Modular Medical(MODD) - 2019 Q4 - Annual Report

Part I Item 1. Business The company is a development-stage entity creating a simpler, more affordable insulin pump for the diabetes market Overview The company is designing an innovative, simple, and affordable insulin pump to expand therapy access for diabetics - The company is a development stage entity focused on designing and commercializing an innovative, simpler, and more affordable insulin pump to expand access for individuals requiring daily insulin administration[20][21] - The company's founder and CEO, Paul DiPerna, also founded Tandem Diabetes Care, Inc. (NASDAQ: TNDM), bringing significant experience in developing and commercializing insulin pumps[22] - Identified shortcomings of current insulin pumps include complexity, being cumbersome, and high costs, which limit broader market acceptance[23] The Market and Opportunity The company targets the large diabetes market, seeing opportunity in the complexity and high cost of existing pumps - In 2012, the CDC estimated 3.1 million people in the U.S. required daily administration of rapid-acting insulin, which constitutes the company's target market[29] - The company believes existing pumps are too complex, bulky, and expensive, which has held back adoption rates and created an opportunity for a simpler, more affordable solution[27][32][34] - A significant opportunity is seen in penetrating the Type 2 diabetes marketplace with a simplified insulin pump[33] Our Solution and Strategy The company is developing a proprietary, simple, and low-cost insulin pump using a lean, experienced engineering team - The company's proposed pump aims to be the simplest and least expensive on the market, targeting users who find current products too complex, costly, or cumbersome[38] - An early prototype has been built to test the novel approach, which will require modification for safety features and low-cost manufacturing[39] - Business strategies include using proprietary technology, keeping development costs low, and utilizing a small, experienced engineering team under the CEO's direct supervision[43][44][45] Government Regulations The company's insulin pump is subject to extensive FDA regulation and will likely require a lengthy PMA process - The medical device industry is heavily regulated by the FDA, covering product design, testing, manufacturing, marketing, and post-market surveillance[46][47] - The company anticipates its proposed insulin pump will require the more rigorous, costly, and lengthy Pre-Market Approval (PMA) pathway from the FDA, as opposed to the 510(k) clearance process[48][49] - Failure to comply with regulations or obtain timely approval could result in significant sanctions, including fines, recalls, and withdrawal of approvals, materially impacting the business[52] Competition, Patents, and Corporate History The company targets mainstream patients to avoid direct competition and has applied for two U.S. patents - Key competitors are Medtronic, Tandem Diabetes Care, and Insulet; the company's strategy is to attract mainstream patients with a simple, cost-effective solution rather than competing for sophisticated users[54] - The company has applied for two U.S. patents on its proprietary fluid movement technology and product configuration[56] - The company acquired Quasuras, Inc. on July 24, 2017, becoming its wholly-owned subsidiary and concurrently completed a private placement raising approximately $4.73 million in gross proceeds[59][60] Item 1A. Risk Factors As a smaller reporting company, this disclosure is not required - As a smaller reporting company, Modular Medical is not required to provide this section[65] Item 2. Properties The company's principal executive offices are located in Escondido, California - The company's principal executive offices are located in Escondido, California[66] Item 3. Legal Proceedings The company is not currently a party to any pending legal proceedings - The company is not currently a party to any pending legal proceedings[67] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades sporadically on the OTC Pink Markets and it has never paid dividends - The company's common stock is quoted on the OTC Pink Markets under the symbol "MODD", and trading is limited and sporadic[70] Common Stock Price Range (Fiscal Years 2018-2019) | Fiscal Year Ending March 31 | Quarter | High Bid ($) | Low Bid ($) | | :--- | :--- | :--- | :--- | | 2018 | Q1-Q4 | 0.38 | 0.38 | | 2019 | Q1-Q2 | 0.38 | 0.38 | | | Q3 | 1.01 | 0.20 | | | Q4 | 1.01 | 1.01 | - The company has never paid dividends and has no current plans to do so[74] - In the 2018 Private Placement (from Nov 2018 to Mar 2019), the company sold 1,856,988 shares at $2.25 per share, raising gross proceeds of $4,142,666[76] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The company's net loss increased to $2.54 million in FY2019, driven by a 466% rise in R&D expenses Results of Operations The net loss for FY2019 increased to $2.54 million, primarily due to a 466% surge in R&D expenses Results of Operations (Fiscal Years 2019 vs. 2018) | | 2019 | 2018 | | :--- | :--- | :--- | | Research and development | $1,882,345 | $332,642 | | Total operating expenses | $2,577,299 | $666,164 | | Operating loss | ($2,577,299) | ($666,164) | | Net loss | ($2,539,498) | ($659,246) | - The increase in net loss was primarily due to a 466% increase in research and development expenses, reflecting higher engineering headcount and costs for designing the insulin pump[83][85] Liquidity and Capital Resources The company relies on equity financing, raising $4.14 million in FY2019 and holding $6.55 million in cash Summary of Cash Flows (Fiscal Years 2019 vs. 2018) | | 2019 | 2018 | | :--- | :--- | :--- | | Cash used in operating activities | ($1,807,934) | ($791,131) | | Cash used in investing activities | ($77,124) | ($15,332) | | Cash provided by financing activities | $4,142,150 | $4,711,132 | | Net change in cash | $2,257,092 | $3,904,669 | - The company has historically raised capital through private placements and expects to continue to raise capital through future equity offerings to finance its operations[88] Working Capital (As of March 31) | | 2019 | 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $6,553,768 | $4,296,676 | | Total current assets | $6,569,358 | $4,313,480 | | Total current liabilities | $178,929 | $15,471 | | Working capital | $6,390,429 | $4,298,009 | Item 8. Financial Statements and Supplementary Data The audited financial statements reflect a development-stage company with no revenue and increasing R&D-driven losses Consolidated Financial Statements Financial statements show a development-stage company with no revenue, growing losses, and reliance on equity financing Consolidated Balance Sheet Data (As of March 31) | | 2019 | 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $6,553,768 | $4,296,676 | | Total Assets | $6,652,986 | $4,334,452 | | Total Liabilities | $178,929 | $15,471 | | Total Stockholders' Equity | $6,474,057 | $4,318,981 | Consolidated Statement of Operations Data (For the Year Ended March 31) | | 2019 | 2018 | | :--- | :--- | :--- | | Total Operating Expenses | $2,577,299 | $666,164 | | Loss From Operations | ($2,577,299) | ($666,164) | | Net Loss | ($2,539,498) | ($659,246) | | Net Loss Per Share (Basic & Diluted) | ($0.153) | ($0.049) | Consolidated Statement of Cash Flows Data (For the Year Ended March 31) | | 2019 | 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | ($1,807,934) | ($791,131) | | Net cash provided by financing activities | $4,142,150 | $4,711,132 | | Cash and cash equivalents, end of period | $6,553,768 | $4,296,676 | Notes to Consolidated Financial Statements Key notes detail the 2017 reverse merger, stock option program, NOLs, and a royalty agreement with the founder - The July 24, 2017 acquisition of Quasuras was accounted for as a reverse merger, with Quasuras as the accounting acquirer[118] - An Employee Stock Option Program (ESOP) was approved on October 19, 2017, reserving 3,000,000 shares of common stock for issuance to employees, directors, and consultants[161] - As of March 31, 2019, the company had federal net operating loss carryforwards of approximately $817,000, which are fully offset by a valuation allowance[170] - A royalty agreement is in place with the founder, Paul DiPerna, entitling him to a royalty on future product sales, capped at a total of $10 million[172] Item 9A. Controls and Procedures Management concluded disclosure controls were ineffective due to a material weakness in financial reporting controls - Management concluded that disclosure controls and procedures were not effective as of March 31, 2019[179] - A material weakness was identified related to inadequate internal controls over financial reporting and a lack of segregation of duties[183][184] - Subsequent to the fiscal year-end, the company hired a full-time Accounting Manager to remedy the material weaknesses[186] Part III Item 10. Directors, Executive Officers, and Corporate Governance The company is led by CEO Paul DiPerna, founder of Tandem Diabetes Care, and lacks formal board committees Directors and Executive Officers | Name | Age | Position | | :--- | :--- | :--- | | Paul DiPerna | 60 | CEO, CFO, Secretary, Treasurer, Director (Chairman) | | Liam Burns | 53 | Director | | Morgan C. Frank | 47 | Director | - Paul DiPerna, the CEO, previously founded Tandem Diabetes Care, Inc. (TNDM) and has significant experience in the diabetes and medical device industries[191] - The company has not established an Audit Committee or a Nominating Committee due to its small size and early stage of operations[207][208] Item 11. Executive Compensation CEO Paul DiPerna's total compensation for FY2019 was $260,271, including salary and option awards Summary Compensation Table (FY 2019) | Name and Principal Position | Salary ($) | Option Awards ($) | All Other Compensation ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | | Paul DiPerna, CEO, CFO | 192,510 | 67,761 | 0 | 260,271 | | Liam Burns, Director | 0 | 0 | 10,000 | 10,000 | - As of March 31, 2019, CEO Paul DiPerna held vested options to purchase 64,687 shares of common stock[216] - Director Liam Burns was granted 90,000 non-qualified stock options with a three-year vesting period and an exercise price of $2.25 per share[217] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Company ownership is highly concentrated, with officers and directors beneficially owning 78.04% of common stock Security Ownership of Beneficial Owners and Management (as of March 31, 2019) | Name of Beneficial Owner | Common Stock Beneficially Owned | Percentage of Common Stock | | :--- | :--- | :--- | | Paul DiPerna (CEO, Director) | 7,588,117 | 42.38% | | Morgan C. Frank (Director) | 6,384,691 | 35.79% | | All officers and directors as a group (3 persons) | 13,972,808 | 78.04% | | James E. Besser / Manchester Group | 6,384,691 | 35.79% | - Ownership is highly concentrated, with the CEO and the Manchester-affiliated group controlling the vast majority of the company's stock[220] Item 14. Principal Accounting Fees and Services Audit fees were $23,500 in FY2019 and $22,000 in FY2018, with no other fees billed by the auditor Accountant Fees (Fiscal Years) | Fee Type | 2019 | 2018 | | :--- | :--- | :--- | | Audit Fees | $23,500 | $22,000 | | Audit Related Fees | $0 | $0 | | Tax Fees | $0 | $0 | | All Other Fees | $0 | $0 | | Total | $23,500 | $22,000 | Part IV Item 15. Exhibits and Financial Statement Schedules This section lists key filed exhibits, including agreements for reorganization, equity plans, and intellectual property - Key filed exhibits include the Reorganization and Share Exchange Agreement (2.1), 2017 Equity Incentive Plan (4.1), and the Intellectual Property Transfer Agreement (10.3)[232]