NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 – THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Modular
Medical, Inc. (the Company) was incorporated in Nevada in October 1998 under the name Bear Lake Recreation, Inc. The Company had
no material business operations from 2002 until approximately 2017 when it acquired all of the issued and outstanding shares of
Quasuras, Inc., a Delaware corporation (Quasuras). As the major shareholder of Quasuras retained control of both the Company and
Quasuras, the share exchange was accounted for as a reverse merger. As such, the Company recognized the assets and liabilities
of Quasuras acquired in the merger at their historical carrying amounts. Prior to the acquisition of Quasuras and, since at least
2002, the Company was a shell company, as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934 (the Exchange
Act). In June 2017, the Company changed its name from Bear Lake Recreation, Inc. to Modular Medical, Inc.
The
Company is a development-stage medical device company focused on the design, development and eventual commercialization of an
innovative insulin pump to address shortcomings and problems represented by the relatively limited adoption of currently available
pumps for insulin-dependent people with diabetes. The Company has developed a hardware technology allowing people with insulin-dependent
diabetes to receive their daily insulin in two ways, through a continuous “basal” delivery allowing a small amount
of insulin to be in the blood at all times and a “bolus” delivery to address meal time glucose input and to address
when the blood glucose level becomes excessively high. By addressing the time and effort required to effectively treat their condition,
the Company believes it can address the less technically savvy, less motivated part of the market.
In
February 2022, the Company completed a public offering of its equity securities, and its common stock was approved to list on
the Nasdaq Capital Market under the symbol “MODD” and began trading there on February 10, 2022.
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 revenue to achieve profitability. The Company’s expected operating losses and cash burn 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.
The
Company’s operating needs include the planned costs to operate its business, 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 condensed 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
2023 refers to the fiscal year ending March 31, 2023). The condensed 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 are unaudited and have been prepared in accordance with generally accepted
accounting principles in the United States (GAAP) and with the rules and regulations of the United States Security and Exchange
Commission (SEC) regarding interim financial reporting. The condensed consolidated balance sheet as of March 31, 2022 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 GAAP have been condensed or omitted in accordance with these rules and regulations
of the 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 months ended December 31, 2022 are not necessarily
indicative of the results that may be expected for the year ending March 31, 2023 or for any other future period.
Reverse Stock
Split
On
November 24, 2021, the Company filed a certificate of amendment to its amended and restated certificate of incorporation with
the Secretary of State of the State of Nevada to effect a 1-for-3 reverse stock split of the Company’s shares of common
stock. Such amendment and ratio were previously approved by a majority of the Company’s stockholders and the board of directors.
As a result of the reverse stock split, which was effective November 29, 2021, every three shares of the Company’s pre-reverse
split outstanding common stock were combined and reclassified into one share of common stock. Proportionate voting rights and
other rights of common stock holders were not affected by the reverse stock split. Any fractional shares of common stock resulting
from the reverse split were rounded up to the nearest whole share. All stock options outstanding and common stock reserved for
issuance under the Company’s equity incentive plans and warrants outstanding immediately prior to the reverse stock split
were adjusted by dividing the number of affected shares of common stock by three and, as applicable, multiplying the exercise
price by three, as a result of the reverse stock split. All share numbers, share prices, exercise prices and per share amounts
have been adjusted, on a retroactive basis to reflect this 1-for-3 reverse stock split.
Use of Estimates
The
preparation of the accompanying condensed consolidated financial statements in conformity with 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 condensed consolidated financial statements and the reported amount of revenues and expenses during the reporting
period. Estimates may include those pertaining to accruals, stock-based compensation and income taxes. Actual results could differ
from those estimates.
Reportable Segment
The Company operates in
one business segment and uses one measurement of profitability for its business.
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 at high-quality financial institutions within the United States, which are insured by the Federal Deposit Insurance Corporation
up to limits of approximately $250,000. 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 financing, liquidity requirements, rapidly changing customer requirements, limited operating history and the volatility of
public markets.
The
global outbreak of the coronavirus disease 2019 (COVID-19) was declared a pandemic by the World Health Organization and a national
emergency by the U.S. government in March 2020. This has negatively affected the U.S. and global economy, disrupted global supply
chains, significantly restricted travel and transportation, resulted in mandated closures and orders to “shelter-in- place”
and created significant disruption of the financial markets. The full extent of the COVID-19 impact on the Company’s operational
and financial performance will depend on future developments, including the duration and spread of the pandemic and related actions
taken by U.S. and foreign government agencies to prevent disease spread, all of which are uncertain, out of the Company’s
control, and cannot be predicted.
Cash and Cash Equivalents
Cash
and cash equivalents include cash on hand and cash in demand deposits, certificates of deposit and all highly liquid debt instruments
with original maturities of three months or less.
Property and Equipment
Property
and equipment are recorded at historical cost. Depreciation is computed using the straight-line method over the estimated useful
lives of the assets, generally three to five years. Depreciation is recorded in operating expenses in the consolidated statements
of operations. Leasehold improvements and assets acquired through capital leases are amortized over the shorter of their estimated
useful life or the lease term, and amortization is recorded in operating expenses in the consolidated statements of operations. Construction-in-process includes machinery and equipment and is stated at cost and not depreciated. Depreciation on construction-in-process commences when the assets are ready for their intended use.
Fixed
assets comprised:
Schedule
of Fixed Assets
| |
December 31, | | |
March 31, | |
| |
2022 | | |
2022 | |
Machinery
and equipment | |
$ | 487,855 | | |
$ | 346,358 | |
Construction-in-process | |
| 427,670 | | |
| — | |
Leasehold
improvements | |
| 139,197 | | |
| 139,197 | |
Total
property and equipment | |
| 1,054,722 | | |
| 485,555 | |
Less:
accumulated depreciation and amortization | |
| (338,313 | ) | |
| (249,596 | ) |
Total
property and equipment, net | |
$ | 716,409 | | |
$ | 235,959 | |
Fair Value of Financial
Instruments
The
Company measures the fair value of financial instruments using a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels:
| · | Level
1 inputs to the valuation methodology are quoted prices for identical assets or liabilities
in active markets. |
| · | Level
2 inputs to the valuation methodology include quoted prices for similar assets and liabilities
in active markets, and inputs that are observable for the asset or liability, either
directly or indirectly, for substantially the full term of the financial instrument. |
| · | Level
3 inputs to the valuation methodology are unobservable and significant to the fair value
measurement. |
Due
to their short-term nature, the carrying values of cash equivalents, accounts payable and accrued expenses, approximate fair value.
Right-of-Use
Asset
The
Company’s right-of-use assets consist of leased assets recognized in accordance with FASB Accounting Standards Codification
(ASC) No. 842, Leases which requires lessees to recognize a lease liability and a corresponding lease asset for virtually all
lease contracts. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and the
lease liability represents the Company’s obligation to make lease payments arising from the lease, both of which are recognized
based on the present value of the future minimum lease payments over the lease term at the commencement date. Leases with a lease
term of 12 months or less at inception are not recorded on the condensed consolidated balance sheets and are expensed on a straight-line
basis over the lease term in the condensed consolidated statement of operations and comprehensive loss. The Company determines
the lease term by agreement with the lessor. In cases where the lease does not provide an implicit interest rate, the Company
uses the Company’s incremental borrowing rate based on the information available at commencement date in determining the
present value of future payments.
Stock-Based Compensation
The
Company recognizes stock-based compensation for stock options granted to employees and non-employees on a straight-line basis
over the requisite service period, usually the vesting period, based on the grant-date fair value. The Company estimates the value
of stock options on the date of grant using the Black-Scholes pricing model. The determination of fair value of share-based payment
awards on the date of grant using an option-pricing model is affected by the option price, as well as assumptions regarding a
number of highly complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility
over the term of the awards, and projected stock option exercise behaviors.
Per-Share Amounts
Basic
net loss per share is computed by dividing the net loss for the period by the weighted-average number of shares of common stock
outstanding during the period. Diluted net loss per share gives effect to all potentially dilutive common shares outstanding during
the period. Potentially dilutive common shares consist of incremental shares of common stock issuable upon the exercise of stock
options and warrants.
For
the nine months ended December 31, 2022 and 2021, the following table sets forth securities outstanding which were excluded from
the computation of diluted net loss per share as their inclusion would be anti-dilutive.
Schedule of Anti-Dilutive Shares
| |
|
|
|
|
|
| |
| |
Nine
Months Ended December 31, | |
| |
2022 | | |
2021 | |
Options to
purchase common stock | |
| 2,174,198 | | |
| 1,967,188 | |
Common
stock warrants | |
| 7,565,588 | | |
| 767,796 | |
Total | |
| 9,739,786 | | |
| 2,734,984 | |
Reclassifications
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 and nine months ended
December 31, 2022 and 2021, the Company’s comprehensive loss was the same as its net loss.
Recently
Issued Accounting Pronouncement
In
June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses. This ASU added a new impairment
model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under
the new guidance, an entity recognizes an allowance for its estimate of expected credit losses and applies to most debt instruments,
trade receivables, lease receivables, financial guarantee contracts, and other loan commitments. The CECL model does not have
a minimum threshold for recognition of impairment losses and entities will need to measure expected credit losses on assets that
have a low risk of loss. This update is effective for fiscal years beginning after December 15, 2022, including interim periods
within those fiscal years for smaller reporting companies. The adoption of this ASU is not expected to have a material impact
on the Company’s results of operations and financial position.
NOTE
2 – LEASES
The
Company accounts for the lease of its corporate facility in San Diego, California in accordance with ASC No. 842. 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. In addition, the Company paid a $100,000 security deposit.
Future
minimum payments under the facility operating lease, as of December 31, 2022, are listed in the table below.
Schedule of Future
minimum Lease Payment
Annual
Fiscal Years | |
Operating
Lease | |
2023 | |
| 39,507 | |
2024 | |
| 40,692 | |
Less: | |
| | |
Imputed
interest | |
| (2,527 | ) |
Present
value of lease liabilities | |
$ | 77,672 | |
Cash
paid for amounts included in the measurement of lease liabilities was $118,521 for the nine months ended December 31, 2022. Rent expense was $80,698 for each of the nine-month periods ended December 31, 2022 and 2021 and $26,930 for each of the three-month periods ended December 31, 2022 and 2021.
NOTE
3 – PPP NOTE
On
April 24, 2020, the Company received a $368,780 unsecured loan (the PPP Note) under the Paycheck Protection Program (the PPP),
which was established under the U.S. government’s Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). The
PPP Note to the Company was made through Silicon Valley Bank (the Lender), and the Company entered into a U.S. Small Business
Administration Paycheck Protection Program Note (the Agreement) with the Lender evidencing the PPP Note. The full amount of the
PPP Note was due in April 2022 and interest accrued on the outstanding principal balance of the PPP Note at a fixed rate of 1.0%
per annum, which was deferred for 10 months after the covered period during which the Company used the proceeds.
In
May 2021, the Lender and the U.S. Small Business Administration notified the Company that the outstanding principal and accrued
interest for the PPP Note was forgiven in full. The Company accounted for the forgiveness of the PPP Note in accordance with ASC
Topic 470: Debt (ASC 470), and the amount forgiven was recorded as a gain on extinguishment and recognized in the other
income line of the consolidated statement of operations.
NOTE
4 – CONVERTIBLE PROMISSORY NOTES
From
February through April 2021, the Company sold $2,310,000 of convertible promissory notes (each an Original Note and, collectively,
the Original Notes), at par in a private placement transaction effected pursuant to an exemption from the registration requirements
under the Securities Act of 1933, as amended. Effective April 30, 2021, pursuant to a revocation and replacement agreement between
each holder of an Original Note and the Company, the $2,310,000 of Original Notes and accrued interest thereon as of April 30,
2021 were replaced with $2,360,550 aggregate principal amount of Notes and 2021 Warrants (as defined below). The Company accounted
for the replacement of the Original Notes in accordance with ASC 470 and recorded a loss on extinguishment of $1,321,450 and interest
expense of $70,647 for unamortized debt issuance costs as of April 30, 2021.
In
April and May 2021, pursuant to a securities purchase agreement by and between the Company and each investor (the SPA), the Company
sold to investors $4,250,000 aggregate principal amount of convertible promissory notes (the Notes) and warrants to purchase shares
of its common stock (the 2021 Warrants). The Notes were unsecured obligations of the Company with each Note having a stated maturity
date of 12 months from its issue date and accrued interest at a rate of 12% per annum, payable on maturity. If the Company completed
an offering of its common stock or other securities in excess of $12,000,000 of gross proceeds (a Qualified Capital Raise, as
defined in the Notes), each Note holder would be required to convert its Adjusted Note Amount (as defined below) into the securities
of such Qualified Capital Raise. Adjusted Note Amount equals the product of (i) the sum of all outstanding principal plus accrued
interest on a Note, multiplied by (ii) 1.25.
In
connection with the issuance of the Notes, the Company issued the 2021 Warrants to purchase in the aggregate 767,796 shares
of its common stock at an initial exercise price of $24.00 per share. The fair value of the 2021 Warrants was $3,700,632, of
which $2,379,182 was recorded as a debt discount and amortized to interest expense, and $1,321,450 was recorded as a loss on
debt extinguishment. The Company calculated the fair value of the Warrants utilizing the Black-Scholes valuation model with
the following assumptions: volatility of 88.98%, risk-free interest rate of 0.86%, a term of 5.75 years and a dividend yield
of zero.
Upon
the closing of a public offering in February 2022, which was a Qualified Capital Raise, in accordance with their terms, the Notes
converted into 1,511,276 shares of common stock and the holders of the Notes received an additional 1,511,276 common stock purchase
warrants with an exercise price of $6.60 per share. In addition, as a result of the February 2022 equity offering, the exercise
price of the 767,796 outstanding 2021 Warrants was reduced to $6.00 per share.
NOTE
5 – STOCKHOLDERS’ EQUITY (DEFICIT)
Placements
of Common Stock and Warrants
On
May 2, 2022, the Company entered into a securities purchase agreement (the Purchase Agreement) with an institutional investor,
pursuant to which the Company sold, in a registered direct offering (the Registered Offering), which closed on May 5, 2022, an
aggregate of 449,438 shares (the Shares) of the Company’s common stock, par value $0.001 per share, at a purchase price
per Share of $4.45 and pre-funded warrants (the Pre-Funded Warrants) to purchase an aggregate of 1,348,314 shares of common stock
at a purchase price per Pre-Funded Warrant of $4.44. The Pre-Funded Warrants will be exercisable immediately on the date of issuance
at an exercise price of $0.01 per share and may be exercised at any time until all of the Pre-Funded Warrants are exercised in
full.
In
a concurrent private placement under the Purchase Agreement, the Company issued to the Investor warrants (the Private Placement
Warrants) to purchase an aggregate of 1,438,202 shares of common stock at an exercise price of $6.60 per share. The Private Placement
Warrants will be exercisable beginning on the six-month anniversary of the date of issuance (the Initial Exercise Date) and will
expire on the five-year anniversary of the Initial Exercise Date.
Warrants
As of December 31, 2022,
the Company had the following warrants outstanding:
Schedule of Warrant Outstanding
Type | |
Number
of Shares | | |
Exercise
Price | | |
Expiration
Date | |
Common
stock | |
| 1,348,314 | | |
$ | 0.01 | | |
| — | |
Common
stock | |
| 767,796 | | |
$ | 6.00 | | |
| January
- February 2027 | |
Common
stock | |
| 4,011,276 | | |
$ | 6.60 | | |
| February
2027 | |
Common
stock | |
| 1,438,202 | | |
$ | 6.60 | | |
| November
2027 | |
Total | |
| 7,565,588 | | |
| | | |
| | |
Other
During
the nine months ended December 31, 2022 and 2021, the Company issued 348 and 28,334 shares of common stock, respectively, with a fair
value of approximately $1,576 and $245,956, respectively, to service providers.
NOTE
6 – STOCK-BASED COMPENSATION
Amended 2017 Equity
Incentive Plan
In
October 2017, the Company’s board of directors (the Board) approved the 2017 Equity Incentive Plan (the Plan), as amended,
with 1,000,000 shares of common stock reserved for issuance. In January 2020 and August 2021, the Board approved increases in
the number of shares reserved for issuance under the Plan by 333,334 and 1,333,334 shares, respectively. Under the 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 Plan is administered by the Board or, in the alternative,
a committee designated by the Board.
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. As of December 31, 2022, the unamortized compensation cost was $3,443,902 related
to stock options and is expected to be recognized as expense over a weighted-average period of approximately 2.07 years.
During
the three and nine months ended December 31, 2022, the Company awarded 6,375 and 20,414 shares, respectively, to members of the Board
in accordance with the compensation plan for non-employee directors. During the nine months ended December 31, 2022, the Company granted
options with 10-year terms to purchase 677,199 shares of its common stock to employees, directors and consultants. The fair value of
the options granted and shares awarded was $2,503,979. The following assumptions were used in the fair value calculations of the
options granted:
Schedule
of Fair value Assumptions of Options
| |
Three
Months Ended
December 31, | | |
Nine
Months Ended
December 31, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Risk-free
interest rates | |
| 3.93%
- 3.99% | | |
| 1.26%
- 1.36% | | |
| 2.82%
- 4.06% | | |
| 0.8%
- 1.36% | |
Volatility | |
| 149% | | |
| 197%
- 253% | | |
| 149%
- 223% | | |
| 89%
- 370% | |
Expected
life (years) | |
| 5.0
- 5.7 | | |
| 5.0
- 6.0 | | |
| 5.0
- 5.7 | | |
| 5.0
- 6.2 | |
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. 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. The Company accounts for forfeitures as they occur.
A summary of stock
option activity under the Plan is presented below:
Schedule of Stock Option activity
| |
| | |
Options
Outstanding | |
| |
Shares
Available for Grant | | |
Number
of
Shares | | |
Weighted
Average
Exercise Prices | |
Balance
at March 31, 2022 | |
| 989,466 | | |
| 1,650,705 | | |
$ | 6.58 | |
Options
granted | |
| (265,634 | ) | |
| 265,634 | | |
| 4.35 | |
Share
awards | |
| (2,664 | ) | |
| — | | |
| — | |
Options
cancelled and returned to the Plan | |
| 96,668 | | |
| (96,668 | ) | |
| 7.69 | |
Balance
at June 30, 2022 | |
| 817,836 | | |
| 1,819,671 | | |
| 6.19 | |
Options
granted | |
| (241,023 | ) | |
| 241,023 | | |
| 4.35 | |
Share
awards | |
| (11,375 | ) | |
| — | | |
| — | |
Options
cancelled and returned to the Plan | |
| 30,444 | | |
| (30,444 | ) | |
| 4.67 | |
Balance
at September 30, 2022 | |
| 595,882 | | |
| 2,030,250 | | |
| 6.00 | |
Options
granted | |
| (170,542 | ) | |
| 170,542 | | |
| 2.00 | |
Share
awards | |
| (6,375 | ) | |
| — | | |
| — | |
Options
cancelled and returned to the Plan | |
| 26,594 | | |
| (26,594 | ) | |
| 5.82 | |
Balance
at December 31, 2022 | |
| 445,559 | | |
| 2,174,198 | | |
$ | 5.69 | |
There were no stock options
exercised during the nine months ended December 31, 2022 and 2021.
The following table
summarizes the range of outstanding and exercisable options as of December 31, 2022:
Schedule of
Outstanding and Exercisable Option, Range
| |
Options
Outstanding | | |
Options
Exercisable | |
Range
of Exercise Price | |
| Number
Outstanding | | |
| Weighted
Average
Remaining
Contractual
Life (in Years) | | |
| Weighted
Average
Exercise
Price | | |
| Number
Exercisable | | |
| Weighted
Average
Exercise Price | | |
| Aggregate
Intrinsic
value | |
$1.98 - $17.70 | |
| 2,174,198 | | |
| 7.94 | | |
$ | 5.69 | | |
| 1,360,318 | | |
$ | 5.87 | | |
$ | 8,894 | |
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 nine months ended
December 31, 2022 and 2021, there were no such tax benefits associated with the exercise of stock options, as no stock options
were exercised.
NOTE
7 – 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
for fiscal 2016 to fiscal 2022 may be subject to examination by the U.S. federal and state tax authorities. As of December 31,
2022, the Company has not recorded any liability for unrecognized tax benefits related to uncertain tax positions.
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 all 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 the
Company’s consolidated financial statements for the nine months ended December 31, 2022 and 2021 related to these indemnifications.
The Company has not estimated the maximum potential amount of indemnification liability under these agreements due to the limited
history of prior claims and the unique facts and circumstances applicable to each particular agreement. To date, the Company has
not made any payments related to these indemnification agreements, and no claims for payment have been made under such agreements.
Purchase Obligations
The
Company's primary purchase obligations include purchase orders for machinery and equipment. At December 31, 2022, the Company
had outstanding purchase orders for machinery and equipment and related expenditures of approximately $735,000.
NOTE
9 – SUBSEQUENT EVENTS
New
Lease Agreement
On
January 5, 2023, the Company entered into a lease agreement (the Thornhill Lease) with Michael Summers (the Lessor) for a new
headquarters facility pursuant to which the Company will lease approximately 24,000 square feet of a building located in San Diego,
California, commencing on or about February 1, 2023. The monthly base rent is $36,000 for the first 12 months of the lease and
will increase by 4% of the prior year’s base rent at the beginning of each 12-month period thereafter. The lease term is
48 months.
Under
the Thornhill Lease, the Company will pay the Lessor a monthly fee for its pro-rated share of specified common area charges, including
maintenance costs, property taxes and insurance, in addition to base rent. The monthly fee for the common area charges is approximately
$10,700 and will be adjusted based on actual costs incurred by the Lessor.
Amended
2017 Equity Incentive Plan
In
January 2023, the Company’s stockholders approved an increase in the number of shares
reserved for issuance under the Plan by 2,000,000 shares.