined
using the Black-Scholes option pricing model. The number of options granted to
each director, calculated using this methodology, was then rounded up to the
nearest 1,000. These options are exercisable immediately and will remain
exercisable until the tenth anniversary of the date of their grant,
notwithstanding any earlier disability or death of the holder thereof or any
earlier termination of his or her service to the Company. The exercise price of
each option is set at $1.82, which was the per share closing price of the
Company's common stock on NASDAQ on March 9, 2007, the last trading day prior to
the date of grant.
On May 30, 2007, TLC Vision Corporation
(“TLC Vision”) and JEGC OCC Corp. (“JEGC”) announced that JEGC had agreed to
purchase TLC Vision’s ownership stake in the Company, subject to certain minimum
prices and regulatory limitations and further subject to JEGC obtaining
satisfactory financing and other customary closing conditions. On June 22, 2007,
JEGC purchased a portion of TLC Vision’s ownership stake in the Company,
consisting of 1,904,762 shares, at a price of $1.05 per share. On July 3, 2007,
we announced that we had entered into discussions with JEGC for the private
placement of approximately $30,000,000 of shares of the Company’s common stock
at a price based upon the average trading price at the time of purchase, subject
to compliance with regulatory requirements and to a minimum purchase price of
$1.05 per share. On October 15, 2007, TLC Vision announced that JEGC was not
able to complete the purchase of TLC Vision’s remaining ownership stake in the
Company by October 12, 2007, being the deadline previously agreed by TLC Vision
and JEGC. In making that announcement, TLC Vision also stated that
JEGC retains a non-exclusive right to purchase TLC Vision’s remaining ownership
stake in the Company, subject to the right of each of TLC Vision and JEGC to
terminate the agreement between them. It was anticipated that JEGC
would have gained a control position in the Company, if both of these
transactions had been completed. Our discussions with JEGC have not resulted in
any agreement. JEGC is owned by Jefferson EquiCorp Ltd. and by Greybrook
Corporation, a firm controlled by Mr. Vamvakas.
As at March 31, 2008 and December 31,
2007, we had investments in the aggregate principal amount of $1,900,000 which
consist of investments in four separate asset-backed auction rate securities
currently
yielding an average return of
3.94
% per annum. However, as a
result of market conditions, all of these investments have recently failed to
settle on their respective settlement dates and have been reset to be settled at
a future date with an average maturity of 46 days. Due to the current
lack of liquidity for asset-backed securities of this type, we concluded that
the carrying value of these investments was higher than its fair value as of
March 31, 2008 and December 31, 2007. Accordingly, these auction rate securities
have been recorded at their estimated fair value of $536,264. We consider this
to be an other-than-temporary reduction in the fair value of these auction rate
securities. Accordingly, the loss associated with these auction rate securities
of
$
327,486 for the
three
months ended March 31, 2008 has been
included as an impairment of investments in our consolidated statement of
operations for the three months ended March 31, 2007.
The auction rate securities were liquid
as at March 31, 2007. As a result,
the loss associated with these
auct
ion rate securities
for the
three
months ended March 31, 200
7 was nil.
Although we continue to receive interest
earned on these securities, we do not know at the present time when
we
will be able to convert these
investments into cash. Accordingly, management has classified these
investments as a non-current asset on its consolidated balance sheet as of March
31, 2008. Management will continue to monitor these investments closely for
future indications of further impairment. The illiquidity of these investments
may have an adverse impact on the length of time during which we currently
expect to be able to sustain
our
operations in the absence of an
additional capital raise by the Company
as we
do not have the cash
reserves to hold these auction rate securities until the market recovers nor can
we hold these securities until their contractual maturity dates.
On
September 18, 2007, OccuLogix received a letter from The NASDAQ Stock Market, or
NASDAQ, indicating that, for the previous 30 consecutive business days, the bid
price of the Company’s common stock closed below the minimum $1.00 per share
requirement for continued inclusion under Marketplace Rule 4450(e)(5), or the
Minimum Bid Price Rule. Therefore, in accordance with Marketplace Rule
4450(e)(2), the Company was provided 180 calendar days, or until March 17, 2008,
to regain compliance. The NASDAQ letter stated that, if, at any time before
March 17, 2008, the bid price of the Company’s common stock closes at $1.00 per
share or more for a minimum of 10 consecutive business days, NASDAQ staff will
provide written notification that it has achieved compliance with the Minimum
Bid Price Rule. The NASDAQ letter also stated that, if the Company does not
regain compliance with the Minimum Bid Price Rule by March 17, 2008, NASDAQ
staff will provide written notification that the Company’s securities will be
delisted, at which time the Company may appeal the NASDAQ staff’s determination
to delist its securities to a NASDAQ Listing Qualifications Panel.
On
February 1, 2008, OccuLogix received a letter from NASDAQ indicating that, for
the previous 30 consecutive trading days, the Company’s common stock did not
maintain a minimum market value of publicly held shares of $5,000,000 as
required for continued inclusion by Marketplace Rule 4450(a)(2), or the MVPHS
Rule. Therefore, in accordance with Marketplace Rule 4450(e)(1), the Company was
provided 90 calendar days, or until May 1, 2008, to regain compliance. The
NASDAQ letter stated that, if at any time before May 1, 2008, the minimum market
value of publicly held shares of the Company’s common stock is $5,000,000 or
greater for a minimum of ten consecutive trading days, NASDAQ staff will provide
written notification that the Company complies with the MVPHS Rule. The NASDAQ
letter also stated that, if the Company does not regain compliance with the
MVPHS Rule by May 1, 2008, NASDAQ staff will provide written notification that
the Company’s securities will be delisted, at which time the Company may appeal
the NASDAQ staff’s determination to delist its securities to a NASDAQ Listing
Qualifications Panel. On May 6, 2008, the Company received a letter from NASDAQ
indicating that since the Company’s MVPHS has been $5,000,000 or greater for at
least 10 consecutive trading days the Company has regained compliance with the
MVPHS rule and the matter is now closed.
The
Company was not compliant with the Minimum Bid Price Rule by March 17, 2008.
While the Company has appealed the determination by NASDAQ staff to delist our
common stock to a NASDAQ Listing Qualifications Panel, we may not be successful
in our appeal, in which case our common stock may be transferred to The NASDAQ
Capital Market or be delisted altogether. Should either occur, existing
stockholders will suffer decreased liquidity.
These
NASDAQ notices have no effect on the listing of the Company's common stock on
the Toronto Stock Exchange.
Recent Developments
On
January 9, 2008, we announced the departure, or pending departure, of seven
members of our executive team and, commencing on February 1, 2008, a 50%
reduction in the salary of each of Elias Vamvakas, our Chairman and Chief
Executive Officer, and Tom Reeves, our President and Chief Operating Officer. By
January 31, 2008, a total of 12 non-executive employees of the Company left the
Company’s employment.
On
February 19, 2008, we announced that the Company secured a bridge loan in an
aggregate principal amount of $3,000,000, less transaction costs of
approximately $180,000, from a number of private parties. The loan bears
interest at a rate of 12% per annum and has a 180-day term, which may be
extended to 270 days under certain circumstances. The repayment of the loan is
secured by a pledge by the Company of its shares of the capital stock of
OcuSense. Under the terms of the loan agreement, the Company has two pre-payment
options available to it, should it decide to not wait until the maturity date to
repay the loan. Under the first pre-payment option, the Company may repay the
loan in full by paying the lenders, in cash, the amount of outstanding principal
and accrued interest and issuing to the lenders five-year warrants in an
aggregate amount equal to approximately 19.9% of the issued and outstanding
shares of the Company’s common stock (but not to exceed 20% of the issued and
outstanding shares of the Company’s common stock). The warrants would be
exercisable into shares of the Company’s common stock at an exercise price of
$0.10 per share and would not become exercisable until the 180
th
day
following their issuance. Under the second pre-payment option, provided that the
Company has closed a private placement of shares of its common stock for
aggregate gross proceeds of at least $4,000,000, the Company may repay the loan
in full by issuing to the lenders shares of its common stock, in an aggregate
amount equal to the amount of outstanding principal and accrued interest, at a
15% discount to the price paid by the private placement investors. Any exercise
by the Company of the second pre-payment option would be subject to stockholder
and regulatory approval.
If the
Company is successful in completing the merger transaction announced on April
22, 2008 in which the Company will acquire the minority ownership interest and
OcuSense will be come a wholly-owned subsidiary of the Company, the dependency
on the success of OcuSense will be increased.
If the
Company is successful in completing a private placement of up to U.S.$6,500,000
of common stock as announced on April 22, 2008, management believes that it will
have sufficient funds to meet its operating activities and other demands until
approximately the end of June 2009.
On May 5, 2008, the Company announced
that it had secured a bridge loan in an aggregate principal amount of $300,000
(less transaction costs of approximately $18,000) from a number of private
parties (“Additional Bridge Loan”).
The Additional Bridge Loan constitutes
an increase to the principal amount of the U.S. $3,000,000 principal amount
bridge loan that the Company announced on February 19, 2008 and was advanced on
substantially the same terms and conditions as the February 19, 2008 bridge
loan, pursuant to an amendment of the loan agreement for the February 19, 2008
bridge loan.
The Additional
Bridge Loan bears interest at a rate of 12% per annum and will have the same
maturity date as the
February 19, 2008
bridge loan. and is secured by the same
collateral as secures the February 19, 2008 bridge loan.
Should
the Company elect to prepay the February 19, 2008 bridge loan it will be
obligated to pre-pay the Additional Bridge Loan in the same manner, provided
that the Company, in no event, shall be obligated to issue warrants exercisable
into shares in a number that exceeds 20% of the issued and outstanding shares of
the Company’s common stock on the date of pre-payment.
Currently,
we anticipate that the net proceeds of the bridge loans, together with the
Company’s other cash and cash equivalents, will be sufficient to sustain the
Company’s operations only until approximately the middle of July
2008.
RESULTS
OF OPERATIONS
Correction of an error related to the
method of consolidation of OcuSense Inc.
Background
Information
On November 30, 2006, OccuLogix acquired
1,754,589 Series A preferred shares of OcuSense. The purchase price of these
shares was made up of two fixed payments of $2.0 million each to be made on the
date of the closing of the transaction (i.e. November 30, 2006) and on January
3, 2007. In addition, subject to OcuSense achieving certain
milestones, the Company was required to pay two additional milestone payments of
$2.0 million each.
Upon acquiring the Series A preferred
shares, OccuLogix and the existing common shareholders entered into a voting
agreement. The voting agreement provides the founding shareholders of
OcuSense, as defined in the voting agreement, with the right to appoint two
board members and OccuLogix with the right to also appoint two
directors. A selection of a fifth director is mutually agreed upon by
both OccuLogix and the founding stockholders, each voting as a separate
class. The voting agreement is subject to termination under the
following scenarios: a) a change of control; b) majority approval of each of
OccuLogix and the founding stockholders; and c) conversion of all outstanding
shares of the Company’s preferred shares to common shares. OccuLogix
has the ability to force the conversion of all of the preferred shares to common
shares and thus has the ability to effect a termination of the voting agreement,
but this would require conversion of its own preferred shares and the
relinquishment of the rights and obligations associated with the preferred
shares.
The rights and obligations of the Series
A preferred shareholders are as follows:
·
|
Voting – Holders of the Series A
preferred shares are entitled to vote on an as-converted
basis. Each Series A preferred share is entitled to one vote
per share.
|
·
|
Conversion features
– Series A preferred shares are convertible to common shares on
a one-for-one basis at the option of
OccuLogix.
|
·
|
Dividends – The preferred shares
are entitled to non-cumulative dividends at 8%, and additional dividends
would be shared between common and preferred shares on a per-share
basis.
|
·
|
Redemption features – Subsequent
to November 30, 2011, the preferred shares may be redeemed at the option
of OccuLogix, at the higher of the original issue price and the fair
market value of the common shares into which the preferred shares could be
converted, subject to available
cash.
|
·
|
Liquidation preferences – Series A
preferred shares have a liquidation preference over common shares up to
the original issue price of the preferred shares (including the milestone
payments).
|
Immediately after the OccuLogix
investment in OcuSense, OcuSense had the following capital
structure:
Description
|
Number
|
Common
shares
|
1,222,979
|
Series A preferred shares –
OccuLogix
|
1,754,589
|
Series A preferred shares – Other
unrelated parties
|
67,317
|
Total
|
3,044,885
|
Potentially dilutive
instruments
|
|
Warrants
|
89,965
|
Stock
options
|
367,311
|
Fully
diluted
|
3,502,161
|
Based on the above capital structure, on
a fully diluted basis, OccuLogix’s voting percentage was determined to be 50.1%.
On a current voting basis, OccuLogix’s voting interest is 57.62%. We previously
consolidated OcuSense based on an ownership percentage of
50.1%.
Interpretation
and Related Accounting Treatment
Since November 30, 2006, the date of the
acquisition, the Company has consolidated OcuSense on the basis of a voting
control model, as a result of the fact that it owns more than 50% of the voting
stock of OcuSense and that the Company has the ability to convert its Series A
preferred shares into common shares, which would result in termination of the
voting agreement between the founders and OccuLogix and which would result in
OccuLogix gaining control of the board of directors.
However, after further consideration,
the Company has now determined that, as a result of the voting agreement between
OccuLogix and certain founding stockholders of OcuSense, OccuLogix is not able
to exercise voting control as contemplated in ARB 51, “Consolidated Financial
Statements” (“ARB 51”) unless the Company converts its Series A preferred
shares. For purpose of assessing voting control in accordance with
ARB 51, accounting principals generally accepted in the United States (“U.S.
GAAP”) do not take into consideration such conversion rights. Accordingly
OccuLogix does not have the ability to exercise control of OcuSense, in light of
the voting agreement that currently exists between the founding stockholders and
OccuLogix.
In addition to the above consideration,
the Company also determined that OcuSense is a Variable Interest Entity and that
OccuLogix is the primary beneficiary based on the following:
·
|
OcuSense is a development stage
enterprise (as defined under FAS 7, “Accounting and Reporting by
Development Stage Enterprises”) and therefore is not considered to be a
business under U.S. GAAP. Accordingly, OcuSense is not subject
to the business scope
exception.
|
·
|
The Company noted that the holders
of the Series A preferred shares (including OccuLogix) have the ability to
redeem their shares at the greater of their original subscription price
and their fair value on an as-converted basis. As such, their
investment is not considered to be at-risk
equity.
|
·
|
Additionally, as a result of
the
voting agreement
between OccuLogix and the founding stockholders of OcuSense, voting
control of OcuSense is shared between OccuLogix and
OcuSense. Accordingly, the common stockholders, who represent
the sole class of at-risk equity, cannot make decisions about an entity’s
activities that have a significant effect on the success of the entity
without the concurrence of
OccuLogix.
|
FIN 46(R) requires that the enterprise
which consolidates the VIE be the primary beneficiary of that entity. The
primary beneficiary is the entity that will absorb a majority of the VIE’s
expected losses, receive a majority of the entity’s expected returns, or both.
At the time of acquisition, it was expected that the Company would contribute
virtually all of the required funding until commercialization through the
acquisition of the Series A preferred shares and future milestone payments as
described above. The common stockholders were expected to make
nominal equity contributions during this period. Therefore, based
primarily on qualitative considerations, the Company believes that it is the
primary beneficiary of OcuSense and should consolidate OcuSense using the
variable interest model.
The Company has noted that the initial
measurement of assets, liabilities and non-controlling interests under FIN 46(R)
differs from that which is required under FAS 141, “Business
Combinations”. In particular, under FIN 46(R), assets, liabilities
and non-controlling interest shall be measured initially at their fair value.
The Company previously recorded non-controlling interest based on the historical
carrying values of OcuSense’s assets and liabilities, and as a result
consolidation under FIN 46(R) will result in material revisions to the amounts
previously reported in the Company’s consolidated financial
statements.
Assets acquired and liabilities assumed
consisted solely of working capital and of a technology intangible asset
relating to patents owned by OcuSense. Before consideration of
deferred tax, the fair value of the assets acquired was greater than the fair
value of the liabilities assumed and the non-controlling
interest. Because OcuSense does not comprise a business, as defined
in Emerging Issues Task Force (“EITF”) 98-3, “Determining Whether a Nonmonetary
Transaction Involves Receipt of Productive Assets or of a Business”, the
Company applied the simultaneous equation method as per EITF 98-11,
“Accounting for Acquired Temporary Differences in Certain Purchase Transactions
That Are Not Accounted for as Business Combinations”, and adjusted the assigned
value of the non-monetary assets acquired (consisting solely of the technology
asset) to include the deferred tax liability.
The Company also considered the
appropriate accounting for the milestone payments, as a result of the fact that
it has determined that it should apply the initial measurement guidance in FIN
46(R). The Company notes that subsequent to initial consolidation,
the milestone payment liability represents a contingent liability to a
controlled subsidiary, and as such, the liability will eliminate on
consolidation. Previously, the Company adjusted the minority interest
at the date of each milestone payment to reflect the non-controlling interest’s
share in the additional cash of the subsidiary, with an offsetting increase to
the non-monetary assets acquired (consisting solely of the technology intangible
asset) reflecting the increased actual cost of obtaining those non-monetary
assets.
The Company notes that because the
non-controlling interest is required to be measured at fair value on acquisition
of OcuSense, the fair value of the milestone payments as of the date of
acquisition will be embedded in the initial measurement of non-controlling
interest. As such, it would be inappropriate to record additional
minority interest based on the full amount of the milestone payment applicable
to the minority interest. Accordingly, the Company has accounted for
the milestone payments as follows:
|
·
|
The Company determined the fair
value of the milestone payments on the date of acquisition, by
incorporating the probability that the milestone payments will be made, as
well as the time value associated with the planned settlement date of the
payments.
|
|
·
|
Upon payment of the milestone
payments, the Company recorded the minority interest portion of the change
in fair value of the milestone payment (i.e. the minority interest portion
of the ultimate value of the milestone payment less the initial fair value
determination) as an expense, with a corresponding increase to minority
interest, to reflect the additional value provided to the minority
interest in excess of that contemplated on the acquisition
date.
|
The
following is a summary of the significant effects of the restatements on our
consolidated balance sheets as of March 31, 2008 and December 31, 2007 and its
consolidated statements of operations and cash flows for the three months ended
March 31, 2008 and 2007.
|
|
Select
balances - consolidated balance sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
At March 31, 2008
|
|
|
As
at December 31, 2007
|
|
|
|
As
previously reported
|
|
|
Adjustment
|
|
|
As
restated
|
|
|
As
previously reported
|
|
|
Adjustment
|
|
|
As
restated
|
|
Consolidated
Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets
|
|
|
5,883,171
|
|
|
|
4,776,166
|
|
|
|
10,659,337
|
|
|
|
5,770,677
|
|
|
|
5,314,377
|
|
|
|
11,085,054
|
|
Deferred
tax liabilities
|
|
|
—
|
|
|
|
1,536,535
|
|
|
|
1,536,535
|
|
|
|
—
|
|
|
|
2,259,348
|
|
|
|
2,259,348
|
|
Minority
interest
|
|
|
274,288
|
|
|
|
4,517,888
|
|
|
|
4,792,176
|
|
|
|
—
|
|
|
|
4,953,960
|
|
|
|
4,953,960
|
|
Additional
paid-in capital
|
|
|
362,486,775
|
|
|
|
(216,619
|
)
|
|
|
362,270,156
|
|
|
|
362,402,899
|
|
|
|
(170.868
|
)
|
|
|
362,232,031
|
|
Accumulated
deficit
|
|
|
(359,504,417
|
)
|
|
|
(1,061,638
|
)
|
|
|
(360,566,055
|
)
|
|
|
(356,560,917
|
)
|
|
|
(1,728,063
|
)
|
|
|
(358,288,980
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative (i)
|
|
|
1,365,484
|
|
|
|
160,590
|
|
|
|
1,526,074
|
|
|
|
2,433,490
|
|
|
|
221,350
|
|
|
|
2,654,840
|
|
Minority
interest
|
|
|
—
|
|
|
|
207,535
|
|
|
|
207,535
|
|
|
|
554,848
|
|
|
|
(190,168
|
)
|
|
|
364,680
|
|
Income
tax recovery (i)
|
|
|
—
|
|
|
|
619,480
|
|
|
|
619,480
|
|
|
|
1,981,325
|
|
|
|
(79,752
|
)
|
|
|
1,901,573
|
|
Loss
from continuing operations (i)
|
|
|
2,943,500
|
|
|
|
(666,425
|
)
|
|
|
2,277,075
|
|
|
|
2,991,002
|
|
|
|
491,270
|
|
|
|
3,482,273
|
|
Discontinued
Operations (i)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,281,742
|
|
|
|
(178,252
|
)
|
|
|
1,103,490
|
|
Net
loss for the period
|
|
|
2,943,500
|
|
|
|
(666,425
|
)
|
|
|
2,277,075
|
|
|
|
4,272,744
|
|
|
|
313,018
|
|
|
|
4,585,762
|
|
Loss
per share
|
|
|
.05
|
|
|
|
(.01
|
)
|
|
|
.04
|
|
|
|
.08
|
|
|
|
-
|
|
|
|
.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
used in operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the year
|
|
|
(2,943,500
|
)
|
|
|
666,425
|
|
|
|
(2,277,075
|
)
|
|
|
(4,272,744
|
)
|
|
|
(313,018
|
)
|
|
|
(4,585,762
|
)
|
Amortization
of intangibles
|
|
|
161,795
|
|
|
|
160,590
|
|
|
|
322,385
|
|
|
|
1,291,802
|
|
|
|
204,749
|
|
|
|
1,496,551
|
|
Deferred
tax liability, net
|
|
|
-
|
|
|
|
(619,480
|
)
|
|
|
(619,480
|
)
|
|
|
(2,879,350
|
)
|
|
|
(81,898
|
)
|
|
|
(2,961,248
|
)
|
Minority
interest
|
|
|
-
|
|
|
|
(207,535
|
)
|
|
|
(207,535
|
)
|
|
|
(554,848
|
)
|
|
|
190,168
|
|
|
|
(364,680
|
)
|
(i) – includes a correction of
comparative amounts allocated to discontinued operations for the three months
ending March 31, 2007. Impact of correction: increase in general and
administrative expenses of $16,601, decrease in recovery of income taxes of
$161,652, increase in loss from continuing operations of $178,252 and decrease
in loss from discontinued operations of $178,252.
There was no net impact on cash flow
from operations.
Continuing
operations
On
December 20, 2007, we announced the sale of SOLX to SOLX Acquisition, Inc., or
SOLX Acquisition, a company wholly owned by Doug P. Adams, the founder of SOLX
and who, until the closing of the sale, had been serving as an executive officer
of the Company in the capacity of President & Founder, Glaucoma
Division. The results of operations of SOLX have been included in
discontinued operations in the Company’s consolidated statements of operations
for the three months ended March 31, 2008 and 2007.
Revenues,
Cost of sales and Gross margin from continuing operations
|
|
Three Months Ended March
31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
$
|
|
|
$
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Retina
revenue
|
|
|
7,200
|
|
|
|
90,000
|
|
|
|
(82,800
|
)
|
|
|
|
7,200
|
|
|
|
90,000
|
|
|
|
(82,800
|
)
|
Cost of
sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Retina cost of
sales
|
|
|
24,556
|
|
|
|
32,100
|
|
|
|
(7,544
|
)
|
|
|
|
24,556
|
|
|
|
32,100
|
|
|
|
(7,544
|
)
|
Gross
margin
|
|
|
|
|
|
|
|
|
|
|
|
|
Retina gross
margin
|
|
|
(17,356
|
)
|
|
|
57,900
|
|
|
|
(75,256
|
)
|
Percentage of retina
revenue
|
|
|
N/M
|
|
|
|
64
|
%
|
|
|
N/M
|
|
Total gross margin
(loss)
|
|
|
(17,356
|
)
|
|
|
57,900
|
|
|
|
(75,256
|
)
|
*N/M – Not
meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
Retina
Revenue
The Company owns a consignment
inventory o
f 400 disposable
treatment sets, in the
keeping of
Macumed AG, a company
based in Switzerland. During the three months ended March 31, 2008, Macumed
consumed a total of 48 treatment sets at a negotiated price of $150 per
treatment set, resulting in $7,200 in revenue. In the three months
ended March 31, 2007, we sold a total of 600 treatment sets at a negotiated
price of $150 per treatment to Macumed AG, resulting in $90,000 of
revenue.
Cost
of Sales
Cost of sales includes costs of goods
sold and royalty costs. Our cost of goods sold
for the three months ended March 31,
2007
consists primarily of
costs for the manufacture of the RHEO™ System
,
including the costs we incur for the
purchase of component parts from our suppliers, applicable freight and shipping
costs, logistics inventory management and recurring regulatory costs associated
with conducting business and ISO certification.
Retina Cost of
Sales
Cost of sales for the three months ended
March 31, 2008 and March 31, 2007 includes royalty fees of $25,000 payable to
Dr. Brunner and Mr. Stock. March 31, 2008 sales were supplied from
consignment inventory located in Switzerland
which have been fully reserved for in
November 2007
. The
Company recovered some of
the
associated freight
costs
that had
been expensed in prior periods. Cost of
sales for the three months ended March 31, 2007 includes freight charges on the
treatment sets sold and delivered to Macumed AG during the
period.
Retina Gross
Margin
During the three months ended March 31,
2008
,
gross margin is negative $17,356
reflecting low sales and fixed
royalty
fees.
Operating
Expenses
|
|
Three Months
ended
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
General and
administrative
|
|
|
1,526,074
|
|
|
|
2,654,840
|
|
|
|
(1,128,766
|
)
|
Clinical and
regulatory
|
|
|
1,022,987
|
|
|
|
2,169,739
|
|
|
|
(1,146,752
|
)
|
Sales and
marketing
|
|
|
176,529
|
|
|
|
472,536
|
|
|
|
(296,007
|
)
|
Discontinued
Operations
|
|
|
―
|
|
|
|
1,934,678
|
|
|
|
(1,934,678
|
)
|
|
|
|
2,725,590
|
|
|
|
7,231,793
|
|
|
|
(4,506,203
|
)
|
General
and Administrative Expenses
General and administrative expenses
decreased by $1,128,766 or 43% during the three months ended March 31, 2008, as
compared with the corresponding period in fiscal 2007, due to the
indefinite suspension of our RHEO™
System clinical development program. Stock-based compensation expense also
declined by $
313,301
from $3
57,089
for the three months ended March 31,
2007
to
$
43,788
for the three months ended March 31,
2008
which reflects the
forfeiture of unvested stock options previously granted to terminated
employees.
We are continuing to focus our efforts
on achieving an orderly refocus on ongoing activities by reviewing and improving
upon our existing business processes and cost structure
Clinical
and Regulatory Expenses
Clinical and regulatory expenses
decreased by $1,146,752 during the three months ended March 31, 2008, as
compared with the corresponding prior year period, due to the
indefinite suspension of our RHEO™
System clinical development program. Clinical expense for retina activity of
$148,305 for the three months ended March 31, 2008 represents expenses to close
clinics and support ongoing obligations for patient support. Clinical expense
for retina activity the three months ended March 31, 2007 were
$1,184,972.
OcuSense
clinical expenditures for the three
months ended March 31, 2008 and 2007 were $874,682 and $984,767, respectively.
The decline of $110,085 or 11.2% reflects the maturing stage of OcuSense
technological development in that the development in the three months ended
March 31, 2008 was of a nature that could be carried out in-house, whereas the
development in the corresponding period was completed primarily in contracted
facilities.
In March 2008, OcuSense announced that
it had validated the prototype of the TearLab
TM
test for DED and received company-wide
certification to ISO 13485:2003. These achievements allow the Company to move
forward with clinical trials and the attainment of the CE Mark in Europe, in
advance of commercialization.
Sales
and Marketing Expense
Sales and marketing expenses decreased
by $296,007 during the three months ended March 31, 2008, as compared with the
prior period in fiscal 2007. The retina sales and marketing expense for the
three months ended March 31, 2008 was $5,399 compared to an expense of $457,090
the previous year. This decline is due in general the
indefinite
suspension of our RHEO™ System clinical development program and, in particular,
to
stock-based compensation
expense which declined by $131,027 from an expense of $131,027 for the three
months ended March 31, 2007 to nil for the three months ended March 31,
2008.
Sales and marketing expense for OcuSense
increased by $155,684 in the three months ended March 31, 2008 when compared
with the prior year period in fiscal 2007. This increase reflects an increased
focus on building awareness of the TearLab
TM
test for DED prior to
commercialization.
The cornerstone of our sales and
marketing strategy to date has been to increase awareness of our products among
eye care professionals and, in particular, the key opinion leaders in the eye
care professions.
We are
presently primarily focused on commercialization in Europe and developing plans
to do the same in North America.
We will continue to develop and execute
our conference and podium strategy to ensure visibility and evidence-based
positioning of the TearLab™ test for DE
D
among eye care
professionals.
Other
Income (Expenses)
|
|
Three months ended March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Variance
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Interest
income
|
|
|
30,288
|
|
|
|
215,438
|
|
|
|
185,150
|
|
Changes in fair value of
obligation under warrants
|
|
|
―
|
|
|
|
(723,980
|
)
|
|
|
(723,980
|
)
|
Impairment of
Investments
|
|
|
(327,486
|
)
|
|
|
―
|
|
|
|
327,486
|
|
Other
income
|
|
|
17,492
|
|
|
|
15,873
|
|
|
|
(1,619
|
)
|
Interest
expense
|
|
|
(40,438
|
)
|
|
|
(16,641
|
)
|
|
|
23,797
|
|
Finance
costs
|
|
|
(41,000
|
)
|
|
|
―
|
|
|
|
41,000
|
|
Minority
interest
|
|
|
207,535
|
|
|
|
364,680
|
|
|
|
157,145
|
|
|
|
|
(153,609
|
)
|
|
|
(144,630
|
)
|
|
|
8,979
|
|
Interest
Income
Interest income consists of interest
income earned in the current period and the corresponding prior period as a
result of the Company’s cash and short-term investment position following the
raising of capital and debt.
Changes
in fair value of obligation under warrants and warrant expense
On February 6, 2007, pursuant to the
Securities Purchase Agreement between the Company and certain institutional
investors, the Company issued five-year warrants exercisable into an aggregate
of 2,670,933 shares of the Company’s common stock to these investors. On
February 6, 2007, the Company also issued a five-year warrant exercisable into
an aggregate of 93,483 shares of the Company’s common stock to Cowen and
Company, LLC in part payment of the placement fee payable to Cowen and Company,
LLC for the services it had rendered as the placement agent in connection with
the private placement of the Company’s shares of common stock and warrants. The
per share exercise price of the warrants is $2.20, subject to adjustment, and
the warrants will become exercisable on August 6, 2007. All of the terms and
conditions of the warrants issued to Cowen and Company, LLC (other than the
number of shares of the Company's common stock into which the warrant is
exercisable) are identical to those of the warrants issued to the institutional
investors. The Company accounts for the warrants in accordance with the
provisions of SFAS No. 133 along with related interpretation EITF 00-19. Based
on the provisions of EITF 00-19, the Company determined that the warrants issued
during the three months ended March 31, 2007 do not meet the criteria for
classification as equity. Accordingly, the Company has classified the warrants
as a current liability as at March 31, 2007. The estimated fair value was
determined using the Black-Scholes option-pricing model. In addition, SFAS No.
133 requires the Company to record the outstanding warrants at fair value at the
end of each reporting period resulting in an adjustment to the recorded
liability of the derivative, with any gain or loss recorded in earnings of the
applicable reporting period. The Company therefore estimated the fair value of
the warrants as at March 31, 2007 and determined the aggregate fair value to be
$2,626,195, an increase of $573,617 over the initial measurement of the fair
value of the warrants on the date of issuance.
Changes in fair value of obligation
under warrants and warrant expense
of $723,980
for the three months ended March 31,
2007 includes
t
ransaction costs associated with the
issuance of the
warrants of
$150,363 and
a charge of
$573,617 which reflect
s
the increase in the fair
value
of the warrants as at March 31, 2007
over the initial measurement of the fair value of the warrants on the date of
issuance. There was no comparable expense in the three months ended March 31,
200
8
.
Change in the fair value of
investments
As at
March 31, 2008 and December 31, 2007, the Company had investments in the
aggregate principal amount of $1,900,000 which consist of investments in four
separate asset-backed auction rate securities yielding an average return of
3.94% per annum. However, as a result of market conditions, all of
these investments have recently failed to settle on their respective settlement
dates and have been reset to be settled at a future date with an average
maturity of 46 days. Due to the current lack of liquidity for
asset-backed securities of this type, the Company has concluded that the
carrying value of these investments was higher than its fair value as of
December 31, 2007 and March 31, 2008. Accordingly, these auction rate securities
have been recorded at their estimated fair value of $863,750 as at December 31,
2007 and $536,264 as at March 31, 2008.
The
Company considers this to be an other-than-temporary reduction in the value.
Accordingly, the loss associated with these auction rate securities of $327,486
for three months ended March 31, 2008 has been included as an impairment of
investments in the Company’s consolidated statement of operations for the three
months ended March 31, 2008. The investments were liquid as at March 31, 2007.
Accordingly, the corresponding charge for the three months ended March 31, 2007
is nil.
Although
the Company continues to receive payment of interest earned on these securities,
the Company does not know at the present time when it will be able to convert
these investments into cash. Accordingly, management has classified
these investments as a non-current asset on its consolidated balance sheet as of
December 31, 2007 and March 31, 2008. Management will continue to monitor these
investments closely for future indications of further impairment. The
illiquidity of these investments may have an adverse impact on the length of
time during which the Company currently expects to be able to sustain its
operations in the absence of an additional capital raise by the Company
as we
do not have the cash
reserves to hold these auction rate securities until the market recovers nor can
we hold these securities until their contractual maturity dates.
Other
Income (Expense)
Other income for the three months ended
March 31, 2008 consists of amounts realized in connection with the disposal of
SOLX
in excess of the amounts
recorded in fiscal 2007.
Other income for the three months ended
March 31, 2007 consists of foreign exchange gain of $15,8
73
due to exchange rate fluctuations on
the Company’s foreign currency transactions. Other expense was $381 for the
three months ended March 31, 200
7
and
consists of miscellaneous tax expense of
$5,713 offset in part by a foreign exchange gain of $5,332 during the
period.
Interest
Expense
On
February 19, 2008, the Company announced that it has secured a bridge loan in an
aggregate principal amount of $3,000,000 (less transaction costs of
approximately $180,000) from a number of private parties. The loan bears
interest at a rate of 12% per annum and has a 180-day term, which may be
extended to 270 days under certain circumstances. The Company has pledged its
shares of the capital stock of OcuSense as collateral for the loan. Interest
expense for the three months ended March 31, 2008 of $40,438 is due to the
lenders.
On
November 30, 2006, the Company announced that Mr. Elias Vamvakas, the Chairman,
Chief Executive Officer and Secretary of the Company, had agreed to provide the
Company with a standby commitment to purchase convertible debentures of the
Company (“Convertible Debentures”) in an aggregate maximum amount of $8,000,000
(the “Total Commitment Amount”). On February 6, 2007, the Total
Commitment Amount was reduced to zero, thus effectively terminating Mr.
Vamvakas’ standby commitment. No portion of the standby commitment was ever
drawn down by the Company, and the Company recognized as interest expense a
total of $16,685 in commitment fees during the three months ended March 31,
2007.
Finance
Costs
Finance
costs reflect the $41,000 amortization of the $180,000 paid to secure the
February 19, 2008 bridge financing.
Minority
Interest
As a result of the restatement of the
financial statements as discussed earlier, the amount of losses allocated to
minority interest increased by $207,535 in the three months ended March 31, 2008
and decreased by $190,168 in the three months ended March 31,
2007.
The increase in the three months ended
March 31, 2008 was primarily related to the following:
|
·
|
the minority interest share of
losses for the three months ended March 31, 2008 of $537,250 not
previously reported on account of the minority interest balance
represented a negative balance, (2007 - $0);
and
|
|
·
|
the minority interest share of
losses arising from the increase in the net amortization of intangibles
and deferred tax liabilities arising from fair valuing minority interest
on the date of acquisition of $81,968, (2007 -
$81,968)
|
These increases were partially offset by
the following decreases:
|
·
|
a decrease related to the minority
interest share of the
excess of the beta
payment of $2,000,000 over the
estimated fair value on the date of our
acquisition of OcuSense amounting
to $203,819, (2007, - $0),
|
|
·
|
the minority interest share of tax
losses benefited in the three ended March 31, 2008 of $207,864, (2007 -
$188,474), and
|
|
.
|
the decrease in the minority
interest share of losses as a result of the reduction in the
applicable percentage used to measure minority interest from
49.9% to 42.38% in the three months ending March 31, 2008 amount to $0,
(2007 - $83,662).
|
The minority interest share of losses in
the three months ended March 31, 2008 decreased by $157,145 from the share of
losses reported in the three months ended March 31, 2007 primarily
related to
the minority
interest share of the
excess of the beta
payment of $2,000,000 over the
estimated fair value on the date of our
acquisition of OcuSense amounting to
$203,819 in the three months ended March 31, 2008, (2007, - $0)
, and the increase in the minority
interest share of tax losses benefited of $19,390 offset by a reduction in the
minority interest share of losses of $66,064
Discontinued
Operations
On December 19, 2007, the Company sold
to
SOLX
Acquisition, and
SOLX
Acquisition purchased from the
Company,
all of the issued and outstanding shares of the capital stock of
SOLX, which had been the Glaucoma division of the Company prior to the
completion of this transaction. The consideration for the purchase and sale of
all of the issued and outstanding shares of the capital stock of SOLX consisted
of: (i) on the closing date of the sale, the assumption by SOLX
Acquisition of all of the liabilities of the Company related to SOLX’s business,
incurred on or after December 1, 2007, and the Company’s obligation to make a
$5,000,000 payment to the former stockholders of SOLX due on September 1, 2008
in satisfaction of the outstanding balance of the purchase price of SOLX; (ii)
on or prior to February 15, 2008, the payment by SOLX Acquisition of all of the
expenses that the Company had paid to the closing date, as they related to
SOLX’s business during the period commencing on December 1, 2007; (iii) during
the period commencing on the closing date and ending on the date on which SOLX
achieves a positive cash flow, the payment by SOLX Acquisition of a royalty
equal to 3% of the worldwide net sales of the SOLX 790 Laser and the SOLX Gold
Shunt, including next-generation or future models or versions of these products;
and (iv) following the date on which SOLX achieves a positive cash flow, the
payment by SOLX Acquisition of a royalty equal to 5% of the worldwide net sales
of these products. In order to secure the obligation of SOLX Acquisition to make
these royalty payments, SOLX granted to the Company a subordinated security
interest in certain of its intellectual property.
No value was assigned to the
royalty payments as the determination of worldwide net sales of SOLX’s products
is subject to significant uncertainty.
The sale
transaction described above established fair values for certain of the Company’s
acquisition-related intangible assets and goodwill. Accordingly, the Company
performed an impairment test of these assets at December 1, 2007. Based on this
analysis, during the year ended December 31, 2007, the Company recognized a
non-cash goodwill impairment charge of $14,446,977 and an impairment charge of
$22,286,383 to record its acquisition-related intangible assets at their fair
value as of December 31, 2007. As at March 31, 2008 and December 31, 2007, the
value of both of these assets associated with SOLX was nil and nil,
respectively.
The Company’s results of operations
related to disco
ntinued
operations for the three months ended March 31, 2008 and 2007
are as follows:
|
|
Three
months ended March 31,
|
|
|
|
2008
$
|
|
|
2007
$
|
|
Revenue
|
|
|
―
|
|
|
|
39,625
|
|
Cost
of goods sold
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
―
|
|
|
|
55,508
|
|
Royalty
costs
|
|
|
―
|
|
|
|
8,734
|
|
Total
cost of goods sold
|
|
|
―
|
|
|
|
64,242
|
|
|
|
|
|
|
|
|
(24,617
|
)
|
Operating
expenses
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
―
|
|
|
|
1,025,276
|
|
Clinical
and regulatory
|
|
|
―
|
|
|
|
628,098
|
|
Sales
and marketing
|
|
|
―
|
|
|
|
281,304
|
|
|
|
|
―
|
|
|
|
1,934,678
|
|
|
|
|
―
|
|
|
|
(1,959,295
|
)
|
Other
income (expenses)
|
|
|
|
|
|
|
|
|
Interest
and accretion expense
|
|
|
―
|
|
|
|
(204,896
|
)
|
Other
|
|
|
―
|
|
|
|
(28
|
)
|
|
|
|
―
|
|
|
|
(204,924
|
)
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations before income taxes
|
|
|
―
|
|
|
|
(2,164,219
|
)
|
Recovery
of income taxes
|
|
|
―
|
|
|
|
1,060,729
|
|
Loss
from discontinued operations
|
|
|
―
|
|
|
|
(1,103,490
|
)
|
(i) corrected
by a decrease of $16,601 from amount previously disclosed.
(ii) corrected
by an increase of $161,652 from amount previously disclosed
Recovery
of income taxes
|
|
Three
months ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
$
|
|
|
$
|
|
Recovery
of income taxes from continuing operations
|
|
|
619,480
|
|
|
|
1,901,573
|
|
Recovery
of income taxes from discontinued operations
|
|
|
—
|
|
|
|
1,060,729
|
|
Recovery
of income taxes
|
|
|
619,480
|
|
|
|
2,962,302
|
|
As a result of the restatement of the
financial statements discussed
in Note 2
earlier, the
recovery of income tax
amount
in
creased by $
619,480
in the
three months ended March
31, 200
8
from what was originally reported to
$
619,480
and
de
creased by $
79,752
from what was originally reported to
$
1,901,573
in the
three months
ended
March
31, 200
7
.
The
in
crease
in the recovery of income taxes
in the
three month period
ended
March
31, 200
8
was primarily related the
following:
|
·
|
an increase in the amount of
OcuSense tax losses benefited for the three months ended March 31, 2008 of
$490,526, ($0 in 2007), and
|
|
·
|
an increase arising from the
reversal of the reversal of tax losses previously benefited in the three
months of $64,718, ($0 in
2007), and
|
|
·
|
an increase in the amortization of
deferred tax liabilities resulting from fair valuing minority interest on
the date of acquisition $81,900, ($81,900 in 2007), offset
by
|
|
·
|
a decrease related to the reversal
of the amortization of deferred taxes related to the initial accounting of
the alpha payment of $2,000,000 of $17,664 ($0 in
2007)
|
|
·
|
a decrease resulting from the
correction of the allocation of the recovery of income taxes between
continuing and discontinued operations as originally filed in the 10-Q for
the three months ended March 31, 2008 of $0, ($161,652 in
2007).
|
Recovery of income taxes from continuing
operations decreased by $1,282,093 during the three months ended March 31, 2008,
as compared with the same period in 2007. The decrease arises primarily from the
impairment of OccuLogix intangible assets reported in third quarter of 2007 when
the Company made the decision to suspend its clinical trial activities relating
to the RHEO™ System. The related elimination of deferred tax liabilities
associated with the RHEO™ intangible assets resulted in amortization of deferred
tax liabilities of $0 in the three months ended March 31, 2008 as compared to
$157,386 in the three months ended March 31, 2007. In addition, this same
elimination does not allow the Company to report tax benefits for US
losses arising at OccuLogix in the
three months ended March 31, 2008 as compared to tax benefits reported re
OccuLogix losses in the three months ended March 31, 2007 of
$1,169,414.
L
IQUIDITY AND CAPITAL
RESOURCES
(in thousands)
|
|
March 31
|
|
|
December
31
|
|
|
|
|
|
|
200
8
|
|
|
2007
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
2,330
|
|
|
$
|
2,236
|
|
|
$
|
94
|
|
Short-term
investments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total cash and cash equivalents
and short-term investments
|
|
$
|
2,330
|
|
|
$
|
2,236
|
|
|
$
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total
assets
|
|
|
15.9
|
%
|
|
|
14.6
|
%
|
|
|
1.2
|
%
|
Working capital
(deficiency)
|
|
$
|
(3,388
|
)
|
|
$
|
(997
|
)
|
|
$
|
(2,391
|
)
|
In December 2004, the Company raised
$67,200,000 of gross cash proceeds (less issuance costs of $7,858,789) in an
initial public offering of shares of its common stock. Immediately prior to the
offering, the primary source of the Company’s liquidity was cash raised through
the issuance of debentures.
On
February 6, 2007, the Company raised gross proceeds in the amount of $10,016,000
(less issuance costs of
$871,215
)
in a private placement of
shares of its common stock and warrants.
On
February 19, 2008, we announced that the Company secured a bridge loan in an
aggregate principal amount of $3,000,000 (less transaction costs of $180,000)
from a number of private parties. The loan bears interest at a rate of 12% per
annum and has a 180-day term, which may be extended to 270 days under certain
circumstances. The repayment of the loan is secured by a pledge by the Company
of its shares of the capital stock of OcuSense.
On May 5,
2008 we announced that the Company secured an additional bridge loan in an
aggregate principal amount of $300,000 (transaction costs of approximately
$18,000) from a number of private parties. The terms of the additional bridge
loan are substantially the same as those of the $3,000,000 bridge loan announced
February 19, 2008.
To the
first quarter of 2008, cash has been primarily utilized to finance increased
infrastructure costs, to accumulate inventory and to fund costs of the MIRA-1,
LEARN and RHEO-AMD trials and other clinical trials and to acquire SOLX and
OcuSense in line with our diversification strategy. With the suspension of the
Company’s RHEO™ System clinical trial development program, and the consequent
winding-down of the RHEO-AMD study, and the Company’s disposition of SOLX, we
expect that, in the future, we will use our cash resources to complete the
product development of OcuSense’s TearLab™ test for DED and to conduct the
clinical trials that will be required for the TearLab™ test for
DED.
Currently,
we anticipate that the net proceeds of the bridge loans, together with the
Company’s other cash and cash-equivalents, will be sufficient to sustain the
Company’s operations only until approximately the middle of July
2008.
As at March 31, 2008 and December 31,
2007
, we had investments in
the aggregate principal amount of $1,900,000 which consist of investments in
four separate asset-backed auction rate securities yielding an average return of
3.94
% per
annum.
Contractual maturities for these auction rate
securities range from 33 to 39 years, with an average interest reset date of
approximately 46 days. Historically, the carrying value of auction rate
securities approximated their fair value due to the frequent resetting of
interest rates.
However, as a
result of market conditions associated with
the liquidity issues
experienced in the global credit and capital markets
, all of these investments have recently
failed to settle on their respective settlement dates and have been reset to be
settled at a future date with an average maturity of 46
days.
Due to the current lack of liquidity for
asset-backed securities of this type, we concluded that the carrying value of
these investments was higher than its fair value as of
March 31, 2008 and
December 31, 2007. Accordingly, these
auction rate securities have been recorded at their estimated fair value of
$
536,264
, which represents a decline of
$1,
363,736
in the carrying value of these auction
rate securities.
We estimated the fair value of these auction rate
securities based on the following: (i) the underlying structure of each
security; (ii) the present value of future principal and interest payments
discounted at rates considered to reflect current market conditions; (iii)
consideration of the probabilities of default, auction failure or repurchase at
par for each period; and (iv) estimates of the recovery rates in the event of
default for each security. This estimated fair value could change
significantly based on future market conditions.
We determined the reduction in the value
of these auction rate securities to be an other-than-temporary reduction in
value. Accordingly, the impairment associated with these auction rate securities
of $1,036,250 has been included as an impairment of investments in our
consolidated statement of operations for the year ended December 31,
2007
and $327,486
has been included as an
impairment of investments in our consolidated statement of operations
for the three months ended
March 31, 2008
.
Our
conclusion for the other-than-temporary impairment is based on the Company’s
current liquidity position.
Although we continue to receive interest
earned on these securities, we do not know at the present time when we will be
able to convert these investments into cash. Accordingly, management
has classified these investments as a non-current asset on its consolidated
balan
ce sheet as at March
31, 2008 and
December 31,
2007. Management will continue to monitor these investments closely for future
indications of further impairment.
If the current market conditions
deteriorate further, or the anticipated recovery in market values does not
occur, we may be required to record additional impairment charges in the
remainder of fiscal 2008.
The illiquidity of these investments may
have an adverse impact on the length of time during which we currently expect to
be able to sustain our operations in the absence of an additional capital raise
by the Company as we
do not have the cash reserves to hold these auction
rate securities until the market recovers nor can we hold these securities until
their contractual maturity dates.
Changes
in Cash Flows
|
|
Three Months Ended March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in operating
activities
|
|
|
(2,
68
2,924
|
)
|
|
|
(4,689,570
|
)
|
|
|
2,006,646
|
|
Cash used in
investing
activities
|
|
|
(43,190
|
)
|
|
|
(5,127,743
|
)
|
|
|
5,084,553
|
|
Cash provided by financing
activities
|
|
|
2
,
820
,000
|
|
|
|
9,343,014
|
|
|
|
(6,523,014
|
)
|
Net (decrease) increase in cash
and cash equivalents period
|
|
|
93,886
|
|
|
|
(474,299
|
)
|
|
|
568,185
|
|
Cash
Used in Operating Activities
Net cash used to fund our operating
activities during the three months ended March 31, 2008 was $2,
68
2,924. Net loss during the
three-month period was $
2,277,075
. The non-cash charges which comprise a
portion of the net loss during that peri
od
the amortization of intangible
assets
of
$322,385
, fixed
assets
of
$17,638
,
and
impairment of investments of
$327,486.
Additional
non-cash charges consist of $
83,875
in stock-based compensation
charges
.
The net change in non-cash working
capital balances related to operations for the three months ended March 31,
200
8
and 200
7
consists of the
following:
|
|
Three months
ended
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Due to related
party
|
|
|
—
|
|
|
|
—
|
|
Amounts receivable
(increase)
decrease
|
|
|
212,721
|
|
|
|
(166,806
|
)
|
Inventory
(increase)
decrease
|
|
|
(41,213
|
)
|
|
|
12,752
|
|
Prepaid expenses
(increase)
decrease
|
|
|
35,825
|
|
|
|
9,642
|
|
Deposit
(increase)
decrease
|
|
|
(2,892
|
)
|
|
|
—
|
|
Other current assets
(increase)
decrease
|
|
|
—
|
|
|
|
(10,600
|
)
|
Accounts payable
(decrease)
increase
|
|
|
(828,795
|
)
|
|
|
43,365
|
|
Accrued liabilities
(decrease)
increase
|
|
|
59,94
5
|
|
|
|
252,626
|
|
Deferred revenue
(decrease)
increase
|
|
|
106,700
|
|
|
|
—
|
|
Due to stockholders
(decrease)
increase
|
|
|
41,238
|
|
|
|
(48,629
|
)
|
Short term liabilities
(decrease)
increase
|
|
|
40,438
|
|
|
|
—
|
|
|
|
|
(
376
,033
|
)
|
|
|
92,350
|
|
·
|
Amounts receivable decrease is due
to receipts for matters related to the sale of SOLX
Inc..
|
·
|
Increase in inventory reflects the
acquisition of tears samples and lab cards consumed in ongoing clinical
tests.
|
·
|
Decrease in prepaid expenses is
primarily due to the decline in prepaid insurance which has resulted from
a decline in insurance costs attributable to discontinued
activities.
|
·
|
Accounts payable decreased due
primarily to payment for clinical test services which were substantially
stopped in the fourth quarter of 2007 and funded in the first quarter of
2008.
|
·
|
Accrued liabilities increased
primarily to the receipt of a $250,000 advance to be utilized to offset
the cost of certain OcuSense TearLab
tests
|
·
|
Increase in deferred revenue
reflects $14,300 received from a customer for the eventual proceeds on
sale of consignment inventory and $92,400 received as an advance payment
for products.
|
·
|
Increase in amounts due to
stockholders is attributable to an increase of $12,500 in the amount due
to Hans Stock and the receipt of $25,000 due from a minority
shareholder of OcuSense.
|
·
|
Increase in short term liabilities
reflects interest accrued on the bridge
financing.
|
Cash
(Used in) Provided by Investing Activities
Net cash used in investing activities
for the three months ended March 31, 2008 was $43,190. Cash used in investing
activities during the period consists of $9,317 used to acquire fixed assets and
$33,873 used to protect and maintain patents and trademarks.
Net cash
used in investing activities for the three months ended March 31, 2007 was
$5,127,743 and resulted from cash provided from the net purchase of short-term
investments of $5,025,000. Cash used in investing activities during the the
three months ended March 31, 2007 included $71,189 used to acquire fixed assets
and $31,554 used to protect and maintain patents and trademarks.
Cash
Provided by Financing Activities
On
February 19, 2008, the Company announced that it has secured a bridge loan in an
aggregate principal amount of $3,000,000 (less transaction costs of $180,000)
from a number of private parties. The loan bears interest at a rate of 12% per
annum and has a 180-day term, which may be extended to 270 days under certain
circumstances. The Company has pledged its shares of the capital stock of
OcuSense as collateral for the loan.
Net cash provided by financing
activities for the
three
months ended March 31, 2007
was $
9,343,014
and
is made up of
gross proceeds
received
in the amount of $10,016,000
from the
private placement of shares of
the Company’s
common stock and warrants
less issuance costs of
$672,986
.
Financial
Condition
Management believes that the existing
cash and cash equivalents and short-term investments, together with the net
proceeds of the bridge loan
s
, will be sufficient to fund the
Company’s anticipated level of operations and other demands and commitments
until approximately the
middle of July
2008
.
As at December 31, 2007, we had
investments in the aggregate principal amount of $1,900,000 which consist of
investments in four separate asset-backed auction rate securities yielding an
average return of
3.94
% per annum. However, as a
result of market conditions, all of these investments have recently failed to
settle on their respective settlement dates and have been reset to be settled at
future date
s
with an average maturity of 46
days. Based on discussions with the Company’s advisors and the
current lack of liquidity for asset-backed securities of this type, we concluded
that the carrying value of these investments was higher than its fair value as
of
March 31, 2008 and
December 31, 2007.
Accordingly, these auction rate securities have been recorded at their estimated
fair value of $
536,264 as
at March 31, 2008 and $863,750 as at December 31, 2007
.
We consider this to be an
other-than-temporary reduction in the value, accordingly, the impairment
associated with these auction rate securities of
$1,036,250 for the the ended December
31, 2008 and $327,486 for the three months ended March 31, 2008 (totaling
$1,
363,736)
has been included as an impairment of
investments in our consolidated statement of operations for the year ended
December 31, 2007
and March
31, 2008 respectively
.
Although
we continue to receive interest earned on these securities, we do not know at
the present time when it will be able to convert these investments into
cash. Accordingly, management has classified these investments as a
non-current asset on its consolidated balance sheet as of December 31, 2007 and
March 31, 2008. Management will continue to monitor these investments closely
for future indications of further impairment. The illiquidity of these
investments may have an adverse impact on the length of time during which we
currently expect to be able to sustain its operations in the absence of an
additional capital raise by the Company as we do not have the cash reserves to
hold these auction rate securities until the market recovers nor can we hold
these securities until their contractual maturity dates.
Our forecast of the period of time
through which our financial resources will be adequate to support our operations
is a forward-looking statement and involves risks and uncertainties. Actual
results could vary as a result of a number of factors. We have based this
estimate on assumptions that may prove to be wrong, and we could utilize our
available capital resources sooner than we currently expect. Our future funding
requirements will depend on many factors, including but not limited
to:
|
·
|
the cost and results of
development of OcuSense’s TearLab™ test for
DED;
|
|
·
|
the cost and results, and the rate
of progress, of the clinical trials of the TearLab™ test for DED that will
be required to support OcuSense’s application to obtain 510(k) clearance
and a CLIA waiver from the FDA to market and sell the TearLab™ test for
DED in the United States;
|
|
·
|
OcuSense’s ability to obtain
510(k) approval and a CLIA waiver from the FDA for the TearLab™ test for
DED and the timing of such approval, if
any;
|
|
·
|
whether government and third-party
payers agree to reimburse treatments using the TearLab™ test for
DED;
|
|
·
|
the costs and timing of building
the infrastructure to market and sell the TearLab™ test for
DED;
|
|
·
|
the costs of filing, prosecuting,
defending and enforcing any patent claims and other intellectual property
rights;
|
|
·
|
the effect of competing
technological and market developments;
and
|
|
·
|
the outcome of the Company’s
appeal to a NASDAQ listings qualifications hearing panelregarding the
NASDAQ’s staff’s determination to delist the Company’s common
stock.
|
With the
suspension of the Company’s RHEO™ System clinical development program, and the
consequent winding-down of the RHEO-AMD study, and the Company’s disposition of
SOLX, the Company’s major asset is its 50.1% ownership stake, on a fully diluted
basis, in OcuSense. Accordingly, unless we acquire other businesses (which, in
light of the Company’s financial condition, is unlikely to occur), our ability
to generate any revenues will be dependent almost entirely upon the success of
OcuSense.
If the
Company is successful in completing the merger transaction announced on April
22, 2008 in which the Company will acquire the minority ownership interest and
OcuSense will be come a wholly-owned subsidiary of the Company, the dependency
on the success of OcuSense will be increased
We cannot
begin commercialization of the TearLab™ test for DED in the United States until
we receive FDA approval. At this time, we do not know when we can expect to
begin to generate revenues from the TearLab™ test for DED in the United
States.
We will
need additional capital in the future, and our prospects for obtaining it are
uncertain. On October 9, 2007, we announced that the Board had authorized
management and the Company’s advisors to explore the full range of strategic
alternatives available to enhance shareholder value, including, but not limited
to, the raising of capital through the sale of securities, one or more strategic
alliances and the combination, sale or merger of all or part of the Company. For
some time prior to the October 9, 2007 announcement, the Company had been
seeking to raise additional capital, with the objective of securing funding
sufficient to sustain its operations as it had been clear that, unless we were
able to raise additional capital, the Company would not have had sufficient cash
to support its operations beyond early 2008. The Company has secured a bridge
loan in an aggregate principal amount of $3,000,000 from a number of private
parties on February 19, 2008 and an additional bridge loan of $300,000 secured
on May 5, 2008. Management believes that these net proceeds, together with the
Company’s existing cash and cash-equivalents, will be sufficient to cover its
operating activities and other demands only until approximately the middle of
July 2008.
If the
Company is successful in completing a private placement of up to U.S.$6,500,000
of common stock as announced on April 22, 2008, management believes that it will
have sufficient funds to meet its operating activities and other demands until
approximately the end of June 2009.
Additional
capital may not be available on terms favorable to us, or at all. In addition,
future financings could result in significant dilution of existing stockholders.
However, unless we succeed in raising additional capital, we will be unable to
continue our operations.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements.” This standard defines fair value, establishes a framework for
measuring fair value in accounting principles generally accepted in the United
States of America and expands disclosure about fair value measurements. This
pronouncement applies to other accounting standards that require or permit fair
value measurements. Accordingly, this statement does not require any new fair
value measurement. This statement is effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. In December of
2007, FASB agreed to a one year deferral of SFAS No. 157’s fair value
measurement requirements for non-financial assets and liabilities that are not
required or permitted to be measured at fair value on a recurring basis. The
Company adopted SFAS No. 157 on January 1, 2008, which had no effect on the
Company’s consolidated financial statements. Refer to Note 8, “Fair value
measurements” for additional information related to the adoption of SFAS No.
157.
In February
2007, FASB issued Statement
No.
159, “The Fair Value Option for
Financial Assets and Financial Liabilities—Including an amendment of FASB
Statement No.
115” (“SFAS No. 159”). SFAS No. 159
expands the use of fair value accounting but does not affect existing standards
which require assets or liabilities to be carried at fair value. Under SFAS No.
159, a company may elect to use fair value to measure accounts and loans
receivable, available-for-sale and held-to-maturity securities, equity method
investments, accounts payable, guarantees and issued debt. Other eligible items
include firm commitments for financial instruments that otherwise would not be
recognized at inception and non-cash warranty obligations where a warrantor is
permitted to pay a third party to provide the warranty goods or services. If the
use of fair value is elected, any upfront costs and fees related to the item
must be recognized in earnings and cannot be deferred (e.g., debt issue costs).
The fair value election is irrevocable and generally made on an
instrument-by-instrument basis, even if a company has similar instruments that
it elects not to measure based on fair value. At the adoption date, unrealized
gains and losses on existing items for which fair value has been elected are
reported as a cumulative adjustment to beginning retained
earnings.
Subsequent
to the adoption of SFAS No. 159, changes in fair value are recognized in
earnings. SFAS No. 159 is effective for fiscal years beginning on or after
November 15, 2007 and is required to be adopted by the Company in the first
quarter of fiscal 2008. The adoption of SFAS No. 159 has not had a material
impact on the Company’s results of operations and financial
position.
On June
14, 2007, FASB ratified EITF 07-3, "Accounting for Non-Refundable Advance
Payments for Goods or Services to Be Used in Future Research and Development
Activities". EITF 07-3 requires that all non-refundable advance payments for
R&D activities that will be used in future periods be capitalized until
used. In addition, the deferred research and development costs need to be
assessed for recoverability. EITF 07-3 is applicable for fiscal years beginning
after December 15, 2007 and is to be applied prospectively without the option of
early application. The adoption of EITF 07-3 has not had a
material impact on the Company’s results of operations and financial
position.
In March
2008, FASB issued SFAS No.
161, “Disclosures about Derivative
Instruments and Hedging Activities — An Amendment of FASB Statement
No.
133”
.
SFAS No.
161 enhances the required disclosures
regarding derivatives and hedging activities, including disclosures
regarding how an entity uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under SFAS No.
133, “Accounting for Derivative
Instruments and Hedging Activities” and how derivative instruments and related
hedged items affect an entity’s financial position, financial performance and
cash flows. SFAS No.
161 is effective for fiscal years
beginning after November
15, 2008. Management is currently
evaluating the requirements of SFAS No.
161 and has not yet determined the
impact, if any, on the Company’s financial statements.
|
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET
RISK
|
Currency fluctuation and exchange
risk
All of our sales are in U.S. dollars or
are linked to the U.S. dollar, while a portion of our expenses are in Canadian
dollars and euros. We cannot predict any future trends in the exchange rate of
the Canadian dollar or euro against the U.S. dollar. Any strengthening of the
Canadian dollar or euro in relation to the U.S. dollar would increase the U.S.
dollar cost of our operations and would affect our U.S. dollar measured results
of operations. We do not engage in any hedging or other transactions intended to
manage these risks. In the future, we may undertake hedging or other similar
transactions or invest in market risk sensitive instruments if we determine that
would be advisable to offset these risks.
Interest
rate risk
The primary objective of our investment
activity is to preserve principal while maximizing interest income we receive
from our investments, without increasing risk. We believe this will minimize our
market risk.
As at March 31, 2008 and December 31,
2007, we had investments in the aggregate principal amount of $1,900,000 which
consist of investments in four separate asset-backed auction rate securities
yielding an average return of 3.940% per annum. However, as a result
of market conditions, all of these investments have recently failed to settle on
their respective settlement dates and have been reset to be settled at future
date
s
with an average maturity of 46
days. Due to the current lack of liquidity for asset-backed
securities of this type, we concluded that the carrying value of these
investments was higher than its fair value as of March 31, 2008 and December 31,
2007. Accordingly, these auction rate securities have been recorded at their
estimated fair value of $536,264. We consider this to be an other-than-temporary
reduction in the fair value of these auction rate securities. Accordingly, the
loss associated with these auction rate securities of $327,486 for the
three
months ended March 31, 2008 has been
included as an impairment of investments in our consolidated statement of
operations for the three months ended March 31, 2007. The auction
rate securities
were liquid
as at March 31, 2007
. As a
result, the loss associated with these auction rate securities for the
three
months ended March 31, 2007 was
nil.
(a)
Disclosure Controls and Procedures. The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the Company’s reports under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded,
processed, summarized and reported within the time reports specified in the
SEC’s rules and forms and that such information is accumulated and communicated
to the Company’s management, including our principal executive officer (the
“CEO”) and our principal financial officer (the “CFO”), as appropriate, to allow
timely decisions regarding required disclosure. In designing and evaluating
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
The Company’s disclosure controls and
procedures are designed to provide reasonable assurance of achieving their
desired objectives.
In
assessing whether the Company’s disclosure controls and procedures and the
Company’s internal control over financial reporting were effective as at March
31, 2008, management also considered the impact of the Restatement of its
Financial Statements with respect to the method of consolidation used to account
for its investment in OcuSense, Inc., to the consolidated financial statements
for the fiscal years ended December 31, 2007 and 2006 and the three months ended
March 31, 2008 as well as the Company’s control environment.
Management
has concluded that due to the failure to account for the consolidation of
OcuSense , Inc. under the variable interest entity model since the Company’s
acquisition of OcuSense on November 30, 2006, there was a material weakness in
its internal control over financial reporting as of December 31,
2007.
During
the period subsequent to December 31, 2007, the Company has undergone
significant changes at the corporate level which included the termination /
resignation of executives and finance individuals. However, given the limited
scope of the Company’s operations, utilizing our existing employees, combined
with the services of consultants, the Company has focused its efforts to ensure
it had appropriate design and operating effectiveness of internal control over
financial reporting. However as is the case for many small companies, the
Company may not have the resources to address fully complex areas of financial
accounting matters.
As of the end of the three-month period
ended March 31, 200
8
, an evaluation of the effectiveness of
the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e)
of the Exchange Act) was carried out by the CEO and the CFO. Based on their
evaluation, the CEO and the CFO have concluded that, as of the end of that
fiscal period, the Company’s disclosure controls and procedures are
not
effective to provide reasonable
assurance of achieving the desired control objectives.
(b)
Changes
in Internal Control over Financial
Reporting. During the three-month period ended March 31, 200
8
, 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
|
We are not aware of any material
litigation involving us that is outstanding, threatened or
pending.
|
UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF
PROCEEDS
|
None
|
DEFAULTS UPON SENIOR
SECURITIES
|
There has not been any default upon our
senior securities.
|
SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
|
None.
None.
Index to
Exhibits
10.1
|
Agreement
and plan of Merger and Reorganization, dated April 22, 2008 by and among
the Registrant, Ocusense Acquireco Inc. and Ocusense, Inc. (exhibits have
been omitted pursuant to Item 601(b)(2) of Regulation S-K and will be
provided to the Securities and Exchange Commission upon
request.)
|
|
|
10.2
|
Amending
Agreement, dated as of May 5, 2008 by and among the Registrant, the
lenders listed on the Schedule of New Lenders attached there to as Exhibit
A, the lenders listed an the schedule of Required Lenders attached thereto
as Exhibit B and Marchant Securities Inc., amending the Loan Agreement,
dated as of February 19, 2008 by and among the Registrant, the Lenders
named therein and Marchant Securities Inc. and the Share Pledge Agreement,
dated as of February 19, 2008, by the Registrant in favor of Marchant
Securities Inc., as collateral agent.
|
|
|
|
CEO’s
Certification required by Rule 13a-14(a) of the Securities Exchange Act of
1934.
|
|
|
|
CFO’s
Certification required by Rule 13a-14(a) of the Securities Exchange Act of
1934.
|
|
|
|
CEO’s
Certification of periodic financial reports pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, U.S.C. Section 1350.
|
|
|
|
CFO’s
Certification of periodic financial reports pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, U.S.C. Section
1350.
|
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