-----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, PsMP3BS0glW4bIy+QQjCrmdc5P9C+gyEjjiqxkcYm6Qg5BSwF8MLSZoeF/jE7plW WJUTEnTixHkePsIvT8ywHQ== 0000909012-03-000643.txt : 20030910 0000909012-03-000643.hdr.sgml : 20030910 20030910150037 ACCESSION NUMBER: 0000909012-03-000643 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030731 FILED AS OF DATE: 20030910 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: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 033-23460 FILM NUMBER: 03889862 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 10QSB 1 t300544.txt MERA PHARMACEUTICALS, INC. ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------------------- FORM 10-QSB (Mark one) [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED JULY 31, 2003 Or [ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 COMMISSION FILE NUMBER: 33-23460-LA ---------------------------------- MERA PHARMACEUTICALS, INC. (FORMERLY AQUASEARCH, INC.) (Exact name of Registrant as specified in its charter) ---------------------------------- DELAWARE 04-3683628 (State or other jurisdiction of (IRS Employer Identification incorporation or organization) Number) 777 SOUTH HIGHWAY 101, SUITE 215 SOLANA BEACH, CALIFORNIA 92075 (858) 847-0747 (Address and telephone number of principal executive offices) 73-4460 QUEEN KA'AHUMANU HIGHWAY, SUITE 110 KAILUA-KONA, HAWAII 96740 (808) 326-9301 (Address and telephone number of principal operations offices) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods as 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 whether the registrant filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. YES [X] NO [ ] 405,643,926 shares of $0.0001 par value common stock outstanding as of August 28, 2003 ================================================================================ MERA PHARMACEUTICALS, INC. FORM 10-QSB FOR THE QUARTER ENDED JULY 31, 2003 CONTENTS PAGE PART I - FINANCIAL INFORMATION Item 1: Financial Statements Condensed Balance Sheets 3 Condensed Statements of Operations 4 Condensed Statements of Cash Flows 6 Notes to Condensed Financial Statements 7 Item 2: Management's Plan of Operation Management's Discussion and Analysis of Financial Condition and Results of ` Operations 13 Item 3. Controls and Procedures 17 PART II - OTHER INFORMATION Item 1: Legal Proceedings 18 Item 2: Changes In Securities 18 Item 3. Defaults Upon Senior Securities 18 Item 4: Submission of Matters to a Vote of Security Holders 18 Item 5: Other Information 18 Item 6: Exhibits and Reports on Form 8-K 19 Signature 19 Certifications 20 MERA PHARMACEUTICALS, INC. CONDENSED BALANCE SHEETS AS OF JULY 31, 2003 AND OCTOBER 31, 2002
ASSETS July 31, 2003 October 31, 2002 (Unaudited) (Audited) --------------------- --------------------- Current assets: Cash and cash equivalents $ 4,070 $ 40,349 Accounts receivable and accrued sales, net 752,499 611,759 Tax receivable 50,572 36,914 Inventories 1,139,497 1,001,303 Investment receivable - 500,000 Notes receivable 100,000 - Prepaid expenses and other 65,008 57,893 --------------------- --------------------- Total current assets 2,111,646 2,248,218 --------------------- --------------------- Plant and equipment, net 3,022,306 3,205,768 Goodwill 66,550 66,550 --------------------- --------------------- Total Assets $ 5,200,502 $ 5,520,536 ===================== ===================== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued expenses $ 980,272 $ 879,153 Notes payable 909,011 2,700,000 Deferred notes payable - 500,000 Deferred revenue 905,992 800,000 --------------------- --------------------- Total Current Liabilities 2,795,275 4,879,153 --------------------- --------------------- Stockholders' equity: Preferred stock, $.0001 par value: 5,000,000 shares authorized, 1,054 and 0 shares issued and outstanding at July 31, 2003 and October 31, 2002, respectively - - Common stock, $.0001 par value: 500,000,000 shares authorized, 405,232,593 and 388,803,300 shares issued and outstanding at July 31, 2003 and October 31, 2002, respectively 40,523 38,880 Additional paid-in capital 4,486,212 1,503,856 Accumulated deficit (2,121,508) (901,353) --------------------- --------------------- Total stockholders' equity 2,405,227 641,383 --------------------- --------------------- Total Liabilities and Stockholders' Equity $ 5,200,502 $ 5,520,536 ===================== =====================
See the accompanying notes to the financial statements MERA PHARMACEUTICALS, INC. Condensed Statements of Operations For the Three Months Ended July 31, 2003 and 2002 (Unaudited)
Successor Predecessor ------------------ ------------------ Three Months Three Months Ended Ended July 31, 2003 July 31, 2002 ------------------ ------------------ Revenues Products, net $ 217,033 $ 162,093 Contract Services 94,519 41,577 Royalties 30,470 16,105 ------------------ ------------------ Total Revenues 342,022 219,775 ------------------ ------------------ Costs and Expenses Cost of products sold 142,637 152,172 Cost of subcontract services 134,970 67,170 Research and development costs 31,804 173,508 General and administrative 173,416 326,531 Depreciation 37,694 - ------------------ ------------------ Total costs and expenses 520,521 719,381 ------------------ ------------------ Loss from operations (178,499) (499,606) Other income (expense): Interest and other income - - Interest expense (18,714) (27,989) ------------------ ------------------ Total other income (expense) (18,714) (27,989) ------------------ ------------------ Net loss before reorganization items (197,213) (527,595) ------------------ ------------------ Professional fees related to reorganization - (96,804) Net loss before extraordinary items (197,213) (624,399) Gain on discharge of debt 38,225 - ------------------ ------------------ Net loss before income tax provision (158,988) (624,399) Tax expense (870) (7,664) Refundable tax credit 4,101 208,955 ------------------ ------------------ Net loss $ (155,757) $ (423,108) ================== ================== Loss per share (0.000) (0.003) Weighted average shares outstanding 398,477,743 122,129,419
See the accompanying notes to the financial statements MERA PHARMACEUTICALS, INC. Condensed Statements of Operations For the Nine Months Ended July 31, 2003 and 2002 (Unaudited)
Successor Predecessor ------------------ ------------------ Nine Months Nine Months Ended Ended July 31, 2003 July 31, 2002 ------------------ ------------------ Revenues Products, net $ 369,010 $ 433,700 Contract Services 183,327 224,464 Royalties 103,752 45,179 ------------------ ------------------ Total Revenues 656,089 703,343 ------------------ ------------------ Costs and Expenses Cost of products sold 178,980 226,151 Cost of subcontract services 281,831 385,117 Research and development costs 318,401 506,811 General and administrative 1,031,091 926,413 Depreciation 98,041 - ------------------ ------------------ Total costs and expenses 1,908,344 2,044,492 ------------------ ------------------ Loss from operations (1,252,255) (1,341,149) Other income (expense): Interest and other income 1,319 - Interest expense (91,235) (63,476) ------------------ ------------------ Total other income (expense) (89,916) (63,476) ------------------ ------------------ Net loss before reorganization items (1,342,171) (1,404,625) ------------------ ------------------ Professional fees related to reorganization - (190,369) Net loss before extraordinary items (1,342,171) (1,594,994) Gain on discharge of debt 109,234 - ------------------ ------------------ Net loss before income tax provision (1,232,937) (1,594,994) Tax expense (876) (7,664) Refundable tax credit 13,657 208,955 ------------------ ------------------ Net loss $ (1,220,156) $ (1,393,703) ================== ================== Loss per share (0.003) (0.011) Weighted average shares outstanding 395,526,458 122,131,641
See the accompanying notes to the financial statements MERA PHARMACEUTICALS, INC. CONDENSED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED JULY 31, 2003 AND 2002 (UNAUDITED)
Successor Predecessor ------------------------- ------------------------- Nine Months Ended Nine Months Ended July 31, 2003 July 31, 2002 ------------------------- ------------------------- Cash Flows from Operating Activities: Net loss $ (1,220,156) $ (970,595) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 187,381 124,017 Gain on discharge of debt (109,234) - Changes in assets and liabilities: Accounts receivable (140,740) 49,664 Tax receivable (13,658) - Inventories (138,194) (25,204) Other current assets (7,509) (33,853) Accounts payable and accured expenses 210,353 304,741 Deferred revenue 105,992 ------------------------- ------------------------- Net cash used by operating activities (1,125,765) (551,230) ------------------------- ------------------------- Cash Flows from Investing Activities: Purchases of fixed assets (3,919) - ------------------------- ------------------------- Net cash used by investing activities (3,919) - ------------------------- ------------------------- Cash Flows from Financing Activities Proceeds from short-term advance - 500,000 Proceeds from issuance of preferred stock 659,000 - Proceeds from issuance of common stock 2,225,000 - Proceeds from notes payable 402,232 - Payment of notes payable (2,193,221) - ------------------------- ------------------------- Net cash provided by financing activities 1,093,011 500,000 ------------------------- ------------------------- Net increase (decrease) in cash and cash equivalents (36,673) (51,230) Cash and cash equivalents, beginning of the period 40,743 47,398 ------------------------- ------------------------- Cash and cash equivalents, end of the period $ 4,070 $ (3,832) ========================= ========================= Supplemental non-cash information Assumption of promissory note in exchange for $ 100,000 common stock
See the accompanying notes to the financial statements MERA PHARMACEUTICALS, INC. NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. GENERAL BASIS OF PRESENTATION: - The interim financial statements presented herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The interim financial statements should be read in conjunction with the Company's annual financial statements, notes and accounting policies included in the Company's annual report on Form 10-KSB for the year ended October 31, 2002 as filed with the SEC. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) which are necessary to provide a fair presentation of financial position as of July 31, 2003 and the related operating results and cash flows for the interim period presented have been made. The results of operations for the period presented are not necessarily indicative of the results to be expected for the year. 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"). 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 $2,121,508 through the quarter ended July 31, 2003 and current liabilities exceeded current assets by $683,629. 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 acquire the necessary capital to achieve a level of sales that will permit it to operate on the basis of revenues alone. These factors, among others, create an uncertainty about the Company's ability to continue as a going concern. 3. 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 July 31, 2003 inventories consisted of $845,787 of work in process and $293,710 of finished goods and are stated at their net realizable value. 7 4. REVENUE RECOGNITION Product revenue is recognized upon shipment to customers. Contract services revenue is recognized as services are performed on a cost reimbursement basis. Royalty revenues are recognized when received. The Company has adopted Security and Exchange Commission's Staff Accounting Bulletin (SAB) No. 101, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. 5. LOSS PER SHARE The Company computed basic and diluted loss per share amounts for July 31, 2003 and 2002 pursuant to the Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings Per Share." The assumed effects of the exercise of outstanding warrants and conversion of notes would be anti-dilutive, accordingly dilutive per share amounts have not been presented in the accompanying statements of operations. 6. NOTES PAYABLE In December 2002, the Company issued a promissory notes totaling $794,000 to a limited liability company managed by Richard D. Propper, MD and Daniel P. Beharry, both officers and directors of the Company, for funds that the Company borrowed. On July 2, 2003, $150,000 of the note was repaid. The repaid funds were reinvested into the Company as part of a total investment of $225,000 (see Note 8). Upon receiving the repayment, the balance of the note was cancelled, and all related interest was forgiven. The total amount of interest forgiven was $38,225. A new promissory note was negotiated by the parties and issued on July 2, 2003 by the Company for the balance of $644,000. Interest accrued on the new promissory note was $3,220. During the month of April 2003, the Company entered into a line of credit agreement with Aquasearch Investment Partners, a general partner of which is Gregory F. Kowal, a director of the Company. Under the credit agreement, the Company may borrow up to $125,000 from Aquasearch Investment Partners at an annual interest rate of 10%. The agreement has a term of one year. During the quarter ended July 31, 2003 the Company borrowed $4,000 and owed a total of $53,000 under the agreement. The credit agreement also provides for the issuance of warrants to purchase shares of the Company's common stock at a price of $0.05 per share. The total number of shares subject to purchase on those conditions is dependent upon the maximum balance outstanding under the line of credit during its term. As of July 31, 2003, the number of warrants issuable under this agreement was 1,060,000, although no warrants had been issued. During the month of June 2003, the Company issued a promissory note in the face amount of $50,000 in exchange for a loan made in that amount to the Company. The outstanding principal amount of the loan accrues interest at the rate of 10% per annum. The note matures on March 31, 2004. In addition to repayment of principal and interest, the note calls for issuance to the lender of warrants to purchase 400,000 shares of the Company's common stock at a price of $0.05 per share. The term of the warrants is five years. A portion of the principal and the interest accrued on the note through July 16, 2003 were prepaid that date, leaving an outstanding principal balance on this note of approximately $40,000. 8 7. COMMON STOCK AND STOCK PURCHASE WARRANTS On July 9, 2003, the Company agreed to accept assignment of a $100,000 promissory note made by Ancile Pharmaceuticals and held by Ancile Opportunity Partners in exchange for the issuance of 3,703,704 shares of its common stock to the partners in Ancile Opportunity Partners. Among the partners of Ancile Opportunity Partners are Richard D. Propper, MD and Daniel P. Beharry, each of whom was an officer and a director of the Company at the time of the assignment. The assigned note reflected an investment by Ancile Opportunity Partners into Ancile Pharmaceuticals as required under the memorandum of understanding by which Mera was to acquire Ancile through a reverse triangular merger. This transaction was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2). On July 11, 2003, the Company issued 6,428,571 shares of common stock at a price of $0.035 per share, for aggregate consideration of $225,000, to a Delaware limited liability company. $150,000 of that consideration was the result of the conversion of debt to equity (see Note 6). The company to whom the stock was issued is managed by Richard D. Propper, MD and Daniel P. Beharry, both officers and directors of the Company at the time of the issuance, but neither Dr. Propper nor Mr. Beharry has an ownership interest in that company, and they receive no compensation in connection with their management of it. This transaction was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2). The following is a summary of the Company's outstanding common stock purchase warrants as of July 31, 2003:
- -------------------- -------------------------- ----------------- --------------- ---------------------------- Exercise Price Outstanding at October Issued Exercised Outstanding at July 31, 31, 2002 2003 - -------------------- -------------------------- ----------------- --------------- ---------------------------- $0.05 - 4,900,600 - 4,900,600 -------------------------- ----------------- --------------- ---------------------------- - 4,900,600 - 4,900,600 -------------------------- ----------------- --------------- ----------------------------
The Company has reserved a sufficient number of shares of its authorized common stock for issuance upon exercise of the outstanding warrants. 8. 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 by the Bankruptcy Court, and the Company has not yet adopted a plan to replace it. 9 9. INCOME TAXES The Company accounts for income taxes under Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." SFAS No. 109 requires the use of the liability method in determining income tax expense. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. Since its formation the Company has incurred net operating losses. 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. The Company is a Qualified High Tech Business ("QHTB") in the State of Hawaii. QHTBs qualify for certain refundable state tax credits. As of July 31, 2003, an estimated $50,000 was receivable by the Company for such credits related to eligible research and development activities. Subsequent to that date, the Company received a payment of approximately $44,000 against the total amount receivable. 10. RELATED PARTY TRANSACTIONS 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 was to receive $5,500 per month. This agreement was terminated on February 28, 2003. In exchange for the Company's agreement to pay certain pre-reorganization expenses totaling less than $4,000, Mr. Sherman has agreed to release the Company from its obligation to pay him the balance due him under this agreement prior to its termination in February 2003. On March 27, 2003, the Company entered into a sales agreement with Aquasearch Investment Partners ("AIP"), a general partner of which is Gregory F. Kowal, a Company director. Under the agreement AIP purchased 10,000 bottles of THE ASTAFACTOR(R) Sports Formula for $7.60 per bottle, or an aggregate price of $76,000. AIP then cosigned the product back to the Company to be resold in the commercial market. AIP will receive $8.35 for each bottle the Company resells under this agreement on AIP's behalf. Based on the Security and Exchange Commission's Staff Accounting Bulletin (SAB) No. 101, which provides guidance on the recognition of revenue in financial statements, the Company has deferred recognition of revenue from this transaction until the Company resells the product in the commercial market. During the three months ended July 31, 2003, the Company recognized approximately $18,000 in revenue under this arrangement. 10 11. COMMITMENTS In January 2001 the Company entered into research and license agreements with a major university to access, manufacture, use and sell products from a microalgal collection. Under terms of the research agreement, the university was 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 was approximately $550,000, although less than $400,000 was reportedly expended. The license agreement provided for royalties to be paid to the university on income from commercialization of products developed from the collection. No commercialization of products occurred under that license. Both agreements expired effective December 31, 2002, and the Company is not incurring any ongoing expense associated with these agreements. The amount due to the university under the expired research agreement remains in dispute, though the financial statements reflect the full amount for which the university has billed the Company. During the nine months ended July 31, 2003, no amounts were paid under the research agreement or the license agreement. In November 2002 the Company entered into a technical services agreement with the entity (the "Chinese Entity") that is developing a large-scale cultivation and production facility in China (the "Chinese Facility") in order to utilize the Company's intellectual property under license from the Company for the production of our product(s). Under the technical services agreement, the Company will provide technical services to the Chinese Entity to assist in the design, construction and initial operation of the Chinese Facility. The initial budget for the contract is $1,000,000 plus related expenses, with some payments being conditioned upon the Company's meeting certain objectives. The term of this contract is fifteen years. The construction of the Chinese Facility will commence when demand for the Company's products warrants that additional capacity. In view of the uncertain date for the start of payments under this contract, no amount has been accrued for payments to be received. 12. CONTINGENCIES Dr. Mark Huntley, former Chief Technical Officer of the Company, has asserted a claim that the Company involuntarily terminated his employment. The Company's position is that Dr. Huntley resigned. The parties are engaged in discussions to resolve this matter. Management does not believe that the resolution of this matter will have a material adverse effect on the Company's financial condition. 13. SUBSEQUENT EVENTS On May 23, 2003, the Company's board of directors agreed to compensate one of its members, Gregory F. Kowal, for his successful efforts in assisting the Company in raising capital during fiscal 2003. The compensation is in the form of issuance to Mr. Kowal of that number of shares of common stock of the Company equal to 7% of the total amount raised in each offering divided by the per share price of such offering. As of July 31, 2003 the total number of shares of stock issuable to Mr. Kowal under this agreement was 411,333. On August 28, 2003 these shares were issued. The Company will recognize an expense of 11 $28,793 on this transaction based on the fair value of $0.07 per share (the price at which the stock was trading on the date of issue). This transaction is exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2). 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"), INCLUDING STATEMENTS THAT INCLUDE THE WORDS "BELIEVES," "EXPECTS," "ESTIMATES," "ANTICIPATES" OR SIMILAR EXPRESSIONS. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE OUR ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. RISK FACTORS INCLUDE, BUT ARE NOT LIMITED TO, OUR ABILITY TO RAISE OR GENERATE ADDITIONAL CAPITAL; OUR ABILITY TO COST-EFFECTIVELY MANUFACTURE OUR PRODUCTS ON A COMMERCIAL SCALE; THE CONCENTRATION OF OUR CURRENT CUSTOMER BASE; COMPETITION; OUR ABILITY TO COMPLY WITH APPLICABLE REGULATORY REQUIREMENTS; POTENTIAL NEED FOR EXPANSION OF OUR PRODUCTION FACILITY; THE POTENTIAL LOSS OF A STRATEGIC RELATIONSHIP; INABILITY TO ATTRACT AND RETAIN KEY PERSONNEL; MANAGEMENT'S ABILITY TO EFFECTIVELY MANAGE OUR GROWTH; DIFFICULTIES AND RESOURCE CONSTRAINTS IN DEVELOPING NEW PRODUCTS; PROTECTION AND ENFORCEMENT OF OUR INTELLECTUAL PROPERTY; COMPLIANCE WITH ENVIRONMENTAL LAWS; CLIMATE UNCERTAINTY; CURRENCY FLUCTUATIONS; EXPOSURE TO PRODUCT LIABILITY LAWSUITS; AND CONTROL OF OUR MANAGEMENT AND AFFAIRS BY PRINCIPAL SHAREHOLDERS. THE READER SHOULD CAREFULLY CONSIDER, TOGETHER WITH THE OTHER MATTERS REFERRED TO HEREIN, THE INFORMATION CONTAINED UNDER THE CAPTION "RISK FACTORS" IN OUR ANNUAL REPORT ON FORM 10-KSB FOR A MORE DETAILED DESCRIPTION OF THESE SIGNIFICANT RISKS AND UNCERTAINTIES. WE CAUTION THE READER, HOWEVER, THAT THESE FACTORS MAY NOT BE EXHAUSTIVE. Since inception, our primary operating activities have consisted of basic research and development and production process development, recruiting personnel, purchasing operating assets and raising capital. From inception through September 16, 2002 (the date that we completed our bankruptcy proceedings and adopted "fresh-start accounting") we had an accumulated deficit of approximately $22,262,111. From September 16, 2002 through July 31, 2003 we had an accumulated deficit of $2,121,508. Our losses to date have resulted primarily from costs incurred in research and development and from general and administrative expenses associated with operations. We expect to continue to incur operating losses for at least the current fiscal year and perhaps beyond. We expect to have quarter-to-quarter and year-to-year fluctuations in revenues, expenses and losses, some of which could be significant. 13 We have a limited operating history. An assessment of our prospects should include the technology risks, market risks, expenses and other difficulties frequently encountered by early-stage operating companies, and particularly companies attempting to enter competitive industries with significant technology risks and barriers to entry. We have attempted to address these risks by, among other things, hiring and retaining highly qualified persons and forging strategic alliances with companies and universities that complement and leverage our technical strengths. However, our best efforts cannot guarantee that we will overcome these risks in a timely manner, if at all. RESULTS OF OPERATIONS REVENUES. During the quarters ended July 31, 2003 and 2002, product sales totaled $217,033 and $162,093, respectively. During the nine months ended July 31, 2003 and 2002, product sales totaled $369,010 and $433,700 respectively. Sales made through the Company's retail sales channel result from large orders placed through brokers, which in turn supply the demand at the retail outlet level. The timing of such orders can significantly affect the revenues that are recognized (or not recognized) in any given quarter. As a result, the amount of revenue realized from product sales in any given quarter does not necessarily relate to the rate at which the retail sales of the Company's product are occurring. As the number of retail outlets and the rate of sales of the Company's products increases, the revenue stream should become more regular, though some degree of variation in this revenue source will always exist. In addition, during the quarter ended July 31, 2003, the Company issued a credit for $28,000 to an account that returned expired product for replacement with current product. If adjusted for this return, the revenue from product sales during the nine months ended July 31, 2003 and 2002, respectively, would have been essentially unchanged. We earned revenues of $94,519 and $41,577 for the quarters ended July 31, 2003 and 2002, respectively, from a subcontract for work on a U.S. Department of Energy ("DOE") project. For the nine months ended July 31, 2003 and 2002, revenues from the DOE project were $183,327 and $224,464 respectively. The changes in revenues under this research agreement relate to changes in the number of personnel assigned to perform work under this project at various times. Royalty revenues for the quarters ended July 31, 2003 and 2002 were of $30,470 and $16,105 respectively. For the nine months ended July 31, 2003 and 2002, royalty revenues were $103,752 and $45,179 respectively. Royalty revenues included amounts received from another company based on sales of its products. Management does not have the ability to predict at what level these royalty revenues will be received for the balance of fiscal 2003. In November 2002, the Company entered into a technical services agreement with a Chinese joint venture to assist the joint venture in the design and construction of a large cultivation and processing facility in Hainan, China (the "Chinese Facility"). The same Chinese joint venture had previously entered into a license and distribution agreement with the Company to utilize our intellectual property to produce AstaFactor(R) and to distribute AstaFactor(R) in China. Under the terms of the consulting agreement, the Company is to receive payments of up to $1 million in exchange for consulting services, with the actual budget to be finalized. Construction of the Chinese Facility is not expected to begin until demand for the Company's products justifies adding that capacity It has also taken the Chinese joint venture longer than anticipated to obtain approval for distribution of AstaFactor(R) in China. The Company does not expect to receive any revenue under the technical services agreement until construction of the Chinese Facility begins. The Company's accumulated inventory, together with its existing production capacity in Kona, is sufficient to meet projected customer demands. 14 COST OF PRODUCTS SOLD. Cost of products sold include manufacturing and production costs associated with ASTAFACTOR(R), as well as the cost of sales of raw materials and certain other products Cost of products sold was $142,637 and $152,172 for the quarters ended July 31, 2003 and 2002, respectively. This resulted in a gross profit margin of approximately 34% for the current fiscal year as compared to 6% for the same quarter in the previous year. The low margins in the third quarter of 2002 were as a result of a large volume sale made to a single customer during that period. Cost of products sold was $178,980 and $226,151 for the nine months ended July 31, 2003 and 2002, respectively. This resulted in a gross profit margin of 51% for the nine months ended July 31, 2003, as compared to 48% for the same period of the preceding fiscal year. In the third quarter of 2002 a large volume sale made to a single customer during that period which carried a lower than normal profit margin. This sale reduced the overall profit margin for the first three fiscal quarters of 2002 as compared to the same period in fiscal 2003. Cost of contract services include costs associated with the U.S. Department of Energy project. During the quarters ended July 31, 2003 and 2002, the cost of contract services was $134,970 and $67,170 respectively. During the nine months ended July 31, 2003 and 2002, the cost of contract services was $281,831 and $385,117 respectively. The changes in costs under this research agreement relate to changes in the number of personnel assigned to perform work under this project at various times. RESEARCH AND DEVELOPMENT COSTS. Research and development costs include salaries, research supplies and materials and other expenses related to product development, exclusive of those costs for which the company is reimbursed.. Research and development costs for the quarter ended July 31, 2003 were $31,804 as compared to $173,508 for the same period in 2002. During the nine months ended July 31, 2003 research and development costs were $318,401 as compared to $506,811 the same period in 2002. The decrease in costs in fiscal year 2003 resulted from a shifting of resources to the U.S Department of Energy project, which is not included in this figure, and from general cost control measures instituted by the Company. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist principally of salaries, fees for professional services and promotional and marketing expenses related to ASTAFACTOR(R). General and administrative expenses for the third quarter of fiscal year 2003 were $173,416 as compared to $326,531 for the respective period of fiscal year 2002, a decrease of 47%. The decrease in selling, general and administrative expenses in the second quarter of fiscal year 2003 as compared to the comparable period in the prior year resulted from cost control measures instituted by the Company. 15 For the nine months ended July 31, 2003, general and administrative expenses were $1,031,091 as compared to $926,413 for the respective period of fiscal year 2002. The increase in overall general and administrative expenses in fiscal 2003 resulted from an increase in personnel and related expenses incurred to support increased operations following the Company's emergence from bankruptcy through its Chapter 11 reorganization, which was completed just prior to the beginning of fiscal 2003. During the second quarter of fiscal 2003 the Company instituted various cost control measures that resulted in a reduction in ongoing general and administrative expenses. As a result of continuing efforts to minimize costs, general and administrative expenses decreased from $312,885 in the second quarter of fiscal 2003 to $173,416 in the third quarter of fiscal 2003, a reduction of 45%. INTEREST EXPENSE. For the quarters ended July 31, 2003 and 2002, interest expense was $18,714 and $27,989, respectively. For the nine months ended July 31, 2003 and 2002, interest expense was $91,235 and $63,476, respectively. The amount of interest expense incurred in any particular period varies with the amount of debt outstanding. LIQUIDITY AND CAPITAL RESOURCES. We have financed our operations principally through public and private sales of debt and equity securities, together with revenues described above. During the month of April 2003, the Company entered into a line of credit agreement with Aquasearch Investment Partners, a general partner of which is Gregory F. Kowal, a director of the Company. Under the credit agreement, the Company may borrow up to $125,000 from Aquasearch Investment Partners at an annual interest rate of 10%. The agreement has a term of one year. During the quarter ended July 31, 2003 the Company borrowed $4,000 and owed a total of $53,000 under the agreement. The credit agreement also provides for the issuance of warrants to purchase shares of the Company's common stock at a price of $0.05 per share. The total number of shares subject to purchase on those conditions is dependent upon the maximum balance outstanding under the line of credit during its term. As of July 31, 2003, the number of warrants issuable under this agreement was 1,060,000, although no warrants had been issued. During the month of June 2003, the Company issued a promissory note in the face amount of $50,000 in exchange for a loan made in that amount to the Company. The outstanding principal amount of the loan accrues interest at the rate of 10% per annum. The note matures on March 31, 2004. In addition to repayment of principal and interest, the note calls for issuance to the lender of warrants to purchase 400,000 shares of the Company's common stock at a price of $0.05 per share. The term of the warrants is five years. A portion of the principal and the interest accrued on the note through July 16, 2003 were prepaid that date, leaving an outstanding principal balance on this note of approximately $40,000. 16 On July 11, 2003, the Company issued 6,428,571 shares of common stock at a price of $0.35 per share to a Delaware limited liability company, for aggregate consideration of $225,000. $150,000 of that consideration was the result of the conversion of debt to equity. The company to whom the stock was issued is managed by Richard D. Propper, MD and Daniel P. Beharry, both officers and directors of the Company at the time of the issuance, but neither Dr. Propper nor Mr. Beharry has an ownership interest in that company, and they receive no compensation in connection with their management of it. This transaction was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2). The Company is owed additional amounts under a conditional license of certain of its intellectual property rights ("IP") and the grant of the rights to distribute its products in certain geographic markets. The condition to the payment of the license and distribution rights fees is the performance of the comprehensive technical services agreement the Company entered into with the Chinese Entity in November 2002, pursuant to which the Company will provide services to support the construction of the Chinese Facility at which the IP will be used and to assist in the effective implementation of the IP. In addition, the Company has received a conditional commitment from an entity for a $285,000 equity investment prior to the end of calendar 2003. The Company believes that the condition associated with that investment will be met and the investment will be received. However, because such investment is not expected to be received during the Company's fiscal year 2003, it is not reflected in the Company's financial statements. ITEM 3. CONTROLS AND PROCEDURES a. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Under the supervision and with the participation of our management, including our chief executive officer and controller, we conducted an evaluation of our disclosure controls and procedures, as such terms are defined in Rule 13a-14(c) promulgated under the Exchange Act, within the 90 day period prior to the filing date of this quarterly report. After review and evaluation, management has concluded that the disclosure controls and procedures are designed effectively to accumulate and communicate material information required to be disclosed in the Company's reports to the Securities and Exchange Commission. b. CHANGES IN INTERNAL CONTROLS. There were no significant changes in our internal controls and no other factors that could significantly affect these controls subsequent to our most recent evaluation. Management found that no corrective actions with regard to any significant deficiency or material weakness in our internal controls needed to be implemented at this time. 17 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - None ITEM 2. CHANGES IN SECURITIES - On July 9, 2003, the Company agreed to accept assignment of a $100,000 promissory note made by Ancile Pharmaceuticals and held by Ancile Opportunity Partners in exchange for the issuance of 3,703,704 shares of its common stock to the partners in Ancile Opportunity Partners. Among the partners of Ancile Opportunity Partners are Richard D. Propper, MD and Daniel P. Beharry, each of whom was an officer and a director of the Company at the time of the assignment. The assigned note reflected an investment by Ancile Opportunity Partners into Ancile Pharmaceuticals as required under the memorandum of understanding by which Mera was to acquire Ancile through a reverse triangular merger. This transaction was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2). On July 11, 2003, the Company issued 6,428,571 shares of common stock at a price of $0.035 per share, for aggregate consideration of $225,000, to a Delaware limited liability company. That company is managed by Richard D. Propper, MD and Daniel P. Beharry, both officers and directors of the Company at the time of the issuance, but neither Dr. Propper nor Mr. Beharry has an ownership interest in that company, and they receive no compensation in connection with their management of it. This transaction was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2). ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None. ITEM 5. OTHER INFORMATION - CHANGE IN OFFICERS AND DIRECTORS Effective July 16, 2003, Richard D. Propper resigned as chief executive officer of the Company and from his position as a director and chairman. Dr. Propper's resignation was to allow him to pursue other interests, and it was not motivated by any disagreements with respect to any of the Company's operations, policies and practices. He remains a consultant to the Company on a month-to-month basis, in which capacity he will remain directly involved in a number of international projects in process at the time of his resignation, as well as on new initiatives as they arise. Effective July 16, 2003, Daniel P. Beharry was elected as chief executive officer of the Company. Effective August 21, 2003, Gregory F. Kowal, then a sitting member of the board, was elected chairman to replace Dr. Propper. The vacancy on the board of directors resulting from Dr. Propper's resignation has not yet been filled. 18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. EXHIBITS 99.1 Certification of Daniel P. Beharry pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Anthony E. Applebaum pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. b. REPORTS ON FORM 8-K The following reports on Form 8-K were filed during the quarter for which this report is filed: September 2, 2003 (filed September 9, 2003) reporting changes in certifying accountant. SIGNATURES Pursuant to the requirements of the Exchange Act, the Registrant has duly caused this Quarterly Report on Form 10-QSB to be signed on its behalf by the undersigned thereunto duly authorized. MERA PHARMACEUTICALS, INC. Dated: 9/10/03 by: /S/ DANIEL P. BEHARRY --------------- --------------------------- Daniel P. Beharry Chief Executive Officer 19 CERTIFICATION I, Daniel P. Beharry, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Mera Pharmaceuticals, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Company's other certifying officers and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of Company's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and 6. The Company's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: 9/10/03 ------------------ /s/DANIEL P. BEHARRY - ----------------------- Daniel P. Beharry Chief Executive Officer 20 CERTIFICATION I, Anthony E. Applebaum, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Mera Pharmaceuticals, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Company's other certifying officers and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of Company's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and 6. The Company's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: 9/10/03 --------------- /s/ ANTHONY E. APPLEBAUM - ------------------------------------------ Anthony E. Applebaum Controller and Principal Financial Officer 21 EX-99.1 3 ex99-1.txt 906 CERTIFICATION OF CEO EXHIBIT 99.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Daniel P. Beharry, Chief Executive Officer of Mera Pharmaceuticals, Inc. (the "Registrant"), do hereby certify in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Quarterly Report on Form 10-QSB of the Registrant, to which this certification is attached as an exhibit (the "Report"), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Dated: 9/10/03 ----------------- /s/DANIEL P. BEHARRY ----------------------- Daniel P. Beharry Chief Executive Officer 23 EX-99.2 4 ex99-2.txt 906 CERTIFICATION OF THE ACCOUNTING OFFICER EXHIBIT 99.2 CERTIFICATION OF CONTROLLER I, Anthony E. Applebaum, Controller of Mera Pharmaceuticals, Inc. (the "Registrant"), do hereby certify in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Quarterly Report on Form 10-QSB of the Registrant, to which this certification is attached as an exhibit (the "Report"), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Dated: 9/10/03 ----------------- /s/ ANTHONY E. APPLEBAUM ------------------------------------------- Anthony E. Applebaum Controller and Principal Accounting Officer 24 -----END PRIVACY-ENHANCED MESSAGE-----