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Item 7. Management’s Discussion and Analysis

2023-06-26 compared with 2022-06-28 · 235 added, 222 removed, 23 unchanged (95% of the section changed)

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.

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,

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, or the Report.

Management’s Discussion and Analysis of Financial Condition and Results of Operations may

contain 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

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.

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.

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.

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

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 8 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.

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.

Recent Economic Disruptions

outbreak of the coronavirus disease 2019 (COVID-19) was declared a pandemic by the World Health Organization and a national emergency

government in March 2020.

This has negatively affected the U.S.

This negatively affected the U.S.

and global economy, disrupted global supply chains, significantly

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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.

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.

time, we implemented a teleworking policy for our employees and contractors to reduce on-site activity at our facility.

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.

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.

of Operations

The following discussion

should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Report.

and Development

While the U.S.

national emergency expired in May 2023 and substantially all closures and “shelter-in-place”

orders have ended, there can be no assurance that the COVID-19 pandemic will not impact our operational and financial performance in the

future, as the duration and spread of the pandemic and related actions taken by U.S.

and foreign government agencies to prevent disease

spread are uncertain, out of our control, and cannot be predicted.

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 cost pressures and recessionary fears have negatively impacted the global economy.

Since mid-2022,

Federal Reserve has addressed elevated inflation by increasing interest rates, as inflation remains elevated.

While we were recently

able to access the capital markets, 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,

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Research and development

Our research and development

expenses include personnel, materials and supplies and other costs associated with the development of our insulin pump product candidate.

Our research and development expenses include

personnel, consulting, testing, 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.

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.

Research and development, or R&D,

expenses increased in fiscal 2023 compared with fiscal 2022 primarily due to increases in engineering and operations personnel costs of

$1.8 million, stock-based compensation expenses of $0.6 million and materials and supplies expenditures of $0.4 million.

Our R&D employee

headcount increased to 34 at March 31, 2023 from 23 at March 31, 2022.

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.

and Administrative

These increases were partially offset by a $1.4 million decrease

in consulting costs, as we increased our engineering and operations headcount during fiscal 2023 and reduced our use of consultants as

we advanced the development of our pump product candidate.

R&D expenses included stock-based compensation expenses of approximately

$1.4 million and $0.8 million for fiscal 2023 and fiscal 2022, respectively.

We expect R&D expenses to continue to increase in fiscal

2024, as we complete the development of our pump product candidate, continue to engage third parties to test our product in preparation

of our FDA submission, hire additional engineering, quality assurance, and operations personnel and complete the development of a low-volume

manufacturing process.

General and Administrative

Years ended March 31,

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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.

General and administrative expenses

consist primarily of personnel and related overhead costs for marketing, finance, human resources and general management.

General and administrative, or G&A, expenses

decreased in fiscal 2023 compared with fiscal 2022 primarily as a result of decreased stock-based compensation expenses of $1.9 million,

personnel costs of $0.5 million and reduced consulting and professional services fees of $0.3 million.

The decreases were partially offset

by increased rent expenses of $0.2 million and increased travel costs of $0.2 million.

G&A expenses included stock-based compensation

expenses of approximately $1.4 million and $3.3 million for fiscal 2023 and fiscal 2022, respectively.

We expect G&A expenses to increase

in fiscal 2024, 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 fiscal 2024.

Interest Expense

Years ended March 31,

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Interest expense

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.

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

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

$ (2,752,229 )

Interest expense in fiscal year 2022

comprised interest accrued on our convertible promissory notes, including amortization of debt issuance costs, and our promissory (bridge)

We retired our outstanding convertible and bridge promissory notes in February 2022.

See Notes 5 and 6 to the consolidated financial

statements included in Item 8 of this Report for additional disclosure.

Liquidity and Going Concern

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, 2023 and 2022, we incurred net losses of approximately $13.9 million and $18.6 million,

respectively.

At March 31, 2023, we had a cash balance of $3.8 million and an accumulated deficit of approximately $48.5 million.

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 the financial statements included in Item 8 of this Report are issued.

Our 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 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 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

In May 2023, we completed a public offering of units, comprising shares of our common stock and warrants to purchase shares

of our common stock, for net proceeds of approximately $9.7 million.

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.

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.

If we are unable to secure additional capital timely, we may be required to curtail R&D

initiatives, reduce headcount and take additional measures to reduce costs in order to conserve our cash.

Purchase Obligations

Our primary purchase obligations include purchase

orders for machinery and equipment.

At March 31, 2023, we had outstanding purchase orders for machinery and equipment and related expenditures

of approximately $833,000.

In fiscal 2023, we used $11,011,644 in operating activities, which

primarily resulted from our net loss of $13,878,936 plus changes to operating assets and liabilities of $211,824, as adjusted for non-cash

charges and gains, which included $2,724,048 of stock-based compensation expenses, $202,669 for issuances of shares of our common stock

in exchange for services, depreciation and amortization expenses of $152,399, and other immaterial adjustments.

The changes in operating

assets and liabilities primarily related to the timing of payments to vendors.

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 $374,991, 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

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.

cash usage during fiscal 2022 was due to increased operating activities related to the development and eventual commercialization of

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.

Accounting Policies and Estimates

Our consolidated financial

statements are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP).

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.

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.

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.

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.

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

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.

For fiscal 2023 and fiscal 2022, cash used in investing activities

of $1,637,751 and $54,764, respectively, was for the purchase of property and equipment.

Cash provided by financing activities

for fiscal 2023 totaled $7,372,347 and was attributable to proceeds from the sale of shares of common stock in a registered direct offering

and issuance of warrants to purchase common stock in a private placement in May 2022, net of placement

agent fees and issuance costs .

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 and common stock purchase warrants in February 2022, $4,137,199

of net proceeds from the issuance of our convertible promissory 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.

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

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

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.

volatility is based on the historical volatility of our stock price.

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 .

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.

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.

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.

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.

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.

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.

Accounting Pronouncements

Note 1 to the consolidated financial statements in Item 8 of this Report for a full description of recent accounting pronouncements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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.

We account for our leases under ASC 842, 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

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 relevant recent accounting pronouncements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

Not required.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis