Our financial condition and history of losses have caused our auditors to express doubt as to whether we will be able to continue as a going concern.

 

   We have prepared our consolidated financial statements on the basis that we will continue as a going concern. However, the Company has sustained substantial losses for each of the years ended December 31, 2006, 2005 and 2004. The Company’s working capital at December 31, 2006 is $13,539,026, which represents a $30,875,921 reduction of its working capital of $44,414,947 at December 31, 2005. As indicated in their audit report dated March 2, 2007, our auditors have expressed substantial doubt as to whether we will be able to continue as a going concern because of the losses that we have sustained during the past three years and our current cash position.

 

   Although the Company realized gross proceeds of $10,016,000 (less transaction costs of approximately $750,000) on February 6, 2007 from the private placement of shares of its common stock and warrants, management believes that these proceeds, together with the Company’s existing cash, will be only be sufficient to cover its operating activity and other demands until early 2008.

 

   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 the Company were not able to continue as a going concern.

 

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 in 1996. Our net loss for the fiscal years ended December 31, 2006, 2005, 2004, 2003 and 2002 was $82.2 million, $163.0 million, $21.8 million, $2.5 million and $2.9 million, respectively. The losses in 2006 and 2005 include a charge for impairment of goodwill of $65.9 million and $147.5 million, respectively. As of December 31, 2006, we had an accumulated deficit of $293.2 million. These losses, among other things, have had and will continue to have an adverse effect on our stockholders’ equity and working capital. We expect our clinical and regulatory expenses to increase significantly in connection with RHEO-AMD, the clinical trials of the components of the SOLX Glaucoma System and other clinical trials that we may initiate. In connection with the acquisition of SOLX on September 1, 2006, we remain indebted to the former stockholders of SOLX in an aggregate amount of up to $13 million for the outstanding portion of the purchase price of SOLX. We also remain indebted to OcuSense in an aggregate amount of up to $4 million for the outstanding portion of the purchase price of the capital stock of OcuSense that we acquired on November 30, 2006. Furthermore, we are legally committed to make an additional equity investment of $3 million upon receipt, if any, from the FDA of a 510(k) clearance for the TearLab™ test for DES and another additional equity investment of $3 million upon receipt, if any, from the FDA of a CLIA waiver for the TearLab™ test for DES. In addition, subject to FDA approval of any of the RHEO™ System and the components of the SOLX Glaucoma System, we expect to incur significant sales, marketing and procurement expenses. As a result, we expect to continue to incur significant and increasing operating losses for the next several years. Because of the numerous risks and uncertainties associated with developing new medical therapies, we are unable to predict the extent of any future losses or when we will become profitable, if ever.

 

Our business may not generate the cash necessary to fund our operations.

 

     Since inception, we have funded our operations through early private placements of our equity and debt securities, early stage revenues, a successful initial public offering, or IPO, and, most recently on February 6, 2007, a private placement of shares of our common stock and warrants. Prior to the IPO, our cash resources were limited. We will need additional capital in the future, and our prospects for obtaining it are uncertain. We expect that the funding requirements for our operating activities will continue to increase substantially in the future, especially in view of the requirement to conduct RHEO-AMD, in support of our PMA application to the FDA, and to support the clinical trials of the SOLX Glaucoma System, in support of our applications to the FDA for 510(k) clearance, and as a consequence of our planned subsequent commercialization of the RHEO™ System and the components of the SOLX Glaucoma System. Sources of additional funds may include product licensing, joint development and other financing arrangements, or a combination of these sources. In addition, we may issue debt or additional equity securities. Future financings could result in significant dilution of existing stockholders. Additional capital may not be available on terms favorable to us, or at all. If adequate capital is unavailable, and if our operations do not generate cash, our commercialization of the RHEO™ System and/or the SOLX Glaucoma System will be delayed and we may be unable to continue our operations. See “Risk Factors—Risks Relating to Our Business—Our financial condition and history of losses have caused our auditors to express doubt as to whether we will be able to continue as a going concern.”

 

We do not know whether we will be able to increase our revenues or become profitable in the future.

 

   We were founded in 1996, but the principal focus of our operations since 2000 has been directed towards our pivotal trials for the RHEO™ System—MIRA-1 initially and now RHEO-AMD. Prior to 2000, our focus had been on commercializing and performing therapeutic apheresis, or blood filtering. We generated revenues of approximately $900,200 and $1,277,800 for the years ended June 30, 1999 and 1998, respectively, all of which were earned in the United States. For the year ended December 31, 2006, we had revenues of $205,884, of which $174,259 was derived from sales of the RHEO™ System and $31,625 was derived from sales of components of the SOLX Glaucoma System. For the years ended December 31, 2005, 2004 and 2003, we had revenues of $1,840,289, $969,357 and $390,479, respectively, of which $81,593, $731,757 and $390,479, respectively, were derived from sales of the RHEO™ System to OccuLogix, L.P., a related party, which then sold the RHEO™ System to three clinics in Canada, one of which is a related party, RHEO Clinic Inc., a subsidiary of TLC Vision. For the period from July 2002 to December 8, 2004, our only customer was OccuLogix, L.P., a related party. Subsequent to December 8, 2004, OccuLogix, L.P. became wholly owned by us. Our ability to increase our revenues and to earn revenues in the United States is dependent on a number of factors, including:

 

 
•

obtaining FDA approvals to market the RHEO™ System and the components of the SOLX Glaucoma System in the United States which will require their respective clinical trials to have successful outcomes;

 

 
•

successfully building the infrastructure and manufacturing capacity to market and sell the RHEO™ System and the components of the SOLX Glaucoma System;

 

 
•

achieving widespread acceptance of RHEO™ Therapy among physicians and patients, as well as the widespread acceptance by physicians and patients of the components of the SOLX Glaucoma System; and

 

 
•

agreement of governmental and third-party payors to reimburse for RHEO™ Therapy and for procedures involving the components of the SOLX Glaucoma System.

 

   We cannot begin commercialization in the United States until we receive FDA approval. At this time, we do not know when we can expect to begin to generate revenues in the United States. If we do not obtain FDA approvals and are required to focus our efforts on marketing the RHEO™ System to clinics solely in Canada and on marketing the components of the SOLX Glaucoma System in Canada and Europe, or if we are unable to generate significant revenues in the United States, we may not become profitable and we may be unable to continue our operations.

 

The business prospects and financial condition of our sole commercial customer, Veris, is uncertain.

 

   We have been notified that Veris has initiated restructuring proceedings under the Bankruptcy and Insolvency Act (Canada) but that it is continuing to carry on its operations in the normal course during its restructuring proceedings. A failure on the part of Veris to restructure its business successfully may adversely affect our ability to generate any revenues since, at this time, there is no other commercial provider of RHEO™ Therapy in any jurisdiction in which we have distribution and marketing rights to the RHEO™ System.

 

 

   During the year ended December 31, 2005, the Company had recorded an allowance for doubtful accounts of $1,047,622 against the amount due from Veris. In June 2006, Veris returned four OctoNova pumps which had been sold to it in December 2005. Accordingly, during fiscal year 2006, amounts receivable, net and the allowance for doubtful account recorded against the amount due from Veris were reduced by $143,520, the invoiced amount for the four pumps that were returned to the Company in June 2006. In addition, in November 2006, the Company forgave an amount receivable of $904,101 (for which an allowance for doubtful account had been recorded previously) which had been owing to the Company for the sale of treatment sets and pumps, and the provision of related services, to Veris during the period from September 14, 2005 to December 31, 2005.

 

   In November 2006, the Company sold 348 treatment sets to Veris for $73,776, including applicable taxes, the revenues for which were not recognized by the Company for the year ended December 31, 2006 as the Company believed that Veris would not be able to meet its financial obligations to the Company. In January 2007, the Company agreed to forgive this outstanding amount receivable of $73,776, and the Company has recorded an inventory loss of $60,987 in the year ended December 31, 2006 for the sale of these 348 treatment sets since these treatment sets had been delivered to Veris already.

 

   As of April 2006, the Company has been selling treatment sets to Veris at the negotiated discounted price of $200 per treatment set, which is lower than the Company’s cost. That price continues to remain in effect at the present time.

 

MIRA-1 did not meet its primary efficacy endpoint, and we are required to conduct a follow-up clinical trial of the RHEO™ System, RHEO-AMD,   to support our PMA application.

 

   We are required to obtain FDA approval to market the RHEO™ System in the United States. To support an application for FDA approval, we conducted, at our own expense, MIRA-1 to evaluate the safety and efficacy of RHEO™ Therapy in humans. MIRA-1 did not meet its primary efficacy endpoint, and we are required to conduct a follow-up clinical trial to support our PMA application, RHEO-AMD. The outcome of RHEO-AMD is uncertain. Clinical testing is expensive and can take many years. Failure can occur at any stage of the testing. We may encounter numerous factors during, or as a result of, RHEO-AMD that could delay or prevent us altogether from completing it and receiving FDA approval for a number of reasons, including:

 

•   we may be unable to obtain the complete number of data sets required by the protocol for RHEO-AMD;

 

•   the costs of RHEO-AMD may be greater than we anticipate;

 

•   we, or the regulators, may suspend or terminate RHEO-AMD if the participating patients are being exposed to unacceptable health risks; and

 

•   negative or inconclusive results may arise, and we may decide, or regulators may require us, to conduct additional clinical and/or preclinical testing.

 

The clinical trials of the components of the SOLX Glaucoma System may not succeed.

 

   We are required to obtain FDA approval to market the components of the SOLX Glaucoma System in the United States. In order to support our 510(k) clearance pre-market notifications, we are conducting, at our own expense, two randomized, multi-center clinical trials to demonstrate substantial equivalency to the argon laser, in the case of the SOLX 790 Laser, and to the Ahmed Glaucoma Valve, in the case of the SOLX Gold Shunt. The outcomes of these clinical trials is uncertain. Clinical testing is expensive and can take many years. Failure can occur at any stage of the testing. We may encounter numerous factors during, or as a result of, these clinical trials that could delay us or prevent us altogether from completing them and receiving the sought-after FDA approvals, including:

 
·  
we may be unable to obtain the complete number of data sets required by the respective protocols for these clinical trials;

·  
the costs of these clinical trials may be greater than we anticipate;

·  
we, or the regulators, may suspend or terminate either or both of these clinical trials if the participating patients are being exposed to unacceptable health risks;

·  
negative or inconclusive results may arise, and we may decide, or regulators may require us, to conduct additional clinical and/or preclinical testing; and

·  
one or both of these clinical trials may fail to demonstrate the substantial equivalency, to its predicate device, of the device being tested.

We may not receive the necessary FDA approvals to market, in the United States, the RHEO™ System or the components of the SOLX Glaucoma System.

 

   We may not receive the necessary FDA approvals to market, in the United States, the RHEO™ System or the components of the SOLX Glaucoma System. Obtaining FDA approval is a lengthy and expensive process, and approval is uncertain. We may be delayed in receiving, or may never receive, the necessary FDA approvals for the RHEO™ System or the components of the SOLX Glaucoma System. One or more delays in obtaining or failure to obtain such FDA approvals would delay or prevent the successful commercialization of the RHEO™ System and/or one or both components of the SOLX Glaucoma System, diminish our competitive advantage and/or defer or decrease our receipt of revenues.

 

   Even if we eventually obtain FDA approval for the RHEO™ System, this approval may only be for a limited or narrow class of Dry AMD patients, thereby diminishing the size of the class of prospective patients for whose use the RHEO™ System can be promoted.

 

   In addition, changes to the RHEO™ System or the components of the SOLX Glaucoma System can require additional FDA approvals.

 

Our purchase commitments may adversely affect our liquidity.

 

   We currently have commitments to purchase approximately $21.9 million of OctoNova pumps (based on current exchange rates) within five years after FDA approval, $13.3 million of Rheofilter filters and Plasmaflo filters over a three-year period beginning six months after FDA approval with respect to the United States, $1.3 million of Rheofilter filters and Plasmaflo filters over a three-year period commencing upon the earlier to occur of the sale of our current inventory of Rheofilter filters or their expiry with respect to Canada and $0.4 million of Rheofilter filters and Plasmaflo filters in 2009 and 2010 with respect to Australia, New Zealand, Colombia, Venezuela and Italy. We expect to fund our purchase commitments with cash generated from operations following receipt of the FDA approvals being sought or, in the event we do not have sufficient cash from operations, other financing sources. Should these sources be insufficient to fund our purchase commitments, our liquidity may be adversely affected.

 

 

We currently depend on single sources for key components of the RHEO™ System and the components of the SOLX Glaucoma System. The loss of any of these sources could delay our clinical trials or prevent or delay commercialization of the RHEO™ System or the components of the SOLX Glaucoma System.

 

   We currently depend on single sources for the filters and the OctoNova pump used in the RHEO™ System. We have entered into a supply agreement for the filters with Asahi Medical and for the OctoNova pump with Diamed, which designed the OctoNova pump, and MeSys, which manufactures the pumps for Diamed. We currently have commitments to purchase approximately $21.9 million of OctoNova pumps (based on current exchange rates) within five years after FDA approval, $13.3 million of Rheofilter filters and Plasmaflo filters over a three-year period beginning six months after FDA approval with respect to the United States, $1.3 million of Rheofilter filters and Plasmaflo filters over a three-year period commencing upon the earlier to occur of the sale of our current inventory of Rheofilter filters or their expiry with respect to Canada and $0.4 million of Rheofilter filters and Plasmaflo filters in 2009 and 2010 with respect to Australia, New Zealand, Colombia, Venezuela and Italy. If we fail to meet our minimum purchase requirements under our agreements with Diamed or Asahi Medical, those agreements may be terminated or rendered non-exclusive at the sole discretion of the supplier. If any of these suppliers ceases to supply components to us or does not supply an adequate number of components, our sales and growth could be restricted, potentially materially. If we do not achieve FDA approval and other necessary approvals in certain of the territories for which we have distribution rights by the applicable deadlines (which, under our agreement with Asahi Medical, are February 28, 2009 for Canada and December 31, 2010 for the United States and all of the other territories where we have distribution rights under this agreement), Asahi Medical can terminate the supply agreement for the filters and Diamed can terminate the supply agreement for the pumps. Our agreement with Asahi Medical as it relates to the United States and our agreement with Diamed each has a term ending ten years after the date of FDA approval and is automatically renewable for one-year terms unless terminated upon six months’ notice. In addition, Diamed may terminate its agreement upon the termination of our manufacturing agreement with MeSys, which has a term of three years following FDA approval. We believe that establishing additional or replacement suppliers for these components may not be possible as these suppliers have trade secrets, patents and other intellectual property that may prevent a third party from manufacturing a suitable replacement product. Even if we switch to replacement suppliers and the supplier can manufacture the necessary components without violating any third-party intellectual property rights, we may face additional regulatory delays and the distribution of the RHEO™ System could be interrupted for an extended period of time, which may delay or slow down the commercialization of RHEO™ Therapy and adversely impact our financial condition and results of operations.

 

   We currently depend on single sources for the manufacture and supply of the SOLX 790 Laser and the SOLX Gold Shunt. If any of our suppliers ceases to supply products to us or does not supply them in adequate quantities, the clinical trials of the components of the SOLX Glaucoma System could be delayed and our sales and growth in the glaucoma business could be restricted, potentially materially. The establishment of a cost-effective, scalable manufacturing capability for the SOLX Gold Shunt will be critical to the success of our glaucoma business. Although, at the present time, we are not aware of any reason why additional or replacement suppliers of the components of the SOLX Glaucoma System cannot be found, including the SOLX Gold Shunt, there is a risk that trade secrets, patents and other intellectual property of our current suppliers may prevent a third party from manufacturing suitable replacement products. Even if no such intellectual property barriers exist, we may face additional regulatory delays and the distribution of the components of the SOLX Glaucoma System could be interrupted for an extended period of time, which may delay or slow down their commercialization and adversely impact our financial condition and results of operations.

 

Our supply agreement with Asahi Medical requires us to transfer the FDA approval of the RHEO™ System, upon its receipt, to a special purpose corporation, to be majority-owned by Asahi Medical, which will limit our control of the FDA approval.

 

   Under our supply agreement with Asahi Medical for the filters that are used in the RHEO™ System, we agreed to obtain FDA approval of the RHEO™ System and to transfer it upon receipt, if any, to a special purpose corporation which will be owned as to 51% by Asahi Medical and as to 49% by us. This transfer of the FDA approval to this special purpose corporation may limit our flexibility to make changes in the FDA approval, such as the addition of alternate suppliers of RHEO™ System components, without Asahi Medical’s consent, or limit our ability to prevent changes to the FDA approval that we might consider detrimental, such as the addition of labeling changes or the substitution of alternate component suppliers. Regulatory approvals obtained for the RHEO™ System, if any, in Canada, Australia, New Zealand, Colombia, Venezuela or Italy will be held by Asahi Medical.

 

If we or our suppliers fail to comply with the extensive regulatory requirements to which we and our products are subject, the RHEO™ System and the components of the SOLX Glaucoma System could be subject to restrictions or withdrawals from the market and we could be subject to penalties.

 

   We, our suppliers and all of our products are subject to numerous FDA requirements covering the design, testing, manufacturing, quality control, labeling, advertising, promotion and export of our products and other matters. Failure to comply with statutes and regulations administered by the FDA could result in, among other things, any of the following actions:

 

•   warning letters;

 

•   fines and other civil penalties;

 

•   unanticipated expenditures;

 

•   withdrawal of FDA approval;

 

•   delays in approving or refusal to approve our products;

 

•   product recall or seizure;

 

•   interruption of production;

 

•   operating restrictions;

 

•   border stops;

 

•   injunctions; and

 

•   criminal prosecution.

 

   We and our suppliers are subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. In addition, advertising and promotional materials relating to medical devices are, in certain instances, subject to regulation by the Federal Trade Commission. We and our suppliers may be required to incur significant costs to comply with such laws and regulations in the future, and such laws and regulations may materially harm our business. Unanticipated changes in existing regulatory requirements, the failure by us or our manufacturers to comply with such requirements or the adoption of new requirements could materially harm our business.

 

 

We may be unable to commercialize the RHEO™ System or the components of the SOLX Glaucoma System successfully in the United States.

 

   Even if we successfully obtain FDA approval for the RHEO™ System, our success depends on our ability to market and sell the RHEO™ System. Successful commercialization of the RHEO™ System depends on a number of factors, including:

 

•   achieving widespread acceptance of RHEO™ Therapy among physicians and patients;

 

•   agreement of governmental and third-party payors to provide reimbursement for RHEO™ Therapy;

 

•   maintaining our relationships with our single source suppliers;

 

•   obtaining sufficient quantities of components for the RHEO™ System;

 

•   establishing adequate sales and marketing capabilities;

 

•   obtaining sufficient facility space;

 

•   our ability to identify and sell the RHEO™ System to key multi-facility health care providers as well as to private eye care professional practices;

 

•   our ability to successfully sell the RHEO™ System at our projected selling price;

 

•   whether there are adverse side effects or unfavorable publicity concerning the RHEO™ System; and

 

•   whether there is competition for the RHEO™ System from new or existing products, which may prove to be safer, more efficacious or more cost-effective than the RHEO™ System.

 

   Other than the ability to identify and make sales to key multi-facility health care providers, all of the above-listed factors (substituting the above-noted references to the RHEO™ System and RHEO™ Therapy with references to the SOLX Glaucoma System and procedures using the SOLX Glaucoma System, respectively) will be equally influential in the success or failure of our efforts to commercialize the SOLX Glaucoma System in the United States. In addition to such factors, the establishment of a cost-effective, scalable manufacturing capability for the SOLX Gold Shunt will be critical to the success of our glaucoma business.

 

RHEO™ Therapy is based on a model that has not achieved widespread acceptance and may be proven incorrect. If we are unsuccessful in achieving widespread acceptance of RHEO™ Therapy among physicians and patients, our business may not succeed.

 

   AMD is not a well understood disease and its underlying cause is not known. RHEO™ Therapy is based on a disease model that has not achieved widespread acceptance with eye care professionals. Unlike traditional therapeutic treatments for eye diseases, RHEO™ Therapy is a systemic approach for the treatment of Dry AMD, rather than a localized approach. Our success is dependent upon achieving widespread acceptance of RHEO™ Therapy among ophthalmologists and optometrists. Eye care professionals and health care service providers may not be willing to integrate RHEO™ Therapy into their workflow. In addition, because RHEO™ Therapy can be performed by health care providers other than eye care professionals, eye care professionals may be reluctant to endorse RHEO™ Therapy. The fact that MIRA-1 did not meet its primary efficacy endpoint may strengthen opposition to RHEO™ Therapy or impede its acceptance.

 

   Even if we are successful in achieving widespread acceptance of RHEO™ Therapy among physicians, we may be unable to achieve widespread acceptance among potential patients. An initial course of RHEO™ Therapy is time consuming, requiring eight procedures over a 10- to 12-week period, with each procedure lasting between two and four hours. Some patients may be reluctant to undergo RHEO™ Therapy because of the time commitment. In addition, RHEO™ Therapy providers may not be easily accessible to all patients and some patients may be unwilling or unable to travel to receive RHEO™ Therapy. If we are unable to achieve widespread acceptance, our financial condition and results of operations will be adversely affected.

 

   In August 1997, our predecessor opened its sole client facility, the Rheotherapy Center, in Tampa, Florida, to perform therapeutic apheresis commercially. In 1999, the FDA’s Office of Compliance issued a directive notifying our predecessor that further conducting of therapeutic apheresis would need to be conducted under the authority of an Investigational Device Exemption filed with the FDA. In a related action, our predecessor, on behalf of one of our founders, Dr. Richard C. Davis, made a payment in the amount of $10,000 to cover legal expenses incurred by the Florida Board of Medicine in prosecuting our predecessor’s unauthorized advertising of new medical therapies. Our predecessor closed the Rheotherapy Center in 1999, after which time we received an Investigational Device Exemption and subsequently completed MIRA-1. Dr. Davis was our Chief Executive Officer from January to June 2003 and was our Chief Science Officer from July 2003 to April 2004 and since then has served as a consultant to us, although he no longer serves us in any capacity. Dr. Davis is also a former director of ours. We believe that the activities of the Rheotherapy Center engendered opposition in certain segments of the eye care community to RHEO™ Therapy and if this opposition continues, acceptance of RHEO™ Therapy among eye care professionals and patients may be difficult to achieve.

 

If RHEO™ Therapy and the procedures involving the components of the SOLX Glaucoma System are not reimbursed by governmental and other third-party payors, or are only reimbursed on a limited basis, our business may not succeed.

 

   Undergoing RHEO™ Therapy is expensive, with an initial course of treatment expected to initially cost between $16,000 and $25,600 in the United States. The cost of procedures involving the components of the SOLX Glaucoma System are not anticipated to be insubstantial either. Continuing efforts of governmental and third-party payors to contain or reduce the costs of health care could negatively affect the sale of the RHEO™ System and the components of the SOLX Glaucoma System. Our ability to commercialize our products successfully will depend in substantial part on favorable determinations by governmental payors, most prominently Medicare, private health insurers and state-funded health care coverage programs. Without the establishment of timely, favorable coverage and reimbursement policies, we may be unable to set or maintain price levels sufficient to realize an appropriate return on our investment in product development. Other significant insurance coverage limitations, such as narrow restrictions on patient coverage criteria and restrictions on treatment settings in which RHEO™ Therapy is covered, may also limit our potential revenues.

 

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 competitors.

 

   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 will continue to apply for patents for certain processes used in the RHEO™ System and for patents important to the development of our glaucoma business. Such applications may not result in the issuance of any patents, and any patents now held or that may be issued may not provide us with adequate protection from competition. In addition, we expect that we will seek to have the patent licensed to us re-issued at the U.S. Patent and Trademark Office, and we believe that a more detailed claim set will be issued. The timing of the submission of our re-issuance application has not yet been determined and will depend, to some degree, on our future estimate of when we will be in a position to begin commercializing the RHEO™ System in the United States. The application for re-issuance of this patent may result in the patent being rejected or no claims of commercial value being issued or it may result in competitors acquiring intervening rights. 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 such patents, any preferred position held by us would be lost. If we are unable to secure or to continue to maintain a preferred position, the components of the RHEO™ 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 our 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 may 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 competitors may be able to sustain the costs of such litigation more effectively than we can because of their substantially greater financial resources. Litigation may also absorb significant management time.

 

   Unpatented trade secrets, improvements, confidential know-how and continuing technological innovation are important to our 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 our 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.

 

Patents of other companies could require us to stop using or pay to use required technology.

 

   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 we 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. Under such circumstances, we may need to materially alter our products or processes and we may be unable to do so successfully.

 

If we are unable to establish adequate sales and marketing capabilities, we may not be able to generate significant revenue and may not become profitable.

 

   While our management team has some experience in marketing medical technology, we do not have a sales organization and have limited experience as a company in the sales, marketing and distribution of ophthalmic therapy products. In order to commercialize our products, we must develop our sales, marketing and distribution capabilities or make arrangements with a third party to perform these functions. If and when marketing of our products is eventually approved by the FDA, our plan will be to establish our own sales force to market them in the United States. Developing a sales force is expensive and time consuming, and we may not be able to develop this capacity. If we are unable to establish adequate sales, marketing and distribution capabilities, independently or with others, we may not be able to generate significant revenue and may not become profitable.

 

Our suppliers may not have sufficient manufacturing capacity and inventory to support our commercialization plans.

 

   Our success requires that our suppliers have adequate manufacturing capacity and inventory in order to facilitate a rapid rollout of our products. In particular, the establishment of a cost-effective, scalable manufacturing capability for the SOLX Gold Shunt will be critical to the success of our glaucoma business. We have not achieved such capability.

 

   Our ability to conduct our clinical trials and commercialize our products depends, in large part, on our ability to have components manufactured at a competitive cost and in accordance with FDA and other regulatory requirements. We do not control the manufacturing processes of our suppliers. If current manufacturing processes are modified, or the source or location of our product supply is changed, voluntarily or involuntarily, the FDA will require us to demonstrate that the material produced from the modified or new process or facility is equivalent to the material used in the clinical trials or products previously approved. Any such modifications to the manufacturing process or supply may not achieve or maintain compliance with the applicable regulatory requirements. In many cases, prior approval by regulatory authorities may be required before any changes can be made, which may adversely affect our business.

 

   To date, we have used $4.8 million to stockpile an inventory of the older cellulose acetate Rheofilter filters that currently form part of the RHEO™ System in anticipation of manufacturing constraints to which such filters are subject. With the FDA’s confirmation of its willingness to allow the substitution of the older Rheofilter filter with the new polysulfone Rheofilter filter in RHEO-AMD, such manufacturing constraints are no longer of immediate concern. However, each of the older Rheofilter filters that we’ve accumulated in inventory has a shelf life of approximately three years, and it is possible that some or all of these filters will expire before they are used. Holding inventory in this manner decreases our short term liquidity.

 

Our success in the commercialization of the RHEO™ System depends upon our ability to sell to key multi-facility health care providers as well as private eye care professional practices.

 

   In order to facilitate a rapid rollout of the RHEO™ System if and when we receive FDA approval, we will need to establish relationships with key organized groups of multi-facility health care service providers, including hospitals, dialysis clinics and ambulatory surgery centers, as well as private practices. We may be unsuccessful in establishing these relationships, which could limit our ability to commercialize the RHEO™ System.

 

   We anticipate that RHEO™ Therapy will be prescribed by physicians and administered by nurses, and therefore our service provider customers will need the support of an adequate supply of trained nurses. Training nurses to administer RHEO™ Therapy may be costly, and our customers may experience shortages of nurses from time to time. If there is a shortage of trained nurses to work in our customers’ facilities, our commercialization of RHEO™ Therapy may be unsuccessful.

 

RHEO™ Therapy and the procedures involving the components of the SOLX Glaucoma System may produce adverse side effects in patients that prevent its adoption or that necessitate withdrawal from the market.

 

   RHEO™ Therapy may produce undesirable, unexpected and unintended side effects not previously observed during clinical trials. These side effects in patients may prevent or limit its commercial adoption and use. Side effects that have been observed in MIRA-1 were all temporary and generally mild and included temporary drops in blood pressure, abnormal heart rate, nausea, chills and localized bleeding, pain, numbness and swelling in the area of the arms where the needles were inserted. The procedures involving the components of the SOLX Glaucoma System may also produce undesirable, unexpected and unintended side effects not previously observed during clinical trials. Should that occur, the commercial adoption and use of the components of the SOLX Glaucoma System may be limited or may be prevented altogether.

 

   Even after approval by the FDA and other regulatory authorities, the RHEO™ System and/or the components of the SOLX Glaucoma System may later be found to produce adverse side effects that prevent widespread use or necessitate withdrawal from the market. The manifestation of such side effects could cause our business to suffer. In some cases, regulatory authorities may require additional disclosure to patients that could add warnings or restrict usage based on unexpected side effects seen after marketing a medical treatment.

 

 

We may face future product liability claims that may result from the use of our products.

 

   The testing, manufacturing, marketing and sale of therapeutic products entails significant inherent risks of allegations of product liability. Our use of such products in clinical trials and the commercial sale of our products may expose us to liability claims. These claims might be made directly by patients, health care providers or others selling our products. We carry clinical trials and product liability insurance to cover certain claims that could arise during our clinical trials or during the commercial use of our products. We currently maintain clinical trials and product liability insurance with coverage limits of $5,000,000   in the aggregate annually. We also maintain some separate clinical trials insurance for clinical trial activities in Spain and Israel. Such coverage, and any coverage obtained in the future, may be inadequate to protect us in the event of a successful product liability claim, 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 cause us to incur large expenditures and divert significant resources.

 

In the medium or long term, we will need to increase the size of our organization, and we may experience difficulties in managing our growth.

 

   In order to commercialize the RHEO™ System and the components of the SOLX Glaucoma System, we will need to expand our employee base for management of operational, sales and marketing, financial and other resources. It is not clear when we will be able to commercially launch our products in the United States, if ever. Future growth will impose significant additional responsibilities on members of management, including the need to identify, recruit, maintain and integrate additional employees. Our future financial performance and our ability to commercialize our products and to compete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to:

 

 
•

integrate additional management, administrative, distribution and sales and marketing personnel;

 

 
•

develop our administrative, accounting and management information systems and controls; and

 

•   hire and train additional qualified personnel.

 

   We may not be able to accomplish these tasks, and our failure to accomplish any of them could prevent us from achieving or maintaining profitability.

 

We may face competition and may not be successful in addressing it.

 

   The pharmaceutical, biotechnology and medical technology industries are characterized by rapidly changing technology and intense competition. AMD is not a well understood disease and researchers are continuing to investigate different theories of the cause of AMD. If the cause of AMD is determined, competitors could potentially develop a treatment for Dry AMD that would replace RHEO™ Therapy. In addition, competitors may develop alternative treatments for Dry AMD that prove to be superior to, or more cost-effective than, RHEO™ Therapy. Some of these competitors may include companies which have access to financial, technical and marketing resources significantly greater than ours and substantially greater experience in developing, manufacturing and distributing products, conducting preclinical and clinical testing and obtaining regulatory approvals.

 

   We are aware of a number of companies which have developed or are in the process of developing treatments for Wet AMD, including Eyetech Pharmaceuticals, Inc./Pfizer Inc., Genentech, Inc./Novartis Ophthalmics, Alcon Laboratories, Inc., Regeneron Pharmaceuticals, Inc./Bayer HealthCare, Sirna Therapeutics, Inc., Acuity Pharmaceuticals, Iridex Corporation and QLT Inc. Some of these treatments are in late-stage clinical development or have been approved by the FDA already. Some of these companies may develop new treatments for Dry AMD or may develop modifications to their treatments for Wet AMD that may be effective for Dry AMD as well. We are aware that Acuity Medical, Inc. is pursuing an electrical stimulation technology to treat Dry AMD. In addition, other companies also may be involved in competitive activities of which we are not aware.

 

   At the present time, there are many treatment alternatives for glaucoma. Numerous companies are engaged in the development, manufacture and marketing of drugs and devices for the treatment of glaucoma, including, but not limited to, Optonol Ltd., Advanced Medical Optics, Inc., Pfizer Inc., New World Medical, Inc., Allergan, Inc. and Alcon, Inc. Although we believe that the SOLX Glaucoma System offers notable improvements in connection with trabeculoplasty procedures and glaucoma surgery, many of our competitors in this space have much greater resources than we have, thus enabling them, among other things, to make greater research and development investments, and to make much more significant investments in marketing, promotion and sales, than we are capable of at the present time or may ever become capable of in the future.

 

We may be unable to attract and retain key personnel which may adversely affect our business.

 

   Our success depends on the continued contributions of our executive officers and scientific personnel. Many of our key responsibilities have been assigned to a relatively small number of individuals. We will be required to hire eyecare specialists as well as personnel with skill sets in apheresis, nursing, training, equipment maintenance, finance, distribution, logistics, warehousing, sales and service, and possibly other areas of expertise, to meet our personnel needs. There is competition for qualified personnel, and the failure to secure the services of key personnel or loss of services of key personnel could adversely affect our business.

 

   The additional uncertainty regarding our business prospects that has been created by MIRA-1’s failure to reach its primary efficacy endpoint may impede our ability to attract and retain key personnel.

 

For as long as TLC Vision owns a substantial portion of our common stock, our other stockholders may be effectively unable to affect the outcome of stockholder voting.

 

   TLC Vision beneficially owns approximately 36.08%   of our outstanding common stock, or 33.79%   on a fully diluted basis. Accordingly, TLC Vision, in conjunction with other stockholders, could possess an effective controlling vote on matters submitted to a vote of the holders of our common stock.

 

   While it owns a substantial portion of our common stock, TLC Vision could effectively control decisions with respect to:

 

•   our business direction and policies, including the election and removal of our directors;

 

•   mergers or other business combinations involving us;

 

•   the acquisition or disposition of assets by us;

 

•   our financing; and

 

•   amendments to our certificate of incorporation and bylaws.

 

   Furthermore, TLC Vision may be able to cause or prevent a change of control of the Company, and this concentration of ownership may have the effect of discouraging others from pursuing transactions involving a potential change of control of the Company, in either case regardless of whether a premium is offered over then-current market prices.

 

 

Conflicts of interest may arise between us and TLC Vision, which has three directors on our board and for which our Chief Executive Officer and Chairman served as Chairman until June 2006.

 

   TLC Vision beneficially owns approximately 36.08% of our outstanding common stock, or 33.79% on a fully diluted basis. Our directors, Elias Vamvakas, Thomas Davidson and Richard Lindstrom, are also directors of TLC Vision. Mr. Vamvakas beneficially owns 2,827,589 common shares of TLC Vision, representing approximately 4.09% of TLC Vision’s outstanding shares. Mr. Davidson beneficially owns 71,954 common shares of TLC Vision, representing approximately 0.10% of TLC Vision’s outstanding shares, and Dr. Lindstrom does not beneficially own any common shares of TLC Vision. Because Messrs. Vamvakas and Davidson and Dr. Lindstrom are directors of TLC Vision, a conflict of interest could arise. Conflicts may arise between TLC Vision and us as a result of our ongoing agreements. We may not be able to resolve all potential conflicts with TLC Vision, and even if we do, the resolution may be less favorable to us than if we were dealing with an unaffiliated third party.

 

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.

 

Certain of our directors and management team members have been with us for only a short time.

 

   Nozhait Chaudry-Rao, our Vice President, Clinical Research, and Stephen Parks, our Vice President, Sales, and our directors, Adrienne Graves and Gilbert Omenn, have all served as members of our management team for less than two years. This poses a number of risks, including the risk that these persons may:

 

•   have limited familiarity with our past practices;

 

•   lack experience in communicating effectively within the team and with other employees;

 

•   lack settled areas of responsibility; and

 

•   lack an established track record in managing our business strategy, including clinical trials.