Modular Medical(MODD) - 2022 Q2 - Quarterly Report

markdown [FORM 10-Q Cover Page](index=1&type=section&id=FORM%2010-Q%20Cover%20Page) This quarterly report (Form 10-Q) for September 30, 2021, details MODULAR MEDICAL, INC.'s filing status and outstanding shares - The report is a Quarterly Report (Form 10-Q) for the period ended September 30, 2021, filed by **MODULAR MEDICAL, INC.** (Commission file number: **000-49671**)[1](index=1&type=chunk)[2](index=2&type=chunk) - The registrant is classified as a **Non-accelerated filer**, a **Smaller reporting company**, and an **Emerging growth company**[4](index=4&type=chunk) - As of November 10, 2021, the number of outstanding shares of **common stock** was **19,100,154**[6](index=6&type=chunk) Part I – Financial Information [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents unaudited condensed consolidated financial statements, including balance sheets, operations, cash flows, and detailed notes [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This section presents the company's financial position, showing a decrease in cash and a significant increase in total liabilities | ASSETS/LIABILITIES/EQUITY | September 30, 2021 (Unaudited) | March 31, 2021 | | :-------------------------- | :----------------------------- | :------------- | | Cash and cash equivalents | $798,161 | $1,468,465 | | TOTAL CURRENT ASSETS | $844,661 | $1,649,089 | | TOTAL ASSETS | $1,374,838 | $2,248,171 | | TOTAL CURRENT LIABILITIES | $6,361,743 | $3,296,965 | | TOTAL LIABILITIES | $6,475,652 | $3,523,320 | | TOTAL STOCKHOLDERS' DEFICIT | $(5,100,814) | $(1,275,149) | - The company's cash and cash equivalents decreased by approximately **45.7%** from **$1,468,465** at March 31, 2021, to **$798,161** at September 30, 2021[9](index=9&type=chunk) - Total liabilities increased significantly by approximately **83.8%** from **$3,523,320** at March 31, 2021, to **$6,475,652** at September 30, 2021, primarily due to an increase in **convertible notes** payable[9](index=9&type=chunk) [Condensed Consolidated Statements of Operations](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) This section details the company's financial performance, reporting a significant increase in net loss driven by higher operating and interest expenses | Operating Expenses / Loss | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Six Months Ended Sep 30, 2021 | Six Months Ended Sep 30, 2020 | | :------------------------ | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Research and development | $2,105,380 | $1,092,665 | $3,893,511 | $2,063,480 | | General and administrative| $1,589,032 | $766,513 | $3,174,489 | $1,669,910 | | Total operating expenses | $3,694,412 | $1,859,178 | $7,068,000 | $3,733,390 | | Loss from operations | $(3,694,412) | $(1,859,178) | $(7,068,000) | $(3,733,390) | | Interest expense | $(685,793) | $— | $(1,194,670) | $— | | Loss on debt extinguishment | $— | $— | $(1,321,450) | $— | | Net Loss | $(4,381,757) | $(1,860,729) | $(9,216,848) | $(3,734,886) | | Net loss per share (Basic and diluted) | $(0.23) | $(0.10) | $(0.49) | $(0.20) | - Net loss for the six months ended September 30, 2021, significantly increased to **$(9,216,848)** from **$(3,734,886)** in the prior year, primarily due to increased operating expenses, interest expense, and a loss on debt extinguishment[11](index=11&type=chunk) - Research and development expenses increased by **88.7%** for the six months ended September 30, 2021, compared to the same period in 2020, reflecting increased development and manufacturing activities[11](index=11&type=chunk)[86](index=86&type=chunk)[87](index=87&type=chunk) [Condensed Consolidated Statements of Stockholders' Equity (Deficit)](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity%20(Deficit)) This section outlines changes in stockholders' equity, primarily reflecting an increased deficit due to net loss, partially offset by capital contributions | Equity Item | Balance as of March 31, 2021 | Shares issued for services | Warrants issued with convertible notes | Stock-based compensation | Net loss | Balance as of September 30, 2021 | | :---------- | :--------------------------- | :------------------------- | :----------------------------------- | :----------------------- | :------- | :------------------------------- | | Common Stock Shares | 18,906,148 | 60,000 | — | 16,414 | — | 18,982,562 | | Common Stock Amount | $18,906 | $60 | — | $17 | — | $18,983 | | Additional Paid-In Capital | $14,652,955 | $172,140 | $3,700,632 | $1,518,334 | — | $20,044,061 | | Accumulated Deficit | $(15,947,010) | — | — | — | $(9,216,848) | $(25,163,858) | | Stockholders' Deficit | $(1,275,149) | $172,200 | $3,700,632 | $1,518,334 | $(9,216,848) | $(5,100,814) | - The total stockholders' deficit increased from **$(1,275,149)** at March 31, 2021, to **$(5,100,814)** at September 30, 2021, primarily due to a net loss of **$(9,216,848)** partially offset by capital contributions from **warrants** issued with **convertible notes** and **stock-based compensation**[14](index=14&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section presents cash flow activities, showing increased cash usage in operations offset by significant cash provided by financing activities | Cash Flow Activity | Six Months Ended Sep 30, 2021 | Six Months Ended Sep 30, 2020 | | :----------------- | :---------------------------- | :---------------------------- | | Net cash used in operating activities | $(4,784,725) | $(3,029,671) | | Net cash used in investing activities | $(22,779) | $(93,303) | | Net cash provided by financing activities | $4,137,200 | $1,487,414 | | Net decrease in cash and cash equivalents | $(670,304) | $(1,635,560) | | Cash and cash equivalents at end of period | $798,161 | $1,486,574 | - Net cash used in operating activities increased to **$(4,784,725)** for the six months ended September 30, 2021, from **$(3,029,671)** in the prior year, driven by a higher net loss[17](index=17&type=chunk)[94](index=94&type=chunk) - Cash provided by financing activities significantly increased to **$4,137,200** for the six months ended September 30, 2021, primarily from the issuance of **convertible notes**[17](index=17&type=chunk)[96](index=96&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=7&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed explanations of the company's accounting policies, financial instruments, equity, and other significant financial disclosures [NOTE 1 – The Company and Summary of Significant Accounting Policies](index=7&type=section&id=NOTE%201%20%E2%80%93%20THE%20COMPANY%20AND%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES) This note describes Modular Medical, Inc. as a development-stage company, highlighting going concern doubts and COVID-19 impacts - **Modular Medical, Inc.** is a development-stage medical device company focused on designing, developing, and commercializing an innovative insulin pump for both **type 1 and type 2 diabetes** markets[20](index=20&type=chunk) - 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 raises[22](index=22&type=chunk)[23](index=23&type=chunk) - The **COVID-19 pandemic** has negatively impacted the economy, supply chains, and financial markets, leading to longer lead times for components and potential delays in **FDA submission**[33](index=33&type=chunk)[82](index=82&type=chunk) [NOTE 2 – Leases](index=10&type=section&id=NOTE%202%20%E2%80%93%20LEASES) This note details the company's lease obligations, including the adoption of ASC 842 and future operating lease payments - The company adopted ASU No. **2016-02**, Leases (**ASC 842**), effective April 1, 2019, and executed a **39-month** lease for a new corporate facility in **San Diego, California**, commencing April 1, 2020[41](index=41&type=chunk) | Annual Fiscal Years | Operating Lease Payments | | :------------------ | :----------------------- | | 2022 | $76,716 | | 2023 | $158,028 | | 2024 | $40,692 | | Less: Imputed interest | $(26,613) | | Present value of lease liabilities | $248,823 | [NOTE 3 – PPP Note](index=10&type=section&id=NOTE%203%20%E2%80%93%20PPP%20NOTE) This note describes the Paycheck Protection Program (PPP) loan received and its subsequent forgiveness, recorded as a gain on extinguishment - The company received a **$368,780** unsecured loan under the **Paycheck Protection Program (PPP)** on April 24, 2020[44](index=44&type=chunk) - The full amount of the **PPP Note**, including accrued interest, was forgiven in May 2021 and recorded as a gain on extinguishment in other income[45](index=45&type=chunk) [NOTE 4 – Convertible Promissory Notes](index=10&type=section&id=NOTE%204%20%E2%80%93%20CONVERTIBLE%20PROMISSORY%20NOTES) This note details the issuance of convertible promissory notes and warrants, including their terms, interest, and conversion features - In April and May 2021, the company sold **$4,250,000** aggregate principal amount of **convertible promissory notes** and **warrants** to purchase **2,303,348** shares of **common stock**[47](index=47&type=chunk)[54](index=54&type=chunk) - The notes bear **12%** interest, mature in **12 months**, and are convertible into **common stock** at an initial price of **$2.87** per share after a **270-day** trigger date[47](index=47&type=chunk)[49](index=49&type=chunk)[56](index=56&type=chunk) - The fair value of the **warrants** was **$3,700,632**, contributing to a debt discount and a **$1,321,450** loss on debt extinguishment[54](index=54&type=chunk) [NOTE 5 – Stockholders' Equity (Deficit) & Stock-Based Compensation](index=12&type=section&id=NOTE%205%20%E2%80%93%20STOCKHOLDERS'%20EQUITY%20(DEFICIT)%20%26%20STOCK-BASED%20COMPENSATION) This note covers changes in stockholders' equity, including common stock issuances and stock-based compensation expenses - During the six months ended September 30, 2021, the company issued **60,000** shares of **common stock** to a service provider and **16,414** shares to non-employee directors[57](index=57&type=chunk) - The **2017 Equity Incentive Plan** was amended in August 2021, increasing the shares reserved for issuance by **4,000,000**[58](index=58&type=chunk)[62](index=62&type=chunk) - **Stock-based compensation** expense for the six months ended September 30, 2021, was **$845,979**, with **1,371,471** options granted[60](index=60&type=chunk) [NOTE 6 – Income Taxes](index=14&type=section&id=NOTE%206%20%E2%80%93%20INCOME%20TAXES) This note addresses the company's income tax position, including deferred tax assets and the valuation allowance recorded - The company has recorded a full valuation allowance for 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](index=65&type=chunk) [NOTE 7 – Related Party Transactions](index=14&type=section&id=NOTE%207%20%E2%80%93%20RELATED%20PARTY%20TRANSACTIONS) This note discloses transactions with related parties, specifically the purchase of convertible notes by company officers and directors - The company's chairman, president, and a director purchased **convertible notes**, with interest expense incurred on these related party notes totaling approximately **$56,760** for the six months ended September 30, 2021[67](index=67&type=chunk)[68](index=68&type=chunk) [NOTE 8 – Commitments and Contingencies](index=14&type=section&id=NOTE%208%20%E2%80%93%20COMMITMENTS%20AND%20CONTINGENCIES) This note outlines the company's commitments and contingencies, including legal proceedings and indemnification agreements - The company is involved in legal proceedings, claims, and assessments in the normal course of business and has entered into indemnification agreements with its officers and directors[69](index=69&type=chunk)[70](index=70&type=chunk) [NOTE 9 – Subsequent Events](index=16&type=section&id=NOTE%209%20%E2%80%93%20SUBSEQUENT%20EVENTS) This note reports significant events occurring after the balance sheet date, such as stock sales to officers and a new credit facility - On October 28, 2021, the company sold **92,592** shares of **common stock** to two executive officers for approximately **$250,000**[72](index=72&type=chunk) - The company issued a secured promissory note (**Bridge Note**) to Manchester Explorer, L.P., providing a **$3,000,000** revolving credit facility, with an initial draw of **$500,000** made on November 9, 2021[73](index=73&type=chunk)[75](index=75&type=chunk)[76](index=76&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=16&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and results of operations, highlighting its development-stage status, the impact of COVID-19, critical accounting policies, and detailed analysis of operating expenses, interest expense, and liquidity challenges [Company Overview](index=17&type=section&id=Company%20Overview) This section provides an overview of Modular Medical, Inc. as a development-stage medical device company and its financing needs - **Modular Medical, Inc.** is a development-stage medical device company focused on an innovative two-part patch insulin pump (**MODD1**) to expand the wearable insulin delivery device market[79](index=79&type=chunk) - The company has historically financed operations through private placements of **common stock** and **convertible promissory notes**, and its ability to continue as a **going concern** depends on raising additional capital[80](index=80&type=chunk) [Impacts of COVID-19](index=17&type=section&id=Impacts%20of%20COVID-19) This section discusses the adverse effects of the COVID-19 pandemic on the company's operations, supply chain, and capital access - The **COVID-19 pandemic** has negatively affected the U.S. and global economy, disrupted supply chains, and led to longer lead times for components needed for **FDA submission**[81](index=81&type=chunk)[82](index=82&type=chunk) - The company faces risks in accessing capital markets due to market volatility caused by **COVID-19**, potentially impacting its ability to secure additional funding for future operations[83](index=83&type=chunk) [Critical Accounting Policies and Estimates](index=17&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This section confirms no material changes to the company's critical accounting policies and estimates during the reporting period - There have been no material changes to the company's significant accounting policies and estimates as of September 30, 2021[85](index=85&type=chunk) [Results of Operations](index=18&type=section&id=Results%20of%20Operations) This section analyzes the company's operating performance, focusing on changes in research and development, general and administrative, and interest expenses [Research and Development](index=18&type=section&id=Research%20and%20Development) This section details the significant increase in research and development expenses driven by intensified development and manufacturing activities | Period | 2021 (USD) | 2020 (USD) | Change (USD) | Change (%) | | :----- | :--------- | :--------- | :----------- | :--------- | | Three months ended Sep 30 | $2,105,380 | $1,092,665 | $1,012,715 | 92.7% | | Six months ended Sep 30 | $3,893,511 | $2,063,480 | $1,830,031 | 88.7% | - The increase in R&D expenses was primarily due to increased engineering and manufacturing consulting costs, prototype and production component costs, and **stock-based compensation** expenses as development and manufacturing activities intensified[87](index=87&type=chunk) [General and Administrative](index=18&type=section&id=General%20and%20Administrative) This section explains the rise in general and administrative expenses due to increased stock-based compensation and consulting fees | Period | 2021 (USD) | 2020 (USD) | Change (USD) | Change (%) | | :----- | :--------- | :--------- | :----------- | :--------- | | Three months ended Sep 30 | $1,589,032 | $766,513 | $822,519 | 107.3% | | Six months ended Sep 30 | $3,174,488 | $1,669,910 | $1,504,578 | 90.1% | - The increase in G&A expenses was mainly driven by higher **stock-based compensation** expense and increased consulting and legal fees[89](index=89&type=chunk) [Interest Expense](index=18&type=section&id=Interest%20Expense) This section highlights the substantial increase in interest expense primarily from convertible promissory notes and debt issuance cost amortization | Period | 2021 (USD) | 2020 (USD) | Change (USD) | | :----- | :--------- | :--------- | :----------- | | Three months ended Sep 30 | $685,793 | $— | $(685,793) |\ | Six months ended Sep 30 | $1,194,670 | $— | $(1,194,670) | - Interest expense significantly increased due to the **convertible promissory notes**, including amortization of debt issuance costs, with all interest accrued on the notes[90](index=90&type=chunk) [Liquidity and Capital Resources](index=19&type=section&id=Liquidity%20and%20Capital%20Resources) This section discusses the company's financial liquidity, significant net loss, accumulated deficit, and ongoing need for additional capital - The company incurred a net loss of approximately **$9.2 million** for the six months ended September 30, 2021, and had an accumulated deficit of approximately **$25.2 million**, raising substantial doubt about its ability to continue as a **going concern**[92](index=92&type=chunk) - Cash balance at September 30, 2021, was approximately **$0.8 million**. The company used **$4,784,725** in operating activities for the six months ended September 30, 2021[92](index=92&type=chunk)[94](index=94&type=chunk) - Recent financing activities include a private placement of **$6,610,500** in **convertible promissory notes**, **$250,000** from officer stock purchases, and a **$3,000,000** revolving credit facility (**Bridge Note**) with an initial draw of **$500,000**[92](index=92&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=20&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) This item is not required for the company - The company is not required to provide quantitative and qualitative disclosures about market risk[97](index=97&type=chunk) [Item 4. Controls and Procedures](index=20&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2021, and reported no material changes in internal control over financial reporting during the period - Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2021[99](index=99&type=chunk) - There were no material changes in the company's internal control over financial reporting during the six months ended September 30, 2021[100](index=100&type=chunk) Part II - Other Information [Item 1. Legal Proceedings](index=21&type=section&id=Item%201.%20Legal%20Proceedings) The company reported no legal proceedings - There are no legal proceedings to report[103](index=103&type=chunk) [Item 1A. Risk Factors](index=21&type=section&id=Item%201A.%20Risk%20Factors) This section reiterates significant risks, emphasizing the uncertain and potentially adverse effects of the COVID-19 pandemic on business - The company faces significant risks, including those related to the full effects of **COVID-19**, which could materially and adversely impact its business, financial condition, operating results, and cash flows[104](index=104&type=chunk)[105](index=105&type=chunk) - **COVID-19** has caused supply chain disruptions, potential delays in prototype production and **FDA submission**, and challenges in accessing capital markets for future funding[106](index=106&type=chunk)[107](index=107&type=chunk)[108](index=108&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=21&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company details recent unregistered sales of equity securities, including common stock issued to executive officers and non-employee directors, and convertible promissory notes with warrants to accredited investors - On October 28, 2021, the company sold **92,592** shares of **common stock** to two executive officers for **$250,000**[109](index=109&type=chunk) - The company issued **10,906** shares and **5,508** shares of **common stock** to non-employee directors on September 30, 2021, and June 30, 2021, respectively, under its compensation plan[109](index=109&type=chunk)[110](index=110&type=chunk) - From April 1, 2021, through June 30, 2021, the company sold **$6,610,550** in **12%** unsecured **convertible promissory notes** and **warrants** to purchase **2,303,348** shares of **common stock** in a private placement to accredited investors[111](index=111&type=chunk)[112](index=112&type=chunk) [Item 3. Defaults Upon Senior Securities](index=22&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reported no defaults upon senior securities - There were no defaults upon senior securities[113](index=113&type=chunk) [Item 4. Mine Safety Disclosures](index=22&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Mine Safety Disclosures are not applicable to the company[114](index=114&type=chunk) [Item 5. Other Information](index=22&type=section&id=Item%205.%20Other%20Information) The company reported no other information - There is no other information to report under this item[115](index=115&type=chunk) [Item 6. Exhibits](index=22&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed as part of the Form 10-Q, including the 2017 Equity Incentive Plan, employment agreements, certifications, and XBRL taxonomy documents | Exhibit No. | Description of Document | | :---------- | :---------------------- | | 4.1 | 2017 Equity Incentive Plan, as amended | | 10.27 | Employment Agreement between the Registrant and Ellen O'Connor Vos dated August 11, 2021 | | 31.1 | Certification of Ellen O'Connor Vos pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | 31.2 | Certification of Paul M. DiPerna pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | 32.1 | Certification of Ellen O'Connor Vos and Paul M. DiPerna pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | 101.INS | XBRL Instance Document | | 101.SCH | XBRL Taxonomy Extension Schema | | 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | | 101.DEF | XBRL Taxonomy Extension Definition Linkbase | | 101.LAB | XBRL Taxonomy Extension Label Linkbase | | 101.PRE | XBRL Taxonomy Extension Presentation Linkbase |