Business context and reporting period
This is LabStyle Innovations Corp.’s unaudited Form 10-Q for the quarter ended September 30, 2014. The filing identifies the company as a mobile-health developer commercializing Dario, a smartphone-connected diabetes-management system; it does not identify the registrant as Dariohealth Corp. Unless noted otherwise, financial figures are in U.S. dollars in thousands.
The company began a soft commercial launch in 2014, but had recognized no revenue through September 30. Management described the business as pre-revenue and dependent on additional capital. A one-for-five reverse stock split was implemented October 6, 2014; share and per-share figures are presented retroactively for the split.
Financial performance and liquidity
| Metric | Three months ended September 30, 2014 | Nine months ended September 30, 2014 | Comparable 2013 period |
|---|---|---|---|
| Revenue | $0 | $0 | $0 |
| Ramp-up manufacturing costs / gross loss | $585 | $1,611 | $0 |
| Operating expenses | $1,922 | $7,167 | $3,238 / $9,910 |
| Operating loss | $2,507 | $8,778 | $3,238 / $9,910 |
| Net loss before deemed dividends | $3,077 | $9,315 | $3,471 / $13,985 |
| Net loss attributable to common stockholders, including deemed dividends | $6,333 | $12,571 | $3,471 / $13,985 |
| Basic loss per share | $(0.66) | $(2.03) | $(0.85) / $(3.95) |
Gross margin is not meaningful because there was no recognized revenue. The company shipped approximately $66 of meters and test-strip cartridges in the quarter and $113 year to date, but did not recognize sales under its revenue-recognition policy.
For the first nine months, operating cash use was $6,168, investing cash use was $125, and financing provided $8,200. Cash and cash equivalents were $4,170 at September 30, up from $2,263 at December 31, 2013. Current assets were $4,728 and current liabilities $2,094. Total assets were $6,002; stockholders’ deficiency was $4,926. The balance sheet showed a $3,053 warrant liability and $5,781 of Series A preferred stock classified outside equity. No conventional borrowings or interest-bearing debt are identified in the provided filing text.
Material changes and financing
- Nine-month operating expenses fell to $7,167 from $9,910, mainly reflecting lower marketing/pre-production and general and administrative costs; research and development was $3,209 versus $3,169.
- Nine-month operating loss improved to $8,778 from $9,910. The reported net loss also declined, partly because warrant revaluation produced $3,144 of financial income, compared with $3,992 of expense in 2013.
- Financing-related costs and deemed dividends affected common-stockholder results: the warrant exchange generated $3,124 of finance expense and a $279 deemed dividend; the Series A preferred issuance generated a $2,977 deemed dividend.
- In September, the company raised approximately $4,100 net through a private placement of Series A convertible preferred shares and warrants. The preferred shares were convertible into approximately 10.684 million common shares; the warrants covered approximately 5.342 million shares. Earlier 2014 common-stock and warrant financing and security exercises also contributed to the $8,200 total net financing cash inflow.
- Common shares outstanding increased to 15,905,871 at September 30 from 4,014,381 at year-end. The filing also highlights substantial potential dilution from preferred conversions, warrants, and options.
Outlook, risks, and unusual items
Management estimated that available resources would fund planned activity only through March 2015, assuming some initial sales inflows. The filing states that substantial doubt exists about the company’s ability to continue as a going concern and that additional capital is needed; there is no assurance financing will be available on acceptable terms or at all. Failure to raise funds or achieve sales could force the company to delay, reduce, or stop operations.
Management expected initial recognized revenue in the fourth quarter of 2014, principally from recurring sales of strips and lancets, upon receipt of payment. It planned to expand the soft launch, ramp manufacturing and distribution, continue product development, and pursue regulatory approvals. The company was seeking U.S. FDA 510(k) clearance and stated an expectation of clearance by mid-2015; that timing was forward-looking, not assured.
Commercial progress included CE marking, reimbursement coverage in Italy and the U.K. jurisdictions described in the filing, and Israeli marketing approval. Key risks include commercialization and manufacturing execution, regulatory and reimbursement approvals, dependence on new financing, dilution and potential sales of a large number of underlying shares, warrant fair-value volatility, and investor participation/preemptive rights that could complicate future financings. The Series A lead investor also had rights to appoint board members. The filing reported no legal proceedings and no off-balance-sheet arrangements. Management said disclosure controls were effective as of quarter-end.
Important facts for investors to verify
- Confirm whether Dario product shipments converted into recognized, collectible revenue and recurring orders after September 30.
- Check actual cash burn, financing raised, and liquidity versus the stated March 2015 runway and going-concern risk.
- Review the terms and dilution impact of the Series A preferred shares, warrants, options, anti-dilution provisions, and investor participation rights.
- Track FDA clearance, reimbursement coverage, and the company’s ability to scale manufacturing and distribution.
- Reconcile headline net loss with loss attributable to common stockholders, including the material deemed dividends and warrant-related accounting effects.