Modular Medical, Inc. 10-Q

Item 1. Financial Statements Modular Medical, Inc. Condensed Consolidated Balance Sheets June 30, 2021 (Unaudited) March 31, 2021 ASSETS CURRENT ASSETS Cash and cash equivalents $ 3,380,968 $ 1,468,465 Prepaid expenses 80,830 178,158 Other current assets 4,632 2,466 TOTAL CURRENT ASSETS 3,466,430 1,649,089 Property and equipment, net 294,384 298,958 Right of use asset, net 181,499 200,124 Security deposit 100,000 100,000 TOTAL NON-CURRENT ASSETS 575,883 599,082 TOTAL ASSETS $ 4,042,313 $ 2,248,171 LIABILITIES AND STOCKHOLDERS’ DEFICIT CURRENT LIABILITIES Accounts payable $ 462,615 $ 169,284 Accrued expenses 511,990 499,948 Short-term lease liability 130,142 125,500 PPP note payable — 368,780 Convertible notes payable 4,369,440 2,133,453 TOTAL CURRENT LIABILITIES 5,474,187 3,296,965 LONG-TERM LIABILITIES` Long-term lease liability 149,614 184,355 Bonus payable — 42,000 TOTAL LIABILITIES 5,623,801 3,523,320 Commitments and Contingencies (Note 8) STOCKHOLDERS’ 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; 18,971,656 and 18,906,148 shares issued and outstanding as of June 30, 2021 and March 31, 2021, respectively 18,972 18,906 Additional paid-in capital 19,181,641 14,652,955 Common stock issuable — — Accumulated deficit ( 20,782,101 ) ( 15,947,010 ) TOTAL STOCKHOLDERS’ DEFICIT ( 1,581,488 ) ( 1,275,149 ) TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT $ 4,042,313 $ 2,248,171 The accompanying notes are an integral part of these condensed consolidated financial statements. 2 Modular Medical, Inc. Condensed Consolidated Statements of Operations (Unaudited) Three Months Ended June 30, 2021 2020 Operating expenses Research and development 1,788,131 970,815 General and administrative 1,585,456 903,397 Total operating expenses 3,373,587 1,874,212 Loss from operations ( 3,373,587 ) ( 1,874,212 ) Other income 368,823 55 Interest expense ( 508,877 ) — Loss on debt extinguishment ( 1,321,450 ) — Net loss $ ( 4,835,091 ) $ ( 1,874,157 ) Net loss per share Basic and diluted $ ( 0.26 ) $ ( 0.10 ) Shares used in computing net loss per share Basic and diluted 18,954,340 18,334,482 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Modular Medical, Inc. Condensed Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited) Additional Common Common Stock Paid-In Stock Accumulated Stockholders’ Shares Amount Capital Issuable Deficit Deficit Balance as of March 31, 2021 18,906,148 $ 18,906 $ 14,652,955 $ — $ ( 15,947,010 ) $ ( 1,275,149 ) Shares issued for services 60,000 60 172,140 — — 172,200 Warrants issued with convertible notes — — 3,700,632 — — 3,700,632 Stock-based compensation 5,508 6 655,914 — — 655,920 Net loss — — — — ( 4,835,091 ) ( 4,835,091 ) Balance as of June 30, 2021 18,971,656 $ 18,972 $ 19,181,641 $ — $ ( 20,782,101 ) $ ( 1,581,488 ) Additional Common Common Stock Paid-In Stock Accumulated Stockholders’ Shares Amount Capital Issuable 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 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Modular Medical, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) Three Months Ended June 30, 2021 2020 Net loss $ ( 4,835,091 ) $ ( 1,874,157 ) Adjustments to reconcile net loss to net cash used in operating activities: Gain on PPP note forgiveness ( 368,780 ) — Loss on debt extinguishment 1,321,450 — Stock-based compensation expense 655,920 344,716 Depreciation and amortization 24,649 24,986 Shares for services 266,910 — Amortization of lease right-of-use asset 18,625 ( 19,593 ) Change in lease liability ( 30,099 ) 121,204 Amortization of debt discount 338,619 — Other 2 ( 575 ) Changes in assets and liabilities: Other assets and prepaid expenses 451 13,478 Accounts payable and accrued expenses 402,723 ( 117,607 ) Net cash used in operating activities ( 2,204,621 ) ( 1,507,548 ) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment ( 20,076 ) ( 12,934 ) Net cash used in investing activities ( 20,076 ) ( 12,934 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from private placement — 1,170,808 Proceeds from issuance of convertible notes, net of placement fees 4,137,200 — Issuance of PPP note — 368,780 Net cash provided by financing activities 4,137,200 1,539,588 Net increase in cash and cash equivalents 1,912,503 19,106 Cash and cash equivalents at beginning of period 1,468,465 3,122,134 Cash and cash equivalents at end of period $ 3,380,968 $ 3,141,240 Supplemental disclosure: Noncash investing and financing activities: Fair value of detachable warrants issued with convertible notes $ 3,700,632 $ — The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 MODULAR MEDICAL, 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 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 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 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. 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 condensed consolidated financial statements do not include any adjustments that might result from this uncertainty. 6 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 2022 refers to the fiscal year ending March 31, 2022). The condensed 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, 2021 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 ended June 30, 2021 are not necessarily indicative of the results that may be expected for the year ending March 31, 2022 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. 7 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 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: · 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, accrued expenses and notes payable 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 three months ended June 30, 2021 and 2020, outstanding options to purchase 3,751,437 and 3,407,587 shares of common stock 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 months ended June 30, 2021 and 2020, the Company’s comprehensive loss was the same as its net loss. Recently Adopted Accounting Pronouncement In August 2020, the FASB issued ASU No. 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40)-Accounting For Convertible Instruments and Contracts in an Entity's Own Equity (ASU 2020-06) . ASU 2020-06 simplifies the accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. ASU 2020-06 also simplifies the diluted net income per share calculation in certain areas. The new guidance is effective for annual and interim periods beginning after December 15, 2021, and early adoption is permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company early adopted ASU 2020-06 effective April 1, 2021, and the impact of the adoption was not material to the Company’s consolidated financial statements. 8 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 June 30, 2021, are listed in the table below. Operating Annual Fiscal Years lease 2022 115,074 2023 158,028 2024 40,692 Less: Imputed interest ( 34,038 ) Present value of lease liabilities $ 279,756 Cash paid for amounts included in the measurement of lease liabilities was $ 48,085 . Rent expense was $ 26,884 and $ 26,885 for the three months ended June 30, 2021 and 2020, respectively. NOTE 3 – 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 was due in April 2022 and interest accrued on the outstanding principal balance of the PPP Note at a fixed rate of 1.0% per annum, which was deferred for 10 months after the covered period during which the Company used the proceeds. The Company applied to the Lender for forgiveness of the PPP Note in October 2020, and, in May 2021, the Company was notified by the Lender and the U.S. Small Business Administration that the outstanding principal and accrued interest for the PPP Note was forgiven in full. The Company accounted for the forgiveness of the PPP Note in accordance with Accounting Standards Codification Topic 470: Debt (ASC 470), and the amount forgiven was recorded as a gain on extinguishment and recognized in the other income line of the condensed consolidated statement of operations. NOTE 4 – CONVERTIBLE PROMISSORY NOTES From February through April 2021, the Company sold $2,310,000 of convertible promissory notes (the Original 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. Effective April 30, 2021, pursuant to a revocation and replacement agreement between each holder of an Original Note and the Company (the Revocation Agreement), the $2,310,000 of Original Notes and accrued interest thereon as of April 30, 2021 were replaced with $2,360,550 aggregate principal amount of Notes (as defined below). The Company accounted for the replacement of the Original Notes in accordance with ASC 470 and recorded a loss on extinguishment of $ 1,321,450 and interest expense of $ 70,647 for unamortized debt issuance costs as of April 30, 2021. 9 In April and May 2021, pursuant to a Securities Purchase Agreement (the SPA), the Company sold to investors $ 4,250,000 aggregate principal amount of convertible promissory notes (the Notes) 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 outstanding principal and accrued interest then outstanding. No Note may be prepaid in whole or in part after the Trigger Date. Notes outstanding after the Trigger Date 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 are subject to adjustment from time to time for subdivisions and consolidations of shares and other standard dilutive and corporate events, as provided in the Notes. Subject to certain Exempt Issuances (as defined in the Notes), if while a Note is outstanding, the Company sells, issues or grants any shares of its common stock or other securities to acquire shares of 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 conversion shares 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. Adjusted Note Amount equals the product of (i) the sum of all outstanding principal plus accrued 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 mergers 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 Note holder the sum of (i) the product of (a) all then outstanding principal amount and accrued interest thereon, multiplied by (b) 125%; and (ii) all collection costs including legal fees and expenses in connection therewith. At the option of a Note holder, in the event the Company receives cash proceeds as a result of certain events, including, but not limited to, payments 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. The Notes include covenants, representations, warranties, other payment obligations and agreements by the Company including, without limitation, most-favored nation rights, rights of participation and first refusal and exchange rights. In connection with the issuance of the Notes, the Company issued Warrants to purchase in the aggregate 2,303,348 shares of its common stock at an initial exercise price of $8.00 per share. The Warrants may be exercised for a period of five years from the Trigger Date, provided that, if 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 Warrants shall be cancelled. The fair value of the Warrants was $3,700,632, of which $2,379,182 was recorded as a debt discount, which is being amortized to interest expense over the term of the Warrants, and $1,321,450 was recorded as a loss on debt extinguishment. The Company calculated the fair value of the Warrants utilizing the Black-Scholes valuation model with the following assumptions: volatility of 88.98 % , risk-free interest rate of 0.86 % , a term of 5.75 years and a dividend yield of zero . In connection with the April and May 2021 sales of the $4,250,000 aggregate principal amount of the Notes, the Company incurred debt issuance costs of $116,000, 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 attributable to the debt discount, comprising the debt issuance costs and Warrants, during the three months ended June 30, 2021 was approximately $338,619. 10 The $6,610,550 aggregate principal amount of Notes are due and payable in full in the first quarter of fiscal 2023. As of June 30, 2021, the Notes and accrued interest could be converted into 2,354,653 shares of common stock at a conversion price of $2.87 per share. NOTE 5 – STOCKHOLDERS’ EQUITY (DEFICIT) & STOCK-BASED COMPENSATION During the three months ended June 30, 2021, the Company issued 60,000 shares of common stock to a service provider. 2017 Equity Incentive Plan In October 2017, 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 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. As of June 30, 2021, the unamortized compensation cost was $ 2,288,683 related to stock options and is expected to be recognized as expense over a weighted-average period of approximately 1.94 years . During the three months ended June 30, 2021, the Company granted 5,508 shares to members of its board of directors (the Board) in accordance with its Board compensation plan for non-employee directors. During the three months ended June 30, 2021, the Company granted options to purchase 182,321 shares of its common stock to employees, directors and consultants. The options had 10-year terms, and 47,320 options granted on June 30, 2020, in accordance with its Board compensation plan for non-employee directors, vested immediately. During the three months ended June 30, 2021, the fair value of the options granted was $ 698,093 , and $ 300,918 was recorded as stock-based compensation expense in the condensed consolidated statement of operations. The following assumptions were used in the fair value calculations: Schedule of Fair Value Assumptions Three Months Ended June 30, 2021 June 30, 2020 Risk-free interest rates 0.81 % - 0.87 % 0.31 % - 0.37 % Volatility 89 % - 366 % 123 % - 128 % Expected life (years) 5.0 - 6.0 5.0 - 6.0 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. 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 EIP is presented below: Schedule of Stock Option activity Options Outstanding Weighted Shares Average Available Number of Exercise for Grant Shares Prices Balance at March 31, 2021 408,245 3,591,755 $ 1.75 Options granted ( 182,321 ) 182,321 4.23 Share awards ( 5,508 ) — — Options cancelled and returned to the Plan 22,639 ( 22,639 ) 2.87 Balance at June 30, 2021 243,055 3,751,437 $ 1.86 There were no stock options exercised during the three months ended June 30, 2021 and 2020. 11 The following table summarizes the range of outstanding and exercisable options as of June 30, 2021: Schedule of Outstanding and Exercisable Option, Range 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 - $ 5.90 3,751,437 8.09 $ 1.86 2,420,577 $ 1.47 $ 10,761,492 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 three months ended June 30, 2021 and 2020, 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 for fiscal 2016 to fiscal 2020 may be subject to examination by the U.S. federal and state tax authorities. As of June 30, 2021, the Company has not recorded any liability for unrecognized tax benefits related to uncertain tax positions. NOTE 7 – RELATED PARTY TRANSACTIONS 2021 Placement In February 2021, the Company’s chief executive officer and an existing investor, who is represented by a member of the Company’s board of directors, purchased $100,000 and $1,000,000, aggregate principal amount of the Original Notes, respectively. Effective April 30, 2021, the Related Party Holders entered into Revocation Agreements with the Company pursuant to which their collective $ 1,100,000 aggregate principal amount of Original Notes and accrued interest of $ 50,091 were replaced with Notes. At June 30, 2021, the investor and executive officer held Notes in an aggregate principal amount of $ 1,026,630 and $ 102,663 , respectively, with $ 20,589 and $ 2,059 of interest payable thereon. In May 2021, a member of the Board purchased $ 200,000 aggregate principal amount of Notes. At June 30, 2021, approximately $ 4,000 of interest was payable by the Company thereon. NOTE 8 – COMMITMENTS & 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 three months ended June 30, 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, and no claims for payment have been made under such agreements. NOTE 9 – SUBSEQUENT EVENT On August 11, 2021, the Board approved an increase in the number of shares reserved for issuance under the Plan by 4,000,000 shares, bringing the total shares reserved for issuance to 8,000,000 shares. 12