Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial
condition and results of operations should be read in conjunction with the financial statements and related notes included in this Annual
Report on Form 10-K, or the Report. Management’s Discussion and Analysis of Financial Condition and Results of Operations may
contain statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk,
uncertainties and other factors. These statements are often identified by the use of words such as “may,” “will,”
“expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,”
or “continue,” and similar expressions or variations. Actual results could differ materially because of the factors discussed
in Part I, Item 1A, These risks and uncertainties may cause actual results to differ materially from those discussed in the forward-looking
statements.
Our fiscal year ends on March 31 of each
calendar year. Each reference to a fiscal year in this Report, refers to the fiscal year ended March 31 of the calendar year indicated
(for example, fiscal 2025 refers to the fiscal year ending March 31, 2025). 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 (the “FDA”) for our MODD1 insulin
pump, and, in September 2024, we received FDA clearance to market and sell our MODD1 pump in the United States. We are actively working
to i) commercialize our MODD1 product and commence initial shipments in the quarter ending September 30, 2025, ii) obtain regulatory clearance
to market and sell our Pivot Product in 2026, iii) obtain regulatory clearance to market and sell our pump products in foreign jurisdictions,
iv) improve the manufacturability and usability of our pump products and v) develop new pump products.
In March 2025, we completed a private placement (the “Private
Placement”) of 6,247,656 units (each a “Unit”), with each Unit consisting of (A) two shares of our common
stock and (B) one warrant to purchase one share of common stock, at an offering price of $1.92 per Unit. The Private Placement provided
us with aggregate gross proceeds totaling approximately $12 million, before deducting placement agent fees and other expenses. Concurrently
with the Private Placement, we entered into a subscription agreement with a foreign investor pursuant to which we completed a direct private
placement of 260,417 Units for additional aggregate gross proceeds of approximately $0.5 million on the same terms as the Private Placement.
Historically, we have financed our operations
principally through private placements and public offerings of our common stock and warrants 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
World Unrest
World unrest due to wars and terrorist
attacks have led to 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. Market conditions
may prevent us from accessing 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.
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
2025
2024
2024 to 2025
Research and development
$ 14,697
$ 12,880
$ 1,817
14.1 %
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 production
of our insulin pump products. We expense R&D costs as they are incurred.
R&D expenses increased in fiscal 2025
compared with fiscal 2024 primarily due to increases in engineering and operations personnel costs of $1.6 million, depreciation and amortization
of $0.7 million and travel-related and other costs of approximately $0.3 million. The increase in personnel costs was attributable to
increased average headcount year over year, salary increases effected during fiscal 2025, payment of bonuses in fiscal 2025 and higher
payroll taxes. Our R&D employee headcount increased to 48 at March 31, 2025 from 36 at March 31, 2024. The increase in depreciation
and amortization expenses was primarily due to an increase in machinery and equipment purchased and placed in service to further develop
and expand our manufacturing capabilities. The increases in R&D expense were partially offset by decreases in consulting costs of
$0.6, materials and supplies expenditures of $0.1 million and stock-based compensation of $0.1 million. The decrease in consulting expenditures
was primarily due to a reduction in utilization of consultants, as we increased our employee headcount, and a decrease in utilization
of outside testing and other third parties in support of our FDA submission in the fourth quarter of 2024. R&D expenses included stock-based
compensation expenses of approximately $1.8 million and $1.9 million for fiscal 2025 and fiscal 2024, respectively.
We expect R&D expenses will increase in fiscal 2026, as we continue
to hire additional engineering, quality assurance, and operations personnel, bring-up our manufacturing process at our medical device
contract manufacturer and continue the development and prepare for the submission of our Pivot product, as we expect to transition our
MODD1 product to the new Pivot product in 2026.
39
General and Administrative
Year ended March 31,
Year-over-Year Change
2025
2024
2024 to 2025
General and administrative
$ 4,351
$ 4,649
$ (298 )
(6.4 )%
General and administrative, or G&A,
expenses consist primarily of personnel and related overhead costs for facilities, finance, human resources, general management and marketing.
G&A expenses decreased in fiscal 2025
compared with fiscal 2024 primarily as a result of reductions in stock-based compensation expense of $0.2 million, marketing expense of
$0.1 million (due to a participant study for our product performed in fiscal 2024), travel-related expenses of $0.1 million and shipping
expenses of $0.1 million. The decreases were partially offset by increased consulting fees of $0.1 million and personnel costs of $0.1
million. G&A expenses included stock-based compensation expenses of approximately $0.6 million and $0.8 million for fiscal 2025 and
fiscal 2024, respectively. We expect G&A expenses to increase in fiscal 2026, as we expect to increase headcount, as we develop a
limited sales and marketing organization, add finance and administration personnel and implement systems to support our anticipated growth
and commercialization of our product during fiscal 2026.
Liquidity and Capital Resources; Changes in Financial
Condition
Going Concern
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 associated with our operations. For the years ended March 31, 2025 and 2024, we incurred net losses of approximately
$18.8 million and $17.5 million, respectively. At March 31, 2025, we had a cash balance of $13.1 million and an accumulated deficit of
approximately $84.8 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, in March 2025, we entered into securities purchase agreements
with investors, with respect to the issuance and sale in a firm commitment underwritten offering for the private placement (the “2025
Private Placement”) of 6,508,073 units of its securities. Upon closing of the 2025 Placement, we sold 13,016,146 shares of common
stock and warrants to purchase 6,508,073 shares of its common stock for net proceeds of approximately $11.4 million. The securities were
sold as a unit with each unit consisting of two shares of common stock and one warrant (the “2025 Private Placement Warrants”)
to purchase one share of common stock, at a public offering price of $1.92 per unit. In November 2024, we completed a firm commitment
underwritten offering for net proceeds of $7.3 million. In November 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 (subject to and based on current availability on our shelf registration statement) through an “at the market
offering” program under which Leerink will act as sales agent or principal. Currently, we have approximately $7.2 million available
for issuance under the ATM Agreement. In fiscal 2025, we received gross proceeds of approximately $2.2 million from sales under the ATM
Agreement. Further, in fiscal year 2025, we received a total of approximately $1.1 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, 2025, we had outstanding purchase orders for machinery and equipment and related
expenditures of approximately $1.5 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, 2025, 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 2025, we used approximately $15.7 million in operating activities,
which primarily resulted from our net loss of approximately $18.8 million, as increased by changes to operating assets and liabilities
of approximately $0.4 million, and as adjusted for non-cash charges and gains, which included approximately $2.4 million of stock-based
compensation expenses, depreciation and amortization expenses of approximately $1.1 million, and other immaterial adjustments. The changes
in operating assets and liabilities primarily related to the timing of payments to vendors.
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, as adjusted for non-cash charges and gains, which included stock-based compensation
expenses of approximately $2.7 million, depreciation and amortization 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.
For fiscal 2025 and fiscal 2024, cash
used in investing activities of approximately $2.5 million and $1.7 million, respectively, was for the purchase of property and equipment.
Cash provided by financing activities for fiscal 2025 totaled approximately
$22.1 million and was primarily attributable to net proceeds of approximately $11.4 million from a private placement of common stock and
warrants, which closed in March 2025, net proceeds of approximately $7.3 million from the issuance of common stock and warrants in a public
offering, which closed in November 2024, proceeds of approximately $1.3 million for the exercise of common stock purchase warrants and
proceeds of approximately $2.1 million from the sale of shares under the ATM Agreement.
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.
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. ROU assets and corresponding lease liabilities 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