Business Context and Reporting Period
Modular Medical, Inc. (formerly Bear Lake Recreation, Inc.) filed this Form 10-K for the fiscal year ended June 30, 2017. Although the request metadata refers to 2016 Q4, the filing reports FY2017 and compares it with FY2016. The reported financial statements cover the legacy shell company only; the acquisition of Quasuras closed on July 24, 2017, after year-end, and its operations are not included.
The company had no material operations from 2002 through the acquisition. It changed its name and trading symbol to Modular Medical, Inc. and MODD in June 2017. The Quasuras acquisition was accounted for as a recapitalization/reverse merger. Management proposed a medical-device business; the filing describes intellectual property transferred in connection with the acquisition but provides no operating results for that business.
Financial Performance and Position
| Metric | FY ended June 30, 2017 | FY ended June 30, 2016 |
|---|---|---|
| Revenue | $0 | $0 |
| General and administrative expense | $91,051 | $13,163 |
| Related-party interest expense | $15,508 | $17,921 |
| Net loss | $106,559 | $31,084 |
| Basic and diluted loss per share | $0.06 | $0.02 |
| Net cash used in operating activities | $94,810 | $10,663 |
| Cash and cash equivalents at year-end | $1,372,400 | $0 |
| Total current liabilities at year-end | $74,420 | $193,763 |
FY2017 financing cash flow was $1,467,210, primarily from $240,000 of stock proceeds and $1,372,400 collected for shares to be issued, partly offset by $131,092 in repayments to related parties and $14,098 for share repurchases and cancellations. There were no investing cash flows. At year-end, reported liabilities consisted of accrued expenses; related-party payable and accrued related-party interest were both zero. The filing reports no revenue, so operating margins are not meaningful.
At June 30, 2017, cash exceeded current liabilities, but $1,122,400 of the bank balance was uninsured under FDIC limits. The filing reports no material off-balance-sheet arrangements. It records a full valuation allowance against deferred tax assets, including approximately $384,400 of federal net operating loss carryforwards.
Material Changes and Subsequent Transactions
- Net loss increased by $75,475 year over year, principally because G&A expense rose by $77,888; management attributed the increase largely to work related to the April 2017 control-block transaction.
- Cash rose from zero to $1,372,400, while current liabilities declined by $119,343. The filing attributes the financing and liability changes to stock issuance, related-party repayments, and related transactions.
- On April 26, 2017, Manchester Explorer purchased 2.9 million newly issued restricted shares for $375,000, changing control. In connection with the transaction, prior officers and directors resigned, and related-party debts were resolved.
- After year-end, the company issued 7,582,060 shares to acquire all of Quasuras and completed a private placement of approximately 7.8 million shares at $0.66 per share for approximately $5.1 million gross proceeds. Manchester cancelled its 2.9 million control-block shares as part of the closing. The filing reports $41,928 in placement compensation.
- The company agreed to pay Paul DiPerna royalties on potential future product sales, subject to a $10 million aggregate cap. The filing provides no forecast of sales or royalty expense.
Outlook, Risks, and Other Matters
The filing provides no revenue, earnings, cash-flow, or product-launch guidance. It cautions that the proposed business faces financing and liquidity needs, competition, changing customer requirements, technology-development and business-relationship risks, and public-market volatility. The company had no employees from June 30, 2016 through the acquisition. Risk factors were not required for the company as a smaller reporting company.
The company stated that no legal proceedings were pending and that it had no established trading market; it gave no assurance a viable market would develop or continue. Because the company had been a shell, the filing also describes restrictions on public resales under Rule 144. The independent auditors gave unqualified opinions on the FY2017 and FY2016 financial statements. Management reported effective disclosure controls and internal control over financial reporting as of June 30, 2017; the auditor did not attest to internal-control effectiveness.
Important Facts to Verify
- Confirm post-acquisition capitalization, ownership, and control, including the final share counts and the cancellation of the 2.9 million control-block shares.
- Reconcile share-count discrepancies in the filing: the private placement is described as 7,801,211 or 7,801,212 shares, and the Quasuras exchange as 7,582,060 or 7,582,000 shares in different passages.
- Verify use of the approximately $5.1 million private-placement proceeds, cash available after the acquisition, and the company’s funding runway and operating requirements.
- Assess product development, intellectual-property ownership, regulatory requirements, commercialization prospects, and the terms and potential cost of the royalty agreement.
- Confirm the status of the uninsured cash balance, market liquidity, and the company’s eligibility and timing for resale of restricted securities.