Modular Medical, Inc. 10-K

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Accounting Firm – Farber Hass Hurley LLP F-2 Consolidated Balance Sheets F-4 Consolidated Statements of Operations F-5 Consolidated Statements of Stockholders’ Equity F-6 Consolidated Statements of Cash Flows F-7 Notes to Consolidated Financial Statements F-8 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - OPEN To the Audit Committee and Stockholders of Modular Medical, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Modular Medical, Inc. (the “Company”) as of March 31, 2024 and 2023, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2024 and 2023, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Substantial Doubt about the Company’s Ability to Continue as a Going Concern The accompanying consolidated financial statements have been prepared to assume the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred losses from operations and needs to raise additional funds to meet its obligations and sustain its future operations until profitability is achieved. These circumstances raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. F- 2 Going Concern As described further in Note 1, the Company has incurred losses since inception, and expects to continue to incur operating losses for the foreseeable future and incur cash outflows from operations as it continues to invest in the development and subsequent commercialization of its product. The Company expects that its research and development and general and administrative expenses will continue to increase, and, as a result, the Company will need to generate significant product revenues to achieve profitability. These circumstances raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these consolidated financial statements are issued. We identified management’s assessment of the Company’s ability to continue as a going concern as a critical audit matter due to the inherent complexities and uncertainties related to the Company’s projections of operations. The primary procedures we performed to address this critical audit matter included: - We evaluated the reasonableness of key assumptions underlying management’s conclusion. - We evaluated that the disclosures included in the Form 10-K were complete and accurate and in accordance with accounting principles generally accepted in the United States of America. - We evaluated the impact of the Company’s existing financing arrangements and future capital needs over the next 12 months on its ability to continue as a going concern. Stock-Based Compensation As discussed in Note 5, during the year ended March 31, 2024, the Company granted options to purchase shares of its common stock to employees, directors and consultants. Management is required to analyze the fair value of each option granted and amortize it over its vesting period. We identified the valuation of stock-based compensation as a critical audit matter due to the significant judgments made by management when developing underlying assumptions regarding the fair value of the options. The primary procedures we performed to address this critical audit matter included: - We gained an understanding of Company’s processes and controls in place for determining the fair value of each granted option. - We evaluated the option price model management selected to determine the fair value, and analyzed the underlying data and assumptions used in the calculations. - We also recalculated the fair value of each option granted. /s/ Farber Hass Hurley LLP PCAOB Firm ID 223 We have served as the Company’s auditor since 2018. Chatsworth, California June 21, 2024 F- 3 Modular Medical, Inc. Consolidated Balance Sheets (In thousands, except par value) March 31, 2024 2023 ASSETS CURRENT ASSETS Cash and cash equivalents $ 9,232 $ 3,799 Prepaid expenses and other 465 147 Security deposit — 100 TOTAL CURRENT ASSETS 9,697 4,046 Property and equipment, net 2,975 1,721 Right of use assets, net 1,135 1,478 TOTAL NON-CURRENT ASSETS 4,110 3,199 TOTAL ASSETS $ 13,807 $ 7,245 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES Accounts payable $ 802 $ 285 Accrued expenses 280 339 Short-term lease liabilities 373 355 TOTAL CURRENT LIABILITIES 1,455 979 Long-term lease liabilities 817 1,190 TOTAL LIABILITIES 2,272 2,169 Commitments and Contingencies (Note 8) STOCKHOLDERS’ EQUITY Preferred Stock, $ 0.001 par value, 5,000 shares authorized, none issued and outstanding — — Common Stock, $ 0.001 par value, 100,000 and 50,000 shares authorized as of March 31, 2024 and 2023, respectively; 32,464 and 10,949 shares issued and outstanding as of March 31, 2024 and 2023, respectively 32 11 Additional paid-in capital 77,432 53,524 Accumulated deficit ( 65,929 ) ( 48,459 ) TOTAL STOCKHOLDERS’ EQUITY 11,535 5,076 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 13,807 $ 7,245 The accompanying notes are an integral part of these audited consolidated financial statements. F- 4 Modular Medical, Inc. Consolidated Statements of Operations (In thousands, except per-share data) Year Ended March 31, 2024 2023 Operating expenses Research and development $ 12,880 $ 9,062 General and administrative 4,649 4,816 Total operating expenses 17,529 13,878 Loss from operations ( 17,529 ) ( 13,878 ) Other income 61 1 Loss before income taxes ( 17,468 ) ( 13,877 ) Provision for income taxes 2 2 Net loss $ ( 17,470 ) $ ( 13,879 ) Net loss per share Basic and diluted $ ( 0.78 ) $ ( 1.15 ) Shares used in computing net loss per share Basic and diluted 22,377 12,103 The accompanying notes are an integral part of these audited consolidated financial statements. F- 5 Modular Medical, Inc. Consolidated Statements of Stockholders’ Equity (In thousands) Additional Common Stock Paid-In Accumulated Stockholders’ Shares Amount Capital Deficit Equity Balance as of March 31, 2022 10,462 $ 11 $ 43,406 $ ( 34,580 ) $ 8,837 Issuance of common stock in registered direct offering, net of fees and issuance costs 449 — 7,372 — 7,372 Shares issued for services 11 — 22 — 22 Issuances under equity incentive plan 27 — 86 — 86 Stock-based compensation — — 2,638 — 2,638 Net loss — — — ( 13,879 ) ( 13,879 ) Balance as of March 31, 2023 10,949 $ 11 $ 53,524 $ ( 48,459 ) $ 5,076 Issuance of common stock in public offerings, net of fees and issuance costs 20,552 20 20,045 — 20,065 At-the-market sales of stock, net 154 — 278 — 278 Exercise of warrants 719 1 883 — 884 Shares issued for services 2 — 1 — 1 Issuances under equity incentive plan 88 — 37 — 37 Stock-based compensation — — 2,664 — 2,664 Net loss — — — ( 17,470 ) ( 17,470 ) Balance as of March 31, 2024 32,464 $ 32 $ 77,432 $ ( 65,929 ) $ 11,535 The accompanying notes are an integral part of these audited consolidated financial statements. F- 6 Modular Medical, Inc. Consolidated Statements of Cash Flows (In thousands) Year ended March 31, 2024 2023 Cash Flows from operating activities Net loss $ ( 17,470 ) $ ( 13,879 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation expense 2,701 2,724 Loss on asset disposal 21 — Depreciation and amortization 426 152 Shares issued for services 19 203 Changes in assets and liabilities: Prepaid expenses and other assets ( 94 ) ( 14 ) Lease right-of-use assets 342 203 Accounts payable and accrued expenses 458 ( 200 ) Change in lease liabilities ( 355 ) ( 200 ) Net cash used in operating activities ( 13,952 ) ( 11,011 ) Cash flows from investing activities Purchases of property and equipment ( 1,700 ) ( 1,638 ) Net cash used in investing activities ( 1,700 ) ( 1,638 ) Cash flows from financing activities Proceeds from at-the-market sales of common stock, net 278 — Proceeds from exercise of common stock warrants 742 — Proceeds from public and registered direct offerings, net 20,065 7,372 Net cash provided by financing activities 21,085 7,372 Net increase (decrease) in cash and cash equivalents 5,433 ( 5,277 ) Cash and cash equivalents, at beginning of year 3,799 9,076 Cash and cash equivalents, at end of year $ 9,232 $ 3,799 Supplemental disclosure: Noncash investing and financing activities: Right-of-use asset obtained in exchange for lease liability $ — $ 1,561 Receivable from transfer agent for warrant exercise proceeds $ 142 — Cash paid for: Income taxes $ 2 $ 2 The accompanying notes are an integral part of these audited consolidated financial statements. F- 7 MODULAR MEDICAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Modular Medical, Inc. (the Company) was incorporated in Nevada in October 1998 under the name Bear Lake Recreation, Inc. The Company had no material business operations from 2002 until approximately 2017 when it acquired all of the issued and outstanding shares of Quasuras, Inc., a Delaware corporation (Quasuras). As the major shareholder of Quasuras retained control of both the Company and Quasuras, the share exchange was accounted for as a reverse merger. As such, the Company recognized the assets and liabilities of Quasuras, acquired in the merger, at their historical carrying amounts. Prior to the acquisition of Quasuras and, since at least 2002, the Company was a shell company, as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934 (the Exchange Act). In June 2017, the Company changed its name from Bear Lake Recreation, Inc. to Modular Medical, Inc. The Company is a pre-revenue, medical device company focused on the design, development and eventual commercialization of innovative insulin pumps using modernized technology to increase pump adoption in the diabetes marketplace. Through the creation of an innovative two-part patch pump, its initial product, the MODD1, the Company seeks to fundamentally alter the trade-offs between cost and complexity and access to the higher standards of care requiring considerable motivation that presently available insulin pumps provide. By simplifying and streamlining the user experience from introduction, prescription, reimbursement, training and day-to-day use, the Company seeks 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, the Company submitted a 510(k) premarket notification to the United States Food and Drug Administration (FDA) for the MODD1. In March 2024, the Company received comments from the FDA on its submission, and the Company is in the process of responding to those comments. Liquidity and Going Concern The Company expects to continue to incur operating losses for the foreseeable future and incur cash outflows from operations as it continues to invest in the development and subsequent commercialization of its product. The Company expects that its research and development and general and administrative expenses will continue to increase, and, as a result, it will eventually need to generate significant revenue to achieve profitability. The Company’s expected operating losses and cash burn raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these financial statements are issued. In addition, the Company’s independent registered public accounting firm, in its report on these consolidated financial statements for the year ended March 31, 2024, expressed substantial doubt about the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments that might result from this uncertainty. Implementation of the Company’s plans and its ability to continue as a going concern will depend upon the Company’s ability to raise additional capital, through the sale of additional equity or debt securities, to support its future operations. There can be no assurance that such additional capital, whether in the form of debt or equity financing, will be sufficient or available and, if available, that such capital will be offered on terms and conditions acceptable to the Company. In, May 2023 and February 2024, the Company completed public offerings of its common stock and warrants. The Company’s operating needs include the planned costs to operate its business, including amounts required to fund working capital and capital expenditures. The Company’s future capital requirements and the adequacy of its available funds will depend on many factors, including the Company’s ability to successfully commercialize its 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 its product offering. If the Company is unable to secure additional capital, it may be required to curtail its research and development initiatives and take additional measures to reduce costs in order to conserve its cash. Basis of Presentation The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America. The Company’s fiscal year ends on March 31 of each calendar year. Each reference to a fiscal year in these notes to the consolidated financial statements 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). The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Quasuras. All significant intercompany transactions and balances have been eliminated in consolidation. F- 8 Use of Estimates The preparation of the accompanying consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management 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 consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Estimates may include those pertaining to accruals, stock-based compensation and income taxes. Actual results could differ from those estimates. Reportable Segment The Company operates in one business segment and uses one measurement of profitability for its business. Research and Development The Company expenses research and development expenditures as incurred. General and Administrative General and administrative expenses consist primarily of payroll and benefit costs, rent, stock-based compensation, legal and accounting fees, and facility and other administrative expenses. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash held in demand deposit accounts. The Company maintains its cash at high credit quality financial institutions within the United States, which are insured by the Federal Deposit Insurance Corporation (FDIC) up to limits of approximately $ 250,000 . No reserve has been made in the financial statements for any possible loss due to financial institution failure. Risks and Uncertainties The Company is subject to risks from, among other things, competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history and the volatility of public markets. 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 the Company’s 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 the Company was recently able to access the capital markets, in the future, the Company may be unable to access the capital markets, and additional capital may only be available to the Company on terms that could be significantly detrimental to its existing stockholders and to its business. F- 9 Cash and Cash Equivalents Cash and cash equivalents include cash held in demand deposit and money market accounts, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less. Property and Equipment Property and equipment are recorded at historical cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally three to five years . Depreciation is recorded in operating expenses in the consolidated statements of operations. Leasehold improvements and assets acquired through finance leases are amortized over the shorter of their estimated useful life or the lease term, and amortization is recorded in operating expenses in the consolidated statements of operations. Construction-in-process includes machinery and equipment and is stated at cost and not depreciated. Depreciation on construction-in-process commences when the assets are ready for their intended use and placed into service. Fair Value of Financial Instruments The Company measures the fair value of financial instruments using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels: ● Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets. ● Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. ● Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement. Due to their short-term nature, the carrying values of cash equivalents, accounts payable and accrued expenses, approximate fair value. Leases The Company’s right-of-use assets consist of leased assets recognized in accordance with Financial Accounting Standards Board (FASB) ASC No. 842, Leases , which requires lessees to recognize a lease liability and a corresponding lease asset for virtually all lease contracts. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and the lease liability represents the Company’s obligation to make lease payments arising from the lease, both of which are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. Leases with a lease term of 12 months or less at inception are not recorded on the consolidated balance sheets and are expensed on a straight-line basis over the lease term in the consolidated statement of operations and comprehensive loss. The Company determines the lease term by agreement with the lessor. In cases where the lease does not provide an implicit interest rate, the Company uses the Company’s incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. Stock-Based Compensation The Company periodically issues 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) Topic 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, the Company assesses the probability of achieving the requisite performance criteria before recognizing compensation expense. The fair value of the Company’s stock options is estimated 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. F- 10 Per-Share Amounts Basic net loss per share is computed by dividing loss for the period by the weighted-average number of shares of common stock outstanding (WASO) during the period. In addition, the Company includes the number of shares of common stock issuable under pre-funded warrants as outstanding for purposes of the WASO calculation. Diluted net loss per share gives effect to all potentially dilutive common shares outstanding during the period. Potentially dilutive common shares consist of incremental shares of common stock issuable upon the exercise of stock options and exercise of warrants. Prior to April 1, 2023, the Company excluded pre-funded warrants from the computation of WASO. The pre-funded warrants are now included in the computation of WASO. Prior period amounts have been conformed to the current-period presentation. The impact of the change reduced the previously reported loss per share by $ 0.13 and increased WASO by approximately 1,223,000 shares for the year ended March 31, 2023. The reclassification had no impact on the Company’s net loss or cash flows for the year ended March 31, 2023. The following table sets forth securities outstanding which were excluded from the computation of diluted net loss per share as their inclusion would be anti-dilutive (in thousands): March 31, 2024 2023 Options to purchase common stock 3,689 2,481 Unvested restricted stock units 187 — Common stock purchase warrants 11,173 6,217 Total 15,049 8,698 Reclassifications Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations or cash flows. Income Taxes The Company determines deferred tax assets and liabilities based upon the differences between the financial statement and tax bases of the Company’s assets and liabilities using tax rates in effect for the year in which the Company expects 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 its federal and state net deferred tax assets will not be fully realized, and the Company has recorded a full valuation allowance. The Company accounts for uncertain tax positions in accordance with FASB 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. The Company files U.S. federal and state income tax returns in jurisdictions with varying statutes of limitations. The Company’s historical net operating loss and credit carryforwards may be adjusted by the federal and state tax authorities until the statute closes on the year in which such tax attributes are utilized. Comprehensive Loss Comprehensive loss represents the changes in equity of an enterprise, other than those resulting from stockholder transactions. Accordingly, comprehensive loss may include certain changes in equity that are excluded from net loss. For the years ended March 31, 2024 and 2023, the Company’s comprehensive loss was the same as its net loss. F- 11 Recently Issued Accounting Pronouncements In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures , which requires disclosure of incremental segment information on an annual and interim basis. ASU No. 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and it requires retrospective application to all prior periods presented in the financial statements. The Company is currently evaluating the impact that this ASU will have on the presentation of its consolidated financial statements. In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures , which expands disclosures in an entity’s income tax rate reconciliation table and disclosures regarding cash taxes paid both in the U.S. and foreign jurisdictions. The update will be effective for annual periods beginning after December 15, 2024. The Company is currently evaluating the impact that this ASU will have on the presentation of its consolidated financial statements. NOTE 2 – CONSOLIDATED BALANCE SHEET DETAIL March 31, 2024 2023 (in thousands) Prepaid and other current assets: Prepaid expenses $ 318 $ 142 Receivable from transfer agent for warrant exercise proceeds 142 — Other receivables 5 5 $ 465 $ 147 March 31, 2024 2023 (in thousands) Property and equipment, net: Machinery and equipment $ 3,209 $ 820 Computer equipment and software 66 66 Construction-in-process 283 1,003 Leasehold improvements 33 25 Office equipment 63 63 3,654 1,977 Less: accumulated depreciation and amortization ( 679 ) ( 256 ) $ 2,975 $ 1,721 March 31, 2024 2023 (in thousands) Accrued Expenses Accrued wages $ 243 $ 267 Other 37 72 $ 280 $ 339 NOTE 3 – LEASES W. Bernardo Drive, San Diego, CA The 39 -month lease term expired on June 30, 2023 , and, subsequent to expiration, the landlord refunded the Company’s security deposit. Thornmint Road, San Diego, CA The 48 -month lease term commenced February 1, 2023, and the lease provides for an initial base monthly rent of $ 36,000 with annual rent increases of approximately 4 %. In addition to the minimum lease payments, the Company is responsible for property taxes, insurance and other certain operating costs. A discount rate of 8 %, which approximated the Company’s incremental borrowing rate, was used to measure the lease asset and liability. The Company obtained a right-of-use asset of approximately $ 1,560,000 in exchange for its obligations under the operating lease. F- 12 Future minimum payments under the facility operating lease, as of March 31, 2024, are listed in the table below (in thousands). Fiscal year ending March 31, 2025 452 2026 470 2027 405 Total future lease payments 1,327 Less: Imputed interest ( 137 ) Present value of lease liabilities $ 1,190 Cash paid for amounts included in the measurement of lease liabilities was approximately $ 476,000 and $ 230,000 for the years ended March 31, 2024 and 2023, respectively. Rent expense was approximately $ 449,000 and $ 237,000 for the years ended March 31, 2024 and 2023, respectively. NOTE 4 – STOCKHOLDERS’ EQUITY Increase in Authorized Shares In February 2024, the Company’s stockholders approved an amendment to the Company’s Articles of Incorporation (the Amendment) to increase the number of authorized shares of common stock from 50,000,000 shares, to 100,000,000 shares. The Amendment was filed with the state of Nevada and became effective on February 15, 2024. February 2024 Public Offering On February 15, 2024, the Company entered into an underwriting agreement (the 2024 Underwriting Agreement) with Titan Partners Group LLC, a division of American Capital Partners, LLC (Titan), with respect to the issuance and sale 9,090,910 shares of its common stock at a price of $ 1.10 per share in a firm commitment underwritten offering (the 2024 Offering) by the Company. Upon the closing of the 2024 Offering, the Company received aggregate proceeds of approximately $ 10,000,000 , before deducting underwiring discounts and commissions and other offering expenses. Pursuant to the 2024 Underwriting Agreement, the Company granted Titan a 30-day option to purchase up to an additional 1,321,989 shares of common stock to cover over allotments, if any. On March 13, 2024, Titan exercised this option in full and purchased the additional securities for aggregate proceeds to the Company of approximately $ 1,454,000 before deducting underwriting discounts and commissions and other offering expenses. Titan was paid a cash fee of 7.0 % of the aggregate gross proceeds of the 2024 Offering (including the over-allotment option) and reimbursed certain out-of-pocket expenses of approximately $ 75,000 . ATM Offering On November 22, 2023, the Company entered into a Sales Agreement (the ATM Agreement) with Leerink Partners LLC (Leerink) under which the Company may offer and sell, from time to time at its sole discretion, shares of its 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. The Company has no obligation to sell any shares under the ATM Agreement and may, at any time, suspend solicitation and offers under the ATM Agreement. In January 2024, under the ATM Agreement, the Company sold 153,879 shares of common stock for net proceeds of approximately $ 278,000 . May 2023 Public Offering On May 15, 2023, the Company entered into an underwriting agreement (the Underwriting Agreement) with Newbridge Securities Corporation (the Underwriter), with respect to the issuance and sale in a firm commitment underwritten offering (the 2023 Offering) by the Company of units of its securities. Upon the closing of the 2023 Offering, the Company sold 8,816,900 shares of its common stock and warrants to purchase 4,408,450 shares of its common stock for aggregate proceeds of approximately $ 9,390,000 , before deducting underwriting discounts and commissions and other offering expenses. The securities were sold as a unit, with each unit consisting of two shares of common stock of the Company and one warrant (the 2023 Warrants) to purchase one share of common stock, at a public offering price of $ 2.13 per unit. The 2023 Warrants were immediately separable and exercisable, have a per share exercise price of $ 1.22 and expire five years from the date of issuance. F- 13 Pursuant to the Underwriting Agreement, the Company granted the Underwriter a 30-day option to purchase up to an additional 1,322,534 shares of common stock and an additional 661,267 of the 2023 Warrants to cover over-allotments, if any. On May 25, 2023, the Underwriter exercised this option in full and purchased the additional securities for aggregate gross proceeds to the Company of approximately $ 1,408,000 , before deducting underwriting discounts and commissions and other offering expenses. The Underwriter was paid a cash fee of 7.0 % of the aggregate gross proceeds of the 2023 Offering (including the over-allotment option) and reimbursed certain out-of-pocket expenses of approximately $ 125,000 . In addition, pursuant to the Underwriting Agreement, the Company initially issued to the Underwriter common stock purchase warrants (the UW Warrants) for a total of 709,760 shares. Subsequently, the UW Warrants were reissued to the Underwriter and its agents for a total of 604,623 shares. The UW warrants were exercisable six months from the respective issuance dates and have a four-year term and a per share exercise price of $ 1.32 . May 2022 Placement On May 2, 2022, the Company entered into a securities purchase agreement (the Purchase Agreement) with an institutional investor, pursuant to which the Company sold, in a registered direct offering, which closed on May 5, 2022, an aggregate of 449,438 shares (the Shares) of the Company’s common stock, par value $ 0.001 per share, at a purchase price per Share of $ 4.45 and pre-funded warrants (the Pre-Funded Warrants) to purchase an aggregate of approximately 1,348,000 shares of common stock at a purchase price per Pre-Funded Warrant of $ 4.44 . The Pre-Funded Warrants will be exercisable immediately on the date of issuance at an exercise price of $ 0.01 per share and may be exercised at any time until all of the Pre-Funded Warrants are exercised in full. In a concurrent private placement under the Purchase Agreement, the Company issued to the Investor warrants (the Private Placement Warrants) to purchase an aggregate of 1,438,202 shares of common stock at an exercise price of $ 6.60 per share. The Private Placement Warrants were exercisable beginning on the six-month anniversary of the date of issuance (the Initial Exercise Date) and will expire on the five-year anniversary of the Initial Exercise Date. Issuances of Common Stock and Warrants During the years ended March 31, 2024 and 2023, the Company issued 1,429 and 11,264 shares of common stock to service providers, respectively, with fair values of approximately $ 1,400 and $ 22,000 , respectively. As of March 31, 2024, the Company had the following warrants outstanding (share amounts in thousands): Type Number of Shares Exercise Prices Expiration Dates Balance as of March 31, 2023 7,565 Issuance of common stock warrants 605 $ 1.32 May 2027 Issuance of common stock warrants 5,070 $ 1.22 May 2028 Common stock warrants exercised ( 70 ) $ 1.32 Common stock warrants exercised ( 649 ) $ 1.22 Balance as of March 31, 2024 12,521 At March 31, 2024, the Company had a receivable from its transfer agent for approximately $ 142,000 for the proceeds from warrants exercised prior to March 31, 2024. The receivable was recorded in the prepaid and other line in the consolidated balance sheet at March 31, 2024. As of March 31, 2023, the Company had the following warrants outstanding (share amounts in thousands): Type Number of Shares Exercise Prices Expiration Dates Common stock 1,348 $ 0.01 — Common stock 768 $ 6.00 January - February 2027 Common stock 4,011 $ 6.60 February 2027 Common stock 1,438 $ 6.60 November 2027 Total 7,565 NOTE 5 – STOCK-BASED COMPENSATION Amended 2017 Equity Incentive Plan In October 2017, the Company’s Board approved the 2017 Equity Incentive Plan (the Plan) with 1,000,000 shares of common stock reserved for issuance. In January 2020 and August 2021, the Board approved increases in the number of shares reserved for issuance under the Plan by 333,334 and 1,333,334 shares, respectively. In January 2023 and February 2024, the Company’s stockholders approved increases in the number of shares reserved for issuance under the Plan by an additional 2,000,000 and 3,000,000 shares, respectively. Under the Plan, eligible employees, directors and consultants may be granted a broad range of awards, including stock options, stock appreciation rights, restricted stock, performance-based awards and restricted stock units (RSUs). The Plan is administered by the Board or, in the alternative, a committee designated by the Board. F- 14 Stock-Based Compensation Expense Stock options granted by the Company generally vest over 36 months and have a 10-year term. As of March 31, 2024, the unamortized compensation cost related to stock options was approximately $ 2,035,000 and is expected to be recognized as expense over a weighted-average period of approximately 1.3 years. In October 2023, under its Two-Part FDA Submission and Clearance Milestone Bonus Program (the Bonus Program), the Company granted stock options for 909,533 shares, which are subject to vesting based upon the achievement of certain performance milestones by the Company and continued service by the optionees. In January 2024, options to purchase 625,326 shares (net of forfeitures), which were granted under part one of the Bonus Program, vested upon the Company’s submission to the FDA. As of March 31, 2024, the Company had not commenced expense recognition of 242,307 (net of forfeitures) of the options, which were granted under part two of the Bonus Program, based on its assessment of the probability of achievement of the applicable performance requirements. During the year ended March 31, 2024, the Company granted options to purchase 127,500 shares that vested immediately when granted. The weighted-average grant date fair values of stock options granted during the years ended March 31, 2024 and 2023 was $ 0.99 and $ 2.85 , respectively. The following assumptions were used in the fair-value method calculations: Year Ended March 31, 2024 2023 Risk-free interest rates 3.51 % - 4.72 % 2.82 % - 4.06 % Volatility 83 % - 152 % 83 % - 223 % Expected life (years) 5.0 - 6.2 5.0 – 5.7 Dividend yield — — The fair values of options at the grant date were estimated utilizing the Black-Scholes valuation model, which includes simplified methods to establish the fair term of options. The expected volatility is based on the historical volatility of the Company’s stock price. The risk-free interest rate was derived from the Daily Treasury Yield Curve Rates, as published by the U.S. Department of the Treasury as of the grant date for terms equal to the expected terms of the options. A dividend yield of zero was applied because the Company has never paid dividends and has no intention to pay dividends in the foreseeable future. The Company accounts for forfeitures as they occur. The following table summarizes the activity in the shares available for grant under the Plan during the year ended March 31, 2024: Options Outstanding Shares Available for Grant Number of Shares Weighted Average Exercise Price Balance at March 31, 2022 989,466 1,650,705 $ 6.58 Additional shares authorized under the Plan 2,000,000 — — Options granted ( 1,006,074 ) 1,006,074 3.15 Share awards ( 26,789 ) — — Options cancelled and returned to the Plan 175,689 ( 175,689 ) 6.48 Balance at March 31, 2023 2,132,292 2,481,090 5.19 Additional shares authorized under the Plan 3,000,000 — — Options granted ( 1,448,533 ) 1,448,533 0.99 Share awards ( 25,390 ) — — RSUs granted ( 250,000 ) — — Options cancelled and returned to the Plan 240,282 ( 240,282 ) 3.84 Balance at March 31, 2024 3,648,651 3,689,341 $ 3.70 No stock options were exercised during the years ended March 31, 2024 and 2023. During the years ended March 31, 2024 and 2023, the Company issued 25,390 and 26,789 shares, respectively, to its non-employee directors under the Company’s outside director compensation plan. For the years ended March 31, 2024 and 2023, the Company recorded stock-based compensation expense for these share awards of approximately $ 37,000 and $ 86,000 , respectively. F- 15 A summary of RSU activity under the Plan is presented below. Number of Shares Weighted Average Grant- Date Fair Value Balance at March 31, 2023 — — Granted 250,000 $ 0.91 Vested ( 62,501 ) 0.91 Balance at March 31, 2024 $ 187,499 $ 0.91 The total intrinsic value of RSUs outstanding as of March 31, 2024 was approximately $ 347,000 . The unamortized compensation cost at March 31, 2024 was approximately $ 171,000 related to RSUs and is expected to be recognized as expense over a period of approximately 2.25 years. The following table summarizes the range of outstanding and exercisable options as of March 31, 2024: Options Outstanding Options Exercisable Weighted Average Remaining Weighted Weighted Contractual Average Average Aggregate Number Life Exercise Number Exercise Intrinsic Range of Exercise Price Outstanding (in Years) Price Exercisable Price Value $ 0.93 - $ 2.00 2,237,066 8.31 $ 1.48 1,409,750 $ 1.52 $ 538,006 $ 3.95 - $ 7.51 943,145 7.20 5.29 771,478 5.52 — $ 8.61 - $ 17.70 509,130 7.23 10.53 470,442 10.53 — $ 0.93 - $ 17.70 3,689,341 7.88 $ 3.70 2,651,670 $ 4.28 $ 538,006 The intrinsic value per share is calculated as the excess of the closing price of the common stock on the Company’s principal trading market over the exercise price of the option at March 31, 2024. F- 16 NOTE 6 – INCOME TAXES The income tax provision consisted of the following: Year Ended March 31, 2024 2023 (in thousands) Current portion: Federal $ — $ — State 2 2 2 2 Deferred portion: Federal ( 3,730 ) ( 2,933 ) State ( 657 ) ( 1,467 ) ( 4,387 ) ( 4,400 ) Change in valuation allowance 4,387 4,400 Provision for income taxes $ 2 $ 2 At March 31, 2024, the Company had net operating loss carryforwards (NOLs) of approximately $ 35,000,000 for federal income tax purposes and $ 50,400,000 for state income tax purposes. These NOLs are available to reduce future taxable income and will expire at various times from 2037 through 2045, except federal NOLs from fiscal 2018 and later, which will never expire. The Company also had federal research and development tax credit carryforwards of approximately $ 2,100,000 , which will begin expiring at various times from 2038 through 2044, and state research and development credits of approximately $ 500,000 , which do not have an expiration date. A reconciliation of income taxes provided at the federal statutory rate to the actual income tax provision is as follows: Year Ended March 31, 2024 2023 Federal statutory rate ( 21 )% ( 21 )% State tax rate, net of federal benefit ( 6 )% ( 6 )% Research and development tax credits ( 7 )% ( 6 )% Change in valuation allowance 32 % 29 % Other 2 % 4 % Effective income tax rate — % — % The losses before income tax provision for the years ended March 31, 2024 and 2023 were solely attributable to US operations. Significant components of the Company’s deferred tax assets and liabilities were (in thousands): March 31, 2024 2023 Net operating loss carryforwards $ 10,860 $ 8,742 Capitalized research and development expense 3,058 1,933 Stock-based compensation expense 2,818 2,587 Research and development tax credits 2,568 1,658 Property and equipment 193 105 Total deferred tax assets 19,497 15,025 Section 179 assets ( 239 ) ( 111 ) Reserves, accruals and other ( 49 ) ( 92 ) Total deferred tax liabilities ( 288 ) ( 203 ) Less: valuation allowance ( 19,209 ) ( 14,822 ) Deferred tax assets, net $ — $ — F- 17 Based on the available information and other factors, management believes it is more likely than not that the net deferred tax assets at March 31, 2024 and 2023, will not be fully realizable. Accordingly, management has recorded a full valuation allowance against its net deferred tax assets at March 31, 2024 and 2023. Management has evaluated and concluded that there were no material uncertain tax positions requiring recognition in the Company’s consolidated financial statements at March 31, 2024 and 2023. The Company does not expect any significant changes in its unrecognized tax benefits within twelve months of the reporting date. NOTE 7 – ROYALTY AGREEMENT In July 2017, the Company entered into a royalty agreement with its founder, then-chief executive officer, president and major shareholder (the Founder). Pursuant to the agreement, the Founder assigned and transferred all of his rights in the intellectual property of Quasuras in return for future royalty payments on the Company’s product. The Company is obligated to make royalty payments under the agreement to the Founder on any sales of the royalty product sold or otherwise commercialized by the Company equal to (a) $0.75 on each sale of a royalty product or (b) 5% of the gross sale price of the royalty product, whichever is less. The royalty payments will cease, and the agreement will terminate, at such time as the total sum of royalty payments actually paid to the Founder, pursuant to the agreement, reaches $10,000,000. The Company has the option to terminate the agreement at any time upon payment, to the Founder, of the difference between total royalty payments actually made to him to date and the sum of $10,000,000. All payments of the royalties, if due, for the preceding quarter, will be made by the Company to the Founder within 30 days after the end of each calendar quarter. NOTE 8 – COMMITMENTS AND CONTINGENCIES Litigations, Claims and Assessments In the normal course of business, the Company may be involved in legal proceedings, claims and assessments arising in the ordinary course of business. The Company records legal costs associated with loss contingencies as incurred and accrues for all probable and estimable settlements. Indemnification In the ordinary course of business, the Company enters into contractual arrangements under which it may agree to indemnify the counterparties from any losses incurred relating to breach of representations and warranties, failure to perform certain covenants, or claims and losses arising from certain events as outlined within the particular contract, which may include, for example, losses arising from litigation or claims relating to past performance. Such indemnification clauses may not be subject to maximum loss clauses. The Company has also entered into indemnification agreements with its officers and directors. No amounts were reflected in the Company’s consolidated financial statements for the years ended March 31, 2024 and 2023 related to these indemnifications. The Company has not estimated the maximum potential amount of indemnification liability under these agreements due to the limited history of prior claims and the unique facts and circumstances applicable to each particular agreement. To date, the Company has not made any payments related to these indemnification agreements. Purchase Obligations The Company’s primary purchase obligations include purchase orders for machinery and equipment. At March 31, 2024, the Company had outstanding purchase orders for machinery and equipment and related expenditures of approximately $ 1,100,000 . In December 2023, the Company signed a device integration agreement with a provider of connected-care and remote monitoring diabetes technology solutions. As of March 31, 2024, the Company had a remaining obligation under the device integration agreement of approximately $ 400,000 over three years for technology license fees. NOTE 9 – RELATED PARTY TRANSACTIONS Manchester Management Company, LLC (MMC), as the general partner of Manchester Explorer, LP (Explorer), combined with the holdings of its affiliates, JEB Partners LP, James Besser and Morgan Frank, owned approximately 11 % of the Company’s outstanding shares of common stock as of March 31, 2024. Mr. Besser is the Company’s chief executive officer and a managing member of MMC. Mr. Frank is one of our directors and serves as the portfolio manager of Explorer and as a managing member of MMC. In February 2024, Explorer purchased 900,000 shares of common stock in the 2024 Offering at the public offering price per share of $ 1.10 for aggregate gross proceeds to the Company of $ 990,000 . The daughter of the Founder is an employee of the Company. During the years ended March 31, 2024 and 2023, the Company paid her approximately $ 137,000 and $ 201,000 , respectively, which includes the aggregate grant date fair values, as determined pursuant to FASB ASC Topic 718, of stock options granted to her during each year. F- 18 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.