Modular Medical, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 Quarterly Report on Form 10-Q (this Report). This Report 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, 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 28, 2022 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 Report 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, 2022. These forward- looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors including, without limitation, the direct and indirect effects of coronavirus disease 2019, or COVID-19 as well as the Russian/Ukraine conflict and inflationary risks, including the risk that the cost of certain of the Company’s materials and product components is increasing, and related issues that may arise therefrom. Many of those factors are outside of our control and could cause actual results to differ materially from those expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. All subsequent written and oral forward-looking statements concerning other matters addressed in this Report and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Report. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise. 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 2023 refers to the fiscal year ending March 31, 2023). 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, substantial doubt about our ability to continue as a going concern for a period of at least one year from the date that the financial statements included in Item 1 of this Report are issued exists. Our 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 condensed consolidated financial statements in Item 1 of this Report and under Liquidity below. 16 COVID-19 and Macroeconomic Factors 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. Since March 2020, the jurisdiction in which we operate has issued “shelter-in-place” orders from time to time. We have complied with these orders, and, when such orders were in place, minimized business activities at our facility. We have implemented a teleworking policy for our employees and contractors to reduce on-site activity, as necessary. 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 U.S. Food and Drug Administration (FDA) for approval to commercialize our pump product. 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. We believe that as the COVID-19 pandemic evolves, the direct and indirect impacts of the pandemic on global macroeconomic conditions, as well as conditions specific to us, are becoming more difficult to isolate or quantify. In addition, these direct and indirect factors can make it difficult to isolate and quantify the portion of our costs that are a direct result of the pandemic and costs arising from factors that may have been influenced by the pandemic, such as supply chain constraints, rising inflation, and recessionary fears. We expect these factors and their effects on our operations may persist for a longer period, even after the COVID-19 pandemic has subsided. The continued spread of COVID-19 has also led to disruption and volatility in the global capital markets. The Russian invasion of Ukraine in February 2022 has led to further economic disruptions. Mounting inflationary costs pressures and recessionary fears have negatively impacted the global economy. During the third quarter of 2022, the U.S. Federal Reserve continued to aggressively address elevated inflation by increasing interest rates. The U.S. Federal reserve increased interest rates by 75 basis points in each of its meetings held in July, September and November 2022, 50 basis points in its meeting held in December 2022, and 25 basis points in its meeting held in February 2023, as inflation remains elevated. We were 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 II, Item 1A of this Report. 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, 2022. As of December 31, 2022, there have been no material changes to our significant accounting policies and estimates. 17 Results of Operations Research and Development December 31, Change 2022 2021 Fiscal 2022 to Fiscal 2023 Research and development – Three months ended $ 2,196,546 $ 1,849,399 $ 347,147 18.8 % Research and development – Nine months ended $ 6,804,069 $ 5,742,911 $ 1,061,158 18.5 % Our research and development expenses include personnel, consulting, product prototyping and other costs associated with the development and initial production of our insulin pump product. We expense research and development costs as they are incurred. Research and development, or R&D, expenses increased for the three and nine months ended December 31, 2022 compared with the same period of fiscal 2021, primarily due to increased engineering and operations personnel costs, prototype and production component and material costs and higher stock-based compensation expenses. The increases in R&D expenses were partially offset by a decrease in consulting costs, as we reduced our utilization of consultants, as we increased our employee headcount and the consultants completed development of aspects of our pump design and features. Our full-time R&D employee headcount increased to 32 at December 31, 2022 from 18 at December 31, 2021. R&D expenses included stock-based compensation expenses of $356,752 and $204,962 for the three months ended December 31, 2022 and 2021, respectively, and $1,034,674 and $459,989 for the nine months ended December 31, 2022 and 2021, respectively. We expect research and development expenses to remain comparable for the remainder of fiscal 2023, as we continue to advance the development of our pump product and develop our manufacturing process. General and Administrative December 31, Change 2022 2021 Fiscal 2022 to Fiscal 2023 General and administrative – Three months ended $ 1,161,351 $ 1,981,665 $ (820,314 ) (41.4 )% General and administrative – Nine months ended $ 3,502,029 $ 5,156,152 $ (1,654,123 ) (32.1 )% General and administrative expenses consist primarily of personnel and related overhead costs for finance, human resources, legal, marketing and general management. General and administrative, or G&A, expenses decreased for the three months ended December 31, 2022 compared with the same period of 2021, primarily as a result of decreased stock-based compensation, personnel and benefit costs and legal fees, which in fiscal 2022 related to our public offering and listing on the Nasdaq that was completed in February 2022. These decreases were partially offset by increased consulting and professional services fees. G&A expenses decreased for the nine months ended December 31, 2022 compared with the same period of 2021, primarily as a result of decreased stock-based compensation, personnel and benefit costs, consulting and legal fees and marketing costs. These decreases were partially offset by increased accounting fees, travel costs and office-related expenses. Our full-time G&A employee headcount increased to 3 at December 31, 2022 from 2 at December 31, 2021. G&A expenses included stock-based compensation expenses of $282,753 and $1,016,774 for the three months ended December 31, 2022 and 2021, respectively and $1,085,839 and $2,280,098 for the nine months ended December 31, 2022 and 2021, respectively. We expect G&A expenses to remain flat for the remainder of fiscal 2023. Liquidity and Capital Resources 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 nine months ended December 31, 2022, we incurred a net loss of approximately $10.3 million. For the years ended March 31, 2022 and 2021, we incurred net losses of approximately $18.6 million and $7.4 million, respectively. At December 31, 2022, we had a cash balance of approximately $7.7 million and an accumulated deficit of approximately $44.9 million. When considered with our current operating plan, these conditions raise substantial doubt about our ability to continue as a going concern for a period of at least one year from the date that of issuance of the consolidated financial statements included in Item 1 of this Report. Our consolidated financial statements do not include adjustments to the amounts and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern. Our 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, and we are currently seeking such additional financing. In May 2022, we completed a registered direct offering of securities for net proceeds of approximately $7.4 million. 18 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. During the nine months ended December 31, we made capital expenditures of approximately $574,000, as we have begun procuring equipment to develop a low-volume manufacturing production line to build our pump product to demonstrate and develop our manufacturing process. We expect to incur increased capital expenditures for the remainder of fiscal 2023. At December 31, 2022, we had outstanding, non-cancelable purchase orders for production equipment totaling $735,000, and we expect to receive and pay for this equipment over the following six months. 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. For the nine months ended December 31, 2022, we used $8,184,696 in operating activities, which primarily resulted from our net loss of $10,307,682, as adjusted for stock-based compensation expenses of $2,120,513, $150,412 for issuances of shares of common stock in exchange for services and depreciation and amortization expenses of $92,616, and increased by net changes in operating lease assets and liabilities of $37,761 and operating assets and liabilities $202,794 and other immaterial adjustments. For the nine months ended December 31, 2021, we used $7,128,787 in operating activities, which primarily resulted from our net loss of $14,058,154, increased for a non-cash gain on the PPP Note extinguishment of $368,780 and net changes in operating lease assets and liabilities of $34,422, as adjusted for changes to operating assets and liabilities of $1,197,988, a loss on debt extinguishment of $1,321,450 stock-based compensation expenses of $2,740,086, $388,021 for issuances of shares of common stock in exchange for services, $149,994 for issuable shares of common stock in exchange for services, depreciation and amortization expenses of $80,268 and interest expense of $1,454,762 for amortization of debt discount. For the nine months ended December 31, 2022 and 2021, cash used in investing activities of $573,066 and $22,779, respectively, was for the purchase of property and equipment. Cash provided by financing activities of $7,372,347 for the nine months ended December 31, 2022 was attributable to net proceeds from the issuance of common stock upon completion of an equity offering, net of underwriting fees and issuance costs. Cash provided by financing activities of $5,887,199 for the nine months ended December 31, 2021 was primarily attributable to $4,137,199 of net proceeds from the issuance of our convertible promissory notes, $250,000 from the sale of shares of common stock to officers of the Company and $1,500,000 from the issuance of a promissory bride note. Recently Issued Accounting Pronouncements Recently Issued Accounting Pronouncements are detailed in Note 1 in the Notes to the Condensed Consolidated Financial Statements included in Item 1 of this Report. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not required.