# Modular Medical, Inc.: Form 10-Q for the period ended Dec 31, 2019

- Company: [Modular Medical, Inc.](/companies/modd.md) (CIK 1074871)
- Form: 10-Q
- Filed: 2020-02-13
- Accepted by EDGAR: Feb 13, 2020, 17:11 ET
- Period: 2019-12-31
- Accession: 0001019056-20-000112
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1074871/000101905620000112/modular_3q20.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1074871/000101905620000112/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-12-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Research and development | 3 months, 2019-10-01 to 2019-12-31 | $608.0k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2019-04-01 to 2019-12-31 | $1.9m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2019-10-01 to 2019-12-31 | −$1.1m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2019-04-01 to 2019-12-31 | −$3.4m | us-gaap:OperatingIncomeLoss |
| Net income | 3 months, 2019-10-01 to 2019-12-31 | −$1.1m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2019-04-01 to 2019-12-31 | −$3.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-10-01 to 2019-12-31 | −$0.06 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 9 months, 2019-04-01 to 2019-12-31 | −$0.19 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 9 months, 2019-04-01 to 2019-12-31 | −$2.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2019-04-01 to 2019-12-31 | $58.3k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2019-12-31 | $3.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-12-31 | $3.8m | us-gaap:AssetsCurrent |
| Total assets | at 2019-12-31 | $3.9m | us-gaap:Assets |
| Total liabilities | at 2019-12-31 | $274.7k | us-gaap:Liabilities |
| Shareholders' equity | at 2019-12-31 | $3.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 10,804 characters.

*This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying condensed consolidated financial statements and notes included in this report. This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which include, without limitation, statements about the market for our technology, our strategy, competition, expected financial performance and capital raising efforts, all information disclosed under Item 3 of this Part I, and other aspects of our business identified in our most recent annual report on Form 10-K filed with the Securities and Exchange Commission on June 27, 2019 and in other reports that we file from time to time with the Securities and Exchange Commission. Any statements about our business, financial results, financial condition and operations contained in this Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,” or similar expressions are intended to identify forward-looking statements. Our actual results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors, including the risk factors described under Item 1A of our Annual Report on Form 10-K for the year ended March 31, 2019. We undertake no obligation to update publicly any forward-looking statements for any reason, except as required by law, even as new information becomes available or events occur in the future.*

### Company Overview

We are a development-stage medical device company focused on the design, development and eventual commercialization of an innovative insulin pump to address shortcomings and problems represented by the relatively limited adoption of currently available pumps for insulin dependent people with diabetes. We have developed a hardware technology allowing people with insulin-dependent diabetes to receive their daily insulin in two ways, through a continuous “basal” delivery allowing a small amount of insulin to be in the blood at all times and a “bolus” delivery to address meal time glucose input and to address when the blood glucose level becomes excessively high. By addressing the time and effort required to effectively treat their condition, we believe we can address the less technically savvy, less motivated part of the market.

We have not completed development of, or obtained U.S. Food and Drug Administration clearance for, our insulin pump, and we have therefore not generated any revenues from product sales. Our net losses were $1.1 million and $3.4 million for the three and nine months ended December 31, 2019, respectively. As of December 31, 2019, we had working capital of $3.5 million and an accumulated deficit of $6.7 million.

Historically, we have financed our operations principally through private placements of our common stock. Although it is difficult to predict our future liquidity requirements, based upon our current operating plan, we do not have sufficient cash to meet our projected operating requirements and will need to raise additional capital during the next twelve months through the sale of additional equity or debt securities to support our future operations. If we are unable to secure additional capital, we may be required to curtail our product development initiatives and take additional measures to reduce costs.

### Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make certain estimates and judgments that affect the reported amounts of assets, liabilities, and expenses. On an ongoing basis we make these estimates based on our historical experience and on assumptions that we consider reasonable under the circumstances. Actual results may differ from these estimates, and reported results could differ under different assumptions or conditions. Our significant accounting policies and estimates are disclosed in Note 1 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended March 31, 2019. As of December 31, 2019, there have been no material changes to our significant accounting policies and estimates, except that we adopted Financial Accounting Standards Board Accounting Standards Update No. 2016-02 effective April 1, 2019, as discussed in Note 1 of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

### Results of Operations

The results of operations for the three and nine months ended December 31, 2019 and 2018 were:

| Operating expenses | Three Months Ended December 31, 2019 | December 31, 2018 | Nine Months Ended December 31, 2019 | December 31, 2018 |
| --- | ---: | ---: | ---: | ---: |
| 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 | 1,135,848 | 750,560 | 3,431,429 | 1,554,748 |
| Operating loss | (1,135,848) | (750,560) | (3,431,429) | (1,554,748) |
| Interest income | 2,331 | 11,355 | 28,148 | 22,203 |
| Net loss | $(1,133,517) | $(739,205) | $(3,403,281) | $(1,532,545) |

#### Operating Expenses:

Research and development expenses include costs related to personnel, stock-based compensation, product development and patent filings. Research and development expenses increased by $103,232 and $936,916 for the three and nine months ended December 31, 2019, respectively, as compared with the comparable prior-year periods. The increases for the three- and nine-month periods ended December 31, 2019 were primarily attributable to increased product development, personnel, consulting and stock-based compensation expenses. During fiscal 2020, we hired additional employees and engaged with additional consultants to accelerate the development of our product, and we incurred increased product tooling and prototyping expenses. We expect research and development expenses to continue to increase in the future as we add personnel and consulting resources and incur increased tooling expenses to continue the development of our product to achieve commercialization.

General and administrative expenses consist primarily of personnel, rent, stock-based compensation, legal and accounting fees and other administrative expenses. General and administrative expenses for the three and nine months ended December 31, 2019 increased by $282,056 and $939,765, respectively, as compared with the comparable prior-year periods. The increases for the three- and nine-month periods ended December 31, 2019 were primarily attributable to increases in personnel and professional services and stock-based compensation expenses, as well as expenses incurred in 2019 for the preparation of a selling shareholders registration statement related to a private placement of our common stock. We expect general and administrative expenses to increase in the future as we expect to hire additional employees to staff our administrative functions and incur increased facilities and professional services costs.

#### Interest Income:

Interest income decreased by $9,024 and increased by $5,945 for the three and nine months ended December 31, 2019, respectively, as compared with the comparable prior-year periods. The decrease for the three months ended December 31, 2019 was primarily due to lower average cash balances as compared with the prior year period. The increase for the nine months ended December 31, 2019 was attributable to higher average cash balances, as a result of our equity offering in 2018.

### Liquidity and Capital Resources

The following table summarizes our cash flows for the nine months ended December 31, 2019 and 2018:

|  | 2019 | 2018 |
| --- | ---: | ---: |
| Cash used in operating activities | $(2,776,998) | $(1,106,941) |
| Cash used in investing activities | (58,278) | (55,058) |
| Cash provided by financing activities | — | 4,003,199 |
| Net change in cash and cash equivalents | (2,835,276) | 2,841,200 |
| Cash and cash equivalents at beginning of period | 6,553,768 | 4,296,676 |
| Cash and cash equivalents at end of period | $3,718,492 | $7,137,876 |

As we are still a development-stage entity, we have not yet generated revenues or achieved profitability, and expect to continue to incur cash outflows from operations. We expect that our research and development and general and administrative expenses will continue to increase and, as a result, we will need to generate significant product revenues to achieve profitability. We have historically raised capital through equity offerings of our common stock, and we expect to continue to raise capital through future equity or debt offerings in order to finance our operations.

We need to raise additional capital to fund our operations, but there can be no assurance that such funding will be available to us, when needed or on favorable terms. The failure to raise capital when needed could have a material adverse effect on our business and financial condition, including requiring us to reduce our operating costs and other expenditures related to our product development efforts, including reductions of personnel, salaries, consulting fees and capital expenditures. Alternatively, or in addition to such potential measures, we may elect to implement such cost reduction actions as we determine are necessary and in our best interests.

#### Net Cash Used in Operating Activities:

We used $2,776,998 of cash to fund operating activities during the nine months ended December 31, 2019, compared with $1,106,941 during the comparable period in 2018. Increased cash usage during 2019 was due to our increased net loss primarily due to increased operating expenses to fund our research and development activities.

#### Net Cash Used in Investing Activities:

We used $58,278 and $55,058 of cash to purchase property and equipment during the nine months ended December 31, 2019 and 2018, respectively.

#### Net Cash Used in Financing Activities:

We had no financing activities during the nine months ended December 31, 2019. For the nine months ended December 31, 2018, cash of $4,003,199 provided by financing activities was primarily attributable to the net proceeds of $3,983,915 from the issuance of common stock in a private placement and $19,800 of proceeds from the sale of our common stock.

## Controls and procedures

As filed, 3,978 characters.

#### Disclosure Controls and Procedures.

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our management, including our Chief Executive Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, our management concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report, as noted below in management’s report on internal control over financial reporting.

#### Changes in Internal Control over Financial Reporting.

During the three months ended December 31, 2019, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

#### Management’s Report on Internal Control over Financial Reporting

Our management assessed the effectiveness of our internal control over financial reporting as of March 31, 2019. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on its evaluation, our management concluded that there were material weaknesses in our internal control over financial reporting and concluded that our internal controls over financial reporting were not effective as of March 31, 2019. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses related to inadequate internal controls over financial reporting, and the lack of segregation of duties in our financial reporting process. In addition, prior to December 31, 2019, we did not have a separately designated audit committee or independent director.

During the nine months ended December 31, 2019, we began implementing a remediation plan to address the material weaknesses identified in our internal controls during the year ended March 31, 2019. These remediation efforts are focused on:

- Enhancing monitoring and review controls over financial reporting and disclosures;
- Enhancing review and approval controls around transaction processing;
- Ensuring adequate segregation of duties; and
- Enhancing and maintaining written policies and procedures for accounting and financial reporting.

In April 2019, we hired a full-time accounting manager to manage our accounting and financial reporting functions. In addition, in August 2019, we engaged a contract chief financial officer (CFO) who has significant experience as a public-company CFO and is a certified public accountant. We believe that the addition of these qualified finance professionals will enable us to remediate the identified material weaknesses during the fiscal year ending March 31, 2020. In addition, in December 2019 and January 2020, our Board appointed two new independent directors, and appointed each director to chair our newly formed audit and compensation committees. The director appointed to chair our audit committee is our audit committee financial expert. We expect that the new independent directors will contribute to our efforts to improve our internal controls.

## Risk factors

As filed, 403 characters.

We face many significant risks in our business, some of which are unknown to us and not presently foreseen. These risks could have a material adverse impact on our business, financial condition and results of operations in the future. We disclosed a number of material risks under Item 1A of our Annual Report on Form 10-K for the year ended March 31, 2019, which we filed with the SEC on June 27, 2019.

Filed Feb 13, 2020.
Source: SEC EDGAR, the filing index for accession 0001019056-20-000112. Last ingested by Listed: Nov 11, 2026, 02:48 ET. No prices; not investment advice.