ITEM 7:
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following
discussion of our financial condition and results of operations should be read in conjunction with the financial statements and
related notes included in this Annual Report on Form 10-K. This discussion may contain forward-looking statements based upon current
expectations that involve risks and uncertainties, including those discussed under Part I, Item 1A, “Risk Factors.”
These risks and uncertainties may cause actual results to differ materially from those discussed in the forward-looking statements.
Overview
We are 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. We have 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, we believe we can address the
less technically savvy, less motivated part of the market.
We have completed
development of, but have not yet obtained U.S. Food and Drug Administration, or FDA, clearance for, our insulin pump, and we have
therefore not generated any revenues from product sales. Our net losses were approximately $7.4 million and $5.3 million for the
years ended March 31, 2021 and 2020, respectively. As of March 31, 2021, we had negative working capital of approximately $1.6
million and an accumulated deficit of approximately $15.9 million.
Historically, we have financed our
operations principally through private placements of our common stock, and, more recently, of convertible promissory notes. In
May 2021, we completed the 2021 Placement and issued $6,610,550 aggregate principal amount of our convertible promissory notes
(the 2021 Notes), at par, and warrants to purchase shares of our common stock. For further discussion of the 2021 Placement and
the 2021 Notes, see Notes 3 and 12 to the consolidated financial statements in Item 8 of this Report and below under Liquidity.
Based on our
current operating plan, substantial doubt about our ability to continue as a going concern for a period of at least one year from
the date that the financial statements included in Item 8 of this Report are issued exists. Our ability to continue as a going
concern depends on our ability to raise additional capital, through the sale of equity or debt securities, to support our future
operations. If we are unable to secure additional capital, we will be required to curtail our research and development initiatives
and take additional measures to reduce costs.
Impacts of 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 our operational and financial
performance will depend on future developments, including, without limitation, 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 our control,
and cannot be predicted.
In March 2020,
Santa Diego County in California, where we are based, and the state of California issued “shelter-in-place” orders
(the Orders). We have been complying with the Orders and, until May 2021, had minimized business activities at our San Diego facility
since March 2020. During that time, we implemented a teleworking policy for our employees and contractors to reduce on-site activity
at our facility. We have and continue to experience longer lead times for certain components used to manufacture initial quantities
of our products for our submission to the FDA, which is expected to occur in the quarter ending December 31, 2021. We remain diligent
in continuing to identify and manage risks to our business given the changing uncertainties related to COVID-19. While we believe
that our operations personnel are currently in a position to build an adequate supply of products for our FDA submission, we recognize
that unpredictable events could create difficulties in the months ahead. We may not be able to address these difficulties in a
timely manner, which could delay our submission to the FDA and negatively impact our business, results of operations, financial
condition and cash flows.
The continued
spread of COVID-19 has also led to disruption and volatility in the global capital markets. We were recently able to raise additional
capital in a private placement (see discussion below under Liquidity), however, we need to raise additional capital
to support our operations in the future. We may be unable to access the capital markets or additional capital may only be available
to us on terms that could be significantly detrimental to our existing stockholders and to our business.
For additional
information on risks that could impact our future results, please refer to “Risk Factors” in Part I, Item 1A of this
Report.
Results of
Operations
The following
discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this
Report.
Research
and Development
Years ended March 31, Year-over-Year Change
Our research
and development expenses include personnel, overhead and other costs associated with the development of our insulin pump product.
We expense research and development costs as they are incurred.
Research and
development, or R&D, expenses increased in fiscal 2021 compared with fiscal 2020 primarily due to increased engineering and
operations personnel and consulting costs. Our R&D employee headcount increased to 17 at March 31, 2021, from 10 at March
31, 2020. R&D expenses included stock-based compensation expenses of $390,045 and $422,625 for fiscal 2021 and fiscal
2020, respectively. We expect R&D expenses to continue to increase in fiscal 2022, as we continue to advance the development
of our pump product and develop a low-volume manufacturing process.
General and
Administrative
Years ended March 31, Year-over-Year Change
General and
administrative expenses consist primarily of personnel and related overhead costs for marketing, finance, human resources and
general management.
General and
administrative expenses, or G&A, increased in fiscal 2021 compared with fiscal 2020 primarily as a result of increased personnel
and consulting costs, stock-based compensation expenses and professional services fees related to our financing activities. Our
full-time G&A headcount increased to four at March 31, 2021 from two at March 31, 2020. G&A expenses included stock-based
compensation expenses of $837,533 and $378,619 for fiscal 2021 and fiscal 2020, respectively. We expect G&A expenses to continue
to increase in fiscal 2022, as we commence the commercialization of our product and increase headcount.
Interest Income
Years ended March 31, Year-over-Year Change
Interest income
consisted of interest earned on our cash deposits. The decrease in interest income for fiscal 2021 compared with fiscal 2020 was
primarily attributable to lower average cash balances during fiscal 2021.
Interest expense represents interest
on our 2021 Notes.
Liquidity
and Going Concern
As a development-stage
enterprise, we do not currently have revenues to generate cash flows to cover operating expenses. Since our inception, we have
incurred operating losses and negative cash flows in each year due to costs incurred in connection with R&D activities and
G&A expenses associated with our operations. For the years ended March 31, 2021 and 2020, we incurred net losses of approximately
$7.4 million and $5.3 million, respectively. At March 31, 2021, we had a cash balance of $1.5 million and an accumulated deficit
of approximately $16 million. When considered with our current operating plan, these conditions raise substantial doubt about
our ability to continue as a going concern for a period of at least one year from the date that the financial statements included
in Item 8 of this Report are issued. Our financial statements do not include adjustments to the amounts and classification of
assets and liabilities that may be necessary should we be unable to continue as a going concern. Our ability to continue as a
going concern depends on our ability to raise additional capital, through the sale of equity or debt securities to support our
future operations, and we are currently seeking such additional financing. In fiscal 2021, we completed the 2021 Placement of
our 2021 Notes for gross proceeds of $6,560,000, we sold shares of our common stock for gross proceeds of $1,838,056 as part of
the 2020 Placement and obtained a $368,000 loan from Silicon Valley Bank in April 2020 under the U.S. Small Business Administration
Paycheck Protection Program, which loan was forgiven in May 2021. Our operating needs include the planned costs to operate our
business, including amounts required to fund research and development activities, including clinical studies, working capital
and capital expenditures. Our future capital requirements and the adequacy of our available funds will depend on many factors,
including, without limitation, our ability to successfully commercialize our 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
our product offerings. If we are unable to secure additional capital timely, we will be required to curtail our research and development
initiatives and take additional measures to reduce costs in order to conserve our cash.
In fiscal 2021,
we used $5,908,662 in operating activities, which primarily resulted from our net loss of $7,377,976 and changes to operating
assets and liabilities of $61,147, as adjusted for non-cash charges and gains, which included stock-based compensation expenses
of $1,227,578, $68,880 for issuances of shares of common stock in exchange for services, $109,731 related to the lease right-of-use
asset and liability and depreciation and amortization expenses of $111,015. Such changes in assets and liabilities primarily related
to the timing of payments to vendors. In fiscal 2020, we used $4,094,839 in operating activities, which primarily resulted from
our net loss of $ 5,320,873, partially offset by changes to operating assets and liabilities of $389,359, and adjusted for non-cash
charges and gains, which included stock-based compensation expenses of $801,244, depreciation and amortization expenses of $35,431.
Such changes in assets and liabilities primarily related to the timing of payments to vendors, offset by an increase in security
deposits. Increased cash usage during fiscal 2021 was due to increased operating activities related to the development and
eventual commercialization of our product.
In fiscal 2021,
cash used in investing activities of $109,669 was for the purchase of property and equipment. We used $260,789 of cash to purchase
property and equipment in fiscal 2020.
Cash provided
by financing activities for fiscal 2021 totaled $4,364,662 and was attributable to $1,785,882 of net proceeds from the sale of
shares of our common stock in the 2020 Placement, $368,760 of proceeds from the PPP Note and $2,210,000 of gross proceeds from
the issuance of our 2021 Notes in the quarter ended March 31, 2021. Our financing activities for fiscal 2020 included $923,994
of proceeds from the 2020 Placement.
Critical
Accounting Policies and Estimates
Our consolidated
financial statements are prepared in conformity with accounting principles generally accepted in the United States of America.
Note 1 to the consolidated financial statements in Item 8 of this Report describes the significant accounting policies
and methods used in the preparation of our consolidated financial statements. We have identified the accounting policies below as
some of the more critical to our business and the understanding of our results of operations. These policies may involve estimates
and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Although we believe our judgments
and estimates are appropriate, actual future results may differ from our estimates, and if different assumptions or conditions
were to prevail, the results could be materially different from our reported results.
Use of estimates
The preparation
of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires
us 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 financial statements and the reported amounts of revenues and expenses during the reporting
periods. Estimates may include those pertaining to accruals, stock-based compensation and income taxes. Actual results could materially
differ from those estimates.
Stock-based compensation
We recognize
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. We estimate 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.
Income taxes
We determine
deferred tax assets and liabilities based upon the differences between the financial statement and tax bases of our assets and
liabilities using tax rates in effect for the year in which we expect 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
our federal and state net deferred tax assets will not be fully realized, and we have recorded a full valuation allowance.
We account for
uncertain tax positions in accordance with FASB Accounting Standards Codification (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 selling, general and administrative expenses in the consolidated statements
of income.
Leases
We account for
our leases under Accounting Standards Update (ASU) No. 2016-02, Leases (ASC 842),and related ASUs,
which provide supplementary guidance and clarifications. Under ASC 842, all significant lease arrangements are generally
recognized at lease commencement. Operating lease right-of-use (ROU) assets and lease liabilities are recognized at the commencement
date. A ROU asset and corresponding lease liability are not recorded for leases with an initial term of 12 months or less (short-term
leases), and we recognize lease expense for these leases as incurred over the lease term.
ROU assets represent
our right to use an underlying asset during the reasonably certain lease terms, and lease liabilities represent our obligation
to make lease payments arising from the lease. Our lease terms may include options to extend or terminate the lease when it is
reasonably certain that we will exercise that option. Operating lease ROU assets and liabilities are recognized at the lease commencement
date based on the present value of lease payments over the lease term. We use our incremental borrowing rate, based on the information
available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes
any lease payments related to initial direct cost and prepayments and excludes lease incentives. Lease expense is recognized on
a straight-line basis over the lease term.
Off-Balance
Sheet Arrangements
We do not maintain
any off-balance sheet arrangements or obligations that are reasonably likely to have a material current or future effect on our
financial condition, results of operations, liquidity or capital resources.
Recent Accounting
Pronouncements
None
ITEM 7A:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required.
ITEM 8:
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
Report of Independent Registered Accounting Firm – Farber Hass Hurley LLP 30
Consolidated Balance Sheets 32
Consolidated Statements of Operations 33
Consolidated Statements of Stockholders’ Equity 34
Consolidated Statements of Cash Flows 35
Notes to Consolidated Financial Statements 36
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, 2021
and 2020, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then
ended, and the related notes (collectively referred to as the 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, 2021 and 2020, 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.
Emphasis
of Matter – Going Concern
The accompanying
consolidated financial statements have been prepared to assume the Company will continue as a going concern. As discussed in Note
1 to the financial statements, 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 product revenues to achieve profitability. These circumstances raise substantial
doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described
in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
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 judgment. 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.
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. These circumstances raise substantial doubt about the Company’s ability to continue as a going concern within
one year after the date that these consolidated financial statements are issued.
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:
Grants
of Stock Options
As discussed
in Note 5, during the year ended March 31, 2021, the Company granted 490,476 options to purchase shares of its common stock with
10-year terms and a grant-date fair value of $1,101,737 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 also recalculated the fair value of each option granted.
/s/ Farber Hass Hurley LLP
We have served as the Company’s auditor since 2018.
Chatsworth, California
Modular Medical,
Inc.
Consolidated
Balance Sheets
CURRENT ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Convertible notes payable 2,133,453 —
Commitments and Contingencies (Note 10)
STOCKHOLDERS’ EQUITY (DEFICIT)
Common stock issuable — 923,994
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) $ 2,248,171 $ 3,858,551
The accompanying
notes are an integral part of these audited consolidated financial statements
Modular Medical,
Inc.
Consolidated
Statements of Operations
Year ended March 31,
Operating expenses
Other income
Interest expense (39,791 ) —
Net loss per share
Basic and diluted $ (0.40 ) $ (0.30 )
Shares used in computing net loss per share
The accompanying
notes are an integral part of these audited consolidated financial statements
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)
The accompanying
notes are an integral part of these audited consolidated financial statements
Modular Medical,
Inc.
Consolidated
Statements of Cash Flows
Year ended March 31,
Cash Flows from operating activities
Adjustments to reconcile net loss to net cash used in operating activities:
Shares for services 68,880 —
Amortization of lease right-of-use asset 70,826 —
Change in lease liability 38,905 —
Amortization of debt issuance costs 12,253 —
Changes in assets and liabilities:
Security deposits — (92,500 )
Cash flows from investing activities
Cash flows from financing activities
Proceeds from private placement, net of issuance costs 1,785,882 923,994
Proceeds from issuance of convertible notes 2,210,000 —
Proceeds from issuance of PPP note payable 368,780 —
Supplemental disclosure:
Cash paid for:
The accompanying
notes are an integral part of these audited consolidated financial statements
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.
The consolidated
financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United
States of America. The following summarizes the more significant of such policies:
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
product revenues to achieve profitability. These circumstances raise substantial doubt about the Company’s ability to continue
as a going concern within one year after the date that these consolidated 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. As discussed in notes 3 and 11, in
February 2021, the Company commenced a private placement of its convertible promissory notes to investors to fund its operations.
In addition, during fiscal 2021, the Company obtained additional equity financing through a private placement of its common stock
(see note 6), and the Company obtained a loan from Silicon Valley Bank in April 2020 (see notes 3 and 12).
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. These consolidated financial statements
do not include any adjustments that might result from this uncertainty.
Basis of
Presentation
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. The Company’s fiscal year ends on March 31 of each calendar
year.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.
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.
Concentration
of Credit Risk
Financial instruments
that potentially subject the Company to concentration of credit risk consist primarily of cash and cash equivalents. Cash and
cash equivalents are deposited with high credit-quality institutions within the United States, which are insured by the Federal
Deposit Insurance Corporation (FDIC) up to limits of approximately $250,000.
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 in 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:
Due to
their short-term nature, the carrying values of cash equivalents, accounts payable and accrued expenses, approximate fair value.
Research
and Development
The Company
expenses research and development expenditures as incurred.
General and
Administrative
General and
administrative expense consists primarily of payroll and benefit related costs, rent, office expenses, equipment supplies and
meetings and travel.
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 net 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.
For the years ended March 31, 2021 and 2020, 3,591,755 and 3,177,945 outstanding options to purchase common stock were excluded
from the calculation of diluted net loss per share because their effect would be anti-dilutive.
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 Accounting Standards Codification (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 selling, 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 2020 may be subject to examination by the U.S. federal and state tax authorities. As of March 31, 2021, the
Company has 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, 2021 and
2020, the Company’s comprehensive loss was the same as its net loss.
NOTE 2 – CONSOLIDATED
BALANCE SHEET DETAIL
Less: accumulated depreciation and amortization (152,091 ) (51,693 )
Accrued placement fees 88,800 —
NOTE 3 – NOTES PAYABLE
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 is due in April 2022. Interest will accrue on the outstanding principal balance of the PPP Note at a fixed rate
of 1.0% per annum, which shall be deferred for 10 months after the covered period during which the Company used the proceeds.
The Company may prepay principal of the PPP Note at any time in any amount without penalty. The Agreement contains customary events
of default relating to, among other things, payment defaults, breach of representations and warranties or provisions of the PPP
Note. The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts
owing from the Company, and/or filing suit and obtaining judgment against the Company.
The Company
applied to the Lender for forgiveness of the PPP Note in October 2020, and the amount which may be forgiven will be equal to the
sum of the payroll and benefit costs and covered rent and utility payments incurred by the Company, as calculated in accordance
with the terms of the CARES Act.
Convertible
Promissory Notes
In
February and March 2021, the Company sold $2,210,000 of convertible promissory notes (the 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
(the 2021 Placement). The Notes bear interest at an annual rate of 12%, and interest is accrued or payable monthly in cash. The
Notes mature on September 30, 2021 (the Maturity Date) and may be prepaid prior to the Maturity Date.
The
aggregate principal amount of the Notes plus accrued but unpaid interest thereon shall automatically convert upon the closing
of an offering of the Company’s equity securities to investors or a strategic corporate investor resulting in aggregate
gross proceeds to the Company of at least $5,000,000 (excluding conversion of the Notes or other convertible securities issued
for capital raising purposes) (a Qualified Financing). In the event of a Qualified Financing, all such outstanding principal and
accrued interest shall convert into the same equity securities purchased by and on the same terms and conditions as the other
investors in such Qualified Financing at a conversion price equal to 80% (a 20% discount) of the lowest price paid per unit or
share by investors in the Qualified Financing. In the event that additional bridge financing is obtained by the Company, the Notes
shall convert into the same securities and on the same terms and conditions as the other investors therein and all such purchases
will be treated as one, single round of financing going forward. As of March 31, 2021, the Notes could be converted into 770,305
shares of common stock, excluding the effects of any payments of interest in kind.
At
any time on or following the Maturity Date, the holders of the Notes may demand repayment of the Notes, and the Company shall
repay the outstanding aggregate principal amount plus accrued but unpaid interest thereon. The holders of the Notes, however,
retain the right for 30 days after the Maturity Date to convert all or part of the aggregate principal amount plus accrued but
unpaid interest on the Notes into the Company’s common stock at the conversion price of $2.87 per share or at a 20% discount
to any financing consummated during the 30-day period following the Maturity Date.
If
a Qualified Financing has not occurred immediately prior to the consummation of a Change of Control (as defined below), the Note
holders shall have the option of either (i) converting all or any portion of the aggregate principal amount of the Notes plus
accrued but unpaid interest thereon into common stock of the Company at a conversion price equal to $2.87 per share or (ii) having
the Company repay the aggregate principal amount of the Notes and accrued but unpaid interest. The term “Change of Control”
means (i) a consolidation or merger of the Company with or into any other corporation or other entity or person, or any other
corporate reorganization, other than any such consolidation, merger or reorganization in which the shares of capital stock of
the Company immediately prior to such consolidation, merger or reorganization continue to represent a majority of the voting power
of the surviving entity immediately after such consolidation, merger or reorganization; (ii) any transaction or series of related
transactions to which the Company is a party in which in excess of 50% of the Company’s voting power is transferred; (iii)
the sale or transfer of all or substantially all of the Company’s assets, or the exclusive license of all or substantially
all of the Company’s material intellectual property; or (iv) the dissolution and winding up of the Company.
The Company incurred debt issuance
costs of $88,800, which were recorded as a debt discount and are being amortized to interest expense over the term of the Notes
using the effective interest rate method. The interest expense related to the debt discount during the year ended March
31, 2021 was approximately $13,000.
NOTE 4 – LEASES
Effective April
1, 2019, the Company adopted ASC No. 842, as amended, using the alternative transition method, which allowed the Company to initially
apply the new lease standard at the adoption date (the “effective date method”). In January 2020, the Company executed
a lease for a new, larger corporate facility in San Diego, California and paid a $100,000
security deposit. The 39-month lease term commenced on 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.