MODULAR MEDICAL, INC. This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying condensed consolidated financial statements and notes included in this Quarterly Report on Form 10-Q (this Report). This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which include, without limitation, statements about the market for our technology, our strategy, competition, expected financial performance and capital raising efforts, and other aspects of our business identified in our most recent annual report on Form 10-K and in other reports that we file from time to time with theSecurities and Exchange Commission . Any statements about our business, financial results, financial condition and operations contained in this Report that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "expects," "intends," "plans," "projects," or similar expressions are intended to identify forward-looking statements. Our actual results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors, including the risk factors described under Item 1A of our Annual Report on Form 10-K for the year endedMarch 31, 2021 . These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors including, without limitation, the direct and indirect effects of coronavirus disease 2019, or COVID-19, and related issues that may arise therefrom. Many of those factors are outside of our control and could cause actual results to differ materially from those expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. All subsequent written and oral forward-looking statements concerning other matters addressed in this Report and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Report. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.
Our fiscal year ends on
Company Overview
We are a development stage medical device company focused on the design, development, and commercialization of an innovative insulin pump using modernized technology to increase pump adoption in the diabetes marketplace. Through the creation of a novel two-part patch pump, our MODD1 product, the Company seeks to fundamentally alter the trade-offs between cost and complexity and access to the higher standards of care that presently-available insulin pumps provide. By simplifying and streamlining the user experience from introduction, prescription, reimbursement, training and day-to-day use, we seek to expand the wearable insulin delivery device market beyond the highly motivated "super users" and expand the category into the mass market. The product seeks to serve both the type 1 and the rapidly growing, especially in terms of device adoption, type 2 diabetes markets. Historically, we have financed our operations principally through private placements of our common stock and 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 1 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 condensed consolidated financial statements in Item 1 of this Report and under Liquidity below. 16 Impacts of COVID-19
The global outbreak of the coronavirus disease 2019 (COVID-19) was declared a pandemic by theWorld Health Organization and a national emergency by theU.S. government inMarch 2020 . This has negatively affected theU.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. The full extent of the COVID-19 impact on our operational and financial performance will depend on future developments, including, without limitation, the duration and spread of the pandemic and related actions taken byU.S. and foreign government agencies to prevent disease spread, all of which are uncertain, out of our control, and cannot be predicted. InMarch 2020 , Santa Diego County inCalifornia , where we are based, and the state ofCalifornia issued "shelter-in-place" orders (the Orders). We complied with the Orders and minimized business activities at ourSan Diego facility fromMarch 2020 untilMay 2021 . During that time, we implemented a teleworking policy for our employees and contractors to reduce on-site activity at our facility. InMay 2021 , our employees and certain contractors returned to work in our office. We have and continue to experience longer lead times for certain components used to manufacture initial quantities of our products for our submission to the FDA. We remain diligent in continuing to identify and manage risks to our business given the changing uncertainties related to COVID-19. While we believe that our operations personnel are currently in a position to build an adequate supply of products for our FDA submission, we recognize that unpredictable events could create difficulties in the months ahead. We may not be able to address these difficulties in a timely manner, which could delay our submission to the FDA and negatively impact our business, results of operations, financial condition and cash flows. The continued spread of COVID-19 has also led to disruption and volatility in the global capital markets. We were recently able to raise additional capital in a private placement of convertible promissory notes (see discussion below under Liquidity). However, we need to raise additional capital to support our operations in the future. We may be unable to access the capital markets or additional capital may only be available to us on terms that could be significantly detrimental to our existing stockholders and holders of the convertible promissory notes and to our business.
For additional information on risks that could impact our future results, please refer to "Risk Factors" in Part II, Item 1A of this Report.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make certain estimates and judgments that affect the reported amounts of assets, liabilities, and expenses. On an ongoing basis, we make these estimates based on our historical experience and on assumptions that we consider reasonable under the circumstances. Actual results may differ from these estimates and reported results could differ under different assumptions or conditions. Our significant accounting policies and estimates are disclosed in Note 1 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year endedMarch 31, 2021 . As ofDecember 31, 2021 , there have been no material changes to our significant accounting policies and estimates. Results of Operations Research and Development December 31, Change 2021 2020 2020 to 2021 Research and development - Three months ended$ 1,849,399 $ 1,086,669 $ 762,730 70.2 % Research and development - Nine months ended$ 5,742,911 $ 3,150,149 $ 2,592,762 82.3 % Our research and development expenses include personnel, consulting, materials and other costs associated with the development of our insulin pump product. We expense research and development costs as they are incurred. Research and development, or R&D, expenses increased for the three months endedDecember 31, 2021 as compared with the prior period of fiscal 2021 primarily due to increased engineering and manufacturing consulting costs, as we have increased our development and manufacturing activities. R&D expenses increased for the nine months endedDecember 31, 2021 as compared with the prior period of fiscal 2021 primarily due to increased engineering and manufacturing personnel and consulting costs, protype and production component and material costs and stock-based compensation expenses. R&D expenses included non-cash, stock-based compensation expenses of$204,962 and$96,127 for the three months endedDecember 31, 2021 and 2020, respectively, and$459,989 and$301,767 for the nine months endedDecember 31, 2021 and 2020, respectively. We expect R&D expenses to remain flat for the remainder of fiscal 2022, as we continue to advance the development of our pump product and develop an initial low-volume manufacturing process. 17 General and Administrative December 31, Change 2021 2020 2020 to 2021 General and administrative - Three months ended$ 1,981,665 $ 783,898 $ 1,197,767 152.8 % General and administrative - Nine months ended$ 5,156,152 $ 2,453,808 $ 2,702,344 110.1 % General and administrative expenses consist primarily of personnel and related overhead costs for facilities, marketing, finance, human resources and general management. General and administrative, or G&A, expenses, increased for the three and nine months endedDecember 31, 2021 as compared with the prior periods of fiscal 2021 primarily as a result of increased stock-based compensation expense and increased consulting and legal fees. G&A expenses included stock-based compensation expenses of$1,016,774 and$198,926 for the three months endedDecember 31, 2021 and 2020, respectively, and$2,280,098 and$638,607 for the nine months endedDecember 31, 2021 and 2020, respectively. We expect G&A expenses to increase for the remainder of fiscal 2022, as we pursue a public offering of our common stock. Interest Expense December 30, Change 2021 2020 2020 to 2021 Interest expense - Three months ended$ 1,010,247 $ -$ (1,010,225 ) - Interest expense - Nine months ended$ 2,204,917 $ -$ (2,204,791 ) -
Interest expense consisted of interest expense incurred from our convertible promissory notes, including amortization of debt issuance costs, and our promissory (bridge) note. See Notes 4 and 5 to the condensed consolidated financial statements included in Item 1 of this Report for additional disclosure.
Liquidity and Capital Resources
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 nine months endedDecember 31, 2021 , we incurred a net loss of approximately$14.1 million . For the years endedMarch 31, 2021 and 2020, we incurred net losses of approximately$7.4 million and$5.3 million , respectively. AtDecember 31, 2021 , we had a cash balance of approximately$0.2 million and an accumulated deficit of approximately$29.9 million . When considered with our current operating plan and the requirement to repay the Notes (as defined below) and the draws under the Bridge Note (as defined below) byMay 2022 , 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 of issuance of the consolidated financial statements included in Item 1 of this Report. Our consolidated 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 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, and we are currently seeking such additional financing. As discussed in Note 3 to our condensed consolidated financial statements in Item 1 of this Report, we obtained forgiveness of the$368,000 principal balance and interest on the PPP Note we received fromSilicon Valley Bank inApril 2020 under theU.S. Small Business Administration Paycheck Protection Program. As discussed in Note 4 to our condensed consolidated financial statements in Item 1 of this Report, inMay 2021 , we completed a private placement of$6,610,500 aggregate principal amount of our convertible promissory notes (the Notes). The Notes are unsecured obligations of ours with each Note having a stated maturity date of 12 months from its issue date (the Issue Date). The Notes bear interest at a rate of 12% per annum, payable on maturity, provided that, if we fail to pay any amounts when due under a Note, the interest rate increases to the greater of 16% or the maximum amount permitted by law. Each Note may be prepaid at our option during the first 270 calendar days following its Issue Date (the 270th day, the Trigger Date), subject to a 110% prepayment penalty on all principal and accrued interest then outstanding. No Notes may be prepaid in whole or in part after the Trigger Date. As discussed in Note 9 to our condensed consolidated financial statements in Item 1 of this Report, onOctober 28, 2021 , we sold$250,000 of shares of our common stock to officers, and we issued a secured promissory note (theBridge Note ) to an investor. The Bridge Note provides us with a$3,000,000 revolving credit facility with all amounts being drawn down by the Company thereunder being due and payable, subject to acceleration in the event of a default, onMarch 15, 2022 . For the three months endedDecember 31, 2021 , we drew down$1,500,000 under the Bridge Note. 18 Our operating needs include the planned costs to operate our business, including amounts required to fund research and development activities, including clinical studies, working capital and capital expenditures. Our future capital requirements and the adequacy of our available funds will depend on many factors, including 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 offering. 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 in order to conserve our cash. For the nine months endedDecember 30, 2021 , we used$7,128,787 in operating activities, which primarily resulted from our net loss of$14,058,155 increased for a non-cash gain on the PPP Note extinguishment of$368,780 and net changes in operating lease assets and liabilities of$34,422 , as adjusted for changes to operating assets and liabilities of$1,197,989 , a loss on debt extinguishment of$1,321,450 stock-based compensation expenses of$2,740,086 ,$388,021 for issuances of shares of common stock in exchange for services,$149,994 for issuable shares of common stock in exchange for services, depreciation and amortization expenses of$80,268 , and interest expense of$1,454,762 for amortization of debt discount. For the nine months endedDecember 31, 2020 , we used$4,570,713 in operating activities, which primarily resulted from our net loss of$5,605,431 and changes to operating assets and liabilities of$107,758 , as adjusted for stock-based compensation expenses of$940,374 , depreciation and amortization expenses of$82,016 , net changes in lease assets and liabilities of$120,085 .
For the nine months ended
Cash provided by financing activities of$6,037,199 for the nine months endedDecember 31, 2021 primarily attributable to net proceeds from the issuance of our Notes of$5,637,199 and net proceeds of$250,000 from the sale of shares of common stock to officers of the Company. Cash provided by financing activities of$2,154,662 for the nine months endedDecember 31, 2020 was attributable to net proceeds of$1,785,882 from the sale of shares of our common stock in a private placement that was initiated inMarch 2020 and$368,780 in proceeds from the PPP Note.
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