UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-K




þANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For the fiscal year ended: October 31, 2010


or





 ̈TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the transition period from: _____________ to _____________





Mera Pharmaceuticals, Inc.


(Exact name of registrant as specified in its charter)




DELAWARE

033-23460

04-3683628(State or other jurisdiction

of incorporation)

(Commission

File Number)

(IRS Employer

Identification No.)




73-4460 QUEEN KA'AHUMANU HIGHWAY, SUITE 110, KAILUA-KONA, HAWAII, 96740


(Address of principal executive offices)
  (808) 326-9301


(Registrant’s Telephone Number, including Area Code)


Securities registered under Section 12(b) of the Act: NONE




Securities registered under Section 12(g) of the Exchange Act: NONE




Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes oNo þ




Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes oNo þ




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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes oNo þ




Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes oNo o




Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ




Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.




Large accelerated filer
 ̈
Accelerated filer
 ̈Non-accelerated filer
 ̈
Smaller reporting company
þ(Do not check if a smaller reporting company)





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes oNo þ




The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the closing price as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $1,185,089.17.




The number of shares outstanding of common equity, as of February 8, 2012, was 547,769,515shares of Common Stock, $0.0001 par value.














MERA PHARMACEUTICALS, INC.





TABLE OF CONTENTS




PAGEPART I.ITEM 1.
BUSINESS


3ITEM 1A.
RISK FACTORS


13ITEM 1B.
UNRESOLVED STAFF COMMENTS


13ITEM 2.
PROPERTIES


13ITEM 3.
LEGAL PROCEEDINGS


13ITEM 4.
REMOVED AND RESERVED


13PART II.ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES


14ITEM 6.
SELECTED FINANCIAL DATA


16ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION


17ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


31ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


31ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE


31ITEM 9A.
CONTROLS AND PROCEDURES


31ITEM 9B.
OTHER INFORMATION


32PART III.ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE


33ITEM 11.
EXECUTIVE COMPENSATION


34ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS


36ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE


37ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES


37PART IV.ITEM 15.
EXHIBITS


38




2




PART I.




THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS, INCLUDING STATEMENTS THAT INDICATE WHAT WE “BELIEVE”, “EXPECT” AND “ANTICIPATE” OR SIMILAR EXPRESSIONS. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE OUR ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH REFLECT OUR MANAGEMENT'S ANALYSIS ONLY AS OF THE DATE OF THIS ANNUAL REPORT. WE UNDERTAKE NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISION OF THESE FORWARD-LOOKING STATEMENTS.




ITEM 1. BUSINESS.




HISTORY




Mera Pharmaceuticals, Inc. is the successor issuer to Aquasearch, Inc. (the “Predecessor”), which was incorporated in Colorado in 1987 for the purpose of developing useful products from aquatic microorganisms and making their production economically feasible. On July 25, 2002, the Predecessor merged with and into Mera Pharmaceuticals, Inc., a Delaware corporation formed in June 2002 for the purpose of changing the corporation's name to Mera Pharmaceuticals, Inc. and changing its state of incorporation from Colorado to Delaware (the “Reincorporation Merger”). Mera Pharmaceuticals continues the operations and business of the Predecessor. Each share of the Predecessor's common stock outstanding at the time of the Reincorporation Merger was exchanged for one share of common stock of Mera. Following the Reincorporation Merger, the former stockholders of the Predecessor continued to own 100% of the Company's issued and outstanding capital stock.




On September 16, 2002, Aqua RM Co., Inc., a privately-held, non-operating Delaware corporation established specifically for the purpose of facilitating the Predecessor's reorganization under Chapter 11 of the U.S. Bankruptcy Code (“Aqua RM”), merged with and into the Company (the “Reorganization Merger”). The Company was the surviving corporation of the Reorganization Merger. Each share of Aqua RM common stock outstanding at the time of the Reincorporation Merger was exchanged for 100 shares of the Company's common stock. Following the Reorganization Merger, former Aqua RM stockholders held approximately 68% of the Company's common stock. The Reorganization Merger was the last material event in the fulfillment of the Company's Chapter 11 Plan of Reorganization.




For the year ended October 31, 2010, the Company had a net loss of $537,838. As of October 31, 2010, the Company has a working capital deficiency of $735,493 and a stockholders’ deficiency of $676,940.  These factors raise substantial doubt about the Company’s ability to continue as a going concern.




3





OVERVIEW OF THE COMPANY'S BUSINESS




The Company develops and commercializes natural products derived principally from microalgae using our patented photobioreactor technology known as the Mera Growth Module (“MGM”).




Microalgae are a diverse group of microscopic plants estimated to consist of more than 30,000 species. They have a wide range of physiological and biochemical characteristics. Microalgae produce many different substances and bioactive compounds that have existing and potential applications in a variety of commercial areas, including human nutrition, pharmaceuticals, and other high value commodities such as bio-diesel.




The major challenge to commercial exploitation of microalgae has been the availability of photobioreactors large enough to achieve commercial production levels at an economic cost. A photobioreactor is a fermentation system that is used to grow photosynthetic organisms. At more than 6,000 gallons (25,000 liters), our proprietary MGM is one of the largest photobioreactors in existence and one of the few photobioreactors used for commercial production of microalgae.




The MGM incorporates a very high level of computerized process control, resulting in a higher degree of reproducible performance at high efficiency levels. This increased reliability is due in large measure to the use of turbulence to control the exposure of the algae to light and nutrients at a frequency that improves yields. Mera owns the basic patent for use of turbulence in this way. Our patents, proprietary process controls and the very low cost of constructing the MGM make the MGM very advanced, cost-effective and scalable.




The Company has used its advantage in photobioreactor technology in the production and marketing of its first commercial product, ASTAFACTOR®, a nutraceutical and source of natural astaxanthin. Natural astaxanthin, a carotenoid found in many species of fish and seafood (it gives wild salmon its distinctive color), has long been recognized as a valuable nutritional supplement. The Company's development of the MGM has enabled it to produce astaxanthin for commercial distribution cost and introduce SALMON ESSENTIALSTM, a proprietary combination of astaxanthin and Omega-3 fatty acids.




The Company's business strategy is to exploit its leading position in microalgae cultivation technology to expand the sales of ASTAFACTOR® and SALMON ESSENTIALSTM while preserving margins. We also hope to develop and introduce additional microalgae-based nutritional products to the marketplace in the future.




We face significant potential competition for ASTAFACTOR®. We expect that other nutraceutical products that the Company may launch in the future will face meaningful competition as well, although at present we are not aware of a product that combines the same ingredients as SALMON ESSENTIALSTM in a single product.




We do not believe that any commercial entity has developed a photobioreactor that matches the MGM's combination of large size, low cost and level of process control or sustained performance for a wide variety of aquatic species, although a number of other companies are developing closed environment production systems for marine micro-organisms. We believe that competition in each of these areas may increase significantly over time as alternatives to the Company's patented technology are developed. For more information on our competition, see “Risk Factors; Risks Related to Our Industry.”




4





Mera Pharmaceuticals' patents and intellectual property include issued patents relating to the MGM and general processes for cultivating microalgae in photobioreactors. The Company believes that intellectual property relative to aquatic organism biotechnology will become much more important, challenging and complex in the future.




Government regulation and product testing are strong factors in the markets for the products we have developed and produced. Our products are subject to regulation by the U.S. Food and Drug Administration or similar agencies in foreign countries and may require extensive testing for safety and efficacy before being released for sale.




The Company currently manufactures its products at a five-acre research, development and production facility at the Hawaii Ocean Science and Technology Business Park in Kailua-Kona, Hawaii. The facility is ideally located for research and development and the commercial production of microalgae. We have access to large volumes of deep ocean water (used for temperature control) in a stable tropical climate with plentiful sunlight, conditions that are well suited to microalgae cultivation. Although Hawaii's distance from many markets increases certain costs of operation, on balance there are few locations, domestic or international, that are as well suited to our cultivation processes.




In addition to the production of our own products, the Company is also seeking new research collaborations with other enterprises to demonstrate the economic feasibility of producing valuable substances that they have identified in microalgae. Such collaborations will be sought to expand the applications of Mera's technology. We will also explore licensing opportunities for the technology where that makes economic sense.




RATIONALE FOR MICROALGAE AS A SOURCE OF COMMERCIAL PRODUCTS




Microalgae represent approximately half of all plant species. Many of their characteristics make them attractive for commercial production.




1)UNTAPPED RESOURCE




·
Fewer than 5,000 out of the estimated total of 30,000 species are believed to have been cultivated in the laboratory




·
Fewer than 1,000 species are believed to have been carefully investigated for new substances




·
Fewer than 10 species have been cultivated at commercial scale




5





2)DEMONSTRATED SOURCE OF NEW SUBSTANCES




·
Several hundred new bioactive substances have been discovered in the small number of microalgae that have been researched to date




3)SOURCE OF VALUABLE SUBSTANCES




·
Many molecules derived from microalgae are already known to be valuable for use as enzymes, pigments, vitamins, nutraceuticals, pharmaceuticals and the like




·
Bioactive compounds extracted from microalgae have substantial potential value as pharmaceuticals




4)RAPID GROWTH RATE




·
Growth rates for microalgae species range from about 1 to 10 divisions per day




·
Growth rates for these plants are, in general, faster than any other plants




5)LOW COST OF RAW MATERIALS




·
Water, sunlight, fertilizer and carbon dioxide, the principal raw materials used in cultivation, are plentiful and economical




THE COMPANY'S MGM TECHNOLOGY




FEATURES OF MGM TECHNOLOGY. The key features of MGM technology are sterility, size (25,000 liters) and enhanced control over virtually all environmental factors affecting growth rates and metabolic activity, such as temperature, pH, nutrient mix and distribution, light, pests and contaminants.




This combination of size and control has been the goal of international research efforts for the past several decades. The MGM has achieved that goal. Although it is among the largest photobioreactors ever operated, the MGM's patented technology allows a far greater degree of control of the growth environment than has been possible in systems previously.




6





PROCESS CONTROL SYSTEMS - THE KEY TO REPRODUCIBLE PERFORMANCE. In order to take greatest advantage of the MGM technology, we have developed proprietary, computerized process control systems for the MGM that make it possible to conduct the following operations automatically:




·
monitoring of key production variables at intervals more frequent than one minute;




·
data archiving for comprehensive analysis of system




·
performance; automated control of all operations performed more than once a




·
day (both a process control improvement and labor cost saving);




·
immediate alarm system for any system component not operating within parameters; and




·
automated maintenance for hundreds of system components, reducing failures and preventing contamination.




Increasing control over processes has produced several benefits. Product quality and consistency have gone up, the scale at which processes are controllable has increased and the amount of capital and labor required to accomplish a given amount of production has decreased. This combination of effects translates into enhanced efficiency, which translates into lower cost per unit of production and higher margins.




COMPETITIVE PRODUCTION SYSTEMS. We are not aware of any closed system photobioreactor that compares favorably with the MGM.




There are other systems that cultivate microalgae at larger than experimental scale. However, we believe that the advantages of the MGM over these other systems include size, versatility, cost-effectiveness and higher yields. We believe that an important advantage of the MGM over any competing technology is the ability to achieve a high degree of control over all critical environmental factors for microalgae, except those species that proliferate under the most extreme conditions. As a result, it can be used in efficiently cultivating hundreds, even thousands, of microalgal species at commercial scale. We do not believe any other large scale system has such flexibility and versatility, which are important factors in the development of new products from a variety of microalgal species.




7





PRODUCTS FROM MICROALGAE




(1)ASTAFACTOR®




DESCRIPTION AND PROPERTIES. Astaxanthin is a red-orange, carotenoid pigment. It is closely related to other well-known carotenoids, such as beta-carotene, lutein and zeaxanthin.




All of these molecules are antioxidants, substances shown by research to protect health, but astaxanthin is among the strongest. Some studies indicate that it is ten times more potent than beta-carotene, and more than 500 times more potent than vitamin E - another well known and commonly used antioxidant.




Astaxanthin is one of the main pigments in aquatic animals. It gives the flesh of salmon its characteristic color, for example. Yet, it is far more than a pigment. Astaxanthin has been shown to perform many essential biological functions, including:




·
protecting against the harmful effects of UV light;




·
enhancing the immune response;




·
protecting against the oxidation of essential polyunsaturated fatty acids;




·
stimulating pro-vitamin A activity and vision;




·
improving reproductive capacity; and assisting in communication.




In species like salmon or shrimp, astaxanthin is essential to normal growth and survival and has been attributed vitamin-like properties. Some of these unique properties are also effective in mammals. Studies in human and animal models suggest that astaxanthin may substantially improve human health by virtue of its antioxidant properties, protecting vision, reducing inflammation (recently shown to be a major factor in heart attacks) slowing neurodegenerative diseases and preventing certain cancers.




THE ASTAFACTOR® MARKET. We believe that the market for ASTAFACTOR® is likely to expand over the next few years. There is growing evidence in the scientific and medical literature that astaxanthin contributes meaningfully to the general well-being of humans. Although we face competition in this market, we believe that our technology will give us significant cost and quality advantages over our competitors in our effort to capture a significant share of this growing market.




Sales of ASTAFACTOR(R) began in Hawaii in March 2000. Our experience has shown that effectively promoting retail sales of astaxanthin requires longer format advertising than can be readily used in typical retail advertising. The Company has maintained its focus in the Hawaiian market, which offers revenue potential to help support the cost of broader retail distribution.




8





(2)SALMON ESSENTIALS




During 2004 the Company introduced an extension of its ASTAFACTOR®) line, Salmon EssentialsTM. This product offers a combination of astaxanthin and Omega-3 fatty acids, the two most important nutritional components available from wild salmon, which is widely recognized as one of nature's most healthful foods. This product offers all of the health benefits associated with ASTAFACTOR®) and adds to them the significant benefits of including Omega-3 fatty acids in your diet, such as improved cardiac health. Omega-3s also help reduce inflammation, adding to that important benefit of SALMON ESSENTIALSTM.




We began marketing SALMON ESSENTIALSTM during 2004, launching the product initially through our Hawaiian retail distribution system. We have also made SALMON ESSENTIALSTM available through our web site. The Company is contemplating a number of strategies to expand the distribution of what we believe is a product with significant potential.




(3)PRODUCT LINE EXPANSION




The Company is currently evaluating product line extensions for its ASTAFACTOR® and Kona Sea SaltTM products and is also contemplating exploring additional microalgae sources for development of nutraceutical products.




We believe that many more nutraceutical products could be developed from microalgae, but they remain unexamined and unexploited because there has been no feasible way to grow them at a large enough scale. The MGM opens a path to this untapped resource by combining effective, reproducible control with commercial scale production.




DEPENDENCE ON KEY CUSTOMERS




Our business depends on key relationships in Hawaii. Sales to our largest customer, Longs Drugs, owned by CVS, continues to represent the largest, but decreasing percentage of our product sales. Sales to various domestic distributors have been slowly increasing, as have internet sales.




OUR STRATEGIES




Our objective is to sustain Mera Pharmaceuticals' leadership in microalgae cultivation technology and to identify, optimize and directly commercialize high-value microalgae products. We have several strategies to achieve these goals.




1)           INCREASE SALES OF NUTRACEUTICAL PRODUCTS. The Company intends to increase sales of its current products, ASTAFACTOR®, SALMON ESSENTIALSTM and KONA SEA SALTTM, by expanding distribution through a variety of sales channels. It appears that awareness of the benefits of our products is growing in the marketplace, and once the benefits of our products are more fully understood by the general public, we will focus on entering national domestic retail chains with the potential for delivering high sales volumes at attractive margins and efficient distribution.




2)           EXPAND STRATEGIC ALLIANCES. We intend to develop relationships with other companies who have products that will benefit from utilizing our technology under license. We believe that there is significant potential revenue associated with the licensing of our technology to other companies or in performing contract work for them utilizing our facilities or expanded facilities if justified.




9





MANUFACTURING




Our Kona facility has sufficient capacity to meet our current demand for products.  Ability to expand our production is sufficient to meet our projected needs for the foreseeable future. Further expansion of the Kona facility is feasible, if demand for our products justifies doing so.




RESEARCH AND DEVELOPMENT COSTS




Research and development costs include salaries, development materials, plant and equipment depreciation and costs associated with operating our five-acre research and development/production facility. During the fiscal years ended October 31, 2010 and 2009, the Company has spent $265,310 and $324,383, respectively.




MARKETING AND SALES




The Company's marketing strategy for its products may vary depending on the specific product being sold and its target market, but that strategy is generally built on two fundamental tenets:




1.           CREATE ALLIANCES WITH EFFICIENT, HIGH-QUALITY DISTRIBUTORS IN KEY U.S. REGIONAL AND INTERNATIONAL MARKETS AND SUPPORT THOSE DISTRIBUTORS WITH EFFECTIVE ADVERTISING AND PROMOTION TO THE CONSUMER.




The Company currently markets ASTAFACTOR®, SALMON ESSENTIALSTM and KONA SEA SALTTM to mass retail outlets in Hawaii through distribution arrangements with established companies. We are also expanding our efforts to distribute outside of Hawaii.




2.           SELL ASTAFACTOR®, SALMONESSENTIALSTM AND KONA SEA SALTTM DIRECTLY TO THE CONSUMER.




This approach allows us to reach consumers throughout the domestic market at the most attractive margins, since it eliminates distributor and retailer profits. Web-based and specialty media promotion are also used to reinforce our marketing efforts and product visibility to all consumers. We are building a customer data base that will enhance our ability to reach regular customers with new products as they are developed and come to market.




10





COMPETITION




The Company believes that its proprietary technology and process control systems and software give it a significant advantage relative to its competitors. However, there are a number of companies that are engaged in efforts to develop microalgae-based products that compete with ours, either directly or indirectly.




We believe that our original MGM technology was the first closed-system, process-controlled photobioreactor to be operated at commercial scales larger than 2,750 gallons (10,000 liters). We can now operate at a scale more than twice that (25,000 liters). We are aware of only three other companies in the world - Biotechna of Australia, Algatechnologies of Israel and AstaReal of Hawaii - that claim to possess proprietary photobioreactor technology.




COMPETITORS FOR ASTAFACTOR®) There are various other producers of astaxanthin that compete with ASTAFACTOR®, our nutraceutical astaxanthin product. Competition also comes from non-producers who acquire raw materials from the producers for distribution in the nutraceuticals market.




Potential competitors include producers of the synthetic material as well. However, to our knowledge neither BASF, a large German chemical company, nor Hoffman-LaRoche, a large Swiss pharmaceutical company, both large global producers of synthetic astaxanthin, has indicated an interest in this market.




Furthermore, we believe that consumers of nutraceuticals prefer products from natural sources to those from synthetic sources. We are aware of other companies that are interested in or are actually marketing nutraceutical astaxanthin which use a fermentation process. We believe our production process has cost or quality advantages or both over those other companies.




PATENTS, LICENSES AND PROPRIETARY TECHNOLOGY




We rely upon a combination of patents, copyrights, trade secrets, know-how, continuing technological innovation and licensing opportunities to develop and maintain our competitive position. Our future prospects depend in part on our ability to obtain patent protection for our products and processes. We need to preserve our copyrights, trademarks and trade secrets. We also need to operate without infringing the proprietary rights of third parties.




PATENTS. We have been awarded or have filed applications for patents relating to various processes, including, but not limited to, the process and apparatus for the production of photosynthetic microbes and the method of control of microorganism growth processes. These patents are active in the United States and potentially other countries. The original duration of these patents varied from fifteen to twenty years from the date of filing or issuance, and the Company's current patents will be active for five to nine years, provided the maintenance fees associated with such patents are timely paid. The Company reassesses the value of each patent it holds at the time maintenance fees are due, and in cases where maintaining a patent is judged to be of no significant strategic value, we do not renew the patent.




Other companies may have filed and in the future are likely to file patent applications that are similar or identical to ours. To determine the priority of inventions, we may have to participate in interference proceedings declared by the United States Patent and Trademark Office. Such proceedings could result in substantial costs to us. We cannot ensure that any such third-party patent application will not have priority over ours. Additionally, the laws of certain foreign countries may not protect our patent and other intellectual property rights to the same extent as the laws of the United States.




11





Our future prospects also depend in part on our neither infringing on patents or proprietary rights of third parties nor breaching any licenses that may relate to our technologies and products. We cannot guarantee that we will not infringe on the patents, licenses or other proprietary rights of third parties. We have not conducted an exhaustive patent search, and we cannot ensure that patents do not exist or could not be filed that would have a material adverse effect on our ability to develop and market our products. There are many United States and foreign patents and patent applications in our area of interest.




We attempt to control the disclosure and use of our proprietary technology, know-how and trade secrets under agreements with the parties involved. However, we cannot ensure that others will honor all confidentiality agreements. We cannot prevent others from independently developing similar or superior technology, nor can we prevent disputes that could arise concerning the ownership of intellectual property.




TRADEMARKS AND SERVICE MARKS. The following trademarks and service marks have been registered or are claimed marks that the Company has not registered but as to which it believes it has established a common law right of use and as to which it has no information to the contrary. The registered trademark on ASTAFACTOR® is valid through March 2012, and the following other claimed marks that the Company believes it has established a common law right of use are valid for the standard period of duration, as provided in applicable common law:




SALMONESSENTIALSTM


AQUAXAN®


MERA PHARMACEUTICALSTM


MERA GROWTH MODULE TM (MGM)


MERA PROCESS CONTROL SYSTEMTM (MPCS)


MERA REMOTE DATA WEB ACCESSTM (RDWA)


DRUGS FROM THE SEATM


KONA SEA SALTTM





GOVERNMENT REGULATION AND PRODUCT TESTING




Our current and potential products and our manufacturing and research activities are or may become subject to varying degrees of regulation by many government authorities in the United States and other countries. Such regulatory authorities could include the State of Hawaii Department of Health or Agriculture Department, the FDA, and comparable authorities in foreign countries. Each existing or potential microalgae product intended for human use that we develop or market, either directly or through licensees or strategic partners, may present unique regulatory problems and risks. Relevant regulations depend on product type, use and method of manufacture. The FDA regulates, in varying degrees and in different ways, dietary supplements, other food products, medical devices and pharmaceutical products. Regulations govern manufacture, testing, exporting, labeling and advertising.




Any products we develop for use in human nutrition, or cosmetics could require that we develop and adhere to Good Manufacturing Practices (“GMP”), as suggested by the FDA, European standards and any other applicable standards mandated by federal, state, local or foreign laws, regulations and policies. Our current cultivation and processing facilities and procedures are not yet required to comply with GMP or ISO standards, although our contract extraction and encapsulation facilities must meet GMP standards, and they do. We believe we are prepared to meet these requirements more broadly when necessary.




The Company currently distributes ASTAFACTOR®, SALMON ESSENTIALSTM and KONA SEA SALTTM in the United States, and in certain foreign countries. We also hope to expand our distribution internationally. Regulatory approval requirements vary by country. We believe the approval process for our products in most countries will come under their “natural” status and that it will be approved relatively quickly; however, we can provide no assurances in this regard.




12





EMPLOYEES




As of October 31, 2010, the Company had four (4) full-time employees and various part time help as needed. We consider relations with our employees to be good. None of our employees are covered by a collective bargaining agreement.




ITEM 1A.  RISK FACTORS




Smaller reporting companies are not required to provide the information required by this item.




ITEM 1B.  UNRESOLVED STAFF COMMENTS




NONE.




ITEM 2. PROPERTIES




Our research, development and production facilities are located in the Hawaii Ocean Science and Technology (HOST) Business Park in Kailua-Kona, Hawaii. Our facility currently consists of approximately five acres containing a number of MGMs, finishing ponds, a processing facility, several laboratories, administrative offices and additional space for production and research and development. All our products are currently produced at this facility.




We currently occupy this facility on a long term lease basis of 30 years through 2038 with rents increases renegotiated every five (5) years at the Company’s option. We currently pay approximately $2,780.50 per month under the lease.




ITEM 3. LEGAL PROCEEDINGS




Subsequent to the period covered by this report, on June 22, 2011, Michael Broby, a former consultant filed a suit in the 3rd Circuit Court of the State of Hawaii against Mera Pharmaceuticals, Inc.  The complaint alleges breach of contract and is seeking damages in excess of $50,000.  Mera management is planning to vigorously defend themselves against this claim, as they believe there is no merit.




ITEM 4. REMOVED AND RESERVED




13





PART II.




ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES




MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS




There is a limited public market for the shares of our common stock. Our stock has been thinly traded. There can be no assurance that a liquid market for our common stock will ever develop.  Transfer of our common stock may also be restricted under the securities or blue sky laws of various states and foreign jurisdictions. Consequently, investors may not be able to liquidate their investments and should be prepared to hold the common stock for an indefinite period of time.




Our common stock is quoted on the OTC Markets (Pink Sheets) under the symbol MRPI. The range of closing prices for our common stock, as reported on the OTC Markets during each calendar quarter since January 1, 2008 was as provided below. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.




Quarter Ended

High


LowMarch 31, 2008

$
0.01


$
0.065June 30, 2008

$
0.0095


$
0.005September 30, 2008

$
0.009


$
0.007December 31, 2008

$
0.008


$
0.005March 31, 2009

$
0.009


$
0.0035June 30, 2009

$
0.019


$
0.006September 30, 2009

$
0.01


$
0.0055December 31, 2009

$
0.01


$
0.004March 31, 2010

$
0.008


$
0.0042June 30, 2010

$
0.008


$
0.004September 30, 2010

$
0.008


$
0.004December 31, 2010

$
0.0048


$
0.002March 31, 2011

$
0.004


$
0.002June 30, 2011

$
0.003


$
0.002September 30, 2011

$
0.003


$
0.0006December 31, 2011

$
0.0025


$
0.0007





On February 8, 2012, our common stock had a closing price of $ 0.003.




14





HOLDERS




As of December 31, 2011, there were approximately 2,300 security holders of record of our common stock.




EQUITY COMPENSATION PLAN INFORMATION




In November 2004 the Board of Directors rescinded the previously adopted 2003 Stock Option Plan and adopted in its place the 2004 Stock Option Plan. That plan authorizes the issuance of options to purchase up to 60,000,000 shares of the Company's common stock. The Board of Directors granted options to purchase approximately, 48,000,000 shares of stock, with vesting credit having been given for past service to the company dating back to the effective date of our reorganization. As of October 31, 2010, 11,215,000 of the options had vested.




The table below provides information pertaining to all compensation plans under which equity securities of our company are authorized for issuance as of the end of the most recent fiscal year.




Number of securities

to be issued upon exercise of outstanding options, warrants

and rights


Weighted-average

exercise price of

outstanding options,

warrants and rights


Number of securities remaining available

for future issuance

under equity

compensation plans (excluding securities reflected in 1st column)Equity compensation plans approved by security holders


11,215,000


$
0.01



48,785,000Equity compensation plans not approved by security holders


0



--



0Total


11,215,000


$
0.01



48,785,000





SALE OF UNREGISTERED SECURITIES




None.




15





PENNY STOCK CONSIDERATIONS




Broker-dealer practices in connection with transactions in “penny stocks” are regulated by certain penny stock rules adopted by the Securities and Exchange Commission. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system). Penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. The broker-dealer must also make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security that becomes subject to the penny stock rules.




DIVIDEND POLICY




We have never paid cash dividends on our common stock. Except as provided below, we currently intend to retain all available funds to operate and expand our business. Except as provided below, we do not anticipate paying any cash dividends in the foreseeable future.




As of October 31, 2010 and 2009, the Company has 80 shares of Series A convertible preferred stock outstanding at a face value of $625.00 per share.  Each share of  Series A preferred stock is convertible into 10,417 shares of common stock at the option of the holder, at the time of the closing bid price of common stock is equal to or greater  than $0.15 per share for a period of  10 consecutive trading days, upon the Company raising at least $10 million in a public offering or upon a merger whereas the existing stockholders immediately prior to the merger hold less than a majority of the stock in the surviving corporation upon the completion of the merger.  In addition, each share of the Series A preferred is entitled to annual dividends of 5% of the face value, or $31.25 per share per annum.  The dividends are cumulative and are payable in either cash or common stock at a conversion price of $0.06 per share.  The Series A convertible preferred stock holders are also entitled to vote on all shareholder matters on an as converted basis or 10,417 common share votes.  As of October 31, 2010 and 2009, the total cumulative outstanding preferred dividends are $19,774 and $17,274 respectively.




As of October 31, 2010 and 2009, the Company has 974 shares of Series B convertible preferred stock outstanding at a face value of $625.00 per share.  Each share of Series B preferred stock is convertible into 8,929 shares of common stock at the option of the holder, at the time the closing bid price of common stock is equal to or greater than $0.15 per share for a period of 10 consecutive trading days, upon the company raising at least $10 million in a public offering or upon a merger whereas the existing stockholders immediately prior to the merger hold less than a majority of the stock in the surviving  corporation upon the completion of the merger.  In addition, each share of Series B preferred is entitled to annual dividends of 5% of the face value, or $31.25 per share per annum.   The dividends are cumulative and are payable in either cash or common stock at a conversion price of $0.07 per share.  The Series B preferred stock holders are also entitled to vote on all shareholder matters on an as converted basis or 8,929 shares votes.  As of October 31, 2010 and 2009, the total cumulative outstanding preferred dividends are $233,595 and $203,595 respectively.




ITEM 6. SELECTED FINANCIAL DATA




Smaller reporting companies are not required to provide the information required by this item.




16


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION




OVERVIEW




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 September 16, 2002, the effective date of our reorganization, through October 31, 2010, we had an accumulated deficit of $8,698,567. 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 the 2011 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. In connection with our financial statements for the year ended October 31, 2009, we have not included a consent of our former auditors to include their previously issued audit report, as such firm has discontinued its auditing practice and ceased operations.  See “Risk Factors” below.




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 expanding our product offering while increasing our efforts to expand sales and improving our production efficiencies and minimizing our overhead. However, our best efforts cannot guarantee that we will overcome these risks in a timely manner, if at all.




CRITICAL ACCOUNTING POLICIES




This discussion and analysis of the Company's financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates. The Company bases its estimates on historical experience and on other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.




INVENTORIES




Inventories are stated at the lower of cost or market. The Company determines cost on a first-in, first-out basis. On an ongoing basis, the company tests its inventory for obsolescence.




REVENUE RECOGNITION




Product revenue is recognized upon shipment to customers. Contract services revenue is recognized as services are performed on a cost reimbursement basis.




17





PLANT AND EQUIPMENT




Plant and equipment are stated at cost. Depreciation is provided on the straight-line method over the estimated useful lives of the assets.




IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED





“Accounting for the Impairment or Disposal of Long-Lived Assets” (ASC 360") establishes the accounting model for long-lived assets to be disposed of by sale and applies to all long-lived assets, including discontinued operations.  This statement requires those long-lived assets to be measured at the lower of carrying amount or fair value less cost to sell.




STOCK ISSUED FOR SERVICES




In December 2004, the FASB issued ASC No. 718, Compensation – Stock Compensation (“ASC 718”).  Under ASC 718, companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over which the employees are required to provide services.  Share- based compensation arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans.  As such, compensation cost is measured on the date of grant at their fair value.  Such compensation amounts, if any, are amortized over the respective vesting periods of the option grant.  The Company applies this statement prospectively.




Equity instruments (“instruments”) issued to persons other than employees are recorded on the basis of the fair value of the instruments as required by ASC 718.  ASC No. 506, Equity Based Payments to Non-Employees (“ASC 505”) defines the measurement date and recognition period for such instruments.  In general, the measurement date is (a) when a performance commitment, as defined, is reached or (b) when the earlier of (i) the non-employee performance is complete or (ii) the instruments are vested.  The measured value related to the instruments is recognized over a period based on the facts and circumstances of each particular grant as defined in the ASC 505.




RESEARCH AND DEVELOPMENT




Research and Development costs are expensed as incurred.




Generally accepted accounting principles state that the costs that provide no discernible future benefits or allocating costs on the basis of association with revenues or among several accounting periods that serve no useful purpose, should be charged to expense in the period occurred.  ASC 350 “Accounting for Research and Development Costs” requires that certain costs be charged to current operations including, but not limited to:  salaries and benefits: contract labor: consulting and professional fees: depreciation: repairs and maintenance on operational assets used in the production of prototypes: testing and modifying product and service capabilities and design: and, other similar costs.




18





INCOME TAXES




The Company uses the asset and liability method of accounting for income taxes as required by ASC 740 “Accounting for Income Taxes”.  ASC requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of certain assets and liabilities. Since its inception, the Company has incurred net operating losses. Accordingly, no provision has been made for income taxes.  Statutory taxes not based on income are included in general and administrative expenses.




RESULTS OF OPERATIONS




The following discussion and analysis provides information that the Company's management believes is relevant to an assessment and understanding of our results of operations and financial condition. This discussion should be read in conjunction with the financial statements and footnotes, which appear elsewhere in this prospectus.




RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED OCTOBER 31, 2010 COMPARED TO THE FISCAL YEAR ENDED OCTOBER 31, 2009




REVENUES. During the years ended October 31, 2010 and 2009, product and technical services revenue totaled $288,888 and $599,091, respectively, resulting in a decrease of 51.8%. During fiscal 2010, this revenue was generated principally through direct sales after expiration of a technical service contract which expired during June 2009. A small portion of sales were attributed to international distribution of our products and some sales of raw materials.




EXPENSES. Overall operating expenses were $794,548 in 2010 compared with $793,335 in fiscal 2009, a decrease of .002%.  This decrease resulted principally from the expiration of the above mentioned technical services agreement.




COST OF PRODUCTS SOLD.Cost of products sold include manufacturing and production costs associated with ASTAFACTOR®, SALMON ESSENTIALSTM®, KONA SEA SALTTM® as well as the cost of sales of raw materials and certain other products. Expenses decreased in the categories of cost of products sold, due principally to better production methods and inventory management.  Cost of product sold in 2010 was $46,066 versus $28,021 in 2009, an increase of 64.4%.  It is expected that the cost of products sold will increase again during 2011 as we attempt to expand our sales going forward.




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 year ended October 31, 2010 were $265,310 as compared to $324,383 for fiscal 2009.  This represents an 18.2% decrease due to a technical service agreement that the company was engaged in during fiscal year 2009.  This contract ended in June 2009.




SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses consist principally of salaries, fees for professional services and promotional and marketing expenses related to our various product lines. Selling and administrative expenses for the fiscal year 2010 were $186,790 versus $363,893 in 2009, a decrease of 48.7%. This decrease was due to the company's completion of the technical services agreement during 2009 and the company’s use of part time workers as needed.




19





IMPAIRMENT OF OTHER LONG-LIVED ASSETS.During Fiscal 2010 and 2009, the Company recorded non-cash impairment charges of $314,440 and $20,413, respectively, to reduce the net carrying value of certain long-lived assets to their estimated fair value.




INTEREST EXPENSE. For the years ended October 31, 2010 and 2009, interest expense was $4,992 and $5,033, respectively. The amount of interest expense incurred in any particular period varies with the amount of debt outstanding and the rate of interest payable on that debt. The total amount of debt decreased in 2010 due to less short term borrowing. It is expected that interest expenses will be comparable in 2011 as the Company’s cash position becomes more stable.




PROVISION FOR EXCESS AND OBSOLETE INVENTORY. There were no changes to the provisions during the fiscal year ended October 31, 2010.




LIQUIDITY AND CAPITAL RESOURCES




The Company has operating and liquidity concerns, has incurred an accumulated deficit of approximately $8.7 million, a net loss of $537,838, and as of October 31, 2010, has a working capital deficiency of $735,493 and a stockholders’ deficiency of $676,940.  This raised substantial doubt about its ability to continue as a going concern.  The Company will continue to pursue additional capital investment.  However, there can be no assurance that the Company will be able to successfully acquire the necessary capital to continue their on-going development efforts and bring products to the commercial market.  These factors, among others, create an uncertainty about the Company’s ability to continue as a going concern.




We have financed our operations until now through public and private sales of debt and equity securities and debt instruments, together with revenues from product sales, contract work and royalties. During the years ended October 31, 2010 and 2009, we did not raise any additional funding.




20




RISK FACTORS




YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, IN ADDITION TO ALL OTHER INFORMATION INCLUDED IN THIS REPORT, BEFORE YOU DECIDE TO INVEST IN OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS OCCURS, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE DUE TO ANY OF THE FOLLOWING RISKS OR OTHERS NOT YET IDENTIFIED BY MANAGEMENT, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.





RISKS RELATED TO OUR BUSINESS




WE HAVE INCURRED SUBSTANTIAL OPERATING LOSSES AND EXPECT TO INCUR FUTURE LOSSES. OUR FUTURE FINANCIAL RESULTS ARE UNCERTAIN, AND WE MAY NEVER BECOME A PROFITABLE COMPANY.




From September 16, 2002 (the date that we completed our reorganization proceedings and adopted “fresh-start accounting”) through October 31, 2010 we had an accumulated deficit of $8,698,567. Our losses to date are primarily due to the costs of research and development, and the general and administrative costs associated with our operations. We expect to continue to incur operating losses through at least fiscal year 2011. We expect to have quarter-to-quarter and year-to-year fluctuations in revenues and expenses. As a result, our losses may increase in the future, even if we achieve our revenue goals, and some of those losses could be significant.




Should we achieve profitability, we may be unable to sustain or increase profitability on a quarterly or annual basis. Many factors could affect our ability to achieve and maintain profitability, including:




·
our ability to complete successfully the commercialization and production cost optimization of our products;




·
our ability to manage production costs and yield issues associated with increased production of our products;




·
the progress of our research and development programs for developing other microalgal products;




·
the time and costs associated with obtaining regulatory approvals for our products;




·
our ability to protect our proprietary rights, or the expense of doing so;




·
the costs of filing, maintaining, protecting and enforcing our patents;




·
competing technological and market developments;




·
changes in our pricing policies or the pricing policies of our competitors;




·
the costs of commercializing and marketing our existing and potential products; and




·
the inability to achieve a level of sales of our products necessary to generate sufficient revenues to cover research, development and operating costs.




If our revenues grow more slowly than we anticipate or if our operating expenses exceed our expectations and cannot be reduced, our losses could continue beyond our present expectations, and we may never become a profitable company.




21





WE MAY BE UNABLE TO RAISE ADDITIONAL CAPITAL OR GENERATE THE CAPITAL NECESSARY TO SUPPORT OUR PLANNED LEVEL OF RESEARCH AND DEVELOPMENT ACTIVITIES AND TO MANUFACTURE AND MARKET OUR PRODUCTS.




We will require expenditures to support our research and development activities and to manufacture and market our products. Over the next twelve months, we project expenditures of approximately $500,000 in operating capital, not including any capital expenditures that may be necessary or desirable. Many factors will determine our future capital requirements, including:




·
market acceptance of our products;




·
our ability to manufacture our products cost-effectively in quantities needed to sustain growing sales of our ASTAFACTOR® and KONA SEA SALTTM line of products;




·
the extent and progress of our research and development programs;




·
the time and costs of obtaining regulatory clearances for some of our products;




·
the costs of filing, maintaining, protecting and enforcing patent claims;




·
the need to address competing technological and market developments;




·
the cost of developing and/or operating production facilities for our existing and potential products; and




·
the costs of commercializing our products.




Revenue from product sales and other sources pay some of our operating costs, but to date that revenue has not been sufficient to cover our operating costs fully. We are seeking investment from various sources to help sustain our operations until we can increase revenues to the point that they can sustain our operations indefinitely. However, additional financing may not be available on favorable terms, if at all. If we do not have adequate funds, we may have to curtail operations significantly. In addition, we may have to enter into unfavorable agreements that could force us to relinquish certain technology or product rights, including patent and other intellectual property rights. If we cannot raise enough capital, then we may have to curtail production, limit our product development activities, reduce marketing activities or delay other plans intended to increase revenue and help us achieve profitability.




22





IF WE CANNOT OVERCOME THE CHALLENGES OF PRODUCING MICROALGAE ON A COMMERCIAL SCALE, WE MAY NOT ACHIEVE ECONOMIC PRODUCTION COSTS.




To be successful, we must produce products at acceptable costs while ensuring that the quantity and quality of our products comply with contractual and regulatory requirements and regulations. Many factors complicate the production of microalgal products, and they could limit production at any time. These include:




·
microbial contamination;




·
variability in production cycle times due to technical, environmental and biological factors; and




·
losses of final product due to inefficient processing.




We currently have sufficient inventory to meet the foreseeable requirements of our existing customers. However, we are engaged in efforts to increase sales in order to achieve profitability, potentially beyond the capacity of our existing facility to produce. We have prepared to meet that increased demand, should it occur, by acquiring additional space at our Kona, Hawaii facility.




IF THE DEMAND FOR NATURAL ASTAXANTHIN OR OUR OTHER PRODUCTS EXCEEDS OUR CURRENT PRODUCTION CAPABILITIES, AND IF WE ARE UNABLE TO EXPAND OUR PRODUCTION CAPACITY IN A TIMELY MANNER, WE MAY EXPERIENCE SIGNIFICANT FINANCIAL, TECHNICAL AND COMMERCIAL CHALLENGES.




The capacity of our existing production facility in Hawaii is sufficient to meetcurrent demand for our products. However, demand for our natural astaxanthin and other products may eventually exceed the current capacity of our Hawaiian production facility. To address this capacity question, we have initiated efforts to increase our production efficiency and to prepare for expansion of our Hawaiian facility, if needed. However, our efforts are focused on generating a level of sales that would make it difficult to meet our total demand from our Hawaiian facility, especially if we develop additional products. We believe that our inventory plus our existing production capacity is sufficient to meet demand for the foreseeable future. In the event that sales increase to a level that we cannot meet with our existing capacity, we have planned for the expansion of our Hawaiian facility. If we are unable to expand our current production facility, we may be unable to meet demand for product and could lose the opportunity to increase our revenues. We could also lose customers, both current and potential, who may not do business with us absent an assurance of the ability to deliver product in sufficient quantities.




OUR CUSTOMER BASE IS CONCENTRATED AMONG RELATIVELY FEW CUSTOMERS, AND THE LOSS OF ANY OF THESE CUSTOMERS WOULD MATERIALLY ADVERSELY AFFECT OUR REVENUES.




Our business currently depends on key distribution relationships in Hawaii.These customers currently purchase approximately 30% of the natural  products we sell, with the remainder being sold to smaller retail accounts, directly to consumers or internationally. If we lose one or more of these customers, or if they do not continue buying our products at the current and anticipated purchase levels, then our revenues could decrease. In addition, the loss of one or more of these customers may adversely affect our reputation, and we could have difficulty attracting new customers as a result.




23





IF WE FAIL TO ATTRACT AND RETAIN KEY PERSONNEL WE WILL BE UNABLE TO EXECUTE OUR BUSINESS PLAN, AND OUR BUSINESS WILL SUFFER.




Our success depends on the continued efforts of the principal members of our management team. The Company presently has the key members of that team that it needs to retain to execute its plans fully. Success in doing so cannot be assured.




OUR BUSINESS WILL NOT OPERATE EFFICIENTLY AND OUR RESULTS OF OPERATIONS WILL BE NEGATIVELY AFFECTED IF WE ARE UNABLE TO MANAGE OUR GROWTH EFFECTIVELY.




Until 2002 we focused almost exclusively on product research and technology development. As we moved toward commercial production of microalgal products we had to initiate or expand many activities, including outsourcing, customer relations, engineering, construction, recruiting and training. During this transition, the size of our organization increased rapidly. During the Company's reorganization, the size of our organization decreased again. We decreased our employee base nominally during fiscal year 2010 and expect to stabilize during fiscal year 2012 in both sales staff and production assuming revenues expand with increased demand for our products. If revenues do not increase, we may not have the financial resources needed to sustain operations.




We expect demands on our financial and management control systems to increase this year. If we fail to upgrade our financial and management control systems, or if we encounter difficulties during upgrades of these systems, then we may not be able to manage our human and financial resources effectively. Such ineffectiveness could make it difficult to retain or attract employees and could directly or indirectly create unnecessary expenses or lead to incorrect decisions by management.




AS WE EXPAND OUR PRODUCT LINE AND ATTEMPT TO PENETRATE ADDITIONAL MARKETS, WE MAY FACE SIGNIFICANT CHALLENGES TO SUCCESS.




We are exploring expanding our product lines. The success of ourproduct lines will depend on our ability to implement our marketing strategy and comply with the standards of Good Manufacturing Practice, or GMP, as and when applicable. We believe the prospects for nutraceutical products will depend, in the short term, on product quality and education of consumers regarding its benefits. Our ability to penetrate new markets for our natural astaxanthin products will, we believe, depend strongly on regulatory approval in several major markets within and outside the United States. We expect the success of our products to depend primarily on our ability to develop and market these new products.




We cannot assure successful development of any potential products, nor can we guarantee market acceptance of any of our products, existing or future. We have limited marketing experience in nutraceutical markets. We have nine years of experience in electronic marketing and direct retail sales. We cannot assure you that we or our consultants or contractors will be successful in our marketing efforts, nor can we prevent them from competing with us or assisting our competitors. If we are unable to develop or commercialize any of our product lines successfully, then our revenues will fail to grow.




OUR PRODUCTS AND PRODUCTION ACTIVITIES ARE SUBJECT TO GOVERNMENT REGULATION AND ACTION, WHICH ARE SUBJECT TO CHANGE.




We are affected by changes in or the imposition of governmental regulations andactions, including: (i) new laws, regulations and judicial decisions related to the production, marketing and sale of nutraceutical products, (ii) changes in the United States Food and Drug Administration and foreign regulatory approval processes that may delay or prevent the approval of new products and result in lost market opportunity, (iii) new laws, regulations and judicial decisions affecting pricing or marketing of our products and (iv) changes in the tax laws relating to Mera Pharmaceuticals' operations.




24





WE MAY BE UNABLE TO PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS ADEQUATELY, AND OUR EFFORTS TO DO SO COULD BE TIME CONSUMING AND EXPENSIVE AND COULD DIVERT MANAGEMENT ATTENTION FROM EXECUTING OUR BUSINESS STRATEGY.




We regard the protection of our patents, copyrights, trade secrets and know-how(collectively intellectual property) as critical to our success. We rely on a combination of patent, copyright and trade secret laws and contractual restrictions to protect our intellectual property and maintain our competitive position. Our future prospects depend in part on our ability to protect our intellectual property while operating without infringing the intellectual property rights of third parties.




We may be unable to develop any additional patentable technologies. We cannot be certain that any patents issued to us or available to us through a license arrangement will establish the means to produce or provide us with any competitive advantage for any product or products. Third parties could challenge our patents or could obtain patents that have a material adverse effect on our ability to do business efficiently and effectively.




The patent positions of nutraceutical, pharmaceutical, biopharmaceutical and biotechnology companies, including ours, are generally uncertain and involve complex legal and factual questions. Patent law continues to evolve in the scope of claims in the technology area in which we operate. Therefore, the degree of future protection for our proprietary rights is uncertain. We cannot guarantee that others will not independently develop similar or alternative technologies. Other parties may duplicate our technologies, or, if patents are issued to us, they may design around those patented technologies. Other parties may have filed or could file patent applications that are similar or identical to some of ours. These patent applications could have priority over ours. To determine the priority of inventions, we may have to participate in interference proceedings declared by the United States Patent and Trademark Office, which could be very costly. In addition, the laws of some foreign countries may not protect our patents and other intellectual property rights to the same extent as the laws of the United States.




We could incur substantial costs in litigation if we need to defend ourselves against patent infringement claims brought by third parties, or if we choose to initiate claims against others. We have in the past, and we may in the future, be required to dedicate significant management time and financial resources to prosecute or defend infringement actions. In addition, a finding of non-infringement or declaration of invalidity of our patents could reduce or eliminate the exclusivity of our proprietary technology. Present and potential collaborators may terminate or decide not to enter into relationships with us if our intellectual property position is weakened. In addition, a finding of non-infringement or declaration of invalidity of our patents could reduce our ability to obtain future financing.




There could be significant litigation in our industry regarding patent and other intellectual property rights. For example, third parties may bring infringement or other claims against us for using intellectual property that we internally developed or license from third parties. In addition, although nondisclosure agreements generally control the disclosure and use of our proprietary technology, know-how and trade secrets, we cannot guarantee that all confidentiality agreements will be honored or that our proprietary technology, know-how and trade secrets will not be disseminated, or that any party responsible for doing so will be able to compensate us adequately for such loss.




We may not prevail in the prosecution or defense of any action, nor can we predict whether third parties will license necessary intellectual property rights to us on commercially acceptable terms, if at all. Any of these outcomes could be very costly and could diminish our ability to develop and commercialize future products.




25





OUR PRODUCTION CAPABILITY IS HIGHLY DEPENDENT ON ENVIRONMENTAL AND CLIMATIC FACTORS BEYOND OUR CONTROL.




All of our current production capacity is located at a single facility in Kona, Hawaii. We currently have an ample inventory to meet our foreseeable demand, but any future event that causes a long-term disruption in production at our facility could significantly impair our ability to meet customer demand. These events could include fires, volcanic eruptions, earthquakes, tidal waves, hurricanes or other natural disasters. In addition, consistent sunlight, high ambient temperatures and an ample supply of fresh water are necessary for microalgal growth. If we experience any significant or unusual change in climate, or should our water supplies be threatened by microbial contamination we cannot control, there could be an adverse impact on our production. If we cease production for any significant period, the success of our business would be threatened from a resulting loss of customers, revenues and valuable employees.




CURRENCY FLUCTUATIONS AND DIFFERENT STANDARDS, REGULATIONS AND LAWS RELATING TO INTERNATIONAL OPERATIONS MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.




We expect to sell our products on a global scale due to projected international market demand. International business is generally more difficult than domestic business and can create additional costs and delays not associated with business conducted solely within the United States. Factors related to doing business internationally that could impact us include: foreign government controls and regulations, economic conditions, currency fluctuations, duties and taxes, political and economic instability or unrest, imposition of or increases in tariffs, disruptions or delays in shipments and other trade restrictions. These factors, among others, can all lead to interference with or increased costs of operation and the ability to sell products in international markets. If any such factors were to render the conduct of business in a particular country undesirable or impracticable, there could be a material adverse effect on our business, our financial condition and the results of operations. There can be no assurance that our products or marketing efforts will be successful in foreign markets.




In addition, fluctuations in currency exchange rates could make our products more expensive in some countries, resulting in the loss of customers in those markets.




WE MAY BE SUBJECT TO PRODUCT LIABILITY LAWSUITS, AND OUR INSURANCE MAY BE INADEQUATE TO COVER DAMAGES.




Clinical trials or marketing of any of our current or potential products may expose us to liability claims arising from the use of these products. Even the most thorough of clinical trials could fail to detect a significant side effect associated with long-term use of a product, and it is possible that liabilities will arise even after our products receive any required regulatory approvals. Even if such claims are not well-founded, defending them will be very costly and consume substantial management attention and energy. We cannot ensure that our current product liability insurance, together with indemnification rights under our existing or future licenses and collaborative arrangements, will be adequate to protect us against any claims and resulting liabilities. As we expand our business, we may be unable to obtain additional insurance on commercially reasonable terms. We could suffer harm to our financial condition and our reputation if a product liability claim or recall exceeds the limits of our insurance coverage.




BECAUSE OUR PRINCIPAL STOCKHOLDERS HAVE SIGNIFICANT CONTROL OF OUR MANAGEMENT AND AFFAIRS, THESE STOCKHOLDERS MAY BE ABLE TO CONTROL US AND ALSO PREVENT POTENTIALLY BENEFICIAL ACQUISITIONS OF OUR COMPANY BY OTHERS.




As of October 31, 2010, our current directors and executive officers and family and related entities, as a group, beneficially owned approximately 100,100,000 of the approximately 548,000,000 shares of our common stock outstanding as of October 31, 2010. As a result, our officers and directors may be able to exert considerable influence over the actions of the Board of Directors and matters requiring approval of our stockholders. This concentration of ownership could delay or prevent a change in control and may adversely affect the ability of other stockholders to adopt a position in opposition to these directors and officers. Our principal stockholders may have interests that differ from our other stockholders, particularly in the context of potentially beneficial acquisitions of our Company by others, and they may legitimately vote as stockholders in a manner that protects their interests.




26





RISKS RELATED TO OUR INDUSTRY




IF WE FAIL TO COMPETE EFFECTIVELY AGAINST LARGER, MORE ESTABLISHED COMPANIES WITH GREATER RESOURCES, OUR BUSINESS WOULD SUFFER.




Competition in the nutraceutical market is intense. Factors affecting competition include financial resources, research and development capabilities and manufacturing and marketing experience and resources.




Our nutraceutical astaxanthin products will compete directly with the products of several companies that sell a similar nutraceutical product. At least three companies that we are aware of have a product like ours. We expect that our nutraceutical astaxanthin products will compete on the basis of product quality, price, and efficiencies derived from our intellectual property and an effective marketing strategy. However, if our competitors develop a proprietary position that inhibits our ability to compete, or if our marketing strategy is not successful, then our revenues may not increase.




There are various companies using microalgae cultivation technology processes that compete with our processes. We are aware of two U.S. companies, Martek of Maryland and Omega-Tech of Colorado, that produce commercial quantities of microalgae using modified fermentation processes. We are also aware of one company, Cell Tech of Oregon, which harvests microalgae from natural environmental sources. There are three other companies in the world - Biotechna of Australia, AlgaTechnologies of Israel and AstaReal of Hawaii - that claim to possess proprietary photobioreactor technology and use it for commercial purposes. While there are many other photobioreactors in operation besides those, to our knowledge, they are all operated by universities or research institutes and are not used for commercial purposes. It is possible that competing photobioreactor technologies that could adversely affect our perceived technical and competitive advantages already exist or may emerge in the future.




We also anticipate that the competition to develop microalgal-based products other than natural astaxanthin will increase. We expect competitors to include major pharmaceutical, food processing, chemical and specialized biotechnology companies. Many of these companies will have financial, technical and marketing resources significantly greater than ours. There are also other emerging marine biotechnology companies that could form collaborations with large established companies to support research, development and commercialization of products that may compete with our current and future products. Also, academic institutions, governmental agencies and other public and private research organizations are conducting research activities and seeking patent protection for microalgal products and may commercialize products that compete with ours on their own or through joint ventures. In addition, there may be technologies we are unaware of, or technologies that may be developed in the future, that could adversely affect our perceived technical and competitive advantage.




INCREASED COMPETITION MAY SIGNIFICANTLY REDUCE THE MARKET PRICE OF NATURAL ASTAXANTHIN.




Astaxanthin can be produced either naturally from Haematococcus pluvialis, as we do, from yeast by fermentation, as Igene Biotechnology, Inc. does, or through synthesis of chemical compounds. We are not aware that synthetic astaxanthin is approved for direct human consumption in any jurisdiction, although the FDA approved the Hoffman-LaRoche, Ltd. synthetic astaxanthin product as a food additive in fish feed in 1995. The Igene yeast-based product is also not approved for regular human consumption. We believe that the cost of producing synthetic astaxanthin is significantly lower than that for natural astaxanthin. We are not able to determine how production costs for the yeast-based product compares with ours. If we succeed in commercializing natural astaxanthin to the extent we project, producers of yeast-based and synthetic astaxanthin may increase their efforts to obtain approval of their product for human consumption. Studies have shown that natural astaxanthin is more effective than synthetic astaxanthin when used with various fish and shellfish populations. However, we have not determined that to be the case in human applications. The introduction of yeast-based or synthetic astaxanthin into the human nutraceutical marketplace could adversely affect the price at which we sell our product and the market share that we can obtain. While we believe that there are substantial hurdles to the approval of yeast-based and synthetic astaxanthin for human consumption in the U.S. and other major markets, we cannot be certain that such approval will not occur. A single producer, Hoffman-LaRoche, Inc., currently dominates the synthetic astaxanthin market. Hoffman-LaRoche has maintained the market price of its synthetic astaxanthin, which is derived from petrochemicals, at approximately $1,800 - $2,500 per kilogram. That is below the price at which we would be able to sell astaxanthin in comparable form.




27





IF WE ARE UNABLE TO COMPLY WITH GOVERNMENT REGULATION OF OUR PRODUCTS AND PRODUCTION ACTIVITIES, WE MAY BE FORCED TO DISCONTINUE PRODUCTION OF CURRENT OR FUTURE PRODUCTS.




We are subject to federal, state, local and foreign laws and regulations governing our products and production activities. This makes us vulnerable to: (i) the imposition of new laws, regulations and judicial decisions related to pharmaceutical and nutraceutical products, (ii) changes in the United States Food and Drug Administration and foreign regulatory approval processes that may delay or prevent the approval of new products and result in lost market opportunity, (iii) delays in the receipt of or the inability to obtain required approvals, (iv) new laws, regulations and judicial decisions affecting pricing or marketing of pharmaceutical and nutraceutical products, (v) the suspension or revocation of the authority necessary for manufacture, marketing or sale of our products, (vi) the imposition of additional or different regulatory requirements, such as those affecting labeling, (vii) seizure or recall of products, and (viii) the failure to obtain, the imposition of limitations on the use of, or the loss of patent and other intellectual property rights. While we do not consider our products to be “herbal” supplements (i.e., products that are made from drying and grinding entire plant parts), increased regulatory scrutiny of herbal products as the result of health issues (e.g., with ephedra) may also lead to more stringent regulation of our products.




Each existing or potential product that we develop, produce, market or license presents unique regulatory problems and risks. Relevant regulations depend on product type, use and method of manufacture. The FDA regulates, in varying degrees and in different ways, dietary supplements, other food products, medical devices and pharmaceutical products. Regulations govern manufacture, testing, exportation and labeling, while the Federal Trade Commission (FTC) regulates advertising.




We are or may become subject to other federal, state and foreign laws, regulations and policies with respect to labeling of products, importation of organisms and occupational safety, among others. Federal, state and foreign laws, regulations and policies are always subject to change and depend heavily on administrative policies and interpretations. We cannot ensure that any of our products will satisfy applicable regulatory requirements. Changes could occur in federal, state and foreign laws, regulations and policies and, particularly with respect to the FDA or other such regulatory bodies, such changes could be retroactive. Such changes could have a material adverse effect on our business, financial condition, results of operations and relationships with corporate partners.




Nutraceutical products that we develop will be viewed as human dietary supplements. The FDA requires pre-market clearance in the United States, as do other countries where these nutraceutical products are marketed, if they are intended for human consumption. The process of obtaining FDA clearance for either a food additive or a human dietary supplement can be expensive and time consuming, although significantly less expensive than the process for obtaining clearances for a new pharmaceutical. With natural products such as ours there is often only a brief and inexpensive waiting period before marketing of a nutraceutical can begin. Extensive information is required on the toxicity of the additive, including carcinogenicity studies and other animal testing. FDA clearance to market dietary supplements is obtained by notifying the FDA in writing of the intention to market a certain product and providing supporting documentation regarding toxicity. If the FDA does not object within a specified period of time, approval is deemed granted.




Mera's corporate predecessor received FDA clearance for the ASTAFACTOR® in early 2000. We similarly notified the FDA of our intention to market Salmon EssentialsTM in 2004, without objection. While we believe that the natural products on which we are focused will be subject to few objections in this approval process, we cannot ensure that any of our future products, on which we may have expended substantial development effort, will be cleared by the FDA on a timely basis, if at all.




The ASTAFACTOR® AND SALMON ESSENTIALSTM our nutraceutical astaxanthin products are being distributed internationally already and are likely to be distributed in others. Regulatory approvals in foreign markets vary by country. We believe the approval process for these products will generally come under their “natural product” status and be approved relatively quickly. However, we can provide no assurances in this regard.




28





RISKS RELATED TO THE SECURITIES MARKETS AND OUR COMMON STOCK




AS THE COMPANY IS UNABLE TO OBTAIN A COPY OF THE AUDIT REPORT ISSUED BY ITS FORMER AUDITORS IN CONNECTION WITH OUR AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED OCTOBER 31, 2009, INVESTORS MAY NOT BE ABLE TO BRING AN ACTION AGAINST OUR FORMER AUDITORS PURSUANT TO THE SECURITIES ACT OR EXCHANGE ACT WITH RESPECT TO OUR SEC REPORTS.




Jewett, Schwartz, Wolfe & Associates, our former independent public accountants, has discontinued its auditing practice and ceased operations. Therefore, the audit report previously issued by our former auditors in connection with the filing of our annual report on Form 10-K for the year ended October 31, 2009 has not been reissued by our former auditors in connection with the filing of this registration statement.  Accordingly, investors may not be able to bring an action against our former auditors pursuant to the Securities Act or Exchange Act with respect to our financial statements and, therefore, any recovery from our former auditors may be limited. The ability of investors to recover from our former auditors may also be limited as a result of our former auditor’s financial condition.




THE PRICE OF OUR COMMON STOCK MAY BE HIGHLY VOLATILE.




The trading price of our common stock has been, and is likely to continue to be, highly volatile. We could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including:




·
announcements of technological innovations or new commercial products by us or our competitors;




·
developments concerning proprietary rights, including patents, by us or our competitors;




·
publicity regarding actual or potential benefits or drawbacks relating to products under development by us or our competitors;




·
conditions or trends in the life sciences, nutraceutical or pharmaceutical markets;




·
changes in the market valuations of biotechnology and life sciences companies in general; and




·
general regulatory developments affecting our products in both the United States and foreign countries.




In addition, technology companies have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. There has been particular volatility in the market prices of securities of life science companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance.




29





OUR COMMON STOCK IS TRADED ON THE PINK-SHEET MARKET, WHICH MAY MAKE THE STOCK MORE DIFFICULT TO TRADE ON THE OPEN MARKET.




Our common stock is currently traded in the PINK-SHEET market. PINK-SHEET markets are generally more difficult to trade than those on the Nasdaq National Market, the Nasdaq Small Cap Market or the major stock exchanges. The average daily trading volume of our common stock has historically been relatively low. We cannot ensure that a more active public trading market will ever develop for our common stock. In addition, accurate price quotations can be difficult to obtain and price volatility is common for companies whose securities trade on the PINK-SHEETS.




THE SALE OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK BY STOCKHOLDERS COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DECLINE.




As of October 31, 2010 we had 547,759,915 shares of common stock outstanding. Of these shares, approximately 193,000,000 have either been registered under the Securities Act of 1933, as amended (the “Securities Act”), are freely tradable without volume limitations under Rule 144 of the Securities Act or are exempt from registration under 11 U.S.C. 1145 as a result of the reorganization of our predecessor issuer, Aquasearch, Inc.




We cannot predict the effect, if any, that sales of shares of our common stock or the availability of these shares being offered for sale will have on prevailing market prices. However, substantial amounts of our common stock were sold in the public market, to the point where raising capital has become extremely difficult.




We will need additional funding for capital expenditures and operating capital. If we raise additional funds by selling equity securities, the share ownership of our existing investors would be diluted. In addition, new equity purchasers may obtain rights, preferences or privileges that are superior to those of our existing stockholders and most likely demand a major reverse stock split in order to clean up the capital structure.  This would allow for potential additional add on investments.




THE ABILITY OF OUR BOARD OF DIRECTORS TO ISSUE PREFERRED STOCK COULD ADVERSELY AFFECT THE INTERESTS OF OUR STOCKHOLDERS.




The Company has 5,200 preferred shares authorized to be issued with the rights and preferences to be determined by the Board of Directors as of October 31, 2010 and 2009.




As of October 31, 2010 and 2009, the Company has 80 shares of Series A convertible preferred stock outstanding at a face value of $625.00 per share.  Each share of  Series A preferred stock is convertible into 10,417 shares of common stock at the option of the holder, at the time of the closing bid price of common stock is equal to or greater  than $0.15 per share for a period of  10 consecutive trading days, upon the Company raising at least $10 million in a public offering or upon a merger whereas the existing stockholders immediately prior to the merger hold less than a majority of the stock in the surviving corporation upon the completion of the merger.  In addition, each share of the Series A preferred is entitled to annual dividends of 5% of the face value, or $31.25 per share per annum.  The dividends are cumulative and are payable in either cash or common stock at a conversion price of $0.06 per share.  The Series A convertible preferred stock holders are also entitled to vote on all shareholder matters on an as converted basis or 10,417 common share votes.  As of October 31, 2010 and 2009, the total cumulative outstanding preferred dividends are $19,774 and $17,274 respectively.




As of October 31, 2010 and 2009, the Company has 974 shares of Series B convertible preferred stock outstanding at a face value of $625.00 per share.  Each share of Series B preferred stock is convertible into 8,929 shares of common stock at the option of the holder, at the time the closing bid price of common stock is equal to or greater than $0.15 per share for a period of 10 consecutive trading days, upon the company raising at least $10 million in a public offering or upon a merger whereas the existing stockholders immediately prior to the merger hold less than a majority of the stock in the surviving  corporation upon the completion of the merger.  In addition, each share of Series B preferred is entitled to annual dividends of 5% of the face value, or $31.25 per share per annum.   The dividends are cumulative and are payable in either cash or common stock at a conversion price of $0.07 per share.  The Series B preferred stock holders are also entitled to vote on all shareholder matters on an as converted basis or 8,929 shares votes.  As of October 31, 2010 and 2009, the total cumulative outstanding preferred dividends are $233,595 and $203,595 respectively.




30





ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




Smaller reporting companies are not required to provide information required by this item.




ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.




Audited balance sheet as of October 31, 2010 and the related statements of operations, cash flows and stockholders' equity (deficit) for the year ended October 31, 2010,  together with related notes and the report of  Webb & Company, our independent auditors, appear on pages F-1 through F-15 of this Report.




ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE




There were no disagreements with accountants on accounting and financial disclosure during fiscal 2010 or 2009.




ITEM 9A. CONTROLS AND PROCEDURES.




Evaluation of Disclosure Controls and Procedures.We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to be effective in providing reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.




The Company’s management, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial (principal accounting) Officer, carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of October 31, 2010.  Based upon that evaluation and the identification of the material weakness in the Company’s internal control over financial reporting as described below under “Management’s Report on Internal Control over Financial Reporting,” the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were ineffective as of the end of the period covered by this report.




Management’s Report on Internal Control over Financial Reporting.Management is responsible for establishing and maintaining adequate internal control over financial reporting of the Company.  Management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our internal control over financial reporting as of October 31, 2010 based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.




31





Based on this evaluation, our Chief Executive Officer and principal financial and accounting officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures and our internal controls over financial reporting were not effective such that the information relating to our company required to be disclosed in our SEC reports (i) is recorded processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management to allow timely decisions regarding required disclosures. Our management concluded that our disclosure controls and procedures were not effective as described in more detail below. A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting such that is a reasonable possibility that a material misstatement of the financial statements will not be prevented or detected on timely basis.




The specific weaknesses identified by our management were: (1) insufficient monitoring controls to determine the adequacy of our internal control over financial reporting and related policies and procedures; (2) lack of competent financial management personnel with appropriate accounting knowledge and training; (3) our financial staff does not hold a license such as Certified Public Accountant in the U.S., nor have they attended U.S. institutions or extended educational programs that would provide enough of the relevant education relating to U.S. GAAP, nor have any U.S. GAAP audit experience; (4) we rely on outside consultant to prepare our financial statements; and (5) insufficient controls over our period-end financial close and reporting processes.  Furthermore, the Company lacks an audit committee which results in ineffective oversight over the Company’s financial reporting and accounting. The weaknesses are principally due to our lack of working capital and other resources. During the period covered by this report we had limited staff.  These deficiencies resulted in the delinquent filing of SEC reports and our inability to complete financial statements in a timely manner.




To mitigate the current limited resources and limited employees, we rely heavily on direct management oversight of transactions, along with the use of legal and accounting consultants. Subject to additional working capital we intend to hire additional accounting personnel, which will enable us to implement adequate segregation of duties within the internal control framework and too correct these ongoing material weaknesses referenced above.




This annual report does not include an attestation report of the company's registered public accounting firm regarding internal control over financial reporting.  Management's report was not subject to attestation by the company's registered public accounting firm pursuant to rules of the SEC that permit the company to provide only management's report in this annual report.




Limitations on Effectiveness of Controls and Procedures.Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.  These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.  The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.




Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended October 31, 2010 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.




ITEM 9B. OTHER INFORMATION.




None.




32





PART III.




ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.




DIRECTORS AND EXECUTIVE OFFICERS




The following table sets forth certain information regarding our current directors and executive officers. All directors serve one year terms or until each of their successors are duly qualified and elected. Our officers are elected by the board.




NAME

AGE

POSITIONGregory F. Kowal

63

Chief Executive Officer and DirectorKenneth I. Crowder

72

Director, Chief Operating OfficerMelanie K. Kelekolio

43

Corporate Secretary, Vice President and Operations ManagerRussell M. Yamamoto

59

DirectorMichael F. Corcoran PH.D

61

Director





GREGORY F. KOWAL, CHIEF EXECUTIVE OFFICER AND DIRECTOR, has served as a director of our Company since June 2002. He assumed the role of CEO on January 3, 2006. Mr. Kowal is co-founder of First Honolulu Securities, Inc. and has been continuously associated with it since 1979. He currently is Chairman of the Board and Portfolio Manager of First Honolulu Asset Management.  He was also President of Hawaii Tsunami Pro Soccer Incorporated. Prior to founding First Honolulu, he was associated with a large west coast regional brokerage firm from 1973 until 1979. Mr. Kowal received his BSBA from Roosevelt University (Chicago, IL) in 1972. His area of concentration included management and finance. He was appointed to serve on the board of directors due to his management and finance experience.




KENNETH I. CROWDER, CHIEF OPERATING OFFICER AND DIRECTOR, has served as a director of the Company since September 16, 2003. Mr. Crowder is the founder and Chief Executive officer of Concordia Finance, which participates in the financing of big rig (Class 8) trucks. Prior to that, he spent more than two decades as an engineer for Northrup Corporation, working on a number of products. He began his engineering career with the U.S. Naval Ordnance Lab in Corona, California. Mr. Crowder received a BA in physics from University of California Riverside in 1960 and a Masters in physics from California State University at Long Beach in 1966. He was appointed to serve on the board of directors due to his engineering background and experience.




MELANIE K. KELEKOLIO, CORPORATE SECRETARY, VICE PRESIDENT AND OPERATIONS MANAGER, joined the company in May 1999 as a Research Associate and became the Team Leader of Production in 2001. Ms. Kelekolio has served as Corporate Secretary and Operations Manager since July, 2008. She has been instrumental in the optimization of our cultivation and scale up processes used to produce the Haematococcus algae and astaxanthin products, as well as Research and Development projects now in the works. Ms. Kelekolio has over 17 years of experience in the aquaculture field.




33





RUSSELL M. YAMAMOTO, DIRECTOR, joined the Company’s Board of Directors in July, 2008. Mr. Yamamoto is the President and CEO of RMY Construction, Inc. which he founded in 1984. He has worked on various municipal projects which range from athletic fields to major sewer and waterline rehabilitation projects statewide in Hawaii. Mr. Yamamoto is also involved in numerous charitable organizations which include Charities of Hawaii, American Heart Association, Palama Settlement, American Diabetes Association, Cancer Research Center of Hawaii, the University of Hawaii Foundation and HHSAA. He is a 1973 graduate from the University of Hawaii with a Bachelor of Business Administration degree. He was appointed to serve on the board of directors due to his business experience.




MICHAEL F. CORCORAN, PH.D. DIRECTOR joined the Company’s Board of Directors in July 2008. Dr. Corcoran founded Gull Rock Services, which provides consulting and fundraising services to non-profits in 1989, and national Data Solutions, LLC, a mailing list management company in 2002. He also served as CEO of a large non-profit conservation organization from 1984 through 1993. He received a doctorate in zoology from Duke University in 1981 and also studied oceanography at the University of Hawaii. He was appointed to serve on the board of directors due to his marketing and oceanography experience.




COMMITTEES




To date, we have not established an audit committee. Due to our financial position, we have been unable to attract independent directors that qualify as “financial experts” to serve on our board. We believe that it has been, and may continue to be, impractical to recruit such a director unless and until we are significantly larger.  Our board of directors reviews the professional services provided by our independent auditors, the independence of our auditors from our management, our annual financial statements and our system of internal accounting controls. None of the board members are considered a "financial expert."  The board has not delegated any of its functions to committees. The entire board of directors acts as our audit committee as permitted under Section 3(a)(58)(B) of the Exchange Act.




ITEM 11. EXECUTIVE COMPENSATION




SUMMARY COMPENSATION




The following table sets forth the information, on an accrual basis, with respect to the compensation of our chief executive officer and any other executive officer serving at the end of the most recently completed fiscal year whose total compensation exceeded $100,000 for the two fiscal years ended October 31, 2010.




NAME AND PRINCIPAL POSITION

YEAR ENDED OCTOBER 31,

SALARY ($)


RESTRICTED STOCK AWARD(S) ($)Gregory F. Kowal, CEO

2010

$
49,500


$
0Gregory F. Kowal, CEO

2009

$
0


$
0





OPTION GRANTS IN FISCAL 2010




No options were granted to Executive officers in fiscal year 2010, 2009 or 2008.




34





STOCK OPTIONS EXERCISED DURING FISCAL 2010




No stock options were exercised by the named executive officers of the Company during fiscal 2010, 2009 or 2008.




FISCAL YEAR-END OPTION VALUES




Option Awards
Stock AwardsNumber of Securities Underlying Unexercised Options

(#)
Number of Securities Underlying Unexercised Options

(#)
Option Exercise Price
Option Expiration
Number of Shares or Units of Stock That Have Not Vested
Market Value of Shares or Units of Stock That Have Not Vested
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other rights That Have Not Vested
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other rights That Have Not VestedName
Exercisable
Unexercisable
($)
Date
(#)
($)
(#)
($)Gregory Kowal
3,000,000
--
0.01
12/17/14
--
--
--
--





The total value of executive and officer’s unexercised vested options as of October 31,2010, was $62,150.




LTIP AWARDS DURING FISCAL YEAR




We did not make any long-term incentive plan awards to any executive officers or directors during the fiscal year ended October 31, 2010.




DIRECTOR COMPENSATION




Our directors do not receive compensation for services they provide as directors, although they are reimbursed their expenses for attendance at board meetings and those otherwise incurred in connection with their duties. We do not provide additional compensation for committee participation or special assignments of the Board of Directors.




Our directors, Messrs. Kowal and Crowder, were each granted options on December 2004 to purchase 5,000,000 shares of the Company's common stock in respect of their service as board members. The exercise price of those options was $0.01 per share. None of the options has been exercised.




35





EMPLOYMENT CONTRACTS




We currently do not have employment contracts with our named executive officers.




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.




The following table provides information known to us about the beneficial ownership of our common stock as of December 31, 2011 for: (1) each person, entity or group that is known by us to beneficially own five percent or more of our common stock; (2) each of our directors; (3) each of our named executive officers; and (4) our directors and executive officers as a group. To the best of our knowledge, each stockholder identified below has voting and investment power with respect to all shares of common stock shown, unless community property laws or footnotes to this table are applicable. Applicable percentage of beneficial ownership is based on shares outstanding as of  December 31, 2011. Beneficial ownership is determined in accordance with rules and regulations of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options or warrants held by that person that are currently exercisable or exercisable within 60 days the date of this report are deemed outstanding, but are not deemed outstanding for computing the percentage of any other person. Unless otherwise disclosed, the address for each person  below is c/o Mera Pharmaceuticals, Inc., 73-4460 Queen Ka’ahumanu Highway, Suite 110, Kailua-Kona, Hawaii 96740.




DIRECTORS AND OFFICERS

NATURE OF

BENEFICIAL OWNERSHIP


NUMBER OF SHARES

BENEFICIALLY OWNED


PERCENTAGE OF SHARES

BENEFICIALLY OWNEDKenneth Crowder

Direct and Indirect



8,177,379
(1)


1.49
%Michael F. Corcoran PH.D.

Direct and Indirect



5,250,154
(2)


.096
%Gregory F. Kowal

Direct and Indirect



28,719,502
(3)


5.24
%Russell M. Yamamoto

Direct and Indirect



63,298,370
(4)


11.556
%Melanie K. Kelekolio


--



--



--All directors and executive officers(5 persons)

Direct and Indirect



105,445,405



19.25
%





———————


1.           This amount includes 5,000,000 shares that Mr. Crowder has the right to acquire within sixty days from the date of this report on Form 10-K by exercising stock options.




2.           This amount includes 2,400,000 shares held by Kona Marketing Group, LLC, an entity owned and controlled by Dr. Corcoran.




3.           These shares held indirectly are in the name of Aquasearch Investment Partners, of which Mr. Kowal is a general partner. This amount includes 5,000,000 shares that Mr. Kowal has the right to acquire within 60 days from this report on Form 10-K by exercising stock options.




4.           This amount includes 7,692,308 shares of RMY Corporation of which Mr. Yamamoto is the founder and principal shareholder. This figure also includes 53,606,062 shares held in the name of his wife and other immediate family members.




36


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.




None.




ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.




The following is a summary of the fees billed to us by Webb & Company P.A. and Jewett, Schwartz, Wolfe & Associates for professional services rendered for the fiscal years ended October 31, 2010 and 2009, respectively:




Fee Category

Fiscal 2010


Fiscal 2009Audit Fees

$
16,000


$
30,000Audit Related Fees

$
0


$
0Tax Fees

$
0


$
0All Other Fees

$
0


$
0Total Fees

$
16,000


$
30,000





Audit fees consisted of fees billed for professional services rendered or the audit of the Company's financial statements included in our annual reports on Form 10-K and Form 10-K for the years ended October 31, 2010 and 2009, respectively, and or reviews of the financial statements included in the Company's quarterly reports on Form 10-Q and Form 10-Q during fiscal 2010 and 2009, respectively.




37





EXHIBITS




INDEX OF EXHIBITS




Exhibit List

Description2.1 *

Plan Confirmation Hearing and Debtor’s Plan of Reorganization2.2 **

Certificate of Merger merging Aquasearch, Inc., a Colorado corporation, into Mera Pharmaceuticals, Inc., a Delaware corporation2.3 **

Certificate of Merger merging Aqua RM co., Inc. into Mera Pharmaceuticals, Inc.3.1 **

Certificate of Incorporation3.2 ###

Certificate of Designation of Series A Preferred Stock of Mera Pharmaceuticals, Inc. and the Express Terms Thereof.3.3 ###

Certificate of Designation of Series B Preferred Stock of Mera Pharmaceuticals, Inc. and the Express Terms Thereof.3.4 **

Bylaws4.1 +

Form of 1996 Bridge Loan Note4.2 +

Form of 1997 Warrant4.3 ++

Form of Convertible Note4.4 ++

Form of Warrant4.5 ++

Form of Note and Warrant Purchase Agreement4.6 #

Form of Promissory Note10.1 #

Distribution and Development Agreement between Cultor Ltd. and Aquasearch, dated May 14, 1996 (terminated)10.2 #

Stock Subscription Agreement between Cultor Ltd. and Aquasearch, dated May 14, 199610.3 +

The Amended Keahole Point Facilities Use Agreement dated august 22, 1006, by and between The National Energy Laboratory of Hawaii Authority and Aquasearch, Inc.10.4 $

Letter of Intent between C. Brewer and company Limited and Aquasearch, Inc.10.5 ##

Amendment to Distribution and Development Agreement between Cultor Ltd. and Aquasearch, Inc., dated June 14, 199910.6 $$

Common Stock Purchase agreement (including form of Warrant) between Alpha Venture Capital, Inc. and Aquasearch, Inc., dated June 14, 200010.7 $$

Registration Rights Agreement between Alpha Venture Capital, Inc. and Aquasearch, Inc., dated June 14, 200010.8 ###

Sublease between the Company and Ancile Pharmaceuticals, Inc., dated July 31, 200210.9 $$$

Technical Services Contract, dated November 9, 2002, between the Company and Hainan sunshine Marine Bioengineering Co., Ltd.16.1 ***

Letter regarding change in Certifying Accountant dated June 14, 201131.1

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 350)31.2

Certification of the Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 350)32.1

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)32.2

Certification of the Principal Accounting Officer pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)


— — — — — — — —


*
Incorporated by reference to the exhibit filed with our Current Report on Form 8-K dated July 3, 2002.**
Incorporated by reference to the exhibit filed with our Current Report on Form 8-K dated July 30, 2002.***
Incorporated by reference to the exhibit filed with our Current Report on Form 8-K dated June 20, 2011.+
Incorporated by reference to the exhibit filed with our Annual Report on Form 10-KSB for the fiscal year ended October 31, 1996.++
Incorporated by reference to the exhibit filed with Amendment No. 1 to our Registration Statement on Form S-B filed October 28, 1998.#
Incorporated by reference to the exhibit filed with our Current Report on Form 8-K filed September 13, 1996.##
Incorporated by reference to the exhibit filed with Amendment No. 1 to the Company’s Registration Statement on Form SB-2 filed November 9, 1999.###
Incorporated by reference to the exhibit filed with our Registration Statement filed on Form SB-2/A dated December 11, 2003.$
Incorporated by reference to the exhibit filed with our Current Report on Form 8-K dated November 13, 1996.$$
Incorporated by reference to the exhibit filed with our Registration Statement on Form SB-2 filed July 13, 2000.$$$
Incorporated by reference to the exhibit filed with our Quarterly Report on Form 10-QSB filed March 24, 2003.






38





SIGNATURES




Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized, on February 10, 2012.




MERA PHARMACEUTICALS, INC.By:
/s/ Gregory F. KowalGregory F. KowalChief Executive Officer





Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons of behalf of the registrant in the capacities and on the dates indicated:





SIGNATURE

TITLE

DATE/s/ Gregory F. Kowal

Chief Executive Officer, and Director

February 10, 2012Gregory F. Kowal/s/ Kenneth I. Crowder

Director and Chief Operating Officer

February 10, 2012Kenneth I. Crowder/s/ Melanie Kelekolio

Secretary, Vice President and Operations Manager

February 10, 2012Melanie Kelekolio/s/ Russell M. Yamamoto

Director

February 10, 2012Russell M. Yamamoto/s/ Michael F. Corcoran Ph.D

Director

February 10, 2012Michael F. Corcoran





39





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





FINANCIAL STATEMENTS




Mera Pharmaceuticals, Inc.




Table of Contents




Report of Registered Public Accounting Firms


F-2  -  F-3Balance Sheets


F-4Statements of Operations


F-5Statements of Changes in Stockholders' Equity/Deficit


F-6Statements of Cash Flows


F-7Notes to Financial Statements


F-8  -  F-16





F-1





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the Board of Directors of:


Mera Pharmaceuticals, Inc.





We have audited the accompanying balance sheet of Mera Pharmaceuticals, Inc. (the “Company”) as October 31, 2010, and the related statements of operations and comprehensive income, changes in stockholders’ equity and cash flows for the year then ended.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audit.  The financial statements of the Company as of October 31, 2009, and for the year then ended were audited by other auditors who have ceased operations.  Those auditors expressed an unqualified opinion on those financial statements in their report dated January 26, 2010.
 
 We also have audited the adjustments described in Note 2 that were applied to restate the 2009 financial statements to correct an error.  In our opinion, such adjustments are appropriate and have been properly applied.  We were not engaged to audit, review, or apply any procedures to the 2009 financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2009 financial statements taken as a whole.
 
 We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.
 
 In our opinion, the financial statements referred to above present fairly in all material respects, the financial position of Mera Pharmaceuticals, Inc. as of October 31, 2010 and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
 
 The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 3 to the financial statements, the Company has a net loss of $537,838, a working capital deficiency of $735,493 and a stockholders' deficiency of $676,940.  These factors raise substantial doubt about the Company's ability to continue as a going concern.  Management's plans concerning these matters are also described in Note 3.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.


WEBB & COMPANY, P.A.


Certified Public Accountants





Boynton Beach, Florida


February 9, 2012




F-2





Provided below is a copy of the accountant’s report issued by Jewett, Schwartz, Wolfe & Associates (“JSW”), our former independent public accountants, in connection with the filing of our Annual Report on Form 10-K for the year ended October 31, 2009.  This audit report is a copy of the previously issued report and has not been reissued by JSW in connection with the filing of this 10-K.We are unable to obtain a reissued accountant’s report from JSW, and we will be unable to obtain future accountant’s reports from JSW, because JSW has discontinued its auditing practice.





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Shareholders of


Mera Pharmaceuticals, Inc.





We have audited the accompanying balance sheet of Mera Pharmaceuticals, Inc. as of October 31, 2009 and 2008 and the related statements of operations, changes in shareholders' equity`, and cash flows for the years ended October 31, 2009 and 2008.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.





We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.





In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mera Pharmaceuticals, Inc. as of October 31, 2009 and 2008 and the results of its operations and its cash flows for the years then ended 2009 and 2008 in conformity with accounting principles generally accepted  in  the  United  States  of  America.





These accompanying financial statements referred to above have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company’s need to seek new sources or methods of financing or revenue to pursue its business strategy, raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans as to these matters are also described in Note 2.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.





JEWETT, SCHWARTZ, WOLFE & ASSOCIATES





Hollywood, Florida


January 16, 2010




F-3





Mera Pharmaceuticals, Inc.


Balance Sheets
 As of October 31,2010


2009Current assets:




(Restated)Cash and cash equivalents

$
5,940


$
3,135Accounts receivable, net


8,864



6,656Other current assets


-



15,994Total current assets


14,804



25,785Plant and equipment, net


8,034



200,482Other assets


50,519



31,229Total Assets

$
73,357


$
257,496
 LIABILITIES AND STOCKHOLDERS' DEFICITCurrent liabilities:Accounts payable and accrued liabilities

$
373,661


$
164,212Accounts payable - related parties


150,000



150,000Notes payable - related parties


51,936



51,936Deferred revenue


174,700



30,450Total current liabilities


750,297



396,598Commitments and contingenciesStockholders' equity (deficit):Preferred Stock $0.0001 par value, 5,200 shares authorized, none issued and outstanding, respectively


-



-Series A- Convertible Preferred Stock $0.0001 par value, 2,400 shares authorized, 80 and 80 issued and outstanding, respectively


1



1Series B- Convertible Preferred Stock $0.0001 par value, 2,400 shares authorized, 974 and 974 shares issued and outstanding


1



1Common stock, $.0001 par value: 750,000,000
 shares authorized, 547,769,915 and 547,769,915 shares issued and 547,269,915 and 547,269,915 outstanding, respectively


54,777



54,777Additional paid-in capital


7,968,873



7,968,873Treasury stock at cost (500,000 shares)


(2,025
)


(2,025
)Accumulated deficit


(8,698,567
)


(8,160,729
)Total stockholders' deficit


(676,940
)


(139,102
)Total Liabilities and Stockholders' Deficit

$
73,357


$
257,496
  See the accompanying notes to the financial statements
  F-4




Mera Pharmaceuticals, Inc.
 Statements of Operations
 For The Years Ended October 31, 2010 and 2009




2010


2009Net Sales

$
288,888


$
599,091Cost of Goods Sold


46,066



28,021GROSS PROFIT


242,822



571,070Operating ExpensesSelling and administrative expenses


186,790



363,893Research and development costs


265,310



324,383Depreciation and amortization


28,008



84,646Impairment loss


314,440



20,413Total operating expenses


794,548



793,335Loss from Operations


(551,726
)


(222,265
)Other income (expense)Interest income


-



2,445Realized gain


-



746Other income


2,312



-Interest expense


(4,992
)


(5,033
)Other expense


(2,722
)


-Total other income (expense)


(5,402
)


(1,842
)Net loss before tax benefit (provision)


(557,128
)


(224,107
)Tax benefit (provision)


19,290



31,229NET LOSS


(537,838
)


(192,878
)Preferred Dividends


(32,938
)


(32,938
)Net Loss Available to Common Stockholders

$
(570,776
)

$
(225,816
)Net loss per common share

$
(0.00
)

$
(0.00
)Weighted average shares outstanding - basic and diluted


547,269,915



547,269,915





See the accompanying notes to the financial statements
  F-5
  Mera Pharmaceuticals, Inc.
 Statements of Changes in Stockholders' Equity (Deficit)
 For The Years Ended October 31, 2010 and 2009


Stock


Additional

Paid - In

Capital


Treasury

Stock

Shares


Treasury

Stock

At Cost





Stockholders'

Equity

(Deficit)Convertible Preferred


Common








Accumulated

(Deficit)Series A Shares


Series B Shares


Series A Par


Series B Par


Shares


AmountBalance at October 31, 2008 (Restated)


80



974


$
1


$
1



547,769,915


$
54,777


$
7,968,873



(500,000
)

$
(2,025
)

$
(7,967,851
)

$
53,776Loss for the year ended October 31, 2009






































(192,878
)


(192,878
)Balance at October 31, 2009 (Restated)


80



974











547,769,915



54,777



7,968,873



(500,000
)


(2,025
)


(8,160,729
)

$
(139,102
)Loss for the year ended October 31, 2010






































(537,838
)


(537,838
)Balance at October 31, 2010


80



974


$
1


$
1



547,769,915


$
54,777


$
7,968,873



(500,000
)

$
(2,025
)

$
(8,698,567
)

$
(676,940
)


See the accompanying notes to the financial statements
  F-6
  Mera Pharmaceuticals, Inc.
 Statements of Cash Flows
 For The Years Ended October 31, 2010 and 2009


2010


2009Cash Flows from Operating Activities:Net loss

$
(537,838
)

$
(192,878
)Adjustments to reconcile net loss to net cashprovided by (used in) operating activities:Depreciation and amortization expense


28,008



84,646Impairment of fixed assets


314,440



20,413Changes in operating Assets and Liabilities:Accounts receivable


(2,208
)


4,351Tax credit receivable


(19,290
)


484Other current assets


15,994



873Accounts payable and accrued liabilities


209,449



25,210Deferred revenue


144,250



30,450Net cash provided by (used in) operating activities


152,805



(26,451
)Cash Flows from Investing Activities:Purchases of fixed assets


(150,000
)


(24,102
)Sale of Marketable Security


-



34,400Net cash provided by investing activities


(150,000
)


10,298Cash Flows from Financing ActivitiesNet cash provided by (used in) financing activities


-



-Net increase (decrease) in cash and cash equivalents


2,805



(16,153
)Cash and cash equivalents, beginning of the period


3,135



19,288Cash and cash equivalents, end of the period

$
5,940


$
3,135Cash paid for taxes

$
-


$
-Cash paid for interest

$
-


$
-





See the accompanying notes to the financial statements




F-7





MERA PHARMACEUTICALS, INC.


NOTES TO THE FINANCIAL STATEMENTS


FOR THE YEARS ENDED OCTOBER 31, 2010 AND 2009




NOTE 1.SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES




Organization - Mera Pharmaceuticals, Inc. (the “Company” or “Mera”), originally was seeking to develop and commercializes natural products from microalgae using its proprietary, large-scale photobioreactor technology.




During 2009, the Company switched its focus to engaging in the development of Sea Salt for sale in commercial and consumer uses. The salt is concentrated, low sodium and organic. The water used to produce the salt is drawn from an ocean depth of one-half mile. It is different in chemical composition from other sea salts because it comes from deep-sea water. It contains less sodium and more potassium, as well as higher concentrations of trace minerals. The Company's operations are located in Kailua-Kona, Hawaii.




Cash and Cash Equivalents - The Company considers all highly liquid debt securities purchased with original or remaining maturities of three months or less to be cash equivalents. The carrying value of cash equivalents approximates fair value.




Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of these financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  Significant estimates include valuation of inventory, valuation of deferred tax assets and impairment of property and equipment.




Fair Value of Financial Instruments - The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair market value because of the short maturity of those instruments.  Notes payable approximate fair value.




Accounts Receivable- The Company performs ongoing credit evaluations of customers, and generally does not require collateral. Allowances are maintained for potential credit losses and returns and such losses have been within management’s expectations.




Credit Risk - It is the Company’s practice to place its cash equivalents in either high quality money market securities or to invest in short term corporate bonds.  Certain amounts of such funds might not be insured by the Federal Deposit Insurance Corporation. However, the Company considers its credit risk associated with cash and cash equivalents to be minimal.




Inventories - Inventories are stated at the lower of cost (which approximates first-in, first-out) or market.  At October 31, 2009, inventories consisted of $742,736 of work in process, $133,767 of finished goods and $19,338 of raw materials.  Management has recorded a full valuation allowance for obsolete and excess inventory totaling $895,841.




October 31,2010


2009Raw Materials

$
19,338


$
19,338Work In Process


742,736



742,736Inventory Asset


68,774



69,430Finished Goods


61,771



64,337892,619



895,841Inventories Allowance


(892,619
)


(895,841
)$
-


$
-
  F-8
  MERA PHARMACEUTICALS, INC.
 NOTES TO THE FINANCIAL STATEMENTS
 FOR THE YEARS ENDED OCTOBER 31, 2010 AND 2009
 NOTE 1.  SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


Revenue Recognition - Product revenue is recognized upon shipment to customers. Contract services revenue is recognized as services are performed on a cost reimbursement basis. Royalties are recognized upon receipt. The Company recognizes revenue when the price is fixed and determinability persuasive evidence of an arrangement exists, the products are shipped and collectability is reasonable assured.




Plant and Equipment, net - Plant and equipment are stated at cost less accumulated depreciation. Depreciation is recorded principally using the straight-line method, based on the estimated useful lives of the assets (property and plant, 10-40 years; machinery and equipment, 3-10 years). When applicable, leasehold improvements and capital leases are amortized over the lives of respective leases, or the service lives of the improvements, whichever is less.




Expenditures for renewals and improvements that significantly extend the useful life of an asset are capitalized.  The costs of software with an expected life of more than one year, and used in the business operations are capitalized and amortized over their expected useful lives.  Expenditures for maintenance and repairs are charged to operations when incurred.  When assets are sold or retired, the cost of the asset and the related accumulated depreciation are removed from the accounts and any gain or loss is recognized at such time.




Impairment of Long Lived Assets and Long Lived Assets to be Disposed Of – ASC 360 “Accounting for the Impairment or Disposal of Long-Lived Assets” establishes the accounting model for long-lived assets to be disposed of by sale and applies to all long-lived assets, including discontinued operations. This statement requires those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell.




Stock Issued For Services - In December 2004, the FASB issued ASC No. 718, Compensation – Stock Compensation (“ASC 718”).  Under ASC 718, companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans.  As such, compensation cost is measured on the date of grant at their fair value.  Such compensation amounts, if any, are amortized over the respective vesting periods of the option grant.  The Company applies this statement prospectively.




Equity instruments (“instruments”) issued to persons other than employees are recorded on the basis of the fair value of the instruments, as required by ASC 718.  ASC No. 505, Equity Based Payments to Non-Employees (“ASC 505”) defines the measurement date and recognition period for such instruments.  In general, the measurement date is (a) when a performance commitment, as defined, is reached or (b) when the earlier of (i) the non-employee performance is complete or (ii) the instruments are vested. The measured value related to the instruments is recognized over a period based on the facts and circumstances of each particular grant as defined in the ASC 505.




Research and Development Costs - Generally accepted accounting principles state that costs that provide no discernible future benefits, or allocating costs on the basis of association with revenues or among several accounting periods that serve no useful purpose, should be charged to expense in the period occurred.  ASC 350 “Accounting for Research and Development Costs” requires that certain costs be charged to current operations including, but not limited to:  salaries and benefits; contract labor; consulting and professional fees; depreciation; repairs and maintenance on operational assets used in the production of prototypes; testing and modifying product and service capabilities and design; and, other similar costs.




Income Taxes - The Company uses the asset and liability method of accounting for income taxes as required by ASC 740 “Accounting for Income Taxes”. ASC requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of certain assets and liabilities. Since its inception, the Company has incurred net operating losses. Accordingly, no provision has been made for income taxes. Statutory taxes not based on income are included in general and administrative expenses.




F-9


MERA PHARMACEUTICALS, INC.
 NOTES TO THE FINANCIAL STATEMENTS
 FOR THE YEARS ENDED OCTOBER 31, 2010 AND 2009


NOTE 1.  SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




Loss Per Share - The Company computed basic and diluted loss per share amounts for October 31, 2010 and 2009 pursuant to the ASC 260, “Earnings per Share.”  The assumed effects of the exercise of 11,215,000 shares of outstanding stock options, and conversion of 833,333 shares of convertible preferred stock series A and 8,695,429, shares of convertible preferred stock series B were anti-dilutive and, accordingly, dilutive per share amounts have not been presented in the accompanying statements of operations.




Concentrations- During 2010 and 2009, the Company obtains 100% of its salt from one source.




As of October 31, 2010 and 2009, the Company has accounts receivable balances that exceed 10% from 2 and 2 customers, respectively.




2010
2009Customer A
12%
17%Customer B
14%
31%





As of October 31, 2010 and 2009, the Company has a sales concentration that exceeded 10% to 1 and 2    customers, respectively.





2010
2009Customer A
38%
17%Customer B
N/A
29%





Recent Authoritative Pronouncements





ASU No. 2011-03; Reconsideration of Effective Control for Repurchase Agreements.  In April, 2011, the FASB issued ASU No. 2011-03. The amendments in this ASU remove from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. The amendments in this ASU also eliminate the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets.




The guidance in this ASU is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.




ASU No. 2011-04; Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.   In May, 2011, the FASB issued ASU No. 2011-04. The amendments in this ASU generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed.  This ASU results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRSs.  The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted.




The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.




F-10




MERA PHARMACEUTICALS, INC.
 NOTES TO THE FINANCIAL STATEMENTS
 FOR THE YEARS ENDED OCTOBER 31, 2010 AND 2009




NOTE 1.  SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




ASU No. 2011-05; Amendments to Topic 220, Comprehensive Income.  In June, 2011, the FASB issued ASU No. 2011-05. Under the amendments in this ASU, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.




The amendments in this ASU should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures. Due to the recency of this pronouncement, the Company is evaluating its timing of adoption of ASU 2011-05, but will adopt the ASU retrospectively by the due date.




On September 15, 2011, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other, which simplifies how an entity is required to test goodwill for impairment. This ASU would allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under the ASU, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The ASU includes a number of factors to consider in conducting the qualitative assessment.  The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  Early adoption is permitted. This standard is not expected to have a material impact on the Company’s reported results of operations or financial position.




NOTE 2.  RESTATEMENT




The Company has restated the 2009 Additional Paid in Capital and Accumulated Deficit by $48,870 to correctly present the effect of the stock options that vested during 2006 and were not properly included in Additional Paid in Capital and Accumulated Deficit.  The restated amounts did not have any effect on the 2009 Statement of Operation or Cash Flows.




NOTE 3.  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 approximately $8.7 million a net loss of $537,838 and as of October 31, 2010 has a working capital deficiency of $735,493 and a stockholders’ deficiency of $676,940. This raised substantial doubt about its ability to continue as a going concern. The Company will continue to pursue additional capital investment. However, there can be no assurance that the Company will be able to successfully acquire the necessary capital to continue their on-going development efforts and bring products to the commercial market. These factors, among others, create an uncertainty about the Company’s ability to continue as a going concern.




F-11





MERA PHARMACEUTICALS, INC.


NOTES TO THE FINANCIAL STATEMENTS


FOR THE YEARS ENDED OCTOBER 31, 2010 AND 2009


NOTE 4.  PROPERTY, PLANT AND EQUIPMENT, NET




Property, Plant and Equipment is as follows:




October 31,

2010


October 31,

2009Plant

$
109,662


$
274,102Equipment


-



-424,102



274,102Accumulated depreciation


(101,628
)


(73,620
)Total

$
8,034


$
200,482





For the years ended October 31, 2010 and 2009, the Company recognized depreciation expense of $28,008 and $84,646, respectively. During the year ended October 31, 2010 and 2009, the Company recognized an impairment of $314,440 and $20,413, respectively.




NOTE 5.  RELATED PARTY TRANSACTIONS




In December 2003 the Board agreed to pay one of its members a commission of 4% of sales made to a Hawaiian distributor. The commission amount to be paid is based on sales consummated and approximately $13,000 was payable under this agreement as of October 31, 2010.




On November 2, 2009 the Company entered into an agreement with an entity created and controlled by certain members of its Board of Directors. The agreement involves the purchase by such entity of Bulk Kona Deep Sea Salt from unsold inventory at a price of $7.25 per kilogram. The Company estimates its direct cost for this material is approximately $5.00 per kilogram.  The purpose of this transaction is, in the absence of any other funding sources, to provide cash flow needed to maintain and grow operations so that the Company is able to produce enough Kona Deep Sea Salt to market and sell outside of Hawaii.  This program will end once the Company is able to attain positive cash flow sufficient to sustain such operations. Under this agreement, the Company shall have the right of first refusal to repurchase some or the entire product purchased by the related entity at a price of $8.50 per Kilogram if certain conditions are met. As of October 31, 2010 and 2009, the Company has received $203,000 and $36,250 under this agreement. Of such amount, $174,700 and $30,450 has been recorded as deferred revenue for product that has not yet been shipped.




In March 2009 the Company entered into an agreement with a Director. The Director’s Company to provide construction services in exchange for payment of $150,000.  As of the date of these financial statements, such amount has not yet been paid.




The Company has an unsecured demand notes payable – shareholder bearing an annual interest rate of 10% due on March 31, 2004. The notes are currently past maturity; however no demand for payment has been made.




The Company has an unsecured demand notes payable – shareholder bearing an annual interest rate of 8% due on various dates through March 26, 2006. The notes are currently past maturity; however no demand for payment has been made.




NOTE 6.  INCOME TAXES




The Company provides for income taxes in accordance with ASC 470 using an asset and liability based approach. Deferred income tax assets and liabilities are recorded to reflect the tax consequences on future years of temporary differences of revenue and expense items for financial statement and income tax purposes.




Since its formation the Company has incurred net operating losses. As of October 31, 2009, the Company had a net operating loss carry forward of approximately $19,833,000 available to offset future taxable income for federal and state income tax purposes.




F-12





MERA PHARMACEUTICALS, INC.
 NOTES TO THE FINANCIAL STATEMENTS
 FOR THE YEARS ENDED OCTOBER 31, 2010 AND 2009





NOTE 6.  INCOME TAXES (CONTINUED)




ASC 470 requires the Company to recognize income tax benefits for loss carry forwards that have not previously been recorded. The tax benefits recognized must be reduced by a valuation allowance if it is more likely than not that loss carry forwards will expire before the Company is able to realize their benefit, or that future deductibility is uncertain. For financial statement purposes, the deferred tax asset for loss carry forwards has been fully offset by a valuation allowance since it is uncertain whether any future benefit will be realized.  An increase in the valuation allowance of approximately $92,000 occurred as of October 31, 2010.




The table below presents a reconciliation between the reported income taxes and the income taxes that would be computed by applying the Company’s incurred tax rates.  The provision (benefit) for income taxes from operations for the years ended October 31, 2010 and 2009 consist of the following:




October 31,2010


2009Federal and State

$
(224,873
)

$
-Tax effect of non-deductible expense


1,335



-Increase in valuation allowance


204,248



-Provision (benefit) for income taxes, net

$
(19,290
)

$
(31,229
)





Deferred income taxes result from temporary differences in the recognition of income and expenses for the financial reporting purposes and for tax purposes. The tax effect of these temporary differences representing deferred tax asset and liabilities result principally from the following:




October 31,2010


2009Net operating loss carry-forwards expiring after the year ended10/31/2010

$
7,616,409


$
-Deferred income tax asset

$
7,616,409


$
-





The net deferred tax assets and liabilities are comprised of the following:




October 31,2010


2008Deferred tax assetsCurrent

$
-


$
-Non-current


7,785,2787,785,278



-Less valuation allowance


(7,785,278
)


-Net deferred income tax asset

$
-


$
-





F-13




MERA PHARMACEUTICALS, INC.
 NOTES TO THE FINANCIAL STATEMENTS
 FOR THE YEARS ENDED OCTOBER 31, 2010 AND 2009


NOTE 6.  INCOME TAXES (CONTINUED)




The Company has the following carry forwards available at October 31, 2010:




Operating lossesAmount
Expires14,880,000
2015 - 20210
20221,900,000
20231,200,000
2024930,000
2025420,000
2026225,000
2027150,000
2028190,000
2029220,000
203092,000
2031





The Company is a Qualified High Tech Business (“QHTB”) in the State of Hawaii. QHTBs qualify for certain refundable state tax credits as they relate to research and development activities (“QHTB tax credit refunds”). For the year ended October 31, 2010, the Company has approximately $50,000 in QHTB tax credit refunds receivable.  As of October 31, 2010, the Company has not completed its 2009 federal and state income tax returns.




NOTE 7.  NOTES PAYABLE - RELATED PARTIES




Notes payable – related parties consists of the following as of October 31, 2010:




The Company has an unsecured demand notes payable – shareholder bearing an annual interest rate of 10% due on March 31, 2004. The notes are currently past maturity; however no demand for payment has been made.

$
41,936The Company has an unsecured demand notes payable – shareholder bearing an annual interest rate of 8% due on various dates through March 26, 2006. The notes are currently past maturity; however no demand for payment has been made.


10,000Total notes payable, related parties

$
51,936





The Company accrued $4,992 and $4,992 for the years ended October 31, 2010 and 2009, respectively for interest expense due on notes payable-related parties.




F-14





MERA PHARMACEUTICALS, INC.
 NOTES TO THE FINANCIAL STATEMENTS
 FOR THE YEARS ENDED OCTOBER 31, 2010 AND 2009





NOTE 8.  STOCKHOLDERS EQUITY




(A)
Preferred Stock- The Company has 5,200 preferred shares authorized to be issued with the rights and preferences to be determined by the Board of Directors as of October 31, 2010 and 2009.





As of October 31, 2010 and 2009, the Company has 80 shares of Series A convertible preferred stock outstanding at a face value of $625.00 per share.  Each share of Series A preferred stock is convertible into 10,417 share of common stock at the option of the holder, at the time the closing bid price of common stock is equal to or greater than $0.15 per share for a period of 10 consecutive trading days, upon the company raising at least $10 million in a public offering or upon a merger whereas the existing stockholders immediately prior to the merger hold less than a majority of the stock in the surviving corporation upon the completion of the merger.  In addition, each share of Series A preferred is entitled to annual dividends of 5% of the face value, or $31.25 per share per annum.  The dividends are cumulative and are payable in either cash or common stock at a conversion price of $.06 per share.  The Series A convertible preferred stock holders are also entitled to vote on all shareholder matters on an as converted bases or 10,417 common shares votes. As of October 31, 2010 and 2009, the total cumulative outstanding preferred dividends are $ 19,774 and $ 17,274, respectively.




As of October 31, 2010 and 2009, the Company has 974 shares of Series B convertible preferred stock outstanding at a face value of $625.00 per share.  Each share of Series B preferred stock is convertible into 8,929 share of common stock at the option of the holder, at the time the closing bid price of common stock is equal to or greater than $0.15 per share for a period of 10 consecutive trading days, upon the company raising at least $10 million in a public offering or upon a merger whereas the existing stockholders immediately prior to the merger hold less than a majority of the stock in the surviving corporation upon the completion of the merger.  .  In addition, each share of Series B preferred is entitled to annual dividends of 5% of the face value, or $31.25 per share per annum.  The dividends are cumulative and are payable in either cash or common stock at a conversion price of $.07 per share.  The Series B convertible preferred stock holders are also entitled to vote on all shareholder matters on an as converted bases or 8,929 common shares votes.  As of October 31, 2010 and 2009, the total cumulative outstanding preferred dividends are $ 233,595 and $ 203,595, respectively.




(B)
Stock Options- On November 7, 2004 the Board of Directors adopted the 2004 Stock Option Plan, authorizing issuance of options on up to 60 million shares of the Company’s common stock.  In December of 2004, the Board approved issuance of options to purchase approximately 48,000,000 shares of its common stock to existing officers, directors and employees, subject to shareholder approval of the plan. In May 2005, such approval was received. The fair value of the options on the grant date was $480,000 calculated using the Black-Scholes Option Pricing Model. As of October 31, 2010, approximately 11,215,000 were deemed vested based on length of service with the Company since the date the Company’s Plan of Reorganization was approved. Terminated employees who have elected not to exercise options have forfeited their options. Approximately 36,000,000 total options have been forfeited since the adoption of the Stock Option Plan.





The following table summarizes the transactions of the Company’s stock options for the two-year period ended October 31, 2010:




Number of Shares


Weighted Average Exercise PriceOptions outstanding, November 1, 2008


12,430,000


$
0.01Options granted


-



-Options exercised


-



-Options forfeited


-



-Options outstanding, October 31, 2009


12,430,000


$
0.01Options granted


-



-Options exercised


-



-Options forfeited


(1,215,000
)


0.01Options outstanding, October 31, 2010


11,215,000


$
0.01





F-15





MERA PHARMACEUTICALS, INC.
 NOTES TO THE FINANCIAL STATEMENTS
 FOR THE YEARS ENDED OCTOBER 31, 2010 AND 2009




NOTE 8.  STOCKHOLDERS EQUITY  (CONTINUED)




2010 Options Outstanding


Options ExercisableRange of

Exercise Price


Number

Outstanding at

October 31, 2010


Weighted Average Remaining Contractual Life


Weighted Average Exercise Price


Number

Exercisable at

October 31, 2010


Weighted Average Exercise Price$
.01



11,215,000



2.58 years


$
.01



11,215,000


$
.01





2009 Options Outstanding


Options ExercisableRange of

Exercise Price


Number

Outstanding at

October 31, 2009


Weighted Average Remaining Contractual Life


Weighted Average Exercise Price


Number

Exercisable at

October 31, 2009


Weighted Average Exercise Price$
.01



12,430,000



3.58 years


$
.01



12,430,000


$
.01





NOTE 9.  COMMITMENT & CONTINGENCES




The Company currently leases land for its office space and Keahole facility that expires February 2038.  The minimum future lease payments required under the Company’s operating leases at October 31, 2010 are as follows:




2011

$
33,3662012


33,3662013


33,3662014


33,3662015


33,366Thereafter


767,418Total

$
934,248





NOTE 10.  LEGAL PROCEEDINGS




On June 22, 2011, Michael Broby, a former consultant filed a suit in the 3rd Circuit Court, State of Hawaii courts against Mera Pharmaceuticals, Inc. The complaint alleges breach of contract and breach of covenant of good faith and fair dealing arising out of a commission contract and is seeking damages in excess of $50,000.  Mera management is planning to vigorously defend themselves against this claim, as they believe there is no merit.