TearLab (TEAR) 10-Q 2010 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended:                            June 30, 2010

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission File Number: 000-51030

TearLab Corporation (formerly OccuLogix, Inc.)

(Exact name of registrant as

specified in its charter)

Delaware	59 343 4771
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

7360 Carroll Road, Suite 200, San Diego, CA 92121

(Address of principal executive offices)

(858) 455-6006

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x   No  o

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

Yes  o   No  o

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

Large accelerated filer o	Accelerated filer o
Non-accelerated filer   o (Do not check if a smaller reporting company)	Smaller reporting company x

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

Yes  o   No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 14,765,794 as of Aug. 10, 2010

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PART I.	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures about Market Risk
Item 4.	Controls and Procedures
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.	Defaults upon Senior Securities
Item 4.	”(Removed and Reserved”)
Item 5.	Other Information
Item 6.	Exhibits

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

· Our future strategy, structure, and business prospects;

· The planned commercialization of our current product;

· The size and growth of the potential markets for our product and technology;

· The adequacy of current, and the development of new distributor, reseller, and supplier relationships, and our efforts to expand relationships with distributors and resellers in North American, European, Asian and Latin American countries;

· Our anticipated expansion of United Stated and international sales and operations;

· Our ability to obtain and protect our intellectual property and proprietary rights;

· Our efforts to obtain certain FDA approvals;

· The results of our clinical trials;

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

· The adequacy of our funding ;

· Use of cash, cash needs and ability to raise capital, and:

· Our ability to obtain reimbursement for patient testing with  the TearLab™ System.

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

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

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TearLab Corp. (formerly OccuLogix, Inc.).

PART I.	FINANCIAL INFORMATION
ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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TearLab Corp. (formerly OccuLogix, Inc.).

CONSOLIDATED BALANCE SHEETS

(expressed in U.S. dollars)

	June 30, 2010			December 31, 2009
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	4,753,943		$	106,200
Accounts receivable, net		210,665			149,039
Due from related party		51,266			—
Inventory, net		340,335			196,461
Prepaid expenses		185,684			337,602
Deferred finance charges		15,600			23,679
Other current assets		35,628			30,911
Total current assets		5,593,121			843,892
Fixed assets, net		133,017			139,589
Patents and trademarks, net		206,529			220,583
Other non-current assets		33,333			175,578
Intangible assets, net		7,746,239			8,353,501
Total assets	$	13,712,239		$	9,733,143
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	298,358		$	447,527
Accrued liabilities		1,033,453			1,093,404
Due to stockholders		31,422			38,422
Deferred revenue		134,153			150,977
Obligations under warrants		266,564			3,195
Notes payable and accrued interest		1,626,850			1,242,403
Total current liabilities		3,390,800			2,975,928
Stockholders’ equity
Capital stock
Preferred Stock, par value $0.001, authorized 10,000,000, zero issued and outstanding at both June 30, 2010 and December 31, 2009		—			—
Common stock, par value $0.001 per share, authorized 40,000,000, issued and outstanding: June 30, 2010 – 14,765,794; December 31, 2009 – 9,866,685		14,766			9,866
Additional paid-in capital		385,969,414			378,789,938
Accumulated deficit		(375,662,741	)		(372,042,589
Total stockholders’ equity		10,321,439			6,757,215
Total liabilities and stockholders’ equity	$	13,712,239		$	9,733,143

See accompanying notes to interim consolidated financial statements

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TearLab Corp. (formerly OccuLogix, Inc.).

CONSOLIDATED STATEMENTS OF OPERATIONS

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

(Unaudited)

	Three months ended
	June 30,
	2010			2009
Revenue
TearLab	$	418,134		$	96,849
Total revenue		418,134			96,849
Cost of goods sold
TearLab – product cost		198,170			130,618
Total cost of goods sold (excluding amortization of intangible assets)		198,170			130,618
Gross profit (loss)		219,964			(33,769	)
Operating expenses
Amortization of intangible assets		303,631			303,631
General and administrative		1,025,033			910,352
Clinical , regulatory and research & development		297,049			306,625
Sales and marketing		346,155			168,550
Total operating expenses		1,971,868			1,689,158
Loss from operations		(1,751,904	)		(1,722,927	)
Other income (expense)
Interest income		8,093			438
Changes in fair value of warrant obligations		402,424			9,742
Interest expense		(52,503	)		—
Amortization of deferred financing charges, warrants & beneficial conversion values		(138,942	)		—
Other income (loss)		(7,298	)		11,408
Total other income (expense)		211,774			21,588
Loss from continuing operations before income taxes		(1,540,130	)		(1,701,339	)
Income tax recovery		—			680,331
Net loss	$	(1,540,130	)	$	(1,021,008	)
Weighted average shares outstanding  - basic and diluted		14,765,794			9,858,179
Loss per share  – basic and diluted	$	(0.10	)	$	(0.10	)

See accompanying notes to interim consolidated financial statements

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TearLab Corp. (formerly OccuLogix, Inc.).

CONSOLIDATED STATEMENTS OF OPERATIONS

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

(Unaudited)

	Six months ended
	June 30,
	2010			2009
Revenue
TearLab	$	693,129		$	340,107
Total revenue		693,129			340,107
Cost of goods sold
TearLab – product cost		387,592			249,817
Total cost of goods sold (excluding amortization of intangible assets)		387,592			249,817
Gross profit		305,537			90,290
Operating expenses
Amortization of intangible assets		607,261			607,261
General and administrative		1,990,505			1,893,331
Clinical , regulatory and research & development		765,115			638,931
Sales and marketing		620,611			382,854
Total operating expenses		3,983,492			3,522,377
Loss from operations		(3,677,955	)		(3,432,087	)
Other income (expense)
Interest income		9,534			2,268
Changes in fair value of warrant obligations		473,402			31,437
Interest expense		(105,005	)		—
Amortization of deferred financing charges, warrants & beneficial conversion values		(292,979	)		—
Other income (loss)		(27,148	)		25,571
Total other income (expense)		57,804			59,276
Loss from continuing operations before income taxes		(3,620,151	)		(3,372,811	)
Income tax recovery		—			1,349,212
Net loss	$	(3,620,151	)	$	(2,023,599	)
Weighted average shares outstanding  - basic and diluted		13,417,021			9,845,155
Loss per share – basic and diluted	$	(0.27	)	$	(0.21	)

See accompanying notes to interim consolidated financial statements

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TearLab Corp. (formerly OccuLogix, Inc.).

CONSOLIDATED STATEMENTS OF CASH FLOWS

(expressed in U.S. dollars)

(Unaudited)

	Six months ended
	June 30,
	2010			2009
OPERATING ACTIVITIES
Net loss for the period	$	(3,620,151	)	$	(2,023,599	)
Adjustments to reconcile net loss to cash used in operating activities:
Stock-based compensation and stock-based restructuring charges		797,993			248,017
Depreciation of fixed assets		34,266			36,678
Amortization and write-down of patents and trademarks		14,054			15,125
Amortization of intangible assets		607,261			607,261
Amortization of deferred financing charges, warrants and beneficial conversion values		292,979			—
Changes in fair value of warrant obligations		(473,402	)		(31,437	)
Deferred tax liability, net		—			(1,349,212	)
Non-cash  interest accrued on convertible debt funding		105,005			—
Gain on disposal of fixed assets		(2,767	)		(3,519	)
Net change in non-cash working capital balances related to operations		(275,843	)		255,866
Cash used in operating activities		(2,520,605	)		(2,244,820	)
INVESTING ACTIVITIES
Additions to fixed assets, net of proceeds		(24,928	)		(6,807	)
Cash used in investing activities		(24,928	)		(6,807	)
FINANCING ACTIVITIES
Proceeds from issuance of shares in a private placement financing		2,999,981			—
Proceeds from issuance of shares and warrants in a registered direct financing		5,000,000			—
Costs of issuance of shares in private placement and registered direct financings		(806,705	)		—
Cash provided by financing activities		7,193,276			—
Net increase (decrease) in cash and cash equivalents during the period		4,647,743			(2,251,627	)
Cash and cash equivalents, beginning of period		106,200			2,565,277
Cash and cash equivalents, end of period	$	4,753,943		$	313,650

See accompanying notes to interim consolidated financial statements

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TearLab Corp. (formerly OccuLogix, Inc.).

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

1.  BASIS OF PRESENTATION

Nature of Operations

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

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany accounts and transactions have been eliminated on consolidation. The Company currently operates in one segment.

The condensed consolidated balance sheet at December 31, 2009 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

2.  SIGNIFICANT ACCOUNTING POLICIES

These unaudited interim consolidated financial statements have been prepared using significant accounting policies that are consistent with the policies used in preparing the Company’s audited consolidated financial statements for the year ended December 31, 2009. We evaluated subsequent events through August 12, 2010, the date on which this Quarterly report on Form 10-Q was filed with the Securities and Exchange Commission.

Management believes that all adjustments necessary for the fair presentation of results, consisting of normally recurring items, have been included in the unaudited consolidated financial statements for the interim periods presented. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The principal areas of judgment relate to the impairment of long-lived and intangible assets and the value of stock options and warrants.

Recent Accounting Pronouncements

In September 2009, the FASB issued authoritative guidance regarding multiple-deliverable revenue arrangements. This guidance addresses how to separate deliverables and how to measure and allocate consideration to one or more units of accounting. Specifically, the guidance requires that consideration be allocated among multiple deliverables based on relative selling prices. The guidance establishes a selling price hierarchy of (1) vendor-specific objective evidence, (2) third-party evidence and (3) estimated selling price. This guidance is effective for annual periods beginning after June 15, 2010, but may be adopted earlier as of the beginning of an annual period. The Company did not elect early adoption and is currently evaluating the effect, if any, that this guidance will have on its consolidated financial position and results of opera tions.

3.  BALANCE SHEET DETAILS

Inventory

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TearLab Corp. (formerly OccuLogix, Inc.).

Inventory is recorded at the lower of cost or net realizable value and consists of finished goods. Cost is accounted for on a first-in, first-out basis. Deferred cost of sales (included in finished goods) consists of products shipped but not recognized as revenue as they have not yet met the revenue recognition criteria.

	June 30, 2010			December 31, 2009
Finished goods	$	464,737		$	320,863
Less reserves for excess and obsolescence		(124,402	)		(124,402	)
	$	340,335		$	196,461

The Company evaluates inventory for estimated excess quantities and obsolescence, based on expected future sales levels and projections of future demand.  In addition, the Company assesses the impact of changing technology and market conditions.

Prepaid Expenses

	June 30, 2010		December 31, 2009
Prepaid insurance	$	66,194	$	146,504
Prepaid financing costs		—		81,571
Prepaid regulatory fees		—		2,821
Deferred royalty costs		39,000		40,500
Other fees and services		80,490		66,206
	$	185,684	$	337,602

Fixed Assets

	June 30, 2010		December 31, 2009
Furniture and office equipment	$	43,860	$	24,812
Computer equipment and software		155,497		145,134
Medical equipment		325,737		330,219
		525,094		500,165
Less accumulated depreciation		392,077		360,576
	$	133,017	$	139,589

Depreciation expense was $34,266 and $36,678 during the six months ended June 30, 2010 and 2009, respectively, and $17,788 and $16,978 for the three months ended June 30, 2010 and 2009, respectively.

Patents and trademarks

	June 30, 2010		December 31, 2009
Patents	$	236,314	$	194,394
Trademarks		32,154		79,413
		268,468		273,807
Less accumulated amortization		61,939		53,224
	$	206,529	$	220,583

Amortization expense for patents and trademarks was $14,054 and $15,125 for the six months ended June 30, 2010 and 2009, respectively, and $7,032 and $7,706 for the three months ended June 30, 2010 and 2009, respectively.

The Company recorded patents and trademarks as of June 30, 2010 relate to the cost of pending applications for patents and trademarks for the TearLab™ technology.  These patents and trademarks are amortized, using the straight-line method, over an estimated useful life of 10 years from the date of approval of the patents and trademarks.

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TearLab Corp. (formerly OccuLogix, Inc.).

Accrued liabilities

	June 30, 2010		December 31, 2009
Due to professionals	$	282,009	$	302,451
Due to employees and directors		197,402		134,000
Clinical trial accruals		174,014		194,800
Amounts due for provision of capital transaction advisory services		100,000		100,000
Corporate compliance		72,562		81,039
Obligation to repay advances received		61,932		66,695
Product development costs		5,106		13,746
Other		140,428		200,673
	$	1,033,453	$	1,093,404

4.   INTANGIBLE ASSETS

The Company's intangible assets consist of the value of TearLab™ Technology acquired in the acquisition of TearLab Research.  The TearLab™ Technology consists of a disposable lab card and card reader, supported by an array of patents and patent applications that are either held or in-licensed by the Company.  The TearLab™ Technology is being amortized using the straight-line method over an estimated useful life of 10 years. The Company has no indefinite-lived intangible assets.

Intangible assets subject to amortization consist of the following:

	As at June 30, 2010
	Cost		Accumulated Amortization
TearLab™ technology	$	12,172,054	$	4,425,815

	As at December 31, 2009
	Cost		Accumulated Amortization
TearLab™ technology	$	12,172,054	$	3,818,553

Estimated amortization expense for the intangible assets for the balance of 2010 and each of the next four years and thereafter is as follows:

	Amortization of intangible assets
Remainder of  2010	$	607,261
2011		1,214,523
2012		1,214,523
2013		1,214,523
2014		1,214,523
Thereafter		2,280,886
	$	7,746,239

Amortization expense of $607,261 for each of the six months ended June 30, 2010 and 2009, respectively, and $303,630 for each of the three months ended June 30, 2010 and 2009, respectively.

5.  RELATED PARTY TRANSACTIONS

The following are the Company's related party transactions:

TLC Vision

TLC Vision Corporation (“TLC”)  held a 5.1%, and 7.6% ownership interest in the Company, on an issued and outstanding basis, as of June 30, 2010 and December 31, 2009 respectively.

TLC provided computer and administrative support to the Company in the six months ended June 30, 2010 and 2009 respectively, for which the Company recorded expense of $6,000, and $15,270, respectively. The balances due to TLC were $31,422 and $38,422 at June 30, 2010 and December 31, 2009, respectively.

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TearLab Corp. (formerly OccuLogix, Inc.).

Other

On August 20, 2009, we entered into a distribution agreement with Science with Vision, pursuant to which Science with Vision obtained exclusive Canadian distribution rights with respect to the Company’s products.  We began selling products through the Canadian distributor in 2010. The Company’s chairman of the Board and chief executive officer, has a material financial interest in Science with Vision.

Effective November 20, 2009, OccuLogix, Inc., entered into an agency agreement with Marchant Securities Inc. (“Marchant”).  Pursuant to the terms of the agreement, Marchant acted as the Canadian placement agent in connection with our private placement of up $3,000,000 of the Company’s common stock. As a result of the closing of the private placement financings in January 2010 and March 2010, under the Agency agreement, the Company issued an aggregate of 101,548 shares to Marchant. The Company’s chairman of the Board and chief executive officer, has a material financial interest in Marchant.  The Company has also agreed to indemnify Marchant, its affiliates and their respective directors, officers, employees, shareholders and agents against all expenses, losses, claims, actions, damages or liabil ities, and the reasonable fees and expenses of their counsel, arising out of the provision of the services pursuant to the agreement.

On November 2, 2009, the Company, entered into a capital advisory agreement for a minimum of two years with Greybrook Capital Inc., or Greybrook.  On January 8, 2010, the Company and Greybrook entered into an amendment to the capital advisory agreement.  Pursuant to the terms of the agreement, as amended, Greybrook is entitled to receive in consideration of its provision of capital advisory services to the Company, within 90 days of the agreement and again on or before the first anniversary of the date of the agreement, compensation consisting of (i) $100,000 in cash or (ii) shares of the Company’s common stock equal to the quotient of (A) $100,000 and (B) $1.22, the closing consolidated bid price on the date of the original execution of the agreement.  All other terms and conditions of the agreement re main in full force and effect.  No shares were issued under this agreement at June 30, 2010. The Company’s chairman of the board of directors and chief executive officer, is a principal with, and holds a material financial interest in Greybrook.

The company has accounts receivable due from a related party in the amount of $51,266 at June 30, 2010 for product shipped.

6.  INCOME TAXES

The Company records tax benefits related to tax losses as deferred income tax assets to offset deferred income tax liabilities arising from its intangible assets.

The Company reported a recovery of income taxes of zero for both the six and three months ended June 30, 2010 of which $334,226 and $164,760 represent the amortization of deferred tax liabilities in the six and three months ended June 30, 2010, respectively, offset by an increase to the valuation allowance against deferred tax assets of $334,226 and $164,760 in the six and three months ended June 30, 2010, respectively, resulting from the reversal of deferred tax assets reported in prior years.

The Company reported a recovery of income taxes of $1,349,212 and $680,331 for the six and three months ended June 30, 2009, respectively of which $242,905 and $121,553 represent the amortization of deferred tax liabilities in the six and three months ended June 30, 2009, respectively, and $1,106,307 and $558,778 represent deferred tax assets reported for losses incurred in the six and three months ended June 30, 2009, respectively.

We evaluated all significant available positive and negative evidence, including the existence of losses in recent years and, as a result, determined it was more likely than not that our federal and certain state deferred tax assets, including benefits related to net operating loss carry forwards, would not be realized based on the measurement standards required under FASB Accounting Standards Codification section 740. As such, we maintain a valuation allowance for these deferred tax assets which increased $334,226 to $6,853,268 in the six months ended June 30, 2010. The increase in the valuation allowance in the six months ended June 30, 2010 is primarily attributable to increases in net deferred tax assets, driven by the decrease in deferred tax liabilities of the same amount.

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TearLab Corp. (formerly OccuLogix, Inc.).

7.  NOTES PAYABLE AND ACCRUED INTEREST

In the third quarter of 2009, the Company closed an agreement with certain investors whereby the investors agreed to provide financing (the “Financing”) to the Company through the purchase of convertible secured notes, in the aggregate amount of $1.75 million.  The convertible secured notes (the “Notes”), mature on the second anniversary of their issuance (“the Maturity Date”), bear interest at a rate of 12% per annum and are convertible into shares of the Company’s common stock upon the request of holders of 51% or more of the outstanding principal amount of the Notes at any time after August 31, 2009 and prior to the Maturity Date.  The conversion price of the Notes (the “Discount Price”) is $1.3186 determined on August 31, 2009 and represented 80% of the volume w eighted average price on the NASDAQ stock market for the ten trading days prior to August 31, 2009.  The Notes are secured by substantially all of the assets of the Company and the financing is subject to customary conditions to closing.

In connection with the Financing, the Company will issue up to 109,389 warrants with a life of five years to purchase shares of common stock equal in value to ten percent of the aggregate principal amount of the notes (the “Warrants”).  The exercise price of the Warrants is $1.60 per common share representing the price per share equal to the closing bid price per share of the Company’s common stock on the NASDAQ stock market on July 15, 2009.  The warrants will not be issued until the convertible secured notes are converted to common shares of the Company. The Company has recorded $162,621 representing the fair value of the warrants in additional paid-in capital which has been calculated using the Black-Scholes value model. The value of the warrants is being accreted over the two year term of the Note s and for the six months ended June 30, 2010, an amortization charge of $51,139 is included in other income (expense).

As the conversion price of the convertible secured debt reflects a price discounted from the fair market value of the Company’s common stock, there is a deemed beneficial conversion feature associated with the Financing. The Company has recorded $727,582 representing the value of the beneficial conversion feature in additional paid-in capital which has been determined by calculating the fair value of shares that could be acquired as the difference between the discounted conversion price and the fair value on the date of funding. The value of the beneficial conversion is being accreted over the two year term of the convertible secured debt and for the six months ended June 30, 2010, an amortization charge of $228,304 is included in other income (expense).

The Company incurred $87,199 in expenses related to the Financing which was allocated to deferred finance charges for $42,844 and cost of equity for $44,355 in proportion to the allocation of the Financing amount between equity and liabilities.  The value of the deferred financing is being accreted over the two year term of the Notes and for the six months ended June 30, 2010, an amortization charge of $13,536 is included in other income (expense).

Two directors of the Company, invested $100,000 each in the Financing.  Greybrook Corporation, an entity controlled by the Company’s Chairman and CEO of the Company, or members of his family, invested $310,000 in the Financing.

Accrued interest of $198,259 and $93,254 was recorded at June 30, 2010 and December 31, 2009, respectively,  and is included in notes payable and accrued interest on our balance sheet.

8.  FAIR VALUE MEASUREMENTS

The Company accounts for the measurements of fair value in accordance with the provisions of the FASB Topic 820 Fair Value Measurements and Disclosures. As defined in the guidance, fair value is based on the prices that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, the guidance establishes a three-tier fair value hierarchy that prioritizes the inputs used to measure fair value. These tiers include:

· Level 1, defined as observable inputs such as quoted prices in active markets;

· Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and

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TearLab Corp. (formerly OccuLogix, Inc.).

· Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

At June 30, 2010, the Company has a liability for warrants to purchase 110,578 shares of common stock at an exercise price of $46.25 that are valued at $1,471, as well as a liability for warrants to purchase 621,118 shares of common stock at an exercise price of $4.00 that are valued at $265,093 (Note 9).  Both liabilities are classified under the level 3 hierarchy.

The following table provides activity for obligations under warrants measured at fair value using significant unobservable inputs (level 3) for the six months ended June 30, 2010:

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Balance of obligations under warrants at January 1, 2010	$	3,195
Issuances		736,771
Change in fair value of obligations under warrants liability included in other (income) / expense		(473,402	)
Balance of obligations under warrants at June 30, 2010	$	266,564

9.  CAPITAL STOCK

(a)  Authorized share capital

The total number of authorized shares of common stock of the Company is 40,000,000.  Each share of common stock has a par value of $0.001 per share.  The total number of authorized shares of preferred stock of the Company is 10,000,000.  Each share of preferred stock has a par value of $0.001 per share.

(b)  Common stock

On February 11, 2009, the Company filed with the Securities and Exchange Commission (“SEC”), a prospectus as part of a registration statement on Form S-3 using a "shelf" registration process.  Under the shelf process, we may from time to time offer or sell any combination of common stock, preferred stock, debt securities, depository shares or warrants in one or more offering up to a total dollar value of $30,000,000.  The Company utilized $5,000,000 of the “shelf” in the registered direct financing which closed on March 18, 2010.

On April 21, 2009, having received the approval of the board of directors, the Company issued 38,276 shares valued at $110,000 under the terms and conditions of a settlement agreement.

On January 11, 2010, the Company sold 1,886,291 shares of its common stock for an aggregate of approximately $1,743,989. The Company also received commitments to purchase an additional 1,358,475 shares for an aggregate of approximately $1,255,992 subject to obtaining stockholder approval which was received on March 3, 2010. The additional shares were issued on March 19, 2010. The per share price of the shares, $0.92456, is equal to 80% of the volume weighted average price of the Company’s common stock for the 10 trading days ending on the day immediately preceding the January 8, 2010 closing date. Related to this equity issuance  transaction, the Company issued 101,548 shares to Marchant, a related party, for its placement services (Note 5).

On March 18, 2010, the Company closed a registered direct financing in which it sold 1,552,796 shares of its common stock and warrants to purchase 621,118 shares of its common stock for gross proceeds of approximately $5,000,000.  The investors agreed to purchase the shares and warrants for $3.22 per unit (each unit consisting of one share and a warrant to purchase 0.4 shares of common stock).  The exercise price of the warrants is $4.00 per share. The warrants are exercisable at any time on or after the sixth-month anniversary of the closing date through and until the 18-month anniversary of the closing of the offering.

14

TearLab Corp. (formerly OccuLogix, Inc.).

(c)  Stock Option Plan

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 June 30,				Six months ended June 30,
	2010		2009		2010		2009
General and administrative	$	514,302	$	73,639	$	655,870	$	146,284
Clinical, regulatory and research and development		45,930		37,826		93,487		78,215
Sales and marketing		30,744		6,260		48,636		23,518
Stock-based compensation expense before income taxes	$	590,976	$	117,725	$	797,993	$	248,017

(d)  Warrants

On February 6, 2007, pursuant to the Securities Purchase Agreement 2007 between the Company and certain institutional investors, the Company issued warrants to these investors (the “2007 Warrants”).  The 2007 Warrants are five-year warrants exercisable immediately into an aggregate of 106,838 shares of the Company's common stock at $46.25 per common share.  On February 6, 2007, the Company also issued the “Cowen Warrant” to Cowen and Company, LLC in partial payment of the placement fee payable for the services it had rendered as the placement agent in connection with the private placement of the Shares and the 2007 Warrants pursuant to the Securities Purchase Agreement 2007.  The Cowen Warrant is a five-year warrant exercisable into an aggregate of 3,740 shares of the Company's common stock.  The per share exercise price of the Cowen Warrants is $46.25, and the Cowen Warrants became exercisable on August 6, 2007.

The Company accounts for the 2007 Warrants and the Cowen Warrant in accordance with the provisions of FASB ASC Topic 815 Derivatives and Hedging.  The FASB guidance 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 applicable U.S. GAAP guidance, the Company determined that the 2007 Warrants and the Cowen Warrant do not meet the criteria for classification as equity.  Accordingly, the Company classified the Warrants and the Cowen Warrant as current li abilities at June 30, 2010 and December 31, 2009, respectively.

The estimated fair value of the 2007 Warrants and the Cowen Warrant at June 30, 2010 was determined using the Black-Scholes option-pricing model with the following weighted average assumptions:

Volatility	99%
Expected life	1.58 years
Risk-free interest rate	0.49%
Dividend yield	0%

The Company is required 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 of June 30, 2010 and determined the aggregate fair value to be $1,471, a decrease of approximately $1,725 over the measurement of the aggregate fair value of the Warrants and the Cowen Warrant on December 31, 2009. This decrease was recorded in other income (expense) as changes in fair value of warrant obligations in the consolidated statement of operations during the six months ended June 30, 2010.

On March 18, 2010, the Company closed a registered direct financing in which it sold approximately 1,552,796 shares of its common stock and warrants (the “2010 Warrants”) to purchase approximately 621,118 shares of its common stock for gross proceeds of approximately $5,000,000.  The investors agreed to purchase the shares and 2010 Warrants for $3.22 per unit (each unit consisting of one share and a 2010 Warrant to purchase 0.4 shares of common stock).  The exercise price of the 2010 Warrants is $4.00 per share. The 2010 Warrants are exercisable at any time on or after the sixth-month anniversary of the closing date through and until the 18-month anniversary of the closing of the offering.

15

TearLab Corp. (formerly OccuLogix, Inc.).

The Company accounts for the 2010 Warrants in accordance with the provisions of ASC Topic 815, derivatives and Hedging. Based on applicable U.S. GAAP guidance, the Company determined that the 2010 Warrants do not meet the criteria for classification as equity.  Accordingly, the Company classified the 2010 Warrants as current liabilities at June 30, 2010.

The estimated fair value of the 2010 Warrants at March 18, 2010 was determined to be $736,771, using the Black-Scholes option-pricing model with the following weighted average assumptions:

Volatility	113%
Expected life	1.50 years
Risk-free interest rate	0.70%
Dividend yield	0%

The estimated fair value of the 2010 Warrants at June 30, 2010 was determined to be $265,093, using the Black-Scholes option-pricing model with the following weighted average assumptions:

Volatility	107%
Expected life	1.25 years
Risk-free interest rate	0.39%
Dividend yield	0%

The Company is required to record the outstanding warrants at fair value at the end of each reporting period, resulting in an adjustment to the recorded liability of the derivative, with any gain or loss recorded in earnings of the applicable reporting period.  The Company, therefore, estimated the fair value of the Warrants as of June 30, 2010 and determined the aggregate fair value to be $265,093, a decrease of approximately $471,677 over the measurement of the aggregate fair value of the Warrants on March 18, 2010. This decrease was recorded in other income (expense) as changes in fair value of warrant obligations in the consolidated statement of operations during the six months ended June 30, 2010.

A summary of Warrants outstanding as of June 30, 2010 is set forth below:

	Number of warrants outstanding		Weighted average exercise price
Outstanding, December 31, 2009		110,578	$	46.25
Granted		621,118		4.00
Forfeited		—		—
Outstanding, June 30, 2010		731,696	$	10.39

In connection with the Financing which the Company was engaged in July and August 2009, the Company will issue 109,389 warrants (“Financing Warrants”) with a life of five years to purchase shares of common stock equal in value to ten percent of the aggregate principal amount of the notes issued in the Financing.  The exercise price of the Financing Warrants is $1.60 per common share representing the price per share equal to the closing bid price per share of the Company’s common stock on the NASDAQ stock market on July 15, 2009.  The warrants will not be issued until the convertible secured notes are converted to common shares of the Company and will be exercisable upon issuance. The Company has recorded $162,621 representing the fair value of the Financing Warrants at the issuance date which has been calculated using the Black-Scholes value model. The value of the Financing Warrants is being amortized over the two year term of the convertible secured debt and a charge of $51,139 is included in other income (expense).

10.  COMPREHENSIVE INCOME (LOSS)

For the six months ended June 30, 2010 and 2009, comprehensive loss was equal to net loss for the period.

16

TearLab Corp. (formerly OccuLogix, Inc.).

11.  NETLOSS PER SHARE

Basic earnings per share (EPS) is calculated by dividing net income or loss by the weighted average number of common shares and vested restricted stock units outstanding. Diluted EPS is computed by dividing net income or loss by the weighted average number of common shares and vested restricted stock units outstanding and the weighted average number of dilutive common stock equivalents, including stock options and non-vested restricted stock units. Common stock equivalents are only included in the diluted earnings per share calculation when their effect is dilutive.

The following table summarizes the potentially dilutive securities which have not been used in the calculation of diluted loss per share as the effect is anti-dilutive:

	Six months ended June 30,
	2010		2009
Stock options		3,527,448		2,416,598
Shares reserved for issuance on convertible debt obligations		1,327,212		—
Warrants		731,696		110,578
Warrants to be issued on conversion of debt obligations		109,389		—
Total		5,695,745		2,527,176

12.  CONSOLIDATED STATEMENTS OF CASH FLOWS

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

	Six months ended June 30,
	2010			2009
Accounts receivable, net	$	(61,626	)	$	198,443
Due from related party		(51,266	)		—
Inventory		(143,874	)		(40,661)
Prepaid expenses		151,918			31,472
Other current assets		(4,717)			(15,537	)
Other non-current assets		66,666			—
Accounts payable		(149,169)			155,583
Accrued liabilities		(59,951	)		(44,163	)
Deferred revenue		(16,824	)		(41,541)
Due to stockholders		(7,000	)		12,270
	$	(275,843)		$	255,866

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:

	Six months ended
	June 30,
	2010		2009
Non-cash investing activities
Warrant issued in Registered Direct financing	$	736,771	$	—
Common stock issued to Marchant Securities Inc. for services provided in the equity issuance transaction.		154,797		—
Accrued costs of fixed asset additions		(1,925)		(18,547)

17

TearLab Corp. (formerly OccuLogix, Inc.).

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

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

Overview

We are an in vitro diagnostic company that has developed a proprietary tear testing platform, the TearLab™ Osmolarity System.  The TearLab test measures tear film osmolarity for diagnosis of Dry Eye Disease, or DED.  Tear osmolarity is a quantitative and highly specific biomarker that has been shown to correlate with DED.  The TearLab test enables the rapid measurement of tear osmolarity in a doctor's office.  We refer to the results of our TearLab testing platform as our Point-of-Care business division in the discussion of our operating results below.  Commercializing our Point-of-Care tear testing platform is now the focus of our business.

In October 2008, the TearLab Osmolarity System received CE mark approval, clearing the way for sales in the European Union and all countries recognizing the CE mark.  In connection with the CE mark clearance, we have entered into multi-year agreements with numerous distributors for distribution of the TearLab Osmolarity System.  Currently, we have signed distribution agreements in each of the following countries: Spain, Germany, Italy, France, Turkey, Ukraine, Bulgaria, Belgium, Netherlands, Switzerland, Korea, Australia, Russia, Hungary, Greece, Canada, Slovakia, Czech Republic, United Kingdom and the United States and a sales representation agreement in Japan.

On May 19, 2009, we announced that we received 510(k) clearance from the FDA.  The 510(k) clearance allows us to market the TearLab™ Osmolarity System to those reference and physician operated laboratories with CLIA certifications allowing them to perform moderate and high complexity tests.  Considering that most of our target customers are eye care practitioners without such certifications, we intend to seek a CLIA waiver from the FDA for the TearLab™ Osmolarity System.  We anticipate receiving the CLIA waiver during the second half of 2010.  A CLIA waiver would greatly reduce the regulatory compliance for our future customers and permit them to perform the TearLab™ Osmolarity test in their offices.  If we receive a CLIA waiver, we will be able to market our product to t he approximately 50,000 eye care practitioners in the United States that are candidates to operate under a CLIA waiver certification.

On December 8, 2009 we announced that Health Canada issued a Medical Device License for the TearLab Osmolarity System. The Health Canada license allowed us to immediately begin marketing the system in Canada.  On August 20, 2009, we entered into an agreement with a distributor, Science with Vision, for exclusive distribution of the TearLab Osmolarity System in Canada.  We began selling products through the Canadian distributor in 2010.

Our success is highly dependent on our ability to increase sales of our testing platform in European and other countries recognizing the CE mark, in Canada where we have a Medical Device License and on our receipt of a CLIA waiver which will enable us to begin full commercialization efforts in the United States.  Meeting these objectives requires that we have sufficient capital to fund our operations.  Subsequent to the equity transactions in the first quarter of 2010 in which a gross aggregate of $8.0 million was raised, we have sufficient cash to fund our operations at current levels for at least the next 12 months.  In spite of having adequate funding at this time we continue to evaluate various financing possibilities.

Recent Developments

On January 11, 2010, the Company sold 1,886,291 shares of its common stock for an aggregate of approximately $1,743,989 and had received additional commitments to purchase an additional 1,358,475 shares for an aggregate of $1,255,992. These equity transactions totaling $2,999,981 closed prior to March 31, 2010. The Company intends to use the net proceeds of the offering for working capital and general corporate purposes.

On March 3, 2010, at a special meeting of the stockholders of the Company, the issuance of 1,358,475 shares of stock was approved for issuance. As a result of this approval, on March 19, 2010, the Company completed the sale of an additional 1,358,475 shares for an aggregate of approximately $1,256,011. The per share price of the shares, $0.92456, is equal to 80% of the volume weighted average price of the Company’s common stock for the 10 trading days ending on the day immediately preceding the January 8, 2010 closing date. The Company intends to use the net proceeds of the offering for working capital and general corporate purposes.

18

TearLab Corp. (formerly OccuLogix, Inc.).

On March 15, 2010, the Company sold 1,552,796 shares of its common stock and warrants to purchase approximately 621,118 shares of its common stock for gross proceeds of approximately $5,000,000.  The investors purchased the shares and warrants for $3.22 per unit (each unit consisting of one share and a warrant to purchase 0.4 shares of common stock).  The exercise price of the warrants is $4.00 per share. The warrants are exercisable at any time on or after the sixth-month anniversary of the closing date through and until the 18-month anniversary of the closing of the offering.  The closing of the offering took place on March 18, 2010.

RESULTS OF OPERATIONS

Revenue, Cost of Sales and Gross Margin

	Three Months Ended June 30,									Six Months Ended June 30,
	(in thousands)									(in thousands)
	2010			2009			Change			2010			2009			Change
	$			$			$			$			$			$
TearLab revenue		418			97			321			693			340			353
TearLab – cost of sales		198			131			67			387			250			137
TearLab gross margin (loss)		220			(34	)		254			306			90			216
Percentage of TearLab revenue		53	%		(35	%)		79	%		44	%		26	%		61	%

Revenues

TearLab Revenue

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

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

TearLab revenue increased by $321,000 or 331% for the three months ended June 30, 2010 as compared to the prior year period, reflecting continued expansion of our business into North America and other global territories, along with various sales promotion activities.  TearLab revenue increased by $353,000 or 104% for the six months ended June 30, 2010 as compared to the prior year period for similar reasons.

19

TearLab Corp. (formerly OccuLogix, Inc.).

TearLab Cost of Sales

TearLab cost of sales includes costs of goods sold, warranty, and royalty costs.  Our cost of goods sold consists primarily of costs for the manufacture of the TearLab test, including the costs we incur for the purchase of component parts from our suppliers, applicable freight and shipping costs, fees related to warehousing and logistics inventory management.

TearLab costs of sales for the three months ended June 30, 2010 increased by $67,000 or 51% over the prior year fiscal period, reflecting global expansion and sales promotion activities.   TearLab costs of sales for the six months ended June 30, 2010 increased by $137,000 or 55% over the prior year for similar reasons.

TearLab Gross Margin

TearLab gross margin for the three months ended June 30, 2010 increased by $254,000 compared to the prior fiscal period, primarily as a result of the current year increase in sales activity as previously mentioned, and partly due to a prior year charge for excess inventory that was not repeated in the current year.   TearLab gross margin for the six months ended June 30, 2010 increased by $216,000 or 240%, compared to the prior fiscal period for similar reasons.

Operating Expenses

	Three months ended June 30							Six months ended June 30
	(in thousands)							(in thousands)
	2010		2009		Change			2010		2009		Change
	$		$		$			$		$		$
Amortization of intangible assets		304		304		―			607		607		―
General and administrative		1,025		909		116			1,991		1,893		98
Clinical, regulatory and research and development		297		307		(10	)		765		639		126
Sales and marketing		346		169		177			621		383		238
Operating expenses		1,972		1,689		283			3,984		3,522		462

Amortization of Intangible Assets

Amortization expense of intangible assets was unchanged for the three and six months ended June 30, 2010 and 2009, as there were no adjustments to the Company’s cost basis or estimated useful life of the underlying assets.

General and Administrative Expenses

General and administrative expenses increased by $116,000 or 13% during the three months ended June 30, 2010, as compared with the corresponding period in 2009, primarily due to a $284,000 increase in non-cash option and director fee expenses booked upon shareholder approval to increase the option pool, a $43,000 increase in public company costs, offset by a $163,000 decrease in expenses related to executive compensation and $34,000 in decreased legal and professional expenses.

General and administrative expenses increased by $98,000 or 5% during the six months ended June 30, 2010, as compared with the corresponding period in 2009, due to increases of $325,000 in non-cash option and director fees recorded upon shareholder approval, $103,000 in executive bonuses and $45,000 in administrative expenses arising from un-needed accruals from prior years that were reversed in 2009.  This was offset by reductions of $231,000 in executive compensation, $33,000 in public company costs, $29,000 in travel and $65,000 in legal expenses and other professional fees for the period.

20

TearLab Corp. (formerly OccuLogix, Inc.).

We are continuing to focus our efforts on controlling costs by reviewing and improving upon our existing business processes and cost structure.

Clinical, Regulatory and Research and Development Expenses

Total clinical, regulatory and research and development expenses decreased by $10,000 or 3% during the three months ended June 30, 2010, as compared with the corresponding prior year period.  Regulatory costs in support of the Company’s goal of obtaining CLIA waiver certification increased by $41,000 over the prior period, but were offset by reductions in clinical overhead and engineering expenses.

Clinical, regulatory and research and development expenses increased by $126,000 or 20% during the six months ended June 30, 2010, versus the prior year period.  Regulatory costs in support of the Company’s goal of obtaining CLIA waiver certification increased by $90,000 over the prior period.  Additionally the Company’s costs related to patents expense increased by $36,000 over the prior period.

Sales and Marketing Expense

Sales and marketing expenses increased by $177,000 or 105% during the three months ended June 30, 2010, as compared with the comparable period in fiscal 2009. The increase is due to $103,000 in sales and business development costs that were not present in the prior year.  Additionally there were increases in marketing advertising and travel expense of $46,000 and $25,000, respectively, reflecting additional marketing production and trade show activity over the prior year period.

Sales and marketing expenses increased by $238,000 or 62% during the six months ended June 30, 2010, as compared with the comparable period in fiscal 2009. The increase is due to $194,000 in sales and business development costs that were not present in the prior year.  Additionally there was a net $28,000 increase in marketing advertising and travel expense, reflecting additional marketing production and trade show activity over the prior year period.

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

Other Income (Expense)

	Three Months Ended June 30,								Six Months Ended June 30,
	(in thousands)								(in thousands)
	2010			2009		Change			2010			2009		Change
	$			$		$			$			$		$
Interest income		8			―		8			9			2		7
Changes in fair value of warrant obligations		402			9		393			473			31		442
Interest expense		(53	)		―		(53	)		(105	)		―		(105	)
Amortization of deferred financing charges, warrants and beneficial conversion values		(139	)		―		(139	)		(293	)		―		(293	)
Other		(6	)		12		(18	)		(26	)		26		(52	)
		212			21		191			58			59		(1	)

21

TearLab Corp. (formerly OccuLogix, Inc.).

Interest Income

Interest income consists of interest earned as a result of the Company’s cash and short-term investment position following the raising of capital.  The increase in interest income in the three and six months ended June 30, 2010, as compared to the three and six months ended June 30, 2009 is indicative of the Company earning interest from higher cash balances than in the prior year.

Changes in Fair Value of Warrants Obligations

The Company has a total of 731,696 warrants subject to fair value re-measurement of which 621,118 warrants were issued during the three months ended March 31, 2010. The value of these 2010 Warrants vary primarily due to the market price of our common stock.

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 110,578 shares of the Company’s common stock. The Company estimated the fair value of these 2007 Warrants as of June 30, 2010 and determined the aggregate fair value to be $1,471, a decrease of $1,725 from the nominal value calculated as at December 31, 2009.

On March 18, 2010, the Company closed a registered direct financing in which it sold approximately 1,552,796 shares of its common stock and warrants (the “2010 Warrants”) to purchase approximately 621,118 shares of its common stock for gross proceeds of approximately $5,000,000.  Based on applicable guidance from the FASB, the Company determined that the Warrants do not meet the criteria for classification as equity.  Accordingly, the Company classified the Warrants as current liabilities at June 30, 2010. The estimated fair value of the Warrants at March 18, 2010 was determined to be $736,771.  The Company estimated the fair value of the Warrants as of June 30, 2010 to be $265,093, a decrease of approximately $471,677 over the measurement of the aggregate fair value of the Warrants on March 18, 2 010.

This net combined decrease of $473,402 in the fair value of warrant obligations is recorded as a gain in other income for the six months ended June 30, 2010. In the six months ended June 30, 2009, a gain of $31,437 was reported.

In the three months ended June 30, 2010, a gain of $402,424 was reported and in the three months ended June 30, 2009, a gain of $9,742 was reported.

Interest Expense

Accrued interest of $52,503 and $105,005 has been recorded in the three and six months ended June 30, 2010, arising from the notes payable issued in the third quarter of 2009 and is included in notes payable and accrued interest on our balance sheet. There were no similar charges in the three and six months ended June 30, 2009.

Amortization of Deferred Financing Charges, Warrants and Beneficial Conversion values

As a result of the financing that the Company completed in July and August 2009 (“Financing”) and which resulted in the purchase of $1.75 million in convertible secured notes by the investors, investors were in a position to convert the notes at a conversion price of $1.3186 per share at a time when the common shares of the Company were trading at $1.75 (July 15th) and $1.70 (August 31st) providing them with a beneficial conversion feature. The Company has valued this feature as $727,528 and the amortization of this amount as an expense over the two year life of the Notes for the three and six months ended June 30, 2010 was $108,269 and $228,304 respectively. No similar e xpense was reported in the three and six months ended June 30, 2009.

Investors in the Financing will receive warrants at an exercise price of $1.60 upon conversion of the convertible secured notes. The Company has valued these warrants using the Black-Scholes value model at a value of $162,621. The amortization of this amount as an expense over the two year life of the convertible secured notes for the three and six months ended June 30, 2010 was $24,253 and $51,139 respectively. No similar expense was reported for the three and six months ended June 30, 2009.

22

TearLab Corp. (formerly OccuLogix, Inc.).

Issuance costs of the Financing totaled $87,199 and have been allocated to cost of equity and to deferred finance charges. The amortization of the deferred finance charges as an expense over the two year life of the Notes for the three and six months ended June 30, 2010 was $6,420 and $13,536 respectively.  No similar expense was reported for the three and six months ended June 30, 2009.

Other

Other income for the three and six months ended June 30, 2010 and 2009 consists of foreign exchange gains and losses, based on fluctuations of the Company’s foreign denominated currencies.

Recovery of Income Taxes

Recovery of income taxes decreased by $1,349,212 to zero during the six months ended June 30, 2010, as compared with a recovery of income taxes of $1,349,212 in the six months ended June 30, 2009. The recovery of income taxes decreased by $680,331 to zero during the three months ended June 30, 2010, as compared with a recovery of income taxes of $680,331 in the three months ended June 30, 2009. At December 31, 2009, deferred tax liabilities equaled deferred tax assets and therefore in the six and three months ended June 30, 2010, it was necessary to offset the amortization of deferred tax liabilities of $334,226 and $164,760, respectively, with an increase to the valuation allowance associated for the deferred tax assets to an equal amount to maintain a net deferred tax balance of zero. As the Company does not know when it will be able to use tax losses to offset taxable income it cannot allow deferred taxes to reflect an asset position.  In the six and  three months ended June 30, 2009, there was sufficient deferred tax liabilities to allow the Company to report $1,106,307 and $558,878  in deferred tax assets representing tax losses benefited in the six and three months ended June 30, 2009, respectively. In addition, in the six and three months ended of June 30, 2009, the Company recorded amortization of deferred tax liabilities of $242,905 and $121,453, respectively

To date, the Company has recognized income tax benefits in the aggregate amount of $3.2 million associated with the recognition of the deferred tax asset from the availability of net operating losses in the United States which may be utilized to reduce taxes in future years. The benefits associated with the balance of the net operating losses are subject to a full valuation allowance since it is not more likely than not that these losses cannot be utilized in future years. A portion of the Company’s net operating losses may, however, be subject to annual limitations as a result of the Company’s initial public offering and prior changes of control. Accordingly, until a formal analysis of the effect of the changes of control is performed, a portion of the income tax benefits recognized to date may be affected.

Review of Intangible Assets for Impairment

The Company determined that, as of June 30, 2010, there have been no significant events which may affect the carrying value of TearLab, Inc.’s (“TearLab”) TearLab™ technology. However, the Company’s prior history of losses and losses incurred during the current fiscal year reflect a potential indication of impairment, thus requiring management to assess whether the TearLab™ technology was impaired as at June 30, 2010. Based on management’s estimates of forecasted undiscounted cash flows as of June 30, 2010, the Company concluded that there is no indication of an impairment of TearLab's TearLab™ technology. Therefore, no impairment charge was recorded during the six or three months ended June 30, 2010.

Liquidity and Capital Resources

(in thousands)

	June 30,		December 31,
	2010		2009			Change
Cash and cash equivalents	$	4,754	$	106		$	4,648
Percentage of total assets		35%		1%
Working capital	$	2,202	$	(2,132	)	$	4,334

23

TearLab Corp. (formerly OccuLogix, Inc.).

Financial Condition

Management believes that our cash and cash equivalents will be sufficient to meet our operating activities and other demands for at least the next 12 months.

Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties.  Actual results could vary as a result of a number of factors.  We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.  Our future funding requirements will depend on many factors, including but not limited to:

- the cost and results of continuing development of TearLab, Corp's TearLab Osmolarity System;

- the cost and results, and the rate of progress, of the clinical trials of the TearLab Osmolarity System that will be required to support TearLab, Corp's application to obtain a CLIA waiver approval from the FDA;

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

- whether government and third-party payers agree to reimburse the TearLab Osmolarity System;

- the costs and timing of building the infrastructure to market and sell the TearLab Osmolarity System;

- the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and

- the effect of competing technological and market developments.

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

We believe that we have sufficient funding to meet operational needs until the Company becomes cash flow positive from operations but if we are not able to achieve a cash positive operating position in 2011 we may need to raise additional funds, and our prospects for obtaining that capital are uncertain.  Additional capital may not be available on terms favorable to us, or at all.  In addition, future financings could result in significant dilution of existing stockholders.  However, we believe that cash and cash equivalents at June 30, 2010 will be sufficient to allow the Company to operate for a minimum of 12 months.

On January 8, 2010, we raised $1,743,989 in the first tranche of a private placement transaction in which 1,886,291 shares of common stock were issued at a share price of $0.92456. On March 19, 2010, we raised an additional $1,255,992 in the second tranche of the private placement transaction in which 1,358,475 shares of common stock were issued at a share price of $0.92456 as these funds were in escrow prior to the first closing on January 8, 2010.

Additionally on March 18, 2010, we closed a registered direct financing in which 1,552,795 shares of common stock and warrants to purchase 621,118 shares of common stock for gross proceeds of approximately $5,000,000 were purchased.  The investors purchased the shares and warrants for $3.22 per unit (each unit consisting of one share and a warrant to purchase 0.4 shares of common stock).  The exercise price of the warrants is $4.00 per share. The warrants are exercisable at any time on or after the sixth-month anniversary of the closing date through and until the 18-month anniversary of the closing of the offering.

Ongoing Sources and Uses of Cash

We anticipate that our cash and cash equivalents will be sufficient to sustain our operations of the Company for at least a period of 12 months.  We continually evaluate various financing possibilities but we typically expect our primary sources of cash will be related to the collection of accounts receivable and, to a lesser degree, interest income on our cash and investment balances.  Our accounts receivable collections will be impacted by our ability to grow our point-of-care revenue, any bad debts we experience and our overall collection rates on the related accounts receivable.

24

TearLab Corp. (formerly OccuLogix, Inc.).

We expect our primary uses of cash will be to fund our operating expenses and pursuing and maintaining our patents and trademarks.  In addition, dependent on available funds, we expect to expend cash to improve production capability of the TearLab test, to further improve the performance of the TearLab test, and to pursue additional applications for the lab-on-a-chip technology.

Changes in Cash Flows

	Six months ended June 30,
	(in thousands)
	2010			2009			Change
Cash used in operating activities	$	(2,520	)	$	(2,245	)	$	(275)
Cash used in investing activities		(25	)		(7	)		(18)
Cash provided by financing activities		7,193			―			7,193
Net increase in cash and cash equivalents during the period	$	4,648		$	(2,252	)	$	6,900

Cash Used in Operating Activities

Net cash used to fund our operating activities during the six months ended June 30, 2010 was $2,520,000.  Net loss during the six month period was $3,620,000. The non-cash sources which comprise a portion of the net loss during that period consist primarily of the amortization of intangible assets, fixed assets, patents and trademarks, stock-based compensation, amortization of prepaid or deferred finance charges, accretion of warrant and beneficial conversion values and accrued interest from the convertible secured note financing in the aggregate total of $1,852,000. Offsetting additional non-cash amounts which comprise a portion of the net loss during that period include changes in the fair value of warrant obligations $473,000 and the gain on the sale of fixed assets of $3,000.

The net change in non-cash working capital balances related to operations for the six months ended June 30, 2010 and 2009 consists of the following:

	Six months ended June 30,
Cash provided (used)	(in thousands)
	2010			2009
Amounts receivable, net	$	(62	)	$	198
Due from related party		(51	)		(62	)
Inventory		(144	)		(41	)
Prepaid expenses		152			31
Other current assets		(5	)		(15	)
Other non-current assets		67			―
Accounts payable		(149	)		156
Accrued liabilities		(60	)		(44	)
Deferred revenue		(17	)		(41	)
Due to stockholders		(7	)		12
	$	(276	)	$	256

Cash Used in Investing Activities

Net cash used in investing activities for the six months ended June 30, 2010 was $25,000. Cash used in investing activities during the period consists of cash in the amount of $39,000 used to acquire fixed assets net of proceeds of $14,000 on sale of fixed assets.

25

TearLab Corp. (formerly OccuLogix, Inc.).

Net cash used in investing activities for the six months ended June 30, 2009 was $7,000. Cash used in investing activities during the period consisted of cash in the amount of $11,000 used to acquire fixed assets net of proceeds of $4,000 on sale of fixed assets.

Cash Provided by Financing Activities

During the six months ended June 30, 2010, the Company issued common stock in a private placement funding for $3,000,000 and in a registered direct funding for $5,000,000, offset by costs paid in the six months ended June 30, 2010 of $807,000. There were no similar transactions in the six months ended June 30, 2009.

Critical Accounting Policies and Estimates

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

There were no significant changes during the six months ended June 30, 2010 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Recent Accounting Pronouncements

For information on the recent accounting pronouncements impacting our business, see Note 2 of the Notes to the unaudited Consolidated Financial Statements for the six months ended June 30, 2010 included in Item 1.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Currency Fluctuations and Exchange Risk

All of our sales are in U.S. dollars, while a portion of our expenses are in Canadian dollars and Australian dollars.  We cannot predict any future trends in the exchange rate of the Canadian dollar or Australian dollar against the U.S. dollar.  Any strengthening of the Canadian dollar or Australian dollar in relation to the U.S. dollar would increase the U.S. dollar cost of our operations, and affect our U.S. dollar measured results of operations.  We maintain bank accounts in both Canadian dollars and Australian dollars to meet short term operating requirements.  Based on the balances in the Canadian dollar and Australian dollar denominated bank accounts at June 30, 2010, hypothetical increases of $0.01 in the value of the Canadian dollar and the Australian dollar in relation to the U.S. dollar wo uld not have a material impact on the results of our operations.  We do not engage in any hedging or other transactions intended to manage these risks.  In the future, we may undertake hedging or other similar transactions or invest in market risk sensitive instruments if we determine that is advisable to offset these risks.

Interest Rate Risk

The primary objective of our investment activity is to preserve principal while maximizing interest income we receive from our investments, without increasing risk.  We believe this will minimize our market risk.  We do not use interest rate derivative transactions to manage our interest rate risk.  We reduce our exposure to interest rate risk by investing in investment grade securities or money market accounts.  Declines in interest rates over an extended period of time will reduce our interest income while an increase over an extended period of time will increase our interest income.  A reduction of interest rate by 100 basis points over the six months ended June 30, 2010 would reduce interest income by under $37,000 annually.

26

TearLab Corp. (formerly OccuLogix, Inc.).

ITEM 4. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures.

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

As required by the SEC, and defined in Rule 13a- 15(e) of the Exchange Act, we carried out an evaluation under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the Company’s disclosure controls and procedures.  Based on that evaluation, our chief executive officer and chief financial officer concluded that, as of the end of that fiscal period, the Company’s disclosure controls and procedures are effective to provide reasonable assurance of achieving the desired control objectives.

(b) Changes in Internal Control over Financial Reporting.

During the second quarter of 2010, 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.

27

TearLab Corp. (formerly OccuLogix, Inc.).

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

Risks Relating to our Business

Our near-term success is highly dependent on the success of the TearLab Osmolarity System, and we cannot be certain that it will receive regulatory approval or be successfully commercialized in the United States.

The TearLab™ Osmolarity System is currently our only product.  Our product is currently sold outside of the United States pursuant to CE mark approval; in Canada pursuant to a Health Canada Medical Device License; and in the United States as a result of having received 510(k) approval from the FDA, to market the TearLab™ Osmolarity System to those reference and physician operated laboratories with moderate and high complexity, Clinical Laboratory Improvement Act, or CLIA, certifications.  We intend to seek a CLIA waiver from the U.S. Food and Drug Administration, or the FDA, which will allow us to sell to those eye care professionals in the United States who do not have CLIA certifications to perform moderate and high complexity tests.  Even if the TearLab™ Osmolarity System receives all reg ulatory approvals in the United States, it may never be successfully commercialized.  If the TearLab™ Osmolarity System does not receive all regulatory approvals or is not successfully commercialized, we may not be able to generate revenue, become profitable or continue our operations.  Any failure of the TearLab™ Osmolarity System to receive regulatory approvals or to be successfully commercialized in the United States would have a material adverse effect on our business, operating results, financial condition and cash flows and could result in a substantial decline in the price of our common stock.

Our near-term success is highly dependent on increasing sales of the TearLab Osmolarity System outside the United States, and we cannot be certain that we will successfully increase such sales.

Our product is currently sold outside of the United States pursuant to CE mark approval and Health Canada Approval in Canada.  Our near-term success is highly dependent on increasing our international sales.  We may also be required to register our product with health departments in our foreign market countries.  A failure to successfully register in such markets would negatively affect our sales in any such markets.  In addition, import taxes are levied on our product in certain foreign markets.  These foreign markets include Turkey, Spain, Italy and France.  Other countries may adopt taxation codes on imported products.  Increases in such taxes or other restrictions on our product could negatively affect our ability to import, distribute and price our product.

Our limited working capital and history of losses have resulted in our auditors expressing doubts in prior years  as to whether we will be able to continue as a going concern.

In the years ended December 31, 2006, 2007, 2008 and 2009, we had prepared our consolidated financial statements on the basis that we will continue as a going concern.  The Company's working capital deficit at December 31, 2009 was $2,132,036.  In the period subsequent to December 31, 2009, the Company raised gross proceeds of $8.0 million in private placement and registered direct financings.  Our net working capital at June 30, 2010 was $2,228,284, which represents a $4,360,320 increase from our working capital at December 31, 2009. Although current levels of cash flows are negative, management believes the Company’s existing cash as well as the proceeds from the funding received in the six months ended June 30, 2010 will be sufficient to cover its operating and other cash demands for at least the nex t 12 months.

Our consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary if we were not able to continue as a going concern.

28

TearLab Corp. (formerly OccuLogix, Inc.).

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

We have incurred losses in each year since our inception.  As of December 31, 2009, we had an accumulated deficit of $372.0 million and have incurred an additional $3.6 million in losses in the six months ended June 30, 2010.  Our losses have resulted primarily from expenses incurred in research and development of our product candidates from our discontinued businesses.  We do not know when or if we will receive CLIA waiver approval from the FDA for the TearLab Osmolarity System or successfully commercialize it in the United States.  As a result, and because of the numerous risks and uncertainties facing us, it is difficult to provide the extent of any future losses or the time required to achieve profitability, if at all.  Any failure of our product candidate to obtain regulatory approval and any failure to become and remain profitable would adversely affect the price of our common stock and our ability to raise capital and continue operations.

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

As of June 30, 2010, our total indebtedness was approximately $3.4 million.  Our significant debt and debt service requirements could adversely affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities.  For example, our high level of debt presents the following risks:

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

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

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

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

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

Since inception, we have funded our operations through debt and equity financings, including 2008 common stock and debt bridge financings, 2009 convertible secured debt financings and the 2010 private placement and registered direct common stock financings.  As of the date of this Quarterly report on Form 10-Q, we estimate that we have sufficient resources to fund operations for at least the next 12 months; however, our prospects for obtaining additional financing are uncertain.  Additional capital may not be available on terms favorable to us, or at all.  If financing is available, it may not be sufficient for us to continue as a going concern and it may be on terms that adversely affect the interest of our existing stockholders.  In addition, future financings could result in significant dilution of existing stockholders and adversely affect the economic interests of existing stockholders.

We will face challenges in bringing the TearLab Osmolarity System to market in the United States and may not succeed in executing our business plan.

29

TearLab Corp. (formerly OccuLogix, Inc.).

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

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

· We may not receive the CLIA waiver for the TearLab™ Osmolarity System from the FDA, in which case our ability to market the TearLab™ Osmolarity System in the United States will be hindered severely.

· Our suppliers and we will be subject to numerous FDA requirements covering the design, testing, manufacturing, quality control, labeling, advertising, promotion and export of the TearLab™ Osmolarity System and other matters.  If our suppliers or we fail to comply with these regulatory requirements, the TearLab™ Osmolarity System could be subject to restrictions or withdrawals from the market and we could become subject to penalties.

· Even if we succeed in obtaining the sought-after FDA approvals, we may be unable to commercialize the TearLab™ Osmolarity System successfully in the United States.  Successful commercialization will depend on a number of factors, including, among other things, achieving widespread acceptance of the TearLab™ Osmolarity System among physicians, establishing adequate sales and marketing capabilities, addressing competition effectively, the ability to obtain and enforce patents to protect proprietary rights from use by would-be competitors, key personnel retention and ensuring sufficient manufacturing capacity and inventory to support commercialization plans.

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

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

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

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

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

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

· refusal to grant export approval for our products;

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

· criminal prosecution.

If any of these enforcement actions were to be taken by the government, our business could be harmed.

We are required to demonstrate and maintain compliance with the FDA's Quality System Regulation, or the QSR.  The QSR is a complex regulatory scheme that covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of our products.  The FDA must determine that the facilities which manufacture and assemble our products that are intended for sale in the United States, as well as the manufacturing controls and specifications for these products, are compliant with applicable regulatory requirements, including the QSR.  The FDA enforces the QSR through periodic unannounced inspections.  Our facilities have not yet been inspected by the FDA, and we cannot assure you that we will pass any future FDA inspection.   Our failure, or the failure of our suppliers, to take satisfactory corrective action in response to an adverse QSR inspection could result in enforcement actions, including a public warning letter, a shutdown of our manufacturing operations, a recall of our product, civil or criminal penalties or other sanctions, which would significantly harm our available inventory and sales and cause our business to suffer.

30

TearLab Corp. (formerly OccuLogix, Inc.).

Our patents may not be valid, and we may not be able to obtain and enforce patents to protect our proprietary rights from use by would-be competitors.  Patents of other companies could require us to stop using or pay to use required technology.

Our owned and licensed patents may not be valid, and we may not be able to obtain and enforce patents and to maintain trade secret protection for our technology.  The extent to which we are unable to do so could materially harm our business.

We have applied for, and intend to continue to apply for, patents relating to the TearLab™ Osmolarity System and related technology and processes.  Such applications may not result in the issuance of any patents, and any patents now held or that may be issued may not provide adequate protection from competition.  Furthermore, it is possible that patents issued or licensed to us may be challenged successfully.  In that event, if we have a preferred competitive position because of any such patents, any preferred position would be lost.  If we are unable to secure or to continue to maintain a preferred position, the TearLab™ Osmolarity System could become subject to competition from the sale of generic products.

Patents issued or licensed to us may be infringed by the products or processes of others.  The cost of enforcing patent rights against infringers, if such enforcement is required, could be significant and the time demands could interfere with our normal operations.  There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical, biotechnology and medical technology industries.  We could become a party to patent litigation and other proceedings.  The cost to us of any patent litigation, even if resolved in our favor, could be substantial.  Some of our would-be competitors may be able to sustain the costs of such litigation more effectively than we can because of their substantially greater financial resources. & #160;Litigation may also absorb significant management time.

Unpatented trade secrets, improvements, confidential know-how and continuing technological innovation are important to our future scientific and commercial success.  Although we attempt to, and will continue to attempt to, protect our proprietary information through reliance on trade secret laws and the use of confidentiality agreements with corporate partners, collaborators, employees and consultants and other appropriate means, these measures may not effectively prevent disclosure of our proprietary information, and, in any event, others may develop independently, or obtain access to, the same or similar information.

Certain of our patent rights are licensed to us by third parties.  If we fail to comply with the terms of these license agreements, our rights to those patents may be terminated, and we will be unable to conduct our business.

It is possible that a court may find us to be infringing upon validly issued patents of third parties.  In that event, in addition to the cost of defending the underlying suit for infringement, we may have to pay license fees and/or damages and may be enjoined from conducting certain activities.  Obtaining licenses under third-party patents can be costly, and such licenses may not be available at all.

We may face future product liability claims.

The testing, manufacturing, marketing and sale of therapeutic and diagnostic products entail significant inherent risks of allegations of product liability.  Our past use of the RHEOTM System and the components of the SOLX Glaucoma System in clinical trials and the commercial sale of those products may have exposed us to potential liability claims.  Our use of the TearLab™ Osmolarity System and its commercial sale could also expose us to liability claims.  All of such claims might be made directly by patients, health care providers or others selling the products.  We carry clinical trials and product liability insurance to cover certain claims that could arise, or that could have arisen, during our clinical trials o r during the commercial use of our products.  We currently maintain clinical trials and product liability insurance with coverage limits of $2,000,000 in the aggregate annually.  Such coverage, and any coverage obtained in the future, may be inadequate to protect us in the event of successful product liability claims, and we may not be able to increase the amount of such insurance coverage or even renew it.  A successful product liability claim could materially harm our business.  In addition, substantial, complex or extended litigation could result in the incurrence of large expenditures and the diversion of significant resources.

31

TearLab Corp. (formerly OccuLogix, Inc.).

We have entered into a number of related party transactions with suppliers, creditors, stockholders, officers and other parties, each of which may have interests which conflict with those of our public stockholders.

We have entered into several related party transactions with our suppliers, creditors, stockholders, officers and other parties, each of which may have interests which conflict with those of our public stockholders.

If we do not introduce new commercially successful products in a timely manner, our products may become obsolete over time, customers may not buy our products and our revenue and profitability may decline.

Demand for our products may change in ways we may not anticipate because of:

· evolving customer needs;

· the introduction of new products and technologies; and

· evolving industry standards.

Without the timely introduction of new commercially successful products and enhancements, our products may become obsolete over time, in which case our sales and operating results would suffer.  The success of our new product offerings will depend on several factors, including our ability to:

· properly identify and anticipate customer needs;

· commercialize new products in a cost-effective and timely manner;

· manufacture and deliver products in sufficient volumes on time;

· obtain and maintain regulatory approval for such new products;

· differentiate our offerings from competitors' offerings;

· achieve positive clinical outcomes; and

· provide adequate medical and/or consumer education relating to new products.

Moreover, innovations generally will require a substantial investment in research and development before we can determine the commercial viability of these innovations and we may not have the financial resources necessary to fund these innovations.  In addition, even if we are able to successfully develop enhancements or new generations of our products, these enhancements or new generations of products may not produce revenue in excess of the costs of development and they may be quickly rendered obsolete by changing customer preferences or the introduction by our competitors of products embodying new technologies or features.

We rely on a single supplier of each of the key components of the TearLab Osmolarity System and are vulnerable to fluctuations in the availability and price of our suppliers' products and services.

We purchase each of the key components of the TearLab™ Osmolarity System from single third-party suppliers.  Our supplier may not provide the components or other products needed by us in the quantities requested, in a timely manner or at a price we are willing to pay.  In the event we were unable to renew our agreements with our supplier or they were to become unable or unwilling to continue to provide important components in the required volumes and quality levels or in a timely manner, or if regulations affecting the components were to change, we would be required to identify and obtain acceptable replacement supply sources.  We may not be able to obtain alternative suppliers or vendors on a timely basis, or at all, which could disrupt or delay, or halt altogether, our ability to manufacture or delive r the TearLab™ Osmolarity System.  If any of these events should occur, our business, financial condition, cash flows and results of operations could be materially adversely affected.

32

TearLab Corp. (formerly OccuLogix, Inc.).

We face intense competition, and our failure to compete effectively could have a material adverse effect on our results of operations.

We face intense competition in the markets for ophthalmic products and these markets are subject to rapid and significant technological change.  Although we have no direct competitors, we have numerous potential competitors in the United States and abroad.  We face potential competition from industry participants marketing conventional technologies for the measurement of osmolarity and other in-lab testing technologies, as well as industry participants developing and marketing point-of-care tests, such as the technology being developed by the Aborn Eye Clinic, which is reportedly able to measure the osmolarity of nanoliter tear samples, and commercially available methods, such as the Schirmer Test and ocular surface staining.  Many of our potential competitors have substantially more resources and a greater m arketing scale than we do.  If we are unable to develop and produce or market our products to effectively compete against our competitors, our operating results will materially suffer.

If we lose key personnel, or we are unable to attract and retain highly qualified personnel on a cost-effective basis, it would be more difficult for us to manage our existing business operations and to identify and pursue new growth opportunities.

Our success depends, in large part, upon our ability to attract and retain highly qualified scientific, clinical, manufacturing and management personnel.  In addition, any difficulties retaining key personnel or managing this growth could disrupt our operations.  Future growth will require us to continue to implement and improve our managerial, operational and financial systems, and to continue to recruit, train and retain, additional qualified personnel, which may impose a strain on our administrative and operational infrastructure.  The competition for qualified personnel in the medical technology field is intense.  We are highly dependent on our continued ability to attract, motivate and retain highly qualified management, clinical and scientific personnel.

Due to our limited resources, we may not be able to effectively recruit, train and retain additional qualified personnel.  If we are unable to retain key personnel or manage our growth effectively, we may not be able to implement our business plan.

Furthermore, we have not entered into non-competition agreements with our key employees.  In addition, we do not maintain “key person” life insurance on any of our officers, employees or consultants.  The loss of the services of existing personnel, the failure to recruit additional key scientific, technical and managerial personnel in a timely manner, and the loss of our employees to our competitors would harm our research and development programs and our business.

If we fail to establish and maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired, which would adversely affect our consolidated operating results, our ability to operate our business and our stock price.

Ensuring that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently.  Failure on our part to maintain effective internal financial and accounting controls would cause our financial reporting to be unreliable, could have a material adverse effect on our business, operating results, financial condition and cash flows, and could cause the trading price of our common stock to fall dramatically.

Maintaining proper and effective internal controls will require substantial management time and attention and may result in our incurring substantial incremental expenses, including with respect to increasing the breadth and depth of our finance organization to ensure that we have personnel with the appropriate qualifications and training in certain key accounting roles and adherence to certain control disciplines within the accounting and reporting function.  Any failure in internal controls or any additional errors or delays in our financial reporting would have a material adverse effect on our business and results of operations and could have a substantial adverse impact on the trading price of our common stock.

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TearLab Corp. (formerly OccuLogix, Inc.).

Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP.  Our management does not expect that our internal control over financial reporting will prevent or detect all errors and all fraud.  A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met.  Our management has identified a control deficiency in the past and may identify additional deficiencies in the future.

We cannot be certain that the actions we are taking to improve our internal controls over financial reporting will be sufficient or that we will be able to implement our planned processes and procedures in a timely manner.  In future periods, if the process required by Section 404 of the Sarbanes-Oxley Act of 2002 reveals material weaknesses or significant deficiencies, the correction of any such material weaknesses or significant deficiencies could require additional remedial measures which could be costly and time-consuming.  In addition, we may be unable to produce accurate financial statements on a timely basis.  Any of the foregoing could cause investors to lose confidence in the reliability of our consolidated financial statements, which could cause the market price of our common stock to decline and ma ke it more difficult for us to finance our operations and growth.

The trading price of our common stock may be volatile.

The market prices for, and the trading volumes of, securities of medical device companies, such as ours, have been historically volatile.  The market has experienced, from time to time, significant price and volume fluctuations unrelated to the operating performance of particular companies.  The market price of our common shares may fluctuate significantly due to a variety of factors, including:

· the results of pre-clinical testing and clinical trials by us, our collaborators and/or our competitors;

· technological innovations or new diagnostic products;

· governmental regulations;

· developments in patent or other proprietary rights;

· litigation;

· public concern regarding the safety of products developed by us or others;

· comments by securities analysts;

· the issuance of additional shares to obtain financing or for acquisitions;

· general market conditions in our industry or in the economy as a whole; and

· political instability, natural disasters, war and/or events of terrorism.

In addition, the stock market has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of individual companies.  Broad market and industry factors may seriously affect the market price of companies’ stock, including ours, regardless of actual operating performance.  In the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies.  This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

Because we do not expect to pay dividends on our common stock, stockholders will benefit from an investment in our common stock only if it appreciates in value.

We have never paid cash dividends on our common stock and have no present intention to pay any dividends in the future.  We are not profitable and do not expect to earn any material revenues for at least several years, if at all.  As a result, we intend to use all available cash and liquid assets in the development of our business.  Any future determination about the payment of dividends will be made at the discretion of our board of directors and will depend upon our earnings, if any, our capital requirements, our operating and financial conditions and on such other factors as our board of directors may deem relevant.  As a result, the success of an investment in our common stock will depend upon any future appreciation in its value.  There is no guarantee that our common stock will appre ciate in value or even maintain the price at which stockholders have purchased their shares.

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TearLab Corp. (formerly OccuLogix, Inc.).

Warrant holders will not be entitled to any of the rights of common stockholders, but will be subject to all changes made with respect thereto.

If you hold warrants, you will not be entitled to any rights with respect to our common stock (including, without limitation, voting rights and rights to receive any dividends or other distributions on our common stock), but you will be subject to all changes affecting our common stock.  You will have rights with respect to our common stock only if you receive our common stock upon exercise of the warrants and only as of the date when you become a record owner of the shares of our common stock upon such exercise.  For example, if an amendment is proposed to our charter or bylaws requiring stockholder approval and the record date for determining the stockholders of record entitled to vote on the amendment occurs prior to the date you are deemed to be the owner of the shares of our common stock due upon exercise of your warrants, you will not be entitled to vote on the amendment, although you will nevertheless be subject to any changes in the powers, preferences or special rights of our common stock.

We can issue shares of preferred stock that may adversely affect the rights of holders of our common stock.

Our certificate of incorporation authorizes us to issue up to 10,000,000 shares of preferred stock with designations, rights, and preferences determined from time to time by our board of directors.  Accordingly, our board of directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights superior to those of holders of our common stock.  For example, an issuance of shares of preferred stock could:

· adversely affect the voting power of the holders of our common stock;

· make it more difficult for a third party to gain control of us;

· discourage bids for our common stock at a premium;

· limit or eliminate any payments that the holders of our common stock could expect to receive upon our liquidation; or

· otherwise adversely affect the market price or our common stock.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

There has not been any default upon our senior securities.

ITEM 4. (Removed and Reserved.)

ITEM 5. OTHER INFORMATION

None.

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TearLab Corp. (formerly OccuLogix, Inc.).

ITEM 6. EXHIBITS

2.1	Form of Plan of Reorganization (incorporated by reference to Exhibit 2.1 to the Registrant’s Registration Statement on Form S-1/A No. 4, filed with the Commission on December 6, 2004 (file no. 333-118024)).
3.1	Amended and Restated Certificate of Incorporation of the Registrant as currently in effect (incorporated by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-1/A No. 3, filed with the Commission on November 16, 2004 (file no. 333-118024)).
3.2	Amended and Restated By-Laws of the Registrant as currently in effect (incorporated by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-1/A No. 3, filed with the Commission on November 16, 2004 (file no. 333-118024)).
10.1	2002 Stock Option Plan, as amended and restated on September 30, 2008.
10.2	Amending Agreement, dated as of October 6, 2008, between the Registrant and William G. Dumencu, amending the Employment Agreement between the Registrant and William G. Dumencu dated as of February 25, 2008.
10.3	Termination Agreement, dated as of October 6, 2008, between Suh Kim and the Registrant, terminating the Employment Agreement between the Registrant and Suh Kim dated as of March 12, 2007.
10.4	Termination Agreement, dated as of October 6, 2008, between Elias Vamvakas and the Registrant, terminating the Employment Agreement between the Registrant and Elias Vamvakas dated as of September 1, 2004.
10.5	Securities Purchase Agreement, dated July 15, 2009 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on July 16, 2009).
10.6	Form of 12% Convertible Secured Note (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed with the Commission on July 16, 2009).
10.7	Form of Warrant (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K, filed with the Commission on July 16, 2009).
10.8	Security Agreement, dated July 15, 2009 (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K, filed with the Commission on July 16, 2009).
10.9	Form of Director and Affiliate Letter Agreement (incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K, filed with the Commission on July 16, 2009).
10.10	Capital Advisory Agreement with Greybrook Capital Inc., dated November 3, 2009 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on November 3, 2009).
31.1	CEO’s Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934.
31.2	CFO’s Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934.
32.1	CEO’s Certification of periodic financial reports pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	CFO’s Certification of periodic financial reports pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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TearLab Corp. (formerly OccuLogix, Inc.).

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	TearLab Corp.
	(Registrant)
Date:    August 12, 2010	/s/ Elias Vamvakas
	Elias Vamvakas
	Chief Executive Officer

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