Microbot Medical Inc. annual report, FY2017

Microbot Medical Inc. — FY2017 Form 10-K

Reporting period: Fiscal year ended December 31, 2017; the filing is an annual report, not a standalone fourth-quarter report. Financial amounts below are in U.S. dollars unless stated otherwise. Microbot is a preclinical medical-device company developing micro-robotics technologies; it reported no product revenue.

Business context and pipeline

• Self-Cleaning Shunt (SCS): A proposed ventricular catheter intended to reduce shunt blockages in hydrocephalus and normal-pressure hydrocephalus. A Washington University animal-study program was underway; the comprehensive study was expected in 2018.
• TipCAT: A semi-disposable, self-propelled endoscope initially aimed at colonoscopy. The company was reviewing the design and proof of concept, with animal studies anticipated during 2017–2018.
• Neither product had FDA clearance or approval, and the company had no commercial products or established sales infrastructure. Microbot expected its products to be Class II devices, but the FDA had not determined their classification or regulatory pathway.

Financial performance and position

Metric	FY2017	FY2016
Product revenue	None	None
Research and development expense	$1.100 million	$0.901 million
General and administrative expense	$4.167 million	$8.734 million
Operating loss	$(5.267) million	$(9.635) million
Financing expense, net	$2.322 million	$0.028 million
Net loss	$(7.589) million	$(9.663) million
Net loss per share, basic and diluted	$0.18	$0.40
Net cash used in operating activities	$(4.856) million	$(0.786) million
Net cash provided by financing activities	$13.019 million	$3.083 million

• At December 31, 2017, cash and cash equivalents were $10.787 million, restricted cash was $27,000, current assets were $10.930 million, current liabilities were $528,000, and working capital was approximately $10.402 million. Total assets were $11.020 million and total liabilities were $556,000. The balance sheet reported no convertible-note balance at year-end.
• R&D expense increased about 22%, principally due to materials. G&A fell by $4.567 million, mainly because $7.258 million of merger-related shares-for-services expense in 2016 did not recur; higher payroll, public relations, insurance, fees, professional services, and board costs partly offset the decline.
• Financing expense rose primarily because of a $2.364 million loss on extinguishment of convertible debt, partly offset by a $285,000 gain from the decrease in derivative warrant liability. The company attributed the extinguishment loss to the exchange of the note for preferred shares.
• Cash burn from operations increased year over year despite the smaller net loss. Financing included $12.702 million of net proceeds from common-stock issuance. The company also received approximately $3.1 million net cash from the legacy stem-cell asset sale in 2016.
• Profit margins are not meaningful because the company had no product revenue. No revenue, gross-profit, or operating-margin guidance was provided.

Material changes, outlook, risks, and unusual items

• Management expected continued losses and rising development costs. It stated that available net cash was expected to fund operations for at least 12 months, including continued SCS and TipCAT development; additional capital may still be needed. There were no committed external funding sources.
• In November 2017, Microbot received approval for a non-dilutive Israeli Innovation Authority grant of up to NIS 2.61 million (approximately $735,000) for SCS development. Grant-funded technology and manufacturing rights are subject to transfer restrictions; successful SCS sales would trigger royalties of 3%–3.5% until the applicable grant amount, plus interest, is repaid.
• On January 4, 2018, the company agreed to acquire CardioSert technology, paid an initial $50,000, and had 90 days to complete the acquisition at its option. The transaction was not closed as of the filing; expected closing was around April 2018. The company projected an expanded IP portfolio if completed.
• The Technion license is exclusive but milestone-dependent. Stated milestones include initial human studies by December 2018 for both platforms, with further clinical-trial milestones in 2019 for SCS and 2020 for TipCAT, if needed. Missing a milestone could give the licensor termination rights.
• A lawsuit by investors in the June 2017 financing seeks rescission and return of their $3.375 million investment, plus damages alleged to exceed $1 million. The matter was in discovery; management said it could not assess the likelihood or amount of any loss and intended to defend the claims.
• Nasdaq notified the company on March 23, 2018 of noncompliance with the $1.00 minimum bid-price requirement. The stated deadline to regain compliance was September 18, 2018; the filing gave no assurance that compliance would be restored.
• Key risks include clinical or animal-study failure, regulatory delays or a more demanding FDA pathway, limited financing and dilution, uncertain physician and payer adoption, reliance on third-party manufacturing, IP-license and patent risks, foreign-exchange exposure, and operations in Israel. The company also disclosed that substantial cash balances at financial institutions could exceed federally insured limits.
• The financial statements received an unqualified independent audit opinion. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an ICFR attestation.

Investor verification points

1. Confirm current cash, restricted cash, subsequent-period spending, and the basis for management’s stated 12-month runway; assess whether further financing is required.
2. Check progress and results of the SCS animal study and TipCAT development, and whether FDA feedback requires human trials or changes the anticipated regulatory pathway.
3. Verify CardioSert closing status, total consideration, development obligations, and any effect on liquidity or the IP portfolio.
4. Review the status, potential exposure, and any subsequent developments in the Sabby litigation and the Nasdaq bid-price deficiency.
5. Reconcile share counts and potential dilution: the year-end financial statements report 40.583 million common shares issued and outstanding, while the cover page reports 42.120 million shares outstanding as of March 30, 2018; also review options, warrants, preferred-stock conversions, and the 2017 equity financing.
6. Assess the terms and restrictions of Israeli Innovation Authority grants and the Technion license, including royalties, transfer approvals, and development milestones.