10QSB 1 t300902.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 JANUARY 31, 2004 Or [ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 COMMISSION FILE NUMBER: 333-107716 ---------------------------------- MERA PHARMACEUTICALS, 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 [ ] 425,144,736 shares of $0.0001 par value common stock outstanding as of January 31, 2004 80 shares of $0.0001 par value Series A preferred stock outstanding as of January 31, 2004 974 shares of $0.0001 par value Series B preferred stock outstanding as of January 31, 2004 ================================================================================ MERA PHARMACEUTICALS, INC. FORM 10-QSB FOR THE QUARTER ENDED JANUARY 31, 2004 CONTENTS PAGE PART I - FINANCIAL INFORMATION Item 1: Financial Statements Condensed Balance Sheets 3 Condensed Statements of Operations 4 Condensed Statements of Cash Flows 5 Notes to Condensed Financial Statements 6 Item 2: Management's Plan of Operation Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Controls and Procedures 11 PART II - OTHER INFORMATION Item 1: Legal Proceedings 11 Item 2: Changes In Securities 11 Item 3. Defaults Upon Senior Securities 12 Item 4: Submission of Matters to a Vote of Security Holders 12 Item 5: Other Information 12 Item 6: Exhibits and Reports on Form 8-K 12 Signature 13 Certifications 13 Mera Pharmaceuticals, Inc. Condensed Balance Sheet (Unaudited)
January 31, 2004 ----------- ASSETS Current assets: Cash and cash equivalents $ 961,778 Accounts receivable, net 92,911 Inventories 931,840 Prepaid expenses and other current assets 79,248 ----------- Total current assets 2,065,777 Plant and equipment, net 3,004,619 Other assets, net of accumulated amortization of $24,838 140,762 ----------- Total Assets $ 5,211,158 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable, accrued expenses and customer credits $ 811,781 Notes payable - related party 154,254 Deferred revenue 305,992 ----------- Total Current Liabilities 1,272,027 ----------- Stockholders' equity: Convertible preferred stock, $.0001 par value, 5,000,000 shares authorized, 80 Series A shares issued and outstanding and 974 Series B shares issued and outstanding at January 31, 2004 2 Common stock, $.0001 par value: 500,000,000 shares authorized, 425,144,736 shares issued and outstanding at January 31, 2004 42,514 Additional paid-in capital 6,818,312 Accumulated deficit (2,921,697) ----------- Total stockholders' equity 3,939,131 ----------- Total Liabilities and Stockholders' Equity $ 5,211,158 ===========
See the accompanying notes to the financial statements 3 Mera Pharmaceuticals, Inc. Condensed Statements of Operations For the Three Months Ended January 31, 2004 and 2003 (Unaudited)
--------------- -------------- Three Months Three Months Ended Ended January 31, 2004 January 31, 2003 ------------- ------------- Revenue Products $ 157,389 $ 123,769 Contract Services 55,160 28,739 Royalties 56,026 29,674 ------------- ------------- Total Revenue 268,575 182,182 ------------- ------------- Costs and Expenses Cost of products sold 97,656 29,568 Cost of subcontract services 97,010 37,599 Research and development costs 7,253 230,982 Selling, general and administrative 221,667 544,213 Depreciation and Amortization 43,538 6,360 ------------- ------------- Total costs and expenses 467,124 848,722 ------------- ------------- Operating loss (198,549) (666,540) Other income (expense): Interest income -- 207 Other income 4,932 -- Interest expense (9,472) (40,982) ------------- ------------- Total other income (expense) (4,540) (40,775) ------------- ------------- Net loss before extraordinary items (203,089) (707,315) Gain on discharge of debt 12,880 71,009 ------------- ------------- Net loss before income tax provision (190,209) (636,306) Tax expense (800) -- Refundable tax credit 2,521 8,210 ------------- ------------- Net loss $ (188,488) $ (628,096) ============= ============= Loss per share - basic and diluted (0.000) (0.002) Weighted average shares outstanding - 418,644,466 389,667,979 basic and diluted
See the accompanying notes to the financial statements 4 Mera Pharmaceuticals, Inc. Condensed Statements of Cash Flows For the Three Months Ended January 31, 2004 and 2003 (Unaudited)
------------------ ------------------ Three Months Three Months Ended Ended January 31, 2004 January 31, 2003 ------------------ ------------------ Cash Flows from Operating Activities: Net loss $ (188,488) $ (628,096) Adjustments to reconcile net loss to net cash used in operating activities: Accumulated depreciation and amortization 66,521 57,819 Gain on discharge of debt (12,880) (71,009) Changes in assets and liabilities Accounts receivable (31,749) (50,673) Inventories 45,662 (194,617) Prepaid expenses and other current assets (56,244) (33,742) Accounts payable, accured expenses and customer credits (213,610) 156,990 ----------- ----------- Net cash used by operating activities (390,788) (763,328) ----------- ----------- Cash Flows from Investing Activities: Purchases of fixed assets (7,826) -- ----------- ----------- Net cash used by investing activities (7,826) -- ----------- ----------- Cash Flows from Financing Activities: Proceeds from issuance of stock 2,145,000 2,659,000 Proceeds from notes payable -- 290,732 Payment of notes payable (785,757) (2,024,732) ----------- ----------- Net cash provided by financing activities 1,359,243 925,000 ----------- ----------- Net increase (decrease) in cash and cash equivalents 960,629 161,672 Cash and cash equivalents, beginning of the period 1,149 40,349 ----------- ----------- Cash and cash equivalents, end of the period $ 961,778 $ 202,021 =========== ===========
See the accompanying notes to the financial statements 5 MERA PHARMACEUTICALS, INC. NOTES TO THE FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED JANUARY 31, 2004 AND 2003 1. GENERAL The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three month period ended January 31, 2004, are not necessarily indicative of the results that may be expected for the year ending October 31, 2004. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended October 31, 2003, included in Form 10-KSB filed with the Securities and Exchange Commission 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, and it has incurred an accumulated deficit of $2,921,697 through the quarter ended January 31, 2004. The Company anticipates that existing capital resources and 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 indefinitely 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 January 31, 2004 inventories consisted of $830,784 of work in process and $236,056 of finished goods, less an allowance of $135,000, and are stated at their net realizable value. 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. 6 5. LOSS PER SHARE The Company computed basic and diluted loss per share amounts for January 31, 2004 and 2003 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. NOTE PAYABLE - RELATED PARTY Note payable - related party consists of the following as of January 31, 2004: Unsecured note payable - stockholder note bearing an annual interest rate of 10% due on various dates through March 31, 2004. These notes contained detachable stock purchase warrants further described in Note 7. $154,254 Total interest expense on notes payable - related party was approximately $4,300 for the quarter ended January 31, 2004. 7. COMMON STOCK AND COMMON STOCK PURCHASE WARRANTS During the fiscal year of 2002, the Company issued detachable stock purchase warrants in connection with notes payable issued to certain directors and stockholders of the Company. These warrants grant the right to purchase up to an aggregate of 5,520,000 shares of common stock at $0.05 per share and the warrants have 5-year terms that expire during the fiscal year ended 2008. These transactions were exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2). The fair market value of the stock purchase warrants at the time of issuance was approximately $165,600. This amount has been recorded as additional paid-in capital and will be amortized over the 5 year term or until exercised. In December 2003, the Company issued 16,909,901 shares of common stock at a price of $0.11 per share, for aggregate consideration of $1,860,000, to a limited liability company. That company is managed in part by certain stockholders, 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). In December 2003, the Company issued 2,590,909 shares of its common stock to an investor at a per share price of $0.11 and aggregate consideration of $285,000. This investment was made in fulfillment of the conditional subscription agreement referred to in previous financial statement of the Company. 7 The following is a summary of the Company's common stock purchase warrants for the quarter ended January 31, 2004:
-------------------- -------------------------- ----------------- --------------- ---------------------------- Exercise Price Outstanding at October Issued Exercised Outstanding at January 31, 31, 2003 2004 -------------------- -------------------------- ----------------- --------------- ---------------------------- $0.05 - 5,520,000 - 5,520,000 -------------------------- ----------------- --------------- ---------------------------- - 5,520,000 - 5,520,000 -------------------------- ----------------- --------------- ----------------------------
The Company has reserved a sufficient number of shares our common stock for issuance upon exercise of the outstanding warrants. 8. STOCK OPTION PLANS In December 2003, the Board of Directors adopted the 2003 Stock Option Plan. The 2003 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. During the three month period ended January 31, 2004, a total of 19,382,143 options were granted, no options were cancelled and none were exercised. The options were all granted with an exercise price of $0.03 per share of common stock and were fully vested as of January 31, 2004. 9. RELATED PARTY TRANSACTIONS In December 2003 the Board agreed to pay one of its members a commission of 4.0% of sales made to a Hawaiian distributor. The commission amount to be paid is based on sales consummated retroactive to May 2003 and approximately $5,800 was payable under this agreement as of January 31, 2004. 8 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 stockholders. 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 $22,295,583. From September 16, 2002 through January 31, 2004 we had an accumulated deficit of $2,921,697. 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 through the current fiscal year. We expect to have quarter-to-quarter and year-to-year fluctuations in revenues, expenses and losses, some of which could be significant. 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 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. 9 RESULTS OF OPERATIONS REVENUES. During the quarters ended January 31, 2004 and 2003, products revenues increased from $157,389 to $123,769, respectively. This increase of $33,260, or 27%, was a result of a general increase in demand and sales of certain raw materials made in the first quarter of fiscal 2004 that did not occur in the corresponding period of fiscal 2003. The Company also recognized revenues of approximately $55,160 and $28,739 for the quarters ended January 31, 2004 and 2003, respectively, from a subcontract for our work on a U.S. Department of Energy project. This resulted in an increase in contract services revenue of $26,421 or 92%. The increase in revenues under this research agreement from the first quarter of fiscal year 2003 to the first quarter of fiscal year 2004 resulted from the increase in personnel assigned to perform work under this project in order to complete it in a timely manner. The Company recognized royalty revenues of $56,026 and $29,674 for the quarters ended January 31, 2004 versus January 31, 2003, respectively. This increase of $26,352, or 89%, related to royalty revenues received from another company based on sales of its products. The payment received in the quarter ended January 31, 2004 will be the last payment received under this agreement. COST OF PRODUCTS SOLD. Cost of products sold includes manufacturing and production costs associated with products produced. Cost of products sold was $97,656 and $29,568 for the quarters ended January 31, 2004 and 2003, respectively. The increase of $68,088, or 230%, in the cost of products sold in the first quarter of fiscal year 2004 as compared to the first quarter of fiscal year 2003 resulted primarily from higher finished goods sales volumes and the sales of raw materials, which carry a lower profit margin when compared to sales of our finished goods products at retail, in the first quarter of 2004. Cost of subcontract services include labor costs associated with the U.S. Department of Energy project. During the quarters ended January 31, 2004 and January 31, 2003, the cost of contract services was $97,010 and $37,599 respectively. This resulted in an increase of $59,411 or 158%, and was primarily due to the increase in number of personnel performing work on this project. RESEARCH AND DEVELOPMENT COSTS. Research and development costs include salaries, research supplies and materials and expenses related to product development and the development of the drug discovery compound library. Research and development costs for the quarter ended January 31, 2004 were $7,253 as compared to $230,982 for the quarter ended January 31, 2003. This decrease of $223,729, or 97%, in the first quarter of 2004 was related to general cost cutting measures as well as a shift in focus from general research and development activities to specific research on our U.S. Department of Energy project, which is included in cost of subcontract services. 10 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses consist primarily of salaries, fees for professional services and promotional and marketing expenses. Selling, general and administrative expenses for the first quarter of fiscal year 2004 were $221,667 compared to $544,213 for the respective period in the first quarter of fiscal year 2003. This decrease of $322,546 or 59% resulted from general cost cutting measures that we implemented following the first quarter of fiscal year 2003. INTEREST EXPENSE. For the quarters ended January 31, 2004 and January 31, 2003 interest expense decreased by $31,510 or 77% from $9,472 to $40,982, respectively. This decrease was due to a further reduction in the amount of outstanding debt during the first quarter of fiscal year 2004. 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 three months ended January 31, 2004, we raised $2,145,000 of net proceeds from the sale of shares of our common stock. We also repaid approximately $786,000 on various promissory notes payable. Furthermore, we have received a conditional commitment for an additional equity investment of $265,000 prior to the end of calendar year 2004. 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, 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. Based on this evaluation, our Chief Executive Officer and Principal Financial and Accounting Officer concluded that our disclosure controls and procedures were effective as of that date. (b) There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES In December 2003, the Company issued 16,909,901 shares of common stock at a price of $0.11 per share, for aggregate consideration of $1,860,000, to a limited liability company. That company is managed in part by certain stockholders, 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). 11 In December 2003, the Company issued 2,590,909 shares of its common stock to an investor at a per share price of $0.11 and aggregate consideration of $285,000. This investment was made in fulfillment of the conditional subscription agreement referred to in previous financial statements of the Company. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. EXHIBITS 31.1 Certification of Chief Executive Officer pursuant to Rule 13a - 14 (a) of the Securities Exchange Act of 1934 (filed herewith electronically). 31.2 Certification of Principal Financial and Accounting Officer pursuant to Rule 13a - 14 (a) of the Securities Exchange Act of 1934 (filed herewith electronically). 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith electronically). 32.2 Certification of Principal Financial and Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002 (filed herewith electronically) b. REPORTS ON FORM 8-K None 12 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: 3/15/04 by: /S/ DANIEL P. BEHARRY --------------------------- Daniel P. Beharry Chief Executive Officer 13