This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the accompanying condensed
consolidated financial statements and notes included in this Quarterly Report on
Form 10-Q (this Report). This Report contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which include, without limitation, statements
about the market for our technology, our strategy, competition, expected
financial performance and capital raising efforts, and other aspects of our
business identified in our most recent annual report on Form 10-K filed with the
Securities and Exchange Commission on June 28, 2022 and in other reports that we
file from time to time with the Securities and Exchange Commission. Any
statements about our business, financial results, financial condition and
operations contained in this Report that are not statements of historical fact
may be deemed to be forward-looking statements. Without limiting the foregoing,
the words "believes," "anticipates," "expects," "intends," "plans," "projects,"
or similar expressions are intended to identify forward-looking statements. Our
actual results could differ materially from those expressed or implied by these
forward-looking statements as a result of various factors, including the risk
factors described under Item 1A of our Annual Report on Form 10-K for the year
ended March 31, 2022. These forward-looking statements represent our intentions,
plans, expectations, assumptions and beliefs about future events and are subject
to risks, uncertainties and other factors including, without limitation, the
direct and indirect effects of coronavirus disease 2019, or COVID-19, as well as
inflationary risks, including the risk that the cost of certain of the Company's
components is increasing, and related issues that may arise therefrom. Many of
those factors are outside of our control and could cause actual results to
differ materially from those expressed or implied by those forward-looking
statements. In light of these risks, uncertainties and assumptions, the events
described in the forward-looking statements might not occur or might occur to a
different extent or at a different time than we have described. You are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this Report. All subsequent written and oral
forward-looking statements concerning other matters addressed in this Report and
attributable to us or any person acting on our behalf are expressly qualified in
their entirety by the cautionary statements contained or referred to in this
Report. We undertake no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events, a change in
events, conditions, circumstances or assumptions underlying such statements, or
otherwise.
Our fiscal year ends on March 31 of each calendar year. Each reference to a
fiscal year in this Report, refers to the fiscal year ended March 31 of the
calendar year indicated (for example, fiscal 2023 refers to the fiscal year
ending March 31, 2023). Unless the context requires otherwise, references to
"we," "us," "our," and the "Company" refer to Modular Medical, Inc. and its
consolidated subsidiary.
Company Overview
We are a development-stage medical device company focused on the design,
development and commercialization of an innovative insulin pump using modernized
technology to increase pump adoption in the diabetes marketplace. Through the
creation of a novel two-part patch pump, our MODD1 product, we seek to
fundamentally alter the trade-offs between cost and complexity and access to the
higher standards of care that presently-available insulin pumps provide. By
simplifying and streamlining the user experience from introduction,
prescription, reimbursement, training and day-to-day use, we seek to expand the
wearable insulin delivery device market beyond the highly motivated "super
users" and expand the category into the mass market. The product seeks to serve
both the type 1 and the rapidly growing, especially in terms of device adoption,
type 2 diabetes markets.
Historically, we have financed our operations principally through private
placements and public offerings of our common stock and sales of convertible
promissory notes. Based on our current operating plan, we believe we have
adequate cash for at least the next 12 months. Our long-term 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.
15
COVID-19 and Other Macroeconomic Factors
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 has 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. 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 by U.S. and foreign government agencies
to prevent disease spread, all of which are uncertain, out of our control, and
cannot be predicted.
In March 2020, San Diego County in California, where we are based, and the state
of California issued "shelter-in-place" orders (the Orders). We complied with
the Orders and minimized business activities at our San Diego facility from
March 2020 until May 2021. During that time, we implemented a teleworking policy
for our employees and contractors to reduce on-site activity at our facility. In
May 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 U.S.
Food and Drug Administration (FDA) for approval to commercialize our pump
product. 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.
We believe that as the COVID-19 pandemic evolves, the direct and indirect
impacts of the pandemic on global macroeconomic conditions, as well as
conditions specific to us, are becoming more difficult to isolate or quantify.
In addition, these direct and indirect factors can make it difficult to isolate
and quantify the portion of our costs that are a direct result of the pandemic
and costs arising from factors that may have been influenced by the pandemic,
such as supply chain constraints, rising inflation, and recessionary fears. We
expect these factors and their effects on our operations may persist for a
longer period, even after the COVID-19 pandemic has subsided.
The continued spread of COVID-19 has also led to disruption and volatility in
the global capital markets. The Russian invasion of Ukraine in February 2022 has
led to further economic disruptions. Mounting inflationary cost pressures and
recessionary fears have negatively impacted the global economy. The U.S. Federal
Reserve increased interest rates starting in March 2022 and additional increases
are expected throughout the year. We were recently able to raise additional
capital through equity offerings in February 2022 and May 2022, however, we will
need to raise additional capital to commercialize our pump product candidate and
support our operations in the future. We may be unable to access the capital
markets, and additional capital may only be available to us on terms that could
be significantly detrimental to our existing stockholders and to our business.
For additional information on risks that could impact our future results, please
refer to "Risk Factors" in Part 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 with U.S. GAAP. The preparation of these condensed
consolidated financial statements requires us to make certain estimates and
judgments that affect the reported amounts of assets, liabilities, and expenses.
On an ongoing basis, we make these estimates based on our historical experience
and on assumptions that we consider reasonable under the circumstances. Actual
results may differ from these estimates and reported results could differ under
different assumptions or conditions. Our significant accounting policies and
estimates are disclosed in Note 1 of the Notes to Consolidated Financial
Statements in our Annual Report on Form 10-K for the year ended March 31, 2022.
As of June 30, 2022, there have been no material changes to our significant
accounting policies and estimates.
16
Results of Operations
Research and Development
Three months ended June 30, Change
2022 2021 2021 to 2022
Research and development $ 2,221,984 $ 1,788,131 $ 433,853 24.3 %
Our research and development expenses include personnel, overhead and other
costs associated with the development and initial production 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 ended
June 30, 2022 compared with the same period of 2021, primarily due to increased
engineering and operations personnel and higher stock-based compensation and
consulting costs. Our full-time R&D employee headcount increased to 23 at June
30, 2022 from 22 at June 30, 2021. R&D expenses included stock-based
compensation expenses of $316,094 and $138,286 for the three-months ended June
30, 2022 and June 30, 2021, respectively. We expect research and development
expenses to increase for the remainder of fiscal 2023, as we continue to advance
the development of our pump product and hire additional personnel to develop our
manufacturing process.
General and Administrative
Three months ended June 30, Change
2022 2021 2021 to 2022
General and administrative $ 1,277,106 $ 1,585,456 $ (308,350 ) (19.4 )%
General and administrative expenses consist primarily of personnel and related
overhead costs for marketing, finance, human resources and general management.
General and administrative expenses, or G&A, decreased for the three months
ended June 30, 2022 compared with the same period of 2021, primarily as a result
of decreased consulting costs, stock-based compensation expenses, professional
services fees and marketing fees. G&A expenses included stock-based compensation
expenses of $422,475 and $517,635 for the quarters ended June 30, 2022 and June
30, 2021, respectively. We expect G&A expenses to remain relatively flat for the
remainder of fiscal 2023.
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 three months ended June 30, 2022, we incurred a net loss of
approximately $3.5 million. For the years ended March 31, 2022 and 2021, we
incurred net losses of approximately $18.6 million and $7.4 million,
respectively. At June 30, 2022, we had a cash balance of approximately $13.7
million and an accumulated deficit of approximately $38.1 million. In May 2022,
we completed a registered direct offering of securities for net proceeds of
approximately $7.4 million. 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, 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 will be
required to curtail our research and development initiatives and take additional
measures to reduce costs in order to conserve our cash. We believe that our cash
will be sufficient to meet our working capital and capital expenditure needs for
at least the next twelve months.
17
For the three months ended June 30, 2022, we used $2,675,627 in operating
activities, which primarily resulted from our net loss of $3,498,791, net
changes in operating lease assets and liabilities of $12,587, as adjusted for
changes to operating assets and liabilities of $17,791, stock-based compensation
expenses of $738,569, $51,188 for issuances of shares of common stock in
exchange for services, depreciation and amortization expenses of $28,202, and
other immaterial adjustments. For the three months ended June 30, 2021, we used
$2,204,621 in operating activities, which primarily resulted from our net loss
of $4,835,091, increased for a non-cash gain on the PPP Note extinguishment of
$368,780 and net changes in operating lease assets and liabilities of $11,474,
as adjusted for changes to operating assets and liabilities of $403,174, a loss
on debt extinguishment of $1,321,450 stock-based compensation expenses of
$655,920, $266,910 for issuances of shares of common stock in exchange for
services, depreciation and amortization expenses of $24,649, interest expense of
$338,619 for amortization of debt discount, and other immaterial adjustments.
For the three months ended June 30, 2022, cash used in investing activities of
$76,017 was for the purchase of property and equipment. For the three months
ended June 30, 2021, cash used in investing activities of $20,076 was for the
purchase of property and equipment.
Cash provided by financing activities of $7,372,347 for the three months ended
June 30, 2022 was attributable to net proceeds from the issuance of common stock
in a registered direct offering, net of underwriting fees and issuance costs.
Cash provided by financing activities of $4,137,200 for the three months ended
June 30, 2021 was attributable to net proceeds from the issuance of our Notes.
Recently Issued Accounting Pronouncements
Recently Issued Accounting Pronouncements are detailed in Note 1 in the Notes to
the Condensed Consolidated Financial Statements included in Item 1 of this
Report.
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