Modular Medical(MODD) - 2022 Q1 - Quarterly Report

Part I – FINANCIAL INFORMATION Item 1. Financial Statements Presents unaudited condensed consolidated financial statements for Modular Medical, Inc., including balance sheets, operations, equity, cash flows, and detailed notes Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (June 30, 2021 vs. March 31, 2021) | Metric | June 30, 2021 | March 31, 2021 | Change | | :-------------------------- | :------------ | :------------- | :----- | | Cash and cash equivalents | $3,380,968 | $1,468,465 | +130% | | Total Current Assets | $3,466,430 | $1,649,089 | +110% | | Total Assets | $4,042,313 | $2,248,171 | +80% | | Convertible notes payable | $4,369,440 | $2,133,453 | +105% | | Total Current Liabilities | $5,474,187 | $3,296,965 | +66% | | Total Liabilities | $5,623,801 | $3,523,320 | +60% | | Total Stockholders' Deficit | $(1,581,488) | $(1,275,149) | -24% | Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations Highlights (Three Months Ended June 30) | Metric | 2021 | 2020 | Change (YoY) | | :---------------------- | :------------ | :------------ | :----------- | | Research and development| $1,788,131 | $970,815 | +84.2% | | General and administrative| $1,585,456 | $903,397 | +75.5% | | Total operating expenses| $3,373,587 | $1,874,212 | +80% | | Loss from operations | $(3,373,587) | $(1,874,212) | -80% | | Other income | $368,823 | $55 | >+1000% | | Interest expense | $(508,877) | $— | N/A | | Loss on debt extinguishment| $(1,321,450) | $— | N/A | | Net loss | $(4,835,091) | $(1,874,157) | -158% | | Net loss per share (Basic and diluted)| $(0.26) | $(0.10) | -160% | Condensed Consolidated Statements of Stockholders' Equity (Deficit) Condensed Consolidated Statements of Stockholders' Equity (Deficit) Highlights | Metric | March 31, 2021 | June 30, 2021 | Change | | :-------------------------- | :------------- | :------------ | :----- | | Common Stock (Amount) | $18,906 | $18,972 | +$66 |\n| Additional Paid-In Capital | $14,652,955 | $19,181,641 | +$4,528,686 |\n| Accumulated Deficit | $(15,947,010) | $(20,782,101) | -$4,835,091 |\n| Total Stockholders' Deficit | $(1,275,149) | $(1,581,488) | -$306,339 | - Key activities impacting stockholders' deficit for the three months ended June 30, 2021, included the issuance of warrants with convertible notes ($3,700,632), stock-based compensation ($655,920), and a net loss of ($4,835,091) [14] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows Highlights (Three Months Ended June 30) | Cash Flow Activity | 2021 | 2020 | Change (YoY) | | :----------------- | :------------ | :------------ | :----------- | | Operating Activities | $(2,204,621) | $(1,507,548) | -46.2% | | Investing Activities | $(20,076) | $(12,934) | -55.2% | | Financing Activities | $4,137,200 | $1,539,588 | +168.7% | | Net increase in cash | $1,912,503 | $19,106 | +9990% | | Cash at end of period| $3,380,968 | $3,141,240 | +7.6% | - The significant increase in cash from financing activities in 2021 was primarily due to proceeds from the issuance of convertible notes, net of placement fees ($4,137,200) [17] NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Modular Medical, Inc. is a development-stage medical device company focused on designing and commercializing an innovative insulin pump for insulin-dependent individuals with diabetes [21] - The Company expects to continue incurring operating losses and cash outflows, raising substantial doubt about its ability to continue as a going concern within one year, necessitating additional capital [23][24] - The global COVID-19 pandemic has negatively affected the economy, supply chains, and financial markets, with the full impact on the Company's operational and financial performance remaining uncertain [34] - The Company early adopted ASU 2020-06, simplifying accounting for convertible instruments, effective April 1, 2021, with no material impact on its financial statements [41] NOTE 2 – LEASES - The Company adopted ASC 842 for leases effective April 1, 2019, and executed a 39-month lease for a new corporate facility in San Diego in January 2020 [42] Future Minimum Operating Lease Payments (as of June 30, 2021) | Annual Fiscal Years | Operating Lease | | :------------------ | :-------------- | | 2022 | $115,074 | | 2023 | $158,028 | | 2024 | $40,692 | | Less: Imputed interest| $(34,038) | | Present value of lease liabilities| $279,756 | NOTE 3 – PPP NOTE - The Company received a $368,780 PPP Note in April 2020, which was fully forgiven in May 2021, resulting in a gain on extinguishment recognized in other income [45][46] NOTE 4 – CONVERTIBLE PROMISSORY NOTES - In April and May 2021, the Company sold $4,250,000 in convertible promissory notes (Notes) and warrants in a private placement, incurring $116,000 in debt issuance costs [48][55] - The Notes bear 12% annual interest, mature in 12 months, and are convertible into common stock at $2.87 per share, subject to certain conditions and adjustments [48][49][56] - Warrants to purchase 2,303,348 shares at an $8.00 exercise price were issued, with a fair value of $3,700,632, recorded as debt discount and loss on debt extinguishment [54] NOTE 5 – STOCKHOLDERS' EQUITY (DEFICIT) & STOCK-BASED COMPENSATION - During Q1 2022, the Company issued 60,000 common shares for services and granted 5,508 shares to directors, along with options to purchase 182,321 shares [57][60] Stock-Based Compensation Expense (Three Months Ended June 30) | Metric | 2021 | 2020 | | :----- | :---------- | :---------- | | Expense| $655,920 | $344,716 | - As of June 30, 2021, unamortized stock option compensation cost was $2,288,683, expected to be recognized over approximately 1.94 years [59] NOTE 6 – INCOME TAXES - The Company has recorded a full valuation allowance against its federal and state net deferred tax assets, as management believes it is more likely than not that they will not be fully realized [65] NOTE 7 – RELATED PARTY TRANSACTIONS - The CEO and a Board-represented investor purchased $100,000 and $1,000,000, respectively, of original convertible notes, which were replaced with new Notes in April 2021 [67] - As of June 30, 2021, the investor and CEO held Notes with aggregate principal amounts of $1,026,630 and $102,663, respectively, plus accrued interest [67] NOTE 8 – COMMITMENTS & CONTINGENCIES - The Company is involved in legal proceedings in the normal course of business and enters into contractual indemnification arrangements with counterparties, officers, and directors [69][70] NOTE 9 – SUBSEQUENT EVENT - On August 11, 2021, the Board approved an increase of 4,000,000 shares reserved for issuance under the 2017 Equity Incentive Plan, bringing the total to 8,000,000 shares [72] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the Company's financial condition and results, covering business overview, COVID-19 impacts, accounting policies, operating expenses, liquidity, and capital resources Company Overview - Modular Medical, Inc. is a development-stage medical device company focused on an innovative insulin pump, currently without product sales revenue [75][76] Key Financial Figures (as of June 30, 2021) | Metric | Amount | | :----- | :----- | | Net Loss (Q1 2022) | $4.8 million | | Negative Working Capital | ~$2.0 million | | Accumulated Deficit | $20.8 million | - Substantial doubt exists about the Company's ability to continue as a going concern, requiring additional capital through equity or debt sales [77] Impacts of COVID-19 - COVID-19 has negatively impacted the economy, supply chains, and financial markets, with the full extent of its impact on the Company remaining uncertain [78] - The Company experienced longer lead times for components, potentially delaying FDA submission, and faces challenges in accessing capital markets [79][80] Critical Accounting Policies and Estimates - There have been no material changes to the Company's significant accounting policies and estimates as of June 30, 2021 [82] Results of Operations Research and Development Research and Development Expenses (Three Months Ended June 30) | Metric | 2021 | 2020 | Change (YoY) | | :----- | :------------ | :------------ | :----------- | | R&D Expenses | $1,788,131 | $970,815 | +84.2% | | Stock-based compensation | $138,286 | $103,725 | +33.3% | - The increase in R&D expenses was primarily due to a rise in engineering and operations personnel and consulting costs, with full-time R&D headcount increasing from 10 to 22 [84] General and Administrative General and Administrative Expenses (Three Months Ended June 30) | Metric | 2021 | 2020 | Change (YoY) | | :----- | :------------ | :------------ | :----------- | | G&A Expenses | $1,585,456 | $903,397 | +75.5% | | Stock-based compensation | $517,635 | $240,991 | +114.8% | - The increase in G&A expenses was mainly driven by higher personnel and consulting costs, stock-based compensation, and professional services fees, with G&A headcount increasing from 3 to 4 [86] Liquidity and Capital Resources - The Company incurred a net loss of approximately $4.4 million for the three months ended June 30, 2021, and had a cash balance of $3.4 million and an accumulated deficit of $20.8 million [87] - Substantial doubt about the Company's ability to continue as a going concern exists due to operating losses and the need to repay convertible notes by May 2022, necessitating additional capital [87][88] Cash Flow Summary (Three Months Ended June 30) | Cash Flow Activity | 2021 | 2020 | | :------------- | :------------ | :------------ | | Operating Activities | $(2,204,621) | $(1,507,548) | | Investing Activities | $(20,076) | $(12,934) | | Financing Activities | $4,137,200 | $1,539,588 | - Cash provided by financing activities in 2021 was primarily from the issuance of $6,610,500 in convertible promissory notes [87][91] Recently Adopted Accounting Pronouncements - Details on recently adopted accounting pronouncements are provided in Note 1 to the Condensed Consolidated Financial Statements [92] Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company is not required to provide quantitative and qualitative disclosures about market risk - The Company is not required to provide quantitative and qualitative disclosures about market risk [93] Item 4. Controls and Procedures Details the Company's effective disclosure controls and procedures, confirming no material changes in internal control over financial reporting during the quarter Disclosure Controls and Procedures. - Management concluded that the Company's disclosure controls and procedures were effective as of June 30, 2021 [95] Changes in Internal Control over Financial Reporting. - There were no material changes in the Company's internal control over financial reporting during the three months ended June 30, 2021 [96] Part II - OTHER INFORMATION Item 1. Legal Proceedings The Company has no legal proceedings to report - The Company has no legal proceedings to report [98] Item 1A. Risk Factors Highlights material risks from the Annual Report on Form 10-K, emphasizing the uncertain and adverse effects of COVID-19 on business and financial condition COVID-19 and Public Health Crises Risk Factors - The COVID-19 pandemic's full effects are uncertain but could materially and adversely impact the Company's business, financial condition, operating results, and cash flows [100] - Operational disruptions, supply chain issues, and difficulties in accessing capital markets due to COVID-19 could delay product development and negatively affect financial performance [101][102][103] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Details the Company's recent unregistered sales of equity securities, specifically private placement of convertible promissory notes and warrants Recent Sales of Unregistered Securities - From April 1 to June 30, 2021, the Company sold $6,610,550 aggregate principal amount of 12% unsecured convertible promissory notes and warrants to purchase 2,303,348 common shares at an $8.00 per share in a private placement [104] - These sales were made to accredited investors under exemptions from registration pursuant to Section 4(2) and/or Rule 506 of Regulation D of the Securities Act [105] Item 3. Defaults Upon Senior Securities There are no defaults upon senior securities to report - There are no defaults upon senior securities to report [106] Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to the Company - Mine safety disclosures are not applicable to the Company [107] Item 5. Other Information There is no other information to report under this item - There is no other information to report under this item [108] Item 6. Exhibits Lists exhibits filed with Form 10-Q, including agreements for the 2021 private placement and Sarbanes-Oxley certifications - Key exhibits include Addendum No. 1 to Reorganization and Share Exchange Agreement, forms of Convertible Promissory Note, Common Stock Purchase Warrant, Securities Purchase Agreement, and Registration Rights Agreement for the 2021 Placement [109] - Certifications by Paul M. DiPerna under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are also included [109] SIGNATURES Filing Signatures Confirms the official signing of the report by Paul M. DiPerna, President, Chief Financial Officer, Secretary, and Treasurer of Modular Medical, Inc - The report was signed on August 16, 2021, by Paul M. DiPerna, President, Chief Financial Officer, Secretary, and Treasurer [115]