NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31,
2018
NOTE 1 - ORGANIZATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Modular Medical,
Inc. (the “
Company
”) was organized under the laws of the State of Nevada on October 22, 1998, to engage in
any lawful purpose. The Company has at the present time, not paid any dividends and any dividends that may be paid in the
future will depend upon the financial requirements of the Company and other relevant factors.
Through the
year ended June 30, 2001, the Company was seeking to rent out snowmobiles and all-terrain vehicles (ATV’s). In June
of 2000, the Company also purchased the rights to manufacture, use, market, and sell the Net Caddy, a backpack style bag used
to transport fishing gear. The Company abandoned both the snowmobile and ATV’s plans, and the Net Caddy plans.
Quasuras, Inc.
(“
Quauras
”) was incorporated in Delaware on April 20, 2015.
Quasuras has
developed a hardware technology allowing people with 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 too high. By addressing the time and effort
required to effectively treat their condition, Quasuras believes it can address the less technically savvy, less motivated part
of the market.
Reorganization
On July 24,
2017, pursuant to a Reorganization and Share Exchange Agreement, by and among the Company and Quasuras, the Company acquired one
hundred percent (100%) of the issued and outstanding shares of Quasuras for 7,582,060 shares of the Company, resulting in Quasuras
becoming a wholly-owned subsidiary of the Company. Since the major shareholder of Quasuras retained control of both the Company
and Quasuras, the share exchange was accounted for as a reverse merger. As such, the Company recognized the assets and liabilities
of Quasuras, acquired in the Reorganization, at their historical carrying amounts.
Pursuant to
the reorganization, the Company changed the fiscal year end from June 30 to March 31, to coincide with the year end for Quasuras.
The financial
statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States
of America. The following summarizes the more significant of such policies:
Basis of Presentation
The preparation
of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (“
GAAP
”)
requires management to make estimates and assumptions that affect reported amounts and related disclosures.
Principles
of Consolidation
The consolidated
financial statements include the accounts of Modular Medical, Inc. and its wholly-owned subsidiary Quasuras, Inc., and are collectively
referred to as the “Company”. All material intercompany accounts, transactions and profits were eliminated in consolidation.
Use of Estimates
The preparation
of the accompanying financial statements in conformity with 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 financial
statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
Reportable Segment
The Company
has one reportable segment. The Company’s activities are interrelated and each activity is dependent upon and supportive
of the other. Accordingly, all significant operating decisions are based on analysis of financial products provided as a single
global business.
Revenue Recognition
Revenue is recognized
when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability
is probable. Revenue generally is recognized net of allowances for returns and any taxes collected from customers and subsequently
remitted to governmental authorities.
Cost of Sales
Cost of sales
consists primarily of inventory costs, as well as warehousing costs (including the cost of warehouse labor), shipping, importation
duties and charges, third party royalties, and product sampling.
Research
and Development
The Company
expenses the cost of research and development as incurred. Research and development costs charged to operations were approximately
$332,642 and $0 for the fiscal year ended March 31, 2018 and 2017, respectively.
General and Administration
General and
administration expense consists primarily of payroll and benefit related costs, rent, office expenses, and meetings and travel.
Income Taxes
The Company
utilizes FASB Accounting Standards Codification (ASC) Topic 740, Income Taxes, which requires recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that were included in the financial statements or tax returns.
Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax
bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory
tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be realized.
The Company
accounts for uncertain tax positions in accordance with FASB ASC Topic 740. 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 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 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 selling, general and administrative
expenses in the statements of income.
At March 31,
2018 and 2017, the Company had not taken any significant uncertain tax positions on its tax returns for periods ended March 31,
2018 and prior years or in computing its tax provision for 2017. Management has considered its tax positions and believes that
all of the positions taken by the Company in its Federal and State tax returns are more likely than not to be sustained upon examination.
The Company is subject to examination by U.S. Federal and State tax authorities for the period ended March 31, 2016 to the present,
generally for three years after they are filed.
Concentration
of Credit Risk
Financial instruments
that potentially subject the Company to concentration of credit risk consist primarily of cash and accounts receivable. The Company
maintains cash balances at financial institutions within the United States, which are insured by the Federal Deposit Insurance
Corporation (FDIC) up to limits of approximately $250,000. The Company has not experienced any losses with regard to its bank
accounts and believes it is not exposed to any risk of loss on its cash bank accounts.
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.
Contingencies
Certain conditions
may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be
resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent
liabilities, and such assessment inherently involves judgment. In assessing loss contingencies related to legal proceedings that
are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates
the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought
or expected to be sought.
If the assessment
of a contingency indicates it is probable that a material loss has been incurred and the amount of the liability can be estimated,
then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a
potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the
nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would
be disclosed. Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees,
in which case the guarantee would be disclosed.
Cash and Cash Equivalents
Cash and
cash equivalents include cash in hand and cash in demand deposits, certificates of deposit and all highly liquid debt instruments
with original maturities of three months or less. At March 31, 2018 and March 31, 2017, the Company had $4,296,676 and $392,007,
respectively, in cash. Deposits at the bank are insured up to $250,000 by the Federal Deposit Insurance Corporation. The
Company’s uninsured portion of the balances held at the bank aggregated to approximately $3,933,002 and $142,007, respectively.
No reserve has been made in the financial statements for any possible loss due to any financial institution failure. The
Company has not experienced any losses in such accounts and believes we are not exposed to any significant risk on cash and cash
equivalents.
Property, Plant & Equipment
Property and
equipment is stated at cost and depreciated using the straight-line method over the shorter of the estimated useful life of the
asset or the lease term. The estimated useful lives of our property and equipment are generally as follows: computer software
developed or acquired for internal use, three to 10 years; computer equipment, two to three years; buildings and improvements,
five to 15 years; leasehold improvements, two to 10 years; and furniture and equipment, one to five years.
As of March 31, 2018 and March 31,
2017, property, plant and equipment amounted to:
|
|
March 31,
2018
|
|
|
March 31,
2017
|
|
Computer and equipment
|
|
$
|
15,103
|
|
|
$
|
—
|
|
Less: accumulated depreciation
|
|
|
(1,844
|
)
|
|
|
—
|
|
|
|
$
|
13,259
|
|
|
$
|
—
|
|
Depreciation expenses for the year
ended March 31, 2018 and 2017 was $1,844 and $0, respectively.
Fair Value of Financial Instrument
For certain
of the Company’s financial instruments, including cash and equivalents, accrued liabilities and short-term debt, the carrying
amounts approximate their fair values due to their short maturities. ASC Topic 820, “Fair Value Measurements and Disclosures,”
requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,”
defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances
disclosure requirements for fair value measures. The carrying amounts reported in the balance sheets for receivables and current
liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period
of time between the origination of such instruments and their expected realization and their current market rate of interest.
The three levels of valuation hierarchy are defined as follows:
Level 1 inputs
to the valuation methodology are quoted prices for identical assets or liabilities in active markets.
Level 2 inputs
to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 inputs
to the valuation methodology are unobservable and significant to the fair value measurement.
Due to their
short-term nature, the carrying values of cash and equivalents, accounts receivable, accounts payable, and accrued expenses, approximate
fair value. Based on borrowing rates currently available to the Company for loans with similar terms, the carrying value of the
notes payable approximates fair value.
Earnings Per Share (“EPS”)
Basic EPS is
computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the
period. Diluted EPS is computed similar to basic net income per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if all the potential common shares, warrants and stock options
had been issued and if the additional common shares were dilutive. Diluted EPS is based on the assumption that all dilutive convertible
shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method for the outstanding
options and the if-converted method for the outstanding convertible preferred shares. Under the treasury stock method, options
and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds
obtained thereby were used to purchase common stock at the average market price during the period. Under the if-converted method,
convertible outstanding instruments are assumed to be converted into common stock at the beginning of the period (or at the time
of issuance, if later).
The following
table sets for the computation of basic and diluted earnings per share for the fiscal years ended March 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
March 31,
2018
|
|
|
March 31,
2017
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(659,246
|
)
|
|
$
|
(29,256
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss Per Share
|
|
|
|
|
|
|
|
|
Basic and Diluted:
|
|
$
|
(0.049
|
)
|
|
$
|
(0.003
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares used in computing basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
13,336,309
|
|
|
|
9,732,986
|
|
Diluted
|
|
|
13,336,309
|
|
|
|
9,732,986
|
|
Recently Issued Accounting Pronouncements
In May 2014,
the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, issued as a new Topic, ASC Topic 606. The new
revenue recognition standard supersedes all existing revenue recognition guidance. Under this ASU, an entity should recognize
revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. ASU 2015-14, issued in August 2015, deferred the effective date
of ASU 2014-09 to the first quarter of 2018, with early adoption permitted in the first quarter of 2017. The Company is currently
evaluating the effect that adopting this new accounting guidance will have on its results of operations, cash flows and financial
position.
In January 2016,
The FASB issued ASU No. 2016-01,
Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities
(Topic 825)
. ASU No. 2016-01 revises the classification and measurement of investments in certain equity investments and the
presentation of certain fair value changes for certain financial liabilities measured at fair value. ASU No. 2016-01 requires
the change in fair value of many equity investments to be recognized in net income. For non-public companies, ASU 2016-01 is effective
for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019.
We are currently evaluating the impact of the adoption of ASU 2016-01 on our consolidated financial statements.
In August 2016,
the Financial Accounting Standards Board (“
FASB
”) issued Accounting Standards Update (“
ASU
”)
No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This update addresses
a diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows
under Topic 230, Statement of Cash Flows, and other Topics. The amendments in this Update are effective for public business entities
for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted,
including adoption in an interim period. We adopted this ASU in 2016 and the implementation did not have a material impact on
our financial position or statement of operations.
In
August 2017, the FASB issued guidance that eases certain documentation and assessment requirements of hedge effectiveness and
modifies the accounting for components excluded from the assessment. Some of the modifications include the ineffectiveness of
derivative gain/loss in highly effective cash flow hedge to be recorded in OCI, the change in fair value of derivative to be recorded
in the same income statement line as hedged item, and additional disclosures required on the cumulative basis adjustment in fair
value hedges and the effect of hedging on financial statement lines for components excluded from the assessment. The amendment
also simplifies the application of hedge accounting in certain situations to permit new hedging strategies to be eligible for
hedge accounting. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods
beginning after December 15, 2018, our fiscal 2020. Early adoption is permitted and the modified retrospective transition method
should be applied. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
Other recent
accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public
Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on
the Company’s present or future consolidated financial statements.
Reclassification
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 flow.
NOTE 2- REORGANIZATION AND PRIVATE
PLACEMENT
On April
26, 2017, Modular issued 2,900,000 shares (the “
Control Block
”), of newly issued, restricted common stock,
par value, $0.001, per share, for a purchase price of $375,000, resulting in a change in control of Modular.
On July
24, 2017, pursuant to a Reorganization and Share Exchange Agreement, by and among, Modular, 3 Quasuras Shareholders and Quasuras
(the “
Acquisition Agreement
”), the Company acquired all 4,400,000 shares of Quasuras’ common stock which
represented one hundred percent (100%) of the issued and outstanding shares of Quasuras for 7,582,060 shares of our common stock,
resulting in Quasuras becoming our wholly-owned subsidiary (the “
Acquisition
”).
Simultaneously
with the closing of the Acquisition and as a condition thereto, we sold (the “
Private Placement
”), in a private
placement an aggregate of 7,233,031 for cash and 568,182 from reissuance of previously canceled shares of our common stock
pursuant to one or more exemptions from the registration requirements of the Securities Act, at a purchase price of $0.66 per
share resulting in net proceeds to us of approximately $4,731,872. Simultaneously with the Acquisition and Private Placement,
the Company cancelled all 2,900,000 Control Block shares it had issued in the Control Block Acquisition (the “
Share Cancellation
”).
In connection with the Private Placement, we paid $41,928 as compensation in connection with sales of our shares therein.
Following
the Acquisition, the Private Placement and the Share Cancellation, we had issued and outstanding 15,983,273 shares of our common
stock.
The cash
received in the private placement was recorded as the cash received in reorganization in the accompanying financial statements.
Simultaneously
with and as a condition to the closing of the Acquisition and the Private Placement, pursuant to an Intellectual Property Transfer
Agreement, dated as of July 24, 2017, by and among us, Quasuras and Mr. DiPerna (the “
IP Transfer Agreement
”),
Mr. DiPerna transferred to us all intellectual property rights owned directly and/or indirectly by him related to our proposed
business. Separately, we agreed to pay Mr. DiPerna as part of his compensation for services to be performed for us pursuant to
a Royalty Agreement (the “
Royalty Agreement
”) certain fees based upon future sales, if any, of our proposed
product subject to a maximum $10,000,000 cap on the aggregate amount of fees that Mr. DiPerna could earn from such arrangement.
NOTE 3 – ACCRUED EXPENSES
As
of March 31, 2018 and 2017, accrued expenses amounted to $14,955 and $8,425, respectively. Accrued expenses comprised of accrued
legal and professional charges as of March 31, 2018 and March 31, 2017.
NOTE 4 – PAYABLE TO
RELATED PARTY
Payable to related
party comprises of the amounts paid by the major shareholder on behalf of the Company. The payable is unsecured, non-interest
bearing and due on demand. As of March 31, 2018 and 2017, respectively, the payable to related party amounted to $516 and $21,256.
NOTE 5 – STOCKHOLDERS’
EQUITY
Common stock
On July 24,
2017, pursuant to a Reorganization and Share Exchange Agreement, by and among, the Company and Quasuras Inc., the Company acquired
one hundred percent (100%) of the issued and outstanding shares of Quasuras for 7,582,060 shares of the Company, resulting in
Quasuras becoming a wholly-owned subsidiary of the Company. The historical equity for Quasuras was restated pursuant to the reorganization.
The Company
has 50,000,000 shares of common stock authorized. The par value of the shares is $0.001. As of March 31, 2018, 15,983,273 shares
of common stock of the Company were issued and outstanding.
Preferred
Stock
The Company
has 5,000,000 shares of preferred stock authorized. The par value of the shares is $0.001. As of March 31, 2018, none of the shares
of preferred stock of the Company were issued.
Stock Options
On October 19,
2017, the Board of Directors approved an Employee Stock Option Program (“ESOP”) that reserves 3,000,000 shares of
common stock of the Company to be issued. Under the Company’s ESOP, eligible employees, directors and consultants are granted
options to purchase shares of common stock of the Company. The ESOP is administered by the Company’s Board of Directors
or, in the alternative, if necessary, a committee designated by the Board of Directors, and has the sole power over the exercise
of the ESOP. The Board of Directors determines whether the ESOP will allow for the issuance of shares of common stock or an option
to purchase shares of common stock, such option designated as either an incentive stock option or a non-qualified stock option.
The exercise
or purchase price shall be calculated as follows:
|
(i)
|
In
the case of an incentive stock option, (A) granted to employees, directors and consultants
who, at the time of the grant of such incentive stock option own stock representing more
than ten percent (10%) of the voting power of all classes of stock of the Company, the
per share exercise price shall be not less than one hundred ten percent (110%) of the
fair market value per share on the date of grant; or (B) granted to employees, directors
and consultants other than to employees, directors and consultants described in the preceding
clause, the per share exercise price shall be not less than one hundred percent (100%)
of the fair market value per share on the date of grant;
|
|
(ii)
|
In
the case of a non-qualified stock option, the per share exercise price shall be not less
than one hundred percent (100%) of the fair market value per share on the date of grant
unless otherwise determined by the Board of Directors; and
|
|
(iii)
|
In
the case of other grants, such price as is determined by the Board of Directors.
|
The Board of
Directors are responsible for determining the consideration to be paid for the shares of common stock to be issued upon exercise
or purchase. The ESOP generally doesn’t allow for the transfer of the options, and the Board of Directors may amend, suspend
or terminate the ESOP at any time. As of March 31, 2018, none of the Company’s employees have enrolled in the ESOP.
NOTE 6 - INCOME TAXES
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, 2018 and 2017, will not be fully realizable. Accordingly, management has recorded a full valuation allowance against its net
deferred tax assets at, March 31, 2018 and 2017. At March 31, 2018 and 2017, the Company had federal net operating loss carry-forwards
of approximately $182,500 and $17,500, respectively, expiring beginning in 2037.
Deferred tax assets consist of the
following components:
|
|
March 31,
2018
|
|
|
March 31,
2017
|
|
Net loss carryforward
|
|
$
|
182,500
|
|
|
$
|
17,500
|
|
Valuation allowance
|
|
|
(182,500
|
)
|
|
|
(17,500
|
)
|
Total deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
NOTE 7 – ROYALTY AGREEMENT
On July 12,
2017, the Company entered into a royalty agreement with the founder and major shareholder. Pursuant to the agreement, the founder
and major shareholder is assigning and transferring all of his rights in the intellectual property in return for royalty payments.
The Company shall pay royalty to the founder on any sales of the royalty product sold or otherwise commercialized by the Company,
equal to (a) US$0.75 on each sale of a royalty product, or (b) five percent (5%) of the gross sale price of the royalty product,
whichever is less. The royalty payments shall cease and this agreement shall terminate, at such time as the total sum of royalty
payments actually paid to the founder, pursuant to this agreement, reaches $10,000,000. The Company shall have the option to terminate
this agreement at any time upon payment, to the founder, of the difference between total royalty payments actually made to him
to date and the sum of $10,000,000. All payments of the royalties, if due, for the preceding quarter, shall be made by the Company
within thirty days after the calendar quarter.
NOTE 8 – LEASE AGREEMENT
On August 21,
2017, the Company entered into a sublease agreement to rent office space. The term of the lease commences on September 1, 2017
and expires on December 14, 2019. The monthly rent for the lease is $3,000. The Company paid a deposit of $7,500 upon execution
of the lease which has been recorded as a security deposit in the accompanying financial statements.
The amounts
of minimum lease payments and periods during which they become due are as follows:
Year
|
|
March 31,
|
|
|
|
|
|
|
2019
|
|
$
|
36,000
|
|
2020
|
|
|
25,500
|
|
Total minimum lease payment
|
|
$
|
61,500
|
|