Modular Medical, Inc S-1, filed Apr 9, 2020
Modular Medical, Inc. (MODD)
As filed with the Securities and Exchange Commission on April 8, 2020
File No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MODULAR
MEDICAL, INC.
(Exact name of registrant as specified in its charter)
| Nevada | 87-0620495 | |
| (State or other jurisdiction of | (IRS Employer | |
| incorporation or organization) | Identification Number) | |
16772 W. Bernardo Drive
San Diego,
California 92127
858-800-3500
(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.
16772 W. Bernardo Drive
San Diego,
California 92127
858-800-3500
(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 | o | Accelerated filer | o |
| Non-accelerated filer | x | Smaller reporting company | x |
| Emerging growth company | x | ||
| 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. | o | ||
CALCULATION OF REGISTRATION FEE
| Title
of Each Class of Securities to be Registered |
Amount to be Registered |
Proposed Maximum Offering Price Per Security |
Proposed Maximum Aggregate Offering Price |
Amount
of Registration Fee(1) | ||||||||
| Preferred Units consisting of: | 2,000,000 | $25.00 | $50,000,000 | $6,490.00 | ||||||||
| i) Series A Preferred Stock, par value $0.001 per share (2) |
2,000,000 |
Included with Preferred Units | — |
— | ||||||||
| ii) Warrants to purchase shares of Common Stock, par value $0.001 per share(2) |
6,000,000 |
Included with Preferred Units | — |
— | ||||||||
| iii) Shares of Common Stock, par value $0.001 per share, issuable upon exercise of the Common Stock Purchase Warrants (3)(4)(5) |
6,000,000 |
Included with Preferred Units |
— |
— | ||||||||
| Total | 16,000,000 | $50,000,000 | $6,490.00 |
(1) Calculated pursuant to Rule 457(a) promulgated under the Securities Act, based on an estimate of the proposed maximum aggregate offering price.
(2) In accordance with Rule 457(i) promulgated under the Securities Act, because the shares of our common stock, par value $0.001 per share, underlying the warrants are registered hereby, no separate registration fee is payable with respect to the warrants registered hereby.
(3) We are issuing three warrants each exercisable to purchase one share of our common stock as part of the Preferred Units. Each Preferred Unit consists of: (i) one share of our Series A Preferred Stock and (ii) three warrants. The warrants are exercisable for a period of five years from the date of issuance to purchase one (1) share of common stock at a price of $11.00 per share.
(4) Because the warrants are registered hereby, no separate registration fee is payable with regard to the common stock registered hereby, pursuant to Rule 457(g) promulgated under the Securities Act.
(5) Pursuant to Rule 416 promulgated 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.
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.
Preliminary Prospectus
Subject to Completion, dated April 8, 2020
The information in this prospectus is not complete and may be changed. We may not sell any of 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.
MODULAR MEDICAL, INC.
Up to 2,000,000 Preferred Units (each Preferred Unit contains one share of 13% Series A Cumulative Redeemable Perpetual Preferred Stock and three Warrants each to Purchase one share of Common Stock) and
Shares of Common Stock Underlying the Warrants
We are offering 2,000,000 preferred units (the “Preferred Units”), with each Preferred Unit consisting of (i) one share of our 13% Series A Cumulative Redeemable Perpetual Preferred Stock with a $25.00 liquidation preference amount (the “Series A Preferred Stock”) and (ii) three (3) common stock purchase warrants, each to purchase one share of our common stock at an exercise price of $11.00 per share (the “Warrants”), at a public offering price of $25.00 per Preferred Unit. Each Warrant will be immediately exercisable upon issuance and will expire five (5) years from the date of issuance. The shares of Series A Preferred Stock and the Warrants comprising the Preferred Units will be issued separately but may only be purchased as Preferred Units in this offering. This prospectus also covers shares of our common stock that are issuable from time to time upon exercise of the common stock purchase warrants contained in the preferred units.
Dividends on the Series A Preferred Stock will be payable on the liquidation preference amount, on a cumulative basis, quarterly in arrears on the 15th day of January, April, July and October of each year. The first dividend payment date will be pro-rata from and including the date of the original issuance of shares of Series A Preferred Stock through and excluding June 30, 2020. Dividends will be payable out of amounts legally available for the payment of dividends at an annual rate equal to 13% of the $25.00 liquidation preference per share of Series A Preferred Stock, or $3.25 per share per year. Dividends on the Series A Preferred Stock will be cumulative from, and including, the date of original issuance of the Series A Preferred Stock.
At the closing of this offering, an amount equal to the first three years of dividend payments, or $9.75 per share of Series A Preferred Stock, from the proceeds from this offering (the “Dividend Reserve”) will be directly transferred from the Offering Escrow Account (as defined below), to a bank account at Truist Bank (the “Dividend Payment Account”) maintained and controlled by SRS Acquiom Inc., as divided payment agent for the Series A Preferred Stock (the “Dividend Payment Agent”). The Dividend Payment Agent will pay the dividend payments to holders of the Series A Preferred Stock for a period of three (3) years from such Dividend Payment Account.
The shares of Series A Preferred Stock are perpetual, have no maturity date, will not be subject to any sinking fund or other mandatory redemption, and will not be convertible into or exchangeable for any of our other securities.
Commencing three years from the date of issuance of Series A Preferred Stock, we may redeem, at our option, such share of Series A Preferred Stock, in whole or in part, at a cash redemption price equal to $25.00 per share, plus all accrued and unpaid dividends to, but excluding, the redemption date. No holder of Series A Preferred Stock shall have any right to require the redemption or repurchase of the Series A Preferred Stock. See “Description of Offered Securities – Series A Preferred Stock – Optional Redemption.”
Holders of the Series A Preferred Stock will have no voting rights, except as set forth under “Description of Offered Securities – Series A Preferred Stock - Voting Rights.”
The Preferred Units, the shares of Series A Preferred Stock and the Warrants are each new issuances with no prior trading market. Following the commencement of this offering, we will seek approval by (i) the Financial Industry Regulatory Authority (“FINRA”) for the trading symbols “MODDU,” “MODDA” and “MODDW” (or such other symbols as assigned to us by FINRA) for our Preferred Units, Series A Preferred Stock and Warrants, respectively, and (ii) the OTC Markets, Inc. (“OTC Markets”), for our applications to have our Preferred Units, shares of Series A Preferred Stock and Warrants become eligible for quotation and trading on the OTCQB. Our common stock is currently quoted on the OTC Pink Open Market under the trading symbol “MODD.” On April 7, 2020, the closing price of our common stock was $0.24 per share. We intend to simultaneously have our shares of common stock become quoted and trade on the OTCQB. No assurances can be given that our shares of common stock or our other securities will be approved for quotation and trading on the OTCQB.
The Preferred Units will be offered on a reasonable best efforts basis. There is no minimum dollar amount or number of Preferred Units that must be sold in this offering to conduct a closing. We intend to have only one closing for the sale of the Preferred Units offered hereby, but reserve the right to have additional closings. This offering shall commence on the date of this prospectus and shall terminate upon the earlier to occur of (i) ninety days from the date hereof, unless extended by us, (ii) when all Preferred Units offered hereby are sold, or (iii) when so determined by the Company in its sole discretion without notice to investors.
The Preferred Units are offered being offered by us directly through our officers, directors and controlling shareholders who will receive no sales commission or other direct compensation related to sales of Preferred Units in the offering. We also intend to use broker-dealers, referred to herein as “selling agents” to solicit offers to purchase the Preferred Units. If any selling agents sell any Preferred Units in this offering, they will be deemed “underwriters” as that term is defined by Section 2(a)(11) of the Securities Exchange Act of 1933 (the “Securities Act”). We will pay any selling agent’s commissions not to exceed eight (8%) percent of the gross proceeds from sales of Preferred Units they sell.
It is anticipated that the Preferred Units, the Series A Preferred Stock and the Warrants sold in this offering will be issued in book-entry, uncertificated form.
All proceeds for sales of Preferred Units in this offering will be deposited in an escrow account at Truist Bank (the “Offering Escrow Account”), which will be controlled and maintained by SRS Acquiom Inc. (the “Offering Escrow Agent”), who also is the Dividend Payment Agent for the Series A Preferred Stock.
To subscribe for Preferred Units in this offering, see “Plan of Distribution – Subscription Procedures.”
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 and we have elected to apply certain reduced public company reporting requirements for this prospectus and future filings.
Investing in our securities involves risks. You should read and carefully consider the “Risk Factors” section beginning on page 17 of this prospectus before investing in our securities.
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 April , 2020.
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 of our securities 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) the widespread outbreak of contagious diseases, including the recent outbreak of a respiratory illness caused by a novel coronavirus known as COVID-19, (ii) our ability to achieve a marketable product (i.e., our insulin pump), (iii) the timely and costs of obtaining all regulatory approvals and clearances relating to our insulin pump including those of the FDA, (iv) the sufficiency of our cash position, (v) our ability to raise additional financing when needed and the terms and timing thereof, (vi) that we have accurately analyzed our target market for our insulin pump, (vii) market acceptance of our product by our target market, (viii) 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, (ix) regulatory initiatives, compliance with governmental regulations and the regulatory approval process, (x) general economic and business conditions, (xi) our ability and the timing of us to successfully commercialize our product (xii) changes in United States economic, political and social conditions, (xiii) 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, (xiv) 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, (xv) issues relating to the thinly traded market for our shares of common stock, (xvi) our ability to compete in the diabetes marketplace with larger and more substantial medical device companies, (xvii) the specific risk factors discussed under the heading “Risk Factors” below, and (xviii) 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.
| 1 |
This summary highlights information contained elsewhere in this prospectus and does not contain all of the information you should consider before investing in our Preferred Units. 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 subsidiary.
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.
| 2 |
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 and obtaining FDA approval for and managing 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 founded and ran Tandem Diabetes Care, Inc, a leading supplier of pumping technology to the existing insulin pumping marketplace, which was founded by Mr. DiPerna.
Our Insulin Pump Prototype
Over the past five years we have designed and developed working prototypes of our insulin pump and are undergoing the testing required to submit for FDA approval.
During this period, we 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:
| · | Continue to modify, refine and finalize our prototype so that it meets: |
| o | 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; and |
| o | 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. |
| 3 |
| · | Continue to work closely with our FDA regulatory consultant to complete, finalize and file our FDA submission to the FDA for 510(k) clearance and all other documentation necessary to obtain FDA approval of our insulin pump. This will include: |
| o | engaging 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). |
| o | preparing and ensuring 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. |
| o | preparing 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. We currently expect to make this submission in the fourth calendar quarter of 2020. |
| · | 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 |
| · | 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 |
| · | Retain appropriate sales and marketing personnel to develop, implement and launch a promotional campaign for our insulin pump substantially focused on our target market |
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:
| · | Obtaining FDA 510(k) clearance to market and sell our insulin pump to the public; |
| · | Obtaining all other FDA approvals with regard to our product, as required by the FDCA; |
| · | Educating endocrinologists and nurse educators, who typically prescribe pump usage, as to what we believe to be the superior qualities of our product; |
| · | 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; |
| · | Ensuring that our final product does, in fact, meet the needs of almost pumpers; |
| · | Overcoming the historic obstacles and reluctance of almost pumpers to using insulin pumps to treat their diabetes; and |
| · | 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. |
| 4 |
The following summary contains certain terms regarding this offering and the Preferred Units, Series A Preferred Stock and the Warrants. This summary is not and is not intended to be complete. It may not contain all of the information that is important to you. You should read the more detailed information contained elsewhere in this prospectus, including but not limited to, the Risk Factors below and “Description of the Securities Offered.” Reference is also made to the Certificate of Designations, Preferences and Rights of 13% Series A Cumulative Redeemable Perpetual Preferred Stock and the Warrant Agent Agreement (the “Warrant Agreement”), both filed as exhibits to the registration statement of which this prospectus forms a part.
| |
| Securities being Offered | 2,000,000 Preferred Units, each consisting of: (i) one share of 13% Series A Preferred Stock having a liquidation preference of $25.00; and (ii) three Warrants each exercisable to purchase one share of our common stock at an exercise price of $11.00 (the “Exercise Price”). The Series A Preferred Stock and Warrants included in the Preferred Units will be issued separately but may only be purchased as a Preferred Unit.
|
| Public Offering Price Per Preferred Unit | $25.00 |
| Securities Outstanding Assuming the Sale of all 2,000,000 Preferred Units Offered hereby | |
| Preferred Units |
2,000,000 |
| Series A Preferred Stock |
2,000,000 |
| Warrants | 6,000,000 |
| Description of Warrants | Each Warrant will be exercisable to purchase one share of our common stock for a 5 year period commencing on the date of issuance, at an initial exercise price per share equal to $11.00 per share of common stock, subject to adjustment in the event of recapitalization, share dividends, share splits, share combinations, reclassifications, reorganizations or similar events affecting our common stock. In addition, the exercise price will be adjusted for certain dilutive issuances during the term of the Warrants. The Warrants will be exercisable for cash or on a cashless basis at any time and from time to time after the date of issuance. See “Description of Offered Securities – The Warrants.” This prospectus also relates to the offering of shares of common stock issuable upon exercise of the Warrants. |
| 5 |
| Dividends | Dividends on the Series A Preferred Stock will be payable if or when declared by our board of directors on the liquidation preference amount, on a cumulative basis, quarterly in arrears on the 15th day of January, April, July and October of each year, commencing on July 15, 2020. Dividends will be payable out of amounts legally available for the payment of dividends at the rate of 13 % per annum of the $25.00 liquidation preference per share of Series A Preferred Stock. Dividends shall be cumulative from, and including, the date of original issuance of each share of Series A Preferred Stock. A pro-rated initial dividend on the Series A Preferred Stock is currently intended be paid on July 15, 2020. The amount of the dividend per share of Series A Preferred Stock will be calculated for each dividend period (or portion thereof) on the basis of a 360-day year consisting of twelve 30-day months. Dividends on the Series A Preferred Stock will be cumulative (i) whether or not we have earnings, (ii) whether or not there are funds legally available for the payment of such dividends, (iii) whether or not such dividends are authorized or declared and (iv) whether or not any of our agreements prohibit the current payment of dividends, including any agreement relating to our indebtedness. No interest, or sum of money in lieu of interest, will be payable on any dividend payment in arrears on the Series A Preferred Stock. |
| Restrictions on Dividends | We will not pay full dividends on the Series A Preferred Stock or any Parity Stock (as defined herein) for any dividend period unless the full cumulative dividends have been paid on the Series A Preferred Stock and any such Parity Stock through the most recently completed dividend period for each such security. When dividends are not paid in full on the Series A Preferred Stock or any Parity Stock, all dividends declared for such dividend period with respect to the Series A Preferred Stock and such Parity Stock shall be declared on a pro rata basis. Any portion of such dividends not paid that are payable upon the Series A Preferred Stock and such Parity Stock in respect of such dividend period on such dividend payment date shall accumulate, and an amount equal to such undeclared portion of such dividends shall become payable out of funds legally available for the payment of dividends upon any liquidation, dissolution or winding-up of our affairs or earlier redemption of such shares of Series A Preferred Stock and such Parity Stock, to the extent not paid prior to such liquidation, dissolution or winding-up or earlier redemption. See “Description of Offered Securities - the Series A Preferred Stock—Dividends.” |
| 6 |
During any dividend period, so long as any Series A Preferred Stock remains outstanding, unless the full dividend payment has been paid on the Series A Preferred Stock and any Parity Stock through the most recently completed dividend period: · no dividend shall be paid or declared on our common stock or other Junior Stock (as defined herein) (other than a dividend payable solely in Junior Stock); and · none of our common stock or other Junior Stock shall be purchased, redeemed or otherwise acquired for consideration by us, directly or indirectly (other than (i) purchases, redemptions or other acquisitions of shares of Junior Stock pursuant to any employment contract, dividend reinvestment plan, benefit plan or other similar arrangement with or for the benefit of employees, officers, directors, consultants or advisors, (ii) as a result of a reclassification of Junior Stock for or into other Junior Stock, (iii) the exchange or conversion of one share of Junior Stock for or into another share of such Junior Stock or (iv) through the use of the proceeds of a substantially contemporaneous sale of Junior Stock) during a dividend period. The Series A Preferred Stock will rank junior as to payment of dividends to any class or series of our Senior Stock (as defined herein) that we may issue in the future. If at any time we have failed to pay, on the applicable payment date, accumulated dividends on any class or series of Senior Stock, we may not pay any dividends on the outstanding Series A Preferred Stock or redeem or otherwise repurchase any shares of Series A Preferred Stock until we have paid or set aside for payment the full amount of the unpaid dividends on the Senior Stock that must, under the terms of such securities, be paid before we may pay dividends on, or redeem or repurchase, the Series A Preferred Stock. No dividends on the Series A Preferred Stock shall be declared and paid (or declared and a sum sufficient for the payment thereof set aside) at such time as the terms and provisions of any agreement of ours, including any agreement relating to our indebtedness, prohibit such declaration and payment (or declaration and setting aside a sum sufficient for the payment thereof) would constitute a breach thereof or a default thereunder, or if the declaration and payment (or the declaration and setting aside a sum sufficient for the payment thereof) shall be restricted or prohibited by law. See “Risk Factors—Dividends are payable on the Series A Preferred Stock only out of funds legally available therefor and only if they are not prohibited by contractual provisions or law.” | |
| 7 |
| Escrow of first 3 Years of Dividend Payments |
At the closing of this offering, an amount equal to the first three years of dividend payments, or $9.75 per share of Series A Preferred Stock, from the proceeds from this Offering (the “Dividend Reserve”) shall be transferred from the Offering Escrow Account by the Escrow Deposit Agent directly to the Dividend Payment Account maintained and controlled by the Dividend Payment Agent. |
No Maturity, Sinking Fund
|
The Series A Preferred Stock has no stated maturity and will not be subject to any sinking fund or mandatory redemption. Shares of the Series A Preferred Stock will remain outstanding indefinitely unless we decide to redeem or otherwise repurchase them, as provided in this Offering Summary under the sections titled “Optional Redemption” and “Special Optional Redemption” below. We are not required to set aside funds to redeem the Series A Preferred Stock. |
Optional Redemption
|
The Series A Preferred Stock is not redeemable by us prior to the three-year anniversary of the closing of the Offering, except as set forth under “Special Optional Redemption” below. After that time, we may, at our option, redeem the Series A Preferred Stock, in whole or in part, at any time or from time to time, for cash at a redemption price equal to $25.00 per share, plus any accumulated and unpaid dividends to, but not including, the redemption date. If we redeem any Series A Preferred Stock, we will only do so by treating all holders of Series A Preferred Stock equally. |
| Special Optional Redemption |
Upon the occurrence of a Change of Control, we may, at our option, redeem the Series A Preferred Stock, in whole or in part, within 120 days after notice of such Change of Control, for cash at a redemption price of $25.00 per share of Series A Preferred Stock, plus any accumulated and unpaid dividends to, but not including, the redemption date. A “Change of Control” is deemed to occur when any person, including any syndicate or group deemed to be a “person” under Section 13(d)(3) of the Securities Exchange Act of 1934 (the “Exchange Act”) of beneficial ownership, directly or indirectly, through a purchase, merger or other acquisition transaction or series of purchases, mergers or other acquisition transactions shall have acquired our stock entitling that person to exercise more than 50% of the total voting power of all our stock entitled to vote generally in the election of our directors (except that such person will be deemed to have beneficial ownership of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition). |
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| Ranking | The Series A Preferred Stock will rank, with respect to anticipated dividends and distributions upon any liquidation, dissolution or winding-up of our affairs: · senior to our common stock and to each other class or series of our capital stock that is expressly made subordinated to the Series A Preferred Stock as to the payment of dividends or amounts payable on a liquidation, dissolution or winding-up of our affairs (the “Junior Stock”); · on a parity with any class or series of our capital stock that is not expressly made senior or subordinated to the Series A Preferred Stock as to the payment of dividends and amounts payable on a liquidation, dissolution or winding-up of our affairs (the “Parity Stock”); · junior to any class or series of our capital stock that is expressly made senior to the Series A Preferred Stock as to the payment of dividends or amounts payable on a liquidation, dissolution or winding-up of our affairs (the “Senior Stock”); · junior to all of our existing and future indebtedness and other liabilities with respect to assets available to satisfy claims against us; and · structurally subordinated to existing and future indebtedness and other liabilities of our subsidiaries. Parity Stock with respect to the Series A Preferred Stock may include series of our preferred stock that have different dividend rates, redemption or conversion features, mechanics, dividend periods (e.g., semi-annual rather than quarterly), payment of dividends (whether cumulative or non-cumulative), payment dates and record dates than the Series A Preferred Stock. |
| Liquidation Rights | Upon any voluntary or involuntary liquidation, dissolution or winding-up of our affairs, holders of the Series A Preferred Stock will be entitled to receive out of our assets legally available for distribution to shareholders, after satisfaction of liabilities and obligations to our creditors, if any, and subject to the rights of holders of Senior Stock in respect of distributions upon liquidation, dissolution or winding-up of our affairs, and before any distribution is made to or set aside for holders of our common stock or any other Junior Stock, a liquidating distribution in the amount of $25.00 per share of Series A Preferred Stock plus all accumulated and unpaid dividends. Distributions will be made pro rata as to the Series A Preferred Stock and any Parity Stock and only to the extent of our assets, if any, that are available after satisfaction of all liabilities and obligations to our creditors, if any. See “Description of the Offered Securities - Series A Preferred Stock—Liquidation Rights.” |
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| Limited Voting Rights | The Series A Preferred Stock will not have voting rights, except (i) with respect to certain amendments to the terms of the Series A Preferred Stock, including to permit the issuance of Senior Stock, and (ii) as otherwise required by applicable law. See “Description of the Offered Securities - Series A Preferred Stock—Voting Rights.” |
| No Maturity Date | The Series A Preferred Stock is perpetual and has no maturity date, and we are not required to redeem the Series A Preferred Stock. Accordingly, all shares of the Series A Preferred Stock will remain outstanding indefinitely, unless and until we decide to redeem or otherwise repurchase them. |
| No Preemptive or Conversion rights |
Holders of the Series A Preferred Stock will not have preemptive or subscription rights to purchase or otherwise acquire more of our stock, including their pro rata share of any offering of shares of any class or series. The Series A Preferred Stock will not be convertible into, or exchangeable for, shares of any of our other class or series of stock or our other securities. |
| Use of Proceeds | After the transfer of the Dividend Reserve to the Dividend Payment Account ($9.75 per each share of Series A Preferred Stock sold) for the payment of the initial three years of dividends, we plan to use the remaining net proceeds from this offering for working capital, general corporate purposes and growth initiatives, including potential future mergers, acquisitions and other similar transactions, although we have no present plans, arrangements or agreements for any such transactions. See “Use of Proceeds.” |
| Terms of the Offering | The Preferred Units will be offered on a reasonable best efforts basis. There is no minimum dollar amount or number of Preferred Units that must be sold in this offering to conduct a closing. We intend to have one closing for the sale of the Preferred Units offered hereby, but reserve the right to have additional closings. This offering shall commence on the date this prospectus and shall terminate upon the earlier to occur of (i) ninety days from the date hereof, unless extended by us, (ii) when all Preferred Units are sold, or (iii) when so determined by us in our sole discretion without notice to investors.
The Preferred Units are offered being offered by us directly through our officers and directors who will receive no sales commission or other direct compensation related to sales of Preferred Units in the offering. We also intend to use broker-dealers, referred to herein as “selling agents” to solicit offers to purchase the Preferred Units. If any selling agents sell any Preferred Units, they will be deemed “underwriters” as that term is defined by Section 2(a)(11) of the Securities Exchange Act of 1933 (the “Securities Act”). We will pay any selling agent’s commissions not to exceed eight (8%) percent of the gross proceeds from sales of Preferred Units they sell. |
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| Trading Market; Proposed Trading Symbols |
The Preferred Units, the shares of Series A Preferred Stock and the Warrants are each new issuances with no prior trading market. Following the commencement of this offering, we will seek approval by (i) FINRA for the trading symbols “MODDU,” “MODDA” and “MODDW” (or such other symbols assigned by FINRA) for our Preferred Units, Series A Preferred Stock and Warrants, respectively, and (ii) the OTC Markets, Inc. (“OTC Markets”), for our applications to have our Preferred Units, shares of Series A Preferred Stock and Warrants become eligible for quotation and trading on the OTCQB. Our common stock is currently quoted on the OTC Pink Open Market under the trading symbol “MODD.” On March 31, 2020, the closing price of our common stock was $0.24 per share. We intend to simultaneously have our shares of common stock become quoted and trade on the OTCQB. No assurances can be given that our shares of common stock or our other securities will be approved for quotation and trading on the OTCQB. |
| Transfer Agent and Registrar for the Preferred Units, shares of Series A Preferred Stock and Warrants |
Colonial Stock Transfer Co., Inc. will be the registrar and transfer agent for the Preferred Units, Series A Preferred Stock and the Warrants and the Warrant Agent for the Warrants. Colonial Stock Transfer Co. is the transfer agent for our common stock. |
| Warrant Agent | Colonial Stock Transfer Co. will be the Warrant Agent for the Warrants. |
| Dividend Payment Agent | SRS Acquiom Inc. will be the Dividend Payment Agent for the Series A Preferred Stock. |
| Escrow of Subscription Proceeds; Offering Escrow Agent; Offering Escrow Account |
SRS Acquiom Inc. will be the escrow agent for this offering (the “Offering Escrow Agent”). Pending the closing of this offering, all subscription funds for the purchase of Preferred Units will be deposited in a bank account at Truist Bank (the “Offering Escrow Account”), which shall be controlled and maintained by the Offering Escrow Agent. |
| Subscription Procedures | To subscribe for Preferred Units in this offering, you must:
(i) fully complete date and execute a Subscription Agreement; and (ii) deliver the subscription price by cashier’s check or wire transfer of immediately available funds, payable to the Offering Escrow Agent, in accordance with the instructions set forth in the Subscription Agreement. |
| Risk Factors | Investing in our securities involves a high degree of risk and purchasers of our securities may lose their entire investment. See “Risk Factors” below and the other information included elsewhere in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our securities. |
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Corporate History and Background
We were formed as a corporation under the laws of the State of Nevada in October 1998 under the name Bear Lake Recreation, Inc. We had no material business operations from 2002 until April 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, L.P., 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.
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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:
| · | 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; |
| · | not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended; |
| · | reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and |
| · | exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. |
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.
Corporate Information
Modular Medical, Inc. is a Nevada corporation with its principal business office at 16772 West Bernardo Drive, San Diego, California 92127. 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.
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RISK FACTORS
Investing in our securities involves a high degree of risk. You should carefully consider the risks and uncertainties described below before making a decision to invest in our securities. 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. Any then market price of our Preferred Units, Series A Preferred Stock and the Warrants could also decline significantly 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 securities, 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 nine months ended December 31, 2019, we incurred a net loss of approximately $3.4 million, and for the fiscal years ended March 31, 2019 and 2018, we incurred net losses of approximately $2.5 million and $0.7 million, respectively.
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. As 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 face risks relating to health epidemics which could adversely affect our business and results of operations.
Our business and prospects could be materially adversely affected by COVID-19. Such material adverse effects from COVID-19 can result in numerous known and currently unknown ways including from quarantines and lockdowns which require us to cease operations at our facility. While we have implemented a work-at-home plan for our employees and consultants, our development progress may be negatively impacted. Such could also impair the timing of obtaining necessary consents and approvals from the FDA, as its employees could also be under such quarantines and lockdowns and their time could be mandatorily required to be allocated to more immediate global and domestic concerns relating to COVID-19. In addition, we purchase materials for our product prototyping from suppliers located in affected areas, and we may not be able to procure required components. The effects of this outbreak have also placed travel restrictions on us and our service providers, as well as temporary closures of the facilities of our suppliers and service providers, which could also impact our business. In addition, a significant outbreak of contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could reduce the demand for our products and impair our business prospects including as a result of being unable to raise additional capital on acceptable terms to us, if at all.
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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:
| · | fund clinical studies and seek regulatory approvals; |
| · | build or access manufacturing and commercialization capabilities; |
| · | develop, test, and, if approved, market our product; |
| · | acquire or license additional internal systems and other infrastructure; and |
| · | hire and support additional management, engineering and scientific personnel. |
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.
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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.
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:
| · | 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; |
| · | our ability to attract future strategic partners to pay for or share costs related to our product development efforts; |
| · | the costs and timing of seeking and obtaining regulatory clearance and approvals for our product; |
| · | 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; |
| · | decisions to hire additional scientific, engineering or administrative personnel or consultants; |
| · | our ability to manage administrative and other costs of our operations; and |
| · | the presence or absence of adverse developments in our research program. |
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.
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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:
| · | the costs and results of our clinical studies regarding our insulin pump product; |
| · | the time and costs involved in obtaining regulatory clearance and approvals; |
| · | whether we are able to obtain funding under future licensing agreements, strategic partnerships, or other collaborative relationships, if any; |
| · | the costs of compliance with laws, regulations, or judicial decisions applicable to us; and |
| · | the costs of general and administrative infrastructure required to manage our business and protect corporate assets and shareholder interests |
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 will 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.”
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We have limited 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. We continue to incur increased research and development expenditures, which 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 a limited number of research and development personnel, and rely and expect for the foreseeable future to continue to rely, on consultants, whom are not our employees, to perform significant functions for us. As a result, we are and expect to continue for the foreseeable future to be dependent on such third parties. 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 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 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 our consultants, 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 consultants for important aspects of our product development strategy. We do not have the required financial resources and personnel 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.
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.
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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:
| · | our inability to demonstrate to the satisfaction of the FDA that our product is safe or effective for its intended use; |
| · | the disagreement of the FDA with the design or implementation of our clinical studies or the interpretation of data from our clinical studies; |
| · | serious and unexpected adverse device effects experienced by participants in our clinical studies; |
| · | the data from clinical studies may be insufficient to support clearance or approval, where required; |
| · | our inability to demonstrate that the benefits of our pump outweigh the risks; |
| · | the manufacturing process or facilities we intend to use may not meet applicable requirements; and |
| · | 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, the U.S. 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 any pumps, except their most technologically proficient and compliant patients and places pumps out of reach for many patients whom 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.
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Our competitors may:
| · | 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; |
| · | develop product candidates and market products that are less expensive or more effective than ours; |
| · | commercialize competing products before we can launch any products we are working to develop; |
| · | hold or obtain proprietary rights that could prevent us from commercializing our products; or |
| · | introduce therapies or market medical products that render our potential product candidates obsolete. |
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:
| · | developing medical device and other product candidates; |
| · | undertaking testing and clinical studies; |
| · | building relationships with key customers and opinion-leading physicians; |
| · | obtaining and maintaining FDA and other regulatory approvals; |
| · | formulating and manufacturing medical devices; |
| · | launching, marketing and selling medical devices; and |
| · | providing management oversight for all of the above-listed operational functions. |
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.
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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 510(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.
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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:
| · | untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties; |
| · | customer notification, or orders for repair, replacement or refunds |
| · | voluntary or mandatory recall or seizure of our current or future products; |
| · | administrative detention by the FDA of medical devices believed to be adulterated or misbranded; |
| · | imposing operating restrictions, suspension or shutdown of production; |
| · | refusing our requests for 510(k) clearance or pre-market approval of any new products, new intended uses or modifications to our insulin pump; |
| · | rescinding 510(k) clearance that has already been granted; and |
| · | criminal prosecution. |
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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 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; |
| · | 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; |
| · | 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 |
| · | 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. |
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, or the ACA, 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.
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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.
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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 party 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.
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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 Related to this Offering and Ownership of the Preferred Units, our Series A Preferred Stock and the Warrants
This is a best efforts offering, no minimum dollar amount or number of Preferred Units is required to be sold, and we may not raise the amount of capital we believe is required for our business.
We are seeking to raise up to $50,000,000 from the sale of the Preferred Units. We will deposit approximately 39% of the gross proceeds in the Dividend Payment Account, from which the Dividend Payment Agent will make payments of dividends on the Series A Preferred Stock for three years from the date of issuance of the Preferred Units. The remaining proceeds will be used by us for working capital, general corporate purposes and growth initiatives, including potential future mergers and acquisitions and similar transactions, although the Company has no present plans, arrangements or agreements for any such transactions. This is a reasonable best efforts offering and there is no minimum dollar amount or number of Preferred Units that must be sold to conduct a closing. As a result, we may not raise sufficient funds to meet our working capital and other operating and business expenses to be able to carry out our business since we are continuing to lose money. In that event, we will be required to seek other financing which, if available, may be very dilutive and expensive. In that event, your investment will be adversely affected and you could lose your entire investment.
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The Series A Preferred Stock is equity and therefore is subordinated to our existing and future indebtedness.
The shares of Series A Preferred Stock are equity interests and do not constitute indebtedness. As such, the Series A Preferred Stock is subordinated to all of our existing and future indebtedness and other liabilities with respect to assets available to satisfy claims against us and is structurally subordinated to existing and future indebtedness and other liabilities of our subsidiaries and any future preferred stock of our subsidiaries. The Series A Preferred Stock would also rank junior to any Senior Stock that we may issue in the future (subject to the required consent of the outstanding Series A Preferred Stock).
Dividends are payable on the Series A Preferred Stock out of funds legally available therefor and only if they are not prohibited by contractual provisions or law.
Dividends on our Series A Preferred Stock are payable only out of funds legally available therefor. In addition, we may become subject to contractual restrictions, including any agreement relating to our indebtedness, on our ability to pay dividends in the future, whether under indebtedness or otherwise. No dividends on the Series A Preferred Stock shall be paid (or declared and a sum sufficient for the payment thereof set aside) at such time as any such contractual provisions prohibit such declaration and payment (or declaration and setting aside a sum sufficient for the payment thereof) would constitute a breach thereof or a default thereunder, or if the declaration and payment (or the declaration and setting aside a sum sufficient for the payment thereof) shall be restricted or prohibited by law.
We may not redeem the Series A Preferred Stock; Dividend Payments after 3 years.
The Series A Preferred Stock will be a perpetual equity security. The Series A Preferred Stock will have no maturity or mandatory redemption date and will not be redeemable at the option of holders. The Series A Preferred Stock may be redeemed by us at our option either in whole or in part, from time to time, on or after the three (3) year date of the closing of this offering, except upon a Change of Control. Any decision we may make at any time to propose a redemption of the Series A Preferred Stock will depend, among other things, upon our available cash, our business strategy as well as general market conditions at such time. We currently do not have any revenues or income and we have relied on sales of our securities to fund all of our capital requirements. Moreover, no assurances can be given that in the future we will have revenues income or other sources of capital to redeem all or any of our Series A Preferred Stock or to make dividend payments on our Series A Preferred Stock in 3 years after the Dividend Reserve in the Dividend Payment Account has been used to pay 3 years of dividends on our Series A Preferred Stock. Accordingly, we may never be able to redeem our Series A Preferred Stock or pay dividends thereon after such 3-year period.
The Preferred Units, the Series A Preferred Stock and the Warrants may not have an active trading market.
The Preferred Units, the Series A Preferred Stock and the Warrants are new issues of securities and do not have an established trading market. Although following the commencement of this offering and the approval by FINRA of trading symbols for the Preferred Units, the Series A Preferred Stock and the Warrants, we intend to apply to the OTC Markets to have such securities and our common stock become eligible for quotation and trading on the OTCQB, there is no guarantee that such applications will be approved or if approved, we cannot assure you that an active market for such securities will develop or be sustained or that holders of such securities will be able to sell such securities at favorable prices or at all.
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The voting rights of holders of the Series A Preferred Stock are limited.
Holders of the Series A Preferred Stock have no voting rights with respect to matters that generally require the approval of voting shareholders. The limited voting rights of holders of the Series A Preferred Stock include the right to vote as a single class on certain matters that may affect the preference or special rights of the Series A Preferred Stock including the issuance of Senior Stock, as described under “Description of the Offered Securities - Series A Preferred Stock—Voting Rights.”
We may not be able to declare and pay dividends on the Series A Preferred Stock, if we fail to comply with the conditions imposed by applicable Nevada law.
Section 78.288 “Distributions to stockholders” of the Nevada Revised Statute provides that we may not declare and pay cash dividends on the Series A Preferred Stock if (a) the corporation would not be able to pay its debts as they become due in the usual course of business; or (b) except as otherwise specifically allowed by the articles of incorporation, the corporation’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the corporation were to be dissolved at the time of distribution, to satisfy the preferential rights upon dissolution of stockholders whose preferential rights are superior to those receiving the distribution. There can be no assurance that we will satisfy such requirements at any given time.
If we redeem the Series A Preferred Stock, investors will no longer be entitled to dividends.
Commencing on or after three years following the termination of this offering, we may, at our option, redeem the Series A Preferred Stock, in whole or in part, at any time or from time-to-time, based upon the payment of the $25.00 liquidation amount per share of Series A Preferred Stock plus accrued dividends. However, upon the occurrence of a Change of Control, we may, at our option, upon not less than 30 and nor more than 60 days’ written notice, redeem the Series A Preferred Stock, in whole or in part, within 120 days after the date of such written notice. We may have an incentive to redeem the Series A Preferred Stock voluntarily if market conditions allow us to issue other preferred stock or debt securities at a rate that is lower than the dividend on the Series A Preferred Stock. If we redeem the Series A Preferred Stock, then from and after the redemption date, dividends will cease to accrue on the shares of Series A Preferred Stock, that have been redeemed, such shares of Series A Preferred Stock shall no longer be deemed outstanding and all rights as a holder of those shares will terminate, except the right to receive the redemption price plus accumulated and unpaid dividends, if any, payable upon redemption.
The offering price and exercise price and other terms of this offering have been arbitrarily determined and may not be indicative of future market prices.
The offering price of the Preferred Units and the exercise price of the Warrants was not established in a competitive market, but was arbitrarily determined by us. The offering price and exercise price bears no relationship to our assets, book value, historical results of operations or any other established criterion of value, and may not be indicative of the fair value of our Series A Preferred Stock. The trading price of the Preferred Units, the shares of Series A Preferred Stock and the Warrants that will prevail in the market in the future may be higher or lower than the price per Preferred Unit, share of Series A Preferred Stock and Warrant that investors pay in this offering.
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Holders of our Warrants will have no rights as a common stockholder until they acquire our common stock.
Until you acquire shares of our Common Stock upon exercise of your Warrants, you will have no rights with respect to shares of our Common Stock issuable upon exercise of your Warrants. Upon exercise of your Warrants, you will be entitled to exercise the rights of a Common Stockholder only as to matters for which the record date occurs after the exercise date.
The market price of our common stock may never exceed the exercise price of the Warrants issued in connection with this offering.
The Warrants will expire five years from the date of issuance. The market price of our common stock is currently below and may never exceed the exercise price of the Warrants prior to their date of expiration. Any Warrants not exercised by their date of expiration will expire worthless and we will be under no further obligation to the Warrant holder.
The Warrants are executory contracts and they may have no value in a bankruptcy or reorganization proceeding.
In the event a bankruptcy or reorganization proceeding is commenced by or against us, a bankruptcy court may hold that any unexercised Warrants are executory contracts that are subject to rejection by us with the approval of the bankruptcy court. As a result, holders of the Warrants may, even if we have sufficient funds, not be entitled to receive any consideration for their Warrants or may receive an amount less than they would be entitled to if they had exercised their Warrants prior to the commencement of any such bankruptcy or reorganization proceeding.
Risks Relating to Our Common Stock
Our shares of Common Stock are quoted on the OTC Pink Market, and there is 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 over three 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. 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 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.
We do not expect any cash dividends to be paid on our shares of common stock for the foreseeable future.
We have never declared or paid a cash dividend and we do not anticipate declaring or paying dividends on our common stock for the foreseeable future. We expect to use future financing proceeds and earnings, if any, to fund operating expenses. Consequently, stockholders’ 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 stockholders of a positive return on their investment when they sell their shares or that stockholders will not lose the entire amount of their investment. See “Description of Our Common Stock – Dividend Policy” below.
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If the beneficial ownership of our common stock continues to be highly concentrated, it may prevent you and other shareholders from influencing significant corporate decisions; agreement to elect directors.
As of March 31, 2020, 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 stockholder 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 2017 agreement pursuant to which we acquired Quasuras, until July 24, 2022, our board of directors will consist of no less than two and no more than five directors, of which Mr. DiPerna, in addition to being our chairman, has the right to appoint two additional directors and Manchester has the right to appoint two directors, of which Mr. Frank constitutes one such director. As a result of such agreement, until July 24, 2022, other stockholders 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 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.
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.
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Our common stock 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.”
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.
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Our certificate of incorporation allows for our board of directors to create new series of preferred stock without further approval by our shareholders, 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 shareholder approval, of which 2,000,000 of such shares have been designated by our board of directors as Series A Preferred Stock and are being offered for sale in this offering. In the future, our board of directors could authorize the issuance of one or more additional 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 shareholders. 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. We have implemented remediation activities to address these weaknesses, including appointing new independent directors to our board of directors and forming an audit committee. Any failure to implement the new or improved controls necessary to remedy the material weaknesses described above, or difficulties encountered in the implementation, operation or effectiveness 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.
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 our 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.
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Assuming that we sell all of the 2,000,000 Preferred Units offered hereby, we estimate that we will receive net proceeds of approximately $45,700,000, after deducting 8% selling agent commissions ($4,000,000) and estimated offering expenses of approximately $300,000 payable by us, based on an assumed public offering price of $25.00 per Preferred Unit.
Of such $45,700,000 of estimated net proceeds, $19,500,000 (39% of the gross proceeds of the offering) ($9.75 per Preferred Unit), will, as a condition to the release of any other net proceeds, be transferred directly by the Offering Escrow Agent from the Offering Escrow Account to the Dividend Payment Account for the purpose of ensuring funds will be available to pay holders of Series A Preferred Stock three years of dividends on the Series A Preferred Stock and the remaining approximately $26,200,000 of net proceeds will be transferred to us.
We intend to use such remaining net proceeds from this offering for working capital, general corporate purposes and growth initiatives, including potential future mergers, acquisitions and other similar transactions, although we have no present plans, arrangements or agreements for any such transactions.
In addition, the amount and timing of what we actually spend for these purposes may vary and will depend on a number of factors, including, without limitation, our future revenue and cash generated by operations, if any, and the other factors described in “Risk Factors.” Accordingly, our management will have discretion and flexibility in applying the net proceeds of this offering. Pending use of the net proceeds as described above, we intend to invest the net proceeds in money market funds and investment-grade debt securities.
Because there is no minimum offering dollar amount or number of Preferred Units that must be sold in this offering to effectuate the closing, the actual offering amount, selling agent commissions, future dividend payments (after 3 years) and the remaining proceeds to us are not presently determinable and may be substantially less than the amount set forth above. We may sell fewer than all of the Preferred Units offered hereby, which may significantly reduce the amount of remaining net proceeds available to us. Thus, we may not raise the amount of capital we believe is required for our business and may need to raise additional funds, which may not be available or available on terms acceptable to us.
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The following table sets forth our actual cash and cash equivalents and our capitalization as of December 31, 2019, and on a pro-forma, as adjusted basis, reflecting sale of all of the Preferred Units offered hereby and the use of proceeds, as described in the section entitled “Use of Proceeds.”
The pro forma information set forth in the table below is illustrative only.
As of December 31, 2019 (in thousands)
| Actual | Pro Forma | |||||||
| Cash and cash equivalents | $ | 3,718 | $ | 29,918 | ||||
| Restricted cash | — | 19,500 | ||||||
| Stockholders’ equity: | ||||||||
| Common stock, $0.001 par value, 50,000 shares authorized; 17,870 shares issued and outstanding, actual and pro forma | 18 | 18 | ||||||
| Series A Preferred stock, $0.001 par value; 2,000 shares authorized and none outstanding, actual; 2,000 shares authorized and outstanding, actual and pro forma | — | 2 | ||||||
| Preferred stock, $0.001 par value; 3,000 shares authorized and undesignated, actual and pro forma; no shares issued and outstanding, actual and pro forma | — | — | ||||||
| Additional paid-in capital | 10,242 | 56,240 | ||||||
| Accumulated deficit | (6,651 | ) | (6,951 | ) | ||||
| Total stockholders’ equity | 3,608 | 49,309 | ||||||
| Total capitalization | $ | 7,326 | $ | 98,727 | ||||
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The Offering
The Preferred Units will be offered on a reasonable best efforts basis. We intend to have only one closing for the sale of the Preferred Units offered hereby, but reserve the right to have additional closings. There is no dollar amount or number of Preferred Units that must be sold in this offering to conduct such closing. All subscription funds for the purchase of Preferred Units offered pursuant to this prospectus shall be deposited and held in the Offering Escrow Account, maintained and controlled by the Offering Escrow Agent.
It is anticipated that the Preferred Units, the Series A Preferred Stock and the Warrants sold in this offering will be issued in book-entry, uncertificated form.
The Preferred Units will be offered by us through our officers, directors and one or more controlling shareholders who will receive no sales commission or other direct compensation related to sales of Preferred Units in the offering.
Selling Agents
We also intend to use broker-dealers, referred to herein as “selling agents” to solicit offers to purchase the Preferred Units. If any selling agents sell any Preferred Units, they will be deemed “underwriters” as that term is defined by Section 2(a)(11) of the Securities Exchange Act of 1933 (the “Securities Act”). We will pay any selling agent’s commissions not to exceed eight percent (8%) of the gross proceeds from sales of Preferred Units it sells.
Subscription Procedures
To subscribe for Preferred Units in this offering, you must:
| · | execute and deliver a Subscription Agreement; and |
| · | deliver the subscription price by check, cashier’s check or wire transfer of immediately available funds, payable in accordance with the instructions set forth in the Subscription Agreement. |
The Subscription Agreement requires you to disclose your name, address, social security or tax identification number, telephone number, email address, number of Preferred Units you are purchasing, and the aggregate subscription price you are paying for your Preferred Units.
Acceptance of Subscriptions
Upon our acceptance of a subscription amount and receipt by the Offering Escrow Agent of full and timely payment of cleared funds, we shall countersign and return your fully executed Subscription Agreement.
Right to Reject Subscriptions
We have the right to accept or reject subscriptions in whole or in part, for any reason or for no reason. All monies from rejected subscriptions will be returned immediately by us to the subscriber, without interest or deductions. Once delivered, you have no right to a return of your subscription funds.
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Indemnification and Contribution
We have the right to indemnify the selling agents against liabilities, including liabilities under the Securities Act. We have been advised that, in the opinion of the Securities and Exchange Commission, indemnification of liabilities under the Securities Act is against public policy as expressed in the Securities Act, and is therefore, unenforceable.
Miscellaneous
A prospectus in electronic format may be made available on websites maintained by us and any selling agent retained by us. These websites and the information contained on these websites, or connected to these websites, are not incorporated into and are not a part of this prospectus. In connection with the offering, we or selling agents may distribute prospectuses electronically. No forms of electronic prospectus other than prospectuses that are printable as Adobe® PDF will be used in connection with this offering.
Selling agents may not confirm sales of Preferred Units offered by this prospectus to accounts over which they exercise discretionary authority. We may amend or supplement this prospectus from time to time by filing amendments or supplements as required. You should read this entire prospectus and any amendments or supplements carefully before you make your investment decision.
Penny Stock Rules / Section 15(g) of the Exchange Act
Our securities 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.
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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 Preferred Units and the shares of Series A Preferred Stock and the Warrants included therein due to broker-dealer reluctance to undertake the above-described regulatory burdens.
We have never declared or paid any cash dividends on our common stock or any other shares of capital stock. Except for the 13% dividends payable to the holders of Series A Preferred Stock as described elsewhere in this prospectus from the Dividend Payment Account on a quarterly basis, we currently intend to retain any future earnings and do not expect to pay any dividends on any other securities, including our common stock for the foreseeable future. Any future determination to declare cash dividends (other than on the Series A Preferred Stock) will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions, and other factors that our board of directors may deem relevant. Nevada law may limit when we can pay dividends on our securities. Further our continuing losses require us to use funds we receive in financings to meet our working capital needs. See “Description of Offered Securities – Dividends.”
DESCRIPTION OF OUR SECURITIES
Our amended and restated articles of incorporation authorize us to issue 50,000,000 shares of common stock, par value $0.001 per share and 5,000,000 shares of preferred stock, par value $0.001 per share.
Common Stock
Each shareholder of our common stock is entitled to a pro rata share of any cash distributions made to holders of our common stock, 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, subject to the July 2017 Agreement, the holders of more than 50% of the shares voted for the election of those directors can elect all of the directors. See “Management – Composition of our Board of Directors.” However, as a result of the rights of certain persons, including our chief executive officer and an affiliate of one of our directors on our board of directors, to appoint all of our directors until July 24, 2022, shareholders will not have the ability to elect any directors either at the annual meeting or by written consent. See “Management – Arrangements for Appointments of directors.”
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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.
We have never paid dividends on our common stock 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.
In March 2020, we commenced a private placement of shares of our common stock at a purchase price of $2.87 per share. As of April 3, 2020, we had sold approximately 357,000 shares and received approximately $1,024,000 of gross proceeds.
Preferred Stock
Our board of directors is authorized to issue up to 5,000,000 shares of preferred stock, par value $0.001 per share, in one or more series, without stockholder approval, of which such preferred shares have been designated Series A Cumulative Perpetual Redeemable Preferred Stock which are defined in and being offered for sale pursuant to this prospectus as “Series A Preferred Stock.” To date, we have not issued any of our preferred stock.
Our board of directors has the authority, subject to any limitations prescribed by Nevada law, to issue shares of preferred stock in one or more series and to fix and determine the relative rights and preferences of the shares constituting any series to be established, without any further vote or action by the stockholders. Any shares of our preferred stock so issued may have priority over our common stock with respect to dividend, liquidation and other rights.
Our board of directors may authorize the issuance of our preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of our common stock. Although the issuance of our preferred stock could provide us with flexibility in connection with possible acquisitions and other corporate purposes, under some circumstances, it could have the effect of delaying, deferring or preventing a change of control.
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Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Colonial Stock Transfer Co., Inc., or Colonial.
DESCRIPTION OF OFFERED SECURITIES
The following description summarizes the most important terms of the Preferred Units, the Series A Preferred Stock and the Warrants. This summary does not purport and is not intended to be a complete description of such securities and is qualified in its entirety by the provisions of our Amended and Restated Certificate of Incorporation, the Certificate of Designations of the Series A Preferred Stock, our Amended and Restated Bylaws, the form of Warrant and the Warrant Agreement, copies of which have been filed as exhibits to the registration statement of which this prospectus is a part.
Preferred Units
Pursuant to this prospectus, we are offering for sale 2,000,000 Preferred Units, each Preferred Unit consisting of (i) one (1) share of our Series A Preferred Stock and (ii) three Warrants each to purchase one (1) of share of our common stock. The Series A Preferred Stock and the Warrants will be issued separately but may only be purchased as a Preferred Unit. We are also registering the shares of common stock issuable from time to time upon exercise of the Warrants included in each Preferred Unit.
Series A Preferred Stock
General
The Series A Preferred Stock represent a single series of our authorized preferred stock. If we sell in this offering all 2,000,000 Preferred Units offered by this prospectus, we will have outstanding 2,000,000 shares of our Series A Preferred Stock. Holders of the Series A Preferred Stock have no preemptive rights. Shares of the Series A Preferred Stock, upon issuance against full payment therefor, will be fully paid and nonassessable.
The Series A Preferred Stock will rank senior to our common stock and other shares of Junior Stock (as defined herein) and equally with any Parity Stock (as defined herein) that we may issue (except for any Senior Stock (as defined herein) that may be issued with two-thirds consent of the holders of the Series A Preferred Stock), with respect to the payment of dividends and distributions of assets upon liquidation, dissolution or winding-up of our affairs. In addition, we will generally be able to pay dividends, any redemption price and distributions upon liquidation, dissolution or winding-up of our affairs only out of legally available funds for such payment (i.e., after taking account of all indebtedness and other non-equity claims).
The shares of Series A Preferred Stock are equity interests in the Company, do not constitute indebtedness. As such, the Series A Preferred Stock is subordinated to all of our existing and future indebtedness and other liabilities with respect to assets available to satisfy claims against us. The Series A Preferred Stock would also rank junior to any Senior Stock that we may issue in the future.
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The Series A Preferred Stock will not be convertible into, or exchangeable for, shares of any of our other class or series of stock or our other securities. The Series A Preferred Stock has no stated maturity and will not be subject to any sinking fund, retirement fund or purchase fund or our other obligation to redeem, repurchase or retire the Series A Preferred Stock.
Dividends
Dividends on the Series A Preferred Stock will be payable when and if declared by our board of directors or a committee of our board of directors out of funds legally available therefor on the liquidation preference amount, on a cumulative basis, quarterly in arrears on the 15th day of January, April, July and October of each year, commencing on July 15, 2020, provided that if any scheduled dividend payment date is not a business day (as defined herein), then the payment will be made on the next succeeding business day and no additional dividends or interest will accrue as a result of that postponement. Dividends will be payable out of amounts legally available for the payment of dividends at an annual rate equal to13% of the $25.00 liquidation preference per share of Series A Preferred Stock. Dividends on the Series A Preferred Stock will be cumulative from, and including, the date of original issuance of the Series A Preferred Stock. “Business day” means each Monday, Tuesday, Wednesday, Thursday or Friday on which banking institutions in The City of New York are not authorized or obligated by law, regulation or executive order to close.
Each date on which dividends are payable pursuant to the foregoing clause, subject to adjustment as provided above, is a “dividend payment date,” and dividends for each dividend payment date are payable with respect to the dividend period (or portion thereof) ending on the day preceding such dividend payment date, in each case to holders of record as of the close of business on the 15th calendar day before such dividend payment date or such other record date not more than 60 calendar days nor less than 10 calendar days preceding such dividend payment date fixed for that purpose by the Board or any duly authorized committee of the Board in advance of payment of each particular dividend. Dividend record dates will apply regardless of whether a particular dividend record date is a business day. In the case of payments of dividends payable in arrears, the record date with respect to a dividend payment date will be such date as may be designated by the Board or any duly authorized committee of the Board.
A pro-rated initial dividend on the Series A Preferred Stock is expected to be paid on July 15, 2020. The amount of the dividend per share of Series A Preferred Stock will be calculated for each dividend period (or portion thereof) on the basis of a 360-day year consisting of twelve 30-day months.
“Dividend period” means each period commencing on (and including) a dividend payment date and continuing to, but excluding, the next succeeding dividend payment date, except that the first dividend period for the initial issuance of Series A Preferred Stock shall commence on (and include) the original issue date.
Dividends on the Series A Preferred Stock will be cumulative (i) whether or not we have earnings, (ii) whether or not there are funds legally available for the payment of such dividends, (iii) whether or not such dividends are authorized or declared and (iv) whether or not any of our agreements prohibit the current payment of dividends, including any agreement relating to our indebtedness. Accordingly, a dividend on the Series A Preferred Stock is not paid on a dividend payment date, such dividend shall accumulate and an amount equal to such accumulated dividend shall become payable out of funds legally available therefor upon any liquidation, dissolution or winding-up of our affairs or earlier redemption of such shares of Series A Preferred Stock, to the extent not paid prior to such liquidation, dissolution or winding-up or earlier redemption, as the case may be. No interest, or sum of money in lieu of interest, will be payable on any dividend payment that may be in arrears on the Series A Preferred Stock.
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We will not declare or pay, or set aside for payment, full dividends on the Series A Preferred Stock or any Parity Stock for any dividend period unless the full cumulative dividends have been declared and paid (or declared and a sum sufficient for the payment thereof has been set aside) on the Series A Preferred Stock and any Parity Stock through the most recently completed dividend period for each such security.
When dividends are not paid in full on the Series A Preferred Stock or any Parity Stock on any dividend payment date (or, in the case of Parity Stock having dividend payment dates different from the dividend payment dates pertaining to the Series A Preferred Stock, on a dividend payment date falling within the related dividend period for the Series A Preferred Stock), all dividends payable on such dividend payment date (or, in the case of such Parity Stock having dividend payment dates different from the dividend payment dates pertaining to the Series A Preferred Stock, on a dividend payment date falling within the related dividend period for the Series A Preferred Stock) shall be declared pro rata so that the respective amounts of such dividends shall bear the same ratio to each other as all accumulated but unpaid dividends per Series A Preferred Stock and all such Parity Stock payable on such dividend payment date (or, in the case of such Parity Stock having dividend payment dates different from the dividend payment dates pertaining to the Series A Preferred Stock, on a dividend payment date falling within the related dividend period for the Series A Preferred Stock) bear to each other. Any portion of such dividends not paid that are payable upon the Series A Preferred Stock and such Parity Stock in respect of such dividend period on such dividend payment date shall accumulate, and an amount equal to such undeclared portion of such dividends shall become payable out of funds legally available for the payment of dividends upon liquidation, dissolution or winding-up of our affairs or earlier redemption of such shares of Series A Preferred Stock and such Parity Stock, to the extent not paid prior to such liquidation, dissolution or winding-up or earlier redemption.
During any dividend period, so long as any Series A Preferred Stock remains outstanding, unless the full cumulative dividends have been paid on the Series A Preferred Stock and any Parity Stock through the most recently completed dividend period for each such security:
| · | no dividend shall be paid or declared on our common stock or any other shares of Junior Stock (as defined herein) (other than a dividend payable solely in shares of Junior Stock); and |
| · | none of our common stock or other Junior Stock shall be purchased, redeemed or otherwise acquired for consideration by us, directly or indirectly (other than (a) purchases, redemptions or other acquisitions of shares of Junior Stock pursuant to any employment contract, dividend reinvestment plan, benefit plan or other similar arrangement with or for the benefit of employees, officers, directors, consultants or advisors, (b) as a result of a reclassification of Junior Stock for or into other Junior Stock, (c) the exchange or conversion of one share of Junior Stock for or into another share of such Junior Stock, or (d) through the use of the proceeds of a substantially contemporaneous sale of Junior Stock) during a dividend period. |
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The Series A Preferred Stock will rank junior as to payment of dividends to any class or series of our Senior Stock that we may issue in the future. If at any time we have failed to pay, on the applicable payment date, accumulated dividends on any class or series of Senior Stock, we may not pay any dividends on the outstanding Series A Preferred Stock or redeem or otherwise repurchase any shares of Series A Preferred Stock until we have paid or set aside for payment the full amount of the unpaid dividends on the Senior Stock that must, under the terms of such securities, be paid before we may pay dividends on, or redeem or repurchase, the Series A Preferred Stock.
No dividends on the Series A Preferred Stock shall be declared and paid (or declared and a sum sufficient for the payment thereof set aside) at such time as the terms and provisions of any agreement of ours, including any agreement relating to our indebtedness, prohibit such declaration and payment (or declaration and setting aside a sum sufficient for the payment thereof) would constitute a breach thereof or a default thereunder, or if the declaration and payment (or the declaration and setting aside a sum sufficient for the payment thereof) shall be restricted or prohibited by law.
As of the date of this prospectus, we do not have (i) any Junior Stock other than the common stock, (ii) any Parity Stock, or (iii) any Senior Stock outstanding.
Subject to the foregoing, dividends (payable in cash, stock or otherwise) as may be determined by our board of directors or any duly authorized committee of our board of directors may be declared and paid on our common stock and any other Junior Stock from time to time out of any funds legally available for such payment, and the Series A Preferred Stock shall not be entitled to participate in any such dividend.
Ranking
The Series A Preferred Stock will rank, with respect to anticipated dividends (whether cumulative or non-cumulative) and distributions upon any liquidation, dissolution or winding-up of our affairs:
| · | senior to our common stock and to each other class or series of our capital stock established after the original issue date of the Series A Preferred Stock that is expressly made subordinated to the Series A Preferred Stock as to the payment of dividends or amounts payable on a liquidation, dissolution or winding-up of our affairs (the “Junior Stock”); |
| · | on a parity with any class or series of our capital stock established after the original issue date of the Series A Preferred Stock that is not expressly made senior or subordinated to the Series A Preferred Stock as to the payment of dividends and amounts payable on a liquidation, dissolution or winding-up of our affairs (the “Parity Stock”); |
| · | junior to any class or series of our capital stock established after the original issue date of the Series A Preferred Stock that is expressly made senior to the Series A Preferred Stock as to the payment of dividends or amounts payable on a liquidation, dissolution or winding-up of our affairs (the “Senior Stock”); |
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| · | junior to all of our existing and future indebtedness (including outstanding indebtedness under our credit facilities, our outstanding unsecured senior notes and our outstanding commercial paper) and other liabilities with respect to assets available to satisfy claims against us; and |
| · | structurally subordinated to existing and future indebtedness and other liabilities of our subsidiaries and any future preferred stock of our subsidiaries. |
Except as otherwise required by law, we may issue Parity Stock and Junior Stock at any time and from time to time in one or more series without the consent of the holders of the Series A Preferred Stock. Our ability to issue any Senior Stock is limited as described under “—Voting Rights.”
Parity Stock with respect to the Series A Preferred Stock may include series of our preferred stock that have different dividend rates, redemption or conversion features, mechanics, dividend periods, payment of dividends (whether cumulative or non-cumulative), payment dates or record dates than the Series A Preferred Stock.
Liquidation Rights
Upon any voluntary or involuntary liquidation, dissolution or winding-up of our affairs, holders of the Series A Preferred Stock and any Parity Stock will be entitled to receive out of our assets legally available for distribution to shareholders, after satisfaction of all liabilities and obligations to our creditors, if any, and subject to the rights of holders of Senior Stock in respect of distributions upon liquidation, dissolution or winding-up of our affairs, and before any distribution of assets is made to or set aside for holders of common stock and any other Junior Stock, in full a liquidating distribution in the amount of $25.00 per share of Series A Preferred Stock, plus all accumulated and unpaid dividends (whether or not declared), if any. Holders of the Series A Preferred Stock will not be entitled to any other amounts from us after they have received their full liquidation preference (as defined below).
In any such distribution, if our assets are not sufficient to pay the liquidation preferences in full to all holders of the Series A Preferred Stock and all holders of any Parity Stock, the amounts paid to the holders of Series A Preferred Stock and to the holders of any Parity Stock will be paid pro rata in accordance with the respective aggregate liquidation preferences of those holders. In any such distribution, the “liquidation preference” of any holder of preferred stock means the amount payable to such holder in such distribution (assuming no limitation on our assets available for such distribution), including any unpaid, accumulated, cumulative dividends, whether or not declared (and, in the case of any Parity Stock on which dividends accumulate on a non-cumulative basis, an amount equal to any declared but unpaid dividends, as applicable). If the liquidation preference has been paid in full to all holders of the Series A Preferred Stock and any holders of Parity Stock, the holders of our other stock shall be entitled to receive all our remaining assets according to their respective rights and preferences.
For purposes of this “—Liquidation Rights” section, neither our merger or consolidation into or with any other corporation, including a merger or consolidation in which the holders of Series A Preferred Stock receive cash, securities or other property for their shares, nor a sale, transfer or lease of all or part of our assets, will be deemed a liquidation, dissolution or winding-up of our affairs.
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The Certificate of Designations does not contain any provision requiring funds to be set aside to protect the liquidation preference of the Series A Preferred Stock even though it is substantially in excess of the par value thereof.
Optional Redemption
The Series A Preferred Stock will not be subject to any mandatory redemption, sinking fund, retirement fund, purchase fund or other similar provisions. We may redeem the Series A Preferred Stock at our option in whole or in part, from time to time, on or after the date 3 years from the issuance of our Preferred Units, at a redemption price in cash equal to $25.00 per share of Series A Preferred Stock, plus, in each case, all accumulated and unpaid dividends (whether or not declared) to, but excluding, the date fixed for redemption.
Upon the occurrence of a Change of Control, whether before or after the three year anniversary of the date of the first issuance, we may, at our option, upon not less than 30 nor more than 60 days’ written notice, redeem the Series A Preferred stock, in whole or in part, within 120 days after notice of such Change of Control, for cash at a redemption price of $25.00 per share, plus any accumulated and unpaid dividends thereon to, but not including, the redemption date.
A “Change of Control” is deemed to occur when any person, including any syndicate or group deemed to be a “person” under Section 13(d)(3) of the Exchange Act of beneficial ownership, directly or indirectly, through a purchase, merger or other acquisition transaction or series of purchases, mergers or other acquisition transactions shall have acquired our stock entitling that person to exercise more than 50% of the total voting power of all our stock entitled to vote generally in the election of our directors (except that such person will be deemed to have beneficial ownership of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition).
Redemption Procedures
If the Series A Preferred Stock is to be redeemed, the notice of redemption shall be given by first class mail, postage prepaid, to the holders of record of the Series A Preferred Stock to be redeemed, mailed not less than 30 days, nor more than 60 days, prior to the date fixed for redemption thereof (provided that, if the Series A Preferred Stock is held in book-entry form through DTC we may give such notice in any manner permitted by DTC). Each notice of redemption will include a statement setting forth:
| · | the redemption date; |
| · | the number of shares of Series A Preferred Stock to be redeemed and, if less than all the shares of Series A Preferred Stock held by such holder are to be redeemed, the number of such shares of Series A Preferred Stock to be redeemed from such holder; |
| · | the redemption price; |
| · | the place or places where holders may surrender certificates evidencing the Series A Preferred Stock for payment of the redemption price; and |
| · | that dividends on the shares of Series A Preferred Stock to be redeemed will cease to accumulate from and after such redemption date. |
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If notice of redemption of any Series A Preferred Stock has been given, and if the funds necessary for such redemption have been set aside by us for the benefit of the holders of any Series A Preferred Stock so called for redemption, then, from and after the redemption date, dividends will cease to accrue on such Series A Preferred Stock, and such Series A Preferred Stock shall no longer be deemed outstanding and all rights of the holders of such Series A Preferred Stock will terminate, except only the right of the holders thereof to receive the amount payable on such redemption, without interest. Any funds unclaimed at the end of two years from the redemption date shall, to the extent permitted by law, be released by us, after which time the holders of such Series A Preferred Stock so called for redemption shall look only to us for payment of the redemption price of such Series A Preferred Stock.
In case of any redemption of only part of the Series A Preferred Stock at the time outstanding, the Series A Preferred Stock to be redeemed shall be selected either pro rata or by lot (or, if applicable, in accordance with the applicable procedures of DTC or any other similar facility in compliance with then-applicable rules of any stock exchange or other trading platform our securities trade or are quoted upon).
Voting Rights
Except as provided below or as otherwise required by applicable law, the holders of the Series A Preferred Stock will have no voting rights.
So long as any Series A Preferred Stock remains outstanding, in addition to any other vote or consent of shareholders required by law, we will not, without the affirmative vote or consent of the holders of at least two-thirds of the outstanding Series A Preferred Stock and all other series of voting preferred stock (subject to the immediately succeeding paragraph below) entitled to vote thereon (voting together as a single class), given in person or by proxy, either in writing or at a meeting:
| · | amend or alter the provisions of our certificate of incorporation or the Certificate of Designations for the Series A Preferred Stock so as to authorize or create, or increase the authorized amount of, any class or series of capital stock ranking senior to the Series A Preferred Stock with respect to payment of dividends and/or the distribution of assets upon any liquidation, dissolution or winding-up of our affairs; |
| · | amend, alter or repeal the provisions of our articles of incorporation or the Certificate of Designations for the Series A Preferred Stock so as to materially and adversely affect the special rights, preferences, privileges and voting powers of the Series A Preferred Stock, taken as a whole; or |
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| · | consummate a binding share exchange or reclassification involving the Series A Preferred Stock or our merger or consolidation with another entity, unless in each case (i) the Series A Preferred Stock remains outstanding or, in the case of any such merger or consolidation with respect to which we are not the surviving or resulting entity, is converted into or exchanged for preference securities of the surviving or resulting entity or its ultimate parent and (ii) such Series A Preferred Stock remaining outstanding or such preference securities, as the case may be, has such rights, preferences, privileges and voting powers, and limitations and restrictions thereof, taken as a whole, as are not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers, and limitations and restrictions thereof, of the Series A Preferred Stock immediately prior to such consummation, taken as a whole; |
provided, however, that any increase in the amount of the authorized or issued Series A Preferred Stock or authorized preferred stock or the creation and issuance, or an increase in the authorized or issued amount, of any other series of preferred stock ranking equally with and/or junior to the Series A Preferred Stock with respect to the payment of dividends and/or the distribution of assets upon any liquidation, dissolution or winding-up of our affairs will not be deemed to materially and adversely affect the special rights, preferences, privileges or voting powers of the Series A Preferred Stock.
If an amendment, alteration, repeal, share exchange, reclassification, merger or consolidation described above would materially and adversely affect the Series A Preferred Stock and one or more, but not all, series of voting preferred stock (including the Series A Preferred Stock for this purpose), then only the series materially and adversely affected by such event and entitled to vote shall vote on the matter together as a single class (in lieu of all other series of voting preferred stock).
To the fullest extent permitted by the law, without the consent of the holders of the Series A Preferred Stock, so long as such action does not adversely affect the special rights, preferences, privileges and voting powers, and limitations and restrictions thereof, of the Series A Preferred Stock, taken as a whole, we may amend, alter, supplement or repeal any terms of the Series A Preferred Stock for the following purposes:
| · | to cure any ambiguity, omission, inconsistency or mistake in any such agreement or instrument; |
| · | to make any provision with respect to matters or questions relating to the Series A Preferred Stock that is not inconsistent with the provisions of the Certificate of Designations for the Series A Preferred Stock and that does not adversely affect the rights of any holder of the Series A Preferred Stock; or |
| · | to make any other change that does not adversely affect the rights of any holder of the Series A Preferred Stock (other than any holder that consents to such change). |
The foregoing voting provisions will not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding Series A Preferred Stock shall have been redeemed or called for redemption upon proper notice, and sufficient funds shall have been set aside by us for the benefit of the holders of Series A Preferred Stock to effect such redemption.
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Warrants
Duration and Exercise Price
Each Warrant issued in this offering entitles the registered holder to purchase one share of our common stock at an exercise price equal to $11.00, subject to adjustment as provided below, immediately following the issuance of such Warrant and terminating at 5:00 p.m., New York City time, five (5) years following the date of issuance.
Exercise
The Warrants will be exercised upon surrender of the Warrant certificate on or prior to the expiration date at the offices of the Warrant Agent, with the exercise form on the reverse side of the Warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price for the number of warrants being exercised. As promptly as reasonably practicable, certificates representing the shares of common stock purchase will be delivered to the warrant holder. The Warrants may be exercised in whole or in part.
Payments
The Warrants will be exercisable for cash, or on a cashless basis, at any time and from time to time after the date of issuance.
Fractional Shares
No fractional shares will be issued upon exercise of the Warrants. If, upon exercise of the Warrants, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, round down to the nearest whole number the number of shares of common stock to be issued to the warrant holder.
Limitation on Exercise
The number of shares of our common stock that may be acquired by a holder upon any exercise of a warrant shall be limited so that the total number of shares of our common stock then beneficially owned by such holder does not exceed 4.99% of the total number of issued and outstanding shares of our common stock (including for such purpose the shares of common stock issuable upon such exercise). Our obligation to issue shares of common stock upon the exercise of a warrant shall be suspended until such time, if any, as shares of common stock may be issued in compliance with such limitation.
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Adjustment
The exercise price and number of shares of common stock issuable upon exercise is subject to appropriate adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting our common stock and the exercise price. If, at any time after the initial issuance of the Warrants, we sell or grant any option to purchase or sell or grant any right to reprice, or otherwise dispose of or issue, any of our common stock or securities convertible into or exercisable for shares of our common stock at an effective price per share that is lower than the then exercise price of the Warrant, then the exercise price will be reduced to equal such lower price, subject to a floor of 60% of the $11.00 original exercise price of the Warrants; except that no adjustment will be made with respect to issuances of (i) of equity securities pursuant to our equity compensation plans, (ii) securities issuable upon the exercise, exchange or conversion of securities exercisable, exchangeable or convertible into shares of our common stock issued and outstanding on the date of closing of this offering, provided that such securities have not been amended since the date of the securities purchase agreement to increase the number of such securities or to decrease the exercise price, exchange price or conversion price of such securities (other than in connection with stock splits or combinations) or to extend the term of such securities, (iii) securities issued pursuant to mergers, acquisitions or strategic transactions approved by a majority of the disinterested directors of the Company, (iv) securities issued in a capital raise resulting in no less than $10,000,000 of gross proceeds to us and the final closing of such offering is either (a) in connection with an initial listing of our common stock on Nasdaq, the NYSE or another stock exchange, or (b) following the date our common stock commenced trading on the Nasdaq, the NYSE or another stock exchange, and (v) shares of our common stock currently being offered by us at a purchase price of $2.87 in an ongoing private placement.
Fundamental Transactions
In addition, in the event we consummate a merger or consolidation with or into another person or other reorganization event in which our common stock is converted or exchanged for securities, cash or other property, or we sell, lease, license, assign, transfer, convey or otherwise dispose of all or substantially all of our assets or we or another person acquire 50% or more of our outstanding shares of common stock then following such event, the holders of the Warrants will be entitled to receive upon exercise of the Warrants the same kind and amount of securities, cash or property which the holders would have received had they exercised the Warrants immediately prior to such fundamental transaction. Any successor to us or the surviving entity is required to assume the obligations under the Warrants. Notwithstanding the foregoing, in the event of a fundamental transaction, the holders will have the option, which may be exercised within 30 days after the consummation of the fundamental transaction, to require us or the successor entity to purchase the Warrant from the holder by paying to the holder an amount of cash equal to the Black Scholes value of the remaining unexercised portion of the warrant on the date of the consummation of the fundamental transaction. However, if the fundamental transaction is not within our control, including not approved by our board of directors or the consideration is not in all stock of the successor entity, the holder will only be entitled to receive from us or any successor entity, as of the date of consummation of such fundamental transaction, the same type or form of consideration (and in the same proportion), at the Black Scholes value of the unexercised portion of the Warrant, that is being offered and paid to the holders of our common stock in connection with the fundamental transaction, whether that consideration be in the form of cash, stock or any combination thereof, or whether the holders of common stock are given the choice to receive from among alternative forms of consideration in connection with the fundamental transaction.
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Rights as Stockholders
The Warrant holders do not have the rights or privileges of holders of common stock and any voting rights until they exercise their warrants and receive shares of common stock. After the issuance of shares of common stock upon exercise of the warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by stockholders.
Warrant Agent
Colonial will be the Warrant Agent for the Warrants.
Transfer Agent and Registrar
Colonial will be the registrar and transfer agent for the Preferred Units, the Series A Preferred Stock and the Warrants for the Warrants. Colonial is the registrar and transfer agent for our common stock.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain U.S. federal income tax considerations that may be applicable to “U.S. holders” and “Foreign holders” (each as defined below) with respect to the purchase, ownership and disposition of the Series A Preferred Stock offered by this prospectus. This discussion only applies to purchasers who purchase and hold the Series A Preferred Stock as a capital asset within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the “Code”) (generally property held for investment). This discussion does not describe all of the tax consequences that may be relevant to each purchaser or holder of the Series A Preferred Stock in light of its particular circumstances.
This discussion is based upon provisions of the Code, Treasury regulations, rulings and judicial decisions as of the date hereof. These authorities may change, perhaps retroactively, which could result in U.S. federal income tax consequences different from those summarized below. This discussion does not address all aspects of U.S. federal income taxation (such as the alternative minimum tax) and does not describe any foreign, state, local or other tax considerations that may be relevant to a purchaser or holder of the Series A Preferred Stock in light of their particular circumstances. In addition, this discussion does not describe the U.S. federal income tax consequences applicable to a purchaser or a holder of the Series A Preferred Stock who is subject to special treatment under U.S. federal income tax laws (including, a corporation that accumulates earnings to avoid U.S. federal income tax, a pass-through entity or an investor in a pass-through entity, a tax-exempt entity, pension or other employee benefit plans, financial institutions or broker-dealers, persons holding the Series A Preferred Stock as part of a hedging or conversion transaction or straddle, a person subject to the alternative minimum tax, an insurance company, former U.S. citizens or former long-term U.S. residents). We cannot assure you that a change in law will not significantly alter the tax considerations that we describe in this discussion.
If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds the Series A Preferred Stock, the U.S. federal income tax treatment of a partner of that partnership generally will depend upon the status of the partner and the activities of the partnership. If you are a partnership or a partner of a partnership holding the Series A Preferred Stock, you should consult your tax advisors as to the particular U.S. federal income tax consequences of holding and disposing of the Series A Preferred Stock.
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You should consult your own tax advisor concerning the U.S. federal income tax consequences to you of acquiring, owning, and disposing of these securities, as well as any tax consequences arising under the laws of any state, local, foreign, or other tax jurisdiction and the possible effects of changes in U.S. federal or other tax laws.
U.S. Holders
Subject to the qualifications set forth above, the following discussion summarizes certain U.S. federal income tax considerations that may relate to the purchase, ownership and disposition of the Series A Preferred Stock by “U.S. holders.” You are a “U.S. holder” if you are a beneficial owner of Series A Preferred Stock and you are for U.S. federal income tax purposes;
| · | an individual citizen or resident of the United States; |
| · | a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia; |
| · | an estate the income of which is subject to U.S. federal income taxation regardless of its source; or |
| · | a trust if it (i) is subject to the primary supervision of a court within the United States and one or more United States persons have the authority to control all substantial decisions of the trust or (ii) has a valid election in effect under applicable United States Treasury regulations to be treated as a United States person. |
Distributions in General
If distributions are made with respect to the Series A Preferred Stock, such distributions will be treated as dividends to the extent of our current or accumulated earnings and profits as determined under the Code. We do not, however, currently have significant current or accumulated earnings and profits. Any portion of a distribution that exceeds such earnings and profits will first be applied to reduce a U.S. holder’s tax basis in the Series A Preferred Stock on a share-by-share basis, and the excess will be treated as gain from the disposition of the Series A Preferred Stock, the tax treatment of which is discussed below under “Certain U.S. Federal Income Tax Considerations - U.S. Holders: Disposition of Series A Preferred Stock, Including Redemptions.”
Under current law, dividends received by individual holders of the Series A Preferred Stock will be subject to a reduced maximum tax rate of 20% if such dividends are treated as “qualified dividend income” for U.S. federal income tax purposes. The rate reduction does not apply to dividends received to the extent that the individual shareholder elects to treat the dividends as “investment income,” which may be offset against investment expenses. Furthermore, the rate reduction does not apply to dividends that are paid to individual shareholders with respect to Series A Preferred Stock that is held for 60 days or less during the 121 day period beginning on the date which is 60 days before the date on which the Series A Preferred Stock becomes ex-dividend (or where the dividend is attributable to a period or periods in excess of 366 days, Series A Preferred Stock that is held for 90 days or less during the 181 day period beginning on the date which is 90 days before the date on which the Series A Preferred Stock becomes ex-dividend). Also, if a dividend received by an individual shareholder that qualifies for the rate reduction is an “extraordinary dividend” within the meaning of Section 1059 of the Code, any loss recognized by such individual shareholder on a subsequent disposition of the stock will be treated as long-term capital loss to the extent of such “extraordinary dividend,” irrespective of such shareholder’s holding period for the stock. In addition, dividends recognized by U.S. holders that are individuals could be subject to the 3.8% tax on net investment income. Individual shareholders should consult their own tax advisors regarding the implications of these rules in light of their particular circumstances.
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Dividends received by corporate shareholders generally will be eligible for the dividends-received deduction. Generally, this deduction is allowed if the underlying stock is held for at least 46 days during the 91 day period beginning on the date 45 days before the ex-dividend date of the stock, and for cumulative preferred stock with an arrearage of dividends attributable to a period in excess of 366 days, the holding period is at least 91 days during the 181 day period beginning on the date 90 days before the ex-dividend date of the stock. Corporate shareholders of the Series A Preferred Stock should also consider the effect of Section 246A of the Code, which reduces the dividends-received deduction allowed to a corporate shareholder that has incurred indebtedness that is “directly attributable” to an investment in portfolio stock such as preferred stock. If a corporate shareholder receives a dividend on the Series A Preferred Stock that is an “extraordinary dividend” within the meaning of Section 1059 of the Code, the shareholder in certain instances must reduce its basis in the Series A Preferred Stock by the amount of the “nontaxed portion” of such “extraordinary dividend” that results from the application of the dividends-received deduction. If the “nontaxed portion” of such “extraordinary dividend” exceeds such corporate shareholder’s basis, any excess will be taxed as gain as if such shareholder had disposed of its shares in the year the “extraordinary dividend” is paid. Each domestic corporate holder of the Series A Preferred Stock is urged to consult with its tax advisors with respect to the eligibility for and the amount of any dividends received deduction and the application of Code Section 1059 to any dividends it may receive on the Series A Preferred Stock.
Constructive Distributions on Series A Preferred Stock
A distribution by a corporation of its stock deemed made with respect to its preferred stock is treated as a distribution of property to which Section 301 of the Code applies. If a corporation issues preferred stock that may be redeemed at a price higher than its issue price, the excess (a “redemption premium”) is treated under certain circumstances as a constructive distribution (or series of constructive distributions) of additional preferred stock. The constructive distribution of property equal to the redemption premium would accrue without regard to the holder’s method of accounting for U.S. federal income tax purposes at a constant yield determined under principles similar to the determination of original issue discount (“OID”) pursuant to Treasury regulations under Sections 1271 through 1275 of the Code (the “OID Rules”). The constructive distributions of property would be treated for U.S. federal income tax purposes as actual distributions of the Series A Preferred Stock that would constitute a dividend, return of capital or capital gain to the holder of the stock in the same manner as cash distributions described under “Certain U.S. Federal Income Tax Considerations - U.S. Holders: Distributions in General.” The application of principles similar to those applicable to debt instruments with OID to a redemption premium for the Series A Preferred Stock is uncertain.
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We have the right to call the Series A Preferred Stock for redemption (the “call option”), and have the option to redeem the Series A Preferred Stock upon any Change of Control (the “contingent call option”). The stated redemption price of the Series A Preferred Stock upon any redemption pursuant to our call option or contingent call option is equal to the liquidation preference of the Series A Preferred Stock (i.e., $25.00, plus accrued and unpaid dividends) and is payable in cash.
If the redemption price of the Series A Preferred Stock exceeds the issue price of the Series A Preferred Stock upon any redemption pursuant to our call option or contingent call option, the excess will be treated as a redemption premium that may result in certain circumstances in a constructive distribution or series of constructive distributions to U.S. holders of additional Series A Preferred Stock. The redemption price for the Series A Preferred Stock should be the liquidation preference of the Series A Preferred Stock. Assuming that the issue price of the Series A Preferred Stock is determined under principles similar to the OID Rules, the issue price for the Series A Preferred Stock should be the initial offering price to the public (excluding bond houses and brokers) at which a substantial amount of the Series A Preferred Stock is sold.
A redemption premium for the Series A Preferred Stock should not result in constructive distributions to U.S. holders of the Series A Preferred Stock if the redemption premium is less than a de-minimis amount as determined under principles similar to the OID Rules. A redemption premium for the Series A Preferred Stock should be considered de-minimis if such premium is less than $.0025 of the Series A Preferred Stock’s liquidation value of $25.00 at maturity, multiplied by the number of complete years to maturity. Because the determination under the OID Rules of a maturity date for the Series A Preferred Stock is unclear, the remainder of this discussion assumes that the Series A Preferred Stock is issued with a redemption premium greater than a de-minimis amount.
The call option should not require constructive distributions of the redemption premium, if based on all of the facts and circumstances as of the issue date, a redemption pursuant to the call option is not more likely than not to occur. The Treasury regulations provide that an issuer’s right to redeem will not be treated as more likely than not to occur if: (i) the issuer and the holder of the stock are not related within the meaning of Section 267(b) or Section 707(b) of the Code (substituting “20%” for the phrase “50%); (ii) there are no plans, arrangements, or agreements that effectively require or are intended to compel the issuer to redeem the stock; and (iii) exercise of the right to redeem would not reduce the yield on the stock determined using principles applicable to the determination of OID under the OID Rules. The fact that a redemption right is not within the safe harbor described in the preceding sentence does not mean that an issuer’s right to redeem is more likely than not to occur and the issuer’s right to redeem must still be tested under all the facts and circumstances to determine if it is more likely than not to occur. We do not believe that a redemption pursuant to the call option should be treated as more likely than not to occur under the foregoing test. Accordingly, no U.S. holder of the Series A Preferred Stock should be required to recognize constructive distributions of the redemption premium because of our call option.
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Disposition of Series A Preferred Stock, Including Redemptions
Upon any sale, exchange, redemption (except as discussed below) or other disposition of the Series A Preferred Stock, a U.S. holder will recognize capital gain or loss equal to the difference between the amount realized by the U.S. holder and the U.S. holder’s adjusted tax basis in the Series A Preferred Stock. Such capital gain or loss will be long-term capital gain or loss if the U.S. holder’s holding period for the Series A Preferred Stock is longer than one year. A U.S. holder should consult its own tax advisors with respect to applicable tax rates and netting rules for capital gains and losses. Certain limitations exist on the deduction of capital losses by both corporate and non-corporate taxpayers. In addition, gains recognized by U.S. holders that are individuals could be subject to the 3.8% tax on net investment income.
A redemption of shares of the Series A Preferred Stock will generally be a taxable event. If the redemption is treated as a sale or exchange, instead of a dividend, a U.S. holder will recognize capital gain or loss (which will be long-term capital gain or loss, if the U.S. holder’s holding period for such Series A Preferred Stock exceeds one year) equal to the difference between the amount realized by the U.S. holder and the U.S. holder’s adjusted tax basis in the Series A Preferred Stock redeemed, except to the extent that any cash received is attributable to any accrued but unpaid dividends on the Series A Preferred Stock, which will be subject to the rules discussed above in “Certain U.S. Federal Income Tax Considerations - U.S. Holders: Distributions in General.” A payment made in redemption of Series A Preferred Stock may be treated as a dividend, rather than as payment in exchange for the Series A Preferred Stock, unless the redemption:
| · | is “not essentially equivalent to a dividend” with respect to a U.S. holder under Section 302(b)(1) of the Code; |
| · | is a “substantially disproportionate” redemption with respect to a U.S. holder under Section 302(b)(2) of the Code; |
| · | results in a “complete redemption” of a U.S. holder’s stock interest in the company under Section 302(b)(3) of the Code; or |
| · | is a redemption of stock held by a non-corporate shareholder, which results in a partial liquidation of the company under Section 302(b)(4) of the Code. |
In determining whether any of these tests has been met, a U.S. holder must take into account not only shares of the Series A Preferred Stock and the common stock that the U.S. Holder actually owns, but also shares of stock that the U.S. holder constructively owns within the meaning of Section 318 of the Code.
A redemption payment will be treated as “not essentially equivalent to a dividend” if it results in a “meaningful reduction” in a U.S. holder’s aggregate stock interest in the company, which will depend on the U.S. holder’s particular facts and circumstances at such time. If the redemption payment is treated as a dividend, the rules discussed above in “Certain U.S. Federal Income Tax Considerations - U.S. Holders: Distributions in General” apply.
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Satisfaction of the “complete redemption” and “substantially disproportionate” exceptions is dependent upon compliance with the objective tests set forth in Section 302(b)(3) and Section 302(b)(2) of the Code, respectively. A redemption will result in a “complete redemption” if either all of the shares of our stock actually and constructively owned by a U.S. holder are exchanged in the redemption or all of the shares of our stock actually owned by the U.S. holder are exchanged in the redemption and the U.S. holder is eligible to waive, and the U.S. holder effectively waives, the attribution of shares of our stock constructively owned by the U.S. holder in accordance with the procedures described in Section 302(c)(2) of Code. A redemption does not qualify for the “substantially disproportionate” exception if the stock redeemed is only non-voting stock, and for this purpose, stock which does not have voting rights until the occurrence of an event is not voting stock until the occurrence of the specified event. Accordingly, any redemption of the Series A Preferred Stock generally will not qualify for this exception because the voting rights are limited as provided in the “Description of Series A Preferred Stock-Voting Rights.” For purposes of the “redemption from non-corporate shareholders in a partial liquidation” test, a distribution will be treated as in partial liquidation of a corporation if the distribution is not essentially equivalent to a dividend (determined at the corporate level rather than the shareholder level) and the distribution is pursuant to a plan and occurs within the taxable year in which the plan was adopted or within the succeeding taxable year. For these purposes, a distribution is generally not essentially equivalent to a dividend if the distribution results in a corporate contraction. The determination of what constitutes a corporate contraction is factual in nature, and has been interpreted under case law to include the termination of a business or line of business. Each U.S. holder of the Series A Preferred Stock should consult its own tax advisors to determine whether a payment made in redemption of the Series A Preferred Stock will be treated as a dividend or a payment in exchange for the Series A Preferred Stock. If the redemption payment is treated as a dividend, the rules discussed above in “Certain U.S. Federal Income Tax Considerations - U.S. Holders: Distributions in General” apply. Under proposed Treasury regulations, if any amount received by a U.S. holder in redemption of Series A Preferred Stock is treated as a distribution with respect to such holder’s Series A Preferred Stock, but not as a dividend, such amount will be allocated to all shares of the Series A Preferred Stock held by such holder immediately before the redemption on a pro rata basis. The amount applied to each share will reduce such holder’s adjusted tax basis in that share and any excess after the basis is reduced to zero will result in taxable gain. If such holder has different bases in shares of the Series A Preferred Stock, then the amount allocated could reduce a portion of the basis in certain shares while reducing all of the basis, and giving rise to taxable gain, in other shares. Thus, such holder could have gain even if such holder’s aggregate adjusted tax basis in all shares of the Series A Preferred Stock held exceeds the aggregate amount of such distribution.
The proposed Treasury regulations permit the transfer of basis in the redeemed shares of the Series A Preferred Stock to the holder’s remaining, unredeemed Series A Preferred Stock (if any), but not to any other class of stock held, directly or indirectly, by the holder. Any unrecovered basis in the Series A Preferred Stock would be treated as a deferred loss to be recognized when certain conditions are satisfied. The proposed Treasury regulations would be effective for transactions that occur after the date the regulations are published as final Treasury regulations. There can, however, be no assurance as to whether, when and in what particular form such proposed Treasury regulations are ultimately finalized.
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Information Reporting and Backup Withholding
Information reporting and backup withholding may apply with respect to payments of dividends on the Series A Preferred Stock and to certain payments of proceeds on the sale or other disposition of the Series A Preferred Stock. Certain non-corporate U.S. holders may be subject to U.S. backup withholding (currently at a rate of 24%) on payments of dividends on the Series A Preferred Stock and certain payments of proceeds on the sale or other disposition of the Series A Preferred Stock unless the beneficial owner thereof furnishes the payor or its agent with a taxpayer identification number, certified under penalties of perjury, and certain other information, or otherwise establishes, in the manner prescribed by law, an exemption from backup withholding. U.S. backup withholding tax is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a U.S. holder’s U.S. federal income tax liability, which may entitle the U.S. holder to a refund, provided the U.S. holder timely furnishes the required information to the Internal Revenue Service.
Foreign Holders
Subject to the qualifications set forth above under the caption “Certain U.S. Federal Income Tax Considerations,” the following discussion summarizes certain U.S. federal income tax consequences of the purchase, ownership and disposition of the Series A Preferred Stock by certain “Foreign holders.” You are a “Foreign holder” if you are a beneficial owner of the Series A Preferred Stock and you are not a “U.S. holder.”
Distributions on the Series A Preferred Stock
If distributions are made with respect to the Series A Preferred Stock, such distributions will be treated as dividends to the extent of our current and accumulated earnings and profits as determined under the Code and may be subject to withholding as discussed below. Any portion of a distribution that exceeds our current and accumulated earnings and profits will first be applied to reduce the Foreign holder’s basis in the Series A Preferred Stock and, to the extent such portion exceeds the Foreign holder’s basis, the excess will be treated as gain from the disposition of the Series A Preferred Stock, the tax treatment of which is discussed below under “Certain U.S. Federal Income Tax Considerations - Foreign Holders: Disposition of Series A Preferred Stock, Including Redemptions.” In addition, if we are a U.S. real property holding corporation, i.e. a “USRPHC,” and any distribution exceeds our current and accumulated earnings and profits, we will need to choose to satisfy our withholding requirements either by treating the entire distribution as a dividend, subject to the withholding rules in the following paragraph (and withhold at a minimum rate of 30% or such lower rate as may be specified by an applicable income tax treaty for distributions from a USRPHC), or by treating only the amount of the distribution equal to our reasonable estimate of our current and accumulated earnings and profits as a dividend, subject to the withholding rules in the following paragraph, with the excess portion of the distribution subject to withholding at a rate of 15% or such lower rate as may be specified by an applicable income tax treaty as if such excess were the result of a sale of shares in a USRPHC (discussed below under “Certain U.S. Federal Income Tax Considerations - Foreign Holders: Disposition of Series A Preferred Stock, Including Redemptions”), with a credit generally allowed against the Foreign holder’s U.S. federal income tax liability in an amount equal to the amount withheld from such excess.
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Dividends paid to a Foreign holder of the Series A Preferred Stock will be subject to withholding of U.S. federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. However, dividends that are effectively connected with the conduct of a trade or business by the Foreign holder within the United States (and, where a tax treaty applies, are attributable to a permanent establishment maintained by the Foreign holder in the United States) are not subject to the withholding tax, provided that certain certification and disclosure requirements are satisfied including completing Internal Revenue Service Form W-8ECI (or other applicable form). Instead, such dividends are subject to U.S. federal income tax on a net income basis in the same manner as if the Foreign holder were a United States person as defined under the Code, unless an applicable income tax treaty provides otherwise. Any such effectively connected dividends received by a foreign corporation may be subject to an additional “branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. A Foreign holder of the Series A Preferred Stock who wishes to claim the benefit of an applicable treaty rate and avoid backup withholding, as discussed below, for dividends will be required to (i) complete Internal Revenue Service Form W-8BEN or Form W-8BEN-E (or other applicable form) and certify under penalty of perjury that such holder is not a United States person as defined under the Code and is eligible for treaty benefits, or (ii) if the Series A Preferred Stock is held through certain foreign intermediaries, satisfy the relevant certification requirements of applicable Treasury regulations. A Foreign holder of the Series A Preferred Stock eligible for a reduced rate of U.S. withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the Internal Revenue Service.
Disposition of Series A Preferred Stock, Including Redemptions
Any gain realized by a Foreign holder on the disposition of the Series A Preferred Stock will not be subject to U.S. federal income or withholding tax unless:
| · | the gain is effectively connected with a trade or business of the Foreign holder in the United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment maintained by the Foreign holder in the United States); |
| · | A Foreign holder is an individual who is present in the United States for 183 days or more in the taxable year of disposition and certain other conditions are met; or |
| · | we are or have been a USRPHC for U.S. federal income tax purposes, as such term is defined in Section 897(c) of the Code, and such Foreign holder owned directly or pursuant to attribution rules at any time during the five year period ending on the date of disposition more than 5% of the Series A Preferred Stock. This assumes that the Series A Preferred Stock is regularly traded on an established securities market, within the meaning of Section 897(c)(3) of the Code. |
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A Foreign holder described in the first bullet point immediately above will generally be subject to tax on the net gain derived from the sale under regular graduated U.S. federal income tax rates in the same manner as if the Foreign holder were a United States person as defined under the Code, and if it is a corporation, may also be subject to the branch profits tax equal to 30% of its effectively connected earnings and profits or at such lower rate as may be specified by an applicable income tax treaty. An individual Foreign holder described in the second bullet point immediately above will be subject to a flat 30% tax (or at such reduced rate as may be provided by an applicable treaty) on the gain derived from the sale, which may be offset by U.S. source capital losses, even though the individual is not considered a resident of the United States. A Foreign holder described in the third bullet point above will be subject to U.S. federal income tax under regular graduated U.S. federal income tax rates with respect to the gain recognized in the same manner as if the Foreign holder were a United States person as defined under the Code. If a Foreign holder is subject to U.S. federal income tax on any sale, exchange, redemption (except as discussed below), or other disposition of the Series A Preferred Stock, such a Foreign holder will recognize capital gain or loss equal to the difference between the amount realized by the Foreign holder and the Foreign holder’s adjusted tax basis in the Series A Preferred Stock. Such capital gain or loss will be long-term capital gain or loss if the Foreign holder’s holding period for the Series A Preferred Stock is longer than one year. A Foreign holder should consult its own tax advisors with respect to applicable tax rates and netting rules for capital gains and losses. Certain limitations exist on the deduction of capital losses by both corporate and non-corporate taxpayers. If a Foreign holder is subject to U.S. federal income tax on any disposition of the Series A Preferred Stock, a redemption of shares of the Series A Preferred Stock will be a taxable event. If the redemption is treated as a sale or exchange, instead of a dividend, a Foreign holder generally will recognize long-term capital gain or loss, if the Foreign holder’s holding period for such Series A Preferred Stock exceeds one year, equal to the difference between the amount of cash received and fair market value of property received and the Foreign holder’s adjusted tax basis in the Series A Preferred Stock redeemed, except that to the extent that any cash received is attributable to any accrued but unpaid dividends on the Series A Preferred Stock, which generally will be subject to the rules discussed above in “Certain U.S. Federal Income Tax Considerations - Foreign Holders: Distributions on the Series A Preferred Stock.” A payment made in redemption of the Series A Preferred Stock may be treated as a dividend, rather than as payment in exchange for the Series A Preferred Stock, in the same circumstances discussed above under “Certain U.S. Federal Income Tax Considerations - U.S. Holders: Disposition of Series A Preferred Stock, Including Redemptions.” Each Foreign holder of the Series A Preferred Stock should consult its own tax advisors to determine whether a payment made in redemption of the Series A Preferred Stock will be treated as a dividend or as payment in exchange for the Series A Preferred Stock.
Information reporting and backup withholding
We must report annually to the Internal Revenue Service and to each Foreign holder the amount of dividends paid to such Foreign holder and the tax withheld with respect to such dividends, regardless of whether withholding was required. Copies of the information returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which the Foreign holder resides under the provisions of an applicable income tax treaty. A Foreign holder will not be subject to backup withholding on dividends paid to such Foreign holder as long as such Foreign holder certifies under penalty of perjury that it is a Foreign holder (and the payor does not have actual knowledge or reason to know that such Foreign holder is a United States person as defined under the Code), or such Foreign holder otherwise establishes an exemption. Depending on the circumstances, information reporting and backup withholding may apply to the proceeds received from a sale or other disposition of the Series A Preferred Stock unless the beneficial owner certifies under penalty of perjury that it is a Foreign holder (and the payor does not have actual knowledge or reason to know that the beneficial owner is a United States person as defined under the Code), or such owner otherwise establishes an exemption. U.S. backup withholding tax is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a Foreign holder’s U.S. federal income tax liability provided the required information is timely furnished to the Internal Revenue Service.
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Foreign Account Tax Compliance Act
Sections 1471 through 1474 of the Code (provisions which are commonly referred to as “FATCA”), generally impose a 30% withholding tax on dividends on Series A Preferred Stock paid on or after July 1, 2014 and the gross proceeds of a sale or other disposition of Series A Preferred Stock paid on or after January 1, 2019 to: (i) a foreign financial institution (as that term is defined in Section 1471(d)(4) of the Code) unless that foreign financial institution enters into an agreement with the U.S. Treasury Department to collect and disclose information regarding U.S. account holders of that foreign financial institution (including certain account holders that are foreign entities that have U.S. owners) and satisfies other requirements; and (ii) specified other foreign entities unless such an entity certifies that it does not have any substantial U.S. owners or provides the name, address and taxpayer identification number of each substantial U.S. owner and such entity satisfies other specified requirements. Foreign holders should consult their own tax advisors regarding the application of FATCA to them and whether it may be relevant to their purchase, ownership and disposition of Series A Preferred Stock.
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.
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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.
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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.
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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.
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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.
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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.
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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 engaged the FDA in a pre-submission conference on March 31, 2020 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, received 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). 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 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.
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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 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. |
| · | 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; |
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| · | 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. |
Employees
As of December 31, 2019, we had 13 employees all of whom are located in San Diego, California, consisting of 12 in research and development and operations and 1 in general and administrative functions.
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.
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Patents
We have submitted applications for: i) three U.S. utility patents, ii) two international patents, and iii) two U.S. provisional patents. All of the patent applications primarily relate to our proprietary fluid movement technology and the configuration of its product offering. There can be no assurance that any patents will be issued, and no assurance that if patents are issued they will prevent other companies from competing with us or infringing on our intellectual property. We will continue to attempt to patent our innovations, as deemed appropriate in the judgment of management, 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 administrative and research and development functions are located in a leased facility in San Diego, California. We currently occupy approximately 7,000 square feet of space in the San Diego facility, and the lease extends through July 2023. We believe that our existing facility is adequate to meet our current needs.
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 percent of our common stock is a party adverse to us or has a material interest adverse to us in any proceeding.
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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.”
Company 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. We have developed a hardware technology allowing people with insulin-dependent diabetes to receive their daily insulin in two ways, through a continuous “basal” delivery allowing a small amount of insulin to be in the blood at all times and a “bolus” delivery to address meal time glucose input and to address when the blood glucose level becomes excessively high. By addressing the time and effort required to effectively treat their condition, we believe we can address the less technically savvy, less motivated part of the market.
We have not completed development of, or obtained U.S. Food and Drug Administration clearance for, our insulin pump, and we have therefore not generated any revenues from product sales. Our net losses were $1.1 million and $3.4 million for the three and nine months ended December 31, 2019, respectively. As of December 31, 2019, we had working capital of $3.5 million and an accumulated deficit of $6.7 million.
Historically, we have financed our operations principally through private placements of our common stock. Although it is difficult to predict our future liquidity requirements, based upon our current operating plan, we do not have sufficient cash to meet our projected operating requirements and will need to raise additional capital during the next twelve months through the sale of additional equity or debt securities to support our future operations. If we are unable to secure additional capital, we may be required to curtail our product development initiatives and take additional measures to reduce costs.
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Results of Operations for Nine Months Ended December 31, 2019 and Compared with Nine Months Ended December 31, 2018
The results of operations for the three and nine months ended December 31, 2019 and 2018 were:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| December
31, 2019 |
December
31, 2018 |
December
31, 2019 |
December
31, 2018 |
|||||||||||||
| Operating expenses | ||||||||||||||||
| Research and development | $ | 608,019 | $ | 504,787 | $ | 1,945,043 | $ | 1,008,127 | ||||||||
| General and administrative | 527,829 | 245,773 | 1,486,386 | 546,621 | ||||||||||||
| Total operating expenses | 1,135,848 | 750,560 | 3,431,429 | 1,554,748 | ||||||||||||
| Operating loss | (1,135,848 | ) | (750,560 | ) | (3,431,429 | ) | (1,554,748 | ) | ||||||||
| Interest income | 2,331 | 11,355 | 28,148 | 22,203 | ||||||||||||
| Net loss | $ | (1,133,517 | ) | $ | (739,205 | ) | $ | (3,403,281 | ) | $ | (1,532,545 | ) | ||||
Operating Expenses:
Research and development expenses include costs related to personnel, stock-based compensation, product development and patent filings. Research and development expenses increased by $103,232 and $936,916 for the three and nine months ended December 31, 2019, respectively, as compared with the comparable prior-year periods. The increases for the three- and nine-month periods ended December 31, 2019 were primarily attributable to increased product development, personnel, consulting and stock-based compensation expenses. During fiscal 2020, we hired additional employees and engaged with additional consultants to accelerate the development of our product, and we incurred increased product tooling and prototyping expenses. We expect research and development expenses to continue to increase in the future as we add personnel and consulting resources and incur increased tooling expenses to continue the development of our product to achieve commercialization.
General and administrative expenses consist primarily of personnel, rent, stock-based compensation, legal and accounting fees and other administrative expenses. General and administrative expenses for the three and nine months ended December 31, 2019 increased by $282,056 and $939,765, respectively, as compared with the comparable prior-year periods. The increases for the three- and nine-month periods ended December 31, 2019 were primarily attributable to increases in personnel and professional services and stock-based compensation expenses, as well as expenses incurred in 2019 for the preparation of a selling shareholders registration statement related to a private placement of our common stock. We expect general and administrative expenses to increase in the future as we expect to hire additional employees to staff our administrative functions and incur increased facilities and professional services costs.
Interest Income:
Interest income decreased by $9,024 and increased by $5,945 for the three and nine months ended December 31, 2019, respectively, as compared with the comparable prior-year periods. The decrease for the three months ended December 31, 2019 was primarily due to lower average cash balances as compared with the prior year period. The increase for the nine months ended December 31, 2019 was attributable to higher average cash balances, as a result of our equity offering in 2018.
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Liquidity and Capital Resources
The following table summarizes our cash flows for the nine months ended December 31, 2019 and 2018:
| 2019 | 2018 | |||||||
| Cash used in operating activities | $ | (2,776,998 | ) | $ | (1,106,941 | ) | ||
| Cash used in investing activities | (58,278 | ) | (55,058 | ) | ||||
| Cash provided by financing activities | — | 4,003,199 | ||||||
| Net change in cash and cash equivalents | (2,835,276 | ) | 2,841,200 | |||||
| Cash and cash equivalents at beginning of period | 6,553,768 | 4,296,676 | ||||||
| Cash and cash equivalents at end of period | $ | 3,718,492 | $ | 7,137,876 | ||||
As we are still a development-stage entity, we have not yet generated revenues or achieved profitability, and expect to continue to incur cash outflows from operations. We expect that our research and development and general and administrative expenses will continue to increase and, as a result, we will need to generate significant product revenues to achieve profitability. We have historically raised capital through equity offerings of our common stock, and we expect to continue to raise capital through future equity or debt offerings in order to finance our operations.
We need to raise additional capital to fund our operations, but there can be no assurance that such funding will be available to us, when needed or on favorable terms. The failure to raise capital when needed could have a material adverse effect on our business and financial condition, including requiring us to reduce our operating costs and other expenditures related to our product development efforts, including reductions of personnel, salaries, consulting fees and capital expenditures. Alternatively, or in addition to such potential measures, we may elect to implement such cost reduction actions as we determine are necessary and in our best interests.
Net Cash Used in Operating Activities:
We used $2,776,998 of cash to fund operating activities during the nine months ended December 31, 2019, compared with $1,106,941 during the comparable period in 2018. Increased cash usage during 2019 was due to our increased net loss primarily due to increased operating expenses to fund our research and development activities.
Net Cash Used in Investing Activities:
We used $58,278 and $55,058 of cash to purchase property and equipment during the nine months ended December 31, 2019 and 2018, respectively.
Net Cash Used in Financing Activities:
We had no financing activities during the nine months ended December 31, 2019. For the nine months ended December 31, 2018, cash of $4,003,199 provided by financing activities was primarily attributable to the net proceeds of $3,983,915 from the issuance of common stock in a private placement and $19,800 of proceeds from the sale of our common stock.
Off-Balance Sheet Arrangements
As of December 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.
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Results of Operations for Fiscal Year Ended March 31, 2019 and Compared with the 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 | 434,558 | 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 to $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 to $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.
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During the fiscal year ended March 31, 2019, general and administrative expenses increased by 332% to $434,558 as compared to $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.
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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 to $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 to $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 to $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.
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The following table sets forth information with respect to each of our directors and executive officers, including their current principal occupation or employment and age as of March 31, 2020.
| Name | Age | Position |
| Paul DiPerna | 61 | Chief Executive Officer, Chief Financial Officer, Secretary, Treasurer and Director (Chairman of the Board) |
| Stephen Daly | 52 | Chief Commercial Officer |
| Liam Burns | 54 | Director |
| William J. Febbo | 51 | Director |
| Morgan C. Frank | 48 | Director |
| Carmen Volkart | 59 | Director |
Paul DiPerna is and has been since our July 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 early 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 holds a number 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 B.S. in Mechanical Engineering from the University of Lowell. In January 2017, Mr. DiPerna joined National Cardiac Incorporated (“Cardiac”) as its chief executive officer and a board member to leverage Cardiac’s technology in the cardiac monitoring space before resigning in 2019 as an executive and in 2020 as a member of its board of directors. 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.
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Stephen Daly was appointed our chief commercial officer in March 2020. Prior to joining the Company, from December 2014 until February 2020, Mr. Daly served as United States General Manager for Adocia, a clinical-stage, French biotechnology company. Before joining Adocia, he served in senior roles for the commercialization of therapeutics in the diabetes and metabolism fields at companies such as Halozyme, Amylin Pharmaceuticals and Affymax. Prior to his industry-specific experience in diabetes and metabolism, Mr. Daly held portfolio planning and commercialization roles in the generic and biosimilar marketplace for Baxter International and Sicor, a division of Teva Pharmaceuticals. Mr. Daly holds a B.S. in Business Administration (Finance and Information Systems) from Northeastern University.
Liam Burns was appointed to our board of directors 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. Dextera 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 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.
William J. Febbo was appointed to our board of directors in January 2020. Mr. Febbo has served as chief executive officer and a member of the board of directors of OptimizeRx Corporation since February 2016. In 2017, he became a faculty member of the Massachusetts Institute of Technology’s linQ program, which is a collaborative initiative focused on increasing the potential of innovative research to benefit society and the economy. Prior to 2016, Mr. Febbo served as chairman and founder of Plexuus, LLC, a payment processing business for medical professionals. From 2007 to 2015, he served as chief operating officer of Merriman Holdings, Inc., an investment banking firm, and assisted with capital raises in the technology, biotech, cleantech, consumer and resources industries. From 2013 to 2015, Mr. Febbo served as chief executive officer and co-founder of Digital Capital Network, Inc., which operated a transaction platform for institutional and accredited investors. Prior to 2007, he was chief executive officer and co-founder of MedPanel, a provider of market intelligence and communications for the pharmaceutical, biomedical, and medical device industries. Mr. Febbo holds a B.A. in international studies and Spanish from Dickinson College. Mr. Febbo is qualified to serve on our board of directors because of his experience in building and managing health services and financial businesses. In addition, he has expertise in corporate finance and strategy experience gained from his experience as an investment banker.
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Morgan C. Frank is and has been a director of ours since April 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 B.A. 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 affect 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.
Carmen Volkart was appointed to our board of directors in December 2019. Ms. Volkart has served as chief financial officer of Natureworks LLC, an advanced materials company offering a portfolio of renewably-sourced polymers, since October 2018. From October 2012 to July 2018, she served as chief financial officer and, for a portion of that time, as senior vice president of commercialization for NxThera, Inc., a medical device company pioneering the application of convective radiofrequency thermotherapy to treat endurological conditions. Ms. Volkart served as global chief financial officer of Tornier N.V. from 2010 to 2012, and was chief operating and financial officer, corporate secretary, compliance officer and treasurer of Spine Wave, Inc. from 2006 to 2010. Prior to 2006, Ms. Volkart held various executive and financial positions at American Medical, Inc., Medtronic, Inc. and Honeywell, Inc. Ms. Volkart holds a B.S. in accounting from the University of North Dakota and an MBA with a concentration in strategic management from the University of Minnesota. Ms. Volkart is qualified to serve on our board of directors because of her substantial financial and public-company experience, as she has served as chief financial officer at multiple medical device and other companies.
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, pursuant to which Manchester appointed Mr. Frank and Ms. Volkart, and (ii) Mr. DiPerna, in addition to being our chairman of the board, has the right to appoint 2 additional directors, pursuant to which he appointed Messrs. Burns and Febbo. 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.”
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Involvement in Legal Proceedings
Except with regard to Mr. Burns, to our knowledge, none of our executive 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 ours, 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 ours, 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.
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The DiPerna Employment and Related Agreements
We 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 2017 acquisition of Quasuras (the “Acquisition”), 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 assignment agreements with us.
Family Relationships
There are no family relationships among the members of our board of directors or our executive officers.
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Composition of our Board of Directors
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. Burn, pursuant to which Mr. DiPerna appointed Messrs. Burns and Febbo and Manchester has the right to appoint 2 directors, pursuant to which Manchester appointed Mr. Frank and Ms. Volkart. 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 of Directors 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.
Audit Committee
On December 31, 2019, we established an Audit Committee for the purpose of overseeing our accounting and financial reporting processes and audits of our financial statements. Our board of directors will be adopting an audit committee charter, which will formally outline the responsibilities of our Audit Committee.
Currently, Ms. Volkart is the sole member of the Audit Committee and serves as the chairperson. She has been designated by the board of directors as the “audit committee financial expert,” as defined by Item 407(d)(5) of Regulation S-K under the Securities Act of 1933, as amended, and the Exchange Act. That status does not impose duties, liabilities or obligations that are greater than the duties, liabilities or obligations otherwise imposed on her as a member of the Audit Committee and the board of directors, however. Ms. Volkart is independent, as determined in accordance with Rule 10A-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
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Compensation Committee
On January 23, 2020, we established a Compensation Committee. The Compensation Committee is responsible for reviewing and making recommendations on our compensation policies and benefits, including the compensation of all of our executive officers and directors. Our Compensation Committee also has the principal responsibility for the administration of our equity incentive plan. Our board of directors will be adopting a compensation committee charter, which will formally outline the responsibilities of our Compensation Committee.
Currently, Mr. Febbo is the sole member of the Compensation Committee and serves as the chairman. Mr. Febbo is independent, as determined in accordance with Rule 10A-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Director Independence
As of March 31, 2020, Mr. Febbo and Ms. Volkart are the directors considered to be independent under the Exchange Act. We are not a “listed issuer” as that term is used in Regulation S-K Item 407 adopted by the SEC.
Director Compensation
Our board of directors has authorized an annual cash retainer fee of $10,000, payable in quarterly installments, for our non-employee directors, with the exception of Mr. Frank, as compensation for their service on our board of directors.
In addition, upon appointment to the Board, we award our non-employee directors a stock option grant under our Amended 2017 Equity Incentive Plan (the “EIP”) ranging from 90,000 to 150,000 shares of our common stock that vest annually over three years.
All Compensation
Our board of directors has reserved 4,000,000 shares of our common stock to be issued under the EIP. Under the Company’s EIP, eligible employees, directors and consultants are granted options to purchase shares of our common stock. 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; |
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| (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.
During the year ended March 31, 2019, under the terms of his employment agreement, Mr. DiPerna was awarded fully-vested stock options under the EIP to purchase 64,687 shares of our common stock. The grant date fair value of these options was determined to be $42,761, was recorded as stock-based compensation expense in general and administrative and research and development expenses in our consolidated financial statements.
On January 16, 2019, the Company granted 90,000 options to Mr. Burns. These options have a term of 10 years and vest annually over three years. The grant date fair value of the options was determined to be $163,620.
The following table sets forth compensation paid for fiscal years 2019 and 2018 for our named executive officer and each of our directors.
SUMMARY COMPENSATION TABLE (Executive Officers and Directors)
| Name and Principal Position | Year Ended March 31, | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | Non-Qualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) | |||||||||||||||||||||||||||
| Paul DiPerna(1) | 2019 | 192,510 | — | -0- | 42,761 | — | — | — | 235,271 | |||||||||||||||||||||||||||
| Chief Executive Officer | 2018 | 30,000 | -0- | -0- | -0- | -0- | -0- | 105,000 | 135,000 | |||||||||||||||||||||||||||
| Secretary, Treasurer and Director | ||||||||||||||||||||||||||||||||||||
| Morgan Frank, Director | 2019 | -0- | — | — | — | — | -0- | — | — | |||||||||||||||||||||||||||
| Liam Burns, Director(2) | 2019 | -0- | -0- | -0- | 163,620 | -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 consolidated 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. |
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| (2) | Mr. Burns entered into a service agreement 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 $2.25, and the shares subject to this option vest annually over three years from the grant date subject to continued service as a director, employee or consultant. The award amount reflects the aggregate grant date fair value with respect to awards granted during the years indicated, as determined pursuant to FASB ASC Topic 718. The assumptions used to calculate the aggregate grant date fair value of option awards are set forth in the notes to the audited financial statements included in our 2019 Annual Report on Form 10-K. These amounts do not reflect actual compensation earned or to be earned by Mr. Burns. |
Outstanding Equity Awards at Fiscal Year-End
The following table shows certain information regarding outstanding equity awards held by our named executive officer and directors as of March 31, 2019. All option awards were granted under our EIP.
| Option Awards | ||||||||||||||||
| Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Option Exercise Price ($) | 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 vesting annually over three years and an exercise price of $2.25 per share.
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STOCK OWNERSHIP BY PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The following table sets forth certain information as of March 20, 2020 concerning the ownership of our common stock by:
| · | each shareholder known by us to be the beneficial owner of more than 5% of the outstanding shares of our common stock (currently our only class of voting securities); |
| · | each of our directors; |
| · | each of our executive officers; and |
| · | all directors and executive officers as a group. |
Beneficial ownership is determined in accordance with Rule 13d-3 of the Exchange Act, and includes all shares over which the beneficial owner exercises voting or investment power. Shares that are issuable upon the exercise of options, warrants and other rights to acquire common stock that are presently exercisable or exercisable within 60 days of March 20, 2020 are reflected in a separate column in the table below. These shares are taken into account in the calculation of the total number of shares beneficially owned by a particular holder and the total number of shares outstanding for the purpose of calculating percentage ownership of the particular holder. We have relied on information supplied by our officers, directors and certain stockholders and on information contained in filings with the SEC. Except as otherwise indicated, and subject to community property laws where applicable, we believe, based on information provided by these persons, that the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. The percentage of beneficial ownership is based on 17,870,261 shares of common stock outstanding as of March 20, 2020.
Unless otherwise stated, the business address of each of our directors and executive officers listed in the table is 16772 West Bernardo Drive, San Diego, California 92127.
| Amount and Nature of Beneficial Ownership | ||||||||||||
| Name and principal position | Number
of Shares Beneficially Owned (Excluding Outstanding Options)(1) |
Number
of Shares Issuable on Exercise of Outstanding Options(2) |
Percent
of Class |
|||||||||
| James Besser | 6,384,691 | (3) | — | 35.73 | % | |||||||
| JEB Partners, L.P. | 6,384,691 | (3) | — | 35.73 | % | |||||||
| Manchester Explorer LLC | 6,384,691 | (3) | — | 35.73 | % | |||||||
| Manchester Management LLC | 6,384,691 | (3) | — | 35.73 | % | |||||||
| Directors and Officers: | ||||||||||||
| Paul DiPerna | 7,523,430 | (4) | 183,399 | 42.69 | % | |||||||
| Liam Burns | — | 85,095 | * | |||||||||
| Stephen Daly | — | — | * | |||||||||
| William J. Febbo | — | — | * | |||||||||
| Morgan C. Frank | 6,384,691 | — | 35.73 | % | ||||||||
| Carmen Volkart | — | — | * | |||||||||
| All current directors and executive officers as a group (6 persons) | 13,908,121 | 268,494 | 78.42 | % | ||||||||
* Represents less than 1%
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| (1) | Excludes shares subject to outstanding options to acquire common stock that are exercisable within 60 days of March 20, 2020. |
| (2) | Represents the number of shares subject to outstanding options to acquire common stock that are exercisable within 60 days of March 20, 2020. |
| (3) | 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 Explorer L.P. (“Manchester”) which purchased such shares in a 2017 private placement (the “2017 Placement”); (iv) 471,111 shares held by Manchester who purchased such shares in a 2018 private placement (the “2018 Placement”); (v) 757,576 shares held by JEB Partners L.P. (“JEB”) purchased in the 2017 Placement; (vi) 160,000 shares held by JEB 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 to Manchester Management, LLC (“MMC”), the general partner of Manchester and JEB, have shared voting and dispositive power over shares held by Manchester and JEB. The address for Messrs. Besser and Frank is c/o Manchester Management, LLC, 2 Calle Nairn, San Juan, Puerto Rico 00907. 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 person’s pecuniary interest therein. |
| (4) | 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 and (ii) 7,220,400 shares acquired by Mr. DiPerna in the Acquisition in exchange for his shares of Quasuras. Mr. DiPerna is the Chairman of our board of directors, and also serves as our Chief Executive Officer, Chief Financial Officer and Secretary. 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 person's pecuniary interest therein. |
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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.
As disclosed elsewhere in this prospectus, Mr. DiPerna, is a party to a Related Party Transaction with us. See “Management – The DiPerna Employment and Related Agreements.”
We entered into consulting agreements with Liam Burns, a member of our Board, during the nine months ended December 31, 2019. Under the consulting agreements, we paid Mr. Burns consulting fees of $25,000 and $75,000 in cash during the three and nine months ended December 31, 2019, respectively, and Mr. Burns was granted stock options with a fair value of $22,500 and $60,000 during the three and nine months ended December 31, 2019, respectively. The options were for a total of 36,788 shares of our common stock, were fully vested on the grant dates and have terms of 10 years.
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.
Number of Equity Security Holders
As of March 31, 2020, 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.
The validity of the securities offered in this prospectus is being passed upon for us by Gusrae Kaplan Nusbaum PLLC, New York, New York.
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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. 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.
This prospectus is part of a registration statement on Form S-1 that we filed with the SEC, of which this prospectus is a part, under the Securities Act, with respect to the Preferred Units offered hereby. This prospectus omits some information contained in the registration statement in accordance with SEC rules and regulations. You should review the information and exhibits in the registration statement for further information about us and the securities being offered hereby. Statements in this prospectus concerning any document we filed as an exhibit to the registration statement or that we otherwise filed with the SEC are not intended to be comprehensive and are qualified by reference to the filings. You should review the complete document to evaluate these statements. You can obtain a copy of the registration statement from the SEC’s website.
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 financial statements have been incorporated herein in reliance on the report of such firm given upon their authority as experts in accounting and auditing.
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MODULAR
MEDICAL, INC.
(FKA BEAR LAKE RECREATION, INC.)
FINANCIAL STATEMENTS
March 31, 2019 and December 31, 2019
TABLE OF CONTENTS
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
| F-1 |
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.
| F-2 |
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.
| F-3 |
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.
| F-4 |
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.
| F-5 |
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.
| F-6 |
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.
| F-7 |
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.
| F-8 |
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.
| F-9 |
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.
| F-10 |
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 918,020 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.
| F-11 |
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.
| F-12 |
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”).
| F-13 |
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.
| F-14 |
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
During the year ended March 31, 2019, the Company granted a total of 64,687 options to its chief executive officer in lieu of 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.
| F-15 |
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.
| F-16 |
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 | ||||||||||||
| Shares Available for Grant | Number of Shares | Weighted Average Exercise Prices | ||||||||||
| Balance at April 1, 2017 | — | — | — | |||||||||
| Shares authorized under the Plan | 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 | |||||||||||||||||||||||
| Range of Exercise Price | Number Outstanding | Weighted Average Remaining Contractual Life (in Years) | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | Aggregate Intrinsic value | ||||||||||||||||||
| $0.66 - $2.25 | 1,529,908 | 9.39 | $ | 0.86 | 918,020 | 0.68 | $ | — | ||||||||||||||||
For the year ended March 31, 2019, the fair value of options and awards vested was approximately $X. 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 | $ | — | $ | — | ||||
| F-17 |
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.
| F-18 |
Modular Medical,
Inc.
(f/k/a- Bear Lake Recreation, Inc.)
Condensed Consolidated Balance Sheets
| ASSETS | December 31, 2019 (Unaudited) | March 31, 2019 | ||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 3,718,492 | $ | 6,553,768 | ||||
| Other current assets | 50,011 | 15,590 | ||||||
| Security deposit | 4,106 | 7,500 | ||||||
| TOTAL CURRENT ASSETS | 3,772,609 | 6,576,858 | ||||||
| Intangible assets, net | — | 180 | ||||||
| Property and equipment, net | 110,402 | 75,948 | ||||||
| TOTAL ASSETS | $ | 3,883,011 | $ | 6,652,986 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | 254,289 | $ | 138,314 | ||||
| Accrued expenses | 20,418 | 40,615 | ||||||
| TOTAL LIABILITIES | 274,707 | 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 and 17,840,261 shares issued and outstanding as of December 31, 2019 and March 31, 2019, respectively | 17,870 | 17,840 | ||||||
| Additional paid-in capital | 10,241,876 | 9,684,578 | ||||||
| Common stock issuable | — | 19,800 | ||||||
| Accumulated deficit | (6,651,442 | ) | (3,248,161 | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY | 3,608,304 | 6,474,057 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 3,883,011 | $ | 6,652,986 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-19 |
Modular Medical,
Inc.
(f/k/a- Bear Lake Recreation, Inc.)
Condensed Consolidated Statements of Operations
(Unaudited)
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Operating Expenses | ||||||||||||||||
| Research and development | 608,019 | 504,787 | 1,945,043 | 1,008,127 | ||||||||||||
| General and administrative | 527,829 | 245,773 | 1,486,386 | 546,621 | ||||||||||||
| Total Operating Expenses | 1,135,848 | 750,560 | 3,431,429 | 1,554,748 | ||||||||||||
| Loss from operations | (1,135,848 | ) | (750,560 | ) | (3,431,429 | ) | (1,554,748 | ) | ||||||||
| Interest income | 2,331 | 11,355 | 28,148 | 22,203 | ||||||||||||
| Net Loss | $ | (1,133,517 | ) | $ | (739,205 | ) | $ | (3,403,281 | ) | $ | (1,532,545 | ) | ||||
| Net Loss Per Share | ||||||||||||||||
| Basic and diluted | $ | (0.06 | ) | $ | (0.04 | ) | $ | (0.19 | ) | $ | (0.09 | ) | ||||
| Weighted Average Number of Shares Outstanding | ||||||||||||||||
| Basic and diluted | 17,870,261 | 16,848,236 | 17,862,625 | 16,272,642 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-20 |
Modular Medical,
Inc.
(f/k/a- Bear Lake Recreation, Inc.)
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
| Common Stock | Additional Paid-In |
Common Stock |
Accumulated | Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Issuable | Deficit | Equity | |||||||||||||||||||
| Balance as of March 31, 2019 | 17,840,261 | $ | 17,840 | $ | 9,684,578 | $ | 19,800 | $ | (3,248,161) | $ | 6,474,057 | |||||||||||||
| Shares issued for services | 30,000 | 30 | 19,770 | (19,800 | ) | — | — | |||||||||||||||||
| Stock-based compensation | — | — | 194,428 | — | — | 194,428 | ||||||||||||||||||
| Net loss | — | — | — | — | (1,122,198 | ) | (1,122,198 | ) | ||||||||||||||||
| Balance as of June 30, 2019 | 17,870,261 | 17,870 | 9,898,776 | — | (4,370,359) | 5,546,287 | ||||||||||||||||||
| Stock-based compensation | — | — | 156,355 | — | — | 156,355 | ||||||||||||||||||
| Net loss | — | — | — | — | (1,147,566 | ) | (1,147,566 | ) | ||||||||||||||||
| Balance as of September 30, 2019 | 17,870,261 | 17,870 | 10,055,131 | — | (5,517,925 | ) | 4,555,076 | |||||||||||||||||
| Stock-based compensation | — | — | 186,745 | — | 186,745 | |||||||||||||||||||
| Net loss | — | — | — | — | (1,133,517 | ) | (1,133,517 | ) | ||||||||||||||||
| Balance as of December 31, 2019 | 17,870,261 | $ | 17,870 | $ | 10,241,876 | — | $ | (6,651,442 | ) | $ | 3,608,304 | |||||||||||||
| Common Stock | Additional Paid-In |
Common Stock |
Accumulated | Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Issuable | Deficit | Equity | |||||||||||||||||||
| Balance as of March 31, 2018 | 15,983,273 | $ | 15,983 | $ | 5,011,661 | $ | — | $ | (708,663 | ) | $ | 4,318,981 | ||||||||||||
| Net loss | — | — | — | — | (249,566 | ) | (249,566 | ) | ||||||||||||||||
| Balance as of June 30, 2018 | 15,983,273 | 15,983 | 5,011,661 | — | (958,229 | ) | 4,069,415 | |||||||||||||||||
| Stock-based compensation | — | — | 166,170 | — | — | 166,170 | ||||||||||||||||||
| Net loss | — | — | — | — | (543,774 | ) | (543,774 | ) | ||||||||||||||||
| Balance as of September 30, 2018 | 15,983,273 | 15,983 | 5,177,831 | — | (1,502,003 | ) | 3,691,811 | |||||||||||||||||
| Shares issued for cash | 1,816,432 | 1,817 | 4,018,565 | — | — | 4,020,382 | ||||||||||||||||||
| Stock-based compensation | — | — | 191,170 | — | — | 191,170 | ||||||||||||||||||
| Net loss | — | — | — | — | (739,205 | ) | (739,205 | ) | ||||||||||||||||
| Balance as of December 31, 2018 | 17,799,705 | $ | 17,800 | $ | 9,387,566 | — | $ | (2,241,208 | ) | $ | 7,164,158 | |||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-21 |
Modular Medical,
Inc.
(f/k/a- Bear Lake Recreation, Inc.)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Nine Months Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Net loss | $ | (3,403,281 | ) | $ | (1,532,545 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock-based compensation | 537,528 | 374,006 | ||||||
| Depreciation and amortization | 23,840 | 8,639 | ||||||
| Changes in assets and liabilities | ||||||||
| Other assets and prepaid expenses | (34,257 | ) | (5,018 | ) | ||||
| Security Deposit | 3,394 | — | ||||||
| Accounts payable and accrued expenses | 95,778 | 47,977 | ||||||
| Net cash used in operating activities | (2,776,998 | ) | (1,106,941 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of property and equipment | (58,278 | ) | (55,058 | ) | ||||
| Net cash used in investing activities | (58,278 | ) | (55,058 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from private placement of stock | — | 3,983,915 | ||||||
| Payment to related party | — | (516 | ) | |||||
| Proceeds from issuance of stock | — | 19,800 | ||||||
| Net cash provided by financing activities | — | 4,003,199 | ||||||
| Net increase (decrease) in cash and cash equivalents | (2,835,276 | ) | 2,841,200 | |||||
| Cash and cash equivalents at beginning of period | 6,553,768 | 4,296,676 | ||||||
| Cash and cash equivalents at end of period | $ | 3,718,492 | $ | 7,137,876 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-22 |
MODULAR MEDICAL,
INC.
F/K/A BEAR LAKE RECREATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Modular Medical, Inc. (the Company) was formed as a corporation under the laws of the State of Nevada in October 1998 under the name Bear Lake Recreation, Inc. The Company had no material business operations from 2002 until approximately 2017 when it acquired all of the issued and outstanding shares of Quasuras, Inc., a Delaware corporation (Quasuras). As the major shareholder of Quasuras retained control of both the Company and Quasuras, the share exchange was accounted for as a reverse merger. As such, the Company recognized the assets and liabilities of Quasuras, acquired in the merger, at their historical carrying amounts. Prior to the acquisition of Quasuras and, since at least 2002, the Company was a shell company, as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934 (the Exchange Act). In June 2017, the Company changed its name from Bear Lake Recreation, Inc. to Modular Medical, Inc.
The Company is a development-stage medical device company focused on the design, development and eventual commercialization of an innovative insulin pump to address shortcomings and problems represented by the relatively limited adoption of currently available pumps for insulin dependent people with diabetes. The Company has developed a hardware technology allowing people with insulin-dependent diabetes to receive their daily insulin in two ways, through a continuous “basal” delivery allowing a small amount of insulin to be in the blood at all times and a “bolus” delivery to address meal time glucose input and to address when the blood glucose level becomes excessively high. By addressing the time and effort required to effectively treat their condition, the Company believes it can address the less technically savvy, less motivated part of the market.
The accompanying condensed consolidated financial statements of the Company have been prepared without audit.
The condensed consolidated balance sheet as of March 31, 2019 has been derived from the audited consolidated financial statements at that date. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed or omitted in accordance with these rules and regulations of the Securities and Exchange Commission (SEC). The information in this report should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in its most recent annual report on Form 10-K filed with the SEC.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to summarize fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. The operating results for the three and nine months ended December 31, 2019 are not necessarily indicative of the results that may be expected for the year ending March 31, 2020 or for any other future period.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Quasuras, Inc. All significant intercompany transactions and balances have been eliminated in consolidation. The Company’s fiscal year ends on March 31 of each calendar year.
Use of Estimates
The preparation of the accompanying financial statements in conformity with U.S. generally accepted accounting principles (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.
| F-23 |
Reportable Segment
The Company has one reportable segment and uses one measurement of profitability for its business.
Research and Development
The Company expenses research and development expenditures as incurred.
General and Administrative
General and administrative expenses consist primarily of payroll and benefit costs, rent, legal and accounting fees, and office and other administrative expenses.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash. The Company maintains its cash balances at high-credit quality financial institutions within the United States, which are insured by the Federal Deposit Insurance Corporation (FDIC) up to limits of approximately $250,000. The uninsured portion of the cash balances held at the Company’s primary bank aggregated approximately $3,463,816 at December 31, 2019. No reserve has been made in the financial statements for any possible loss due to financial institution failure.
Risks and Uncertainties
The Company is subject to risks from, among other things, competition associated with the industry in general, risks associated with its ability to continue to obtain financing and to satisfy liquidity requirements, as well as risks related to rapidly changing customer requirements, its limited operating history and the volatility of public markets.
Contingencies
Certain conditions may exist as of the date the condensed 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 assesses 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, with the assistance of 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 highly liquid debt instruments with original maturities of three months or less.
Property & 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 property and equipment are generally as follows: computer equipment & software, three to ten years; office equipment, two to three years; buildings and improvements, five to fifteen years; and machinery and equipment, one to five years.
| F-24 |
Fair Value of Financial Instruments
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. Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 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 Company measures the fair value of financial instruments using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:
| · | Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets. | |
| · | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. | |
| · | Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
Due to their short-term nature, the carrying values of cash and equivalents, accounts receivable, accounts payable and accrued expenses approximate their fair values.
| F-25 |
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 and nine months ended December 31, 2019, 2,526,443 outstanding options to purchase common stock were excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive. For the three and nine months ended December 31, 2018, 1,344,687 outstanding options to purchase common stock were excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive.
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated:
| Three months ended December 31, | Nine months ended December 31, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Net loss | $ | (1,133,517 | ) | $ | (739,205 | ) | $ | (3,403,281 | ) | $ | (1,532,545 | ) | ||||
| Net loss per share | ||||||||||||||||
| Basic and diluted | $ | (0.06 | ) | $ | (0.04 | ) | $ | (0.19 | ) | $ | (0.09 | ) | ||||
| Weighted average shares outstanding | ||||||||||||||||
| Basic and diluted | 17,870,261 | 16,848,236 | 17,862,625 | 16,272,642 | ||||||||||||
| F-26 |
Recently Adopted Accounting Pronouncement
In 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases. The standard introduces a new lessee model that requires most leases to be recorded on the balance sheet and eliminates the required use of bright-line tests for determining lease classification. In July 2018, the FASB issued the following standards which clarified ASU No. 2016-02 and have the same effective date as the original standard: ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. ASU No. 2018-11 includes an option to not restate comparative periods in transition and elect to use the effective date of ASU No. 2016-02 as the date of initial application of transition. In March 2019, the FASB issued ASU No. 2019-01, Leases (Topic 842): Codification Improvements, which clarifies ASU No. 2016-02 and is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company adopted ASU No. 2016-02, as amended, on April 1, 2019, using the optional transition method provided by the FASB in ASU No. 2018-11. The Company elected to use the practical expedient that allowed it to not reassess: (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases as well as the practical expedient that allows lessees to treat the lease and non-lease components of leases as a single lease component for all asset classes. The Company identified only one lease to be accounted for under Topic 842, and this was the lease for its corporate facility, which expired in December 2019 and was renewed for an additional two-month term. As of December 31, 2019, the Company had prepaid the remaining lease payments for its corporate lease. The Company made cash rent payments of $39,700 (including the prepaid rent payments for 2020) and incurred rent expense of $25,500 for the nine months ended December 31, 2019. The adoption of this standard did not have a material impact on the Company’s balance sheet, results of operations or cash flows.
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 flows.
NOTE 2 – ACCRUED EXPENSES
As of December 31, 2019 and March 31, 2019, accrued expenses were primarily comprised of accrued legal, professional and consulting services fees.
NOTE 3 – STOCK-BASED COMPENSATION
2017 Equity Incentive Plan
In October 2017, the Company’s board of directors (the Board) approved the 2017 Equity Incentive Plan (the EIP) with 3,000,000 shares of common stock reserved for issuance. Under the EIP, eligible employees, directors and consultants may be granted a broad range of awards, including stock options, stock appreciation rights, restricted stock, performance-based awards and restricted stock units. The EIP is administered by the Board or, in the alternative, a committee designated by the Board.
The exercise or purchase price of a stock option 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; and |
| (iii) | In the case of other grants, such price as determined by the Board. |
| F-27 |
The Board 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 awards, and the Board 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 December 31, 2019, was $1,627,097 related to stock options and is expected to be recognized as expense over a weighted-average period of approximately 2.83 years.
During the nine months ended December 31, 2019, the Company granted options to purchase 996,535 shares of its common stock to employees, directors and consultants. The options had 10-year terms, and 116,535 options vested immediately on the grant dates. The fair value of the options was determined to be $1,634,595, of which $220,578 was recorded as stock-based compensation expense and included in the condensed consolidated statement of operations for the nine months ended December 31, 2019.
The following assumptions were used in the fair value method calculations:
| Nine
Months Ended December 31, 2019 |
||||
| Risk-free interest rates | 1.34% - 2.41 | % | ||
| Volatility | 87% - 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 | ||||||||
| Options granted | (77,800 | ) | 77,800 | 2.25 | ||||||||
| Balance at September 30, 2019 | 1,369,606 | 1,630,394 | $ | 0.95 | ||||||||
| Options granted | (896,049 | ) | 896,049 | 2.25 | ||||||||
| Balance at December 31, 2019 | 473,557 | 2,526,443 | $ | 1.41 | ||||||||
There were no stock options exercised during the nine months ended December 31, 2019 and 2018.
| F-28 |
The following table summarizes the range of outstanding and exercisable options as of December 31, 2019:
| Options Outstanding | Options Exercisable | |||||||||||||||||||||||
| Range of Exercise Price | Number Outstanding |
Weighted Average Remaining Contractual Life (in Years) |
Weighted Average Exercise Price |
Number Exercisable |
Weighted Average Exercise Price |
Aggregate Intrinsic value |
||||||||||||||||||
| $0.66 - $2.25 | 2,526,443 | 9.12 | $ | 1.41 | 1,462,222 | $ | 0.80 | $ | — | |||||||||||||||
The Company is required to present the tax benefits resulting from tax deductions in excess of the compensation cost recognized from the exercise of stock options as financing cash flows in the consolidated statements of cash flows. For the nine months ended December 31, 2019 and 2018, there were no such tax benefits associated with the exercise of stock options.
NOTE 4 – INCOME TAXES
The Company determines deferred tax assets and liabilities based upon the differences between the financial statement and tax bases of the Company’s assets and liabilities using tax rates in effect for the year in which the Company expects the differences to affect taxable income. A valuation allowance is established for any deferred tax assets for which it is more likely than not that all or a portion of the deferred tax assets will not be realized. Based on the available information and other factors, management believes it is more likely than not that its federal and state net deferred tax assets will not be fully realized, and the Company has recorded a full valuation allowance.
The Company files U.S. federal and state income tax returns in jurisdictions with varying statutes of limitations. All tax returns from 2016 to 2019 may be subject to examination by the U.S. federal and state tax authorities. As of December 31, 2019, the Company has not recorded any liability for unrecognized tax benefits related to uncertain tax positions.
NOTE 5 – ROYALTY AGREEMENT
In July 2017, the Company entered into a royalty agreement with its founder, chief executive officer and major shareholder (the Founder). Pursuant to the agreement, the Founder assigned and transferred all of his rights in the intellectual property of Quasuras in return for future royalty payments. The Company is obligated to make royalty payments under the agreement to the Founder on any sales of the royalty product sold or otherwise commercialized by the Company, equal to (a) $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 will cease, and the agreement will terminate, at such time as the total sum of royalty payments actually paid to the Founder, pursuant to the agreement, reaches $10,000,000. The Company has the option to terminate the 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, will be made by the Company to the Founder within thirty days after the end of each calendar quarter.
NOTE 6 – RELATED PARTY TRANSACTION
During the nine months ended December 31, 2019, the Company entered into consulting agreements with a member of its Board. Under the consulting agreements, the Company paid the director consulting fees of $25,000 and $75,000 in cash during the three and nine months ended December 31, 2019, respectively, and the director was granted stock options with a fair value of $22,500 and $60,000 during the three and nine months ended December 31, 2019, respectively. The options were for a total of 36,788 shares of common stock, were fully vested on the grant dates and have terms of 10 years.
NOTE 7 – SUBSEQUENT EVENTS
In January 2020, the Board approved an amendment to the Plan to increase the number of shares reserved for issuance by 1,000,000 shares.
In January 2020, the Company executed a three-year lease for a new, larger corporate facility in San Diego, California. The lease will commence on April 1, 2020 and provides for an initial monthly rent of approximately $12,400 with annual rent increases of approximately 3%. In addition, the Company paid a $100,000 security deposit.
| F-29 |
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 | $ | 6,490 | ||
| Printing expenses | 25,000 | |||
| Legal fees and expenses | 75,000 | |||
| Accounting fees and expenses | 6,000 | |||
| Miscellaneous fees and expenses | 115,000 | |||
| Total | $ | 227,490 | ||
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.
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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.
In July 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.
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From November 2018 through March 2019, we sold 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.
In June 2019, we sold 30,000 shares of common stock to a consultant.
In March and April 2020, we sold shares at a price of $2.87 per share
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:
(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; and
(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.
(2) That, for the purpose of determining any liability under the Securities Act of 1933, as amended (the “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.
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(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 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.
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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SIGNATURE
Pursuant to the requirements of the Securities Act, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Diego, State of California, on April 8th, 2020.
| MODULAR MEDICAL, INC | ||
| By: | /s/ Paul M. DiPerna | |
| Paul M. DiPerna | ||
| Chairman,
Chief Executive Officer, President and Chief Financial Officer (principal executive officer, principal financial officer and principal accounting officer) | ||
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Paul M. DiPerna, as his or her attorney-in-fact, with full power of substitution, in any and all capacities, to sign any and all amendments to this Registration Statement (including post-effective amendments), and to sign any registration statement for the same offering covered by this Registration Statement under the Securities Act of 1933, and all post-effective amendments thereto, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact or his substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
| Signature | Title | Date | |||
| By: | /s/ Paul M. DiPerna | Chairman, Chief Executive Officer, President, | April 8, 2020 | ||
| Paul M. DiPerna | and Chief Financial Officer | ||||
| (principal executive officer, principal | |||||
| financial officer and principal accounting officer) | |||||
| By: | /s/ Liam Burns | Director | April 8, 2020 | ||
| Liam Burns | |||||
| By: | /s/ William J. Febbo | Director | April 8, 2020 | ||
| William J. Febbo | |||||
| By: | /s/ Morgan C. Frank | Director | April 8, 2020 | ||
| Morgan C. Frank | |||||
| By: | /s/ Carmen Volkart | Director | April 8, 2020 | ||
| Carmen Volkart |
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EXHIBIT INDEX
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| 10.13(2) | Services Agreement effective December 31, 2019 between the Registrant and Carmen Volkart |
| 10.14(2) | Services Agreement effective January 23, 2020 between the Registrant and William Febbo |
| 10.15(2) | Form of Indemnification Agreement between the Registrant and each of its directors and officers used from January 23, 2020 |
| 10.16(2) | Form of Notice of Stock Option Grant and Stock Option Agreement under the Amended 2017 Equity Incentive Plan |
| 10.17* | Form of Common Stock Purchase Agreement by and between the Registrant and the Investors named therein |
| 21.1 | Sole Subsidiary of the Registrant (as disclosed in the Notes to Consolidated Financial Statements as of March 31, 2019 in the prospectus to this registration statement) |
| 23.1* | Consent of Farber Haas Hurley LLP |
| 23.2** | Consent of Gusrae Kaplan Nusbaum PLLC (included in Exhibit 5.1) |
| 101.INS XBRL Instance Document | |
| 101.SCH XBRL Taxonomy Extension Schema | |
| 101.CAL XBRL Taxonomy Extension Calculation Linkbase | |
| 101.DEF XBRL Taxonomy Extension Definition Linkbase | |
| 101.LAB XBRL Taxonomy Extension Label Linkbase | |
| 101.PRE XBRL Taxonomy Extension Presentation Linkbase | |
* Filed herewith
** To be filed by amendment
| (1) | Filed as an exhibit to the Registrant’s Registration Statement on Form S-1 dated June 27, 2019 |
| (2) | Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2019 |
+ Management contract or compensatory plan arrangement.
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Exhibit 3.1.1
CERTIFICATE OF DESIGNATION OF
SERIES A PREFERRED STOCK, SETTING FORTH THE POWERS,
PREFERENCES, RIGHTS, QUALIFICATIONS, LIMITATIONS AND
RESTRICTIONS OF SUCH SERIES OF PREFERRED STOCK
Pursuant to Section 78.195 of the Nevada Revised Statute, Modular Medical, Inc., a Nevada corporation (the “Corporation”), DOES HEREBY CERTIFY:
The Amended and Restated Certificate of Incorporation of the Corporation (the “Certificate of Incorporation”) confers upon the Board of Directors of the Corporation (the “Board of Directors”) the authority to provide for the issuance of shares of preferred stock in series and to establish the number of shares to be included in each such series and to fix the powers, designations, preferences and rights of the shares of each such series and any qualifications, limitations or restrictions thereof. On ____, 2020, the Board of Directors duly adopted the following resolution creating a series of preferred stock designated as the “Series A 13% Cumulative Redeemable Perpetual Preferred Stock,” comprised initially of 2,000,000 shares and such resolution has not been modified and is in full force and effect on the date hereof:
RESOLVED that, pursuant to the authority vested in the Board of Directors in accordance with the provisions of the Certificate of Incorporation, a series of the class of authorized preferred stock, par value $0.001 per share, of the Corporation is hereby created and that the designation and number of shares thereof and the powers, preferences and rights of the shares of such series, and the qualifications, limitations and restrictions thereof are as follows:
Section 1 Designation. The distinctive serial designation of such series of Preferred Stock is “13% Series A Cumulative Redeemable Perpetual” (the “Series A Preferred Stock”). Each share of Series A Preferred Stock shall be identical in all respects to every other share of Series A Preferred Stock, except as to the respective dates from which dividends thereon shall accumulate, to the extent such dates may differ as permitted pursuant to Section 5(a).
Section 2 Number of Shares. The authorized number of shares of Series A Preferred Stock shall be 2,000,000.
Section 3 Definitions. As used herein with respect to Series A Preferred Stock:
“Agent Members” has the meaning specified in Section 14(b).
“Articles of Incorporation” has the meaning specified in the introductory paragraph.
“Business Day” means each Monday, Tuesday, Wednesday, Thursday or Friday on which banking institutions in The City of New York are not authorized or obligated by law, regulation or executive order to close.
“Bylaws” means the Bylaws of the Corporation, amended as of April __, 2020, as the same may be further amended or restated from time to time.
“Certificate of Designations” means this Certificate of Designations relating to the Series A Preferred Stock, as it may be amended from time to time.
“Certificated Series A Preferred Stock” has the meaning specified in Section 14(a).
“Common Stock” means the common stock, par value $0.001 per share, of the Corporation.
“Dividend Payment Date” has the meaning specified in Section 5(a)(i).
“Dividend Period” means, with respect to the Series A Preferred Stock, each period commencing on (and including) a Dividend Payment Date and continuing to, but excluding, the next succeeding Dividend Payment Date, except that the first Dividend Period for the initial issuance of Series A Preferred Stock shall commence on (and include) the Issue Date.
“Dividend Record Date” has the meaning specified in Section 5(a)(ii).
“DTC” means The Depository Trust Company.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Global Depositary” has the meaning specified in Section 14(b).
“Global Legend” has the meaning specified in Section 14(b).
“Global Series A Preferred Stock” has the meaning specified in Section 14(b).
“Issue Date” means ____ 2020, which is the original issue date of the Series A Preferred Stock.
“Junior Stock” has the meaning specified in Section 4(a)(i).
“Liquidation Preference” has the meaning specified in Section 6(b).
“Liquidation Preference Amount” means $25.00 per share of Series A Preferred Stock.
“Nonpayment Event” has the meaning specified in Section 8(b).
“Parity Stock” has the meaning specified in Section 4(a)(ii).
“Person” means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, company, limited liability company, trust, unincorporated association, or government or any agency or political subdivision thereof, or any other entity of whatever nature.
“Preferred Stock” means any and all series of preferred stock, having a par value of $0.001 per share, of the Corporation, including the Series A Preferred Stock.
“Senior Stock” has the meaning specified in Section 4(a)(iii).
“Transfer Agent” means the transfer agent and registrar for the Series A Preferred Stock.
“Voting Preferred Stock” means, with regard to any matter as to which the holders of Series A Preferred Stock are entitled to vote as specified in Section 8, any and all class or series of Preferred Stock (other than Series A Preferred Stock) that rank equally with Series A Preferred Stock either as to the payment of dividends (whether cumulative or non-cumulative) or as to the distribution of assets upon any liquidation, dissolution or winding-up of the affairs of the Corporation and upon which like voting rights have been conferred and are exercisable with respect to such matter.
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References to (a) the word “Section” shall refer to the applicable Section of this Certificate of Designations and (b) the word “or” shall not be exclusive.
Section 4 Ranking.
(a) The shares of Series A Preferred Stock shall rank, with respect to the payment of dividends (whether cumulative or non-cumulative) and distributions upon any liquidation, dissolution or winding-up of the affairs of the Corporation:
(i) senior to the Common Stock and to each other class or series of the Corporation’s capital stock established after the Issue Date that is expressly made subordinated to the Series A Preferred Stock as to the payment of dividends or amounts payable on any liquidation, dissolution or winding-up of the affairs of the Corporation (the “Junior Stock”);
(ii) on a parity with any class or series of the Corporation’s capital stock established after the Issue Date that is not expressly made senior or subordinated to the Series A Preferred Stock as to the payment of dividends and amounts payable on any liquidation, dissolution or winding-up of the affairs of the Corporation (the “Parity Stock”); and
(iii) junior to any class or series of the Corporation’s capital stock established after the Issue Date that is expressly made senior to the Series A Preferred Stock as to the payment of dividends or amounts payable on any liquidation, dissolution or winding-up of the affairs of the Corporation (the “Senior Stock”).
The Corporation may not authorize and issue any additional shares of Series A Preferred Stock at any time and from time to time without notice to or the consent of the holders of the Series A Preferred Stock, and such additional shares of Series A Preferred Stock will be deemed to form a single series together with all outstanding shares of the Series A Preferred Stock.
Except as otherwise required by law, the Corporation may issue Parity Stock and Junior Stock at any time and from time to time in one or more series without notice to or the consent of the holders of the Series A Preferred Stock.
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Section 5 Dividends.
(a) Rate.
(i) Holders of Series A Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors or any duly authorized committee of the Board of Directors out of funds legally available for the payment of dividends under applicable law, cumulative cash dividends per each share of Series A Preferred Stock at the rate determined as set forth below in this Section 5 applied to the Liquidation Preference Amount of $25.00 per share of Series A Preferred Stock. Dividends on the Series A Preferred Stock shall accumulate daily and shall be cumulative from, and including, the Issue Date and shall be payable quarterly in arrears on the 15th day of each January, April, July and October, commencing on July 15, 2020 (each such date, a “Dividend Payment Date”); provided, that if any such Dividend Payment Date is a day that is not a Business Day, the dividend with respect to such Dividend Payment Date shall instead be payable on the immediately succeeding Business Day, without additional dividends, interest or other payment in respect of such delayed payment. Dividends on Series A Preferred Stock shall be cumulative whether or not (i) the Corporation has earnings, (ii) there are funds legally available for the payment of such dividends, (iii) such dividends are authorized or declared and (iv) any of the Corporation’s agreements prohibit the current payment of dividends, including any agreement relating to the Corporation’s indebtedness. Accordingly, if the Board of Directors or any duly authorized committee of the Board of Directors does not declare a dividend on the Series A Preferred Stock payable in respect of any Dividend Period before the related Dividend Payment Date, such dividend shall accumulate and an amount equal to such accumulated dividend shall become payable out of funds legally available therefor upon any liquidation, dissolution or winding-up of the affairs of the Corporation or earlier redemption of such shares of Series A Preferred Stock, to the extent not paid prior to such liquidation, dissolution or winding-up or earlier redemption, as the case may be. No interest, or sum of money in lieu of interest, shall be payable on any dividend payment that may be in arrears on the Series A Preferred Stock.
(ii) Dividends that are payable on Series A Preferred Stock on any Dividend Payment Date will be payable to holders of record of Series A Preferred Stock as they appear on the stock register of the Corporation as of the close of business on the applicable record date, which shall be the 15th calendar day before such Dividend Payment Date or such other record date fixed by the Board of Directors or any duly authorized committee of the Board of Directors that is not more than 60 calendar days nor less than 10 calendar days prior to such Dividend Payment Date (each, a “Dividend Record Date”). Any such day that is a Dividend Record Date shall be a Dividend Record Date whether or not such day is a Business Day. In the case of payments of dividends payable in arrears, the Dividend Record Date shall be such date fixed by the Board of Directors or any duly authorized committee of the Board of Directors.
(iii) Dividends payable on the Series A Preferred Stock, including dividends payable for any partial Dividend Period, shall be calculated on the basis of a 360-day year consisting of twelve 30-day months.
(iv) The dividend rate on the Series A Preferred Stock for each Dividend Period shall be a rate per annum equal to 13%.
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(b) Priority of Dividends.
(i) The Corporation shall not declare or pay, or set aside for payment, full dividends on the Series A Preferred Stock or any Parity Stock for any Dividend Period unless the full cumulative dividends have been declared and paid (or declared and a sum sufficient for the payment thereof has been set aside) on the Series A Preferred Stock and any Parity Stock through the most recently completed Dividend Period for each such security. When dividends are not paid (or declared and a sum sufficient for payment thereof set aside) in full on the Series A Preferred Stock and any shares of Parity Stock on any Dividend Payment Date (or, in the case of Parity Stock having dividend payment dates different from the Dividend Payment Dates, on a dividend payment date falling within the related Dividend Period), all dividends declared on the Series A Preferred Stock and all such Parity Stock and payable on such Dividend Payment Date (or, in the case of Parity Stock having dividend payment dates different from the Dividend Payment Dates, on a dividend payment date falling within the Dividend Period related to such Dividend Payment Date) shall be declared pro rata so that the respective amounts of such dividends shall bear the same ratio to each other as all accumulated but unpaid dividends per share on the Series A Preferred Stock and all Parity Stock payable on such Dividend Payment Date (or, in the case of Parity Stock having dividend payment dates different from the Dividend Payment Dates, on a dividend payment date falling within the Dividend Period related to such Dividend Payment Date) bear to each other. Any portion of such dividends not declared and paid that are payable upon the Series A Preferred Stock and such Parity Stock in respect of such Dividend Period on such Dividend Payment Date shall accumulate, and an amount equal to such undeclared portion of such dividends shall become payable out of funds legally available for the payment of dividends upon any liquidation, dissolution or winding-up of the affairs of the Corporation or earlier redemption of such shares of Series A Preferred Stock and such Parity Stock, to the extent not paid prior to such liquidation, dissolution or winding- up or earlier redemption, as the case may be.
(ii) During any Dividend Period, so long as any shares of Series A Preferred Stock remain outstanding, unless the full cumulative dividends have been declared and paid on the Series A Preferred Stock and any Parity Stock through the most recently completed Dividend Period for each such security:
(A) no dividend shall be declared or paid on the Common Stock or any other shares of Junior Stock (other than a dividend payable solely in shares of Junior Stock); and
(B) no Common Stock or other Junior Stock shall be purchased, redeemed or otherwise acquired for consideration by the Corporation, directly or indirectly (other than (A) purchases, redemptions or other acquisitions of shares of Junior Stock pursuant to any employment contract, dividend reinvestment plan, benefit plan or other similar arrangement with or for the benefit of employees, officers, directors, consultants or advisors, (B) as a result of a reclassification of Junior Stock for or into other Junior Stock, (C) the exchange or conversion of one share of Junior Stock for or into another share of such Junior Stock, or (D) through the use of the proceeds of a substantially contemporaneous sale of Junior Stock) during a Dividend Period.
(iii) The Series A Preferred Stock shall rank junior as to payment of dividends to any class or series of Senior Stock that the Corporation may issue in the future. If at any time the Corporation has failed to pay, on the applicable payment date, accumulated dividends on any class or series of Senior Stock, the Corporation may not pay any dividends on the outstanding Series A Preferred Stock or redeem or otherwise repurchase any shares of Series A Preferred Stock until the Corporation has paid or set aside for payment the full amount of the unpaid dividends on the Senior Stock that must, under the terms of such securities, be paid before the Corporation may pay dividends on, or redeem or repurchase, the Series A Preferred Stock.
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(iv) Notwithstanding anything herein to the contrary, no dividends on the Series A Preferred Stock shall be paid at such time as the terms and provisions of any agreement of the Corporation, including any agreement relating to its indebtedness, prohibit such declaration and payment (or declaration and setting aside a sum sufficient for the payment thereof) would constitute a breach thereof or a default thereunder, or if the declaration and payment (or the declaration and setting aside a sum sufficient for the payment thereof) shall be restricted or prohibited by law.
(c) Subject to the foregoing, dividends (payable in cash, stock or otherwise) as may be determined by the Board of Directors or any duly authorized committee of the Board of Directors may be declared and paid on the Common Stock and any other shares of Junior Stock from time to time out of any funds legally available for such payment, and the Series A Preferred Stock shall not be entitled to participate in any such dividend.
Section 6 Liquidation Rights.
(a) Voluntary Or Involuntary Liquidation. In the event of any liquidation, dissolution or winding-up of the affairs of the Corporation, whether voluntary or involuntary, holders of Series A Preferred Stock and all holders of any Parity Stock shall be entitled to receive, out of the assets of the Corporation legally available for distribution to shareholders of the Corporation, after satisfaction of all liabilities and obligations to creditors of the Corporation, if any, and subject to the rights of holders of Senior Stock in respect of distributions upon any liquidation, dissolution or winding-up of the affairs of the Corporation, and before any distribution of such assets is made to or set aside for the holders of Common Stock and any other Junior Stock, in full an amount equal to $25.00 per share of Series A Preferred Stock, together with an amount equal to all accumulated and unpaid dividends (whether or not declared), if any. Holders of the Series A Preferred Stock will not be entitled to any other amounts from the Corporation after they have received their full Liquidation Preference.
(b) Partial Payment. If in any distribution described in Section 6(a) the assets of the Corporation are not sufficient to pay the Liquidation Preferences in full to all holders of Series A Preferred Stock and all holders of any Parity Stock, the amounts paid to the holders of Series A Preferred Stock and to the holders of all such other Parity Stock shall be paid pro rata in accordance with the respective aggregate Liquidation Preferences of the holders of Series A Preferred Stock and the holders of all such other Parity Stock. In any such distribution, the “Liquidation Preference” of any holder of Preferred Stock of the Corporation shall mean the amount otherwise payable to such holder in such distribution (assuming no limitation on the assets of the Corporation available for such distribution), including any unpaid, accumulated, cumulative dividends, whether or not declared (and, in the case of any Parity Stock on which dividends accumulate on a non-cumulative basis, an amount equal to any declared but unpaid dividends, as applicable).
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(c) Residual Distributions. If the Liquidation Preference has been paid in full to all holders of Series A Preferred Stock and any Parity Stock, the holders of other stock of the Corporation shall be entitled to receive all remaining assets of the Corporation according to their respective rights and preferences.
(d) Merger, Consolidation and Sale of Assets Not Liquidation. For purposes of this Section 6, neither the merger or consolidation of the Corporation into or with any other corporation, including a merger or consolidation in which the holders of Series A Preferred Stock receive cash, securities or other property for their shares, nor a sale, transfer or lease of all or part of its assets, will be deemed a liquidation, dissolution or winding-up of the affairs of the Corporation.
Section 7 Redemption.
(a) Optional Redemption. The Series A Preferred Stock is perpetual and has no maturity date. Holders of the Series A Preferred Stock will have no right to require the redemption or repurchase of the Series A Preferred Stock. The Corporation may, at its option, redeem the shares of Series A Preferred Stock at the time outstanding, upon notice given as provided in Section 7(c) in whole or in part, from time to time, on or after ____, 2023, at a redemption price in cash equal to $25.00 per share of Series A Preferred Stock, plus an amount equal to accumulated and unpaid dividends (whether or not declared) to, but excluding, the date fixed for redemption.
The redemption price for any shares of Series A Preferred Stock shall be payable on the redemption date to the holder of such shares against surrender of the certificate(s) evidencing such shares to the Corporation or its agent. Any declared and unpaid dividends payable on a redemption date that occurs subsequent to the Dividend Record Date for a Dividend Period shall not constitute a part of or be paid to the holder entitled to receive the redemption price on the redemption date, but rather shall be paid to the holder of record of the redeemed shares on the Dividend Record Date relating to such Dividend Payment Date as provided in Section 5.
(b) No Sinking Fund. The Series A Preferred Stock will not be subject to any mandatory redemption, sinking fund, retirement fund or purchase fund or other similar provisions. Holders of Series A Preferred Stock will have no right to require redemption, repurchase or retirement of any shares of Series A Preferred Stock.
(c) Notice of Redemption. Notice of every redemption of shares of Series A Preferred Stock shall be given by first class mail, postage prepaid, addressed to the holders of record of the shares of Series A Preferred Stock to be redeemed at their respective last addresses appearing on the books of the Corporation. Such mailing shall be at least 30 days and not more than 60 days before the date fixed for redemption. Any notice mailed as provided in this Section 7(c) shall be conclusively presumed to have been duly given, whether or not the holder receives such notice, but failure duly to give such notice by mail, or any defect in such notice or in the mailing thereof, to any holder of shares of Series A Preferred Stock designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of Series A Preferred Stock. Notwithstanding the foregoing, if the Series A Preferred Stock or any depositary shares representing interests in the Series A Preferred Stock are issued in book-entry form through DTC or any other similar facility, notice of redemption may be given to the holders of Series A Preferred Stock at such time and in any manner permitted by such facility. Each such notice given to a holder shall state: (1) the redemption date; (2) the number of shares of Series A Preferred Stock to be redeemed and, if less than all the shares of Series A Preferred Stock held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (3) the redemption price; (4) the place or places where certificates for such shares are to be surrendered for payment of the redemption price; and (5) that dividends on the shares of Series A Preferred Stock to be redeemed will cease to accumulate from and after such redemption date.
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(d) Partial Redemption. In case of any redemption of only part of the shares of Series A Preferred Stock at the time outstanding, the shares of Series A Preferred Stock to be redeemed shall be selected either pro rata or by lot (or, in the event the Series A Preferred Stock is in the form of Global Series A Preferred Stock in accordance with the applicable procedures of DTC or any other similar facility in compliance with the then-applicable rules of any applicable stock exchange the shares of Series A Preferred Stock are listed or quoted on). Subject to the provisions hereof, the Corporation shall have full power and authority to prescribe the terms and conditions upon which shares of Series A Preferred Stock shall be redeemed from time to time. If fewer than all the shares of Series A Preferred Stock represented by any certificate are redeemed, a new certificate shall be issued representing the unredeemed shares of Series A Preferred Stock without charge to the holder thereof.
(e) Effectiveness of Redemption. If notice of redemption has been duly given and if on or before the redemption date specified in the notice all funds necessary for the redemption have been set aside by the Corporation, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the shares of Series A Preferred Stock called for redemption, so as to be and continue to be available therefor, then, notwithstanding that any certificate for any share of Series A Preferred Stock so called for redemption has not been surrendered for cancellation, on and after the redemption date dividends shall cease to accumulate on all shares of Series A Preferred Stock so called for redemption, all shares of Series A Preferred Stock so called for redemption shall no longer be deemed outstanding and all rights with respect to such shares shall forthwith on such redemption date cease and terminate, except only the right of the holders thereof to receive the amount payable on such redemption, without interest. Any funds unclaimed at the end of two years from the redemption date shall, to the extent permitted by law, be released to the Corporation, after which time the holders of the shares of Series A Preferred Stock so called for redemption shall look only to the Corporation for payment of the redemption price of such shares.
Section 8 Voting Rights.
(a) General. The holders of Series A Preferred Stock shall not have any voting rights except as set forth below or as otherwise from time to time required by Delaware law.
(b) Other Voting Rights. So long as any shares of Series A Preferred Stock are outstanding, in addition to any other vote or consent of shareholders required by law, the vote or consent of the holders of at least two-thirds of the shares of Series A Preferred Stock and any Voting Preferred Stock (subject to the last paragraph of this Section 8(b)) at the time outstanding and entitled to vote thereon, voting together as a single class, given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, shall be necessary for effecting or validating:
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(i) Authorization of Senior Stock. Any amendment or alteration of the Certificate of Incorporation or this Certificate of Designations to authorize or create, or increase the authorized amount of, any shares of any class or series of capital stock of the Corporation ranking senior to the Series A Preferred Stock with respect to the payment of dividends or the distribution of assets on any liquidation, dissolution or winding-up of the affairs of the Corporation;
(ii) Amendment of Series A Preferred Stock. Any amendment, alteration or repeal of any provision of the Certificate of Incorporation or this Certificate of Designations so as to materially and adversely affect the special rights, preferences, privileges or voting powers of the Series A Preferred Stock, taken as a whole; or
(iii) Share Exchanges, Reclassifications, Mergers And Consolidations. Any consummation of a binding share exchange or reclassification involving the Series A Preferred Stock, or of a merger or consolidation of the Corporation with another corporation or other entity, unless in each case (x) the shares of Series A Preferred Stock remain outstanding or, in the case of any such merger or consolidation with respect to which the Corporation is not the surviving or resulting entity, are converted into or exchanged for preference securities of the surviving or resulting entity or its ultimate parent, and (y) such Series A Preferred Stock remaining outstanding or such preference securities, as the case may be, have such rights, preferences, privileges and voting powers, and limitations and restrictions thereof, taken as a whole, as are not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers, and limitations and restrictions thereof, of the Series A Preferred Stock immediately prior to such consummation, taken as a whole; provided, however, that for all purposes of this Section 8(b), any increase in the amount of the authorized Preferred Stock, or the creation and issuance, or an increase in the authorized or issued amount, of any other series of Preferred Stock ranking equally with or junior to the Series A Preferred Stock with respect to the payment of dividends (whether such dividends are cumulative or non-cumulative) or the distribution of assets upon any liquidation, dissolution or winding-up of the affairs of the Corporation will not be deemed to materially and adversely affect the special rights, preferences, privileges or voting powers of the Series A Preferred Stock.
If any amendment, alteration, repeal, share exchange, reclassification, merger or consolidation specified in this Section 8(b) would materially and adversely affect the Series A Preferred Stock and one or more, but not all, series of Voting Preferred Stock (including the Series A Preferred Stock for this purpose), then only the Series A Preferred Stock and such series of Voting Preferred Stock as are materially and adversely affected by and entitled to vote shall vote on the matter together as a single class (in lieu of all other series of Voting Preferred Stock).
(c) Changes for Clarification. To the fullest extent permitted by the Nevada Revised Statute, without the consent of the holders of the Series A Preferred Stock, so long as such action does not adversely affect the special rights, preferences, privileges and voting powers, and limitations and restrictions thereof, of the Series A Preferred Stock, the Corporation may amend, alter, supplement or repeal any term of the Series A Preferred Stock for the following purposes:
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(i) to cure any ambiguity, omission, inconsistency or mistake in any such agreement or instrument;
(ii) to make any provision with respect to matters or questions relating to the Series A Preferred Stock that is not inconsistent with the provisions of this Certificate of Designations and that does not adversely affect the rights of any holder of the Series A Preferred Stock; or
(iii) to make any other change that does not adversely affect the rights of any holder of the Series A Preferred Stock (other than any holder that consents to such change).
(d) Changes After Provision for Redemption. No vote or consent of the holders of Series A Preferred Stock shall be required pursuant to Section 8(b) if, at or prior to the time when any such vote or consent would otherwise be required pursuant to such Section, all outstanding shares of Series A Preferred Stock shall have been redeemed, or shall have been called for redemption upon proper notice and sufficient funds shall have been set aside for such redemption, in each case pursuant to Section 7.
(e) Procedures for Voting and Consents. The rules and procedures for calling and conducting any meeting of the holders of Series A Preferred Stock (including, without limitation, the fixing of a record date in connection therewith), the solicitation and use of proxies at such a meeting, the obtaining of written consents and any other aspect or matter with regard to such a meeting or such consents shall be governed by any rules the Board of Directors or a duly authorized committee of the Board of Directors, in its discretion, may adopt from time to time, which rules and procedures shall conform to the requirements of the Certificate of Incorporation, the Bylaws, applicable law and any national securities exchange or other trading facility on which the Series A Preferred Stock is listed or traded at the time. Whether the vote or consent of the holders of a plurality, majority or other portion of the shares of Series A Preferred Stock and any Voting Preferred Stock has been cast or given on any matter on which the holders of shares of Series A Preferred Stock are entitled to vote shall be determined by the Corporation by reference to the specified liquidation amounts of the shares voted or covered by the consent.
Section 9 Record Holders. To the fullest extent permitted by applicable law, the Corporation and the Transfer Agent for the Series A Preferred Stock may deem and treat the record holder of any share of Series A Preferred Stock as the true and lawful owner thereof for all purposes, and neither the Corporation nor such Transfer Agent shall be affected by any notice to the contrary.
Section 10 Notices. All notices or communications in respect of Series A Preferred Stock shall be sufficiently given if given in writing and delivered in person or by first class mail, postage prepaid, or if given in such other manner as may be permitted in this Certificate of Designations, in the Articles of Incorporation or Bylaws or by applicable law.
Section 11 No Preemptive Rights. No holder of any share of Series A Preferred Stock, in such capacity, shall have any rights of preemption or subscription whatsoever as to any securities of the Corporation, or any warrants, rights or options issued or granted with respect thereto, regardless of how such securities, or such warrants, rights or options, may be designated, issued or granted.
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Section 12 No Other Rights. The holders of shares of Series A Preferred Stock, in such capacity, shall not have any voting powers, preferences or relative, participating, optional or other special rights, or qualifications, limitations or restrictions thereof, other than as set forth herein or in the Articles of Incorporation or as provided by applicable Missouri law.
Section 13 No Conversion Rights. The shares of Series A Preferred Stock shall not be convertible into, or exchangeable for, any other class or series of stock or other securities of the Corporation.
Section 14 Form.
(a) Certificated Series A Preferred Stock. The Series A Preferred Stock may be issued in the form of one or more definitive shares in fully registered form in substantially the form attached to this Certificate of Designations as Exhibit A (“Certificated Series A Preferred Stock”), which is incorporated in and expressly made a part of this Certificate of Designations. Each Certificated Series A Preferred Stock shall reflect the number of shares of Series A Preferred Stock represented thereby, and may have notations, legends, or endorsements required by law, stock exchange rules, agreements to which the Corporation is subject, if any, or usage (provided that any such notation, legend, or endorsement is in a form acceptable to the Corporation). Each Certificated Series A Preferred Stock shall be registered in the name or names of the Person or Persons specified by the Corporation in a written instrument to the Registrar.
(b) Global Series A Preferred Stock. If DTC or another depositary reasonably acceptable to the Corporation (the “Global Depositary”) is willing to act as depositary for the Series A Preferred Stock, a holder who is an Agent Member may request the Corporation to issue one or more shares of Series A Preferred Stock in global form with the global legend (the “Global Legend”) as set forth on the form of Series A Preferred Stock certificate attached to this Certificate of Designations as Exhibit A (“Global Series A Preferred Stock”), in exchange for the Certificated Series A Preferred Stock held by such holder, with the same terms and of equal aggregate Liquidation Preference Amount. The Global Series A Preferred Stock may have notations, legends, or endorsements required by law, stock exchange rules, agreements to which the Corporation is subject, if any, or usage (provided that any such notation, legend, or endorsement is in a form acceptable to the Corporation). Any Global Series A Preferred Stock shall be deposited on behalf of the holders of the Series A Preferred Stock represented thereby with the Transfer Agent, at the principal office of the Transfer Agent at which at any particular time its registrar business is administered, as custodian for the Global Depositary, and registered in the name of the Global Depositary or a nominee of the Global Depositary, duly executed by the Corporation and countersigned and registered by the Transfer Agent, as hereinafter provided. The aggregate number of shares represented by each Global Series A Preferred Stock may from time to time be increased or decreased by adjustments made on the records of the Transfer Agent and the Global Depositary or its nominee as hereinafter provided. This Section 14(b) shall apply only to Global Series A Preferred Stock deposited with or on behalf of the Global Depositary. The Corporation shall execute and the Transfer Agent shall, in accordance with this Section 14(b), countersign and deliver any Global Series A Preferred Stock that (i) shall be registered in the name of Cede & Co. or other nominee of the Global Depositary and (ii) shall be delivered by the Transfer Agent to Cede & Co. or pursuant to instructions received from Cede & Co. or held by the Transfer Agent as custodian for the Global Depositary pursuant to an agreement between the Global Depositary and the Transfer Agent. Members of, or participants in, the Global Depositary (“Agent Members”) shall have no rights under this Certificate of Designations, with respect to any Global Series A Preferred Stock held on their behalf by the Global Depositary or by the Transfer Agent as the custodian for the Global Depositary, or under such Global Series A Preferred Stock, and the Global Depositary may be treated by the Corporation, the Transfer Agent, and any agent of the Corporation or the Transfer Agent as the absolute owner of such Global Series A Preferred Stock for all purposes whatsoever.
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Notwithstanding the foregoing, nothing herein shall prevent the Corporation, the Transfer Agent, or any agent of the Corporation or the Transfer Agent from giving effect to any written certification, proxy, or other authorization furnished by the Global Depositary or impair, as between the Global Depositary and its Agent Members, the operation of customary practices of the Global Depositary governing the exercise of the rights of a holder of a beneficial interest in any Global Series A Preferred Stock. The holder of the Global Series A Preferred Stock may grant proxies or otherwise authorize any Person to take any action that a holder is entitled to take pursuant to the Global Series A Preferred Stock, this Certificate of Designations, or the Articles of Incorporation. Owners of beneficial interests in Global Series A Preferred Stock shall not be entitled to receive physical delivery of Certificated Series A Preferred Stock, unless (x) the Global Depositary notifies the Corporation that it is unwilling or unable to continue as Global Depositary for the Global Series A Preferred Stock and the Corporation does not appoint a qualified replacement for the Global Depositary within 90 days after such notice, (y) the Global Depositary ceases to be a “clearing agency” registered pursuant to Section 17A of the Exchange Act when the depositary is required to be so registered and so notifies the Corporation, and the Corporation does not appoint a qualified replacement for the Global Depositary within 90 days after such notice or (z) the Corporation in its sole discretion and subject to the Global Depositary’s procedures determines that the Series A Preferred Stock shall be exchangeable for Certificated Series A Preferred Stock. In any such case, the Global Series A Preferred Stock shall be exchanged in whole for Certificated Series A Preferred Stock, with the same terms and of an equal aggregate Liquidation Preference Amount, and such Certificated Series A Preferred Stock shall be registered in the name or names of the Person or Persons specified by the Global Depositary in a written instrument delivered to the Transfer Agent.
[Remainder of Page Intentionally Left Blank]
IN WITNESS WHEREOF, Modular Medical, Inc. has caused this Certificate of Designations to be signed by its Corporate Secretary on this ___ day of April, 2020.
| MODULAR MEDICAL INC. | ||
| By: | ||
| Name: | ||
| Title: | Executive Officer and Secretary | |
[Signature Page to Series A Certificate of Designations]
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Exhibit A
[FORM OF FACE OF CERTIFICATE]
[UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF , TO MODULAR MEDICAL, INC., AS TRANSFER AGENT (THE “TRANSFER AGENT”), AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF (AND ANY PAYMENT IS MADE TO , OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF ), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL IN AS MUCH AS THE REGISTERED OWNER HEREOF, , HAS AN INTEREST HEREIN.
TRANSFERS OF THIS [GLOBAL] SERIES A PREFERRED STOCK SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR’S NOMINEE AND TRANSFERS OF PORTIONS OF THIS [GLOBAL] SERIES A PREFERRED STOCK SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE RELATED CERTIFICATE OF DESIGNATIONS. IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS SUCH TRANSFER AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS.]
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MODULAR MEDICAL, INC.
Incorporated under the laws of
the State of Delaware
CUSIP: [_________] 13% SERIES A CUMULATIVE REDEEMABLE
PERPETUAL PREFERRED STOCK
ISIN: [___________]
THIS CERTIFICATE IS TRANSFERRABLE IN
NEW YORK, NY:
This is to certify that is the registered owner of shares of fully paid and non-assessable 13% Series A Cumulative Redeemable Perpetual Preferred Stock, $0.001 par value and a liquidation preference of $25.00 per share of MODULAR MEDICAL, INC., a Delaware corporation (the “Corporation”), transferable on the books of the Corporation by the holder hereof, in person or by duly authorized attorney, upon surrender of this Certificate properly endorsed. This Certificate is not valid unless countersigned and registered by the Transfer Agent.
Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.
| Dated: | |||
| MODULAR MEDICAL, INC. | |||
| By: | |||
| Name: | |||
| Title: | |||
| [Impression of Corporation Seal] | ||
| Countersigned and registered | ||
| TRANSFER AGENT | ||
| By: | ||
| Authorized Officer | ||
[FORM OF REVERSE OF CERTIFICATE]
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MODULAR MEDICAL, INC.
The Corporation will furnish without charge to each shareholder who so requests the powers, designations, preferences and relative participating, optional or special rights of each class of stock or series thereof of the Corporation and the qualifications, limitations or restrictions of such preferences or rights. Such request should be addressed to the Corporation or the Transfer Agent.
The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with rights of survivorship and not as tenants in common
UNIF GIFT MIN ACT - Custodian
(Cust) (Minor)
under Uniform Gift to Minors Act
(State)
Additional abbreviations may also be used though not in the above list.
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For Value Received, the undersigned hereby sells, assigns and transfers unto
(PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE)
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS,
INCLUDING ZIP CODE OF ASSIGNEE)
Shares
of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises.
Dated:
NOTICE: THE SIGNATURE TO THE ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.
| Signature(s) Guaranteed: |
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO RULE 17Ad-15 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
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Exhibit 4.2
COMMON STOCK PURCHASE WARRANT
MODULAR MEDICAL, INC.
| Warrant Shares: _______ | Original Issue Date: __________ __, 2020 |
This COMMON STOCK PURCHASE WARRANT (the “Warrant”) certifies that, for value received, ____________________ or [his][her][its] assigns (the “Holder”) is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after [•], 2020 (the “Original Issuance Date”) and on or prior to the Expiration Date (as defined in Section 2(a)(ii), below) but not thereafter, to subscribe for and purchase from MODULAR MEDICAL, INC., a Nevada corporation (the “Company”), up to ___________ shares (as subject to adjustment hereunder, the “Warrant Shares”) of Common Stock. The purchase price of one share of Common Stock under this Warrant shall be equal to the Exercise Price (as defined below). This Warrant shall initially be issued and maintained in the form of a security held in book-entry form (the “Book-Entry Warrant”) and The Depository Trust Company or its nominee (“DTC”) shall initially be the sole registered holder of this Warrant, subject to a Holder’s right to elect to receive a Warrant in certificated form pursuant to the terms of the Warrant Agent Agreement, in which case this sentence shall not apply.
Section 1 Definitions. In addition to the terms defined elsewhere in this Warrant, the following terms have the meanings indicated in this Section 1:
“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 405 under the Securities Act.
“Business Day” means any day except any Saturday, any Sunday, any day that is a federal legal holiday in the United States of America or any day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close.
“Commission” means the United States Securities and Exchange Commission.
“Common Stock” means the common stock, par value $0.0001 per share, of the Company.
“Common Stock Equivalents” means any securities of the Company or the Subsidiaries which would entitle the holder thereof to acquire at any time shares of Common Stock, including, without limitation, any debt, preferred stock, right, option, warrant or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.
“Exchange Act” means the Securities Exchange Act of 1934, as amended, of the Commission and the rules and regulations promulgated thereunder.
“Exempt Issuance” means the issuance of (i) shares of Common Stock or options to employees, officers or directors of the Company pursuant to any stock or option plan duly adopted for such purpose, by a majority of the non-employee members of the Board of Directors or a majority of the members of a committee of non-employee directors established for such purpose for services rendered to the Company, (ii) securities upon the exercise or exchange of or conversion of the Warrants, any securities issued hereunder and/or other securities exercisable or exchangeable for or convertible into shares of Common Stock issued and outstanding on the date of this Agreement, provided that such securities have not been amended since the date of this Agreement to increase the number of such securities or to decrease the exercise price, exchange price or conversion price of such securities (other than in connection with stock splits or combinations) or to extend the term of such securities, (iii) securities issued pursuant to acquisitions or strategic transactions approved by a majority of the disinterested directors of the Company, provided that such securities are issued as “restricted securities” (as defined in Rule 144) and carry no registration rights that require or permit the filing of any registration statement in connection therewith during the period ending on the 90 day anniversary of the Initial Issuance Date, and provided that any such issuance shall only be to a Person (or to the equity holders of a Person) which is, itself or through its subsidiaries, an operating company or an owner of an asset in a business synergistic with the business of the Company and shall provide to the Company additional benefits in addition to the investment of funds, but shall not include a transaction in which the Company is issuing securities primarily for the purpose of raising capital or to an entity whose primary business is investing in securities, and (iv) securities issued in connection with a capital raise resulting in no less than $10,000,000 of gross proceeds to us and the final closing of such capital raise is either (a) in connection with an initial listing of our common stock on Nasdaq, the NYSE or another stock exchange, or (b) following the date our common stock commenced trading on the Nasdaq, the NYSE or another stock exchange, and (v) shares of Common Stock sold or to be sold at a purchase price of $2.87 in an ongoing private placement by the Company commenced in March 2020.
“Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof), or other entity of any kind.
“Securities Act” means the Securities Act of 1933, as amended, of the Commission, and the rules and regulations promulgated thereunder.
“Trading Day” means a day on which the principal Trading Market is open for trading.
“Transfer Agent” means Colonial Stock Transfer Co., Inc., the current transfer agent of the Company, with a mailing address of 66 Exchange Place, 1st floor Salt Lake City, UT 84111, and any successor transfer agent of the Company.
“Variable Rate Transaction” means a transaction in which the Company (i) issues or sells any debt or equity securities that are convertible into, exchangeable or exercisable for, or include the right to receive, additional shares of Common Stock either (A) at a conversion price, exercise price or exchange rate or other price that is based upon, and/or varies with, the trading prices of or quotations for the shares of Common Stock at any time after the initial issuance of such debt or equity securities or (B) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of such debt or equity security or upon the occurrence of specified or contingent events directly or indirectly related to the business of the Company or the market for the Common Stock or (ii) enters into any agreement, including, but not limited to, an equity line of credit, whereby the Company may sell securities at a future determined price.
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“Warrant Agent Agreement” means that certain warrant agent agreement relating to the Warrant, dated on or about the Original Issuance Date, between the Company and the Warrant Agent.
“Warrant Agent” means Colonial Stock Transfer Co., Inc., the current transfer agent of the Company, with a mailing address of 66 Exchange Place, 1st floor, Salt Lake City, UT 84111, and any successor warrant agent of the Company.
Section 2 Terms and Exercise of this Warrant.
(a) Exercise Price and Duration.
(i) Exercise Price. This Warrant shall entitle the Holder thereof, subject to the provisions herein, to purchase from the Company the number of shares of Common Stock stated therein at the price of $11.00 per whole share, subject to the subsequent adjustments provided in Section 3 hereof. The term “Exercise Price” as used in this Warrant refers to the price per share at which Common Stock may be purchased at the time this Warrant is exercised.
(ii) Duration of Warrant. This Warrant may be exercised only during the period (the “Exercise Period”) commencing on the Original Issuance Date and terminating at 5:00 P.M., New York City time (the “close of business”) and on or prior to the close of business on the five (5) year anniversary of the Original Issuance Date (the “Expiration Date”). If this Warrant is not exercised on or before the Expiration Date it shall become void, and all rights hereunder shall cease at the close of business on the Expiration Date.
(b) Exercise of Warrant and Payment. Subject to the provisions of this Warrant, the Holder may exercise this Warrant by delivering, not later than 5:00 P.M., New York City time, on any Business Day during the Exercise Period (the “Exercise Date”) to the office of the Warrant Agent, or at the office of its successor as Warrant Agent, and to the Company at its office designated for such purpose (or such other office or agency of the Company as it may designate by notice in writing to the Holder at the address of the Holder appearing on the books of the Company) of a.pdf copy via e-mail attachment of the Notice of Exercise in the form annexed hereto as Exhibit A (the “Notice of Exercise”). Within the three (3) Trading Days following the date of exercise as aforesaid, the Holder shall deliver the unpaid portion of the aggregate Exercise Price for the Warrant Shares specified in the applicable Notice of Exercise by wire transfer or cashier’s check drawn on a federally chartered United States bank unless the cashless exercise procedure specified in Section 2(c), below, is specified in the applicable Notice of Exercise. No ink-original Notice of Exercise shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Notice of Exercise be required. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company for cancellation within three (3) Trading Days of the date on which the final Notice of Exercise is delivered to the Company. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of Exercise within one (1) Business Day of receipt of such notice. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.
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If any of (A) the Warrant, (B) the executed Notice of Exercise, or (C) the Exercise Price therefor, and all applicable taxes and charges due in connection therewith, is received by the Company after 5:00 P.M., New York City time, on any date, or on a date that is not a Business Day, the Warrant with respect thereto will be deemed to have been received and exercised on the Business Day next succeeding such date. For the avoidance of doubt, the “Exercise Date” will be the date the materials in the foregoing sentence are received by the Company (if by 5:00 P.M., New York City time), or the following Business Day (if after 5:00 P.M., New York City time), regardless of any earlier date written on the materials. If the Warrant is received or deemed to be received after the Expiration Date, the exercise thereof will be null and void and any funds delivered to the Company will be returned to the Holder as soon as practicable. In no event will interest accrue on any funds delivered to the Company in respect of an exercise or attempted exercise of Warrants. The validity of any exercise of any Warrant will be determined by the Company in its sole discretion and such determination will be final and binding upon the Holder. The Company shall not have any obligation to inform a Holder of the invalidity of any exercise of Warrants.
Notwithstanding the foregoing in this Section 2(b), a Holder whose interest in this Warrant is a beneficial interest in certificate(s) representing this Warrant held in book-entry form through DTC (or another established clearing corporation performing similar functions), shall effect exercises made pursuant to this Section 2(b) by delivering to DTC (or such other clearing corporation, as applicable) the appropriate instruction form for exercise, complying with the procedures to effect exercise that are required by DTC (or such other clearing corporation, as applicable), subject to a Holder’s right to elect to receive a Warrant in certificated form pursuant to the terms of the Warrant Agent Agreement, in which case this sentence shall not apply.
(c) Cashless Exercise. At any time and from time to time during the Exercise Period, including if at the time of exercise hereof there is no effective registration statement registering, or the prospectus contained therein is not available for the issuance of the Warrant Shares to the Holder, this Warrant may be exercised, in whole or in part, by means of a “cashless exercise” in which the Holder shall be entitled to receive the number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:
| (A) | = | the VWAP on the Trading Day immediately preceding the Exercise Date; |
| (B) | = | the Exercise Price of the Warrant; and |
| (X) | = | the number of Warrant Shares that would be issuable upon exercise of the Warrant in full in accordance with the terms of the Warrant if such exercise were by means of a cash exercise rather than a cashless exercise. |
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Upon receipt of a Notice of Exercise for a cashless exercise, the Company will promptly confirm the number of Warrant Shares issuable in connection with the cashless exercise. In addition, if Warrant Shares are issued in such a cashless exercise where no commission or other remuneration is paid or given directly or indirectly for soliciting such cashless exercise, the parties acknowledge and agree that in accordance with Section 3(a)(9) of the Securities Act, the Warrant Shares shall take on the registered characteristics of the Warrant being exercised. The Company agrees not to take any position contrary to this Section 2(c). Without limiting the rights of a Holder to receive Warrant Shares on a “cashless exercise,” and to receive any cash payment contemplated pursuant to Section 3(e), in no event will the Company be required to net cash settle a Warrant exercise.
“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange, or the NYSE American (each, a “Trading Market”), the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b) the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the OTCQB® Venture Market or the OTCQX® Best Market, (c) if the Common Stock is not then quoted on the OTCQB or the OTCQX and if prices for the Common Stock are then reported in the OTC Pink Open Market maintained by OTC Markets Group Inc. (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported, or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the holders of a majority in interest of the Warrants then outstanding and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.
(iii) Disputes. In the case of a dispute as to the determination of the Exercise Price or the arithmetic calculation of the Warrant Shares, the Company shall promptly issue to the Holder the number of Warrant Shares that are not disputed.
(d) Mechanics of Exercise.
(i) Delivery of Warrant Shares Upon Exercise. The Company shall cause the Warrant Shares purchased hereunder to be transmitted by the Transfer Agent to the Holder by crediting the account of the Holder’s or its designee’s balance account with DTC through its Deposit or Withdrawal at Custodian system (“DWAC”) if the Company is then a participant in such system and either (A) there is an effective registration statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares by Holder or (B) this Warrant is being exercised via cashless exercise, and otherwise by physical delivery of a certificate, registered in the Company’s share register in the name of the Holder or its designee, for the number of Warrant Shares to which the Holder is entitled pursuant to such exercise to the address specified by the Holder in the Notice of Exercise within three (3) Trading Days after the delivery to the Company of the Notice of Exercise (such date, the “Warrant Share Delivery Date”). Notwithstanding the foregoing, with respect to any Notice(s) of Exercise delivered by 12:00 noon (New York City time) on an Exercise Date, the Company agrees to deliver the Warrant Shares subject to such notice(s) by 4:00 p.m. (New York City time) on the second Trading Day thereafter. Upon delivery of the Notice of Exercise, the Holder shall be deemed for all corporate purposes to have become the holder of record of the Warrant Shares with respect to which this Warrant has been exercised, irrespective of the date of delivery of the Warrant Shares, provided that payment of the aggregate Exercise Price (other than in the case of a cashless exercise) is received within the three (3) Trading Days following delivery of the Notice of Exercise. Notwithstanding the foregoing, with respect to any Notice(s) of Exercise delivered by 12:00 noon (New York City time) on the Original Issuance Date, the Company agrees to deliver the Warrant Shares subject to such notice(s) by 4:00 p.m. (New York City time) on the next Trading Day.
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(ii) Delivery of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Company or the Warrant Agent shall, at the request of a Holder and upon surrender of this Warrant certificate, at the time of delivery of the Warrant Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.
(iii) Rescission Rights. If the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares pursuant to Section 2(d)(i), above, by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise.
(iv) Valid Issuance. All shares of Common Stock issued by the Company through the Transfer Agent upon the proper exercise of this Warrant in conformity with this Warrant shall be validly issued, fully paid and non-assessable.
(v) No Fractional Exercise. This Warrant may be exercised only in whole numbers of Warrant Shares. No fractional Warrant Shares are to be issued upon the exercise of the Warrant, but rather the number of Warrant Shares to be issued shall be rounded up or down, as applicable, to the nearest whole number. If fewer than all of the Warrants evidenced by this Warrant are exercised, a notation shall be made to the records maintained by the Company evidencing the balance of the Warrants remaining after such exercise.
(vi) No Transfer Taxes. The Company shall not be required to pay any stamp or other tax or charge required to be paid in connection with any transfer involved in the issue of the Warrant Shares upon the exercise of Warrants; and in the event that any such transfer is involved, neither the Company nor the Warrant Agent shall be required to issue or deliver any Warrant Shares until such tax or other charge shall have been paid or it has been established to the Company’s satisfaction that no such tax or other charge is due.
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(vii) Date of Issuance. Each person in whose name any such shares of Common Stock is issued shall for all purposes be deemed to have become the Holder of record of such shares on the date on which the Warrant was validly exercised and payment of the Exercise Price was made, irrespective of the date of delivery of such Notice of Exercise, except that, if the date of such Notice of Exercise and payment is a date when the stock transfer books of the Company are closed, such person shall be deemed to have become the Holder of such shares at the close of business on the next succeeding date on which the stock transfer books are open.
Section 3 Adjustments.
(a) Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon exercise of this Warrant), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event, and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged. Any adjustment made pursuant to this Section 3(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.
(b) Subsequent Equity Sales. If the Company or any Subsidiary thereof, as applicable, at any time while this Warrant is outstanding, shall sell or grant any option to purchase, or sell or grant any right to reprice, or otherwise dispose of or issue (or announce any offer, sale, grant or any option to purchase or other disposition) any Common Stock or Common Stock Equivalents, at an effective price per share less than the Exercise Price then in effect (such lower price, the “Base Share Price” and such issuances collectively, a “Dilutive Issuance”) (it being understood and agreed that if the holder of the Common Stock or Common Stock Equivalents so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights per share which are issued in connection with such issuance, be entitled to receive shares of Common Stock at an effective price per share that is less than the Exercise Price, such issuance shall be deemed to have occurred for less than the Exercise Price on such date of the Dilutive Issuance at such effective price), then simultaneously with the consummation (or, if earlier, the announcement) of each Dilutive Issuance the Exercise Price shall be reduced and only reduced to equal the Base Share Price, provided that the Base Share Price shall not be less than $6.60 (subject to adjustment for reverse and forward stock splits, recapitalizations and similar transactions following the date of the Purchase Agreement). Notwithstanding the foregoing, no adjustments shall be made, paid or issued under this Section 3(b) in respect of an Exempt Issuance. The Company shall notify the Holder, in writing, no later than the Trading Day following the issuance or deemed issuance of any Common Stock or Common Stock Equivalents subject to this Section 3(b), indicating therein the applicable issuance price, or applicable reset price, exchange price, conversion price and other pricing terms (such notice, the “Dilutive Issuance Notice”). For purposes of clarification, whether or not the Company provides a Dilutive Issuance Notice pursuant to this Section 3(b), upon the occurrence of any Dilutive Issuance, the Holder is entitled to receive a number of Warrant Shares based upon the Base Share Price regardless of whether the Holder accurately refers to the Base Share Price in the Notice of Exercise. If the Company enters into a Variable Rate Transaction, despite the prohibition thereon in the Purchase Agreement, the Company shall be deemed to have issued Common Stock or Common Stock Equivalents at the lowest possible conversion or exercise price at which such securities may be converted or exercised
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(c) Subsequent Rights Offerings. In addition to any adjustments pursuant to Section 3(a) above, if at any time the Company grants, issues or sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
(d) Pro Rata Distributions. During such time as this Warrant is outstanding, if the Company shall declare or make any dividend or other distribution of its assets (or rights to acquire its assets) to holders of shares of Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a “Distribution”), at any time after the issuance of this Warrant, then, in each such case, the Holder shall be entitled to participate in such Distribution to the same extent that the Holder would have participated therein if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date of which a record is taken for such Distribution, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the participation in such Distribution (provided, however, to the extent that the Holder's right to participate in any such Distribution would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Distribution to such extent (or in the beneficial ownership of any shares of Common Stock as a result of such Distribution to such extent) and the portion of such Distribution shall be held in abeyance for the benefit of the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
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(e) Fundamental Transaction. If, at any time while this Warrant is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance, or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property, (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another person whereby such other person acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other person or other persons making or party to, or associated or affiliated with the other persons making or party to, such stock or share purchase agreement or other business combination) (each, a “Fundamental Transaction”), then, upon any subsequent exercise of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction (without regard to any limitations in Section 5 on the exercise of this Warrant), the number of shares of Common Stock, if any, of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such Fundamental Transaction. For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash, or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. Notwithstanding anything to the contrary, in the event of a Fundamental Transaction, the Company or any Successor Entity (as defined below) shall, at the Holder’s option, exercisable at any time concurrently with, or within 30 days after, the consummation of the Fundamental Transaction (or, if later, the date of the public announcement of the applicable Fundamental Transaction), purchase this Warrant from the Holder by paying to the Holder an amount of consideration equal to the Black Scholes Value of the remaining unexercised portion of this Warrant on the date of the consummation of such Fundamental Transaction; provided, however, Holder shall only be entitled to receive from the Company or any Successor Entity, as of the date of consummation of such Fundamental Transaction, the same type or form of consideration (and in the same proportion), at the Black Scholes Value (as defined below) of the unexercised portion of this Warrant, that is being offered and paid to the holders of Common Stock of the Company in connection with the Fundamental Transaction, whether that consideration be in the form of cash, stock or any combination thereof, or whether the holders of Common Stock are given the choice to receive from among alternative forms of consideration in connection with the Fundamental Transaction. “Black Scholes Value” means the value of this Warrant based on the Black and Scholes Option Pricing Model obtained from the “OV” function on Bloomberg, L.P. (“Bloomberg”) determined as of the day of consummation of the applicable Fundamental Transaction for pricing purposes and reflecting (A) a risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to the time between the date of the public announcement of the applicable Fundamental Transaction and the Termination Date, (B) an expected volatility equal to the lesser of 100% and the 100 day volatility obtained from the HVT function on Bloomberg as of the Trading Day immediately following the public announcement of the applicable Fundamental Transaction, (C) the underlying price per share used in such calculation shall be the greater of (i) the sum of the price per share being offered in cash, if any, plus the value of any non-cash consideration, if any, being offered in such Fundamental Transaction and (ii) the greater of (x) the last VWAP immediately prior to the public announcement of such Fundamental Transaction and (y) the last VWAP immediately prior to the consummation of such Fundamental Transaction and (D) a remaining option time equal to the time between the date of the public announcement of the applicable Fundamental Transaction and the Expiration Date. The payment of the Black Scholes Value will be made by wire transfer of immediately available funds within five Business Days of the Holder’s election (or, if later, on the effective date of the Fundamental Transaction). The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor (the “Successor Entity”) to assume in writing all of the obligations of the Company under this Warrant and the Warrant Agent Agreement in accordance with the provisions of this Section 4(a) pursuant to written agreements and shall, upon the written request of the Holder, deliver to the Holder in exchange for this Warrant a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Warrant which is exercisable for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the shares of Common Stock acquirable and receivable upon exercise of this Warrant (without regard to any limitations in Section 5 on the exercise of this Warrant) immediately prior to such Fundamental Transaction, and with an exercise price which applies the Exercise Price hereunder to such shares of capital stock, if any (but taking into account the relative value of the shares of Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such exercise price being for the purpose of protecting the economic value of this Warrant immediately prior to the consummation of such Fundamental Transaction). Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Warrant referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Warrant and the Warrant Agreement with the same effect as if such Successor Entity had been named as the Company herein.
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Any supplemented or amended agreement entered by the successor corporation or transferee shall provide for adjustments, which shall be as nearly equivalent as may be practicable to the adjustments provided for in Section 3. The provisions of this Section 3(c) shall similarly apply to successive reclassifications, changes, consolidations, mergers, sales, and conveyances of the kind described above.
(f) [INTENTIONALLY OMITTED]
(g) Notices of Changes in Warrant. Upon every adjustment of the Exercise Price or the number of shares issuable upon exercise of this Warrant, the Company shall give written notice thereof to the Holder, at the last address set forth for such holder in the Warrant Register, of the record date or the effective date of the event. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such event.
(h) Notice to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property, or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be mailed to the Holder at its last address as it shall appear upon the Warrant Register of the Company, at least 10 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (i) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights, or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (ii) the date on which such reclassification, consolidation, merger, sale, transfer, or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, or share exchange; provided, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. To the extent that any notice provided hereunder constitutes, or contains, material, non-public information regarding the Company or any of its subsidiaries, the Company shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K. The Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.
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Section 4 Transfer of Warrant.
(a) Transferability. This Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form annexed hereto as Exhibit B duly executed by the Holder or its agent or attorney-in-fact and funds sufficient to pay any transfer taxes payable upon the making of such transfer, accompanied by reasonable evidence of authority of the party making such request that may be required by the Warrant Agent, including, but not limited to, the signature guarantee of a guarantor institution that is a participant in a signature guarantee program approved by the Securities Transfer Association. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. Notwithstanding anything herein to the contrary, the Holder shall be required to surrender this Warrant to the Company physically in order to assign or transfer any portion of this Warrant. The Holder shall surrender this Warrant to the Company within two (2) Trading Days of the date on which the Holder delivers an assignment form to the Company assigning this Warrant in full. This Warrant, if properly assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.
(b) New Warrants. This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any transfer that may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the Issue Date of this Warrant and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.
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(c) Warrant Register. The Company (or its Warrant Agent) shall register this Warrant, upon records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company may deem and treat the Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary. To the extent this Warrant is DTC eligible, this Warrant shall be represented by one of more Book-Entry Warrants deposited with DTC and registered in the name of Cede & Co., a nominee of DTC. Ownership of beneficial interests in Book-Entry Warrants shall be shown on, and the transfer of such ownership shall be effected through, records maintained (i) by DTC or its nominee for each Book-Entry Warrant; (ii) by institutions that have accounts with DTC (such institution, with respect to a Warrant in its account, a “Participant”); or (iii) directly on the book-entry records of the Warrant Agent with respect only to owners of beneficial interests that represent such direct registration. If the Warrants are not DTC eligible as of the Original Issuance Date or DTC subsequently ceases to make its book-entry settlement system available for this Warrant, the Company may instruct the Warrant Agent in writing regarding making other arrangements for book-entry settlement within ten (10) days after the DTC ceases to make its book-entry settlement available. In the event that the Company does not make alternative arrangements for book-entry settlement within ten (10) days or this Warrant is not eligible for, or it is no longer necessary to have this Warrant available in, book-entry form, the Warrant Agent shall provide written instructions to DTC to deliver to the Warrant Agent for cancellation each Book-Entry Warrant, and the Company shall instruct the Warrant Agent to deliver to DTC definitive certificates in physical form evidencing such Warrant.
(d) Fractional Warrants. The Company shall not be required to effect any registration of transfer or exchange that will result in the issuance of a Warrant for a fraction of this Warrant.
Section 5 Limitations on Exercise. The Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, to the extent that after giving effect to the issuance of shares of Common Stock after exercise as set forth on the applicable Notice of Exercise, the Holder (together with such Holder’s Affiliates (as defined in Rule 405 under the Securities Act), and any other persons acting as a group together with the Holder or any of the Holder’s Affiliates), would beneficially own in excess of 4.99% of the Common Stock (the percentage limitation, the “Beneficial Ownership Limitation”). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of shares of Common Stock issuable upon exercise of the Warrant with respect to which such determination is being made, but shall exclude the number of shares of Common Stock that would be issuable upon exercise of the remaining, non-exercised portion of any Warrant beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 5, beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 5 applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder’s determination of whether such Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable, and the Company shall not have any obligation to verify or confirm the accuracy of such determination and neither of them shall have any liability for any error made by the Holder. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 5 , in determining the number of outstanding shares of Common Stock, a Holder may rely on the number of outstanding shares of Common Stock as reflected in (A) the Company’s most recent periodic or annual report filed with the Commission, as the case may be, (B) a more recent public announcement by the Company, or (C) a more recent written notice by the Company or the Company’s transfer agent setting forth the number of shares of Common Stock outstanding. The provisions of this Section 5 shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 5 to correct this subsection (or any portion hereof) that may be defective or inconsistent with the intended beneficial ownership limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The Holder, upon not less than 61 days’ prior notice to the Company, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 5. In the event of a Holder’s election to increase the Beneficial Ownership Limitation, such increase will not be effective until the 61st day after such notice is delivered to the Company. The limitations contained in this Section 5 shall apply to a successor holder of this Warrant.
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Section 6 Miscellaneous.
(a) No Rights as Stockholder. Except as otherwise specifically provided herein, a Holder, solely in its capacity as a holder of this Warrant, shall not be entitled to vote or receive dividends or be deemed the holder of share capital of the Company for any purpose, nor shall anything contained in this Warrant be construed to confer upon a registered holder, solely in its capacity as the Holder of this Warrant, any of the rights of a stockholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger, conveyance, or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise, prior to the issuance to the Holder of the Warrant Shares that it is then entitled to receive upon the due exercise of this Warrant. This Warrant does not entitle the registered holder thereof to any of the rights of a stockholder of the Company.
(b) Reservation of Common Stock. The Company shall always reserve and keep available out of its authorized but unissued shares of Common Stock that number of shares that will be sufficient to permit the exercise in full of this Warrant.
(c) Loss, Theft, Destruction, or Mutilation of Warrant. The Company covenants that, upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction, or mutilation of this Warrant or any stock certificate relating to the Warrant Shares and, in case of loss, theft, or destruction, of indemnity or security reasonably satisfactory to it and the Warrant Agent (that, in the case of the Warrant, shall include the posting of a bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.
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(d) Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Business Day, then, such action may be taken or such right may be exercised on the next succeeding Business Day.
(e) Jurisdiction. All questions concerning the construction, validity, enforcement, and interpretation of this Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Warrant (whether brought against a party hereto or their respective affiliates, directors, officers, stockholders, partners, members, employees, or agents) shall be commenced exclusively in the state and federal courts sitting in the City of New York. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, Borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper or is an inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action, or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law. If either party shall commence an action, suit or proceeding to enforce any provisions of this Warrant, the prevailing party in such action, suit or proceeding shall be reimbursed by the other party for their reasonable attorneys’ fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding.
(f) Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered and the Holder does not utilize cashless exercise, will have restrictions upon resale imposed by state and federal securities laws.
(g) Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice the Holder’s rights, powers, or remedies. Without limiting any other provision of this Warrant, if the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to the Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by the Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.
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(h) Notices. Any notices, consents, waivers or other document or communications required or permitted to be given or delivered under the terms of this Warrant must be in writing and will be deemed to have been delivered: (i) upon receipt, if delivered personally or (ii) if sent by overnight courier service, one (1) Trading Day after deposit with an overnight courier service with next day delivery specified, and (iv) if sent by certified mail or private courier service within five (5) Trading Days after deposit of such notice, in each case, properly addressed to the party to receive the same. The addresses for such communications shall be:
If to the Company:
Modular Medical, Inc.
16772 West Bernardo Drive
San Diego, CA 92127
Attention: Chief Executive Officer
Email: contracts@modular-medical.com
If to a Holder, to its address or e-mail address set forth herein or on the books and records of the Warrant Agent.
(i) Limitation of Liability. No provision hereof, in the absence of any affirmative action by the Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.
(j) Remedies. The Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive and not to assert the defense in any action for specific performance that a remedy at law would be adequate.
(k) Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.
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(l) Amendment. This Warrant may be modified or amended, including any amendment to increase the Exercise Price or shorten the Exercise Period, and the provisions hereof may be waived, in each case with the written consent of the Company and the registered holders of a majority of the then outstanding Warrants issued by the Company.
(m) Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.
(n) Effect of Headings. The Section headings herein are for convenience only and are not part of this Warrant and shall not affect the interpretation thereof.
(o) Warrant Agent Agreement. This Warrant is issued subject to the Warrant Agent Agreement. To the extent any provision of this Warrant conflicts with the express provisions of the Warrant Agent Agreement, the provisions of this Warrant shall govern and be controlling; provided, however, that all provisions with respect to the rights, duties, obligations, protections, immunities, and liability of the Warrant Agent only shall be determined and interpreted solely by the provisions of the Warrant Agent Agreement.
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(Signature Page Follows)
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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.
| MODULAR MEDICAL, INC. | ||
| By: | ||
| Name: | ||
| Title: | ||
____________________, as warrant agent
| By: | ||
| Name: |
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Exhibit A
NOTICE OF EXERCISE
TO: MODULAR MEDICAL, INC.
(1) The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.
(2) Payment shall take the form of (check applicable box):
| [ ] | in lawful money of the United States by wire transfer, ACH or cashier’s check drawn on a United States bank; or |
| [ ] | if permitted by the terms of the Warrant, the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 2(c). |
(3) Please issue said Warrant Shares in the name of the undersigned or in such other name as is specified below:
| The Warrant Shares shall be delivered to the following DWAC Account Number: | ||
| [SIGNATURE OF HOLDER] | ||
| Name of Investing Entity: | ||
| Signature of Authorized Signatory of Investing Entity: | ||
| Name of Authorized Signatory: | ||
| Title of Authorized Signatory: | ||
| Date: | ||
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Exhibit B
ASSIGNMENT FORM
(To assign the attached Warrant, execute this form and supply required information.
Do not use this form to exercise the Warrant.)
FOR VALUE RECEIVED, [____] all of or [_______] shares of the attached Warrant and all rights evidenced thereby are hereby assigned to:
_______________________________________________, whose address is
_______________________________________________________________
_______________________________________________________________
| Date: ______________, _______ | ||
| Holder’s Signature: | ||
| Holder’s Address: | ||
NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.
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Exhibit 4.3
WARRANT AGENT AGREEMENT
THIS WARRANT AGENT AGREEMENT (this “Warrant Agent Agreement”) dated as of April __, 2020 (the “Issuance Date”), by and between Modular Medical, Inc., a company incorporated under the laws of the State of Nevada (the “Company”), and ________ (the “Warrant Agent”). All capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Warrants (as defined below).
WHEREAS, the Company is engaged in a best efforts public offering (the “Offering”) of up to 2,000,000 units (the “Units”) consisting of an aggregate of (i) 2,000,000 shares (the “Shares”) of Series A 13% Cumulative Redeemable Perpetual Preferred Stock (the “Series A Preferred Stock”), and (ii) 6,000,000 warrants (the “Warrants”) to purchase shares (the “Warrant Shares”) of common stock, par value $0.001 per share (the “Common Stock”).
WHEREAS, the Company has filed with the Securities and Exchange Commission (the “Commission”) a Registration Statement on Form S-1 (File No. 333-____) (as the same may be amended from time to time, the “Registration Statement”), for the registration under the Securities Act of 1933, as amended (the “Securities Act”), of the Units, the Shares, the Warrants, and the Warrant Shares, and such Registration Statement was declared effective by the Commission on ____ __, 2020.
WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing so to act, in accordance with the terms set forth in this Warrant Agent Agreement in connection with the issuance, registration, transfer, exchange, and exercise of the Warrants.
WHEREAS, the Company desires to provide for the form and provisions of the Warrants, the terms upon which they shall be issued and exercised, and the respective rights, limitation of rights, and immunities of the Company, the Warrant Agent, and the holders of the Warrants.
WHEREAS, all acts and things have been done and performed that are necessary to make the Warrants the valid, binding, and legal obligations of the Company, and to authorize the execution and delivery of this Warrant Agent Agreement.
NOW, THEREFORE, in consideration of the mutual agreements herein contained, and for other good and valuable consideration, the adequacy, sufficiency, and receipt of which are hereby acknowledged, the parties hereto agree as follows:
1. Appointment of the Warrant Agent. The Company hereby appoints the Warrant Agent to act as agent for the Company with respect to the Warrants, and the Warrant Agent hereby accepts such appointment and agrees to perform the same in accordance with the express terms and conditions set forth in this Warrant Agent Agreement (and no implied terms or conditions).
2. Warrants.
| 2.1. | Form of Warrants. Each Warrant shall be (a) issued in book-entry form or (b) in substantially in the form of Exhibit A attached hereto, the provisions of which are incorporated herein, and signed by, or bear the .pdf signature of, the Chief Executive Officer or Chief Financial Officer, or such other officer of the Company as the Company may designate with written notice to the Warrant Agent (each, an “Authorized Signatory”; and, collectively, the “Authorized Signatories”). In the event the person whose .pdf signature has been placed upon any Warrant shall have ceased to serve in the capacity in which such person signed the Warrant before such warrant is issued, it may be issued with the same effect as if he or she had not ceased to be such at the date of issuance. All of the Warrants shall initially be represented by one or more book-entry positions (each, a “Book-Entry Warrant”). |
| 2.2. | Issuance and Registration of Warrants. |
| 2.2.1. | Warrant Register. The Warrant Agent shall maintain books (the “Warrant Register”) for the registration of the original issuance and the registration of all transfers of the Warrants. |
| 2.2.2. | Issuance of Warrants. Upon the initial issuance of the Warrants, the Warrant Agent shall issue and register the Warrants in the names of the respective holders thereof in such denominations and otherwise in accordance with the instructions delivered to the Warrant Agent by the Company. To the extent the Warrants are Depository Trust Company (“DTC”) eligible as of the Issuance Date, all of the Warrants shall be represented by one or more Book-Entry Warrants deposited with DTC and registered in the name of Cede & Co., a nominee of DTC. Ownership of beneficial interests in the Book-Entry Warrants shall be shown on, and the transfer of such ownership shall be effected through, records maintained (i) by DTC or its nominee for each Book-Entry Warrant; (ii) by institutions that have accounts with DTC (such institution, with respect to a Warrant in its account, a “Participant”); or (iii) directly on the book-entry records of the Warrant Agent with respect only to owners of beneficial interests that represent such direct registration. If the Warrants are not DTC Eligible as of the Issuance Date or DTC subsequently ceases to make its book-entry settlement system available for the Warrants, the Company may instruct the Warrant Agent in writing regarding making other arrangements for book-entry settlement within ten (10) days after DTC ceases to make its book-entry settlement available. In the event that the Company does not make alternative arrangements for book-entry settlement within ten (10) days of when the Warrants are not eligible for, or it is no longer necessary to have the Warrants available in, book-entry form, the Warrant Agent shall provide written instructions to DTC to deliver to the Warrant Agent for cancellation of each Book-Entry Warrant, and the Company shall instruct the Warrant Agent to deliver to DTC definitive certificates in physical form evidencing such Warrants in substantially the form annexed hereto as Exhibit A. |
| 2.2.3. | Beneficial Owner; Registered Holder. Prior to due presentment for registration of transfer of any Warrant, the Company and the Warrant Agent may deem and treat the person in whose name that Warrant shall be registered on the Warrant Register (the “Registered Holder”) as the absolute owner of such Warrant for purposes of any exercise thereof, and for all other purposes, and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. Any person in whose name ownership of a beneficial interest in the Warrants evidenced by a Book-Entry Warrant is recorded in the records maintained by DTC or its nominee shall be deemed the “beneficial owner” thereof. |
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| 2.2.4. | Physical Certificate . Notwithstanding anything contained herein, a Registered Holder or if the Book-Entry Warrants are deposited with DTC, the beneficial owner, has the right, upon written notice to the Warrant Agent (in form and substance reasonably acceptable to the Warrant Agent), to request a physical warrant certificate in substantially the form of Exhibit A, attached hereto, as applicable, for up to the same number of Warrants as are registered in the name of such Registered Holder or beneficial owner, as applicable, in the records maintained by the Warrant Agent (a “Warrant Certificate”). Such Warrant Certificate shall be dated as of the original Issuance Date and shall be executed by an Authorized Signatory. The Warrant Agent shall deliver the Warrant Certificate to the Registered Holder as promptly as practicable. |
3. Exercise of Warrants. Subject to the provisions of the Warrants and this Warrant Agent Agreement, a Warrant may be exercised by the Registered Holder thereof by delivering to the Warrant Agent and to the Company, the notice of exercise, as set forth in the Warrant, duly executed and properly completed, and by paying in full, in lawful money of the United States by wire transfer to the Company (or, if available, pursuant to the cashless exercise feature as set forth in such Warrant, all cashless exercises should be directed to the Company for calculation of the applicable number of Warrant Shares issuable upon such cashless exercise and upon completion of such calculation by the Company, the Company shall provide the Warrant Agent with issuance instructions), the Exercise Price for each full Warrant Share as to which the Warrant is exercised and the issuance of the Warrant Shares by the Warrant Agent as set forth in the applicable Warrant. No ink-original Notice of Exercise is required to be delivered, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Notice of Exercise be required.
4. Concerning the Warrant Agent and Other Matters.
| 4.1. | Payment of Taxes. The Company will, from time to time, promptly pay all taxes and charges that may be imposed upon the Company or the Warrant Agent in respect of the issuance or delivery of Warrant Shares upon the exercise of Warrants, but the Company shall not be required to pay any transfer taxes in respect of the Warrants or such Warrant Shares. The Warrant Agent may refrain from registering any transfer of Warrants or any delivery of any Warrant Shares unless or until the persons requesting the registration or issuance shall have paid to the Warrant Agent for the account of the Company the amount of such tax or charge, if any, or shall have established to the reasonable satisfaction of the Company and the Warrant Agent that such tax or charge, if any, has been paid. |
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| 4.2. | Resignation, Consolidations, or Merger of the Warrant Agent. |
| 4.2.1. | Appointment of Successor Warrant Agent. The Warrant Agent, or any successor to it hereafter appointed, may resign its duties and be discharged from all further duties and liabilities hereunder after giving thirty (30) days’ notice in writing to the Company, or such shorter period of time agreed to by the Company. The Company may terminate the services of the Warrant Agent, or any successor Warrant Agent, after giving thirty (30) days’ notice in writing to the Warrant Agent or successor Warrant Agent, or such shorter period of time as agreed. If the office of the Warrant Agent becomes vacant by resignation, termination, or incapacity to act or otherwise, the Company shall appoint in writing a successor Warrant Agent in place of the Warrant Agent. If the Company shall fail to make such appointment within a period of 30 days after it has been notified in writing of such resignation or incapacity by the Warrant Agent, then the Warrant Agent or any Holder may apply to any court of competent jurisdiction for the appointment of a successor Warrant Agent at the Company’s cost. Pending appointment of a successor to such Warrant Agent, either by the Company or by such a court, the duties of the Warrant Agent shall be carried out by the Company. Any successor Warrant Agent (but not including the immediate predecessor Warrant Agent), whether appointed by the Company or by such court, shall be a person organized and existing under the laws of any state of the United States of America, in good standing, and authorized under such laws to exercise corporate trust powers and subject to supervision or examination by federal or state authority. After appointment, any successor Warrant Agent shall be vested with all the authority, powers, rights, immunities, duties, and obligations of its predecessor Warrant Agent with like effect as if originally named as Warrant Agent hereunder, without any further act or deed, and except for executing and delivering documents as provided in the sentence that follows, the predecessor Warrant Agent shall have no further duties, obligations, responsibilities, or liabilities hereunder, but shall be entitled to all rights that survive the termination of this Warrant Agent Agreement and the resignation or removal of the Warrant Agent, including but not limited to its right to indemnity hereunder. If for any reason it becomes necessary or appropriate or at the request of the Company, the predecessor Warrant Agent shall execute and deliver, at the expense of the Company, an instrument transferring to such successor Warrant Agent all the authority, powers, and rights of such predecessor Warrant Agent hereunder; and upon request of any successor Warrant Agent the Company shall make, execute, acknowledge, and deliver any and all instruments in writing for more fully and effectually vesting in and confirming to such successor Warrant Agent all such authority, powers, rights, immunities, duties, and obligations. |
| 4.2.2. | Notice of Successor Warrant Agent. In the event a successor Warrant Agent shall be appointed, the Company shall give notice thereof to the predecessor Warrant Agent and the transfer agent for the Common Stock not later than the effective date of any such appointment. |
| 4.2.3. | Merger or Consolidation of Warrant Agent. Any person into which the Warrant Agent may be merged or converted or with which it may be consolidated or any person resulting from any merger, conversion, or consolidation to which the Warrant Agent shall be a party or any person succeeding to the shareowner services business of the Warrant Agent or any successor Warrant Agent shall be the successor Warrant Agent under this Warrant Agent Agreement, without any further act or deed. For purposes of this Warrant Agent Agreement, “person” shall mean any individual, firm, corporation, partnership, limited liability company, joint venture, association, trust, or other entity, and shall include any successor (by merger or otherwise) thereof or thereto. |
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| 4.3. | Fees and Expenses of the Warrant Agent. |
| 4.3.1. | Remuneration. Whether or not any Warrants are exercised, for the Warrant Agent’s services as agent for the Company hereunder, the Company shall pay to the Warrant Agent such fees as may be separately agreed between the Company and Warrant Agent and the Warrant Agent’s out-of-pocket expenses in connection with this Warrant Agent Agreement, including, without limitation, the fees and expenses of the Warrant Agent’s counsel and the fees and expenses charged by the Warrant Agent in connection with exercises and transfers of the Warrants. While the Warrant Agent endeavors to maintain out-of-pocket charges (both internal and external) at competitive rates, these charges may not reflect actual out-of-pocket costs, and may include handling charges to cover internal processing and use of the Warrant Agent’s billing systems. All amounts owed by the Company to the Warrant Agent under this Warrant Agent Agreement are due within 30 days of the invoice date. Delinquent payments are subject to a late payment charge of one and one-half percent (1.5%) per month, commencing 45 days from the invoice date. The Company agrees to reimburse the Warrant Agent for any attorneys’ fees and any other costs associated with collecting delinquent payments. No provision of this Warrant Agent Agreement shall require the Warrant Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties under this Warrant Agent Agreement or in the exercise of its rights. |
| 4.3.2. | Further Assurances. The Company agrees to perform, execute, acknowledge, and deliver or cause to be performed, executed, acknowledged, and delivered, all such further and other acts, instruments, and assurances as may reasonably be required by the Warrant Agent for the carrying out or performing of the provisions of this Warrant Agent Agreement. |
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| 4.4. | Liability of the Warrant Agent. |
| 4.4.1. | Exclusions. As agent for the Company hereunder, the Warrant Agent: (a) shall have no duties or obligations other than those specifically set forth herein or as may subsequently be agreed to in writing by the Warrant Agent and the Company; (b) shall be regarded as making no representations and having no responsibilities as to the validity, sufficiency, value, or genuineness of the Warrants or any Warrant Shares; (c) shall not be obligated to take any legal action hereunder; if, however, the Warrant Agent determines to take any legal action hereunder, and where the taking of such action might, in its judgment, subject or expose it to any expense or liability it shall not be required to act unless it has been furnished with an indemnity reasonably satisfactory to it; (e) may rely on and shall be fully authorized and protected in acting or failing to act upon any certificate, instrument, opinion, notice, letter, telex, facsimile transmission, or other document or security delivered to the Warrant Agent and believed by it to be genuine and to have been signed by the proper party or parties; (f) shall not be liable or responsible for any recital or statement contained in the Registration Statement or any other documents relating thereto; (g) shall not be liable or responsible for any failure on the part of the Company to comply with any of its covenants and obligations relating to the Warrants, including without limitation obligations under applicable securities laws; (h) may rely on and shall be fully authorized and protected in acting or failing to act upon the written, telephonic, or oral instructions with respect to any matter relating to its duties as the Warrant Agent covered by this Warrant Agent Agreement (or supplementing or qualifying any such actions) of officers of the Company, and is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from the Company or counsel to the Company, and may apply to the Company, for advice or instructions in connection with the Warrant Agent’s duties hereunder, and the Warrant Agent shall not be liable for any delay in acting while waiting for those instructions; any applications by the Warrant Agent for written instructions from the Company may, at the option of the Warrant Agent, set forth in writing any action proposed to be taken or omitted by the Warrant Agent under this Warrant Agent Agreement and the date on or after which such action shall be taken or such omission shall be effective; the Warrant Agent shall not be liable for any action taken by, or omission of, the Warrant Agent in accordance with a proposal included in such application on or after the date specified in such application (which date shall not be less than five (5) business days after the date such application is sent to the Company, unless the Company shall have consented in writing to any earlier date) unless prior to taking any such action, the Warrant Agent shall have received written instructions in response to such application specifying the action to be taken or omitted; (i) may perform any of its duties hereunder either directly or by or through nominees, correspondents, designees, or subagents, and it shall not be liable or responsible for any misconduct or negligence on the part of any nominee, correspondent, designee, or subagent appointed with reasonable care by it in connection with this Warrant Agent Agreement; (j) is not authorized, and shall have no obligation, to pay any brokers, dealers, or soliciting fees to any person; and (k) shall not be required hereunder to comply with the laws or regulations of any country other than the United States of America or any political subdivision thereof. |
| 4.4.2. | Limitation of Liability. In the absence of gross negligence or willful or illegal misconduct on its part, the Warrant Agent shall not be liable for any action taken, suffered, or omitted by it or for any error of judgment made by it in the performance of its duties under this Warrant Agent Agreement. Anything in this Warrant Agent Agreement to the contrary notwithstanding, in no event shall the Warrant Agent be liable for special, indirect, incidental, consequential, or punitive losses or damages of any kind whatsoever (including, but not limited to, lost profits), even if the Warrant Agent had been advised of the possibility of such losses or damages and regardless of the form of action. Any liability of the Warrant Agent will be limited in the aggregate to the amount of fees paid by the Company hereunder. In the event any question or dispute arises with respect to the proper interpretation of the Warrants or the Warrant Agent’s duties under this Warrant Agent Agreement or the rights of the Company or of any Registered Holder or beneficial owner, as applicable, the Warrant Agent shall not be required to act and shall not be held liable or responsible for its refusal to act until the question or dispute has been judicially settled (and, if appropriate, it may file a suit in interpleader or for a declaratory judgment for such purpose) by final judgment rendered by a court of competent jurisdiction, binding on all persons interested in the matter that is no longer subject to review or appeal, or settled by a written document in form and substance satisfactory to Warrant Agent and executed by the Company and each such Registered Holder or beneficial owner, as applicable. In addition, the Warrant Agent may require for such purpose, but shall not be obligated to require, the execution of such written settlement by all the Registered Holders and beneficial owners and all other persons that may have an interest in the settlement. |
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| 4.4.3. | Indemnity. The Company agrees to indemnify the Warrant Agent and hold it harmless from and against any loss, liability, claim, or expense (a “Loss”) arising out of or in connection with the Warrant Agent’s duties under this Warrant Agent Agreement, including the costs and expenses of defending itself against any Loss, unless such Loss shall have been determined by a court of competent jurisdiction to be a result of the Warrant Agent’s gross negligence or willful misconduct. |
| 4.5. | Rights and Duties of the Warrant Agent. |
| 4.5.1. | Counsel. The Warrant Agent may consult with counsel satisfactory to the Warrant Agent, including its in-house counsel, and the advice of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered, or omitted by it hereunder in good faith and in accordance with the advice of such counsel. |
| 4.5.2. | No Duty of Demand. The Warrant Agent shall not have any duty or responsibility in the case of the receipt of any written demand from any holder of Warrants with respect to any action or default by the Company, including, without limitation the generality of the foregoing, any duty or responsibility to initiate or attempt to initiate any proceedings at law or otherwise or to make any demand upon the Company. |
| 4.5.3. | Reliance on Attorneys and Agents. The Warrant Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorney or agents, and the Warrant Agent shall not be answerable or accountable for any act, default, neglect, or misconduct of any such attorney or agents or for any loss to the Company resulting from any such act default, neglect, or misconduct, absent gross negligence, bad faith, or willful misconduct (each as determined by a final non-appealable judgment of a court of competent jurisdiction in the selection and continued employment thereof. |
| 4.5.4. | Company Instructions. Any instructions given to the Warrant Agent orally, as permitted by any provision of this Warrant Agent Agreement, shall be confirmed in writing by the Company as soon as practicable. The Warrant Agent shall not be liable or responsible and shall be fully authorized and protected for acting, or failing to act, in accordance with any oral instructions that do not conform with the written confirmation received in accordance with this Section 4.5.4. |
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5. Notices of Changes in Warrants. Upon every adjustment of the Exercise Price of a Warrant or the number of shares issuable upon exercise of a Warrant, the Company shall give written notice thereof to the Warrant Agent, which notice shall state the Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of shares purchasable at such price upon the exercise of a Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. The Warrant Agent shall be fully protected in relying upon such a notice.
6. Reservation of Warrant Shares. The Company shall at all times reserve and keep available a number of its authorized but unissued shares of Common Stock that will be sufficient to permit the exercise in full of all outstanding Warrants issued pursuant to this Warrant Agent Agreement.
7. Representations and Warranties of the Company. The Company represents and warrants that: (a) it is duly incorporated and validly existing under the laws of its jurisdiction of incorporation; (b) the offer and sale of the Warrants and the execution, delivery, and performance of all transactions contemplated thereby (including this Warrant Agent Agreement) have been duly authorized by all necessary corporate action and will not result in a breach of or constitute a default under the Articles of Incorporation, bylaws, or any similar document of the Company, or any indenture, agreement, or instrument to which it is a party or is bound; (c) this Warrant Agent Agreement has been duly executed and delivered by the Company and constitutes the legal, valid, binding, and enforceable obligation of the Company; (d) the Warrants will comply in all material respects with all applicable requirements of law; and (e) to the best of its knowledge, there is no litigation pending or threatened as of the date hereof in connection with the offering of the Warrants.
8. Miscellaneous Provisions.
| 8.1. | Loss, Theft, Destruction, or Mutilation of a Warrant. Upon receipt by the Company and the Warrant Agent of evidence reasonably satisfactory to them (including, posting a bond) of the loss, theft, destruction, or mutilation of a Warrant or any stock certificate relating to shares underlying the Warrants, and, in case of loss, theft, or destruction, of indemnity or security in customary form and amount, and reimbursement to the Company and the Warrant Agent of all reasonable expenses incidental thereto, and upon surrender to the Warrant Agent and cancellation of the Warrant or stock certificate, if mutilated, the Warrant Agent shall, on behalf of the Company, countersign and deliver a new Warrant or stock certificate of like tenor to the Registered Holder or beneficial owner, as applicable, in lieu of the Warrant or stock certificate so lost, stolen, destroyed, or mutilated. |
| 8.2. | Successors. This Warrant Agent Agreement shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto. |
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| 8.3. | Termination. Unless terminated earlier by the parties hereto, this Warrant Agent Agreement shall terminate 90 days after the earlier of the Expiration Date and the date on which no Warrants remain outstanding (the “Termination Date”). On the Business Day following the Termination Date, the Warrant Agent shall deliver to the Company any entitlements, if any, held by the Warrant Agent under this Warrant Agent Agreement. The Warrant Agent’s right to be reimbursed for fees, charges, and out-of-pocket expenses as provided in this Section 8.3 shall survive the termination of this Warrant Agent Agreement. |
| 8.4. | Severability. If any provision of this Warrant Agent Agreement shall be held illegal, invalid, or unenforceable by any court, this Warrant Agent Agreement shall be construed and enforced as if such provision had not been contained herein and shall be deemed an agreement among the parties to it to the full extent permitted by applicable law. |
| 8.5. | Authorized Representatives. The Company shall, from time to time, certify to the Warrant Agent the names and signatures of any persons authorized to act for the Company under this Warrant Agent Agreement. |
| 8.6. | Notices. Except as expressly set forth elsewhere in this Warrant Agent Agreement, all notices, instructions, and communications under this Warrant Agent Agreement shall be in writing, shall be deemed to have been delivered: (i) upon receipt, if delivered personally; (ii) when sent, if sent by e-mail (provided that such sent e-mail is kept on file (whether electronically or otherwise) by the sending party and the sending party does not receive an automatically generated message from the recipient’s e-mail server that such e-mail could not be delivered to such recipient); and (ii) if sent by overnight courier service, one (1) Trading Day after deposit with an overnight courier service with next day delivery specified, in each case, properly addressed to the party to receive the same. The addresses and e-mail addresses for such communications shall be: |
If to the Company:
Modular Medical, Inc.
16772 West Bernardo Drive
San Diego, CA 92127
Attention: Chief Executive Officer
contracts@modular-medical.com
with a copy (which shall not constitute notice) to:
Gusrae Kaplan Nusbaum PLLC
120 Wall Street, 25th Floor
New York, NY 10005
Attention: Lawrence G Nusbaum, Esq.
If to the Warrant Agent:
[Address]
Attention:
| 9 |
Any notice, statement, or demand authorized to be given or made by the Warrant Agent or the Company to the Registered Holder or beneficial owner, as applicable of any Warrant shall be in writing and shall be delivered by hand or sent by first-class mail, postage prepaid, or registered or certified mail or overnight courier service, addressed, at the last address set forth for such holder in the Warrant Register. Any notice, sent pursuant to this Warrant Agent Agreement shall be effective, if delivered by hand, upon receipt thereof by the party to whom it is addressed, if sent by overnight courier, on the next business day of the delivery to the courier, if sent by registered or certified mail on the third business day after registration or certification thereof, and if sent by first class mail on the fifth business day after mailing.
| 8.7. | Applicable Law. This Warrant Agent Agreement shall be governed by and construed in accordance with the laws of the State of New York. All actions and proceedings relating to or arising from, directly or indirectly, this Warrant Agent Agreement may be litigated in courts located within the Borough of Manhattan in the City and State of New York. The Company hereby submits to the personal jurisdiction of such courts and consents that any service of process may be made by certified or registered mail, return receipt requested, directed to the Company at its address last specified for notices hereunder. Each of the parties hereto hereby waives the right to a trial by jury in any action or proceeding arising out of or relating to this Warrant Agent Agreement. |
| 8.8. | Assignments. This Warrant Agent Agreement may not be assigned, or otherwise transferred, in whole or in part, by either party without the prior written consent of the other party, which the other party will not unreasonably withhold, delay, deny, or condition; except that (i) consent is not required for an assignment or delegation of duties by the Warrant Agent to any affiliate of the Warrant Agent and (ii) any reorganization, merger, consolidation, sale of assets, or other form of business combination by the Warrant Agent or the Company shall not be deemed to constitute an assignment of this Warrant Agent Agreement. |
| 8.9. | Amendments. No provision of this Warrant Agent Agreement may be amended, modified, or waived, except in a written document signed by both parties. The Company and the Warrant Agent may amend or supplement this Warrant Agent Agreement without the consent of any Registered Holder or beneficial owner, as applicable, for the purpose of curing any ambiguity, or curing, correcting, or supplementing any defective provision contained herein or adding or changing any other provisions with respect to matters or questions arising under this Warrant Agent Agreement as the parties may deem necessary or desirable and that the parties determine, in good faith, shall not adversely affect the interest of the Registered Holders and beneficial owners. All other amendments and supplements shall require the vote or written consent of the Registered Holders and beneficial owners of at least 50.1% of the then outstanding Warrants; provided, that, adjustments may be made to the Warrant terms and rights in accordance with the Warrants without the consent of the holders. |
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| 8.10. | Persons Having Rights under this Warrant Agent Agreement. Nothing in this Warrant Agent Agreement expressed and nothing that may be implied from any of the provisions hereof is intended, or shall be construed, to confer upon, or give to, any person or corporation other than the parties hereto and the Holders any right, remedy, or claim under or by reason of this Warrant Agent Agreement or of any covenant, condition, stipulation, promise, or agreement hereof. |
| 8.11. | Examination of the Warrant Agent Agreement. A copy of this Warrant Agent Agreement shall be available at all reasonable times at the office of the Warrant Agent designated for such purpose for inspection by any Registered Holder or beneficial owner, as applicable. Prior to such inspection, the Warrant Agent may require any such holder to provide reasonable evidence of its interest in the Warrants. |
| 8.12. | Counterparts. This Warrant Agent Agreement may be executed in any number of original or electronic counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. |
| 8.13. | Effect of Headings. The Section headings herein are for convenience only and are not part of this Warrant Agent Agreement and shall not affect the interpretation thereof. |
| 8.14. | Force Majeure. Notwithstanding anything to the contrary contained herein, the Warrant Agent shall not be liable for any failures, delays, or losses, arising directly or indirectly out of conditions beyond its reasonable control including, but not limited to, acts of government, exchange, or market ruling, suspension of trading, work stoppages, or labor disputes, fires, civil disobedience, riots, rebellions, storms, electrical or mechanical failure, computer hardware or software failure, communications facilities failures including telephone failure, war, terrorism, insurrection, earthquakes, floods, acts of God, or similar occurrences. |
[Signature Page to Follow]
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IN WITNESS WHEREOF, this Warrant Agent Agreement has been duly executed by the parties hereto as of the day and year first above written.
| MODULAR MEDICAL, INC. | ||
| By: | ||
| Name: | ||
| Title: | ||
| [_____________________________________] | ||
| By: | ||
| Name: | ||
| Title: | ||
| 12 |
EXHIBIT A
Form of Investor Warrant
See attached.
| 13 |
Exhibit 4.4
MODULAR MEDICAL, INC.
SUBSCRIPTION AGREEMENT
This Subscription Agreement (this “Subscription Agreement”) is dated ______ _, 2020, by and between the undersigned identified on the Signature Page hereto (the “Investor”) and Modular Medical , Inc., a Nevada corporation (the “Company”).
WHEREAS, the Company has authorized the sale and issuance of 2,000,000 preferred units (the “Preferred Units”), with each Preferred Unit consisting of (i) one share (a “Share”) of the Company’s 13% Series A Cumulative Redeemable Perpetual Preferred Stock with a $25.00 liquidation preference amount (the “Series A Preferred Stock”), and (ii) three (3) common stock purchase warrants, each to purchase one share of the Company’s common stock (the “Warrant Shares”), at an initial exercise price of $11.00 per share (the “Warrants” and together with the Shares and the Preferred Units, collectively, the “Purchased Securities”), at a public offering price of $25.00 per Preferred Unit (the “Purchase Price”);
WHEREAS, the sale of the Preferred Units (the “Offering”) is being made pursuant to an effective Registration Statement on Form S-1 (File No. ) (as amended and/or supplemented from time to time, the “Registration Statement”) filed under the Securities Act of 1933, as amended (the “Securities Act”), by the Company with the U.S. Securities and Exchange Commission (the “Commission”);
WHEREAS, the Company and [name of Escrow Agent] (the “Escrow Agent”) have entered into an Escrow Agreement, dated ____ __, 2020 (the “Escrow Agreement”), pursuant to which the Escrow Agent has agreed to serve as the escrow agent in connection with the Offering;
WHEREAS, all funds for the purchase of Preferred Units in the Offering will prior to the closing of the Offering be deposited in a bank account at _____ (Account No.: _____) (the “Escrow Account”) maintained by the Escrow Agent;
WHEREAS, the Investor desires to purchase a certain amount of Preferred Units from the Company.
NOW, THEREFORE, in consideration of the foregoing and of the covenants contained herein, the sufficiency of which is hereby mutually accepted, the parties hereby agree as follows:
| 1. | Subscription. |
(a) Investor agrees to buy and the Company agrees to sell and issue to Investor such number of Preferred Units as set forth on the signature page hereto (the “Signature Page”), for an aggregate purchase price equal to the product of (x) the aggregate number of Preferred Units the Investor has agreed to purchase and (y) the Purchase Price.
(b) The Preferred Units are being offered by the Company on a “reasonable best efforts” basis. The completion of the purchase and sale of the Preferred Units (the “Closing”) shall take place at a place and time to be specified by the Company in accordance with Rule 15c6-1 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
| 2. | Procedure. Prior to the Closing Date (as defined below), the Investor will: |
| (a) | Subscription Agreement. Complete and execute this Subscription Agreement and deliver it to the Escrow Agent at the address set forth below for forwarding to the Company: |
[Escrow Agent]
___________________
___________________
___________________
Attn:
T: (___) ________
F.: (___) ________
| (b) | Delivery of Purchase Price. Deliver funds in an amount equal to the Purchase Price multiplied by the number of Preferred Units to which such Investor has subscribed to the Escrow Agent by: |
(i) Wire Transfer:
[Escrow Agent]
_________________
_________________
ABA No.:
Account No.:
(ii) Certified Check:
make certified payable to: “________, as Escrow Agent for Modular Medical, Inc.” and forward to:
[Escrow Agent]
________________
________________
________________
Attn: ____________
T: (__) _________
F.: (__) _________
| 3. | Closing Date; Termination Date. |
(a) As set forth in the Prospectus, the Preferred Units are being offered by the Company for a period that will commence on the date of the Prospectus and terminate on the first to occur of (i) the date all of the Preferred Units have been fully subscribed for, (ii) ____ __, 2020, or (iii) when the Company so determines, in its sole discretion, without notice (“Termination Date”). No further subscriptions for the Preferred Units will be accepted by the Company after the Termination Date. There is no minimum dollar amount or number of Preferred Units that must be sold to effectuate [the closing] [an initial or any subsequent closing] of the Offering and all proceeds from subscribers of Preferred Units will be retained by the Company.
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(b) At the time of Closing, at the direction of the Company, the Escrow Agent will release the balance of the Escrow Account for collection by the Company as provided in the Escrow Agreement and the Company shall deliver to the Investor the Purchased Securities being purchased on the Closing Date, through the facilities of DTC, and such Purchased Securities shall be registered in the names of the Investors in the denominations set forth in the Subscription Agreements. The Shares and the Warrants included in the Preferred Units will be immediately separable upon delivery. The date on which the Escrow Agent releases the balance of the Escrow Account for collection by the Company against delivery of the Preferred Units to the Investors as described above, is hereinafter referred to as the “Closing Date.”
4. Return of Funds. Upon the occurrence of the Termination Date, the Escrow Agent will promptly return the funds to the Investors without interest or deduction.
5. Investor Representations.
| (a) | The Investor represents that it has received (or otherwise had made available to it by the filing by the Company of an electronic version thereof with the Commission) the final prospectus in connection with the Registration Statement pursuant to Rule 424(b) of the Securities Act, prior to or in connection with the receipt of this Subscription Agreement. |
| (b) | The Investor represents that it understands and hereby acknowledges that the Investor’s subscription for the Preferred Units indicated on the Signature Page hereto may be accepted or rejected in whole or in part by the Company, for any reason or no reason, and in its sole and absolute discretion. |
| (c) | The Investor represents that (i) it has had no position, office or other material relationship within the past three years with the Company or persons known to it to be affiliates of the Company, (ii) it is not a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”) or an Associated Person (as such term is defined under the FINRA’s NASD Membership and Registration Rules Section 1011) as of the Closing, and (iii) neither the Investor nor any group of Investors (as such term is used in Rule 13d-5 under the Exchange Act (as defined below)) of which the Investor is a part in connection with the Offering, has acquired, or obtained the right to acquire, 10% or more of the common stock of the Company (or securities convertible into or exchangeable or exercisable for common stock of the Company) or the voting power of the Company on a post-transaction basis. |
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6. Acceptance. No offer by the Investor to buy Preferred Units will be accepted and no part of the Purchase Price will be delivered to the Company until the Company has accepted such offer, or a portion thereof, by countersigning a copy of this Subscription Agreement and delivering a fully-executed version of this Subscription Agreement, and any such offer may be withdrawn or revoked, without obligation or commitment of any kind, at any time prior to such execution and delivery by the Company. If the Company rejects a subscription, or a portion thereof, for the Preferred Units, the deposited Purchase Price for the rejected subscription, or a portion thereof as the case may be, shall be returned by the Escrow Agent to the Investor, without interest thereon or deduction therefrom.
7. Company Confirmation. The Investor acknowledges and agrees that such Investor’s receipt of the Company’s signed counterpart to this Subscription Agreement, together with the Prospectus (or the filing by the Company of an electronic version thereof with the Commission), shall constitute written confirmation of the Company’s sale of the Preferred Units to such Investor.
8. Not a Firm Commitment Offering. The Investor acknowledges that the Offering is being conducted on a “reasonable best efforts” basis and is not being underwritten on a “firm commitment” basis. The Company, however, receives the right to pay broker/dealers (“Selling Agents”) up to 8.0% of the purchase price paid by any Purchasers in this Offering that was introduced to the Company by the Selling Agents.
9. Notices. All communications hereunder, except as herein otherwise specifically provided, shall be in writing and shall be mailed (registered or certified mail, return receipt requested), personally delivered or sent by facsimile transmission and confirmed, or by electronic transmission via PDF, and shall be deemed given when so delivered or faxed and confirmed or transmitted or if mailed, two days after such mailing.
If to the Escrow Agent: [Escrow Agent]. _________________ _________________ _________________ Attn: _____________
If to the Company: Modular Medical, Inc. 16772 W. Bernardo Drive San Diego, California 92127 Attn: Chief Executive Officer contracts@modular-medical.com
With a copy (which shall not constitute notice) to: Gusrae Kaplan Nusbaum PLLC 120 Wall Street, 25th Floor New York, New York 10005 Attn: Lawrence G. Nusbaum |
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10. Changes. This Subscription Agreement may not be modified or amended except pursuant to an instrument in writing signed by the Company and the Investor.
11. Headings. The headings of the various sections of this Subscription Agreement have been inserted for convenience of reference only and will not be deemed to be part of this Subscription Agreement.
12. Severability. In case any provision contained in this Subscription Agreement is invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein will not in any way be affected or impaired thereby.
13. Governing Law. This Subscription Agreement will be governed by, and construed in accordance with, the internal laws of the State of New York, without giving effect to the principles of conflicts of law that would require the application of the laws of any other jurisdiction. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Subscription Agreement and any other this Subscription Agreement (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the City of New York. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, borough of Manhattan for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of this Subscription Agreement), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper or is an inconvenient venue for such proceeding.
14. Counterparts. This Subscription Agreement may be executed in two or more counterparts, each of which will constitute an original, but all of which, when taken together, will constitute but one instrument, and will become effective when one or more counterparts have been signed by each party hereto and delivered to the other parties.
[SIGNATURE PAGE FOLLOWS]
| 5 |
IN WITNESS WHEREOF, the Investor has executed this Subscription Agreement as of the date written below.
| Issuer: | Modular Medical, Inc. | |
| Purchase Price : | $ | |
| Number of Preferred Units being Purchased by Investor: | ||
| Total Purchase Price (Number of Preferred Units multiplied by Purchase Price): | $ | |
| INVESTOR: | CO-INVESTOR (if any): | |||||
| Name of Investor | Name of Co-Investor, if applicable | |||||
| Signature of Investor | Signature of Co-Investor, if applicable | |||||
| Social Security Number (SSN) or Fed Tax ID (EIN) | Social Security Number (SSN) or Fed Tax ID (EIN) | |||||
| Date: | Date: | |||||
The Preferred Unis subscribed for hereby are being purchased as follows:
(Check One)
individually
joint tenants
joint tenants with right of survivorship
tenants in common
partnership
limited liability company
as custodian, trustee or agent for
corporation
| 6 |
| Investor’s Name and | Co-Investor’s Name and Business | |||
| Business Address (please print or type) | Address (please print or type): | |||
| Phone Number/Email address | Phone Number/Email Address | |||
| Investor’s Residence Address | Co-Investor’s Residence Address | |||
| (please print or type): | (please print or type): | |||
The foregoing Subscription is hereby accepted.
| MODULAR MEDICAL, INC. | ||
| By: | ||
| Name: Paul DiPerna | ||
| Title: Chairman, Chief Executive | ||
| Officer, Chief Financial Officer, | ||
| Secretary and Treasurer | ||
| 7 |
Exhibit 4.5
SUBSCRIPTION ESCROW AGREEMENT
This Subscription Escrow Agreement (this “Agreement”) is entered into and effective as of , 2020, by and among MODULAR MEDICAL, INC., a Nevada corporation (the “Company”) and TRUIST BANK, a North Carolina banking corporation (the “Escrow Agent”),
W I T N E S S E T H:
WHEREAS, the Company has authorized the issuance and sale of its preferred units (the “Preferred Units”), with each Preferred Unit consisting of (i) one share of the Company’s 13% Series A Cumulative Redeemable Perpetual Preferred Stock with a $25.00 liquidation preference amount, and (ii) three (3) common stock purchase warrants, each to purchase one share of the Company’s common stock, at an exercise price of $11.00 per share at a public offering price of $25.00 per Preferred Unit;
WHEREAS, the sale of the Preferred Units (the “Offering”) is being made on a reasonable best-efforts basis pursuant to an effective Registration Statement on Form S-1 (File No. ______ ) (the “Registration Statement”) filed under the Securities Act of 1933, as amended, by the Company with the U.S. Securities and Exchange Commission;
WHEREAS, there is no minimum number or dollar amount of Preferred Units that must be sold in the Offering to conduct an initial or subsequent closings of the Offering;
WHEREAS, the Offering shall commence on the date of the prospectus included and made a part of the Registration Statement and shall terminate upon the earlier to occur of (i) ____, 2020, unless extended by the Company, and (ii) when all Preferred Units offered pursuant to the prospectus are sold, or (iii) when so determined by the Company in its sole discretion without notice to investors. The earliest of such dates shall hereinafter be, the “Termination Date.”
NOW THEREFORE, in consideration of the mutual covenants and agreements contained herein and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the Company and the Escrow Agent agree as follows:
| 1. | Deposits in Escrow. |
(a) The Company shall deposit or cause to be deposited with the Escrow Agent, to be held in escrow under the terms of this Agreement, all subscription proceeds received for purchases of Preferred Units in the Offering (the “Subscription Proceeds”). The Escrow Agent shall have no responsibility for Subscription Proceeds until such proceeds are actually received, clear through normal banking channels and constitute collected funds. The Escrow Agent shall have no duty to collect or seek to compel payment of any Subscription Proceeds, except to place such proceeds or instruments representing such proceeds for deposit and payment through customary banking channels. Checks for Subscription Proceeds furnished by Subscribers shall be made payable to: “Truist Bank, as Escrow Agent for Modular Medical, Inc. Best Efforts Public Offering.”
(b) The Company shall deliver to the Escrow Agent, in a form acceptable to the Escrow Agent, schedules disclosing the name and address of each of the Subscribers, the number of Preferred Units subscribed for by each Subscriber, the Federal tax identification number of each of the Subscribers, the amount of Subscription Proceeds received from each Subscriber, and such other information as will enable the Escrow Agent to attribute to a particular Subscriber all Subscription Proceeds received by the Escrow Agent.
| 2. | Rejection of Subscription Agreement. |
(a) Any Subscription Agreement may be rejected by the Company in whole or in part. The Company shall promptly notify the Escrow Agent in writing in the event of any such rejection. Upon the receipt of a written notice of rejection from the Company pertaining to any Subscription Agreement, the Escrow Agent shall return to the Subscriber whose name appears on the rejected Subscription Agreement the Subscription Agreement (if then in the Escrow Agent’s possession) and the Subscription Proceeds tendered by such Subscriber, without payment of interest; provided such Subscriber’s Subscription Proceeds constitute collected funds held by the Escrow Agent.
(b) In the event the Escrow Agent receives written notice from the Company that a Subscription Agreement has been withdrawn by a Subscriber, the Escrow Agent shall return to such Subscriber whose name appears on the withdrawn Subscription Agreement the Subscription Agreement (if then in the Escrow Agent’s possession) and the Subscription Proceeds tendered by such Subscriber, without payment of interest; provided such Subscriber’s Subscription Proceeds constitute collected funds held by the Escrow Agent.
Truist Bank Escrow Services Subscription Escrow 1.2015
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| 3. | Disbursements. |
(a) At such time on or before ___, 2020 (or such later date, if any, to which the Offering has been extended as provided in Section 3(c)) as the Escrow Agent has received written notice from the Company stating that it intends to effectuate a closing of the Offering, the Escrow Agent shall, subject to the receipt of such Subscription Proceeds, disburse all Subscription Proceeds then held by the Escrow Agent and any earnings thereon in accordance with written directions provided by the Company and thereupon this Agreement shall terminate, unless the Company informs the Escrow Agent prior to closing that it intends to conduct one or more additional closings in which event, this Agreement shall continue in accordance with its terms and the Company shall be entitled to conduct additional closings hereunder through the Termination Date.
(b) On ___, 2020, the Escrow Agent shall refund to each of the Subscribers the full amount of Subscription Proceeds held by the Escrow Agent for such Subscriber without payment of interest. Upon disbursement of all of the Subscription Proceeds and earnings thereon held by the Escrow Agent s provided in this Section 3(b), this Agreement (except as otherwise provided herein) shall terminate.
(c) The Company may elect to extend the Offering one or more times to a date not later than ________. In the event the Offering is extended, the Company shall give the Escrow Agent written notice on or before ________ of the date to which the Offering has been extended.
(d) The Company shall provide a copy of this Agreement to each Subscriber.
| 4. | Investment of Subscription Proceeds; Compensation of Escrow Agent. |
(a) The Escrow Agent shall invest all funds held pursuant to this Agreement in the SunTrust Non-Interest Deposit Option. The investments in the SunTrust Non-Interest Deposit Option are insured, subject to the applicable rules and regulations of the Federal Deposit Insurance Corporation (the “FDIC”), in the standard FDIC insurance amount of $250,000, including principal and accrued interest, and are not secured. The [insert appropriate title of the SunTrust Deposit Option to be used] is more fully described in materials which have been furnished to the Parties by the Escrow Agent, and the Parties acknowledge receipt of such materials from the Escrow Agent. Instructions to make any other investment must be in writing and signed by the Company. The Company represents and warrants that the investment in SunTrust Non-Interest Deposit Option is a legal investment under applicable law for the Subscription Proceeds and that the Company will not direct that the funds be invested in any investment that would not be a legal investment under applicable law for such funds. The Company recognizes and agrees that the Escrow Agent will not provide supervision, recommendations or advice relating to the investment of moneys held hereunder or the purchase, sale, retention or other disposition of any investment, and the Escrow Agent shall not be liable to the Company, any Subscriber or any other person or entity for any loss incurred in connection with any such investment. The Escrow Agent is hereby authorized to execute purchases and sales of investments through the facilities of its own trading or capital markets operations or those of any affiliated entity. The Escrow Agent or any of its affiliates may receive compensation with respect to any investment directed hereunder including without limitation charging any applicable agency fee in connection with each transaction. The Escrow Agent shall use its best efforts to invest funds on a timely basis upon receipt of such funds; provided, however, that the Escrow Agent shall in no event be liable for compensation to the Company, any Subscriber or any other person or entity related to funds which are held un-invested or funds which are not invested timely. The Escrow Agent is authorized and directed to sell or redeem any investments as it deems necessary to make any payments or distributions required under this Agreement. Any investment earnings and income on the Escrow Fund regardless of whether the Company effectuates one or more or no closings in the Offering, shall be the property of the Company.
(b) The Company agrees that all interest and income from the investment of the funds held hereunder shall be reported as having been earned by [the Company] as of the end of each calendar year whether or not such income was disbursed during such calendar year and to the extent required by the Internal Revenue Service. On or before the execution and delivery of this Agreement, the Company shall provide to the Escrow Agent a correct, duly completed, dated and executed current United States Internal Revenue Service Form W-9 or Form W-8, whichever is appropriate, or any successor forms thereto, in a form and substance satisfactory to the Escrow Agent including appropriate supporting documentation and/or any other form, document, and/or certificate required or reasonably requested by the Escrow Agent to validate the form provided. Notwithstanding anything to the contrary herein provided, except for the delivery and filing of tax information reporting forms required pursuant to the Internal Revenue Code of 1986, as amended, to be delivered and filed with the Internal Revenue Service by the Escrow Agent, as escrow agent hereunder , the Escrow Agent shall have no duty to prepare or file any Federal or state tax report or return with respect to any funds held pursuant to this Agreement or any income earned thereon. With respect to the preparation, delivery and filing of such required tax information reporting forms and all matters pertaining to the reporting of earnings on funds held under this Agreement, the Escrow Agent shall be entitled to request and receive written instructions from the Company, and the Escrow Agent shall be entitled to rely conclusively and without further inquiry on such written instructions. The Company shall indemnify, defend and hold the Escrow Agent harmless from and against any tax, late payment, interest, penalty or other cost or expense that may be assessed against the Escrow Agent on or with respect to the Subscription Proceeds or any earnings or interest thereon unless such tax, late payment, interest, penalty or other cost or expense was finally adjudicated by a court of competent jurisdiction to have been directly caused by the gross negligence of willful misconduct of the Escrow Agent. The indemnification provided in this section is in addition to the indemnification provided to the Escrow Agent in other sections of this Agreement and shall survive the resignation or removal of the Escrow Agent and the termination of this Agreement.
Truist Bank Escrow Services Subscription Escrow 1.2015
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(c) The Company agrees to pay to the Escrow Agent compensation, and to reimburse the Escrow Agent for costs and expenses, all in accordance with invoices, consistent with the fees set forth on Exhibit B, delivered to Purchaser by Acquiom Clearinghouse LLC (“Acquiom”). The fee agreed upon for the services rendered hereunder is intended as full compensation for the Escrow Agent’s services as contemplated by this Agreement; provided, however, that in the event that the conditions for the disbursement of funds are not fulfilled, or the Escrow Agent renders any service not contemplated in this Agreement, or there is any assignment of interest in the subject matter of this Agreement or any material modification hereof, or if any dispute or controversy arises hereunder, or the Escrow Agent is made a party to any litigation pertaining to this Agreement or the subject matter hereof, then the Company shall compensate the Escrow Agent for such extraordinary services and reimburse the Escrow Agent for all costs and expenses, including reasonable attorneys’ fees and expenses, occasioned by any such delay, controversy, litigation or event. In the event the Escrow Agent is authorized to make a distribution of funds to the Company pursuant to the terms of this Escrow Agreement, and fees or expenses are then due and payable to the Escrow Agent pursuant to the terms of this Escrow Agreement (including, without limitation, amounts owed under this Section 4(c) and Sections 5(k) and 5(m)) by the Company, the Escrow Agent is authorized to offset and deduct such amounts due and payable to it from such distribution. To the extent permitted by applicable law, the Escrow Agent shall have, and is hereby granted, a prior lien upon and first priority security interest in the Subscription Proceeds held hereunder (and the earnings and interest accrued thereon) with respect to its unpaid fees, non-reimbursed expenses and unsatisfied indemnification rights, superior to the interests of any other persons or entities and without judicial action to foreclose such lien and security interest, and the Escrow Agent shall have and is hereby granted the right to set off and deduct any unpaid fees, non-reimbursed expenses and unsatisfied indemnification rights from the Subscription Proceeds held hereunder (and the earnings and interest accrued thereon). The provisions of this section shall survive the termination of this Agreement and any resignation or removal of the Escrow Agent.
| 5. | Duties of Escrow Agent; Indemnification. |
(a) This Agreement expressly and exclusively sets forth the duties of the Escrow Agent with respect to any and all matters pertinent hereto, which duties shall be deemed purely ministerial in nature, and no implied duties or obligations shall be read into this Agreement against the Escrow Agent. The Escrow Agent shall in no event be deemed to be a fiduciary to the Company, the Subscribers, or any other person or entity under this Agreement. The permissive rights of the Escrow Agent to do things enumerated in this Agreement shall not be construed as duties. In performing its duties under this Agreement, or upon the claimed failure to perform its duties, the Escrow Agent shall not be liable for any damages, losses or expenses other than damages, losses or expenses which have been finally adjudicated by a court of competent jurisdiction to have directly resulted from the Escrow Agent’s willful misconduct or gross negligence. In no event shall the Escrow Agent be liable for incidental, indirect, special, consequential or punitive damages of any kind whatsoever (including but not limited to lost profits), even if the Escrow Agent has been advised of the likelihood of such loss or damage and regardless of the form of action. The Escrow Agent shall not be responsible or liable for the failure of the Company to take any action in accordance with this Agreement. Any wire transfers of funds made by the Escrow Agent pursuant to this Escrow Agreement will be made subject to and in accordance with the Escrow Agent’s usual and ordinary wire transfer procedures in effect from time to time. The Escrow Agent shall have no liability with respect to the transfer or distribution of any funds affected by the Escrow Agent pursuant to wiring or transfer instructions provided to the Escrow Agent in accordance with the provisions of this Agreement. The Escrow Agent shall not be obligated to take any legal action or to commence any proceedings in connection with this Agreement or any property held hereunder or to appear in, prosecute or defend in any such legal action or proceedings.
(b) The Company acknowledges and agrees that the Escrow Agent acts hereunder as a depository only, and is not responsible or liable in any manner whatsoever for the sufficiency, correctness, genuineness or validity of the subject matter of this Escrow Agreement or any part thereof, or of any person executing or depositing such subject matter. No provision of this Agreement shall require the Escrow Agent to risk or advance its own funds or otherwise incur any financial liability or potential financial liability in the performance of its duties or the exercise of its rights under this Agreement.
Truist Bank Escrow Services Subscription Escrow 1.2015
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(c) This Agreement constitutes the entire agreement between the Escrow Agent and the Company in connection with the subject matter of this Agreement, and no other agreement entered into by the Company related to the subject matter of this Agreement, including, without limitation, the Subscription Agreements, shall be considered as adopted or binding, in whole or in part, upon the Escrow Agent notwithstanding that any such other agreement may be deposited with the Escrow Agent or the Escrow Agent may have knowledge thereof.
(d) The Escrow Agent shall in no way be responsible for nor shall it be its duty to notify the Company or any other person or entity interested in this Agreement of any payment required or maturity occurring under this Agreement or under the terms of any instrument deposited herewith unless such notice is explicitly provided for in this Agreement.
(e) The Escrow Agent shall be protected in acting upon any written instruction, notice, request, waiver, consent, certificate, receipt, authorization, power of attorney or other paper or document which the Escrow Agent in good faith believes to be genuine and what it purports to be, including, but not limited to, items directing investment or non-investment of funds, items requesting or authorizing release, disbursement or retainage of the subject matter of this Agreement and items amending the terms of this Agreement. The Escrow Agent shall be under no duty or obligation to inquire into or investigate the validity, accuracy or content of any such notice, request, waiver, consent, certificate, receipt, authorization, power of attorney or other paper or document. The Escrow Agent shall have no duty or obligation to make any formulaic calculations of any kind hereunder.
(f) The Escrow Agent may execute any of its powers and perform any of its duties hereunder directly or through affiliates or agents. The Escrow Agent shall be entitled to seek the advice of legal counsel with respect to any matter arising under this Agreement and the Escrow Agent shall have no liability and shall be fully protected with respect to any action taken or omitted pursuant to the advice of such legal counsel. The Company shall be liable for and shall promptly pay upon demand by the Escrow Agent the reasonable and documented fees and expenses of any such legal counsel.
(g) The Company represents and warrants to the Escrow Agent that there is no security interest in the Subscription Proceeds or the earnings thereon or any part of the Subscription Proceeds or such earnings; no financing statement under the Uniform Commercial Code of any jurisdiction is on file in any jurisdiction claiming a security interest in or describing, whether specifically or generally, the Subscription Proceeds or the earnings thereon or any part of the Subscription Proceeds or such earnings; and the Escrow Agent shall have no responsibility at any time to ascertain whether or not any security interest exists in the Subscription Proceeds or the earnings thereon or any part of the Subscription Proceeds or such earnings or to file any financing statement under the Uniform Commercial Code of any jurisdiction with respect to the Subscription Proceeds, the earnings thereon or any part thereof.
(h) In the event of any disagreement involving the Company, any Subscriber or any other person or entity resulting in adverse claims or demands being made in connection with the matters covered by this Agreement, or in the event that the Escrow Agent, in good faith, is in doubt as to what action it should take hereunder, the Escrow Agent may, at its option, refuse to comply with any claims or demands on it, or refuse to take any other action hereunder, so long as such disagreement continues or such doubt exists, and in any such event, the Escrow Agent shall not be or become liable in any way to the Company, any Subscriber or any other person or entity for its failure or refusal to act, and the Escrow Agent shall be entitled to continue to refrain from acting until (i) the rights of the Company, the Subscribers and all other interested persons and entities shall have been fully and finally adjudicated by a court of competent jurisdiction, or (ii) all differences shall have been settled and all doubt resolved by agreement among the Company and all other interested persons and entities, and the Escrow Agent shall have been notified thereof in writing signed by the Company and all such persons and entities. Notwithstanding the preceding, the Escrow Agent may in its discretion obey the order, judgment, decree or levy of any court, whether with or without jurisdiction, or of an agency of the United States or any political subdivision thereof, or of any agency of any State of the United States or of any political subdivision of any thereof, and the Escrow Agent is hereby authorized in its sole discretion to comply with and obey any such orders, judgments, decrees or levies. The rights of the Escrow Agent under this sub-paragraph are cumulative of all other rights which it may have by law or otherwise.
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In the event of any disagreement or doubt, as described above, the Escrow Agent shall have the right, in addition to the rights described above and at the election of the Escrow Agent, to tender into the registry or custody of any court having jurisdiction, all funds and property held under this Agreement, and the Escrow Agent shall have the right to take such other legal action as may be appropriate or necessary, in the sole discretion of the Escrow Agent. Upon such tender, the Escrow Agent shall be discharged from all further duties under this Agreement; provided, however, that any such action of the Escrow Agent shall not deprive the Escrow Agent of its compensation and right to reimbursement of expenses hereunder arising prior to such action and discharge of the Escrow Agent of its duties hereunder.
(i) The Escrow Agent may resign at any time from its obligations under this Agreement by providing written notice to the Company. Such resignation shall be effective on the date set forth in such written notice, which shall be no earlier than thirty (30) days after such written notice has been furnished. In such event, the Company shall promptly appoint a successor escrow agent. In the event no successor escrow agent has been appointed on or prior to the date such resignation is to become effective, the Escrow Agent shall be entitled to tender into the custody of any court of competent jurisdiction all funds and other property then held by the Escrow Agent hereunder and the Escrow Agent shall thereupon be relieved of all further duties and obligations under this Agreement; provided, however, that any such action of the Escrow Agent shall not deprive the Escrow Agent of its compensation and right to reimbursement of expenses hereunder arising prior to such action and discharge of the Escrow Agent of its duties hereunder. The Escrow Agent shall have no responsibility for the appointment of a successor escrow agent hereunder.
(j) Any entity into which the Escrow Agent may be merged or converted or with which it may be consolidated, or any entity to which all or substantially all the escrow business of the Escrow Agent may be transferred, shall be the Escrow Agent under this Agreement without further act.
(k) The Company agrees to indemnify, defend and hold harmless the Escrow Agent and each of the Escrow Agent’s officers, directors, agents and employees (the “Indemnified Parties”) from and against any and all losses, liabilities, claims made by the Company, any Subscriber or any other person or entity, damages, expenses and costs (including, without limitation, attorneys’ fees and expenses) of every nature whatsoever (collectively, “Losses”) which any such Indemnified Party may incur and which arise directly or indirectly from this Agreement or which arise directly or indirectly by virtue of the Escrow Agent’s undertaking to serve as Escrow Agent hereunder; provided, however, that no Indemnified Party shall be entitled to indemnity with respect to Losses that have been finally adjudicated by a court of competent jurisdiction to have been directly caused by such Indemnified Party’s gross negligence or willful misconduct. The provisions of this section shall survive the termination of this Agreement and any resignation or removal of the Escrow Agent.
(l) The Company acknowledges that the Escrow Agent is serving as escrow agent for the limited purposes set forth herein and represents, covenants and warrants to the Escrow Agent that no statement or representation, whether oral or in writing, has been or will be made to any Subscriber to the effect that the Escrow Agent has investigated the desirability or advisability of investment in the Shares or approved, endorsed or passed upon the merits of such investment or is otherwise involved in any manner with the transactions contemplated hereby, other than as escrow agent under this Agreement. It is further agreed that the Company shall not use or permit the use of the name “Truist”, “Truist Bank”, “SunTrust,” “SunTrust Bank,” “SunTrust Banks, Inc.” or any variation thereof in any sales presentation, placement or offering memorandum or literature pertaining directly or indirectly to the Offering except strictly in the context of the duties of the Escrow Agent as escrow agent under this Agreement. Any breach or violation of the paragraph shall be grounds for immediate termination of this Agreement by the Escrow Agent.
(m) The Escrow Agent shall have no duty or responsibility for determining whether the Shares or the offer and sale thereof conform to the requirements of applicable Federal or state securities laws, including but not limited to the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. The Company represents and warrants to the Escrow Agent that the Shares and the Offering will comply in all respects with applicable Federal and state securities laws and further represents and warrants that the Company has obtained and acted upon the advice of legal counsel with respect to such compliance with applicable Federal and state securities laws. The Company acknowledges that the Escrow Agent has not participated in the preparation or review of any sales or offering material relating to the Offering or the Shares. In addition to any other indemnities provided for in this Agreement, the Company agrees to indemnify, defend and hold harmless the Indemnified Parties from and against any and all Losses incurred by any of the Indemnified Parties which directly or indirectly arise from any violation or alleged violation of any Federal or state securities laws; provided, however, that no Indemnified Party shall have the right to be indemnified hereunder with respect to any Losses that have been finally adjudicated by a court of competent jurisdiction to have been directly caused by such Indemnified Party’s gross negligence or willful misconduct. The Company hereby agrees that the indemnifications and protections afforded the Escrow Agent and the other Indemnified Parties in this section shall survive the termination of this Agreement and any resignation or removal of the Escrow Agent.
(n) The Escrow Agent and any director, officer or employee of the Escrow Agent may become financially interested in any transaction in which the Company may be interested and may contract with and lend money to the Company and otherwise act as fully and freely as though it were not escrow agent under this Agreement. Nothing herein shall preclude the Escrow Agent from acting in any other capacity for the Company.
Truist Bank Escrow Services Subscription Escrow 1.2015
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(o) This Agreement is for the sole benefit of the Company, the Subscribers and the Escrow Agent, and their respective successors and permitted assigns, and nothing herein, express or implied, is intended to or shall confer upon any other person or entity any legal or equitable right, benefit or remedy of any nature whatsoever under or by reason of this Agreement; provided, that Acquiom shall be a third party beneficiary entitled to enforce the terms of this Escrow Agreement, including without limitation with respect to the fees payable to Acquiom under Section 4(c).
| 6. | Notices. |
Any notice, request for consent, report, or any other communication required or permitted in this Agreement shall be in writing and shall be deemed to have been given when delivered (i) personally, (ii) by facsimile transmission with written confirmation of receipt, (iii) by electronic mail to the e-mail address given below, and written confirmation of receipt is obtained promptly after completion of the transmission, (iv) by overnight delivery swith a reputable national overnight delivery service, or (v) by United States mail, postage prepaid, or by certified mail, return receipt requested and postage prepaid, in each case to the appropriate address set forth below or at such other address as any party hereto may have furnished to the other parties hereto in writing:
| If to Escrow Agent: | Truist Bank |
| Attn: Escrow Services | |
| _____________________________ | |
| _________________________ | |
| Phone #: 804-782- | |
| Fax #: 804-225-7141 | |
| Email: @suntrust.com | |
| With a copy to: | Acquiom Clearinghouse LLC |
| 950 17th Street, Suite 1400 | |
| Denver, CO 80202 | |
| Attention: ________________________ | |
| Telephone: ____________; (303) 222-2080 | |
| Facsimile: (720) 554-7828 | |
| Email: ____________@srsacquiom.com, cc: paymentsadministration@srsacquiom.com | |
| If to Company: | Modular Medical, Inc. |
| 16772 West Bernardo Drive | |
| San Diego, CA 92127 | |
| Attention: Authorized Officer | |
| E-mail:____________________________________ | |
| Tax identification #:__________________________ |
Any party hereto may unilaterally designate a different address by giving notice of each change in the manner specified above to each other party hereto. Notwithstanding anything to the contrary herein provided, the Escrow Agent shall not be deemed to have received any notice, request, report or other communication hereunder prior to the Escrow Agent’s actual receipt thereof.
| 7. | Successors and Assigns; Amendment. |
The rights created by this Agreement shall inure to the benefit of and the obligations created hereby shall be binding upon the successors and assigns of the Escrow Agent and the Company; provided, however, that except as provided in Section 5(j) neither this Agreement nor any rights or obligations hereunder may be assigned by any party hereto without the express written consent of the other party hereto. This Agreement may not be amended without the written consent of all parties in writing.
| 8. | Construction. |
This Agreement shall be construed and enforced according to the laws of the State of Georgia.
Truist Bank Escrow Services Subscription Escrow 1.2015
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| 9. | Severability. |
If any provision of this Agreement, or the application thereof, is for any reason held to any extent to be invalid, illegal or unenforceable, then the remainder of this Agreement and the application thereof will nevertheless remain in full force and effect so long as the economic and legal substance of the transactions contemplated by this Agreement are not affected in any manner materially adverse to any party hereto. Upon such determination that any provision is invalid, illegal or unenforceable, the parties hereto agree to replace such provision with a valid, legal and enforceable provision that will achieve, to the maximum extent legally permissible, the economic, business and other purposes of such provision.
| 10. | Term. |
This Agreement shall terminate and the Escrow Agent shall be discharged of all responsibilities hereunder at such time as the Escrow Agent shall have disbursed all Subscription Proceeds and any earnings thereon in accordance with the provisions of this Agreement; provided, however, that the provisions of Sections 4(b), 4(c), 5(k) and 5(m) hereof shall survive any termination of this Agreement and any resignation or removal of the Escrow Agent.
| 11. | Counterparts. |
This Agreement may be executed in separate facsimile or other electronic counterparts, each of which when executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument.
12. Authorized Signatures. Contemporaneously with the execution and delivery of this Agreement and, if necessary, from time to time thereafter, the Company shall execute and deliver to the Escrow Agent a Certificate of Incumbency substantially in the form of Exhibit A hereto (a “Certificate of Incumbency”) for the purpose of establishing the identity and authority of persons entitled to issue notices, instructions or directions to the Escrow Agent on behalf of the Company. Until such time as the Escrow Agent shall receive an amended Certificate of Incumbency replacing any Certificate of Incumbency theretofore delivered to the Escrow Agent, the Escrow Agent shall be fully protected in relying, without further inquiry, on the most recent Certificate of Incumbency furnished to the Escrow Agent.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed as of the date first above written.
| Truist Bank, as Escrow Agent | |
| By: | |
| Title: | |
| Company: Modular Medical, Inc. | |
| By: | |
| Title: |
Truist Bank Escrow Services Subscription Escrow 1.2015
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EXHIBIT A
Certificate of Incumbency
(List of Authorized Representatives)
Client Name:
As an Authorized Officer of the above referenced entity, I hereby certify that each person listed below is an authorized signor for such entity, and that the title and signature appearing beside each name is true and correct.
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IN WITNESS WHEREOF, this certificate has been executed by a duly authorized officer on:
DATE: ______________________
By: _________________________
Name: ______________________
Title: ________________________
Truist Bank Escrow Services Subscription Escrow 1.2015
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EXHIBIT B
Schedule of Fees & Expenses
TO BE PROVIDED BY TRUIST
Truist Bank Escrow Services Subscription Escrow 1.2015
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Exhibit 4.6
DIVIDEND PAYMENT ESCROW AGREEMENT
THIS DIVIDEND PAYMENT ESCROW AGREEMENT (the “Escrow Agreement”) is entered into and effective this [·] day of [·], 2020, by and between Truist Bank, a North Carolina banking corporation (the “Escrow Agent”) and Modular Medical, Inc. (“Company”).
WHEREAS, Company desires for the Escrow Agent to open an account (the “Escrow Account”) into which funds will be deposited to be held, disbursed and invested by the Escrow Agent in accordance with this Escrow Agreement.
NOW, THEREFORE, in consideration of the premises herein, the parties hereto agree as follows:
| I. | Terms and Conditions |
1.1. Company hereby appoints the Escrow Agent as its escrow agent and the Escrow Agent hereby accepts its duties as provided herein. The initial escrow deposit will be US$[ ] (the “Escrow Amount”).
1.2 Company shall from time to time remit, or cause to be remitted, funds to the Escrow Agent, using the wire instructions set forth below, to be held by the Escrow Agent and disbursed and invested as provided in this Escrow Agreement.
Truist Bank
ABA: 061000104
Account: 9443001321
Account Name: Escrow Services
Reference: [To be provided by Truist]
Attention: [·]
1.3. Within two Business Days (except as provided below) of receipt of written instructions signed by an authorized representative of Company (a list of whom are provided in Exhibit A, the “Authorized Representatives”) (“Instructions”), the Escrow Agent shall disburse funds held in the Escrow Account as provided in such Instructions and this Section 1.3, but only to the extent that funds are collected and available. The Instructions shall include the amount to be disbursed and shall identify the party to whom the disbursement shall be made. Disbursements shall be made in accordance with the payment instructions set forth in such Instructions and will be made on the same Business Day as the Escrow Agent receives such Instructions, or the next Business Day if such Instructions are received after 3:00 p.m. Eastern Time. For purposes of this Escrow Agreement, “Business Day” shall mean any day other than a Saturday, Sunday or any other day on which the Escrow Agent located at the notice address set forth in Section 4.4 is authorized or required by law or executive order to remain closed.
| II. | Provisions as to the Escrow Agent |
2.1. This Escrow Agreement expressly and exclusively sets forth the duties of the Escrow Agent with respect to any and all matters pertinent hereto and no implied duties or obligations shall be read into this Escrow Agreement against the Escrow Agent. In performing its duties under this Escrow Agreement, or upon the claimed failure to perform its duties, the Escrow Agent shall have no liability except for the Escrow Agent’s willful misconduct or gross negligence. In no event shall the Escrow Agent be liable for incidental, indirect, special, consequential or punitive damages of any kind whatsoever (including but not limited to lost profits), even if the Escrow Agent has been advised of the likelihood of such loss or damage and regardless of the form of action. The Escrow Agent shall have no liability with respect to the transfer or distribution of any funds effected by the Escrow Agent pursuant to wiring or transfer instructions provided to the Escrow Agent in accordance with the provisions of this Escrow Agreement. Any wire transfers of funds made by the Escrow Agent pursuant to this Escrow Agreement will be made subject to and in accordance with the Escrow Agent’s usual and ordinary wire transfer procedures in effect from time to time. No provision of this Escrow Agreement shall require the Escrow Agent to risk or advance its own funds or otherwise incur any financial liability or potential financial liability in the performance of its duties or the exercise of its rights under this Escrow Agreement. The Escrow Agent shall not be obligated to take any legal action or to commence any proceedings in connection with this Escrow Agreement or any property held hereunder or to appear in, prosecute or defend in any such legal action or proceedings.
2.2. Company acknowledges and agrees that the Escrow Agent acts hereunder as a depository only, and is not responsible or liable in any manner whatsoever for the sufficiency, correctness, genuineness or validity of the subject matter of this Escrow Agreement or any part thereof, or of any person executing or depositing such subject matter.
2.3. This Escrow Agreement constitutes the entire agreement between the Escrow Agent and Company in connection with the subject matter of this Escrow Agreement, and no other agreement entered into between Company and any third party, shall be considered as adopted or binding, in whole or in part, upon the Escrow Agent notwithstanding that any such other agreement may be deposited with the Escrow Agent or the Escrow Agent may have knowledge thereof.
2.4. The Escrow Agent shall be protected in acting upon any written instruction, notice, request or instrument which the Escrow Agent in good faith believes to be genuine and what it purports, to be, including, but not limited to, items directing investment or non-investment of funds, items requesting or authorizing release, disbursement or retainage of the subject matter of this Escrow Agreement and items amending the terms of this Escrow Agreement.
2.5. The Escrow Agent may consult with legal counsel in the event of any dispute or question as to the construction of any of the provisions hereof or its duties hereunder, and it shall incur no liability and shall be fully protected in acting in accordance with the advice of such counsel.
2.6. In the event of any disagreement between Company and any other party, resulting in adverse claims or demands being made in connection with the matters covered by this Escrow Agreement, or in the event that the Escrow Agent, in good faith, be in doubt as to what action it should take hereunder, the Escrow Agent may, at its option, refuse to comply with any claims or demands on it, or refuse to take any other action hereunder, so long as such disagreement continues or such doubt exists, and in any such event, the Escrow Agent shall not be or become liable in any way or to any party for its failure or refusal to act, and the Escrow Agent shall be entitled to continue to refrain from acting until (i) the rights of all interested parties shall have been fully and finally adjudicated by a court of competent jurisdiction, or (ii) Company delivers to the Escrow Agent written instructions with respect to the resolution of such disagreement. Notwithstanding the preceding, the Escrow Agent may in its discretion obey the order, judgment, decree or levy of any court, whether with or without jurisdiction, or of an agency of the United States or any political subdivision thereof, or of any agency of any State of the United States or of any political subdivision thereof, and the Escrow Agent is hereby authorized in its sole discretion, to comply with and obey any such orders, judgments, decrees or levies. The rights of the Escrow Agent under this sub-paragraph are cumulative of all other rights which it may have by law or otherwise.
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In the event of any disagreement or doubt, as described above, the Escrow Agent shall have the right, in addition to the rights described above and at the election of the Escrow Agent, to tender into the registry or custody of any court having jurisdiction, all funds and property held under this Escrow Agreement, and the Escrow Agent shall have the right to take such other legal action as may be appropriate or necessary, in the sole discretion of the Escrow Agent. Upon such tender, Company agrees that the Escrow Agent shall be discharged from all further duties under this Escrow Agreement.
2.7. Company agrees to defend, indemnify and hold harmless the Escrow Agent and each of the Escrow Agent’s officers, directors, agents and employees (the “Indemnified Parties”) from and against any and all losses, liabilities, claims made by any party or any other person or entity, damages, expenses and costs (including, without limitation, attorneys’ fees and expenses) of every nature whatsoever (collectively, “Losses”) which any such Indemnified Party may incur and which arise directly or indirectly from this Escrow Agreement or which arise directly or indirectly by virtue of the Escrow Agent’s undertaking to serve as the Escrow Agent hereunder; provided, however, that no Indemnified Party shall be entitled to indemnity with respect to Losses that have been finally adjudicated by a court of competent jurisdiction to have been directly caused by such Indemnified Party’s gross negligence or willful misconduct. The provisions of this section shall survive the termination of this Escrow Agreement and any resignation or removal of the Escrow Agent.
2.8. Any entity into which the Escrow Agent may be merged or converted or with which it may be consolidated, or any entity to which all or substantially all the escrow business of the Escrow Agent may be transferred, shall be the Escrow Agent under this Escrow Agreement without further act.
2.9. The Escrow Agent may resign at any time from its obligations under this Escrow Agreement by providing written notice to Company. Such resignation shall be effective on the date set forth in such written notice, which shall be no earlier than thirty (30) days after such written notice has been furnished. Company shall promptly appoint a successor escrow agent. In the event no successor escrow agent has been appointed on or prior to the date such resignation is to become effective, the Escrow Agent shall be entitled to tender into the custody of any court of competent jurisdiction all funds and other property then held by the Escrow Agent hereunder and the Escrow Agent shall thereupon be relieved of all further duties and obligations under this Escrow Agreement. The Escrow Agent shall have no responsibility for the appointment of a successor escrow agent hereunder.
| III. | Compensation of the Escrow Agent |
3.1. Company shall pay the fees for the services provided by the Escrow Agent hereunder in accordance with invoices, consistent with the fees set forth on Exhibit B, delivered to Company by Acquiom Clearinghouse LLC (“Acquiom”).
| IV. | Miscellaneous |
4.1. The Escrow Agent shall invest all funds held pursuant to this Escrow Agreement in accordance with Exhibit C. Instructions to make any other investment must be in writing and signed by Company. Company recognizes and agrees that the Escrow Agent will not provide supervision, recommendations or advice relating to the investment of moneys held hereunder or the purchase, sale, retention or other disposition of any investment, and the Escrow Agent shall not be liable to Company or any other person or entity for any loss incurred in connection with any such investment. The Escrow Agent is hereby authorized to execute purchases and sales of investments through the facilities of its own trading or capital markets operations or those of any affiliated entity. The Escrow Agent, Acquiom and/or any of their affiliates may receive compensation with respect to any investment directed hereunder including without limitation charging any applicable agency fee in connection with each transaction. The Escrow Agent is authorized and directed to sell or redeem any investments as it deems necessary to make any payments or distributions required under this Escrow Agreement.
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4.2. The Escrow Agent shall provide monthly reports of transactions and holdings to Company as of the end of each month, at the address provided by Company.
4.3. Company agrees that, subject to the terms and conditions of this Escrow Agreement, the owner of the funds held in the Escrow Fund is Company and all interest and income from the investment of the funds shall be reported as having been earned by Company as of the end of the calendar year in which it was earned, whether or not such income was disbursed during such calendar year, to the extent required by the United States Internal Revenue Service (“IRS”). On or before the execution and delivery of this Escrow Agreement, Company shall provide to the Escrow Agent a correct, duly completed, dated and executed current IRS Form W-9 or Form W-8, whichever is appropriate or any successor forms thereto, in a form and substance satisfactory to the Escrow Agent including appropriate supporting documentation and/or any other form, document, and/or certificate required or reasonably requested by the Escrow Agent to validate the form provided. Notwithstanding anything to the contrary herein provided, except for the delivery and filing of tax information reporting forms required pursuant to the Internal Revenue Code of 1986, as amended, to be delivered and filed with the IRS by the Escrow Agent, as escrow agent hereunder, the Escrow Agent shall have no duty to prepare or file any Federal or state tax report or return with respect to any funds held pursuant to this Escrow Agreement or any income earned thereon. Company agrees to indemnify, defend and hold the Escrow Agent harmless from and against any tax, late payment, interest, penalty or other cost or expense that may be assessed against the Escrow Agent on or with respect to the funds held under this Escrow Agreement or any earnings or interest thereon unless such tax, late payment, interest, penalty or other cost or expense was finally adjudicated by a court of competent jurisdiction to have been directly caused by the gross negligence or willful misconduct of the Escrow Agent. The indemnification provided in this section is in addition to the indemnification provided to the Escrow Agent elsewhere in this Escrow Agreement and shall survive the resignation or removal of the Escrow Agent and the termination of this Escrow Agreement.
4.4. Any notice, request for consent, report, or any other communication required or permitted in this Escrow Agreement shall be in writing and shall be deemed to have been given when delivered (i) personally, (ii) by facsimile transmission with written confirmation of receipt, (iii) by electronic mail to the e-mail address given below, and written confirmation of receipt is obtained promptly after completion of the transmission, (iv) by overnight delivery with a reputable national overnight delivery service, or (v) by United States mail, postage prepaid, or by certified mail, return receipt requested and postage prepaid, in each case to the appropriate address set forth below or at such other address as any party hereto may have furnished to the other party hereto in writing:
If to the Escrow Agent:
Truist Bank
Attn: Escrow Services
919 East Main Street, 5th Floor
Richmond, Virginia 23219
Client Manager: [·]
Telephone: (804) 782-[·]
Facsimile: (804) 225-7141
Email: [·]@suntrust.com
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with a copy (which shall not constitute notice) to:
Acquiom Clearinghouse LLC
950 17th Street, Suite 1400
Denver, CO 80202
Attention: [·]
Telephone: [·]; (303) 222-2080
Facsimile: (720) 554-7828
Email: [·]@srsacquiom.com, cc: paymentsadministration@srsacquiom.com
If to Company:
Modular Medical, Inc.
16772 West Bernardo Drive
San Diego, CA 92127
Attention: Authorized Officer
Telephone: (760) 392-1342
Facsimile: [·]
Email: [·]
Any party may unilaterally designate a different address by giving notice of each change in the manner specified above to each other party.
4.5. This Escrow Agreement is intended to be construed according to the laws of the Commonwealth of Virginia. Except as permitted in Section 2.8, neither this Escrow Agreement nor any rights or obligations hereunder may be assigned by any party hereto without the express written consent of the other party hereto. This Escrow Agreement shall inure to and be binding upon the parties hereto and their respective successors, heirs and permitted assigns.
4.6. The terms of this Escrow Agreement may be altered, amended, modified or revoked only by an instrument in writing signed by all the parties hereto.
4.7. If any provision of this Escrow Agreement shall be held or deemed to be or shall in fact, be illegal, inoperative or unenforceable, the same shall not affect any other provision or provisions herein contained or render the same invalid, inoperative or unenforceable to any extent whatsoever.
4.8. This Escrow Agreement is for the sole benefit of the Indemnified Parties, Company and the Escrow Agent, and their respective successors and permitted assigns, and nothing herein, express or implied, is intended to or shall confer upon any other person or entity any legal or equitable right, benefit or remedy of any nature whatsoever under or by reason of this Escrow Agreement; provided, that Acquiom shall be a third party beneficiary entitled to enforce the terms of this Escrow Agreement, including without limitation with respect to the fees payable to Acquiom under Section 3.1.
4.9. No party to this Escrow Agreement shall be liable to any other party hereto for losses due to, or if it is unable to perform its obligations under the terms of this Escrow Agreement because of, acts of God, fire, war, terrorism, floods, strikes, electrical outages, equipment or transmission failure, or other causes reasonably beyond its control.
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4.10. This Escrow Agreement shall terminate upon the distribution of all funds and property held under this Escrow Agreement or upon the earlier written instructions of Company.
4.11. All titles and headings in this Escrow Agreement are intended solely for convenience of reference and shall in no way limit or otherwise affect the interpretation of any of the provisions hereof.
4.12. This Escrow Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.
4.13. Contemporaneously with the execution and delivery of this Escrow Agreement and, if necessary, from time to time thereafter, Company shall execute and deliver to the Escrow Agent a Certificate of Incumbency substantially in the form of Exhibit A (a “Certificate of Incumbency”) for the purpose of establishing the identity and authority of persons entitled to issue notices, instructions or directions to the Escrow Agent on behalf of each such party. Until such time as the Escrow Agent shall receive an amended Certificate of Incumbency replacing any Certificate of Incumbency theretofore delivered to the Escrow Agent, the Escrow Agent shall be fully protected in relying, without further inquiry, on the most recent Certificate of Incumbency furnished to the Escrow Agent. Whenever this Escrow Agreement provides for written notices or written instructions to be delivered to the Escrow Agent, the Escrow Agent shall be fully protected in relying, without further inquiry, on any written notice, instructions or action executed by persons named in such Certificate of Incumbency.
IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT:
To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens an account. When a party opens an account, the Escrow Agent will ask for each party’s name, address, date of birth, or other appropriate information that will allow the Escrow Agent to identify such party. The Escrow Agent may also ask to see each party’s driver’s license or other identifying documents.
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IN WITNESS WHEREOF, the parties hereto have caused this Escrow Agreement to be executed as of the date first above written.
| Truist Bank, as the Escrow Agent | ||
| By: | ||
| Name: | ||
| Title: | ||
| MODULAR MEDICAL, INC. | ||
| By: | ||
| Name: | ||
| Title: | Authorized Officer | |
EXHIBIT A
Certificate of Incumbency
(List of Authorized Representatives)
Client Name: MODULAR MEDICAL, INC.
| Name | Title | Signature | Contact Number |
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IN WITNESS WHEREOF, this certificate has been executed by a duly authorized officer on:
| Date | ||
| By: | ||
| Its: | Authorized Officer | |
Exhibit B
Fee Schedule
EXHIBIT C
Company authorizes and directs the Escrow Agent to invest all deposits pursuant to this Escrow Agreement as follows:
Escrow Fund:
Check one:
| o SunTrust Non-Interest Deposit Option |
| o SunTrust Institutional Deposit Option |
[Additional escrows, if applicable:
Check one:
| o SunTrust Non-Interest Deposit Option |
| o SunTrust Institutional Deposit Option] |
The investments in the SunTrust Institutional Deposit Option and the SunTrust Non-Interest Deposit Option are insured, subject to the applicable rules and regulations of the Federal Deposit Insurance Corporation (the “FDIC”), in the standard FDIC insurance amount of $250,000, including principal and accrued interest, and are not secured. The SunTrust Institutional Deposit Option and SunTrust Non-Interest Deposit Option are more fully described in materials which have been furnished to Company, and Company acknowledges receipt of such materials. By electing the investment election above, Company hereby authorizes the Escrow Agent to enter into any required documentation, on their behalf, to effect such investment election, consistent with the materials furnished to Company. Any investment earnings and income on funds held in the SunTrust Institutional Deposit Option shall become part of the account and shall be disbursed in accordance with this Escrow Agreement.
| [COMPANY] | ||
| By: | ||
| Name: | ||
| Title: | ||
Exhibit 10.17
COMMON STOCK PURCHASE AGREEMENT
by and among
MODULAR MEDICAL, INC.
and
THE INVESTORS REFERRED TO HEREIN
, 2020
COMMON STOCK PURCHASE AGREEMENT
This Common Stock Purchase Agreement (this “Agreement”) is dated as of ______, 2020, by and among MODULAR MEDICAL, INC., a Nevada corporation (the “Company”), and each investor identified on the signature pages hereto, whether such investor is or becomes a signatory as of the Initial Closing (as defined below) or any Subsequent Closing (as defined below) (each, including its successors and assigns, an “Investor” and collectively, the “Investors”).
WHEREAS, the Company is conducting a private placement (the “Offering”) of shares (each a “Share”) of its common stock, par value $0.001 per share, of the Company (the “Common Stock”), pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) and/or Rule 506(b) of Regulation D (“Rule 506”) promulgated thereunder (“Regulation D”);
WHEREAS, the Company desires, at the Initial Closing and at any Subsequent Closings during the Offering Period, to issue and sell to each Investor, and each Investor, severally and not jointly, desires to purchase from the Company, Shares as more fully described in this Agreement.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement, and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the Company and each Investor agree as follows:
SECTION 1
Purchase and Sale of Shares
1.1. Agreement to Sell and Purchase. On each Closing Date (as defined below) of the Offering, the Company, upon the terms and subject to the conditions set forth herein, agrees to sell and each Investor, severally and not jointly, with the other Investors (as the case may be) agrees to purchase from the Company, the number of such Shares indicated on such Purchaser’s signature page hereto with respect to such Closing. The purchase price per Share is $2.87 (the “Per Share Purchase Price”). For purposes of this Agreement, the term “Closing” means any closing of the purchase and sale during the Offering Period of Shares pursuant to this Agreement including the Initial Closing and any Subsequent Closing.
1.2. Offering; Offering Period. Each purchase and sale of Shares by the Company to the Investors shall occur at a Closing of the Offering during a period (the “Offering Period”) beginning on _______, 2020 and ending on the first to occur of: (a) the forty-fifth (45th) day following such date (unless extended by the Company one or more times to such final date as determined by the Company), and (b) the date on which the Company, in its sole and absolute discretion, elects to terminate the Offering (it being agreed that no notice to Investors shall be required in connection with any such extension and/or termination by the Company).
1.3. No Minimum Offering. There is no minimum number or dollar amount of Shares that must be purchased to effectuate the Initial Closing or any Subsequent Closing.
1.4. Closings; Closing Dates. The Company may conduct multiple Closings during the Offering Period. Each Closing shall occur as soon as reasonably practicable following the satisfaction (or waiver) of the conditions set forth in Section 1.7(a) and Section 1.7(b) for such Closing. The initial Closing of the Offering (the “Initial Closing”), shall occur on the date hereof, subject to the satisfaction of the conditions set forth herein and following such Initial Closing, the Company may, in its sole discretion and subject to the satisfaction of the conditions set forth herein, conduct subsequent Closings (a “Subsequent Closing”) until the conclusion of the Offering Period. Investors signing a counterpart signature page to this Agreement as of a Closing Date shall become parties to this Agreement only as of such Closing Date. The date of each Closing shall be a “Closing Date.” Unless otherwise provided herein, all Closings shall be effectuated remotely by facsimile or other electronic transmission of documents and at such time as the Company and the applicable Investors may agree.
1.5. Payment. On or prior to each Closing Date, each applicable Investor shall deliver to the Company, via wire transfer, in US dollars and immediately available funds, the aggregate dollar amount to be paid for the Shares purchased hereunder (the “Aggregate Purchase Price”), as set forth below such Investor’s name on the signature page of this Agreement and next to the heading “Aggregate Purchase Amount.”
| 1.6. | Deliveries. |
(a) Deliveries of the Company. On each Closing Date, the Company shall deliver or cause to be delivered to each Investor participating therein, the following:
(i) one or more stock certificates, representing the Shares being purchased by such Investor at the Closing, and registered in the name of such Investor, as set forth on such Investor’s executed signature page; or at such Investor’s request, a statement or other written evidence that the Shares issuable to such Investor have been issued and are held in book entry form at the Company’s transfer agent, in either case dated as of the applicable Closing Date;
(ii) A copy of this Agreement executed by the Company.
(b) Deliveries of each Investor. On each Closing Date, each Investor participating therein shall deliver or cause to be delivered to the Company the following:
(i) This Agreement duly executed by such Investor; and
(ii) Such Investor’s Aggregate Purchase Price in accordance with Section 1.5 (unless other means of payment shall have been agreed upon by the Investor and the Company).
| 1.7. | Closing Conditions. |
(a) Closing Conditions of the Investor. The obligation of an Investor to purchase Shares at a Closing is subject to the satisfaction, at or before the Closing Date for such Closing, of each of the following conditions, provided that these conditions are for each Investor’s sole benefit and may be waived by such Investor at any time in its sole discretion by providing the Company with written notice thereof:
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(i) the accuracy in all material respects on each Closing Date of the representations and warranties of the Company contained herein (unless as of a specific date therein, in which case they shall be accurate as of such date);
(ii) all obligations, covenants and agreements of the Company required to be performed at or prior to each Closing Date shall have been performed; and
(iii) the delivery by the Company of the items set forth in Section 1.6(a) of this Agreement.
(b) Closing Conditions of the Company. The obligation of the Company to issue and sell the Shares to an Investor at a Closing is subject to the satisfaction, at or before the Closing Date for such Closing, of each of the following conditions, provided that these conditions are for the Company’s sole benefit and may be waived by the Company at any time in its sole discretion by providing each Investor with prior written notice thereof:
(i) the accuracy in all material respects on each Closing Date of the representations and warranties of the Investor contained herein (unless as of a specific date therein, in which case they shall be accurate as of such date);
(ii) all obligations, covenants and agreements of the Investor required to be performed at or prior to the Closing Date shall have been performed; and
(iii) the delivery by the Investor of the items set forth in Section 1.6(b) of this Agreement.
SECTION 2
Representations and Warranties of the Company
Except as disclosed in any report, schedule, form, statement and other document required to be filed by the Company under the Securities Act and the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof (the foregoing materials, including the exhibits thereto and documents incorporated by reference therein, being collectively referred to herein as the “SEC Reports”), the Company represents and warrants to each Investor as of the Closing Date that an Investor purchases Shares pursuant to this Agreement as follows:
2.1. Subsidiaries. The Company’s only Subsidiary is Quasuras, Inc., a Delaware corporation (“Quasuras”), of which the Company owns all of the outstanding capital stock of Quasuras free and clear of any lien, charge, pledge, security interest and/or other encumbrance (a “Lien”).
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2.2. Organization, Good Standing, Qualifications, Etc. The Company and each Subsidiary is an entity duly incorporated or otherwise organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, with the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted. Neither the Company nor any Subsidiary is in violation or default of any of the provisions of its respective certificate or articles of incorporation, bylaws or other organizational or charter documents. Each of the Company and the Subsidiaries is duly qualified to conduct business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, would not have a Material Adverse Effect. For purposes of this Agreement the term (i) “Material Adverse Effect” means any material adverse effect on the business, assets and/or financial condition of the Company and its Subsidiaries, taken as a whole, provided none of the following shall constitute a Material Adverse Effect: (a) the effects of conditions or events that are generally applicable to the capital, financial, banking or currency markets and/or industries that the Company and its Subsidiaries operate in or intend to operate in including the biotechnology industry, the medical device industry and/or the insulin delivery device industry and/or changes in applicable laws, rules and regulations including GAAP, (b) changes in the market price of the Common Stock, and (c) effects resulting from the announcement and/or occurrence of any Closing of the Offering; (ii) “Subsidiary” means any Person in which the Company, directly or indirectly, (a) owns more than fifty (50%) percent of the outstanding capital stock or holds any equity or similar interest of such Person, or (b) controls or operates all or any part of the business, operations or administration of such Person; (iii) “Person” means an individual, corporation, partnership, limited liability company, trust, business trust, association, joint stock company, joint venture, sole proprietorship, unincorporated organization, governmental authority or any other form of entity not specifically listed in this “(iii),” (iv) “Affiliate” or “affiliate” means any Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with a Person, and as used in this “(iv),” the term “control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and/or policies of a Person, whether through ownership of voting securities or other ownership interest by contract, or otherwise, and (v) “knowledge” or “Knowledge” of a Person means such Person’s actual knowledge, provided that Knowledge of the Company means the actual knowledge of Paul DiPerna, the Company’s Chief Executive Officer.
2.3. Authorization. (i) The Company has the requisite corporate power and authority to enter into and perform its obligations under this Agreement; (ii) the execution and delivery of this Agreement by the Company and the issuance and sale of the Shares have been duly authorized by all necessary corporate action and no further consent or authorization of the Company, its Board of Directors (the “Board”) or stockholders is required; and (iii) this Agreement has been duly executed and delivered by the Company and when executed by the Investors, constitutes a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.
2.4. Issuance of Shares. When issued, sold and delivered in accordance with the terms of this Agreement, the Shares will be duly and validly issued, fully paid, and nonassessable, and free of Liens imposed by the Company.
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2.5. No Disqualification Events. With respect to the Shares to be offered and sold hereunder in reliance on Rule 506 (the “506 Securities”), none of the Company, any of its predecessors, any affiliated issuer, any director, executive officer, other officer of the Company in the Offering, any beneficial owner of twenty percent (20%) or more of the Company’s outstanding voting equity securities, calculated on the basis of voting power nor any promoter (as that term is defined in Rule 405 under the Securities Act) connected with the Company in any capacity at the time of sale (each, an “Issuer Covered Person” and, together, “Issuer Covered Persons”) is subject to any of the “Bad Actor” disqualifications described in Rule 506(d)(1)(i) to (viii) under the Securities Act (a “Disqualification Event”), except for a Disqualification Event covered by Rule 506(d)(2) or (d)(3).
2.6. Other Covered Persons. The Company is not aware of any Person (other than any Selling Agent) that has been or will be paid (directly or indirectly) remuneration for solicitation of Investors or potential Investors in connection with the sale of any of the 506 Securities.
2.7. Notice of Disqualification Events. The Company will notify the Investors and any Selling Agent in writing, prior to each Closing Date of (i) any Disqualification Event related to any Issuer Covered Person, and (ii) any event that with the passage of time, become a Disqualification Event relating to any Issuer Covered Person.
2.8. No Conflict. The execution, delivery and performance of this Agreement by the Company and the issuance and sale by the Company of the Shares contemplated hereby, do not: (i) violate any provision of the COI or the Bylaws, (ii) constitute an event of default under any material agreement which the Company is a party where such event of default would have a Material Adverse Effect, (iii) create a lien or encumbrance on any material property of the Company under any agreement by which the Company is bound, which would have a Material Adverse Effect, (iv) result in a violation of any federal, state, local or foreign statute, rule, regulation, order, writ, judgment or decree (including federal and state securities laws and regulations) applicable to the Company where such violation would have a Material Adverse Effect, or (v) require any consent of any third-party that has not been obtained pursuant to any material contract to which the Company is subject where the failure to obtain such would have a Material Adverse Effect. The Company is not required under federal, state or local law, rule or regulation to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform its obligations under this Agreement (other than any filings that may be required to be made by the Company with the Securities and Exchange Commission (the “Commission” or the “SEC”), the OTCQB, any other OTC Market and/or any state securities commissions subsequent to each Closing); provided that, for purposes of the representation made in this sentence, the Company is assuming and relying upon the accuracy of the relevant representations and agreements of each Investor and each investor.
2.9. Capitalization. The authorized capital stock of the Company consists of (i) 50,000,000 shares of Common Stock, of which 17,870,261 shares of Common Stock were outstanding as of December 31, 2019; and (ii) 5,000,000 shares of preferred stock, par value $.001 per share, none of which are outstanding. As of December 31, 2019, the Company had outstanding Common Stock Equivalents to purchase 2,526,443 shares of Common Stock. Except as contemplated by and/or disclosed in this Agreement and/or set forth in any filing of the Company made with the SEC including, without limitation, the SEC Reports (i) the Company has no (a) obligations to purchase redeem or otherwise acquire any of its outstanding capital stock; and/or (b) anti-dilution or price adjustment provisions in any outstanding security of the Company that will be triggered by the issuance and sale of the Shares, and (ii) no Person has any current right to cause the Company to effect the registration under the Securities Act of any shares of Common Stock. The term “Common Stock Equivalents” means any securities of the Company or the Subsidiaries which would entitle the holder thereof to acquire shares of Common Stock.
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2.10. SEC Reports, Documents and Financial Statements. The Company has filed with the SEC all SEC Reports required to be filed by it during the immediately preceding twelve (12) months, all of which SEC Reports, to the knowledge of the Company, were filed with the SEC on a timely basis or the Company received a valid extension of such time of filing and filed any such SEC Reports prior to the expiration of any such extension. To the knowledge of the Company, the SEC Reports filed by the Company with the SEC during the preceding twelve (12) months complied in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations of the Commission promulgated thereunder (as applicable). To the knowledge of the Company, the financial statements of the Company included in the SEC Reports filed by the Company during the immediately preceding twelve (12) months complied in all material respects with applicable accounting requirements and the rules and regulations of the Commission with respect thereto as in effect at the time of filing. To the knowledge of the Company, such financial statements were prepared in accordance with United States generally accepted accounting principles applied on a consistent basis during the periods involved (“GAAP”), except as may be otherwise specified in such financial statements or the notes thereto and except that unaudited financial statements may not contain all footnotes required by GAAP, and fairly present in all material respects the financial position of the Company and its consolidated Subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments.
2.11. No Undisclosed Liabilities. Other than approximately $200,000 owed by the Company to Mr. DiPerna, as a result of approximately $200,000 in Quasuras’ bank account following the Company’s July 2017 acquisition of Quasuras, to the Company’s knowledge, the Company has no liabilities, obligations, claims or losses that would be required to be disclosed on a balance sheet of the Company that are not disclosed in any filing made by or on behalf of the Company with the SEC including, without limitation, in any SEC Report, other than those incurred in the ordinary course of the Company’s business.
2.12. No Undisclosed Events or Circumstances. Except for the transactions contemplated by this Agreement including the Offering, to the knowledge of the Company, no event or circumstance has occurred, which, under applicable law, rule or regulation, requires public disclosure or announcement by the Company but which has not been so publicly announced or disclosed and which, individually or in the aggregate, would have a Material Adverse Effect.
2.13. Actions Pending. To the knowledge of the Company, there is no action, suit, claim, investigation or proceeding pending or threatened against the Company which questions the validity of this Agreement or the issuance and sale of the Shares hereby that would have a Material Adverse Effect. There is no judgment, order, writ, injunction or decree or award has been issued by or, to the knowledge of the Company, requested of any court, arbitrator or governmental agency which would result in a Material Adverse Effect.
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2.14. Compliance with Law. The business of the Company is currently being conducted in accordance with all applicable federal, state and local governmental laws, rules, regulations and ordinances, except as would not reasonably be expected to cause a Material Adverse Effect. The Company has all material permits, licenses, consents and other governmental or regulatory authorizations and approvals necessary for the conduct of its business as now being conducted by it, except for such permits, licenses, consents and other governmental or regulatory authorizations and approvals, the failure to possess which could not reasonably be expected to have a Material Adverse Effect.
2.15. Private Placement. Assuming the accuracy of the Investors’ representations and warranties set forth in this Agreement, no registration under the Securities Act is required for the offer and sale of the Shares by the Company to the Investors as contemplated hereby.
2.16. OTCQB DTC Status. The Common Stock is eligible for quotation on the OTCQB under the symbol “MODD,” is DTC eligible securities and the Company’s transfer agent, Colonial Stock Transfer Co., Inc. (including any other transfer agent the Company may retain, the “Transfer Agent”), is a participant in the DTC Automated Securities Transfer Program.
2.17. Investment Company. The Company is not and, after giving effect to the Offering and sale of the Shares, will not be an “investment company” as defined in the Investment Company Act of 1940, as amended.
2.18. Shell Company Status. The Company is not, and has not been since July 24, 2017, an issuer identified in Rule 144(i)(1) of the Securities Act. On or about July 28, 2017, the Company filed a Super 8-K with the SEC reflecting its status as an entity that was no longer an issuer described in Rule 144(i)(1)(i).
2.19. No Integrated Offering. Assuming the accuracy of the Investors’ representations and warranties set forth in Section 3 any transaction described in any SEC Report, neither the Company, any of its Affiliates, nor any Person acting on its behalf has, directly or indirectly, made any offers or sales of any security that would cause the Offering to be integrated with prior offerings by the Company of its securities for purposes of the Securities Act.
2.20. No General Solicitation; Agent Fees. Neither the Company, any of its Affiliates nor any Person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with the offer or sale of the Shares. The Shares will be offered and sold by the Company’s officers and directors and affiliates, who will receive no commissions or other payments directly from any such sales. The Company, however, reserves the right to pay Persons who assist in the sale of Shares (each a “Selling Agent”) up to eight (8%) percent of the gross purchase price of such Shares, in cash and/or Shares with each Share and share of Common Stock valued at the Per Share Purchase Price. The Company shall hold each Investor harmless against, any liability, loss or expense (including, without limitation, attorney’s fees and out-of-pocket expenses) arising in connection with any such claim by any such Selling Agent. The Company shall not be responsible for the payment of any fees, if any, including but not limited to, financial advisory fees, finder’s fees or brokers’ commissions for Persons engaged by any Investor, its Affiliates and/or related persons or its investment advisor or otherwise) relating to or arising out of the transactions contemplated hereby.
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2.21. Foreign Corrupt Practices. To the knowledge of the Company, no agent or other person acting on behalf of the Company, has (i) used any Company funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign political activity, (ii) made any unlawful payment to foreign government officials or employees, or (iii) violated in any material respect any provision of the Foreign Corrupt Practices Act of 1977, as amended.
2.22. Acknowledgment Regarding Investor’s Status. The Company acknowledges and agrees that the Investor is acting solely in the capacity of arm’s length purchaser with respect to this Agreement and the transaction contemplated hereby. The Company further acknowledges that the Investor is not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement and the transaction contemplated hereby and any advice given by the Investor or any of its representatives or agents in connection with this Agreement and the transaction contemplated hereby is merely incidental to the Investor’s purchase of the Shares.
SECTION 3
Representations and Warranties of the Investor
Each Investor severally, and not jointly represents, warrants and acknowledges to the Company as of the Closing Date that such Investor purchases Shares pursuant to this Agreement, as follows:
3.1. Access to Information; Certain Disclosure. Investor acknowledges and agrees that it has fully read and understands the Company’s SEC Reports and other documents and items filed by the Company with the SEC (including all financial statements and footnotes thereto, exhibits and schedules to all filings made by or on behalf of the company with the SEC including, without limitation, the SEC Reports and other documents and items filed) that are publicly available including on the SEC’s website. Investor further acknowledges that it has had been afforded (i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from the Company concerning and/or relating to, among other items and matters, the Company and its Subsidiaries including, but not limited to, the terms and conditions of the Offering, this Agreement, the SEC Reports and other SEC filings of the Company publicly available, the Shares, the business of and intellectual property and intellectual property rights of the Company and its Subsidiaries and the merits and risks of investing in the Shares; (ii) access to information about the Company and its Subsidiaries and its financial condition, results of operations, business, properties, management and prospects sufficient to enable it to evaluate its investment; (iii) copies of all of the transaction documents used in the Offering; and (iv) the opportunity to obtain such additional information that the Company possesses or can acquire without unreasonable effort or expense that is necessary to make an informed investment decision with respect to the investment. Investor acknowledges that no Person has been authorized to give any information or make a representation concerning the Company, the Shares, the Offering and/or otherwise, other than expressly set forth in this Agreement, and if given or made, any such information or representation has not been relied upon.
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3.2. Experience. The Investor is experienced in evaluating companies such as the Company, including early and/or development stage medical device and biotechnology companies that have limited or no trading markets for their common stock and limited resources, both before and following each Closing and has knowledge and experience in financial and business matters such that the Investor is capable of evaluating the merits and risks of the Investor’s prospective investment in the Company, before and after each Closing, and has the ability and financial wherewithal to bear the economic risks of its purchase of the Shares including a complete loss of its Aggregate Purchase Price.
3.3. Purchase Entirely for Own Account. This Agreement is made with Investor in reliance upon Investor’s representation to the Company, which, by Investor’s execution of this Agreement, Investor hereby confirms, that the Shares to be acquired by Investor pursuant to this Agreement will be acquired for investment for Investor’s own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that Investor has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, Investor further represents that Investor does not presently have any contract, undertaking, agreement or arrangement with any Person to sell, transfer or grant participations to such Person or to any third Person with respect to any of the Shares.
3.4. Restricted Securities; Rule 144; Shell Company. Investor understands that the Shares have not been registered under the Securities Act, by reason of specific exemptions from the registration provisions of the Securities Act which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of Investor’s representations as expressed herein. Investor understands that the Shares are “restricted securities” under applicable U.S. federal and state securities laws and that, pursuant to such laws, Investor must hold the Shares indefinitely unless they are registered with the SEC and qualified by state authorities, or an exemption from such registration and qualification requirements is available. Investor acknowledges that if an exemption from registration or qualification is available, it may be conditioned on various requirements including, but not limited to, the time and manner of sale, the holding period for the Shares, and on requirements relating to the Company which are outside of Investor’s control, and which the Company is under no obligation and may not be able to satisfy. The Investor is aware of the provisions of Rule 144 promulgated under the Securities Act which permit limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions. In connection therewith, the Investor acknowledges that the Company will make a notation on its stock books regarding the restrictions on transfers set forth in this Section 3.4, subject to Sections 4.1(a) and (b), and will transfer the Shares on the books of the Company only to the extent not inconsistent herewith and therewith. Investor acknowledges that the Company was a former shell company that ceased being a shell company on July 24, 2017, pursuant to Rule 144, and subsequently filed a Super 8-K with the SEC on July 28, 2017 reflecting its status as an entity that was no longer an issuer described in Rule 144 (i)(1)(i).
3.5. Authorization. This Agreement when executed and delivered by the Investor will constitute a valid and legally binding obligation of the Investor, enforceable in accordance with its terms, subject to: (i) judicial principles respecting election of remedies or limiting the availability of specific performance, injunctive relief, and other equitable remedies; and (ii) bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect generally relating to or affecting creditors’ rights.
3.6. Investor Status. At the time such Investor was offered the Shares, it was, and at the date hereof it is, and on each date on which it receives the Shares it will be, either: (i) an “accredited investor” as defined in Rule 501 of the Securities Act, and/or (ii) a “qualified institutional buyer” as defined in Rule 144A of the Securities Act. Such Investor was not organized for the purpose of acquiring the Shares and is not required to be registered as a broker-dealer under Section 15 of the Exchange Act.
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3.7. General Solicitation. Such Investor is not purchasing the Shares as a result of any advertisement, article, notice or other communication regarding the Shares published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or any other general solicitation or general advertisement. Such Investor further acknowledges that he or it, or his or its Affiliate, has a pre-existing relationship with the Company such as (i) as a holder of currently outstanding securities of the Company, or (ii) another affiliation with the Company or its affiliates.
3.8. Fees and Commissions. The Investor has not retained any intermediary with respect to the transactions contemplated by this Agreement and agrees to indemnify and hold harmless the Company from any liability for any compensation to any intermediary retained by such Investor and the fees and expenses of defending against such liability or alleged liability.
3.9. No Prior Short Selling. The Investor has not prior to the date of this Agreement either through itself, its agents, representatives and/or Affiliates engaged in or effected, in any manner whatsoever, directly or indirectly, any (i) “Short Sale” (as such term is defined in Section 242.200 of Regulation SHO of the Exchange Act) of shares of Common Stock, or (ii) hedging transaction, which establishes a net short position with respect to the shares of Common Stock.
SECTION 4
Other Agreements of the Parties
4.1. Legends; Removal of Legends, Etc.
(a) Each Investor acknowledges and agrees that the Shares may only be disposed of in compliance with state and federal securities laws. In connection with any transfer of Shares other than pursuant to an effective registration statement or Rule 144, the Investor acknowledges that it will be required to provide the Company and the Transfer Agent with an opinion of counsel selected by the Investor (who is reasonably acceptable to the Company and the Transfer Agent), the form and substance of which opinion shall be reasonably satisfactory to the Company and the Transfer Agent, to the effect that such transfer does not require registration of such transferred Shares under the Securities Act.
(b) Each Investor acknowledges and agrees that all Certificates representing Shares shall contain legends thereon providing substantially as follows:
THIS SECURITY HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.
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(c) Certificates evidencing Shares shall not contain any legend (including the legends set forth in Section 4.1(b) hereof): following the resale of such Shares (i) pursuant to an effective registration statement under the Securities Act covering resales of such Shares, or (ii) pursuant to and in compliance with Rule 144. Investor, at the Company’s request, shall cause its counsel to issue a legal opinion to the Transfer Agent (in form and substance satisfactory to the Transfer Agent) to effect the removal of the legend hereunder.
(d) Each Investor, severally and not jointly with the other Investors, agrees with the Company that such Investor will only sell or otherwise transfer any Shares pursuant to either the registration requirements of the Securities Act, including any applicable prospectus delivery requirements, or an exemption therefrom, and that if Shares are sold pursuant to an effective registration statement, they will be sold in compliance with the plan of distribution set forth therein, and acknowledges that the removal of the restrictive legend from certificates representing Shares as set forth in this Section 4.1 is predicated upon the Company’s reliance upon this understanding.
4.2. Furnishing of Information. Commencing on the date an Investor is able to resell Shares under Rule 144, until the date all Shares may be sold under Rule 144(b)(1) with regard to meeting the requirements of Rule 144(c), the Company agrees to use its reasonable commercial efforts to timely file (or obtain extensions in respect thereof and file with the SEC within the applicable grace period) all reports required to be filed with the SEC by the Company after the date hereof pursuant to the Exchange Act.
4.3. Form D Filing. The Company agrees, to the extent required by law, to timely file a Form D with respect to the Shares as required under Regulation D.
4.4. Indemnification of Investors. Subject to the provisions of this Section 4.4, the Company will indemnify and hold each Investor harmless from any losses, claims, damages or liabilities, including judgments, amounts paid in settlements and reasonable attorneys’ fees and expenses that any such Investor actually incurs as a direct result of any material breach of any representation, warrant, covenant or agreement made by the Company in this Agreement. If any action shall be brought against any Investor in respect of which indemnity may be sought pursuant to this Agreement, such Investor shall promptly (but no later than the third business day following receipt of notice of any such action by the Investor), notify the Company in writing, which writing shall explain in reasonable detail and attach relevant documents the reason and basis that such Investor is entitled to indemnification pursuant to this Section 4.4 (an “Indemnification Notice”). Thereafter, the Company shall have the right to assume the defense thereof with counsel of its own choosing. Each Investor shall fully cooperate with the Company and its counsel in defending any such claim. An Investor shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the sole expense of such Investor except to the extent that (i) the employment thereof has been specifically authorized by the Company in writing, (ii) the Company has failed after a reasonable period of time after receipt of an Indemnification Notice to assume such defense and to employ counsel or (iii) in such action there is, in the reasonable opinion of such separate counsel, as provided in writing to the Company by such counsel, a material conflict on any material issue between the position of the Company and the position of such Investor. The Company will not be liable to any Investor under this Agreement (i) for any settlement by an Investor effected without the Company’s prior written consent, which shall not be unreasonably withheld, conditioned or delayed; or (ii) to the extent that a loss, claim, damage or liability is attributable to an Investor’s gross negligence, intentional misconduct and/or any breach of any of the representations, warranties, covenants or agreements made by the Investor in this Agreement.
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4.5. Short Sales and Confidentiality After the Date Hereof. Each Investor severally and not jointly with the other Investors covenants that neither it nor any Affiliates acting on its behalf or pursuant to any understanding with it will execute any Short Sales during the period after the time such Investor and/or the Company started discussing the transactions contemplated in this Agreement and ending at the time that the transactions contemplated by this Agreement are first publicly disclosed by the Company through the filing with the SEC of a Current Report on Form 8-K. Each Investor, severally and not jointly with the other Investors, covenants that until such time as the transactions contemplated by this Agreement are first publicly disclosed by the Company through the filing with the SEC of a Current Report on Form 8-K, such Investor will maintain, the confidentiality of all disclosures made to it in connection with this Offering and/or any related information and/or transactions (including the existence and terms of this Agreement). Notwithstanding the foregoing, in the case of an Investor that is a multi-managed investment vehicle whereby separate portfolio managers manage separate portions of such Investor’s assets and the portfolio managers have no direct knowledge of the investment decisions made by the portfolio managers managing other portions of such Investor’s assets, the covenant set forth above shall only apply with respect to the portion of assets managed by the portfolio manager that made the investment decision to purchase the Shares covered by this Agreement.
4.6. Use of Proceeds. The Company will use the net proceeds from the sale of the Shares for general corporate purposes and working capital of the Company.
4.7. Listing. The Company shall promptly secure the listing of all of the Shares upon each national securities exchange and automated quotation system that requires an application by the Company for listing, upon which the shares of Common Stock shall become listed on (subject to official notice of issuance).
4.8. Filing of Current Report on Form 8-K. The Company agrees that it shall file a Current Report on Form 8-K relating to the Offering.
4.9. Registration Rights. The Company shall use its commercially reasonable efforts to (i) prepare and file with the SEC, within ninety (90) days after the final Closing, a registration statement (the “Registration Statement”) relating to the resale of shares of Common Stock issued to Investors in the Offering (the “Registrable Securities”), on any form for which the Company then qualifies or which counsel for the Company shall deem appropriate and which form shall be available for the resale of the Registrable Securities, (ii) have the SEC declare such Registration Statement effective, and (iii) maintain the effectiveness thereof until all Registrable Securities covered by such Registration Statement (a) have been sold, or (b) may be sold without volume or manner-of-sale restrictions pursuant to Rule 144 and without the requirement for the Company to be in compliance with the current public information requirement under Rule 144. If the SEC requires any Registrable Securities covered by the Registration Statement to be reduced, such Registrable Securities shall be reduced pro-rata from each holder’s shares of Registrable Securities being registered for resale therein.
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4.10. Issuance of Additional Shares Upon Certain Events. If during the period commencing on the final Closing Date and terminating on the date six (6) months following the Initial Closing Date (the “Anti-Dilution Period”), the Company consummates a sale of shares of its Common Stock for cash consideration at a price per share that is lower than the then Per Share Purchase Price (as adjusted for stock splits and consolidations and related corporate events) (such lower price, the “New Issuance Price” and each such issuance, a “Dilutive Issuance”), then following each such Dilutive Issuance, the Company shall issue to each Investor such number of additional Shares equal to the product of (i) the number of Shares purchased by the Investor in the Offering, multiplied by (ii) the quotient of (a) the Per Share Purchase Price (as adjusted for stock splits and consolidations and related corporate events), divided by (b) the New Issuance Price. Notwithstanding the above, no additional Shares will be issued to any Investor pursuant to this Section 4.10, and no anti-dilution rights hereunder will apply (i) upon the exercise of any warrants, options or convertible securities granted, issued and outstanding on the date of this Agreement; (ii) upon the grant or exercise of any stock or options which may hereafter be granted or exercised under any employee equity incentive plan of the Company now existing or to be implemented in the future; (iii) upon the issuance of any securities in connection with an acquisition by the Company; (iv) upon the issuance of any securities pursuant to a commitment by the Company that has been previously disclosed prior to the date hereof in SEC filings or herein; (v) in connection with any public offering of securities; (vi) in connection with the sale, exercise or conversion of any convertible securities including any warrants or options; (vii) in connection with the issuance of shares of Common Stock other than for cash consideration; and/or (viii) issuances of Shares in connection with the Offering.
SECTION 5
Miscellaneous
5.1. Governing Law. This Agreement and the terms and conditions set forth herein, shall be governed by and construed solely and exclusively in accordance with the internal laws of the State of New York without regard to the conflicts of laws principles thereof. The parties hereto hereby expressly and irrevocably agree that any suit or proceeding arising directly and/or indirectly pursuant to or under this Agreement shall be brought solely in a federal or state court located in the City, County and State of New York. By its execution hereof, the parties hereto covenant and irrevocably submit to the in personam jurisdiction of the federal and state courts located in the City, County and State of New York and agree that any process in any such action may be served upon any of them personally, or by certified mail or registered mail upon them or their agent, return receipt requested, with the same full force and effect as if personally served upon them in New York, New York. The parties hereto expressly and irrevocably waive any claim that any such jurisdiction is not a convenient forum for any such suit or proceeding and any defense or lack of in personam jurisdiction with respect thereto. In the event of any such action or proceeding, the party prevailing therein shall be entitled to payment from the other parties hereto of all of its reasonable counsel fees and disbursements.
5.2. Survival. The representations and warranties, covenants and agreements made by each Investor and the Company herein terminate following the last Closing Date.
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5.3. Successors, Assigns. Except as otherwise provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. This Agreement may not be assigned by either party without the prior written consent of the other; except that either party may assign this Agreement to an Affiliate of such party or to any third party that acquires all or substantially all of such party’s business, whether by merger, sale of assets or otherwise.
5.4. Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of: (a) the date of transmission, if such notice or communication is delivered via email attachment at the email address as set forth on the signature pages attached hereto at or prior to 5:30 p.m. (New York City time) on a Business Day, (b) the next Business Day after the date of transmission, if such notice or communication is delivered via email attachment at the email address as set forth on the signature pages attached hereto on a day that is not a Trading Day or later than 5:30 p.m. (New York City time) on any Business Day, (c) the second (2nd) Business Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service or (d) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as set forth on the signature pages attached hereto.
5.5. Expenses. Each of the Company and each Investor shall bear its own expenses and legal fees incurred on its behalf with respect to this Agreement and the transactions contemplated hereby.
5.6. Finder’s Fees. Each of the Company and each Investor shall indemnify and hold the other harmless from any liability for any commission or compensation in the nature of a finder’s fee, placement fee or underwriter’s discount (including the costs, expenses and legal fees of defending against such liability) for which the Company or the Investor, or any of its respective partners, employees, or representatives, as the case may be, is responsible it being understood that the Company is only responsible for the commission and/or other compensation payable to Selling Agents, if any.
5.7. Counterparts. This Agreement may be executed in counterparts, each of which shall be enforceable against the party actually executing the counterpart, and all of which together shall constitute one instrument.
5.8. Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party.
5.9. Entire Agreement. This Agreement including the exhibits and schedules attached hereto and thereto, constitute the full and entire understanding and agreement among the parties with regard to the subjects hereof and thereof. No party shall be liable or bound to any other party in any manner with regard to the subjects hereof or thereof by any warranties, representations or covenants except as specifically set forth herein or therein.
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5.10. Waiver. The failure of either party to assert a right hereunder or to insist upon compliance with any term or condition of this Agreement shall not constitute a waiver of that right or excuse a similar subsequent failure to perform any such term or condition by the other party. None of the terms, covenants and conditions of this Agreement can be waived except by the written consent of the party waiving compliance.
5.11. Independent Nature of Investors’ Obligations and Rights. The obligations of each Investor under this Agreement are several and not joint with the obligations of any other Investor, and no Investor shall be responsible in any way for the performance of the obligations of any other Investor under this Agreement. Nothing contained herein and no action taken by any Investor pursuant hereto, shall be deemed to constitute the Investors as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Investors are in any way acting in concert or as a group with respect to such obligations. Each Investor has been represented by its own separate legal counsel in its review and negotiation of this Agreement and related documents. The Company has elected to provide all Investors with the same terms and Offering documents for the convenience of the Company and not because it was required or requested to do so by the Investors.
[SIGNATURE PAGES FOLLOW]
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[COMPANY SIGNATURE PAGE]
IN WITNESS WHEREOF, the parties hereto have caused this Common Stock Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.
MODULAR MEDICAL, INC.
By: ____________________________ Name: Title:
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Address for Notice: Modular Medical, Inc. 16772 West Bernardo Drive San Diego, California 92127 Attn: Chief Executive Officer
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With a copy to (which shall not constitute notice):
Lawrence G. Nusbaum Gusrae Kaplan Nusbaum PLLC 120 Wall Street, 25th Floor New York, NY 10005 |
[END OF COMPANY SIGNATURE PAGE; SIGNATURE PAGE FOR INVESTOR FOLLOWS]
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[INVESTOR SIGNATURE PAGE TO MODULAR MEDICAL, INC.
COMMON STOCK PURCHASE AGREEMENT]
IN WITNESS WHEREOF, the undersigned have caused this Common Stock Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.
Name of Purchaser: ________________________________________________________________________________
Signature of Signatory Investor: ______________________________________________________________________
Name of Authorized Signatory (if applicable): ____________________________________________________________
Title of Authorized Signatory (if applicable): _____________________________________________________________
Email Address of Authorized Signatory: ________________________________________________________________
Address for Notices and Delivery of Shares to Investor: ____________________________________________________
_______________________________________________________________________________________________
Aggregate Purchase Price: _____________
Shares: _______________________________
Investor Social Security or EIN Number: _____________________
[END OF INVESTOR SIGNATURE PAGE]
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Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the use in this registration statement on Form S-1 of Modular Medical, Inc. of our report dated June 26, 2019 on our audit of the consolidated financial statements of Modular Medical, Inc. as of and for the years ended March 31, 2019 and 2018, filed with the Securities and Exchange Commission, and the reference to us under the caption “Experts.”
/s/ Farber Hass Hurley LLP
Chatsworth, CA
April 8, 2020