Modular Medical, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2019, compared with the corresponding 2018 periods. This is the company’s fiscal second quarter of fiscal 2020; its fiscal year ends March 31.
Business context
Modular Medical is a development-stage medical-device company developing an insulin pump. The pump was not yet fully developed or cleared by the FDA, and the company had not generated product revenue.
Financial performance and position
| Metric | Three months ended Sep. 30, 2019 | Six months ended Sep. 30, 2019 |
|---|---|---|
| Revenue | None reported | None reported |
| Research and development expense | $633,241 | $1,337,025 |
| General and administrative expense | $524,100 | $958,556 |
| Operating loss | $1,157,341 | $2,295,581 |
| Net loss | $1,147,566 | $2,269,764 |
| Net loss per share, basic and diluted | $0.06 | $0.13 |
Gross margin and operating margin are not meaningful because no product revenue was reported. Six-month operating cash use was $1,747,462, and investing cash use was $30,600; there were no financing cash flows. Cash declined from $6,553,768 at March 31 to $4,775,706 at September 30.
At September 30, total assets were $4,885,668, current liabilities were $330,592, and stockholders’ equity was $4,555,076. Working capital was approximately $4.5 million. The balance sheet reports no debt; liabilities consisted of accounts payable and accrued expenses. Approximately $4.521 million of cash at the primary bank exceeded FDIC insurance limits.
Changes, outlook, and risks
- Compared with the prior-year quarter, quarterly R&D expense increased about $266,000 and G&A increased about $343,000; net loss rose from $543,774 to $1,147,566. For the six-month period, net loss rose from $793,340 to $2,269,764. Management attributed expense increases mainly to product development, staffing, consulting, professional services, and stock-based compensation.
- Management expects R&D and G&A expenses to continue increasing. It stated that existing cash was insufficient for projected operating requirements over the next 12 months and that additional equity or debt financing would be needed. Funding availability and terms are uncertain; failure to raise capital could require cost reductions and curtailed development.
- Key risks include development and FDA-clearance uncertainty, no product revenue, ongoing cash burn, dependence on external financing, competition, and limited operating history. No specific revenue or profitability guidance was provided.
- Management reported disclosure controls were not effective. Material weaknesses included inadequate financial-reporting controls and lack of segregation of duties; the company also lacked a separately designated audit committee or independent director. It had begun remediation, including hiring an accounting manager and engaging a contract CFO, and expected to address the weaknesses during fiscal 2020.
- Related-party item: during the six months, the company paid a director $62,500 in consulting fees and granted options with a stated fair value of $37,500. The company also has a royalty agreement with its founder: the lesser of $0.75 per product sale or 5% of gross sale price, subject to a $10 million cumulative payment cap.
- The filing reported no legal proceedings. The corporate lease expired in December 2019, with approximately $7,500 in remaining minimum payments disclosed.
Important facts for investors to verify
- Whether the company obtained financing after the reporting date, and the resulting cash runway, dilution, and financing terms.
- Product-development milestones, FDA pathway and timing, and the resources required to reach commercialization.
- Progress in remediating the disclosed material weaknesses and whether controls have been independently assessed.
- Cash concentration and exposure to uninsured deposits, along with the pace of operating cash use.
- Terms and potential economic impact of the founder royalty agreement and director consulting arrangements.