Modular Medical, Inc. 10-K

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 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 pre-revenue medical device company focused on the design, development and commercialization of innovative insulin pumps using modernized technology to increase pump adoption in the diabetes marketplace. Through the creation of a novel two-part patch pump, our initial product, the MODD1, 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 submitted a 510(k) premarket notification to the United States Food and Drug Administration (“FDA”) for our MODD1 insulin pump. In March 2024, we received comments from the FDA, and we are in the process of responding to those comments. In February 2024, we completed a firm commitment underwritten offering and issued and sold to the underwriter 9,090,910 shares of our common stock at a price of $1.10 per share (the 2024 Offering). We received aggregate proceeds of approximately $10,000,000 before deducting underwriting discounts and commissions and other offering expenses. We also granted the underwriter a 30-day option to purchase up to an additional 1,321,989 shares of common stock to cover over allotments, if any. In March 2024, the underwriter exercised this option in full and purchased the additional securities for additional aggregate proceeds to us of approximately $1,454,000, before deducting underwriting discounts and commissions and other offering expenses. 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. 38 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, at times, 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 2024 2023 2024 to 2023 Research and development $ 12,880 $ 9,062 $ 3,818 42.1 % Our research and development, or R&D, expenses include personnel, consulting, testing, materials and supplies, depreciation and amortization and other operational costs associated with the pre-FDA clearance production of our insulin pump product. We expense R&D costs as they are incurred. R&D expenses increased in fiscal 2024 compared with fiscal 2023 primarily due to increases in engineering and operations personnel costs of $1.6 million, consulting costs of $0.8 million, stock-based compensation expenses of $0.5 million and materials, supplies expenditures of $0.5 million and depreciation and amortization of $0.4 million. The increase in personnel costs was attributable to increased average headcount year over year, salary increases effected during fiscal 2024, payment of a bonus implemented in fiscal 2024 related to our 510(k) submission and higher payroll taxes. Our R&D employee headcount increased to 36 at March 31, 2024 from 34 at March 31, 2023. The increase in consulting costs was primarily driven by the utilization of consultants and outside testing and other firms in support of our FDA submission in January 2024. R&D expenses included stock-based compensation expenses of approximately $1.9 million and $1.4 million for fiscal 2024 and fiscal 2023, respectively. The increase in stock-based compensation costs was primarily attributable to the granting of stock options under our bonus program for our FDA submission; these options were granted in October 2023 and expensed over an expected term of four months. We expect R&D expenses will increase in fiscal 2025, as we continue to engage third parties to support our responses to the FDA on our MODD1 510(k) submission, hire additional engineering, quality assurance, and operations personnel, bring-up our manufacturing process at our medical device contract manufacturer and commence the commercialization of our product in late fiscal 2025. 39 General and Administrative Year ended March 31, Year-over-Year Change 2024 2023 2024 to 2023 General and administrative $ 4,649 $ 4,816 $ (167 ) (3.5 )% General and administrative, or G&A, expenses consist primarily of personnel and related overhead costs for marketing, finance, human resources, facilities and general management. G&A expenses decreased in fiscal 2024 compared with fiscal 2023 primarily as a result of reductions in stock-based compensation expense of $0.5 million, consulting fees of $0.4 million and reduced personnel costs of $0.2 million. The decreases were partially offset by increased professional services expenses of $0.4 million, which was primarily attributable to higher investor relations and financing-related costs, facilities-related expenses of $0.3 million due to our move to a larger facility in the fourth quarter of fiscal 2023, marketing expense of $0.2 million for a participant study for our product and costs incurred for initial trade show activities. G&A expenses included stock-based compensation expenses of approximately $0.8 million and $1.3 million for fiscal 2024 and fiscal 2023, respectively. We expect G&A expenses to increase in fiscal 2025, as we expect to increase headcount, as we expand our organization and implement systems to support our anticipated growth and prepare for the commercialization of our product in late fiscal 2025. Liquidity and Capital Resources; Changes in Financial Condition 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, 2024 and 2023, we incurred net losses of approximately $17.5 million and $13.9 million, respectively. At March 31, 2024, we had a cash balance of $9.2 million and an accumulated deficit of approximately $66 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 continued research and development activities, 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. Recently, during the three months ended March 31 2024, we completed the 2024 Offering for net proceeds of approximately $10.3 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 $6.5 million (subject to availability on our shelf registration statement) through an “at the market offering” program under which Leerink will act as sales agent or principal. In January 2024, we sold 153,879 shares of common stock for net proceeds of approximately $0.3 million under the ATM Agreement. We suspended sales under the ATM Agreement due to the 2024 Offering, and we may resume sales under the ATM during fiscal 2025. In addition, from December 2023 to April 2024, we received a total of approximately $0.9 million of proceeds from the exercise of common stock purchase warrants issued in a public offering we completed in May 2023. 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, 2024, we had outstanding purchase orders for machinery and equipment and related expenditures of approximately $1.1 million. In December 2023, we signed a device integration agreement with a provider of connected-care and remote monitoring diabetes technology solutions. As of March 31, 2024, we had a remaining obligation under the device integration agreement of approximately $400,000 over three years for technology license fees. 40 Liquidity In fiscal 2024, we used approximately $14.0 million in operating activities, which primarily resulted from our net loss of approximately $17.5 million less changes to operating assets and liabilities of approximately $0.4 million, and as adjusted for non-cash charges and gains, which included approximately $2.7 million of stock-based compensation expenses, depreciation and amortization expenses of approximately $0.4 million, and other immaterial adjustments. The changes in operating assets and liabilities primarily related to the timing of payments to vendors. In fiscal 2023, we used approximately $11.0 million in operating activities, which primarily resulted from our net loss of approximately $13.9 million plus changes to operating assets and liabilities of approximately $0.2 million, as adjusted for non-cash charges and gains, which included stock-based compensation expenses of approximately $2.7 million, approximately $0.2 million for issuance of shares of our common stock in exchange for services, depreciation and amortization expense of approximately $0.2 million and other immaterial adjustments. The changes in operating assets and liabilities primarily related to the timing of payments to vendors. For fiscal 2024 and fiscal 2023, cash used in investing activities of approximately $1.7 million and $1.6 million, respectively, was for the purchase of property and equipment. Cash provided by financing activities for fiscal 2024 totaled approximately $21.1 million and was primarily attributable to proceeds of approximately $20.1 million from the sale of shares of common stock in a registered direct offering and issuance of warrants to purchase common stock in private placements that closed in May 2023 and February 2024, net of underwriter fees and issuance costs, proceeds of approximately $0.7 million for the exercise of common stock purchase warrants and proceeds of approximately $0.3 from the sale of shares under the ATM agreement . Cash provided by financing activities for fiscal 2023 totaled approximately $7.4 million and was attributable to approximately $7.4 million of net proceeds from a registered direct offering of our common stock and common stock purchase warrants in May 2022, net of placement agent fees and issuance costs . 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 periodically issue stock options, restricted stock units and stock awards to employees and non-employees. We account for such awards based on Financial Accounting Standards Board Accounting Standards Codification (ASC) 718, whereby the value of the award is measured on the date of grant and recognized as compensation expense on a straight-line basis over the requisite service period, usually the vesting period. With respect to performance-based awards, we assess the probability of achieving the requisite performance criteria before recognizing compensation expense. We estimate the fair value of stock options on the date of grant using the Black-Scholes-Merton Option Pricing (Black Scholes) model which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the options, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes model. The assumptions used in the Black-Scholes model could materially affect compensation expense recorded in future periods. 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. 41 We account for uncertain tax positions in accordance with 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 applicable. 42