10QSB 1 t302088.txt QUARTERLY REPORT ================================================================================ 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, 2005 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) 73-4460 QUEEN KA'AHUMANU HIGHWAY, SUITE 110 KAILUA-KONA, HAWAII 96740 (808) 326-9301 (Address and telephone number of principal executive 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 [ ] 469,576,411 shares of $0.0001 par value common stock outstanding as of July 31, 2005 80 shares of $0.0001 par value Series A preferred stock outstanding as of July 31, 2005 974 shares of $0.0001 par value Series B preferred stock outstanding as of July 31, 2005 ================================================================================ MERA PHARMACEUTICALS, INC. FORM 10-QSB FOR THE QUARTER ENDED JULY 31, 2005 CONTENTS PAGE PART I - FINANCIAL INFORMATION Item 1: Financial Statements Condensed Balance Sheet 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 7 Item 3. Controls and Procedures 9 PART II - OTHER INFORMATION Item 1: Legal Proceedings 9 Item 2: Changes In Securities 9 Item 3. Defaults Upon Senior Securities 9 Item 4: Submission of Matters to a Vote of Security Holders 9 Item 5: Other Information 10 Item 6: Exhibits and Reports on Form 8-K 10 Signature 10 Certifications 11
MERA PHARMACEUTICALS, INC. CONDENSED BALANCE SHEETS July 31, 2005 ----------- (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 20,466 Accounts receivable, net 18,913 Inventories, net of provision for excess inventory of $483,000 324,073 Prepaid expenses and other current assets 35,094 ----------- TOTAL CURRENT ASSETS 398,546 ----------- PROPERTY, PLANT, AND EQUIPMENT, NET 2,634,497 OTHER ASSETS, NET OF ACCUMULATED AMORTIZATION OF $28,080 34,320 ----------- TOTAL ASSETS $ 3,067,363 =========== LIABILITIES AND SHARHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable, accrued expenses and customer credits $ 194,044 Notes payable - related party 45,015 ----------- TOTAL CURRENT LIABILITIES 239,059 ----------- SHAREHOLDERS' EQUITY Convertible preffered stock, $.0001 par value, 10,000 shares authorized, 80 Series A shares issued and outstanding and 974 Series B shares issued and outstanding 2 Common stock, $.0001 par value: 500,000,000 shares authorized, 469,576,411 shares issued and outstanding 46,958 Additional paid-in capital 7,331,796 Accumulated deficit (4,550,452) ----------- TOTAL SHAREHOLDERS' EQUITY 2,828,304 ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,067,363 ===========
The accompanying notes are an integral part of these financial statements 3 MERA PHARMACEUTICALS, INC. CONDENSED STATEMENTS OF OPERATIONS
Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended July 31, July 31, July 31, July 31, 2005 2004 2005 2004 ------------- ------------- ------------- ------------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) NET SALES $ 116,592 $ 120,812 $ 357,639 $ 557,573 Cost of goods sold 75,050 30,086 233,815 178,463 ------------- ------------- ------------- ------------- GROSS PROFIT 41,542 90,726 123,824 379,110 ------------- ------------- ------------- ------------- Operating Expenses Selling and administrative expenses 126,804 276,742 423,350 676,279 Cost of subcontract services 9,993 74,757 122,613 260,735 Research and development costs 76,152 44,765 120,867 80,609 Depreciation and amortization 66,236 45,315 154,910 116,948 Provision for excess inventory -- 640,000 25,000 640,000 ------------- ------------- ------------- ------------- Total operating expenses 279,185 1,081,579 846,740 1,774,571 ------------- ------------- ------------- ------------- Operating loss (237,643) (990,853) (722,916) (1,395,461) Other income (expense) Interest income 552 -- 552 -- Other income -- -- -- 306,587 Interest expense (457) -- (1,357) (13,993) ------------- ------------- ------------- ------------- Total other income (expense) 95 -- (805) 292,594 ------------- ------------- ------------- ------------- Net income (loss) before extraordinary item (237,548) (990,853) (723,721) (1,102,867) Gain on discharge of debt -- -- 12,880 ------------- ------------- ------------- ------------- Net income (loss) before tax provision (237,548) (990,853) (723,721) (1,089,987) Provision for income taxes (518) (1,500) (518) (2,300) Refundable tax credit 8,243 20,159 11,548 25,321 ------------- ------------- ------------- ------------- NET INCOME (LOSS) $ (229,823) $ (972,194) $ (712,691) $ (1,066,966) Net income (loss) per common share $ (0.0005) $ (0.0024) $ (0.0016) $ (0.0026) ============= ============= ============= ============= Weighted Average Shares Outstanding 469,576,411 411,144,736 447,578,467 418,311,313 ============= ============= ============= =============
The accompanying notes are an integral part of these financial statements 4 MERA PHARMACEUTICALS, INC. CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Nine Months Ended Ended July 31, July 31, 2005 2004 ------------- ------------- (Unaudited) (Unaudited) Cash Flows from Operating Activities Net Income (loss) $ (712,691) $ (1,066,966) Adjustments to reconcile net loss to net cash used in operating activities: Accumulated depreciation and amortization 193,215 211,355 Expenses paid wih common stock 14,992 -- Changes in current assets and liabilities: Accounts receivable 1,131 30,573 Inventories 24,959 577,505 Prepaid expenses and other current assets 6,891 (18,748) Accounts payable, accrued expenses, and customer credits (29,285) (836,940) Deferred revenue (10,790) (75,704) ------------- ------------- Net Cash Used in Operating Activities (511,578) (1,178,925) ------------- ------------- Cash flows from Investing Activities Purchase of fixed assets -- (17,144) ------------- ------------- Net Cash Used in Investing Activities -- (17,144) ------------- ------------- Cash flows From Financing Activities Proceeds from issuance of stock 547,643 2,145,040 Payment of notes payable (20,000) (894,996) ------------- ------------- Net Cash Provided by Financing Activities 527,643 1,250,044 ------------- ------------- Net increase (decrease) in cash and cash equivalents 16,065 53,975 Cash and cash equivalents - beginning of period 4,401 1,149 ------------- ------------- Cash and cash equivalents - end of period $ 20,466 $ 55,124 ============= =============
The accompanying notes are an integral part of these financial statements 5 MERA PHARMACEUTICALS, INC. NOTES TO CONDESED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED JULY 31, 2005 AND 2004 1. BASIS OF PRESENTATION OF FINANCIAL STATEMENTS 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 nine month period ended July 31, 2005 are not necessarily indicative of the results that may be expected for the year ending October 31, 2005. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended October 31, 2004, included in Form 10-KSB filed with the Securities and Exchange Commission The preparation of the Company's Consolidated Financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. The more significant areas requiring the use of managements estimates and assumptions relate to depreciation and amortization calculations; inventory valuations; asset impairments(including impairments of goodwill, long-lived assets, and investments); valuation allowances for deferred tax assets; reserves for contingencies and litigation; and the fair value and accounting treatment of financial instruments. The Company bases its estimates on the Company's historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ significantly from these estimates under different assumptions or conditions. 6 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, raising capital and sales of product. From September 16, 2002, the effective date of our plan of reorganization, through July 31, 2005 we had an accumulated deficit of $4,550,452. Our losses to date have resulted primarily from costs incurred in research and development, production costs 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, diversifying our customer base and expanding revenue sources, e.g., by performing other contract services and increasing efforts to sell raw materials to other product formulators. However, our best efforts cannot guarantee that we will overcome these risks in a timely manner, if at all. 7 RESULTS OF OPERATIONS REVENUES. During the quarter ended July 31, 2005, as compared to the equivalent period in 2004, revenues from product sales increased to $103,000 from $81,000, or about 27.5%. Overall revenues decreased slightly, from $120,812 to $116,592, a decrease of $4,000, or about 3%. This slight decrease in total revenues, despite the increase in product revenues, is due primarily to the fact that the contract research that we have been engaged in for the Department of Energy came to an end during our second quarter. Only minimal revenues from this source were booked for the third quarter of 2005 relative to the third quarter of 2004. The company anticipates commencing additional contract research activities in the near future to replace the revenue from the Department of Energy grant. COST OF SALES. Cost of goods sold was $75,000 as compared to $30,000 for the quarters ended July 31, 2005 and 2004, respectively. The increased cost of goods results from the fact that in the past the Company has capitalized certain production costs which it is now expensing. Consistent with that, gross margins on the sales of products were approximately 27% for the quarter ended July 31, 2005 as compared to 63% for the quarter ended July 31, 2004. Cost of subcontract services includes costs associated with our U.S. Department of Energy project. During the quarters ended July 31, 2005 and 2004, the cost of contract services was $9,993 and $74,757, respectively. This decrease was due to the fact that the Department of Energy research grant ended during the second quarter of 2005. RESEARCH AND DEVELOPMENT COSTS. Research and development costs include salaries, research supplies and materials and expenses related to product development. Research and development costs for the quarter ended July 31, 2005 were $76,152 as compared to $44,765 for the quarter ended July 31, 2004. The increase of approximately $30,000 was the result of shifting personnel to general research activities following the end of the Department of Energy grant work. 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 third quarter of fiscal year 2005 were $126,804 compared to $276,742 for the same period in 2004. This decrease of approximately $150,000, or 54%, resulted from the Company's continuing reduction in salary costs. INTEREST EXPENSE. For the quarters ended July 31, 2005 versus July 31, 2004, interest expense was $457 and $0.00. This increase was due to a slightly higher level of borrowing by the Company during the third quarter of 2005 compared to the third quarter of 2004, as well as an agreement with a creditor to halt interest accrual on a note. 8 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 May 2005 the Company issued a total of 15,000,000 shares of common stock to private investors . These issuances were exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2). In August 2005 the Company repurchased a total of 11,884,800 shares of its common stock for total consideration of $118.80 pursuant to a stock repurchase agreement. Proceeds from the sales of securities were used as general working capital. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Beginning March 16, 2005, the Company sought written consent from shareholders as to two matters. One matter was to permit the amendment of the Company's certificate of incorporation to increase the authorized common stock from 500,000,000 shares to 750,000,000 shares. The other was to obtain shareholder approval of an employee stock option plan approved by the board of directors on November 7, 2004. Both proposals required a majority vote of the issued and outstanding stock of the Company to pass. The votes needed for approval of both measures were received during May 2005. Company's certificate of incorporation has not yet been amended to reflect the increase in authorized stock. 9 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. 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: September 19, 2005 By: /s/ Daniel P. Beharry ---------------------- Daniel P. Beharry Chief Executive Officer 10