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 26, 2023 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, 2023. 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 inflationary risks, including the risk that the cost of certain of the Company’s 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 2024 refers to the fiscal year ending March 31, 2024). 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. 13 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 able to access the capital markets in May 2023 and 2022, 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. 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, 2023. As of June 30, 2023, there have been no material changes to our significant accounting policies and estimates. Results of Operations Research and Development Three months ended June 30, Change (dollar amounts in thousands) 2023 2022 2022 to 2023 Research and development $ 2,604 $ 2,222 $ 382 17.2 % Our research and development expenses include personnel, overhead 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 fiscal 2024 compared with the same period of fiscal 2023, primarily due to increased employee-related costs of approximately of $410,000, an increase of approximately $50,000 in stock-based compensation expense and in increase in materials costs of $177,000. These increases were partially offset by an approximately $255,000 decrease in consulting costs, as we have increased our employee headcount and completed development of our pump product. Our full-time R&D employee headcount increased to 34 at June 30, 2023 from 23 at June 30, 2022. R&D expenses included stock-based compensation expenses of approximately $366,000 and $316,000 for the three-months ended June 30, 2023 and June 30, 2022, respectively. We expect research and development expenses to remain consistent for the remainder of fiscal 2024. 14 General and Administrative Three months ended June 30, Change (dollar amounts in thousands) 2023 2022 2022 to 2023 General and administrative $ 1,147 $ 1,277 $ (130 ) (10.2 )% General and administrative expenses consist primarily of personnel and related overhead costs for finance, human resources, marketing and general management. General and administrative expenses, or G&A, decreased for the three months ended June 30, 2023 compared with the same period of 2022, primarily as a result of a decrease in stock-based compensation expenses of approximately $305,000 and consulting and professional services expenses of approximately $70,000, partially offset by increases in facility-related costs of approximately $137,000, employee-related costs of $80,000 and other administrative expenses. G&A expenses included stock-based compensation expenses of approximately $117,000 and $422,000 for the quarters ended June 30, 2023 and June 30, 2022, respectively. We expect G&A expenses to remain consistent for the remainder of fiscal 2024. 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 three months ended June 30, 2023 and year ended March 31, 2023, we incurred net losses of $3.7 million and $13.9 million, respectively. At June 30, 2023, we had a cash balance of approximately $10.0 million and an accumulated deficit of $52.2 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 $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. For the three months ended June 30, 2023, we used approximately $3,207,000 in operating activities, which primarily resulted from our net loss of approximately $3,737,000 and net changes in operating assets and liabilities of approximately $17,000, as adjusted for stock-based compensation expenses of approximately $484,000, depreciation and amortization expenses of approximately $58,000 and other immaterial adjustments. For the three months ended June 30, 2022, we used $2,675,000 in operating activities, which primarily resulted from our net loss of $3,499,000, as adjusted for changes to operating assets and liabilities of approximately $5,000, stock-based compensation expenses of approximately $739,000, approximately $51,000 for issuances of shares of common stock in exchange for services, depreciation and amortization expenses of approximately $29,000 and other immaterial adjustments. For the three months ended June 30, 2023 and 2022, cash used in investing activities of approximately $373,000 and $76,000 , respectively, was for the purchase of property and equipment. 15 Cash provided by financing activities of $9.7 million for the three months ended June 30, 2023 was attributable to net proceeds from the issuance of common stock and warrants in a public offering, net of underwriting fees and issuance costs. Cash provided by financing activities of $7.4 million for the three months ended June 30, 2022 was attributable to net proceeds from the issuance of common stock and warrants in a registered direct offering, net of placement agent fees and issuance costs. Purchase Obligations Our primary purchase obligations include purchase orders for machinery and equipment. At June 30, 2023, we had outstanding purchase orders for machinery and equipment and related expenditures of approximately $566,000. 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.