Modular Medical, Inc. Income Taxes Disclosure

NOTE 6 – INCOME TAXES

 

The income tax provision consisted of the following:

 

		Year Ended March 31,
		2025				2024
		(in thousands)
Current provision:
Federal		$	—			$	—
State			2				2
			2				2
Deferred provision:
Federal			—				—
State			—				—
			—				—
Total income tax provision		$	2			$	2

 

A reconciliation of income taxes provided at the federal statutory rate to the actual income tax provision is as follows:

 

		Year Ended March 31,
		2025				2024
Federal statutory rate			(21	)%			(21	)%
State tax rate, net of federal benefit			(6	)%			(6	)%
Research and development tax credits			(5	)%			(7	)%
Change in valuation allowance			30	%			32	%
Other			2	%			2	%
Effective income tax rate			—				—

 

The losses before income tax provision for the years ended March 31, 2025 and 2024 were solely attributable to US operations.

 

Significant components of the Company’s deferred tax assets and liabilities were (in thousands):

 

		March 31,
		2025				2024
Net operating loss carryforwards		$	14,343			$	10,860
Capitalized research and development expense			5,391				3,058
Stock-based compensation expense			1,267				2,818
Research and development tax credits			2,420				2,568
Lease liability			230				—
Reserves, accruals and other			82				—
Total gross deferred tax assets			23,733				19,304
Right-of-use asset			(215	)			—
Property and equipment			(481	)			(46	)
Reserves, accruals and other			—				(49	)
Total deferred tax liabilities			(696	)			(95	)
Less: valuation allowance			(23,037	)			(19,209	)
Deferred tax assets, net		$	—			$	—

  

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Based on the available information and other factors, management believes it is more likely than not that the net deferred tax assets at March 31, 2025 and 2024, will not be fully realizable. Accordingly, management has recorded a full valuation allowance against its net deferred tax assets at March 31, 2025 and 2024. The net change in the total valuation allowance for the year ended March 31, 2025 and 2024 was an increase of approximately $3,828,000 and $4,387,000 respectively.

 

At March 31, 2025, the Company had net operating loss carryforwards (“NOLs”) of approximately $45,556,000 for federal income tax purposes and $68,499,000 for state income tax purposes. These NOLs are available to reduce future taxable income and will expire at various times from 2037 through 2045, except federal NOLs from fiscal 2018 and later, which will never expire.

 

The Company also had federal research and development tax credit carryforwards of approximately $2,600,000, which will begin expiring at various times from 2038 through 2045, and state research and development credits of approximately $1,074,000, which do not have an expiration date.

 

Internal Revenue Code Sections 382 and 383 place a limitation on the amount of net operating loss and income tax credit carryforwards that can offset taxable income after a change in control (generally a greater than 50% change in ownership) of a loss corporation. Most states have similar rules. Due to these “change in ownership” provisions, utilization of the net operating loss carryforwards may be subject to an annual limitation regarding their utilization against taxable income.

The Company’s unrecognized tax benefits were as follows (in thousands):

 

		Year Ended March 31,
		2025				2024
Beginning balance			—				—
Additions based on tax positions related to the current year		$	405				—
Additions for tax positions of prior years			699				—
Ending balance		$	1,104				—

 

There are no unrecognized tax benefits that, if recognized, would impact the Company's effective tax rate. The Company's policy is to include interest and penalties related to unrecognized tax benefits within the Company's provision for income taxes. As of March 31, 2025, the Company had no accrual for interest and penalties related to unrecognized tax benefits. The Company does not expect any unrecognized tax benefits to be recognized within the next 12 months.

 

The Company files U.S. federal and various state income tax returns. The Company is not currently under audit by any taxing authorities. The federal and state income tax returns are generally subject to examination for tax years 2022 through 2024. The statute of limitations for U.S. net operating losses and research and development tax credit carryovers begin to toll in the year they are used; therefore, all carryovers are subject to examination.