Modular Medical, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2018, compared with the fiscal year ended March 31, 2017. This is an annual report, not a standalone fourth-quarter report; the filing does not provide quarterly financial results.
Business context
Modular Medical acquired Quasuras, Inc. on July 24, 2017, in a share exchange accounted for as a recapitalization/reverse merger. Quasuras is developing insulin-delivery hardware intended to provide continuous basal and mealtime bolus insulin delivery. The company was a shell with no material operations before the acquisition and remains a development-stage business with no reported revenue.
The company raised approximately $4.732 million net in a private placement completed with the acquisition. It ended the year with 15,983,273 common shares outstanding. The founder and CEO/CFO, Paul DiPerna, held approximately 47% of shares; the filing also describes substantial ownership and control by funds associated with Manchester Management Company.
Financial performance and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $666,164 | $29,418 |
| Operating loss | $(666,164) | $(29,418) |
| Net loss | $(659,246) | $(29,256) |
| Basic and diluted loss per share | $(0.049) | $(0.003) |
| Cash used in operating activities | $(791,131) | $(21,137) |
| Cash provided by financing activities | $4,711,132 | $23,521 |
FY 2018 operating expenses included $332,642 of research and development, $232,961 of professional expenses, and $98,700 of general and administrative expenses, plus $1,861 of depreciation. Management attributed the increase in professional expenses mainly to consulting and filing costs, and the increase in general and administrative costs to staffing, marketing, rent, insurance, and other operating expenses.
At March 31, 2018, cash and cash equivalents were $4,296,676, total current assets were $4,313,480, current liabilities were $15,471, and working capital was approximately $4.298 million. Total assets were $4,334,452 and stockholders’ equity was $4,318,981. The balance sheet reports no debt; liabilities consisted primarily of accrued expenses and a $516 related-party payable. Cash increased by $3,904,669 during the year. The filing reports approximately $3.933 million of cash above FDIC-insured limits.
Material changes, outlook, and risks
- Compared with FY 2017, the net loss widened substantially as the company began product development and incurred higher professional and administrative costs. Research and development rose from zero to $332,642.
- Management expects to continue incurring research and development costs. The filing gives no revenue, commercialization, or earnings guidance and does not state a quantified cash runway.
- The company’s future depends on developing its insulin-pump product, obtaining funding as needed, and establishing a market. Disclosed risks include competition, financing and liquidity needs, rapidly changing customer requirements, limited operating history, and public-market volatility.
- Disclosure controls and internal control over financial reporting were found ineffective as of March 31, 2018, due to material weaknesses, including inadequate controls and lack of segregation of duties. Management intended to engage an internal accountant when finances permitted. The auditor did not express an opinion on internal-control effectiveness.
- The filing states there was no established trading market for the common stock. It also reports no pending legal proceedings. A lease signed in August 2017 requires monthly rent of $3,000 through December 2019, with $61,500 of minimum payments disclosed.
- Under a royalty agreement, the founder may receive the lesser of $0.75 per product sale or 5% of gross sale price, capped at $10 million in total payments. No royalty revenue or payments are reported for the period.
- The company reported an unrecognized net operating loss carryforward of approximately $182,500 at March 31, 2018, with a full valuation allowance against deferred tax assets.
Important facts for investors to verify
- Product-development progress, regulatory pathway, testing requirements, and realistic commercialization timing for the insulin-delivery technology.
- Expected R&D and operating cash burn, financing needs, and the sufficiency of the reported cash balance to fund planned development.
- Ownership and voting arrangements, including the disclosed beneficial ownership overlap among directors and funds associated with Manchester Management Company.
- Remediation of the reported material weaknesses and any subsequent improvements in financial-reporting controls and governance.
- Terms and potential economic effect of the founder royalty agreement, including how the royalty base and product sales will be determined.
- Cash concentration and bank-deposit exposure: the filing reports approximately $3.933 million above FDIC-insured limits.