NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2017
(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’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
100% of the issued and outstanding shares of Quasuras for 7,582,000 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,
Inc.
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 (“US 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 June 30, 2017 and the Form 8-K
filed on July 28, 2017. 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 June 30, 2017 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, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31,
2018.
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 financial statements in conformity with US GAAP requires management to make certain 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 period. Actual results could differ from those
estimates. Significant estimates include collectability of accounts receivable, accounts payable, sales returns and recoverability
of long-term assets.
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
$259,000 and $0 for the nine months ended December 31, 2017 and 2016, respectively, and approximately $171,045 and $0 for the
three months ended December 31, 2017 and 2016, 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 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 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
December 31, 2017 and 2016, the Company had not taken any significant uncertain tax positions on its tax returns for periods ended
March 31, 2017 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, 2017
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 December 31, 2017 and March 31, 2017, the Company had $4,510,052 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 $4,010,052 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.
Inventory
Inventories
are valued at the lower of cost (determined on a weighted average basis) or market. Management compares the cost of inventories
with the market value and allowance is made to write down inventories to market value, if lower. As of December 31, 2017 and March
31, 2017, the Company had no inventory.
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 December 31, 2017
and March 31, 2017, property, plant and equipment amounted to:
|
|
December
31,
|
|
|
March
31,
|
|
|
|
2017
|
|
|
2017
|
|
Computers
and equipment
|
|
$
|
13,032
|
|
|
$
|
—
|
|
Less:
accumulated depreciation
|
|
|
(758
|
)
|
|
|
—
|
|
Property
and equipment, net
|
|
$
|
12,274
|
|
|
$
|
—
|
|
Depreciation expenses
for the nine months ended December 31, 2017 and 2016 was $758 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.
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, 2017 and March 31, 2017, 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 the three and nine months ended December
31, 2017 and 2016:
|
|
Three
Month Periods Ended
December 31,
|
|
|
Nine
Month Periods Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(258,772
|
)
|
|
$
|
(6,427
|
)
|
|
$
|
(477,863
|
)
|
|
$
|
(7,568
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted:
|
|
$
|
(0.016
|
)
|
|
$
|
(0.001
|
)
|
|
$
|
(0.037
|
)
|
|
$
|
(0.001
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares used in computing basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,983,273
|
|
|
|
7,582,060
|
|
|
|
12,895,670
|
|
|
|
7,582,060
|
|
Diluted
|
|
|
15,983,273
|
|
|
|
7,582,060
|
|
|
|
12,895,670
|
|
|
|
7,582,060
|
|
Recently Issued Accounting
Pronouncements
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.
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, and
3 Quasuras Shareholders
and Quasuras (the “
Acquisition Agreement
”), the Company acquired all 4,400,000 shares of Quasuras’
common stock which represented 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 7,801,212 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 gross proceeds to us of approximately $5,100,000. 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 15,983,272 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 December 31, 2017 and March 31, 2017, accrued expenses amounted to $32,601 and $8,425, respectively. Accrued expenses comprised
of accrued legal and professional charges as of December 31, 2017 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 December 31, 2017 and March 31, 2017, respectively, the payable to related party amounted
to $0 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 100% of the issued and outstanding shares of Quasuras for 7,582,000 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 December 31, 2017, 15,983,000 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, 2017, none of the
shares of preferred stock of the Company were issued.
Stock Options
On
October 19, 2017, the board approved an Employee Stock Option Program (“ESOP”) that reserves 3,000,000 shares to be
issued. As of December 31, 2017, no options has been granted.
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, December 31, 2017 and 2016, will not be fully realizable. Accordingly, management has recorded a full valuation allowance
against its net deferred tax assets at, December 31, 2017 and 2016. At December 31, 2017 and March 31, 2017, the Company had federal
net operating loss carry-forwards of approximately $290,000 and $75,000, respectively, expiring beginning in 2037
.
Deferred
tax assets consist of the following components:
|
|
December
31,
|
|
|
March
31
|
|
|
|
2017
|
|
|
2017
|
|
Net loss
carryforward
|
|
$
|
550,000
|
|
|
$
|
75,000
|
|
Valuation
allowance
|
|
|
(550,000
|
)
|
|
|
(75,000
|
)
|
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) 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
|
|
December
31,
|
|
|
|
|
|
2018
|
|
$
|
36,000
|
|
2019
|
|
|
33,000
|
|
Total
minimum lease payment
|
|
$
|
69,000
|
|
|
|
|
|
|