Modular Medical, Inc. — Form 10-Q Summary
Business context and period: The unaudited report covers the quarter and nine months ended December 31, 2017; the company’s fiscal year ends March 31. After acquiring Quasuras, Inc. in July 2017, Modular Medical became a development-stage medical-device company focused on an insulin-delivery pump. The acquisition was accounted for as a reverse merger, and the company’s current and historical financial statements may not be directly comparable.
Financial performance and position
- Revenue: $0 in both the three- and nine-month periods ended December 31, 2017, and in the comparable 2016 periods. With no revenue, a meaningful gross margin is not available.
- Expenses and losses: Nine-month operating expenses were $480,971, versus $7,567 in 2016; net loss was $477,863, versus $7,568. For the quarter, operating expenses were $260,860, versus $5,812, and net loss was $258,772, versus $6,427. The filing attributes the increase mainly to consulting, professional, research and development, and general and administrative costs. Nine-month R&D expense was $258,799.
- Cash flow: Nine-month operating cash use was $544,837, compared with $7,874 in 2016. Investing activities provided $4,684,138, principally reflecting cash acquired in the July reorganization, partly offset by equipment and intangible-asset purchases. Financing activities used $21,256, reflecting repayment to a related party. Cash increased by $4,118,045 to $4,510,052.
- Liquidity and balance sheet: At December 31, 2017, total assets were $4,532,965, including $4,510,052 in cash; total liabilities were $32,601, all current. Stockholders’ equity was $4,500,364. The company reported no inventory and no debt balance. Cash includes approximately $4,010,052 above FDIC-insured limits, according to the filing.
- Share count and funding: The July private placement sold 7,801,212 shares at $0.66 per share for approximately $5.1 million gross proceeds; the company reported $41,928 in placement-related compensation. Shares outstanding were reported as approximately 15.98 million at December 31.
Material changes, outlook, and risks
- The July acquisition brought Quasuras’ insulin-delivery technology and intellectual property into the company. The company had no material operations from 2002 through June 2017 and has not yet reported product revenue.
- The company entered an office sublease beginning September 1, 2017, at $3,000 per month, expiring December 14, 2019. Disclosed minimum lease payments total $69,000 for 2018 and 2019.
- A royalty agreement with the founder provides, on qualifying product sales, the lesser of $0.75 per unit or 5% of gross sale price, capped at $10 million in aggregate payments. The filing does not provide revenue guidance or a quantified commercialization timetable.
- Management cited competition, financing and liquidity needs, rapidly changing customer requirements, limited operating history, and public-market volatility as risks. Management cautioned that nine-month results are not necessarily indicative of the fiscal year ending March 31, 2018.
- Management concluded disclosure controls were not effective at December 31, 2017, citing lack of segregation of incompatible duties and insufficient Board representation. No material change in internal control over financial reporting was reported during the quarter.
- The filing states there were no known pending or threatened legal proceedings and no material off-balance-sheet arrangements. No specific contingent loss is quantified.
Important facts for investors to verify
- Confirm the company’s cash runway and expected spending needs against its development and commercialization plans; the filing provides no formal guidance.
- Review the acquisition, private-placement proceeds, share issuance, and ownership details, including dilution and the founder’s related-party royalty arrangement.
- Assess progress in remediating the disclosed control weaknesses and the implications of the CEO also serving as CFO and other corporate officers.
- Verify reported share counts: the filing gives 15,983,273 on the cover and balance sheet, 15,983,272 in transaction disclosures, and 15,983,000 in a stockholders’ equity note.
- Reconcile the MD&A’s statement of $4,532,965 in “total current assets” with the balance sheet, which reports that figure as total assets and current assets of $4,512,961. The MD&A also labels March 31, 2017 balance-sheet figures as December 31, 2016; the filing does not provide a clear reconciliation.