Modular Medical, Inc. 10-K

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Accounting Firm – Farber Hass Hurley LLP 30 Consolidated Balance Sheets 32 Consolidated Statements of Operations 33 Consolidated Statements of Stockholders’ Equity 34 Consolidated Statements of Cash Flows 35 Notes to Consolidated Financial Statements 36 29 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Audit Committee and Stockholders of Modular Medical, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Modular Medical, Inc. (the “Company”) as of March 31, 2021 and 2020, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Emphasis of Matter – Going Concern The accompanying consolidated financial statements have been prepared to assume the Company will continue as a going concern. As discussed in Note 1 to the financial statements, 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 its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved especially challenging, subjective, or complex judgment. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Going Concern As described further in Note 1 to the financial statements, the Company has incurred losses since inception, and 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 consolidated financial statements are issued. We identified management’s assessment of the Company’s ability to continue as a going concern as a critical audit matter due to inherent complexities and uncertainties related to the Company’s projections of operations. Auditing management’s going concern assessment involved a high degree of auditor judgment and audit effort due to the impact of these assumptions on the determination of the degree of doubt regarding the ability of the entity to continue as a going concern. The primary procedures we performed to address this critical audit matter included: 30 · We evaluated the reasonableness of key assumptions underlying management’s conclusion. · We evaluated that the disclosures included in the Form 10-K were complete and accurate and in accordance with accounting principles generally accepted in the United States of America. · We evaluated the impact of the Company’s existing financing arrangements on their ability to continue as a going concern. Grants of Stock Options As discussed in Note 5, during the year ended March 31, 2021, the Company granted 490,476 options to purchase shares of its common stock with 10-year terms and a grant-date fair value of $1,101,737 to employees, directors and consultants. Management is required to analyze the fair value of each option granted and amortize it over its vesting period. We identified the grant of stock options as a critical audit matter. Management’s estimates regarding fair value of options result in the application of a high degree of auditor judgment. The primary procedures we performed to address this critical audit matter included the following: · We gained an understanding of Company’s processes and controls in place for determining the fair value of each granted option. · We evaluated the option price model the management selected to determine the fair value, and analyzed the underlying data used in the calculations. · We also recalculated the fair value of each option granted. /s/ Farber Hass Hurley LLP We have served as the Company’s auditor since 2018. Chatsworth, California June 29, 2021 31 Modular Medical, Inc. Consolidated Balance Sheets March 31, ASSETS 2021 2020 CURRENT ASSETS Cash and cash equivalents $ 1,468,465 $ 3,122,134 Prepaid expenses 178,158 63,853 Other current assets 2,466 306 TOTAL CURRENT ASSETS 1,649,089 3,186,293 Property and equipment, net 298,958 301,308 Right of use asset, net 200,124 270,950 Security deposit 100,000 100,000 TOTAL NON-CURRENT ASSETS 599,082 672,258 TOTAL ASSETS $ 2,248,171 $ 3,858,551 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES Accounts payable $ 169,284 $ 367,019 Accrued expenses 499,948 202,160 Short-term lease liability 125,500 92,214 PPP note payable 368,780 — Convertible notes payable 2,133,453 — TOTAL CURRENT LIABILITIES 3,296,965 661,393 Long-term lease liability 184,355 178,736 Bonus payable 42,000 140,000 TOTAL LIABILITIES 3,523,320 980,129 Commitments and Contingencies (Note 10) STOCKHOLDERS’ EQUITY (DEFICIT) 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, 18,906,148 shares and 17,870,261 shares issued and outstanding as of March 31, 2021 and 2020, respectively 18,906 17,870 Additional paid-in capital 14,652,955 10,505,592 Common stock issuable — 923,994 Accumulated deficit (15,947,010 ) (8,569,034 ) TOTAL STOCKHOLDERS’ EQUITY (DEFICIT) (1,275,149 ) 2,878,422 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) $ 2,248,171 $ 3,858,551 The accompanying notes are an integral part of these audited consolidated financial statements 32 Modular Medical, Inc. Consolidated Statements of Operations Year ended March 31, 2021 2020 Operating expenses Research and development $ 4,083,303 $ 3,034,152 General and administrative expenses 3,253,412 2,313,870 Total operating expenses 7,336,715 5,348,022 Loss from operations (7,336,715 ) (5,348,022 ) Other income Interest income 130 28,749 Interest expense (39,791 ) — Loss before income taxes (7,376,376 ) (5,319,273 ) Provision for income taxes 1,600 1,600 Net loss $ (7,377,976 ) $ (5,320,873 ) Net loss per share Basic and diluted $ (0.40 ) $ (0.30 ) Shares used in computing net loss per share Basic and diluted 18,634,686 17,864,769 The accompanying notes are an integral part of these audited consolidated financial statements 33 Modular Medical, Inc. Consolidated Statements of Stockholders’ Equity (Deficit) Common Stock Additional Paid-In Common Stock Accumulated Stockholders’ Shares Amount Capital Issuable Deficit Equity (Deficit) Balance as of March 31, 2019 17,840,261 $ 17,840 $ 9,684,578 $ 19,800 $ (3,248,161 ) $ 6,474,057 Placement of common stock — — — 923,994 — 923,994 Shares issued for services 30,000 30 19,770 (19,800 ) — — Stock-based compensation — — 801,244 — — 801,244 Net loss — — — — (5,320,873 ) (5,320,873 ) Balance as of March 31, 2020 17,870,261 $ 17,870 $ 10,505,592 $ 923,994 $ (8,569,034 ) $ 2,878,422 Placement of common stock 962,387 962 2,708,914 (923,994 ) — 1,785,882 Shares issued for services 73,500 74 210,871 — — 210,945 Stock-based compensation — — 1,227,578 — — 1,227,578 Net loss — — — — (7,377,976 ) (7,377,976 ) Balance as of March 31, 2021 18,906,148 $ 18,906 $ 14,652,955 $ — $ (15,947,010 ) $ (1,275,149 ) The accompanying notes are an integral part of these audited consolidated financial statements 34 Modular Medical, Inc. Consolidated Statements of Cash Flows Year ended March 31, 2021 2020 Cash Flows from operating activities Net loss $ (7,377,976 ) $ (5,320,873 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation expense 1,227,578 801,244 Depreciation and amortization 111,015 35,431 Shares for services 68,880 — Amortization of lease right-of-use asset 70,826 — Change in lease liability 38,905 — Amortization of debt issuance costs 12,253 — Other 1,004 — Changes in assets and liabilities: Other assets and prepaid expenses 25,600 (48,391 ) Security deposits — (92,500 ) Accounts payable and accrued expenses (86,747 ) 530,250 Net cash used in operating activities (5,908,662 ) (4,094,839 ) Cash flows from investing activities Purchases of property and equipment (109,669 ) (260,789 ) Net cash used in investing activities (109,669 ) (260,789 ) Cash flows from financing activities Proceeds from private placement, net of issuance costs 1,785,882 923,994 Proceeds from issuance of convertible notes 2,210,000 — Proceeds from issuance of PPP note payable 368,780 — Net cash provided by financing activities 4,364,662 923,994 Net decrease in cash and cash equivalents (1,653,669 ) (3,431,634 ) Cash and cash equivalents, at beginning of year 3,122,134 6,553,768 Cash and cash equivalents, at end of year $ 1,468,465 $ 3,122,134 Supplemental disclosure: Cash paid for: Income taxes $ 1,600 $ 1,600 The accompanying notes are an integral part of these audited consolidated financial statements 35 MODULAR MEDICAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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. The consolidated 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: Liquidity Financial Accounting Standards Board (FASB) Accounting Standard Update (ASU) No. 2014-15 (ASU 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 consolidated 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 notes 3 and 11, in February 2021, the Company commenced a private placement of its convertible promissory notes to investors to fund its operations. In addition, during fiscal 2021, the Company obtained additional equity financing through a private placement of its common stock (see note 6), and the Company obtained a loan from Silicon Valley Bank in April 2020 (see notes 3 and 12). 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. 36 Basis of Presentation 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 Company’s fiscal year ends on March 31 of each calendar year. 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. Use of Estimates The preparation of the accompanying consolidated financial statements in conformity with U.S. generally accepted accounting principles (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. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash and cash equivalents. Cash and cash equivalents are deposited with high credit-quality institutions within the United States, which are insured by the Federal Deposit Insurance Corporation (FDIC) up to limits of approximately $250,000. 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. 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 in hand and cash in demand deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less. Property and 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 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 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: 37 · 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. Research and Development The Company expenses research and development expenditures as incurred. General and Administrative General and administrative expense consists primarily of payroll and benefit related costs, rent, office expenses, equipment supplies and meetings and travel. Stock-Based Compensation The Company recognizes 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. The Company estimates 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. Per-Share Amounts Basic net loss per share is computed by dividing net 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 years ended March 31, 2021 and 2020, 3,591,755 and 3,177,945 outstanding options to purchase common stock were excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive. 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 accounts 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 operations. The Company files U.S. federal and state income tax returns in jurisdictions with varying statutes of limitations. All tax returns from 2016 to 2020 may be subject to examination by the U.S. federal and state tax authorities. As of March 31, 2021, the Company has not recorded any liability for unrecognized tax benefits related to uncertain tax positions. 38 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 years ended March 31, 2021 and 2020, the Company’s comprehensive loss was the same as its net loss. NOTE 2 – CONSOLIDATED BALANCE SHEET DETAIL March 31, Property and equipment, net: 2021 2020 Leasehold improvements $ 139,197 $ 139,197 Office equipment 56,476 49,724 Computer equipment and software 52,383 51,882 Machinery and equipment 202,993 112,198 451,049 353,001 Less: accumulated depreciation and amortization (152,091 ) (51,693 ) $ 298,958 $ 301,308 March 31, Accrued expenses: 2021 2020 Accrued wages and bonus $ 372,563 $ 198,160 Accrued placement fees 88,800 — Accrued interest 27,538 — Other 11,047 4,000 $ 499,948 $ 202,160 39 NOTE 3 – NOTES PAYABLE PPP Note 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 CARES 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 10 months after the covered period during which the Company used the proceeds. 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. The Company applied to the Lender for forgiveness of the PPP Note in October 2020, and the amount which may be forgiven will be equal to the sum of the payroll and benefit costs and covered rent and utility payments incurred by the Company, as calculated in accordance with the terms of the CARES Act. Convertible Promissory Notes In February and March 2021, the Company sold $2,210,000 of convertible promissory notes (the Notes), at par in a private placement transaction effected pursuant to an exemption from the registration requirements under the Securities Act of 1933, as amended (the 2021 Placement). The Notes bear interest at an annual rate of 12%, and interest is accrued or payable monthly in cash. The Notes mature on September 30, 2021 (the Maturity Date) and may be prepaid prior to the Maturity Date. The aggregate principal amount of the Notes plus accrued but unpaid interest thereon shall automatically convert upon the closing of an offering of the Company’s equity securities to investors or a strategic corporate investor resulting in aggregate gross proceeds to the Company of at least $5,000,000 (excluding conversion of the Notes or other convertible securities issued for capital raising purposes) (a Qualified Financing). In the event of a Qualified Financing, all such outstanding principal and accrued interest shall convert into the same equity securities purchased by and on the same terms and conditions as the other investors in such Qualified Financing at a conversion price equal to 80% (a 20% discount) of the lowest price paid per unit or share by investors in the Qualified Financing. In the event that additional bridge financing is obtained by the Company, the Notes shall convert into the same securities and on the same terms and conditions as the other investors therein and all such purchases will be treated as one, single round of financing going forward. As of March 31, 2021, the Notes could be converted into 770,305 shares of common stock, excluding the effects of any payments of interest in kind. At any time on or following the Maturity Date, the holders of the Notes may demand repayment of the Notes, and the Company shall repay the outstanding aggregate principal amount plus accrued but unpaid interest thereon. The holders of the Notes, however, retain the right for 30 days after the Maturity Date to convert all or part of the aggregate principal amount plus accrued but unpaid interest on the Notes into the Company’s common stock at the conversion price of $2.87 per share or at a 20% discount to any financing consummated during the 30-day period following the Maturity Date. If a Qualified Financing has not occurred immediately prior to the consummation of a Change of Control (as defined below), the Note holders shall have the option of either (i) converting all or any portion of the aggregate principal amount of the Notes plus accrued but unpaid interest thereon into common stock of the Company at a conversion price equal to $2.87 per share or (ii) having the Company repay the aggregate principal amount of the Notes and accrued but unpaid interest. The term “Change of Control” means (i) a consolidation or merger of the Company with or into any other corporation or other entity or person, or any other corporate reorganization, other than any such consolidation, merger or reorganization in which the shares of capital stock of the Company immediately prior to such consolidation, merger or reorganization continue to represent a majority of the voting power of the surviving entity immediately after such consolidation, merger or reorganization; (ii) any transaction or series of related transactions to which the Company is a party in which in excess of 50% of the Company’s voting power is transferred; (iii) the sale or transfer of all or substantially all of the Company’s assets, or the exclusive license of all or substantially all of the Company’s material intellectual property; or (iv) the dissolution and winding up of the Company. The Company incurred debt issuance costs of $88,800, which were recorded as a debt discount and are being amortized to interest expense over the term of the Notes using the effective interest rate method. The interest expense related to the debt discount during the year ended March 31, 2021 was approximately $13,000. 40 NOTE 4 – LEASES Effective April 1, 2019, the Company adopted ASC No. 842, 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 on 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 is 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, net of the lease incentive, as of March 31, 2021, are listed in the table below. Operating Annual Fiscal Years lease 2022 $ 153,432 2023 158,028 2024 40,692 Less: Imputed interest (42,297 ) Present value of lease liabilities $ 309,855 Rent expense was $107,540 and $35,766 for the years ended March 31, 2021 and 2020, respectively. NOTE 5 – STOCK-BASED COMPENSATION Equity Compensation Plan In October 2017, the Company’s board of directors (the Board) approved the 2017 Equity Incentive Plan (the 2017 Plan) with 3,000,000 shares of common stock reserved for issuance. In January 2020, the Board approved an amendment to the 2017 Plan to increase the number of shares reserved for issuance by 1,000,000 shares. Under the 2017 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 2017 Plan is administered by the Board or, in the alternative, a committee designated by the Board. The exercise or purchase price of a stock option shall be calculated as follows: (i) In the case of an incentive stock option, (a) granted to employees, who, at the time of the grant of such incentive stock option own stock representing more than 10% of the voting power of all classes of stock of the Company, the per share exercise price shall be not less than 110% of the fair market value per share on the date of grant; or (b) granted to employees, other than to employees, described in the preceding clause, the per share exercise price shall be not less than 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 100% of the fair market value per share on the date of grant unless otherwise determined by the Board; and (iii) In the case of other grants, such price as determined by the Board. The Board is responsible for determining the consideration to be paid for the shares of common stock to be issued upon exercise or purchase. The 2017 Plan generally does not allow for the transfer of awards, and the Board may amend, suspend or terminate the 2017 Plan at any time. 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 March 31, 2021 was $2,242,352 related to stock options and is expected to be recognized as expense over a weighted-average period of approximately 2 years. 41 During the year ended March 31, 2021, options granted to purchase shares of its common stock to employees, directors and consultants had 10-year terms and a grant-date fair value of $1,101,737. Options to purchase 10,476 shares vested immediately on the respective grant dates. The following assumptions were used in the fair-value method calculations: Year ended March 31, 2021 2020 Risk-free interest rates 0.28% - 0.71 % 0.77% - 2.37 % Volatility 87% - 127 % 86% - 103 % 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 2017 Plan is presented below: Shares Options Outstanding Available Number of Weighted Average for Grant Shares Exercise Price Balance at March 31, 2019 1,470,092 1,529,908 0.86 Additional shares authorized under the Plan 1,000,000 — — Options granted (1,717,204 ) 1,717,204 2.25 Options cancelled and returned to the Plan 69,167 (69,167 ) 2.25 Balance at March 31, 2020 822,055 3,177,945 1.58 Options granted (490,476 ) 490,476 2.88 Options cancelled and returned to the Plan 76,666 (76,666 ) 2.25 Balance at March 31, 2021 408,245 3,591,755 1.75 There were no stock options exercised during the years ended March 31, 2021 and 2020. The following table summarizes the range of outstanding and exercisable options as of March 31, 2021: 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 3,591,755 8.25 $ 1.75 2,228,738 $ 1.32 $ 8,763,260 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. 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 years ended March 31, 2021 and 2020, there were no such tax benefits associated with the exercise of stock options. NOTE 6 – STOCKHOLDERS’ EQUITY Private Placement Between March and December 2020, the Company completed a private placement of shares of its common stock (the 2020 Placement). The Company sold 962,387 shares of common stock, at a purchase price of $2.87 per share, for gross proceeds of $2,762,054. The Company paid placement agent fees on the 2020 Placement of $52,256 during fiscal 2021. 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 to register for resale the shares of common stock sold. 42 NOTE 7 – INCOME TAXES The income tax provision (benefit) consisted of the following: Year Ended March 31, 2021 2020 Current portion: Federal $ — $ — State 1,600 1,600 1,600 1,600 Deferred portion: Federal (1,931,390 ) (1,180,434 ) State (576,868 ) (391,865 ) (2,508,258 ) (1,572,299 ) Change in valuation allowance 2,508,258 1,572,299 Provision for income taxes $ 1,600 $ 1,600 As of March 31, 2021, the Company had net operating loss carryforwards (NOLs) of approximately $13,954,000 for federal income tax purposes and $14,019,000 for state income tax purposes. These NOLs are available to reduce future taxable income and will expire at various times from 2037 through 2041, except federal NOLs from fiscal 2018, 2019 and 2020 which will never expire. The Company also had federal research and development tax credit carryforwards of approximately $535,000, which will begin expiring at various times from 2038 through 2040, and state research and development credits of approximately $141,000, which do not have an expiration date. A reconciliation of income taxes provided at the federal statutory rate (21% for fiscal 2021 and 2020) to the actual income tax provision is as follows: Year Ended March 31, 2021 2020 Federal statutory rate (21 )% (21 )% State tax rate, net of federal benefit (7 )% (7 )% Permanent differences — % — % Research and development tax credits (6 )% (3 )% Section 179 assets — % — % Change in valuation allowance 34 % 31 % Effective income tax rate — % — % 43 Significant components of the Company’s deferred tax assets and liabilities were: March 31, 2021 2020 Net operating loss carryforwards $ 3,909,434 $ 1,965,118 Stock-based compensation expense 554,892 364,989 Property and equipment (18,039 ) 6,842 Reserves, accruals & other (79,878 ) (7,181 ) Research and development tax credits 646,296 237,716 Total deferred tax assets 5,012,705 2,567,484 Less: valuation allowance (5,012,705 ) (2,567,484 ) Deferred tax assets, net $ — $ — Based on the available information and other factors, management believes it is more likely than not that the net deferred tax assets at March 31, 2021 and 2020, will not be fully realizable. Accordingly, management has recorded a full valuation allowance against its net deferred tax assets at March 31, 2021 and 2020. Management has evaluated and concluded that there were no material uncertain tax positions requiring recognition in the Company’s consolidated financial statements at March 31, 2021 and 2020. The Company does not expect any significant changes in its unrecognized tax benefits within twelve months of the reporting date. NOTE 8 – ROYALTY AGREEMENT In July 2017, the Company entered into a royalty agreement with its founder, chief executive officer and major shareholder (the Founder). Pursuant to the agreement, the Founder assigned and transferred all of his rights in the intellectual property of Quasuras in return for future royalty payments on the Company’s product. The Company is obligated to make royalty payments under the agreement to the Founder on any sales of the royalty product sold or otherwise commercialized by the Company equal to (a) $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 will cease, and the agreement will terminate, at such time as the total sum of royalty payments actually paid to the Founder, pursuant to the agreement, reaches $10,000,000. The Company has the option to terminate the 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, will be made by the Company to the Founder within thirty days after the end of each calendar quarter. NOTE 9 – RETIREMENT SAVINGS PLAN Effective March 2020, the Company adopted the Modular Medical, Inc. 401(k) Plan (the Savings Plan), which qualifies as a thrift plan under Section 401(k) of the Internal Revenue Code. Full-time and part-time employees who are at least 21 years of age are eligible to participate in the Savings Plan at the time of hire. Participants may contribute up to 15% of their earnings to the Savings Plan. The Plan became effective and began accepting participant contributions in April 2020. NOTE 10 – 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 years ended March 31, 2021 and 2020 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. 44 NOTE 11 – RELATED PARTY TRANSACTIONS Consulting Services During the year ended March 31, 2020, the Company entered into consulting agreements with a member of its board of directors. Under the consulting agreements, during the year ended March 31, 2020, the Company paid the director consulting fees of $140,625 in cash, and the director was granted stock options with a fair value of $76,875. The options were for a total of 47,062 shares of common stock, were fully vested on the grant dates and have terms of 10 years. The most recent consulting agreement, which was entered into between the Company and the director in September 2019, was terminated in March 2020. At March 31, 2020, the Company had an outstanding payable to the director of $5,585, which was included in accounts payable in the consolidated balance sheet. The Company paid the $5,585 to the director during fiscal 2021. 2021 Placement The Company’s chief executive officer and an existing investor, which is represented by a member of the Company’s board of directors, purchased $100,000 and $1,000,000, respectively, aggregate principal amount of the Notes (the Related Party Notes) in the 2021 Placement. As of March 31, 2021, $1,677 and $16,767 of interest was payable by the Company on the Related Party Notes to its chief executive officer and to the investor, respectively. NOTE 12 – SUBSEQUENT EVENTS Convertible Promissory Notes Subsequent to March 31, 2021, the Company issued an additional $4,250,000 of the Notes in the 2021 Placement pursuant to a Securities Purchase Agreement between the Company and each investor (the SPA) and warrants to purchase shares of its common stock (the Warrants). The Notes are unsecured obligations of the Company with each Note having a stated maturity date of 12 months from its issue date (the Issue Date). The Notes bear interest at a rate of 12% per annum, payable on maturity, provided that, if the Company fails to pay any amounts when due under a Note, the interest rate increases to the greater of 16% or the maximum amount permitted by law. Each Note may be prepaid at the Company’s option during the first 270 calendar days following its Issue Date (the 270 th day, the Trigger Date), subject to a 110% prepayment penalty on all principal and accrued but unpaid interest then outstanding. No Notes may be prepaid in whole or in part after the Trigger Date. If the Notes remain outstanding after the Trigger Date, the Notes may be converted into shares of the Company’s common stock at an initial conversion price of $2.87 per share; provided, that a Note holder may not convert any portion of its Note that would cause it to beneficially own in excess of 4.99% of the Company’s outstanding common stock. The conversion price and number of shares of Company common stock issuable upon conversion of the Notes will be subject to adjustment from time to time for any subdivision or consolidation of shares and other standard dilutive and certain other corporate events, as provided in the Notes. Subject to certain Exempt Issuances (as defined in the Notes), if at any time while a Note is outstanding, the Company sells, issues or grants any shares of its common stock or other securities entitling the holder to acquire shares of the Company’s common stock at a price per share less than the then conversion price, such conversion price shall be reduced to such lesser price, and the number of shares of the Company’s common stock issuable upon conversion of the Notes shall be increased, as provided in the Notes. If the Company completes an offering of its common stock or other securities in excess of $12,000,000 of gross proceeds (a Qualified Capital Raise), each Note holder will be required to convert its Adjusted Note Amount into the securities of such Qualified Capital Raise. For purposes hereof, Adjusted Note Amount equals the product of (i) the sum of all outstanding principal plus accrued but unpaid interest on a Note, multiplied by (ii) 1.25. The Notes contain a number of Company events of default (Events of Default) including, without limitation (i) failure to pay any principal or interest thereon when due, (ii) failure to timely deliver shares upon conversions, (iii) failure to comply with SEC reporting requirements under the Exchange Act, (iv) certain breaches of the SPA, the Notes, the Warrants, and the Registration Rights Agreement, (v) material restatements of the Company’s consolidated financial statements filed with the SEC, (vi) a holder’s inability to rely on Rule 144 for sales of shares underlying the Notes, (vii) the Company’s common stock is suspended or halted from trading and/or fails to be quoted or listed (as applicable) on the OTCQB, OTCQX, any tier of the NASDAQ Stock Market, the New York Stock Exchange, or the NYSE American within 10 days thereafter, (viii) failure to file with the SEC a registration statement covering the resale of shares of common stock underlying the Notes and Warrants within 60 calendar days following the Issue Date, (ix) failure to cause such registration statement to become effective within 120 calendar days following the Issue Date, or (x) certain merger consolidations, business combinations and sales of all or substantially all of the Company’s assets in the event the Company is not the survivor of such transaction. Upon an Event of Default, a Note holder may declare all amounts under its Note(s) due and payable, in which event the Company will be required to pay such Noteholder the product of (i) all then outstanding principal amount and accrued but unpaid interest thereon, multiplied by (ii) 125%; and all collection costs including legal fees and expenses in connection therewith. At the option of a Note holder, in the event the Company receive cash proceeds as a result of certain events including, but not limited to, from customers, issuances of debt or equity securities, exercise of warrants or asset sales, the Company will be required to use such proceeds to repay all or any lesser outstanding amounts due under such holder’s Note. 45 The Notes also includes various covenants, including negative covenants, representations, warranties, other payment obligations and agreements by the Company including, without limitation, most-favored nation clauses, rights of participation and first refusal and exchange rights. In connection with the issuance of the Notes, the Company issued Warrants to purchase 2,285,736 shares of its common stock (Warrant Shares) at an initial exercise price of $8.00 per share. The Warrants may be exercised for a period of 5 years from the Trigger Date. In the event that, prior to the Trigger Date, the Company (i) completes a Qualified Capital Raise, the outstanding Warrants shall be cancelled or (ii) prepays a holder’s Note(s) in whole or in part, such holder’s pro-rata number of its Warrants shall be cancelled. Effective April 30, 2021, each of the holders of the $2,210,000 of Notes outstanding at March 31, 2021 entered into a revocation and replacement agreement with the Company (the Revocation Agreement). Under the terms of the Revocation Agreement, the $2,210,000 of Notes and accrued interest of $50,091 were replaced with new Notes consistent with the terms described above. In May 2021, a member of the Board purchased $200,000 of the Notes. PPP Note As a result of the Company’s request for loan forgiveness, on May 29, 2021, the Company was notified that the outstanding principal and accrued interest for the PPP Note was forgiven in full by the U.S. Small Business Administration. ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.