Modular Medical, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2019; filed February 13, 2020. The company is a development-stage medical-device business developing an insulin pump. It had not completed development or obtained FDA clearance and reported no product revenue.
Financial results and position
| Metric | Three months ended Dec. 31, 2019 | Three months ended Dec. 31, 2018 | Nine months ended Dec. 31, 2019 | Nine months ended Dec. 31, 2018 |
|---|---|---|---|---|
| Revenue | No product revenue | No product revenue | No product revenue | No product revenue |
| Research and development | $608,019 | $504,787 | $1,945,043 | $1,008,127 |
| General and administrative | $527,829 | $245,773 | $1,486,386 | $546,621 |
| Total operating expenses / operating loss | $1,135,848 | $750,560 | $3,431,429 | $1,554,748 |
| Net loss | $1,133,517 | $739,205 | $3,403,281 | $1,532,545 |
| Loss per share, basic and diluted | $0.06 | $0.04 | $0.19 | $0.09 |
| Operating cash used | Not separately provided for quarter | $2,776,998 | $1,106,941 |
There is no meaningful gross margin reported because the company had no product sales. At December 31, 2019, cash and equivalents were $3,718,492; current assets were $3,772,609; current liabilities were $274,707; working capital was approximately $3.50 million; total assets were $3,883,011; and stockholders’ equity was $3,608,304. The balance sheet reports no debt. Accumulated deficit was $6,651,442.
Changes versus comparable periods
- Quarterly net loss increased about 53% year over year; nine-month net loss increased about 122%.
- Quarterly R&D expense rose about 20%; nine-month R&D expense rose about 93%, primarily due to product development, personnel, consulting, tooling and prototyping.
- Quarterly G&A expense rose about 115%; nine-month G&A expense rose about 172%, reflecting added personnel and professional services, stock compensation and costs related to a selling-shareholder registration statement.
- Nine-month operating cash use increased to $2.78 million from $1.11 million. There were no financing cash flows in the 2019 nine-month period, compared with $4.00 million of financing inflows in the prior-year period, principally from a private placement.
- Cash declined by $2.84 million from March 31, 2019. Common shares outstanding were 17,870,261 at December 31, 2019, compared with 17,840,261 at March 31, 2019.
Outlook, risks and notable items
- Management stated that existing cash was insufficient for projected operating requirements and that additional capital would be needed within the next 12 months through equity or debt financing. Funding may not be available on acceptable terms; absent financing, the company may reduce costs and curtail development.
- Management expects R&D and G&A expenses to continue increasing as product development, staffing, facilities and professional-service needs grow. No specific revenue, profitability or product-launch guidance was provided.
- Management cited the company’s development-stage status, lack of product revenue, financing needs, competition, limited operating history, changing customer requirements and public-market volatility as risks.
- Disclosure controls and procedures were deemed not effective. Management cited material weaknesses involving inadequate financial-reporting controls and lack of segregation of duties, and described remediation efforts, including hiring an accounting manager and contract CFO and appointing independent directors to lead newly formed audit and compensation committees.
- Cash balances included approximately $3.46 million above FDIC insurance limits at the primary bank; no reserve for possible bank failure was recorded.
- In January 2020, the company signed a three-year lease for a larger San Diego facility commencing April 1, 2020, with initial monthly rent of approximately $12,400 and annual increases of about 3%; it paid a $100,000 security deposit. The 2019 adoption of the lease accounting standard had no material reported impact.
- A board member received $75,000 in consulting fees and options with a reported fair value of $60,000 during the nine months. The company also has a royalty agreement with its founder, payable upon commercialization under specified terms; no product sales or royalty payments are reported.
Important facts for investors to verify
- Current cash runway, projected spending and whether additional financing was obtained after the filing.
- Insulin-pump development milestones, clinical or regulatory path, FDA clearance prospects and commercialization timing.
- Progress in remediating the reported material weaknesses and the effectiveness of financial-reporting controls.
- Expected costs and commitments under the new facility lease, and the company’s ability to fund increased operating expenses.
- Terms and potential dilution associated with outstanding options: 2,526,443 options were outstanding at December 31, 2019; the filing reports $1,627,097 of unamortized compensation cost.