Business context and reporting period
LabStyle Innovations Corp. (the issuer in this filing) develops and commercializes Dario™, a mobile diabetes-management system comprising a glucose meter, disposables, software and related services. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2015. Unless otherwise noted, financial amounts are in U.S. dollars, thousands.
Financial performance and condition
- Revenue: Q3 revenue was $273, versus none in Q3 2014; nine-month revenue was $515, versus none in the prior-year period. Revenue came mainly from meter and disposable sales and a healthcare-provider arrangement.
- Gross profit and margins: Gross loss was $131 in Q3 and $596 for nine months, compared with gross losses of $585 and $1,611, respectively, in 2014. Gross margins were approximately -48% and -116% in 2015. Costs included manufacturing ramp-up and inventory write-downs.
- Operating costs and loss: Q3 operating expenses were $2,416 and operating loss was $2,547; nine-month amounts were $5,240 and $5,836. Net loss was $1,829 for Q3 and $5,470 for nine months, down 41% year over year in each period. Nine-month net loss attributable to common stockholders was $5,624, including a $154 deemed dividend.
- Cash flow: Nine-month operating cash use was $4,214, investing cash use $65, and financing cash inflow $4,734. Cash and cash equivalents rose $455 from year-end 2014 to $1,908 at September 30, 2015.
- Liquidity and capitalization: Current assets were $2,721 and current liabilities $1,527. The company reported a $3,626 warrant-related liability, $2,357 of Series A preferred stock presented outside stockholders’ deficiency, and stockholders’ deficiency of $3,960. No conventional borrowing balance is shown in the supplied financial statements. Common shares outstanding were 42.8 million at quarter-end and 42.99 million on November 13.
Material changes versus the prior comparable period
- Commercial sales began after the prior-year comparison period, producing $515 of nine-month revenue.
- Nine-month operating expenses declined 27% and operating loss declined 34%; management attributed lower research and development and general and administrative costs primarily to reduced staffing, subcontracting and other expenses. Sales and marketing costs rose slightly for the nine-month period and 65% in Q3.
- Financial results benefited from warrant remeasurement: nine-month net financial income was $366, versus net expense of $537 in 2014. The 2015 amount included a $377 non-cash reduction in the warrant liability.
- Cash used in operations fell from $6,168 to $4,214, while financing proceeds fell from $8,200 to $4,734. The company raised approximately $1.956 million in a February/March placement, $453,000 from warrant exercises and approximately $2.325 million in a July/August placement.
Outlook, risks and notable items
- Going concern and funding: The company reported cumulative losses of approximately $42 million and negative operating cash flow. Management estimated available resources would support planned activity only into January 2016; the filing states that substantial doubt exists about the company’s ability to continue as a going concern. Additional financing and commercial revenue are needed, with no assurance funding will be available.
- Regulatory and commercialization: The Dario system had CE Mark certification and approvals or reimbursement coverage in several markets; Canadian sales began in June 2015. The FDA had issued further comments on the U.S. 510(k) application. Management expected to address them and obtain clearance in the next few months, but that outcome was not assured.
- Equity and warrants: Financing and compensation arrangements increased the common share count substantially. The July 2015 placement triggered anti-dilution adjustments to older warrants. After quarter-end, the company agreed to replace certain September 2014 warrants with new warrants; the incremental value was to be recorded as a finance expense.
- Other risks: The filing highlights dependence on additional capital, successful manufacturing and sales ramp-up, regulatory clearance, distribution partners, intellectual property protection and customer acceptance. Inventory write-offs were $138 for the first nine months of 2015; no specific material litigation outcome is quantified in the supplied text.
- Management said disclosure controls were effective at a reasonable assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Current cash, actual operating cash burn, and whether financing extended the runway beyond management’s January 2016 estimate.
- FDA 510(k) status and timing, and evidence of commercial sales growth, collections and gross-margin improvement.
- Terms and accounting impact of the post-quarter warrant replacements, including resulting dilution and any finance expense.
- Fully diluted share count, including outstanding options, warrants and convertible preferred stock and their anti-dilution provisions.
- Whether the company obtained enough capital to fund operations and commercialization, and any subsequent going-concern developments.