Item 7. Management’s Discussion and Analysis
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, 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
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 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 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. 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.
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Recent Economic Disruptions
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 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. 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,
the U.S. 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,
Year-over-Year Change
2023
2022
2023 to 2022
Research and development
$ 9,061,744
$ 7,729,240
$ 1,332,504
17.2 %
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.
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. 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.
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General and Administrative
Years ended March 31,
Year-over-Year Change
2023
2022
2023 to 2022
General and administrative
$
4,816,567
$
7,197,162
$
(2,380,595
)
(33.1
)%
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,
Year-over-Year Change
2023
2022
2023 to 2022
Interest expense
$ —
$ 2,752,229
$ (2,752,229 )
(100 )%
Interest expense in fiscal year 2022
comprised interest accrued on our convertible promissory notes, including amortization of debt issuance costs, and our promissory (bridge)
note. 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. 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 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
operations. 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 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.
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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
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. The expected
volatility is based on the historical volatility of our stock price.
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.
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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.
Leases
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
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 relevant recent accounting pronouncements.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Not required.
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