There were no stock options to a consultant, these options will be fully vested onexercised during the grant date. The 8,908 options will expire on April 14^thnine months ended December 31, 2019 and May 14^th, 2029. The fair value of the options 8,908 shares is determined to be $15,000 was accrued in consulting expenses for the fiscal quarter ended June 30, 2019.2018. 

The following assumptions were used intable summarizes the fair value method calculation:

On April 15^th, 2019, the Company granted 9,000 options to an employee, these options will be fully vested three years from the date granted. The 9,000 options will expire on April 14^th, 2029. The fair value of the options 9,000 shares is determined to be $16,258. During the quarter ended June 30, 2019, $447 was accrued monthly in general and administrative expenses.

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

On July 25, 2018, the Company granted 1,280,000 options to certain consultants, these options are fully vested one year from the date granted. The 1,280,000 options will expire on August 31, 2019. The fair value of the options 1,280,000 shares is determined to be $682,240, was accrued monthly in research and development expenses for the fiscal quarter ended June 30, 2019.

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

On January 16, 2019, the Company granted 185,221 options to certain consultants, these options will be fully vested three years from the date granted. The 185,221 options will expire on January 15, 2029. The fair value of the options 185,221 shares is determined to be $336,732, was accrued monthly in general and administrative expenses for the fiscal quarter ended June 30, 2019.

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

The relative fair value of each of the granted options set forth above has been calculated using the Black-Scholes-Merton pricing model, which, for each such option, is based on the granted strike price, the three month average trading volatility of three comparable companies (e.g., PODD, TNDM, VLRX), the five year, risk-free treasury bond interest rate on the applicable grant date and a weighted average term using the simplified method calculation. It outlines calculation methods for sbc.

The following is a rollforward of the options outstanding and exercisable for the fiscal quarter ended June 30,options as of December 31, 2019:

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 nine months ended December 31, 2019 and 2018, there were no such tax benefits associated with the exercise of stock options.

NOTE 64 – 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 theits federal and state net deferred tax assets at, June 30, 2019 and March 31, 2019, will not be fully realizable. Accordingly, managementrealized, and the Company has recorded a full valuation allowance against its net deferredallowance. 

The Company files U.S. federal and state income tax assets at June 30,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 March 31, 2019. At June 30, 2019 and Marchstate tax authorities.  As of December 31, 2019, the Company had federal net operating loss carryforwards of approximately $1,098,000 and $817,000 respectively, expiring beginning in 2037.

Deferredhas not recorded any liability for unrecognized tax assets consist of the following components:benefits related to uncertain tax positions.

NOTE 75 – ROYALTY AGREEMENT

OnIn July 12, 2017, the Company entered into a royalty agreement with theits founder, chief executive officer and major shareholder.shareholder (the Founder). Pursuant to the agreement, the founderFounder assigned and major shareholder is assigning and transferringtransferred all of his rights in the intellectual property of Quasuras in return for future royalty payments. The Company shall payis obligated to make royalty payments under the agreement to the founderFounder on any sales of the royalty product sold or otherwise commercialized by the Company, equal to (a) US $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 shallwill cease, and thisthe agreement shallwill terminate, at such time as the total sum of royalty payments actually paid to the founder,Founder, pursuant to thisthe agreement, reaches $10,000,000. The Company shall havehas the option to terminate thisthe agreement at any time upon payment, to the founder,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, shallwill be made by the Company to the Founder within thirty days after the end of each calendar quarter.

NOTE 6 – RELATED PARTY TRANSACTION 

During the nine months ended December 31, 2019, the Company entered into consulting agreements with a member of its Board. Under the 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 director 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 January 2020, the Company executed a three-year lease for a new, larger corporate facility in San Diego, California. The lease will commence on April 1, 2020 and provides for an initial monthly rent of approximately $12,400 with annual rent increases of approximately 3%. In addition, the Company paid a $100,000 security deposit.

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

OverviewThis 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. This Form 10-Q 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, 2019 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-Q 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. We undertake no obligation to update publicly any forward-looking statements for any reason, except as required by law, even as new information becomes available or events occur in the future.

Modular Medical, Inc. (the “Company”) was organized underCompany Overview

We are a development-stage medical device company focused on the lawsdesign, development and eventual commercialization of an innovative insulin pump to address shortcomings and problems represented by the Staterelatively limited adoption of Nevada on October 22, 1998, to engage in any lawful purpose. The Company has at the present time, not paid any dividends and any dividends that may be paid in the future will depend upon the financial requirements of the Company and other relevant factors.

Quasuras, Inc. (“Quasuras”) was incorporated in Delaware on April 20, 2015.

Quasuras hascurrently available pumps for insulin dependent people with diabetes. We have developed a hardware technology allowing people with insulin dependentinsulin-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 tooexcessively high. By addressing the time and effort required to effectively treat their condition, Quasuras believes itwe believe we can address the less technically savvy, less motivated part of the market.

On July 24, 2017, pursuant to the Acquisition Agreement, by and among the Company, the 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 2017 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 reverse merger effected by a share exchange, wherein Quasuras is considered the acquirer for accounting and financial reporting purposes.

We have not completed development of, or obtained U.S. Food and Drug Administration clearance for, our insulin pump, and we have therefore not generated any revenues from product sales. Our net losses were $1.1 million and $3.4 million for the three and nine months ended December 31, 2019, respectively. As of December 31, 2019, we had working capital of $3.5 million and an accumulated deficit of $6.7 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 upon our current operating plan, we do not have sufficient cash to meet our projected operating requirements and will need 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 may be required to curtail our product development initiatives and take additional measures to reduce costs.

Critical Accounting Policies and Estimates 

The Company is focused on providing next generation productsdiscussion and services to address the diseaseanalysis of our financial condition and condition diabetes.

This discussion should be read in conjunction withresults of operations are based upon our condensed consolidated financial statements, and the notes thereto contained elsewherewhich have been prepared in this Quarterly Report.

Critical Accounting Policies

Use of Estimates

accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements in conformity with U.S. GAAP requires us to make certain estimates and assumptionsjudgments that affect the reported amounts of assets, and liabilities, and disclosure of contingent assetsexpenses. On an ongoing basis we make these estimates based on our historical experience and liabilities aton assumptions that we consider reasonable under 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.circumstances. Actual results could materiallymay differ from those estimates.

Off-Balance Sheet Arrangements

As of June 30, 2019, we had not entered into any off-balance sheet arrangements that havethese estimates, and reported results could differ under different assumptions or conditions. Our significant accounting policies and estimates are reasonably likely to have a current or future effect on our financial condition, changesdisclosed 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 inof the Notes to theConsolidated Financial Statements in our Annual Report on Form 10-K for recentthe year ended March 31, 2019. As of December 31, 2019, there have been no material changes to our significant accounting pronouncements.

There were various other accounting standardspolicies and interpretations recently issued, noneestimates, except that we adopted Financial Accounting Standards Board Accounting Standards Update No. 2016-02 effective April 1, 2019, as discussed in Note 1 of which are expectedthe Notes to have a material impactCondensed Consolidated Financial Statements in this Quarterly Report on our financial position, operations or cash flows.

Form 10-Q.

Results of Operations  

The results of operations for the fiscal quarters are as follows:

Overview:

We reported a net loss of $1,122,198three and $249,566 for the threenine months ended June 30,December 31, 2019 and 2018 respectively. The increase in our net loss during the current quarter is due to an increase in research and development and professional fees.were: 

Operating Expenses:

ProfessionalResearch and development expenses include costs related to personnel, stock-based compensation, product development and patent filings. Research and development expenses increased by $103,232 and $936,916 for the three and nine months ended June 30,December 31, 2019, increased to $287,831respectively, as compared to $41,710with the comparable prior-year periods. The increases for the quarterthree- and nine-month periods ended June 30, 2018. The increase isDecember 31, 2019 were primarily attributable to an increase inincreased product development, personnel, consulting fees paidand stock-based compensation expenses. During fiscal 2020, we hired additional employees and engaged with additional consultants to outside consultantsaccelerate the development of our product, and professional services required for our required filings.

Researchwe incurred increased product tooling and development for the three months ended June 30, 2019 increased to $703,783 as compared to $135,789 for the quarter ended June 30, 2018. The increase inprototyping expenses. We expect 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 increase in the future as we add personnel and consulting resources and incur costs relatedincreased tooling expenses to researchcontinue the development of our product to achieve commercialization.

General and development.

administrative expenses consist primarily of personnel, rent, stock-based compensation, legal and accounting fees and other administrative expenses. General and administrative expenses for the three and nine months ended June 30,December 31, 2019 increased to $146,626by $282,056 and $939,765, respectively, as compared to $77,691with the comparable prior-year periods. The increases for the quarterthree- and nine-month periods ended June 30, 2018. The increaseDecember 31, 2019 were primarily attributable to increases in personnel and professional services and stock-based compensation expenses, as well as expenses incurred 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 expense is attributable primarilyexpenses to an increase in employee related cost.

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 compared with the comparable prior-year periods. The decrease for the three months ended June 30,December 31, 2019 and 2018 was $16,042 and $5,624, respectively.

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.

Liquidity and Capital Resources

The following table summarizes our cash flows for the fiscal quarternine months ended June 30,:December 31, 2019 and 2018: 

As we are still 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 stage enterprise, the Company does not currently haveand general and administrative expenses will continue to increase and, as a result, we will need to generate significant product revenues to generate cash flow to cover operating expenses. The Company hasachieve profitability. We have historically raised capital through the 2017 Private Placementequity offerings of our common stock, and the 2018 Private Placement. Management expectswe expect to continue to raise capital through future equity or debt offerings in order to finance itsour operations.

AsWe need 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 business and financial condition, including requiring us to reduce our operating costs and other expenditures related to our product development efforts, including reductions of June 30, 2019,personnel, salaries, consulting fees and capital expenditures. Alternatively, or in addition to such potential measures, we had total current assets of $5,716,128 of which $5,706,628 were cashmay elect to implement such cost reduction actions as we determine are necessary and cash equivalents, and current liabilities of 253,474. As of June 30, 2019 and March 31, 2019, we had working capital of approximately of $5,462,654 and $6,390,429, respectively.

in our best interests.

Net Cash Used Inin Operating Activities:

We used $840,421$2,776,998 of cash to fund operating activities during the threenine months ended June 30,December 31, 2019, compared to $236,219with $1,106,941 during the comparable period in 2018. Increased cash usage during the recent quarter2019 was due to increasingour increased net loss primarily due to increased operating expenses to fund our research and development.

development activities. 

Net Cash Used Inin Investing Activities:

We used $6,719$58,278 and $6,170$55,058 of cash to purchase property and equipment during the threenine months ended June 30,December 31, 2019 and 2018, respectively.

Net Cash Used Inin Financing Activities:

We usedhad no cash for financing activities during the threenine months ended June 30, 2019, comparedDecember 31, 2019. For the nine months ended December 31, 2018, cash of $4,003,199 provided by financing activities was primarily attributable to $516 during the prior year quarter.net proceeds of $3,983,915 from the issuance of common stock in a private placement and $19,800 of proceeds from the sale of our common stock.

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, 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.

reporting. Because of its inherent limitations, internal controlscontrol 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.misstatements on a timely basis. 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 Exchange Act. Based upon that evaluation, our management concluded that 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. 

Changes in Internal Control over Financial Reporting.

During the three months ended December 31, 2019, 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”)(COSO) in Internal Control-Integrated Framework. Based on its evaluation, our management concluded that there arewere material weaknesses in our internal control over financial reporting and Management has concluded that the Company’sour internal controls over financial reporting arewere 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 relaterelated to inadequate internal controls over financial reporting, and the lack of segregation of duties in our financial reporting process. We doIn addition, prior to December 31, 2019, we did not have a separately designated audit committee or independent director. To remedy these

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 assistmanage our accounting and financial reporting functions. In addition, in remedyingAugust 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 by implementingduring the fiscal year ending March 31, 2020. In addition, in December 2019 and January 2020, our Board appointed two new policiesindependent directors, and proceduresappointed each director to ensure effectivechair 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 control over financial reporting.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, which we filed with the SEC on June 27, 2019.   

No report is required.

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

Stock-Based Compensation

Recent Sales of Unregistered Securities

During the threenine months ended June 30,December 31, 2019, pursuant to the terms of our Employment Agreement, we granted Ms. Gordon options exercisable to purchase 9,000 shares at an exercise price of $2.25 per share, and, pursuant to the terms of our Stock Option Agreement, we granted Mr. David Nassif options exercisable to purchase 4,778 shares at an exercise price of $2.25 per share.

During the three months ended June 30, 2019, pursuant to the terms of our Stock Option Agreement, we granted Mr. Burns options exercisable to purchase 8,908 shares at an exercise price of $2.25 per share.

The options andCompany issued 30,000 shares of restricted Common Stockcommon stock to a consultant. The offer, sale and issuance of these securities were granted withoutdeemed to be exempt from registration either under the Securities Act, of 1933, as amended, in reliance upon exemptions providedon 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. Act, as a transaction not involving a public offering. Appropriate legends were affixed to the securities issued in this transaction.

Item 3. Defaults Upon Senior Securities

None.

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.

MODULAR MEDICAL, INC.