-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FxeCcwViomaxseZahzMKzd/olXICEVlsKz6oo3tEkJQd67Djc8Vue4GGBFspfFxq 57coBZnPXr+8SLPKa2m2wQ== 0000909012-03-000155.txt : 20030227 0000909012-03-000155.hdr.sgml : 20030227 20030227164431 ACCESSION NUMBER: 0000909012-03-000155 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20021031 FILED AS OF DATE: 20030227 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERA PHARMACEUTICALS INC CENTRAL INDEX KEY: 0000837490 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 043683628 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10KSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 033-23460 FILM NUMBER: 03583833 BUSINESS ADDRESS: STREET 1: 73-4460 QUEEN KA'AHUMANU HWY. STREET 2: SUITE 110 CITY: KAILUA-KONA STATE: HI ZIP: 96740 BUSINESS PHONE: (808) 326-9301 MAIL ADDRESS: STREET 1: 73-4460 QUEEN KA'AHUMANU HWY. STREET 2: SUITE 110 CITY: KAILUA-KONA STATE: HI ZIP: 96740 FORMER COMPANY: FORMER CONFORMED NAME: AQUASEARCH INC DATE OF NAME CHANGE: 19920703 10KSB/A 1 t300133.txt MERA PHARMACEUTICALS, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB/A (Amendment No. 1) (X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR COMMISSION FILE ENDED OCTOBER 31, 2002 NUMBER 33-23460-LA MERA PHARMACEUTICALS, INC. (FORMERLY AQUASEARCH, INC.) ---------------------------------------------- (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER) DELAWARE 04-3683628 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 777 SOUTH HIGHWAY 101, SUITE 215 SOLANA BEACH, CA 92075 (858) 847-9000 (ADDRESS AND TELEPHONE OF PRINCIPAL EXECUTIVE OFFICES) 73-4460 QUEEN KA'AHUMANU HIGHWAY, SUITE 110 KAILUA-KONA, HAWAII 96740 (808) 326-9301 (ADDRESS AND TELEPHONE OF PRINCIPAL OPERATIONS OFFICES) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ] Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] Mera Pharmaceuticals' revenues for its most recent fiscal year: $662,072 The aggregate market value of the common equity held by non-affiliates computed by reference to the price at which the common equity was sold as of January 14, 2003, was $19,417,617. Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after distribution of securities under a plan confirmed by a court: Yes [X] No [ ] The number of shares outstanding of common stock, as of October 31, 2002, was 388,803,300 shares of Common Stock, $0.0001 par value. Documents Incorporated by Reference: None Transitional Small Business Disclosure Format (check one): [ ] Yes [X] No EXPLANATORY NOTE This Amendment No. 1 to the annual report on Form 10-KSB/A is being filed to correct the disclosure of certain Notes Payable that were issued and repaid subsequent to the end of Mera Pharmaceuticals' fiscal year. The corrections are made only to the paragraphs relating to the applicable Notes Payable as follows: Paragraph 3 of Note 8 to the audited financial statements (Item 7 of Part II) Paragraph 3 of "Certain Relationships and Related Transactions" (Item 12 of Part III). Part II ITEM 7. FINANCIAL STATEMENTS Audited balance sheet as of October 31, 2002 and the related statements of operations and accumulated deficit, cash flows and stockholders' equity (deficit) for the years ended October 31, 2002 and 2001 together with related notes and the report of Buttke Bersch & Wanzek, PC, independent auditors, appear on pages F-1 through F-20 of this Report. Part III ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On December 30, 2002, the Company issued 18,181,818 shares of common stock at $0.11 per share, for an aggregate purchase price of $2,000,000, to a Hawaiian limited liability company managed in part by Richard D. Propper, MD and Daniel P. Beharry, both officers and directors of the Company. On December 30, 2002, the Company issued 325 shares of Series B preferred stock at $625.00 per share, for aggregate consideration of $203,000, to a limited liability company managed by Richard D. Propper, MD and Daniel P. Beharry, both officers and directors of the Company. During the months of July through December 2002, the Company issued various promissory notes totaling $2,805,000 to a limited liability company managed by Richard D. Propper, MD and Daniel P. Beharry, both officers and directors of the Company, for investment funds borrowed by the Company. $2,011,000 of such notes were repaid subsequent to October 31, 2002 and reinvested into the Company. All three promissory notes were cancelled upon repayment and all accrued interest on the notes was forgiven. A new promissory note was negotiated by the parties and issued on December 31, 2002 by the Company for the remaining balance of $794,000. This promissory note accrues interest at 6% per annum and has a maturity date of December 31, 2003. During the month of November 2002, the Company entered into various convertible promissory notes totaling $185,732 with Richard D. Propper, MD, an officer and director of the Company. The terms of the notes include interest accruing at 10% per annum and a maturity date of March 31, 2003. In addition, these convertible promissory notes carry 5% warrant coverage and call for issuance of common stock warrants to the lender equal to the face amount of the promissory notes divided by $0.05, or warrants to purchase up to 3,440,000 shares of common stock. The exercise price of the warrants is $0.05 per share and the warrants have 5 year terms. On January 10, 2003 a payment of $13,901 in principal and accrued interest was made against this obligation. On August 1, 2002, the Company entered into a month-to-month consulting agreement with Richard L. Sherman, a director of the Company. Under the agreement Mr. Sherman is to receive $5,500 per month. Mr. Sherman was paid a total of $5,500 under this agreement during the year ended October 31, 2002. During the months June through July 2002, the Company entered into various promissory notes totaling $117,300 with: Richard D. Propper, MD, an officer and director of the Company; Daniel P. Beharry, an officer and director of the Company; and a limited liability company which Richard D. Propper, MD and Daniel P. Beharry, officers and directors of the Company, are managers, officers and members. Interest was accrued at 12% per annum. On July 23, 2002 such notes were repaid in full. During the two years ended October 31, 2001, Mr. Kowal, a director and beneficial owner of over 5% of our common stock purchased 7,833,334 shares of common stock at $0.15 per share. In connection with the purchase, Mr. Kowal received 1,175,000 warrants with an exercise price of $0.40 per share. All of these transactions preceeded Mr. Kowal's becoming a director of the Company on June 17, 2002. FINANCIAL STATEMENTS Mera Pharmaceuticals, Inc CONTENTS Report of Independent Auditors.............................................. F-2 Audited Financial Statements: Balance Sheets as of October 31, 2002 and 2001.............................. F-3 Statements of Operations for the Periods November 1, 2001 through September 16, 2002 September 17, 2002 through October 31, 2002 and the Year Ended October 31, 2001......................................... F-4 Statements of Stockholders' Equity (Deficit) for the Periods November 1, 2001 through September 16, 2002 September 17, 2002 through October 31, 2002 and the Year Ended October 31, 2001......................................... F-5 Statements of Cash Flows for the Periods November 1, 2001 through September 16, 2002 September 17, 2002 through October 31, 2002 and the Year Ended October 31, 2001......................................... F-7 Notes to the Financial Statements........................................... F-8 The Board of Directors Mera Pharmaceuticals, Inc. We have audited the accompanying balance sheets of Mera Pharameuticals, Inc. as of October 31, 2002 (Successor Company) and Aquasearch, Inc, as of October 31, 2001 (Predecessor Company) and the related statements of operations, stockholder's equity/(deficit) and cash flows for the ten and one-half months ended September 16, 2002 and the year ended October 31, 2001 (Predecessor Company) and the month and one-half ended October 31, 2002 (Successor Company). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 3, effective September 16, 2002, the Company was reorganized under a plan confirmed by the United States Bankruptcy Court, District of Hawaii and adopted a new basis of accounting whereby all remaining assets and liabilities were adjusted to their estimated fair values. Accordingly, the financial statements for periods subsequent to the reorganization are not comparable to the financial statements presented for prior periods. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mera Pharmaceuticals, Inc. as of October 31, 2002 (Successor Company) and Aquasearch, Inc, as of October 31, 2001 (Predecessor Company) and the results of their operations and their cash flows for the ten and one-half months ended September 16, 2002 and the year ended October 31, 2001 (Predecessor Company) and the month and one-half ended October 31, 2002 (Successor Company) in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that the company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company's losses from operations and working capital deficit at October 31, 2002 raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should be Company be unable to continue as a going concern. /S/ Buttke, Bersch & Wanzek -------------------------- Buttke, Bersch & Wanzek, P.C. Lake Havasu City, AZ January 24, 2003 F-2 MERA PHARMACEUTICALS, INC. CONDENSED BALANCE SHEETS
Successor Predecessor --------------------- ------------------ October 31, 2002 October 31, 2001 --------------------- ------------------ ASSETS Current assets: Cash and cash equivalents $ 40,349 $ 47,398 Accounts receivable and accrued sales, net 611,759 101,625 Tax receivable 36,914 - Inventories 1,001,303 535,461 Investment receivable 500,000 - Prepaid expenses and other 57,893 4,326 ----------- ----------- Total current assets 2,248,218 688,810 ----------- ----------- Plant and equipment, net 3,205,768 3,449,794 Goodwill, net 66,550 - ----------- ----------- Total Assets $ 5,520,536 $ 4,138,604 =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued expenses $ 879,153 $ 1,940,189 Due to officer - 297,000 Notes payable 2,700,000 1,405,000 Notes payable to officer - 954,362 Deferred notes payable 500,000 - Deferred revenue 800,000 - ----------- ----------- Total Current Liabilities 4,879,153 4,596,551 ----------- ----------- Stockholders' deficit: Preferred stock (5,000,000 shares authorized) - - Common stock, $.0001 par value: 200,000,000 shares authorized, and 122,134,419 shares issued and outstanding at October 31, 2001 (predecessor) - 13,335 Common stock, $.0001 par value: 500,000,000 shares authorized, and 388,803,300 shares issued and outstanding at October 31, 2002 (successor) 38,880 - Additional paid-in capital 1,503,856 19,976,153 Accumulated deficit (901,353) (20,447,435) ----------- ----------- Total stockholders' equity (deficit) 641,383 (457,947) ----------- ----------- Total Liabilities and Stockholders' Equity (Deficit) $ 5,520,536 $ 4,138,604 =========== =========== See the accompanying notes to the financial statements
F-3 MERA PHARMACEUTICALS, INC. Condensed Statements of Operations
Successor Predecessor ----------------------- -------------------------------------------- September 17, 2002 November 1, 2001 Twelve Months Through Through Ended October 31, 2002 September 16, 2002 October 31, 2001 ----------------------- -------------------------------------------- Revenue Products $ 17,777 $ 323,212 $ 547,868 Contract Services 15,443 245,123 256,607 Royalties 15,350 45,167 228,169 ----------- ----------- ----------- Total Revenue 48,570 613,502 1,032,644 ----------- ----------- ----------- Costs and Expenses Cost of products sold 10,627 145,505 265,316 Cost of subcontract services 36,054 413,051 239,155 Research and development costs 158,299 754,408 1,759,619 General and administrative 302,147 933,725 2,559,565 Depreciation 68,867 145,290 - ----------- ----------- ----------- Total costs and expenses 575,994 2,391,979 4,823,655 =========== =========== =========== Operating loss (527,424) (1,778,477) (3,791,011) Other income (expense): Interest income 106 979 - Interest expense (17,891) (85,893) (300,560) ----------- ----------- ----------- Total other income (expense) (17,785) (84,914) (300,560) Net loss before reorganization items (545,209) (1,863,391) (4,091,571) ----------- ----------- ----------- Professional fees related to reorganization - (192,477) - ----------- ----------- ----------- Net loss before income tax provision (545,209) (2,055,868) (4,091,571) Income tax expense (1,400) (7,190) - Refundable tax credit 4,719 214,910 - ----------- ----------- ----------- Net loss $ (541,890) $ (1,848,148) $ (4,091,571) =========== =========== =========== Loss per share - basic and diluted (0.00) (0.02) (0.04) Weighted average shares outstanding 308,803,300 122,131,237 113,475,945
See the accompanying notes to the financial statements F-4 Mera Pharmaceuticals, Inc Condensed Statements of Stockholders' Equity (Deficit)
Common Additional Stockholders' Stock Paid In Notes Accumulated Equity Shares Amount Capital Receivable Deficit (Deficit) ----------------------------------------------------------------------------------------- Predecessor Balance at October 31, 2000 105,589,076 $ 11,679 $16,970,990 $ (29,179) $ (16,355,821) $ 597,669 Issuance of stock on conversion of convertible notes payable ($0.14 to $0.44 per share) 5,470,343 547 1,128,432 - - 1,128,979 Sales, grants, and issuance of stock upon exercise of stock options ($0.10 to $0.36 per share) 11,075,000 1,109 1,733,736 - - 1,734,845 Payment on notes receivable issued upon exercise of common stock options - - - 29,179 - 29,179 Discount on convertible notes payable - - 142,995 - - 142,995 Loss for the year ended October 31, 2001 - - - - (4,091,571) (4,091,571) ------------------------------------------------------------------------------------------ Balance at October 31, 2001 122,134,419 13,335 19,976,153 - (20,447,435) (457,947) ------------------------------------------------------------------------------------------ Loss from November 1, 2001 through September 16, 2002 - - - - (1,848,148) (1,848,148) Elimination of prior equity (122,134,419) (13,335) (19,976,153) - 22,295,583 2,306,095 ------------------------------------------------------------------------------------------ Balance September 16, 2002 - - - - - - ------------------------------------------------------------------------------------------
F-5 MERA PHARMACEUTICALS, INC Condensed Statements of Stockholders' Equity (Deficit) Con't
Common Additional Stockholders' Stock Paid In Notes Accumulated Equity Shares Amount Capital Receivable Deficit (Deficit) --------------------------------------------------------------------------------------------- SUCCESSOR Distribution of new common shares - September 16, 2002 388,803,300 38,880 1,503,856 - - 1,542,736 Loss retained in merger with Aqua RM Co., Inc. - - - - (359,463) (359,463) Loss from September 17, 2002 through October 31, 2002 - - - - (541,890) (541,890) --------------------------------------------------------------------------------------------- Balance at October 31, 2002 388,803,300 $ 38,880 $ 1,503,856 $ - $ (901,353) $ 641,383 =============================================================================================
See the accompanying notes to the financial statements F-6 MERA PHARMACEUTICALS, INC. Condensed Statements of Cash Flows
Successor Predecessor ----------------------- ---------------------------------------- September 17, 2002 November 1, 2001 Twelve Months Through Through Ended October 31, 2002 September 16, 2002 Ocotber 31, 2001 ----------------------- ---------------------------------------- Cash Flows from Operating Activities: Net loss $ (541,890) $ (1,848,148) $ (4,091,571) Adjustments to reconcile net loss to net cash used in operating activities: Accumulated depreciation 20,797 231,636 266,631 Allowance on note receivable from officer - - 50,000 Expenses paid with common stock - - 430,466 Discount on convertible notes payable - - 153,582 Changes in assets and liabilities, net of effects of debt discharge and fresh start adjustments: Accounts receivable 11,139 78,727 (89,269) Tax receivable 177,996 (214,910) - Inventories (87,709) (378,133) (535,461) Other current assets (23,894) (29,672) 10,610 Accounts payable and accured expenses (33,590) (217,801) 768,224 Deferred revenue 100,000 56,810 - ----------- ----------- ----------- Net cash used by operating activities (377,151) (2,321,491) (3,036,788) ----------- ----------- ----------- Cash Flows from Investing Activities: Purchases of fixed assets (774) (7,633) (269,156) ----------- ----------- ----------- Net cash used by investing activities (774) (7,633) (269,156) ----------- ----------- ----------- Cash Flows from Financing Activities Proceeds from issuance of common stock - - 1,647,087 Proceeds from short term advances - - (500,000) Proceeds from notes payable 350,000 2,350,000 1,807,087 Offering costs - - (110,324) ----------- ----------- ----------- Net cash provided by financing activities 350,000 2,350,000 2,843,850 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents (27,925) 20,876 (462,094) Cash and cash equivalents, beginning of the period 68,274 47,398 509,492 ----------- ----------- ----------- Cash and cash equivalents, end of the period $ 40,349 $ 68,274 $ 47,398 =========== =========== =========== Supplemental non-cash information Conversion of notes payable to common stock $ - $ - $ 1,112,087 Increase (reduction) in notes payable to officer and - - 196,943 related interest for exercise of stock options See the accompanying notes to the financial statements
F-7 MERA PHARMACEUTICALS, INC. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 2002 AND 2001 1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION -- Mera Pharmaceuticals, Inc. (the "Company"), is the successor company to Aquasearch, Inc. Aquasearch was founded in February 1988. The Company develops and commercializes natural products from microalgae using its proprietary, large-scale photobioreactor technology. The Company's operations are located in Kailua-Kona, Hawaii and its corporate offices are located in Solana Beach, California. Microalgae are a diverse group of microscopic plants comprising an estimated 30,000 species that display a wide range of physiological and biochemical characteristics. Many of these organisms are known to contain valuable substances that have identified and potential commercial applications in such fields as animal and human nutrition, food colorings, cosmetics, diagnostic products, pharmaceuticals, research grade chemicals, pigments and dyes. Microalgae grow ten times faster than the fastest growing land-based crops and represent a largely unexploited and renewable natural resource with a biodiversity comparable to that of land-based plants. Mera Pharmaceuticals' first commercial product, AstaFactor(R), is a nutritional supplement based on astaxanthin, a naturally occurring red pigment derived from a freshwater microalgae. The Company has devoted most of its efforts since inception to research and development, and accordingly was considered a development stage company until fiscal 2001. FRESH START ACCOUNTING -- Upon emergence from bankruptcy, the Company adopted "fresh start" accounting. As a result, all assets and liabilities were restated to reflect their respective fair values. The condensed financial statements after emergence are those of a new reporting entity (the "Successor") and are not comparable to the financial statements of the pre-confirmation company (the "Predecessor"). A black line has been drawn in the financial statements to distinguish Predecessor and Successor Company results. (See Note 3 - - "Bankruptcy Proceedings and Fresh Start Accounting.") CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid debt securities purchased with original or remaining maturities of three months or less to be cash equivalents. The carrying value of cash equivalents approximates fair value. FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair market value because of the short maturity of those instruments. Notes payable approximate fair value. CREDIT RISK - It is the Company's practice to place its cash equivalents in high quality money market securities with one major banking institution. Such funds are not insured by the Federal Deposit Insurance Corporation, however the Company considers its credit risk associated with cash and cash equivalents to be minimal. INVENTORIES -- Inventories are stated at the lower of cost or market. The Company intends to determine cost on a first-in, first-out basis. At October 31,2002, inventories consisted of $864,944 of work in process and $136,359 of finished goods and are stated at cost. F-8 MERA PHARMACEUTICALS, INC. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 2002 AND 2001 1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT'D) REVENUE RECOGNITION -- Product revenue is recognized upon shipment to customers. Contract services revenue is recognized as services are performed on a cost reimbursement basis. Royalties are recognized as received. The Company has adopted Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 101, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. PLANT AND EQUIPMENT -- Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is recorded principally using the straight-line method, based on the estimated useful lives of the assets (property and plant, 10-30 years; machinery and equipment, 3-10 years). On September 16, 2002 in connection with the adoption of fresh start accounting, property, plant and equipment were restated at their fair values and new useful lives for such assets were estimated (see Note 3). IMPAIRMENT OF LONG LIVED ASSETS AND LONG LIVED ASSETS TO BE DISPOSED OF - -- In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" which supersedes both Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the accounting and reporting provisions of APB Opinion No. 30 ("Opinion 30"), "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as previously defined in that opinion). This statement establishes the accounting model for long-lived assets to be disposed of by sale and applies to all long-lived assets, including discontinued operations. This statement requires those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. The Company adopted SFAS No. 144 in the fiscal year ending October 31, 2002. SFAS 144 retains the fundamental provisions of SFAS 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS 121. The adoption of SFAS 144 did not have a material effect on the Company's consolidated financial position or results of operations. INTANGIBLE ASSETS -- The Company accounts for intangible assets in accordance with SFAS 144. Such assets are amortized on a straight-line basis over the estimated useful life of the asset. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the fair value is less than the carrying amount of the asset, an impairment loss is then recognized. PREFERRED STOCK -- The Company has authorized 10,000 shares of "blank check" preferred stock, with such designations, rights, preferences, privileges and restrictions to be determined by the Company's Board of Directors. No preferred stock has been issued as of October 31, 2002. F-9 MERA PHARMACEUTICALS, INC. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 2002 AND 2001 1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT'D) STOCK ISSUED FOR SERVICES -- The value of stock issued for services is based on management's estimate of the fair value of the Company's stock at the date of issue or the fair value of the services received, whichever is more reliably measurable. RESEARCH AND DEVELOPMENT COSTS - Research and development costs are expensed as incurred. INCOME TAXES -- The Company uses the asset and liability method of accounting for income taxes as required by Statement of Financial Accounting Standards No. 109 ("SFAS 109"), ACCOUNTING FOR INCOME TAXES. SFAS 109 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of certain assets and liabilities. Since its inception, the Company has incurred net operating losses. Accordingly, no provision has been made for income taxes. LOSS PER SHARE -- The Company computed basic and diluted loss per share amounts for October 31, 2002 and 2001 pursuant to the Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings Per Share." The assumed effects of the exercise of outstanding stock options, warrants, and conversion of notes were anti-dilutive and, accordingly, dilutive per share amounts have not been presented in the accompanying statements of operations. USE OF ESTIMATES -- The preparation of financial statements in conformity with generally accepted accounting principles 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 these financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATION -- Certain prior year amounts have been reclassified to conform with the 2001 presentation. RECENT AUTHORITATIVE PRONOUNCEMENTS - In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141 "Business Combinations." This statement requires business combinations initiated after June 30, 2001, to be accounted for using the purchase method of accounting. It also specifies the types of acquired intangible assets that are required to be recognized and reported separately from goodwill. The Company adopted SFAS No. 141 as of January 1, 2002. The statement is not expected to have a material effect on the Company's financial position or results of operations. In June 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible Assets." This statement addresses how intangible assets that are acquired individually or with a group of other assets should be accounted for upon their acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The Company adopted SFAS No. 142 as of January 1, 2002. The statement is not expected to have a material effect on the Company's financial position or results of operations. F-10 MERA PHARMACEUTICALS, INC. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 2002 AND 2001 1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT'D) In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 establishes accounting standards for recognition and measurement of a liability for the costs of asset retirement obligations. Under SFAS 143, the costs of retiring an asset will be recorded as a liability when the retirement obligation arises, and will be amortized to expense over the life of the asset. The statement is not expected to have a material effect on the Company's financial position or results of operations. In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement establishes the accounting model for long-lived assets to be disposed of by sale and applies to all long-lived assets, including discontinued operations. This statement requires those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. The Company adopted SFAS No. 144 during the fiscal year ending October 31, 2002. The statement is not expected to have a material effect on the Company's financial position or results of operations. In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and an amendment of that Statement, FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements" and FASB Statement No. 44, "Accounting for Intangible Assets of Motor Carriers." This Statement amends FASB Statement No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The Company does not expect the adoption to have a material impact to the Company's financial position or results of operations. In June 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company does not expect the adoption to have a material impact to the Company's financial position or results of operations. In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 addresses the disclosure requirements of a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. FIN 45 also requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements of FIN 45 are effective for Avnet in its quarter ended December 27, 2002. The liability recognition requirements will be applicable prospectively to all guarantees issued or modified after December 31, 2002. Management is assessing the impact of FIN 45. F-11 MERA PHARMACEUTICALS, INC. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 2002 AND 2001 2. GOING CONCERN These financial statements have been prepared assuming that the Company will continue as a going concern. The Company has operating and liquidity concerns, has incurred an accumulated deficit of $901,353 through the year ended October 31, 2002 and current liabilities exceeded current assets by $2,630,935. The Company anticipates that future revenue will be sufficient to cover certain operating expenditures, and, in the interim, will continue to pursue additional capital investment. However, there can be no assurance that the Company will be able to successfully acquire the necessary capital to continue their on-going development efforts and bring products to the commercial market. These factors, among others, create an uncertainty about the Company's ability to continue as a going concern. 3. BANKRUPTCY PROCEEDINGS AND FRESH START ACCOUNTING On October 30, 2001, certain creditors of the Company filed an involuntary petition under Chapter 11 of the United States Bankruptcy Code against Aquasearch, Inc. (predecessor to Mera) in United States Bankruptcy Court for the District of Hawaii. On November 30, 2001, the Company stipulated to an entry of an Order for Relief, agreeing to the jurisdiction of the Bankruptcy Court for purposes of resolving the petition. On December 3, 2001, the Company's motion to the Bankruptcy Court to incur indebtedness was granted, and Aquasearch, Inc. entered into a Debtor-in-Possession financing arrangement with certain parties. On June 17, 2002, the Bankruptcy Court confirmed the Company's Plan of Reorganization (the "Plan"). Under Chapter 11, certain claims against the Debtor accruing prior to the filing of the petition for relief under the federal bankruptcy laws were stayed while the Debtor continued to operate. These claims are identified in the balance sheet as "liabilities subject to compromise." Pursuant to the Plan, on July 25, 2002, Aquasearch, Inc., merged with Mera Pharmaceuticals, Inc., a Delaware corporation, for the purpose of changing Aquasearch's name to "Mera Pharmaceuticals, Inc." and reincorporating in Delaware. Mera Pharmaceuticals, Inc. is the surviving corporation and is considered the successor issuer to Aquasearch, Inc. under federal securities laws. Pursuant to this merger, each share of Aquasearch, Inc. common stock, issued and outstanding immediately prior to July 25, 2002, was changed and converted into one share of Mera Pharmaceuticals, Inc. common stock. Also pursuant to the Plan, Aqua RM Co., Inc. ("Aqua RM") merged with and into the Company on September 16, 2002 (the "Merger"). A total of 263,992,029 shares of the Company's common stock were issued to Aqua RM shareholders in consummation of this merger. In addition, 2,661,332 shares of the Company's common stock were issued pursuant to the Plan to holders of warrants of Aquasearch, Inc. that were validly issued and outstanding as of October 31, 2001. Total shares of common stock of Mera Pharmaceuticals, Inc. issued and outstanding following this Merger are 388,803,300. The merger was the final outstanding material event to achieve compliance with the requirements of the Plan, and, as such, the effective date of the Plan (the "Effective Date") was September 16, 2002, the date of this Merger. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 141, the merger was accounted for using the purchase method of accounting. For reporting purposes the foregoing stock-exchange transaction has been accounted for as a reverse acquisition in which Mera Pharmaceuticals, Inc. acquired all the assets and liabilities of Aqua RM, Inc. recording them at their fair value as if Mera Pharamaceuticals, Inc. remained thereporting entity. Because Mera Pharamaceuticals, Inc. is the entity for legal purposes, all equity transactions have been restated in terms of this corporation's capital structure. F-12 MERA PHARMACEUTICALS, INC. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 2002 AND 2001 3. BANKRUPTCY PROCEEDINGS AND FRESH START ACCOUNTING (CONT'D) In accounting for the effects of the reorganization, the Company adopted "fresh start" accounting principles contained in the American Institute of Certified Public Accountants Statement of Position 90-7 ("SOP 90-7"). The Company applied principles contained in SOP 90-7 because after the merger with Aqua RM, existing Mera shareholders owned less than 50% of Mera's total issued and outstanding common stock and the reorganization value of Mera's assets upon completion of the Plan was less than the sum of total pre-petition liabilities allowed plus post-petition liabilities. Fresh start accounting principles require that the Company establish a reorganization value. Management calculated the Company's reorganization value to be $4,700,000 based on the following:
- ------------------------------------------------------------------------------------- New notes payable $ 2,350,000 Commitment for additional notes 850,000 Common stock issued to existing Mera shareholders ($.0001 par value) 13,335 Common stock issued to former Aqua RM shareholders ($.0001 par value) 25,545 Additional paid in capital 1,461,120 - ------------------------------------------------------------------------------------- Total $ 4,700,000 - -------------------------------------------------------------------------------------
In accordance with fresh start accounting, the Company's tangible and intangible assets were recorded at their assumed fair value. Other intangible assets in the amount of $66,550 were established as part of fresh start accounting. Such assets are accounted for in accordance with SFAS No. 141, and as such, will be tested annually for impairment. The application of fresh start accounting on the Company's September 16, 2002 balance sheet is as follows: F-13
Mera Mera Pharmaceuticals Aqua RM CO., Adjustments Pharmaceuticals Setember 16, Debt Fresh Inc. For Reorganized 2002 Discharge Start Setember 16, 2002 Merger Setember 16, 2002 ---------------------------------------------------------------------------------------------- Current assets: Cash and cash equivalents (136,286) 204,560(d) 68,274 Accounts receivable, net 622,898 - 622,898 Tax receivable 214,910 - 214,910 Notes receivable 336,904 - (336,904)(e) - Investment Receivable 850,000(a) 850,000 Inventories 913,595 - 913,595 Prepaid expenses and other 33,999 - 33,999 ---------------------------------------------------------------------------------------------- Total current assets 1,986,020 850,000 204,560(d) (336,904) 2,703,676 ---------------------------------------------------------------------------------------------- Plant and equipment, net 3,221,780 4,009(d) 3,225,789 Goodwill 48,310(c) 18,240(f) 66,550 Total assets 5,207,800 850,000 48,310 208,569(d) (318,664) 5,996,015 ============================================================================================== Current liabilities: Liabilites not subject to compromise Accounts payable and accrued exppenses 629,971 58,948(b) 223,823(d) 912,742 Notes payable 2,350,000 336,904(d) (336,904)(e) 2,350,000 Deferred notes payable 850,000(a) 850,000 ---------------------------------------------------------------------------------------------- Deferred revenue 700,000 700,000 ---------------------------------------------------------------------------------------------- Liabilites subject to compromise 3,833,925 (3,833,925)(b) Total current liabilities 7,513,896 (2,924,977) - 560,727(d) (336,904) 4,812,742 ---------------------------------------------------------------------------------------------- Stockholders' deficit: Common stock, old 13,335 (13,335) - Common stock, new 13,335 25,545(g) 38,880 Common stock, ARM 2,640(d) (2,640)(g) - Additional paid-in capital 19,976,153 1,503,856(b) (19,976,1(c) 191,360(d) (191,360)(g) 1,503,856 Accumulated deficit (22,295,584) 2,271,121(b) 20,024,46(c) (546,158)(d) 186,695(h) (359,463) ---------------------------------------------------------------------------------------------- Total stockholders' equity (deficit) (2,306,096) 3,774,977 48,310 (352,158)(d) 18,240 1,183,273 ---------------------------------------------------------------------------------------------- Total Liabilities and Stockholders'Equity (Deficit) 5,207,800 850,000 48,310 208,569(d) (318,664) 5,996,015 ==============================================================================================
F-14 MERA PHARMACEUTICALS, INC. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 2002 AND 2001 3. BANKRUPTCY PROCEEDINGS AND FRESH START ACCOUNTING (CONT'D) (a) Additional loan commitment received. (b) Liabilities subject to compromise forgiven as of September 16, 2002 (the effective date of the Plan) totaled $3,833,925. In accordance with SOP 90-7 the discharge of debt was allocated first to the new equity of the Company and then as gain from the forgiveness of debt. The allocation of the discharge of debt is as follows: --------------------------------------------------------------- Additional paid in capital $ 1,503,856 Accounts payable (additional claims to be paid) 58,948 Gain on forgiveness of debt (accumulated deficit) 2,271,121 --------------------------------------------------------------- Total $3,833,925 --------------------------------------------------------------- (c) Fresh start adjustments were made to eliminate Mera's equity and accumulated deficit accounts through the Effective Date of the Plan and after the discharge of debt. Amounts in excess of these adjustments are recorded as goodwill and are accounted for in accordance with SFAS Nos. 141 and 142 (see Note 2). All other assets are continuing to be carried at their net book value as of the Effective Date of the Plan. The calculation of the portion of goodwill calculated prior to the Merger is as follows: --------------------------------------------------------------- Elimination of accumulated deficit $ 20,024,463 Elimination of additional paid in capital (19,976,153) --------------------------------------------------------------- Excess (entered as goodwill) $ 48,310 --------------------------------------------------------------- (d) Amounts recorded on the Aqua RM balance sheet as of the Merger date. (e) Elimination of inter-company loans made between Mera and Aqua RM. (f) Additional goodwill created as the result of fresh start adjustments in relation to the Merger. (g) Elimination of Aqua RM capital as a result of the Merger and fresh-start accounting adjustments. All outstanding shares of Aqua RM common stock were exchanged for shares of Mera common stock. (h) As part of the Plan, Aqua RM acquired certain claims of Mera creditors. Aqua RM recorded an expense of $186,695 in relation to such claims. As part of the Merger, Aqua RM's accumulated deficit is reduced by this amount to more accurately reflect the additional payment as satisfaction of liabilities subject to compromise. 5. RELATED PARTY TRANSACTIONS During the two years ended October 31, 2001, Mr. Gregory Kowal, a director and beneficial owner of over 5% of our common stock, purchased 7,833,334 shares of common stock at $0.15 per share. In connection with the purchase, Mr. Kowal received 1,175,000 warrants with an exercise price of $0.40 per share. All of these transactions preceded Mr. Kowal's becoming a director of the Company on June 17, 2002. F-15 MERA PHARMACEUTICALS, INC. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 2002 AND 2001 5. RELATED PARTY TRANSACTIONS (CONT'D) On August 1, 2002, the Company entered into a month-to-month consulting agreement with Richard L. Sherman, a director of the Company. Under the agreement Mr. Sherman is to receive $5,500 per month. Mr. Sherman was paid a total of $5,500 under this agreement during the year ended October 31, 2002. 6. INCOME TAXES The Company provides for income taxes in accordance with SFAS No. 109 using an asset and liability based approach. Deferred income tax assets and liabilities are recorded to reflect the tax consequences on future years of temporary differences of revenue and expense items for financial statement and income tax purposes. Since its formation the Company has incurred net operating losses. As of October 31, 2002, the Company had a net operating loss carryforward available to offset future taxable income for federal and state income tax purposes. SFAS No. 109 requires the Company to recognize income tax benefits for loss carryforwards that have not previously been recorded. The tax benefits recognized must be reduced by a valuation allowance if it is more likely than not that loss carryforwards will expire before the Company is able to realize their benefit, or that future deductibility is uncertain. For financial statement purposes, the deferred tax asset for loss carryforwards has been fully offset by a valuation allowance since it is uncertain whether any future benefit will be realized. Current income tax expense is $8,590. The Company is a Qualified High Tech Business ("QHTB") in the State of Hawaii. QHTBs qualify for certain refundable state tax credits as they relate to research and development activities ("QHTB tax credit refunds"). During the year ended October 31, 2002, the Company received $182,715 in QHTB tax credit refunds. At October 31, 2002, approximately $36,914 in additional QHTB tax credit refunds were receivable. 7. COMMITMENTS AND MATERIAL AGREEMENTS In January 2001 the Company entered into a research and license agreement with a major university to access, manufacture, use and sell products from a microalgal collection. Under terms of the research agreement, the university is to receive reimbursement for its costs incurred in performing the research. The budget over the initial two-year term for maintenance and research work on the collection is approximately $550,000. The license agreement provides for royalties to be paid to the university on income from commercialization of products developed from the collection. During the year ended October 31, 2002, a total of $22,675 was paid under the research agreement, and $0 was paid under the license agreement. In June 2002, the Company entered into an Intellectual Property License and Distribution Rights Agreement with Aqua RM (the "IP License Agreement"). Under the terms of this agreement, Aqua RM is to pay the Company $100,000 for licensing certain intellectual property rights related to its product(s) to Aqua RM and $100,000 to for rights to market, distribute and sell ASTAFACTOR(R) in parts of Asia. This term of this agreement continues for as long as Aqua RM continues to use an intellectual property of the Company, unless terminated earlier. F-16 MERA PHARMACEUTICALS, INC. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 2002 AND 2001 7. COMMITMENTS AND MATERIAL AGREEMENTS (CONT'D) In June 2002, the IP License Agreement was assigned in its entirety by Aqua RM to Aqua Culture, Inc., an international business company which is co-owned by an entity which Richard D. Propper, MD and Daniel P. Beharry, officers and directors of the Company, are members, managers and officers of ("Aqua Culture, Inc."). In August 2002, the IP License Agreement was assigned by Aqua Culture, Inc. to Hainan Sunshine Bioengineering, Ltd., a joint venture made up of five separate companies, including Aqua Culture, Inc. In June 2002, the Company entered into a lease for an office in San Diego, California. The lease ends on May 31, 2003. Rent expense for this facility is $10,578 per month. 8. NOTES PAYABLE During the months of December 2001 through April 2002, the Company received $500,000 in Debtor In Possession financing from Chardan Ventures, of which Richard D. Propper, MD and Daniel P. Beharry, officers and directors of the Company, are principals, in connection with the Company's Plan of Reorganization. Interest accrued at 12% per annum. On July 23, 2002 the Debtor in Possession obligation was repaid in full. During the months June through July 2002, the Company entered into various promissory notes totaling $117,300 with: Richard D. Propper, MD, an officer and director of the Company; Daniel P. Beharry, an officer and director of the Company; and a limited liability company which Richard D. Propper, MD and Daniel P. Beharry, officers and directors of the Company, are managers, officers and members. Interest was accrued at 12% per annum. On July 23, 2002 such notes were repaid in full. During the months of July through December 2002, the Company issued various promissory notes totaling $2,805,000 to a limited liability company managed by Richard D. Propper, MD and Daniel P. Beharry, both officers and directors of the Company, for investment funds borrowed by the Company. Of such promissory notes, $2,700,000 was issued prior to October 31, 2002. $2,011,000 of such notes were repaid subsequent to October 31, 2002 and reinvested into the Company. All three promissory notes were cancelled upon repayment and all accrued interest on the notes was forgiven. A new promissory note was negotiated by the parties and issued on December 31, 2002 by the Company for the remaining balance of $794,000. This promissory note accrues interest at 6% per annum and has a maturity date of December 31, 2003. The Company's total interest expense was $103,784 and $300,560 for the years ended October 31, 2002 and 2001, respectively. Notes outstanding prior to the filing of the involuntary Bankruptcy Petition on October 30, 2001 have been paid in the amounts provided for by the Plan, and the remaining balances were discharged. These transactions have been accounted for in conjunction with the Company's adoption of fresh start accounting (see Note 3). F-17 MERA PHARMACEUTICALS, INC. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 2002 AND 2001 9. COMMON STOCK AND COMMON STOCK PURCHASE WARRANTS Under the Plan, all common stock outstanding as of October 31, 2001 was converted, on a one-for-one basis, into common stock in the reorganized Company. In addition, every five valid warrants to purchase stock in the Company that were outstanding as of October 31, 2001 were converted into one share of common stock in the Company. The conversions took place upon the fulfillment of the Company's obligations under the Plan on September 16, 2002. The conversion of warrants into common stock resulted in the issuance of an additional 2,661,332shares of the Company's common stock. Total shares of common stock of Mera Pharmaceuticals, Inc. issued and outstanding upon the fulfillment of the of the Company's obligations under the Plan was 124,811,271. Issuance of stock in these transactions is exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 1145 of the United States Bankruptcy Code. No underwriters were involved in these transactions, and no commissions were paid to any party in connection with them. In addition, under the Plan and as part of the merger with Aqua RM, shareholders of Aqua RM were issued 100 shares of the Company's common stock for each share of Aqua RM stock they held. A total of 263,992,029 shares of the Company's common stock were issued to Aqua RM shareholders in consummation of the Merger. The issuance took place upon the fulfillment of the Company's obligations under the Plan on September 16, 2002. The total shares of the Company's common stock issued and outstanding after the Aqua RM merger was 388,803,300. On June 6, 2002, the Company (as Aquasearch) issued 1,400,000 shares of common stock to Western Financial Communications, Inc., a consultant, as compensation for services. The value of the services received was accrued in the fiscal year ended October 31, 2001 based on management's estimate of the fair value of the shares issued, and a corresponding expense was recorded. As such, the amount of shares has been included in the calculation of total shares outstanding in financial statements starting with and subsequent to October 31, 2001, even though the issuance did not take place until June 2002. This transaction was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2). No underwriters were involved in this transaction, and no commissions were paid to any party in connection with it. The shares issued to Western Financial Communications, Inc. in this transaction are among the shares converted into stock in the reorganized Company, as described in the first paragraph under this item 10. 10. STOCK OPTION PLANS In March 1996, the Board of Directors adopted the 1996 Stock Option Plan. The 1996 Stock Option Plan provided for the grant of incentive stock options to employees, and for nonstatutory stock options and stock purchase rights to employees and consultants. The 1996 Stock Option Plan was terminated on June 17, 2002 upon confirmation of the Company's Plan of Reorganization (see Note 3). 11. CUSTOMER CONCENTRATION Sales to the Company's major customers for the year ended October 31, 2002 for customers A, B, C and D amounted to 41%, 18%, 8% and 6%. F-18 MERA PHARMACEUTICALS, INC. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 2002 AND 2001 12. PROPERTY, PLANT AND EQUIIPMENT, NET Successor Predecessor October 31, 2002 September 16, 2001 October 31, 2001 Plant 2,616,604 3,280,474 3,280,475 Equipment 609,961 1,105,584 1,097,952 3,226,565 4,386,058 4,378,427 Accumulated depreciation (20,797) (1,160,269) (928,633) 3,205,768 3,225,789 3,449,794 13. DEFERRED REVENUE In May 2002, the Company recognized revenue in the amount of $100,000 as the result of a product sale. Pursuant to the Company's revenue recognition policy, the sale was recognized upon shipment to the customer. In October 2002, the product was returned from the customer and the revenue deferred. This sale was made under contract and amounts received are not to be refunded. The returned product will be reshipped at a later date. 14. LEGAL PROCEEDINGS On July 13, 1998, Cyanotech filed a complaint against the Company in the United States District Court for the District of Hawaii (Case No. CV98-00600ACK). In the complaint, Cyanotech sought declaratory judgment of non-infringement of the Company's U.S. Letters Patent No. 5,541,056; invalidity of the 5,541,056 Patent; and non-misappropriation of the Company's trade secrets relating to closed culture production of astaxanthin. Cyanotech filed the complaint after the Company expressed to Cyanotech its concern that Cyanotech infringed the 5,541,056 Patent and misappropriated the Company's trade secrets. On September 11, 1998, the Company filed an answer denying all of Cyanotech's allegations and a counter claim, alleging infringement of the 5,541,056 Patent; misappropriation of trade secrets; unfair competition; and breach of contract relative to the parties' 1994 Dissolution Agreement. On December 30, 1999, the United States District Court for the District of Hawaii granted summary judgment on the Company's motion that Cyanotech infringed the Company's patent, misappropriated the Company's trade secrets and breached the terms of the parties' 1994 Dissolution Agreement. In its order, the Court found that the tube process used by Cyanotech for cultivating microalgae infringed the 5,541,056 Patent. The Court further found that Cyanotech violated the Uniform Trade Secrets Act and breached the 1994 Dissolution Agreement when it misappropriated trade secrets relating to the Company's proprietary closed-system technology for cultivation of microalgae. On March 6, 2001, the Company settled the litigation with Cyanotech without admission of liability by either party. Under the agreement, Cyanotech agreed to an injunction that prevents it from using any tube system for microalgae production that infringes our U.S. Patent No. 5,541,056. The Company agreed that Cyanotech's current proprietary process for producing microalgae, known as the Phytodome, does not infringe our U.S. Patent No. 5,541,056. Cyanotech will also pay undisclosed royalties to Aquasearch. The Companies agreed to dismiss all claims with prejudice that were asserted in the litigation. The Court entered an order to that effect and that our U.S. Patent No. 5,541,056 is valid and enforceable. 14. LEGAL PROCEEDINGS (CON'T) F-19 Royalty income received in connection with the Cyanotech settlement for the year ended October 31, 2002 totaled $60,517. On October 11, 2001 a complaint was filed by Kenneth Crowder against the Company and certain unnamed individuals in the Superior Court of the State of California, Orange County, alleging breach of contract in connection with certain monies paid to the Company, and claiming damages in excess of approximately $75,000. On October 16, 2001, an action was commenced by C&J Distribution, a purchaser of ASTAFACTOR(TM) product, in the Superior Court of California, San Bernadino County, against the Company, one of its officers and unnamed individuals, alleging fraud and breach of contract in connection with an alleged oral distribution agreement between the Company and plaintiff and claiming damages in the amount of $35,000. The plaintiff's have withdrawn this suit, with prejudice, and the Company considers the matter resolved. The Company was the debtor in an involuntary Chapter 11 Bankruptcy proceeding, commenced October 31, 2001, as described in Note 3, above. 15. SUBSEQUENT EVENTS During the month of November 2002, the Company entered into various convertible promissory notes totaling $185,732 with Richard D. Propper, MD, an officer and director of the Company. The terms of the notes include interest accruing at 10% per annum and a maturity date of March 31, 2003. In addition, these convertible promissory notes carry 5% warrant coverage and call for issuance of common stock warrants to the lender equal to the face amount of the promissory notes divided by $0.05, or warrants to purchase up to 3,440,000 shares of common stock. The exercise price of the warrants is $0.05 per share and the warrants have 5 year terms. On January 10, 2003 a payment of $13,901 in principal and accrued interest was made against this obligation. On December 2, 2002, the Company issued 80 shares of Series A preferred stock at a price of $625.00 per share, for aggregate consideration of $50,000, to an individual investor. Each share of Series A preferred stock is convertible into 10,417 shares of common stock. This transaction was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2). On December 30, 2002, the Company issued 18,181,818 shares of common stock at $0.11 per share, for an aggregate purchase price of $2,000,000, to a Hawaiian limited liability company managed in part by Richard D. Propper, MD and Daniel P. Beharry, both officers and directors of the Company. This transaction was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2). On December 30, 2002, the Company issued 325 shares of Series B preferred stock at $625.00 per share, for aggregate consideration of $203,000, to a limited liability company managed by Richard D. Propper, MD and Daniel P. Beharry, both officers and directors of the Company. This transaction was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2). On January 3, 2003, the Company entered into a Memorandum of Understanding ("MOU") setting forth the principal terms of an agreement governing the merger (the "Merger") between the Company and Ancile Pharmaceuticals, Inc., a California corporation ("Ancile"). The Company expects to consummate the Merger during the second quarter of fiscal year 2003. F-20 -----END PRIVACY-ENHANCED MESSAGE-----