As
filed with the Securities and Exchange Commission October 18, 2019
File
No. 333-232377
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Pre-effective
AMENDMENT
NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
MODULAR
MEDICAL, INC.
(Exact name of registrant as specified in its charter)
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Nevada
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87-0620495
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(State or other
jurisdiction of
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(IRS Employer
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incorporation or
organization)
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Identification Number)
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800
West Valley Parkway, Suite 203
Escondido, California 92025
(949) 370-9062
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Paul
DiPerna
Chairman, Chief Executive Officer, Chief Financial Officer, Secretary and Treasurer
Modular Medical, Inc.
800 West Valley Parkway, Suite 203
Escondido, California 92025
(949) 370-9062
(Name, address, including zip code, and telephone number, including area code, of agent for service)
With
copy to:
Lawrence G Nusbaum, Esq.
Howard F. Mulligan, Esq.
Gusrae Kaplan Nusbaum PLLC
120 Wall Street
New York, New York 10005
Telephone: (212) 269-1400
Approximate
date of commencement of proposed sale to the public: From time to time after the effective date of this Registration Statement.
If any
of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, check the following box. x
If this
Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following
box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
o
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and
list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective registration statement for the same offering. o
Indicate
by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in rule 12b-2 of the Exchange Act.
Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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x
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Emerging growth company
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x
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If an emerging growth company,
indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new
or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.
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CALCULATION
OF REGISTRATION FEE
Title
of Each Class of
Securities to be Registered
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Amount
to be
Registered(1)(2)
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Proposed
Maximum
Offering Price
Per Share(3)
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Proposed
Maximum
Aggregate
Offering Price(3)
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Amount
of
Registration
Fee
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Common
Stock, par value $0.001 per share
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9,658,201
shares
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$3.00
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$28,974,603
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$3,511.72
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(1)
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The
shares of common stock to be offered for resale by selling shareholders consists of:
7,801,213 shares issued in the 2017 Placement (as defined herein) and (ii) 1,856,988
shares issued in the 2018 Placement (as defined herein).
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(2)
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Pursuant
to Rule 416 under the Securities Act, this registration statement also covers an indeterminate
number of shares that may be issued upon stock splits, stock dividends or similar transactions.
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(3)
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Estimated
in accordance with Rule 457(c) under the Securities Act of 1933, as amended, solely for
the purpose of calculating the registration fee.
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The
registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until
the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective
on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be changed. The selling shareholders may not sell these securities until
the registration statement filed with the Securities and Exchange Commission relating to these securities is effective. This prospectus
is not an offer to sell these securities and it is not a solicitation of an offer to buy these securities in any jurisdiction
where such offer, solicitation or sale is not permitted.
Subject
to Completion, dated October 18, 2019
Prospectus
MODULAR
MEDICAL, INC.
9,658,201
SHARES OF COMMON STOCK
This prospectus
relates to the offer and sale of up to 9,658,201 shares of our common stock, par value $0.001 per share, by the selling shareholders
identified in this prospectus. The shares being offered consist exclusively of:
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7,801,213
shares issued to selling shareholders in the private placement completed on July 24,
2017 (the “2017 Placement”);
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1,856,988
shares issued to selling shareholders in the private placement conducted between November
2018 through March 29, 2019 (the “2018 Placement”).
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The selling
shareholders will sell all or a portion of these shares from time to time, at a fixed price of $3.00 per share until our common
stock is quoted on the OTC Bulletin Board, OTCQX or OTCQB, and, thereafter, at prevailing market prices or privately negotiated
prices. The shares may be sold by any means described in the section of this prospectus entitled “Plan of Distribution”
beginning on page 24 of this prospectus. We will pay the expenses relating to the registration under the Securities Act of
1933, as amended, of the offer and sale by the selling shareholders of the shares covered by this prospectus including legal and
accounting fees. Each selling shareholder, however, will pay and be responsible for all brokerage commissions and similar charges,
if any, incurred by such person in connection with sales of such person’s shares.
We will
not receive any proceeds from the sale of these shares.
Our common
stock is quoted on the OTC Pink Open Market under the trading symbol “MODD.” On October 17, 2019, the closing price
of our common stock was $0.24 per share.
We
are an “emerging growth company” under the federal securities laws and are subject to reduced public company reporting
requirements for this prospectus and future filings.
Investing
in our common stock involves risks. You should read and carefully consider the “Risk Factors” section beginning
on page 7 of this prospectus before investing in our common stock.
Neither
the Securities and Exchange Commission nor any state regulatory agency has approved or disapproved of these securities or determined
if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date
of this prospectus is ,
2019.
TABLE
OF CONTENTS
In
making your investment decision, you should rely only on the information contained in this prospectus. We have not authorized
anyone to provide you with different or additional information.
We
are not making an offer to sell or seeking an offer to buy any shares of common stock in any jurisdiction where the offer or sale
is not permitted.
You
should not assume that the information contained in this prospectus is complete and accurate as of any date other than the date
of this prospectus, regardless of the time of delivery of this prospectus or any sale of securities offered hereby
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus contains certain forward-looking statements that involve risks, uncertainties and assumptions that are difficult to
predict. Words and expressions reflecting optimism, satisfaction or disappointment with current prospects, as well as words such
as “believes,” “hopes,” “intends,” “estimates,” “expects,” “projects,”
“plans,” “anticipates” and variations thereof, or the use of future tense, identify forward-looking statements,
but their absence does not mean that a statement is not forward-looking. Our forward-looking statements are not guarantees of
performance and actual results could differ materially from those contained in or expressed by such statements. In evaluating
all such statements we urge you to specifically consider various risk factors identified in this prospectus, including the matters
set forth under the heading “Risk Factors,” any of which could cause actual results to differ materially from those
indicated by our forward-looking statements.
Our
forward-looking statements reflect our current views with respect to future events and are based on currently available financial,
economic, scientific, regulatory, industry and competitive data and information on our business plans. You should not place undue
reliance on our forward-looking statements, which are subject to risks and uncertainties relating to, among other things: (i)
our ability to achieve a marketable product (i.e., our insulin pump), (ii) the timely and costs of obtaining all regulatory approvals
and clearances relating to our insulin pump including those of the FDA, (iii) the sufficiency of our cash position, (iv) our ability
to raise additional financing when needed and the terms and timing thereof, (v) that we have accurately analyzed our target market
for our insulin pump, (vi) market acceptance of our product by our target market, (vii) the existence or development of products
for diabetes that are viewed by medical professionals, third party payors and insulin dependent people with diabetes as superior
and/or more preferable to, or more affordable or cost efficient than our product, (viii) regulatory initiatives, compliance with
governmental regulations and the regulatory approval process, (ix) general economic and business conditions, (x) our ability and
the timing of us to successfully commercialize our product (xi) changes in United States economic, political and social conditions,
(xii) our ability to recruit and retain (and replace if necessary on a timely basis) competent professionals including third party
consultants and advisors and their ability to timely and competently perform their services for us, (xiii) litigation related
to our intellectual property rights and patents and claims against us for infringement on such rights of others as well as potential
product liability claims against us, (xiv) issues relating to the thinly traded market for our shares of common stock, (xv) our
ability to compete in the diabetes marketplace with larger and more substantial medical device companies, (xvi) the specific risk
factors discussed under the heading “Risk Factors” below, and (xvii) various other matters, many of which are beyond
our control. Should one or more of these risks or uncertainties develop, or should underlying
assumptions prove to be incorrect, actual results may vary materially and adversely from those anticipated, believed, estimated,
or otherwise indicated by our forward-looking statements.
We intend
that all forward-looking statements made in this prospectus will be subject to the safe harbor protection of the federal securities
laws pursuant to Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), to the extent applicable.
Except as required by law, we do not undertake any responsibility to update these forward-looking
statements to take into account events or circumstances that occur after the date of this prospectus. Additionally, we do not
undertake any responsibility to update you on the occurrence of any unanticipated events which may cause actual results to differ
from those expressed or implied by these forward-looking statements.
PROSPECTUS
SUMMARY
This
summary highlights information contained elsewhere in this prospectus and does not contain all of the information you should consider
before investing in shares of our common stock. You should read this entire prospectus carefully, including the sections entitled
“Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
before you decide to invest in shares of our common stock. Unless the context otherwise requires, references in this prospectus
to “Modular Medical,” the “Company,” “we,” “our,” or “us” are to Modular
Medical, Inc. and its subsidiaries.
Overview
We
are 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
International Diabetes Federation, or IDF, estimates that in 2017, approximately 425 million people had diabetes worldwide
and that by 2045, this number will increase to 629 million people. According to the Centers for Disease Control and Prevention,
or CDC, 2017 National Diabetes Statistics Report, approximately 23 million people in the United States have diagnosed diabetes,
of which type 1 diabetes accounts for approximately 5% to 10%, or approximately 1.2 to 2.3 million people. All people with
type 1 diabetes require daily insulin. Of people with type 2 diabetes in the United States, according to the CDC, approximately
14%, or 3.2 million people, require insulin to manage their diabetes. We refer in this prospectus to people with type 1 diabetes
and people with type 2 diabetes who require daily insulin as “insulin-dependent people with diabetes.”
Currently,
there are two primary therapies available for insulin-dependent people with diabetes: multiple daily insulin injections directly
into the body through syringes or insulin pens, referred to as Multiple Daily Injection (MDI) therapy, or the use of an insulin
pump to deliver a continuous subcutaneous insulin infusion into the body, and user directed infusions as appropriate (Continuous
Subcutaneous Insulin Injections (CSII) therapy. Generally, CSII therapy is considered to provide a number of advantages over MDI
therapy primarily in that the continuous infusion of insulin allows absorption of glucose in a controlled manner minimizing large
doses of insulin required before meals. This has proven to improve glucose control and reduce emergency room visits associated
with low glucose.
Notwithstanding
these advantages, the difficulty in use resulting from the complexity and cumbersome design of available insulin pumps, as well
as high and often prohibitive costs, has resulted not only in dissatisfaction among many existing pump users, but also has severely
limited the adoption rate of insulin pumps by a segment of the diabetes population, who we refer to in this prospectus as “almost
pumpers.”
We
generally define almost pumpers as persons with insulin dependent diabetes who are aware of pumps and the potential benefits,
but because of the shortcomings and problems prevalent in available insulin pumps, continue to receive their daily insulin through
insulin injections.
Our
initial target market for our insulin pump is the almost pumper population located in the United States.
Based
upon our knowledge of the diabetes industry and information available and/or obtained by us, we believe that an estimated 35%
of Americans with type 1 diabetes use insulin pump therapy and an estimated 30% of Americans with type 1 diabetes are who we classify
as “almost pumpers”.
Our design
and development team is led by Paul DiPerna, our chairman, chief executive officer and a 40% shareholder. Mr. DiPerna has over
30 years of high level experience in developing, designing, obtaining FDA approval, managing and the commercialization of medical
devices, including consumer and hospital based insulin pumps while working for such industry leading medical device companies
as Baxter Healthcare, Inc., a supplier of drug therapies and associated pumping technologies and Tandem Diabetes Care, Inc, a
leading supplier of pumping technology to the existing insulin pumping marketplace, which was originally founded by Mr. DiPerna.
Our
Insulin Pump Prototype
Over
the past two years we have designed and developed working prototypes of our insulin pump.
During
this period, we also have and continue to devote substantial time and resources to better understand the needs and preferences
of almost pumpers to enable us to modify and refine our insulin pump to the needs and preferences of this target market. To
help us better understand their needs and preferences, we obtained information about our target market and their care givers through
one on one interviews, human factors testing, on-line and in person surveys, focus groups both at industry related tradeshows
and conferences.
Pre-Commercialization
Steps
While
we have substantially completed the general engineering and mechanical aspects of our current insulin pump prototype, prior to,
commercializing, we still must successfully complete a number of material steps including:
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Continue
to modify, refine and finalize our prototype so that it:
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meets
the general needs and preferences of our almost pumper target market based upon our knowledge
of the diabetes industry and information available and/or obtained by us from almost
pumpers and their caregivers.
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meets
the general guidelines of third party payors, private and public insurance companies,
preferred provider organizations and other managed care providers with particular focus
on the guidelines established by the Center for Medicare and Medicaid Services, CMS which
administrates the United States Medicare program. To assist us in making such modifications
and refinements, we have retained an independent consulting firm, who is focused on ensuring
that our product satisfies the coverage and reimbursement criteria of such third party
payors.
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Continue
to work closely with our FDA
regulatory consultant to complete, finalize and file our FDA submission including
our pre-market notification to the FDA for 510(k) clearance and all other documentation
necessary to obtain FDA approval of our insulin pump. This will include the following:
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engage
the FDA in a pre-submission conference to ensure that we understand and meet the FDA’s
requirements, expectations and standards with regard to approval of our product. At this
meeting, our team, including our FDA regulatory consultant, will receive FDA comments
and guidance regarding our proposed submission during the pre-market notification period
for 510(K) clearance (including any suggested modifications to the device description,
indications for use or summary of supporting data contained in the notification). We
currently expect that such conference will be conducted during the fourth quarter of
calendar year 2019.
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Prepare
and ensure that our pre-market notification that will be part of our FDA submission,
demonstrates that our insulin pump is substantially equivalent to an insulin pump previously
cleared by the FDA and legally marketed to the public.
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prepare
our submission to the FDA, to include all of the appropriate results of tests (relating
to, among other things, user effectiveness, sterility, pump efficiency and shipping compatibility)
demonstrating safety and efficacy of our insulin pump in satisfaction of the mandates
of the Federal Food, Drug and Cosmetics Act (the “FDCA”), including requirements
with regard to registration and listing, labeling, medical device reporting and good
manufacturing practices.
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We
currently expect to make this submission near the end of the last quarter of 2019 or
in the first quarter of 2020.
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Take
such actions, if any, as may be required by the FDA as a condition to granting approval
and providing 510(k) clearance for our insulin pump
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At
the point that we feel confident of the FDA approval and clearance process relating to
our insulin pump, select a manufacturer of our insulin pump through a competitive bidding
process
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Retain
appropriate sales and marketing personnel to develop, implement and launch a promotional
campaign for our insulin pump substantially focused on our target market
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As
with any medical device attempting to enter and successfully compete with existing products in an established and competitive
marketplace, we will face significant hurdles to accomplish the above steps to commercialization including:
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Obtaining
FDA 510(K) clearance to market and sell our insulin pump to the public
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Obtaining
all other FDA approvals with regard to our product required by the FDCA
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Educating
endocrinologists, who typically prescribe pump usage, as to the superior qualities of
our product
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Demonstrating
to general practitioners, who have been historically skeptical of the heightened support
inherent in insulin pumps, of our product’s ease of use and convenience
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Ensuring
that our final product does in fact meet the needs of almost pumpers
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Overcoming
the historic obstacles and reluctance of almost pumpers to using insulin pumps to treat
their diabetes
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Ensuring
that third party payors agree to cover all or a substantial portion of the purchase price
and recurring costs of the use of our insulin pump
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The
Private Placement Transactions
The shares
of our common stock being offered for resale by selling shareholders named herein pursuant to this prospectus were issued in connection
with two private placement transactions described below.
2017
Placement
On July
24, 2017, we sold to accredited investors in a private placement (the “2017 Placement”) an aggregate 7,801,213 shares
of our common stock at a purchase price of $0.66 per share, resulting in gross proceeds to us of $4,731,872. We are registering
for resale by the selling shareholders named herein the 7,801,213 shares of our common stock issued to such persons in the 2017
Placement.
2018
Placement
Between
November 2018 and March 29, 2019, in a private placement (the “2018 Placement”) 1,856,988 shares of our common stock
at a purchase price of $2.25 per share, resulting in gross proceeds to us of $4,142,666. We are registering for resale by the
selling shareholders named herein the 1,856,988 shares of our common stock issued in the 2018 Placement.
All
of the 9,658,201 Shares purchased in the 2017 Placement and the 2018 Placement were issued for cash except for 568,182 shares
issued in the 2017 Placement to Manchester, at the same $0.66 per share purchase price paid by other investors, in exchange for
the cancellation of the 2,900,000 shares Manchester purchased in April 2017 for $375,000 (or $0.13 per share). See “Prospectus
Summary – Corporate History and Background – The Control Block Acquisition.”
Our offer
and sale of all of the foregoing shares in connection with the 2017 Placement and the 2018 Placement were intended to be exempt
from the registration requirements of the Securities Act, pursuant to Section 4(a)(2) of the Securities Act and the safe harbor
provisions of Rule 506(b) of Regulation D thereunder, as applicable to sales of securities exclusively to accredited investors,
as that term is defined in Rule 501(a) of Regulation D.
This
Offering
Securities being offered:
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Up to
9,658,201 shares of common stock, consisting of (i) 7,801,213 shares issued in the 2017 Placement and (ii) 1,856,988 shares
issued in the 2018 Placement. See “Selling Shareholders,” below.
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Use of proceeds:
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We will not receive
any of the proceeds from the sale or other disposition of shares of our common stock by the selling shareholders. See “Use
of Proceeds.”
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Market symbol for
common stock:
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Our common stock
is quoted on the OTC Pink Open Market under the trading symbol “MODD.”
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Risk factors:
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See “Risk
Factors” beginning on page 7 for risks you should consider before investing in our shares.
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Corporate
History and Background
We
were formed as a corporation under the laws of the State of Nevada on October 22, 1998 under the name Bear Lake Recreation, Inc.
We had no material business operations from 2002 until approximately April 26, 2017 when
we acquired Quasuras, Inc., a Delaware corporation (“Quasuras”), in the Acquisition (as defined below). Prior to the
Acquisition and, since at least 2002, we were a shell company as defined in Rule 12b-2 promulgated under the Securities Exchange
Act of 1934 (the “Exchange Act”). On June 27, 2017, in anticipation of the closing of the Acquisition, we changed
our name from “Bear Lake Recreation, Inc.” to “Modular Medical, Inc.” and changed our trading symbol from
“BLKE” to “MODD.”
The
Control Block Acquisition. On April 26, 2017, pursuant to a Common Stock Purchase Agreement, dated as of July 24, 2017, by
and among Manchester Explorer, LP, a Delaware limited partnership (“Manchester”), the Company and certain other persons
named therein, Manchester purchased from us 2,900,000 shares of our common stock representing in excess of a majority of our then
issued and outstanding common stock, for a purchase price of $375,000 (the “Control Block Acquisition”), resulting
in a change in control of the Company. In connection with the Control Block Acquisition, James E. Besser was appointed our president
and a director and Morgan C. Frank was appointed our chief executive officer, chief financial officer, secretary, treasurer and
a director and immediately following such appointments, our then officers and directors resigned. Mr. Besser is the managing member
of and Mr. Frank is the portfolio manager and a consultant to Manchester Management Company, LLC, a Delaware limited liability
company (“MMC”). MMC is the general partner of Manchester and JEB Partners, L.P. (“JEB Partners”).
The
Acquisition. On July 24, 2017, pursuant to a Reorganization and Share Exchange Agreement, by and among the Company, Mr. DiPerna,
the sole officer, director and a controlling stockholder of Quasuras, Messrs. Besser and Frank (Messrs. Besser, Frank and DiPerna,
collectively, the “3 Quasuras Shareholders”), and Quasuras (the “2017 Acquisition Agreement”), the Company
acquired all of the issued and outstanding shares of Quasuras owned by the 3 Quasuras Shareholders in exchange for 7,582,060 shares
of our common stock of which Messrs DiPerna, Besser and Frank received 7,220,400 shares, 180,830 shares and 180,830 shares, respectively,
resulting in Quasuras becoming our wholly-owned subsidiary (the “Acquisition”). Messrs. Besser and Frank each previously
purchased for $50,000 approximately 2.25% of the capital stock of Quasuras, and as a result each received 180,830 shares of our
common stock in the Acquisition. Simultaneously with the closing of the Acquisition, we completed the 2017 Placement, Manchester
cancelled the 2,900,000 shares of our common stock it purchased in the April 2017 Control Block Acquisition, Mr. Besser resigned
as our president and a director and Mr. Frank resigned as our chief executive officer, chief financial officer, secretary, and
treasurer, but remained a director and Mr. DiPerna was appointed our chairman, chief executive officer, chief financial officer,
secretary and treasurer.
On
July 28, 2017, we filed with the Securities and Exchange Commission (the “SEC”), a Current Report on Form 8-K, our
Super 8-K, disclosing the Acquisition, the 2017 Placement, the cancellation of the 2,900,000 Control Block and related transactions.
As a result of the filing of our Super 8-K we ceased being a shell company.
Implications
of being an emerging growth company
We are an
“emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012. We will remain an emerging
growth company until the earliest to occur of: the last day of the fiscal year in which we have more than $1.07 billion in
annual revenue; the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities
held by non-affiliates; the issuance, in any three-year period, by us of more than $1 billion in non-convertible debt
securities; and the last day of the fiscal year ending after the fifth anniversary of our initial public offering. We refer to
the Jumpstart Our Business Startups Act of 2012 herein as the “JOBS Act,” and any reference herein to “emerging
growth company” has the meaning ascribed to it in the JOBS Act.
An
emerging growth company may take advantage of reduced reporting requirements that are otherwise applicable to public companies.
These provisions include, but are not limited to:
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being
permitted to present only two years of audited financial statements and only two years of related Management’s Discussion
and Analysis of Financial Condition and Results of Operations in this prospectus;
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not
being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002,
as amended;
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reduced
disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements;
and
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exemptions
from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden
parachute payments not previously approved.
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We
have elected to take advantage of certain of the reduced disclosure obligations in this prospectus and may elect to take advantage
of other reduced reporting requirements in our future filings with the SEC. As a result, the information that we provide to our
stockholders may be different than you might receive from other public reporting companies in which you hold equity interests.
The
JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or
revised accounting standards. We have elected to avail ourselves of this exemption and, therefore, we will not be subject to the
same new or revised accounting standards as other public companies that are not emerging growth companies.
Corporate
Information
Modular Medical,
Inc. is a Nevada corporation with its principal business office at 800 West Valley Parkway, Suite 203, Escondido, California 92025.
Our website can be found at www.modular-medical.com. We do not intend nor are we incorporating any contents from our website
into this prospectus.
RISK
FACTORS
Investing
in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below
before making a decision to invest in our common stock. Our business, operating results or financial condition could be adversely
affected by any of these risks. The risks described below are not the only ones we face. The occurrence of any of the following
risks or future or additional risks and uncertainties not presently known to us or that we currently believe to be immaterial
could materially and adversely affect our business, financial position, results of operations or cash flows. The trading price
of our common stock could also decline due to any of these risks, and, as a result, you may lose all or part of your investment.
Before deciding whether to invest in our common stock, you should also refer to the other information included in this prospectus,
including our consolidated financial statements and the related notes.
Risks
Related to Our Business
We
are a developmental stage medical device company and have a history of significant operating losses; we expect to continue to
incur operating losses, and we may never achieve or maintain profitability.
As a
development stage enterprise, we do not currently have revenues to generate cash flows to cover operating expenses. Since our
inception, we have incurred operating losses in each year due to costs incurred in connection with research and development activities
and general and administrative expenses associated with our operations. For the 3 month periods ending June 30. 2019 and 2018,
we incurred net losses of approximately $1,122,198 and $249,566, respectively, and for the fiscal years ended March 31, 2019 and
2018, we incurred net losses of approximately $2,539,498 million and $659,246 million, respectively. General administrative expenses
for the 3 months ending June 30, 2019 increased by 88.7% to $146,626 as compared to $77,691 for the same period in 2018. For the
fiscal year ended March 31, 2019, general and administrative expenses increased by 332% to $434,558 as compared to $100,561 for
2018.
We
expect to incur losses for the foreseeable future as we continue the development of, and seek regulatory clearance and approvals
for, our insulin pump. Since our prototype insulin pump is currently our only product, if it fails to gain regulatory approval
and market acceptance, we will not be able to generate any revenue, or explore other opportunities to enhance shareholder value,
such as through a sale. If we fail to generate revenue and eventually become profitable, or if we are unable to fund our continuing
losses, our shareholders could lose all or a substantial part of their investment. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” below.
We
will need substantial additional funding to complete subsequent phases of our insulin pump product and to operate our business
and such funding may not be available or, if it is available, such financing is likely to substantially dilute our existing shareholders.
The
discovery, development, and commercialization of new medical devices, such as our insulin pump, entails significant costs. While
we believe that we have generally completed the engineering and mechanical aspects of our insulin pump prototype, we still must
modify, refine and finalize our insulin pump to, among other things, meet the general needs and preferences of the almost pumper
marketplace and the guidelines of third party payors. To enable us to accomplish these and other related items and continue to
operate our business, we will need to raise substantial additional capital, or enter into strategic partnerships, to enable us
to:
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fund
clinical studies and seek regulatory approvals;
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build
or access manufacturing and commercialization capabilities;
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develop,
test, and, if approved, market our product;
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acquire
or license additional internal systems and other infrastructure; and
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hire
and support additional management, engineering and scientific personnel.
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Until
we can generate a sufficient amount of product revenue to finance our cash requirements, which we may never achieve, we expect
to finance our cash needs primarily through public or private equity offerings, debt financings or through the establishment of
possible strategic alliances. We cannot be certain that additional funding will be available on acceptable terms, or at all. If
we are not able to secure additional equity funding when needed, we may have to delay, reduce the scope of, or eliminate one or
more of our clinical studies, development programs or future commercialization initiatives.
In addition, any additional equity funding that we do obtain will dilute the ownership held by our existing security holders.
The amount of this dilution may be substantially increased if the trading price of our common stock is lower at the time of any
financing. Regardless, the economic dilution to shareholders will be significant if our stock price does not increase significantly,
or if the effective price of any sale is below the price paid by a particular shareholder. Any debt financing that we obtain in
the future could involve substantial restrictions on activities and creditors could seek a pledge of some or all of our assets.
We have not identified potential sources for such financing that we will require, and we do not have commitments from any third
parties to provide any future debt financing. If we fail to obtain funding as needed, we may be forced to cease or scale back
operations, and our results, financial condition and stock price would be adversely affected. See “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” below.
We
have a limited operating history and historical financial information upon which you may evaluate our performance.
You should
consider, among other factors, our prospects for success in light of the risks and uncertainties encountered by companies that,
like us, are in their early stages of development. We may not successfully address these risks and uncertainties or successfully
complete our studies and/or implement our existing and new products. If we fail to do so, it could materially harm our business
and impair the value of our common stock. Unanticipated problems, expenses and delays are frequently encountered in establishing
a new business, conducting research, and developing new products. These include, but are not limited to, inadequate funding,
failure to obtain regulatory approval, unforeseen research issues, lack of consumer acceptance, competition, sluggish product
development, and inadequate sales and marketing. The failure by us to meet any of these conditions would have a materially
adverse effect upon us and may force us to reduce or curtail operations. No assurance can be given that we can or will ever operate
profitably. See “Our Business – Corporate History and Background,” below.
We
may not be able to meet our future capital needs.
To date,
we have no revenue and we have limited cash liquidity and capital resources. We will need additional capital in the near future.
Any equity financings will result in dilution and may contain other terms that are not favorable to our then-existing stockholders.
Although we currently do not have any debt financing, any sources of debt financing that we may obtain in the future may result
in a high interest expense. Any financing, if available, may be on unfavorable terms. If adequate funds are not obtained, we will
be required to reduce or curtail operations. See “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” below.
The
amount of financing we require will depend on a number of factors, many of which are beyond our control. Our results of operations,
financial condition and stock price are likely to be adversely affected if our funding requirements increase or are otherwise
greater than we expect.
Our future
funding requirements will depend on many factors, including, but not limited to:
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the
costs of our clinical studies for our insulin pump product and other development activities
conducted by us directly, and our ability to successfully conclude the studies and activities
and achieve favorable results;
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our
ability to attract future strategic partners to pay for or share costs related to our
product development efforts;
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the
costs and timing of seeking and obtaining regulatory clearance and approvals for our
product;
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the
costs of filing, prosecuting, maintaining and enforcing any patents and other intellectual
property rights that we may have and defending against potential claims of infringement;
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decisions
to hire additional scientific, engineering or administrative personnel or consultants;
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our
ability to manage administrative and other costs of our operations; and
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the
presence or absence of adverse developments in our research program.
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If any
of these factors cause our funding needs to be greater than expected, our operations, financial condition, ability to continue
operations and stock price may be adversely affected. See “Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” below.
Our
future cash requirements may differ significantly from our current estimates.
Our cash
requirements may differ significantly from our estimates from time to time, depending on a number of factors, including:
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the
costs and results of our clinical studies regarding our insulin pump product;
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the
time and costs involved in obtaining regulatory clearance and approvals;
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whether
we are able to obtain funding under future licensing agreements, strategic partnerships,
or other collaborative relationships, if any;
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the
costs of compliance with laws, regulations, or judicial decisions applicable to us; and
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the
costs of general and administrative infrastructure required to manage our business and
protect corporate assets and shareholder interests
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If we
fail to raise additional funds on a timely basis we will need to scale back our business plans, which would adversely affect our
business, financial condition, and stock price, and we may even be forced to discontinue our operations and liquidate our assets.
See “Our Business – Keep costs low during our design and development process,” below.
Technological
breakthroughs in diabetes monitoring, treatment or prevention could render our insulin pump obsolete.
The
diabetes treatment market is subject to rapid technological change and product innovation. Our insulin pump is based on
our proprietary technology, but a number of companies, medical researchers and existing pharmaceutical companies are pursuing
new delivery devices, delivery technologies, sensing technologies, procedures, drugs and other therapeutics for the monitoring,
treatment and/or prevention of insulin-dependent diabetes. Any technological breakthroughs in diabetes monitoring, treatment or
prevention could render our insulin pump obsolete, which, since our insulin pump is our only product, would have a material
adverse effect on our business, financial condition and results of operations and could result in shareholders losing their entire
investment.
Any
failure to attract and retain skilled directors, executives, employees and consultants could impair our product development and
commercialization activities.
Our business
depends on the skills, performance, and dedication of our directors, executive officers and key engineering, scientific and technical
advisors. Many of our current engineering or scientific advisors are independent contractors and are either self-employed or employed
by other organizations. As a result, they may have conflicts of interest or other commitments, such as consulting or advisory
contracts with other organizations, which may affect their ability to provide services to us in a timely manner. We may need to
recruit additional directors, executive management employees, and advisers, particularly engineering, scientific and technical
personnel, which will require additional financial resources. In addition, there is currently intense competition for skilled
directors, executives and employees with relevant engineering, scientific and technical expertise, and this competition is likely
to continue. If we are unable to attract and retain persons with sufficient engineering, scientific, technical and managerial
experience, we may be forced to limit or delay our product development activities or may experience difficulties in successfully
conducting our business, which would adversely affect our operations and financial condition. See “Our Business –
Employ experienced engineers, recruited, supervised and led by Mr. DiPerna, a highly experienced respected engineer and executive
in the insulin pump industry.”
We
do not have internal research and development personnel, making us dependent on consulting relationships.
We
consider research and development to be an important part of the process of designing, developing, obtaining regulatory required
approvals and the eventual commercialization of our insulin pump. For the quarter ending June 30, 2019, our research and development
expenditures increased approximately 518% to $703,783 from $135,789 during the same quarter in 2018. For our fiscal year ended
March 31, 2019, research and development expenditures increased by 466% to $1,882,345 as compared to $332,642 for fiscal year
2018. Such increases in research and development expenditure are attributable to effort and expenses incurred in designing and
developing our innovative insulin pump. We expect to continue to incur substantial costs
related to research and development.
We
currently have no research and development personnel, and rely and expect for the foreseeable future to continue to rely, on third
party consultants to perform such functions for us. As a result, we are and expect to continue for the foreseeable future to be
dependent on such third parties. Generally, our contracts with such third parties, are terminable for any reason by us or such
third parties on 2 weeks to 30 day notice (with one exception, providing for 90 days’ notice) and provide for no severance
or termination benefits to such third parties. As a result, such third parties may be able to terminate their contractual relationships
with us quickly and with little, if any, notice. Although we believe there is a relatively large and readily accessible network
of third parties that we can draw from to replace any of our then third party consultants, no assurances can be given that we
would be able to quickly and seamlessly find and hire suitable replacements. Any material interruption or delay in our research
and development activities performed by our third party consultants could impair our ability to meet any deadlines and materially
impair our then product design and development, regulatory approval and/or commercialization activities which could have a material
adverse effect on our business, financial condition and stock price. In addition, if we do not appropriately manage our relationships
with such third parties, we may not be able to efficiently manage the development, testing, regulatory approval and eventual commercialization
of our insulin pump, which also could have a material and adverse effect on our business, financial condition and stock price.
We
will need to outsource and rely on third parties for various aspects relating to the development, manufacture, sales and marketing
of our insulin pump as well as in connection with assisting us in the preparation and filing of our FDA submission, and our future
success will be dependent on the timeliness and effectiveness of the efforts of these third parties.
We
are dependent on our third party consultants, for important aspects of our product development strategy. We do not have the required
financial and human resources to carry out independently the development of our product, and do not have the capability or resources
to manufacture, market or sell our current product. As a result, we contract with and rely on third parties for important functions,
including in connection with the development and finalization of our insulin pump, the preparation and filing of our FDA submission
and eventual manufacturing and commercialization of our product. We have recently entered
into several agreements with third parties for such services. If problems develop in our relationships with third parties,
or if such parties fail to perform as expected, it could lead to delays or lack of progress in obtaining FDA clearance, significant
cost increases, changes in our strategies, and even failure of our product initiatives. See “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” below.
We
may not be able to identify, negotiate and maintain the strategic alliances necessary to develop and commercialize our products
and technologies, and we will be dependent on our corporate partners if we do.
We may seek
to enter into a strategic alliance with a diabetes related service providing company for the further development and approval
of our insulin pump product. At this time, we have not entered into any such strategic alliance. Strategic alliances, if entered
into, could potentially provide us with additional funds, expertise, access, and other resources in exchange for exclusive or
non-exclusive licenses or other rights to the product that we are currently developing or a product we may explore in the future.
We cannot give any assurance that we will be able to enter into strategic relationships with a diabetes related service providing
company or others in the near future or at all. In addition, we cannot assure you that any agreements that we do reach will achieve
our goals or be on terms that prove to be economically beneficial to us. When we do enter
into strategic or contractual relationships, we become dependent on the successful performance of our partners or counter-parties.
If they fail to perform as expected, such failure could adversely affect our financial condition, lead to increases in our capital
needs, or hinder or delay our development efforts. See “Our Business – Number of Total Employees,” below.
We
may not receive the necessary regulatory clearance or approvals for our insulin pump, and failure to timely obtain necessary clearances
and/or approvals could harm our then operations including to commercialize our product.
Before
we can market a new medical device, such as our insulin pump, we must first receive clearance under Section 510(k) of the
Federal Food, Drug, and Cosmetic Act, or the FDCA. In the 510(k) clearance process, before a device may be marketed, the FDA must
determine that such proposed device is "substantially equivalent" to a legally-marketed "predicate" device,
which includes a device that has been previously cleared through the 510(k) process, a device that was legally marketed prior
to May 28, 1976 (pre-amendments device), a device that was originally on the U.S. market pursuant to an approved pre-market
approval (“PMA”) and later down-classified, or a 510(k)-exempt device. To be "substantially equivalent,"
the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics
as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness
than the predicate device.
Certain
modifications made to our product, which we currently expect to be cleared through 510(k), may require a new 510(k) clearance.
The 510(k) clearance process can be expensive, lengthy and uncertain. The FDA's 510(k) clearance process usually takes from three
to 12 months, but can last longer. Despite the time, effort and cost, a device may not be approved or cleared by the FDA.
Any delay or failure to obtain necessary regulatory approvals could harm our business, including our ability to commercialize
our product and our shareholders could lose their entire investment. Furthermore, even if we are granted the required regulatory
clearances, such clearances may be subject to significant limitations on the indicated uses for the device, which may limit the
market for our product.
If
the FDA requires us to go through a lengthier, more rigorous examination for our product than we had expected, product introductions
or modifications could be delayed or canceled, which could adversely affect our ability to grow our business.
The
FDA can delay, limit or deny clearance or approval for our insulin pump medical device for many reasons, including:
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our
inability to demonstrate to the satisfaction of the FDA that our product is safe
or effective for its intended use;
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the
disagreement of the FDA with the design or implementation of our clinical studies
or the interpretation of data from our clinical studies;
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serious
and unexpected adverse device effects experienced by participants in our clinical studies;
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the
data from clinical studies may be insufficient to support clearance or approval, where
required;
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our
inability to demonstrate that the benefits of our pump outweigh the risks;
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the
manufacturing process or facilities we intend to use may not meet applicable requirements;
and
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the
potential for approval policies or regulations of the FDA to change significantly
in a manner rendering our data or regulatory filings insufficient for clearance or approval.
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In addition,
the FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take other
actions, which may prevent or delay approval or clearance of our product or impact our ability to modify our product after clearance
on a timely basis. Such policy or regulatory changes could impose additional requirements upon us that could delay our ability
to obtain clearance for our pump, increase the costs of compliance or restrict our ability to maintain our current approval. For
example, as part of the Food and Drug Administration Safety and Innovation Act, or FDASIA, enacted in 2012, Congress reauthorized
the Medical Device User Fee Amendments with various FDA performance goal commitments and enacted several "Medical Device
Regulatory Improvements" and miscellaneous reforms, which are further intended to clarify and improve medical device regulation
both pre- and post-clearance and approval. Some of these proposals and reforms could impose additional regulatory requirements
upon us that could delay our ability to obtain new clearance, increase the costs of compliance or restrict our ability to maintain
any clearance or approval we are able to obtain.
As
a general rule, demonstration of conformity of medical devices and their manufacturers with the essential requirements must be
based, among other things, on the evaluation of data supporting the safety and performance of the products during normal conditions
of use. Specifically, a manufacturer must demonstrate that the device achieves its intended performance during normal conditions
of use, that the known and foreseeable risks, and any adverse events, are minimized and acceptable when weighed against the benefits
of its intended performance, and that any claims made about the performance and safety of the device are supported by suitable
evidence.
Our
competitors may develop products that are more effective, safer and less expensive than ours.
Existing
insulin pumps are expensive, with the more popular models having purchase prices exceeding $4,000 for individuals without health
insurance and often require significant patient copays. Others have daily use costs that exceed the reimbursement rates of many
health insurance plans, forcing some users to spend thousands of dollars a year in copays. We believe this makes insurers hesitant
to pay for pumps for any but their most technologically proficient and compliant patients and places pumps out of reach for many
patients who cannot afford such out of pocket expenses.
We are
engaged in the diabetes treatment sector of the healthcare marketplace, which is intensely competitive. There are current products
that are quite effective at addressing the effects of diabetes, and we expect that new developments by other companies and academic
institutions in the areas of diabetes treatment will continue. If approved for marketing by the FDA, depending on the approved
clinical indication, our product will be competing with existing and future products related to treatments for diabetes.
Our competitors
may:
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develop
product candidates and market products that increase the levels of safety or efficacy
that our product candidates will need to show in order to obtain regulatory approval;
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develop
product candidates and market products that are less expensive or more effective than
ours;
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commercialize
competing products before we can launch any products we are working to develop;
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hold
or obtain proprietary rights that could prevent us from commercializing our products;
or
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introduce
therapies or market medical products that render our potential product candidates obsolete.
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We
expect to compete against large medical device companies, such as Medtronic, Inc., Tandem Diabetes Care, Inc. and Insulet Corporation
and smaller companies that are collaborating with larger medical device companies, new companies, academic institutions, government
agencies and other public and private research organizations. These competitors, in nearly
all cases, produce similar products relative to the treatment of diabetes that have substantially greater financial resources
than we do. Our competitors also have significantly greater experience in:
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developing
medical device and other product candidates;
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undertaking
testing and clinical studies;
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building
relationships with key customers and opinion-leading physicians;
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obtaining
and maintaining FDA and other regulatory approvals;
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formulating
and manufacturing medical devices;
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launching,
marketing and selling medical devices; and
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providing
management oversight for all of the above-listed operational functions.
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If we fail to
achieve superiority over other existing or newly developed products, we may be unable to obtain regulatory approval. If our
competitors market medical devices that are less expensive, safer or more effective than our insulin pump, or that gain or maintain
greater market acceptance, we may not be able to compete effectively. See “Our Business – Competition,”
below.
We
expect to rely on third party manufacturers and will be dependent on their quality and effectiveness.
Our
insulin pump requires precise, high-quality manufacturing. The failure to achieve and maintain high manufacturing standards, including
failure to detect or control anticipated or unanticipated manufacturing errors or the frequent occurrence of such errors, could
result in patient injury or death, discontinuance or delay of ongoing or planned clinical studies, delays or failures in product
testing or delivery, cost overruns, product recalls or withdrawals and other problems that could seriously hurt our business.
Contract medical device manufacturers often encounter difficulties involving production
yields, quality control and quality assurance and shortages of qualified personnel. These manufacturers are subject to stringent
regulatory requirements, including the FDA’s current good-manufacturing-practices regulations. If our contract manufacturers
fail to maintain ongoing compliance at any time, the production of our product could be interrupted, resulting in delays or discontinuance
of our clinical studies, additional costs and loss of potential revenues. See “Our Business – Keep costs low during
design and development process,” below.
We
may not be able to successfully scale-up manufacturing of our product in sufficient quality and quantity, which would delay or
prevent us from developing our product and commercializing our product.
In
order to conduct larger-scale or late-stage clinical studies and for commercialization of our insulin pump, if 501(k) clearance
is granted, we will need to manufacture it in larger quantities. We may not be able to successfully increase the manufacturing
capacity for our product in a timely or cost-effective manner, or at all. In addition,
quality issues may arise during scale-up activities. If we are unable to successfully scale up the manufacture of our product
in sufficient quality and quantity, the development and testing of our product and regulatory approval or commercial launch may
be delayed, which could significantly harm our business.
We
may be subject to potential product liability and other claims that could materially impact our business and financial condition.
The
development and sale of our insulin pump exposes us to the risk of significant damages from product liability and other claims,
and the use of our product in clinical studies may result in adverse effects. We cannot
predict all the possible harms or adverse effects that may result. We maintain a modest amount of product liability insurance
to provide some protection from claims. Nonetheless, we may not have sufficient resources to pay for any liabilities resulting
from a personal injury or other claim, even if it is partially covered by insurance. In addition to the possibility of direct
claims, we may be required to indemnify third parties against damages and other liabilities arising out of our development, commercialization
and other business activities, which would increase our liability exposure. If third parties that have agreed to indemnify us
fail to do so, we may be held responsible for those damages and other liabilities as well.
Legislative,
regulatory, or medical cost reimbursement changes may adversely impact our business.
New
laws, regulations and judicial decisions, or new interpretations of existing laws, regulations and decisions, that relate to the
health care system in the U.S. and in other jurisdictions may change the nature of and regulatory requirements relating to innovations
in medical devices, testing and regulatory approvals, limit or eliminate payments for medical procedures and treatments, or subject
the pricing of medical devices to government control. In addition, third-party payors in the U.S. are increasingly attempting
to contain health care costs by limiting both coverage and the level of reimbursement of new products.
Consequently, significant uncertainty exists as to the reimbursement status of newly approved health care products. Significant
changes in the health care system in the U.S. or elsewhere, including changes resulting from adverse trends in third-party reimbursement
programs, could have a material adverse effect on our projected future operating results and our ability to raise capital, commercialize
products, and remain in business. See “Our Business – Government Regulations,” below.
We
are subject to extensive regulation by the U.S. Food and Drug Administration, which could restrict the sales and marketing
of our insulin pump and could cause us to incur significant costs.
Our insulin
pump is subject to extensive regulation by the FDA. These regulations relate to manufacturing, labeling, sale, promotion, distribution
and shipping. Before a new medical device, or a new use of or claim for an existing product, can be marketed in the United States,
it must first receive either 510(k) clearance or PMA from the FDA, unless an exemption applies. We may be required to obtain a
new 510(k) clearance for significant post-market modifications to our insulin pump. Each of these processes can be expensive
and lengthy, and entail significant user fees, unless exempt.
Medical
devices may be marketed only for the indications for which they are approved or cleared. Further, 510(k) clearances can
be revoked if safety or effectiveness problems develop.
The
current regulatory requirements to which we are subject may change in the future in a way that adversely affects us. If
we fail to comply with present or future regulatory requirements that are applicable to us, we may be subject to enforcement action
by the FDA, which may include any of the following sanctions:
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untitled
letters, warning letters, fines, injunctions, consent decrees and civil penalties;
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customer
notification, or orders for repair, replacement or refunds
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voluntary
or mandatory recall or seizure of our current or future products;
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administrative
detention by the FDA of medical devices believed to be adulterated or misbranded;
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imposing
operating restrictions, suspension or shutdown of production;
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refusing
our requests for 510(k) clearance or pre-market approval of any new products, new intended
uses or modifications to our insulin pump;
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rescinding
510(k) clearance that has already been granted; and
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The
occurrence of any of these events would have a material adverse effect on our business, financial condition and results of operations
and could result in shareholders losing their entire investment.
Our
success depends substantially upon our ability to obtain and maintain intellectual property protection relating to our product
and research technologies.
We have
applied to the U.S. Patent and Trademark Office for two US patents on our proprietary fluid movement technology and the configuration
of our insulin pump. There is no assurance that these patents will be issued, and no assurance that they will prevent other companies
from competing with us. We will continue to attempt to patent our innovations as appropriate to help ensure a sustainable competitive
advantage.
Due to
evolving legal standards relating to the patentability, validity and enforceability of patents covering health care product inventions,
our ability to enforce our existing patents and to obtain and enforce patents that may issue from any pending or future patent
applications is uncertain and involves complex legal, scientific and factual questions. To date, no consistent policy has emerged
regarding the breadth of claims allowed in medical device patents. Thus, we cannot be sure that any patents will issue from any
pending or future patent applications owned by or licensed to us. Even if patents do issue, we cannot be sure that the claims
of these patents will be held valid or enforceable by a court of law, will provide us with any significant protection against
competing products, or will afford us a commercial advantage over competitive products. If, at some point in the future, one
or more products resulting from our product candidates is approved for sale by the FDA and we do not have adequate intellectual
property protection for those products, competitors could duplicate them for approval and sale in the United States without repeating
the extensive testing required of us to obtain FDA approval. See “Our Business – Patents,” below.
If
we are sued for infringing on third-party intellectual property rights, it will be costly and time-consuming, and an unfavorable
outcome would have a significant adverse effect on our business.
Our ability
to commercialize our product depends on our ability to use, manufacture and sell our product without infringing the patents or
other proprietary rights of third parties. Numerous U.S. and foreign issued patents and pending patent applications owned by third
parties exist in the diabetes medical device area. There may be existing patents, unknown to us, on which our activities with
our insulin pump candidate could infringe.
If a
third party claims that our actions infringe on its patents or other proprietary rights, we could face a number of issues that
could seriously harm our competitive position, including, but not limited to:
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infringement
and other intellectual property claims that, even if meritless, can be costly and time-consuming,
delay the regulatory approval process and divert management’s attention from our
core business operations;
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substantial
damages for infringement, including consequential damages for lost of profits or market
share, if a court determines that our products or technologies infringe on a third party’s
patent or other proprietary rights;
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a
court prohibiting us from selling or licensing our products or technologies unless the
holder licenses the patent or other proprietary rights to us, which it is not required
to do; and
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even
if a license is available from a holder, we may have to pay substantial royalties or
grant cross-licenses to our patents or other proprietary rights.
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If any
of these events occur, it could significantly harm our operations and financial condition and negatively affect our stock price.
Healthcare
reform laws could adversely affect our product and financial condition.
During
the past several years, the U.S. healthcare industry has been subject to an increase in governmental regulation at both the federal
and state levels. Efforts to control healthcare costs, including limiting access to care, alternative delivery models and changes
in the methods used to determine reimbursement scenarios and rates, are ongoing at the federal and state government levels. There
are provisions of law that provide for the creation of a new public-private Patient-Centered Outcomes Research Institute tasked
with identifying comparative effectiveness research priorities. For example, establishing a research project agenda and contracting
with entities to conduct the research in accordance with the agenda. Research findings published by this institute are publicly
disseminated. It is difficult at this time to determine whether a comparative effectiveness analysis impacting our business will
be done, and assuming one is, what impact that analysis will have on our insulin pump or our future financial results.
In
addition, the Affordable Care Act and related healthcare reform laws, regulations and initiatives have significantly increased
regulation of managed care plans and decreased reimbursement to Medicare managed care. Some of these initiatives purport to, among
other things, require that health plan members have greater access to drugs not included on a plan’s formulary. Moreover,
to alleviate budget shortfalls, states have reduced or frozen payments to Medicaid managed care plans. We cannot accurately predict
the complete impact of these healthcare reform initiatives, but they could lead to a decreased demand for medical devices such
as our insulin pump and other outcomes that could adversely impact our business and financial results.
Some of the
provisions of the ACA have yet to be fully implemented, and certain provisions have been subject to judicial and Congressional
challenges. In addition, there have been efforts by the Trump administration to repeal or replace certain aspects of the ACA and
to alter the implementation of the ACA and related laws. For example, the Tax Cuts and Jobs Act enacted on December 22, 2017,
eliminated the shared responsibility payment for individuals who fail to maintain minimum essential coverage under section 5000A
of the Internal Revenue Code of 1986, commonly referred to as the "individual mandate", effective January 1, 2019. Further,
the Bipartisan Budget Act of 2018 among other things, amended the Medicare statute, effective January 1, 2019, to reduce the coverage
gap in most Medicare drug plans, commonly known as the “donut hole,” by raising the manufacturer discount under the
Medicare Part D coverage gap discount program to 70%. It is unclear how the ACA and its implementation, as well as efforts to
repeal or replace, or invalidate, the ACA, or portions thereof, will affect our insulin pump or our business. Additional
legislative changes, regulatory changes, and judicial challenges related to the ACA remain possible. It is possible that the ACA,
as currently enacted or as it may be amended in the future, and other healthcare reform measures that may be adopted in the future,
could have an adverse effect on our industry generally and on our ability to commercialize our insulin pump and achieve
profitability.
If
we are able to obtain all regulatory approvals and have completed all other steps needed to be taken to commercialize our insulin
pump, if we or any contract manufacturers we select fails to comply with the FDA’s quality system regulations, the manufacturing
and distribution of our product could be interrupted, and our product sales and operating results could suffer.
A
material step in the process of the commercialization of our product will involve selecting a manufacturer or manufacturers for
our pump. We and any future contract manufacturers of our insulin pump will be required to comply with the FDA’s quality
system regulations, which impose a complex regulatory framework that covers the procedures and documentation of the design, testing,
production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of medical devices. The FDA enforces
its quality system regulations through periodic unannounced inspections. We cannot assure you that, in the future, any manufacturing
facilities owned by us or any contract manufacturer will pass any quality system inspection. In the event that our or any contract
manufacturer’s facilities fails a quality system inspection, the manufacturing or distribution of our product could be interrupted
and our operations disrupted. Failure to take adequate and timely corrective action in response to an adverse quality system inspection
could force a suspension or shutdown of any packaging and labeling operations or then manufacturing operations of any contract
manufacturers, or a recall of our insulin pump. If any of these events were to occur, we at such time would not be able to provide
our customers with the quantity of insulin pumps that they require on a timely basis, our reputation could be harmed and
we could lose any customers we then have, any or all of which could have a material adverse effect on our business, financial
condition and results of operations.
We
may undertake infringement or other legal proceedings against third parties, causing us to spend substantial resources on litigation
and exposing our own intellectual property portfolio to challenge.
We may
come to believe that third parties are infringing on our patents or other proprietary rights. To prevent infringement or unauthorized
use, we may need to file infringement and/or misappropriation suits, which are very expensive and time-consuming, could result
in meritorious counterclaims against us and would distract management’s attention. Also, in an infringement or misappropriation
proceeding, a court may decide that one or more of our patents is invalid, unenforceable, or both, in which case third parties
may be able to use our technology without paying license fees or royalties. Even if the validity of our patents is upheld,
a court may refuse to stop the other party from using the technology at issue on the grounds that the other party’s activities
are not covered by our patents. See “Our Business – Patents,” below.
We
may become involved in disputes with our present or future contract partners over intellectual property ownership or other matters,
which would have a significant effect on our business.
Inventions
discovered in the course of performance of contracts with third parties or contractors may become jointly owned by such third
parties contractors and us, in some cases, and the exclusive property of one of us, in other cases.
Under some circumstances, it may be difficult to determine who owns a particular invention or whether it is jointly owned, and
disputes could arise regarding ownership or use of those inventions or jointly developed improvements thereto. Other disputes
may also arise relating to the performance or alleged breach of our agreements with third parties. Any disputes could be costly
and time-consuming, and an unfavorable outcome could have a significant adverse effect on our business. See “Our Business
–Use of Proprietary Technology,” below.
Assuming
our insulin pump receives FDA clearance or approval, our insulin pump will still be subject to recalls, which would harm our reputation,
business operations and financial results.
Even assuming
we obtain FDA approval or clearance with regard to our insulin pump, the FDA has the authority to require the recall of our pump
if we commence manufacturing of our insulin pump and we or any contract manufacturers we retain fail to comply with relevant regulations
pertaining to manufacturing practices, labeling, advertising or promotional activities, or if new information is obtained concerning
the safety or efficacy of the product. A government-mandated recall could occur if the FDA finds that there is a reasonable probability
that our product would cause serious, adverse health consequences or death. A voluntary recall by us could occur as a result of
manufacturing defects, labeling deficiencies, packaging defects or other failures to comply with applicable regulations. Any recall
would divert management’s attention and financial resources and harm our reputation with customers. A recall involving our
insulin pump would be particularly harmful to our business, financial condition and results of operations because it is currently
our only product.
Any
disruption and/or instability in economic conditions and capital markets could adversely affect our ability to access the capital
markets, and thus adversely affect our business and liquidity.
Negative
economic conditions and issues with regard to the financial markets, could have a negative impact on our ability to access the
capital markets, and thus have a negative impact on our then operations and liquidity. A general shortage of liquidity and credit
combined with the substantial losses in worldwide equity markets could lead to an extended worldwide recession in the future.
If such occurred, we would face significant challenges if conditions in the capital markets did not improve.
Our ability to access the capital markets under such circumstances could be severely restricted at a time when we need to access
such markets, which could have a negative impact on our business plans. Even if we are able to raise capital under such circumstances,
it may not be at a price or on terms that are favorable to us. We cannot predict the occurrence of future disruptions or how long
such negative conditions might continue.
Because
our current insulin pump prototype is still in the development stage, it does not have reimbursement and is not approved for insurance
coverage. If in the future we are approved for and are otherwise able to commercialize our insulin pump, but are unable to obtain
adequate reimbursement or insurance coverage for such product from third-party payors, we will be unable to generate significant
revenue.
Because
our current insulin pump prototype is still in the development stage, it does not have reimbursement and is not approved for insurance
coverage. The future availability of insurance coverage and reimbursement for newly approved medical devices is highly uncertain.
In the United States, patients using insulin pumps are generally reimbursed for all or part of the product cost by Medicare or
other third-party payors. Any future commercial success of our insulin pump will be substantially dependent on whether third-party
coverage and reimbursement is available for future customers. Medicare, Medicaid, health maintenance organizations and other third-party
payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement of new
medical devices, and, as a result, they may not cover or provide adequate reimbursement for our insulin pump, assuming we are
able to fully develop and obtain all regulatory approval to market it in the United States. Accordingly, unless government and
other third-party payors provide coverage and reimbursement for our insulin pump, patients may not use it, which would cause investors
to lose their entire investment.
We
are subject to the oversight of the SEC and other regulatory agencies. Investigations by those agencies could divert management’s
focus and could have a material adverse effect on our reputation and financial condition.
We are
subject to the regulation and oversight of the SEC and state regulatory agencies, in addition to the FDA. As a result, we may
face legal or administrative proceedings by these agencies. We are unable to predict the effect of any investigations on our business,
financial condition or reputation. In addition, publicity surrounding any investigation, even if ultimately resolved in our favor,
could have a material adverse effect on our business. See “Our Business – Government Regulation,” below.
Risks
Relating to Our Common Stock
Our
shares of common stock are quoted on the OTC Pink Open Market; no active trading market for our common stock.
Our
shares of common stock are traded on the OTC Pink Open Market. There is currently no trading market, and for at least the prior
3 years there has not been any active trading market for our common stock. There can be no assurance that an active trading market
for our common stock will develop or if one develops, it will be sustained. Furthermore, because our shares of common stock are
traded on the OTC Pink Open Market, the shares of our common stock covered by this
prospectus will only be offered and sold by selling shareholders at a fixed price of $3.00 per share until our shares are quoted
on the OTCQX or OTCQB marketplace of the OTC Link, and, thereafter, at prevailing market prices or privately negotiated prices.
The
sale of shares by the selling shareholders may cause our stock price to decline.
The selling
shareholders may sell, in accordance with the limitations set forth in this prospectus, up to the 9,658,201 shares of common stock
covered by this prospectus, in the public markets. Because of the lack of any active trading market for our shares, any such sales
that are able to be made will likely cause our stock price to decline. See “Plan of Distribution,” below.
We
do not expect any cash dividends to be paid on our shares in the foreseeable future.
We have
never declared or paid a cash dividend and we do not anticipate declaring or paying dividends for the foreseeable future. We expect
to use future financing proceeds and earnings, if any, to fund operating expenses. Consequently, shareholders’ only opportunity
to achieve a return on their investment is if the price of our stock appreciates and they sell their shares at a profit. We cannot
assure shareholders of a positive return on their investment when they sell their shares or that shareholders will not lose the
entire amount of their investment. See “Description of Our Common Stock – Dividend Policy,” below.
If
the beneficial ownership of our stock continues to be highly concentrated, it may prevent you and other shareholders from influencing
significant corporate decisions; agreement to elect directors.
As
of June 30, 2019, our executive officers, directors and certain persons who may be deemed their affiliates beneficially owned
substantially in excess of 50.1% of our issued and outstanding common stock. As a result, such persons may exercise substantial
influence over the outcome of corporate actions requiring shareholder approval including, without limitation, the election of
directors, certain mergers, consolidations and sales of all or substantially all of our assets or any other significant corporate
transactions. Such persons may also vote against a change of control, even if such a change of control would benefit our other
shareholders. In addition, pursuant to the July 24, 2017 agreement pursuant to which we acquired Quasuras, until July 24, 2022,
our board of directors will consist of no less than 2 and no more than 5 directors, of which Mr. DiPerna, in addition to being
our chairman, has the right to appoint 2 additional directors and Manchester has the right to appoint 2 directors, of which Mr.
Frank constitutes 1 such director. As a result of such agreement, until July 24, 2022, other shareholders will not have the ability
to elect any directors either at the annual meeting or by written consent, even if such other shareholders believe that our board
of directors is taking actions to which the shareholders object. See “Stock Ownership
by Principal Shareholders and Management” below.
Sale
of our common stock by the selling shareholders could encourage short sales by third parties, which could contribute to the further
decline of our stock price.
The
significant downward pressure on the price of our common stock that would be caused by the sale of material amounts of our common
stock could encourage short sales by third parties. Such an event could place further
downward pressure on the price of our common stock. See “Plan of Distribution,” below.
We
are an emerging growth company, and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies
will make our common stock less attractive to investors.
We are an
“emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”).
For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements
that are applicable to other public companies that are not emerging growth companies, including not being required to comply with
the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive
compensation in this prospectus and our periodic reports and proxy statements and exemptions from the requirements of holding
nonbinding advisory votes on executive compensation and stockholder approval of any golden parachute payments not previously approved.
We could be an emerging growth company for up to five years following the year in which we complete this offering, although circumstances
could cause us to lose that status earlier. We will remain an emerging growth company until the earlier of (i) the last day
of the fiscal year (a) following the fifth anniversary of the completion of the first sale of shares covered by this prospectus,
(b) in which we have total annual gross revenue of at least $1.07 billion or (c) in which we are deemed to be a
large accelerated filer, which requires the market value of our common stock that is held by non-affiliates to exceed
$700.0 million as of the prior June 30th, and (ii) the date on which we have issued more than $1.0 billion in non-convertible
debt during the prior three-year period.
Our
common shares may be classified as “penny stock” and trading of our shares may be restricted by the SEC’s penny
stock regulations.
Our
common stock is traded on the OTC Pink Markets. Rules 15g-1 through 15g-9 promulgated under the Securities Exchange Act impose
sales practice and disclosure requirements on certain brokers-dealers who engage in transactions involving a “penny stock.”
The SEC has adopted regulations which generally define “penny stock” to be
any equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject
to certain exceptions. Our common shares may be covered by the penny stock rules, which impose additional sales practice requirements
on broker-dealers who sell to persons other than established customers and “accredited investors.” The penny stock
rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized
risk disclosure document in a form prepared by the SEC, which provides information about penny stocks and the nature and level
of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for
the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements
showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules require
that, prior to a transaction in a penny stock that is not otherwise exempt, the broker-dealer must make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction.
These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for stock
that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to
trade our common stock. We believe that the penny stock rules may discourage investor interest in and limit the marketability
and reduce the level of trading activity of our common shares. The market price of our common stock may suffer as a result. See
“Plan of Distribution,” below.
Future
sales of our securities could adversely affect the market price of our common stock and our future capital-raising activities
could involve the issuance of equity securities, which would dilute your investment and could result in a decline in the trading
price of our common stock.
We may
sell securities in the public or private equity markets if and when conditions are favorable, or at prices per share below the
current market price of our common stock, even if we do not have an immediate need for additional capital at that time. Sales
of substantial amounts of shares of our common stock, or the perception that such sales could occur, could adversely affect the
prevailing market price of our shares and our ability to raise capital. We may issue additional shares of common stock in future
financing transactions or as incentive compensation for our executive management and other key personnel, consultants and advisors.
Issuing any equity securities would be dilutive to the equity interests represented by our then-outstanding shares of common stock.
Moreover, sales of substantial amounts of shares in the public market, or the perception that such sales could occur, may adversely
affect the prevailing market price of our common stock and make it more difficult for us to raise additional capital. See “Description
of Common Stock - Stock Options”, below.
Purchasers
in this offering may experience immediate and substantial dilution.
The current
trading price of the common stock that may be offered for resale pursuant to this prospectus is higher than the current net tangible
book value per share of our common stock. Therefore, if you purchase shares of common stock in this offering, you may incur immediate
and substantial dilution in the pro forma net tangible book value per share of common stock from the price per share that you
pay for the common stock. In addition, you may experience dilution if we issue additional shares of common stock that we are permitted
or required to issue under outstanding options and under our equity incentive plan or other compensation plans that may be implemented
in the future. See “Description of Common Stock - Dilution,” below.
Our
certificate of incorporation allows for our board of directors to create new series of preferred stock without further approval
by our stockholders, which could adversely affect the rights of the holders of our common stock.
Our
board of directors has the authority to fix and determine the relative rights and preferences of preferred stock. Currently our
board of directors has the authority to designate and issue up to 5,000,000 shares of our preferred stock without further stockholder
approval. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to
holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed
to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption
of our common stock. In addition, our board of directors could authorize the issuance of a series of preferred stock that has
greater voting power than our common stock or that is convertible into our common stock, which could decrease the relative voting
power of our common stock or result in dilution to our existing stockholders. See “Description
of the Common Stock – Preferred Stock,” below.
If
we are unable to effectively implement or maintain a system of internal control over financial reporting, we may not be able to
accurately or timely report our financial results and our stock price could be adversely affected.
Section 404
of the Sarbanes-Oxley Act of 2002 and related regulations require our management to evaluate the effectiveness of our internal
control over financial reporting as of the end of each fiscal year. Based on its evaluations, our management concluded that there
were material weaknesses in our internal control over financial reporting and management concluded that the Company’s internal
controls over financial reporting were not effective as of March 31, 2019. Such material weaknesses related to inadequate internal
controls over financial reporting, and the lack of segregation of duties in our financial reporting process. Specifically, management
noted that we do not have a separately designated audit committee or an independent director. Any failure to implement the new
or improved controls necessary to remedy the material weaknesses described above, or difficulties encountered in the implementation
or operation of these controls, could harm our operations, decrease the reliability of our financial reporting, and cause us to
fail to meet our financial reporting obligations, which could adversely affect our business and reduce our stock price.
We
have not held regular annual meetings of stockholders in the past, and if we are required by the Nevada District Court to hold
an annual meeting pursuant to Nevada Revised Statutes §78.345(1), it could result in the unanticipated expenditure of funds, time
and other Company resources.
Section
2.09 of our Amended Bylaws provides that an annual meeting of stockholders shall be held each year on a date and at a time designated
by our board of directors. Section 78.345(1) of the Nevada Revised Statutes provides that, if there is a failure to hold the annual
meeting for a period of 18 months after the last election of directors, stockholders owning at least 15% of the voting power of
the outstanding common stock may apply to the Nevada district court to order the election of directors. We have not held regular
annual meetings of stockholders in the past because approximately 78.52% of our voting stock is owned by our largest stockholders,
thereby making it easy to obtain written consent in lieu of a meeting when necessary. In addition, Mr. DiPerna and Manchester,
collectively, have the right to appoint 4 out of a maximum of 5 directors that can serve on our board. Moreover, handling matters
by written consent allows us to save on financial and administrative resources required to prepare for and hold such annual meetings.
To our knowledge, no stockholder or director has requested our management to hold such an annual meeting and no stockholder or
director has applied to the Nevada district court seeking an order directing us to hold such annual meeting of stockholders. However,
if one or more stockholders or directors were to apply to the Nevada district court seeking such an order, and if the Nevada district
court were to order an annual meeting before we were prepared to hold one, the preparation for an annual meeting of stockholders
and the meeting itself could result in the unanticipated expenditure of funds, time, and other Company resources.
Our
board of directors is able to adopt recapitalizations through forward or reverse splits of our outstanding shares of common stock
without shareholder approval.
Pursuant
to Article IX of our second amended and restated articles of incorporation, our board of directors has the power, without obtaining
shareholder approval, to effectuate recapitalizations of the Company through forward or reverse splits of our outstanding common
stock. As a result of such provision, our board of directors can implement recapitalizations of the Company by effectuating a
forward or reverse stock split of our outstanding common stock, which would increase or decrease each of our shareholder’s
number of shares owned, and our shareholders will have no right to approve or disapprove any such action even if such actions
have a material adverse effect on them.
USE
OF PROCEEDS
This
prospectus relates to shares of our common stock that may be offered and sold from time to time by the selling shareholders. We
will receive no proceeds from the sale of shares of common stock by the selling shareholders. For more information about the selling
shareholders, See “Selling Shareholders,” below.
SELLING
SHAREHOLDERS
The table
below sets forth information concerning the resale of our shares by the selling shareholders. The selling shareholders acquired
our shares in private placement transactions. The total number of common shares sold under this prospectus may be adjusted to
reflect adjustments due to stock dividends, stock distributions, splits, combinations or recapitalizations with regard to the
common stock. Unless otherwise stated below in the footnotes, to our knowledge, no selling shareholder: (i) has held any position
or office with us during the three (3) years prior to the date of this prospectus, or (ii) is a broker-dealer, or an affiliate
of a broker-dealer.
Set forth
below is the name of each selling shareholder and the amount and percentage of common stock owned by each prior to the offering,
the shares to be sold in the offering, and the amount and percentage of common stock to be owned by each after the offering assuming
all shares are sold. The footnotes provide information about persons who have voting and dispositive power with respect to shares
held by the selling shareholders.
We
have registered up to 9,658,201 shares of common stock, consisting of (i) 7,801,213 shares issued in the 2017 Placement and (ii)
1,856,988 shares issued in the 2018 Placement. For a more complete summary of the foregoing transactions, refer to the disclosure
under the heading “Prospectus Summary—The Private Placement Transactions” beginning on page 4 of this prospectus.
The amounts
and percentages of shares beneficially owned are reported on the basis of SEC regulations governing the determination of beneficial
ownership of securities. Under SEC rules, a person is deemed a “beneficial owner” of a security if that person has
or shares voting power or investment power, which includes the power to dispose of or to direct the disposition of the security.
A person is also deemed a beneficial owner of any securities of which that person has a right to acquire beneficial ownership
within 60 days. Securities that can be acquired this way are deemed to be outstanding for purposes of computing a person’s
ownership percentage, but not for purposes of computing any other person’s percentage. Under these rules, more than one
person may be deemed a beneficial owner of the same securities, and a person may be deemed a beneficial owner of securities to
which that person has no economic interest.
The following
table is based on information provided to us by the selling shareholders and is as of September 30, 2019.
The selling shareholders may sell all or some of the shares of common stock they are offering and may sell unless indicated otherwise
in the footnotes below shares of our common stock otherwise pursuant to this prospectus. The tables below assume that each selling
shareholder sells all of the shares offered by it in offerings pursuant to this prospectus, and does not acquire any additional
shares. We are unable to determine the exact number of shares that will actually be sold or when or if these sales will occur.
Name
of Selling
Shareholder
|
|
Shares
of
Common
Stock
Beneficially
Owned
Pre-
Offering(1)
|
|
|
%
Owned
Beneficially
Pre-
Offering(1)(2)
|
|
|
Shares
of
Common
Stock to be
offered for
selling
shareholder’s
account(3)
|
|
|
Shares
of
Common
Stock
Beneficially
Owned
Post-
Offering(1)
|
|
|
%
Beneficially
Owned
Post-
Offering(1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Atwood P.
Collins (4)
|
|
|
44,444
|
|
|
|
*
|
|
|
|
44,444
|
|
|
|
—
|
|
|
|
—
|
|
Blackwell Partners LLC
– Series A (4)(5)
|
|
|
213,334
|
|
|
|
1.20
|
%
|
|
|
156,000
|
|
|
|
—
|
|
|
|
—
|
|
Christopher Davis (6)
|
|
|
400,000
|
|
|
|
2.24
|
|
|
|
400,000
|
|
|
|
—
|
|
|
|
—
|
|
Christopher B. Davis
Guardianship Dated 1/25/2007 (4)
|
|
|
122,667
|
|
|
|
*
|
|
|
|
122,667
|
|
|
|
—
|
|
|
|
—
|
|
Clive Anthony Caunter
(6)
|
|
|
227,273
|
|
|
|
1.27
|
|
|
|
227,273
|
|
|
|
—
|
|
|
|
—
|
|
Dick Horn (6)
|
|
|
76,000
|
|
|
|
*
|
|
|
|
76,000
|
|
|
|
—
|
|
|
|
—
|
|
Dogma Holdings Inc.
(4)
|
|
|
22,002
|
|
|
|
*
|
|
|
|
22,002
|
|
|
|
—
|
|
|
|
—
|
|
Frank Family 1996 Trust
|
|
|
489,999
|
|
|
|
2.74
|
%
|
|
|
489,899
|
(7)
|
|
|
—
|
|
|
|
—
|
|
Harry Charles Mills
Scio (6)
|
|
|
40,000
|
|
|
|
*
|
|
|
|
40,000
|
|
|
|
—
|
|
|
|
—
|
|
James E. Besser
|
|
|
6,384,691
|
(8)
|
|
|
35.73
|
%
|
|
|
88,889
|
(4)
|
|
|
6,295,802
|
|
|
|
35.23
|
%
|
Jason Pickett (6)
|
|
|
151,515
|
|
|
|
*
|
|
|
|
151,515
|
|
|
|
—
|
|
|
|
—
|
|
JEB Partners, LP
|
|
|
6,384,691
|
(8)
|
|
|
35.73
|
%
|
|
|
917,576
|
(9)
|
|
|
5,467,115
|
|
|
|
30.60
|
%
|
JOJ Holdings, LLC (6)
|
|
|
75,758
|
|
|
|
*
|
|
|
|
75,758
|
|
|
|
—
|
|
|
|
—
|
|
Lawrence Groo (6)
|
|
|
38,000
|
|
|
|
*
|
|
|
|
38,000
|
|
|
|
—
|
|
|
|
—
|
|
Manchester Explorer,
LP
|
|
|
6,384,691
|
(8)
|
|
|
35.73
|
%
|
|
|
5,016,566
|
(10)
|
|
|
1,368,125
|
|
|
|
7.66
|
%
|
Michael Malouf (6)
|
|
|
151,515
|
|
|
|
*
|
|
|
|
151,515
|
|
|
|
—
|
|
|
|
—
|
|
Paul DiPerna Trust
|
|
|
7,638,117
|
(11)
|
|
|
42.74
|
%
|
|
|
303,030
|
(6)
|
|
|
7,335,087
|
|
|
|
41.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pepper Grove Holdings
Limited (6)
|
|
|
151,515
|
|
|
|
*
|
|
|
|
151,515
|
|
|
|
—
|
|
|
|
*
|
|
Peter Karabatos (4)
|
|
|
13,333
|
|
|
|
*
|
|
|
|
13,333
|
|
|
|
—
|
|
|
|
*
|
|
Ray Gallo (4)
|
|
|
44,444
|
|
|
|
*
|
|
|
|
44,444
|
|
|
|
—
|
|
|
|
*
|
|
Robert Andrade (4)
|
|
|
11,111
|
|
|
|
*
|
|
|
|
11,111
|
|
|
|
—
|
|
|
|
*
|
|
Robert Gambi (6)
|
|
|
50,000
|
|
|
|
*
|
|
|
|
50,000
|
|
|
|
—
|
|
|
|
*
|
|
Robin Russell (6)
|
|
|
76,000
|
|
|
|
*
|
|
|
|
76,000
|
|
|
|
—
|
|
|
|
*
|
|
Rostilav Raykov (12)
|
|
|
89,092
|
|
|
|
*
|
|
|
|
89,092
|
|
|
|
—
|
|
|
|
*
|
|
Samuel Davis Trust FBO
Alma Davis David (4)
|
|
|
44,000
|
|
|
|
*
|
|
|
|
44,000
|
|
|
|
—
|
|
|
|
*
|
|
Sarah Ball (4)
|
|
|
8,882
|
|
|
|
*
|
|
|
|
8,882
|
|
|
|
—
|
|
|
|
*
|
|
Simon Ball (4)
|
|
|
8,882
|
|
|
|
*
|
|
|
|
8,882
|
|
|
|
—
|
|
|
|
*
|
|
683 Capital Partners,
LP (4)
|
|
|
444,444
|
|
|
|
2.49
|
|
|
|
444,444
|
|
|
|
—
|
|
|
|
*
|
|
Solas Capital Partners,
LP (4)(5)
|
|
|
213,334
|
|
|
|
1.20
|
%
|
|
|
21,778
|
|
|
|
—
|
|
|
|
*
|
|
Solas Capital Partners
II, LP (4)(5)
|
|
|
213,334
|
|
|
|
1.20
|
%
|
|
|
35,556
|
|
|
|
—
|
|
|
|
*
|
|
The Entrust Group FBO
William Meehan IRA 7230006842 (4)
|
|
|
35,000
|
|
|
|
*
|
|
|
|
35,000
|
|
|
|
—
|
|
|
|
*
|
|
Varana Capital Focused,
LP (6)
|
|
|
303,030
|
|
|
|
1.70
|
|
|
|
303,030
|
|
|
|
—
|
|
|
|
*
|
|
*Represents
less than 1%
|
(1)
|
Beneficial
ownership includes shares of common stock as to which a person or group has sole or shared
voting power or investment power. Shares of common stock subject to options, warrants
or other convertible securities that are exercisable or convertible currently or within
60 days, are deemed outstanding for purposes of computing the number of shares beneficially
owned and percentage ownership of the person or group holding such options, warrants
or convertible securities, but are not deemed outstanding for computing the percentage
of any other person.
|
|
(2)
|
Percentages
are based on 17,870,261 shares of common stock outstanding as of September 30, 2019.
|
|
(3)
|
Represents
shares of our common stock issued exclusively in the 2017 Placement and the 2018 Placement.
|
|
(4)
|
Includes
shares purchased in the 2018 Placement.
|
|
(5)
|
Includes
(i) 156,000 shares directly held, which shares constitute a portion of the assets of
Blackwell Partners, LLC-Series A for which Solas Capital Management, LLC (“Solas
Capital Management”), acts as its investment manager for and has voting and dispositive
power over; (ii) 21,778 shares held directly by Solas Capital Partners, LP, of which
Solas Capital Management is the investment manager of and has voting and dispositive
power over; and (iii) 35,556 shares held directly by Solas Capital Partners II, LP, of
which Solas Capital Management is the investment manager of and has voting and dispositive
power over. Such person disclaims beneficial ownership of all shares not held directly
by such person and this prospectus shall not be deemed an admission that such person
is the beneficial owner of such shares, except to the extent of such persons pecuniary
interest therein.
|
|
(6)
|
Includes
shares purchased in the 2017 Placement.
|
|
(7)
|
Includes
(i) 378,778 shares purchased in the 2017 Placement, and (ii) 111,111 shares purchased
in the 2018 Placement. The address for the Frank Family Trust is c/o Manchester Management,
LLC, 3 West Hill Place, Boston, MA 02114. Such person disclaims beneficial ownership
of all shares not held directly by such person and this prospectus shall not be deemed
an admission that such person is the beneficial owner of such shares, except to the extent
of such persons pecuniary interest therein.
|
|
(8)
|
Includes
(i) 180,830 shares directly held by Mr. Besser, which shares were received in the Acquisition
in exchange for Mr. Besser’s shares of Quasuras; (ii) 88,889 shares directly held
by Mr. Besser who purchased such shares in the 2018 Placement; (iii) 4,545,455 shares
held by Manchester who purchased such shares in the 2017 Placement; (iv) 471,111 shares
held by Manchester who purchased such shares in the 2018 Placement; (v) 757,576 shares
held by JEB Partners who purchased such shares in the 2017 Placement; (vi) 160,000 shares
held by JEB Partners who purchased such shares in the 2018 Placement; and (vii) 180,830
shares held by Mr. Frank, which shares were received in the Acquisition in exchange for
Mr. Frank’s shares of Quasuras. Mr. Besser as the managing member and Mr. Frank
as the portfolio manager and consultant of Manchester Management, LLC (“MMC”),
the general partner of Manchester and JEB Partners, have shared voting and dispositive
power over shares held by Manchester and JEB Partners. The address for Mr. Besser is
c/o Manchester Management, LLC, 3 West Hill Place, Boston, MA 02114. Such person disclaims
beneficial ownership of all shares not held directly by such person and this prospectus
shall not be deemed an admission that such person is the beneficial owner of such shares,
except to the extent of such persons pecuniary interest therein.
|
|
(9)
|
Includes
(i) 757,576 shares directly held and purchased in the 2017 Placement; and (ii) 160,000
shares directly held and purchased in the 2018 Placement. The address for JEB Partners
is c/o Manchester Management, LLC, 3 West Hill Place, Boston, MA 02114. Such person
disclaims beneficial ownership of all shares not held directly by such person and this
prospectus shall not be deemed an admission that such person is the beneficial owner
of such shares, except to the extent of such persons pecuniary interest therein.
|
|
(10)
|
Includes
(i) 4,545,455 shares purchased by Manchester in the 2017 Placement; and (ii) 471,111
shares purchased by Manchester in the 2018 Placement. The address for Manchester is c/o
Manchester Management, LLC, 3 West Hill Place, Boston, MA 02114. Such person disclaims
beneficial ownership of all shares not held directly by such person and this prospectus
shall not be deemed an admission that such person is the beneficial owner of such shares,
except to the extent of such persons pecuniary interest therein.
|
|
(11)
|
Includes
(i) 303,030 shares held directly by the Paul DiPerna Trust, which shares were purchased
by the Paul DiPerna Trust in the 2017 Placement; (ii) 7,270,400 shares acquired by Mr.
DiPerna in the Acquisition in exchange for his shares of Quasuras; and (iii) 64,687 shares
issuable upon exercise of fully vested stock options issued to Mr. DiPerna under our
EIP (as defined below). Mr. DiPerna is our Chairman,
Chief Executive Officer, Chief Financial Officer, Secretary and Director. The address
for Mr. DiPerna is 800 West Valley Parkway, Suite 203, Escondido, CA 92025. Such person
disclaims beneficial ownership of all shares not held directly by such person and this
prospectus shall not be deemed an admission that such person is the beneficial owner
of such shares, except to the extent of such persons pecuniary interest therein.
|
|
(12)
|
Includes
(i) 75,758 shares purchased in the 2017 Placement; and (ii) 13,334 shares purchased in
the 2018 Placement. Such person disclaims beneficial ownership of all shares not held
directly by such person and this prospectus shall not be deemed an admission that such
person is the beneficial owner of such shares, except to the extent of such persons pecuniary
interest therein.
|
PLAN
OF DISTRIBUTION
We
are not offering any of the selling shareholders’ shares. We will not receive any of the proceeds from any sale by the selling
shareholders.
The selling
shareholders, which for this purpose includes donees, pledgees, transferees or other successors-in-interest selling shares of
common stock or interests in shares of common stock received after the date of this prospectus from a selling shareholder as a
gift, pledge, dividend, distribution or other transfer, may, from time to time, sell, transfer or otherwise dispose of any or
all of their shares of common stock or interests in shares of common stock on any stock exchange, market or trading facility on
which the shares are traded, or in private transactions. The selling shareholders will sell all or a portion of these shares,
from time to time, at a fixed price of $3.00 per share until our common stock is quoted on the OTC Bulletin Board, OTCQX or OTCQB,
and, thereafter, at prevailing market prices or privately negotiated prices.
The selling
shareholders may use any one or more of the following methods when selling our shares or interests in our shares:
|
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer solicits purchasers;
|
|
·
|
block
trades in which a broker-dealer will attempt to sell the shares as agent, but may position
and resell a portion of the block as principal to facilitate the transaction;
|
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for its account;
|
|
·
|
on
any national securities exchange or quotation service on which the shares may be listed
or quoted at the time of sale;
|
|
·
|
privately
negotiated transactions;
|
|
·
|
short
sales effected after the date the registration statement of which this prospectus is
a part is declared effective by the SEC;
|
|
·
|
through
the writing or settlement of options or other hedging transactions, whether through an
options exchange or otherwise;
|
|
·
|
broker-dealers
may agree with the selling shareholders to sell a specified number of such shares at
a stipulated price per share;
|
|
·
|
a
combination of any such methods of sale; and
|
|
·
|
any
other method permitted by applicable law.
|
The selling
shareholders may, from time to time, pledge or grant a security interest in some or all of our shares owned by them and, if they
default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common
stock, from time to time, under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable
provision of the Securities Act amending the list of selling shareholders to include the pledgee, transferee or other successors
in interest as selling shareholders under this prospectus. The selling shareholders may also transfer our shares in other circumstances,
in which case the transferees, pledgees or other successors will be the selling beneficial owners for purposes of this prospectus.
In connection
with the sale of our common shares or interests therein, the selling shareholders may enter into hedging transactions with broker-dealers
or other financial institutions, which may in turn engage in short sales of our shares in the course of hedging the positions
they assume. The selling shareholders may also sell shares of our common stock short and deliver these securities to close out
their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The selling
shareholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation
of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares
offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus
(as supplemented or amended to reflect such transaction).
The aggregate
proceeds to the selling shareholders from the sale of the common stock offered by them will be the purchase price of the common
stock less discounts or commissions, if any. Each of the selling shareholders reserves the right to accept and, together with
their agents from time to time, to reject, in whole or in part, any proposed purchase of common stock to be made directly or through
agents. We will not receive any of the proceeds from sales of shares by the selling shareholders.
The selling
shareholders may also resell all or a portion of the shares in open market transactions in reliance upon Rule 144 under the Securities
Act, provided that they meet the criteria and conform to the requirements of that rule, or under Section 4(1) of the Securities
Act, if available, rather than by means of this prospectus.
In connection
with the sale of shares of common stock covered by this prospectus, broker-dealers may receive commissions or other compensation
from a selling shareholder in the form of commissions, discounts or concessions. Broker-dealers may also receive compensation
from purchasers of the shares of common stock for whom they act as agents or to whom they sell as principals or both. Compensation
as to a particular broker-dealer may be in excess of customary commissions or in amounts to be negotiated. In connection with
any underwritten offering, underwriters may receive compensation in the form of discounts, concessions or commissions from a selling
shareholder or from purchasers of the shares for whom they act as agents. Underwriters may sell the shares of common stock to
or through dealers, and such dealers may receive compensation in the form of discounts, concessions or commissions from the underwriters
and/or commissions from the purchasers for whom they may act as agents. Any underwriters, broker-dealers, agents or other persons
acting on behalf of a selling shareholder that participate in the distribution of the shares of common stock may be deemed to
be “underwriters” within the meaning of the Securities Act, and any profit on the sale of the shares of common stock
by them and any discounts, commissions or concessions received by any of those underwriters, broker-dealers, agents or other persons
may be deemed to be underwriting discounts and commissions under the Securities Act. The aggregate amount of compensation in the
form of underwriting discounts, concessions, commissions or fees and any profit on the resale of shares by the selling shareholders
that may be deemed to be underwriting compensation pursuant to Financial Industry Regulatory Authority, Inc., rules and regulations
will not exceed applicable limits.
The selling
shareholders and any underwriters, broker-dealers or agents that participate in the sale of the common stock or interests therein
may be “underwriters” within the meaning of Section 2(11) of the Securities Act. Any discounts, commissions, concessions
or profit they earn on any resale of the shares may be underwriting discounts and commissions under the Securities Act. Selling
shareholders who are “underwriters” within the meaning of Section 2(11) of the Securities Act will be subject to the
prospectus delivery requirements of the Securities Act and may be subject to certain statutory liabilities, including but not
limited to, Sections 11, 12 and 17 of the Securities Act and Rule 10b-5 under the Exchange Act.
To the
extent required, the shares of our common stock to be sold, the names of the selling shareholders, the respective purchase prices
and public offering prices, the names of any agent, dealer or underwriter, and any applicable commissions or discounts with respect
to a particular offer will be set forth in an accompanying prospectus supplement or, if appropriate, a post-effective amendment
to the registration statement that includes this prospectus.
In order
to comply with the securities laws of some states, if applicable, the common stock may be sold in these jurisdictions only through
registered or licensed brokers or dealers. In addition, in some states the common stock may not be sold unless it has been registered
or qualified for sale or an exemption from registration or qualification requirements is available and is complied with.
We have
advised the selling shareholders that the anti-manipulation rules of Regulation M under the Exchange Act may apply to sales of
shares in the market and to the activities of the selling shareholders and their affiliates. In addition, to the extent applicable,
we will make copies of this prospectus (as it may be supplemented or amended from time to time) available to the selling shareholders
for the purpose of satisfying the prospectus delivery requirements of the Securities Act. The selling shareholders may indemnify
any broker-dealer that participates in transactions involving the sale of the shares against certain liabilities, including liabilities
arising under the Securities Act. All of the foregoing may affect the marketability of the common stock and the ability of any
person or entity to engage in market-making activities with respect to our common stock.
Penny
Stock Rules / Section 15(g) of the Exchange Act
Our shares
may be considered penny stock covered by Section 15(g) of the Securities Exchange Act of 1934, as amended, and Rules 15g-1 through
15g-6 promulgated thereunder. They impose additional sales practice requirements on broker/dealers who sell our securities to
persons other than established customers and accredited investors who are generally institutions with assets in excess of $5,000,000
or individuals with net worth in excess of $1,000,000 (including spouse’s net worth and may include the fair market value
of home furnishings and automobiles, but excluding from the calculation the value any primary residence and the related amount
of any indebtedness on primary residence up to the fair market value of the primary residence (any indebtedness that exceeds the
fair market value of the primary residence must be deducted from net worth calculation)) or annual income exceeding $200,000 or
$300,000 jointly with their spouses.
Rule 15g-1
exempts a number of specific transactions from the scope of the penny stock rules. Rule 15g-2 declares unlawful broker/dealer
transactions in penny stocks unless the broker/dealer has first provided to the customer a standardized disclosure document.
Rule 15g-3
provides that it is unlawful for a broker/dealer to engage in a penny stock transaction unless the broker/dealer first discloses
and subsequently confirms to the customer current quotation prices or similar market information concerning the penny stock in
question.
Rule 15g-4
prohibits broker/dealers from completing penny stock transactions for a customer unless the broker/dealer first discloses to the
customer the amount of compensation or other remuneration received as a result of the penny stock transaction.
Rule 15g-5
requires that a broker/dealer executing a penny stock transaction, other than one exempt under Rule 15g-1, disclose to its customer,
at the time of or prior to the transaction, information about the sales person’s compensation.
Rule 15g-6
requires broker/dealers selling penny stocks to provide their customers with monthly account statements.
Rule 15g-9
requires broker/dealers to approved the transaction for the customer’s account; obtain a written agreement from the customer
setting forth the identity and quantity of the stock being purchased; obtain from the customer information regarding his investment
experience; make a determination that the investment is suitable for the investor; deliver to the customer a written statement
for the basis for the suitability determination and that it is unlawful to effect the transaction without written authorization
for the transaction from the customer.
The application
of the penny stock rules may affect your ability to resell your shares due to broker-dealer reluctance to undertake the above-described
regulatory burdens.
DETERMINATION
OF OFFERING PRICE
The
selling shareholders will sell all or a portion of these shares, from time to time, at a fixed price of $3.00 per share until
our common stock is quoted on the OTC Bulletin Board, OTCQX or OTCQB, and, thereafter, at prevailing market prices or privately
negotiated prices.
DESCRIPTION
OF COMMON STOCK
We are
authorized to issue up to 50,000,000 shares of common stock, par value $0.001 per share. As of September 30, 2019, we had 17,870,261
common shares issued and outstanding held by approximately 91 holders of record.
Common
Stock
Each shareholder
of our common stock is entitled to a pro rata share of any cash distributions made to shareholders, including any dividend payments.
The holders of our common stock are entitled to one vote for each share of record on all matters to be voted on by shareholders.
There is no cumulative voting with respect to the election of our directors or any other matter. Therefore, under our governing
documents, the holders of more than 50% of the shares voted for the election of those directors can elect all of the directors.
However, pursuant to the July 24, 2017 agreement in which we acquired Quasuras, until July 24, 2022, our board of directors will
consist of no less than 2 and no more than 5 directors, of which Mr. DiPerna in addition to being the chairman of our board has
the right to appoint 2 directors and Manchester has the right to appoint 2 directors, of which Mr. Frank constitutes 1 such director.
As a result, until July 24, 2022, shareholders will not have the ability to elect any directors either at the annual meeting or
by written consent. Our board of directors is elected as a single class.
The
holders of our common stock are entitled to receive dividends when and if declared by our board of directors from funds legally
available therefore. Cash dividends are at the sole discretion of our board of directors.
In the event of our liquidation, dissolution or winding up, the holders of common stock are entitled to share ratably in all assets
remaining available for distribution to them after payment of our liabilities and after provision has been made for each class
of stock, if any, having any preference in relation to our common stock. Holders of shares of our common stock have no conversion,
preemptive or other subscription rights, and there are no redemption provisions applicable to our common stock.
Dividend
Policy
We have
never paid dividends and have no current plans to do so. We currently anticipate that we will retain all of our future earnings,
if any, for use in the development and expansion of our business and for general corporate purposes. Any determination to pay
dividends in the future will be at the discretion of our board of directors and will depend upon our results of operations, financial
condition, and other factors that the board of directors, in its discretion, may deem relevant. There are no restrictions, other
than applicable law, on the ability of the board of directors to declare and pay dividends.
Preferred
Stock
Our
board of directors is authorized to issue up to 5,000,000 shares of non-voting preferred stock, par value $0.001 per share, in
one or more series, without stockholder approval. We have not issued, nor established
any series for, any of our preferred stock.
Stock
Options
On
October 19, 2018, our board of directors approved our 2017 Equity Incentive Plan (“EIP”) that reserves 3,000,000 shares
of common stock of the Company to be issued. Under the Company’s EIP, eligible employees, directors and consultants are
granted options to purchase shares of common stock of the Company. The EIP is administered by the Company’s board of directors
or, in the alternative, if necessary, a committee designated by the board of directors, and has the sole power over the exercise
of the EIP. The board of directors determines whether the EIP will allow for the issuance of shares of common stock or an option
to purchase shares of common stock, such option designated as either an incentive stock option or a non-qualified stock option.
As of June 30, 2019, stock options to purchase 1,557,019 shares have been granted under our EIP.
The exercise
or purchase price shall be calculated as follows:
|
(i)
|
In
the case of an incentive stock option, (A) granted to employees, directors and consultants
who, at the time of the grant of such incentive stock option own stock representing more
than ten percent (10%) of the voting power of all classes of stock of the Company, the
per share exercise price shall be not less than one hundred ten percent (110%) of the
fair market value per share on the date of grant; or (B) granted to employees, directors
and consultants other than to employees, directors and consultants described in the preceding
clause, the per share exercise price shall be not less than one hundred percent (100%)
of the fair market value per share on the date of grant;
|
|
(ii)
|
In
the case of a non-qualified stock option, the per share exercise price shall be not less
than one hundred percent (100%) of the fair market value per share on the date of grant
unless otherwise determined by the board of directors; and
|
|
(iii)
|
In
the case of other grants, such price as is determined by the board of directors.
|
The board
of directors is responsible for determining the consideration to be paid for the shares of common stock to be issued upon exercise
or purchase. The EIP generally does not allow for the transfer of the options, and the board of directors may amend, suspend or
terminate the EIP at any time.
Dilution
The current
trading price of the common stock that may be offered for resale pursuant to this prospectus is higher than the current net tangible
book value per share of our common stock. Therefore, if you purchase shares of common stock in this offering, you may incur immediate
and substantial dilution in the pro forma net tangible book value per share of common stock from the price per share that you
pay for the common stock.
This
offering is for sales of common stock by the selling shareholders on a continuous or delayed basis in the future. Neither sales
of common stock by the selling shareholders nor cash payments made by the purchasers of the common stock will result in a change
to the net tangible book value per share before and after the sale of the shares by the selling shareholders. Prospective investors
should be aware, however, that the price of shares of common stock may not bear any rational relationship to the net tangible
book value per share of the common stock. See “Risk Factors – Purchases in this offering may experience immediate
and substantial dilution,” above.
OUR
BUSINESS
Overview
We
are 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 limited adoption of currently available pumps for insulin dependent
people with diabetes.
It is
our view that many people with diabetes currently experience a number of problems and/or shortcomings with the current products
in the insulin pump market and that, by alleviating these issues, we can expand the scope insulin pump usage. We believe that,
to achieve broader market acceptance, an insulin pump must be simpler and less time consuming to operate, as well as more intuitive
to both patients and physicians in order to reduce the friction of current products. We also believe that such a product must
be specifically designed to meet the general guidelines of third party payors, private and public insurance companies, preferred
provider organizations and other managed care providers with particular focus on the guidelines established by the Center for
Medicare and Medicaid Services, CMS, which administrates the United States Medicare program. This will increase the likelihood
that such third party payors will cover all or a substantial portion of the purchase price and recurring costs
of the use of our insulin pump (with manageable co-payments, as applicable), so that our product will be affordable by users.
See “Risk Factor – Healthcare reform laws could adversely affect our product and financial condition,” above.
Among
the more prominent issues are:
|
·
|
Complexity:
Many existing pumps are highly complex and require significant technical expertise to
be used effectively. We believe such pumps were designed for so called “super users”
who have high levels of motivation and technical competence and that the complexity of
such existing pumps proves daunting to less technically inclined users.
|
|
·
|
Cumbersome:
We believe that a majority of existing pumps are bulky and difficult to manage, in many
cases requiring additional equipment to introduce a catheter to the patient’s body
and 48 inches of tubing, which must be replaced frequently, to connect this catheter
to a pump. This requires users to carry spare parts and other equipment adding to the
cumbersomeness of using the pump.
|
|
·
|
Cost:
Costs associated with insulin pump therapy are high and can be prohibitive, especially
for those on fixed or limited incomes. Although, these costs vary by pump, multi thousand
dollar upfront payments, often with substantial co-payments, in addition to possible
daily co-payments on consumables are not uncommon. Such expenses often place current
pumps out of reach for patients and make insurers very hesitant to pay for them, leading
to limited or nonexistent reimbursement/coverage.
|
The
Market
Diabetes
is a chronic, life-threatening disease for which there is no known cure. Type 1 diabetes is an auto immune disease whereby the
immune system attacks and destroys beta cells in the pancreas leaving it unable to produce insulin. Type 2 diabetes is most commonly
caused by the development of insulin resistance that prevents the body from properly using insulin. Insulin is a life sustaining
hormone that allows cells in the body to absorb glucose and store it or covert it to energy. Those with diabetes are left unable
to properly process sugars resulting in excessive sugar in their bloodstream. If not closely monitored and properly treated, such
excess blood sugar can lead to serious medical complications including damage to organs and tissues, seizures, coma, and death.
By injecting controlled doses of insulin, people suffering from diabetes can reduce their blood glucose levels to mitigate these
complications and allow better processing and storage of sugars.
The
International Diabetes Federation, or IDF, estimates that in 2017, approximately 425 million people had diabetes worldwide
and that by 2045, this number will increase to 629 million people worldwide. According to the Centers for Disease Control
and Prevention, or CDC, 2017 National Diabetes Statistics Report, approximately 23 million people in the United States have
diagnosed diabetes, of which type 1 diabetes accounts for approximately 5% to 10%, or approximately 1.2 to 2.3 million people.
All people with type 1 diabetes require daily insulin. Of people with type 2 diabetes in the United States, according to the CDC,
approximately 14%, or 3.2 million people, require insulin to manage their diabetes.
Currently,
there are two primary therapies available for insulin-dependent people with diabetes: multiple daily insulin injections directly
into the body through syringes or insulin pens, referred to as Multiple Daily Injection (MDI) therapy, or the use of an insulin
pump to deliver a continuous subcutaneous insulin infusion into the body, and user directed infusions as appropriate (Continuous
Subcutaneous Insulin Injections (CSII)) therapy. Each is designed to supplement or replace
the insulin-producing function of the pancreas. Generally, CSII therapy is considered to provide a number of advantages over
MDI therapy primarily in that the continuous infusion of insulin allows absorption of glucose in a controlled manner minimizing
large doses of insulin required before meals. The steady flow of insulin and the easier application of mealtime boluses has
been shown by numerous studies to result in lower HbA1c’s (a measure of the amount of glucose in the bloodstream) when compared
to MDI therapy. This has proven to improve glucose control and reduce overall long term adverse effects and emergency
room visits associated with low glucose.
Notwithstanding
the advantages of pump usage, the difficulty in use resulting from the complexity and cumbersome design of available insulin
pumps, as well as high and often prohibitive costs, has resulted not only in dissatisfaction among many existing pump users, but
also has severely limited the adoption rate of insulin pumps by a segment of the diabetes population, referred to herein as
“almost pumpers.” We generally define almost pumpers as persons with insulin dependent diabetes who are aware of pumps
and the potential benefits, however, because of the shortcomings and problems prevalent in available insulin pumps, continue to
receive their daily insulin through insulin injections. Our initial target market for our insulin pump is the almost pumper population
located in the United States. Based upon our knowledge of the diabetes industry and information available and/or obtained
by us, we believe that an estimated 35% of Americans with type 1 diabetes use insulin pump therapy and an estimated 30%
of Americans with type 1 diabetes are who we classify as “almost pumpers.” We believe our proposed product has
the potential to substantially improve the day to day quality of life of such persons. In addition to educating almost pumpers
as to why our insulin pump is a “better” solution to their treatment needs, with regard to physicians, we need
to inform endocrinologists, who typically prescribe pump usage, about the superior qualities of our product and convince general
practitioners, who have been historically skeptical of the heightened support inherent in insulin pumps, of our product’s
ease of use and convenience.
In an article
entitled “Evaluation of the Cascade of Diabetes Care in the United States, 2005-2016” published in the Journal of
Academy of Medical Sciences on August 12, 2019, Pooyan Kazemian PhD and various co-authors found that rates of adults diagnosed
with diabetes, achieving A1c, blood pressure and cholesterol targets, had not improved significantly from 2005 to 2016. Specifically,
the study found that only 1 in 4 adults with diabetes in the United States achieved composite goals during this period. The study
indicated that, although there have been significant advances in diabetes drugs, technology and clinical guidelines since 2005,
the most formidable challenges confronting future advances in diabetes care may be in providing access to high quality treatment.
We believe that the study’s conclusions reflect the impact of the industry’s singular focus on improving the care
of the highly motivated, well insured and technologically proficient people with the opportunity and capability of using pumps
currently prevalent in the market, leaving non pumpers behind. These patients are left with dated and less effective devices,
highlighting the opportunity of providing technology that is appropriate for this badly underserved segment of the population
of Americans with diabetes.
The
Opportunity
We
believe an insulin pump having the correct mix of efficiency, reliability, features that are easy to understand and use, offer
and are offered at an affordable price point will drive a substantial percentage of “almost pumpers” to use insulin
pumps. We believe that such an insulin pump can improve glucose control, and, therefore,
the user’s quality of life while substantially mitigating adverse diabetes related health risks and many if not all of the
challenges and shortcomings discussed herein.
As set
forth in general terms herein, we believe existing pumps have numerous shortcomings and challenges including:
Outdated
Style. Consumer electronics devices have evolved in both form and function. Diabetes pumps have not experienced similar
progress. We believe that consumers will be more receptive to products designed with the user experience in mind and that many
have low tolerance for complex, difficult procedures for use and maintenance of products.
Bulky
size. We believe that consumers view traditional pumps, especially those with tubing, to be large, bulky, and inconvenient
to carry or wear, especially when compared to modern consumer electronic devices. The size of the pump further contributes to
users being embarrassed by the pump. We believe a simple patch style of pump will drive adoption.
Pump
mechanism limitations. Traditional pumps generally utilize a syringe and plunger mechanism to deliver insulin. We believe
this design limits the ability to reduce the size of the pump, and also potentially exposes the user to the unintended delivery
of the full volume of insulin within the pump, which can cause hypoglycemia or death. We believe that the fear of adverse health
events due to technical malfunctions related to traditional pump mechanism limitations deters the adoption of insulin pump therapy.
Costs.
Existing pumps are expensive, with the more popular models having purchase prices exceeding $4,000 (for individuals without
health insurance coverage) and often require significant patient copays (for those patients with insurance coverage). Others have
daily use costs that exceed the reimbursement rates of many health insurance plans, forcing some users to spend thousands of dollars
a year in copays. We believe this makes insurers hesitant to pay for pumps for any but their best and most compliant patients
and places such pumps out of reach for many patients who cannot afford such out of pocket expenses and/or do not have the clinical
care professionals to advocate for them with insurers.
Our
Solution
The
Company’s proposed pump is being designed and developed to address the above shortcomings and to appeal to the substantial
group of “almost pumpers” currently interested in using an insulin pump, but have not done so because of the complexity,
cost or cumbersome nature of existing products.
We have
substantially completed the general engineering and mechanical aspects of our current insulin pump prototype. However, we are
continuing to modify, refine and fine tune our prototype so that it meets the general needs and preferences of our almost pumper
target market as determined by us based upon our knowledge of the diabetes industry and information available and/or obtained
by us. including feedback obtained from almost pumpers and their caregivers. We are also in the process of modifying our product
so that meets the general guidelines of third party payors. To assist us in making these coverage driven modifications and
refinements, we have retained an independent consulting firm focused on ensuring that our product satisfies the coverage and reimbursement
criteria of such third party payors.
Over the past
two years we have designed and developed working prototypes of our insulin pump. During this period, we also have and continue
to expend substantial time and resources to better understand the needs and preferences of almost pumpers to enable us to modify
and refine our insulin pump to the needs and preferences of this target market. We continue to obtain specific feedback and
information from our target market and their care givers through one on one interviews, human factors testing, on-line and in
person surveys, focus groups both at industry related tradeshows and conferences.
The
human factors studies that we have conducted, and will continue to conduct take place in three stages. Stage 1 studies were conducted
to validate the almost pumper market segment. Stage 2 studies have been conducted to
identify specific potential features and attributes for our prototype pump based on feedback from almost pumper test participants.
For example, based on participant feedback, we have modified our pump to meet several user preferences, such as enhanced compatibility
with smart phones, the flexibility for pump usage for limited periods of time without a controller and the ability to temporarily
remove the pump. Stage 3 studies, which we expect to conduct after obtaining 510(k) clearance from the FDA, will be conducted
to validate the design and functionality of our product based on actual treatment of participants (i.e., using our pump to inject
insulin). Currently, we are at the very end of Stage 2.
Our current
objective is to successfully design, develop and obtain all required regulatory approvals for our proposed insulin pump and, thereafter,
commercialize, market and sell the finished product. At the point that we feel confident of the FDA approval or clearance process
relating to our insulin pump, we will start manufacturing our insulin pump. For cost efficiency, we will select a manufacturer
or manufacturers through a competitive bidding process. We will need to be cognizant of our prospective manufacturer’s
ability to comply , and maintain compliance with, the FDA’ quality system regulations. We intend to make our product available
to almost pumpers across mostly all socioeconomic groups in the United States. To that end, we intend to recruit and retain a
sales and marketing team, familiar with our product’s regulatory environment, to launch a promotional campaign
for our insulin pump substantially focused on the almost pumper target market. For a general discussion of the steps to
commercialization of our pump and the hurdles that we will need to surmount, see “Prospectus Summary – Pre-Commercialization
Steps.”
To achieve
our above stated immediate and current goals, we intend to pursue the following business strategies:
Use
of Innovative proprietary technology. Our design and development team is led by Paul DiPerna, our chairman, chief executive
officer and a 40% shareholder. Mr. DiPerna has over 30 years of high level experience in developing, designing, obtaining FDA
approval and the commercialization of medical devices, including consumer and hospital based insulin pumps while working for such
industry leading medical device companies as Baxter Healthcare, Inc., a supplier of drug therapies and associated pumping technologies
and founding Tandem Diabetes Care, Inc, a leading supplier of pumping technology to the existing insulin pumping marketplace.
Based upon Mr. DiPerna’s substantial experience in engineering design and innovative technology in the medical device
industry and in particular with insulin pumps, we have created certain critical proprietary technology that will be incorporated
into our proposed insulin pump. We believe our technology will greatly assist us in creating a simpler user-friendly pump.
See “Risk Factor – Technological Breakthroughs in diabetes monitoring, treatment or prevention could render our insulin
pump obsolete,” above.
Keep
costs low during our design and development process. To attempt to ensure that we have sufficient funds to design, develop
and obtain all required regulatory approvals for our proposed insulin pump without having to sacrifice quality and efficiency,
we intend to maintain a tight budget and limit expenditures where possible. We believe this will be possible because of the extensive
knowledge and experience of Mr. DiPerna, not only in the diabetes industry, but more specifically in the insulin pump device market.
In addition to his experience in designing and developing insulin pumps as well as other medical devices, Mr. DiPerna has demonstrated
a proven ability to manage a small and focused development team. We currently expect various other expenses, such as product
scale up, sales and marketing costs, will not be incurred until such time as development work is completed and regulatory clearance
and approvals are obtained. See “Risk Factor – we are a developmental stage medical device company and have a history
of significant operating losses; we expect to continue to incur operating losses and we may never achieve or maintain profitability,”
above.
Employ
experienced engineers recruited, supervised and led by Mr. DiPerna, a highly experienced and respected engineer and executive
in the insulin pump industry. To attempt to ensure that our proposed insulin pump is functional and efficient as well
as to conserve funds, significantly all of our employees will initially be hand-picked engineers under the direct supervision
and leadership of Mr. DiPerna. We believe that there is a rich pool of engineers with significant applicable experience and
knowledge who we will be able to initially employ on a contract and/or outsource basis to help us design and develop our proposed
insulin pump. We believe by hiring such persons on an out-source basis, we will save substantial resources. Moreover, under Mr.
DiPerna’s leadership, we believe that the team will be focused on the technological and mechanical aspects of our proposed
insulin pump, resulting in a cost efficient and precisely designed product. See “Risk Factor – we do not have internal
research and development personnel, making us dependent on consulting relationships,” above.
Government
Regulations.
Before
we can market our prototype insulin pump to the public, we will need to obtain FDA clearance. Our insulin pump is and will be
subject to extensive and ongoing regulation by the FDA and other federal, state, and local regulatory bodies. FDA regulations
govern, among other things, product design and development, pre-clinical and clinical testing, manufacturing, labeling, post-market
adverse event reporting, post-market surveillance, complaint handling, repair or recall of products, product storage, record keeping,
pre-market clearance or approval, advertising and promotion, and sales and distribution.
Unless
an exemption applies, each medical device, such as our insulin pump, that is intended to be commercially distributed in the United
States requires either prior 510(k) clearance or pre-market approval (“PMA”) from the FDA. Based on the FDA guidance
documents that we have reviewed, we expect to be subject to the shorter and more streamlined 510(k) process, which typically involves
less risk of uncertainty, and the submission of less supporting documentation, and without the costly clinical trials associated
with PMA. Generally, gaining 510(k) clearance for a product turns on demonstrating that the subject product is “substantially
equivalent” to a previously cleared 510(k) device.
We are
working closely with our FDA regulatory consultant to complete, finalize and file our FDA submission, including our
pre-market notification to the FDA for 510(k) clearance and all other documentation necessary to obtain FDA approval of our insulin
pump. This will involve three material steps. First, we will engage the FDA in a pre-submission conference to ensure that we understand
and meet the FDA’s requirements, expectations and standards with regard to approval of our product. At this meeting, our
team, including our FDA regulatory consultant, will receive FDA comments and guidance regarding our proposed submission during
the pre-market notification period for 510(K) clearance (including any suggested modifications to the device description, indications
for use or summary of supporting data contained in the notification). We currently expect that such conference will be conducted
during the fourth quarter of 2019. Second, we will prepare our pre-market notification to be part of our submission to the
FDA, demonstrating that our insulin pump is substantially equivalent to an insulin pump previously cleared by the FDA and legally
marketed to the public. Third, we will prepare our submission to the FDA, to include all of the appropriate results of tests (relating
to, among other things, user effectiveness, sterility, pump efficiency and shipping compatibility) demonstrating safety and efficacy
of the product in satisfaction of the mandates of the Federal Food, Drug and Cosmetics Act (the “Act”), including
requirements with regard to registration and listing, labeling, medical device reporting and good manufacturing practices. We
currently expect to make this submission near the end of the fourth quarter of 2019 or in the first quarter of 2020.
The
FDA’s 510(k) clearance pathway generally takes from three to twelve months from the date the application is completed, but,
if additional testing, verifications or other procedures (or even clinical trials in care instances) are required, can take significantly
longer (as compared to PMA which can extend from one to three years, or longer in certain instances). After a medical device receives
510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a significant
change in its intended use, requires a new 510(k) clearance or, depending on the modification, could require a PMA application.
The FDA requires each manufacturer to make this determination initially, but the FDA can review any such decision and can disagree
with a manufacturer’s determination. If the FDA disagrees with a manufacturer’s determination regarding whether a
new premarket submission is required for the modification of an existing device, the FDA can, at its discretion, require the manufacturer
to cease marketing and/or recall the modified device until 510(k) clearance is obtained. Failure to comply with applicable regulatory
requirements can result in enforcement actions by the FDA and other regulatory agencies, which may include any of the following
sanctions: untitled letters or warning letters, fines, injunctions, consent decrees, civil or criminal penalties, recall or seizure
of our current or future products, operating restrictions, partial suspension or total shutdown of production, refusal of or delay
in granting 510(k) clearance of new products or modified products or rescinding previously granted 510(k) clearances. Any of these
sanctions could result in higher than anticipated costs and have a material adverse effect on our reputation, business and financial
condition. See “Risk Factor – Government Regulation,” above.
The FDA
can delay, limit or deny clearance or approval of our proposed pump device for many reasons, including:
|
·
|
our
inability to demonstrate that our product is safe and effective for its intended users;
|
|
·
|
our
inability to demonstrate that our product is the “substantial equivalent”
of a previously cleared device;
|
|
·
|
the
data from our user studies may be insufficient to support clearance or approval;
and
|
|
·
|
failure
of the manufacturing process or facilities we use to meet applicable requirements.
|
In
addition, the FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations,
or take other actions which may prevent or delay approval or clearance of our pump.
Any
delay in, or failure to receive or maintain, clearance or approval for our insulin pump could prevent us from generating revenue
therefrom or achieving profitability. Additionally, the FDA and other regulatory authorities
have broad enforcement powers. Regulatory enforcement or inquiries, or other increased scrutiny on us, could dissuade some
customers from using our proposed product and adversely affect our reputation and the perceived safety and efficacy of our insulin
pump. If the FDA requires us to go through a more rigorous examination for our proposed product than we currently expect, such
as requiring additional testing further verification or other procedures, we may require substantial additional funding sooner
than anticipated and/or our product could be severely delayed. Being subject to an extended period of scrutiny or being required
to conduct expensive clinical trials would be particularly harmful to our business because our insulin pump is our only product.
Ongoing
Regulation by FDA.
Even
after a device such as our insulin pump receives FDA clearance and is placed on the market, numerous regulatory requirements apply.
These include:
|
·
|
establishment
registration and device listing;
|
|
·
|
quality
system regulation, which requires manufacturers, including third party manufacturers,
to follow stringent design, testing, control, documentation and other quality assurance
procedures during all aspects of the manufacturing process;
|
|
·
|
labeling
regulations and FDA prohibitions against the promotion of products for uncleared, unapproved
or “off-label” uses, and other requirements related to advertising and promotional
activities;
|
|
·
|
medical
device reporting regulations, which require that manufacturers report to the FDA if their
device may have caused or contributed to a death or serious injury or malfunctioned in
a way that would likely cause or contribute to a death or serious injury if the malfunction
were to recur;
|
|
·
|
corrections
and removals reporting regulations, which require that manufacturers report to the FDA
field corrections and product recalls or removals if undertaken to reduce a risk to health
posed by the device or to remedy a violation of the FDCA that may present a risk to health;
and
|
|
·
|
post-market
surveillance regulations, which apply when necessary to protect the public health or
to provide additional safety and effectiveness data for the device.
|
Number
of Total Employees and Number of Full-Time Employees
We
currently employ six (6) full-time employees, including one executive officer, Paul DiPerna, our chief executive officer, chief
financial officer, secretary, treasurer, and director.
Competition
The medical
device industry, generally, and the diabetes segment of that industry particularly, is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market activities of industry participants. Our insulin
pump will compete with a number of existing devices, any new devices introduced in the future as well as other methods
for the treatment of people with insulin dependent diabetes. These products will be produced by competitors that, in many cases,
will be larger, substantially better capitalized with significantly more employees, market share and resources than us. As a consequence,
they will be able to spend more aggressively on product development, marketing, sales and other product initiatives than we can.
Many of these competitors have:
|
·
|
significantly
greater name recognition and greater recognition by the FDA with regard to clearance
process;
|
|
·
|
established
relations with regulators, healthcare professionals, customers and third-party payors;
|
|
·
|
established
distribution networks;
|
|
·
|
additional
lines of products, and the ability to offer rebates or bundle products to offer higher
discounts or other incentives to gain a competitive advantage;
|
|
·
|
greater
experience in conducting research and development, manufacturing, clinical trials, clinical
studies, marketing and obtaining regulatory approval for products; and
|
|
·
|
greater
financial and human resources for product development, sales and marketing and patent
litigation.
|
Medtronic
Inc., Tandem Diabetes Care, Inc. and Insulet Corporation are all much larger companies with substantially greater resources than
the Company’s resources, make similar products for the more sophisticated, technically capable person with diabetes. The
Company does not intend to compete for those patients, instead by offering a simple to use more cost-effective solution, the Company
intends to attract more mainstream patients such as our almost pumper target market.
See “Risk Factors – Our competitors may develop products that are more effective, safer and less expensive than ours,”
above.
Patents
The Company
has applied to the U.S. Patent and Trademark Office for two US patents on its proprietary fluid movement technology and the configuration
of its product offering. There is no assurance that these patents will be issued, and no assurance that they will prevent other
companies from competing with the Company. The Company will continue to attempt to patent its innovations as appropriate to help
ensure a sustainable competitive advantage. See “Risk Factors – Our success depends substantially upon our ability
to obtain and maintain intellectual property protection relating to our product and research technologies,” above.
Properties
Our principal
executive offices are located at 800 West Valley Parkway, Suite 203, Escondido, California 92025. We lease our executive offices
in a commercial office building pursuant to a standard sublease dated as of August 21, 2017. The term is from September 1, 2018
through December 14, 2019. The rental amount under the lease is $3,000 per month. The Company paid a security deposit of $7,500
upon execution of the lease on August 21, 2017.
Legal
Proceedings
We are
not a party to any pending legal proceeding. To the knowledge of our management, no federal, state or local governmental agency
is presently contemplating any proceeding against us. No director, executive officer or affiliate of ours or owner of record or
beneficially of more than five (5%) percent of our common stock is a party adverse to us or has a material interest adverse to
us in any proceeding.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This
Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide a reader of
our financial statements with a narrative from the perspective of our management on our financial condition, results of operations,
liquidity and certain other factors that may affect our future results. You should read the following discussion and analysis
of our financial condition and results of operations in conjunction with the audited consolidated financial statements and related
notes included elsewhere in this prospectus. The following discussion contains forward-looking statements that are subject to
risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements” for a discussion of the uncertainties,
risks, and assumptions associated with those statements. Actual results could differ materially from those discussed in or implied
by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus,
particularly in “Risk Factors.”
The Company
was incorporated under the laws of the State of Nevada on October 22, 1998 under the name Bear Lake Recreation Inc.
We
had no material business operations from 2002 through July 24, 2017 when we acquired Quasuras.
Our
acquisition of Quasuras was accounted for as a recapitalization effected by a share exchange and Quasuras was considered the acquirer
for accounting and financial reporting purposes.
Following
our acquisition of Quasuras, in addition to capital raising and general day to day business and administrative actions relating
to being a publicly traded reporting company, we have been singularly focused on activities relating to designing and developing
our innovative insulin pump.
From
July 24, 2017 through March 29, 2019, we conducted two private placements, the 2017 Placement and the 2018 Placement, of shares
of our common stock discussed elsewhere herein pursuant to which we received in the aggregate $8,874,538 of gross proceeds. In
addition to costs and expenses in operating our business including general administrative costs and expenses as well as those
resulting from being a public reporting company, we are using the net proceeds from such private placements in connection with
activities relating to the design, development and obtaining required regulatory approvals of our insulin pump.
In
April 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an “emerging growth company”
may take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with
new or revised accounting standards. Therefore, an emerging growth company can delay the adoption of certain accounting standards
until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption from new
or revised accounting standards, and, therefore, will not be subject to the same new or revised accounting standards as other
public companies that are not emerging growth companies.
Results
of Operations for Three Months Ended June 30, 2019 and Compared to Three Months Ended June 30, 2018
For
the quarters ended June 30:
|
|
2019
|
|
|
2018
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Professional expenses
|
|
$
|
287,831
|
|
|
$
|
41,710
|
|
Research and development
|
|
|
703,783
|
|
|
|
135,789
|
|
General and administrative
|
|
|
146,626
|
|
|
|
77,691
|
|
Total operating expenses
|
|
|
1,138,240
|
|
|
|
255,190
|
|
Operating loss
|
|
|
(1,138,240
|
)
|
|
|
(255,190
|
)
|
Interest income
|
|
|
16,042
|
|
|
|
5,624
|
|
Income tax
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
$
|
(1,122,198
|
)
|
|
$
|
(249,566
|
)
|
|
Overview:
We
reported a net loss of $1,122,198 and $249,566 for the three months ended June 30, 2019 and 2018, respectively. The increase in
our net loss is primarily due to an increase in our research and development expenses.
Operating
Expenses:
During
the three months ended June 30, 2019, professional expenses increased by 590.1% to $287,831, as compared with $41,710 for the
quarter ended June 30, 2018. The increase is primarily due to an increase in fees paid
to outside consultants and professional services required for our required filings.
For
the three months ended June 30, 2019, research and development expenses increased by 418.3% to $703,783 as compared with $135,789
for the quarter ended June 30, 2018. The increase in research and development expenses
is primarily due to increased engineering headcount and increasing outside expenses necessary to the design and development of
our innovative insulin pump. By “increasing outside expenses,” we mean that, as we continue to implement product design
enhancements and progress along the path to FDA clearance, these expenses will escalate.
For
the three months ended June 30, 2019, general and administrative expenses increased by 88.7% to $146,626 as compared with $77,691
for the quarter ended June 30, 2018. The increase in our general and administrative expense
is attributable primarily to an increase in employee related cost.
Interest
Income:
Interest
income for the three months ended June 30, 2019 and 2018 was $16,042 and $5,624, respectively.
Liquidity
and Capital Resources
The
following tables summarizes our cash flows for the three months ended June 30, 2019 and June 30, 2018.
|
|
2019
|
|
|
2018
|
|
Cash used in operating activities
|
|
$
|
(840,421
|
)
|
|
$
|
(236,219
|
)
|
Cash used in investing activities
|
|
|
(6,719
|
)
|
|
|
(6,170
|
)
|
Cash provided by financing
activities
|
|
|
—
|
|
|
|
(516
|
)
|
Net change in cash and cash
equivalents
|
|
|
(847,140
|
)
|
|
|
(242,905
|
)
|
Cash and cash equivalents
at beginning of period
|
|
|
6,553,768
|
|
|
|
4,296,676
|
|
Net change in cash and
cash equivalents
|
|
$
|
5,706,628
|
|
|
$
|
4,053,771
|
|
As
a development stage enterprise, the Company does not currently have revenues to generate cash flow to cover operating expenses.
The Company has historically raised capital through the 2017 Private Placement and the 2018 Private Placement. Management expects
to continue to raise capital through future equity offerings in order to finance its operations.
As
of June 30, 2019, we had total current assets of $5,716,128 of which $ 5,706,628 were cash and cash equivalents, and current liabilities
of $253,474. As of March 31, 2019, we had total current assets of $6,569,358, of which $6,553,768 were cash and cash equivalents
and current liabilities of $178,929. As of June 30, 2019 and March 31, 2019, we had working capital of approximately of $5,462,654
and $6,390,429, respectively.
Net
Cash Used In Operating Activities
We
used $840,421 of cash to fund operating activities during the three months ended June 30, 2019, compared with $236,219 during
the comparable period in 2018. Increased cash usage was due to increasing operating expenses
to fund research and development.
Net
Cash Used In Investing Activities
We used $6,719
of cash to purchase equipment during the three months ended June 30, 2019, compared with $6,170 during the three months ended
June 30, 2018.
Net
Cash Used In Financing Activities
We
used no cash for financing activities during the three months ended June 30, 2019, compared with $516 during the prior year quarter.
Off-Balance
Sheet Arrangements
As
of June 30, 2019, we had not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current
or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors.
Results
of Operations for Fiscal Year Ended March 31, 2019 and Compared with Fiscal Year Ended March 31, 2018
For
the fiscal years ended March 31:
|
|
2019
|
|
|
2018
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Professional expenses
|
|
$
|
260,396
|
|
|
$
|
232,961
|
|
Research and development
|
|
|
1,882,345
|
|
|
|
332,642
|
|
General and administrative
|
|
|
4,34,558
|
|
|
|
100,561
|
|
Total operating expenses
|
|
|
2,577,299
|
|
|
|
666,164
|
|
Operating loss
|
|
|
(2,577,299
|
)
|
|
|
(666,164
|
)
|
Interest income
|
|
|
39,390
|
|
|
|
8,518
|
|
Provision (benefit) for income taxes
|
|
|
(1,589
|
)
|
|
|
(1,600
|
)
|
Net loss
|
|
$
|
(2,539,498
|
)
|
|
$
|
(659,246
|
)
|
Overview
We reported
a net loss of $2,539,498 and $659,246 for the fiscal years ended March 31, 2019 and 2018, respectively. The increase in our
net loss was primarily due to an increase in our research and development expenses.
Operating
Expenses
During
the fiscal year ended March 31, 2019, professional expenses increased by 12% to $260,396, as compared with $232,961 for the prior
fiscal year. The increase was primarily due to an increase in fees paid for consulting fees.
During
the fiscal year ended March 31, 2019, research and development expenses increased by 466% to $1,882,345 as compared with $332,642
for the prior fiscal year. The increase in research and development expenses is primarily
due to increased engineering headcount and increasing outside expenses necessary to the design and development of our innovative
insulin pump. By “increasing outside expenses,” we mean that, as we continue to implement product design enhancements
and progress along the path to FDA clearance, these expenses will escalate.
During
the fiscal year ended March 31, 2019, general and administrative expenses increased by 332% to $434,558 as compared with $100,561
for the prior fiscal year. The increase in our general and administrative expense was attributable primarily to an increase in
employee related cost.
Interest
Income
Interest
income for the fiscal year ended March 31, 2019 and 2018 was $39,390 and $8,518, respectively.
Liquidity
and Capital Resources
The following
tables summarizes our cash flows for the fiscal years ended March 31, 2019 and March 31, 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 and cash equivalents
|
|
|
2,257,092
|
|
|
|
3,904,669
|
|
Cash and cash equivalents at beginning of period
|
|
|
4,296,676
|
|
|
|
392,007
|
|
Net change in cash and
cash equivalents
|
|
$
|
6,553,768
|
|
|
$
|
4,296,676
|
|
As
a development stage enterprise, the Company does not currently have revenues to generate cash flow to cover operating expenses.
The Company has historically raised capital through the 2017 Private Placement and the 2018 Private Placement. Management expects
to continue to raise capital through future equity offerings in order to finance its operations.
As
of March 31, 2019, we had total current assets of $6,569,358 of which $ 6,553,768 were cash and cash equivalents, and current
liabilities of $178,929. As of March 31, 2018, we had total current assets of $4,313,480 and current liabilities of $15,471. As
of March 31, 2019 and 2018, we had working capital of approximately of $6,390,429 and $4,298,009, respectively.
Net
Cash Used In Operating Activities
We
used $1,807,934 of cash to fund operating activities during the fiscal year ended March 31, 2019, compared with $791,131 in 2018.
Increased cash usage during the recent fiscal year was due to increasing operating expenses
to fund research and development.
Net
Cash Used In Investing Activities
We
used $77,124 of cash to purchase equipment and intangible assets during the fiscal year ended March 31, 2019, compared with $15,332
in the prior fiscal year.
Net
Cash Provided By Financing Activities
The
2018 Private Placement accounted for an increase of $4,142,150 of cash from financing activities during fiscal year ended March
31, 2019, compared with $4,711,132 for the year ended March 31, 2018.
Off-Balance
Sheet Arrangements
As
of March 31, 2019, we had not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current
or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors.
Critical
Accounting Policies and Estimates
Use
of Estimates
The preparation
of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”)
requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
periods. Estimates may include those pertaining to accruals, stock-based compensation and income taxes. Actual results could materially
differ from those estimates.
MANAGEMENT
The
following table sets forth information with respect to each of our directors, including their current principal occupation or
employment and age as of September 30, 2019.
Name
|
Age
|
Position
|
Paul DiPerna
|
60
|
Chief Executive Officer, Chief Financial
Officer, Secretary, Treasurer and Director (Chairman of the Board)
|
Liam Burns
|
53
|
Director
|
Morgan C. Frank
|
47
|
Director
|
|
|
|
Paul
DiPerna is and has been since our July 24, 2017 acquisition of Quasuras, our chairman, chief executive officer, chief
financial officer, secretary and treasurer. Mr. DiPerna began his career in approximately
1980 as a mechanical design engineer in the automated test equipment industry before moving in approximately 1989 to a start-up
in the blood separation sciences industry. This company was eventually acquired in approximately 1991 by Baxter Healthcare (“Baxter”).
Following such acquisition, Mr. DiPerna became employed by Baxter and held various positions during his approximate 12 years at
Baxter. While at Baxter, Mr. DiPerna worked on numerous projects and initiatives including leading a team of approximately
50 engineers in developing equipment in the blood separation sciences industry. In approximately 1996, Mr. DiPerna was promoted
to General Manager of Baxter’s business development group to identify targets for Baxter’s expansion opportunities
in the medical device industry. While holding such position, Mr. DiPerna led a team researching custom orthopedics, digital
dentistry and rapid prototyping. In such role, one of Mr. DiPerna’s assignments was identifying synergistic opportunities
in the diabetes industry. As a result, Mr. DiPerna developed substantial expertise and knowledge in the diabetes industry
and led attempts by Baxter to acquire three insulin pump manufacturers. In 2003, Mr. DiPerna left Baxter and founded what subsequently
became Tandem Diabetes Care, Inc. (“Tandem”). While at Tandem, Mr. DiPerna held various positions, including as director,
chief executive officer and chief technology officer and was primarily responsible for the design concept and development of Tandem’s
initial insulin pump, which subsequently was commercialized by Tandem. Tandem is a medical device company that designs, develops
and commercializes products for people with insulin dependent diabetes. In 2011, Mr. DiPerna resigned from his
executive officer position and board seat at Tandem but continued to assist the company through 2013. In approximately January,
2012, Mr. DiPerna was the co-inventor with regard to a private company with property rights in a medical device used for blood
borne infection control called the “Curos Cap.” Curos Cap was acquired by 3M Corporation in 2015. Thereafter, Mr.
DiPerna founded a company, Fuel Source Partners, LLC (“FSP”), where he is the manager of, to incubate early stage
medical device products and accumulate technical talent. One of such proposed products was spun-out to Quasuras in March 2015,
which we acquired in July 2017. Mr. DiPerna owns a variety of, patents and patents pending and is a member of the American
Diabetes Association. Mr. DiPerna received a Masters in Engineering Management from Northeastern University and a BS in Mechanical
Engineering from the University of Lowell. In January 2017, Mr. DiPerna joined National Cardiac Incorporated (“Cardiac”)
as the chief executive officer and a board member to leverage Cardiac’s technology in the cardiac monitoring space. In addition
to FSP and Cardiac, Mr. DiPerna is one of 3 owners of Patient Focused Innovation Partners (“PFIP”), a company that
manages patent applications with regard to a gastric delivery system. Mr. DiPerna has informed us that he devotes less than 3
hours per month in the aggregate to his activities with FSP, Cardiac and PFIP, which he expects to further decrease over time.
We believe that Mr. DiPerna is qualified to serve as the chairman of our board of directors due to his extensive knowledge and
experience in the medical device industry generally, and, in particular, with regard to insulin pumps and the diabetes industry
as well as his management and leadership experience from holding director and senior executive positions in other public and private
companies and leading project development teams of medical device companies.
Liam Burns
was elected a director of the Company in January 2019. Since that time, he has also been the Chief Executive Officer of Endo-TAGSS,
LLC, a privately-held company developing a novel surgical access system for treatment of gastrointestinal diseases. From December
2017 to December 2018, Mr. Burns was the Chief Executive Officer of CuraSeal Inc., a privately-held regenerative medical company.
From January 2014 to March 2018, he was the Vice President, Global Sales and Marketing for Dextera Surgical Inc., which
marketed the world’s smallest surgical stapler. Dexteria Surgical Inc. filed for bankruptcy protection on December 11, 2017
and was subsequently sold to B. Braun Aesculap in 2018. From January 2013 to September 2016, Mr. Burns was the managing member
and majority interest holder in Bensi Flemington LLC., which operated a restaurant in Flemington, New Jersey. Bensi Flemington
LLC filed for bankruptcy protection on August 11,2015. Prior to that, Mr. Burns held a variety of commercial leadership roles
at Ethicon (JNJ) and various early stage medical device companies. Mr. Burns received a B.A. in Economics from the College of
the Holy Cross and an Executive MBA from the Weatherhead School of Management at Case Western Reserve University. We believe
that Mr. Burns is qualified to serve as a member of our board of directors due to his extensive experience and background in developing
and launching new medical technologies, commercial strategy, marketing and branding, as well as his experience in metabolic health.
Morgan
C. Frank is and has been a director of the Company since April 26, 2017. Mr. Frank has worked with Manchester Explorer since
May 2002, and prior to such time, he was a founder and managing director at First Principles Group, a boutique consultancy and
principal investor specializing in corporate restructuring, restarts, intellectual property assessment and salvage, and spin outs.
Prior to such time, Mr. Frank spent approximately five years as an analyst and portfolio manager at Hollis Capital, a San Francisco
based hedge fund and prior thereto, Mr. Frank worked for an independent private client group at Paine Webber specializing in primary
research to develop investment ideas (particularly short sale ideas) for institutional clients. Prior to his employment at Paine
Webber, Mr. Frank was a currency trader for Eastern Vanguard. Mr. Frank holds a BA in Economics and in Political Science from
Brown University. We believe that Mr. Frank is qualified to serve as member of our board of directors due to his extensive
prior experience conducting financial analysis of public companies (certain of which were in the development stage), including
such public companies’ management teams, products, including products in the development stage, the potential markets for
such products and other factors that could effect the likelihood and timing of success and market penetration of such entities’
products as well as his capital raising activities. We believe this provides us with valuable insights into the financial markets
and investment criteria of institutional and other investors as well as capital raising activities.
Arrangements
for Appointment of Directors.
Until
July 24, 2022, our board of directors shall consist of no more than five (5) and no less than two (2) directors of which (i) Manchester
has the right to appoint two (2) directors, one of whom is Mr. Frank, and (ii) Mr. DiPerna, in addition to being our Chairman,
has the right to appoint 2 additional directors, one of which is Mr. Burns. See “Risk Factors - If the beneficial ownership
of our stock continues to be highly concentrated, it may prevent you and other shareholders from influencing significant corporate
decisions; right of certain parties to appoint directors.”
Significant
Employees
Marc
Goldman, our Head of Engineering, is expected to make a significant contribution to our business.
Involvement
in Legal Proceedings
Except
with regard to Mr. Burns, to the Company’s knowledge, none of our officers or our directors has, during the last ten years:
|
·
|
been
convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding
traffic violations and other minor offenses);
|
|
·
|
had
any bankruptcy petition filed by or against the business or property of the person, or
of any partnership, corporation or business association of which he was a general partner
or executive officer, either at the time of the bankruptcy filing or within two years
prior to that time;
|
|
·
|
been
subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated,
of any court of competent jurisdiction or federal or state authority, permanently or
temporarily enjoining, barring, suspending or otherwise limiting, his involvement in
any type of business, securities, futures, commodities, investment, banking, savings
and loan, or insurance activities, or to be associated with persons engaged in any such
activity;
|
|
·
|
been
found by a court of competent jurisdiction in a civil action or by the SEC or the Commodity
Futures Trading Commission to have violated a federal or state securities or commodities
law, and the judgment has not been reversed, suspended, or vacated;
|
|
·
|
been
the subject of, or a party to, any federal or state judicial or administrative order,
judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including
any settlement of a civil proceeding among private litigants), relating to an alleged
violation of any federal or state securities or commodities law or regulation, any law
or regulation respecting financial institutions or insurance companies including, but
not limited to, a temporary or permanent injunction, order of disgorgement or restitution,
civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition
order, or any law or regulation prohibiting mail or wire fraud or fraud in connection
with any business entity; or
|
|
·
|
been
the subject of, or a party to, any sanction or order, not subsequently reversed, suspended
or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the
Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity
Exchange Act), or any equivalent exchange, association, entity or organization that has
disciplinary authority over its members or persons associated with a member.
|
To
our knowledge, there are no material proceedings to which any director, officer or affiliate of yours, any owner of record or
beneficially of more than 5% of any class of voting securities of us, or any associate of any such director, officer, affiliate
of yours, or security holder is a party adverse to us or any of our subsidiaries or has a material interest adverse to us or any
of our subsidiaries.
The
DiPerna Employment and Related Agreements
We
have entered into an employment agreement dated August 1, 2018 with Mr. DiPerna pursuant to which Mr. DiPerna is employed by us
as our Chief Executive Officer and President for a 2-year term with automatic one-year renewals.
Pursuant to such agreement, we have agreed to pay Mr. DiPerna an annual salary of $200,000, plus $100,000 per year in stock options
with an exercise price of $0.66 per share or a price determined by the board of directors in its sole discretion and an annual
bonus of $300,000, payable at the discretion of the board of directors in its sole discretion, either in shares of stock or in
cash. If the Board chooses to pay the bonus in shares of stock, such shares will be valued at $0.66 per share or a price determined
by the board of directors. In addition, pursuant to our employment agreement with Mr. DiPerna, in the event that we terminate
Mr. DiPerna’s employment without cause or he resigns with good reason, we will pay Mr. DiPerna a lump sum of $200,000. In
the event that we terminate Mr. DiPerna’s employment for cause, we are not obligated to make any severance payment and Mr.
DiPerna will receive only his base compensation through the last day of his employment. In the event of Mr. DiPerna’s death
or disability, he will receive his base compensation through the last day of his employment and will remain eligible for all applicable
benefits relative to death or disability pursuant to any plans that we have in place at such time. In the event of a “change
in control” (as defined in the employment agreement), Mr. DiPerna will be paid a lump sum of $100,000 within sixty days
of the time at which such change of control takes place.
In connection
with our July 24, 2017 acquisition of Quasuras, we entered into an Intellectual Property Transfer Agreement dated as of July 24,
2017, with Quasuras and Mr. DiPerna (the “IP Transfer Agreement”), pursuant to which Mr. DiPerna transferred to us
all intellectual property rights owned directly and/or indirectly by him related to our business. Also, in connection with
the Acquisition, we agreed to pay Mr. DiPerna as part of his compensation for services to be performed for us pursuant to a Technology
and Royalty Agreement, dated as of July 24, 2017 (the “Royalty Agreement”), certain fees based upon future sales,
if any, of our potential product subject to a maximum $10,000,000 cap on the aggregate amount of fees that Mr. DiPerna could earn
from such arrangement.
Mr. DiPerna
is subject to confidentiality, non-compete and invention agreements with us.
Family
Relationships
There are
no family relationships among the members of our board of directors or our executive officers.
Composition
of the Board
In
accordance with our articles of incorporation, our board of directors is to be elected annually as a single class. However, pursuant
to our by-laws, in lieu of electing the entire number of directors annually, our board may provide that the directors be divided
into either two or three classes, each class to be as nearly equal in number as possible, the term of office of the directors
of the first class to expire at the first annual meeting of shareholders after their election, that of the second class to expire
at the second annual meeting after their election, and that of the third class, if any, to expire at the third annual meeting
after their election. At each annual meeting after such classification, the number of directors equal to the number of the class
whose term expires at the time of such meeting shall be elected to hold office until the second succeeding annual meeting, if
there be two classes, or until the third succeeding annual meeting, if there be three classes. To date, no such election has been
made by our board. Pursuant to the July 24, 2017 agreement pursuant to which we acquired Quasuras, until July 24, 2022, our board
of directors will consist of no less than 2 and no more than 5 directors, of which Mr. DiPerna in addition to being the chairman
of our board has the right to appoint 2 directors, of which Mr. Burns constitutes one and Manchester has the right to appoint
2 directors, of which Mr. Frank constitutes 1 such director. As a result, until July 24, 2022, our shareholders will not have
the ability to elect any directors either at the annual meeting or by written consent, even if our shareholders believe that our
board of directors is taking actions to which the shareholders object. See “Risk Factors - If the beneficial ownership of
our stock continues to be highly concentrated, it may prevent you and other shareholders from influencing significant corporate
decisions; right of certain parties to appoint directors.”
Communications
with our board of directors
Our
stockholders may send correspondence to our board of directors c/o the corporate secretary at the address set forth on the cover
page of this prospectus. Our corporate secretary will forward stockholder communications to our board of directors prior to the
board of director’s next regularly scheduled meeting following the receipt of the communication.
Corporate
Governance
Board
Leadership Structure and Role in Risk Oversight
Due to
the small size and early stage of the Company, we have not adopted a formal policy on whether the chairman and chief executive
officer positions should be separate or combined. Our board of directors is primarily responsible for overseeing our risk management
processes on behalf of the Company. Our board of directors receives and reviews periodic reports from management, auditors, legal
counsel, and others, as considered appropriate regarding our company’s assessment of risks. Our board of directors will
focus on the most significant risks facing us and our general risk management strategy, and also ensure that risks undertaken
by our Company are consistent with the Board of Director’s appetite for risk. While the board of directors oversees our
Company’s risk management, management is responsible for day-to-day risk management processes. We believe this division
of responsibilities is the most effective approach for addressing the risks facing us and that our board leadership structure
supports this approach.
Nominating
Committee
We have
not established a Nominating Committee because, due to our lack of operations and the fact that we only have three (3) directors
and one (1) executive officer, we believe that we are able to effectively manage the issues normally considered by a Nominating
Committee. A further review of this issue will be undertaken by the new management.
If
we do establish a Nominating Committee, we will disclose this change to our procedures in recommending nominees to our board of
directors.
Audit
Committee
We have
not established an Audit Committee because, due to our lack of material operations and the fact that we only have three (3) directors
and one (1) executive officer, we believe that we are able to effectively manage the issues normally considered by an Audit Committee.
A further review of this issue will be undertaken by the new management.
Director
Independence
As
of September 30, 2019, Liam Burns, who was appointed as a director in January 2019 is our only director considered to be independent,
in as much as he does not beneficially own greater than a 10% ownership interest in our common stock and is unrelated to any of
our shareholders who hold any such interest.
We are not
a “listed issuer” as that term is used in Regulation S-K Item 407 adopted by the SEC.
EXECUTIVE
COMPENSATION
All
Compensation
On
October 19, 2017, our board of directors approved the 2017 Equity Incentive Plan (“EIP”) that reserves 3,000,000 shares
of common stock of the Company to be issued thereunder. Under the Company’s EIP, eligible employees, directors and consultants
are granted options to purchase shares of common stock of the Company. The EIP is administered by the Company’s board of
directors or, in the alternative, if necessary, a committee designated by the board of directors, and has the sole power over
the exercise of the EIP. The board of directors determines whether the EIP will allow for the issuance of shares of common stock
or an option to purchase shares of common stock, such option designated as either an incentive stock option or a non-qualified
stock option.
The exercise
or purchase price shall be calculated as follows:
|
(i)
|
In
the case of an incentive stock option, (A) granted to employees who, at the time of the
grant of such incentive stock option own stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company, the per share exercise price
shall be not less than one hundred ten percent (110%) of the fair market value per share
on the date of grant; or (B) granted to employees other than to employees described in
the preceding clause, the per share exercise price shall be not less than one hundred
percent (100%) of the fair market value per share on the date of grant;
|
|
(ii)
|
In
the case of a non-qualified stock option, the per share exercise price shall be not less
than one hundred percent (100%) of the fair market value per share on the date of grant
unless otherwise determined by the board of directors; and
|
|
(iii)
|
In
the case of other grants, such price as is determined by the board of directors.
|
The
board of directors is responsible for determining the consideration to be paid for the shares of common stock to be issued upon
exercise or purchase. The EIP generally does not allow for the transfer of the options, and the board of directors may amend,
suspend or terminate the EIP at any time.
On
August 15th, September 15th and October 15th, 2018, the Company granted 54,039 options to Mr.
DiPerna in lieu of a portion of his salary. The options expire on August 14th,
September 14th and October 14th, 2028 and vest immediately. The fair value of these options, determined
to be $24,840, was included in general and administrative and research and development expenses for the relevant period.
On
November 15th and December 15th 2018, the Company granted 10,648 options to Mr. DiPerna in lieu of a
portion of his salary. The options expire on November 14th, and December
14th, 2028 and vest immediately. The fair value of these options, determined to be $17,921, was included in
general and administrative and research and development expenses for the relevant period.
On January
16, 2019, the Company granted 90,000 options to Mr. Burns. These options will be fully vested three years from the grant date,
and the vesting schedule provides that 33% of such options will vest on the first anniversary of the grant date. The 90,000 options
will expire on January 15, 2029. The fair value of the options was determined to be $163,620, of which the Company had recorded
$24,478 as and was included in general and administrative and research and development expenses for the period from January 15
through June 30, 2019. On April 15 and May 15, 2019, the Company granted 8,907 options to Mr. Burns. These options were fully
vested on the grant dates and will expire on April 14 and May 14. 2029, respectively. The fair value of the 8,907 options was
determined to be $15,000 and was recorded and was included in general and administrative and research and development expenses
during the quarter ended June 30, 2019. The following assumptions were used in the fair-value method calculation: volatility:
97.49%-104%; risk free rate of return: 2.15%-2.54%; and expected term: 5-5.88 years
The
following table sets forth compensation paid for fiscal years 2019 and 2018 for our named executive officer and directors.
SUMMARY
COMPENSATION TABLE (Executive Officers and Directors)
Name
and
Principal
Position
|
|
Year
Ended
March 31,
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
Non-Equity
Incentive
Plan
Compensation
($)
|
|
|
Non-Qualified
Deferred
Compensation
Earnings
($)
|
|
|
All
Other
Compensation
($)
|
|
|
Total
($)
|
|
Paul DiPerna,
|
|
|
2019
|
|
|
|
192,510
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
42,761
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
235,271
|
|
Secretary, Treasurer and Director (1) CEO, CFO,
|
|
|
2018
|
|
|
|
30,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
105,000
|
|
|
$
|
135,000
|
|
Morgan Frank, Director
|
|
|
2019
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Liam Burns, Director (2)
|
|
|
2019
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
163,320
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
10,000
|
|
|
|
173,620
|
|
|
(1)
|
Mr.
DiPerna was named our Chief Executive Officer, Chief Financial Officer, Secretary, and
Treasurer and appointed to our board of directors on July 24, 2017 at an initial annual
salary base of $180,000, which was increased to $300,000 in August 2018. Pursuant to
his employment agreement then in effect, for the fiscal year ended March 31, 2018, Mr.
DiPerna received $105,000 as a consultant and $30,000 in salary, which represented his
base compensation for fiscal 2018. Prior to 2018, we did not have employees, only consultants,
and, beginning in early 2018, we converted certain key consultants, including Mr. DiPerna,
to employees. Stock options were granted to Mr. DiPerna on each of August 15, 2018, September
15, 2018, October 15, 2018, November 15, 2018 and December 15, 2018 to purchase a total
of 64,687 shares of our common stock with a term of 10 years. The shares subject to each
option vested immediately on the respective grant dates. Award amounts reflect the aggregate
grant date fair value with respect to awards granted during the years indicated, as determined
pursuant to FASB ASC Topic 718. The assumptions used to calculate the aggregate grant
date fair value of option awards are set forth in the notes to the audited financial
statements included in our 2019 Annual Report on Form 10-K. These amounts do not reflect
actual compensation earned or to be earned by Mr. DiPerna.
|
|
(2)
|
Mr.
Burns entered into a services contract to serve on our board of directors for an annual
cash retainer of $10,000, payable in quarterly installments, together with a stock option
grant to purchase 90,000 shares of our common stock. The stock option was granted on
January 16, 2019 with a term of 10 years at an exercise price of $2.25, and the shares
subject to this option vest annually over three years from the grant date subject to
continued service as a director, employee or consultant. The award amount reflects the
aggregate grant date fair value with respect to awards granted during the years indicated,
as determined pursuant to FASB ASC Topic 718. The assumptions used to calculate the aggregate
grant date fair value of option awards are set forth in the notes to the audited financial
statements included in our 2019 Annual Report on Form 10-K. These amounts do not reflect
actual compensation earned or to be earned by Mr. Burns.
|
Outstanding
Equity Awards at Fiscal Year-End
The
following table shows certain information regarding outstanding equity awards held by our named executive officer and director
as of March 31, 2019. All option awards were granted under our EIP.
|
|
Option
Awards
|
|
Name
|
|
Number
of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
|
|
Number
of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
|
|
Option
Exercise
Price $
|
|
|
Option
Expiration
Date
|
|
Paul DiPerna
|
|
|
18,013
|
|
|
|
0
|
|
|
|
0.66
|
|
|
|
08/14/2028
|
|
|
|
|
18,013
|
|
|
|
0
|
|
|
|
0.66
|
|
|
|
09/14/2028
|
|
|
|
|
18,013
|
|
|
|
0
|
|
|
|
0.66
|
|
|
|
10/14/2028
|
|
|
|
|
5,324
|
|
|
|
0
|
|
|
|
2.25
|
|
|
|
11/14/2028
|
|
|
|
|
5,324
|
|
|
|
0
|
|
|
|
2.25
|
|
|
|
12/14/2028
|
|
Liam Burns
|
|
|
8,907
|
|
|
|
90,000
|
|
|
|
2.25
|
|
|
|
01/15/2029
|
|
Compensation
of Directors
Mr. Burns
entered into an agreement effective January 16, 2019 to serve on our board of directors for an annual retainer of $10,000, payable
in quarterly installments, and a grant of 90,000 stock options under our EIP with 3-year vesting and an exercise price of $2.25
per share.
STOCK
OWNERSHIP BY PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The
following table sets forth information as of September 30, 2019, concerning, except as indicated by the footnotes below: (i) each
person or group whom we believe beneficially owns more than 5% of our common stock; (ii) each of our directors, (iii) each of
our executive officers; and (iv) each of our directors and executive officers as a group. The following table assumes none of
the persons set forth in such table have sold any shares held by such persons pursuant to this prospectus.
|
·
|
We
have determined beneficial ownership in accordance with the rules of the SEC. SEC Rule
13d-3 generally provides that beneficial owners of securities include any person who,
directly or indirectly, has or shares voting power and/or investment power with respect
to such securities, and any person who has the right to acquire beneficial ownership
of such security within 60 days. Any securities not outstanding which are subject to
such options, warrants or conversion privileges exercisable within 60 days are treated
as outstanding for the purpose of computing the percentage of outstanding securities
owned by that person. Such securities are not treated as outstanding for the purpose
of computing the percentage of the class owned by any other person.
|
|
·
|
Except
as indicated by the footnotes below, we believe, based on the information furnished to
us, that the persons and entities named in the table below have sole voting and investment
power with respect to all shares of common stock that they beneficially own, subject
to applicable community property laws.
|
|
·
|
The
information provided in the table is based on our records, information filed with the
SEC, and information provided to us, except where otherwise noted.
|
Name
of Beneficial Owner
|
|
Common
Stock
Beneficially
Owned
|
|
|
Percentage
of
Common
Stock (1)
|
|
Directors
and Officers:
|
|
|
|
|
|
|
|
|
Paul
DiPerna (2)
|
|
|
7,638,117
|
|
|
|
42.74
|
%
|
Morgan
C. Frank (3)
|
|
|
6,384,691
|
|
|
|
35.73
|
%
|
Liam
Burns (4)
|
|
|
8,907
|
|
|
|
*
|
|
All
officers and directors as a group (3 persons) (5)
|
|
|
14,031,715
|
|
|
|
78.52
|
%
|
Beneficial
owners of more than 5%:
|
|
|
|
|
|
|
|
|
James
E. Besser (6)
|
|
|
6,384,691
|
|
|
|
35.73
|
%
|
Manchester
Management LLC (MMC) (6)
|
|
|
6,384,691
|
|
|
|
35.73
|
%
|
Manchester
Explorer, L.P. (Manchester) (6)
|
|
|
6,384,691
|
|
|
|
35.73
|
%
|
JEB
Partners, L.P. (JEB Partners) (6)
|
|
|
6,384,691
|
|
|
|
35.73
|
%
|
*
Represents less than 1%
|
(1)
|
Based
upon 17,870,261 shares of our common stock outstanding on September 30, 2019.
|
|
(2)
|
See
footnote 11 to the selling shareholders table set forth in “Selling Shareholders.”
|
|
(3)
|
Includes
(i) 180,830 shares directly held and received in the Acquisition in exchange for Mr.
Frank’s shares of Quasuras; (ii) 4,545,455 shares purchased by Manchester in the
2017 Placement; (iii) 471,111 shares purchased by Manchester in the 2018 Placement; (iv)
757,576 purchased by JEB Partners in the 2017 Placement; (vii) 160,000 shares purchased
by JEB Partners in the 2018 Placement, and (viii) 269,717 shares held by Mr. Besser.
Mr. Frank is one of our directors and 1 of 2 directors that MMC has the right to appoint
to our board of directors pursuant to the 2017 Acquisition Agreement. Mr. Besser
as the managing member and Mr. Frank as the portfolio manager and a consultant to MMC,
the General Partner of Manchester and JEB Partners, Mr. Frank have shared voting and
dispositive power of the shares owned by Manchester and JEB Partners. The address for
Mr. Frank is c/o Manchester Management, LLC, 3 West Hill Place, Boston, MA 02114. Such
person disclaims beneficial ownership of all shares not held directly by such person
and this prospectus shall not be deemed an admission that such person is the beneficial
owner of such shares, except to the extent of such persons pecuniary interest therein.
|
|
(4)
|
Mr.
Burns was appointed a director to our Board in January 26, 2019. Includes 8,907 shares
of common stock issuable upon vested stock options granted to Mr. Burns under our EIP
in April and May 2019 and excludes 90,000 shares of common stock issuable upon unvested
stock options granted to Mr. Burns under our EIP in January 2019, in each case, at an
exercise price of $2.25 per share. See “Executive Compensation – All
Compensation.”
|
|
(5)
|
See
footnotes 2, 3, and 4.
|
|
(6)
|
See
footnote 8 to the selling shareholders table set forth in “Selling Shareholders.”
|
RELATED
PARTY TRANSACTIONS
A “Related
Party Transaction” means a transaction (including any series of related transactions or a material amendment or modification
to an existing Related Party Transaction) directly or indirectly involving any Related Party that would need to be disclosed under
Item 404(a) of Regulation S-K. Generally, under Item 404(a) of Regulation S-K, we are required to disclose any transaction
occurring since the beginning of the last two fiscal years preceding our last fiscal year, or any currently proposed transaction,
involving us or our subsidiary where the amount involved exceeds the lesser of (i) $120,000 or (ii) one percent of the average
of the Company’s total assets at year-end for the last two completed fiscal years, and in which any Related Party had or
will have a direct or indirect material interest. A “Related Party” means any of the following: (i) any of our
directors of the Company or Director Nominees; (ii) any of our executive officers; (iii) a person known by us to be the beneficial
owner of more than 5% of our common stock or (iv) an immediate family member of any of the foregoing.
Except
as provided elsewhere in this prospectus with regard to Mr. DiPerna, no director, executive officer or affiliate of ours or owner
of record or beneficially of more than five (5%) percent of our common stock is a party to a Related Party Transaction with us.
See “Management – The DiPerna Employment and Related Agreements.”
MARKET
FOR OUR COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Market
Information
Our
common stock is currently quoted on the OTC Pink Markets under the trading symbol “MODD.”
As is typical for stocks quoted on the OTC Pink Markets, trading in shares of our common stock is limited and sporadic. There
is no established trading market for shares of our common stock and no assurances can be given that any such trading market will
develop or be maintained.
For the
periods indicated, the following table sets forth the high and low bid prices per share of common stock based on inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent actual transactions. The below prices were obtained
from the OTC Market Group, Inc.
Fiscal
Year ended March 31, 2018
|
|
High
Bid
|
|
|
Low
Bid
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
0.38
|
|
|
$
|
0.38
|
|
Second Quarter
|
|
$
|
0.38
|
|
|
$
|
0.38
|
|
Third Quarter
|
|
$
|
0.38
|
|
|
$
|
0.38
|
|
Fourth Quarter
|
|
$
|
0.38
|
|
|
$
|
0.38
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year ended March 31, 2019
|
|
High
Bid
|
|
|
Low
Bid
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
0.38
|
|
|
$
|
0.38
|
|
Second Quarter
|
|
$
|
0.38
|
|
|
$
|
0.38
|
|
Third Quarter
|
|
$
|
1.01
|
|
|
$
|
0.20
|
|
Fourth Quarter
|
|
$
|
1.01
|
|
|
$
|
1.01
|
|
On
October 17, 2019, the closing price of our common stock was $0.24 per share.
Number
of Equity Security Holders
As
of September 30, 2019, we had 91 holders of record of our common stock. This does not
include beneficial owners holding common stock in street name. As such, the number of beneficial holders of our shares could be
substantially larger than the number of shareholders of record.
LEGAL
MATTERS
The validity
of the securities offered in this prospectus is being passed upon for us by Gusrae Kaplan Nusbaum PLLC, New York, New York.
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
We file
annual, quarterly and current reports and other information with the SEC, as required by the Exchange Act. The SEC maintains a
site on the internet at http://www.sec.gov/ which contains reports and other information that we file electronically with the
SEC. You may also review such reports and other documents we file with the SEC on our website at www.modular-medical.com. Information
included on our website is not a part of this prospectus. Our SEC reports and registration statements are also available from
commercial document retrieval services, such as CCH Washington Service Bureau, whose telephone number is 1-800-955-0219.
We have
filed a Registration Statement on Form S-1 to register the shares of common stock to be sold by the selling shareholders. This
prospectus is a part of that Registration Statement. As allowed by SEC rules, this prospectus does not contain all the information
you can find in the Registration Statement or the exhibits to that Registration Statement, which additional information can be
found and reviewed as described above. You can obtain a copy of the registration statement from the SEC’s website.
EXPERTS
The consolidated
balance sheet of Modular Medical, Inc. as of March 31, 2019 and March 31, 2018, and the related consolidated statements of operations,
changes in stockholders’ equity, and cash flows for the years then ended have been audited by Farber Hass Harley LLP, an
independent registered public accounting firm, as stated in their report which is incorporated herein. Such consolidated financial
statements have been incorporated herein in reliance on the report of such firm given upon their authority as experts in accounting
and auditing.
MODULAR
MEDICAL, INC.
(FKA BEAR LAKE RECREATION, INC.)
FINANCIAL STATEMENTS
March 31, 2019 and June 30, 2019
TABLE
OF CONTENTS
Reports of Independent Registered Accounting Firm
|
F-1
|
Consolidated Balance Sheets as of March 31, 2019 and March 31, 2018
|
F-2
|
Consolidated Statements of Operations for years ended March 31, 2019 and March 31, 2018
|
F-3
|
Consolidated Statements of Stockholders’ Equity for years ended March 31, 2019 and March 31, 2018
|
F-4
|
Consolidated Statements of Cash Flows for years ended March 31, 2019 and March 31, 2018
|
F-5
|
Notes to Financial Statements
|
F-6
|
Consolidated
Balance Sheets as of June 30, 2019 and March 31, 2019
|
F-15
|
Consolidated
Statements of Operations for quarters ended June 30, 2019 and 2018
|
F-16
|
Consolidated
Statements of Cash Flows for quarters ended June 30, 2019 and 2018
|
F-17
|
Notes to Financial
Statements at June 30, 2019
|
F-18
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the board of directors
and
Stockholders of Modular Medical, Inc.
Opinion
on the Financial Statements
We
have audited the accompanying consolidated balance sheets of Modular Medical, Inc. (the “Company”) as
of March 31, 2019 and 2018, and the related consolidated statements of operations, stockholders’ equity, and cash flows
for the years then ended, and the related notes (collectively referred to as the financial statements). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of March 31, 2019 and 2018, and
the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
Basis
for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to
the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted
our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting,
but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits
included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating
the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of
the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Farber
Hass Hurley LLP
|
|
|
We
have served as the Company’s auditor since 2018.
|
|
|
Chatsworth,
California
|
June
26, 2019
|
|
Modular Medical,
Inc. And its Subsidiary
(f/k/a- Bear
Lake Recreation, Inc.)
Consolidated
Balance Sheets
|
|
|
|
|
|
|
ASSETS
|
|
March
31,
2019
|
|
|
March
31,
2018
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
6,553,768
|
|
|
$
|
4,296,676
|
|
Other
current assets
|
|
|
15,590
|
|
|
|
16,804
|
|
TOTAL
CURRENT ASSETS
|
|
|
6,569,358
|
|
|
|
4,313,480
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets, net
|
|
|
180
|
|
|
|
213
|
|
Property
and equipment, net
|
|
|
75,948
|
|
|
|
13,259
|
|
Security
deposit
|
|
|
7,500
|
|
|
|
7,500
|
|
TOTAL
NON-CURRENT ASSETS
|
|
|
83,628
|
|
|
|
20,972
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
6,652,986
|
|
|
$
|
4,334,452
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
178,929
|
|
|
$
|
14,955
|
|
Payable
to related party
|
|
|
—
|
|
|
|
516
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
178,929
|
|
|
|
15,471
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
—
|
|
|
|
—
|
|
TOTAL LIABILITIES
|
|
|
178,929
|
|
|
|
15,471
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Preferred
Stock, $0.001 par value, 5,000,000 shares authorized, none issued and outstanding
|
|
|
—
|
|
|
|
—
|
|
Common
Stock, $0.001 par value, 50,000,000 shares authorized, 17,840,261 shares issued and outstanding as of March
31, 2019 and 15,983,273 as of March 31, 2018
|
|
|
17,840
|
|
|
|
15,983
|
|
Additional
paid-in capital
|
|
|
9,684,578
|
|
|
|
5,011,661
|
|
Common
Stock Issuable
|
|
|
19,800
|
|
|
|
|
|
Accumulated
deficit
|
|
|
(3,248,161
|
)
|
|
|
(708,663
|
)
|
TOTAL
STOCKHOLDERS’ EQUITY
|
|
|
6,474,057
|
|
|
|
4,318,981
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
6,652,986
|
|
|
$
|
4,334,452
|
|
The accompanying
notes are an integral part of these audited consolidated financial statements.
Modular Medical,
Inc. And its Subsidiary
(f/k/a- Bear
Lake Recreation, Inc.)
Consolidated
Statements of Operations
For The Fiscal
Years Ended March 31, 2019 and 2018
|
|
|
|
|
|
|
|
|
March 31,
2019
|
|
|
March 31,
2018
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
Professional expenses
|
|
$
|
260,396
|
|
|
$
|
232,961
|
|
Research and development
|
|
|
1,882,345
|
|
|
|
332,642
|
|
General and administration expenses
|
|
|
420,090
|
|
|
|
98,700
|
|
Depreciation expense
|
|
|
14,468
|
|
|
|
1,861
|
|
Total Operating Expenses
|
|
|
2,577,299
|
|
|
|
666,164
|
|
Loss From Operations
|
|
|
(2,577,299
|
)
|
|
|
(666,164
|
)
|
|
|
|
|
|
|
|
|
|
Other Income (Expenses):
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
39,390
|
|
|
|
8,518
|
|
|
|
|
|
|
|
|
|
|
Loss Before Income Taxes
|
|
|
(2,537,909
|
)
|
|
|
(657,646
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
1,589
|
|
|
|
1,600
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(2,539,498
|
)
|
|
$
|
(659,246
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss Per Share
|
|
|
|
|
|
|
|
|
Basic and Diluted:
|
|
$
|
(0.15
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares used in computing basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,589,633
|
|
|
|
13,336,309
|
|
Diluted
|
|
|
16,589,633
|
|
|
|
13,336,309
|
|
The accompanying
notes are an integral part of these audited consolidated financial statements.
Basic earnings
per share would have been diluted if the Company had outstanding convertible preferred shares, convertible debentures or warrants.
However, The Company has none of the foregoing outstanding.
Modular Medical,
Inc. And its Subsidiary
(f/k/a- Bear
Lake Recreation, Inc.)
Consolidated
Statements of Stockholders’ Equity
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid In
|
|
|
Common
Stock
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Issuable
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2017
|
|
|
—
|
|
|
|
—
|
|
|
|
7,582,060
|
|
|
$
|
7,582
|
|
|
$
|
404,467
|
|
|
$
|
—
|
|
|
$
|
(49,417
|
)
|
|
$
|
362,632
|
|
Reverse Capitalization
|
|
|
—
|
|
|
|
—
|
|
|
|
1,168,182
|
|
|
|
1,168
|
|
|
|
(117,445
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(116,277
|
)
|
Shares issued for cash
|
|
|
—
|
|
|
|
—
|
|
|
|
7,233,031
|
|
|
|
7,233
|
|
|
|
4,724,639
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,731,872
|
|
Net loss for the fiscal year ended March 31, 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
(659,246
|
)
|
|
|
(659,246
|
)
|
Balance as of March 31, 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
15,983,273
|
|
|
$
|
15,983
|
|
|
$
|
5,011,661
|
|
|
$
|
—
|
|
|
$
|
(708,663
|
)
|
|
$
|
4,318,981
|
|
Shares issued for cash
|
|
|
—
|
|
|
|
—
|
|
|
|
1,856,988
|
|
|
|
1,857
|
|
|
|
4,140,809
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,142,666
|
|
Shares issuable for services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
19,800
|
|
|
|
—
|
|
|
|
19,800
|
|
Stock based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
532,108
|
|
|
|
—
|
|
|
|
—
|
|
|
|
532,108
|
|
Net loss for the fiscal year
ended March 31, 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,539,498
|
)
|
|
|
(2,539,498
|
)
|
Balance as of March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
17,840,261
|
|
|
$
|
17,840
|
|
|
$
|
9,684,578
|
|
|
$
|
19,800
|
|
|
$
|
(3,248,161
|
)
|
|
$
|
6,474,057
|
|
The accompanying notes are an integral part of these audited consolidated financial statements.
Modular Medical,
Inc. And its Subsidiary
(f/k/a- Bear
Lake Recreation, Inc.)
Consolidated
Statements of Cash Flows
For The Fiscal
Years Ended March 31, 2019 and 2018
|
|
|
|
|
|
|
|
|
March 31,
2019
|
|
|
March 31,
2018
|
|
Net loss
|
|
$
|
(2,539,498
|
)
|
|
$
|
(659,246
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
532,108
|
|
|
|
—
|
|
Depreciation and amortization
|
|
|
14,468
|
|
|
|
1,861
|
|
Shares for services
|
|
|
19,800
|
|
|
|
—
|
|
Increase in current assets:
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
1,214
|
|
|
|
(23,998
|
)
|
Decrease in current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
163,974
|
|
|
|
(109,748
|
)
|
Net cash used in operating activities
|
|
|
(1,807,934
|
)
|
|
|
(791,131
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
(77,124
|
)
|
|
|
(15,119
|
)
|
Purchase of intangible assets
|
|
|
—
|
|
|
|
(213
|
)
|
Net cash used in investing activities
|
|
|
(77,124
|
)
|
|
|
(15,332
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from private placement
|
|
|
4,142,666
|
|
|
|
4,731,872
|
|
Repayment to related party, net
|
|
|
(516
|
)
|
|
|
(20,740
|
)
|
Net cash provided by financing activities
|
|
|
4,142,150
|
|
|
|
4,711,132
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
2,257,092
|
|
|
|
3,904,669
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, at the beginning of the period
|
|
|
4,296,676
|
|
|
|
392,007
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, at the end of the period
|
|
$
|
6,553,768
|
|
|
$
|
4,296,676
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES:
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Income tax payments
|
|
$
|
1,589
|
|
|
$
|
1,600
|
|
Interest payments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
The accompanying
notes are an integral part of these audited consolidated financial statements.
MODULAR MEDICAL,
INC.
F/K/A - BEAR
LAKE RECREATION, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31,
2019
NOTE 1 – ORGANIZATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Modular Medical,
Inc. (the “Company”) was organized under the laws of the State 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 has
developed a hardware technology allowing people with 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 too high. By addressing the time and effort
required to effectively treat their condition, Quasuras believes it can address the less technically savvy, less motivated part
of the market.
Reorganization
On July 24,
2017, pursuant to a Reorganization and Share Exchange Agreement, by and among the Company and Quasuras, the Company acquired one
hundred percent (100%) of the issued and outstanding shares of Quasuras for 7,582,060 shares of the Company, resulting in Quasuras
becoming a wholly-owned subsidiary of the Company. Since 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 Reorganization, at their historical carrying amounts.
Pursuant to
the reorganization, the Company changed the fiscal year end from June 30 to March 31, to coincide with the year end for Quasuras.
The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the
United States of America. The following summarizes the more significant of such policies:
Basis of Presentation
The preparation
of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”)
requires management to make estimates and assumptions that affect reported amounts and related disclosures.
Principles
of Consolidation
The consolidated
financial statements include the accounts of Modular Medical, Inc. and its wholly-owned subsidiary Quasuras, Inc., and are collectively
referred to as the “Company.” All material intercompany accounts, transactions
and profits were eliminated in consolidation.
Use of Estimates
The preparation
of the accompanying 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 consolidated
financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Reportable Segment
The Company
has one reportable segment. The Company’s activities are interrelated and each activity is dependent upon and supportive
of the other. Accordingly, all significant operating decisions are based on analysis of financial products provided as a single
global business.
Professional
Fees
The Company
expenses the cost of legal, accounting, audit, tax and other professional services.
Research
and Development
The Company
expenses the cost of research and development as incurred. Research and development costs charged to operations were approximately
$1,882,345 and $332,642 for the fiscal year ended March 31, 2019 and 2018, respectively.
General and Administration
General and
administrative expense consists primarily of payroll and benefit related costs, rent, office expenses, equipment supplies
and meetings and travel.
Income Taxes
The Company
utilizes Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 740, Income
Taxes, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that
were included in the consolidated financial statements or tax returns. Under this method, deferred income taxes are recognized
for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting
amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to
the amount expected to be realized.
The Company
accounts for uncertain tax positions in accordance with FASB ASC Topic 740. When tax returns are filed, it is likely that some
positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the
merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is
recognized in the consolidated financial statements in the period during which, based on all available evidence, management
believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals
or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet
the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent
likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax
positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits
in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable
to the taxing authorities upon examination. Interest associated with unrecognized tax benefits is classified as interest expense
and penalties are classified in selling, general and administrative expenses in the consolidated statements of income.
At March 31,
2019 and 2018, the Company had not taken any significant uncertain tax positions on its tax returns for periods ended March 31,
2019 and prior years or in computing its tax provision for 2019. Management has considered its tax positions and believes that
all of the positions taken by the Company in its Federal and State tax returns are more likely than not to be sustained upon examination.
The Company is subject to examination by U.S. Federal and State tax authorities for the period ended March 31, 2016 to the present,
generally for three years after they are filed.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to concentration of credit risk consist primarily of cash and accounts receivable.
The Company maintains cash balances at financial institutions within the United States, which are insured by the Federal Deposit
Insurance Corporation (FDIC) up to limits of approximately $250,000. The Company has not experienced any losses with regard to
its bank accounts and believes it is not exposed to any risk of loss on its cash bank accounts.
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.
Contingencies
Certain conditions
may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company but
which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel
assess such contingent liabilities, and such assessment inherently involves judgment. In assessing loss contingencies related
to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s
legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of
the amount of relief sought or expected to be sought.
If the assessment
of a contingency indicates it is probable that a material loss has been incurred and the amount of the liability can be estimated,
then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment
indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be
estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable
and material would be disclosed. Loss contingencies considered to be remote by management are generally not disclosed unless they
involve guarantees, in which case the guarantee would be disclosed.
Cash and Cash Equivalents
Cash
and cash equivalents include cash in hand and cash in demand deposits, certificates of deposit and all highly liquid debt instruments
with original maturities of three months or less. At March 31, 2019 and March 31, 2018, the Company had $6,553,768 and $4,296,676,
respectively, in cash. Deposits at the bank are insured up to $250,000 by the Federal Deposit Insurance Corporation. The Company’s
uninsured portion of the balances held at the bank aggregated to approximately $6,269,116 and
$3,933,002, respectively. No reserve has been made in the financial statements for any possible loss due to any financial institution
failure. The Company has not experienced any losses in such accounts and believes we are not exposed to any significant risk
on cash and cash equivalents.
Property, Plant & Equipment
Property
and equipment is stated at cost and depreciated using the straight-line method over the shorter of the estimated useful life of
the asset or the lease term. The estimated useful lives of our property and equipment are generally as follows: computer equipment
& software developed or acquired for internal use, three to ten years; office equipment, two to three years; buildings and
improvements, five to fifteen years; leasehold improvements, two to ten years; and machinery and equipment, one to five years.
As of March 31, 2019 and March 31,
2018, property, plant and equipment amounted to:
|
|
March 31,
2019
|
|
|
March 31,
2018
|
|
Computer equipment and software
|
|
$
|
20,565
|
|
|
$
|
15,103
|
|
Office equipment
|
|
|
49,724
|
|
|
|
—
|
|
Machinery and equipment
|
|
|
21,937
|
|
|
|
—
|
|
Less: accumulated depreciation
|
|
|
(16,278
|
)
|
|
|
(1,844
|
)
|
|
|
$
|
75,948
|
|
|
$
|
13,259
|
|
Depreciation
expenses for the year ended March 31, 2019 and 2018 was $14,435 and
$1,844, respectively.
Fair Value of Financial Instrument
For certain
of the Company’s financial instruments, including cash and equivalents, accrued liabilities and short-term debt, the carrying
amounts approximate their fair values due to their short maturities. ASC Topic 820, “Fair Value Measurements and Disclosures,”
requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,”
defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances
disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables
and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the
short period of time between the origination of such instruments and their expected realization and their current market rate
of interest. The three levels of valuation hierarchy are defined as follows:
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 and equivalents, accounts receivable, accounts payable, and accrued expenses, approximate
fair value. Based on borrowing rates currently available to the Company for loans with similar terms, the carrying value of the
notes payable approximates fair value.
Per Share Amounts
Basic net loss per share is computed by
dividing loss for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted loss
per share gives effect to all potentially dilutive common shares outstanding during the period. For the year ended March 31, 2019,
the Company excluded 1,529,908 outstanding options to purchase common stock from the computation of diluted net loss per share,
as their inclusion would be anti-dilutive.
The following
table sets for the computation of basic and diluted earnings per share for the fiscal years ended March 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
March 31,
2019
|
|
|
March 31,
2018
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(2,539,498
|
)
|
|
$
|
(659,246
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss Per Share:
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(0.15
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number
of shares used in computing basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
16,589,633
|
|
|
|
13,336,309
|
|
Recently Issued Accounting
Pronouncements
In
May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, issued as a new Topic, ASC Topic 606.
The new revenue recognition standard supersedes all existing revenue recognition guidance. Under this ASU, an entity should recognize
revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. ASU 2015-14, issued in August 2015, deferred the effective date
of ASU 2014-09 to the first quarter of 2018, with early adoption permitted in the first quarter of 2018. The company has adopted
the new standard utilizing the modified retrospective approach. The adoption of this new accounting guidance does not have material
effects on results of operations, cash flows and financial position for the forceable future because the company does not have
revenues.
In January 2016,
The FASB issued ASU No. 2016-01, Financial Instruments - Recognition and Measurement of Financial Assets and Financial
Liabilities (Topic 825). ASU No. 2016-01 revises the classification and measurement of investments in certain equity investments
and the presentation of certain fair value changes for certain financial liabilities measured at fair value. ASU No. 2016-01 requires
the change in fair value of many equity investments to be recognized in net income. For non-public companies, ASU 2016-01 is effective
for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019.
We are currently evaluating the impact of the adoption of ASU 2016-01 will have on the Company’s consolidated financial
statements.
In August 2016,
the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.
This update addresses a diversity in practice in how certain cash receipts and cash payments are presented and classified in the
statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. The amendments in this Update are effective
for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.
Early adoption is permitted, including adoption in an interim period. The Company adopted this ASU in 2016 and the implementation
did not have a material impact on the Company’s financial position or statement of operations.
In
August 2018, the FASB issued guidance that eases certain documentation and assessment requirements of hedge effectiveness and
modifies the accounting for components excluded from the assessment. Some of the modifications include the ineffectiveness of
derivative gain/loss in highly effective cash flow hedge to be recorded in other comprehensive income, the change in fair value
of derivative to be recorded in the same income statement line as hedged item, and additional disclosures required on the cumulative
basis adjustment in fair value hedges and the effect of hedging on financial statement lines for components excluded from the
assessment. The amendment also simplifies the application of hedge accounting in certain situations to permit new hedging strategies
to be eligible for hedge accounting. The guidance is effective for annual reporting periods and interim periods within those annual
reporting periods beginning after December 15, 2018, our fiscal 2020. Early adoption is permitted and the modified retrospective
transition method should be applied. The Company does not expect the adoption of this guidance to have a material impact on
its consolidated financial statements.
In February 2016, FASB issued ASU No. 2016-02,
Leases (“Topic 842”). Topic 842 requires an entity to recognize right-of-use assets and lease liability on its balance
sheet and disclosure key information about leasing arrangements. For public companies, Topic 842 is effective for annual reporting
periods beginning after December 15, 2018, including interim periods within that reporting period, with early adoption permitted.
The Company has evaluated this ASU and believe this guidance will not have a material impact on the Company’s financial
position and statement of operations.
Other recent
accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public
Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on
the Company’s present or future consolidated financial statements.
Reclassification
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 flow.
NOTE 2 – REORGANIZATION AND
PRIVATE PLACEMENT
On
April 26, 2017, Modular Medical, Inc. issued 2,900,000 shares (the “Control Block”), of new, restricted common stock,
par value, $0.001, per share, for a purchase price of $375,000, resulting in a change in control of Modular Medical, Inc.
On July
24, 2017, pursuant to a Reorganization and Share Exchange Agreement, by and among, Modular Medical, Inc., 3 Quasuras Shareholders
and Quasuras (the “Acquisition Agreement”), the Company acquired all 4,400,000 shares of Quasuras’ common stock
which represented one hundred percent (100%) of the issued and outstanding shares of Quasuras for 7,582,060 shares of our common
stock, resulting in Quasuras becoming our wholly-owned subsidiary (the “Acquisition”).
Simultaneously
with the closing of the Acquisition and as a condition thereto, we sold (the “2017 Private Placement”), in a private
placement an aggregate of 7,233,031 for cash and 568,182 from reissuance of previously canceled shares of our common stock pursuant
to one or more exemptions from the registration requirements of the Securities Act, at a purchase price of $0.66 per share resulting
in net proceeds to us of approximately $4,731,872. Simultaneously with the Acquisition and Private Placement, the Company cancelled
all 2,900,000 Control Block shares it had issued in the Control Block Acquisition (the “Share Cancellation”). In connection
with the Private Placement, we paid $41,928 as compensation in connection with sales of our shares therein.
Following
the Acquisition, the 2017 Private Placement and the Share Cancellation, we had issued and outstanding 15,983,273 shares of our
common stock.
The cash received
in the private placement was recorded as the cash received in reorganization in the accompanying consolidated financial
statements.
Simultaneously
with and as a condition to the closing of the Acquisition and the Private Placement, pursuant to an Intellectual Property Transfer
Agreement, dated as of July 24, 2018, by and among the Company, Quasuras and Mr. DiPerna (the “IP Transfer Agreement”),
Mr. DiPerna transferred to the Company all intellectual property rights owned directly and/or indirectly by him related to the
Company’s proposed business. Separately, the Company agreed to pay Mr. DiPerna as part of his compensation for services
to be performed for the Company pursuant to a Royalty Agreement (the “Royalty Agreement”) certain fees based upon
future sales, if any, of the Company’s proposed product subject to a maximum $10,000,000 “cap” on the aggregate
amount of fees that Mr. DiPerna could earn from such arrangement.
NOTE 3 – ACCRUED EXPENSES
As of March
31, 2019, and 2018, accrued expenses amounted to $178,929 and $14,955, respectively. Accrued expenses comprised accrued legal
and professional, consultant services and year end employee bonuses as of March 31, 2019 and March 31, 2018.
NOTE 4 – PAYABLE TO
RELATED PARTY
Payable to related
party comprises of the amounts paid by the major shareholder on behalf of the Company. The payable is unsecured, non-interest
bearing and due on demand. As of March 31, 2019 and 2018, respectively, the payable to related party amounted to $0 and $516,
respectively.
NOTE 5 – STOCKHOLDERS’
EQUITY
Common Stock
On July
24, 2017, pursuant to a Reorganization and Share Exchange Agreement by and among, the Company and Quasuras Inc., the Company
acquired 100% of the issued and outstanding shares of Quasuras for 7,582,060 shares of common stock of
the Company, resulting in Quasuras becoming a wholly-owned subsidiary of the Company. The historical equity for Quasuras was
restated pursuant to the reorganization.
Preferred
Stock
The Company
has 5,000,000 shares of preferred stock authorized. The par value of the shares is $0.001. As of March 31, 2019, none of the shares
of preferred stock of the Company were issued.
2017 Equity Incentive Plan
On October 19, 2017, the board of
directors approved the 2017 Equity Incentive Plan (the “EIP”) that authorizes the board of directors or a committee
of the board of directors to grant a broad range of awards, including stock options, stock appreciation rights, restricted stock,
performance-based awards and restricted stock units. The EIP has a 10-year term and has a reserve of 3,000,000 shares of the Company’s
common stock for issuance. The term of options granted under the EIP may not exceed ten years. The term of all incentive stock
options granted to a person who, at the time of grant, owns stock representing more than 10% of the voting power of all classes
of the Company’s stock may not exceed five years.
Generally,
options granted under the Amended 2010 Plan vest over a three-year period and have a ten-year term. Under the EIP, the exercise
or purchase price shall be calculated as follows:
|
(i)
|
In
the case of an incentive stock option, (A) granted to employees who, at the time of the grant of such incentive stock option
own stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company, the per share
exercise price shall be not less than 110% of the fair market value per share on the date of grant; or (B) granted to employees
other than to employees described in the preceding clause, the per share exercise price shall be not less than 100% of the
fair market value per share on the date of grant;
|
|
(ii)
|
In
the case of a non-qualified stock option, the per share exercise price shall be not less than 100% of the fair market value
per share on the date of grant unless otherwise determined by the board of directors; and
|
|
(iii)
|
In the case
of other grants, such price as is determined by the board of directors.
|
The
board of directors is responsible for determining the consideration to be paid for the shares of common stock to be issued upon
exercise or purchase. The EIP generally doesn’t allow for the transfer of the options, and the board of directors may amend,
suspend or terminate the EIP at any time.
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. During the year ended March 31, 2019, the Company granted a total of
64,687 options to Mr. DiPerna in lieu of a portion of his salary. The options expire
10 years from the respective grant dates and vested immediately upon grant. The fair value of these options was determined to
be $42,761 and was included in general and administrative and research and development expenses for the year ended March
31, 2019.
The
following assumptions were used in the fair value method calculations:
|
|
Year Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
Risk-free interest rates
|
|
|
2.73
- 3.01
|
%
|
Volatility
|
|
|
71%
- 112
|
%
|
Expected life (years)
|
|
|
5.0
|
|
Dividend yield
|
|
|
—
|
%
|
During
the fiscal year ended March 31, 2019, the Company granted options to purchase 1,465,221 shares of common stock to certain directors
and consultants. The fair value of the options granted was $1,021,733, and the Company
has been recording stock-based compensation expense for each grant over the respective vesting periods. For the year ended
March 31, 2019, the Company recorded total stock-based compensation expense of $532,108, which is less than the total fair value.
The unamortized compensation cost as of March 31, 2019 was $529,625 related to stock options and is expected to be recognized
as expense over a weighted average period of approximately 1.8 years. The table below provides a reconciliation of
total fair value of the options granted and related expense recognized by the Company during fiscal 2019
Grantees
|
|
Option
Shares
|
|
|
Vesting
Periods
|
|
Total Fair
Value of
Options
|
|
|
2019 Stock-Based
Compensation
Expense
|
|
|
Unrecognized
expense at
March 31, 2019
|
|
Consultants
|
|
|
1,280,000
|
|
|
July 25, 2018 to July 24, 2019
|
|
$
|
682,240
|
|
|
$
|
466,197
|
|
|
$
|
216,043
|
|
Consultants
|
|
|
185,221
|
|
|
January 16, 2019 to January 15, 2022
|
|
$
|
336,732
|
|
|
$
|
23,150
|
|
|
$
|
313,582
|
|
Chief Executive Officer
|
|
|
64,687
|
|
|
*
|
|
$
|
42,761
|
|
|
$
|
42,761
|
|
|
|
—
|
|
Total
|
|
|
1,529,908
|
|
|
|
|
$
|
1,061,733
|
|
|
$
|
532,108
|
|
|
$
|
529,625
|
|
* Options were fully vested as
of the grant date, as disclosed above.
The
following assumptions were used in the fair value method calculation for the consultant options:
|
|
Year Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
Risk-free interest rates
|
|
|
2.54
- 2.82
|
%
|
Volatility
|
|
|
104%
- 110
|
%
|
Expected life (years)
|
|
|
5.21 - 5.88
|
|
Dividend yield
|
|
|
—
|
%
|
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 of three comparable organizations. 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.
In
accordance with ASU No. 2016-09, the Company accounts for forfeitures as they occur.
A summary of stock option activity under the EIP is presented below.
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Shares
|
|
|
|
|
|
Average
|
|
|
|
Available
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
for Grant
|
|
|
Shares
|
|
|
Prices
|
|
Balance at April 1, 2017
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Shares authorized under the
EIP
|
|
|
3,000,000
|
|
|
|
—
|
|
|
|
—
|
|
Balance at March 31, 2018
|
|
|
3,000,000
|
|
|
|
—
|
|
|
$
|
—
|
|
Options granted
|
|
|
(1,529,908
|
)
|
|
|
1,529,908
|
|
|
$
|
0.86
|
|
Balance at March 31, 2019
|
|
|
1,470,092
|
|
|
|
1,529,908
|
|
|
$
|
0.86
|
|
There were no stock options exercised during the years ended March 31, 2019 or 2018.
The following table summarizes the range of outstanding and exercisable options as of March 31, 2019:
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Contractual
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
Life
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
|
Intrinsic
|
|
Range of Exercise Price
|
|
Outstanding
|
|
|
(in Years)
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
value
|
|
$0.66 - $2.25
|
|
|
1,529,908
|
|
|
|
9.39
|
|
|
$
|
0.86
|
|
|
|
918,020
|
|
|
|
0.68
|
|
|
$
|
—
|
|
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 years ended March
31, 2019 and 2018, there were no such tax benefits associated with the exercise of stock options.
NOTE 6 – INCOME TAXES
Based
on the available information and other factors, management believes it is more likely than not that its net deferred tax assets
will not be fully realizable. Accordingly, management has recorded
a full valuation allowance against its net deferred tax assets at, March 31, 2019 and 2018. At March 31, 2019 and 2018, the Company
had federal net operating loss carry-forwards of approximately $817,000 and $182,500,
respectively, expiring beginning in 2037.
Deferred tax assets consist of the
following components:
|
|
March 31,
2019
|
|
|
March 31,
2018
|
|
Net operating loss carryforward
|
|
$
|
817,000
|
|
|
$
|
182,500
|
|
Valuation allowance
|
|
|
(817,000
|
)
|
|
|
(182,500
|
)
|
Total deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
NOTE 7 – ROYALTY AGREEMENT
On July 24,
2017, the Company entered into the Royalty Agreement under which the Company shall pay royalty to the founder 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 shall cease and
the Royalty Agreement shall terminate, at such time as the total sum of royalty payments actually paid to the founder, pursuant
to this agreement, reaches $10,000,000. The Company shall have the option to terminate
this agreement at any time upon payment, to the 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, shall be made by the Company
within thirty days after the calendar quarter.
NOTE 8 – LEASE AGREEMENT
On
August 21, 2017, the Company entered into a sublease agreement to rent office space. The term of the lease commences on September
1, 2017 and expires on December 14, 2019. The monthly rent for the lease is $3,000. For the remaining lease term, the rent
balance is $27,000, $3,000 payable monthly. The Company paid a deposit of $7,500 upon execution of the lease which has been recorded
as a security deposit in the accompanying consolidated financial statements.
Modular
Medical, Inc. and its Subsidiary
(f/k/a- Bear Lake Recreation, Inc.)
Condensed Consolidated Balance Sheets
|
|
|
|
|
|
|
ASSETS
|
|
June 30, 2019
(UNAUDITED)
|
|
|
March 31,
2019
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,706,628
|
|
|
$
|
6,553,768
|
|
Other current assets
|
|
|
9,500
|
|
|
|
15,590
|
|
TOTAL CURRENT ASSETS
|
|
|
5,716,128
|
|
|
|
6,569,358
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
172
|
|
|
|
180
|
|
Property and equipment, net
|
|
|
75,961
|
|
|
|
75,948
|
|
Security deposit
|
|
|
7,500
|
|
|
|
7,500
|
|
TOTAL NON-CURRENT ASSETS
|
|
|
83,633
|
|
|
|
83,628
|
|
TOTAL ASSETS
|
|
$
|
5,799,761
|
|
|
$
|
6,652,986
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
253,474
|
|
|
$
|
178,929
|
|
TOTAL CURRENT LIABILITIES
|
|
|
253,474
|
|
|
|
178,929
|
|
TOTAL LIABILITIES
|
|
|
253,474
|
|
|
|
178,929
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Preferred Stock, $0.001 par value, 5,000,000 shares
authorized, none issued and outstanding
|
|
|
—
|
|
|
|
—
|
|
Common Stock, $0.001 par value, 50,000,000 shares authorized, 17,870,261
shares issued and outstanding as of June 30, 2019 and 17,840,261 as of March 31, 2019
|
|
|
17,870
|
|
|
|
17,840
|
|
Additional paid-in capital
|
|
|
9,898,776
|
|
|
|
9,684,578
|
|
Common stock issuable
|
|
|
—
|
|
|
|
19,800
|
|
Accumulated deficit
|
|
|
(4,370,359
|
)
|
|
|
(3,248,161
|
)
|
TOTAL STOCKHOLDERS’ EQUITY
|
|
|
5,546,287
|
|
|
|
6,474,057
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’
EQUITY
|
|
$
|
5,799,761
|
|
|
$
|
6,652,986
|
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Modular
Medical, Inc. and its Subsidiary
(f/k/a- Bear Lake Recreation, Inc.)
Consolidated Statements of Operations
|
|
Three Months Ended
|
|
|
|
June 30, 2019
(UNAUDITED)
|
|
|
June 30, 2018
(UNAUDITED)
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
Professional expenses
|
|
|
287,831
|
|
|
|
41,710
|
|
Research and development
|
|
|
703,783
|
|
|
|
135,789
|
|
General and administration expenses
|
|
|
139,912
|
|
|
|
76,296
|
|
Depreciation and amortization expenses
|
|
|
6,714
|
|
|
|
1,395
|
|
Total Operating Expenses
|
|
|
1,138,240
|
|
|
|
255,190
|
|
Loss From Operations
|
|
|
(1,138,240
|
)
|
|
|
(255,190
|
)
|
|
|
|
|
|
|
|
|
|
Other Income (Expenses):
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
16,042
|
|
|
|
5,624
|
|
|
|
|
|
|
|
|
|
|
Loss Before Income Taxes
|
|
|
(1,122,198
|
)
|
|
|
(249,566
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(1,122,198
|
)
|
|
$
|
(249,566
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss Per Share
|
|
|
|
|
|
|
|
|
Basic and Diluted:
|
|
$
|
(0.06
|
)
|
|
$
|
(0.02
|
)
|
Weighted average number of
shares used in computing basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
17,847,740
|
|
|
|
15,983,273
|
|
Diluted
|
|
|
17,847,740
|
|
|
|
15,983,273
|
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Modular
Medical, Inc. and its Subsidiary
(f/k/a- Bear Lake Recreation, Inc.)
Consolidated Statements of Cash Flows
|
|
Three Months Ended
|
|
|
|
June 30, 2019
(UNAUDITED)
|
|
|
June 30, 2018
(UNAUDITED)
|
|
Net loss
|
|
$
|
(1,122,198
|
)
|
|
$
|
(249,566
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Stock-Based Compensation
|
|
|
194,428
|
|
|
|
—
|
|
Depreciation and amortization
|
|
|
6,714
|
|
|
|
1,395
|
|
|
|
|
|
|
|
|
|
|
Increase/Decrease in current assets:
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
6,090
|
|
|
|
10,248
|
|
|
|
|
|
|
|
|
|
|
Decrease in current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
74,545
|
|
|
|
1,704
|
|
Net cash used in operating activities
|
|
|
(840,421
|
)
|
|
|
(236,219
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
(6,719
|
)
|
|
|
(6,170
|
)
|
Net cash used in investing activities
|
|
|
(6,719
|
)
|
|
|
(6,170
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Repayment to related party
|
|
|
—
|
|
|
|
(516
|
)
|
Net cash used in financing activities
|
|
|
—
|
|
|
|
(516
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
(847,140
|
)
|
|
|
(242,905
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, at the beginning of the period
|
|
|
6,553,768
|
|
|
|
4,296,676
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, at the end of the period
|
|
$
|
5,706,628
|
|
|
$
|
4,053,771
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES:
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Income tax
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest
|
|
$
|
—
|
|
|
$
|
—
|
|
Common
stock issuable was met. Therefore, $19,800 was re-classed from common stock issuable to common stock in the Stockholders’
equity.
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
MODULAR
MEDICAL, INC.
F/K/A
BEAR LAKE RECREATION, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019
(UNAUDITED)
NOTE
1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Modular
Medical, Inc. (the “Company”) was organized under the laws of the State 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
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 too high. By addressing the time
and effort required to effectively treat their condition, Quasuras believes it can address the less technically savvy, less motivated
part of the market.
Reorganization
On
July 24, 2017, pursuant to a Reorganization and Share Exchange Agreement, by and among the Company and Quasuras, the Company acquired
one hundred percent (100%) of the issued and outstanding shares of Quasuras for 7,582,060 shares of the Company, resulting in
Quasuras becoming a wholly-owned subsidiary of the Company. Since 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 Reorganization, at their historical carrying amounts.
Pursuant
to the reorganization, the Company changed the fiscal year end from June 30 to March 31, to coincide with the year end for Quasuras.
The
consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted
in the United States of America. The following summarizes the more significant of such policies:
Basis
of Presentation
The
preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”)
requires management to make estimates and assumptions that affect reported amounts and related disclosures.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Modular Medical, Inc. and its wholly-owned subsidiary Quasuras, Inc.,
and are collectively referred to as the “Company.”
All material intercompany accounts, transactions and profits were eliminated in consolidation.
Use
of Estimates
The
preparation of the accompanying 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 consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Reportable
Segment
The
Company has one reportable segment. The Company’s activities are interrelated and each activity is dependent upon and supportive
of the other. Accordingly, all significant operating decisions are based on analysis of financial products provided as a single
global business.
Professional
Fees
The
Company expenses the cost of legal, accounting, audit, tax and other professional services.
Research
and Development
The
Company expenses the cost of research and development as incurred. Research and development costs charged to operations were approximately
$703,783 and $135,789 for the fiscal quarter ended June 30, 2019 and 2018, respectively.
General
and Administrative
General
and administrative expense consists primarily of payroll and benefit related costs, rent, office expenses, equipment supplies
and meetings and travel.
Income
Taxes
The
Company utilizes Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 740, Income Taxes,
which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that were
included in the consolidated financial statements or tax returns. Under this method, deferred income taxes are recognized for
the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting
amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to
the amount expected to be realized.
The
Company accounts for uncertain tax positions in accordance with FASB ASC Topic 740. When tax returns are filed, it is likely that
some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about
the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position
is recognized in the consolidated financial statements in the period during which, based on all available evidence, management
believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals
or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet
the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent
likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax
positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits
in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the
taxing authorities upon examination. Interest associated with unrecognized tax benefits is classified as interest expense and
penalties are classified in selling, general and administrative expenses in the consolidated statements of income.
At
June 30, 2019 and 2018, the Company had not taken any significant uncertain tax positions on its tax returns for periods ended
June 30, 2019 and prior years or in computing its tax provision for 2019. Management has considered its tax positions and believes
that all of the positions taken by the Company in its federal and state tax returns are more likely than not to be sustained upon
examination. The Company’s tax returns are subject to examination by U.S. Federal and State tax authorities for the period
ended March 31, 2017 to the present, generally for three years after they are filed.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to concentration of credit risk consist primarily of cash and accounts receivable.
The Company maintains cash balances at financial institutions within the United States, which are insured by the Federal Deposit
Insurance Corporation (FDIC) up to limits of approximately $250,000. The Company has not experienced any losses with regard to
its bank accounts and believes it is not exposed to any risk of loss on its cash bank accounts.
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.
Contingencies
Certain
conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company
but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal
counsel assess such contingent liabilities, and such assessment inherently involves judgment. In assessing loss contingencies
related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the
Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived
merits of the amount of relief sought or expected to be sought.
If
the assessment of a contingency indicates it is probable that a material loss has been incurred and the amount of the liability
can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the
assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but
cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable
and material would be disclosed. Loss contingencies considered to be remote by management are generally not disclosed unless they
involve guarantees, in which case the guarantee would be disclosed.
Cash
and Cash Equivalents
Cash
and cash equivalents include cash in hand and cash in demand deposits, certificates of deposit and all highly liquid debt instruments
with original maturities of three months or less. At June 30, 2019 and March 31, 2019, the Company had $5,706,628 and $6,553,768,
respectively, in cash. Deposits at the bank are insured up to $250,000 by the Federal Deposit Insurance Corporation. The Company’s
uninsured portion of the balances held at the bank aggregated to approximately $5,421,940 and $6,269,116 respectively. No reserve
has been made in the financial statements for any possible loss due to any financial institution failure. The Company
has not experienced any losses in such accounts and believes it is not exposed to any significant risk on cash and cash equivalents.
Property,
Plant & Equipment
Property
and equipment is stated at cost and depreciated using the straight-line method over the shorter of the estimated useful life of
the asset or the lease term. The estimated useful lives of our property and equipment are generally as follows: computer equipment&
software developed or acquired for internal use, three to ten years; office equipment, two to three years; buildings and improvements,
five to fifteen years; leasehold improvements, two to ten years; and machinery and equipment, one to five years.
As
of June 30, 2019 and March 31, 2019, property, plant and equipment amounted to:
|
|
June 30, 2019
(UNAUDITED)
|
|
|
March 31, 2019
|
|
Computer equipment and software
|
|
$
|
25,028
|
|
|
$
|
20,565
|
|
Office equipment
|
|
|
49,724
|
|
|
|
49,724
|
|
Machinery and equipment
|
|
|
24,194
|
|
|
|
21,937
|
|
Less: accumulated depreciation
|
|
|
(22,985
|
)
|
|
|
(16,278
|
)
|
|
|
$
|
75,961
|
|
|
$
|
75,948
|
|
Depreciation
expenses for the quarter ended June 30, 2019 and March 31, 2019 was $6,707 and $1,387 respectively.
Fair
Value of Financial Instrument
For
certain of the Company’s financial instruments, including cash and equivalents, accrued liabilities and short-term debt,
the carrying amounts approximate their fair values due to their short maturities. ASC Topic 820, “Fair Value Measurements
and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial
Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement
that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets
for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values
because of the short period of time between the origination of such instruments and their expected realization and their current
market rate of interest. The three levels of valuation hierarchy are defined as follows:
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 and equivalents, accounts receivable, accounts payable, and accrued expenses,
approximate fair value. Based on borrowing rates currently available to the Company for loans with similar terms, the carrying
value of the notes payable approximates fair value.
Per
Share Amounts
Basic
net loss per share is computed by dividing loss for the period by the weighted-average number of shares of common stock
outstanding during the period. Diluted loss per share gives effect to all potentially dilutive common shares outstanding
during the period. For the three months ended June 30, 2019, the Company excluded 1,552,594 outstanding options to
purchase common stock from the computation of diluted net loss per share, as their inclusion would be
anti-dilutive.
The
following table sets for the computation of basic and diluted earnings per share for the fiscal quarters ended June 30, 2019 and
June 30, 2018:
|
|
|
|
|
|
|
|
|
June 30, 2019
(UNAUDITED)
|
|
|
June 30, 2018
(UNAUDITED)
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(1,122,198
|
)
|
|
$
|
(249,566
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss Per Share:
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(0.06
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of
shares used in computing basic and diluted net loss
per share:
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
17,847,740
|
|
|
|
15,983,273
|
|
Recently
Issued Accounting Pronouncements
In
May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, issued as a new Topic, ASC Topic 606.
The new revenue recognition standard supersedes all existing revenue recognition guidance. Under this ASU, an entity should recognize
revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. ASU 2015-14, issued in August 2015, deferred the effective date
of ASU 2014-09 to the first quarter of 2018, with early adoption permitted in the first quarter of 2018. The Company has adopted
the new standard utilizing the modified retrospective approach. The adoption of this new accounting guidance does not have material
effects on results of operations, cash flows and financial position for the forceable future because the Company does not have
revenues.
In
January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Recognition and Measurement of Financial Assets
and Financial Liabilities (Topic 825). ASU No. 2016-01 revises
the classification and measurement of investments in certain equity investments and the presentation of certain fair value changes
for certain financial liabilities measured at fair value. ASU No. 2016-01 requires the change in fair value of many equity investments
to be recognized in net income. For non-public companies, ASU 2016-01 is effective for fiscal years beginning after December 15,
2018, and interim periods within fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact
of the adoption of ASU 2016-01 will have on its consolidated financial statements.
In
August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and
Cash Payments. This update addresses a diversity in practice in how certain cash receipts and cash payments are presented and
classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. The amendments in this Update
are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those
fiscal years. Early adoption is permitted, including adoption in an interim period. The Company adopted this ASU in 2016 and
the implementation did not have a material impact on its financial position or statement of operations.
In
February 2016, the FASB issued ASU No. 2016-02, Leases (“Topic 842”). Topic 842 requires an entity to recognize right-of-use
assets and lease liability on its balance sheet and disclosure key information about leasing arrangements. For public companies,
Topic 842 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting
period, with early adoption permitted. The Company has evaluated this ASU and believe this guidance will not have a material impact
on its financial position and statement of operations.
Other
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact
on the Company’s present or future consolidated financial statements.
Reclassification
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 flow.
NOTE
2 – REORGANIZATION AND PRIVATE PLACEMENT
On
April 26, 2017, Modular Medical, Inc. issued 2,900,000 shares (the “Control Block”), of new, restricted common stock,
par value, $0.001, per share, for a purchase price of $375,000, resulting in a change in control of Modular Medical, Inc.
On
July 24, 2017, pursuant to a Reorganization and Share Exchange Agreement, by and among, Modular Medical, Inc., 3 Quasuras Shareholders
and Quasuras (the “Acquisition Agreement”), the Company acquired all 4,400,000 shares of Quasuras’ common stock
which represented one hundred percent (100%) of the issued and outstanding shares of Quasuras for 7,582,060 shares of our common
stock, resulting in Quasuras becoming our wholly-owned subsidiary (the “Acquisition”).
Simultaneously
with the closing of the Acquisition and as a condition thereto, the Company sold (the “2017 Private Placement”), in
a private placement an aggregate of 7,233,031 for cash and 568,182 from reissuance of previously canceled shares of our common
stock pursuant to one or more exemptions from the registration requirements of the Securities Act, at a purchase price of $0.66
per share resulting in net proceeds to us of approximately $4,731,872.
Simultaneously with the Acquisition and Private Placement, the Company cancelled all 2,900,000 Control Block shares it had issued
in the Control Block Acquisition (the “Share Cancellation”). In connection with the 2017 Private Placement, the
Company paid $41,928 as compensation in connection with sales of our shares therein.
Following
the Acquisition, the 2017 Private Placement and the Share Cancellation, the Company had issued and outstanding 15,983,273 shares
of its common stock.
The
cash received in the private placement was recorded as the cash received in reorganization in the accompanying consolidated financial
statements.
Simultaneously
with and as a condition to the closing of the Acquisition and the 2017 Private Placement, pursuant to an Intellectual Property
Transfer Agreement, dated as of July 24, 2018, by and among us, Quasuras and Mr. DiPerna (the “IP Transfer Agreement”),
Mr. DiPerna transferred to us all intellectual property rights owned directly and/or indirectly by him related to our proposed
business. Separately, the Company agreed to pay Mr. DiPerna as part of his compensation for services to be performed for the
Company pursuant to a Royalty Agreement (the “Royalty Agreement”) certain fees based upon future sales, if any, of
our proposed product subject to a maximum $10,000,000 “cap” on the aggregate amount of fees that Mr. DiPerna could
earn from such arrangement.
NOTE
3 – ACCRUED EXPENSES
As
of June 30, 2019 and March 31, 2019, accrued expenses amounted to $253,474 and $178,929 respectively. Accrued expenses comprised
accrued legal and professional, consultant services as of June 30, 2019 and March 31, 2019.
NOTE 4
– PAYABLE TO RELATED PARTY
Payable
to related party comprises the amounts paid by the major shareholder on behalf of the Company. The payable is unsecured, non-interest
bearing and due on demand. As of June 30, 2019 and March 31, 2019, respectively, there were no amounts payable to related party.
NOTE
5 – STOCKHOLDERS’ EQUITY
Common
stock
On
July 24, 2017, pursuant to a Reorganization and Share Exchange Agreement, by and among, the Company and Quasuras Inc., the Company
acquired one hundred percent (100%) of the issued and outstanding shares of Quasuras for 7,582,060 shares of the Company, resulting
in Quasuras becoming a wholly-owned subsidiary of the Company. The historical equity for Quasuras was restated pursuant to the
reorganization.
The
Company has 50,000,000 shares of common stock authorized. The par value of the shares is $0.001. In April 2019 the Company issued
30,000 shares for services bringing the outstanding balance to 17,870,261 shares of common stock.
2017
Equity Incentive Plan
On
October 19, 2017, the board of directors approved the 2017 Equity Incentive Plan (the “EIP”) that authorizes the board
of directors or a committee of the board of directors to grant a broad range of awards, including stock options, stock appreciation
rights, restricted stock, performance-based awards and restricted stock units. The EIP has a 10-year term and has a reserve of
3,000,000 shares of the Company's common stock for issuance. The term of options granted under the EIP may not exceed ten years.
The term of all incentive stock options granted to a person who, at the time of grant, owns stock representing more than 10% of
the voting power of all classes of the Company's stock may not exceed five years.
Generally,
options granted under the Amended 2010 Plan vest over a three-year period and have a ten-year term. Under the EIP, the exercise
or purchase price shall be calculated as follows:
(i)
|
In
the case of an incentive stock option, (A) granted to employees who, at the time of the grant of such incentive stock option
own stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company, the per share
exercise price shall be not less than 110% of the fair market value per share on the date of grant; or (B) granted to employees
other than to employees described in the preceding clause, the per share exercise price shall be not less than 100% of the
fair market value per share on the date of grant;
|
(ii)
|
In
the case of a non-qualified stock option, the per share exercise price shall be not less than 100% of the fair market value
per share on the date of grant unless otherwise determined by the board of directors; and
|
(iii)
|
In
the case of other grants, such price as is determined by the board of directors.
|
The board of directors is responsible for
determining the consideration to be paid for the shares of common stock to be issued upon exercise or purchase. The EIP generally
doesn’t allow for the transfer of the options, and the board of directors may amend, suspend or terminate the EIP at any
time.
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. The unamortized compensation cost, as of June 30, 2019, was $285,799 related to stock options and is expected to be recognized as expense over a weighted-average period of approximately 0.5 years.
During the three months ended June 30, 2019, the Company granted options to purchase 22,686 shares of its common stock to employees, directors and consultants. The options had a 10-year term, and 13,685 options vested immediately on the date of grant. The fair value of the options was determined to be $39,431, and $24,514 was recorded as stock-based compensation expense and included in general and administrative and research and development expenses in the consolidated statement of operations for the three months ended June 30, 2019.
The
following assumptions were used in the fair value method calculations:
|
|
Three Months Ended
|
|
|
|
June 30, 2019
|
|
Risk-free interest rates
|
|
|
2.15%
- 2.41
|
%
|
Volatility
|
|
|
97%
- 102
|
%
|
Expected life (years)
|
|
|
5.0 - 6.0
|
|
Dividend yield
|
|
|
—
|
%
|
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 of three comparable organizations. 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.
In
accordance with ASU No. 2016-09, the Company accounts for forfeitures as they occur.
A summary of stock option activity under the EIP is presented below:
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Shares
|
|
|
|
|
|
Average
|
|
|
|
Available
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
for Grant
|
|
|
Shares
|
|
|
Prices
|
|
Balance at April 1, 2019
|
|
|
1,470,092
|
|
|
|
1,529,908
|
|
|
$
|
0.86
|
|
Options granted
|
|
|
(22,686
|
)
|
|
|
22,686
|
|
|
$
|
2.25
|
|
Balance at June 30, 2019
|
|
|
1,447,406
|
|
|
|
1,552,594
|
|
|
$
|
0.88
|
|
There
were no stock options exercised during the three months ended June 30, 2019 or June 30, 2018.
The
following table summarizes the range of outstanding and exercisable options as of June 30, 2019:
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Contractual
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
Life
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
|
Intrinsic
|
|
Range of Exercise Price
|
|
Outstanding
|
|
|
(in Years)
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
value
|
|
$0.66 - $2.25
|
|
|
1,552,594
|
|
|
|
9.15
|
|
|
$
|
0.88
|
|
|
|
1,251,705
|
|
|
|
0.69
|
|
|
$
|
—
|
|
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 three months ended
June 30, 2019 and 2018, there were no such tax benefits associated with the exercise of stock options.
NOTE
6 – INCOME TAXES
Based
on the available information and other factors, management believes it is more likely than not that the net deferred tax assets
will not be fully realizable. Accordingly, management has recorded
a full valuation allowance against its net deferred tax assets at June 30, 2019 and March 31, 2019. At June 30, 2019 and March
31, 2019, the Company had federal net operating loss carryforwards of approximately $1,098,000 and $817,000 respectively, expiring
beginning in 2037.
Deferred
tax assets consist of the following components:
|
|
June 30, 2019
|
|
|
March 31, 2019
|
|
Net loss carryforward
|
|
$
|
1,098,000
|
|
|
$
|
817,000
|
|
Valuation allowance
|
|
|
(1,098,000
|
)
|
|
|
(817,000
|
)
|
Total deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
NOTE
7 – ROYALTY AGREEMENT
On
July 12, 2017, the Company entered into a royalty agreement with the founder and major shareholder. Pursuant to the agreement,
the founder and major shareholder is assigning and transferring all of his rights in the intellectual property in return for royalty
payments. The Company shall pay royalty to the founder 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 shall cease, and this agreement shall terminate, at such time as the
total sum of royalty payments actually paid to the founder, pursuant to this agreement, reaches $10,000,000. The Company shall
have the option to terminate this agreement at any time upon payment, to the 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,
shall be made by the Company within thirty days after the calendar quarter.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution.
The following
table sets forth the estimated expenses payable by the registrant in connection with the sale of shares of our common stock covered
by this registration statement, other than sales commissions or discounts, and related expenses, which will be paid by the selling
shareholders. All amounts shown, except the SEC registration fee, are estimates:
|
|
|
|
|
SEC registration fee
|
|
$
|
3500
|
|
Printing expenses
|
|
|
10,000
|
|
Legal fees and expenses
|
|
|
75,000
|
|
Accounting fees and expenses
|
|
|
10,000
|
|
Miscellaneous fees and expenses
|
|
|
10,000
|
|
Total
|
|
$
|
108,500
|
|
|
|
|
|
|
Item
14. Indemnification of Directors and Officers.
Our Second
Amended and Restated Articles of Incorporation and our Amended and Restated Bylaws provide that each person who was or is made
a party or is threatened to be made a party to or is otherwise involved (including, without limitation, as a witness) in any action,
suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was one
of our directors or officers or is or was serving at our request as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, whether the basis of such action, suit or proceeding is alleged action
in an official capacity as a director, officer or trustee or in any other capacity while serving as a director, officer or trustee,
shall be indemnified and held harmless by us to the fullest extent authorized by the Nevada Revised Statutes, or NRS, against
all expense, liability and loss (including attorneys’ fees and amounts paid in settlement) reasonably incurred or suffered
by such.
NRS 78.7502
permits a corporation to indemnify any director or officer of the corporation against expenses (including attorneys’ fees)
and amounts paid in settlement actually and reasonably incurred in connection with any action, suit or proceeding brought by reason
of the fact that such person is or was a director or officer of the corporation, if such person (i) is not liable pursuant to
NRS 78.138 and (ii) acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the conduct
was unlawful. In a derivative action (i.e., one brought by or on behalf of the corporation), indemnification may be provided only
for expenses actually and reasonably incurred by any director or officer in connection with the defense or settlement of such
an action or the suit if such person (i) is not liable pursuant to NRS 78.138 and (ii) acted in good faith and in a manner which
he or she reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification
shall be provided if such person shall have been adjudged to be liable to the corporation, unless and only to the extent that
the court in which the action or suit was brought or some other court of competent jurisdiction determines that such person is
fairly and reasonably entitled to indemnity for such expenses as the court deems proper.
Our Second
Amended and Restated Articles of Incorporation provide that the liability of our directors and officers shall be eliminated or
limited to the fullest extent permitted by the NRS. NRS 78.138(7) provides that, subject to limited statutory exceptions and unless
the articles of incorporation or an amendment thereto (in each case filed on or after October 1, 2003) provide for greater individual
liability, a director or officer is not individually liable to a corporation or its stockholders or creditors for any damages
as a result of any act or failure to act in his or her capacity as a director or officer unless it is proven that: (i) the act
or failure to act constituted a breach of his or her fiduciary duties as a director or officer and (ii) the breach of those duties
involved intentional misconduct, fraud or a knowing violation of law.
The foregoing
discussion of our Second Amended and Restated Articles of Incorporation, Amended and Restated Bylaws and Nevada law is not intended
to be exhaustive and is qualified in its entirety by such Second Amended and Restated Articles of Incorporation, Amended and Restated
Bylaws, indemnification agreements, indemnity agreement, or law.
Item
15. Recent Sales of Unregistered Securities.
On April
26, 2017, pursuant to a Common Stock Purchase Agreement, dated as of July 24, 2017, by and among Manchester Explorer, LP, a Delaware
limited partnership (“Manchester”), the Company and certain other persons named therein, Manchester purchased from
us 2,900,000 shares of our common stock representing in excess of a majority of our then issued and outstanding common stock,
for a purchase price of $375,000 (the “Control Block Acquisition”), resulting in a change in control of the Company.
Simultaneously with the closing of the Acquisition (as defined below), Manchester cancelled the 2,900,000 shares of our common
stock it purchased in the April 2017 Control Block Acquisition.
On July
24, 2017, pursuant to a Reorganization and Share Exchange Agreement, by and among the Company, Mr. DiPerna, the sole officer,
director and a controlling stockholder of Quasuras, Messrs. Besser and Frank (Messrs. Besser, Frank and DiPerna, collectively,
the “3 Quasuras Shareholders”), and Quasuras, the Company acquired all of the issued and outstanding shares of Quasuras
owned by the 3 Quasuras Shareholders in exchange for 7,582,060 shares of our common stock of which Messrs DiPerna, Besser and
Frank received 7,220,400 shares, 180,830 shares and 180,830 shares, respectively, resulting in Quasuras becoming our wholly-owned
subsidiary (the “Acquisition”).
Messrs.
Besser and Frank each previously purchased for $50,000 approximately 2.25% of the capital stock of Quasuras, and as a result each
received 180,830 shares of our common stock in the Acquisition.
On July
24, 2017, simultaneously with the closing of the Acquisition, we sold in the 2017 Placement an aggregate of 7,801,213 shares of
our common stock at a purchase price of $0.66 per share resulting in gross proceeds to us of approximately $4,731,872. In connection
with the 2017 Placement, we paid $41,928 as compensation in connection with sales of our shares.
During
our fiscal year ending March 31, 2019, we sold from November 2018 through March 29, 2019, in the 2018 Placement 1,856,988 shares
of our common stock at a purchase price of $2.25 per share resulting in gross proceeds to us of $4,142,666 (the “2018 Private
Placement”).
From
August 15, 2018 to January 16, 2019 we issued stock options to purchase 1,529,908 shares of our common stock at exercise prices
ranging from $0.66 to $2.25 all under our EIP.
The above
sales of our shares of common stock were made pursuant to exemptions from registration pursuant to Section 4(2) and/or Rule 506
of Regulation D of the Securities Act. We made such determinations based upon representations by the purchasers of such shares
including, without limitation, that such purchasers were “accredited investors” as defined in the Securities Act.
Item
16. Exhibits.
The Index
to Exhibits listing the exhibits required by Item 601 of Regulation S-K is located on the page immediately following the signature
page to this registration statement.
Item
17. Undertakings.
The undersigned
registrant hereby undertakes:
(a) (1) To
file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement;
(i) To
include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
(ii) To
reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high
and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.
(iii) To
include any material information with respect to the plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement.
(A)
Paragraphs (a)(1)(i) and (a)(1)(ii) of this section do not apply if the registration statement is on Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the
Commission by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934, as amended (“Securities
Exchange Act of 1934”) (15 U.S.C. 78m or 78o(d)) that are incorporated by reference in the registration statement; and
(B)
Paragraphs (a)(1)(i), (a)(1)(ii) and (a)(1)(iii) of this section do not apply if the registration statement is on Form S-3 or
Form F-3 and the information required to be included in a post-effective amendment by those paragraphs is contained in reports
filed with or furnished to the Commission by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange
Act of 1934 that are incorporated by reference in the registration statement, or is contained in a form of prospectus filed pursuant
to Rule 424(b) that is part of the registration statement.
(2) That,
for the purpose of determining any liability under the Securities Act of 1933, as amended (“Securities Act”) each
such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To
remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at
the termination of the offering.
(4) That,
for the purpose of determining any liability under the Securities Act, each Prospectus filed pursuant to Rule 424(b) as part of
a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than Prospectuses
filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is
first used after effectiveness. Provided, however, that no statement made in a registration statement or Prospectus that
is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration
statement or Prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior
to such first use, supersede or modify any statement that was made in the registration statement or Prospectus that was part of
the registration statement or made in any such document immediately prior to such date of first use.
(5) That,
for the purpose of determining liability under the Securities Act to any purchaser:
(ii) If
the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating
to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A,
shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness.
Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement
or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part
of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify
any statement that was made in the registration statement or prospectus that was part of the registration statement or made in
any such document immediately prior to such date of first use.
(6) That,
for the purpose of determining liability of the registrant under the Securities Act to any purchaser in the initial distribution
of the securities: The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant
pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if
the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant
will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) Any
preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule
424;
(ii) Any
free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to
by the undersigned registrant;
(iii) The
portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant
or its securities provided by or on behalf of the undersigned registrant; and
(iv) Any
other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
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(3)
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Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may be permitted
to directors, officers and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such indemnification by it
is against public policy as expressed in the Act and will be governed by the final adjudication
of such issue.
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(i) The
undersigned registrant hereby undertakes that:
(1)
For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement
as of the time it was declared effective.
(2)
For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized in La Jolla, California, on the 18th day of October, 2019.
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MODULAR
MEDICAL, INC.
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By:
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/s/
Paul DiPerna
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Paul
DiPerna
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Chairman, Chief
Executive Officer,
President and Chief Financial Officer
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Pursuant
to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the
capacities and on the dates indicated below.
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Signature
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Title
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Date
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By:
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/s/
Paul DiPerna
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Chairman,
Chief Executive Officer, President,
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October
18, 2019
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Paul
Diperna
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and
Chief Financial Officer
(Principal Executive Officer and Principal
Financial and Accounting Officer)
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By:
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*
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Director
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October
18, 2019
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Morgan
C. Frank
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By:
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*
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Director
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October
18, 2019
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Liam
Burns
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By:
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/s/
Paul DiPerna
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October
18, 2019
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Paul
Diperna
Attorney-In-Fact
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EXHIBIT
INDEX
No.
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Description
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2.1
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Reorganization
and Share Exchange Agreement, dated as of July 24, 2017, by and among Modular Medical, Inc., Quasuras, Inc., Paul DiPerna
and the other stockholders of Quasuras, Inc. (incorporated by reference to Exhibit 2.1 to Current Report of the Company on Form 8-K filed on July 28, 2017 with the SEC)
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3.1
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Second
Amended and Restated Articles of Incorporation, as filed with the Secretary of State of Nevada on June 27, 2017 (incorporated by reference to Exhibit 3.1 to Current Report of the Company on Form 8-K filed on June 29, 2017 with the SEC)
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3.2
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Amended
Bylaws of Company (incorporated by reference to Exhibit 3.2 of Form 10-K-A of the Company for June 30, 2008 filed on September 2, 2009 with the SEC)
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4.1
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2017
Equity Incentive Plan (incorporated by reference to Exhibit 4.1 to Form 10-K of the Company for 2018 filed on June 29, 2018 with the SEC)
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5.1*
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Opinion of Gusrae Kaplan Nusbaum PLLC
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10.1
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Common
Stock Purchase Agreement, dated as of April 5, 2017, by and among Bear Lake Recreation, Inc., Manchester Explorer, LP, a Delaware
limited partnership, and certain person named therein (incorporated by reference to Exhibit 10.2 to Current Report of the Company on Form 8-K filed on July 28, 2017 with the SEC)
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10.2
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Common Stock Purchase Agreement, dated as of July 24, 2017, by and between the Company and the purchaser named therein (incorporated by reference to Exhibit 2.1 to Current Report of the Company on Form 8-K filed on July 28, 2017 with the SEC)
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10.3
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Common Stock Purchase Agreement, dated as of November 19, 2018, by and among the Company and the Investors named therein (incorporated by reference to Exhibit 99.1 to Current Report of the Company on Form 8-K filed on November 20, 2018 with the SEC)
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10.4+**
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Employment Agreement, dated August 1, 2018, by and between the Company and Paul DiPerna
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10.5+***
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Intellectual
Property Assignment Agreement, dated July 24, 2017, by and between the Company, Quasuras, Inc. and Paul DiPerna
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10.6+***
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Technology
Royalty Agreement, dated as of July 24, 2017, by and between the Company, Quasuras, Inc. and Paul DiPerna
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10.7+**
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Services Agreement effective January 16, 2019 between the Company and Liam Burns
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10.8**
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Standard Sublease Agreement, dated August 21, 2017, between the Company and Western Education Corporation
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21.1
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Sole Subsidiary of the Company (as disclosed in Notes to Consolidated Financial Statements as of March 31, 2019 in the prospectus to this registration statement)
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23.1*
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Consent of Farber Haas Hurly LLP
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23.2*
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Consent of Gusrae Kaplan Nusbaum PLLC (included in Exhibit 5.1)
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101.INS
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XBRL
Instance Document
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101.SCH
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XBRL
Taxonomy Extension Schema
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101.CAL
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XBRL
Taxonomy Extension Calculation Linkbase
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101.DEF
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XBRL
Taxonomy Extension Definition Linkbase
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101.LAB
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XBRL
Taxonomy Extension Label Linkbase
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101.PRE
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XBRL
Taxonomy Extension Presentation Linkbase
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* Filed herewith
** Filed as an exhibit to the Registration Statement on Form S-1, dated June 27, 2019
*** Filed
as an exhibit to Amendment No. 1 to the Registration Statement on Form S-1, dated September 9, 2019
+ Management contract or compensatory plan arrangement.