Modular Medical(MODD) - 2022 Q3 - Quarterly Report

PART I: FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including the balance sheets, statements of operations, stockholders' equity (deficit), and cash flows, along with detailed notes explaining significant accounting policies, debt instruments, equity changes, and subsequent events Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights | Metric | December 31, 2021 (Unaudited) (USD) | March 31, 2021 (USD) | | :-------------------------- | :------------------------------ | :--------------- | | Cash and cash equivalents | $204,098 | $1,468,465 | | Total Current Assets | $268,651 | $1,649,089 | | Total Assets | $751,839 | $2,248,171 | | Total Current Liabilities | $8,921,262 | $3,296,965 | | Total Liabilities | $8,998,474 | $3,523,320 | | Total Stockholders' Deficit | $(8,246,635) | $(1,275,149) | Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations Highlights | Metric | Three Months Ended Dec 31, 2021 (USD) | Three Months Ended Dec 31, 2020 (USD) | Nine Months Ended Dec 31, 2021 (USD) | Nine Months Ended Dec 31, 2020 (USD) | | :------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Research and development | $1,849,399 | $1,086,669 | $5,742,911 | $3,150,149 | | General and administrative | $1,981,665 | $783,898 | $5,156,152 | $2,453,808 | | Total operating expenses | $3,831,064 | $1,870,567 | $10,899,063 | $5,603,957 | | Loss from operations | $(3,831,064) | $(1,870,567) | $(10,899,063) | $(5,603,957) | | Interest expense | $(1,010,247) | $0 | $(2,204,917) | $0 | | Net loss | $(4,841,307) | $(1,870,545) | $(14,058,155) | $(5,605,431) | | Net loss per share (Basic and diluted) | $(0.76) | $(0.30) | $(2.22) | $(0.91) | Condensed Consolidated Statements of Stockholders' Equity (Deficit) Stockholders' Deficit Changes (Nine Months Ended Dec 31, 2021) | Item | Amount (USD) | | :------------------------------------ | :----------- | | Balance as of March 31, 2021 | $(1,275,149) | | Shares issued for services | $172,200 | | Warrants issued with convertible notes| $3,700,632 | | Stock-based compensation | $2,740,073 | | Net loss | $(14,058,155)| | Balance as of December 31, 2021 | $(8,246,635) | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows Highlights (Nine Months Ended) | Cash Flow Activity | December 31, 2021 (USD) | December 31, 2020 (USD) | | :----------------- | :---------------- | :---------------- | | Operating | $(7,128,787) | $(4,570,713) | | Investing | $(22,779) | $(109,541) | | Financing | $5,887,199 | $2,154,662 | | Net decrease | $(1,264,367) | $(2,525,592) | | Cash at end of period | $204,098 | $596,542 | Notes to Unaudited Condensed Consolidated Financial Statements These notes provide detailed explanations and disclosures for the condensed consolidated financial statements, covering the company's business, significant accounting policies, lease obligations, PPP loan forgiveness, convertible and promissory notes, stockholders' equity, income taxes, related party transactions, commitments, contingencies, and subsequent events NOTE 1 – THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Modular Medical, Inc. is a development-stage medical-device company focused on designing, developing, and commercializing an innovative two-part insulin patch pump for both type 1 and type 2 diabetes markets[23] - 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[25] - A 1-for-3 reverse stock split was effective November 29, 2021, combining every three shares of common stock into one, with proportionate adjustments to voting rights, options, and warrants[29] NOTE 2 – LEASES Future Minimum Lease Payments (as of December 31, 2021) | Annual Fiscal Years | Operating Lease (USD) | | :------------------ | :-------------- | | 2022 | $38,358 | | 2023 | $158,028 | | 2024 | $40,692 | | Less: Imputed interest | $(20,049) | | Present value of lease liabilities | $217,029 | - Cash paid for lease liabilities was $115,073 for the nine months ended December 31, 2021[47] NOTE 3 – PPP NOTE - The Company received a $368,780 PPP Note in April 2020, which was fully forgiven in May 2021, and recorded as a gain on extinguishment in other income[48][49] NOTE 4 – CONVERTIBLE PROMISSORY NOTES - In April and May 2021, the Company sold $4,250,000 in convertible promissory notes and warrants, bearing 12% annual interest (16% upon default) and convertible at $8.61 per share after 270 days[51][52] - The fair value of warrants issued with convertible notes was $3,700,632, with $2,379,182 recorded as a debt discount and $1,321,450 as a loss on debt extinguishment[57] - Interest expense attributable to debt discount (issuance costs and warrants) was $630,323 for the three months and $1,454,762 for the nine months ended December 31, 2021[58] NOTE 5 – PROMISSORY NOTE - On October 28, 2021, the Company issued a secured promissory note (Bridge Note) to Manchester Explorer, L.P., providing a $3,000,000 revolving credit facility due March 15, 2022, with a 12% interest rate[60] - During the quarter ended December 31, 2021, the Company drew $1,500,000 on the Bridge Note and incurred $180,000 in interest charges[64] NOTE 6 – STOCKHOLDERS' DEFICIT AND STOCK-BASED COMPENSATION - During the three months ended December 31, 2021, the Company sold 30,865 common shares to officers, issued 8,334 shares to a service provider, and 5,775 shares to non-employee directors[65] - Stock-based compensation expense for the nine months ended December 31, 2021, was $1,769,805, with an unamortized cost of $7,419,022 expected to be recognized over approximately two years[67][68] Stock Option Activity (Nine Months Ended Dec 31, 2021) | Metric | Number of Shares | | :-------------------------------- | :--------------- | | Balance at March 31, 2021 | 1,197,252 | | Options granted | 723,269 | | Options cancelled and returned | (67,990) | | Balance at December 31, 2021 | 1,845,953 | | Options Exercisable (Dec 31, 2021)| 1,011,586 | | Weighted Average Exercise Price (Outstanding) | $7.57 | | Weighted Average Exercise Price (Exercisable) | $5.10 | NOTE 7 – 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[75] NOTE 8 – RELATED PARTY TRANSACTIONS - Related parties, including the chairman/president and an investor, held convertible notes totaling $1,129,293 in principal and accrued interest as of December 31, 2021[77][78] - The CEO and Chairman/CFO purchased 30,864 shares of common stock for $250,000 in October 2021[79] NOTE 9 – COMMITMENTS AND CONTINGENCIES - The Company is involved in legal proceedings, claims, and assessments in the normal course of business but has not made any payments or received claims under indemnification agreements with officers and directors[81][82] NOTE 10 – SUBSEQUENT EVENTS - Subsequent to December 31, 2021, the Company made additional draws totaling $600,000 under the Bridge Note[83] - On February 9, 2022, the Company completed a public offering of 2,500,000 common shares and 2,500,000 warrants at $6.00 per unit, generating $15 million in gross proceeds, and listed on Nasdaq Capital Market under 'MODD'[84] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition, results of operations, and liquidity for the reported periods. It highlights the company's development-stage status, the impact of COVID-19, critical accounting policies, and detailed analysis of operating expenses and capital resources, emphasizing the going concern risk and need for future financing - The Company is a development-stage medical device company focused on an innovative insulin pump, targeting both type 1 and type 2 diabetes markets[90] - Substantial doubt exists about the Company's ability to continue as a going concern due to ongoing operating losses and negative cash flows, necessitating additional capital raises[91][102] Company Overview - Modular Medical, Inc. is a development-stage medical device company focused on designing, developing, and commercializing an innovative two-part patch insulin pump (MODD1) to expand the wearable insulin delivery device market[90] Impacts of COVID-19 - COVID-19 has negatively affected the economy, supply chains, and financial markets, leading to longer lead times for components and potential delays for FDA submission[92][93] - The Company's ability to raise additional capital to support future operations may be impacted by continued disruption and volatility in global capital markets[94] Critical Accounting Policies and Estimates - As of December 31, 2021, there have been no material changes to the Company's significant accounting policies and estimates[96] Results of Operations Research and Development Research and Development Expenses (YoY Change) | Period | 2021 (USD) | 2020 (USD) | Change (USD) | Change (%) | | :------------------------- | :---------- | :---------- | :----------- | :--------- | | Three months ended Dec 31 | $1,849,399 | $1,086,669 | $762,730 | 70.2% | | Nine months ended Dec 31 | $5,742,911 | $3,150,149 | $2,592,762 | 82.3% | - The increase in R&D expenses was primarily due to increased engineering and manufacturing consulting costs, personnel, prototype and production component costs, and stock-based compensation expenses[98] General and Administrative General and Administrative Expenses (YoY Change) | Period | 2021 (USD) | 2020 (USD) | Change (USD) | Change (%) | | :------------------------- | :---------- | :---------- | :----------- | :--------- | | Three months ended Dec 31 | $1,981,665 | $783,898 | $1,197,767 | 152.8% | | Nine months ended Dec 31 | $5,156,152 | $2,453,808 | $2,702,344 | 110.1% | - The increase in G&A expenses was mainly driven by higher stock-based compensation expense and increased consulting and legal fees[100] Interest Expense Interest Expense (YoY Change) | Period | 2021 (USD) | 2020 (USD) | Change (USD) | | :------------------------- | :---------- | :--------- | :----------- | | Three months ended Dec 31 | $1,010,247 | $0 | $(1,010,225) | | Nine months ended Dec 31 | $2,204,917 | $0 | $(2,204,791) | - Interest expense significantly increased due to interest incurred from convertible promissory notes and the promissory (bridge) note[101] Liquidity and Capital Resources - The Company incurred a net loss of approximately $14.1 million for the nine months ended December 31, 2021, and had an accumulated deficit of approximately $29.9 million[102] - Cash used in operating activities was $7,128,787 for the nine months ended December 31, 2021, compared to $4,570,713 for the same period in 2020[104] - Cash provided by financing activities was $5,887,199 for the nine months ended December 31, 2021, primarily from convertible notes ($4,137,199 net) and a promissory note ($1,500,000), and private placement of common stock ($250,000)[19][106] Item 3. Quantitative and Qualitative Disclosures about Market Risk This item is not required for the Company - This item is not required[107] Item 4. Controls and Procedures Management concluded that the Company's disclosure controls and procedures were effective as of December 31, 2021, and reported no material changes in internal control over financial reporting during the nine months ended December 31, 2021 - Management concluded that disclosure controls and procedures were effective as of December 31, 2021[109] - There were no material changes in internal control over financial reporting during the nine months ended December 31, 2021[110] PART II: OTHER INFORMATION Item 1. Legal Proceedings The Company reported no legal proceedings - There are no legal proceedings[113] Item 1A. Risk Factors This section reiterates significant business risks, including the ongoing and uncertain adverse effects of the COVID-19 pandemic on operations, supply chains, and the ability to raise capital, which could materially impact the Company's financial condition and results - The full effects of COVID-19 are uncertain and could materially and adversely affect the Company's business, financial condition, operating results, and cash flows, particularly impacting supply chains and workforce effectiveness[115][116][117] - The Company may be unable to access capital markets or secure additional capital on favorable terms, which is crucial for future operations, given the ongoing disruption and volatility caused by COVID-19[118] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details recent unregistered sales of common stock, including issuances to non-employee directors, service providers, and executive officers, totaling 30,864 shares to officers for $250,000 - On December 31, 2021, 5,775 shares of common stock were issued to non-employee directors[119] - On October 22, 2021, 8,834 shares of common stock were issued to service providers[119] - On October 28, 2021, 30,864 shares of common stock were sold to two executive officers for gross proceeds of $250,000[121] Item 3. Defaults Upon Senior Securities The Company reported no defaults upon senior securities - There are no defaults upon senior securities[122] Item 4. Mine Safety Disclosures This item is not applicable to the Company - This item is not applicable[123] Item 5. Other Information The Company reported no other information - There is no other information to report[124] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, debt agreements, stock purchase agreements, and certifications Key Exhibits Filed | Exhibit No. | Description of Document | | :---------- | :---------------------- | | 3.1 | Certificate of Amendment and Second Amended and Restated Articles of Incorporation | | 3.2 | Certificate of Amendment to the Amended and Restated Articles of Incorporation | | 10.27 | Promissory Note dated October 28, 2021 | | 10.28 | Security Agreement dated October 28, 2021 | | 10.29 | Form of Common Stock Purchase Agreement dated October 28, 2021 | | 31.1 | Certification of Ellen O'Connor Vos pursuant to Section 302 of SOX | | 31.2 | Certification of Paul M. DiPerna pursuant to Section 302 of SOX | | 32.1 | Certification of Ellen O'Connor Vos and Paul M. DiPerna pursuant to 18 U.S.C. Section 1350 | | 101.INS | XBRL Instance Document | Signatures This section contains the official signatures of the Company's Chief Executive Officer and Chief Financial Officer, certifying the accuracy and completeness of the quarterly report - The report is signed by Ellen O'Connor Vos, Chief Executive Officer, and Paul M. DiPerna, Chief Financial Officer, on February 14, 2022[130]