Modular Medical, Inc.: Form 10-Q for the period ended Dec 31, 2020

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 proposed product, strategy, competition, expected financial performance, capital position and capital raising efforts, and other aspects of our business identified in our most recent Annual Report on Form 10-K for the year ended March 31, 2020 (the 2020 10-K) filed with the Securities and Exchange Commission on June 29, 2020 and in other reports that we file from time to time with the Securities and Exchange Commission. Any statements about, among other items, 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 2020 10-K. 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 COVID-19, and related issues that may arise therefrom and/or be related thereto. 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 2021 refers to the fiscal year ending March 31, 2021). 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 eventual commercialization of an innovative insulin pump to address shortcomings and problems represented by the relatively limited adoption of currently available pumps for insulin dependent people with diabetes. We have developed a hardware technology allowing people with insulin-dependent diabetes to receive their daily insulin in two ways, through a continuous “basal” delivery allowing a small amount of insulin to be in the blood at all times and a “bolus” delivery to address meal time glucose input and to address when the blood glucose level becomes excessively high. By addressing the substantial time and effort required by them to effectively treat their condition, we believe we can address the less technically savvy, less motivated part of the market, which we believe is underserved.

We have substantially completed development of, but have not yet obtained U.S. Food and Drug Administration, or FDA, clearance for, our insulin pump, and we have therefore not generated any revenues from product sales. Our net losses were approximately $5.6 million and $5.3 million for the nine months ended December 31, 2020 and year ended March 31, 2020, respectively. As of December 31, 2020, we had a negative working capital of approximately $0.2 million and an accumulated deficit of approximately $14.2 million.

Historically, we have financed our operations principally through private placements of our common stock. 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 of the notes to the condensed consolidated financial statements and under Liquidity and Capital Resources below.

Impacts of COVID-19

The global outbreak of 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 have been complying with the Orders and have minimized business activities at our San Diego facility. We have implemented a teleworking policy for our employees and contractors to minimize on-site activity at our facility. We have experienced longer lead times for certain components used to manufacture initial quantities of our products for our product-approval submission to the FDA, which is expected to occur in the first half of calendar year 2021. In addition, our teleworking policy, which was required to comply with the Orders, has required us to minimize the number of our employees and contractors that are working on site at our facility at any one time. We have implemented a COVID-19 policy and related protocols and procedures, which are based on guidance from the U.S. government’s Centers for Disease Control and Prevention and San Diego County, to address the health and safety of our employees and their families.

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. In addition, we could experience delays in obtaining FDA approval for our product, if the FDA does not review our submission in a timely manner, as the FDA may place higher priority on reviewing COVID-19 product-related submissions.

The continued spread of COVID-19 has also led to disruption and volatility in the global capital markets. We have been able to raise additional capital in a private placement that commenced in March 2020 and received a $368,780 unsecured loan (the PPP Note) under the Paycheck Protection Program (the PPP), which was established under the U.S. government’s Coronavirus Aid, Relief, and Economic Security Act (see discussion below under Liquidity and Capital Resources). However, we need to raise additional capital to support our operations. 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 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, 2020. As of December 31, 2020, there have been no material changes to our significant accounting policies and estimates.

Results of Operations

Research and Development

Our research and development expenses include personnel, consulting, tooling 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 ended December 31, 2020 primarily due to increased engineering and manufacturing personnel and consulting costs, as we have increased our development and manufacturing activities.

R&D expenses increased for the nine months ended December 31, 2020 primarily due to increased engineering and manufacturing personnel and consulting costs. Our R&D employee headcount increased to 15 at December 31, 2020 from eight at December 31, 2019. R&D expenses included non-cash, stock-based compensation expenses of $96,127 and $66,314 for the three months ended December 31, 2020 and 2019, respectively, and $301,767 and $317,783 for the nine months ended December 31, 2020 and 2019, respectively. We expect R&D expenses to decrease for the remainder of fiscal 2021, as we intend to closely manage our expenses and reduce certain expenditures.

General and Administrative

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 ended December 31, 2020 primarily as a result of increased personnel costs, stock-based compensation expenses and facilities costs, partially offset by reduced consulting and professional services expenses. Our G&A employee headcount increased to four at December 31, 2020 from two at December 31, 2019. G&A expenses included stock-based compensation expenses of $198,926 and $120,431 for the three months ended December 31, 2020 and 2019, respectively, and $638,607 and $219,745 for the nine months ended December 31, 2020 and 2019, respectively. We expect G&A expenses to decrease for the remainder of fiscal 2021, as we intend to closely manage our expenses and reduce certain expenditures.

Interest Income

Interest income consists of interest earned on our cash deposits. The decrease in interest income for fiscal 2021 compared with the same periods for fiscal 2020 was primarily attributable to a reduction in interest rates in fiscal 2021 combined with lower average cash balances during fiscal 2021.

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 ended December 31, 2020, we incurred a net loss of approximately $5.6 million. For the years ended March 31, 2020 and 2019, we incurred net losses of approximately $5.3 million and approximately $2.5 million, respectively. At December 31, 2020, we had a cash balance of approximately $0.6 million and an accumulated deficit of approximately $14.2 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 issuance date of the financial statements included in Item 1 of this Report. 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 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 current and future operations, and we are currently seeking such additional financing. As discussed in the notes to our condensed consolidated financial statements in Item 1 of this Report, during 2020, we obtained additional equity financing through a private placement of our common stock. In addition, we obtained a $368,780 loan (the PPP Note) from Silicon Valley Bank in April 2020 under the U.S. Small Business Administration Paycheck Protection Program (the PPP). The full amount of the PPP Note is due in April 2022, and interest accrues on the outstanding principal balance of the PPP Note at a fixed rate of 1.0% per annum. Monthly payments will be due and payable beginning in September 2021 and continue each month thereafter until maturity. In October 2020, we applied to have the PPP Note forgiven, as permitted under the terms of the PPP. No assurance is provided that we will obtain forgiveness of the PPP Note in whole or in part, but we believe we have used the proceeds in accordance with the PPP to qualify for forgiveness of the PPP Note. As disclosed in the notes to the condensed consolidated financial statements in Item 1 of this Report, in February 2021, we issued $1.1 million aggregate principal amount of convertible promissory notes.

Our operating needs include the planned costs to operate our business, including amounts required to fund research and development activities, including those related to our FDA submission and 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 ended December 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 December 31, 2019, we used $2,776,998 in operating activities, which primarily resulted from our net loss of $3,403,281, which was partially offset by changes to operating assets and liabilities of $64,915, and adjusted for non-cash charges, which included stock-based compensation expenses of $537,528 and depreciation and amortization expenses of $23,840.

For the nine months ended December 31, 2020, cash used in investing activities of $109,541 was due to the purchase of property and equipment. We used $58,278 of cash to purchase equipment during the nine months ended December 31, 2019.

Cash provided by financing activities of $2,154,662 for the nine months ended December 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 in March 2020 and $368,780 in proceeds from the PPP Note. We had no cash flows related to financing activities during the nine months ended December 31, 2019.

Disclosure Controls and Procedures.

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our management, including our Chief Executive Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on this evaluation, our management concluded that, as of December 31, 2020, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting.

During the nine months ended December 31, 2020, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

We face many significant risks in our business, some of which are unknown to us and not presently foreseen. These risks could have a material adverse impact on our business, financial condition and results of operations in the future. We disclosed a number of material risks under Item 1A of our Annual Report on Form 10-K for the year ended March 31, 2020, which we filed with the SEC on June 29, 2020.

COVID-19

The global outbreak of 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 world 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 extent of the impact on our operational and financial performance will depend on future developments, including 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.

We have been complying with county and state orders and have implemented a teleworking policy for our employees and contractors and significantly minimized the number of employees who visit our office. However, a facility closure, work slowdowns or temporary stoppage at our facility or at one of our suppliers could occur, which could have a longer-term impact and could delay our product production and delay the submission of our product for approval by the FDA and affect our ability to conduct business.

If our workforce is unable to work effectively, including because of illness, quarantines, absenteeism, government actions, facility closure, travel restrictions or other restrictions in connection with the COVID-19 pandemic, our operations will be negatively impacted. We may be unable to develop our product, and our costs may increase as a result of the COVID-19 outbreak. The impacts could worsen if there is an extended duration of any COVID-19 outbreak or a resurgence of COVID-19 infection in affected regions after they have begun to experience improvement.

We rely on other companies to provide components and to perform services for us. An extended period of supply chain disruption caused by the response to COVID-19 could impact our ability to produce our initial product quantities, and, if we are not able to implement alternatives or other mitigations, product deliveries would be adversely impacted and negatively impact our business, financial condition, operating results and cash flows. Limitations on government operations can also impact regulatory approvals that are necessary for us to operate our business.

The continued spread of COVID-19 has also led to disruption and volatility in the global capital markets. We have been able to raise capital in a private placement that commenced in March 2020, however, we will need to raise additional capital to 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.