Business context and reporting period
LabStyle Innovations Corp. (the company identified in the filing; its product is Dario) filed this unaudited Form 10-Q for the quarter ended June 30, 2013. The development-stage company is developing and preparing to commercialize a smartphone-connected blood-glucose monitoring system. It had generated no revenue through the period.
Key financial metrics
| Metric | Q2 2013 / June 30, 2013 | Comparable period / prior year-end |
|---|---|---|
| Revenue | $0 | $0 in Q2 2012 |
| Operating loss | $3.60 million | $0.87 million in Q2 2012 |
| Net loss | $5.29 million | $0.87 million in Q2 2012 |
| Net loss, six months | $10.51 million | $1.44 million in first half 2012 |
| Cash and cash equivalents | $7.03 million | $1.23 million at Dec. 31, 2012 |
| Total current assets | $7.81 million | $1.67 million at Dec. 31, 2012 |
| Total current liabilities | $1.33 million | $0.57 million at Dec. 31, 2012 |
| Warrant liability | $6.23 million | $2.82 million at Dec. 31, 2012 |
| Stockholders’ equity (deficit) | $1.84 million | $(1.07) million at Dec. 31, 2012 |
For the six months ended June 30, 2013, operating cash use was $3.02 million, investing cash use was $1.33 million, and financing cash inflow was $10.15 million. The filing reports no debt balance; the warrant liability is a fair-value liability, not described as borrowing. Profit margins are not meaningful because the company had no revenue.
Material changes versus prior comparable period
- Q2 2013 research and development expense rose to $1.42 million from $0.45 million; first-half expense increased to $2.09 million from $0.62 million. Management cited hiring, production-related costs and inventory costs associated with clinical trials.
- Marketing and pre-production costs were $0.66 million in Q2 and $1.16 million for the first half, versus none in 2012, reflecting staffing, production-equipment depreciation, contractor, travel and marketing costs.
- General and administrative expense increased to $1.52 million in Q2 from $0.42 million, and to $3.42 million for the first half from $0.74 million, including higher compensation, professional fees and public-company costs.
- First-half net loss included $3.80 million of warrant revaluation expense. The fair-value changes are noncash and contributed to the increase in financial expense.
Outlook, risks and unusual items
- Management expected to seek European regulatory approvals and begin commercial sales in Europe in 2013, subject to approvals. No quantified revenue guidance was provided.
- The company estimated at least $8 million of expenses would be needed over the next 12 months for production ramp-up, marketing and sales, product development, patents, regulatory work and general operations. Management estimated available liquidity would support operations only until at least the end of January 2014, assuming its budget; it warned that costs could accelerate and additional funding might be unavailable.
- The filing states that recurring losses, negative operating cash flow and the need for further capital raise substantial doubt about the company’s ability to continue as a going concern.
- The April–May 2013 private placement raised $10 million gross and approximately $9 million net. It issued 4 million shares and warrants for 2 million shares; the financing and other share issuances increased dilution. The company reported 19,965,079 shares outstanding at June 30 and 19,990,079 as of August 13, 2013.
- Disclosure controls and procedures were deemed ineffective as of June 30, 2013. The company described remediation steps, including hiring a controller and engaging outside accounting and internal-audit support.
- A July 2013 resale registration statement became effective, and management changes were approved in August, including the CEO becoming executive chairman and the R&D vice president becoming CEO. A memorandum of understanding with an academic medical center was nonbinding.
Important facts for investors to verify
- Progress and timing of European regulatory approvals, launch, production scale-up and actual sales.
- Cash burn, spending against the stated $8 million requirement, and the timing and terms of any additional financing.
- Warrant-liability valuation assumptions and resulting noncash earnings volatility, alongside potential dilution from outstanding warrants and options.
- Remediation and subsequent testing of the ineffective disclosure controls.
- Whether the nonbinding medical-center collaboration leads to definitive agreements or commercial outcomes.