TEARLAB CORPORATION The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes, included in Item 8 of this Report. Unless
otherwise specified, all dollar amounts are in
Overview
We are an in vitro diagnostic company that has developed a proprietary tear
testing platform, the TearLab® Osmolarity System. The
In
On
On
On
RESULTS OF OPERATIONS
Revenue, Cost of Goods Sold and Gross Profit (in thousands)
For the years ended December 31,
% of % of
2019 Revenue 2018 Revenue
Revenue $ 22,655 100.0 % $ 24,999 100.0 %
Cost of goods sold 8,356 36.9 % 9,456 37.8 %
Gross profit $ 14,299 63.1 % $ 15,543 62.2 %
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Revenue
The TearLab® Osmolarity System consists of the following three components: (1)
the
Having received 510(k) approval from the FDA in
We are working with our established distributors in
Cost of Goods Sold
Gross Profit
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Operating Expenses (in thousands)
For the years ended December 31,
% of % of
2019 Revenue 2018 Revenue
Sales and marketing $ 3,652 16.1 % 3,334 13.3 %
Clinical, regulatory and research
and development 3,817 16.8 % 3,587 14.3 %
General and administrative 6,555 28.9 % 6,160 24.6 %
Total operating expenses $ 14,024 61.9 % $ 13,081 52. 3 %
Sales and Marketing Expenses
For the year ended
Clinical, Regulatory and Research and Development
For the year ended
General and Administrative Expenses
General and administrative expenses increased
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Other Income (Expense), Net (in thousands)
For the years ended December 31,
% of % of
2019 Revenue 2018 Revenue
Interest expense $ (5,703 ) -25.2 % $ (4,709 ) -18.8 %
Other, net 12 0.1 % (4 ) 0.0 %
Total other income (expense)
Interest Expense
Interest expense is generated from our long-term debt under the Term Loan
Agreement, which was most recently amended on
Other Income (Expense)
Other income for the year ended
Liquidity and Capital Resources (in thousands)
As of December 31,
2019 2018
Cash and cash equivalents $ 7,108 $ 8,473
Percentage of total assets 49.7 % 58.4 %
Working capital $ (27,899 ) $ 9,279
Financial Condition
In
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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. 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:
? whether CRG offers a covenant waiver or an Equity Cure can be obtained within
90 days;
?
Our ability to execute our commercial strategy with our current resources;
? whether government and third-party payers agree to continue reimbursement of
the TearLab® Osmolarity System at current levels;
? the cost and results of continuing development of our next generation TearLab
DiscoveryTM Platform including the cost of suppliers and service providers
that require advance payment;
? 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
although we have received 510(k) clearance from the FDA and a CLIA waiver
approval from the FDA, at this time, we do not know when we will generate
revenue from the TearLab® Osmolarity System in
Indebtedness
On
As part of Amendment No. 2 to the Term Loan Agreement, and funding of the second
tranche, CRG received warrants to purchase 35,000 common shares in the Company
at a price of
On
In connection with the
On
On
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On
The Term Loan Agreement is collateralized by all assets of the Company.
Additionally, the terms of the Term Loan Agreement contain various affirmative
and negative covenants agreed to by the Company. Among them, the Company must
attain minimum certain annual revenue and minimum cash threshold levels through
calendar year 2020. The minimum annual revenue threshold level required by the
Term Loan Agreement, 2019 is
The Company is currently in default of the 2019 minimum revenue threshold of
Ongoing Sources and Uses of Cash
We anticipate that our cash and cash equivalents and cash generated from business operations will be sufficient to sustain our operations into the first quarter of 2020. We continually evaluate various financing possibilities but we typically expect our primary source of cash will be related to the collection of accounts receivable. Our accounts receivable collections will be impacted by our ability to maintain current customers and annuity revenue base, while reducing costs as per our business model.
We expect to use our cash primarily to fund our operating expenses and to pursue the development and generation of clinical data for our new generation platform.
Changes in Cash Flows (in thousands)
Years ended December 31,
2019 2018
Cash (used in) provided by operating activities $ (954 )
(411 ) (461 )
Cash used in financing activities - (1,000 )
Net (decrease) increase in cash and cash
equivalents during the year $ (1,365 ) $ 1,201 Cash Used in Operating Activities
Net cash used in our operating activities for 2019 was
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The net change in non-cash working capital and non-current asset balances
related to operations for the years ended
Years ended December 31,
2019 2018
Accounts receivable, net $ 269 $ 350
Inventory (282 ) 11
Prepaid expenses and other assets (872 ) -
Other non-current assets 31 (50 )
Accounts payable (82 ) (1,039 )
Accrued liabilities (25 ) (497 )
Deferred rent/revenue 12 (28 )
$ (949 ) $ (1,253 ) Explanations of the more significant net changes in working capital and non-current asset balances are as follows:
? Accounts receivable decreased in 2019 due to improved collection on
outstanding balances and a reduction in sales;
? Inventory levels of test cards on hand increased in 2019 due to lower than
expected sales volumes;
? Prepaid expenses and other assets had an increase in 2019 due to the purchase
of parts for the TearLab DiscoveryTM systems to be built upon FDA approval.
Cash Used in Investing Activities
Net cash used in investing activities for the years ended
Cash Used in Financing Activities
There was zero net cash provided by or used in financing activities for the year
ended
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The following table summarizes our contractual commitments as of
Less Than 1 To 3 More Than
Contractual obligation Total 1 Year Years 3 Years
Operating leases $ 829 $ 311 $ 518 $ -
Royalty payments 385 35 105 245
Purchase obligations 676 676 - -
Long-term debt 24,000 24,000 - -
Interest payments 16,160 16,160 - -
Total contractual obligations
Off-Balance-Sheet Arrangements
As of
Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of
operations is based upon our audited consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our audited consolidated financial statements.
Revenue Recognition
Revenue is recognized when obligations under the terms of a contract with our
customer are satisfied; generally this occurs with the transfer of control of
our products or services. Revenue is measured as the amount of consideration we
expect to receive in exchange for transferring goods or providing services which
includes estimates of variable consideration that results from returns, rebates
or test card replacements. The Company records allowances for returns and
rebates and reports revenue net of such amounts which was
The Company sells its proprietary TearLab® Osmolarity System and related test
cards to external customers, who are primarily eye care professionals, for use
in osmolarity testing procedures. Revenue is primarily derived from the sale of
disposable test cards. Products are generally shipped from a distribution and
warehousing facility located in
The Company enters into contracts where revenue is derived either from agreements whereby the customer is provided the right to use the TearLab® Osmolarity System (reader equipment) at no separate cost to the customer in consideration for a minimum or implied purchase commitment of disposable test cards over the related contract term (referred to as either "Use Agreements," "Masters Agreements" or "Flex Agreements"), or from agreements to sell the reader equipment and disposable test cards at their stand-alone selling price with no contractual future purchase commitment (referred to as "Purchase Agreements").
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Use, Masters, and Flex Agreements
Purchase commitments for Use Agreements and Flex Agreements are expressed in the agreement for a specified period of time (generally one to three years). The purchase commitment for Masters Agreements is implied for large physician practices with an expectation of purchasing certain levels of test cards. The Company recovers the cost of providing the reader equipment in the amount charged for disposable test cards. Two performance obligations exist under these contracts, related to the customers' right to use the reader equipment and orders of test cards. As the customer has the ability and right to operate the reader equipment in a manner it determines as well as obtain the output from using the reader equipment, the revenue related to the reader equipment use performance obligation is recognized in accordance with ASC 842 - Leases, wherein revenue related to the reader equipment is recognized over the defined contract term. Revenue related to disposable test cards is recognized as the disposable test cards are shipped. Based on the nature of these contracts, which provide terms for the future purchase of test cards but do not contractually obligate the customer to do so, each purchase of test cards is treated as its own distinct contract with a performance obligation to provide the test cards ordered, memorialized by the customers' purchase order/request. Revenue under such agreements is allocated between the lease of the reader equipment and the sale of the disposables based upon each component's relative standalone selling price, which is estimated using the selling prices of the reader device and test cards under Purchase Agreements, discussed further below.
When reader equipment is placed with a customer at no separate cost, the Company retains title to the equipment and it remains capitalized on the Company's Consolidated Balance Sheet as equipment classified within fixed assets, net. The equipment is depreciated on a straight-line basis once shipped to a customer location over its estimated useful life and depreciation expense is included in cost of goods sold within the Consolidated Statements of Operations.
Purchase Agreements
Revenue recognition for Purchase Agreements is based on the individual performance obligations determined to exist in the contract. Since the reader equipment and the test cards are separate and distinct delivered items, the delivery of each are considered separate performance obligations. The reader equipment and test cards are separately identified under the Purchase Agreements and are sold at their standalone selling price. The Company recognizes revenue for each of the performance obligations only when it determines that all applicable recognition criteria have been met, which is usually upon shipment to the customer. Under Purchase Agreements, the customer is not contractually obligated to purchase additional test cards, and each subsequent order of test cards represents a separate and distinct contract with the performance obligation to provide the test cards ordered.
Amounts billed to customers for shipping and handling of a sales transaction are included as revenue.
Valuation of Intangible and Other long-lived Assets
We periodically assess the carrying value of intangible and other long-lived assets, which requires us to make assumptions and judgments regarding the future cash flows of these assets. The assets are considered to be impaired if we determine that the carrying value may not be recoverable based upon our assessment of the following events or changes in circumstances:
? the asset's ability to continue to generate income from operations and
positive cash flow in future periods;
? loss of legal ownership or title to the asset;
? significant changes in our strategic business objectives and utilization of
the asset(s); and
? the impact of significant negative industry or economic trends.
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If the assets are considered to be impaired, the impairment is the amount by which the carrying value of the assets exceeds the fair value of the assets. Fair value is determined by a combination of available third-party sources and discounted cash flows. In addition, we base the useful lives and related amortization or depreciation expense on our estimate of the period that the assets will generate revenue or otherwise be used by us. We also periodically review the lives assigned to our intangible assets to ensure that our initial estimates do not exceed any revised estimated periods from which we expect to realize cash flows from the technologies. If a change were to occur in any of the above-mentioned factors or estimates, the likelihood of a material change in our reported results would increase.
As of
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts to reflect estimated losses resulting from our customers' inability to make required payments. On an on-going basis, we evaluate the collectability of accounts receivable based on a combination of factors, including historical collection trends, current economic factors, and the assessment of collectability of specific accounts.
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