Quarterly Report (10-q)

Date : 02/14/2019 @ 10:15PM
Source : Edgar (US Regulatory)
Stock : Modular Medical, Inc. (PC) (MODD)
Quote : 0.2  0.0 (0.00%) @ 9:52PM

Quarterly Report (10-q)

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

       
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the quarterly period ended December 31, 2018
     
OR
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the transition period from ____________________________ to __________________________
   
  Commission file number   000-49671

 

MODULAR MEDICAL, INC.
(Exact Name of Registrant as Specified in its Charter)

 

Nevada   87-0620495
(State or Other Jurisdiction of Incorporation or Organization)   (I.R.S. Employer Identification No.)
     
800 West Valley Parkway, Suite 203, Escondido, California 92025
(Address of Principal Executive Offices) (Zip Code)

 

(949) 370-9062
(Registrant’s Telephone Number, Including Area Code)
 
 N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

   
Large accelerated filer o Accelerated filer o
Non-accelerated filer x Smaller reporting company x
  Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes o No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of February 14, 2019, there were 17,799,705 shares of our common stock (“Common Stock”), par value $.001 per share, outstanding.

 
 

Unless expressly indicated or the context requires otherwise, the terms “Modular Medical, Inc.”, “Modular Medical”, “Company”, “we”, “us”, and “our” in this document refer to Modular Medical, Inc. (f/k/a Bear Lake Recreation, Inc.), a Nevada corporation, and may include Modular Medical, Inc.’s wholly-owned subsidiary, Quasuras, Inc., a Delaware corporation.

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, including the Financial Statements and Notes to Financial Statements contained herein may contain forward-looking statements that discuss, among other things, future expectations and projections regarding future developments, operations and financial conditions. All forward-looking statements are based on management’s existing beliefs about present and future events outside of management’s control and on assumptions that may prove to be incorrect. If any underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or intended.

2
 

Item 1. Financial Statements

Modular Medical, Inc. and its Subsidiary
(f/k/a- Bear Lake Recreation, Inc.)
Condensed Consolidated Balance Sheets

             
ASSETS   December 31,
2018
(UNAUDITED)
    March 31,
2018
 
CURRENT ASSETS                
Cash and cash equivalents   $ 7,137,876     $ 4,296,676  
Other current assets     21,822       16,804  
TOTAL CURRENT ASSETS     7,159,698       4,313,480  
Intangible assets, net     189     213  
Property and equipment, net     59,703       13,259  
Security deposit     7,500       7,500  
TOTAL NON-CURRENT ASSETS     67,392       20,972  
TOTAL ASSETS   $ 7,227,090     $ 4,334,452  
LIABILITIES AND STOCKHOLDERS’ EQUITY                
CURRENT LIABILITIES                
Accounts payable and accrued expenses   $ 62,932     $ 14,955  
Payable to related party           516  
TOTAL CURRENT LIABILITIES     62,932       15,471  
Commitments and Contingencies            
TOTAL LIABILITIES     62,932       15,471  
STOCKHOLDERS’ EQUITY                
Preferred Stock, $0.001 par value, 5,000,000 shares authorized, none issued and outstanding            
Common Stock, $0.001 par value, 50,000,000 shares authorized, 17,799,705
shares issued and outstanding as of December 31, 2018 and 15,983,273 as of March 31, 2018
    17,800       15,983  
Additional paid-in capital     9,387,566       5,011,661  
Accumulated deficit     (2,241,208 )     (708,663 )
TOTAL STOCKHOLDERS’ EQUITY     7,164,158       4,318,981  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   $ 7,227,090     $ 4,334,452  

 

  The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

3
 

Modular Medical, Inc. and its Subsidiary
(f/k/a- Bear Lake Recreation, Inc.)
Condensed Consolidated Statements of Operations
(UNAUDITED)

           
    Three Months Ended     Nine Months Ended  
    December 31,
2018
    December 31,
2017
    December 31,
2018
    December 31,
2017
 
Net Revenues   $     $     $     $  
Cost of revenues                          
Gross Profit (Loss)                          
                               
Operating Expenses:                                
Professional expenses     115,111       44,588       238,704       157,517  
Research and development     504,787       171,045       1,008,127       258,799  
General and administration expenses     130,662       45,227       307,917       64,655  
Total Operating Expenses     750,560       260,860       1,554,748       480,971  
Loss From Operations     (750,560 )     (260,860 )     (1,554,748 )     (480,971 )
                               
Other Income (Expenses):                                
Interest income     11,355       2,888       22,203       3,908  
Amortization of debt discount                        
Total Other Income (Expense)     11,355       2,888       22,203       3,908  
Loss Before Income Taxes     (739,205 )     (257,972 )     (1,532,545 )     (477,063 )
Provision for income taxes         800           800  
Net Loss   $ (739,205)     $ (258,772 )   $ (1,532,545 )   $ (477,863 )
                               
Net Loss Per Share                                
Basic and Diluted:   $ (0.044 )   $ (0.016 )   $ (0.094 )   $ (0.038 )
Weighted average number of shares used in computing basic and diluted net loss per share:                                
Basic     16,848,236       15,983,273       16,272,642       12,500,588  
Diluted     16,848,236       15,983,273       16,272,642       12,500,588  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

4
 

Modular Medical, Inc. and its Subsidiary
(f/k/a- Bear Lake Recreation, Inc.)
Condensed Consolidated Statements of Cash Flows
(UNAUDITED)

       
    Nine Months Ended  
    December 31,
2018
    December 31,
2017
 
Net loss   $ (1,532,545 )   $ (477,863 )
Adjustments to reconcile net loss to net cash used in operating activities :                
                 
Depreciation and amortization     8,639       758  
Adjustment to reorganization expenses           34,472  
Stock-Based Compensation     374,006        
                 
Increase/Decrease in current assets:                
Other assets     (5,018 )      
Security deposits           (10,103 )
                 
Decrease in current liabilities:                
Accounts payable and accrued expenses     47,977       (92,101 )
Net cash used in operating activities     (1,106,941 )     (544,837 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES                
Purchase of property, plant and equipment     (55,058 )     (13,032 )
Purchase of intangible assets           (230 )
Net cash used in investing activities     (55,058 )     (13,262 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
Proceeds from private placement     3,983,915       4,697,400  
Repayment to related party     (516 )     (21,256 )
Proceeds from issuance of stock     19,800        
Net cash provided by financing activities     4,003,199       4,676,144  
                 
Net increase in cash and cash equivalents     2,841,200       4,118,045  
                 
Cash and cash equivalents, at the beginning of the period     4,296,676       392,007  
                 
Cash and cash equivalents, at the end of the period   $ 7,137,876     $ 4,510,052  
                 
SUPPLEMENTAL DISCLOSURES :                
Cash paid during the year for:                
Income tax   $     $ 800  
Interest   $     $  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

5
 

MODULAR MEDICAL, INC.

F/K/A BEAR LAKE RECREATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 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. 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 nine months ended December 31, 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.

6
 

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 $504,787 and $171,045 for the three months ended December 31, 2018 and 2017, respectively. For the nine months ended December 31, 2018 and 2017, the costs were approximately $1,008,127 and $258,799 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 December 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, 2018 to the present, generally for three years after they are filed.

7
 

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 December 31, 2018 and March 31, 2018, the Company had $7,137,876 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 $6,707,805 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 December 31, 2018, and March 31, 2018, property, plant and equipment amounted to:

 

    December 31,
2018
    March 31,
2018
 
Computer and equipment   $ 70,161     $ 15,103  
Less: accumulated depreciation     (10,458 )     (1,844 )
    $ 59,703     $ 13,259  

 

Depreciation expenses for the three months ended December 31, 2018 and 2017 were $5,426 and $458, respectively. For the nine months ended December 31, 2018 and 2017, depreciation was approximately $8,614 and $758, respectively.

8
 

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 December 31, 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 & nine months ended December 31, 2018 and 2017:

 

    Three Months Ended     Nine Months Ended  
    December 31,
2018
    December 31,
2017
    December 31,
2018
    December 31,
2017
 
Net Loss   $ (739,205 )   $ (258,772 )     $ (1,532,545 )   $ (477,863 )
Net Loss Per Share                                
Basic and Diluted:   $ (0.044 )   $ (0.016 )   $ (0.094 )   $ (0.038 )
           
Weighted average number of shares used in computing basic and diluted net loss per share:          
Basic     16,848,236       15,983,273       16,272,642       12,500,588  
Diluted     16,848,236       15,983,273       16,272,642       12,500,588  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

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.

9
 

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. DiPerna could earn from such arrangement.

 

NOTE 3 – ACCRUED EXPENSES

 

As of December 31, 2018 and March 31, 2018, accrued expenses amounted to $62,932 and $14,955, respectively. Accrued expenses comprised of rent and research and development as of December 31, 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 December 31, 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. During the three months ended December 31, 2018, 1,786,432 shares of Common Stock were issued for a private placement at $4,019,478, including legal fees of $35,563. During the three months ended December 31, 2018, 30,000 shares of Common Stock were issued for cash of $19,800. As of December 31, 2018, 17,799,705 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 December 31, 2018, none of the shares of preferred stock of the Company were issued.

10
 

Stock Options

 

On October 19, 2017, the Board of Directors approved an Employee Stock Option Program (“Stock Option Program”) that reserves 3,000,000 shares of common stock of the Company to be issued. Under the Company’s Stock Option Program, eligible employees, directors and consultants are granted options to purchase shares of common stock of the Company. The Stock Option Program 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 Stock Option Program. The Board of Directors determines whether the Stock Option Program 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 Stock Option Program generally doesn’t allow for the transfer of the options, and the Board of Directors may amend, suspend or terminate the Stock Option Program at any time.

 

NOTE 6 — STOCK-BASED COMPENSATION

 

During the three months ended December 31, 2018, we granted options for a total of 28,661 shares with a weighted average grant date fair value of $0.87 per option. During the nine months ended December 31, 2018, we granted options for a total of 1,264,687 shares with a weighted average grant date fair value of $0.55 per option.

 

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 December 31, 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 for options granted from July to October, and 2.52 percent for options granted in November and December, and (iv) and expected option term of 8 years for 1,200,000 shares of option granted, and 5 years for 64,687 shares of option granted.

 

General and administrative expense for the three and nine months ended December 31, 2018 included stock-based compensation expense of $12,500 and $20,833. Research and development expenses also include stock-based compensation expenses of $178,670 and $353,173 for the three and nine months ended December 31, 2018.

 

As of December 31, 2018, the unrecognized stock-based compensation expenses related to non-vested stock options was approximately $330,000, which will be amortized over an estimated weighted average period of approximately 6 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, December 31, 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 December 31, 2018 and March 31, 2018. At December 31, 2018 and March 31, 2018, the Company had federal net operating loss carry-forwards of approximately $565,500 and $182,500, respectively, expiring beginning in 2037 .

 

Deferred tax assets consist of the following components:

 

    December 31,
2018
    March 31,
2018
 
Net loss carryforward   $ 565,500     $ 182,500  
Valuation allowance     (565,500 )     (182,500 )
Total deferred tax assets   $     $  
11
 

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   $ 9,000  
2020     25,500  
Total minimum lease payment   $ 34,500  

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

The Company was organized under the laws of the State of Nevada on October 22, 1998 under the name Bear Lake Recreation Inc., with an initial authorized capital consisting of 50,000,000 shares of $0.001 par value common voting stock. In 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.

 

Our initial operations consisted of renting snowmobiles and ATVs. We had also planned on organizing snowmobile rental packages, which would have included lodging at Ideal Beach Resort at Bear Lake, Utah. On or about October 1999, we abandoned the snowmobile, ATV and lodging plans. Our lack of success was attributed to entering the marketplace comprising this endeavor during a year that was the beginning of a drought cycle, resulting in below average snowfall and competitive growth from one to three self-promoting developmental properties. Our operations ceased due to depleted capital resources resulting from offering vacation packages lacking in demand.

 

On June 27, 2000, we entered into a licensing agreement with AlCORP, an Oregon limited liability company, to purchase the right to manufacture, use, market and sell the NetCaddy, a backpack style bag used to transport fishing gear. By the end of the first quarter of 2002, we had also abandoned the Net Caddy operations. We realized only minimal sales through our e-commerce site and 800-number infomercial advertisements. Additionally, due to the exhaustion of our capital resources, we could no longer maintain the infrastructure required for sales promotion while faced with limited consumer demand.

 

We had no material business operations from 2002 through the Acquisition, and we were a shell company as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”). As a shell company, we did not have material operations and had assets consisting solely of cash and cash equivalents.

 

On July 24, 2017, pursuant to the Acquisition Agreement, by and among the Company, three Quasuras shareholders and Quasuras, the Company acquired all 4,400,000 shares of Quasuras’ common stock owned by the three Quasuras shareholders (which represented one hundred percent (100%) of the issued and outstanding shares of Quasuras) resulting in Quasuras becoming our wholly-owned subsidiary and Mr. Paul DiPerna owning approximately forty-seven percent (47%) of our issued and outstanding common stock, after giving effect to the Private Placement and the Share Cancellation. Simultaneously with the closing of the Acquisition and pursuant to the Acquisition Agreement, (i) Mr. James Besser resigned as president and a director and Mr. Morgan Frank resigned as chief executive officer, chief financial officer, secretary, and treasurer but remained a director of the Company, and (ii) Mr. Paul DiPerna was appointed our chairman, chief executive officer, chief financial officer, secretary and treasurer.

 

The Acquisition was accounted for as a recapitalization effected by a share exchange, wherein Quasuras is considered the acquirer for accounting and financial reporting purposes.

 

The Company is focused on providing next generation products and services to address the disease and condition diabetes.

 

This discussion should be read in conjunction with our condensed consolidated financial statements and the notes thereto contained elsewhere in this Quarterly Report.

12
 

Critical Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. 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.

 

Off-Balance Sheet Arrangements

 

As of December 31, 2018, we had not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

Recent Accounting Pronouncements

 

See Note 1 in the Notes to the Financial Statements for recent accounting pronouncements.

 

There were various other accounting standards and interpretations recently issued, none of which are expected to have a material impact on our financial position, operations or cash flows.

 

Results of Operations  

 

For the Three & Nine Months Ended December 31,

 

    Three Months Ended     Nine Months Ended  
    December 31,
2018
    December 31,
2017
    December 31,
2018
    December 31,
2017
 
Sales, net   $     $     $     $  
Cost of sales                        
Cost of sales                        
Gross profit margin     0 %     0 %     0 %     0 %
Operating expenses                                
Professional expenses     115,111       44,588       238,704       157,517  
Research and development     504,787       171,045       1,008,127       258,799  
General and administrative     130,662       45,227       307,917       64,655  
Total operating expenses     750,560       260,860       1,554,748       480,971  
Operating loss     (750,560 )     (260,860 )     (1,554,748 )     (480,971 )
Interest income     11,355       2,888       22,203       3,908  
Income tax           800             800  
Net loss   $ (739,205 )   $ (258,772 )   $ (1,532,545 )   $ (477,863 )

 

Overview :

We reported a net loss of $739,205 and $258,772 for the three months ended December 31, 2018 and 2017, respectively, and losses for the nine months ended December 31, 2018 and 2017 of $1,532,545 and $477,863, respectively. The increase in our net loss from December 31, 2018 to December 31, 2017, is due to an increase in research and developments, consulting fees, professional fees and general and administrative expenses.

 

Revenues :

Revenue for the three and nine months ended December 31, 2018 and 2017 was $0.

 

Operating Expenses :

Professional expenses for the three months ended December 31, 2018 increased to $115,111 as compared to $44,588 for 2017. For the nine months ended December 31, 2018 and 2017, professional fees increased to $238,704 in 2018 versus $157,517 in 2017. The increase is attributable to an increase in consulting fees paid to outside consultants and professional services required for our required filings.

13
 

Research and development for the three months ended December 31, 2018 increased to $504,787 as compared to $171,045 for 2017. For the nine months ended December 31, 2018 and 2017, research and development increased to $1,008,127 in 2018 versus $258,799 in 2017. The increase in research and development expenditures is attributable to efforts and expenses incurred to design and develop an innovative insulin pump to better serve the diabetic insulin delivery market along with stock-based compensation. We expect to continue to incur costs related to research and development.

 

General and administrative expenses for the three months ended December 31, 2018 increased to $130,662 as compared to $45,227 for 2017. For the nine months ended December 31, 2018 and 2017, general and administrative increased to $307,917 in 2018 versus $64,655 in 2017. The increase in our general and administrative expense is attributable to (i) an increase in employee related cost of approximately $127,000 (ii) an increase in stock-based compensation of approximately $20,833, (iii) an increase in rent & utilities of approximately $20,400, (iv) an increase in insurance expense of approximately $35,000, (v) an increase in marketing of $10,700, and (vi) an increase in equipment supplies of approximately $54,500.

 

Interest Income :

Interest income for the three months ended December 31, 2018 and 2017 was $11,355 and $2,888, respectively. For the nine months ended December 31, 2018 and 2017, interest income was $22,203 and $3,908, respectively.

 

Liquidity and Capital Resources

 

The following summarizes our cash flows for the nine months ended December 31,

 

    Nine Months Ended  
    December 31,
2018
         December 31,
2017
 
Cash used in operating activities   $ (1,106,941 )   $ (544,837 )
Cash used in investing activities     (55,058 )     (13,262 )
Cash acquired in financing activities     4,003,199       4,676,144  
Net change in cash   $ 2,841,200     $ 4,118,045  

 

As a result of our growth stage, the Company has not experienced sales to sustain cash flow to meet our current obligations and operations expenditures. As a result, the Company raised capital though the share exchange to meet our operating expenditures.

 

As of December 31, 2018, we had total current assets of $7,159,698 of which $7,137,876 were cash and cash equivalents, and current liabilities of $62,932. As of March 31, 2018, we had total current assets of $4,313,480 and current liabilities of $15,471. As of December 31, 2018 and March 31, 2018, we had working capital of approximately of $7,096,766 and $4,298,009, respectively.

 

Net Cash Used In Operating Activities :  

We used $1,106,941 of cash to fund operating activities during nine month ended December 31, 2018, compared to $544,837 in 2017.  Increased cash usage in 2018 was driven by greater operating losses deriving from development. We reported net losses of $1,532,545 and $477,863 for the nine months ended December 31, 2018 and 2017, respectively.

 

Net Cash Provided By Investing Activities :

We used $55,058 and $13,262 of cash to purchase equipment and intangible assets during the nine month ended December 31, 2018 and 2017, respectively.  

 

Net Cash Acquired In Financing Activities :

We acquired $4,003,199 of cash from financing activities for nine month ended December 31, 2018, compared to $4,676,144 in 2017.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not required.

 

Item 4. Controls and Procedures

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Rule 13a-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

 

Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and our receipts

14
 

and expenditures of are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2018. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Based on its evaluation, our management concluded that there are material weaknesses in our internal control over financial reporting and Management has concluded that the Company’s internal controls over financial reporting are not effective as of December 31, 2018. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

 

The material weaknesses relate to inadequate internal controls over financial reporting, and the lack of segregation of duties in our financial reporting process. We do not have a separately designated audit committee or independent director. To remedy these material weaknesses, we intend to engage an internal accountant to assist with financial reporting as soon as our finances will allow.

 

Part II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

No report is required.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Stock-Based Compensation

 

During the three months ended December 31, 2018, pursuant to the terms of our Employment Agreement, we granted Mr. DiPerna options exercisable to purchase 28,661 shares at an exercise price of $0.66 and $2.25 per share.

 

In addition, the Company issued 30,000 shares of restricted Common Stock to a consultant for $19,800.

 

The options and shares of restricted Common Stock were granted without registration under the Securities Act of 1933, as amended, in reliance upon exemptions provided under Section 4(a)(2) of the Securities Act.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

Employment Agreement

 

On August 1, 2018, the Company entered into an Employment Agreement (the “ Employment Agreement ”) with Paul M. DiPerna, whereby in consideration for Mr. DiPerna’s employment with the Company, the Company agreed to pay Mr. DiPerna a base compensation of $200,000 annually, plus $100,000 per year payable in options for shares of the Company’s Common Stock. Mr. DiPerna is eligible to receive a $300,000 annual bonus payable at the discertion of the Board in options or cash. Mr. DiPerna and the Company are eligible to terminate Mr. DiPerna’s employment at any time, for any reason or no reason. In addition, Mr. DiPerna may resign or terminate this employment at any time by giving the Company 30 days’ prior written notice.

The foregoing description of the Employment Agreement is qualified by reference to the full terms of the Employment Agreement attached hereto as Exhibit 10 and incorporated herein by reference. 

 

Election of New Director

 

On January 16, 2019, the Board elected Liam Burns as a director of the Company for a term lasting until the next annual meeting of the shareholders. Mr. Burns has been granted an option to purchase 90,000 shares of the Company’s Common Stock at an exercise price of $2.25 per share in accordance with the Company's Stock Option Program.

15
 

Item 6. Exhibits

 

Exhibit No.   Description of Document
10   Employment Agreement, dated as of August 1, 2018, by and between the Company and Paul M. DiPerna.
     
31.1   Certification of Paul M. DiPerna pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1   Certification of Paul M. DiPerna of Periodic Financial Report under Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase
     
101.LAB   XBRL Taxonomy Extension Label Linkbase
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase
16
 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

MODULAR MEDICAL, INC.

         
Date: February 14, 2019   By:   /s/ Paul M. DiPerna
        Paul M. DiPerna
        Chief Executive Officer, Chief Financial Officer,
Secretary, Treasurer and Director
        (principal executive, financial and accounting officer)

17

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