Modular Medical(MODD) - 2024 Q1 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for Modular Medical, Inc., including balance sheets, statements of operations, stockholders' equity, and cash flows, along with detailed notes Condensed Consolidated Balance Sheets The balance sheet shows a significant increase in total assets and stockholders' equity from March 31, 2023, to June 30, 2023, primarily driven by an increase in cash and cash equivalents and additional paid-in capital from an equity offering | Metric | March 31, 2023 (Unaudited, in thousands) | June 30, 2023 (Unaudited, in thousands) | | :-------------------------- | :--------------------------------------- | :-------------------------------------- | | Cash and cash equivalents | $3,799 | $9,952 | | Total Current Assets | $4,046 | $10,235 | | Total Assets | $7,245 | $13,666 | | Total Current Liabilities | $979 | $1,010 | | Total Liabilities | $2,169 | $2,110 | | Common Stock (shares) | 10,949 | 21,095 | | Additional paid-in capital | $53,524 | $63,731 | | Accumulated deficit | $(48,459) | $(52,196) | | Total Stockholders' Equity | $5,076 | $11,556 | Condensed Consolidated Statements of Operations The company reported a net loss of $3,737 thousand for the three months ended June 30, 2023, slightly higher than the $3,499 thousand loss for the same period in 2022, with increased operating expenses mainly due to higher R&D costs | Metric | Three Months Ended June 30, 2023 (in thousands) | Three Months Ended June 30, 2022 (in thousands) | | :-------------------------------- | :---------------------------------------------- | :---------------------------------------------- | | Research and development | $2,604 | $2,222 | | General and administrative | $1,147 | $1,277 | | Total operating expenses | $3,751 | $3,499 | | Loss from operations | $(3,751) | $(3,499) | | Net loss | $(3,737) | $(3,499) | | Net loss per share (Basic/Diluted)| $(0.22) | $(0.30) | | Shares used in computing net loss | 17,099 | 11,588 | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity significantly increased from $5,076 thousand at March 31, 2023, to $11,556 thousand at June 30, 2023, primarily due to the issuance of common stock and warrants in an equity offering, adding $9,733 thousand to additional paid-in capital | Metric | March 31, 2023 (in thousands) | Issuance of common stock and warrants, net (in thousands) | Stock-based compensation (in thousands) | Net loss (in thousands) | June 30, 2023 (in thousands) | | :-------------------------- | :---------------------------- | :---------------------------------------- | :-------------------------------------- | :---------------------- | :--------------------------- | | Total Stockholders' Equity | $5,076 | $9,733 | $478 | $(3,737) | $11,556 | Condensed Consolidated Statements of Cash Flows The company experienced a net increase in cash and cash equivalents of $6,153 thousand for the three months ended June 30, 2023, primarily driven by $9,733 thousand in financing activities, partially offset by cash used in operating and investing activities | Cash Flow Activity | Three Months Ended June 30, 2023 (in thousands) | Three Months Ended June 30, 2022 (in thousands) | | :--------------------------------- | :---------------------------------------------- | :---------------------------------------------- | | Net cash used in operating activities | $(3,207) | $(2,675) | | Net cash used in investing activities | $(373) | $(76) | | Net cash provided by financing activities | $9,733 | $7,372 | | Net increase in cash and cash equivalents | $6,153 | $4,621 | | Cash and cash equivalents at end of period | $9,952 | $13,697 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures for the condensed consolidated financial statements, covering the company's business, significant accounting policies, balance sheet details, lease obligations, changes in stockholders' equity, stock-based compensation, income tax positions, and commitments and contingencies NOTE 1 – THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Modular Medical, Inc. is a development-stage medical device company focused on the design, development, and eventual commercialization of an innovative insulin pump (MODD1) for the diabetes marketplace, expecting continued operating losses and cash outflows, raising substantial doubt about its ability to continue as a going concern, necessitating additional capital raises - Company is a development-stage medical device company focused on an innovative two-part patch insulin pump (MODD1) to expand the wearable insulin delivery device market for type 1 and type 2 diabetes[23][81] - Expects continued operating losses and cash outflows, raising substantial doubt about the company's ability to continue as a going concern, requiring additional capital through equity or debt securities[25][26][91] - The company adopted ASU No. 2016-13 (CECL model) effective April 1, 2023, with no impact on its results of operations and financial position[53] NOTE 2 – CONSOLIDATED BALANCE SHEET DETAIL Details of property and equipment, net, show an increase from $1,721 thousand to $2,036 thousand, primarily in machinery and equipment and construction-in-process, while accrued expenses decreased from $339 thousand to $198 thousand, mainly due to a decrease in accrued wages and employee benefits | Property and Equipment, net | March 31, 2023 (in thousands) | June 30, 2023 (in thousands) | | :-------------------------- | :---------------------------- | :--------------------------- | | Machinery and equipment | $820 | $1,171 | | Construction-in-process | $1,003 | $1,018 | | Total property and equipment, net | $1,721 | $2,036 | | Accrued expenses | $339 | $198 | NOTE 3 – LEASES The company's 39-month lease at W. Bernardo Drive expired on June 30, 2023, and a new 48-month lease for Thornmint Road commenced February 1, 2023, with an initial monthly rent of $36,000 and annual increases, resulting in a right-of-use asset of approximately $1,560,000 - The 39-month lease at W. Bernardo Drive expired on June 30, 2023, with a $100,000 security deposit receivable[55] - A new 48-month lease for Thornmint Road commenced February 1, 2023, with an initial base monthly rent of $36,000 and annual increases, resulting in a right-of-use asset of approximately $1,560,000[56] | Annual Fiscal Years | Operating Lease Payments (in thousands) | | :------------------ | :-------------------------------------- | | 2024 | $327 | | 2025 | $452 | | 2026 | $470 | | 2027 | $405 | | Total future lease payments | $1,654 | | Present value of lease liability | $1,439 | NOTE 4 – STOCKHOLDERS' EQUITY In May 2023, the company completed a public offering, issuing 8,816,900 shares of common stock and warrants to purchase 4,408,450 shares, generating approximately $9,390,000 in gross proceeds, with the underwriter exercising an over-allotment option for additional securities, bringing total gross proceeds to approximately $10,798,000 - In May 2023, the company completed a public offering, selling 8,816,900 shares of common stock and warrants to purchase 4,408,450 shares, for aggregate gross proceeds of approximately $9,390,000[59] - The underwriter exercised its over-allotment option in full on May 25, 2023, purchasing additional securities for approximately $1,408,000 in gross proceeds[60] | Warrant Type | Number of Shares (in thousands) | Exercise Price | Expiration | | :----------- | :------------------------------ | :------------- | :--------- | | Common stock | 1,348 | $0.01 | — | | Common stock | 768 | $6.00 | Jan-Feb 2027 | | Common stock | 4,011 | $6.60 | Feb 2027 | | Common stock | 1,438 | $6.60 | Nov 2027 | | Common stock | 710 | $1.32 | May 2027 | | Common stock | 5,070 | $1.22 | May 2028 | | Total | 13,345 | | | NOTE 5 – STOCK-BASED COMPENSATION The company's 2017 Equity Incentive Plan was amended in January 2023 to increase reserved shares by 2,000,000, with stock-based compensation expense for Q2 2023 at approximately $484,000 and unamortized compensation cost for stock options of $3,084,000 expected to be recognized over approximately 1.90 years - Stockholders approved an increase of 2,000,000 shares reserved for issuance under the 2017 Equity Incentive Plan in January 2023[66] - Unamortized compensation cost for stock options was approximately $3,084,000 as of June 30, 2023, to be recognized over a weighted-average period of approximately 1.90 years[67] | Metric | Three Months Ended June 30, 2023 (in thousands) | Three Months Ended June 30, 2022 (in thousands) | | :-------------------------------- | :---------------------------------------------- | :---------------------------------------------- | | Stock-based compensation expense | $484 | $739 | | Weighted-average grant date fair value of options | $1.00 | $4.26 | NOTE 6 – INCOME TAXES The company has recorded a full valuation allowance against its federal and state net deferred tax assets, as management believes it is more likely than not that these assets will not be fully realized, and no liability for unrecognized tax benefits has been recorded - A full valuation allowance has been established for federal and state net deferred tax assets, as realization is not considered more likely than not[74] - No liability for unrecognized tax benefits related to uncertain tax positions has been recorded as of June 30, 2023[75] NOTE 7 – COMMITMENTS AND CONTINGENCIES The company is not currently involved in any litigation expected to have a material adverse effect, has contractual indemnification arrangements with counterparties and its officers/directors with unestimable maximum potential liability, and had outstanding purchase obligations for machinery and equipment totaling approximately $566,000 at June 30, 2023 - The company is not currently involved in any litigation that is believed to have a material adverse effect on its financial condition or results of operations[103] - The company has entered into indemnification agreements with its officers and directors; no amounts were reflected in the financial statements, and the maximum potential amount of indemnification liability is not estimable[77] - Outstanding purchase orders for machinery and equipment and related expenditures totaled approximately $566,000 at June 30, 2023[78][96] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, highlighting its development-stage status, reliance on capital raises, and the impact of economic disruptions, detailing changes in R&D and G&A expenses and reiterating going concern doubts Company Overview Modular Medical, Inc. is a development-stage medical device company focused on commercializing an innovative two-part patch insulin pump (MODD1) to expand the wearable insulin delivery market for both type 1 and type 2 diabetes, historically financing operations through equity and debt offerings, and while it believes it has adequate cash for the next 12 months, its long-term viability depends on raising additional capital - The company is a development-stage medical device company focused on designing, developing, and commercializing an innovative insulin pump (MODD1) to expand the wearable insulin delivery device market[81] - Historically, operations have been financed through private placements and public offerings of common stock and convertible promissory notes[82] - Long-term ability to continue as a going concern depends on raising additional capital through equity or debt securities[82] Recent Economic Disruptions The company acknowledges the past and potential future impacts of the COVID-19 pandemic, the Russian invasion of Ukraine, inflationary pressures, and rising interest rates on the global economy and capital markets, and while it recently accessed capital markets, future access on favorable terms is uncertain - The COVID-19 pandemic's U.S. national emergency expired in May 2023, but its future impact on operational and financial performance remains uncertain[83] - Global capital markets have experienced disruption and volatility due to the continued spread of COVID-19, the Russian invasion of Ukraine, mounting inflationary cost pressures, and rising interest rates[39][84] - Future access to capital markets and the terms of additional capital are uncertain, potentially being significantly detrimental to existing stockholders[39][84] Critical Accounting Policies and Estimates The company's financial statements are prepared in accordance with U.S. GAAP, requiring management to make estimates and judgments, and as of June 30, 2023, there have been no material changes to its significant accounting policies and estimates previously disclosed in its annual 10-K - Financial statements are prepared in accordance with U.S. GAAP, requiring management to make estimates and judgments[86] - As of June 30, 2023, there have been no material changes to the company's significant accounting policies and estimates disclosed in its most recent annual report on Form 10-K[86] Results of Operations The company's operating expenses increased for the three months ended June 30, 2023, compared to the same period in 2022, primarily driven by higher research and development costs, partially offset by a decrease in general and administrative expenses Research and Development R&D expenses increased by 17.2% to $2,604 thousand for Q2 2023, primarily due to higher employee-related costs and materials, partially offset by reduced consulting costs as the company increased headcount and completed pump product development | Metric | Three Months Ended June 30, 2023 (in thousands) | Three Months Ended June 30, 2022 (in thousands) | Change ($ in thousands) | Change (%) | | :-------------------------- | :---------------------------------------------- | :---------------------------------------------- | :---------------------- | :--------- | | Research and development | $2,604 | $2,222 | $382 | 17.2% | - Increase primarily due to increased employee-related costs (approx. $410,000) and materials costs (approx. $177,000)[88] - Partially offset by an approximately $255,000 decrease in consulting costs as employee headcount increased (34 at June 30, 2023, from 23 at June 30, 2022) and pump product development was completed[88] General and Administrative G&A expenses decreased by 10.2% to $1,147 thousand for Q2 2023, mainly due to a significant reduction in stock-based compensation expenses and consulting services, partially offset by increased facility-related and employee-related costs | Metric | Three Months Ended June 30, 2023 (in thousands) | Three Months Ended June 30, 2022 (in thousands) | Change ($ in thousands) | Change (%) | | :-------------------------- | :---------------------------------------------- | :---------------------------------------------- | :---------------------- | :--------- | | General and administrative | $1,147 | $1,277 | $(130) | (10.2)% | - Decrease primarily due to a reduction in stock-based compensation expenses (approx. $305,000) and consulting and professional services expenses (approx. $70,000)[90] - Partially offset by increases in facility-related costs (approx. $137,000) and employee-related costs (approx. $80,000)[90] Liquidity and Going Concern As a development-stage company with no current revenues, Modular Medical continues to incur operating losses and negative cash flows, resulting in an accumulated deficit of $52.2 million at June 30, 2023, and despite a recent $9.7 million equity offering, these conditions raise substantial doubt about its ability to continue as a going concern, necessitating further capital raises or cost reductions - Incurred net losses of $3.7 million for the three months ended June 30, 2023, and $13.9 million for the year ended March 31, 2023[91] - Cash balance of approximately $10.0 million and an accumulated deficit of $52.2 million at June 30, 2023[91] - Conditions raise substantial doubt about the company's ability to continue as a going concern, requiring additional capital or curtailment of R&D initiatives and cost reductions[91] | Cash Flow Activity | Three Months Ended June 30, 2023 (in thousands) | Three Months Ended June 30, 2022 (in thousands) | | :--------------------------------- | :---------------------------------------------- | :---------------------------------------------- | | Net cash used in operating activities | $(3,207) | $(2,675) | | Net cash used in investing activities | $(373) | $(76) | | Net cash provided by financing activities | $9,733 | $7,372 | Purchase Obligations The company's primary purchase obligations consist of purchase orders for machinery and equipment, totaling approximately $566,000 as of June 30, 2023 - Outstanding purchase orders for machinery and equipment and related expenditures totaled approximately $566,000 at June 30, 2023[78][96] Recently Issued Accounting Pronouncements This section refers to Note 1 of the financial statements for details on recently issued accounting pronouncements - Details on recently issued accounting pronouncements are provided in Note 1 of the Notes to the Condensed Consolidated Financial Statements[97] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2023, and there were no material changes in internal control over financial reporting during the three months ended June 30, 2023 Disclosure Controls and Procedures Management, including the Chief Executive Officer, evaluated the effectiveness of disclosure controls and procedures and concluded they were effective as of June 30, 2023 - Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2023[100] Changes in Internal Control over Financial Reporting No material changes in internal control over financial reporting occurred during the three months ended June 30, 2023 - There was no change in internal control over financial reporting that materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting during the three months ended June 30, 2023[101] PART II — OTHER INFORMATION Item 1. Legal Proceedings The company is not currently involved in any litigation that is believed to have a material adverse effect on its financial condition or results of operations - The company is not currently involved in any litigation that is believed to have a material adverse effect on its financial condition or results of operations[103] Item 1A. Risk Factors There are no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended March 31, 2023 - There are no material changes to the risk factors set forth under Item 1A of the Annual Report on Form 10-K for the year ended March 31, 2023[104] Item 2. Unregistered Sales of Equity Securities On June 30, 2023, the company issued 6,375 shares of restricted common stock to four non-employee directors under its Outside Director Compensation Plan, pursuant to exemptions from registration - On June 30, 2023, the company issued a total of 6,375 shares of restricted common stock to four non-employee directors in accordance with its Outside Director Compensation Plan[105] - These issuances were made pursuant to exemptions from registration under Section 4(2) and/or Rule 506 of Regulation D of the Securities Act[105] Item 3. Defaults Upon Senior Securities There have been no defaults in payment of principal, interest, or any other material default with respect to any of the company's indebtedness - There has been no default in the payment of principal, interest, or any other material default with respect to any indebtedness of the company[106] Item 4. Mine Safety Disclosures This item is not applicable to the company - This item is not applicable[107] Item 5. Other Information No other information is reported under this item - None[108] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including the Underwriting Agreement, forms of warrants, certifications (302 and 906), and XBRL financial data - Exhibits include the Form of Underwriting Agreement, forms of warrants from the May 2023 Public Offering, certifications of Principal Executive Officer and Principal Financial Officer (Sections 302 and 906 of Sarbanes-Oxley Act), and Inline Extensible Business Reporting Language (Inline XBRL) financial information[110] Signatures The report is signed by James E. Besser, Chief Executive Officer, and Paul DiPerna, Chairman, President, Chief Financial Officer, and Treasurer, on August 14, 2023 - The report was signed on August 14, 2023, by James E. Besser, Chief Executive Officer, and Paul DiPerna, Chairman, President, Chief Financial Officer, and Treasurer[114]