Business context and reporting period
Modular Medical, Inc. filed this unaudited Form 10-Q for the quarter ended December 31, 2018, its fiscal third quarter, and the nine months then ended. The company is developing diabetes products, including an insulin pump through wholly owned subsidiary Quasuras. It reported no revenue in either the three- or nine-month periods.
Financial performance and position
| Metric | Three months ended Dec. 31, 2018 | Nine months ended Dec. 31, 2018 |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $750,560 | $1,554,748 |
| Net loss | $739,205 | $1,532,545 |
| Net loss per share, basic and diluted | $0.044 | $0.094 |
| Operating cash used | $1,106,941 for the nine months |
At December 31, 2018, cash and cash equivalents were $7,137,876; current assets were $7,159,698; current liabilities were $62,932; working capital was approximately $7,096,766; and total liabilities were $62,932. The balance sheet reports no debt. Cash increased $2,841,200 during the nine months, supported by $4,003,199 in financing cash inflows, primarily private-placement proceeds. Investing cash use was $55,058. No gross margin was generated because there were no sales.
Changes versus the prior comparable period
For the quarter, net loss increased from $258,772 to $739,205; for the nine months, it increased from $477,863 to $1,532,545. Nine-month research and development expense rose to $1,008,127 from $258,799, reflecting insulin-pump design and development activity and stock-based compensation. Professional expense rose to $238,704 from $157,517, and general and administrative expense rose to $307,917 from $64,655. Operating cash use increased from $544,837 to $1,106,941.
Cash rose from $4,296,676 at March 31, 2018, while common shares outstanding increased from 15,983,273 to 17,799,705 by December 31, 2018. The company reported $3,983,915 of private-placement proceeds in financing activities for the nine months. Separately, it disclosed issuing 1,786,432 shares in a private placement during the quarter and 30,000 shares to a consultant for $19,800.
Outlook, risks, and unusual items
- Management expects research and development costs to continue. The filing provides no revenue, earnings, or cash-flow guidance and cautions that nine-month results are not necessarily indicative of the full fiscal year.
- The company has no sales to fund operations and depends on financing. It identifies financing and liquidity needs, competition, changing customer requirements, limited operating history, and public-market volatility as risks.
- Management concluded internal controls over financial reporting were ineffective at December 31, 2018, citing material weaknesses, including inadequate controls and lack of segregation of duties. The company had no separately designated audit committee or independent director and intended to engage an internal accountant when finances allowed.
- Approximately $6.7 million of bank cash was uninsured by the FDIC, with no reserve recorded for possible bank failure. Management stated it believed the company was not exposed to significant risk from these deposits.
- The founder and major shareholder has a royalty arrangement tied to future product sales: the lesser of $0.75 per unit or 5% of gross sale price, capped at $10 million in total payments. The filing reports no royalties due based on its disclosed absence of sales.
- The CEO/CFO employment agreement provides $200,000 annual base compensation, $100,000 per year payable in options, and eligibility for a discretionary annual bonus of up to $300,000 in cash or options. The company also disclosed options granted and approximately $330,000 of unrecognized stock-based compensation expected to be amortized over about six months.
- The filing reports no legal proceedings. It describes a sublease at $3,000 per month expiring December 14, 2019, with $34,500 in minimum lease payments remaining as disclosed.
Important facts for investors to verify
- Product-development status, milestones, regulatory pathway, and cash required before potential commercialization.
- Cash runway under continued operating cash use, and the company’s ability to raise additional capital.
- Share issuance, option grants, and other potential dilution, including the terms and net proceeds of private placements.
- Progress in remediating the disclosed internal-control material weaknesses and establishing independent oversight.
- Potential obligations under the founder royalty agreement and CEO compensation agreement.