Modular Medical, Inc. 10-K

ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and related notes included in this Annual Report on Form 10-K. Management’s Discussion and Analysis of Financial Condition and Results of Operations may contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk, uncertainties and other factors. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. Actual results could differ materially because of the factors discussed in Part I, Item 1A, These risks and uncertainties may cause actual results to differ materially from those discussed in the forward-looking statements. Our fiscal year ends on March 31 of each calendar year. Each reference to a fiscal year in this Report, refers to the fiscal year ended March 31 of the calendar year indicated (for example, fiscal 2022 refers to the fiscal year ending March 31, 2022). Unless the context requires otherwise, references to “we,” “us,” “our,” and the “Company” refer to Modular Medical, Inc. and its consolidated subsidiary. Company Overview We are a development-stage medical device company focused on the design, development and commercialization of an innovative insulin pump using modernized technology to increase pump adoption in the diabetes marketplace. Through the creation of a novel two-part patch pump, our MODD1 product, we seek to fundamentally alter the trade-offs between cost and complexity and access to the higher standards of care that presently-available insulin pumps provide. By simplifying and streamlining the user experience from introduction, prescription, reimbursement, training and day-to-day use, we seek to expand the wearable insulin delivery device market beyond the highly motivated “super users” and expand the category into the mass market. The product seeks to serve both the type 1 and the rapidly growing, especially in terms of device adoption, type 2 diabetes markets. Historically, we have financed our operations principally through private placements and public offerings of our common stock and sales of convertible promissory notes. Based on our current operating plan, we believe we have adequate cash for at least the next 12 months. Our long-term ability to continue as a going concern depends on our ability to raise additional capital, through the sale of equity or debt securities, to support our future operations. If we are unable to secure additional capital, we will be required to curtail our research and development initiatives and take additional measures to reduce costs. We have provided additional disclosure in Note 1 to the consolidated financial statements in Item 1 of this Report and under Liquidity below. 39 Impacts of COVID-19 The global outbreak of the coronavirus disease 2019 (COVID-19) was declared a pandemic by the World Health Organization and a national emergency by the U.S. government in March 2020. This has negatively affected the U.S. and global economy, disrupted global supply chains, significantly restricted travel and transportation, resulted in mandated closures and orders to “shelter-in-place” and created significant disruption of the financial markets. The full extent of the COVID-19 impact on our operational and financial performance will depend on future developments, including, without limitation, the duration and spread of the pandemic and related actions taken by U.S. and foreign government agencies to prevent disease spread, all of which are uncertain, out of our control, and cannot be predicted. In March 2020, Santa Diego County in California, where we are based, and the state of California issued “shelter-in-place” orders (the Orders). We complied with the Orders and minimized business activities at our San Diego facility since March 2020 until May 2021. During that time, we implemented a teleworking policy for our employees and contractors to reduce on-site activity at our facility. In May 2021, our employees and certain contractors returned to work in our office. We have and continue to experience longer lead times for certain components used to manufacture initial quantities of our products for our submission to the FDA. We remain diligent in continuing to identify and manage risks to our business given the changing uncertainties related to COVID-19. While we believe that our operations personnel are currently in a position to build an adequate supply of products for our FDA submission, we recognize that unpredictable events could create difficulties in the months ahead. We may not be able to address these difficulties in a timely manner, which could delay our submission to the FDA and negatively impact our business, results of operations, financial condition and cash flows. The continued spread of COVID-19 has also led to disruption and volatility in the global capital markets. We were recently able to raise additional capital through equity offerings in February 2022 and May 2022, however, we will need to raise additional capital to commercialize our pump product candidate and support our operations in the future. We may be unable to access the capital markets, and additional capital may only be available to us on terms that could be significantly detrimental to our existing stockholders and to our business. For additional information on risks that could impact our future results, please refer to “Risk Factors” in Part I, Item 1A of this Report. Results of Operations The following discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Report. Research and Development Years ended March 31, Year-over-Year Change 2022 2021 2022 to 2021 Research and development $ 7,729,240 $ 4,083,303 $ 3,645,937 89.3 % Our research and development expenses include personnel, materials and supplies and other costs associated with the development of our insulin pump product candidate. We expense research and development costs as they are incurred. Research and development, or R&D, expenses increased in fiscal 2022 compared with fiscal 2021 primarily due to increased consulting costs, engineering and operations personnel, stock compensation expense and materials and supplies expenditures. Our R&D employee headcount increased to 23 at March 31, 2022, from 17 at March 31, 2021. R&D expenses included stock-based compensation expenses of $758,938 and $390,045 for fiscal 2022 and fiscal 2021, respectively. We expect R&D expenses to continue to increase in fiscal 2023, as we complete the development of our pump product candidate, engage third parties to test our product and develop a low-volume manufacturing process. 40 General and Administrative Years ended March 31, Year-over-Year Change 2022 2021 2022 to 2021 General and administrative $ 7,197,162 $ 3,253,412 $ 3,943,750 121.2 % General and administrative expenses consist primarily of personnel and related overhead costs for marketing, finance, human resources and general management. General and administrative expenses, or G&A, increased in fiscal 2022 compared with fiscal 2021 primarily as a result of increased personnel and consulting costs, stock-based compensation expenses and professional services fees, primarily related to our financing activities, including our public offering that was completed in February 2022. G&A expenses included stock-based compensation expenses of $3,272,964 and $837,533 for fiscal 2022 and fiscal 2021, respectively. We expect G&A expenses to continue to increase in fiscal 2023, as we will increase headcount as we expand our organization to support our anticipated growth and prepare for the expected commencement of the commercialization of our product in late fiscal 2023. Interest Expense Years ended March 31, Year-over-Year Change 2022 2021 2022 to 2021 Interest expense $ 2,752,229 $ 39,791 $ 2,712,438 6,816.7 % Interest expense consisted of interest expense incurred from our convertible promissory notes, including amortization of debt issuance costs, and our promissory (bridge) note. We retired our outstanding debt in February 2022. See Notes 5 and 6 to the consolidated financial statements included in Item 8 of this Report for additional disclosure. Liquidity As a development-stage enterprise, we do not currently have revenues to generate cash flows to cover operating expenses. Since our inception, we have incurred operating losses and negative cash flows in each year due to costs incurred in connection with R&D activities and G&A expenses associated with our operations. For the years ended March 31, 2022 and 2021, we incurred net losses of approximately $18.6 million and $7.4 million, respectively. At March 31, 2022, we had a cash balance of $9.1 million and an accumulated deficit of approximately $34.6 million. In May 2022, we completed a registered direct offering of securities for net proceeds of approximately $7.4 million. Our operating needs include the planned costs to operate our business, including amounts required to fund research and development activities, including clinical studies, working capital and capital expenditures. Our future capital requirements and the adequacy of our available funds will depend on many factors, including, without limitation, our ability to successfully commercialize our product, competing technological and market developments, and the need to enter into collaborations with other companies or acquire other companies or technologies to enhance or complement our product offerings. If we are unable to secure additional capital timely, we will be required to curtail our research and development initiatives and take additional measures to reduce costs in order to conserve our cash. We believe that our cash will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months. In fiscal 2022, we used $10,259,528 in operating activities, which primarily resulted from our net loss of $18,632,761 less changes to operating assets and liabilities of $420,600, as adjusted for non-cash charges and gains, which included stock-based compensation expenses of $4,031,902, amortization of debt issuance costs of $1,833,618, a loss on debt extinguishment of $1,321,450, accrued interest of $666,338, $395,950 for issuances of shares of common stock in exchange for services, and depreciation and amortization expenses of $117,490, partially offset by a gain on PPP note forgiveness of $368,780 and net changes in lease assets and liabilities of $45,610 and other immaterial adjustments. The changes in operating assets and liabilities primarily related to the timing of payments to vendors. In fiscal 2021, we used $5,908,662 in operating activities, which primarily resulted from our net loss of $7,377,976 and changes to operating assets and liabilities of $61,147, as adjusted for non-cash charges and gains, which included stock-based compensation expenses of $1,227,578, $68,880 for issuance of shares of common stock in exchange for services, $109,731 related to the lease right-of-use asset and liability and depreciation and amortization expenses of $111,015. Such changes in assets and liabilities primarily related to the timing of payments to vendors. Increased cash usage during fiscal 2022 was due to increased operating activities related to the development and eventual commercialization of our product. 41 In fiscal 2022, cash used in investing activities of $54,764 was for the purchase of property and equipment. We used $109,669 of cash to purchase property and equipment in fiscal 2021. Cash provided by financing activities for fiscal 2022 totaled $17,922,199 and was attributable to $13,535,000 of net proceeds from a public offering of our common stock in February 2022, $4,137,199 of net proceeds from the issuance of convertible notes, $2,100,000 of net proceeds from issuance of a bridge promissory note, and $250,000 of proceeds from a private placement of common stock to officers, which were partially offset by the $2,100,00 repayment of the bridge promissory note. Our financing activities for fiscal 2021 totaled $4,364,662 and were attributable to $1,785,882 of net proceeds from the sale of shares of common stock in a private placement, $368,760 of proceeds from the PPP Note and $2,210,00 of gross proceeds from the issuance of our convertible notes in the quarter ended March 31, 2021. Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). Note 1 to the consolidated financial statements in Item 8 of this Report describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. We have identified the accounting policies below as some of the more critical to our business and the understanding of our results of operations. These policies may involve estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Although we believe our judgments and estimates are appropriate, actual future results may differ from our estimates, and if different assumptions or conditions were to prevail, the results could be materially different from our reported results. Use of estimates The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Estimates may include those pertaining to accruals, stock-based compensation and income taxes. Actual results could materially differ from those estimates. Stock-based compensation We recognize stock-based compensation for stock options granted to employees and non-employees on a straight-line basis over the requisite service period, usually the vesting period, based on the grant-date fair value. We estimate the value of stock options on the date of grant using the Black-Scholes pricing model. The determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the option price, as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards, and projected stock option exercise behaviors. Income taxes We determine deferred tax assets and liabilities based upon the differences between the financial statement and tax bases of our assets and liabilities using tax rates in effect for the year in which we expect the differences to affect taxable income. A valuation allowance is established for any deferred tax assets for which it is more likely than not that all or a portion of the deferred tax assets will not be realized. Based on the available information and other factors, management believes it is more likely than not that our federal and state net deferred tax assets will not be fully realized, and we have recorded a full valuation allowance. We account for uncertain tax positions in accordance with Financial Accounting Standards Board Accounting Standards Codification (ASC) Topic 740, Income Taxes . When tax returns are filed, it is likely that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the consolidated financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest associated with unrecognized tax benefits is classified as interest expense and penalties are classified in general and administrative expenses in the consolidated statements of operations. 42 Leases We account for our leases under Accounting Standards Update (ASU) No. 2016-02, Leases (ASC 842), and related ASUs, which provide supplementary guidance and clarifications. Under ASC 842, all significant lease arrangements are generally recognized at lease commencement. Operating lease right-of-use (ROU) assets and lease liabilities are recognized at the commencement date. A ROU asset and corresponding lease liability are not recorded for leases with an initial term of 12 months or less (short-term leases), and we recognize lease expense for these leases as incurred over the lease term. ROU assets represent our right to use an underlying asset during the reasonably certain lease terms, and lease liabilities represent our obligation to make lease payments arising from the lease. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. We use our incremental borrowing rate, based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments related to initial direct cost and prepayments and excludes lease incentives. Lease expense is recognized on a straight-line basis over the lease term. Off-Balance Sheet Arrangements We do not maintain any off-balance sheet arrangements or obligations that are reasonably likely to have a material current or future effect on our financial condition, results of operations, liquidity or capital resources. Contractual Obligations As a “smaller reporting company,” as defined by Item 10 of Regulation S-K, we are not required to provide the information requested by paragraph (a)(5) of this Item. Recent Accounting Pronouncements See Note 1 to the consolidated financial statements in Item 8 of this Report for a full description of recent accounting pronouncements. ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not required. 43