Dariohealth Corp. annual report, FY2013

Business context and reporting period

This is LabStyle Innovations Corp.’s Form 10-K for the fiscal year ended December 31, 2013, not a standalone fourth-quarter report. The filing describes DarioHealth’s predecessor, LabStyle Innovations, a development-stage company developing the Dario mobile diabetes-management app and blood-glucose monitoring device. It had not generated revenue from operations.

Dario received CE Mark certification in September 2013, enabling marketing in 32 European countries and certain other markets. The company launched its iOS app in the UK, Australia and New Zealand in December 2013; the full device-and-app offering had not yet launched.

Financial performance and position

Margins are not meaningful because the company reported no commercial revenue. At December 31, 2013, cash and cash equivalents were $2.26 million; current assets were $2.93 million and current liabilities were $1.51 million. The balance sheet also showed $2.70 million of warrant liabilities and a stockholders’ deficit of $86,381. The filing reports no conventional borrowings in the balance sheet presented.

Material changes versus the prior year

• Net loss increased by $8.25 million, reflecting higher product development, pre-production, marketing, stock-based compensation and public-company costs.
• Research and development spending rose by $3.41 million, including product, software and regulatory work. Marketing and pre-production costs increased by $2.06 million, including $770,378 of depreciation.
• General and administrative expense increased by $4.12 million. FY 2013 stock-based compensation totaled $3.21 million, compared with $0.56 million in 2012.
• Cash used in operations increased by $4.62 million. Financing inflows included approximately $9 million net proceeds from the 2013 private placement.

Outlook, risks and unusual items

• Management planned a European soft launch of the full iOS product in the second quarter of 2014 and expected to launch the Android version around that period. These are plans, not guaranteed results.
• Management estimated at least $6.8 million would be needed to fund operations and commercialization through the end of 2014. At year-end, it estimated available resources would support planned activity only into October 2014, assuming timely commercial sales.
• After year-end, the company raised approximately $3.79 million net in a February 2014 private placement. The financing included warrants and potential adjustment shares, creating possible dilution; the warrants have anti-dilution provisions.
• The company filed an FDA 510(k) application on January 7, 2014; clearance had not been received as of the filing. New Zealand registration was completed in January 2014, while Australian registration was still in process.
• The auditor issued an unmodified opinion but highlighted substantial doubt about the company’s ability to continue as a going concern. The company had accumulated losses of $20.00 million, no operating revenue, and dependence on further financing and successful commercialization.
• Key risks include regulatory delays or denial, market acceptance and competition, limited cash runway and financing access, dependence on contract manufacturers and distributors, reimbursement uncertainty, product liability, and pending intellectual-property protection. The company reported no material legal proceedings.
• Warrant fair-value remeasurement was a significant non-operating item: warrant-related finance expense was $293,542 in 2013 versus $1.61 million in 2012. Warrant liabilities are valued using a model with significant unobservable inputs.

Important facts for investors to verify

• Whether FDA 510(k) clearance and required non-U.S. registrations were obtained, and on what terms.
• Whether the full Dario product launched on schedule, and whether customer uptake generated meaningful revenue and recurring test-strip sales.
• Actual cash burn, current liquidity and financing needs relative to the stated October 2014 runway and $6.8 million funding estimate.
• The dilution and other potential consequences of the February 2014 financing, including adjustment-share and warrant provisions.
• Manufacturing scale, product performance, distribution execution and third-party reimbursement progress.