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
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
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
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
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, 2025 and 2024, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended
March 31, 2025, 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, 2025 and 2024, and the results of its operations and its cash flows for each of the years in the two-year period ended
March 31, 2025, 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 will need to raise additional funds to sustain its operations and meet future obligations
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 future 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:
Stock Based Compensation
As discussed in Note 5, during the year ended
March 31, 2025, 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 the expense over the vesting period.
We identified the valuation recognition of stock-based
compensation of granted stock options as a critical audit matter due to the significant judgments and assumptions required by management
when developing the fair value of the options and the potential for material impact. The fair value includes subjective assumptions including
the expected stock price volatility, expected term of the granted options, and the risk-free interest rate.
The primary procedures we performed to address
this critical audit matter included:
/s/ Farber Hass Hurley LLP
PCAOB Firm ID 223
We have served as the Company’s auditor
since 2018.
Chatsworth, California
June 20, 2025
F-3
Modular Medical, Inc.
Consolidated
Balance Sheets
(In thousands, except par value)
ASSETS
CURRENT ASSETS
Prepaid expenses and other 422 465
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Short-term lease liabilities 423 373
Long-term lease liabilities 393 817
Commitments and Contingencies (Note 7)
STOCKHOLDERS’ EQUITY
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 18,735 $ 13,807
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,
Operating expenses
Provision for income taxes 2 2
Net loss per share
Basic and diluted $ (0.51 ) $ (0.78 )
Shares used in computing net loss per share
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
At-the-market sales of stock, net 154 — 278 — 278
Shares issued for services 2 — 1 — 1
Issuances under equity incentive plan 88 — 37 — 37
Stock-based compensation — — 2,664 — 2,664
Shares issued for services 30 — 51 — 51
Issuances under equity incentive plan 106 — 24 — 24
Stock-based compensation — — 2,357 — 2,357
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,
Cash Flows from operating activities
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense 2,381 2,701
Loss on asset disposal — 21
Depreciation and amortization 1,063 426
Shares issued for services 51 19
Other 1 —
Changes in assets and liabilities:
Prepaid expenses and other assets (100 ) (94 )
Lease right-of-use assets 370 342
Accounts payable and accrued expenses (288 ) 458
Lease liabilities (374 ) (355 )
Net cash used in operating activities (15,720 ) (13,952 )
Cash flows from investing activities
Purchases of property and equipment (2,493 ) (1,700 )
Net cash used in investing activities (2,493 ) (1,700 )
Cash flows from financing activities
Proceeds from at-the-market sales of common stock, net 2,114 278
Proceeds from exercise of common stock warrants 1,251 742
Proceeds from public offering of common stock and warrants, net 7,344 20,065
Proceeds from private placements of common stock and warrants, net 11,367 —
Net cash provided by financing activities 22,076 21,085
Net increase in cash and cash equivalents 3,863 5,433
Cash and cash equivalents, at beginning of year 9,232 3,799
Cash and cash equivalents, at end of year $ 13,095 $ 9,232
Supplemental disclosure:
Noncash investing and financing activities:
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 until approximately
2017 when it acquired all of the issued and outstanding shares of Quasuras, Inc., a Delaware corporation (“Quasuras”), and
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 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, and, in September 2024, the Company received FDA clearance to market and sell
its MODD1 pump in the United States.
Liquidity and Going Concern
The Company does not currently have revenues to generate cash flows
to cover operating expenses. Since its inception, the Company has incurred operating losses and negative cash flows in each year due to
costs incurred in connection with its operations. 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 commercialization of its products. The Company
expects that its operating expenses will continue to increase, and, as a result, it will eventually need to generate significant revenue
to achieve profitability. When considered with its current operating plan, these conditions 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 the consolidated financial statements as of and for the year ended March
31, 2025, 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. 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 pump products, 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 product
commercialization and research and development initiatives and take additional measures to reduce costs in order to conserve its cash.
In November 2024, the Company completed a public offering of its common stock for net proceeds of approximately $7.3 million. In March
2025, the Company completed private placements of its common stock and warrants for net proceeds of approximately $11.4 million.
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 2025 refers to the fiscal year ending March
31, 2025). 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.
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 finance and
administrative expenses.
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.
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.
F-9
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:
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.
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):
Options to purchase common stock 4,917 3,689
Unvested restricted stock units 104 187
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, 2025 and 2024, 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 adoption of this standard did not have a material impact on the Company’s consolidated
financial statements, but it has resulted in additional disclosures within the footnotes to the consolidated financial statements (see
Note 8).
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 does not expect that the adoption of this ASU will have a
material impact on the presentation of its consolidated financial statements.
In November 2024, the FASB issued ASU
No. 2024-03, Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40):
Disaggregation of Income Statement Expenses. The new standard requires disclosures about specific types of expenses included in the
expense captions presented on the face of the income statement as well as disclosures about selling expenses. The standard is effective
for the Company for annual periods beginning April 1, 2027 and interim periods beginning April 1, 2028, with early adoption permitted.
The standard may be applied either prospectively to financial statements issued for reporting periods after the effective date or retrospectively
to any or all prior periods presented in the financial statements. The Company is evaluating the impact that this ASU will have on the
presentation of its consolidated financial statements.
NOTE 2 – CONSOLIDATED BALANCE
SHEET DETAIL
(in thousands)
Prepaid and other current assets:
Receivable from transfer agent for warrant exercise proceeds — 142
Other receivables 70 5
(in thousands)
Property and equipment, net:
Computer equipment and software 66 66
Construction-in-process 685 283
Leasehold improvements 33 33
Office equipment 45 63
Less: accumulated depreciation and amortization (1,687 ) (679 )
(in thousands)
Accrued expenses:
NOTE 3
– LEASES
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, 2025, are listed in the table below (in thousands).
Fiscal year ending March 31,
Total future lease payments 875
Less: Imputed interest (59 )
Present value of lease liabilities $ 816
Cash paid for amounts included in the
measurement of lease liabilities was approximately $452,000 and $476,000 for the years ended March 31, 2025 and 2024, respectively. Rent
expense was approximately $449,000 for each of the years ended March 31, 2025 and 2024.
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.
ATM Offering
In November 2023, the Company entered into a Sales
Agreement (the “ATM Agreement”) with Leerink Partners LLC (“Leerink”) under which the Company may offer and sell,