Business context and reporting period
Modular Medical, Inc. is a development-stage medical-device company developing an insulin pump. This Form 10-Q covers the quarter and nine months ended December 31, 2020; because the company’s fiscal year ends March 31, this is fiscal Q3 2021, not calendar Q3 2020. The company had not received FDA clearance and had generated no product revenue.
Financial results and position
| Metric | Three months ended Dec. 31, 2020 | Nine months ended Dec. 31, 2020 |
|---|---|---|
| Revenue | No product revenue | No product revenue |
| Research and development expense | $1.09 million | $3.15 million |
| General and administrative expense | $0.78 million | $2.45 million |
| Net loss | $1.87 million | $5.61 million |
| Net loss per share, basic and diluted | $0.10 | $0.30 |
There is no meaningful operating margin to report because the company had no product revenue. Nine-month cash used in operating activities was $4.57 million, compared with $2.78 million in the prior-year period; investing cash use was $0.11 million. Financing provided $2.15 million, including $1.79 million net private-placement proceeds and a $368,780 Paycheck Protection Program (PPP) loan. Cash declined from $3.12 million at March 31, 2020 to $596,542 at December 31, 2020.
At December 31, 2020, current assets were $644,738 and current liabilities were $820,859, implying negative working capital of approximately $176,000. Total liabilities were $1.29 million, including the $368,780 PPP loan and lease liabilities. Stockholders’ equity was approximately negative $753, and accumulated deficit was $14.17 million. The filing reports no clear profitability or revenue outlook in numerical terms.
Material changes versus the prior comparable period
For the quarter, operating expenses rose 64.7% to $1.87 million from $1.14 million, and net loss increased to $1.87 million from $1.13 million. For the nine months, operating expenses rose 63.3% to $5.60 million from $3.43 million, and net loss increased to $5.61 million from $3.40 million. R&D increases reflected higher engineering and manufacturing staffing and consulting costs; R&D headcount rose to 15 from eight year over year. G&A increases reflected personnel, stock-based compensation and facilities costs; G&A headcount rose to four from two.
During the nine months, the company sold common shares in a private placement and issued 962,387 shares cumulatively through December 31 at $2.87 per share for $2.76 million gross proceeds. Outstanding shares increased to 18,832,648 from 17,870,261 at March 31. Cash used in operations increased year over year, while the company also obtained the PPP loan.
Outlook, risks and unusual items
Management expects R&D and G&A expenses to decrease during the remainder of fiscal 2021 as it manages costs. The company expected to submit its product to the FDA in the first half of calendar 2021. It reported longer component lead times and reduced on-site activity related to COVID-19, which could delay manufacturing, the FDA submission or regulatory review.
Management stated that substantial doubt exists about the company’s ability to continue as a going concern for at least one year after issuance of the financial statements. The company expected continuing losses and cash outflows and said it needed additional capital; absent financing, it may curtail R&D and reduce costs. The PPP loan bears 1% interest, is due in April 2022, and forgiveness was not assured.
After quarter-end, on February 8, 2021, the company issued $1.1 million of convertible notes bearing 12% annual interest and maturing September 30, 2021. The notes were purchased by the chairman/CEO and an existing investor represented by a board member. They provide for conversion in specified financings, including at a 20% discount in a qualifying financing, or repayment at maturity. This subsequent financing provides capital but also creates interest, repayment and potential dilution exposure.
The filing reported no legal proceedings and no material changes in internal control over financial reporting; management concluded disclosure controls were effective as of December 31, 2020. Other risks include competition, financing and liquidity needs, technology and market uncertainty, and COVID-related workforce, supplier and regulatory disruptions.
Investor facts to verify
- Whether the company completed the anticipated FDA submission and what regulatory milestones or timing followed.
- Cash burn, financing needs and available liquidity after the February 2021 note financing; the quarter-end cash balance was only $596,542.
- Whether the PPP loan was forgiven, and the repayment status and terms of the $1.1 million convertible notes.
- Product development, manufacturing readiness and the effect of component delays and COVID-19 on commercialization timing.
- Potential dilution from outstanding options, private placements and convertible notes; options outstanding totaled 3,512,588 at December 31, 2020.