LabStyle Innovations Corp. (Dario) — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; financial amounts below are in U.S. dollars, thousands, unless stated otherwise. The filing is by LabStyle Innovations Corp., which commercializes the Dario diabetes-management solution.
Business context and results
The company develops and sells a smartphone-connected blood glucose meter, app and related supplies. It reported sales across several international markets and began U.S. commercialization in March 2016, initially through its e-store. The Dario system received FDA 510(k) clearance in December 2015 for the Apple iOS platform described in the filing.
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $568 | $67 |
| Cost of revenue | $670 | $297 |
| Gross loss | $102 | $230 |
| Operating expenses | $1,821 | $1,547 |
| Operating loss | $1,923 | $1,777 |
| Net loss | $1,189 | $1,638 |
| Net loss attributable to common shareholders | $1,644 | $1,638 |
| Basic and diluted loss per share | $0.33 | $1.39 |
| Net cash used in operating activities | $2,105 | $1,525 |
Revenue increased substantially, primarily from Smart Meter and disposable sales through distributors and to end users. Gross loss narrowed, but the company remained unprofitable: higher sales and a lower gross loss were outweighed at the operating level by increased operating expenses. Net loss improved mainly because of a favorable, noncash warrant revaluation; the $455 deemed dividend from revised Series A preferred conversion terms raised the loss attributable to common shareholders.
Financial position, liquidity and capital
At March 31, 2016, cash and cash equivalents were $8,267, current assets $10,248 and current liabilities $1,489, for working capital of $8,759. Total assets were $10,963; stockholders’ equity was $7,611. The balance sheet reports a $1,863 warrant liability and no conventional borrowing balance; preferred shares outstanding were zero after conversion.
Operating cash outflow was $2,105 and investing cash outflow was $27. Financing provided $7,728, including $7,538 net proceeds from March public and private offerings and $190 from warrant exercises. Cash rose from $2,671 at year-end 2015 to $8,267 at quarter-end. The company reported a cumulative deficit of $44,998.
Material changes, outlook and risks
- Research and development expense fell 55% to $397, mainly because prior-year U.S. clinical-trial and regulatory work had declined; software development costs increased.
- Sales and marketing expense rose 106% to $519, reflecting U.S. launch and marketing activity. General and administrative expense rose 120% to $905, including payroll and bonuses, legal costs, investor relations, patent registration and stock compensation.
- Cost of revenue included $32 of deferred-inventory write-off associated with a legal settlement with a former distributor, $62 of inventory write-downs and $14 for disposed manufacturing equipment. The filing does not provide a clear settlement amount.
- In March, the company completed a public offering and a concurrent private placement, issuing shares and warrants. It also converted the remaining Series A preferred shares into common stock, with a 25% increase in conversion shares, and recorded a $455 deemed dividend. A one-for-eighteen reverse stock split took effect February 26, 2016; Nasdaq listing began in March.
- Management estimated available resources would support planned activity into July 2017, based partly on anticipated sales and distribution-partner inflows. This is an estimate, not a guarantee or formal revenue guidance. Management said additional capital may be needed sooner if sales underperform or cash use exceeds expectations.
- The filing states that operating losses and negative operating cash flow raise substantial doubt about the company’s ability to continue as a going concern. Continued commercialization depends on sales growth, distribution, further financing and execution of product-development and regulatory plans. Management cautioned that failure to secure funding or meet commercial targets could impair or end operations.
- Revenue was recognized on a cash basis until the company could determine a distributor’s ability to complete payment. The warrant liability is remeasured at fair value; its $747 decrease generated financial income and reduced reported net loss, making earnings sensitive to warrant valuation.
Important facts for investors to verify
- Whether U.S. launch and third-party distribution plans translated into sustained sales, collections and improved gross margins.
- The assumptions supporting management’s July 2017 liquidity estimate, including expected sales, cash burn and the timing and availability of additional financing.
- Potential dilution and cash proceeds from outstanding warrants and other equity awards; the filing reports 5,575,633 common shares outstanding at March 31, 2016 and 5,581,216 at May 9, 2016.
- The status and financial effects of the former-distributor settlement, inventory write-downs and any remaining commitments or claims.
- The impact of warrant fair-value changes on reported earnings, separate from operating performance.