The accompanying notes are an integral part of these financial statements.
(a development stage enterprise)
Notes to Unaudited Financial Statements
September 30, 2011
Note 1: Basis of Presentation
The accompanying unaudited financial statements of Merilus, Inc. (the Company) were prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. Management of the Company (Management) believes that the following disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Companys Form 10-K report for the year ended December 31, 2010.
These unaudited financial statements reflect all adjustments, consisting only of normal recurring adjustments that, in the opinion of Management, are necessary to present fairly the financial position and results of operations of the Company for the periods presented. Operating results for the nine months ended September 30, 2011, are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.
These unaudited financial statements have been prepared in contemplation of the Company continuing as a going concern. However, the Company has not had revenue from operations and is considered a development stage enterprise as defined by FASB Accounting Standards Codification (ASC) Topic 915. The Company's ability to meet its ongoing financial requirements has been dependent on loans from a stockholder and will continue to be so dependent until it engages in profitable operations. As described in Note 4 Related Party Transactions, the Company is in default of a note payable to this stockholder. The Company has issued shares of its common stock to satisfy loan obligations and for the payment of accounts payable. The Company has also relied on the services of its Management without receipt of monetary compensation; however, shares of common stock were issued to Management on a one-time basis (See Note 4 Related Party Transactions). The Company does not anticipate the issuance of additional shares of common stock to Management in the future; however, no assurance thereof can be given. The Company also assumes that capital for operations will be available from stockholders or others during the next 12 months; however, no assurance thereof can be given. A change in these circumstances would have a material adverse effect on the Company's plan of operations.
Note 2: Summary of Significant Accounting Policies
Development stage enterprise The Company was incorporated under the laws of the State of Nevada on May 7, 1985. During the year 2000 the Company entered into a reorganization agreement (Agreement) with the intent to acquire all of the issued and outstanding shares of a development stage enterprise, Merilus Technologies, Inc. (MTI), a British Columbia corporation. During 2001 the Company attempted to complete the terms of the Agreement; however, the acquisition of MTI was never consummated as contemplated and in 2003 MTI filed for bankruptcy. Subsequent thereto, the Company became dormant and during 2005, the Company commenced its efforts to acquire an operating entity through a reverse acquisition.
Use of estimates These unaudited financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and require that management make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities. The use of estimates and assumptions may also affect the reported amounts of revenues and expenses. Actual results could differ from those estimates or assumptions.
(a development stage enterprise)
Notes to Unaudited Financial Statements
September 30, 2011
Note 2: Summary of Significant Accounting Policies (continued)
Net loss per share of common stock The loss per share of common stock is computed by dividing the net loss during the periods presented by the weighted average number of shares outstanding during those same periods.
Income Taxes The Company has no deferred taxes arising from temporary differences between income for financial reporting and for income tax purposes. At September 30, 2011, the Company has a net operating loss carry forward of approximately $267,000 that expires if unused through 2031. A deferred tax asset in the amount of $40,050 is fully offset by a valuation allowance in the same amount. The Company follows the provisions of uncertain tax positions as addressed in FASB ASC 740-10-65-1. The Company recognized approximately no increase in the liability for unrecognized tax benefits.
The Company has no tax position at September 30, 2011 and December 31, 2010 for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. No such interest or penalties were recognized during the periods presented. The Company had no accruals for interest and penalties at September 30, 2011 or December 31, 2010. The Companys utilization of any net operating loss carry forward may be unlikely as a result of its intended development stage activities.
Recently Enacted Accounting Standards - The Company has reviewed all recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on its results of operation, financial position or cash flows. Based on that review, the Company believes that none of these pronouncements will have a significant effect on its current or future earnings or operations.
Note 3 Capital Stock
Preferred Stock - One share of preferred stock was authorized and issued in conjunction with the Agreement. Pursuant to the terms of the Agreement, the preferred share represented 3,767,500 shares of the Companys common stock (Exchangeable Shares) to be issued upon surrender of MTI common stock by the MTI stockholders. By the end of 2001, MTI stockholders had surrendered sufficient MTI common stock to allow the Company to issue 828,300 (pre reverse split) shares of its common stock, which represented approximately 22% of the Exchangeable Shares. At September 30, 2011, the preferred share remains authorized but is not outstanding. The preferred shares represented the ability to convert into shares of our common stock. It was held by MTI which was liquidated. To date, no additional shareholders have indicated they are converting. Under the original terms of the escrow the preferred stock was held under, up to an additional 146,060 shares of common stock could be issued.
Common stock During May 2007, stockholders of the Company authorized a 1 for 20 reverse split of the Companys outstanding common stock with the provision that no stockholder shall receive less than 100 shares. As a result, 90,652 shares of post-split common stock were issued to existing stockholders, which represented an increase of 15.2% in the total number of common shares outstanding. These shares of common stock were valued at par value because the Company received no consideration from the issuance thereof. The total number of authorized shares of common stock and the par value of the common stock did not change.
(a development stage enterprise)
Notes to Unaudited Financial Statements
September 30, 2011
Note 4: Related Party Transactions
The Company entered into an unsecured convertible promissory note bearing interest at 6% per annum with a stockholder. On November 5, 2007, the Company renegotiated the terms and entered into a new unsecured convertible note and letter of credit (Convertible Note) with this stockholder in an amount of up to $30,000, bearing interest at 18% per annum. The negotiation of the Convertible Note was not at arms length and the Company recognized an expense of $57,387 at the time that this note was issued relating to the beneficial conversion feature, which allowed the holder to convert the principal sum and accrued interest into shares of common stock. On March 28, 2008, the Convertible Note was converted into 600,000 shares of the Companys common stock at a price of $0.05 per share, which represented a reduction of $25,880 of principal and $4,120 of interest. On March 31, 2008, the Company entered into an unsecured note payable (Unsecured Note) with this stockholder that contained no conversion provision, in the amount of $6,855 bearing interest at 18% per annum with a due date of May 31, 2008. In 2010, the shareholder settled $10,000 of the note for 500,000 shares of common stock at a rate of $0.02 per share. Subsequently, additional cash was provided to the Company by the stockholder and at September 30, 2011, this note remains unpaid and a total of $32,322 in principal and $13,509 in accrued interest is due the stockholder.
On October 10, 2008, a $10,000 account payable to a former officer and director, and stockholder of the Company was satisfied by the issuance of 200,000 shares of the Companys common stock ($0.05 per share). At the same time, this individual entered into an engagement letter with the Company to provide accounting and record keeping services.
In April 2009, the Company issued 200,000 shares of common stock to its sole officer and director for services rendered. These shares were valued at the prevailing bid price for the Companys common stock as reflected on the OTCBB of $0.11 per share or a total of $22,000.
Note 5: Contingent Liabilities
To the extent that the Company was a party to any financial transactions that were not discharged through MTIs bankruptcy proceedings, including the obligations associated with the issuance of the one share of preferred stock, or that may not have been listed as part of MTIs bankruptcy, the Company may have contingent liabilities. To the best of management's knowledge and belief the financial statements accurately reflect the financial position of the Company as of the dates presented and no contingent liabilities exist.
Note 6: Subsequent Events
The Company has evaluated subsequent events from the balance sheet date through the date the financials were issued, and has determined there are no events that would require disclose herein.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Special Note Regarding Forward-Looking Statements
This periodic report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the Plan of Operations provided below, including information regarding the Companys financial condition, results of operations, business strategies, operating efficiencies or synergies, competitive positions, growth opportunities, and the plans and objectives of management. The statements made as part of the Plan of Operations that are not historical facts are hereby identified as "forward-looking statements."
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the unaudited Financial Statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions. The Company believes there have been no significant changes during the three and nine month periods ended September 30, 2011, to the items disclosed as significant accounting policies in management's Notes to the Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2010.
Plan of Operations
Merilus, Inc. (Company) was incorporated in Nevada in May 1985 and its initial business endeavors were not successful. During the year 2000 the Company filed a definitive information statement pursuant to Section 14c of the Securities Act of 1934, to disclose that it had entered into a reorganization agreement with the intent to acquire all of the issued and outstanding shares of Merilus Technologies, Inc. ("MTI"), a British Columbia, Canada corporation. The Company had issued warrants for the purchase of 2,000,000 shares of its common stock at an exercise price of $1.00 per share and upon entering into the reorganization agreement, the warrants were exercised and the Company received $2,000,000, which was given to MTI in exchange for notes receivable. Terms of the reorganization agreement included the establishment of a trust into which the Company issued 1 share of preferred stock that represented 3,767,500 exchangeable shares of the Companys common stock. Upon surrender by MTI stockholders of their MTI stock, the Company would issue its common stock to the MTI stockholder. By end of the year 2001, the Company had issued 828,300 shares of its common stock, which represented approximately 22% of the exchangeable shares. MTI filed for bankruptcy protection and was liquidated under the laws of Canada. There are potentially 146,060 shares which possibly could still be issued under the terms of the agreement with MTI.
The Company has not received any revenue from operations in each of the last two fiscal years and is considered a development stage enterprise. The Companys current operations have consisted of taking such action as management believes necessary to prepare to seek an acquisition or merger with an operating entity. The Company has obtained loans from a shareholder and has issued shares of its common stock to its president for services rendered. The Company may also issue shares of its common stock to raise equity capital. A shareholder of the Company has financed the Company's current operations, which have consisted primarily of maintaining in good standing the Company's corporate status, in fulfilling its filing requirements with the Securities and Exchange Commission, including the audit of its financial statements, and in changing the marketplace of its securities.
A major stockholder of the Company has provided funds to keep the Company operating, cover cost associated with bringing the Company current on its reporting obligations and funding ongoing expenses. The stockholder had agreed to fund up to $30,000. In 2008, the stockholder agreed to convert debt into 600,000 shares of common stock of the Company. In 2010, this same stockholder converted an additional debt into another 500,000 shares of common stock. This stockholder has continued to advance money to the Company to pay ongoing expenses but the
stockholder is under no obligation to continue to advance funds to the Company.
The financial statements contained in this interim report have been prepared assuming that the Company will continue as a going concern. The Company is not engaged in any revenue producing activities and has not established any source of revenue other than described herein. These factors raise substantial doubt that the Company will be able to continue as a going concern even though management believes that sufficient funding is available to meet its operating needs during the next twelve months. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Risks associated with the plan of operations:
In its search for a business opportunity, management anticipates that the Company will incur additional costs for legal and accounting fees to locate and complete a merger or acquisition. Other than previously discussed, the Company does not have any revenue producing activities whereby it can meet the financial requirements of seeking a business opportunity. As of September 30, 2011, the Company has debts of $83,183 and may further obligate itself as it pursues its plan of operations. There can be no assurance that the Company will receive any benefits from the efforts of management to locate a business opportunity.
The Company does not propose to restrict its search for a business opportunity to any particular industry or geographical area and may, therefore, attempt to acquire any business in any industry. The Company has unrestricted discretion in seeking and participating in a business opportunity, subject to the availability of such opportunities, economic conditions, and other factors. Consequently, if and when a business opportunity is selected, such business opportunity may not be in an industry that is following general business trends.
The selection of a business opportunity in which to participate is complex and risky. Additionally, the Company has only limited resources and this fact may make it more difficult to find any such opportunities. There can be no assurance that the Company will be able to identify and acquire any business opportunity which will ultimately prove to be beneficial to the Company and its shareholders. The Company will select any potential business opportunity based on management's business judgment. At the present time, only Mr. Demitriev serves in management and allowing only one individual to exercise his business judgment in the selection of a business opportunity for the Company presents a significant risk to the Company's shareholders. The Company may acquire or participate in a business opportunity based on the decision of management that potentially could act without the consent, vote, or approval of the Company's shareholders.
Since its inception, the Company has not generated any revenue and it is unlikely that any revenue will be generated until such time as the Company locates a business opportunity to acquire or with which it can merge. However, the Company is not restricting its search to those business opportunities that have profitable operations. Even though a business opportunity is acquired that has revenues or gross income, there is no assurance that profitable operations or net income will result there from. Consequently, even though the Company may be successful in acquiring a business opportunity, such acquisition does not assume that a profitable business opportunity is being acquired or that shareholders will benefit through an increase in the market price of the Company's common stock.
The acquisition of a business opportunity, no matter what form it may take, will almost assuredly result in substantial dilution for the Company's current shareholders. Inasmuch as the Company only has its equity securities (its common and preferred stock) as a source to provide consideration for the acquisition of a business opportunity, the Company's issuance of a substantial portion of its authorized common stock is the most likely method for the Company to consummate an acquisition. The issuance of any shares of the Company's common stock will dilute the ownership percentage that current shareholders have in the Company.
The Company does not intend to employ anyone in the future, unless its present business operations were to change. Mr. Demitriev does not have a contract to remain with the Company over any certain time period and may resign his position prior to the time that a business opportunity is located and/or business reorganization takes place.
At the present time, management does not believe it is necessary for the Company to have an administrative office and utilizes the mailing post office box of the Company's president for business correspondence. The Company
intends to reimburse management for any out of pocket costs other than those associated with maintaining the post office box.
Liquidity and Capital Resources
As of September 30, 2011, the Company had a negative $81,612 in working capital with assets of $1,571 and liabilities of $83,183. If the Company cannot find a new business, it will have to seek additional capital either through the sale of its shares of common stock or through a loan from its officer, shareholders or others. The Company has only incidental ongoing expenses primarily associated with maintaining its corporate status and professional fees associated with accounting and legal costs.
Management anticipates that the Company will incur more costs including legal and accounting fees to locate and complete a merger or acquisition. At the present time the Company does not have the assets to meet these financial requirements. Additionally, the Company does not have substantial assets to entice potential business opportunities to enter into transactions with the Company.
It is unlikely that any revenue will be generated until the Company locates a business opportunity that it may acquire or merge. Management of the Company will be investigating various business opportunities. These efforts may cost the Company not only out of pocket expenses for its management but also expenses associated with legal and accounting costs. There can be no guarantee that the Company will receive any benefits from the efforts of management to locate business opportunities.
If and when the Company locates a business opportunity, management of the Company will give consideration to the dollar amount of that entity's profitable operations and the adequacy of its working capital in determining the terms and conditions under which the Company would consummate such an acquisition. Potential business opportunities, no matter which form they may take, will most likely result in substantial dilution for the Company's shareholders as it has only limited capital and no operations.
Results of Operations
For the three and nine months ended September 30, 2011, the Company had a net loss of $4,814 and $16,060 respectively, compared to a loss for the three and nine months ended September 30, 2010, of $4,844 and $14,609 respectively. The Company had no revenue during the three and nine months ended September 30, 2011. The Company does not anticipate any revenue until it locates a new business opportunity.
Off-balance sheet arrangements
The Company does not have any off-balance sheet arrangements and it is not anticipated that the Company will enter into any off-balance sheet arrangements.
Our Company and our representatives may from time to time make written or oral statements that are forward-looking, including statements contained in this Quarterly Report and other filings with the Securities and Exchange Commission and in reports to our Companys stockholders. Management believes that all statements that express expectations and projections with respect to future matters, as well as from developments beyond our Companys control including changes in global economic conditions are forward-looking statements within the meaning of the Act. These statements are made on the basis of managements views and assumptions, as of the time the statements are made, regarding future events and business performance. There can be no assurance, however, that managements expectations will necessarily come to pass. Factors that may affect forward- looking statements include a wide range of factors that could materially affect future developments and performance, including the following:
Changes in Company-wide strategies, which may result in changes in the types or mix of businesses in which our Company is involved or chooses to invest; changes in U.S., global or regional economic conditions, changes in U.S.
and global financial and equity markets, including significant interest rate fluctuations, which may impede our Companys access to, or increase the cost of, external financing for our operations and investments; increased competitive pressures, both domestically and internationally, legal and regulatory developments, such as regulatory actions affecting environmental activities, the imposition by foreign countries of trade restrictions and changes in international tax laws or currency controls; adverse weather conditions or natural disasters, such as hurricanes and earthquakes, labor disputes, which may lead to increased costs or disruption of operations.
This list of factors that may affect future performance and the accuracy of forward-looking statements is illustrative, but by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
NA-Smaller Reporting Company
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our CEO and Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our CEO and Principal Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and (ii) accumulated and communicated to our management, including our CEO and Principal Financial Officer, as appropriate to allow timely decisions regarding disclosure.
Managements Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes of accounting principles generally accepted in the United States.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
Our management, with the participation of the CEO and Principal Financial Officer, evaluated the effectiveness of our internal control over financial reporting as of September 30, 2011. Based on this evaluation, our management, with the participation of the CEO and Principal Financial Officer, concluded that, as of September 30, 2011, our internal control over financial reporting was effective.
Changes in internal control over financial reporting
There have been no changes in internal control over financial reporting that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Securities
We have not sold for cash any restricted securities during the three months ended September 30, 2011.
Use of Proceeds of Registered Securities
None; not applicable.
Purchases of Equity Securities by Us and Affiliated Purchasers
During the three months ended September 30, 2011, we have not purchased any equity securities nor have any officers or directors of the Company.
ITEM 3. Defaults Upon Senior Securities
We are not aware of any defaults upon senior securities.
ITEM 4. Removed and Reserved
ITEM 5. Other Information.
ITEM 6. Exhibits
a) Index of Exhibits:
Exhibit Table #
Title of Document
Articles of Incorporation
Incorporated by reference*
Amended Articles of Incorporation
Incorporated by reference**
Amended Articles of Incorporation
Incorporated by reference***
Incorporated by reference*
Incorporated by reference****
Specimen Stock Certificate
Incorporated by reference*
Computation of loss per share
Notes to financial statements
Rule 13a-14(a)/15d-14a(a) Certification CEO & CFO
Section 1350 Certification CEO & CFO
* Incorporated by reference from the Company's registration statement on Form 10-SB filed with the Commission, SEC file no.000-28475.
** Incorporated by reference from the Company's definitive 14C filed on July 31, 2000, with the Commission, SEC file no.000-28475.
*** Incorporated by reference from the Company's definitive 14C filed on January 9, 2001, with the Commission, SEC file no.000-28475.
**** Incorporated by reference from the Companys Form 10-QSB, for the quarter ended March 31, 2006, filed with the Commission.
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, thereunto duly authorized.
Dated: October 28, 2011
By: /s/ Alex Demitriev
Chief Executive Officer
Principal Financial Officer