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
 


 
1

 

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.

 
2

 

Specia l Note Regarding Forward-Looking Statements




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.


Occu Logix, Inc.
 

PART I.
FINANCIAL INFORMATION
   
ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS


OccuLogix, Inc.
 
CONSOLIDATED BALANCE SHEETS
(expressed in U.S. dollars )
(Unaudited)
(Going Concern Uncertainty – See Note 1)  
   
March 31 ,
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)
As restated – Note 2
   
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
 
Basis of presentation
 
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.

3.   INTANGIBLE ASSETS
 
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.
 
7.   INVENTORY
 
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  


12.   CAPITAL STOCK
 
(a)
Common stock

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.
 
(c) 
Warrant s
 
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  

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

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.

15 .   INCOME TAXES

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.

16.   DUE TO STOCKHOLDERS
 
   
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.


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

Overview
We are an ophthalmic therapeutic company founded to commercialize innovative treatments for age-related eye diseases. Until recently, the Company operated three business divisions, being Retina, Glaucoma and Point-of-care. Until recently, the Company’s Retina division was in the business of developing and commercializing a treatment for dry age-related macular degeneration, or Dry AMD. The Company’s product for Dry AMD, the RHEO™ System contains a pump that circulates blood through two filters and is used to perform the Rheopheresis™ procedure, which is referred to under the Company’s trade name RHEO™ Therapy. The Rheopheresis™ procedure is a blood filtration procedure that selectively removes molecules from plasma, which is designed to treat Dry AMD, the most common form of the disease.
 
We conducted a pivotal clinical trial, called MIRA-1, or Multicenter Investigation of Rheopheresis for AMD, which, if successful, was expected to support our application to the U.S. Food and Drug Administration, or FDA, to obtain approval to market the RHEO™ System in the United States. On February 3, 2006, we announced that, based on a preliminary analysis of the data from MIRA-1, MIRA-1 did not meet its primary efficacy endpoint as it did not demonstrate a statistically significant difference in the mean change of Best Spectacle-Corrected Visual Acuity applying the Early Treatment Diabetic Retinopathy Scale, or ETDRS BCVA, between the treated and placebo groups in MIRA-1 at 12 months post-baseline. As expected, the treated group demonstrated a positive result. An anomalous response of the control group is the principal reason why the primary efficacy endpoint was not met. There were subgroups that did demonstrate statistical significance in their mean change of ETDRS BCVA.

Subsequent to the February 3, 2006 announcement, the Company completed an in-depth analysis of the MIRA-1 study data identifying subjects that were included in the intent-to-treat, or ITT, population but who deviated from the MIRA-1 protocol as well as those patients who had documented losses or gains in vision for reasons not related to retinal disease such as cataracts. Those subjects in the ITT population who met the protocol requirements, and who did not exhibit ophthalmic changes unrelated to retinal disease, comprised the modified per-protocol population.

In light of the MIRA-1 study results, we also re-evaluated our Pre-market Approval Application, or PMA, submission strategy and then met with representatives of the FDA on June 8, 2006 in order to discuss the impact the MIRA-1 results would have on our PMA to market the RHEO™ System in the United States.  In light of MIRA-1’s failure to meet its primary efficacy endpoint, the FDA advised us that it will require an additional study of the RHEO™ System to be performed.

On January 29, 2007, the Company announced that it had obtained Investigational Device Exemption clearance from the FDA to commence the new pivotal clinical trial of the RHEO™ System, called RHEO-AMD, or Safety and Effectiveness in a Multi-center, Randomized, Sham-controlled Investigation for Dry, Non-exudative Age-Related Macular Degeneration (AMD) Using Rheopheresis.

However, on November 1, 2007, the Company announced the indefinite suspension of its RHEO™ System clinical development program. This decision was made following a comprehensive review of the respective costs and development timelines associated with the products in the Company’s portfolio and in light of the Company’s financial position. Between January 29, 2007 and November 1, 2007, the Company had prepared the RHEO-AMD protocol and had been putting into place all of the resources required for the conduct for the RHEO-AMD study, including the securing of clinical trial site commitments. The Company is in the process of winding down the RHEO-AMD study as there is no reasonable prospect that the RHEO™ System clinical development program will be relaunched in the foreseeable future. Subsequent to our fiscal 2007 year-end, as of February 25, 2008, we have terminated our relationship with Asahi Kasei Kuraray Medical Co., Ltd. (formerly Asahi Kasei Medical Co., Ltd.), or Asahi Medical. Asahi Medical manufactures, and supplied us with, the Rheofilter filter and the Plasmaflo filter, both of which are key components of the RHEO™ System. We also are engaged in discussions with Diamed Medizintechnik GmbH, or Diamed, and MeSys GmbH, or MeSys, regarding the termination of our relationship with each of them.  Diamed is the designer, and MeSys is the manufacturer, of the OctoNova pump, another key component of the RHEO™ System.

As a result of the announcement on February 3, 2006, the per share price of our common stock as traded on the NASDAQ Global Market, or NASDAQ, decreased from $12.75 on February 2, 2006 to close at $4.10 on February 3, 2006. The 10-day average price of the stock immediately following the announcement was $3.65 and reflected a decrease in our market capitalization from $536.6 million on February 2, 2006 to $153.6 million based on the 10-day average share price subsequent to the announcement. On June 12, 2006, we announced that the FDA will require us to perform an additional study of the RHEO™ System. In addition, on June 30, 2006, we announced that we had terminated negotiations with Sowood Capital Management LP (“Sowood”) in connection with a proposed private purchase of approximately $30,000,000 of zero-coupon convertible notes of the Company. The per share price of our common stock decreased subsequent to the June 12, 2006 announcement and again after the June 30, 2006 announcement. Based on the result of the analysis of the data from MIRA-1 and the events that occurred during the second quarter of fiscal 2006, we concluded that there were sufficient indicators of impairment leading to an analysis of our intangible assets and goodwill and resulting in our reporting an impairment charge to goodwill of $65,945,686 and $147,451,758 in the second quarter of 2006 and in the fourth quarter of 2005, respectively.


We considered our announcement of the indefinite suspension of the Company’s RHEO™ System clinical development program for Dry AMD to be a significant event which may affect the carrying value of our intangible assets. This led to an analysis of our intangible assets and resulted in our reporting an impairment charge to intangible assets of $20,923,028 during the third quarter of 2007. We also believe that we may not be able to sell or utilize the components of the RHEO™ System prior to their expiration dates or before the technologies become outdated, as the case may be. Accordingly, we set up a provision for obsolescence of $2,782,494 for treatment sets and OctoNova pumps that are unlikely to be utilized prior to their expiration dates, in the case of treatment sets, or before the technologies become outdated. In addition, we have recorded a reduction to the carrying values of (i) certain of our medical equipment used in the clinical trials of the RHEO™ System of $431,683 and (ii) certain of our patents and trademarks related to the RHEO™ System of $190,873.

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.


I TEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Currency fluctuation and exchange risk

All of our sales are in U.S. dollars or are linked to the U.S. dollar, while a portion of our expenses are in Canadian dollars and euros. We cannot predict any future trends in the exchange rate of the Canadian dollar or euro against the U.S. dollar. Any strengthening of the Canadian dollar or euro in relation to the U.S. dollar would increase the U.S. dollar cost of our operations and would affect our U.S. dollar measured results of operations. We do not engage in any hedging or other transactions intended to manage these risks. In the future, we may undertake hedging or other similar transactions or invest in market risk sensitive instruments if we determine that would be advisable to offset these risks.

Interest rate risk
 
The primary objective of our investment activity is to preserve principal while maximizing interest income we receive from our investments, without increasing risk. We believe this will minimize our market risk.

As at March 31, 2008 and December 31, 2007, we had investments in the aggregate principal amount of $1,900,000 which consist of investments in four separate asset-backed auction rate securities yielding an average return of 3.940% per annum.  However, as a result of market conditions, all of these investments have recently failed to settle on their respective settlement dates and have been reset to be settled at future 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.

I TEM 4.
CONTROLS AND PROCEDURES

(a)                     Disclosure Controls and Procedures. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time reports specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including our principal executive officer (the “CEO”) and our principal financial officer (the “CFO”), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their desired objectives.

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.
 
58

 
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

ITE M 1.
LEGAL PROCEEDINGS

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

ITE M 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITE M 3.
DEFAULTS UPON SENIOR SECURITIES

There has not been any default upon our senior securities.

ITE M 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

OTHER INFORMATION

None.
 
 
I TEM 6.
EXHIBITS

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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