UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

or

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

MODULAR MEDICAL, INC.

(Exact Name of Registrant as Specified in its Charter)

80016772 West Valley Parkway, Suite 203, Escondido,Bernardo Drive, San Diego, California 9202592127

(Address of Principal Executive Offices)   (Zip Code)

(760) 392-1343(858) 800-3500

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yeso No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

x Yeso No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).o

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 17,870,26118,600,158 as of February 12,August 10, 2020.

Part I – FINANCIAL INFORMATION

Item 1. Financial Statements

Modular Medical, Inc.
(f/k/a- Bear Lake Recreation, Inc.)
Condensed Consolidated Balance Sheets

The accompanying notes are an integral part of these condensed consolidated financial statements.

Modular Medical, Inc.
(f/k/a- Bear Lake Recreation, Inc.)
Condensed Consolidated Statements of Operations

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

Modular Medical, Inc.
(f/k/a- Bear Lake Recreation, Inc.)
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

Modular Medical, Inc.
(f/k/a- Bear Lake Recreation, Inc.)
Condensed Consolidated Statements of Cash Flows

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

MODULAR MEDICAL, INC.
F/K/A BEAR LAKE RECREATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 – ORGANIZATIONTHE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Modular Medical, Inc. (the Company) was formed as a corporation under the laws of the State ofincorporated 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 dependentinsulin-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.  

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 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 note 4, the Company is currently pursuing additional equity financing through a private placement of its common stock and a public offering of its preferred units. In addition, the Company obtained a loan from Silicon Valley Bank in April 2020 (see note 3).

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 Company’s fiscal year ends on March 31 of each calendar year. Each reference to a fiscal year in these notes to the condensed consolidated financial statements refers to the fiscal year ended March 31 of the calendar year indicated (for example, fiscal 2021 refers to the fiscal year ending March 31, 2021). 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 accompanying condensed consolidated financial statements of the Company have been prepared without audit. 

The condensed consolidated balance sheet as of March 31, 20192020 has been derived from the audited consolidated financial statements at that date. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed or omitted in accordance with these rules and regulations of the Securities and Exchange Commission (SEC). The information in this report should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in its most recent annual report on Form 10-K filed with the SEC. 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to summarize fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. The operating results for the three and nine months ended December 31, 2019June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending March 31, 20202021 or for any other future period. 

Basis of Presentation 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Quasuras, Inc. All significant intercompany transactions and balances have been eliminated in consolidation. The Company’s fiscal year ends on March 31 of each calendar year.

Use of Estimates 

The preparation of the accompanying consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP)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 hasoperates in one reportablebusiness segment and uses one measurement of profitability for its business.

Research and Development 

The Company expenses research and development expenditures as incurred. 

General and Administrative 

General and administrative expenses consist primarily of payroll and benefit costs, rent, stock-based compensation, legal and accounting fees, and office and other administrative expenses. 

Concentration of Credit Risk 

Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash. The Company maintains its cash balances at high-credit qualityhigh-quality financial institutions within the United States, which are insured by the Federal Deposit Insurance Corporation (FDIC) up to limits of approximately $250,000. The uninsured portion of the cash balances held at the Company’s primary bank aggregated approximately $3,463,816 at December 31, 2019. No reserve has been made in the financial statements for any possible loss due to financial institution failure.  

Risks and Uncertainties 

The Company is subject to risks from, among other things, competition associated with the industry in general, other risks associated with its ability to continue to obtain financing, and to satisfy liquidity requirements, as well as risks related to rapidly changing technology and customer requirements, its limited operating history and the volatility of public markets.

Contingencies

Certain conditions may exist as of the date the condensed consolidated financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company, with the assistance of legal counsel, evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.

If the assessment of a contingency indicates it is probable that a material loss has been incurred and the amountCOVID-19

The global outbreak of the liability can be estimated, thencoronavirus disease 2019 (COVID-19) was declared a pandemic by the estimated liability would be accruedWorld 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 consolidatedoperational and financial statements. Ifperformance will depend on future developments, including the assessment indicates that a potential material loss contingency is not probable, but is reasonably possible, or is probable butduration 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 estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed. Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed. predicted.

Cash and Cash Equivalents 

Cash and cash equivalents include cash inon hand and cash in demand deposits, certificates of deposit and highly liquid debt instruments with original maturities of three months or less.  

Property & Equipment 

Property and equipment are originally recorded at cost. Depreciation is stated at cost and depreciatedcomputed using the straight-line method over the shorter of the estimated useful life of the asset or the lease term. The estimated useful lives of property and equipment arethe assets, generally as follows: computer equipment & software, three to ten years; office equipment, two to three years; buildingsfive years. Depreciation is recorded in operating expenses in the consolidated statements of operations. Leasehold improvements and improvements, five to fifteen years;assets acquired through capital leases are amortized over the shorter of their estimated useful life or the lease term, and machinery and equipment, one to five years.amortization is recorded in operating expenses in the consolidated statements of operations.  

Fair Value of Financial Instruments 

For certain of the Company’s financial instruments, including cash and equivalents, accrued liabilities and short-term debt, the carrying amounts approximate their fair values due to their short maturities. Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) ASC Topic 820,Fair Value Measurements and Disclosures, requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825,Financial Instruments, defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. 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 and equivalents, accounts receivable, accounts payable and accrued expenses approximate their fair values.

value.

Per-Share Amounts 

Basic net loss per share is computed by dividing loss for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share gives effect to all potentially dilutive common shares outstanding during the period. For the three and nine months ended December 31,June 30, 2020 and 2019, 2,526,443 outstanding options to purchase 3,407,587 and 1,591,806 shares of common stock were excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive. For the three and nine months ended December 31, 2018, 1,344,687 outstanding options to purchase common stock were excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive. 

The following table sets forth the computation of basic and diluted earnings per share for the periods indicated: 

Recently Adopted Accounting Pronouncement

In 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases. The standard introduces a new lessee model that requires most leases to be recorded on the balance sheet and eliminates the required use of bright-line tests for determining lease classification. In July 2018, the FASB issued the following standards which clarified ASU No. 2016-02 and have the same effective date as the original standard: ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. ASU No. 2018-11 includes an option to not restate comparative periods in transition and elect to use the effective date of ASU No. 2016-02 as the date of initial application of transition. In March 2019, the FASB issued ASU No. 2019-01, Leases (Topic 842): Codification Improvements, which clarifies ASU No. 2016-02 and is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company adopted ASU No. 2016-02, as amended, on April 1, 2019, using the optional transition method provided by the FASB in ASU No. 2018-11. The Company elected to use the practical expedient that allowed it to not reassess: (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases as well as the practical expedient that allows lessees to treat the lease and non-lease components of leases as a single lease component for all asset classes. The Company identified only one lease to be accounted for under Topic 842, and this was the lease for its corporate facility, which expired in December 2019 and was renewed for an additional two-month term. As of December 31, 2019, the Company had prepaid the remaining lease payments for its corporate lease. The Company made cash rent payments of $39,700 (including the prepaid rent payments for 2020) and incurred rent expense of $25,500 for the nine months ended December 31, 2019. The adoption of this standard did not have a material impact on the Company’s balance sheet, results of operations or cash flows. 

Reclassification 

Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations or cash flows. 

Comprehensive Loss

Comprehensive loss represents the changes in equity of an enterprise, other than those resulting from stockholder transactions. Accordingly, comprehensive loss may include certain changes in equity that are excluded from net loss. For the three months ended June 30, 2020 and 2019, the Company’s comprehensive loss was the same as its net loss.

NOTE 2 – ACCRUED EXPENSESLEASES

Effective April 1, 2019, the Company adopted Accounting Standards Update (ASU) No. 2016-02, Leases (ASC 842),and related ASUs, 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 April 1, 2020, and the lease provides for an initial monthly rent of approximately $12,400 with annual rent increases of approximately 3%. In addition to the minimum lease payments, the Company is responsible for property taxes, insurance and certain other operating costs. The right-to-use asset and corresponding liability for the facility lease have been measured at the present value of the future minimum lease payments. A discount rate of 11%, which approximated the Company’s incremental borrowing rate, was used to measure the lease asset and liability. Lease expense is recognized on a straight line basis over the lease term.

The Company obtained a right-of-use asset of $270,950 in exchange for its obligations under the operating lease. The landlord also provided a lease incentive of approximately $139,000, which was paid to the Company in June 2020, for the Company to make improvements to the leased space.

Future minimum payments under the facility operating lease, as of June 30, 2020, are listed in the table below.

Cash paid for amounts included in the measurement of lease liabilities was $37,239. Rent expense was $26,885 and $9,000 for the three months ended June 30, 2020 and 2019, respectively.

NOTE 3 – NOTE PAYABLE

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 the first six months of the term of the PPP Note. Monthly payments will be due and payable beginning in November 2020 and continue each month thereafter until maturity of the PPP Note. 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 may apply to the Lender for forgiveness of the PPP Note, 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. No assurance is provided that the Company will obtain forgiveness of the PPP Note in whole or in part, but the Company intends to use the proceeds in accordance with the PPP.

NOTE 4 – STOCKHOLDERS’ EQUITY

Private Placement

In March 2020, the Company initiated a private placement of shares of its common stock (the 2020 Placement). As of December 31, 2019 andJune 30, 2020, the Company had sold 729,897 shares of common stock, at a purchase price of $2.87 per share, for aggregate proceeds of approximately $ 2,094,806. The Company had recorded $924,000 of the proceeds as common stock issuable in the stockholders’ equity section of the consolidated balance sheet at March 31, 2019, accrued expenses2020 for 321,950 shares that were primarily comprisedissued by the Company’s transfer agent during the quarter ended June 30, 2020. Under the terms of accrued legal, professionalthe common stock purchase agreements between the Company and consulting services fees. the investors, the Company must use commercially reasonable efforts to file a registration statement with the SEC within 90 days of the closing of the 2020 Placement to register the shares of common stock sold in the 2020 Placement.

Preferred Unit Public Offering

On April 2, 2020, the Company’s board of directors authorized the designation of 2,000,000 shares of the Company’s preferred stock as 13% Series A Cumulative Redeemable Perpetual Preferred Stock (the Series A Preferred Stock). On April 9, 2020, the Company filed a registration statement on Form S-1 (No. 333-237615), as amended, with the SEC, which was declared effective on May 11, 2020, to register 2,000,000 preferred units (the Preferred Units) at a price of $25.00 per unit. Each Preferred Unit consists of (i) one share of Series A Preferred Stock with a $25.00 liquidation preference amount and (ii) three common stock purchase warrants, each to purchase one share of the Company’s common stock at an exercise price of $11.00 per share. To date, the Company has not sold any of the Preferred Units.

NOTE 35 – STOCK-BASED COMPENSATION 

2017 Equity Incentive Plan  

In October 2017, the Company’s board of directors (the Board) approved the 2017 Equity Incentive Plan (the EIP)Plan) with 3,000,000 shares of common stock reserved for issuance. In January 2020, the Board approved an increase in the number of shares reserved for issuance by 1,000,000 shares. Under the EIP,Plan, eligible employees, directors and consultants may be granted a broad range of awards, including stock options, stock appreciation rights, restricted stock, performance-based awards and restricted stock units. The EIPPlan is administered by the Board or, in the alternative, a committee designated by the Board. 

The exercise or purchase price of a stock option shall be calculated as follows: 

The Board is responsible for determining the consideration to be paid for the shares of common stock to be issued upon exercise or purchase. The EIP generally does not allow for the transfer of awards, and the Board may amend, suspend or terminate the EIP at any time. 

Stock-Based Compensation Expense 

The expense relating to stock options is recognized on a straight-line basis over the requisite service period, usually the vesting period, based on the grant date fair value. The unamortized compensation cost, as of December 31, 2019,June 30, 2020, was $1,627,097$2,733,904 related to stock options and is expected to be recognized as expense over a weighted-average period of approximately 2.832.48 years. 

During the ninethree months ended December 31, 2019,June 30, 2020, the Company granted options to purchase 996,535230,476 shares of its common stock to employees, directors and consultants. The options had 10-year terms, and 116,53510,476 options vested immediately on the grant dates. The fair value of the options was determined to be $1,634,595,$572,903 of which $220,578$101,891 was recorded as stock-based compensation expense and included in the condensed consolidated statement of operations for the ninethree months ended December 31, 2019.June 30, 2020. 

The following assumptions were used in the fair value method calculations: 

The fair values of options at the grant date were estimated utilizing the Black-Scholes valuation model, which includes simplified methods to establish the fair term of options as well as average volatility of three comparable organizations. The risk-free interest rate was derived from the Daily Treasury Yield Curve Rates, as published by the U.S. Department of the Treasury as of the grant date for terms equal to the expected terms of the options. A dividend yield of zero was applied because the Company has never paid dividends and has no intention to pay dividends in the foreseeable future. In accordance with ASU No. 2016-09, the Company accounts for forfeitures as they occur.

A summary of stock option activity under the EIP is presented below:

There were no stock options exercised during the ninethree months ended December 31, 2019June 30, 2020 and 2018.2019. 

The following table summarizes the range of outstanding and exercisable options as of December 31, 2019:June 30, 2020:  

The intrinsic value per share is calculated as the excess of the closing price of the common stock on the Company’s principal trading market over the exercise price of the option.

The Company is required to present the tax benefits resulting from tax deductions in excess of the compensation cost recognized from the exercise of stock options as financing cash flows in the consolidated statements of cash flows. For the ninethree months ended December 31,June 30, 2020 and 2019, and 2018, there were no such tax benefits associated with the exercise of stock options. 

NOTE 46 – INCOME TAXES 

The Company determines deferred tax assets and liabilities based upon the differences between the financial statement and tax bases of the Company’s assets and liabilities using tax rates in effect for the year in which the Company expects the differences to affect taxable income. A valuation allowance is established for any deferred tax assets for which it is more likely than not that all or a portion of the deferred tax assets will not be realized. Based on the available information and other factors, management believes it is more likely than not that its federal and state net deferred tax assets will not be fully realized, and the Company has recorded a full valuation allowance. 

The Company files U.S. federal and state income tax returns in jurisdictions with varying statutes of limitations.  All tax returns from 2016 to 2019 may be subject to examination by the U.S. federal and state tax authorities.  As of December 31, 2019,June 30, 2020, the Company has not recorded any liability for unrecognized tax benefits related to uncertain tax positions.

NOTE 5 – ROYALTY AGREEMENT

In July 2017, the Company entered into a royalty agreement with its founder, chief executive officer and major shareholder (the Founder). Pursuant to the agreement, the Founder assigned and transferred all of his rights in the intellectual property of Quasuras in return for future royalty payments. The Company is obligated to make royalty payments under the agreement to the Founder on any sales of the royalty product sold or otherwise commercialized by the Company, equal to (a) $0.75 on each sale of a royalty product, or (b) five percent (5%) of the gross sale price of the royalty product, whichever is less. The royalty payments will cease, and the agreement will terminate, at such time as the total sum of royalty payments actually paid to the Founder, pursuant to the agreement, reaches $10,000,000. The Company has the option to terminate the agreement at any time upon payment, to the Founder, of the difference between total royalty payments actually made to him to date and the sum of $10,000,000. All payments of the royalties, if due, for the preceding quarter, will be made by the Company to the Founder within thirty days after the end of each calendar quarter. 

NOTE 67 – RELATED PARTY TRANSACTION 

During the nine months ended December 31, 2019,fiscal 2020, the Company entered into consulting agreements with a member of its Board. Under theboard of directors. The most recent consulting agreements, the Company paid the director consulting fees of $25,000 and $75,000in cash during the three and nine months ended December 31, 2019, respectively, and the directoragreement was granted stock options with a fair value of $22,500 and $60,000 during the three and nine months ended December 31, 2019, respectively. The options were for a total of 36,788 shares of common stock, were fully vested on the grant dates and have terms of 10 years.

NOTE 7 – SUBSEQUENT EVENTS

In January 2020, the Board approved an amendment to the Plan to increase the number of shares reserved for issuance by 1,000,000 shares.

In Januaryterminated in March 2020. At June 30, 2020, the Company executed a three-year leasehad an outstanding payable to the director of $5,585, which was included in accounts payable in the condensed consolidated balance sheet.

NOTE 8 – COMMITMENTS & CONTINGENCIES

Litigations, Claims and Assessments 

In the normal course of business, the Company may be involved in legal proceedings, claims and assessments arising in the ordinary course of business. The Company records legal costs associated with loss contingencies as incurred and accrues for a new, larger corporate facilityall probable and estimable settlements.

Indemnification

In the ordinary course of business, the Company enters into contractual arrangements under which it may agree to indemnify the counterparties from any losses incurred relating to breach of representations and warranties, failure to perform certain covenants, or claims and losses arising from certain events as outlined within the particular contract, which may include, for example, losses arising from litigation or claims relating to past performance. Such indemnification clauses may not be subject to maximum loss clauses. The Company has also entered into indemnification agreements with its officers and directors. No amounts were reflected in San Diego, California. The lease will commence on April 1,the Company’s consolidated financial statements for the three months ended June 30, 2020 and provides for an initial monthly rent2019 related to these indemnifications. The Company has not estimated the maximum potential amount of approximately $12,400 with annual rent increasesindemnification liability under these agreements due to the limited history of approximately 3%. In addition,prior claims and the unique facts and circumstances applicable to each particular agreement. To date, the Company paid a $100,000 security deposit.has not made any payments related to these indemnification agreements, and no claims for payment have been made under such agreements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying condensed consolidated financial statements and notes included in this report.Quarterly Report on Form 10-Q (this Report). This Form 10-QReport contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which include, without limitation, statements about the market for our technology, our strategy, competition, expected financial performance and capital raising efforts, all information disclosed under Item 3 of this Part I, and other aspects of our business identified in our most recent annual report on Form 10-K filed with the Securities and Exchange Commission on June 27, 201929, 2020 and in other reports that we file from time to time with the Securities and Exchange Commission. Any statements about our business, financial results, financial condition and operations contained in this Form 10-QReport that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,” or similar expressions are intended to identify forward-looking statements. Our actual results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors, including the risk factors described under Item 1A of our Annual Report on Form 10-K for the year ended March 31, 2019.2020. These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors including, without limitation, the direct and indirect effects of coronavirus disease 2019, or COVID-19, and related issues that may arise therefrom. Many of those factors are outside of our control and could cause actual results to differ materially from those expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. All subsequent written and oral forward-looking statements concerning other matters addressed in this Report and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Report. We undertake no obligation to update publiclyor revise any forward-looking statements, for any reason, exceptwhether as required by law, even asa result of new information, becomes availablefuture events, a change in events, conditions, circumstances or events occurassumptions underlying such statements, or otherwise.

Our fiscal year ends on March 31 of each calendar year. Each reference to a fiscal year in this Report, refers to the future.fiscal year ended March 31 of the calendar year indicated (for example, fiscal 2021 refers to the fiscal year ending March 31, 2021). Unless the context requires otherwise, references to “we,” “us,” “our,” and the “Company” refer to Modular Medical, Inc. and its consolidated subsidiary.

Company 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 substantial time and effort required by them to effectively treat their condition, we believe we can address the less technically savvy, less motivated part of the market.market, which we believe is underserved. 

We have not completed development of, orbut 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 $1.1$5.3 million and $3.4$2.5 million for the threeyears ended March 31, 2020 and nine months ended December 31, 2019, respectively. As of December 31, 2019,June 30, 2020, we had working capital of $3.5$2.5 million and an accumulated deficit of $6.7$10.4 million.

Historically, we have financed our operations principally through private placements of our common stock. Although it is difficult to predict our future liquidity requirements, based uponBased on our current operating plan, we do not have sufficient cashsubstantial doubt about our ability to meetcontinue as a going concern for a period of at least one year from the date that the financial statements included in Item 1 of this Report are issued exists. Our ability to continue as a going concern depends on our projected operating requirements and will needability to raise additional capital, during the next twelve months through the sale of additional equity or debt securities, to support our future operations. If we are unable to secure additional capital, we maywill be required to curtail our productresearch and development initiatives and take additional measures to reduce costs. We have provided additional disclosure in Note 1 to the condensed consolidated financial statements and under Liquidity below.

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 have minimized business activities at our San Diego facility. We have implemented a teleworking policy for our employees and contractors to minimize on-site activity at our facility. We have experienced longer lead times for certain components used to manufacture initial quantities of our products for our product-approval submission to the FDA, which is expected to occur in the quarter ending December 31, 2020. In addition, our teleworking policy, which was required to comply with the Orders, has required us to minimize the number of our employees and contractors that are working on site at our facility at any one time. We have implemented a COVID-19 policy and related protocols and procedures, which are based on guidance from the U.S. government’s Centers for Disease Control and Prevention (CDC) and San Diego County, to address the health and safety of our employees and their families.

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. In addition, we could experience delays in obtaining FDA approval for our product, if the FDA does not review our submission in a timely manner, as the FDA may place higher priority on reviewing COVID-19 product-related submissions.

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 and 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) (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 II, Item 1A of this Report.

Critical Accounting Policies and Estimates 

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make certain estimates and judgments that affect the reported amounts of assets, liabilities, and expenses. On an ongoing basis, we make these estimates based on our historical experience and on assumptions that we consider reasonable under the circumstances. Actual results may differ from these estimates and reported results could differ under different assumptions or conditions. Our significant accounting policies and estimates are disclosed in Note 1 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended March 31, 2019.2020. As of December 31, 2019,June 30, 2020, there have been no material changes to our significant accounting policies and estimates, except that we adopted Financial Accounting Standards Board Accounting Standards Update No. 2016-02 effective April 1, 2019, as discussed in Note 1 of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.estimates.

Results of Operations  

The results of operations for the threeResearch and nine months ended December 31, 2019 and 2018 were: 

Development

Operating Expenses:

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 include costs relatedincreased in fiscal 2021 compared with fiscal 2020 primarily due to increased engineering and operations personnel and consulting costs. Our full-time R&D employee headcount increased to 10 at June 30, 2020 from 4 at June 30, 2019. R&D expenses included stock-based compensation product developmentexpenses of $103,725 and patent filings. Research$142,133 for fiscal 2021 and development expenses increased by $103,232 and $936,916 for the three and nine months ended December 31, 2019, respectively, as compared with the comparable prior-year periods. The increases for the three- and nine-month periods ended December 31, 2019 were primarily attributable to increased product development, personnel, consulting and stock-based compensation expenses. During fiscal 2020, we hired additional employees and engaged with additional consultants to accelerate the development of our product, and we incurred increased product tooling and prototyping expenses.respectively. We expect research and development expenses to continue to increase infor the futureremainder of fiscal 2021, as we add personnel and consulting resources and incur increased tooling expensescontinue to continueadvance the development of our pump product to achieve commercialization.and develop a low-volume manufacturing process.

General and Administrative

General and administrative expenses consist primarily of personnel rent, stock-based compensation, legal and accounting feesrelated overhead costs for marketing, finance, human resources and other administrative expenses. general management.

General and administrative expenses, for the three and nine months ended December 31, 2019or G&A, increased by $282,056 and $939,765, respectively, asin fiscal 2021 compared with the comparable prior-year periods.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 3 at June 30, 2020 from 2 at June 30, 2019. G&A expenses included stock-based compensation expenses of $240,991 and $52,295 for fiscal 2021 and fiscal 2020, respectively.

Interest Income

Interest income consists of interest earned on our cash deposits. The increasesdecrease in interest income for the three- and nine-month periods ended December 31, 2019 werefiscal 2021 compared with fiscal 2020 was primarily attributable to increasesa reduction in personnel and professional services and stock-based compensation expenses, as well as expenses incurredinterest rates in 2019 for the preparation of a selling shareholders registration statement related to a private placement of our common stock. We expect general and administrative expenses to increase in the future as we expect to hire additional employees to staff our administrative functions and incur increased facilities and professional services costs. 

Interest Income:

Interest income decreased by $9,024 and increased by $5,945 for the three and nine months ended December 31, 2019, respectively, as comparedfiscal 2021 combined with the comparable prior-year periods. The decrease for the three months ended December 31, 2019 was primarily due to lower average cash balances as compared with the prior year period. The increase for the nine months ended December 31, 2019 was attributable to higher average cash balances, as a result of our equity offering in 2018.during fiscal 2021.

Liquidity and Capital Resources 

The following table summarizes ourAs a development-stage enterprise, we do not currently have revenues to generate cash flows forto 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 ninethree months ended DecemberJune 30, 2020, we incurred a net loss of approximately $1.9 million. For the years ended March 31, 2020 and 2019, we incurred net losses of approximately $5.3 million and 2018: 

As$2.5 million, respectively. At June 30, 2020, we had a cash balance of $3.1 million and an accumulated deficit of approximately $10.4 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 1 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 stillcurrently seeking such additional financing. As discussed in Note 4 to our condensed consolidated financial statements in Item 1 of this Report, we are currently pursuing additional equity financing through a development-stage entity, we have not yet generated revenues or achieved profitability, and expect to continue to incur cash outflows from operations. We expect that our research and development and general and administrative expenses will continue to increase and, as a result, we will need to generate significant product revenues to achieve profitability. We have historically raised capital through equity offeringsprivate placement of our common stock and a public offering of our preferred units. In addition, we expectobtained a $368,000 loan from Silicon Valley Bank in April 2020 under the U.S. Small Business Administration Paycheck Protection Program. The full amount of the PPP Note is due in April 2022, and 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 the first six months of the term. Monthly payments will be due and payable beginning in November 2020 and continue each month thereafter until maturity. We intend to continueapply to raisehave the PPP Note forgiven, as permitted under the terms of the PPP. No assurance is provided that we will obtain forgiveness of the PPP Note in whole or in part, but we intend to use the proceeds in accordance with the PPP.

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 throughand capital expenditures. Our future equitycapital requirements and the adequacy of our available funds will depend on many factors, including our ability to successfully commercialize our product, competing technological and market developments, and the need to enter into collaborations with other companies or debt offeringsacquire other companies or technologies to enhance or complement our product offerings. 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 in order to financeconserve our operations.cash.

We need

In fiscal 2021, we used $1,507,548 in operating activities, which primarily resulted from our net loss of $1,874,157 and changes to raise additional capital to fund our operations, but there can be no assurance that such funding will be available to us, when needed or on favorable terms. The failure to raise capital when needed could have a material adverse effect on our businessoperating assets and financial condition, including requiring us to reduce our operating costsliabilities of $104,129, as adjusted for stock-based compensation expenses of $344,716, depreciation and amortization expenses of $24,986, net changes in lease assets and liabilities of $101,611 and other expenditures relatedadjustments of $575. In fiscal 2020, we used $840,421 in operating activities, which primarily resulted from our net loss of $1,122,198, which was partially offset by changes to operating assets and liabilities of $80,635, and adjusted for non-cash charges and gains, which included stock-based compensation expenses of $194,428 and depreciation and amortization expenses of $6,714.

In fiscal 2021, cash used in investing activities of $12,934 was due to the purchase of property and equipment. We used $6,719 of cash to purchase property and equipment and intangible assets during fiscal 2020.

Cash provided by financing activities of $1,539,588 for fiscal 2021 was attributable to proceeds of $1,170,808 from the sale of shares of our product development efforts, including reductions of personnel, salaries, consulting feescommon stock in a private placement that was initiated in March 2020 and capital expenditures. Alternatively, or$368,780 in addition to such potential measures, we may elect to implement such cost reduction actions as we determine are necessary and in our best interests.proceeds from the PPP Note.

Net Cash Used in Operating Activities: 

We used $2,776,998In May 2020, we commenced our best-efforts public offering of cashup to fund operating activities during2,000,000 of our preferred units at a public offering price of $25.00 per preferred unit. Each preferred unit consists of (i) one share of our 13% Series A Cumulative Redeemable Perpetual Preferred Stock, which has a $25.00 liquidation preference amount (the Series A Preferred Stock), and (ii) three common stock purchase warrants with each warrant entitling the nine months ended December 31, 2019, compared with $1,106,941 during the comparable period in 2018. Increased cash usage during 2019 was due to our increased net loss primarily due to increased operating expenses to fund our research and development activities. 

Net Cash Used in Investing Activities:

We used $58,278 and $55,058 of cashholder to purchase property and equipment during the nine months ended December 31, 2019 and 2018, respectively. 

Net Cash Used in Financing Activities:

We had no financing activities during the nine months ended December 31, 2019. For the nine months ended December 31, 2018, cashfor a period of $4,003,199 provided by financing activities was primarily attributable to the net proceeds of $3,983,9155 years from the date of issuance one share of our common stock at an exercise price of $11.00 per share, subject to adjustment. The preferred units, the Series A Preferred Stock, the common stock purchase warrants and the shares of common stock inissuable upon exercise of the warrants are registered on our registration statement on Form S-1 (SEC No.: 333-237615), as amended, declared effective by the SEC on May 11, 2020. At each closing of the preferred unit public offering, an amount equal to the first three years of dividend payments, or $9.75 per share of Series A Preferred Stock sold, will be retained by a private placement and $19,800 ofdividend payment agent from the proceeds from such offering and will be used to pay dividends to the saleholders thereof for a three year period. The shares of Series A Preferred Stock are perpetual, have no maturity date, will not be subject to any sinking fund or other mandatory redemption, and will not be convertible into or exchangeable for any of our common stock.other securities. Commencing three years from the date of issuance of Series A Preferred Stock, we may redeem, at our option, the Series A Preferred Stock, in whole or in part, at a cash redemption price equal to $25.00 per share, plus all accrued and unpaid dividends. No holder of Series A Preferred Stock shall have any right to require as to redeem or repurchase the Series A Preferred Stock. As of August 4, 2020, we had not sold any preferred units.

Item 3. Quantitative and Qualitative Disclosures about Market Risk 

Not required. 

Item 4. Controls and Procedures 

Disclosure Controls and Procedures.

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis.misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our management, including our Chief Executive Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act.Act of 1934. Based upon thaton this evaluation, our management concluded that, as of June 30, 2020, our disclosure controls and procedures were not effective as of the end of the period covered by this report, as noted below in management’s report on internal control over financial reporting.effective. 

Changes in Internal Control over Financial Reporting.

During the three months ended December 31, 2019,June 30, 2020, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.  

Management’s Report on Internal Control over Financial Reporting

Our management assessed the effectiveness of our internal control over financial reporting as of March 31, 2019. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on its evaluation, our management concluded that there were material weaknesses in our internal control over financial reporting and concluded that our internal controls over financial reporting were not effective as of March 31, 2019. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses related to inadequate internal controls over financial reporting, and the lack of segregation of duties in our financial reporting process. In addition, prior to December 31, 2019, we did not have a separately designated audit committee or independent director.

During the nine months ended December 31, 2019, we began implementing a remediation plan to address the material weaknesses identified in our internal controls during the year ended March 31, 2019. These remediation efforts are focused on:

In April 2019, we hired a full-time accounting manager to manage our accounting and financial reporting functions. In addition, in August 2019, we engaged a contract chief financial officer (CFO) who has significant experience as a public-company CFO and is a certified public accountant. We believe that the addition of these qualified finance professionals will enable us to remediate the identified material weaknesses during the fiscal year ending March 31, 2020. In addition, in December 2019 and January 2020, our Board appointed two new independent directors, and appointed each director to chair our newly formed audit and compensation committees. The director appointed to chair our audit committee is our audit committee financial expert. We expect that the new independent directors will contribute to our efforts to improve our internal controls.

Part II - OTHER INFORMATION

Item 1. Legal Proceedings 

None. 

Item 1A. Risk Factors 

We face many significant risks in our business, some of which are unknown to us and not presently foreseen. These risks could have a material adverse impact on our business, financial condition and results of operations in the future. We disclosed a number of material risks under Item 1A of our Annual Report on Form 10-K for the year ended March 31, 2019,2020, which we filed with the SEC on June 27, 2019.29, 2020.   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

Recent Sales of Unregistered Securities 

During the nine months ended December 31, 2019, the Company issued 30,000We initiated a private placement for shares of our common stock in March 2020 (the 2020 Placement). Since March 2020, we have sold 729,897 shares of our common stock at a purchase price of $2.87 per share resulting in gross proceeds to a consultant. The offer, sale and issuanceus of these securities were deemed to be exemptapproximately $2,094,806 from registration either under the Securities Act, in reliance on Rule 701 promulgated under the Securities Act, as a transaction under compensatory benefit plans, or Section 4(a)(2) and Rule 506 of Regulation D of the Securities Act, as a transaction not involving a public offering. Appropriate legends were affixed to the securities issued in this transaction.2020 Placement.

Item 3. Defaults Upon Senior Securities 

None. 

Item 4. Mine Safety Disclosures 

Not applicable. 

Item 5. Other Information 

None.  

Item 6. Exhibits

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.