LabStyle Innovations Corp. (DarioHealth) — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. The filing is by LabStyle Innovations Corp., then a development-stage company; it describes the Dario smartphone-connected blood-glucose monitoring system. Financial statements are unaudited.
Business context and financial performance
The company had not generated revenue and reported no cost of revenue. It was developing and preparing to commercialize Dario, subject to regulatory approvals. Accordingly, gross margin and operating margin are not meaningful for this period.
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development | $675,414 | $171,670 |
| Marketing and pre-production | $497,028 | $0 |
| General and administrative | $1,903,725 | $323,076 |
| Operating loss | $3,076,167 | $494,746 |
| Net loss | $5,226,869 | $570,883 |
| Basic and diluted loss per share | $0.35 | $0.05 |
| Cash used in operating activities | $971,291 | $316,010 |
Financial position and liquidity
- At March 31, 2013, cash and cash equivalents were $294,897, down from $1,230,034 at December 31, 2012. Current assets were $739,424 and current liabilities were $1,195,543.
- Total assets were $2,063,663. The company reported a $4,953,738 warrant liability and a $4,085,618 stockholders’ deficit. The filing does not report conventional borrowings or debt.
- Investing cash outflow was $461,872, mainly for property and equipment; financing provided $498,026, including $498,011 net proceeds from the February share-and-warrant tranche. Cash declined by $935,137 during the quarter.
- Management said the company would need additional capital and disclosed substantial doubt about its ability to continue as a going concern. It estimated available resources would last at least until January 2014, assuming commercial sales began on schedule.
Changes, outlook, and material developments
- Compared with Q1 2012, operating expenses and net loss rose substantially. The quarter included $2,135,997 of warrant revaluation expense, versus a $21,117 revaluation gain in Q1 2012. This non-cash fair-value change was a major contributor to the higher net loss.
- Stock-based compensation expense was $1,319,398 in Q1 2013. The company also recorded $237,500 of expense for warrants issued to a service provider.
- Management planned to seek regulatory approvals and target a commercial launch in Europe during 2013, with revenue expected within nine months. It projected at least approximately $8.5 million of expenses over the next 12 months for development, production, marketing, regulatory work, and corporate costs. These are expectations, not assured outcomes.
- After quarter-end, the company completed a private placement raising $10 million gross, approximately $8,985,510 net. It also expected approximately $500,000 from the remaining August 2012 placement tranche by July 17, 2013. These financings post-date the March 31 balance sheet.
- After quarter-end, the Israeli subsidiary agreed to three-year office leases at approximately $27,000 monthly rent, and signed an exclusive three-year distribution agreement for the U.K. and Belgium, conditional on regulatory approvals. A separate memorandum with an academic medical center was non-binding.
- The company’s disclosure controls were deemed ineffective, with material weaknesses attributed to insufficient accounting staff and incomplete control design, implementation, and testing. Management described remediation steps and expected implementation during 2013.
Important facts for investors to verify
- Whether Dario obtained required regulatory approvals and launched on the stated timetable, and whether sales met management’s assumptions.
- How quickly cash was consumed after the quarter, whether the additional financing and expected tranche funded as described, and whether further capital was needed.
- The valuation and potential dilution associated with outstanding warrants, options, and equity issuances; the warrant liability was remeasured through earnings.
- Progress in remediating the disclosed control weaknesses and the status of the distribution agreement and lease commitments.
- The filing contains an apparent discrepancy in the development-stage accumulated deficit: the balance sheet states $11,298,791, while the statement of changes in equity shows $11,298,291. The reported total stockholders’ deficit is $4,085,618; investors should verify the correct figure in the filed financial statements.