Modular Medical, Inc. — Form 10-Q
Reporting period: Quarter ended September 30, 2021, with comparative results for the three and six months ended September 30, 2020. The filing describes fiscal 2022 (fiscal year ending March 31, 2022); this is not a quarter ended June 30, 2021.
Business context
Modular Medical is a development-stage medical-device company developing the MODD1 two-part patch insulin pump for people with type 1 and type 2 diabetes. It reported no product revenue and continues to fund development and operating costs through financing.
Financial results and liquidity
| Metric | Three months ended September 30, 2021 | Six months ended September 30, 2021 |
|---|---|---|
| Revenue | None reported | None reported |
| Research and development expense | $2.11 million | $3.89 million |
| General and administrative expense | $1.59 million | $3.17 million |
| Total operating expenses | $3.69 million | $7.07 million |
| Net loss | $4.38 million | $9.22 million |
| Net loss per share, basic and diluted | $0.23 | $0.49 |
| Operating cash used | Not stated for quarter | $4.78 million |
Year over year, quarterly R&D expense rose 92.7% and G&A expense rose 107.3%; six-month increases were 88.7% and 90.1%, respectively. Six-month net loss increased from $3.73 million in 2020 to $9.22 million in 2021. The 2021 period included $1.19 million of interest expense and a $1.32 million loss on debt extinguishment; it also included $368,780 of income from forgiveness of the PPP loan.
Cash and cash equivalents were $798,161 at September 30, down from $1.47 million at March 31. Total assets were $1.37 million; current liabilities were $6.36 million, including $4.86 million of convertible notes payable. The balance sheet showed a $5.10 million stockholders’ deficit and a $25.16 million accumulated deficit. There was no meaningful revenue base from which to assess gross or operating margins.
Six-month investing cash use was $22,779, and financing provided $4.14 million net from convertible-note issuance. Cash declined by $670,304 over the six months. Management identified substantial doubt about the company’s ability to continue as a going concern, citing operating losses, cash outflows, limited cash, and repayment obligations on the notes.
Debt, outlook, risks, and unusual items
- The company issued $6.61 million aggregate principal of unsecured convertible notes in 2021, bearing 12% annual interest and generally due 12 months after issue. The filing says the notes are due in the first half of 2022; conversion and repayment terms include a $2.87 conversion price after a trigger date and a 110% early-prepayment premium. The notes also carry default, dilution-protection, and other investor rights.
- Warrants for 2,303,348 shares were issued with the notes, exercisable at $8 per share. Their $3.70 million fair value contributed to debt discount and the reported extinguishment loss, increasing noncash interest expense.
- After quarter-end, two officers purchased $250,000 of common stock. The company also obtained a secured revolving credit facility of up to $3 million, due March 15, 2022, at 12% interest; it drew $500,000 on November 9. The facility is secured by a first-priority interest in company property.
- Management expects R&D expense to remain flat to slightly decrease for the remainder of fiscal 2022, while G&A expense is expected to increase as the company pursues a public offering. Management expects continued operating losses and cash outflows and says additional capital is necessary; financing may not be available on acceptable terms.
- COVID-19-related supply-chain delays had lengthened lead times for components used in initial product quantities for FDA submission. Management said it believed it could build an adequate supply but warned that further disruption could delay submission. Other risks include competition, technology and market changes, and dependence on future financing and commercialization.
- Stock-based compensation was $1.52 million for the six months, including $1.26 million in G&A. The company reported $5.99 million of unrecognized option compensation expected to be expensed over approximately three years.
Important facts for investors to verify
- Cash runway, anticipated operating cash needs, and the timing and availability of additional financing.
- Exact note principal and accrued interest outstanding, maturity dates, conversion provisions, and any repayment or default triggers.
- Amount drawn and remaining availability under the secured bridge facility, together with its collateral and repayment terms.
- Progress toward FDA submission, product development and manufacturing readiness, and the effect of component lead times.
- Whether prospective public or other financing and the company’s stated expense outlook materialize; no product revenue or commercialization guidance is provided.
- The filing’s MD&A contains an apparent period-label inconsistency in its liquidity discussion; use the financial statements for the reported six-month 2021 figures.