NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018
(UNAUDITED)
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. In June of 2017, the Company changed its name to Modular Medical, Inc. by filing a Certificate of Amendment to
the Company’s Articles of Incorporation with the Nevada Secretary of State. 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”). 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 plans, as well as 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 accompanying
condensed consolidated financial statements were prepared in conformity with generally accepted accounting principles in the United
States (“U.S. GAAP”) and with the instructions to Form 10-Q.
Certain information
and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or
omitted pursuant to U.S. GAAP rules and regulations for presentation of interim financial information. Therefore, the unaudited
condensed interim consolidated financial statements should be read in conjunction with the financial statements and the notes
thereto, included in the Company’s Annual Report on the Form 10-K for the fiscal year ended March 31, 2018. Current and
future financial statements may not be directly comparable to the Company’s historical financial statements. However, except
as disclosed herein, there have been no material changes in the information disclosed in the notes to the financial statements
for the fiscal year ended March 31, 2018 included in the Company’s Annual Report on Form 10-K filed with the Securities
and Exchange Commission. In the opinion of Management, all adjustments considered necessary for a fair presentation, consisting
solely of normal recurring adjustments, have been made. Operating results for the six months ended September 30, 2018 are not
necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2019.
Principles
of Consolidation
The consolidated
financial statements include the accounts of Modular Medical, Inc. and its wholly-owned subsidiary, Quasuras, Inc., 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 U.S. 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
$367,550 and $83,408 for the three months ended September 30, 2018 and 2017, respectively. For the six months ended September
30, 2018 and 2017, the costs were approximately $503,340 and $87,754 respectively.
General and Administration
General and
administration expenses consist 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
follows FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (codified in 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 fifty
percent (50%) 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 September
30, 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, 2018
to the present, generally for three years after they are filed.
Concentration
of Credit Risk
Financial instruments
that potentially subject the Company to concentrations of credit risk are cash, accounts receivable and other receivables arising
from its normal business activities. The Company places its cash in what it believes to be credit-worthy financial institutions.
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 September 30, 2018 and March 31, 2018, the Company had $3,687,822 and $4,296,676,
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 $3,187,822 and $3,933,002, 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 ten years; computer equipment, two to three years; buildings and improvements,
five to fifteen years; leasehold improvements, two to ten years; and furniture and equipment, one to five years.
As of September 30, 2018, and March
31, 2018, property, plant and equipment amounted to:
|
|
September
30,
2018
|
|
|
March
31,
2018
|
|
Computer
and equipment
|
|
$
|
47,856
|
|
|
$
|
15,103
|
|
Less:
accumulated depreciation
|
|
|
(5,033
|
)
|
|
|
(1,844
|
)
|
|
|
$
|
42,823
|
|
|
$
|
13,259
|
|
Depreciation
expenses for the three months ended September 30, 2018 and 2017 were $1,802 and $154, respectively. For the six months ended September
30, 2018 and 2017 depreciation was approximately $3,189 and $300, 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.
The Company
analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities
from Equity,” and ASC 815.
As of September
30, 2018 and June 30, 2018, the Company did not identify any assets and liabilities that are required to be presented on the balance
sheet at 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 three & six months ended September 30, 2018 and
2017:
|
|
Three Mo
nths Ended
|
|
|
Six Mo
nths Ended
|
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(543,774
|
)
|
|
$
|
(176,002
|
)
|
|
$
|
(793,340
|
)
|
|
$
|
(219,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N
et Loss Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted:
|
|
$
|
(0.034
|
)
|
|
$
|
(0.013
|
)
|
|
$
|
(0.050
|
)
|
|
$
|
(0.020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares used in computing basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,983,273
|
|
|
|
13,882,970
|
|
|
|
15,983,273
|
|
|
|
10,749,730
|
|
Diluted
|
|
|
15,983,273
|
|
|
|
13,882,970
|
|
|
|
15,983,273
|
|
|
|
10,749,730
|
|
Recently Issued Accounting Pronouncements
In August of
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 Medical 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 Medical.
On July
24, 2017, pursuant to a Reorganization and Share Exchange Agreement, by and among, Modular Medical, three Quasuras shareholders
and Quasuras (the “Acquisition Agreement”), Modular Medical 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 in a private placement (the “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 Modular Medical, Quasuras and Mr. Paul DiPerna (the “IP Transfer Agreement”),
Mr. Paul 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. Paul 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. Paul DiPerna could earn from such arrangement.
NOTE 3 – ACCRUED EXPENSES
As of September
30, 2018 and March 31, 2018, accrued expenses amounted to $46,837 and $14,955, respectively. Accrued expenses comprised of credit
card transactions, rent and stock compensation as of September 30, 2018 and March 31, 2018.
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 September 30, 2018 and March 31, 2018, respectively, the payable to related party amounted to
$0 and $516, respectively.
NOTE 5 – STOCKHOLDERS’
EQUITY
Common stock
On July 24,
2017, pursuant to the Acquisition Agreement, 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 September 30, 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 September 30, 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.
NOTE 6 — STOCK-BASED COMPENSATION
During the three
months ended September 30, 2018, we granted options for a total of $1,351,515 shares with a weighted average grant date fair value
of $0.55 per option. No options were granted during the prior quarters.
The fair values
of options at the grant date were estimated utilizing the Black-Scholes valuation model with the following weighted average assumptions
for the three months ended September 30, 2018: (i) dividend yield on our common stock of 0 percent, (ii) expected stock price
volatility of 88 percent, (iii) a risk-free interest rate of 3.2 percent, and (iv) and expected option term of 9 years.
General and
administrative expense for the three months ended September 30, 2018 included stock-based compensation expense of $8,334. Research
and development expenses also included stock-based compensation expenses of $174,504 for the three months ended September 30,
2018. No such expenses were recognized in the prior quarters.
As of September
30, 2018, the unrecognized stock-based compensation expenses related to non-vested stock options was approximately $562,000, which
will be amortized over an estimated weighted average period of approximately 9 months.
NOTE 7 - 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, September
30, 2018 and March 31, 2018 will not be fully realizable. Accordingly, management has recorded a full valuation allowance against
its net deferred tax assets at September 30, 2018 and March 31, 2018. At September 30, 2018 and March 31, 2018, the Company had
federal net operating loss carry-forwards of approximately $380,500 and $182,500, respectively, expiring beginning in 2037.
Deferred tax assets consist of the
following components:
|
|
September 30,
2018
|
|
|
March 31,
2018
|
|
Net loss carryforward
|
|
$
|
380,500
|
|
|
$
|
182,500
|
|
Valuation allowance
|
|
|
(380,500
|
)
|
|
|
(182,500
|
)
|
Total deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
NOTE 8 – 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 9 – 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
|
|
$
|
18,000
|
|
2020
|
|
|
25,500
|
|
Total
minimum lease payment
|
|
$
|
43,500
|
|