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. In January 2024, we made the premarket submission of our MODD1 next-generation insulin pump to the U.S. Food and Drug Administration (the FDA) for 510(k) clearance. We expect the FDA to provide initial feedback on our submission during the quarter ending June 30, 2024. 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 this Report are issued exists. Our ability to continue as a going concern depends on our ability to raise additional capital, likely 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. 14 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. Wars and acts of terrorism have 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 December 31, 2023, there have been no material changes to our significant accounting policies and estimates. Results of Operations Research and Development December 31, Change (dollar amounts in thousands) 2023 2022 2022 to 2023 Research and development – Three months ended $ 3,619 $ 2,197 $ 1,422 64.7 % Research and development – Nine months ended $ 9,204 $ 6,804 2,400 35.3 % Our research and development expenses include personnel and related costs, materials and other costs associated with the development and initial production of our insulin pump products. We expense research and development costs as they are incurred. Research and development, or R&D, expenses increased for the three months ended December 31, 2023 compared with the same period of 2022, primarily due to increases in employee-related costs of approximately $348,000, stock-based compensation of approximately $324,000 and consulting costs of approximately $766,000. The increase in consulting costs was primarily attributable to pre-submission testing and related activities performed during the third quarter of fiscal 2024 in preparation for our 510(k) submission to the FDA, which was completed in January 2024. R&D expenses increased for the nine months ended December 31, 2023 compared with the same period of 2022, primarily due to increases in employee-related costs of approximately $1,134,000, consulting costs of $580,000, stock-based compensation expense of $385,000 and materials costs of approximately $300,000. The increase in material costs was primarily attributable to pre-submission activities, as we began producing units of our MODD1 pump product during fiscal 2024 in anticipation of our 510(k) submission to the FDA. The increase in consulting costs was primarily attributable to third-party testing costs incurred in fiscal 2024 in anticipation of our 510(k) submission to the FDA, which was completed in January 2024. Our R&D employee headcount increased to 36 at December 31, 2023 from 32 at December 31, 2022. R&D expenses included stock-based compensation expenses of approximately $681,000 and $357,000 for the three-months ended December 31, 2023 and 2022, respectively, and $1,420,000 and $1,035,000 for the nine months ended December 31, 2023 and 2022, respectively. We expect research and development expenses to decrease for the remainder of fiscal 2024, as we made our 510(k) submission of our MODD-1 insulin pump to the FDA in January 2024. 15 General and Administrative December 31, Change (dollar amounts in thousands) 2023 2022 2022 to 2023 General and administrative – Three months ended $ 1,650 $ 1,161 $ 489 42.1 % General and administrative – Nine months ended $ 4,006 $ 3,502 $ 504 14.4 % General and administrative expenses consist primarily of costs for personnel, finance, human resources, marketing, and general management. General and administrative, or G&A, expenses increased for the three months ended December 31, 2023 compared with the same period of the prior year, primarily as a result of increases in legal and other professional services fees of $143,000, rent and other facility-related expenses of approximately $130,000, marketing-related expenses of approximately $113,000, employee-related costs of approximately $112,000, depreciation and amortization expense of approximately $97,000, stock-based compensation of approximately $30,000, accounting costs of approximately $22,000 and other expense increases, as partially offset by a decrease in consulting expenses of approximately $169,000. G&A expenses increased for the nine months ended December 31, 2023 compared with the same period of the prior year, primarily as a result of increases in facility-related costs of approximately $383,000, employee-related costs of approximately $272,000, depreciation expense of approximately $190,000, marketing-related expenses of approximately $193,000, legal and other professional services fees of $147,000, and other expenses, as partially offset by decreases in stock-based compensation expenses of approximately $464,000 and consulting services expenses of approximately $415,000. Our G&A employee headcount increased to four at December 31, 2023 from three at December 31, 2022. G&A expenses included stock-based compensation expenses of approximately $313,000 and $283,000 for the three months ended December 31, 2023 and 2022, respectively, and approximately $622,000 and $1,086,000 for the nine months ended December 31, 2023 and 2022, respectively. We expect G&A expenses to decrease 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 from operations 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, 2023 and year ended March 31, 2023, we incurred net losses of $13.2 million and $13.9 million, respectively. At December 31, 2023, we had a cash balance of approximately $2.0 million and an accumulated deficit of $61.4 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 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. On November 22, 2023, we entered into a Sales Agreement (the ATM Agreement) with Leerink Partners LLC (Leerink) under which we may offer and sell, from time to time at our sole discretion, shares of our common stock, for aggregate gross proceeds of up to $6,500,000 through an “at the market offering” program under which Leerink will act as sales agent or principal. The ATM Agreement provides that Leerink will be entitled to compensation for its services equal to 3.0% of the gross proceeds from sales of any shares of common stock under the ATM Agreement. In January 2024, we sold 153,879 shares of common stock for net proceeds of approximately $278,000 under the ATM Agreement. In addition, in January 2024, we received a total of approximately $550,000 of proceeds from the exercise of warrants to purchase 445,744 shares of our common stock. 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 o ff erings. 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. 16 For the nine months ended December 31, 2023, we used approximately $10.5 million in operating activities, which primarily resulted from our net loss of approximately $13.2 million, as adjusted for net changes in operating assets and liabilities of approximately $0.4 million and non-cash items, including stock-based compensation expenses of approximately $2.0 million, depreciation and amortization expenses of approximately $0.3 million and other immaterial adjustments. For the nine months ended December 31, 2022, we used approximately $8.2 million in operating activities, which primarily resulted from our net loss of $10.3 million, as adjusted for changes to operating assets and liabilities of approximately $0.2 million and non-cash items, including stock-based compensation expenses of approximately $2.1 million, issuances of shares of common stock in exchange for services of approximately $0.1 million and depreciation and amortization expenses of approximately $0.1 million. For the nine months ended December 31, 2023 and 2022, cash used in investing activities of approximately $1.2 million and $0.6 million, respectively, was for the purchase of property and equipment. Cash provided by financing activities for the nine months ended December 31, 2023 was attributable to $9.7 million of net proceeds from the issuance of common stock and warrants in a public offering, which closed in May 2023, and approximately $0.2 million of proceeds from the exercise of common stock warrants. Cash provided by financing activities of $7.4 million for the nine months ended December 31, 2022 was attributable to net proceeds from the issuance of common stock and warrants in a registered direct offering, which closed in May 2022. Purchase Obligations Our primary purchase obligations include purchase orders for machinery and equipment and software. At December 31, 2023, we had outstanding purchase orders for machinery and equipment and related expenditures of approximately $0.6 million. In December 2023, we signed a device integration agreement with a provider of connected-care and remote monitoring diabetes technology solutions for an obligation of approximately $0.6 million for technology integration and license fees over three years. Recently Adopted and Issued Accounting Pronouncements Recently Adopted and 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 As a smaller reporting company, we are not required to provide the information required by this item.