Dariohealth Corp. annual report, FY2014

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LabStyle Innovations Corp. (now associated with DarioHealth) — 2014 Form 10-K

Period: Fiscal year ended December 31, 2014; this is an annual filing, not a standalone fourth-quarter report. Financial statement amounts below are in U.S. dollars, in thousands, unless stated otherwise. The company was developing and beginning commercial sales of its Dario mobile diabetes-monitoring system.

Financial results and liquidity

  • Revenue: $51,000, versus none in 2013. Initial product shipments began in 2014; revenue recognition was generally deferred until distributors paid.
  • Costs and operating results: Cost of revenues was $2.274 million, including a $1.046 million inventory write-down. A further $489,000 impairment charge related to a production line. Gross loss was $2.712 million and operating loss was $11.358 million.
  • Expenses: Research and development was $3.943 million, sales, marketing and pre-production $1.063 million, and general and administrative $3.640 million. These were all lower than in 2013.
  • Net loss: $12.877 million, compared with $13.931 million in 2013. Net loss attributable to common shareholders was $16.055 million after $3.178 million in deemed dividends associated with preferred stock and an exchange agreement. Basic and diluted loss per share attributable to common stock was $1.85, versus $3.80.
  • Cash flow: Operating cash used was $8.581 million, versus $7.601 million in 2013; investing cash used was $429,000, versus $1.640 million; financing provided $8.200 million, versus $10.274 million. Cash and cash equivalents declined to $1.453 million from $2.263 million.
  • Balance sheet and liquidity: Current assets were $2.056 million and current liabilities $1.616 million at year-end. Total assets were $3.081 million and stockholders’ deficit $5.295 million. The balance sheet includes a $4.003 million warrant liability and $2.757 million of Series A preferred stock classified outside stockholders’ equity. The filing does not report conventional borrowings as a material debt balance.
  • Funding and runway: The company raised $8.2 million net from financing activities in 2014. After year-end it raised approximately $2 million gross in February and March 2015. Management estimated available resources would fund planned activities only into July 2015, including anticipated sales receipts.

Material changes versus 2013

  • Commercial activity commenced, producing $51,000 of revenue, while cost of revenues and inventory write-downs contributed to a substantial gross loss.
  • Operating expenses fell to $8.646 million from $13.562 million, mainly reflecting lower research and development subcontracting, pre-production costs, payroll and stock-based compensation.
  • Operating loss narrowed, but 2014 common-shareholder loss was higher than the reported net loss because of preferred-stock and exchange-agreement deemed dividends. Net loss itself improved year over year.
  • Cash used in operations increased and year-end cash fell despite substantial equity financing. The company also recorded a $489,000 production-line impairment and held $234,000 of inventory where none was reported in 2013.
  • A one-for-five reverse stock split took effect in October 2014. A September 2014 financing issued convertible preferred stock and warrants; subsequent financing and conversion rights create significant potential dilution.

Outlook, commentary and risks

  • Management planned to expand the Dario soft launch, ramp production, develop the product and pursue U.S. and other regulatory clearances. The company expected U.S. FDA clearance during 2015, but the filing cautions that timing and approval were uncertain. The 510(k) application was resubmitted on March 24, 2015, after the reporting date.
  • Dario had CE Mark certification and reimbursement status in Italy, the UK, and Australia; the company was pursuing additional reimbursement and market access. A January 2015 agreement with Israel’s Maccabi Healthcare was described as a potential digital-services revenue channel.
  • The independent auditor’s report was unmodified but included a going-concern emphasis: recurring losses and negative operating cash flows raised substantial doubt about the company’s ability to continue. Management’s financing plans do not remove that uncertainty.
  • Key risks include dependence on additional financing and continued losses; uncertain sales adoption and reimbursement; regulatory and clinical delays; competition from established glucose-monitoring companies; reliance on contract manufacturers and distributors; and protection of intellectual property. The company also disclosed no product-liability insurance at the time of filing.
  • Warrant fair-value changes and financing-related charges materially affected results. The company reported no material legal proceedings and no off-balance-sheet arrangements.

Most important facts for investors to verify

  • Whether the February–March 2015 financing and subsequent cash position were sufficient to extend runway beyond management’s July 2015 estimate.
  • Actual Dario sales, distributor collections, recurring consumables demand, and progress toward positive gross margins; 2014 revenue was only $51,000.
  • FDA status and timing, plus regulatory and reimbursement progress in other target markets.
  • The fully diluted share count and potential dilution from preferred-stock conversions, warrants, options and later financings. The filing reported 9.882 million warrants outstanding at year-end and substantial additional securities issued or issuable after year-end.
  • The reconciliation of the $12.877 million reported net loss to the $16.055 million net loss attributable to common shareholders, including the deemed-dividend and warrant-related accounting.