Mbody AI Ltd. annual report, Q4 FY2018

Business context and reporting period

Issuer: Check-Cap Ltd. (the request metadata names Mbody AI Ltd., but the supplied filing is Check-Cap Ltd.’s Form 20-F). This is an annual report for the fiscal year ended December 31, 2018, filed March 28, 2019—not a standalone fourth-quarter report. Financial statements are audited and prepared under U.S. GAAP.

Check-Cap is a clinical-stage medical diagnostics company developing C-Scan, an ingestible, ultra-low-dose X-ray capsule system intended to screen for colorectal polyps and cancer without bowel preparation. The company reported no revenue since inception.

Financial and operating results

R&D costs rose mainly on clinical-trial materials and activity, including the EU post-CE study and preparation for the U.S. pilot. G&A included higher salary and professional-service costs, partly offset by a share-based compensation credit, primarily following forfeiture of awards to the former CEO. Net finance income was $0.473 million versus $0.236 million, including interest on deposits and changes in royalty-related provisions. Loss per share is affected by the 1-for-12 reverse split and substantial share issuance; operating margins are not meaningful because there was no revenue.

Year-end liquidity (US$ millions): cash and cash equivalents $8.572; short-term bank deposits $5.643; restricted cash $0.350; current assets $14.984; current liabilities $2.221; working capital $12.763; total assets $15.436; shareholders’ equity $13.030. The filing reports no conventional borrowings in the balance sheet; it does disclose royalty and other obligations. Cash, cash equivalents and restricted cash totaled $8.922 million in the cash-flow statement.

Net financing cash flow was $17.762 million in 2018, primarily from the May public offering; investing cash outflow was $5.723 million, mainly placement of funds in short-term deposits. At year-end, accumulated deficit was $63.301 million. The auditor’s report includes a going-concern explanatory paragraph; management said existing cash would fund operations into February 2020, but only with continued cost control and additional financing as needed. A February 2019 offering raised approximately $7.5 million gross after year-end.

Material changes versus prior comparable period

• Net loss increased about 8% year over year, while operating loss rose about 11%, reflecting higher R&D and G&A spending.
• Operating cash use increased to $10.034 million from $9.150 million. Cash and cash equivalents rose to $8.572 million from $6.997 million, while short-term deposits and working capital also increased, supported by the May 2018 equity offering.
• The May 2018 offering generated approximately $20.2 million gross and materially expanded the share count. The 1-for-12 reverse split took effect April 4, 2018; all share data in the report is presented on a post-split basis.
• Clinical progress included CE Mark approval in January 2018 and Israeli marketing approval in September 2018. The Israeli approval was stated to expire February 28, 2019; an extension request was pending at the filing date.

Outlook, commentary, risks and unusual items

• Development and regulatory plans: The FDA conditionally approved the U.S. pilot-study IDE in December 2018 and granted final approval in February 2019. The single-arm pilot was planned for up to 45 average-risk subjects. Subject to pilot results, regulatory approvals and financing, the company planned a U.S. pivotal study in 2020 and anticipated a direct de novo FDA submission in 2021. A PMA pathway could be required instead, with greater time, cost and uncertainty.
• Clinical evidence: The 2017 multicenter study reported 44% overall sensitivity and 89% specificity in 45 evaluable patients; sensitivity was higher among patients with greater colon coverage. In a separate 2018 interim EU post-approval analysis of 31 evaluable patients, Version 3 showed 76% sensitivity and 80% specificity. Final results were expected in the second quarter of 2019. These are study results, not proof of broad clinical effectiveness or market acceptance.
• Commercialization: The company discussed a possible second-half 2019 launch in selected European and Israeli markets, subject to funding, regulatory approvals and partners, but also stated it had no specific product launch dates and did not expect near-term product revenue. CE Mark and Israeli approval do not remove the need for certain local approvals or U.S. clearance.
• Going concern and financing: Management said additional capital was necessary and that failure to raise funds by or before the end of 2019 could require immediate expense reductions and trial delays; without timely financing, it might license or sell assets, seek an acquisition, cease operations or seek bankruptcy protection. Equity financing could dilute shareholders.
• Execution risks: C-Scan remains development-stage, with technical capsule failures reported and reliability improvements underway. The company relies on single-source suppliers; the X-ray source supply agreement had expired and was being renegotiated, while the battery supplier planned to stop manufacturing by mid-2019. Manufacturing scale-up, reimbursement, adoption, regulatory clearance and clinical outcomes remain uncertain.
• Contingencies and unusual items: IIA grants totaled approximately $5.3 million received, with a contingent royalty obligation of about $5.6 million; BIRD-related contingent royalties were about $0.18 million. IIA rules may constrain transfer of funded know-how or manufacturing outside Israel. The company also disclosed a $0.12 million ASIC royalty provision and a $0.065 million predecessor-holder reimbursement liability. No material litigation or material off-balance-sheet arrangements were reported.
• Shareholder and tax considerations: The company believed it was a PFIC for 2018 and could be one in 2019, with potentially adverse U.S. tax consequences. Four reported major holders together owned approximately 32% as of the report’s stated reference points. There were no dividends and none were planned for the foreseeable future.

Important facts for investors to verify

• Whether the Israeli AMAR approval was extended and whether European local, radiation-safety and other required authorizations were obtained.
• Final EU post-approval study results, U.S. pilot enrollment and outcomes, and the evidence and timing required for a U.S. pivotal study and FDA submission.
• Actual cash runway and subsequent financing needs, considering operating cash use, restricted funds, offering proceeds and potential dilution.
• Resolution of X-ray source and battery supply, alternate suppliers, and readiness to manufacture at commercial scale.
• Reimbursement coverage, physician and patient adoption, and the economics of any proposed launch; the filing reports no revenue and no established launch date.
• Potential IIA/BIRD repayment, manufacturing-transfer restrictions, PFIC status, and the filing’s share-count differences: the cover reports 5,328,700 shares outstanding at December 31, 2018, while the audited equity statement shows 5,330,684.