Business context and reporting period
LabStyle Innovations Corp. (the issuer named in this filing; a development-stage company) reported unaudited results for the quarter and nine months ended September 30, 2013. It was developing and commercializing Dario, a mobile diabetes-management platform combining a glucose meter, smartphone app and cloud services. The company had generated no revenue since inception.
Financial results and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $0 in 2013 and 2012 | $0 in 2013 and 2012 |
| Operating loss | $3.24 million in 2013; $1.02 million in 2012 | $9.91 million in 2013; $2.38 million in 2012 |
| Net loss | $3.47 million in 2013; $3.06 million in 2012 | $13.99 million in 2013; $4.49 million in 2012 |
| Net loss per share, basic and diluted | $0.17 in 2013; $0.25 in 2012 | $0.79 in 2013; $0.38 in 2012 |
| Cash used in operating activities | Quarterly amount not provided | $5.47 million in 2013; $1.52 million in 2012 |
Operating expenses for the first nine months were R&D $3.17 million, marketing and pre-production $1.92 million, and general and administrative $4.82 million. No operating margin is meaningful given the absence of revenue. Net loss included $3.99 million of nine-month warrant revaluation expense; warrant fair-value changes are non-cash but can materially affect reported results.
At September 30, cash and cash equivalents were $4.47 million, restricted cash $14,239, and short-term bank deposits $93,861. Current assets were $5.16 million versus current liabilities of $1.09 million. The company reported a $6.41 million warrant liability and stockholders’ deficit of $839,000; no conventional borrowings are shown in the provided balance sheet. Financing activities provided $10.20 million during the first nine months, principally from stock and warrant issuance. The May 2013 private placement raised $10 million gross, approximately $9 million net.
Material changes versus the prior comparable period
- Nine-month operating loss increased to $9.91 million from $2.38 million, reflecting higher R&D, pre-production/marketing, and administrative spending.
- Nine-month net loss increased to $13.99 million from $4.49 million, including higher warrant revaluation expense. Third-quarter net loss rose less sharply, to $3.47 million from $3.06 million, as quarterly warrant revaluation expense was lower than in 2012.
- Cash rose from $1.23 million at December 31, 2012 to $4.47 million at September 30, 2013, supported by equity financing; property and equipment also increased to $1.37 million from $617,000.
- Management changes included appointment of a new president and CEO in August 2013 and departure of the prior president and COO.
Outlook, risks, and unusual items
- The company received CE Mark certification in September 2013, allowing Dario to be marketed in the EU, subject to applicable requirements. Further regulatory filings, including in the United States, were planned.
- Management expected an initial software-app launch in December 2013, commercial revenues beginning in the first quarter of 2014, and a full European platform launch. These were expectations, not assured outcomes.
- The company estimated at least $8.7 million of expenses to carry out its plans over the next 12 months. Management said available resources were expected to support planned activity only into March 2014, assuming sales began on schedule. It stated that additional financing would be needed and that inability to obtain funding or launch commercially could threaten continued operations; the filing says these conditions raise substantial doubt about going concern.
- Disclosure controls and procedures were deemed ineffective at September 30, 2013. Cited material weaknesses included insufficient accounting and financial-reporting staffing, inadequate segregation of duties and review, and incomplete control design and testing. Management described remediation efforts and expected full implementation during 2013.
- Warrants classified as liabilities are remeasured each reporting period using a valuation model, creating potentially volatile non-cash expenses. The filing reported no legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether Dario obtained required regulatory clearances beyond the CE Mark and launched on the expected timetable, and whether sales generated meaningful revenue.
- Whether the company secured enough additional financing to fund operations beyond the stated March 2014 runway, and the terms and dilution of any financing.
- Actual cash burn and spending against the stated $8.7 million minimum plan, including whether resources were consumed faster than forecast.
- The size and potential volatility of the warrant liability, including the effects of warrant exercises and valuation assumptions on reported earnings.
- Whether management remedied the disclosed internal-control weaknesses and whether subsequent filings reported any control issues or financial restatements.