Modular Medical, Inc.: Form 10-Q for the period ended Dec 31, 2018

Overview

The Company was organized under the laws of the State of Nevada on October 22, 1998 under the name Bear Lake Recreation Inc., with an initial authorized capital consisting of 50,000,000 shares of $0.001 par value common voting stock. In 2017, the Company changed its name to Modular Medical, Inc. by filing a Certificate of Amendment to the Company’s Articles of Incorporation with the Nevada Secretary of State.

Our initial operations consisted of renting snowmobiles and ATVs. We had also planned on organizing snowmobile rental packages, which would have included lodging at Ideal Beach Resort at Bear Lake, Utah. On or about October 1999, we abandoned the snowmobile, ATV and lodging plans. Our lack of success was attributed to entering the marketplace comprising this endeavor during a year that was the beginning of a drought cycle, resulting in below average snowfall and competitive growth from one to three self-promoting developmental properties. Our operations ceased due to depleted capital resources resulting from offering vacation packages lacking in demand.

On June 27, 2000, we entered into a licensing agreement with AlCORP, an Oregon limited liability company, to purchase the right to manufacture, use, market and sell the NetCaddy, a backpack style bag used to transport fishing gear. By the end of the first quarter of 2002, we had also abandoned the Net Caddy operations. We realized only minimal sales through our e-commerce site and 800-number infomercial advertisements. Additionally, due to the exhaustion of our capital resources, we could no longer maintain the infrastructure required for sales promotion while faced with limited consumer demand.

We had no material business operations from 2002 through the Acquisition, and we were a shell company as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”). As a shell company, we did not have material operations and had assets consisting solely of cash and cash equivalents.

On July 24, 2017, pursuant to the Acquisition Agreement, by and among the Company, three Quasuras shareholders and Quasuras, the Company acquired all 4,400,000 shares of Quasuras’ common stock owned by the three Quasuras shareholders (which represented one hundred percent (100%) of the issued and outstanding shares of Quasuras) resulting in Quasuras becoming our wholly-owned subsidiary and Mr. Paul DiPerna owning approximately forty-seven percent (47%) of our issued and outstanding common stock, after giving effect to the Private Placement and the Share Cancellation. Simultaneously with the closing of the Acquisition and pursuant to the Acquisition Agreement, (i) Mr. James Besser resigned as president and a director and Mr. Morgan Frank resigned as chief executive officer, chief financial officer, secretary, and treasurer but remained a director of the Company, and (ii) Mr. Paul DiPerna was appointed our chairman, chief executive officer, chief financial officer, secretary and treasurer.

The Acquisition was accounted for as a recapitalization effected by a share exchange, wherein Quasuras is considered the acquirer for accounting and financial reporting purposes.

The Company is focused on providing next generation products and services to address the disease and condition diabetes.

This discussion should be read in conjunction with our condensed consolidated financial statements and the notes thereto contained elsewhere in this Quarterly Report.

Critical Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with U.S. 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.

Off-Balance Sheet Arrangements

As of December 31, 2018, we had not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Recent Accounting Pronouncements

See Note 1 in the Notes to the Financial Statements for recent accounting pronouncements.

There were various other accounting standards and interpretations recently issued, none of which are expected to have a material impact on our financial position, operations or cash flows.

Results of Operations

For the Three & Nine Months Ended December 31,

Overview:

We reported a net loss of $739,205 and $258,772 for the three months ended December 31, 2018 and 2017, respectively, and losses for the nine months ended December 31, 2018 and 2017 of $1,532,545 and $477,863, respectively. The increase in our net loss from December 31, 2018 to December 31, 2017, is due to an increase in research and developments, consulting fees, professional fees and general and administrative expenses.

Revenues:

Revenue for the three and nine months ended December 31, 2018 and 2017 was $0.

Operating Expenses:

Professional expenses for the three months ended December 31, 2018 increased to $115,111 as compared to $44,588 for 2017. For the nine months ended December 31, 2018 and 2017, professional fees increased to $238,704 in 2018 versus $157,517 in 2017. The increase is attributable to an increase in consulting fees paid to outside consultants and professional services required for our required filings.

Research and development for the three months ended December 31, 2018 increased to $504,787 as compared to $171,045 for 2017. For the nine months ended December 31, 2018 and 2017, research and development increased to $1,008,127 in 2018 versus $258,799 in 2017. The increase in research and development expenditures is attributable to efforts and expenses incurred to design and develop an innovative insulin pump to better serve the diabetic insulin delivery market along with stock-based compensation. We expect to continue to incur costs related to research and development.

General and administrative expenses for the three months ended December 31, 2018 increased to $130,662 as compared to $45,227 for 2017. For the nine months ended December 31, 2018 and 2017, general and administrative increased to $307,917 in 2018 versus $64,655 in 2017. The increase in our general and administrative expense is attributable to (i) an increase in employee related cost of approximately $127,000 (ii) an increase in stock-based compensation of approximately $20,833, (iii) an increase in rent & utilities of approximately $20,400, (iv) an increase in insurance expense of approximately $35,000, (v) an increase in marketing of $10,700, and (vi) an increase in equipment supplies of approximately $54,500.

Interest Income:

Interest income for the three months ended December 31, 2018 and 2017 was $11,355 and $2,888, respectively. For the nine months ended December 31, 2018 and 2017, interest income was $22,203 and $3,908, respectively.

Liquidity and Capital Resources

The following summarizes our cash flows for the nine months ended December 31,

As a result of our growth stage, the Company has not experienced sales to sustain cash flow to meet our current obligations and operations expenditures. As a result, the Company raised capital though the share exchange to meet our operating expenditures.

As of December 31, 2018, we had total current assets of $7,159,698 of which $7,137,876 were cash and cash equivalents, and current liabilities of $62,932. As of March 31, 2018, we had total current assets of $4,313,480 and current liabilities of $15,471. As of December 31, 2018 and March 31, 2018, we had working capital of approximately of $7,096,766 and $4,298,009, respectively.

Net Cash Used In Operating Activities:

We used $1,106,941 of cash to fund operating activities during nine month ended December 31, 2018, compared to $544,837 in 2017. Increased cash usage in 2018 was driven by greater operating losses deriving from development. We reported net losses of $1,532,545 and $477,863 for the nine months ended December 31, 2018 and 2017, respectively.

Net Cash Provided By Investing Activities:

We used $55,058 and $13,262 of cash to purchase equipment and intangible assets during the nine month ended December 31, 2018 and 2017, respectively.

Net Cash Acquired In Financing Activities:

We acquired $4,003,199 of cash from financing activities for nine month ended December 31, 2018, compared to $4,676,144 in 2017.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Rule 13a-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and our receipts and expenditures of are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. 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.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2018. 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 are material weaknesses in our internal control over financial reporting and Management has concluded that the Company’s internal controls over financial reporting are not effective as of December 31, 2018. 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 relate to inadequate internal controls over financial reporting, and the lack of segregation of duties in our financial reporting process. We do not have a separately designated audit committee or independent director. To remedy these material weaknesses, we intend to engage an internal accountant to assist with financial reporting as soon as our finances will allow.