Modular Medical, Inc. 10-K

ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is currently quoted on the OTCQB Venture Market under the trading symbol “MODD.” Trading in shares of our common stock is limited and sporadic. There is no established trading market for shares of our common stock and no assurances can be given that any such trading market will develop or be maintained. Holders of Record As of March 31, 2021, we had approximately 100 holders of record of our common stock. This does not include beneficial owners holding common stock in street name. As such, the number of beneficial holders of our shares could be substantially larger than the number of shareholders of record. Dividend Policy We have never declared or paid any dividends on our capital stock. We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Securities Authorized for Issuance under Equity Compensation Plan In October 2017, our board of directors approved the Amended 2017 Equity Incentive Plan (the 2017 Plan) and reserved 3,000,000 shares of our common stock to be issued thereunder. In January 2020, our board of directors approved an amendment to the 2017 Plan to increase the number of shares reserved for issuance by 1,000,000 shares. The following table shows shares of our common stock authorized for issuance under our 2017 Plan as of March 31, 2021: Plan Category Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights Weighted Average Exercise Price of Outstanding Options, Warrants and Rights Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (excluding Securities reflected in Column (a)) (a) (b) I Equity compensation plans approved by security holders(1) 3,591,755 $ 1.75 408,245 (1) The 2017 Plan allows for grants in the form of incentive stock options, nonqualified stock options, stock units, stock awards, stock appreciation rights, and other stock-based awards. All of our officers, directors, employees, consultants and advisors are eligible to receive grants under the Plan. Options to purchase shares of common stock are granted at exercise prices not less than 100% of fair value on the dates of grant. Recent Sales of Unregistered Securities 2021 Placement Between February and May 2021, we issued to accredited investors in the 2021 Placement, $6,610,550 aggregate principal amount of our 12% unsecured convertible promissory notes, due 12 months from each respective issuance date, at par and warrants to purchase in the aggregate 2,285,736 shares of our common stock at an exercise price of $8.00 per share, exercisable for a 5-year period, as provided in such warrants. We intend to use net proceeds from the 2021 Placement for business development, including, without limitation, working capital and general corporate purposes. Other Transactions In 2021, we issued a total of 133,500 shares of common stock to three service providers in exchange for services rendered, and, in 2019, we sold 30,000 shares of our common stock to a service provider. 2020 Placement Between March and December 2020, we sold to accredited investors in a private placement (the 2020 Placement) a total of 962,387 shares of our common stock at a purchase price of $2.87 per share. The 2020 Placement resulted in gross proceeds to us of $2,762,054. 24 2018 Placement Between November 2018 and March 2019, we sold to accredited investors in a private placement (the 2018 Placement) a total of 1,856,988 shares of our common stock at a purchase price of $2.25 per share, resulting in gross proceeds to us of $4,142,666. The above sales of our securities were made pursuant to exemptions from registration pursuant to Section 4(2) and/or Rule 506 of Regulation D of the Securities Act. We made such determinations based upon representations by the purchasers of such securities including, without limitation, that such purchasers were “accredited investors” as defined in the Securities Act. Repurchases of Equity Securities None ITEM 6: SELECTED FINANCIAL DATA Not required ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and related notes included in this Annual Report on Form 10-K. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties, including those discussed under Part I, Item 1A, “Risk Factors.” These risks and uncertainties may cause actual results to differ materially from those discussed in the forward-looking statements. Overview We are 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. We have 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, we believe we can address the less technically savvy, less motivated part of the market. We have completed development of, but have not yet obtained U.S. Food and Drug Administration, or FDA, clearance for, our insulin pump, and we have therefore not generated any revenues from product sales. Our net losses were approximately $7.4 million and $5.3 million for the years ended March 31, 2021 and 2020, respectively. As of March 31, 2021, we had negative working capital of approximately $1.6 million and an accumulated deficit of approximately $15.9 million. Historically, we have financed our operations principally through private placements of our common stock, and, more recently, of convertible promissory notes. In May 2021, we completed the 2021 Placement and issued $6,610,550 aggregate principal amount of our convertible promissory notes (the 2021 Notes), at par, and warrants to purchase shares of our common stock. For further discussion of the 2021 Placement and the 2021 Notes, see Notes 3 and 12 to the consolidated financial statements in Item 8 of this Report and below under Liquidity . Based on our current operating plan, substantial doubt about our ability to continue as a going concern for a period of at least one year from the date that the financial statements included in Item 8 of this Report are issued exists. Our ability to continue as a going concern depends on our ability to raise additional capital, through the sale of equity or debt securities, to support our future operations. If we are unable to secure additional capital, we will be required to curtail our research and development initiatives and take additional measures to reduce costs. Impacts of 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 our operational and financial performance will depend on future developments, including, without limitation, 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 our control, and cannot be predicted. 25 In March 2020, Santa Diego County in California, where we are based, and the state of California issued “shelter-in-place” orders (the Orders). We have been complying with the Orders and, until May 2021, had minimized business activities at our San Diego facility since March 2020. During that time, we implemented a teleworking policy for our employees and contractors to reduce on-site activity at our facility. We have and continue to experience longer lead times for certain components used to manufacture initial quantities of our products for our submission to the FDA, which is expected to occur in the quarter ending December 31, 2021. We remain diligent in continuing to identify and manage risks to our business given the changing uncertainties related to COVID-19. While we believe that our operations personnel are currently in a position to build an adequate supply of products for our FDA submission, we recognize that unpredictable events could create difficulties in the months ahead. We may not be able to address these difficulties in a timely manner, which could delay our submission to the FDA and negatively impact our business, results of operations, financial condition and cash flows. The continued spread of COVID-19 has also led to disruption and volatility in the global capital markets. We were recently able to raise additional capital in a private placement (see discussion below under Liquidity ), however, we need to raise additional capital to support our operations in the future. We may be unable to access the capital markets or additional capital may only be available to us on terms that could be significantly detrimental to our existing stockholders and to our business. For additional information on risks that could impact our future results, please refer to “Risk Factors” in Part I, Item 1A of this Report. Results of Operations The following discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Report. Research and Development Years ended March 31, Year-over-Year Change 2021 2020 2021 to 2020 Research and development $ 4,083,303 $ 3,034,152 $ 1,049,151 34.6 % Our research and development expenses include personnel, overhead and other costs associated with the development of our insulin pump product. We expense research and development costs as they are incurred. Research and development, or R&D, expenses increased in fiscal 2021 compared with fiscal 2020 primarily due to increased engineering and operations personnel and consulting costs. Our R&D employee headcount increased to 17 at March 31, 2021, from 10 at March 31, 2020. R&D expenses included stock-based compensation expenses of $390,045 and $422,625 for fiscal 2021 and fiscal 2020, respectively. We expect R&D expenses to continue to increase in fiscal 2022, as we continue to advance the development of our pump product and develop a low-volume manufacturing process. General and Administrative Years ended March 31, Year-over-Year Change 2021 2020 2021 to 2020 General and administrative $ 3,253,412 $ 2,313,870 $ 939,542 40.6 % General and administrative expenses consist primarily of personnel and related overhead costs for marketing, finance, human resources and general management. General and administrative expenses, or G&A, increased in fiscal 2021 compared with fiscal 2020 primarily as a result of increased personnel and consulting costs, stock-based compensation expenses and professional services fees related to our financing activities. Our full-time G&A headcount increased to four at March 31, 2021 from two at March 31, 2020. G&A expenses included stock-based compensation expenses of $837,533 and $378,619 for fiscal 2021 and fiscal 2020, respectively. We expect G&A expenses to continue to increase in fiscal 2022, as we commence the commercialization of our product and increase headcount. Interest Income Years ended March 31, Year-over-Year Change 2021 2020 2021 to 2020 Interest income $ 130 $ 28,749 $ (28,619 ) (99.5 )% Interest expense $ 39,791 $ — $ 39,791 — 26 Interest income consisted of interest earned on our cash deposits. The decrease in interest income for fiscal 2021 compared with fiscal 2020 was primarily attributable to lower average cash balances during fiscal 2021. Interest expense represents interest on our 2021 Notes. Liquidity and Going Concern As a development-stage enterprise, we do not currently have revenues to generate cash flows to cover operating expenses. Since our inception, we have incurred operating losses and negative cash flows in each year due to costs incurred in connection with R&D activities and G&A expenses associated with our operations. For the years ended March 31, 2021 and 2020, we incurred net losses of approximately $7.4 million and $5.3 million, respectively. At March 31, 2021, we had a cash balance of $1.5 million and an accumulated deficit of approximately $16 million. When considered with our current operating plan, these conditions raise substantial doubt about our ability to continue as a going concern for a period of at least one year from the date that the financial statements included in Item 8 of this Report are issued. Our financial statements do not include adjustments to the amounts and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern. Our ability to continue as a going concern depends on our ability to raise additional capital, through the sale of equity or debt securities to support our future operations, and we are currently seeking such additional financing. In fiscal 2021, we completed the 2021 Placement of our 2021 Notes for gross proceeds of $6,560,000, we sold shares of our common stock for gross proceeds of $1,838,056 as part of the 2020 Placement and obtained a $368,000 loan from Silicon Valley Bank in April 2020 under the U.S. Small Business Administration Paycheck Protection Program, which loan was forgiven in May 2021. Our operating needs include the planned costs to operate our business, including amounts required to fund research and development activities, including clinical studies, working capital and capital expenditures. Our future capital requirements and the adequacy of our available funds will depend on many factors, including, without limitation, our ability to successfully commercialize our 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 our product offerings. If we are unable to secure additional capital timely, we will be required to curtail our research and development initiatives and take additional measures to reduce costs in order to conserve our cash. In fiscal 2021, we used $5,908,662 in operating activities, which primarily resulted from our net loss of $7,377,976 and changes to operating assets and liabilities of $61,147, as adjusted for non-cash charges and gains, which included stock-based compensation expenses of $1,227,578, $68,880 for issuances of shares of common stock in exchange for services, $109,731 related to the lease right-of-use asset and liability and depreciation and amortization expenses of $111,015. Such changes in assets and liabilities primarily related to the timing of payments to vendors. In fiscal 2020, we used $4,094,839 in operating activities, which primarily resulted from our net loss of $ 5,320,873, partially offset by changes to operating assets and liabilities of $389,359, and adjusted for non-cash charges and gains, which included stock-based compensation expenses of $801,244, depreciation and amortization expenses of $35,431. Such changes in assets and liabilities primarily related to the timing of payments to vendors, offset by an increase in security deposits. Increased cash usage during fiscal 2021 was due to increased operating activities related to the development and eventual commercialization of our product. In fiscal 2021, cash used in investing activities of $109,669 was for the purchase of property and equipment. We used $260,789 of cash to purchase property and equipment in fiscal 2020. Cash provided by financing activities for fiscal 2021 totaled $4,364,662 and was attributable to $1,785,882 of net proceeds from the sale of shares of our common stock in the 2020 Placement, $368,760 of proceeds from the PPP Note and $2,210,000 of gross proceeds from the issuance of our 2021 Notes in the quarter ended March 31, 2021. Our financing activities for fiscal 2020 included $923,994 of proceeds from the 2020 Placement. Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. Note 1 to the consolidated financial statements in Item 8 of this Report describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. We have identified the accounting policies below as some of the more critical to our business and the understanding of our results of operations. These policies may involve estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Although we believe our judgments and estimates are appropriate, actual future results may differ from our estimates, and if different assumptions or conditions were to prevail, the results could be materially different from our reported results. 27 Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (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. Stock-based compensation We recognize stock-based compensation for stock options granted to employees and non-employees on a straight-line basis over the requisite service period, usually the vesting period, based on the grant-date fair value. We estimate the value of stock options on the date of grant using the Black-Scholes pricing model. The determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the option price, as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards, and projected stock option exercise behaviors. Income taxes We determine deferred tax assets and liabilities based upon the differences between the financial statement and tax bases of our assets and liabilities using tax rates in effect for the year in which we expect 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 our federal and state net deferred tax assets will not be fully realized, and we have recorded a full valuation allowance. We account for uncertain tax positions in accordance with FASB Accounting Standards Codification (ASC) Topic 740, Income Taxes . 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 consolidated 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 consolidated 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 consolidated statements of income. Leases We account for our leases under Accounting Standards Update (ASU) No. 2016-02, Leases (ASC 842), and related ASUs, which provide supplementary guidance and clarifications. Under ASC 842, all significant lease arrangements are generally recognized at lease commencement. Operating lease right-of-use (ROU) assets and lease liabilities are recognized at the commencement date. A ROU asset and corresponding lease liability are not recorded for leases with an initial term of 12 months or less (short-term leases), and we recognize lease expense for these leases as incurred over the lease term. ROU assets represent our right to use an underlying asset during the reasonably certain lease terms, and lease liabilities represent our obligation to make lease payments arising from the lease. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. We use our incremental borrowing rate, based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments related to initial direct cost and prepayments and excludes lease incentives. Lease expense is recognized on a straight-line basis over the lease term. Off-Balance Sheet Arrangements We do not maintain any off-balance sheet arrangements or obligations that are reasonably likely to have a material current or future effect on our financial condition, results of operations, liquidity or capital resources. Recent Accounting Pronouncements None 28 ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not required.