Modular Medical,
Inc.
(f/k/a- Bear Lake Recreation, Inc.)
Condensed Consolidated Balance Sheets
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September 30,
2020
(Unaudited)
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March 31,
2020
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ASSETS
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|
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CURRENT ASSETS
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|
|
|
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Cash and cash equivalents
|
|
$
|
1,486,574
|
|
|
$
|
3,122,134
|
|
Other current assets
|
|
|
35,498
|
|
|
|
64,159
|
|
TOTAL CURRENT ASSETS
|
|
|
1,522,072
|
|
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|
3,186,293
|
|
|
|
|
|
|
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Property and equipment, net
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|
342,299
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|
301,308
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|
Right of use asset, net
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|
235,027
|
|
|
|
270,950
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|
Security deposit
|
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100,000
|
|
|
|
100,000
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|
TOTAL NON-CURRENT ASSETS
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|
677,326
|
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|
672,258
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|
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TOTAL ASSETS
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$
|
2,199,398
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|
|
$
|
3,858,551
|
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|
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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CURRENT LIABILITIES
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Accounts payable
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$
|
214,359
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|
|
$
|
367,019
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|
Accrued expenses
|
|
|
238,301
|
|
|
|
202,160
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|
Short-term lease liability
|
|
|
116,645
|
|
|
|
92,214
|
|
PPP note payable, current
|
|
|
163,902
|
|
|
|
—
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TOTAL CURRENT LIABILITIES
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|
|
733,207
|
|
|
|
661,393
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|
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|
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LONG-TERM LIABILITIES
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Long-term lease liability
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248,823
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|
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|
178,736
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Bonus payable
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|
105,000
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|
|
|
140,000
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|
PPP note payable
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|
|
204,878
|
|
|
|
—
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|
TOTAL LONG-TERM LIABILITIES
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|
558,701
|
|
|
|
318,736
|
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|
|
|
|
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TOTAL LIABILITIES
|
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|
1,291,908
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|
|
980,129
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Commitments and Contingencies (Note 8)
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STOCKHOLDERS’ EQUITY
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Preferred Stock, $0.001 par value, 5,000,000 shares authorized, none issued and outstanding
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—
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—
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Common Stock, $0.001 par value, 50,000,000 shares authorized; 18,600,158 and 17,870,261 shares issued and outstanding as of September 30, 2020 and March 31, 2020, respectively
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18,600
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17,870
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|
Additional paid-in capital
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13,192,810
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|
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|
10,505,592
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|
Common stock issuable
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|
|
—
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|
|
|
923,994
|
|
Accumulated deficit
|
|
|
(12,303,920
|
)
|
|
|
(8,569,034
|
)
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TOTAL STOCKHOLDERS’ EQUITY
|
|
|
907,490
|
|
|
|
2,878,422
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
2,199,398
|
|
|
$
|
3,858,551
|
|
The accompanying
notes are an integral part of these condensed consolidated financial statements.
Modular Medical,
Inc.
(f/k/a- Bear Lake Recreation, Inc.)
Condensed Consolidated Statements of Operations
(Unaudited)
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Three Months Ended
September 30,
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Six Months Ended
September 30,
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2020
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2019
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2020
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2019
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Operating expenses
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|
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|
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Research and development
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1,092,665
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633,241
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2,063,480
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|
1,337,025
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General and administrative
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|
766,513
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|
524,100
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|
1,669,910
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|
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|
958,556
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|
Total Operating Expenses
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|
1,859,178
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|
|
|
1,157,341
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|
|
|
3,733,390
|
|
|
|
2,295,581
|
|
Loss from operations
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|
|
(1,859,178
|
)
|
|
|
(1,157,341
|
)
|
|
|
(3,733,390
|
)
|
|
|
(2,295,581
|
)
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|
|
|
|
|
|
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Other income
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Interest income
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|
49
|
|
|
|
9,775
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|
|
|
104
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|
25,817
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|
|
|
|
|
|
|
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|
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|
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Loss before income taxes
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|
(1,859,129
|
)
|
|
|
(1,147,566
|
)
|
|
|
(3,733,286
|
)
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|
|
(2,269,764
|
)
|
|
|
|
|
|
|
|
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|
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Provision for income taxes
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|
1,600
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|
|
|
—
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|
|
1,600
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|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net Loss
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|
$
|
(1,860,729
|
)
|
|
$
|
(1,147,566
|
)
|
|
$
|
(3,734,886
|
)
|
|
$
|
(2,269,764
|
)
|
|
|
|
|
|
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|
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Net Loss Per Share
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|
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Basic and diluted
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$
|
(0.10
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of Shares Outstanding
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
18,600,158
|
|
|
|
17,870,261
|
|
|
|
18,469,805
|
|
|
|
17,855,343
|
|
The accompanying
notes are an integral part of these condensed consolidated financial statements.
Modular Medical,
Inc.
(f/k/a- Bear Lake Recreation, Inc.)
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
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Additional
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Common
|
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|
|
|
|
|
|
|
|
Common
Stock
|
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|
Paid-In
|
|
|
Stock
|
|
|
Accumulated
|
|
|
Stockholders’
|
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|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Issuable
|
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|
Deficit
|
|
|
Equity
|
|
Balance
as of March 31, 2020
|
|
|
17,870,261
|
|
|
$
|
17,870
|
|
|
$
|
10,505,592
|
|
|
$
|
923,994
|
|
|
$
|
(8,569,034
|
)
|
|
$
|
2,878,422
|
|
Private
placement of common stock
|
|
|
729,897
|
|
|
|
730
|
|
|
|
2,041,898
|
|
|
|
(923,994
|
)
|
|
|
—
|
|
|
|
1,118,634
|
|
Stock-based
compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
344,716
|
|
|
|
—
|
|
|
|
—
|
|
|
|
344,716
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,874,157
|
)
|
|
|
(1,874,157
|
)
|
Balance
as of June 30, 2020
|
|
|
18,600,158
|
|
|
$
|
18,600
|
|
|
$
|
12,892,206
|
|
|
$
|
—
|
|
|
$
|
(10,443,191
|
)
|
|
$
|
2,467,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
300,604
|
|
|
|
—
|
|
|
|
—
|
|
|
|
300,604
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,860,729
|
)
|
|
|
(1,860,729
|
)
|
Balance
as of September 30, 2020
|
|
|
18,600,158
|
|
|
$
|
18,600
|
|
|
$
|
13,192,810
|
|
|
$
|
—
|
|
|
$
|
(12,303,920
|
)
|
|
$
|
907,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Paid-In
|
|
|
Stock
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Issuable
|
|
|
Deficit
|
|
|
Equity
|
|
Balance
as of March 31, 2019
|
|
|
17,840,261
|
|
|
$
|
17,840
|
|
|
$
|
9,684,578
|
|
|
$
|
19,800
|
|
|
$
|
(3,248,161
|
)
|
|
$
|
6,474,057
|
|
Shares
issued for services
|
|
|
30,000
|
|
|
|
30
|
|
|
|
19,770
|
|
|
|
(19,800
|
)
|
|
|
—
|
|
|
|
—
|
|
Stock-based
compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
194,428
|
|
|
|
—
|
|
|
|
—
|
|
|
|
194,428
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,122,198
|
)
|
|
|
(1,122,198
|
)
|
Balance
as of June 30, 2019
|
|
|
17,870,261
|
|
|
$
|
17,870
|
|
|
$
|
9,898,776
|
|
|
$
|
—
|
|
|
$
|
(4,370,359
|
)
|
|
$
|
5,546,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
156,355
|
|
|
|
—
|
|
|
|
—
|
|
|
|
156,355
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,147,566
|
)
|
|
|
(1,147,566
|
)
|
Balance
as of September 30, 2019
|
|
|
17,870,261
|
|
|
$
|
17,870
|
|
|
$
|
10,055,131
|
|
|
$
|
—
|
|
|
$
|
(5,517,925
|
)
|
|
$
|
4,555,076
|
|
The accompanying
notes are an integral part of these condensed consolidated financial statements.
Modular Medical,
Inc.
(f/k/a- Bear Lake Recreation, Inc.)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
Six Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Net loss
|
|
$
|
(3,734,886
|
)
|
|
$
|
(2,269,764
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
645,320
|
|
|
|
350,783
|
|
Depreciation and amortization
|
|
|
52,314
|
|
|
|
14,354
|
|
Amortization of lease right-to-use asset
|
|
|
35,923
|
|
|
|
—
|
|
Change in lease liability
|
|
|
94,518
|
|
|
|
—
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
28,659
|
|
|
|
5,502
|
|
Accounts payable and accrued expenses
|
|
|
(151,519
|
)
|
|
|
151,663
|
|
Net cash used in operating activities
|
|
|
(3,029,671
|
)
|
|
|
(1,747,462
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(93,303
|
)
|
|
|
(30,600
|
)
|
Net cash used in investing activities
|
|
|
(93,303
|
)
|
|
|
(30,600
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from private placement, net of issuance costs
|
|
|
1,118,634
|
|
|
|
—
|
|
Proceeds from issuance of PPP note payable
|
|
|
368,780
|
|
|
|
—
|
|
Net cash provided by financing activities
|
|
|
1,487,414
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(1,635,560
|
)
|
|
|
(1,778,062
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
3,122,134
|
|
|
|
6,553,768
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,486,574
|
|
|
$
|
4,775,706
|
|
The accompanying
notes are an integral part of these unaudited condensed consolidated financial statements.
MODULAR MEDICAL,
INC.
F/K/A BEAR LAKE RECREATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 – THE COMPANY AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Modular Medical,
Inc. (the Company) was incorporated in Nevada in October 1998 under the name Bear Lake Recreation, Inc. The Company had no material
business operations from 2002 until approximately 2017, when it acquired all of the issued and outstanding shares of Quasuras,
Inc., a Delaware corporation (Quasuras). As 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 reverse merger at their historical carrying amounts. Prior to the acquisition of Quasuras and, since at least
2002, the Company was a shell company, as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934 (the Exchange
Act). In June 2017, the Company changed its name from Bear Lake Recreation, Inc. to Modular Medical, Inc.
The Company
is a development-stage medical device company focused on the design, development and eventual commercialization of an innovative
insulin pump to address shortcomings and problems represented by the relatively limited adoption of currently available pumps
for insulin-dependent people with diabetes. The Company has developed a hardware technology allowing people with insulin-dependent
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 excessively high. By addressing the time and effort required to effectively treat their condition,
the Company believes it can address the less technically savvy, less motivated part of the market.
Liquidity
Financial
Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2014-15, Going Concern, requires management
to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s
ability to continue as a going concern within one year after the date that the financial statements are issued. If management
identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, management
must consider if there are plans that are probable to be implemented, and whether it is probable that the plans will mitigate
the conditions or events raising the substantial doubt about the entity’s ability to continue as a going concern. If
the substantial doubt is not alleviated after consideration of management’s plans, the entity must include a statement in
the notes to the financial statements indicating that there is substantial doubt about the entity’s ability to continue
as a going concern within one year after the date that the financial statements are issued including: 1) the principal conditions
or events that raise substantial doubt about the entity’s ability to continue as a going concern, 2) management’s
evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations,
and 3) management’s plans to attempt to mitigate the conditions or events causing the substantial doubt about the entity’s
ability to continue as a going concern.
The Company
expects to continue to incur operating losses for the foreseeable future and incur cash outflows from operations as it continues
to invest in the development and subsequent commercialization of its product. The Company expects that its research and development
and general and administrative expenses will continue to increase, and, as a result, it will eventually need to generate significant
product revenues to achieve profitability. These circumstances raise substantial doubt about the Company’s ability to continue
as a going concern within one year after the date that these financial statements are issued. Implementation of the Company’s
plans and its ability to continue as a going concern will depend upon the Company’s ability to raise additional capital,
through the sale of additional equity or debt securities, to support its future operations. There can be no assurance that such
additional capital, whether in the form of debt or equity financing, will be sufficient or available and, if available, that such
capital will be offered on terms and conditions acceptable to the Company. As discussed in note 4, the Company is currently
pursuing additional equity financing through a private placement of its common stock. In addition, the Company obtained a loan
from Silicon Valley Bank in April 2020 (see note 3).
The Company’s
operating needs include the planned costs to operate its business, including amounts required to fund working capital and capital
expenditures. The Company’s future capital requirements and the adequacy of its available funds will depend on many factors,
including the Company’s ability to successfully commercialize its product, competing technological and market developments,
and the need to enter into collaborations with other companies or acquire other companies or technologies to enhance or complement
its product offering. If the Company is unable to secure additional capital, it may be required to curtail its research and development
initiatives and take additional measures to reduce costs in order to conserve its cash. These consolidated financial statements
do not include any adjustments that might result from this uncertainty.
Basis of Presentation
The Company’s
fiscal year ends on March 31 of each calendar year. Each reference to a fiscal year in these notes to the condensed consolidated
financial statements refers to the fiscal year ended March 31 of the calendar year indicated (for example, fiscal 2021 refers
to the fiscal year ending March 31, 2021). The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Quasuras. All significant intercompany transactions and balances have been eliminated in consolidation.
The accompanying
condensed consolidated financial statements of the Company have been prepared without audit. The condensed consolidated balance
sheet as of March 31, 2020 has been derived from the audited consolidated financial statements at that date. Certain information
and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted
in the United States (GAAP) have been condensed or omitted in accordance with these rules and regulations of the Securities and
Exchange Commission (SEC). The information in this report should be read in conjunction with the Company’s consolidated
financial statements and notes thereto included in its most recent annual report on Form 10-K filed with the SEC.
In the
opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting
only of normal recurring adjustments) necessary to summarize fairly the Company’s financial position, results of operations
and cash flows for the interim periods presented. The operating results for the three months and six months ended September 30,
2020 are not necessarily indicative of the results that may be expected for the year ending March 31, 2021 or for any other future
period.
Use
of Estimates
The preparation
of the accompanying consolidated 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 consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Estimates
may include those pertaining to accruals, stock-based compensation and income taxes. Actual results could differ from those estimates.
Reportable Segment
The Company operates in one
business segment and uses one measurement of profitability for its business.
Research and Development
The Company
expenses research and development expenditures as incurred.
General and Administrative
General
and administrative expenses consist primarily of payroll and benefit costs, rent, stock-based compensation, legal and accounting
fees, and office and other administrative expenses.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to concentration of credit risk consist primarily of cash. The Company maintains
its cash balances at high-quality financial institutions within the United States, which are insured by the Federal Deposit Insurance
Corporation up to limits of approximately $250,000. No reserve has been made in the financial statements for any possible loss
due to financial institution failure.
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 technology and customer requirements, limited operating history and the volatility
of public markets.
COVID-19
The global outbreak
of the coronavirus disease 2019 (COVID-19) was declared a pandemic by the World Health Organization and a national emergency by
the U.S. government in March 2020. This has negatively affected the U.S. and global economy, disrupted global supply
chains, significantly restricted travel and transportation, resulted in mandated closures and orders to “shelter-in-place”
and created significant disruption of the financial markets. The full extent of the COVID-19 impact on the Company’s operational
and financial performance will depend on future developments, including the duration and spread of the pandemic and related actions
taken by U.S. and foreign government agencies to prevent disease spread, all of which are uncertain, out of the Company’s
control, and cannot be predicted.
Cash and Cash Equivalents
Cash
and cash equivalents include cash on hand and cash in demand deposits, certificates of deposit and highly liquid debt instruments
with original maturities of three months or less.
Property & Equipment
Property and
equipment are originally recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives
of the assets, generally three to five years. Depreciation is recorded in operating expenses in the condensed consolidated statements
of operations. Leasehold improvements and assets acquired through capital leases are amortized over the shorter of their estimated
useful life or the lease term, and amortization is recorded in operating expenses in the condensed consolidated statements of
operations.
Fair Value of Financial
Instruments
The Company
measures the fair value of financial instruments using a fair value hierarchy that prioritizes the inputs to valuation techniques
used to measure fair value into three broad levels:
|
·
|
Level
1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.
|
|
·
|
Level 2 inputs to the valuation methodology
include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the financial instrument.
|
|
·
|
Level 3 inputs to
the valuation methodology are unobservable and significant to the fair value measurement.
|
Due to
their short-term nature, the carrying values of cash equivalents, accounts payable and accrued expenses approximate fair value.
Per-Share Amounts
Basic net loss per share is
computed by dividing loss for the period by the weighted-average number of shares of common stock outstanding during the period.
Diluted net loss per share gives effect to all potentially dilutive common shares outstanding during the period. For the six months
ended September 30, 2020 and 2019, outstanding options to purchase 3,480,088 and 1,630,394 shares of common stock, respectively,
were excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive.
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 flows.
Comprehensive Loss
Comprehensive
loss represents the changes in equity of an enterprise, other than those resulting from stockholder transactions. Accordingly,
comprehensive loss may include certain changes in equity that are excluded from net loss. For the three and six months ended September
30, 2020 and 2019, the Company’s comprehensive loss was the same as its net loss.
NOTE 2 – LEASES
Effective April
1, 2019, the Company adopted ASU No. 2016-02, Leases (ASC 842), and related ASUs, as amended, using
the alternative transition method, which allowed the Company to initially apply the new lease standard at the adoption date (the
“effective date method”). In January 2020, the Company executed a lease for a new, larger corporate facility in San
Diego, California and paid a $100,000 security deposit. The 39-month lease
term commenced April 1, 2020, and the lease provides for an initial monthly rent of approximately $12,400 with
annual rent increases of approximately 3%. In addition to the minimum lease payments, the Company is responsible for
property taxes, insurance and certain other operating costs. The right-to-use asset and corresponding liability for the facility
lease have been measured at the present value of the future minimum lease payments. A discount rate of 11%, which approximated
the Company’s incremental borrowing rate, was used to measure the lease asset and liability. Lease expense is recognized
on a straight line basis over the lease term.
The Company
obtained a right-of-use asset of $270,950 in exchange for its obligations under the operating lease. The landlord also provided
a lease incentive of approximately $139,000, which was paid to the Company in June 2020, for the Company to make improvements
to the leased space.
Future minimum
payments under the facility operating lease, as of September 30, 2020, are listed in the table below.
|
|
Operating
|
|
Annual Fiscal Years
|
|
lease
|
|
2021
|
|
$
|
74,478
|
|
2022
|
|
|
153,432
|
|
2023
|
|
|
158,028
|
|
2024
|
|
|
40,692
|
|
Less:
|
|
|
|
|
Imputed interest
|
|
|
(61,162
|
)
|
Present value of lease liabilities
|
|
$
|
365,468
|
|
Cash
paid for amounts included in the measurement of lease liabilities was $49,652 for the six months ended September 30, 2020. Rent
expense was $26,884 and $9,000 for the three months ended September 30, 2020 and 2019, respectively, and $53,768 and $18,000 for
the six months ended September 30, 2020 and 2019, respectively.
NOTE 3 – NOTE PAYABLE
On April 24,
2020, the Company received a $368,780 unsecured loan (the PPP Note) under the Paycheck Protection Program (the PPP), which was
established under the U.S. government’s Coronavirus Aid, Relief, and Economic Security Act. The PPP Note to the Company
was made through Silicon Valley Bank (the Lender), and the Company entered into a U.S. Small Business Administration Paycheck
Protection Program Note (the Agreement) with the Lender evidencing the PPP Note.
The full amount
of the PPP Note is due in April 2022. Interest will accrue on the outstanding principal balance of the PPP Note at a fixed rate
of 1.0% per annum, which shall be deferred for the first six months of the term of the PPP Note. Monthly payments will be due
and payable beginning in February 2021 and continue each month thereafter until maturity of the PPP Note. The Company may prepay
principal of the PPP Note at any time in any amount without penalty. The Agreement contains customary events of default relating
to, among other things, payment defaults, breach of representations and warranties or provisions of the PPP Note. The occurrence
of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from the Company,
and/or filing suit and obtaining judgment against the Company.
In October 2020,
the Company applied to the Lender for forgiveness of the PPP Note. No assurance is provided that the Company will obtain forgiveness
of the PPP Note in whole or in part.
NOTE 4 – STOCKHOLDERS’
EQUITY
Private
Placement
In March
2020, the Company initiated a private placement of shares of its common stock (the 2020 Placement). As of September 30, 2020,
the Company had sold 729,897 shares of common stock, at a purchase price of $2.87 per share, for aggregate proceeds of $2,094,806.
The Company had recorded $924,000 of the proceeds as common stock issuable in the stockholders’ equity section of the consolidated
balance sheet at March 31, 2020 for 321,950 shares that were issued by the Company during the quarter ended June 30, 2020. Under
the terms of the common stock purchase agreements between the Company and the investors, the Company must use commercially reasonable
efforts to file a registration statement with the SEC within 90 days of the closing of the 2020 Placement to register for resale
the shares of common stock sold.
In October
2020, the Company sold an additional 125,000 shares of common stock for proceeds of $358,750.
NOTE 5 – STOCK-BASED
COMPENSATION
2017 Equity Incentive Plan
In October 2017,
the Company’s board of directors (the Board) approved the 2017 Equity Incentive Plan (the Plan) with 3,000,000 shares of
common stock reserved for issuance. In January 2020, the Board approved an increase in the number of shares reserved for issuance
under the Plan by 1,000,000 shares. Under the Plan, eligible employees, directors and consultants may be granted a broad range
of awards, including stock options, stock appreciation rights, restricted stock, performance-based awards and restricted stock
units. The Plan is administered by the Board or, in the alternative, a committee designated by the Board.
Stock-Based Compensation
Expense
The expense
relating to stock options is recognized on a straight-line basis over the requisite service period, usually the vesting period,
based on the grant date fair value. The unamortized compensation cost, as of September 30, 2020, was $2,568,504 related to stock
options and is expected to be recognized as expense over a weighted-average period of approximately 2.28 years.
During
the six months ended September 30, 2020, the Company granted options to purchase 302,976 shares of its common stock to employees,
directors and consultants. The options had 10-year terms, and 10,476 options vested immediately when granted. The fair value of
the options was determined to be $720,205 of which $159,671 was recorded as stock-based compensation expense and included in the
condensed consolidated statement of operations for the six months ended September 30, 2020.
The following assumptions were used
in the fair value method calculations:
|
|
|
|
|
|
|
|
|
Six Months Ended
September 30
|
|
|
|
2020
|
|
|
2019
|
|
Risk-free interest rates
|
|
|
.28% - .37%
|
|
|
|
1.35% - 2.41%
|
|
Volatility
|
|
|
88% - 128%
|
|
|
|
97% - 102%
|
|
Expected life (years)
|
|
|
5.0 - 6.0
|
|
|
|
5.0 - 6.0
|
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
The fair values
of options at the grant date were estimated utilizing the Black-Scholes valuation model, which includes simplified methods to
establish the fair term of options as well as average volatility of three comparable organizations. The risk-free interest rate
was derived from the Daily Treasury Yield Curve Rates, as published by the U.S. Department of the Treasury as of the grant date
for terms equal to the expected terms of the options. A dividend yield of zero was applied because the Company has never paid
dividends and has no intention to pay dividends in the foreseeable future. In accordance with ASU No. 2016-09, the Company accounts
for forfeitures as they occur.
A summary
of stock option activity under the Plan is presented below:
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Shares
|
|
|
|
|
|
Average
|
|
|
|
Available
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
for Grant
|
|
|
Shares
|
|
|
Prices
|
|
Balance at March 31, 2020
|
|
|
822,055
|
|
|
|
3,177,945
|
|
|
$
|
1.58
|
|
Options granted
|
|
|
(230,476
|
)
|
|
|
230,476
|
|
|
|
2.88
|
|
Options cancelled and returned to the Plan
|
|
|
833
|
|
|
|
(833
|
)
|
|
|
2.25
|
|
Balance at June 30, 2020
|
|
|
592,412
|
|
|
|
3,407,588
|
|
|
|
1.67
|
|
Options granted
|
|
|
(72,500
|
)
|
|
|
72,500
|
|
|
|
2.87
|
|
Balance at September 30, 2020
|
|
|
519,912
|
|
|
|
3,480,088
|
|
|
|
1.70
|
|
There were no
stock options exercised during the six months ended September 30, 2020 and 2019.
The following
table summarizes the range of outstanding and exercisable options as of September 30, 2020:
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
Range
of Exercise Price
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life
(in Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
value
|
|
$0.66
- $3.16
|
|
|
3,480,088
|
|
|
|
8.67
|
|
|
$
|
1.70
|
|
|
|
1,685,950
|
|
|
$
|
1.00
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value per share is
calculated as the excess of the closing price of the common stock on the Company’s principal trading market over the exercise
price of the option at September 30, 2020.
The Company
is required to present the tax benefits resulting from tax deductions in excess of the compensation cost recognized from the exercise
of stock options as financing cash flows in the consolidated statements of cash flows. For the six months ended September 30,
2020 and 2019, there were no such tax benefits associated with the exercise of stock options.
NOTE 6 – INCOME TAXES
The Company
determines deferred tax assets and liabilities based upon the differences between the financial statement and tax bases of the
Company’s assets and liabilities using tax rates in effect for the year in which the Company expects the differences to
affect taxable income. A valuation allowance is established for any deferred tax assets for which it is more likely than not that
all or a portion of the deferred tax assets will not be realized. Based on the available information and other factors, management
believes it is more likely than not that its federal and state net deferred tax assets will not be fully realized, and the Company
has recorded a full valuation allowance.
The Company
files U.S. federal and state income tax returns in jurisdictions with varying statutes of limitations. All tax returns
from 2016 to 2019 may be subject to examination by the U.S. federal and state tax authorities. As of September 30, 2020,
the Company has not recorded any liability for unrecognized tax benefits related to uncertain tax positions.
NOTE 7 – RELATED
PARTY TRANSACTION
During fiscal
2020, the Company entered into consulting agreements with a member of its board of directors. The most recent consulting
agreement was terminated in March 2020. At September 30, 2020, the Company had an outstanding payable to the director of $5,585,
which was included in accounts payable in the condensed consolidated balance sheet.
NOTE 8 –
COMMITMENTS AND CONTINGENCIES
Litigations,
Claims and Assessments
In the
normal course of business, the Company may be involved in legal proceedings, claims and assessments arising in the ordinary course
of business. The Company records legal costs associated with loss contingencies as incurred and accrues for all probable and estimable
settlements.
Indemnification
In the
ordinary course of business, the Company enters into contractual arrangements under which it may agree to indemnify the counterparties
from any losses incurred relating to breach of representations and warranties, failure to perform certain covenants, or claims
and losses arising from certain events as outlined within the particular contract, which may include, for example, losses arising
from litigation or claims relating to past performance. Such indemnification clauses may not be subject to maximum loss clauses.
The Company has also entered into indemnification agreements with its officers and directors. No amounts were reflected in the
Company’s consolidated financial statements for the six months ended September 30, 2020 and 2019 related to these indemnifications.
The Company has not estimated the maximum potential amount of indemnification liability under these agreements due to the limited
history of prior claims and the unique facts and circumstances applicable to each particular agreement. To date, the Company has
not made any payments related to these indemnification agreements, and no claims for payment have been made under such agreements.