Modular Medical, Inc. 10-Q

Item 1. Financial Statements Modular Medical, Inc. Condensed Consolidated Balance Sheets September 30, 2022 (Unaudited) March 31, 2022 ASSETS CURRENT ASSETS Cash and cash equivalents $ 10,840,597 $ 9,076,372 Prepaid expenses and other 164,566 313,422 TOTAL CURRENT ASSETS 11,005,163 9,389,794 Property and equipment, net 257,053 235,959 Right of use asset, net 75,421 120,693 Security deposit 100,000 100,000 TOTAL NON-CURRENT ASSETS 432,474 456,652 TOTAL ASSETS $ 11,437,637 $ 9,846,446 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES Accounts payable $ 244,626 $ 299,951 Accrued expenses 336,119 524,891 Short-term lease liability 114,368 144,857 TOTAL CURRENT LIABILITIES 695,113 969,699 LONG-TERM LIABILITIES’ Long-term lease liability — 39,957 TOTAL LIABILITIES 695,113 1,009,656 Commitments and Contingencies (Note 8) STOCKHOLDERS’ EQUITY 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; 10,925,723 and 10,461,898 shares issued and outstanding as of September 30, 2022 and March 31, 2022, respectively 10,926 10,462 Additional paid-in capital 52,260,567 43,406,099 Accumulated deficit ( 41,528,969 ) ( 34,579,771 ) TOTAL STOCKHOLDERS’ EQUITY 10,742,524 8,836,790 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 11,437,637 $ 9,846,446 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Modular Medical, Inc. Condensed Consolidated Statements of Operations (Unaudited) Three Months Ended September 30, Six Months Ended September 30, 2022 2021 2022 2021 Operating expenses Research and development $ 2,385,539 $ 2,105,380 $ 4,607,523 $ 3,893,511 General and administrative 1,063,572 1,589,032 2,340,678 3,174,489 Total operating expenses 3,449,111 3,694,412 6,948,201 7,068,000 Loss from operations ( 3,449,111 ) ( 3,694,412 ) ( 6,948,201 ) ( 7,068,000 ) Other income 304 48 603 368,872 Interest expense — ( 685,793 ) — ( 1,194,670 ) Loss on debt extinguishment — — — ( 1,321,450 ) Loss before income taxes ( 3,448,807 ) ( 4,380,157 ) ( 6,947,598 ) ( 9,215,248 ) Provision for income taxes 1,600 1,600 1,600 1,600 Net loss $ ( 3,450,407 ) $ ( 4,381,757 ) $ ( 6,949,198 ) $ ( 9,216,848 ) Net loss per share Basic and diluted $ ( 0.32 ) $ ( 0.69 ) $ ( 0.64 ) $ ( 1.46 ) Shares used in computing net loss per share Basic and diluted 10,914,953 6,323,925 10,830,974 6,320,916 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Modular Medical, Inc. Condensed Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited) Additional Common Stock Paid-In Accumulated Stockholders’ Shares Amount Capital Deficit Equity Balance as of March 31, 2022 10,461,898 $ 10,462 $ 43,406,099 $ ( 34,579,771 ) $ 8,836,790 Shares issued for services 348 — 1,576 — 1,576 Issuance of common stock and warrants in equity offering, net 449,438 449 7,371,898 — 7,372,347 Issuance of common stock under equity incentive plan 2,664 3 13,747 13,750 Stock-based compensation — — 724,819 — 724,819 Net loss — — — ( 3,498,791 ) ( 3,498,791 ) Balance as of June 30, 2022 10,914,348 $ 10,914 $ 51,518,139 $ ( 38,078,562 ) $ 13,450,491 Issuance of common stock under equity incentive plan 11,375 12 50,368 50,380 Stock-based compensation 692,060 692,060 Net loss ( 3,450,407 ) ( 3,450,407 ) Balance as of September 30, 2022 10,925,723 $ 10,926 $ 52,260,567 $ ( 41,528,969 ) $ 10,742,524 Additional Common Stock Paid-In Accumulated Stockholders’ Shares Amount Capital Deficit Deficit Balance as of March 31, 2021 6,302,050 $ 6,302 $ 14,665,559 $ ( 15,947,010 ) $ ( 1,275,149 ) Shares issued for service 20,000 20 172,180 — 172,200 Warrants issued with convertible notes — — 3,700,632 — 3,700,632 Issuance of common stock under equity incentive plan 1,836 2 32,495 — 32,497 Stock-based compensation — — 623,423 — 623,423 Net loss — — — ( 4,835,091 ) ( 4,835,091 ) Balance as of June 30, 2021 6,323,886 $ 6,324 $ 19,194,289 $ ( 20,782,101 ) $ ( 1,581,488 ) Net loss ( 4,381,757 ) ( 4,381,757 ) Balance as of September 30, 2021 6,327,521 $ 6,328 $ 20,056,716 $ ( 25,163,858 ) $ ( 5,100,814 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 5 Modular Medical, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) Six Months Ended September 30, 2022 2021 Cash Flows from operating activities Net loss $ ( 6,949,198 ) $ ( 9,216,848 ) 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 1,481,009 1,518,351 Depreciation and amortization 60,180 53,599 Shares for services 100,800 314,265 Amortization of lease right-of-use asset 45,272 38,085 Change in lease liability ( 70,446 ) ( 61,032 ) Amortization of debt discount — 824,439 Changes in assets and liabilities: Other assets and prepaid expenses 49,632 ( 7,941 ) Accounts payable and accrued expenses ( 244,097 ) 799,687 Net cash used in operating activities ( 5,526,848 ) ( 4,784,725 ) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment ( 81,274 ) ( 22,779 ) Net cash used in investing activities ( 81,274 ) ( 22,779 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock and warrants, net 7,372,347 — Proceeds from issuance of convertible notes, net — 4,137,200 Net cash provided by financing activities 7,372,347 4,137,200 Net increase in cash and cash equivalents 1,764,225 ( 670,304 ) Cash and cash equivalents at beginning of period 9,076,372 1,468,465 Cash and cash equivalents at end of period $ 10,840,597 $ 798,161 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. 6 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. 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. 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 revenue to achieve profitability. The Company’s expected operating losses and cash burn 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. 7 The Company’s operating needs include the planned costs to operate its business, 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. 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 2023 refers to the fiscal year ending March 31, 2023). 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 are unaudited and have been prepared in accordance with generally accepted accounting principles in the United States (GAAP) and with the rules and regulations of the United States Security and Exchange Commission (SEC) regarding interim financial reporting. The condensed consolidated balance sheet as of March 31, 2022 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 GAAP have been condensed or omitted in accordance with these rules and regulations of the 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 September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending March 31, 2023 or for any other future period. 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 condensed 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 condensed 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. 8 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 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. 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 recorded at historical 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. 9 Right-of-Use Asset The Company’s right-of-use assets consist of leased assets recognized in accordance with FASB Accounting Standards Codification (ASC) No. 842, Leases which requires lessees to recognize a lease liability and a corresponding lease asset for virtually all lease contracts. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and the lease liability represents the Company’s obligation to make lease payments arising from the lease, both of which are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. Leases with a lease term of 12 months or less at inception are not recorded on the condensed consolidated balance sheets and are expensed on a straight-line basis over the lease term in the condensed consolidated statement of operations and comprehensive loss. The Company determines the lease term by agreement with lessor. In cases where the lease does not provide an implicit interest rate, the Company uses the Company’s incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. Stock-Based Compensation The Company recognizes stock-based compensation for stock options granted to employees and non-employees on a straight-line basis over the requisite service period, usually the vesting period, based on the grant-date fair value. The Company estimates the value of stock options on the date of grant using the Black-Scholes pricing model. The determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the option price, as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards, and projected stock option exercise behaviors. Per-Share Amounts Basic net loss per share is computed by dividing 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. For the six months ended September 30, 2022 and 2021, 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. Schedule of Anti-Dilutive Shares Six Months Ended September 30, 2022 2021 Options to purchase common stock 2,030,250 4,972,948 Common stock warrants 7,565,588 — Total 9,595,838 4,972,948 Reclassification Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations or cash flows. Comprehensive Loss Comprehensive loss represents the changes in equity of an enterprise, other than those resulting from stockholder transactions. Accordingly, comprehensive loss may include certain changes in equity that are excluded from net loss. For the three and six months ended September 30, 2022 and 2021, the Company’s comprehensive loss was the same as its net loss. 10 Recently Issued Accounting Pronouncement In June 2016, the FASB issued 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 – LEASES The Company accounts for the lease of its corporate facility in San Diego, California in accordance with ASC No. 842. 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. In addition, the Company paid a $100,000 security deposit. Future minimum payments under the facility operating lease, as of September 30, 2022, are listed in the table below. Schedule of Future minimum Lease Payment Annual Fiscal Years Operating lease 2023 74,411 2024 40,692 Less: Imputed interest ( 735 ) Present value of lease liabilities $ 114,368 Cash paid for amounts included in the measurement of lease liabilities was $ 79,014 for the six months ended September 30, 2022. Rent expense was $ 53,842 and $ 53,768 for the six months ended September 30, 2022 and 2021, respectively and $ 26,921 and $ 26,844 for the three months ended September 30, 2022 and 2021, 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. 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. 11 NOTE 4 – 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 $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 and 2021 Warrants (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 2021 Warrants). The Notes were unsecured obligations of the Company with each Note having a stated maturity date of 12 months from its issue date and accrued interest at a rate of 12% per annum, payable on maturity. If the Company completed 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 would 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. In connection with the issuance of the Notes, the Company issued the 2021 Warrants to purchase in the aggregate 767,796 shares of its common stock at an initial exercise price of $24.00 per share. The fair value of the 2021 Warrants was $3,700,632, of which $2,379,182 was recorded as a debt discount and amortized to interest expense, 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 . Upon the closing of a public offering in February 2022, 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 an additional 1,511,276 common stock purchase warrants with an exercise price of $6.60 per share. In addition, as a result of the February 2022 equity offering, the exercise price of the 767,796 outstanding 2021 Warrants was reduced to $6.00 per share. NOTE 5 – STOCKHOLDERS’ EQUITY (DEFICIT) Placements of Common Stock and Warrants On May 2, 2022, the Company entered into a securities purchase agreement (the Purchase Agreement) with an institutional investor, pursuant to which the Company sold, in a registered direct offering (the Registered Offering), which closed on May 5, 2022, an aggregate of 449,438 shares (the Shares) of the Company’s common stock, par value $0.001 per share, 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 will be 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 to the Investor warrants (the Private Placement Warrants) 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 beginning on the six-month anniversary of the date of issuance (the Initial Exercise Date) and will expire on the five-year anniversary of the Initial Exercise Date. 12 Warrants As of September 30, 2022, the Company had the following warrants outstanding: Schedule of Warrant Outstanding Type Number of Shares Exercise Price Expiration Date Common stock 1,348,314 $ 0.01 — Common stock 767,796 $ 6.00 April 2027 - May 2027 Common stock 4,011,276 $ 6.60 February 2027 Common stock 1,438,202 $ 6.60 November 2027 Total 7,565,588 Other During the six months ended September 30, 2022 and 2021, the Company issued 348 and 20,000 shares of common stock, respectively, with a fair value of approximately $ 1,576 and $ 172,200 , respectively, to service providers. NOTE 6 – STOCK-BASED COMPENSATION Amended 2017 Equity Incentive Plan In October 2017, the Board approved the 2017 Equity Incentive Plan (the Plan), as amended, 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. As of September 30, 2022, the unamortized compensation cost was $ 3,847,696 related to stock options and is expected to be recognized as expense over a weighted-average period of approximately 2.17 years. During the six months ended September 30, 2022, the Company granted 14,039 shares to members of the Board in accordance with the compensation plan for non-employee directors. During the six months ended September 30, 2022, the Company granted options with 10-year terms to purchase 506,657 shares of its common stock to employees, directors and consultants. During the six months ended September 30, 2022, the fair value of awards granted was $ 2,174,367 , and $ 1,481,009 was recorded as stock-based compensation expense in the condensed consolidated statement of operations. The following assumptions were used in the fair value calculations: The following assumptions were used in the fair value calculations: Three Months Ended September 30, Six Months Ended September 30, 2022 2021 2022 2021 Risk-free interest rates 3.00 % - 4.06 % 0.8 % - 0.98 % 2.82 % - 4.06 % 0.8 % - 0.98 % Volatility 156 % - 159 % 367 % - 370 % 156 % - 223 % 89 % - 366 % Expected life (years) 5.0 - 5.7 5.0 - 6.2 5.0 - 5.7 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. The Company accounts for forfeitures as they occur. 13 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, 2022 989,466 1,650,705 $ 6.58 Options granted ( 265,634 ) 265,634 4.35 Share awards ( 2,664 ) — — Options cancelled and returned to the Plan 96,668 ( 96,668 ) 7.69 Balance at June 30, 2022 817,836 1,819,671 6.19 Options granted ( 241,023 ) 241,023 4.35 Share awards ( 11,375 ) — — Options cancelled and returned to the Plan 30,444 ( 30,444 ) 4.67 Balance at September 30, 2022 595,882 2,030,250 $ 6.00 There were no stock options exercised during the six months ended September 30, 2022 and 2021. The following table summarizes the range of outstanding and exercisable options as of September 30, 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 $ 3.95 - $ 17.70 2,030,250 8.02 $ 6.00 1,228,447 $ 5.65 $ 952,473 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 six months ended September 30, 2022 and 2021, there were no such tax benefits associated with the exercise of stock options, as no stock options were exercised. NOTE 7 – 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 2022 may be subject to examination by the U.S. federal and state tax authorities. As of September 30, 2022, the Company has not recorded any liability for unrecognized tax benefits related to uncertain tax positions. 14 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 six months ended September 30, 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, and no claims for payment have been made under such agreements. 15