Modular Medical(MODD) - 2023 Q4 - Annual Report

Part I ITEM 1. BUSINESS Modular Medical, Inc. is a development-stage medical device company focused on commercializing the MODD1 insulin pump to expand market adoption for diabetes patients - Modular Medical is a development-stage medical device company focused on the design, development, and commercialization of an innovative insulin pump (MODD1) to increase pump adoption in the diabetes marketplace by simplifying the user experience and addressing cost and complexity[14][15][19] - The MODD1 pump is designed for affordability and ease of use, featuring a two-part system (reusable/disposable), a one-button interface, and a slim profile[20][22] - The company targets 'Almost Pumpers' deterred by existing device costs and complexity, representing a $1.9 billion growth opportunity in the Type 1 diabetes market alone[25][26][32] - MODD1 offers technological advantages including 50% lower estimated manufacturing cost, 50% more insulin capacity (3mL vs. 2mL for Omnipod) in a smaller volume, and removable design[51][53][54][56] - The commercialization strategy involves offering a 20% discount to payors, utilizing existing PBM codes, providing free clinician samples and training, and integrating telehealth support[68][70][71] - Future product roadmap includes MODD1+ with phone-based control and AID capability, and MODD2 for fully autonomous closed-loop insulin delivery and pre-filled drug cartridges[79][80] Key Competitors and Market Share (2020) | Company | Product Type | US Market Share (2020) | | :----------- | :------------- | :----------------------- | | Medtronic | Durable Pump | 51% | | Tandem | Durable Pump | 28% | | Insulet | Patch Pump | 19% | - As of March 31, 2023, the company had 38 employees, with 34 in research and development and manufacturing operations[81] - The company held three U.S. utility patents and 22 pending applications as of March 31, 2023, covering proprietary fluid movement and insulin delivery technology[90] - The MODD1 insulin pump is regulated by the FDA as a Class II medical device, requiring 510(k) clearance, and the company has engaged in three pre-submission conferences with the FDA[76][77][98] ITEM 1A. RISK FACTORS The company faces significant risks including its ability to continue as a going concern, successful development and regulatory approval of MODD1, intense competition, and reliance on third-party manufacturing - The company's consolidated financial statements are prepared under the assumption of continuing as a going concern, but significant operating losses and cash burn raise substantial doubt about this ability, requiring additional capital[120][121] - As a development-stage company, it has a history of significant operating losses ($13.9 million in fiscal 2023, $18.6 million in fiscal 2022) and expects to continue incurring losses, with future success dependent on raising additional capital[122][123] - The company is highly dependent on obtaining FDA 510(k) clearance for its insulin pump, a process that can be expensive, lengthy, and uncertain, with potential delays or denials significantly harming commercialization efforts[140][141][142] - The diabetes treatment market is intensely competitive and subject to rapid technological change; breakthroughs by competitors could render the MODD1 insulin pump obsolete, materially affecting the business[132][148] - Reliance on third-party manufacturers and suppliers for components and production exposes the company to risks of quality control issues, supply shortages, price increases, and inability to scale manufacturing[152][153][154] - The company's success depends on obtaining and maintaining intellectual property protection (patents, trade secrets) and avoiding infringement claims from third parties, which can be costly and time-consuming[161][163][165] - Future commercial success is substantially dependent on obtaining adequate reimbursement and insurance coverage from third-party payors (Medicare, Medicaid, private insurers), which is highly uncertain for new medical devices[181] ITEM 1B. UNRESOLVED STAFF COMMENTS There are no unresolved staff comments from the SEC ITEM 2. PROPERTIES In January 2023, the company entered into a new 48-month lease for approximately 24,000 square feet of office and operating space in San Diego, California - In January 2023, the company signed a new 48-month lease for approximately 24,000 square feet in San Diego, California, effective February 1, 2023, and occupied the space in March 2023[193] ITEM 3. LEGAL PROCEEDINGS The company is not currently a party to any material legal proceedings expected to have a significant adverse effect on its financial position or operations - The company is not a party to any material legal proceeding likely to have a material adverse effect on its consolidated financial position or results of operations[194] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to the company Part II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The company's common stock is listed on Nasdaq under 'MODD', with approximately 70 stockholders, and it has never paid cash dividends, intending to retain earnings for growth - The company's common stock is listed on the Nasdaq Capital Market under the symbol 'MODD'[197] - As of March 31, 2023, there were approximately 70 stockholders of record[197] - The company has never declared or paid cash dividends and does not anticipate doing so in the foreseeable future, planning to retain all earnings for growth and operations[199] - The company issued common stock to non-employee directors for compensation on multiple dates in fiscal years 2021, 2022, and 2023[201] - In May 2022, the company issued warrants in a private placement to purchase 1,438,202 shares of common stock at an exercise price of $6.60 per share[204] - Between February and May 2021, the company issued $6,610,550 in 12% unsecured convertible promissory notes and warrants to purchase 761,912 shares of common stock in a private placement[206] ITEM 6. RESERVED This item is reserved and contains no information ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The company, a development-stage medical device firm, continues to incur operating losses and negative cash flows, raising substantial doubt about its going concern ability without additional capital - The company is a development-stage medical device company focused on an innovative insulin pump, MODD1, aiming to expand the wearable insulin delivery device market[209] - The company has historically financed operations through private placements and public offerings of common stock and convertible promissory notes[210] - Substantial doubt exists about the company's ability to continue as a going concern for at least one year from the financial statement issuance date due to expected operating losses and cash burn[210][222] Research and Development Expenses (YoY Change) | Metric | Fiscal 2023 ($) | Fiscal 2022 ($) | YoY Change ($) | YoY Change (%) | | :------------------------- | :-------------- | :-------------- | :------------- | :------------- | | Research and Development | 9,061,744 | 7,729,240 | 1,332,504 | 17.2% | - R&D expenses increased primarily due to a $1.8 million increase in engineering and operations personnel costs, a $0.6 million increase in stock-based compensation, and a $0.4 million increase in materials and supplies, partially offset by a $1.4 million decrease in consulting costs[217] General and Administrative Expenses (YoY Change) | Metric | Fiscal 2023 ($) | Fiscal 2022 ($) | YoY Change ($) | YoY Change (%) | | :------------------------- | :-------------- | :-------------- | :------------- | :------------- | | General and Administrative | 4,816,567 | 7,197,162 | (2,380,595) | (33.1)% | - G&A expenses decreased mainly due to a $1.9 million decrease in stock-based compensation, a $0.5 million decrease in personnel costs, and a $0.3 million reduction in consulting fees[220] Interest Expense (YoY Change) | Metric | Fiscal 2023 ($) | Fiscal 2022 ($) | YoY Change ($) | YoY Change (%) | | :------------- | :-------------- | :-------------- | :------------- | :------------- | | Interest Expense | — | 2,752,229 | (2,752,229) | (100)% | - Interest expense decreased to zero in fiscal 2023 as outstanding convertible and bridge promissory notes were retired in February 2022[221] - In May 2023, the company completed a public offering for net proceeds of approximately $9.7 million, which is crucial for funding future operations[222] Cash Flow Summary | Activity | Fiscal 2023 ($) | Fiscal 2022 ($) | | :----------------------- | :-------------- | :-------------- | | Net cash used in operating activities | (11,011,644) | (10,259,528) | | Net cash used in investing activities | (1,637,751) | (54,764) | | Net cash provided by financing activities | 7,372,347 | 17,922,199 | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This item is not required for the company ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements for Modular Medical, Inc. as of March 31, 2023, and 2022, present the company's financial position, operations, stockholders' equity, and cash flows, with the auditor highlighting going concern doubt - The independent auditor's report expresses substantial doubt about the company's ability to continue as a going concern due to incurred losses and the need for additional funds[246][251] Consolidated Balance Sheet Highlights (March 31) | Metric | 2023 ($) | 2022 ($) | | :---------------------- | :---------- | :---------- | | Cash and cash equivalents | 3,799,324 | 9,076,372 | | Total Assets | 7,245,248 | 9,846,446 | | Total Liabilities | 2,169,272 | 1,009,656 | | Total Stockholders' Equity | 5,075,976 | 8,836,790 | | Accumulated Deficit | (48,458,707)| (34,579,771)| Consolidated Statements of Operations Highlights (Year Ended March 31) | Metric | 2023 ($) | 2022 ($) | | :---------------------- | :------------ | :------------ | | Research and development | 9,061,744 | 7,729,240 | | General and administrative | 4,816,567 | 7,197,162 | | Total operating expenses | 13,878,311 | 14,926,402 | | Net loss | (13,878,936) | (18,632,761) | | Net loss per share (Basic and diluted) | (1.28) | (2.74) | Consolidated Statements of Cash Flows Highlights (Year Ended March 31) | Activity | 2023 ($) | 2022 ($) |\n| :----------------------- | :------------ | :------------ | | Net cash used in operating activities | (11,011,644) | (10,259,528) | | Net cash used in investing activities | (1,637,751) | (54,764) | | Net cash provided by financing activities | 7,372,347 | 17,922,199 | | Cash and cash equivalents, at end of year | 3,799,324 | 9,076,372 | - The company expenses research and development expenditures as incurred and recognizes stock-based compensation using the Black-Scholes pricing model[278][290] - A full valuation allowance has been recorded against net deferred tax assets, as management believes it is more likely than not that these assets will not be fully realized[296][331] - The company had net operating loss carryforwards of approximately $29.5 million (federal) and $36.6 million (state) as of March 31, 2023[328] - In May 2023, the company completed an underwritten offering, selling 8,816,900 shares of common stock and warrants to purchase 4,408,450 shares, generating approximately $9.4 million in gross proceeds[342] ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in or disagreements with the company's accountants on accounting and financial disclosure matters ITEM 9A. CONTROLS AND PROCEDURES Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of March 31, 2023, with no material changes in the fourth fiscal quarter - As of March 31, 2023, the company's disclosure controls and procedures were evaluated and deemed effective[349] - Management concluded that the company's internal control over financial reporting was effective as of March 31, 2023, based on the COSO framework[353] - No material changes in internal control over financial reporting occurred during the fourth fiscal quarter of 2023[354] ITEM 9B. OTHER INFORMATION This item contains no other information ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS This item is not applicable to the company Part III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The company's leadership includes key executives and independent directors, with the board overseeing risk management through established committees, though some Section 16(a) reports were delinquent Directors and Executive Officers (as of March 31, 2023) | Name | Age | Position | | :-------------- | :-- | :-------------------------------------------- | | James Besser | 47 | Chief Executive Officer | | Paul DiPerna | 64 | President, CFO, Treasurer, Chairman of Board | | Kevin Schmid | 63 | Chief Operating Officer | | William J. Febbo| 54 | Director | | Steven Felsher | 74 | Director | | Morgan C. Frank | 51 | Director | | Philip Sheibley | 64 | Director | | Carmen Volkart | 62 | Director | | Ellen O'Connor Vos| 67 | Director | - Paul DiPerna, a co-founder of Tandem Diabetes Care, Inc., holds approximately 70 patents in medical device and microfluidic technology and has extensive experience in the diabetes industry[361] - Kevin Schmid, COO since July 2022, has over 19 years of experience in medical device senior management and high-volume global manufacturing operations[362] - The board of directors oversees risk management and has established independent Audit, Compensation, and Nominating and Governance Committees[385][386][388][389][391] - The company has adopted a Code of Business Conduct and Ethics applicable to all employees, executive officers, and directors[393] - Several directors and executive officers (Mr. Felsher, Mr. Frank, Mr. Sheibley, Mr. Schmid, Ms. Volkart, and Ms. Vos) had delinquent Section 16(a) reports in fiscal 2023[396][397] ITEM 11. EXECUTIVE COMPENSATION Executive compensation for fiscal years 2023 and 2022 is detailed, with Paul DiPerna as the highest-compensated executive in 2023 and non-employee directors receiving annual retainers and equity awards Summary Compensation Table (Fiscal Years 2023 and 2022) | Name and Principal Position | Year | Salary ($) | Option Awards ($) | Total ($) | | :-------------------------- | :--- | :--------- | :---------------- | :-------- | | James E. Besser, CEO | 2023 | — | — | — | | | 2022 | — | — | — | | Paul DiPerna, President, CFO, Treasurer, Chairman | 2023 | 300,000 | 189,413 | 489,413 | | | 2022 | 370,833 | — | 370,833 | | Kevin Schmid, COO | 2023 | 176,121 | 701,945 | 878,066 | | | 2022 | — | — | — | | Ellen O'Connor Vos, CEO | 2023 | — | — | — | | | 2022 | 133,654 | 4,414,645 | 4,957,961 | - Paul DiPerna's 2022 salary included $70,833 of deferred salary[402] - Kevin Schmid was appointed COO in July 2022 with an annual base salary of $250,000 and was granted a stock option to purchase 175,000 shares[381][403] - Ellen O'Connor Vos resigned as CEO in February 2022 and received separation payments totaling $375,000[380][404] Non-Employee Director Compensation (Fiscal 2023) | Name | Fee Compensation ($) | Option Awards ($) | Total ($) | | :---------------- | :------------------- | :---------------- | :-------- | | William Febbo | 30,000 | — | 60,795 | | Steven Felsher | — | 84,135 | 97,474 | | Morgan Frank | — | 114,734 | 114,734 | | Philip Sheibley | 30,000 | — | 60,795 | | Carmen Volkart | — | 84,135 | 95,254 | | Ellen O'Connor Vos| 6,250 | 59,530 | 65,780 | - Non-employee directors receive annual retainers ($25,000 for board service, $5,000 for committee chairs) and an annual service equity award of $100,000, payable in cash, options, or common stock[419][424] ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS As of June 15, 2023, executive officers, directors, and certain affiliates beneficially owned approximately 32.33% of outstanding common stock, with key individuals and entities holding significant stakes Security Ownership (as of June 15, 2023) | Name | Number of Shares Beneficially Owned (Excluding Options and Warrants) | Number of Shares Issuable on Exercise of Outstanding Options and Warrants | Percent of Class | | :------------------------------------ | :------------------------------------------------------------------- | :------------------------------------------------------------------------ | :--------------- | | JEB Partners, L.P. | 2,720,577 | 653,511 | 15.52% | | Manchester Explorer, L.P. | 2,720,577 | 653,511 | 15.52% | | Manchester Management Company, LLC | 2,720,577 | 653,511 | 15.52% | | Sio Capital Management, LLC | 689,352 | 1,348,314 | 9.08% | | James Besser | 2,720,577 | 653,511 | 15.52% | | Paul DiPerna | 2,553,586 | 204,512 | 12.95% | | Morgan C. Frank | 2,720,577 | 793,469 | 16.06% | | All current directors and executive officers as a group (9 persons) | 5,533,188 | 1,441,459 | 32.33% | - Beneficial ownership is based on 21,088,823 shares of common stock outstanding as of June 15, 2023[427] - James Besser and Morgan C. Frank, through Manchester Management Company, LLC, have shared voting and dispositive power over shares held by Manchester Explorer, L.P. and JEB Partners, L.P.[430] - Paul DiPerna's beneficial ownership includes shares held by the Paul DiPerna Irrevocable Trust and Paul DiPerna Trust, over which he has sole voting power[430] ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The company engaged in various related party transactions, and the board determined most directors are independent according to NASDAQ and SEC standards - Paul DiPerna's daughter is an employee and was paid $201,275 in fiscal 2023, including stock option fair value[432] - Mr. DiPerna and Manchester Explorer, L.P. (represented by Mr. Frank) purchased convertible notes and received warrants, which later converted into common stock and additional warrants[433] - Mr. Febbo purchased convertible notes and received warrants, which also converted into common stock and additional warrants[434] - Mr. DiPerna and Ms. Vos purchased common stock in a private placement in October 2021[435] - All current directors, except Paul DiPerna, Morgan C. Frank, and Ellen O'Connor Vos, are considered 'independent' by NASDAQ and SEC standards[437] ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Farber Hass Hurley LLP billed $58,600 in total audit and audit-related fees for fiscal year 2023, an increase from $53,200 in fiscal 2022 Principal Accountant Fees and Services | Fee Type | Year Ended March 31, 2023 ($) | Year Ended March 31, 2022 ($) | | :---------------- | :---------------------------- | :---------------------------- | | Audit fees | 52,500 | 43,000 | | Audit-related fees| 6,100 | 10,200 | | Total | 58,600 | 53,200 | - Audit fees increased by $9,500 (22.1%) from fiscal 2022 to fiscal 2023[439] - Audit-related fees decreased by $4,100 (40.2%) from fiscal 2022 to fiscal 2023[439] - Farber Hass Hurley LLP did not provide any non-audit or other services beyond audit and audit-related fees[439] Part IV ITEM 15. EXHIBITS This section lists all exhibits filed as part of the Form 10-K, including underwriting agreements, corporate documents, equity incentive plans, and employment agreements - The exhibits include key corporate documents such as the Underwriting Agreement (May 15, 2023), Reorganization and Share Exchange Agreement (July 24, 2017), and Amended and Restated Articles of Incorporation[442] - Equity-related exhibits include the 2017 Equity Incentive Plan, various forms of warrants (Common Stock, Pre-Funded, Private Placement, Underwriter's), and Common Stock Purchase Agreements[442] - Employment and related agreements for key executives like Paul DiPerna, Ellen O'Connor Vos, and Kevin Schmid are also listed[442] ITEM 16. FORM 10K SUMMARY This item is not applicable to the company