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 45 Consolidated Balance Sheets 47 Consolidated Statements of Operations 48 Consolidated Statements of Stockholders’ Equity (Deficit) 49 Consolidated Statements of Cash Flows 50 Notes to Consolidated Financial Statements 51 44 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, 2022 and 2021, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated 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, 2022 and 2021, 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. 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 judgments. 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. 45 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. As of March 31, 2022, the Company had cash balances of approximately $9,076,000, as a result of the capital raised in the public offering in February 2022. In addition, subsequent to March 31, 2022, the Company raised net proceeds from an equity offering of approximately $7,372,000. The Company has concluded that these plans alleviate the doubt related to its ability to continue as a going concern. 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: · 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 and future capital needs over the next 12 months on its ability to continue as a going concern. Stock Based Compensation As discussed in Note 8, during the year ended March 31, 2022, the Company granted 827,427 options to purchase shares of its common stock with 10-year terms and a grant-date fair value of $8,507,311 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 Firm Id 223 We have served as the Company’s auditor since 2018. Chatsworth, California June 28, 2022 46 Modular Medical, Inc. Consolidated Balance Sheets March 31, ASSETS 2022 2021 CURRENT ASSETS Cash and cash equivalents $ 9,076,372 $ 1,468,465 Prepaid expenses 312,464 178,158 Other current assets 958 2,466 TOTAL CURRENT ASSETS 9,389,794 1,649,089 Property and equipment, net 235,959 298,958 Right of use asset, net 120,693 200,124 Security deposit 100,000 100,000 TOTAL NON-CURRENT ASSETS 456,652 599,082 TOTAL ASSETS $ 9,846,446 $ 2,248,171 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES Accounts payable $ 299,951 $ 169,284 Accrued expenses 524,891 499,948 Short-term lease liability 144,857 125,500 PPP note payable — 368,780 Convertible notes payable — 2,133,453 TOTAL CURRENT LIABILITIES 969,699 3,296,965 Long-term lease liability 39,957 184,355 Bonus payable — 42,000 TOTAL LIABILITIES 1,009,656 3,523,320 Commitments and Contingencies (Note 11) 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, 10,461,898 shares and 6,302,050 shares issued and outstanding as of March 31, 2022 and 2021, respectively 10,462 6,302 Additional paid-in capital 43,406,099 14,665,559 Accumulated deficit ( 34,579,771 ) ( 15,947,010 ) TOTAL STOCKHOLDERS’ EQUITY (DEFICIT) 8,836,790 ( 1,275,149 ) TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) $ 9,846,446 $ 2,248,171 The accompanying notes are an integral part of these audited consolidated financial statements 47 Modular Medical, Inc. Consolidated Statements of Operations Twelve Months Ended March 31, 2022 2021 Operating expenses Research and development $ 7,729,240 $ 4,083,303 General and administrative 7,197,162 3,253,412 Total operating expenses 14,926,402 7,336,715 Loss from operations ( 14,926,402 ) ( 7,336,715 ) Other income 368,920 130 Interest expense ( 2,752,229 ) ( 39,791 ) Loss on debt extinguishment ( 1,321,450 ) — Loss before income taxes ( 18,631,161 ) ( 7,376,376 ) Provision for income taxes 1,600 1,600 Net loss $ ( 18,632,761 ) $ ( 7,377,976 ) Net loss per share Basic and diluted $ ( 2.74 ) $ ( 1.20 ) Shares used in computing net loss per share Basic and diluted 6,807,710 6,211,562 The accompanying notes are an integral part of these audited consolidated financial statements 48 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, 2020 5,956,754 $ 5,957 $ 10,517,505 $ 923,994 $ ( 8,569,034 ) $ 2,878,422 Placement of common stock 320,796 321 2,709,555 ( 923,994 ) — 1,785,882 Shares issued for services 24,500 24 210,921 — — 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 6,302,050 $ 6,302 $ 14,665,559 $ — $ ( 15,947,010 ) $ ( 1,275,149 ) Issuance of common stock upon public offering, net of issuance costs 2,500,000 2,500 13,657,500 — — 13,660,000 Issuance of common stock in settlement of convertible notes and accrued interest 1,511,276 1,511 6,506,254 — — 6,507,765 Placement of common stock 30,864 31 249,969 — — 250,000 Warrants issued with convertible notes — — 3,700,632 — — 3,700,632 Shares issued for services 90,000 90 594,310 — — 594,400 Shares issued for reverse stock split 1,211 1 ( 1 ) — — — Issuance of common stock under equity incentive plan 26,497 27 172,091 — — 172,118 Stock-based compensation — — 3,859,785 — — 3,859,785 Net loss — — — — ( 18,632,761 ) ( 18,632,761 ) Balance as of March 31, 2022 10,461,898 $ 10,462 $ 43,406,099 $ — $ ( 34,579,771 ) $ 8,836,790 The accompanying notes are an integral part of these audited consolidated financial statements 49 Modular Medical, Inc. Consolidated Statements of Cash Flows Year ended March 31, 2022 2021 Cash Flows from operating activities Net loss $ ( 18,632,761 ) $ ( 7,377,976 ) 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 4,031,902 1,227,578 Depreciation and amortization 117,490 111,015 Accrued interest 666,338 — Shares issued for services 395,950 68,880 Amortization of lease right-of-use asset 79,431 70,826 Change in lease liability ( 125,040 ) 38,905 Amortization of debt issuance costs 1,833,618 12,253 Other 274 1,004 Changes in assets and liabilities: Other assets and prepaid expenses 65,652 25,600 Accounts payable and accrued expenses 354,948 ( 86,747 ) Net cash used in operating activities ( 10,259,528 ) ( 5,908,662 ) Cash flows from investing activities Purchases of property and equipment ( 54,764 ) ( 109,669 ) Net cash used in investing activities ( 54,764 ) ( 109,669 ) Cash flows from financing activities Proceeds from private placements, net of issuance costs 250,000 1,785,882 Proceeds from issuance of convertible notes, net of placement fees 4,137,199 2,210,000 Proceeds from issuance of promissory note 2,100,000 — Repayment of promissory note ( 2,100,000 ) — Proceeds from issuance of PPP note payable — 368,780 Proceeds from issuance of common stock upon public offering, net of issuance costs 13,535,000 — Net cash provided by financing activities 17,922,199 4,364,662 Net increase (decrease) in cash and cash equivalents 7,607,907 ( 1,653,669 ) Cash and cash equivalents, at beginning of year 1,468,465 3,122,134 Cash and cash equivalents, at end of year $ 9,076,372 $ 1,468,465 Supplemental disclosure: Noncash investing and financing activities: Fair value of detachable warrants issued with convertible notes $ 3,700,632 — Conversion of convertible notes and accrued interest into common stock $ 7,253,876 — Cash paid for: Income taxes $ 1,600 $ 1,600 Interest paid $ 252,000 — The accompanying notes are an integral part of these audited consolidated financial statements 50 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. As discussed in Note 7, in February 2022, the Company completed a public offering of its equity securities, and its common stock was approved to list on the Nasdaq Capital Market under the symbol “MODD” and began trading there on February 10, 2022. Going Concern The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Company’s ability to operate profitably, to generate cash flows from operations, and to pursue financing arrangements to support its working capital requirements. At issuance of the Company’s financial statements for the year ended March 31, 2021, management had determined that there was significant doubt as to the ability of the Company to meet its obligations and continue as a going concern. As a result of the Offering (see Note 7), which was completed in February 2022, and the Registered Offering (see Note 13), which was completed in May 2022, and resulting improved financial position, the Company believes it has sufficient liquidity to meet its obligations as they come due and conduct its business for a period of at least 12 months from the date of issuance of these financial statements. 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. Basis of Presentation The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America. The Company’s fiscal year ends on March 31 of each calendar year. Each reference to a fiscal year in these notes to the 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 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. 51 Reverse Stock Split On November 24, 2021, the Company filed a certificate of amendment to its amended and restated certificate of incorporation with the Secretary of State of the State of Nevada to effect a 1-for-3 reverse stock split of the Company’s shares of common stock. Such amendment and ratio were previously approved by a majority of the Company’s stockholders and the board of directors. As a result of the reverse stock split, which was effective November 29, 2021, every three shares of the Company’s pre-reverse split outstanding common stock were combined and reclassified into one share of common stock. Proportionate voting rights and other rights of common stock holders were not affected by the reverse stock split. Any fractional shares of common stock resulting from the Reverse Split were rounded up to the nearest whole share. All stock options outstanding and common stock reserved for issuance under the Company’s equity incentive plans and warrants outstanding immediately prior to the reverse stock split were adjusted by dividing the number of affected shares of common stock by three and, as applicable, multiplying the exercise price by three, as a result of the reverse stock split. All share numbers, share prices, exercise prices and per share amounts have been adjusted, on a retroactive basis to reflect this 1-for-3 reverse stock split. 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. 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 at high quality financial institutions within the United States, which are insured by the Federal Deposit Insurance Corporation (FDIC) 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 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. 52 Cash and Cash Equivalents Cash and cash equivalents include cash on 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: · 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. Debt Modifications and Extinguishments When the Company modifies or extinguishes debt, it does so in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 470-50, Debt— Modifications and Extinguishments, which requires modification to debt instruments to be evaluated to assess whether the modifications are considered “substantial modifications.” A substantial modification of terms shall be accounted for like an extinguishment. Based on the guidance relied upon and the analysis performed, if the Company believes the embedded conversion feature has no fair value on the date of issuance (measurement date) and the embedded conversion feature has no beneficial conversion feature, the embedded conversion feature does not meet the criteria in ASC 470-50-40-10 or 470-20-25 and the issuance of the convertible note payable is considered a modification, and not an extinguishment that would require the recognition of a gain or loss. If the Company determines the change in terms meet the criteria for substantial modification under ASC 470 it will treat the modification as extinguishment and recognize a loss from debt extinguishment. Leases Effective April 1, 2019, the Company adopted ASC No. 842, Leases (ASC 842). ASC 842 requires an entity to recognize a right-of-use asset and a lease liability for all leases with terms longer than 12 months. The Company adopted ASC 842 utilizing the modified retrospective transition method. The Company elected the practical expedient afforded in ASC 842 in which the Company did not reassess whether any contracts that existed prior to adoption have or contain leases or the classification of its existing leases. 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. 53 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. Potentially dilutive common shares consist of incremental shares of common stock issuable upon the exercise of stock options and exercise of warrants. The following table sets forth securities outstanding which were excluded from the computation of diluted net loss per share as their inclusion would be anti-dilutive: March 31, 2022 2021 Options to purchase common stock 1,650,705 1,197,252 Warrants 4,779,072 — Total 6,429,777 1,197,252 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. 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 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 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 2021 may be subject to examination by the U.S. federal and state tax authorities. As of March 31, 2022 and 2021, the Company had not recorded any liability for unrecognized tax benefits related to uncertain tax positions. 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, 2022 and 2021, the Company’s comprehensive loss was the same as its net loss. 54 Recently Issued Accounting Pronouncement In June 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments—Credit Losses . This ASU added a new impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes an allowance for its estimate of expected credit losses and applies to most debt instruments, trade receivables, lease receivables, financial guarantee contracts, and other loan commitments. The CECL model does not have a minimum threshold for recognition of impairment losses and entities will need to measure expected credit losses on assets that have a low risk of loss. This update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for smaller reporting companies. The Company is still evaluating the impact of this accounting guidance on its results of operations and financial position. NOTE 2 – CONSOLIDATED BALANCE SHEET DETAIL March 31, Property and equipment, net: 2022 2021 Leasehold improvements $ 139,197 $ 139,197 Office equipment 63,298 56,476 Computer equipment and software 52,114 52,383 Machinery and equipment 230,947 202,993 Property and equipment, gross 485,556 451,049 Less: accumulated depreciation and amortization ( 249,597 ) ( 152,091 ) Property and equipment, net $ 235,959 $ 298,958 March 31, Accrued expenses: 2022 2021 Accrued wages and bonus $ 457,891 $ 372,563 Accrued placement fees — 88,800 Accrued interest — 27,538 Other 67,000 11,047 Accrued expenses $ 524,891 $ 499,948 NOTE 3 – LEASES The Company accounts for the lease for its corporate facility in San Diego, California in accordance with ASC 842. The 39-month lease term commenced April 1, 2020, and the lease provides for an initial monthly rent of approximately $12,400 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. In addition, the Company paid a $100,000 security deposit. Future minimum payments under the facility operating lease , as of March 31, 2022, are listed in the table below. Annual Fiscal Years Operating lease 2023 158,028 2024 40,692 Less: Imputed interest ( 13,906 ) Present value of lease liabilities $ 184,814 Cash paid for amounts included in the measurement of lease liabilities was $ 153,432 for the year ended March 31, 2022. Rent expense was $ 107,820 and $ 107,540 for the years ended March 31, 2022 and 2021, respectively. 55 NOTE 4 – PPP NOTE In April 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 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. In May 2021, the Lender and the U.S. Small Business Administration notified the Company 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 ASC 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 consolidated statement of operations. NOTE 5 – CONVERTIBLE PROMISSORY NOTES From February through April 2021, the Company sold $2,310,000 of convertible promissory notes (each an Original Note and, collectively, 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 new 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. In April and May 2021, pursuant to a securities purchase agreement by and between the Company and each investor (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 $8.61 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, as defined in the Notes), each Note holder will be required to convert its Adjusted Note Amount (as defined below) 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. 56 The Notes contained 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 767,796 shares of its common stock at an initial exercise price of $24.00 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 were 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 year ended March 31, 2022 was $1,833,618. Upon the closing of the Offering (see Note 7), which was a Qualified Capital Raise, in accordance with their terms, the Notes converted into 1,511,276 shares of common stock and the holders of the Notes received 1,511,276 Offering Warrants (as defined in Note 7). As a result of the Offering, the exercise price of the 767,796 outstanding Warrants was reduced to $6.00 per share. NOTE 6 – PROMISSORY NOTE In October 2021, the Company issued a secured promissory note (the Bridge Note) to Manchester Explorer, L.P. (Manchester) that provided the Company with a $ 3,000,000 revolving credit facility with all amounts being drawn down by the Company thereunder being due and payable, subject to acceleration in the event of a default, on March 15, 2022 (the Maturity Date). Interest at the rate of 12 % was payable on each drawn down without regard to the draw down date or the date when interest is paid. The principal amount of the Bridge Note and interest due thereon is payable to Manchester no later than the earlier of: (i) the Maturity Date and (ii) the date on which the Company has received proceeds in excess of $12,000,000 from a transaction or series of related transactions occurring prior to the Maturity Date, which such transactions constitute equity financings or other issuances of the Company’s equity securities. Provided that no Event of Default (as such term is defined in the Bridge Note) has occurred, on any date prior to the Maturity Date, upon no less than three days written notice by the Company specifying the draw amount, Manchester will advance the draw amount to the Company. No draw amount can be in an amount less than $100,000 or exceed an amount equal to $3,000,000 minus the aggregate principal amount outstanding under the Bridge Note at the time of such draw request. If an Event of Default occurs and is continuing, Manchester may declare all of the Bridge Note, including any interest and other amounts due, to be due and payable immediately. 57 In connection with the issuance of the Note, on October 28, 2021, the Company entered into a security agreement with Manchester (the Security Agreement) under which the Company granted Manchester a continuing and unconditional first priority security interest in and to any and all of the Company’s property of any kind or description, tangible or intangible, wheresoever located and whether now existing or hereafter arising or acquired. During fiscal 2022, the Company made draws on the Bridge Note of $ 2,100,000 and incurred interest charges of $ 252,000 . In February 2022, subsequent to the completion of the Offering (see Note 7), the Bridge Note and accrued interest was paid in full, and the Security Agreement was terminated. NOTE 7 – STOCKHOLDERS’ EQUITY (DEFICIT) Public Offering On February 9, 2022, the Company entered into an underwriting agreement (the Underwriting Agreement) with Oppenheimer & Co. Inc., who acted as the representative of the several underwriters (the Underwriters), in a firm commitment underwritten public offering (the Offering) pursuant to which, on February 14, 2022, the Company sold to the Underwriters an aggregate of 2,500,000 shares of the Company’s common stock and 2,500,000 warrants (the Offering Warrants and, collectively with the shares of common stock, the Units), each to purchase one share of common stock. The price to the public in the Offering was $6.00 per Unit, before underwriting discounts and commissions. The common stock and the Offering Warrants comprising the Units were immediately separable upon issuance and were issued separately. The Offering Warrants were exercisable immediately, have an exercise price of $6.60 per share and expire on February 14, 2027. The gross proceeds from the Offering were $ 15,000,000 , before deducting underwriting discounts and commissions and other offering expenses. Placements of Common Stock 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. In October 2021, the Company sold 30,864 shares of common stock to two officers, its i) chief executive officer and ii) the chairman of the Company’s board of directors (the Board), president, chief financial officer and treasurer, at a purchase price of $8.10 per share, for gross proceeds of approximately $ 250,000 . During the year ended March 31, 2022, the Company issued to service providers 90,000 shares of common stock with a fair value of approximately $ 594,400 . NOTE 8 – STOCK-BASED COMPENSATION Amended 2017 Equity Incentive Plan In October 2017, the Company’s Board approved the 2017 Equity Incentive Plan (the Plan) with 1,000,000 shares of common stock reserved for issuance. In January 2020 and August 2021, the Board approved increases in the number of shares reserved for issuance under the Plan by 333,334 and 1,333,334 shares, respectively. Under the Plan, eligible employees, directors and consultants may be granted a broad range of awards, including stock options, stock appreciation rights, restricted stock, performance-based awards and restricted stock units. The Plan is administered by the Board or, in the alternative, a committee designated by the Board. Stock-Based Compensation Expense The expense relating to stock options is recognized on a straight-line basis over the requisite service period, usually the vesting period, based on the grant date fair value. The unamortized compensation cost, as of March 31, 2022 was $ 3,286,370 related to stock options and is expected to be recognized as expense over a weighted-average period of approximately two years . During the year ended March 31, 2022, the Company granted options to purchase 827,427 shares of its common stock to employees, directors and consultants. The options had 10-year terms and 137,292 options vested immediately when granted. The grant-date fair value was determined to be $ 8,507,311 of which $ 2,739,490 was recorded as stock-based compensation expense and included in the consolidated statements of operations for the year ended March 31, 2022. 58 The following assumptions were used in the fair-value method calculations: Schedule of Fair Value Assumptions Year Ended March 31, 2022 2021 Risk-free interest rates 0.8 % - 2.42 %   0.28 % - 0.71 %   Volatility 89 % - 370 %   87 % - 127 %   Expected life (years) 5.0 - 6.2 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: Schedule of Stock Option activity Shares Options Outstanding Available Number of Weighted Average for Grant Shares Exercise Price Balance at March 31, 2020 274,019 1,059,315 $ 4.74 Options granted ( 163,492 ) 163,492 8.64 Options cancelled and returned to the Plan 25,555 ( 25,555 ) 6.75 Balance at March 31, 2021 136,082 1,197,252 5.25 Additional shares authorized under the Plan 1,333,334 — — Options granted ( 827,427 ) 827,427 10.39 Share awards ( 26,497 ) — — Options cancelled and returned to the Plan 373,974 ( 373,974 ) 10.73 Balance at March 31, 2022 989,466 1,650,705 $ 6.58 There were no stock options exercised during the years ended March 31, 2022 and 2021. The Company issued 26,497 shares to its non-employee directors under the Company’s outside director compensation plan and approximately $172,100 was recorded as stock-based compensation expense for these share awards during the year ended March 31, 2022. The following table summarizes the range of outstanding and exercisable options as of March 31, 2022: 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 $ 1.98 - $ 17.70 1,650,705 8.01 $ 6.58 1,193,680 $ 5.69 $ 1,090,966 The intrinsic value per share is calculated as the excess of the closing price of the common stock on the Company’s principal trading market over the exercise price of the option at March 31, 2022. 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, 2022 and 2021, there were no such tax benefits associated with the exercise of stock options. 59 NOTE 9 – INCOME TAXES The income tax provision consisted of the following: Schedule of Income tax provision Year Ended March 31, 2022 2021 Current portion: Federal $ — $ — State 1,600 1,600 Current 1,600 1,600 Deferred portion: Federal ( 4,109,000 ) ( 1,931,390 ) State ( 1,300,000 ) ( 576,868 ) Deferred ( 5,409,000 ) ( 2,508,258 ) Change in valuation allowance 5,409,000 2,508,258 Provision for income taxes $ 1,600 $ 1,600 At March 31, 2022, the Company had net operating loss carryforwards (NOLs) of approximately $ 27,600,000 for federal income tax purposes and $ 27,800,000 for state income tax purposes. These NOLs are available to reduce future taxable income and will expire at various times from 2037 through 2042, except federal NOLs from fiscal 2018, 2019, 2020, 2021 and 2022, which will never expire. The Company also had federal research and development tax credit carryforwards of approximately $ 800,000 , which will begin expiring at various times from 2038 through 2041, and state research and development credits of approximately $ 200,000 , which do not have an expiration date. A reconciliation of income taxes provided at the federal statutory rate (21% for each of fiscal 2022 and 2021) to the actual income tax provision is as follows: Schedule of Income Tax Provisions Year Ended March 31, 2022 2021 Federal statutory rate ( 21 )% ( 21 )% State tax rate, net of federal benefit ( 7 )% ( 7 )% Permanent differences — % — % Research and development tax credits ( 2 )% ( 6 )% Section 179 assets — % — % Change in valuation allowance 30 % 34 % Effective income tax rate — % — % The losses before income tax provision for the years ended March 31, 2022 and 2021 were solely attributable to US operations. Significant components of the Company’s deferred tax assets and liabilities were: Schedule of Deferred Tax Assets March 31, 2022 2021 Net operating loss carryforwards $ 7,731,000 $ 3,909,434 Stock-based compensation expense 1,824,000 554,892 Property and equipment 80,000 ( 18,039 ) Reserves, accruals & other ( 104,000 ) ( 79,878 ) Research and development tax credits 988,000 646,296 Total deferred tax assets 10,519,000 5,012,705 Section 179 assets ( 97,000 ) — Total deferred tax liabilities ( 97,000 ) — Less: valuation allowance ( 10,422,000 ) ( 5,012,705 ) Deferred tax assets, net $ — $ — 60 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, 2022 and 2021, will not be fully realizable. Accordingly, management has recorded a full valuation allowance against its net deferred tax assets at March 31, 2022 and 2021. 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, 2022 and 2021. The Company does not expect any significant changes in its unrecognized tax benefits within twelve months of the reporting date. NOTE 10 – ROYALTY AGREEMENT In July 2017, the Company entered into a royalty agreement with its founder, then-chief executive officer, president 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 11 – 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, 2022 and 2021 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. NOTE 12 – RELATED PARTY TRANSACTIONS In February 2021, the Company’s chairman of the Board and president and Manchester, which 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 aggregate principal amount of Original Notes and accrued interest were replaced with Notes. On February 14, 2022, Manchester and the executive officer held Notes in an aggregate principal amount of $ 1,026,630 and $ 102,663 , respectively, with $ 97,881 and $ 9,788 of interest payable thereon. In connection with the Offering, Manchester and the executive officer received 234,274 and 23,429 shares of common stock, respectively, and 234,274 and 23,429 Offering Warrants, respectively. In May 2021, a member of the Board purchased $ 200,000 aggregate principal amount of Notes (the Director Note). On February 14, 2022, in connection with the Offering, the Director Note and $ 18,805 of accrued interest thereon were converted into 45,586 shares of common stock 45,586 Offering Warrants . The daughter of the Company’s president, chief financial officer, treasurer and chairman of the Board is an employee of the Company. During fiscal 2022, the Company paid her $ 169,589 , which includes the aggregate grant date fair value, as determined pursuant to FASB ASC Topic 718, of a stock option granted in November 2021. 61 NOTE 13 – SUBSEQUENT EVENT On May 2, 2022, the Company entered into a securities purchase agreement (the Purchase Agreement) with an institutional investor (the Investor) pursuant to which the Company sold, in a registered direct offering (the Registered Offering), for gross proceeds of $8,000,000 an aggregate of 449,438 shares (the Shares) of the Company’s common stock, at a purchase price per Share of $4.45 and pre-funded warrants (the Pre-Funded Warrants) to purchase an aggregate of 1,348,314 shares of common stock at a purchase price per Pre-Funded Warrant of $4.44. The Pre-Funded Warrants were exercisable immediately on the date of issuance at an exercise price of $0.01 per share and may be exercised at any time until all of the Pre-Funded Warrants are exercised in full. In a concurrent private placement under the Purchase Agreement, the Company issued warrants (the Private Placement Warrants) to the Investor to purchase an aggregate of 1,438,202 shares of common stock at an exercise price of $6.60 per share. The Private Placement Warrants will be exercisable commencing November 5, 2022 and have a five-year term. ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.