On June 3, 2003, we received correspondence from counsel to an entity
purportedly known as Axiom Pharmaceutical Corporation, which alleged that we
were infringing upon its use of the trademark "Axiom Pharmaceutical
Corporation." On September 29, 2003, we entered into a settlement agreement with
Axiom Pharmaceutical Corporation, whereby we agreed to cease using the name
"Axiom Pharmaceuticals, Inc." and in consideration Axiom Pharmaceutical
Corporation agreed to release us from any claims of infringement regarding use
of the trademark "Axiom Pharmaceutical Corporation" and to pay us $5,000.
Other than as disclosed herein, we are not a party to any material
legal proceeding and no such proceeding is known to be contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote to the security
holders during 2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The common stock is currently listed on the American Stock Exchange
under the symbol "AXJ." Prior to March 14, 2003, the date on which the reverse
acquisition with Werke Pharmaceuticals, Inc. occurred, the common stock was
quoted under the symbol "WICK" on the over-the-counter Bulletin Board.
The following table sets forth the quarterly high and low bid prices
for the common stock since the quarter ended March 30, 2002. The prices set
forth below represent inter-dealer quotations, without retail markup, markdown
or commission and may not be reflective of actual transactions.
Fiscal 2003 HIGH LOW
---- ----
Quarter ended March 31, 2002 ............................ $0.55 $0.10
Quarter ended June 30, 2002 ............................. 7.00 0.11
Quarter ended September 30, 2002 ........................ 0.51 0.10
Quarter ended December 31, 2002 ......................... 0.51 0.09
January 1, 2003 to March 13, 2003 ....................... 0.51 0.14
Quarter ended March 30, 2003 (beginning on March 14) .... 1.85 0.14
Quarter Ended June 30, 2003 ............................. 6.69 1.05
Quarter Ended September 30, 2003 ........................ 5.68 4.20
Quarter Ended December 31, 2003 ......................... 5.10 3.30
At December 31, 2003, the closing bid price of our common stock was
$4.95. At December 31, 2003, there were approximately 118 record holders of our
common stock. This number excludes any estimate by AXM Pharma of the number of
beneficial owners of shares held in street name, the accuracy of which cannot be
guaranteed.
Starting on March 3, 2004, our common stock listed on the American
Stock Exchange, also called the AMEX, under the trading symbol "AXJ." On March
25, 2004, the closing bid for our common stock as reported on the AMEX was $5.21
per share. As of March 25, 2004 there were 14,807,780shares of common stock
outstanding, 2,425,000 shares of Series A Preferred Stock outstanding and
860,000 shares of Series B Preferred Stock outstanding.
We have not paid cash dividends on any class of common equity since
formation and we do not anticipate paying any dividends on our outstanding
common stock in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
In order to accomplish the March 2003 share exchange with Werke
Pharmaceuticals, Inc., we issued an aggregate of 11,420,000 shares of common
stock in exchange for all of the issued and outstanding capital stock of Werke
Pharmaceuticals, Inc. The shares issued to the former shareholders of Werke
Pharmaceuticals, Inc. were issued to 25 accredited investors pursuant to an
exemption from registration under Section 4(2) of the Securities Act and to 33
non-U.S. persons pursuant to an exemption from registration under Regulation S
promulgated under the Securities Act.
On April 30, 2003, we issued 30,000 shares of restricted common stock
to Rabelaisian Resources, Plc. pursuant to a consulting agreement. Rabelasian
Resources' services were business and product development. The shares were
issued pursuant to the exemption from registration provided by Section 4(2) of
the Securities Act for issuances not involving a public offering. The shares
were valued at $1.80 per share, the market price for shares of our common stock
at the time of issuance. Therefore, the total aggregate value of the
consideration paid to Rabelasian Resources was $54,000.
On April 30, 2003, we issued 150,000 shares of restricted common stock
to Madden Consulting, Inc. pursuant to a consulting agreement. The services to
be provided under the consulting agreement were investor and public relations.
On September 18, 2003, we issued an additional 400,000 shares to Madden
Consulting, in connection with renewal of its consulting agreement. The shares
were issued pursuant to the exemption from registration provided by Section 4(2)
of the Securities Act for issuances not involving a public offering. The shares
issued on April 30, 2003, were valued at $1.80 per share and the shares issued
on September 18, 2003, were valued at $5.00 per share, the market price for
shares of our common stock at the respective times of issuance. Therefore, the
total aggregate value of the consideration paid to Madden Consulting was
$270,000 on April 30, 2003, and $2,000,000 on September 18, 2003.
On May 1, 2003, we issued 25,000 shares of restricted common stock to
Robert Alexander pursuant to a consulting agreement. The services to be provided
under the consulting agreement were the identification and evaluation of
pharmaceutical companies, products and licenses in Canada. The shares were
issued pursuant to the exemption from registration provided by Section 4(2) of
the Securities Act for issuances not involving a public offering. The shares
were valued at $1.50 per share, the market price for shares of our common stock
at the time of issuance. Therefore, the total aggregate value of the
consideration paid to Robert Alexander was $37,500.
On May 21, 2003, we issued 40,000 shares of restricted common stock to
Amaroq Capital, LLC pursuant to a consulting agreement. The services to be
provided under the consulting agreement were business development and financial
consulting. The shares were issued pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act for issuances not involving a
public offering. The shares were valued at $1.75 per share, the market price for
shares of our common stock at the time of issuance. Therefore, the total
aggregate value of the consideration paid to Amaroq Capital was $70,000.
On May 21, 2003, we issued 15,000 shares of restricted common stock to
McCartney Multimedia, Inc. in consideration for the creation of our website and
corporate logo. The shares were issued pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act for issuances not
involving a public offering. The shares were valued at $1.75 per share, the
market price for shares of our common stock at the time of issuance. Therefore,
the total aggregate value of the consideration paid to McCartney Multimedia was
$26,250.
On June 27, 2003, we issued 80,000 shares of restricted common stock to
Woodbridge Management, Ltd. pursuant to a consulting agreement. The services to
be provided under the consulting agreement were business development, corporate
strategy, and assistance with joint ventures, mergers and acquisitions. The
shares were issued pursuant to the exemption from registration provided by
Section 4(2) of the Securities Act for issuances not involving a public
offering. The shares were valued at $4.45 per share, the market price for shares
of our common stock at the time of issuance. Therefore, the total aggregate
value of the consideration paid to Woodbridge Management was $356,000.
On August 21, 2003, and September 12, 2003, we issued 2,750,000 shares
of our preferred stock at a price per share of $2.00 and 2,750,000 warrants,
each of which entitles the holder to purchase one share of our common stock for
a period of five years from the date of issuance at a price of $3.00 per share,
to two accredited investors pursuant to a private equity financing. Each share
of preferred stock is convertible, at the option of the holder, into one share
of common stock, subject to adjustment for certain occurrences. We also issued a
five-year warrant to purchase up to 275,000 units , each Unit consisting of one
share of preferred stock and one Warrant at an exercise price of $2.00 per Unit
to TN Capital Equities, Ltd., our placement agent in connection with the private
equity financing. The private equity financing described above was made pursuant
to the exemption from the registration provisions of the Securities Act provided
by Section 4(2) of the Act and Rule 506 of Regulation D promulgated thereunder.
On August 31, 2003, we issued 41,667 shares to Peter Cunningham, our
President and Chief Executive Officer, pursuant to the terms of his employment
agreement with AXM Pharma. The shares were issued pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act for issuances not
involving a public offering. The shares were valued at $5.00 per share, the
market price for shares of our common stock at the time of issuance. Therefore,
the total aggregate value of the consideration paid to Peter W. Cunningham was
$208,335.
On September 18, 2003, we issued 100,000 shares to Lan Hao, our Chief
Financial Officer, pursuant to the terms of his employment agreement with AXM
Pharma. The shares were issued pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act for issuances not involving a
public offering. The shares were valued at $5.00 per share, the market price for
shares of our common stock at the time of issuance. Therefore, the total
aggregate value of the consideration paid to Lan S. Hao was $500,000.
On December 31, 2003, we issued 860,000 shares of our preferred stock,
at a price per share of $2.25 and 1,000,000 warrants. Each share of preferred
stock is convertible, at the option of the holder, into one share of common
stock, subject to adjustment for certain occurrences. Each warrant entitles the
holder to purchase one share of our common stock for a period of five years from
the date of issuance at a price of $3.00 per share. Holders of our warrants may
also exercise the warrants through a cashless exercise under certain
circumstances. In addition, we issued to TN Capital Equities, our placement
agent, a five-year warrant to purchase up to 86,000 shares of our preferred
stock for $2.25 per share and up to 100,000 warrants to purchase shares of our
common stock upon exercise at $3.00 per share, on a pro-rata basis to the number
of shares of preferred stock purchased. The private equity financing described
above was made pursuant to the exemption from the registration provisions of the
Securities Act provided by Section 4(2) of the Act and Rule 506 of Regulation D
promulgated thereunder.
On January 26, 2004, the Board authorized the issuance of 100,000
shares of restricted common shares and 50,000 warrants to Great Eastern
Securities, Inc. pursuant to an investment banking agreement. The shares are to
be released quarterly based upon a vesting schedule of 25,000 shares per quarter
during the term of the agreement. Pursuant to an agreement that was executed on
December 18, 2003, Great Eastern will provide investor relations related
services and assist AXM Pharma with broker relations for our stock. The warrants
are for a term of five years and have an exercise price equal to $4.74 per
share. The shares were issued pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act for issuances not involving a
public offering. The shares were valued at $5.65 per share, the market price for
shares of our common stock at the time of issuance. Therefore, the total
aggregate value of the consideration paid to Great Eastern Securities, Inc. was
$565,000.
On February 2, 2004, we issued 200,000 shares of restricted common to
the Aston Organization. We have only released 20,000 of the issued shares to the
Aston Organization. The remaining 180,000 shares are to be released monthly
based upon a vesting schedule of 15,000 shares per month during the term of the
agreement. The services to be provided under the agreement are investor
relations. The shares were issued pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act for issuances not involving a
public offering. The shares were valued at $5.65 per share, the market price for
shares of our common stock at the time of issuance. Therefore, the total
aggregate value of the consideration paid to the Aston Organization was
$1,130,000.
ITEM 6. MANAGEMENT DISCUSSIONS AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with our financial
statements and the notes thereto which appear elsewhere in this report. The
results shown herein are not necessarily indicative of the results to be
expected in any future periods. This discussion contains forward-looking
statements based on current expectations, which involve uncertainties. Actual
results and the timing of events could differ materially from the
forward-looking statements as a result of a number of factors. Readers should
also carefully review factors set forth in other reports or documents that we
file from time to time with the Securities and Exchange Commission.
OVERVIEW
On March 14, 2003, we completed a share exchange with Werke
Pharmaceuticals, Inc., a Delaware corporation, formed to develop and finance the
growth of Chinese based pharmaceutical companies. As a result of the share
exchange, Werke became our wholly owned subsidiary. Werke's wholly owned
operating subsidiary is Shenyang Tianwei Werke Pharmaceutical Co. Ltd., a
northern China-based pharmaceutical company. The comparables discussed below
relate to the operations of Werke and its wholly owned subsidiary, Shenyang
Tianwei Werke Pharmaceutical Co., for the periods discussed.
We anticipate seeking Chinese government approval to repackage our
product line with the AXM Pharma brand during 2004 following completion of a
full redesign and reconfiguration of our packaging by our international brand
consulting firm.
Our products are currently primarily sold through one third party
distributor, Liaoning Weikang Medicine Co., Ltd. and its selected
sub-distributors, to hospital pharmacies in the key cities of Shanghai,
Guangzhou and Shenyang. We anticipate expanding our sales into retail pharmacies
within these regions during the next quarter and will make efforts to expand
both hospital and retail pharmacy sales into other regional cities such as
Beijing.
We are currently seeking to license various branded OTC products from
identifiable North American pharmaceutical and supplement companies for
distribution and manufacturing in China and Asia-Pacific. As of the date of this
filing we have not entered into any definitive agreements with any such
companies.
LIQUIDITY AND CAPITAL RESOURCES
Total assets increased from $4,312,196 at December 31, 2002 to
$11,024,738 at December 31, 2003. The increase is primarily attributable to
receipt of $4,888,502 in net proceeds from the placement of securities and
accounts receivable that increased approximately $1.7 million and a $.9 million
inventory increase. All of these increases except for cash are directly
attributable to the increase in sales of $6.9 million or 223% over the period
ended December 31, 2002.
During the third quarter, we completed a private equity financing of
$5,500,000 with two accredited investors. After payment of costs and expenses,
including fees of the placement agent, we received net proceeds of approximately
$4,888,502. Pursuant to the terms of the purchase agreements with our investors,
dated as of August 21, 2003, and September 12, 2003, we issued 2,750,000 shares
of our preferred stock, $.001 par value per share, at a price per share of $2.00
and 2,750,000 warrants. Each share of preferred stock is convertible, at the
option of the holder, into one share of common stock, subject to adjustment for
certain occurrences. Each warrant entitles the holder to purchase one share of
our common stock, $.001 par value, for a period of five years from the date of
issuance at a price of $3.00 per share.
Our total outstanding current liabilities increased to approximately
$3.4 million at December 31, 2003, as compared to approximately $1.4 million at
December 31, 2002. The current liabilities increase was the result of an
increase in value-added tax payable and accrued expenses.
From December 31, 2002, to December 31, 2003, our cash and cash
equivalents increased by approximately $2.8 million as a result of receipt of
net proceeds in the private placement offering of $4,888,502. This figure was
offset by cash general, administrative and selling expenses of approximately
$3.7 million. The sales, general and administrative expenditures were incurred
primarily for offering fees and expenses, planning and construction, legal and
accounting fees and consulting fees. Approximately $3.5 million of non-cash
general, administrative and selling expenses were incurred in 2003. The non-cash
expense is where we pay for services (e.g. financial consulting and investor
relations services) using shares of our common stock. In the past the Company
took advantage of these opportunities to conserve cash.
Assuming there is no decrease in current accounts payable, and
accounting for various one-time expenses, the Company's negative cash flow is
approximately $185,000 per month. Without a significant change in sales and
operating gross profits, our only source of significant additional funds to meet
future operating expenses is the sale of our securities. The amount of cash on
hand is sufficient to meet our operating expenses through at least December 31,
2004. Management anticipates that the future prospects and trends in our
business indicate that we may experience at least a 100 percent growth of sales
and operating gross profits during 2004.
We do expect to incur material capital expenditures for the new plant
in Shenyang. Based on discussions with engineering and design firms and
consultants for U.S. Food and Drug Administration validation and Good
Manufacturing Practices certification, the cost of the factory is budgeted at
approximately U.S.$ 5.0 million. Required future capital expenditures for
construction of the new plant, associated manufacturing equipment and staffing
of the new plant will be funded out of existing cash on hand, future revenues or
additional financing activities. There is no assurance we will be able to
generate sufficient revenues or obtain sufficient funds when needed, or whether
such funds, if available, will be obtained on terms satisfactory to us. We do
not have any long term or contingent obligations that must be satisfied.
Additionally, in order to ensure that sufficient funds are available to
develop various additional phases of the new Shenyang plant, we may in the near
future, following completing any regulatory or contractual obligations, provide
notice of redemption of the warrants sold in the private placement, which would
have the effect of forcing exercise of the warrants; provided the exercise price
of the warrants is less than the market price of our common stock at the time
the notice of redemption is provided to our investors. If one hundred percent of
these warrants were exercised, we would receive approximately $8,250,000 in
gross proceeds. Our ability to provide notice of redemption of the warrants is,
however, subject to several factors beyond our control. Such factors include,
the effectiveness of our registration statement on Form SB-2, originally filed
on September 25, 2003, at the time of the notice of redemption, and the price of
our common stock on the market on which it is listed. Therefore, there can be no
guarantee that we will be able to provide notice of redemption of the warrants
or that we will receive any proceeds from the exercise of the warrants.
If the warrants are not exercised and we are unable to provide
necessary capital for construction of the Shenyang plant from future revenues or
financing activities, this may cause delays in the construction of the Shenyang
plant. More likely, however, is that in the absence of the funds from the
exercise of the warrants, we will still be able to complete the Shenyang plant
but we will be forced to acquire manufacturing equipment that operates at lower
capacity and speed. We intend to use the additional funds from exercise of the
warrants, if any, for engineering support to increase speed of production
through improving work flow and using higher speed equipment; for higher speed
equipment for tableting and encapsulation production; and for higher volume
equipment and higher speed equipment for cream mixing and filling production.
CRITICAL ACCOUNTING POLICIES
We believe the following critical accounting policies, among others,
affect our more significant judgments and estimates used in the preparation of
our financial statements:
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. The
allowance for doubtful accounts is based on specific identification of customer
accounts and our best estimate of the likelihood of potential loss, taking into
account such factors as the financial condition and payment history of major
customers. We evaluate the collectibility of our receivables at least quarterly.
If the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. The differences could be material and could significantly impact cash
flows from operating activities.
INVENTORY
We write down our inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand, future
pricing and market conditions. If actual future demand, future pricing or market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required and the differences could be material.
Such differences might significantly impact cash flows from operating
activities.
ACCOUNTING FOR STOCK-BASED COMPENSATION
We account for stock-based compensation based on the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," as amended by the Financial Accounting Standards Board
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation." Accounting Principles Board Opinion No. 25 and Financial
Accounting Standards Board Interpretation No. 44 state that no compensation
expense is recorded for stock options or other stock-based awards to employees
that are granted with an exercise price equal to or above the estimated fair
value per share of the company's common stock on the grant date. We adopted the
disclosure requirements of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," which requires compensation expense
to be disclosed based on the fair value of the options granted at the date of
the grant.
In December 2002, the Financial Accounting Standards Board issued its
Statement No. 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure--an amendment of Financial Accounting Standards Board Statement No.
123." This Statement amends Statement of Financial Accounting Standards No. 123,
to provide alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of Statement of Financial
Accounting Standards No. 123 to require prominent disclosure about the effects
on reported net income of an entity's accounting policy decisions with respect
to stock-based employee compensation. The transition and annual disclosure
provisions of Statement of Financial Accounting Standards No. 148 are effective
for fiscal years ending after December 15, 2002, and the interim disclosure
provisions were effective for the first interim period beginning after December
15, 2002. We did not voluntarily change to the fair value based method of
accounting for stock-based employee compensation, therefore, the adoption of
Statement of Financial Accounting Standards No. 148 did not have a material
impact on our operations and/or financial position.
We did not issue any stock options to employees during the 2003 fiscal
year, therefore pro forma disclosures are not required for the twelve months
ended December 31, 2003.
CONVERTIBLE PREFERRED STOCK
Convertible Preferred Sock issued by AXM Pharma is initially offset by
a discount representing the relative fair value of the beneficial conversion
feature and warrants. This beneficial conversion for the preferred stock is
recorded as a dividend over the period the preferred stock is convertible and
accelerated pro-rata as the preferred stock are converted. The beneficial
conversion feature allocated to warrants is recognized over the life of the
warrants and accelerated as warrants are exercised. The fair value of the
warrants and beneficial conversion discount are calculated based on available
market data using appropriate valuation models. The beneficial conversion
feature is limited to the total proceeds received.
SALES ALLOWANCES
A portion of our business is to sell products to distributors who
resell the products to the end customers. In certain instances, these
distributors obtain discounts based on the contractual terms of these
arrangements. Sales discounts are usually based upon the volume of purchases or
by reference to a specific price in the related distribution agreement. We
recognize the amount of these discounts at the time the sale is recognized.
Additionally, sales returns allowances are estimated based on historical return
data, and recorded at the time of sale. If the quality or efficacy of our
products deteriorates or market conditions otherwise change, actual discounts
and returns could be significantly higher than estimated, resulting in
potentially material differences in cash flows from operating activities.
VALUATION OF INTANGIBLES
From time to time, we acquire intangible assets that are beneficial to
our product development processes. We periodically evaluate the carrying value
of intangibles, including the related amortization periods. In evaluating
acquired intangible assets, we determine whether there has been an impairment by
comparing the anticipated undiscounted cash flows from the operation and
eventual disposition of the product line with its carrying value. If the
undiscounted cash flows are less than the carrying value, the amount of the
impairment, if any, will be determined by comparing the carrying value of each
intangible asset with its fair value. Fair value is generally based on either a
discounted cash flows analysis or market analysis. Future operating income is
based on various assumptions, including regulatory approvals, patents being
granted, and the type and nature of competing products. If regulatory approvals
or patents are not obtained or are substantially delayed, or other competing
technologies are developed and obtain general market acceptance, or market
conditions otherwise change, our intangibles may have a substantially reduced
value, which could be material.
DEFERRED TAXES
We record a valuation allowance to reduce the deferred tax assets to
the amount that is more likely than not to be realized. We have considered
estimated future taxable income and ongoing tax planning strategies in assessing
the amount needed for the valuation allowance. Based on these estimates, all of
our deferred tax assets have been reserved. If actual results differ favorably
from those estimates used, we may be able to realize all or part of our net
deferred tax assets. Such realization could positively impact our operating
results and cash flows from operating activities.
VALUE ADDED TAX
Value added tax payable is reported as a significant liability. The
accounting policies adopted by management include full disclosure of the Value
Added Tax liability calculated at 17% of the difference between ex factory price
and the cost of raw materials, less the cost of the fees paid to the third-party
original equipment manufacturing company.
LITIGATION
We account for litigation losses in accordance with Statement of
Financial Accounting Standards (SFAS) No. 5, "Accounting for Contingencies."
Under SFAS No. 5, loss contingency provisions are recorded for probable losses
at management's best estimate of a loss, or when a best estimate cannot be made,
a minimum loss contingency amount is recorded. These estimates are often
initially developed substantially earlier than the ultimate loss is known, and
the estimates are refined each accounting period, as additional information is
known. Accordingly, we are often initially unable to develop a best estimate of
loss; therefore, the minimum amount, which could be zero, is recorded. As
information becomes known, either the minimum loss amount is increased or a best
estimate can be made, resulting in additional loss provisions. Occasionally, a
best estimate amount is changed to a lower amount when events result in an
expectation of a more favorable outcome than previously expected. Due to the
nature of current litigation matters, the factors that could lead to changes in
loss reserves might change quickly and the range of actual losses could be
significant, which could materially impact our results of operations and cash
flows from operating activities.
COMPARISON OF RESULTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003, TO THE FISCAL
YEAR ENDED DECEMBER 31, 2002.
REVENUE. During the fiscal year ended December 31, 2003, we generated
$10,025,605 from product sales compared to revenues from product sales for the
fiscal year ended December 31, 2002, of $3,103,656. This is an increase of
$6,921,949 or approximately 223%. The increase is primarily due to more robust
sales of our product line, particularly the sales of Asarone tablets and
Weifukang cream. Domestic Chinese customers accounted for 100% of total sales.
We estimate that 45% of these sales were from the sale of Asarone Tablets and
27% were from the sale of Weifukang cream.
Management anticipates growing total revenues by as much as 100% in
2004, through broader distribution within China and the addition of one or more
new products. Despite the views of management, the statement concerning future
gross revenues is a forward-looking statement that involves certain risks and
uncertainties, which could result in a fluctuation of gross sales below those
achieved for the year ended December 31, 2003. Pricing of our products and gross
profit on product sales could change due to competitive forces, which could
negatively impact future sales and or operating profits
GROSS PROFIT. Gross profit on product sales for the fiscal year ended
December 31, 2003, was $3,497,325 compared to $621,579 for the fiscal year ended
December 31, 2002, an increase of $2,875,746 or approximately 462%. The increase
in gross profits during 2003 was due primarily to the $6.9 million increase in
sales. More efficient third party product manufacturing accounted for the
remainder of the increase in our gross profits. Assuming the product sales mix
remains the same, management anticipates future gross profit margins to increase
by as much as another 5% in 2004. This gross profit margin increase is due to
higher pricing of our products and slightly lower production and distribution
costs. We plan to achieve higher average unit prices through the introduction of
new high value products and the revision of marketing and pricing programs to
reflect the Wholly Foreign Owned Entity status of the Company. The State Food
and Drug Administration allows for higher prices to be charged in the hospital
tendering process by foreign owned enterprises as compared to locally owned
companies. We believe that lower production and distribution costs will result
from the opening of the new manufacturing facility, which will enable us to
reduce processing costs through the use of high speed equipment. Further, with
our own factory operating, we eliminate the need to pay the processing fees to
the third-party original equipment manufacturer. We also believe that the
increased unit production and sales volume being achieved will enable us to
negotiate improved raw material supply prices. Despite the views of management,
the statement concerning future gross profit margins is a forward-looking
statement that involves certain risks and uncertainties, which could result in a
fluctuation of gross margins below those achieved for the three months ended
September 30, 2003. Pricing of our products and gross profit on product sales
could change due to competitive forces that could negatively impact future sales
and or operating profits.
SALES, GENERAL AND ADMINISTRATIVE EXPENSES. We incurred Sales, General
and Administrative expenses of $7,205,392 for fiscal year ended December 31,
2003, compared to $673,936 for the fiscal year ended December 31, 2002, an
increase of $6,531,456. There were $3,522,085 in non-cash expenses in
recognition of stock issued to cover administrative services provided by
consultants in lieu of cash. The cash Selling, General and Administrative
expense was $3,683,307 for the same period, or an increase of $3,009,371 and was
the result of the increased personnel and outside services required to prepare
the Company for the increase in sales, marketing of our products, expenses
associated with our public reporting status and increased activities associated
with the proposed construction of a new plant in Shenyang.
NON-CASH CONSULTING ACTIVITIES. During the year ended December 31,
2003, our Board of Directors authorized the issuance of shares of our restricted
common stock to various consultants in lieu of cash payments. Based upon the
common stock trading price at the times of issuance, and FASB rules, we were
required to incur non-cash consulting expenses of $3,522,085 for the issuance of
these shares during the year ended December 31, 2003.
NET LOSS. We recorded a Net Loss applicable to common shareholders for
the fiscal year ended December 31, 2003, of $6,771,556 compared to a Net Loss of
$52,357 for the fiscal year ended December 31, 2002. The increase is the result
of the aforementioned increase in Selling, General and Administrative expenses
and approximately $3.1 million charged to the deemed dividend from beneficial
conversion feature embedded in the preferred stock. The net loss per share for
the year ended December 31, 2003 was $0.52 per share calculated on weighted
average shares outstanding of 12,927,956. This was compared to a net loss per
share for the year ended December 31, 2002 of $0.01 for weighted average shares
outstanding of 10,000,000.
RISK FACTORS
You should carefully consider the risks described below before making an
investment in AXM Pharma. All of these risks may impair our business operations.
If any of the following risks actually occurs our business, financial condition
or results of operations could be materially adversely affected. In such case,
the trading price of our common stock could decline, and you may lose all or
part of your investment.
RISKS RELATING TO OUR BUSINESS
We may not be able to adequately protect and maintain our intellectual property.
Our success will depend in part on our ability to protect and maintain
intellectual property rights and licensing arrangements for our products. No
assurance can be given that licenses or rights used by AXM Pharma will not be
challenged, invalidated, infringed or circumvented, or that the rights granted
thereunder will provide competitive advantages to us. There can be no assurance
that we will be able to obtain a license to any third-party technology that we
may require to conduct our business or that such technology can be licensed at a
reasonable cost. There is no certainty that we will not be challenged by our
partners for non-compliance with our licensing arrangements. Furthermore, there
can be no assurance that we will be able to remain in compliance with our
existing or future licensing arrangements. Consequently, there may be a risk
that licensing arrangements are withdrawn with no penalties to the licensor or
compensation to AXM Pharma.
We may not be able to obtain regulatory approvals for our products or
reimbursement from the sale of our products.
The manufacture and sale of pharmaceutical products in The Peoples
Republic of China is highly regulated by a number of state, regional and local
authorities. These regulations significantly increase the difficulty and costs
involved in obtaining and maintaining regulatory approval and reimbursement
listings for marketing new and existing products. In addition, our future growth
and profitability are, to a significant extent, dependent upon our ability to
obtain timely regulatory approvals and reimbursement from the relevant
authorities.
The State Food and Drug Administration of The Peoples Republic of China
recently implemented new guidelines for licensing of pharmaceutical products.
All existing manufacturers with licenses, which are currently valid under the
previous guidelines, are required to apply for Good Manufacturing Practices
certification by June 30, 2004, and to receive approval by December 31, 2004. As
a result, we plan to submit our application to the State Food and Drug
Administration within the required time period. Furthermore, we believe that our
new factory, which is currently under construction in Shenyang and which is
being constructed to meet more stringent U.S. Good Manufacturing Practices
requirements, will pass the certification process and that our current licenses
will be renewed under the new guidelines. However, should we fail to receive
certification under the new guidelines promulgated by the State Food and Drug
Administration, our business would be impacted in a materially adverse manner.
Our dependence on certain local parties may impact our ability to control
certain aspects of our operations.
Our operations may become substantially dependent on local Chinese
partners to provide marketing expertise and knowledge of the local regulatory
environment in order to facilitate the acquisition of necessary licenses and
permits. Any failure to form or maintain alliances with local partners, or the
preemption or disruption of such alliances by our competitors or otherwise,
could adversely affect our ability to penetrate and compete successfully in the
Chinese marketplace. In addition, in the uncertain legal environments in The
Peoples Republic of China, our business may be vulnerable to local government
agencies or other parties who wish to renegotiate the terms and conditions of,
or terminate, their agreements or other understandings with AXM Pharma.
We rely on third parties for the supply, manufacture and distribution of our
products.
Third parties manufacture and distribute all of our products. We do not
currently have manufacturing facilities, personnel or access to raw materials to
independently manufacture our products. Currently, our products are manufactured
by Qiqihaer Pharmaceutical Factory 2 and our products are distributed by
Liaoning Weikang Medicine Co. Ltd. Except for any contractual rights and
remedies that we may have with our manufacturer and our distributor, we have no
control over the availability of our products, their quality or cost or the
actual distribution of our products. Our current distribution agreement with
Liaoning Weikang Medicine Co. Ltd. expires at the end of March 2004. Although
Liaoning Weikang Medicine Co. Ltd. has verbally agreed to continue as our
distributor at this time, we have not yet signed a definitive written agreement
for distribution of our products with either Liaoning Weikang Medicine Co. Ltd.
or any other distributor. If for any reason we are unable to obtain or retain
third-party manufacturers and distributors on commercially acceptable terms, we
may not be able to produce and distribute our products as planned. If we
encounter delays or difficulties with our contract manufacturer in producing or
packaging our products or with our distributor in distributing our products, the
production, distribution, marketing and subsequent sales of these products would
be adversely affected, and we may have to seek alternative sources of supply or
distribution or abandon or sell product lines on unsatisfactory terms. We may
not be able to enter into alternative supply, production or distribution
arrangements on commercially acceptable terms, if at all. There can be no
assurance that the manufacturer that we have engaged will be able to provide
sufficient quantities of these products or that the products supplied will meet
with our specifications or that our distributor will be able to distribute our
products in accordance with our requirements. In addition, production of our
products may require raw materials for which the sources and quantities are
limited. An inability to obtain adequate supplies of raw materials could
significantly delay development, regulatory approval and marketing of our
products.
During the fiscal years ended December 31, 2003 and 2002, one distributor
accounted for 100% of our net revenues.
During the fiscal years ended December 31, 2003 and 2002, one
distributor, Liaoning Weikang Medicine Co., Ltd., accounted for 100% of our net
revenues during the past two fiscal years. Any dispute with Liaoning Medicine
Co. could have a material adverse effect on our ability to distribute our
products. Additionally, should Liaoning Weikang Medicine Co.'s business suffer
for any reason or if they encounter problems with their customers our business
would be adversely affected.
Additionally, our distributor, Liaoning Weikang Medicine Co. is
required to comply with new Good Sales Practices guidelines promulgated by the
State Food and Drug Administration by December 31, 2004. We have been informed
by Liaoning Weikang Medicine Co. that they are in the process of preparing for
this certification requirement and that they expect to meet the new
requirements. If, however, Liaoning Weikang Medicine Co. does not meet the new
certification requirements, we would be forced to find a new distributor for our
products that is in compliance with the new guidelines. Any delay in our
distribution caused by such an event could have a material adverse effect on our
business. Furthermore, we may not be able to obtain terms as favorable to us
from a new distributor as the terms we have currently negotiated with Liaoning
Weikang Medicine Co., which could also have an adverse effect on our business.
We may have difficulty competing with larger and better financed companies in
our sector.
The ethical and over-the-counter drug markets in The Peoples Republic
of China are very competitive and competition may increase. Products compete on
the basis of efficacy, safety, side effect profiles, price and brand
differentiation. Some of our competitors may have greater technical and
financial resources than AXM Pharma and may use these resources to pursue a
competitive position that threatens our products. Our products could be rendered
obsolete, or uneconomical by the development of new pharmaceuticals to treat
conditions addressed by our products, as a result of technological advances
affecting the cost of production, or as a result of marketing or pricing action
by one or more of our competitors.
We are dependant on certain key existing and future personnel.
Our success will depend, to a large degree, upon the efforts and
abilities of our officers and key management employees such as Peter Cunningham,
our Chief Executive Officer; Chet Howard, our Chief Financial Officer; and Wang
Wei Shi, Chief Executive Officer of Shenyang Tianwei Werke Pharmaceuticals and
Chairman of AXM Pharma. The loss of the services of one or more of our key
employees could have a material adverse effect on our operations. We currently
only have an employment agreement with Peter Cunningham . We do not currently
maintain key man life insurance on any of our key employees. In addition, as our
business plan is implemented, we will need to recruit and retain additional
management and key employees in virtually all phases of our operations. Key
employees will require not only a strong background in the pharmaceutical
industry, but a familiarity with language and culture in the markets in which we
compete. We cannot assure that we will be able to successfully attract and
retain key personnel.
Our growth is dependent on our ability to successfully develop, acquire or
license new drugs.
We must invest substantial time, resources and capital in identifying
and developing new drugs, dosage and delivery systems, either on our own or by
acquiring and licensing such products from third parties. Our growth depends, in
part, on our success in such process. Our planned expansion over time is founded
on a simple principal of introducing two new products or line extensions each
year and to expand distribution into two new territories each year. This
strategy has the advantage of building brands through geographic expansion and
line extensions, and establishing incremental capabilities for new product
introductions. We believe that our planned expansion will require $5.0 million
in total over three years, which we intend to fund out of our future revenues
and, if necessary, additional financing. If we are unable to either develop new
products on our own or acquire licenses for new products from third parties, our
ability to grow revenues and market share will be adversely affected. In
addition, we may not be able to recover our investment in the development of new
drugs, given that projects may be interrupted, unsuccessful, not as profitable
as initially contemplated or we may not be able to obtain necessary financing
for such development if we are unable to fund such development from our future
revenues. Similarly, there is no assurance that we can successfully secure such
rights from third parties on an economically feasible basis.
We may be subject to product liability claims in the future.
We face an inherent business risk of exposure to product liability
claims in the event that the use of our technologies or products are alleged to
have resulted in adverse side effects. Side effects or marketing or
manufacturing problems pertaining to any of our products could result in product
liability claims or adverse publicity. These risks will exist for those products
in clinical development and with respect to those products that receive
regulatory approval for commercial sale. Furthermore, although we have not
historically experienced any problems associated with claims by users of our
products, we do not currently maintain product liability insurance. We plan to
have a product liability insurance plan in place by the first quarter of fiscal
2004; however, there can be no assurance that we will be able to acquire product
liability insurance with terms that are commercially feasible.
RISKS RELATING TO THE PHARMACEUTICAL INDUSTRY IN THE PEOPLE'S REPUBLIC OF CHINA
Changes in the laws and regulations in The Peoples Republic of China may
adversely affect our ability to conduct our business.
The pharmaceutical industry is relatively new in the emerging markets
of The Peoples Republic of China that we are targeting, and the manner and
extent to which it is regulated in these geographical areas is evolving. As a
Chinese corporation, AXM Pharma is subject to the Company Law of The Peoples
Republic of China and more specifically to the Foreign Company provisions of the
Company Law and the Law on Foreign Capital Enterprises of the People's Republic
of China. Additionally, as a pharmaceutical company, we are subject to the
Pharmaceutical Administrative Law. Changes in existing laws or new
interpretations of such laws may have a significant impact on our methods and
costs of doing business. For example, new legislative proposals for
pharmaceutical product pricing, reimbursement levels, approval criteria and
manufacturing requirements may be proposed and adopted. Such new legislation or
regulatory requirements may have a material adverse effect on our financial
condition, results of operations or cash flows. In addition, we will be subject
to varying degrees of regulation and licensing by governmental agencies in The
Peoples Republic of China. There can be no assurance that the future regulatory,
judicial and legislative changes will not have a material adverse effect on AXM
Pharma, that regulators or third parties will not raise material issues with
regard to AXM Pharma or our compliance or non-compliance with applicable laws or
regulations or that any changes in applicable laws or regulations will not have
a material adverse effect on AXM Pharma or our operations.
We may experience barriers to conducting business due to governmental policy.
The State Food and Drug Administration of The Peoples Republic of China
set up a classification administrative system in 1999 for prescription and
over-the-counter drugs. Since then, the State Food and Drug Administration has
issued a series of guidelines for interpretation of the new classification
system for labeling, usage instructions and packaging of over-the-counter
products. The State Food and Drug Administration currently requires that
pharmaceutical manufacturers clearly label drugs for over-the-counter sales and
distinguish them from those to be sold in hospitals as ethical drugs. We have
instituted this policy as required by the State Food and Drug Administration. To
date, we have never experienced any problems with compliance with the
regulations of the State Food and Drug Administration. We have never been
investigated for noncompliance by this agency nor have we violated any
regulations of the State Food and Drug Administration.
Our business may be adversely affected by government plans to consolidate state
owned pharmaceutical companies in the Peoples Republic of China.
The Ministry of Commerce announced plans to consolidate nearly 5,000
state owned pharmaceutical companies into approximately 12 to 15 companies. The
Ministry of Commerce has stated that it targets the size of these remaining
firms to be at least U.S.$ 10.0 billion revenue per annum in the future (U.S.$
5.0 billion by the year 2010). Their primary business will be to make generic
pharmaceutical products for sale to state owned hospitals. The planned
consolidation has already commenced and is anticipated to continue until the
goals of the Ministry of Commerce have been realized. The Ministry of Commerce
has set a near term goal of having 10 large companies with annual sales of over
RMB 5 billion by 2005. We are not aware, however, at this time of how many
companies have been consolidated or when the planned consolidation will be
completed. A recent example of the consolidation amongst state owned
pharmaceutical companies is the acquisition by the conglomerate Huayuan Group of
a 40% stake in Shanghai Pharmaceutical Group. This new company will be involved
in Manufacture, distribution and research and development. An objective of the
consolidation is to establish a manufacturing standard consistent with U.S. Good
Manufacturing Practices. It is planned that all products manufactured in The
Peoples Republic of China will meet U.S. Good Manufacturing Practices standard
in the future.
AXM Pharma has initiated several programs to mitigate any potential
negative impact that this consolidation may have. These steps include commencing
construction of a U.S. Good Manufacturing Practices qualified facility that will
comply with both Chinese and U.S. requirements; seeking to license original
molecules from multi national pharmaceutical firms and specialist drug discovery
firms to participate in the patented prescription product segment of the market
which provides certain protections and pricing multiples not available in other
segments;; and pursuing expansion into the distribution segment of the
pharmaceutical business which is being opened for foreign companies at this
time. This access is supported by new government regulation. Despite these
steps, however, should The Ministry of Commerce follow through with its plans to
consolidate the many fragmented Chinese pharmaceutical companies into a smaller
number of large firms, we will face increased competition from large, well
funded, government supported companies. Our business could be adversely affected
by this increased competition.
RISKS RELATING TO THE PEOPLE'S REPUBLIC OF CHINA
Capital outflow policies in The Peoples Republic of China may hamper our ability
to remit income to the United States.
The Peoples Republic of China has adopted currency and capital transfer
regulations. These regulations may require that we comply with complex
regulations for the movement of capital. In order to comply with these
regulations we may have to revise or change the banking structure of our company
or its subsidiaries Although we believe that we are currently in compliance with
these regulations, should these regulations or the interpretation of them by
courts or regulatory agencies change we may not be able to remit all income
earned and proceeds received in connection with our operations to the U.S.
Fluctuation of the Renminbi could materially affect our financial condition and
results of operations.
The value of the Renminbi fluctuates and is subject to changes in The
Peoples Republic of China's political and economic conditions. Since 1994, the
conversion of Renminbi into foreign currencies, including United States dollars,
has been based on rates set by the People's Bank of China, which are set daily
based upon the previous day's interbank foreign exchange market rates and
current exchange rates on the world financial markets. Since 1994, the official
exchange rate for the conversion of Renminbi to United States dollars has
generally been stable. As of November 15, 2003, the exchange rate between the
Renminbi and the United States dollar was 8.26 Renminbi to every one United
States dollar.
We may face obstacles from the communist system in The Peoples Republic of
China.
Foreign companies conducting operations in The Peoples Republic of
China face significant political, economic and legal risks. The Communist regime
in The Peoples Republic of China, including a stifling bureaucracy, may hinder
Western investment. Another obstacle to foreign investment is corruption. There
is no assurance that we will be able to obtain recourse, if desired, through The
Peoples Republic of China's poorly developed and often corrupt judicial systems.
We may have difficulty establishing adequate management, legal and financial
controls in The Peoples Republic of China.
The Peoples Republic of China historically has been deficient in
Western style management and financial reporting concepts and practices, as well
as in modern banking, computer and other control systems. We may have difficulty
in hiring and retaining a sufficient number of qualified employees to work in
The Peoples Republic of China. As a result of these factors, we may experience
difficulty in establishing management, legal and financial controls, collecting
financial data and preparing financial statements, books of account and
corporate records and instituting business practices that meet Western
standards.
Trade barriers and taxes may have an adverse effect on our business and
operations.
We may experience barriers to conducting business and trade in our
targeted emerging markets in the form of delayed customs clearances, customs
duties and tariffs. In addition, we may be subject to repatriation taxes levied
upon the exchange of income from local currency into foreign currency,
substantial taxes of profits, revenues, assets and payroll, as well as
value-added tax . The markets in which we plan to operate may impose onerous and
unpredictable duties, tariffs and taxes on our business and products, and there
can be no assurance that this will not have an adverse effect on our finances
and operations.
It will be extremely difficult to acquire jurisdiction and enforce liabilities
against our officers, directors and assets based in The Peoples Republic of
China.
Because several of our directors, including Wei Shi Wang, the chairman
of our Board of Directors, are Chinese citizens it may be difficult, if not
impossible, to acquire jurisdiction over these persons in the event a lawsuit is
initiated against AXM Pharma and/or its officers and directors by a shareholder
or group of shareholders in the U.S. Also, although our executive officers are
U.S. citizens, because they may be residing in The Peoples Republic of China at
the time such a suit is initiated achieving service of process against such
persons would be extremely difficult. Furthermore, because the majority of our
assets are located in The Peoples Republic of China it would also be extremely
difficult to access those assets to satisfy an award entered against us in U.S.
court.
There can be no guarantee that The Peoples Republic of China will comply with
the membership requirements of the World Trade Organization.
Due in part to the relaxation of trade barriers following World Trade
Organization accession in January 2002, we believe The Peoples Republic of China
will become one of the world's largest pharmaceutical markets by the middle of
the twenty-first century. As a result, we believe the Chinese market presents a
significant opportunity for both domestic and foreign drug manufacturers. With
the Chinese accession to the World Trade Organization, the Chinese
pharmaceutical industry is gearing up to face the new patent regime that is
required by World Trade Organization regulation. The Chinese government has
begun to reduce its average tariff on pharmaceuticals. The Peoples Republic of
China has also agreed that foreign companies will be allowed to import most
products, including pharmaceuticals, into any part of The Peoples Republic of
China. Current trading rights and distribution restrictions are to be phased out
over a three-year period. In the sensitive area of intellectual property rights,
The Peoples Republic of China has agreed to implement the trade-related
intellectual property agreement of the Uruguay Round. There can be no assurances
that The Peoples Republic of China will implement any or all of the requirements
of its membership in the World Trade Organization in a timely manner, if at all.
The recent outbreak of Severe Acute Respiratory Syndrome (SARS) may adversely
impact our operations and the operations of our contract manufacturers and
distributors.
The SARS outbreak has been most notable in Asia, in particular The
Peoples Republic of China, Singapore and Vietnam. Our principal administrative,
sales, marketing and production development facilities are located in the
Northern portion of The Peoples Republic of China and the operations of all of
our contract manufacturers and distributors are located in The Peoples Republic
of China, as well. The development, manufacture, marketing and distribution of
our pharmaceutical products could suffer if a significant number of our
employees or the employees of our contract manufacturers or distributors
contract SARS or otherwise are unable to fulfill their responsibilities. In
addition, while we possess technology that would allow us to develop and market
products with minimal travel to or from Asia, our business could also be harmed
if travel to or from Asia and the United States is restricted or inadvisable.
Because of our relatively small size, many of our competitors may be better able
to withstand the adverse impact to their businesses resulting from the SARS
outbreak.
RISKS RELATING TO OWNERSHIP OF COMMON STOCK
There may not be sufficient liquidity in the market for our securities in order
for investors to sell their securities.
There is currently only a limited public market for our common stock,
which is listed on the American Stock Exchange, and there can be no assurance
that a trading market will develop further or be maintained in the future.
During the month of February 2004, our common stock traded an average of
approximately 55,000 shares per day. As of March 25, 2004, the closing bid price
of our common stock on the American Stock Exchange was $ 5.21 per share. As of
March 25, 2004, we had approximately 114 shareholders of record not including
shares held in street name. In addition, during the past two years our common
stock has had a trading range with a low price of $.09 per share and a high
price of $7.30 per share.
The fact that our directors and officers own approximately 38.65% of our capital
stock may decrease your influence on shareholder decisions.
Our executive officers and directors, in the aggregate, beneficially
own approximately 38.65% of our capital stock. As a result, our officers and
directors, will have the ability to influence our management and affairs and the
outcome of matters submitted to shareholders for approval, including the
election and removal of directors, amendments to our bylaws and any merger,
consolidation or sale of all or substantially all of our assets.
The outstanding warrants may adversely affect AXM Pharma in the future and cause
dilution to existing Shareholders.
The holders of the warrants have until August 21, 2008, September 12,
2008, and December 31, 2008, respectively, to exercise their warrants. There are
currently 3,333,750 warrants outstanding, which are exercisable at a price of
$3.00 per share, subject to adjustment in certain circumstances. Exercise of the
warrants may cause dilution in the interests of other shareholders as a result
of the additional common stock that would be issued upon exercise. In addition,
sales of the shares of our common stock issuable upon exercise of the warrants
could have a depressive effect on the price of our stock, particularly if there
is not a coinciding increase in demand by purchasers of our common stock.
Further, the terms on which we may obtain additional financing during the period
any of the warrants remain outstanding may be adversely affected by the
existence of these warrants as well.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Financial Statements required by this item appear at the end of
this report:
Report of Independent Public Accountant
Balance Sheet as of December 31, 2003
Statement of Operations - For the years ended December 31, 2002, and
2003.
Statement of Stockholders Equity - For the years ended December 31,
2002, and 2003.
Statement of Cash Flows - For the years ended December 31, 2002, and
2003.
Notes to Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANICAL DISCLOSURES
We have had no disagreements with our certified public accountants with respect
to accounting practices or procedures or financial disclosure.
ITEM 8A. CONTROLS AND PROCEDURES
EVALUATION AND DISCLOSURE CONTROLS AND PROCEDURES
The Company, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the design and operation
of the Company's "disclosure controls and procedures," as such term is defined
in Rules 13a-15e promulgated under the Exchange Act as of this report. Based
upon the evaluation, the Chief Executive Officer and Chief Financial Officer has
concluded that the Company's disclosure controls and procedures were effective
as of the end of the period covered by this report to provide reasonable
assurance that information required to be disclosed by the Company in reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and report within the time periods specified in SEC rules and forms.
CHANGES IN INTERNAL CONTROLS
There have been no changes in internal controls or in other factors
that could significantly affect those controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART III.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The following table and text set forth the names and ages of all
directors and executive officers of AXM Pharma as of March 25, 2004. The Board
of Directors is comprised of only one class. All of the directors will serve
until the next annual meeting of shareholders, which is anticipated to be held
in April of 2004, and until their successors are elected and qualified, or until
their earlier death, retirement, resignation or removal. To date we have not had
an annual meeting. There are no family relationships among directors and
executive officers. Also provided herein are brief descriptions of the business
experience of each director and executive officer during the past five years and
an indication of directorships held by each director in other companies subject
to the reporting requirements under the Federal securities laws.
NAME AGE POSITION
---- --- --------
Wang Wei Shi 45 Chairman
Douglas C. MacLellan 47 Vice Chairman
Peter W. Cunningham 47 Chief Executive Officer, President
Mark H. Elenowitz 34 Director
Mark J. Bluer 41 Director
Chet Howard 61 Chief Financial Officer
Montgomery F. Simus 36 Director
Chaoying (Charles) Li 33 Director
MS. WANG WEI SHI, CHAIRMAN. Ms. Wang became Chairman of AXM Pharma
when we acquired Werke Pharmaceuticals, Inc. in March 2003 and has been Chairman
of Shenyang Tianwei Werke Pharmaceuticals and Vice-Chairman of Werke
Pharmaceuticals, Inc. since December 2000. From 1999 until December 2000, Ms.
Wang was Chairman and General Manager of Shenyang Tianwei Pharmaceutical
Factory, Ltd., a predecessor to Shenyang Tianwei Werke Pharmaceuticals. Since
May 1996, she has also been Chairman of Liaoning Shenda Import and Export
Company, a Chinese import/export company. From 1984 through 1988, Ms. Wang was
the Manager of the Finance Department of the Shenyang Five Mineral Import and
Export Company, a Chinese import/export company. Ms. Wang attended Beijing
University and Shenyang University and studied financial management, accounting
and economics.
MR. DOUGLAS C. MACLELLAN, VICE-CHAIRMAN. Mr. MacLellan became
Vice-Chairman of AXM Pharma in connection with our acquisition of Werke
Pharmaceuticals, Inc. in March 2003 and has been Vice-Chairman of Werke
Pharmaceuticals, Inc. since October 2000 and Vice Charman of the Board of
Directors of Shenyang Tianwei Werke Pharmaceutical Co., Ltd. since December
2000. Mr. MacLellan is a venture capitalist and business incubation executive.
He holds significant expertise in developing and financing Chinese-based
businesses, particularly in the telecommunications, software and Internet
industries. Since May 1992, Mr. MacLellan has been President and Chief Executive
Officer of the MacLellan Group, Inc., a privately-held business incubator and
financial advisory firm. From March 1998 through October 2000, Mr. MacLellan was
the co-founder and a significant shareholder of Wireless Electronique, Ltd., a
China-based telecommunications company having joint venture operations with
China Unicom (NASDAQ: CHU) in Yunnan, Inner Mongolia and Ningxia provinces. He
is also a co-founder and, since May 1997, has been a director of Datalex
Corporation, a Canadian-based legacy software solution provider. Mr. MacLellan
is also a member of the board of directors and chairman of the audit committee
of AMDL, Inc. (AMEX: ADL), a publicly-held biotechnology firm. From November
1996 to March 1998, Mr. MacLellan was co-Chairman and an Investment Committee
member of the Strategic East European Fund. From November 1995 to March 1998,
Mr. MacLellan was President, Chief Executive Officer and a Director of PortaCom
Wireless, Inc., a company engaged as a developer and operator of cellular and
wireless telecommunications ventures in selected developing world markets. Mr.
MacLellan is a former member of the board of directors and co-founder of
FirstCom Corporation (NASDAQ: FCLX), an international telecommunications company
that operates a competitive access fiber and satellite network in Latin America,
which became AT&T Latin America (NASDAQ: ATTL) in August 2000. During 1996, he
was also the Vice-Chairman of Asia American Telecommunications (now Metromedia
China Corporation), a majority-owned subsidiary of Metromedia International
Group, Inc. (AMEX: MMG). Mr. MacLellan was educated at the University of
Southern California in economics and finance, with advanced training in
classical economic theory.
MR. PETER W. CUNNINGHAM, CHIEF EXECUTIVE OFFICER, PRESIDENT. Mr.
Cunningham was appointed as our Chief Operating Officer in August 2003 and
promoted to the positions of Chief Executive Officer and President in September
2003. He is a known pharmaceutical industry advisor with extensive experience in
creating increased market share for new and existing ethical drug and
over-the-counter pharmaceutical products. He has more than 15 years of
experience working in the healthcare industries in the Asia Pacific region.
Since 1997 Mr. Cunningham has been an independent consultant to the
pharmaceutical industry. From 1994 to 1997, he was the Principal Consultant in
the firms Marc J Consultants & Coopers & Lybrand / Marc J Consultants Healthcare
Industry Practice. He is the former General Manager of Sterling Drug Singapore
(1983 to 1985), where he was the youngest General Manager in the company's
history. He held regional management positions with Rhone Poulenc Rorer from
1987 to 1990, and Becton Dickinson from 1990 to 1994. While at Becton Dickinson,
he held additional responsibility as a member of an internal strategy advisory
team comprising headquarters staff and visionary management from various
operations worldwide. Mr. Cunningham received his MBA from The George Washington
University and a B.A. from the State University of New York and is a Research
Fellow at the American Red Cross National Headquarters.
MR. MARK H. ELENOWITZ, DIRECTOR. Mr. Elenowitz became a Director of AXM
Pharma in connection with our acquisition of Werke Pharmaceuticals, Inc. in
March 2003. Mr. Elenowitz was a co-founder and since July 2001, has been a
managing director of TriPoint Capital Advisors, LLC, a consulting firm, where he
is responsible for the overall corporate development of TriPoint and assisting
its clients with corporate and general business development. From September 2001
to March 2002, Mr. Elenowitz was a Director and President of Image World Media,
Inc. (Pink sheet: IMWI), an international media company specializing in the
production and distribution of various media content for worldwide distribution
across multiple media platforms, such as traditional television, film and the
Internet. From February 1998 to October 2001, Mr. Elenowitz was Co-Chairman and
Managing Director of GroupNow!, Inc., a financial consulting firm. He was also a
founder, and since 1996 has been the senior managing director of Investor
Communications Company, LLC, a national investor relations firm. Mr. Elenowitz
has held Series 7 and 63 licenses as a broker, and has held a Series 24 license
at a regional brokerage firm. Mr. Elenowitz is a graduate of the University of
Maryland School of Business and Management, with a BS in Finance.
MR. MARK J. BLUER, DIRECTOR. Mr. Bluer is the most recent addition to
AXM Pharma's Board of Directors; he joined the AXM Pharma team on February 25,
2004. Mr. Bluer is a founder and managing partner of Bluer and Bluer, LLP, which
was founded in 2000 and is a San Francisco bay area based law firm primarily
focused on business and employment litigation. Mr. Bluer personally represents
clients through all stages of litigation and many cases involve parties from
China or disputes involving transactions between China and the United States.
Prior to founding Bluer and Bluer, Mr. Bluer served as Deputy Chief
Representative for the Beijing Representative office of the law firm CHA & PAN
from 1997 to 1999. Mr. Bluer represented various American clients of the firm
with business interests in China. Mr. Bluer's first attorney position was with
Kern, Noda, Devine & Segal from 1992 to 1995. Mr. Bluer was enrolled in the
Taipei Language Institute where he took tutorial classes in Mandarin Chinese
from 1985 to 1986 and now has over 14 years experience speaking and reading
Mandarin Chinese. Mr. Bluer also has a BA in Business Economics and History,
from the University of California, Santa Barbara. In 1990, Mr. Bluer received
his JD from Santa Clara University School of Law and has been an active member
of the California State Bar since 1991.
MR. CHET HOWARD, CFO. Mr. Chet Howard has over 30 years of financial
management experience working with a variety of early stage and growth
companies. Since January 2000, Mr. Howard has maintained a consulting practice
that specializes in SEC reporting and Sarbanes-Oxley compliance. His clients
have included Amerimmune Pharmaceuticals, Inc., Mandalay Resorts, Inc. and Smart
Chip Technologies, Inc. From January 2001 to December 2002, Mr. Howard was
Executive Vice President and CFO of AirCard Cellular, Inc., where he organized
the finance department, implemented the accounting system and helped develop the
business plan. Prior to AirCard, he was Senior Vice President and CFO of Big
Hub.com, Inc., where he was responsible for all aspects of taking the company
public and instrumental in raising $7.5 million. Before joining Big Hub.com, he
was Executive Vice President and CFO of USA Service Systems, Inc., a marketing
and merchandising company with clients such as Sam's Club, Wal-Mart, Walgreen's
and Sears. Mr. Howard was also Executive Vice President and CFO of InterAmericas
Communication Corp (now AT&T Latin American) and Executive Vice President and
CFO of HQ Office Supplies Warehouse, Inc, where he managed the sale of the
company to Staples, Inc. Previously, he helped develop the business plan and
manage venture capital investment as Senior Vice President, CFO and a co-founder
of the Sports Authority, Inc. In addition to these corporate positions, Mr.
Howard has eight years of experience as a consultant where he has prepared
IPO's, several secondary offering documents and assisted company executives with
SEC filings on a regular basis. Mr. Howard holds both an MBA and BS degree
(Accounting Major) from California State Poly University and has attended
numerous seminars to maintain current expertise in SEC reporting and other
corporate goverence matters.
MR. MONTGOMERY FRANK SIMUS, DIRECTOR. Mr. Simus has more than nine
years of experience working in Central and Southeast Asia, including a unique
combination of information and communications technology expertise and
international development and team-building experience. Since August 2002, he
has been President, CEO and founder of Golden Asia Ventures, a management
consultancy that focuses on strategic business and technology investments
partnerships between Asian and North American organizations. From 2001 to 2002,
Mr. Simus was a Vice President at CEM Investments, where he focused on
early-stage commercial and residential real estate and mezzanine financing
opportunities. Prior to CEM Investments, he worked as an Alliance Manager in the
Institutional Business Development Group at Financial Engines, Inc. from
September 1999 to January 2001. Before joining Financial Engines, Inc., Mr.
Simus held a variety of technology and finance related positions with various
international firms, including AES Corporation, Lehman Brothers Asia Limited
(Hong Kong), Hong Kong and Shanghai Banking Corporation Limited (Hong Kong),
Oracle Corporation and EDS Limited. Mr. Simus also previously managed the
implementation of a multi-million dollar international aid project portfolio
focused on telecommunications, aviation, and parastatal reform for the United
Nations Development Program in Kenya. He graduated from Harvard University's
John F. Kennedy School of Government with a Masters Degree in Public Policy
focused on International Development. He has a BA in History from Yale
University and is functional in French, Mandarin Chinese and Russian.
MR. CHAOYING (CHARLES) LI, DIRECTOR. Mr. Li is a registered lawyer and
trademark attorney in the People's Republic of China where he specializes in
foreign investments in China, mergers and acquisitions, joint venture structure
and formations and intellectual property and technology law. Since August 2001,
he has been a partner at T&C Law Offices in Beijing. Prior to joining T&C, Mr.
Li was a founder and general counsel of Bookoo, Inc., a pioneer in the e-book
marketplace and one of the first Internet companies in Greater China that
extensively emphasized the management of intellectual property rights from
January 2000 to August 2001. Before the founding of Bookoo, Inc., Mr Li spent
over 4 years from August 1995 to December 1999 working for Cha & Cha, an
international law firm specializing in Telecom, Internet and joint venture law.
He received a Master of Laws from the University of Ottawa in 2003 and both a
Master of Laws in July 1999 and Bachelor of Laws in July 1996 from Peking
University, majoring in Intellectual Property Law. He also has earned BS in
Mathematics in July 1995 from Peking University. Mr. Li has written numerous
academic and professional articles that are widely published internationally and
in Mainland China, Hong Kong and Taiwan. Mr. Li is fluent in English and
Mandarin. He also completed an internship at Gowling Lafleur Henderson LLP in
Ottawa, Canada in 2003.
AUDIT COMMITTEE FINANCIAL EXPERT AND IDENTIFY AUDIT COMMITTEE:
The Audit Committee focuses its efforts on assisting our Board of Directors
to fulfill its oversight responsibilities with respect to AXM Pharma's:
o Quarterly and annual consolidated financial statements and financial
information filed with the Securities and Exchange Commission;
o System of internal controls;
o Financial accounting principles and policies;
o Internal and external audit processes; and
o Regulatory compliance programs.
The committee meets periodically with management to consider the
adequacy of AXM Pharma's internal controls and financial reporting process. It
also discusses these matters with AXM Pharma's independent auditors and with
appropriate financial personnel employed by AXM Pharma. The committee reviews
our financial statements and discusses them with management and our independent
auditors before those financial statements are filed with the Securities and
Exchange Commission. The committee met 3 times in fiscal 2003.
The committee has the sole authority to retain and dismiss our
independent auditors and periodically reviews their performance and independence
from management. The independent auditors have unrestricted access and report
directly to the committee.
AUDIT COMMITTEE FINANCIAL EXPERT.
The Board has determined that the Chairman of the committee, Mr.
MacLellan is an "audit committee financial expert" as that term is defined in
Item 401(e) of Regulation S-B and "independent" for purposes of currently
adopted American Stock Exchange listing standards and Section 10A(m)(3) of the
Securities Exchange Act of 1934. Mr. MacLellan is also currently the Chairman of
the Audit Committee of AMDL, Inc. a company also listed on the American Stock
Exchange. Our Board of Directors has determined that such simultaneous service
does not impair the ability of Mr. MacLellan to effectively serve as the
Chairman of AXM Pharma's Audit Committee.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
On December 26, 2003, our officers, Directors and 10% or greater
shareholders became subject to the requirements of Section 16(a) of the
Securities Exchange Act by virtue of our common stock becoming registered
pursuant to Section 12 of the Securities Exchange Act on such date. As a result,
each of our officers, directors and 10% or greater shareholders were required on
that date to file a Form 3 reporting their beneficial ownership of AXM Pharma's
securities at such date. Although all of the required Form 3s have now been
filed as required by the Securities Exchange Act, Peter Cunningham, Lan Hao,
Doug MacLellan, Mark Elenowitz, Tongbo Wang and Wang Wei Shi all filed their
initial statements of beneficial ownership on Form 3 late. Other than as set
forth herein, we believe that all reports, which our officers, Directors and 10%
or greater shareholders were required to file in fiscal 2003, pursuant to
Section 16(a) of the Securities Exchange Act, have been timely filed.
CODE OF ETHICS
The Company has always encouraged its employees, including officers and
directors to conduct business in an honest and ethical manner. Additionally, it
has always been our policy to comply with all applicable laws and provide
accurate and timely disclosure. Although we did not have a formal written code
of ethics for the 2003 fiscal year, due to the abundance of tasks associated
with our gaining entrance to a public stock exchange. In March 2004, our Board
adopted formal written codes of ethics for both our executive officers and for
our directors.
Our codes of ethics are designed to deter wrongdoing and promote honest
and ethical conduct and compliance with applicable laws and regulations. These
codes also incorporate our expectations of our executives that enable us to
provide accurate and timely disclosure in our filings with the Securities and
Exchange Commission and other public communications. Our codes of ethics is
posted on our website, www.axmpharma.com. Any future changes or amendments to
our code of ethics, and any waiver of our codes of ethics will also be posted on
our website when applicable.
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
Summary Compensation Table
Long Term Compensation
----------------------------- -----------
ANNUAL COMPENSATION AWARDS Payouts
----------------------------- -----------
---------------------------------------------------------------- ----------------------------- -----------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities All
Name Annual Restricted Under- Other
And Compen- Stock lying LTIP Compen-
Principal sation Award(s) Options/ Payouts sation
($) SARs (#) ($) ($)
Position Year Salary($) Bonus($) ($)
---------------------------------------------------------------- ----------------------------- ----------- -----------
Peter W. Cunningham, 2003 $50,000 0 0 $208,335 41,667 0 0
President, CEO, 2002 0 0 0
2001 0 0 0
Lan Hao 2003 40,000 0 0 $500,000 100,000 0 0
CFO, Director, 2002 0 0 0
2001 0 0 0
Option/SAR in Last Fiscal Year
(Individual Grants)
--------------------------------------------------------------------------------------------------------------
Name Number of Percent of total Exercise or Expiration
Securities options/SARs base price date
Underlying granted to ($/Sh)
Options/SARs employees in
Granted (#) fiscal year
--------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Peter W. Cunningham(1), 0 0 0 N/A
President, CEO
Lan S. Hao(2) 0 0 0 N/A
CFO, Director
(1) Does not include 400,000 incentive stock options authorized by our
Board of Directors exercisable at $3.90 per share which are subject to
ratification of the "2004 Qualified and Nonstatutory Stock Option
Plan" by our Shareholders at the next annual meeting.
(2) Does not include 25,000 incentive stock options authorized by our
Board of Directors exercisable at $3.90 per share which are subject to
ratification of the "2004 Qualified and Nonstatutory Stock Option
Plan" by our Shareholders at the next annual meeting.
BOARD OF DIRECTORS
Our directors who are employees do not receive any compensation from
AXM Pharma for services rendered as directors. Outside directors receive $3,000
a month for serving on the Board of Directors. Members of the Audit Committee
receive an additional $1,500 per month and the chairman of the Audit Committee
receives an additional $9,000 per month. The chairpersons of the other two board
committees receive an additional $4,500 per month. The Vice-chairman of the
Board receives an additional $6,000 for service in such position, in addition to
any other payments to which he is entitled, and our Chairperson of the Board is
paid a flat fee of $20,000 per month. All board members are entitled to
participate in AXM Pharma's health insurance plan. In January 2004, our Board of
Directors authorized the issuance of 910,000 stock options exercisable at $3.90
per share to members of our Board of Directors and an additional 40,000 stock
options exercisable at 5.70 per share. The foregoing options are subject to
ratification of the "2004 Qualified and Nonstatutory Stock Option Plan" by our
Shareholders at the next annual meeting.
EMPLOYMENT AGREEMENTS
In August 2003, we entered into an employment agreement with Peter
Cunningham, our President and Chief Executive Officer. Although he was
originally hired to serve as our Chief Operating Officer, in September 2003, Mr.
Cunningham was promoted to the positions of President and Chief Executive
Officer. At the time of his promotion, other than the change in his
responsibilities, the terms of Mr. Cunningham's employment agreement remained
the same. Pursuant to the terms of his agreement with AXM Pharma, Mr. Cunningham
shall be paid not less than $120,000 per year for his services. In January 2004,
our Board of Directors increased Mr. Cunningham's salary from $120,000 per year
to $240,000 per year. In addition, Mr. Cunningham is entitled to receive a stock
grant of 250,000 shares of our common stock, which shall be issued and vest in
equal installments every six months (41,667 per six month period) beginning in
August 2003. Mr. Cunningham is also entitled to health insurance and such other
bonus and incentives as the Board of Directors, in its discretion, shall
authorize. Mr. Cunningham's salary, bonus and incentives shall be reviewed
yearly by our Board of Directors and compensation committee with the goal of
bringing Mr. Cunningham's salary in line with industry standards. The term of
Mr. Cunningham's agreement with AXM Pharma is one year, but the agreement shall
automatically renew on the first and second anniversary dates of the agreement
unless either AXM Pharma or Mr. Cunningham provides written notice to the other
not less than 60 days prior to the anniversary date that they do not wish to
renew the agreement, in which case the agreement shall expire on the day prior
to the anniversary date. The employment agreement may be terminated for good
cause by either party in the event of a material breach of the employment
agreement by either party or in the case of Mr. Cunningham of a change in
control of AXM Pharma. In the event of termination with good cause by Mr.
Cunningham or without good cause by AXM Pharma, Mr. Cunningham is entitled to
three months severance plus bonus and incentives earned to that date and
relocation to Los Angeles, California. In the event that Mr. Cunningham is
terminated for good cause by the Company or terminates the agreement without
good cause he will only be entitled to payment of his salary, bonus and
incentives earned to the date of termination and relocation to Los Angeles,
California. Mr. Cunningham's agreement requires that he keep confidential any
proprietary information acquired while employed and upon termination of his
employment. He is also prohibited from soliciting any employees of AXM Pharma
for a period of one year following his termination for any reason.
In September 2003, we entered into employment agreement with Lan Hao,
our former Chief Financial Officer. Pursuant to the terms of his agreement with
AXM Pharma, Mr. Hao was entitled to be paid $120,000 per year for his services.
In addition, Mr. Hao received a stock grant of 100,000 shares of our common
stock, health insurance and such other bonus and incentives as the Board of
Directors, in its discretion, shall authorize. The term of Mr. Hao's employment
agreement is one year but the agreement may be terminated by either party with
or without cause on 30 days written notice. In the event of termination with
good cause by Mr. Hao or without good cause by AXM Pharma, Mr. Hao is entitled
to three months severance pay plus bonus and incentives earned to that date. In
the event that Mr. Hao is terminated for good cause by the Company or terminates
the agreement without good cause he will only be entitled to payment of his
salary, bonus and incentives earned to the date of termination. Mr. Hao is not
subject to any restrictive covenants in his employment agreement. In March 2003
Mr. Hao voluntarily resigned from his position as our Chief Financial Officer.
He is not entitled to any severance pay as a result of his voluntary
resignation.
STOCK OPTION PLANS
In January of 2004, our Board of Directors approved the "2004 Qualified
and Nonstatutory Stock Option Plan." The Board of Directors reserved 3,000,000
shares of the Company's common stock to be issued in the form of incentive
and/or non-qualified stock options for employees, directors and consultants to
AXM. As of March 25, 2004, our Board of Directors, authorized the issuance of
2,040,000 options to employees, directors and consultants. The stock option plan
and the options authorized thereunder are subject to ratification of the stock
option plan by our Shareholders at our next annual meeting.
ITEM 11. SECURITY OWNERSHIP OF MANANGEMENT AND BENEFICIAL OWNERS
As used in this section, the term beneficial ownership with respect to
a security is defined by Rule 13d-3 under the Securities Exchange Act of 1934,
as amended, as consisting of sole or shared voting power (including the power to
vote or direct the vote) and/or sole or shared investment power (including the
power to dispose of or direct the disposition of) with respect to the security
through any contract, arrangement, understanding, relationship or otherwise,
subject to community property laws where applicable.
As of March 25, 2004, we had a total of 14,807,780 shares of common
stock and 3,285,000 shares of preferred stock issued and outstanding, which are
the only issued and outstanding voting equity securities of AXM Pharma. Shares
of preferred stock vote on as converted basis with the common stock. At the date
of this filing, each share of Preferred Stock is convertible into one share of
common stock.
BENEFICIAL OWNERS OF MORE THAN 5% OF OUR COMMON STOCK AND PREFERRED STOCK
The following table sets forth, as of March 25, 2004, the names and
addresses of each beneficial owner of more than five percent (5%) of our common
stock and Preferred Stock (taken together as one class) known to us (other than
as set forth under "Security Ownership of Management" below), the number of
shares of common stock and Preferred Stock beneficially owned by each such
person, and the percent of our common stock and Preferred Stock so owned. Each
person has sole voting and investment power with respect to the shares of our
common stock and Preferred Stock, except as otherwise indicated. Beneficial
ownership consists of a direct interest in the shares of common stock and
Preferred Stock, except as otherwise indicated.
Amount and Nature of Percentage
Name and Address Beneficial Ownership Of Voting of
Securities (1)
Byrle Lerner 1,000,000 5.53%
2904 Via Campesina
Palo Verdes Estates, CA 90274
Gryphon Master Fund, L.P. 1,807,469 9.99%
500 Crescent Court
Suite 270
Dallas, Texas 75201
SF Capital Partners Ltd. 925,000 5.11%
c/o Staro Asset Management, LLC
3600 South Lake Drive
St. Francis, Wisconsin 53235
----------------
(1) All Percentages have been rounded up to the nearest one hundredth of one
percent.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of March 25, 2003, the names and
addresses of each director and executive officer, the number of shares of our
common stock and Preferred Stock beneficially owned, and the percentage of our
common stock and Preferred Stock so owned, by each such person. Each person has
sole voting and investment power with respect to the shares of our common stock
and Preferred Stock, except as otherwise indicated. Beneficial ownership
consists of a direct interest in the shares of common stock and Preferred Stock,
except as otherwise indicated.
Percentage
Amount and Nature of Of Voting of
Name and Address Beneficial Ownership Securities (1)
Douglas C. MacLellan 533,672(1) 2.95%
8324 Delgany Avenue
Playa Del Rey, California 90293
Peter W. Cunningham 71,667(2) 0.40%
755 Promontory Point Drive West
Newport Beach, California 92660
Mark Elenowitz 225,160 (3) 1.24%
400 Professional Drive, Suite 310
Gaithersburg, MD 20879
Ms. Wang Wei Shi 6,027,000 (4) 33.31%
46 Wen An Road
Building 4, 5th Floor
Shenyang, Liaoning, The Peoples
Republic of China 110003
Mr. Mark Bluer 25,000 0.14%
945 Magnolia Avenue, #77
Larkspur, CA 94939
Mr. Montgomery Simus 0 0%
33 Haight Street, Apt. #8
San Francisco, CA 94111
Mr. Chet Howard 0 0%
11792 Lily Rubin Ave.
Las Vegas, NV 89138
Chaoying (Charles) Li 110,000 0.61%
14/F, Building A, Huixium Plaza,
No.8 Beisihuan Zhong Road
Chaoyang District, Beijing 100101,
P.R. China
All directors and officers as a 6,992,499(5) 38.65%
group (6 persons)
-------------------
(1) Includes 475,000 shares owned by Mr. MacLellan directly, 48,500 shares
owned by The MacLellan Group, Inc., which is owned by Mr. MacLellan, and
16,953 shares owned by Broadband Access Market Space, Ltd., a company in
which Mr. MacLellan owns 60% of the outstanding shares.
(2) Includes 41,667 shares owned by Mr. Cunningham directly and 30,000 shares
owned by Rabelaisian Resources, Plc., a company owned by Mr. Cunningham. In
addition to the shares listed herein Mr. Cunningham is entitled to receive
an additional 208,333 shares of our common stock over the next three years
pursuant to his employment agreement with AXM Pharma which provides that
Mr. Cunningham is entitled to receive a stock grant of 250,000 shares of
our common stock, which shall be issued and vest in equal installments
every six months (41,667 per six month period) beginning in August 2003.
(3) Includes (i) 201,160 shares indirectly owned by MHE, Inc. (a company owned
100% by Mark Elenowitz) as a result of its 40% ownership interest of
TriPoint Capital Holdings, LLC, which owns 502,900 shares of common stock,
and (ii) 24,000 shares owned by Investor Communications Company, LLC, a
company which is owned by MHE, Inc.
(4) Includes 3,117,000 shares owned by Ms. Wang directly and 2,910,000 shares
owned by members of her immediate family.
(5) The amounts listed herein do not include stock options authorized by the
Board of Directors which are subject to ratification of the 2004 "Qualified
and Nonstatutory Stock Option Plan" by our shareholders at the next annual
meeting. The following option grants were approved by the Board: Ms Wang
300,000 options, Mr. MacLellan 400,000 options, Mr. Cunningham 400,000, Mr.
Elenowitz 160,000 options, and Mr. Li 100,000 options. All of the foregoing
options have a proposed exercise price of $3.90 per share. In addition on
February 24, 2004, the Board of Directors authorized the issuance of 40,000
options to Mr. Bluer at an exercise price of $5.70 per share.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
EQUITY COMPENSATION PLAN INFORMATION
PLAN CATEGORY NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE EXERCISE NUMBER OF SECURITIES
------------- --------------------------- -------------------------- --------------------
ISSUED UPON EXERCISE OF PRICE OF OUTSTANDING REMAINING AVAILABLE FOR
------------------------ --------------------- -----------------------
OUTSTANDING OPTIONS, OPTIONS, WARRANTS AND FUTURE ISSUANCE UNDER
--------------------- ---------------------- ---------------------
WARRANTS AND RIGHTS RIGHTS EQUITY COMPENSATION PLANS
------------------- ------ -------------------------
(EXCLUDING SECURITIES
---------------------
REFLECTED IN COLUMN (A)
-----------------------
(A) (B) (C)
EQUITY COMPENSATIONS PLANS 0 0 0
APPROVED BY SECURITY HOLDERS
EQUITY COMPENSATION PLANS NOT 0 0 0
APPROVED BY SECURITY HOLDERS
TOTAL 0 0 0
CHANGES IN CONTROL
As of the date of this filing, there are no arrangements which may
result in a change in control of AXM Pharma, Inc.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTION
We are party to a consulting agreement with TriPoint Capital Advisors,
LLC, a company in which Mark Elenowitz, a director and significant shareholder
of AXM Pharma, indirectly owns a 40% interest. Pursuant to the terms of the
consulting agreement, we are required to pay TriPoint a monthly fee of $10,000.
The current agreement between Tripoint Capital Advisors and AXM Pharma has a
one-year term and is terminable by either party, with or without cause, upon 30
days written notice. Additionally, on May 1, 2002, pursuant to the terms of a
previous consulting agreement with TriPoint, Werke Pharmaceuticals, Inc., our
wholly owned subsidiary issued TriPoint 500,000 shares of its common stock,
which shares were exchanged pursuant to the terms of our share exchange
agreement with the shareholders of Werke Pharmaceuticals, Inc. into shares of
AXM Pharma common stock. In addition, Werke Pharmaceuticals, Inc. is party to a
consulting agreement with Investor Communications Company, LLC , a company in
which Mark Elenowitz directly benefits from 20% of the stock compensation
received from the Company. Pursuant to the terms of the consulting agreement,
Werke Pharmaceuticals, Inc. is required to pay Investor Communications Company,
LLC a monthly fee of $5,000 and issued to Investor Communications Company, LLC
120,000 shares of its common stock which were subsequently converted into shares
of AXM Pharma common stock as a result of the Share Exchange.
On September 12, 2002, Byrle Lerner, a significant shareholder of AXM
Pharma, made a capital contribution of $100,000 to Werke Pharmaceuticals, Inc.
to provide working capital for Werke Pharmaceuticals, Inc.'s United States
administrative offices, including expenses for travel to The Peoples Republic of
China by Werke Pharmaceuticals, Inc.'s U.S. employees and consultants. Mr.
Lerner received shares of Werke Pharmaceuticals, which were later exchanged for
shares of AXM Pharma pursuant to our share exchange with Werke Pharmaceuticals,
in consideration for his capital contribution.
In September 2003, we engaged Amaroq Capital, LLC, to provide advice
regarding business development and to identify and review potential merger and
acquisition candidates in Asia. Amaroq Capital will be paid $5,000 per month for
its services and is entitled to receive additional compensation in connection
with mergers or acquisitions that it identifies or for which it provides
substantive assistance to AXM Pharma. The current agreement with Amaroq Capital
is for a six month term and is terminable only upon the mutual written consent
of AXM Pharma and Amaroq Capital. Amaroq Capital is owned by Joseph Cunningham,
brother of Peter Cunningham, our President and Chief Executive Officer.
In April 2003, we engaged Rabelaisian Resources, Plc., to provide
consulting services for AXM Pharma. Rabelaisian Resources' agreement expired in
August 2003. Rabelaisian Resources is owned by Peter Cunningham, who is
currently our President and Chief Executive Officer. In August 2003, Mr.
Cunningham was hired as our Chief Operating Officer and was promoted to the
positions of President and Chief Executive Officer following the resignation of
That Ngo from such positions in September 2003.
ITEM 13. EXHIBITS, FINANICAL STATEMENTS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report: Financial
Statements (appearing at the end of this report):
Report of Independent Public Accountant
Balance Sheet as of December 31, 2003
Statement of Operations - For the years ended December 31, 2002, and
2003.
Statement of Stockholders Equity - For the years ended December 31,
2002, and 2003.
Statement of Cash Flows - For the years ended December 31, 2002, and
2003.
Notes to Financial Statements
(b) Exhibits
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
4.1* Securities Purchase Agreement dated as of August 21,
2003
4.2* Registration Rights Agreement dated as of August 21,
2003
4.3* Designation of Rights and Preferences of Series A
Preferred Stock dated as of August 21, 2003
4.4* Form of Warrant to Purchase Common Stock issued August
21, 2003
4.5** Securities Purchase Agreement dated as of September 12,
2003
4.6** Registration Rights Agreement dated as of September 12,
2003
4.7** Form of Warrant to Purchase Common Stock issued
September 12, 2003
4.8** Form of Warrant to Purchase Common Stock issued
September 12, 2003
4.9*** Securities Purchase Agreement dated as of December 30,
2003
4.10*** Registration Rights Agreement dated as of December 30,
2003
4.11*** Designation of Rights and Preferences of Series A
Preferred Stock dated as of December 30, 2003
4.12*** Form of Warrant to Purchase Common Stock issued December
31, 2003
10.1****++ Employment Agreement of Peter W. Cunningham
10.2****++ Employment Agreement of Lan S. Hao
10.3**** Agreement for Processing between Shenyang Tianwei Werke
Pharmaceutical Co., Ltd. and Qiqihaer No. 2
Pharmaceutical Factory
10.4**** Agreement on Agency for Sale (Distribution) between
Shenyang Taiwei Pharmaceutical Factory and Liaoning
Weikang Medicine Co., Ltd.
10.5**** Consulting Agreement with Tripoint Capital Advisors, LLC
10.6**** Consulting Agreement with Amaroq Capital, LLC
10.7**** Consulting Services Agreement with Woodbridge
Management, Ltd.
10.8**** Consulting Agreement with Madden Consulting, Inc.
10.9**** Investment Banking Agreement with Great Eastern
Securities, Inc.
10.10**** Investor Relations Agreement with the Aston Organization
10.11+,++ Incentive and Nonstatutory Stock Option Plan
14.1+ Code of Ethics for Board of Directors
14.2+ Code of Ethics for Executive Officers
21.1+ Subsidiaries of the Company
31.1+ Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) Certification of Chief Executive Officer
pursuant to Rule 13a-14(a)*
31.2+ Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) Certification of Chief Financial Officer
pursuant to Rule 13a-14(a)*
32.1+ Certification of Chief Executive Officer pursuant to 18
U.S.C. 1350 Certification of Chief Executive Officer
pursuant to 18 U.S.C. 1350*
32.2+ Certification of Chief Financial Officer pursuant to 18
U.S.C. 1350 Certification of Chief Financial Officer
pursuant to 18 U.S.C. 1350*
99.1**** Form of lock-up agreement by officers, directors and 5%
or greater shareholders
* Incorporated herein by reference to Exhibits 10.1 to 10.4 of the
Company's Current Report on Form 8-K Dated August 21, 2003.
** Incorporated herein by reference to Exhibits 10.1 to 10.5 of the
Company's Current Report on Form 8-K Dated September 12, 2003.
*** Incorporated herein by reference to Exhibits 10.1 to 10.4 of the
Company's Current Report on Form 8-K Dated December 31, 2003
**** Incorporated herein by reference to Exhibits 10.1 to 10.10 of the
Company's Registration Statement on Form SB-2 Dated March 4, 2004.
+ Filed herewith
++Exhibit represents a management contract or compensatory plan or
arrangement.
(c) Reports on Form 8-K.
1. On October 1, 2003, we filed a report on Form 8-K disclosing the
fact that we had changed our corporate name from "Axiom
Pharmaceuticals, Inc." to "AXM Pharma, Inc."
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES-
(1) AUDIT FEES
The aggregate fees billed for professional services rendered by Malone & Bailey,
PLLC, for the audit of the registrant's annual financial statements and review
of the financial statements included in the registrant's Form 10-QSB or services
that are normally provided by the accountant in connection with statutory and
regulatory filings or engagements for fiscal years 2003 and 2002 were $6,280.00
and $4,800.00, respectively.
(2) AUDIT-RELATED FEES
The aggregate fees billed for professional services rendered by Malone & Bailey,
PLLC, for "Audit-related fees" were $12,100.00, for issuance of consents in
connection our Registration Statement on Form SB-2 originally filed on September
25, 2003, assistance with response to SEC comments to such Registration
Statement and consultations regarding generally accepted accounting principles.
(3) TAX FEES
NONE
(4) ALL OTHER FEES
NONE
(5) AUDIT COMMITTEE POLICIES AND PROCEDURES
Under its charter, the Audit Committee must pre-approve all auditing
services and permitted non-audit services (including the fees and terms thereof)
to be performed for AXM Pharma by its independent auditors, subject to the de
minimus exceptions for non-audit services described in Section 10A(i)(1)(B) of
the Securities Exchange Act of 1934, which should nonetheless be approved by the
Audit Committee prior to the completion of the audit. Each year the independent
auditor's retention to audit our financial statements, including the associated
fee, is approved by the committee before the filing of the previous year's
annual report on Form 10-KSB. At the beginning of the fiscal year, the Audit
Committee will evaluate other known potential engagements of the independent
auditor, including the scope of work proposed to be performed and the proposed
fees, and approve or reject each service, taking into account whether the
services are permissible under applicable law and the possible impact of each
non-audit service on the independent auditor's independence from management. At
each subsequent committee meeting, the auditor and management may present
subsequent services for approval. Typically, these would be services such as due
diligence for an acquisition, that would not have been known at the beginning of
the year.
Since the May 6, 2003, effective date of the Securities and Exchange
Commission rules stating that an auditor is not independent of an audit client
if the services it provides to the client are not appropriately approved, each
new engagement of Malone & Bailey, PLLC, has been approved in advance by the
Audit Committee, and none of those engagements made use of the de minimus
exception to pre-approval contained in Section 10A(i)(1)(B) of the Securities
Exchange Act of 1934.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Annual Report on Form 10-KSB/A to be signed on
its behalf by the undersigned hereunto duly authorized.
AXM PHARMA, INC.
By: /s/ Peter Cunningham
---------------------------
Peter Cunningham,
Chief Executive Officer
Dated: April 5, 2004
By: /s/ Chet Howard
---------------------------
Chet Howard,
Chief Financial Officer
Dated: April 5, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Peter W. Cunningham Dated: April 5, 2004
-----------------------------------------
Peter W. Cunningham
President and Chief Executive Officer
/s/ Chet Howard Dated: April 5, 2004
-----------------------------------------
Chet Howard
Chief Financial Officer
/s/ Wang Wei Shi Dated: April 5, 2004
-----------------------------------------
Wang Wei Shi
Chairman of the Board
/s/ Douglas C. MacLellan Dated: April 5, 2004
-----------------------------------------
Douglas C. MacLellan
Vice-chairman of the Board
/s/ Mark H. Elenowitz Dated: April 5, 2004
-----------------------------------------
Mark H. Elenowitz
Director
/s/ Chaoying Li Dated: April 5, 2004
-----------------------------------------
Chaoying Li
Director
/s/ Mark J. Bluer Dated: April 5, 2004
-----------------------------------------
Mark J. Bluer
Director
/s/ Montgomery F. Simus Dated: April 5, 2004
-----------------------------------------
Montgomery F. Simus
Director
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
AXM Pharma, Inc.
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheet of AXM Pharma, Inc.
as of December 31, 2003 and the related statements of operations, stockholders'
equity, and cash flows for each of the two years then ended. These financial
statements are the responsibility of AXM Pharma'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 audits provide 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 AXM Pharma, Inc. as of December
31, 2003 and the results of its operations and its cash flows for each of the
two years then ended, in conformity with accounting principles generally
accepted in the United States of America.
AXM PHARMA, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2003
ASSETS
Current assets
Cash $ 2,950,782
Accounts receivable, net of allowance of $0 2,614,979
Inventories 2,243,754
Advances - supplier 1,465,699
------------
Total current assets 9,275,214
Property and equipment, net 299,776
Licenses 1,449,748
------------
TOTAL ASSETS $ 11,024,738
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Value added tax payable $ 2,917,826
Accounts payable and accrued expenses 524,164
------------
Total current liabilities 3,441,990
------------
Commitments
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 10,000,000 shares authorized,
2,750,000 shares issued and outstanding 2,750
Common stock, $.001 par value, 50,000,000 shares authorized,
13,728,347 shares issued and outstanding 13,728
Additional paid-in capital 12,844,354
Accumulated deficit (5,278,084)
------------
Total Stockholders' Equity 7,582,748
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,024,738
============
See accompanying summary of accounting policies
and notes to financial statements.
AXM PHARMA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003 AND 2002
December 31,
2003 2002
-------------- --------------
Revenues $ 10,025,605 $ 3,103,656
Cost of revenues 6,528,280 2,482,077
-------------- --------------
Gross profit 3,497,325 621,579
-------------- --------------
General, administrative and selling:
Cash 3,683,307 673,936
Non-cash 3,522,085 -
-------------- --------------
7,205,392 673,936
-------------- --------------
Net loss $ (3,708,067) $ (52,357)
============== ==============
Net loss applicable to common shareholders:
Net loss $ (3,708,067) $ (52,357)
Beneficial conversion of preferred stock (2,933,137) -
Deemed dividend from beneficial conversion
feature of warrants (130,362) -
-------------- --------------
Net loss applicable to common shareholders $ (6,771,556) $ (52,357)
============== ==============
Net loss per share:
$ (0.52) $ (0.01)
Basic and diluted ===== =====
Weighted averaged shares outstanding:
Basic and diluted 12,927,956 10,000,000
============== ==============
See accompanying summary of accounting policies
and notes to financial statements.
AXM PHARMA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003 AND 2002
Common Stock Preferred Stock Additional
------------ --------------- Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
------------ ----------- ----------- --------- ------------ ------------- -------------
Balance,
December 31, 2001 10,000,000 $ 10,000 - $ - $ 4,362,877 $ (1,517,660) $ 2,855,217
Contributed capital - - - - 100,000 - 100,000
Net loss - - - - - (52,357) (52,357)
------------ ----------- ----------- --------- ------------ ------------- -------------
Balance,
December 31, 2002 10,000,000 10,000 - - 4,462,877 (1,570,017) 2,902,860
Issuance of common
stock in connection
with recapitalization 2,846,680 2,847 - - (25,539) - (22,692)
Issuance of common
stock for services 881,667 881 - - 3,521,204 - 3,522,085
Issuance of preferred
stock and warrants,
net of expenses - - 2,750,000 2,750 4,885,812 - 4,888,562
Beneficial conversion
feature embedded in
preferred stock and
warrants - - - - 3,063,499 - 3,063,499
Deemed dividend on
preferred stock - - - - (2,933,137) - (2,933,137)
Deemed dividends
on warrants - - - - (130,362) - (130,362)
Net loss - - - - - (3,708,067) (3,708,067)
------------ ----------- ----------- --------- ------------ ------------- -------------
Balance,
December 31, 2003 13,728,347 $ 13,728 2,750,000 $ 2,750 $ 12,844,354 $ (5,278,084) $ 7,582,748
============ =========== =========== ========= ============ ============= =============
See accompanying summary of accounting policies
and notes to financial statements.
AXM PHARMA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,708,067) $ (52,357)
Adjustments to reconcile net loss to cash used in
operating activities:
Common stock issued for services 3,522,085 -
Depreciation and amortization 51,573 21,664
Changes in assets and liabilities:
Cash held in trust 149,203 738,360
Accounts receivable (1,681,978) (387,622)
Advances (1,166,101) (291,597)
Inventories (918,829) (650,009)
Accounts payable 457,317 -
Value added tax payable 1,705,755 538,901
Accrued expenses (161,111) 88,687
-------------- -------------
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES (1,750,153) 6,027
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (293,654) -
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions - 100,000
Proceeds from the sale of preferred stock 4,888,562 -
-------------- -------------
CASH FROM FINANCING ACTIVITIES 4,888,562 100,000
-------------- -------------
NET INCREASE IN CASH 2,844,755 106,027
Cash, beginning of period 106,027 -
-------------- -------------
Cash, end of period $ 2,950,782 $ 106,027
============== =============
SUPPLEMENTAL NON-CASH TRANSACTIONS:
Net liabilities assumed in reverse merger $ 22,692 $ -
============== =============
See accompanying summary of accounting policies
and notes to financial statements.
AXM PHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION
Nature of our Business
AXM Pharma, Inc. ("AXM Pharma"), a Nevada corporation, is a pharmaceutical
company based in The People's Republic of China. We are a publicly listed
company quoted under the symbol (OTCBB: AXMA). Our business is the sale of
over-the-counter and prescription pharmaceutical products in The People's
Republic of China. Our business in The People's Republic of China is conducted
by our wholly-owned subsidiary, Shenyang Tianwei Werke Pharmaceuticals Co.,
Ltd., located in the city of Shenyang in the Northeastern Portion of the
People's Republic of China. Our products are currently produced by third-party
manufacturers and sold through a third-party distributor. Shenyang Tianwei Werke
Pharmaceuticals currently holds 43 licenses to produce over-the-counter and
prescription pharmaceutical products in The Peoples Republic of China. Of these
43 licenses, we have, to date, commercialized four of these licenses from which
we produce five products. In the future we plan to expand our business by
commercializing additional licenses held by Shenyang Tianwei Werke
Pharmaceuticals; acquiring additional product licenses; and by moving the
manufacturing and distribution of our products in-house.
Our subsidiary, Shenyang Tainwei Werke Pharmaceutical Co., Ltd., is classified
under Chinese Company Law as a Wholly Foreign Owned Enterprise. Wholly Foreign
Owned Enterprises have recently become the investment vehicle of choice for
foreign investors who wish to manufacture, process, or assemble products in
China. Wholly Foreign Owned Enterprises are limited liability companies
established under Chinese Company Law, which are owned exclusively by one or
more foreign investors and thus offer controls over AXM Pharma's management,
technology, and finances that the typical foreign investor requires. From a
foreign investors' point of view, the advantages of establishing a Wholly
Foreign Owned Enterprise include:
o Independence and freedom to implement the worldwide strategies of its
parent company without having to consider the involvement of a Chinese
partner;
o Ability to carry on business rather than just a representative office
function;
o Ability to issue invoices to their customers in Renminbi (Chinese
Currency) and receive Renminbi revenues;
o Ability to convert Renminbi profits to US dollars for remittance to
their parent company outside China;
o Ability to employ staff directly within China;
o Protection of intellectual know-how technology;
o Greater efficiency in its operations, management and future
development; and
o No requirement to share profits with another party; and
In summary, the key differences between a Wholly Foreign Owned Enterprise and an
equity or cooperative joint venture are that the joint venture business
structure requires profit sharing between the stake holders, significant
involvement in operational and business matters by the Chinese stake holders,
indirect representation in business matters and much less effective and
efficient cooperation between the stake holders. Typically, the foreign party to
a Chinese joint venture experiences significantly less control over the business
structure than if the foreign party forms a Wholly Foreign Owned Enterprise or
converts an existing joint venture into a Wholly Foreign Owned Enterprise.
Because the Wholly Foreign Owned Enterprise business structure is relatively new
compared to the joint venture structure, fewer than 5% of foreign firms
currently operate as Wholly Foreign Owned Enterprises. It is anticipated that
newly formed businesses will likely choose the use of the Wholly Foreign Owned
Enterprise structure over the joint venture structure. It is also anticipated
that existing joint ventures are likely to migrate their corporate structures to
Wholly Foreign Owned Enterprises over the next five years.
Shenyang Tianwei Werke Pharmaceuticals is located in the City of Shenyang, which
is in the Province of Liaoning in the Northeastern section of The Peoples
Republic of China. Shenyang Tianwei Werke Pharmaceuticals and its predecessor
company, Shenyang Tianwei Pharmaceutical Factory, Ltd. have an operating history
of approximately 10 years. Shenyang Tianwei Werke Pharmaceuticals historically
has been a manufacturer and distributor of proprietary and generic
pharmaceutical products, which include injectables, capsules, tablets, liquids
and medicated skin products for export and domestic Chinese sales. We currently
own 43 product licenses and permits, of which only four licenses are currently
commercialized. Shenyang Tianwei Werke Pharmaceuticals's Shenyang plant was
decommissioned in December 2001 due to the significant growth of the population
of Shenyang that caused the surrounding area to change from a city-edge
industrial area to a city-center, non-industrial urban residential neighborhood.
As part of a broad-based corporate development strategy, the Shenyang plant is
anticipated to be contributed to a city sponsored commercial/residential real
estate development. Shenyang Tianwei Werke Pharmaceuticals currently utilizes a
third-party original equipment manufacturing pharmaceutical plant to produce all
of its products and sells its products only through third-party distributors.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the balance sheet. Actual results could differ from
those estimates.
Cash and Cash Equivalents
Cash equivalents include highly liquid, temporary cash investments having
original maturity dates of three months or less. For reporting purposes, cash
equivalents are stated at cost plus accrued interest, which approximates fair
value.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined by
using the average cost method. Inventories consist primarily of raw materials
for its three products which are for the treatment of bronchial infections, skin
infections and gastric and urinary infections. AXM Pharma uses third party
manufacturers and generally has no work in process or finished goods inventory.
Long-Lived Assets
Property and equipment are stated at cost less accumulated depreciation. Major
renewals and improvements are capitalized; minor replacements, maintenance and
repairs are charged to current operations. Depreciation is computed by applying
the straight-line method over the estimated useful lives of machinery and
equipment (three to seven years). The majority of AXM Pharma's long-lived assets
are located in The People's Republic of China. Axiom performs reviews for the
impairment of long-lived assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Licenses
Licenses consist of permits to produce pharmaceutical products which were
acquired in a business combination. The licenses were valued at their historical
cost. The cost of the licenses is not amortized since they have an indefinite
life. The licenses are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The permits are in the Peoples Republic of China.
Value Added Tax Payable
AXM Pharma is subject to a value added tax rate of 17% on product sales by the
Peoples Republic of China. Value added tax payable is computed net of value
added tax paid on purchases for all sales in the Peoples Republic of China.
Convertible Preferred Stock
Convertible Preferred Sock issued by AXM Pharma is initially offset by a
discount representing the relative fair value of the beneficial conversion
feature and warrants. This beneficial conversion for the preferred stock is
recorded as a dividend over the period the preferred stock is convertible and
accelerated pro-rata as the preferred stock are converted. The beneficial
conversion feature allocated to warrants is recognized over the life of the
warrants and accelerated as warrants are exercised. The fair value of the
warrants and beneficial conversion discount are calculated based on available
market data using appropriate valuation models. The beneficial conversion
feature is limited to the total proceeds received.
Revenue Recognition
AXM Pharma recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred, the sales price is fixed or determinable and
collectibility is probable.
Product sales are recognized by AXM Pharma generally at the time product is
shipped. Shipping and handling costs are included in cost of goods sold.
Income Taxes
Income taxes are computed using the asset and liability method. Under the asset
and liability method, deferred income tax assets and liabilities are determined
based on the differences between the financial reporting and tax bases of assets
and liabilities and are measured using the currently enacted tax rates and laws.
A valuation allowance is provided for the amount of deferred tax assets that,
based on available evidence, are not expected to be realized.
Foreign Currency Translation
The Renminbi ("RMB") is the functional currency of AXM Pharma. Transactions in
foreign currency are translated at rates of exchange rates ruling at the
transaction date. Monetary assets and liabilities denominated in foreign
currencies are retranslated at rates ruling at the balance sheet date. Exchange
differences are recognize in the in the statement of operations.
Stock-Based Compensation
AXM Pharma accounts for stock-based compensation for employees and non-employee
members of our board of directors in accordance with Accounting Principles
Board, or APB, Opinion No. 25, "Accounting for Stock Issued to Employees." Under
APB Opinion No. 25, compensation expense is based on the intrinsic value on the
measurement date, calculated as the difference between the fair value of our
common stock and the relevant exercise price. We account for stock-based
compensation for non-employees, who are not members of our board of directors,
at fair value using a Black-Scholes option-pricing model in accordance with the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" and other
applicable accounting principles. We recorded stock-based compensation expense
of approximately $3,522,000 million during 2003. There were no options granted
to employees during 2003 and 2002.
Basic and Diluted Net Loss per Share
Basic net loss per share is computed using the weighted average number of common
shares outstanding during the period. Diluted net loss per share is computed
using the weighted average number of common and, if dilutive, potential common
shares outstanding during the period. Potential common shares consist of the
incremental common shares issuable upon the exercise of stock options and
warrants (using the treasury stock method). For 2003 and 2002, there were no
potential common shares outstanding that were related to shares issuable upon
the exercise of stock options or warrants.
Recent Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" (the
"Statement"). The Statement establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. The Statement is generally effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of this Statement had no effect on our consolidated financial
statements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46") Consolidation
of Variable Interest Entities, which addresses the consolidation of variable
interest entities ("VIEs") by business enterprises that are the primary
beneficiaries. A VIE is an entity that does not have sufficient equity
investment at risk to permit it to finance its activities without additional
subordinated financial support, or whose equity investors lack the
characteristics of a controlling financial interest. The primary beneficiary of
a VIE is the enterprise that has the majority of the risks or rewards associated
with the VIE. In December 2003, the FASB issued a revision to FIN 46,
Interpretation No. 46R ("FIN 46R"), to clarify some of the provisions of FIN 46,
and to defer certain entities from adopting until the end of the first interim
or annual reporting period ending after March 15, 2004. Application of FIN 46R
is required in financial statements of public entities that have interests in
structures that are commonly referred to as special-purpose entities for periods
ending after December 15, 2003. Application for all other types of VIEs is
required in financial statements for periods ending after March 15, 2004. We
believe we have no arrangements that would require the application of FIN 46R.
We have no material off-balance sheet arrangements.
Reclassifications
Certain items in 2002 have been reclassified to conform to the 2003 financial
statement presentation.
NOTE 2 - ACCOUNTS RECEIVABLE
AXM Pharma's trade accounts receivable are shown net of allowance for doubtful
accounts of $0.
AXM Pharma maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customer to make required payments. If the
financial condition of AXM Pharma's customer were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required.
NOTE 3 - PROPERTY AND EQUIPMENT:
Components of property, plant, and equipment, at December 31, 2003 are as
follows:
Vehicles $ 77,473
Equipment 126,704
Construction in progress 190,496
----------
394,673
Less: accumulated depreciation (94,897)
----------
$ 299,776
Depreciation expense totaled $51,573 and $21,664 in 2003 and 2002, respectively.
NOTE 4 - STOCKHOLDERS' EQUITY
Common Stock
We periodically issue common stock for services rendered. Common stock issued is
valued at fair market value, which is the quoted market price. During the year
ended December 31, 2003, AXM Pharma issued 881,667 shares of common stock for
services valued at $3,522,085.
On September 18, 2003, we issued 400,000 shares of restricted Common Stock to
Madden Consulting, Inc. pursuant to a consulting agreement. The shares were
issued pursuant to the exemption from registration provided by Section 4(2) of
the Securities Act for issuances not involving a public offering. The services
provided are public relations consulting.
On September 18, 2003, we issued 100,000 shares to Lan Hao, our Chief Financial
Officer, pursuant to the terms of his employment agreement with AXM Pharma. The
shares were issued pursuant to an exemption from registration under Section 4(2)
of the Securities Act for issuances not involving a public offering.
On August 31, 2003, we issued 41,667 shares to Peter Cunningham, our President
and Chief Executive Officer, pursuant to the terms of his employment agreement
with AXM Pharma. The shares were issued pursuant to an exemption from
registration under Section 4(2) of the Securities Act for issuances not
involving a public offering.
On June 27, 2003, we issued 80,000 shares of restricted Common Stock to
Woodbridge Management, Ltd. pursuant to a consulting agreement. The shares were
issued pursuant to the exemption from registration provided by Section 4(2) of
the Securities Act for issuances not involving a public offering. The services
provided are financial consulting.
On May 1, 2003, we issued 25,000 shares of restricted Common Stock to Robert
Alexander pursuant to a consulting agreement. The shares were issued pursuant to
the exemption from registration provided by Section 4(2) of the Securities Act
for issuances not involving a public offering. The services provided are
identification and consulting for acquisition of pharmaceutical companies in
Canada.
On May 21, 2003, we issued 40,000 shares of restricted Common Stock to Amaroq
Capital, LLC pursuant to a consulting agreement. The shares were issued pursuant
to the exemption from registration provided by Section 4(2) of the Securities
Act for issuances not involving a public offering. The services provided are
business development and financial consulting.
On May 21, 2003, we issued 15,000 shares of restricted Common Stock to McCartney
Multimedia, Inc. pursuant to a consulting agreement. The shares were issued
pursuant to the exemption from registration provided by Section 4(2) of the
Securities Act for issuances not involving a public offering. The services
provided are the creation of company's web site and logo.
On April 30, 2003, we issued 30,000 shares of restricted Common Stock to
Rabelaisian Resources, Plc. pursuant to a consulting agreement. The shares were
issued pursuant to the exemption from registration provided by Section 4(2) of
the Securities Act of 1933 for issuances not involving a public offering. The
services are to include business and product development.
On April 30, 2003, we issued 150,000 shares of restricted Common Stock to Madden
Consulting, Inc. pursuant to a consulting agreement. The shares were issued
pursuant to the exemption from registration provided by Section 4(2) of the
Securities Act for issuances not involving a public offering. The services
provided are public relations consulting.
Convertible Preferred Stock
On September 12, 2003, AXM Pharma completed a private equity financing of
$5,500,000 with two accredited investors. After payment of costs and expenses,
including fees of the placement agent, we received net proceeds of approximately
$4,889,000. Pursuant to the terms of the Securities Purchase Agreements, dated
as of August 21, 2003, and September 12, 2003, we issued 2,750,000 shares of our
preferred stock, $.001 par value per share, at a price per share of $2.00 and
2,750,000 warrants. Each share of preferred stock is convertible, at the option
of the holder, into one share of common stock, subject to adjustment for certain
occurrences. Each warrant entitles the holder to purchase one share of our
common stock, $.001 par value, for a period of five years from the date of
issuance at a price of $3.00 per share. Holders of our warrants may also
exercise the warrants through a cashless exercise under certain circumstances.
The warrants are redeemable by AXM Pharma under certain circumstances. In
addition to its fees and expenses, TN Capital Equities, Ltd., the placement
agent, received a five-year warrant to purchase up to 275,000 units. Each unit
granted to the placement agent consists of one share of our preferred stock and
one common stock purchase warrant. The placement agent's warrants are
exercisable at a price of $2.00 per unit.
The warrants are redeemable at AXM Pharma's option, commencing 60 days from the
date of the final Closing, by AXM Pharma at a price of $.05 per warrant upon 30
days written notice; provided (i) closing sales price for the common stock for
at least 30 days has been at $4.00 per share; (ii) a registration statement
relating to the common stock underlying the warrants has been declared effective
by the Securities and Exchange Commission; and (iii) the holder would not be
prevented from selling the common shares issuable upon exercise of the warrants
subject to the notice of redemption as a result of the lock-up/dribble-out
provisions
In connection with the transaction, AXM Pharma recorded a deemed dividend of
$2,933,137 for the beneficial conversion feature embedded in the preferred stock
and a deemed dividend of $130,362 for the beneficial conversion feature embedded
in the warrants.
AXM Pharma is authorized to issue up to 4,095,000 shares of Series A preferred
stock par value $.001 per share.
Voting. The holder of each share of the Series A Preferred Stock shall be
entitled to the number of votes equal to the number of shares of Common Stock
into which such share of Series A Preferred Stock could be converted for
purposes of determining the shares entitled to vote at any regular, annual or
special meeting of shareholders of AXM Pharma, and shall have voting rights and
powers equal to the voting rights and powers of the Common Stock.
Dividend Provisions. The holders of the Series A Preferred Stock shall be
entitled to receive, when and as declared by the Board of Directors, dividends
in such amounts as may be determined by the Board of Directors from time to time
out of funds legally available. No dividends (other than those payable solely in
Common Stock) shall be paid on the Common Stock during any fiscal year of AXM
Pharma until there shall have been paid or declared and set apart during that
fiscal year for the holders of the Series A Preferred Stock a dividend in an
amount per share equal to (i) the number of shares of Common Stock issuable upon
conversion of the Series A Preferred Stock times (ii) the amount per share of
the dividend to be paid on the Common Stock.
NOTE 4 - INCOME TAXES
AXM Pharma is incorporated in the PRC which is governed by the Income Tax Law of
the PRC concerning Foreign Investment Enterprises and Foreign Enterprises and
various local income tax laws (the "Income Tax Laws"). Under the Income Tax
Laws, foreign investment enterprises ("FIE") generally are subject to an income
tax at an effective rate of 33% (30% state income taxes plus 3% local income
taxes) on income as reported in their statutory financial statements after
appropriate tax adjustments unless the enterprise is located in specially
designated regions or cities for which more favorable effective rates apply.
Upon approval by the PRC tax authorities, FIEs scheduled to operate for a period
of 10 years or more and engaged in manufacturing and production may be exempt
from income taxes for two years, commencing with their first profitable year of
operations, and thereafter with a 50% exemption for the next three years. As of
December 31, 2003, AXM Pharma had not attained profitable operations for tax
purposes.
For the years ended December 31, 2003 and 2002, AXM Pharma incurred net losses
and, therefore, has no tax liability. The net deferred tax asset generated by
the loss carry-forward has been fully reserved. The cumulative net operating
loss carry-forward is approximately $3,000,000 at December 31, 2003, and will
expire in the years 2007 through 2023.
Deferred income taxes consist of the following at December 31, 2003:
Long-term:
Net operating loss $ 1,020,000
Valuation allowance (1,020,000)
------------
$ -
============
NOTE 5 - MAJOR DISTRIBUTOR
AXM Pharma has one distributor that accounted for 100% of net revenues for the
years ended December 31, 2003 and 2002, respectively. The distribution agreement
expires in March 2004.
AXM Pharma will maintain allowances for estimated potential bad debt losses and
will revise its estimates of collectibility on a periodic basis. There is no
history of bad debt experience with the distributor and collection of the
receivable is reasonably assured.
AXM Pharma products are sold by a third party distributor to hospitals and
hospital distributors. The slow down of the pharmaceutical industry globally
will have a material adverse effect on AXM Pharma's business. AXM Pharma's has
one primary distributor and the loss of this distributor could cause AXM
Pharma's business to suffer while they are finding new distributors.
NOTE 6 - RELATED PARTY TRANSACTIONS
AXM Pharma has a consulting agreement with TriPoint Capital Advisors, LLC, a
company in which Mark Elenowitz, a director and significant shareholder of AXM
Pharma, indirectly owns a 40% interest. AXM Pharma is required to pay TriPoint a
monthly fee of $10,000. The current agreement between Tripoint Capital Advisors
and AXM Pharma is for a one-year term and is terminable by either party with 30
days notice. The one-year term expires on August 24, 2004.
Additionally, on May 1, 2002, pursuant to the terms of a previous consulting
agreement with TriPoint, Werke Pharmaceuticals, Inc., our wholly owned
subsidiary issued TriPoint 500,000 shares of its common stock, which shares were
exchanged pursuant to the terms of our share exchange agreement with the
shareholders of Werke Pharmaceuticals, Inc. into shares of AXM Pharma common
stock. In addition, Werke Pharmaceuticals, Inc. is party to a consulting
agreement with Investor Communications Company, LLC, a company in which Mark
Elenowitz directly benefits from 20% of the stock compensation received from AXM
Pharma. Pursuant to the terms of the consulting agreement, Werke
Pharmaceuticals, Inc. is required to pay Investor Communications Company, LLC a
monthly fee of $5,000 and issued to Investor Communications Company, LLC 120,000
shares of its common stock which were subsequently converted into shares of AXM
Pharma common stock as a result of the Share Exchange.
In September 2003, we engaged Amaroq Capital, LLC, to provide advice regarding
business development and to identify and review potential merger and acquisition
candidates in Asia. Amaroq Capital will be paid $5,000 per month for its
services and is entitled to receive additional compensation in connection with
mergers or acquisitions that it identifies or for which it provides substantive
assistance to AXM Pharma. The current agreement with Amaroq Capital is for a
six- month term and is terminable only upon the mutual written consent of AXM
Pharma and Amaroq Capital. Amaroq Capital is owned by Joseph Cunningham, brother
of Peter Cunningham, our President and Chief Executive Officer.
In April 2003, we engaged Rabelaisian Resources, Plc., to provide consulting
services for AXM Pharma. Rabelaisian Resources' agreement expired in August
2003. Rabelaisian Resources is owned by Peter Cunningham, who is currently our
President and Chief Executive Officer. In August 2003, Mr. Cunningham was hired
as our Chief Operating Officer and was promoted to the positions of President
and Chief Executive Officer following the resignation of That Ngo from such
positions in September 2003.
NOTE 7 - VALUE ADDED TAX PAYABLE
AXM Pharma is subject to Chinese value added tax at a rate of 17% on product
sales. Value added tax payable on sales is computed net of value added tax paid
on purchases for all domestic sales.
NOTE 8 - DISTRIBUTION OF PROFITS
As stipulated by the relevant laws and regulations applicable to China's foreign
investment enterprises, AXM Pharma is required to make appropriations from net
income as determined under accounting principles generally accepted in the PRC
("PRC GAAP") to non-distributable reserves which include a general reserve, an
enterprises expansion reserve and employee welfare and bonus reserves.
The general reserve is used to offset future extraordinary losses as defined
under PRC GAAP. AXM Pharma may, upon a resolution passed by the owners, convert
the general reserve into capital. The employee welfare and bonus reserve is used
for the collective welfare of the employees of AXM Pharma. The enterprise
expansion reserve is used for the expansion of AXM Pharma and can be converted
to capital subject to approval by the relevant authorities. AXM Pharma did not
record any reserves in 2003 and 2002. AXM Pharma incurred losses under
accounting principles generally accepted under the PRC. Therefore, AXM Pharma
was not required to record such reserves. No such adjustments are required under
accounting principles generally accepted in the United States of America in 2003
and 2002.
NOTE 9 - EMPLOYEE RETIREMENT BENEFITS AND POST RETIREMENT BENEFITS
AXM Pharma's employees in the PRC are entitled to retirement benefits calculated
with reference to their basic salaries on retirement and their length of service
in accordance with a government managed benefits plan. The PRC government is
responsible for the benefit liability to these retired employees. AXM Pharma is
required to make contributions to the state retirement plan based on 19% of the
employees' monthly basic salaries. Because AXM Pharma only has temporary staff
for the years ended 2003 and 2002, AXM Pharma is not obligated under any
contributions to the state retirement. AXM Pharma does not have any other post
retirement benefit plans and does not provide any post-employment benefits.
NOTE 10 - COMMITMENTS
In August 2003, we entered into an employment agreement with Peter Cunningham,
our President and Chief Executive Officer. Although he was originally hired to
serve as our Chief Operating Officer, in September 2003, Mr. Cunningham was
promoted to the positions of President and Chief Executive Officer. At the time
of his promotion, other than the change in his responsibilities, the terms of
Mr. Cunningham's employment agreement remained the same. Pursuant to the terms
of his agreement with AXM Pharma, Mr. Cunningham shall be paid not less than
$120,000 per year for his services. In January 2004, our Board of Directors
increased Mr. Cunningham's salary from $120,000 per year to $240,000 per year.
In addition, Mr. Cunningham is entitled to receive a stock grant of 250,000
shares of our common stock, which shall be issued and vest in equal installments
every six months (41,667 per six month period) beginning in August 2003. The
term of Mr. Cunningham's agreement with AXM Pharma is one year, but the
agreement shall automatically renew on the first and second anniversary dates of
the agreement unless either AXM Pharma or Mr. Cunningham provides written notice
to the other not less than 60 days prior to the anniversary date that they do
not wish to renew the agreement, in which case the agreement shall expire on the
day prior to the anniversary date. The employment agreement may be terminated
for good cause by either party in the event of a material breach of the
employment agreement by either party or in the case of a change in control of
AXM Pharma. In the event of termination with good cause by Mr. Cunningham or
without good cause by AXM Pharma, Mr. Cunningham is entitled to three months
severance plus bonus and incentives earned to that date and relocation to Los
Angeles, California. In the event that Mr. Cunningham is terminated for good
cause by AXM Pharma or terminates the agreement without good cause he will only
be entitled to payment of his salary, bonus and incentives earned to the date of
termination and relocation to Los Angeles, California. Mr. Cunningham's
agreement requires that he keep confidential any proprietary information
acquired while employed and upon termination of his employment. He is also
prohibited from soliciting any employees of AXM Pharma for a period of one year
following his termination for any reason.
In September 2003, we entered into employment agreement with Lan Hao, our Chief
Financial Officer. Pursuant to the terms of his agreement with AXM Pharma, Mr.
Hao is entitled to be paid $120,000 per year for his services. In addition, Mr.
Hao received a stock grant of 100,000, issued in December 2003, shares of our
common stock, health insurance and such other bonus and incentives as the Board
of Directors, in its discretion, shall authorize. The term of Mr. Hao's
employment agreement is one year but the agreement may be terminated by either
party with or without cause on 30 days written notice. In the event of
termination with good cause by Mr. Hao or without good cause by AXM Pharma, Mr.
Hao is entitled to three months severance plus bonus and incentives earned to
that date. In the event that Mr. Hao is terminated for good cause by AXM Pharma
or terminates the agreement without good cause he will only be entitled to
payment of his salary, bonus and incentives earned to the date of termination.
Mr. Hao is not subject to any restrictive covenants in his employment agreement.
Mr. Hao's employment agreement may be extended by mutual written consent of AXM
Pharma and Mr. Hao.
NOTE 11 - SUBSEQUENT EVENTS
Stock Option Plans
In January of 2004, our Board of Directors approved the "2004 Qualified and
Nonstatutory Stock Option Plan." The Board of Directors reserved 3,000,000
shares of AXM Pharma's common stock to be issued in the form of incentive and/or
non-qualified stock options for employees, directors and consultants to AXM
Pharma. As of January 2004, our Board of Directors, authorized the issuance of
2,040,000 options to employees, directors and consultants. The stock option plan
and the options authorized there under are subject to ratification of the stock
option plan by our Shareholders at our next annual meeting.
Private Equity Financings
In January 2004, AXM Pharma, Inc. completed a private equity financing of
$1,935,000, with two accredited investors. Net proceeds from the offering after
estimated costs and expenses, including fees of the placement agent, are
approximately $1,740,000. We issued 860,000 shares of our Series B Preferred
Stock, $.001 par value per share, at a price per share of $2.25 and 1,000,000
Common Stock Purchase Warrants (the "Warrants"), each of which entitles the
holder to purchase one share of our common stock, $.001 par value, for a period
of five years from the date of issuance at a price of $3.00 per share. Each
share of Series B Preferred Stock is convertible, at the option of the holder,
into one share of common stock, subject to adjustment for certain occurrences.
In addition to its fees and expenses, the placement agent, or its assigns,
received a five-year warrant to purchase up to 86,000 shares of AXM Pharma's
Series B Preferred Stock at a price of $2.25 per share and up to 100,000
Warrants on a pro-rata basis to the number of shares of Preferred Stock
purchased upon exercise. AXM Pharma is obligated to file a registration
statement within six months the closing covering the shares of common stock
issuable upon conversion of the Series B Preferred Stock and exercise of the
Warrants.
On June 24, 2004, we completed a private equity financing of $3,042,500 with 11
accredited investors. After payment of costs and expenses, including fees of the
placement agent, we received net proceeds of approximately $2,773,800. We issued
30.425 shares of our Series C Preferred Stock, $.001 par value per share, at a
price per share of $100,000 and 357,936 common stock purchase warrants, each of
which entitles the holder to purchase one share of our common stock, $.001 par
value, for a period of three years from the date of issuance at an exercise
price equal to $5.50 per share. Each share of the preferred stock is convertible
into a number of fully paid and non-assessable shares of our common stock
obtained by dividing the face value of $100,000 per share by the fixed
conversion price of $4.25 per share. The warrants are redeemable by AXM Pharma
under certain circumstances.
Common Stock for Services
On May 10, 2004, we issued 300,000 shares of restricted common shares valued at
$1,176,000 pursuant to an agreement with Madden Consulting to provide investor
relations services. The shares were issued pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act for issuances not
involving a public offering. The shares were valued at $3.92 per share, the
market price for shares of our common stock at the time of issuance.
On May 7, 2004, we issued 120,000 shares of restricted common to XCL Partners
valued at $490,800 pursuant to an agreement with XCL Partners to provide
investor relations services. The shares were issued pursuant to the exemption
from registration provided by Section 4(2) of the Securities Act for issuances
not involving a public offering. The shares were valued at $4.09 per share, the
market price for shares of our common stock at the time of issuance.
On March 12, 2004, we issued 100,000 shares of restricted common 50,000 warrants
to Great Eastern Securities, Inc. pursuant to an investment banking agreement.
The shares are to be released quarterly based upon a vesting schedule of 25,000
shares per quarter during the term of the agreement. Investor relation services
are to be provided under the agreement, which was executed on December 18, 2003.
The warrants are for a term of five years and have an exercise price equal to
$4.74 per share. The services to be provided under the agreement are to assist
AXM Pharma with broker relations for our stock. The shares were issued pursuant
to the exemption from registration provided by Section 4(2) of the Securities
Act for issuances not involving a public offering. The shares were valued at
$5.65 per share, the market price for shares of our common stock at the time of
issuance. Therefore, the total aggregate value of the consideration paid to
Great Eastern Securities, Inc. was $565,000.
Conversions of Preferred Stock and Warrant Exercises
During the third quarter, AXM Pharma issued shares of common stock in connection
with the following conversions of its Series A Preferred Stock and exercise of
Common Stock purchase warrants. AXM Pharma issued 200,000 shares of common stock
for the conversion of 200,000 shares of Series A Preferred Stock. AXM Pharma
issued 20,000 shares of common stock for the exercise of warrants for proceeds
of $40,000.
Product Licenses
Due to new State Food and Drug Administration guidelines, we are now required to
obtain Chinese Good Manufacturing Practices certification and renew our licenses
to manufacture and sell our existing products at the national level, as opposed
to the state and local level as had been required in the past. Because our
national approval license applications were not submitted until April 2004, we
have been unable to continue manufacturing and selling these items until we
receive approval from the State Food and Drug Administration. Under the
proscribed timeline for the approval process of national licenses (more than 100
working days from submission thereof), we expect to receive approval of our
applications in October 2004 and to restart production of these products at that
time. We have requested accelerated approval of our application for national
registration approval number and hope that the renewal will be granted in
advance of the inspection of our new factory for Chinese Good Manufacturing
Certification scheduled for the fourth quarter of 2004.
In addition to the licenses for the products listed above, we acquired the
rights to Qiyao, an adjunctive therapy for Type II diabetes; Tong Yang, an
anti-fatigue functional food; Sunkist Vitamin Range; and, Whisper Feminine
Hygiene Wash. We intend to manufacture, market and sell these products in the
future, when we enter into appropriate marketing and distribution agreements. On
July 29, 2004 we entered into a distribution agreement with China Zuellig
Xinxing Pharmaceutical Company Limited. Zuellig Xinxing has the exclusive right
to distribute and sell our Whisper Feminine Hygiene Wash in Beijing. The term of
the agreement is one year, however it can be extended for an additional year on
each anniversary of the date the agreement was entered into. We have finalized
the plan with 40 product promoters for the test launch of Whisper Feminine
Hygiene Wash in the top 100 pharmacies in Beijing. We have already met with
three of the largest chain retail pharmacies in Beijing, namely, Golden
Elephant, Chaoyang Dispatching (Yiyuan Tang), and Beijing Medical Group
(Yibaoquanxing), all of whom we believe are enthusiastic and eager to carry our
product in their stores. Zuellig Xinxing has also agreed to try to expand
distribution of our product to more pharmacies. We are currently negotiating to
import additional products under our Sunkist Agreement. It is our intention to
begin importing these products sometime in the third or fourth quarter of this
fiscal year.
Although our new sales and marketing initiatives have been delayed until later
in the third and fourth quarters of 2004, management remains confident that the
activities currently being completed in China will position us to be able to
execute a solid growth plan of increased sales and earnings during the 4th
quarter of 2004 and on into 2005. Management recognizes that 2004 is a
significant transition year, where we are transforming a localized
privately-owned pharmaceutical company into an international company with state
of the art manufacturing facilities, nation-wide distribution reach and new
globally recognized branded products. Delays in the actual launch of our new
products, which is the culmination of our efforts over the past year, is typical
within emerging markets and the pharmaceutical industry as a whole.
Exhibit 10.11
AXM PHARMA, INC.
Incentive and Nonstatutory Stock Option Plan
A. Purpose
This Incentive and Nonstatutory Stock Option Plan (the "Plan") is intended to
further the growth and financial success of AXM Pharma, Inc. (the "Corporation")
by providing additional incentives to directors, executives and selected
employees of and consultants to the Corporation so that such participants may
acquire or increase their proprietary interest in the Corporation. The term
"Corporation" shall include any parent corporation or subsidiary corporation of
the Corporation as those terms are defined in Section 424(e) and (f) of the
Internal Revenue Code of 1986, as amended (the "Code"). Stock options granted
under the Plan ("Options") may be either "Incentive Stock Options", as defined
in Code section 422 and any regulations promulgated under that Section, or
"Nonstatutory Options" at the discretion of the Board of Directors of the
Corporation (the "Board") and as reflected in the respective written stock
option agreements granted pursuant to this Plan.
B. Administration
The Plan shall be administered by the Board; provided however, that the Board
may delegate such administration to a committee of not fewer than two members
(the "Committee"), each of whom is a member of the Board and all of whom are
disinterested persons, as contemplated by Rule 16b-3 ("Rule 16b-3") promulgated
under the Securities Exchange Act of 1934, as amended ("Exchange Act").
Subject to the provisions of the Plan, the Board and/or the Committee shall have
authority to (a) grant, in its discretion, Incentive Stock Options in accordance
with Code section 422 or Nonstatutory Options; (b) determine in good faith the
fair market value of the stock covered by an Option; (c) determine which
eligible persons shall be granted Options, the number of shares to be covered by
the Options and the restrictions, terms and conditions thereof; (d) construe and
interpret the Plan; (e) promulgate, amend and rescind rules and regulations
relating to its administration, and correct defects, omissions and
inconsistencies in the Plan or any Option; (f) consistent with the Plan and with
the consent of the Optionee, as appropriate, amend any outstanding Option or
amend the exercise date or dates; (g) determine the duration and purpose of
leaves of absence which may be granted to Optionees without constituting
termination of their employment for the purpose of the Plan; and (h) make all
other determinations necessary or advisable for the Plan's administration. The
interpretation and construction by the Board of any provisions of the Plan or of
any Option it shall be conclusive and final. No member of the Board or the
Committee shall be liable for any action or determination made in good faith
with respect to the Plan or any Option.
C. Eligibility
The persons who shall be eligible to receive Options shall be directors,
officers and employees of the Corporation and consultants to the Corporation
("Optionees"). The term consultant shall mean any person, other than an
employee, who is engaged by the Corporation to render services and is
compensated for such services, and any director of the Corporation whether or
not compensated for such services; provided that, if the Corporation registers
any of its securities pursuant to the Exchange Act, the term consultant shall
thereafter not include directors who are not compensated for their services or
are paid only a director fee by the Corporation.
(a) Incentive Stock Options. Incentive Stock Options may only be issued to
employees of the Corporation. Incentive Stock Options may be granted to officers
or directors, provided they are also employees of the Corporation. Payment of a
director's fee shall not be sufficient to constitute employment by the
Corporation. Any grant of option, subsequent to the first registration of any of
the securities of the Corporation under the Securities Act, may at the
discretion of the Board be made subject to certain conditions, including,
without limitation, condition which are intended to avoid the imposition of
liability under Section 16(b) of the 1934 Act. An Optionee may hold more than
one Option.
The Corporation shall not grant an Incentive Stock Option under the Plan to any
employee if the grant would result in the employee holding the right to exercise
for the first time in any one calendar year, under all Incentive Stock Options
granted under the Plan or any other plan maintained by the Corporation, Options
with respect to shares of stock having an aggregate fair market value,
determined as of the date the Option is granted, in excess of $100,000. Should
it be determined that an Incentive Stock Option granted under the Plan exceeds
such maximum for any reason other than a failure in good faith to value the
stock subject to such Option, the excess portion of the Option shall be
considered a Nonstatutory Option. To the extent the employee holds two or more
such Options which become exercisable for the first time in the same calendar
year, the foregoing limitation on the exercisability of such Option as Incentive
Stock Options under the Federal tax laws shall be applied on the basis of the
order in which the Options are granted. If, for any reason, an entire option
does not qualify as an Incentive Stock Option by reason of exceeding such
maximum, that option shall be considered a Nonstatutory Option.
(b) Nonstatutory Option. The provisions of Section 3(a) shall not apply to any
Option designated as a "Nonstatutory Stock Option Agreement" or which sets forth
the intention of the parties that the option be a Nonstatutory Option.
D. Stock
The stock subject to Options shall be shares of the Corporation's authorized but
unissued or reacquired common stock (the "Stock").
(a) Number of Shares. Subject to adjustment as provided in Paragraph 5(i) of
this Plan, the total number of shares of Stock which may be purchased through
exercise of Options granted under this Plan shall not exceed 3,000,000. If any
Option shall for any reason terminate or expire, any shares allocated thereto
but remaining unpurchased upon such expiration or termination shall again be
available for the grant of Options with respect to that Option under the Plan as
though no Option had been granted with respect to such shares. Any shares of
Stock issued pursuant to an Option and repurchased pursuant to the terms of the
Option shall be available for future Options as though not previously covered by
an Option.
(b) Reservation of Shares. The Corporation shall reserve and keep available at
all times during the term of the Plan such number of shares as shall be
sufficient to satisfy the requirements of the Plan. If, after reasonable
efforts, which efforts shall not include the registration of the Plan or Options
under the Securities Act, the Corporation is unable to obtain authority from any
applicable regulatory body, which authorization is deemed necessary by legal
counsel for the Corporation for the lawful issuance of shares hereunder, the
Corporation shall be relieved of any liability with respect to its failure to
issue and sell the shares for which such requisite authority was deemed
necessary unless and until the authority is obtained.
(c) Application of Funds. The proceeds received by the Corporation from the sale
of Stock pursuant to the exercise of Options will be used for general corporate
purposes.
(d) No Obligation to Exercise Option. The granting of an Option shall impose no
obligation upon the Optionee to exercise such Option.
(e) Adjustment of Shares. In the event of any change in the outstanding Stock by
reason of a stock split, stock dividend, combination, subdivision or
reclassification of shares, recapitalization, merger, or similar event, the
Board or the Committee may adjust proportionately (a) the number of shares of
Stock reserved under the Plan and available for Incentive Stock Options and
Nonstatutory Options; and (b) the exercise prices related to outstanding
Options. In the event of any other change affecting the Stock or any
distribution (other than normal cash dividends) to holders of Stock, such
adjustments as may be deemed equitable by the Board or the Committee, including
adjustments to avoid fractional shares, shall be made to give proper effect to
such event. In the event of a corporate merger, consolidation, acquisition of
property or stock, separation, reorganization or liquidation, the Board or the
Committee shall be authorized to issue or assume Options, whether or not in a
transaction to which Code section 424(a) applies, by means of substitution of
new Options for previously issued Options or an assumption of previously issued
Options.
E. Terms and Conditions of Options
Options granted hereunder shall be evidenced by agreements between the
Corporation and the respective Optionees, in such form and substance as the
Board or Committee shall from time to time approve. Such agreements need not be
identical, and in each case may include such provisions as the Board or
Committee may determine, but all such agreements shall be subject to and limited
by the following terms and conditions:
(a) Number of Shares. Each Option shall state the number of shares to which it
pertains.
(b) Option Price. Each Option shall state the exercise price, which shall be
determined as follows:
(i) Any Stock Option granted to a person who at the time the Option is granted
owns (or is deemed to own pursuant to Code section 424(d)) stock possessing more
than ten percent (10%) of the total combined voting power or value of all
classes of stock of the Corporation, ("Ten Percent Holder") shall have an
exercise price of no less than one hundred ten percent (110%) of the fair market
value of the common stock as of the date of grant; and
(ii) Incentive Stock Options granted to a person who at the time the Option is
granted is not a Ten Percent Holder shall have an exercise price of no less than
one hundred percent (100%) of the fair market value of the common stock as of
the date of grant.
(iii) Nonstatutory Options granted to a person who at the time the Option is
granted is not a Ten Percent Holder shall have an exercise price of no less than
eighty-five percent (85%) of the fair market value of the common stock as of the
date of grant. For the purposes of this Paragraph 5(b), the fair market value
shall be as determined by the Board, in good faith, which determination shall be
conclusive and binding; provided however, that if there is a public market for
the Stock, the fair market value per share shall be the average of the bid and
asked prices (or the closing price if the stock is listed on the NASDAQ National
Market System) on the date of grant of the Option, or if listed on a stock
exchange, the closing price on such exchange on the date of grant.
(c) Medium and Time of Payment. The Option exercise price shall become
immediately due upon exercise of the Option and shall be paid in cash or check
made payable to the Corporation. Should the Corporation's outstanding common
stock be registered under Section 12(g) of the Exchange Act at the time the
Option is exercised, then the exercise price may also be paid as follows:
(i) in shares of Stock held by the Optionee for the requisite period necessary
to avoid a charge to the Corporation's earnings for financial reporting purposes
and valued at fair market value on the exercise date, or
(ii) through a special sale and remittance procedure pursuant to which the
Optionee shall concurrently provide irrevocable written instructions (a) to a
Corporation designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable Federal,
state and local income and employment taxes required to be withheld by the
Corporation by reason of such purchase, and (b) to the Corporation to deliver
the certificates for the purchased shares directly to such brokerage firm in
order to complete the sale transaction.
At the discretion of the Board, exercisable either at the time of Option grant
or of Option exercise, the exercise price may also be paid (i) by Optionee's
delivery of a promissory note in form and substance satisfactory to the
Corporation and permissible under the Nevada Securities Regulations and bearing
interest at a rate determined by the Board in its sole discretion, but in no
event less than the minimum rate of interest required to avoid the imputation of
compensation income to the Optionee under the Federal tax laws, or (ii) in such
other form of consideration permitted by the Nevada Corporation Laws as may be
acceptable to the Board.
(d) Term and Exercise of Options. Any Option granted to an Employee of the
Corporation shall become exercisable over a period of no longer than 5 years,
and no less than twenty percent (20%) of the shares covered thereby shall become
exercisable annually. No Option shall be exercisable, in whole or in part, prior
to one (1) year from the date it is granted unless the Board shall specifically
determine otherwise, as provided herein. In no event shall any Option be
exercisable after the expiration of 10 years from the date it is granted, and no
Incentive Stock Option granted to a Ten Percent Holder shall, by its terms, be
exercisable after the expiration of 5 years from the date of the Option. Unless
otherwise specified by the Board or the Committee in the resolution authorizing
such Option, the date of grant of an Option shall be deemed to be the date upon
which the Board or the Committee authorizes the granting of the Option.
Each Option shall be exercisable to the nearest whole share, in installments or
otherwise, as the respective Option agreements may provide. During the lifetime
of an Optionee, the Option shall be exercisable only by the Optionee and shall
not be assignable or transferable by the Optionee, and no other person shall
acquire any rights therein. To the extent not exercised, installments (if more
than one) shall accumulate, but shall be exercisable, in whole or in part, only
during the period for exercise as stated in the Option agreement, whether or not
other installments are then exercisable.
(e) Termination of Status as Employee, Consultant or Director. If Optionee's
status as an employee shall terminate for any reason other than Optionee's
disability or death, then Optionee (or if the Optionee shall die after such
termination, but prior to exercise, Optionee's personal representative or the
person entitled to succeed to the Option) shall have the right to exercise the
portions of any of Optionee's Incentive Stock Options which were exercisable as
of the date of such termination, in whole or in part, not less than 30 days nor
more than three (3) months after such termination, or, in the event of
"termination for cause" (as that term is defined in Nevada Labor Code and case
law related thereto) or by the terms of the Plan or the Option Agreement or an
employment agreement, the Option shall automatically terminate as of the
termination of employment as to all shares covered by the Option.
With respect to Nonstatutory Options granted to employees, directors or
consultants, the Board may specify such period for exercise, not less than 30
days except that in the case of "termination for cause" or removal of a director
pursuant to the Nevada Corporation Laws, the Option shall automatically
terminate as of the termination of employment or services as to shares covered
by the Option, following termination of employment or services as the Board
deems reasonable and appropriate. The Option may be exercised only with respect
to installments that the Optionee could have exercised at the date of
termination of employment or services. Nothing contained herein or in any Option
granted pursuant hereto shall be construed to affect or restrict in any way the
right of the Corporation to terminate the employment or services of an Optionee
with or without cause.
(f) Disability of Optionee. If an Optionee is disabled (within the meaning of
Code section 22(e)(3)) at the time of termination, the three (3) month period
set forth in Paragraph 5(e) shall be a period, as determined by the Board and
set forth in the Option, of not less than 6 months nor more than one year.
(g) Death of Optionee. If an Optionee dies while employed by, engaged as a
consultant to or serving as a Director of the Corporation, the portion of the
Optionee's Option which was exercisable at the date of death may be exercised,
in whole or in part, by the estate of the decedent or by a person succeeding to
the right to exercise the Option at any time within (i) a period, as determined
by the Board and set forth in the Option, of not less than three months nor more
than ten year after Optionee's death, which period shall not be more, in the
case of a Nonstatutory Option, than the period for exercise following
termination of employment or services, or (ii) during the remaining term of the
Option, whichever is the lesser. The Option may be so exercised only with
respect to installments exercisable at the time of Optionee's death and not
previously exercised by the Optionee.
(h) Nontransferability of Option. No Option shall be transferable by the
Optionee, except by will or by the laws of descent and distribution.
(i) Recapitalization. Subject to any required action of shareholders, the number
of shares covered by each outstanding Option, and the exercise price per share
set forth in each Option, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Stock resulting from a subdivision or
consolidation of shares or the payment of a stock dividend, or any other
increase or decrease in the number of such shares affected without receipt of
consideration by the Corporation; provided, however, the conversion of any
convertible securities of the Corporation shall not be deemed to have been
effected without receipt of consideration by the Corporation.
In the event a proposed dissolution or liquidation of the Corporation, a merger
or consolidation in which the Corporation is not the surviving entity, or a sale
of all or substantially all of the assets or capital stock of the Corporation
(collectively, a "Reorganization"), unless otherwise provided by the Board, this
Option shall terminate immediately prior to such date as is determined by the
Board, which date shall be no later than the consummation of the Reorganization.
In such event, if the entity which shall be the surviving entity does not tender
to Optionee an offer, having no obligation to do so, to substitute for any
unexercised Option a stock option or capital stock of the surviving entity, as
applicable, which on an equitable basis shall provide the Optionee with
substantially the same economic benefit as the unexercised Option, then the
Board may grant to the Optionee, in its sole and absolute discretion and without
obligation, the right for a period commencing 30 days prior to and ending
immediately prior to the date determined by the Board pursuant hereto for
termination of the Option or during the remaining term of the Option, whichever
is the lesser, to exercise any unexpired Option or Options without regard to the
installment provisions of Paragraph 5(d) of the Plan; provided, that any such
right granted shall be granted to all Optionees not receiving an offer to
receive substitute options on a consistent basis, and provided further, that any
such exercise shall be subject to the consummation of the Reorganization.
Subject to any required action of stockholders, if the Corporation shall be the
surviving entity in any merger or consolidation, each outstanding Option
thereafter shall pertain to and apply to the securities to which a holder of
shares of Stock equal to the shares subject to the Option would have been
entitled by reason of the merger or consolidation.
In the event of a change in the Stock as presently constituted, which is limited
to a change of all of its authorized shares without par value into the same
number of shares with a par value, the shares resulting from any such change
shall be deemed to be the Stock within the meaning of the Plan.
To the extent that the foregoing adjustments relate to stock or securities of
the Corporation, such adjustments shall be made by the Board, whose
determination in that respect shall be final, binding and conclusive. Except as
expressly provided in this Paragraph 5(i), the Optionee shall have no rights by
reason of any subdivision or consolidation of shares of stock of any class or
the payment of any stock dividend or any other increase or decrease in the
number of shares of stock of any class, and the number or price of shares of
Stock subject to any Option shall not be affected by, and no adjustment shall be
made by reason of, any dissolution, liquidation, merger, consolidation or sale
of assets or capital stock, or any issue by the Corporation of shares of stock
of any class or securities convertible into shares of stock of any class.
The grant of an Option pursuant to the Plan shall not affect in any way the
right or power of the Corporation to make any adjustments, reclassifications,
reorganizations or changes in its capital or business structure or to merge,
consolidate, dissolve, or liquidate or to sell or transfer all or any part of
its business or assets.
(j) Rights as a Stockholder. An Optionee shall have no rights as a stockholder
with respect to any shares covered by an Option until the effective date of the
issuance of the shares following exercise of this Option by Optionee. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distributions or other rights for which
the record date is prior to the date such stock certificate is issued, except as
expressly provided in Paragraph 5(i) of this Plan.
(k) Modification, Acceleration, Extension, and Renewal of Options. Subject to
the terms and conditions and within the limitations of the Plan, the Board may
modify an Option, or once an Option is exercisable, accelerate the rate at which
it may be exercised, and may extend or renew outstanding Options granted under
the Plan or accept the surrender of outstanding Options (to the extent not yet
exercised) and authorize the granting of new Options in substitution for such
Options, provided such action is permissible under Code and under the Corporate
Securities Rules of the Nevada Corporations Commissioner. Notwithstanding the
provisions of this Paragraph 5(k), however, no modification of an Option shall,
without the consent of the Optionee, alter to the Optionee's detriment or impair
any rights or obligations under any Option theretofore granted under the Plan.
(l) Exercise Before Exercise Date. At the discretion of the Board, the Option
may, but need not, include a provision whereby the Optionee may elect to
exercise all or any portion of the Option prior to the stated exercise date of
the Option or any installment thereof. Any shares so purchased prior to the
stated exercise date shall be subject to repurchase by the Corporation upon
termination of Optionee's employment as contemplated by Paragraphs 5(n) of this
Plan prior to the exercise date stated in the Option and such other restrictions
and conditions as the Board or Committee may deem advisable.
(m) Reacquisition, Replacement and Reissuance of Options. (a) The Board or the
Committee, with or without the consent of the Optionee, may at any time cause
the Corporation to reacquire and cancel any outstanding and unexercised Option,
or any portion therefor. In such event, the Corporation shall pay to such
Optionee an amount in cash equal to the excess (if any) of (i) the fair market
value of the shares of Stock subject to such Option, or portion thereof, at the
time of reacquisition, over (ii) the option price of such Option, or portion
thereof. The Corporation may withhold from any such payment applicable taxes and
other amounts. The shares of Stock subject to such Option, or portion thereof,
reacquired and canceled in consideration for a cash payment to an Optionee shall
not again be available for option under the Plan. In the event that the exercise
price of such Option, or portion thereof, exceeds the fair market value of the
shares of Stock subject to such Option, or portion thereof, at the time of
reacquisition, such Option may be reacquired and canceled by the Company without
payment therefor. The shares of Stock subject to such Option, or portion
thereof, reacquired and canceled without payment therefor to the Optionee, may
again be subject to an Option under the Plan.
(n) Other Provisions. The Option agreements authorized under this Plan shall
contain such other provisions, including, without limitation, restrictions upon
the exercise of the Options, as the Board or the Committee shall deem advisable.
Shares shall not be issued pursuant to the exercise of an Option, if the
exercise of such Option or the issuance of shares thereunder would violate, in
the opinion of legal counsel for the Corporation, the provisions of any
applicable law or the rules or regulations of any applicable governmental or
administrative agency or body, such as the Code, the Securities Act, the
Exchange Act, the Nevada Securities Rules, and the rules promulgated under the
foregoing or the rules and regulations of any exchange upon which the shares of
the Corporation are listed. Without limiting the generality of the foregoing,
the exercise of each Option shall be subject to the condition that if at any
time the Corporation shall determine that (i) the satisfaction of withholding
tax or other similar liabilities, or (ii) the listing, registration or
qualification of any shares covered by such exercise upon any securities
exchange or under any state or federal law, or (iii) the consent or approval of
any regulatory body, or (iv) the perfection of any exemption from any such
withholding, listing, registration, qualification, consent or approval is
necessary or desirable in connection with such exercise or the issuance of
shares thereunder, then in any such event, such exercise shall not be effective
unless the withholding, listing registration, qualification, consent, approval
or exemption shall have been effected, obtained or perfected free of any
conditions not acceptable to the Corporation.
(o) Repurchase Agreement. The Board may, in its discretion, require as a
condition to the grant of an Option under this Plan, that an Optionee execute an
agreement with the Corporation, in form and substance satisfactory to the Board
in its discretion ("Repurchase Agreement"), (i) restricting the Optionee's right
to transfer shares purchased under the Option without first offering the shares
to the Corporation or another stockholder of the Corporation upon the same terms
and conditions as provided therein; and (ii) providing that upon termination of
Optionee's employment with the Corporation, for any reason, the Corporation (or
another stockholder of the Corporation, as provided in the Repurchase Agreement)
shall have the right at its discretion (or the discretion of such other
shareholders) to purchase and/or redeem all such shares owned by the Optionee on
the date of termination of his or her employment at a price equal to (A) the
fair value of the shares as of such date of termination, or (B) if such
repurchase right lapses at twenty percent (20%) of the number of shares per
year, the original purchase price of such shares, and upon terms of payment
permissible under the Nevada Securities Rules; provided that in the case of
Options or Stock Awards granted to officers, directors, consultants or
affiliates of the Company, such repurchase provisions may be subject to
additional or greater restrictions as determined by the Board or Committee.
(p) Investment Intent. Unless and until the issuance and sale of the shares
subject to the Plan are registered under the Securities Act or shall be exempt
pursuant to the rules promulgated thereunder, each Option under the Plan shall
provide that the purchases of shares thereunder shall be for investment purposes
and not with a view to, or for resale in connection with, any distribution
thereof. Further, unless the issuance and sale of the stock have been registered
under the Securities Act, each Option shall provide that no shares shall be
purchased upon the exercise of such Option unless and until (i) any then
applicable requirements of state and federal laws and regulatory agencies shall
have been fully complied with to the satisfaction of the Corporation and its
counsel, and (ii) if requested to do so by the Corporation, the person
exercising the Option shall (i) give written assurances as to knowledge and
experience of such person (or a representative employed by such person) in
financial and business matters and the ability of such person (or
representative) to evaluate the merits and risks of exercising the Option, and
(ii) execute and deliver to the Corporation a letter of investment intent and/or
such other form related to applicable exemptions from registration, all in such
form and substance as the Corporation may require. If shares are issued upon
exercise of an Option without registration under the Securities Act, subsequent
registration of the shares shall relieve the purchaser of any investment
restrictions or representations made upon the exercise of such Options.
(q) Tax Withholding. The Company shall have the right to deduct applicable taxes
from any Option payment and withhold, at the time of delivery or exercise of
Options or vesting of shares under such Options, an appropriate number of shares
for payment of taxes required by law or to take such other action as may be
necessary in the opinion of the Company to satisfy all obligations for
withholding of such taxes. If Stock is used to satisfy tax withholding, the
Stock shall be valued based on the fair market value of the Stock when the tax
withholding is required to be made.
F. Amendment and Termination of Plan
The Board may, insofar as permitted by law, from time to time, with respect to
any shares at the time not subject to Options, suspend or terminate the Plan or
revise or amend it in any respect whatsoever, except that without the approval
of the shareholders of the Corporation, no such revision or amendment shall (i)
increase the number of shares subject to the Plan, (ii) decrease the price at
which Options may be granted, (iii) materially increase the benefits to
Optionees, or (iv) change the class of persons eligible to receive Options under
the Plan; provided, however, no such action shall alter or impair the rights and
obligations under any Option outstanding as of the date thereof without the
written consent of the Optionee thereunder. No Option may be granted while the
Plan is suspended or after it is terminated, but the rights and obligations
under any Option granted while the Plan is in effect shall not be impaired by
suspension or termination of the Plan.
G. Availability of Information
During the term of the Plan and any additional period during which an Option
granted pursuant to the Plan shall be exercisable, the Corporation shall make
available, not later than 90 days following the close of each of its fiscal
years, such financial and other information regarding the Corporation as is
required by the bylaws of the Corporation and applicable law to be furnished in
an annual report to the stockholders of the Corporation.
H. Notices
All notices, requests, demands, and other communications pursuant to this Plan
shall be in writing and shall be deemed to have been duly given on the date of
service if served personally on the party to whom notice is to be given, or on
the third day following mailing to the party to whom notice is to be given, by
first class mail, registered or certified, postage prepaid.
I. Indemnification of Board
In addition to such other rights or indemnifications as they may have as
directors or otherwise, and to the extent allowed by applicable law, the members
of the Board and the Committee shall be indemnified by the Corporation against
the reasonable expenses, including attorney fees, actually and necessarily
incurred in connection with the defense of any claim, action, suit or
proceeding, or in connection with any appeal thereof, to which they or any of
them may be a party by reason of any action taken, or failure to act, under or
in connection with the Plan or any Option granted under the Plan, and against
all amounts paid by them in settlement thereof (provided the settlement is
approved by independent legal counsel selected by the Corporation) or paid by
them in satisfaction of a judgment in any such claim, action, suit or
proceeding, except in any case in relation to matters as to which it shall be
adjudged in such claim, action, suit or proceeding that the Board or Committee
member is liable for negligence or misconduct in the performance of his or her
duties; provided that within seven days after institution of any such action,
suit or Board proceeding the member involved shall offer the Corporation, in
writing, the opportunity, at its own expense, to handle and defend the same.
J. Governing Law
The Plan and all determinations made and actions taken pursuant to it, to the
extent not otherwise governed by the Code or the securities laws of the United
States, shall be governed by the laws of the State of Nevada and construed
accordingly.
Exhibit 14.1
AXM PHARMA, INC.
CODE OF ETHICS FOR DIRECTORS
The Board of Directors has adopted this Code of Ethics (the "Code') as a set of
guidelines for AXM Pharma, Inc. ("Company") directors, intended to promote
ethical behavior and to provide guidance to help directors recognize and deal
with ethical issues.
The business of the Company is managed under the direction of the Board of
Directors and the various committees thereof. The basic responsibility of the
directors is to exercise their business judgment, carrying out their
responsibilities in a manner that they reasonably believe to be in the best
interest of the Company and its stockholders. The Board of Directors is not
expected to assume an active role in the day-to-day operational management of
the Company.
1. Conflicts of Interest. Directors should avoid actual or apparent conflicts
of interest with the Company in personal and professional relationships.
Generally speaking, a conflict of interest occurs when a director's or a
director's immediate family's personal interest interferes, has the
potential to interfere, or appears to interfere materially with: (a)the
interests or business of the Company; or (b) the ability of the director
to carry out his or her duties and responsibilities. A director should
disclose to the Board any transaction or relationship that the director
reasonably expects could give rise to an actual or apparent conflict of
interest with the Company,
2. Corporate Opportunities. In carrying out their duties and
responsibilities, directors should endeavor to advance the legitimate
interests of the Company when the opportunity to do so arises. Directors
should avoid: (a) taking for themselves personally opportunities that are
discovered in carrying out their duties and responsibilities to the
Company; (b) using Company property or information, or their position as
directors, for personal gain; and (c) competing with the Company, in each
of the foregoing eases, to the material detriment of the Company. Whether
any of the foregoing actions is to the material detriment of the Company
will be determined by the Board of Directors based on all relevant facts
and circumstances, including in the ease of the foregoing clause (a),
whether the Company has previously declined to pursue such proposed
opportunity for its own benefit.
3. Confidentiality. Directors should observe the confidentiality of
information that they acquire in carrying out their duties and
responsibilities, except where disclosure is approved by the Company or
legally mandated. Confidential information includes, but is not limited
to, all non-public information that might be of use to competitors, or
harmful to the Company or its customers, if disclosed. Of special
sensitivity is financial information, which should under all circumstances
be considered confidential except where its disclosure is approved by the
Company or when the information has been publicly disseminated.
4. Fair Dealing. In carrying out their duties and responsibilities
(including, among others, the appointment of senior management of the
Company and the setting of policies pursuant to which the Company
operates), directors should promote fair dealing by the Company and its
employees and agents with customers, suppliers, competitors and employees.
5. Protection and Proper Use of Company Assets In carrying out their duties
and responsibilities, directors should promote the responsible use and
control of the Company's assets and resources by die Company. Company
assets, such as information, materials, supplies, intellectual property,
facilities, software and other assets owned or leased by the Company, or
that are otherwise in the Company's possession, should be used only for
legitimate business purposes of the Company.
6. Compliance with Laws, Rules and Regulations. In carrying out their duties
and responsibilities, directors should comply, and endeavor to cause the
Company to comply, with applicable governmental laws, rules and
regulations. In addition, if any director becomes aware of any information
that lie or she believes constitutes evidence of a material violation of
the securities or other laws, rules or regulations applicable to the
Company and the operation of its business, by the Company, any employee or
another director, then such director should bring such information to the
attention of any one or more of the following persons, as circumstances
may warrant: the Company's General Counsel, the Chair of the Board's Audit
Committee or the Board's Presiding Director.
7. Encouraging the Reporting of Illegal or Unethical Behavior. Directors
should endeavor to cause the Company to proactively promote ethical
behavior and to encourage employees to report evidence of illegal or
unethical behavior to appropriate Company personnel.
8. Insider Trading. Directors should observe Company policies applicable to
them with respect to the purchase and sale of Company common stock.
9. Personal Loans to Executive Officers or Directors. Federal securities laws
prohibit the Company from, directly or indirectly (including through
subsidiaries), (a) extending or arranging for the extension of personal
loans to its directors and executive officers and (b) renewing or
materially modifying existing loans to such persons. Directors shall not
seek or facilitate personal loans from the Company in contravention of the
foregoing.
Directors are expected to adhere to this Code. It is the responsibility of each
director to become familiar with and understand this Code, seek further
explanation and advice concerning the interpretation and requirements of this
Code, as well as any situation which appears to be in conflict with it. The
Board of Directors shall determine appropriate actions to be taken in the event
of violations of this Code.
Any waiver of, or amendment to, the requirements of this Code may only be
authorized by the Board of Directors, and will be subject to public disclosure
to the extent required by law or the listing standards of the American Stock
Exchange.
Directors should direct questions regarding the application or interpretation of
the Code to the Company's Counsel.
Exhibit 14.2
AXM PHARMA, INC.
CODE OF ETHICS FOR THE CHIEF EXECUTIVE OFFICER, CHIEF FINANCIAL OFFICER,
SENIOR FINANCIAL OFFICERS AND OTHER EXECUTIVE OFFICERS
The Company has adopted this Code of Ethics (the "Code") as a set of guidelines
pursuant to which our chief executive officer and senior executive officers
should perform their duties. The Code is intended to deter wrongdoing and to
promote adherence to the standards set forth below, Executives subject to the
Code include the President and Chief Executive Officer, the Chief Financial
Officer, the Chief Accounting Officer, and any person who performs a similar
function (the "Covered Executives"). The particular executives who are subject
to the Code from time to time will be designated by, and informed of such
designation, by the Company.
o In carrying out their duties and responsibilities, Covered Executives
should endeavor to act with honesty and integrity, including the ethical
handling of actual or apparent conflicts of interest between personal and
professional relationships.
o To promote full, fair, accurate, timely and understandable disclosure in
the periodic reports that the Company files with, or submits to, the
Securities and Exchange Commission and in other public communications made
by the Company, it is the responsibility of each Covered Executive
promptly to bring to the attention of the Company's Disclosure Committee
any material information of which he may become aware that affects the
disclosures made by the Company in its public filings or otherwise, and to
otherwise assist the Disclosure Committee in fulfilling its
responsibilities.
In addition, each Covered Executive shall promptly bring to the attention
of the Disclosure Committee any information he may have concerning (a)
significant deficiencies in the design or operation of internal controls
which could adversely affect the Company's ability to record, process,
summarize and report financial data or (b) any fraud, whether or not
material, that involves management or other employees who have a
significant role in the Company's financial reporting, disclosures or
internal controls.
o In carrying out their duties and responsibilities, Covered Executives
should endeavor to comply, and to cause the Company to comply, with
applicable governmental laws, rules and regulations. In addition, each
Covered Executive shall promptly bring to the attention of the Compliance
Officer (as defined below) or the head of the Audit Committee any
information he may have concerning evidence of a material violation of the
securities or other laws, rules or regulations applicable to the Company
and the operation of its business, by the Company or any agent thereof
o Each Covered Executive shall promptly report to the Compliance Officer any
information he may have concerning evidence of a material violation of the
Code.
o Covered Executives are expected to adhere to the Code. The Company shall
determine appropriate actions to be taken in the event of violations of
the Code by any Covered Executives. Such actions shall he reasonably
designed to deter wrongdoing and to promote accountability for adherence
to the Code.
o The Company will appropriately disclose any substantive amendment to, and
any waiver of, any provision of the Code that applies to the Covered
Executives.
o The compliance officer (the "Compliance Officer") for the implementation
and administration of the Code shall be the Company's Chief Financial
Officer.
Exhibit 21.1
Werke Pharmaceuticals, Inc.
Shenyang Tianwei Werke Pharmaceuticals Co., Ltd.
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Peter Cunningham, certify that:
1. I have reviewed this annual report on Form 10-KSB of AXM Pharma, Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for
the small business issuer and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
small business issuer, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b. Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
c. Disclosed in this report any change in the small business
issuer's internal control over financial reporting that occurred
during the small business issuer's most recent fiscal quarter
(the small business issuer's fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably
likely to materially affect, the small business issuer's internal
control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the small
business issuer's ability to record, process, summarize and
report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer's
internal control over financial reporting.
Date: August 30, 2004
/s/ Peter Cunningham
---------------------------
Peter Cunningham
Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Chet Howard, certify that:
1. I have reviewed this annual report on Form 10-KSB of AXM Pharma, Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for
the small business issuer and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
small business issuer, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b. Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
c. Disclosed in this report any change in the small business
issuer's internal control over financial reporting that occurred
during the small business issuer's most recent fiscal quarter
(the small business issuer's fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably
likely to materially affect, the small business issuer's internal
control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the small
business issuer's ability to record, process, summarize and
report financial information; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business
issuer's internal control over financial reporting.
Date: August 30, 2004
/s/ Chet Howard
---------------------------
Chet Howard,
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of AXM Pharma, Inc. (the "Company") on Form
10-KSB for the period ending December 31, 2003, as filed with the Securities and
Exchange Commission on the date hereof (the "Report'), I, Peter W. Cunningham,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1)The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company
at the dates and for the periods indicated.
/s/ Peter W. Cunningham
---------------------------
Peter W. Cunningham,
Chief Executive Officer
August 30, 2004
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of AXM Pharma, Inc. (the "Company") on Form
10-KSB for the period ending December 31, 2003, as filed with the Securities and
Exchange Commission on the date hereof (the "Report'), I, Chet Howard, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company at the dates and for the periods indicated.
/s/ Chet Howard
---------------------------
Chet Howard,
Chief Financial Officer
August 30, 2004
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
COMMISSION FILE NUMBER __________
AXM PHARMA, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
NEVADA 20-0745214
----------------------------------- --------------------------------
(STATE OR OTHER JURISDICTION IRS EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
US REPRESENTATIVE OFFICE
7251 WEST LAKE MEAD BLVD., SUITE 300, LAS VEGAS, NV 89128
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(702) 562-4155
(ISSUER'S TELEPHONE NUMBER)
(FORMER ADDRESS)
CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(D) OF THE EXCHANGE ACT OF 1934 DURING THE PAST 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 X NO
AS OF SEPTEMBER 30, 2004, THERE WERE 16,066,789SHARES OF COMMON STOCK
OUTSTANDING, 2,255,000 SHARES OF SERIES A PREFERRED STOCK OUTSTANDING AND
860,000 SHARES OF SERIES B PREFERRED STOCK OUTSTANDING AND 30.419 SHARES OF
SERIES C PREFERRED STOCK OUTSTANDING.
PART I - FINANCIAL INFORMATION.................................................3
Item 1. Financial Statements
Balance Sheet at September 30, 2004 (unaudited)................................3
Unaudited Statements of Operations for the three month periods ended
September 30, 2004 and 2003..................................................4
Unaudited Statements of Cash Flows for the
nine month periods ended September 30, 2004 and 2003.........................5
Notes to Financial Statements..................................................6
NOTE 1: MANAGEMENT REPRESENTATION AND PRESENTATION ............................6
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ...........................6
NOTE 3 - STOCK ISSUANCES......................................................10
Item 2 - MANAGEMENT DISCUSSION AND ANALYSIS...................................12
Item 3 - CONTROLS AND PROCEDURES..............................................26
PART II - OTHER INFORMATION...................................................27
Item 1. LEGAL PROCEEDINGS....................................................27
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................27
Item 3. DEFAULTS UPON SENIOR SECURITIES......................................28
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................28
Item 5. OTHER INFORMATION....................................................28
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................29
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AXM Pharma, Inc.
CONSOLIDATED BALANCE SHEET
September 30, 2004
(UNAUDITED)
ASSETS
Current assets
Cash $ 941,623
Accounts Receivable, net of allowance of 0 25,717
Inventories 2,976,012
Advances, Suppliers 90,119
------------
Total current assets 4,033,472
Property and equipment, net 4,176,333
Licenses 1,449,871
------------
TOTAL ASSETS $ 9,659,676
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Value added tax payable $ 678,746
Accounts payable and accrued expenses 340,785
------------
Total current liabilities 1,019,531
Stockholders' Equity
Series A Preferred stock, $.001 par value, 4,050,00 shares authorized,
2,255,000 shares issued and outstanding 2,255
Series B Preferred stock, $.001 par value, 2,000,000 shares authorized,
860,000 shares issued and outstanding 860
Series C Preferred stock, $.001 par value, 100 shares authorized,
34 shares issued and outstanding 1
Common stock, $.001 par value, 50,000,000 shares authorized,
16,066,789 issued and outstanding 16,067
Additional paid-in-capital 23,896,429
Accumulated deficit (15,275,467)
------------
Stockholders' Equity 8,640,145
------------
LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,659,676
AXM PHARMA, INC
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED September 30, 2004
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues $ 0 $ 3,123,441 $ 2,097,628 $ 6,338,657
Cost of revenues 0 2,186,519 1,045,772 4,151,293
------------ ------------ ------------ -------------
Gross profit 0 936,922 1,051,856 2,187,364
General, administrative and selling:
Cash 1,908,627 1,258,517 6,477,320 2,114,046
Non-cash 1,240,118 2,708,335 4,571,918 3,495,835
------------ ------------ ------------ -------------
Net loss $ (3,148,745) $ (3,029,930) $ (9,997,382) $ (3,422,517)
Net loss applicable common shareholders:
Net loss $ (3,148,745) $ (3,029,930) $ (9,997,382) $ (3,422,517)
Beneficial conversion features of
preferred stock 0 (2,933,137) (2,357,916) (2,933,137)
Deemed dividend from beneficial
conversion feature of warrants (95,754) (40,743) (665,099) (40,743)
------------ ------------ ------------ -------------
Net loss applicable to common shareholders $ (3,244,499) $ (6,003,810) $(13,020,397) $ (6,396,397)
============ ============ ============ =============
Net loss per share:
Basic and diluted $ (0.22) $ (0.45) $ (0.82) $ (0.51)
Weighted averaged shares outstanding:
Basic and diluted 15,969,560 13,257,332 15,070,424 12,658,227
AXM PHARMA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2004 and 2003
(UNAUDITED)
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (9,997,382) (3,422,517)
Adjustments to reconcile net loss to cash used in
operating activities:
Common stock issued for services 4,571,918 3,495,835
Depreciation and amortization 33,731 43,776
Changes in assets and liabilities:
Cash held in trust 0 (66,573)
Accounts receivable 2,589,262 (1,890,025)
Advances 1,374,580 291,597
Inventories (732,258) (392,887)
Accounts payable and accrued expenses (179,291) 146,855
Value added tax payable (2,239,080) 1,104,183
----------- -----------
CASH FLOWS USED IN OPERATING ACTIVITIES (4,578,520) (689,576)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (3,906,707) (27,236)
CASH FROM FINANCING ACTIVITIES
Proceeds from sale of stock 6,476,068 4,888,562
NET INCREASE IN CASH (2,009,159) 4,171,570
Cash, beginning of period 2,950,782 106,036
Cash, end of period 941,623 4,277,597
SUPPLEMENTAL NON-CASH TRANSACTIONS
Net liabilities assumed in reverse merger
AXM PHARMA, INC.
(FORMERLY AXIOM PHARMACEUTICALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: MANAGEMENT REPRESENTATION AND PRESENTATION
Operating results for the three months ended September 30, 2004 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004. It is suggested that the financial statements be read in
conjunction with the audited financial statements and notes for the fiscal year
ended December 31, 2003 included in our Annual Report on Form 10-KSB.
The balance sheet of AXM Pharma, Inc. as of September 30, 2004, the related
consolidated statement of operations for the three and nine months ended
September 30, 2004, and the consolidated statement of cash flows for the nine
months ended September 30, 2004 included in the consolidated financial
statements have been prepared by us without audit. In the opinion of management,
the accompanying consolidated financial statements include all adjustments
(consisting of normal, recurring adjustments) necessary to summarize fairly our
consolidated financial position and results of operations. The consolidated
results of operations for the three and nine months ended September 30, 2004,
are not necessarily indicative of the results of operations for the full year or
any other interim period. Notes to the financial statements which would
substantially duplicate the disclosure contained in the audited financial
statements for the most recent fiscal year ended December 31, 2003 and reported
in our most recent Form 10-KSB, have been omitted.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OUR BUSINESS
AXM Pharma, Inc., a Nevada corporation, is a pharmaceutical company based in The
People's Republic of China. We are a publicly listed company trading under the
symbol (AMEX: AXJ). Our business is the sale of over-the-counter and
prescription pharmaceutical products in the People's Republic of China. Our
business in the People's Republic of China is conducted by our wholly-owned
subsidiary, AXM Pharma Shenyang, Inc., located in the city of Shenyang in the
Northeastern Portion of the People's Republic of China. AXM Shenyang and its
predecessor company, Shenyang Tiawei Pharmaceutical Factory, Ltd., have an
operating history of approximately 10 years. AXM Shenyang has historically been
a manufacturer and distributor of proprietary and generic pharmaceutical
products, which include injectables, capsules, tablets, liquids and medicated
skin products for export and domestic Chinese sales. AXM Shenyang's plant was
decommissioned in 2002 due to significant growth of the population of Shenyang
that caused the surrounding area to change from a city-edge industrial area to a
city-center, non-industrial, residential neighborhood. In April 2004 AXM
Shenyang applied for national renewal of its 43 licenses to produce
over-the-counter and prescription pharmaceutical products in The Peoples
Republic of China. We have received confirmation that 42 of these licenses,
including all of those which we have historically commercialized, have now been
renewed by the State Food and Drug Administration. We anticipate recommencing
production of Asarone and Weifukang as soon as our factory receives Chinese Good
Manufacturing Practices certification. We anticipate receiving this
certification in December 2004, although there can be no guarantee. In the
future we plan to expand our business by commercializing additional licenses
held by AXM Shenyang; acquiring
additional product licenses; and by moving the manufacturing and distribution of
our products in-house.
Our subsidiary, AXM Shenyang, is classified under Chinese Company Law as a
Wholly Foreign Owned Enterprise. Wholly Foreign Owned Enterprises have recently
become the investment vehicle of choice for foreign investors who wish to
manufacture, process, or assemble products in China. Wholly Foreign Owned
Enterprises are limited liability companies established under Chinese Company
Law, which are owned exclusively by one or more foreign investors and thus offer
controls over the company's management, technology, and finances that the
typical foreign investor requires. From a foreign investors' point of view, the
advantages of establishing a WFOE include:
o Independence and freedom to implement the worldwide strategies of its
parent company without having to consider the involvement of a Chinese
partner;
o Ability to carry on business rather than just a representative office
function;
o Ability to issue invoices to their customers in Renminbi (Chinese
Currency) and receive Renminbi revenues;
o Ability to convert Renminbi profits to US dollars for remittance to
their parent company outside China;
o Ability to employ staff directly within China;
o Protection of intellectual know-how technology;
o Greater efficiency in its operations, management and future
development; and
o No requirement to share profits with another party; and
In summary, the key differences between a WFOE and an equity or cooperative
joint venture are that the joint venture business structure requires profit
sharing between the stake holders, significant involvement in operational and
business matters by the Chinese stake holders, indirect representation in
business matters and much less effective and efficient cooperation between the
stake holders. Typically, the foreign party to a Chinese joint venture
experiences significantly less control over the business structure than if the
foreign party forms a Wholly Foreign Owned Enterprise or converts an existing
joint venture into a Wholly Foreign Owned Enterprise. Because the Wholly Foreign
Owned Enterprise business structure is relatively new compared to the joint
venture structure, fewer than 5% of foreign firms currently operate as Wholly
Foreign Owned Enterprises. It is anticipated that newly formed businesses will
likely choose the use of the Wholly Foreign Owned Enterprise structure over the
joint venture structure. It is also anticipated that existing joint ventures are
likely to migrate their corporate structures to Wholly Foreign Owned Enterprises
over the next five years.
FINANCIAL CONDITION
On June 24, 2004, we completed a private equity financing of $3,042,500 with 11
accredited investors. After payment of costs and expenses, including fees of the
placement agent, we received net proceeds of approximately $2,773,800. We issued
30.425 shares of our Series C Preferred Stock, $.001 par value per share, at a
price per share of $100,000 and 357,936 common stock purchase warrants, each of
which entitles the holder to purchase one share of our common stock, $.001 par
value, for a period of three years from the date of issuance at an exercise
price equal to $5.50 per share. Each share of the preferred stock is convertible
into a number of fully paid and non-assessable shares of our common stock
obtained by dividing the face value of $100,000 per share by the fixed
conversion price of $4.25 per share. The warrants are redeemable by AXM Pharma
under certain circumstances.
During the three-month period ended September 30, 2004 we did not generate any
product sales compared to revenues from product sales for the three-month period
ended September 30, 2003 of $3,123,441. This represents a sales decrease of
$3,123,441 from the three-month period ended September 30, 2003.
The lack of sales was specifically due to the changing government regulations
regarding the sales and marketing of pharmaceutical products in China. Due to
new State Food and Drug Administration guidelines, we are now required to obtain
Chinese Good Manufacturing Practices certification and renew our licenses to
manufacture and sell our existing products at the national level, as opposed to
the state and local level as had been required in the past. Because our national
approval license applications were not submitted until April 2004, we were
required to cease manufacturing and selling these items until we received
approval from the State Food and Drug Administration. We have received
confirmation that 42 of our license renewals have been approved by the State
Food and Drug Administration. We expect to begin producing and selling these
products again as soon as our new factory receives Chinese Good Manufacturing
Practices certification. We hope to receive Chinese Good Manufacturing Practices
certification in December 2004 following an anticipated inspection of our
factory in November 2004.
In addition to the licenses for the products listed above, we acquired the
rights to Qiyao, an adjunctive therapy for Type II diabetes; Tong Yang, an
anti-fatigue functional food; Sunkist Vitamin Range; and, Whisper Feminine
Hygiene Wash. We intend to manufacture, market and sell these products in the
future, when we enter into appropriate marketing and distribution agreements.
Although our new sales and marketing initiatives have been delayed until later
in the fourth quarter of 2004, management remains confident that the activities
currently being completed in China will position us to be able to execute a
solid growth plan of increased sales and earnings during the 4th quarter of 2004
and on into 2005. Management recognizes that 2004 is a significant transition
year, where we are transforming a localized privately-owned pharmaceutical
company into an international company with state of the art manufacturing
facilities, nation-wide distribution reach and new globally recognized branded
products. Delays in the actual launch of our new products, which is the
culmination of our efforts over the past year, is typical within emerging
markets and the pharmaceutical industry as a whole.
Due to the absence of any sales for the three months ended September 30, 2004
there was not any gross profit compared to $936,922 for the three-month period
ended September 30, 2003, a decrease of $936,922. During the remainder of FY
2004, we anticipate continuing to increase our gross profit margin with the
sales of our new and re-licensed products. We continue to anticipate a
significant increase in gross profit margin through the introduction of our
various new products, which are anticipated to have an average gross margin of
75%, the re-branding of our products under the AXM Pharma Shenyang and Sunkist
brands, signing new distribution contracts at margins that are equivalent or
better than the agreements in force in 2003, and the opening of our new state of
the art manufacturing plant in Shenyang scheduled for December 2004.
At September 30, 2004, we had total assets of $9,659,676 compared to total
assets of $11,024,738 at December 31, 2003. Cash was $941,623 as of September
30, 2004, a decrease of $2,009,159 from the $2,950,782 cash on hand as of
December 31, 2003. Cash used in operations was $5,038,269. Accounts receivable
was $25,717 at September 30, 2004, a decrease of $2,589,262 from the $2,614,979
at December 31, 2003. Trade receivables of approximately $828,902 were written
off due to Chinese trade laws governing pharmaceuticals that are no longer
licensed for sale. Inventories increased $732,259 to $2,976,013 from the
$2,243,754 at December 31, 2003. Total liabilities at September 30, 2004 were
$1,019,531, a decrease of $2,422,459 from the $3,441,990 at December 31, 2003.
Accounts payable and accrued liabilities were $340,785 at September 30, 2004, a
decrease of $183,379 from the $524,164 at December 31, 2003.
Despite the views of management, the statements concerning future gross revenues
and gross profits are forward-looking statement that involves certain risks and
uncertainties, which could result in a fluctuation of total sales below those
anticipated to be achieved. Pricing of our products and gross profit on product
sales could change due to competitive forces, which could negatively impact
future sales and or operating profits.
RECENT DEVELOPMENTS
In October we completed construction on several key facilities within our new
factory, including our Ointment/Cream facility, which is now ready for Good
Manufacturing Practices certification. This facility has undergone a test-run,
standard operating procedures have been established for Good Manufacturing
Practices, and technicians and department employees have undergone the necessary
training. Additionally, construction is now complete on our Solid Dosage Form
facility. The major equipment, such as a high speed tablet press, has been
shipped from the supplier and we anticipate that it will be installed and
operational in late November or December 2004. . Standard operating procedures
have been established for this equipment and training has already been completed
by a team of engineers from the US and Shenyang. We anticipate that the Chinese
Good Manufacturing Practices inspection group will perform their inspection at
the end of November. We anticipate that we will obtain the final Chinese Good
Manufacturing Practices certificate of approval in December2004.
Since July 2004, we signed exclusive supply agreements for a range of chewable
prescription and OTC products under the Sunkist brand In Asia. We have signed
distribution contracts with distributors in Shenzhen, Beijing and Shanghai and
plan to launch Whisper in November 2004 in these territories.
In June 2004 we appointed as our key advertising advisor the Ogilvy Group public
relations firm to assist us in our product launch strategy focused on the second
half of 2004. We also acquired an anti-depression and anti-fatigue compound for
OTC distribution in China. We also, launched a new product line of chewable
prescription and OTC products under the Sunkist brand in Asia that included the
acquisition of the exclusive rights to an oral drug delivery technology.
In June 2004, we completed a $3,042,500 financing led by HC Wainwright and the
Shemano Group. We received a key drug manufacturing license and appointed
Saatchi & Saatchi to advise on certain advertising and marketing issues related
to new product launches.
In May 2004, we were approved to use the name AXM Pharma in China. We also
appointed the Alliance of ZZAD and Ogilvy Group to advise on various product
packaging and marketing issues. Also, our feminine hygiene product was approved
by the National Ministry for Health and Hygiene in China.
In October 2003, we began construction of a modern production and distribution
facility, which we intend to qualify under United States Good Manufacturing
Practice regulations. The new plant is located in a special economic zone in the
city of Shenyang that will provide us with various multi-year tax and
development incentives. We anticipate that when our new facility is certified
and becomes operational, we will have approximately 320 employees.
AXM Shenyang has chosen to locate its new production facility in the Shenyang
Hunnan National New & High-Tech Industrial Development District. This special
economic district is located at the southern part of the city of Shenyang with a
total area of approximately 120 square kilometers. The development and
construction of the High-Tech Industrial Development District is a major step
for Shenyang's economic and social development.
The High-Tech Industrial Development District was established in May of 1988 in
order to accelerate the development and industrialization of high-tech
industries in the North-Eastern portion of the Peoples Republic of China. After
thirteen years of development, it has successfully attracted various high-tech
industries, including: biotechnology, pharmaceuticals, software, digital
technology, robots, nano-materials and a distribution center for IT products.
Currently, over 480 foreign enterprises including General Motors, Toshiba and LG
that have set up offices or manufacturing facilities in the High-Tech Industrial
Development District.
In order to create unique incentives for companies to locate in the High-Tech
Industrial Development District, favorable corporate income rates have been
established. The income tax rate for those companies that have chosen to locate
in the High-Tech Industrial Development District will be levied at 15 percent
annually. Newly founded high-tech enterprises, including AXM Shenyang, will
enjoy exemption from income tax for 2 years from the first year of operation.
RISKS AND UNCERTAINTIES
All of the following risks may impair our business operations. If any of the
following risks actually occurs, our business, financial condition or results of
operations could be materially adversely affected. In such case, the trading
price of our common stock could decline, and one may lose all or part of your
investment. Additional risks include: We may not be able to adequately protect
and maintain our intellectual property. We may not be able to obtain regulatory
approvals for our products or reimbursement from the sale of our products. Our
dependence on certain local third parties may impact our ability to control
certain aspects of our operations. We may have difficulty competing with larger
and better financed companies in our sector. New legislative or regulatory
requirements may adversely affect our business and operations. We are dependant
on certain key existing and future personnel. Our growth is dependent on our
ability to successfully develop, acquire or license new drugs. We may be subject
to product liability claims in the future. Changes in the laws and regulations
in The Peoples Republic of China may adversely affect our ability to conduct our
business. We may experience barriers to conducting business due to governmental
policy. Capital outflow policies in The Peoples Republic of China may hamper our
ability to remit income to the United States. Fluctuation of the Renminbi could
materially affect our financial condition and results of operations. We may face
obstacles from the communist system in The Peoples Republic of China. We may
have difficulty establishing adequate management, legal and financial controls
in The Peoples Republic of China. Trade barriers and taxes may have an adverse
affect on our business and operations. There can be no guarantee that The
Peoples Republic of China will comply with the membership requirements of the
World Trade Organization. A future outbreak of Severe Acute Respiratory Syndrome
(SARS) or similar virus may adversely impact our operations and the operations
of our contract manufacturers and distributors. There may not be sufficient
liquidity in the market for our securities in order for investors to sell their
securities. The fact that our directors and officers own approximately 45% of
our capital stock may decrease the influence on shareholder decisions. The
outstanding warrants may adversely affect us in the future and cause dilution to
existing shareholders.
INVENTORIES
Inventories, which consist primarily of raw materials and related materials, are
stated at the lower of cost or market with cost determined on a first-in,
first-out (FIFO) basis. We regularly monitor inventories for excess or obsolete
items and make any valuation corrections when such adjustments are needed.
NOTE 3 - STOCK ISSUANCES
COMMON STOCK ISSUED FOR STOCK-BASED COMPENSATION
We periodically issue common stock for services rendered. Common stock issued is
valued at the estimated fair market value, as determined by management and the
board of directors of the Company. Management and the board of directors
consider market price quotations, recent stock offering prices and other factors
in determining fair market value for purposes of valuing the common stock.
During the three months ending September 30, 2004, we issued 283,334 shares of
common stock for services valued at $1,085,169.
On September 10, 2004, we issued 83,334 shares of restricted common shares
valued at $319,169 pursuant to an agreement with Peter Cunningham, our Chief
Executive Officer. The shares were issued pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act for issuances not
involving a public offering. The shares were valued at $3.83 per share, the
market price for shares of our common stock at the time of issuance.
On July 21, 2004, we issued 100,000 shares of restricted common to Chet Howard,
our Chief Financial Officer and Chief Accounting Officer, valued at $383,00. The
shares were issued pursuant to the exemption from registration provided by
Section 4(2) of the Securities Act for issuances not involving a public
offering. The shares were valued at $3.83 per share, the market price for shares
of our common stock at the time of issuance.
On July 21, 2004, we issued 100,000 shares of restricted common to Harry Zhang,
Chief Accounting Officer of our wholly owned subsidiary, valued at $383,000. The
shares were issued pursuant to the exemption from registration provided by
Section 4(2) of the Securities Act for issuances not involving a public
offering. The shares were valued at $3.83 per share, the market price for shares
of our common stock at the time of issuance.
On August 27, 2004 we issued 35,000 stock options to each of Montgomery Simus
and Mark Bluer, both of whom are members of our Board of Directors, valued at a
total of $190,400. The shares were issued pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act for issuances not
involving a public offering. The shares were valued at $2.72 per share, the
market price for shares of our common stock at the time of issuance.
On September 1, 2004 we issued stock options, for an aggregate of 100,000 shares
valued at $269,000 pursuant to an agreement with Dreamvest, LLC. The shares were
issued pursuant to the exemption from registration provided by Section 4(2) of
the Securities Act for issuances not involving a public offering. The shares
were valued at $2.69 per share, the market price for shares of our common stock
at the time of issuance.
On September 8, 2004 we issued stock options, for an aggregate of 80,000 shares
valued at $312,000 pursuant to an agreement with RCG Capital Markets Group, Inc.
The shares were issued pursuant to the exemption from registration provided by
Section 4(2) of the Securities Act for issuances not involving a public
offering. The shares were valued at $3.90 per share, the market price for shares
of our common stock at the time of issuance.
At September 30, 2004, the Company had a stock-based compensation plan. In April
2004, the Board of Directors adopted the 2004 Qualified and Nonstatutory Stock
Option Plan. The Board of Directors reserved 3,000,000 stock options to
directors, executive officers, employees and consultants. During the nine months
ended September 30, 2004, the Company granted options to no employees under the
2004 Plan and 180,000 options to various consultants under the 2004 Plan. . The
recorded stock based compensation totaling $154,949 related to the options
issued to consultants.
The Company applies and intends to continue to apply the recognition and
intrinsic value measurement principles of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations in accounting for those plans. The Company recorded $0 of
stock-based compensation expense for stock options issued to employees which is
reflected in the net loss for the nine month period ended September 30, 2004. In
addition, the Company recorded stock based compensation expense totaling
$$154,949 related to the options issued to consultants. The consultant options
vested immediately and were expensed based on the fair value calculated using
the Black-Scholes pricing model using the following assumptions: 56% volatility,
one year life, 2.5% discount rate and 0% dividend yield.
There was no effect on net income and earnings per share if AXM Pharma, inc. had
applied the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
Conversions of Preferred Stock and Warrant Exercises
During the third quarter, AXM Pharma issued shares of common stock in connection
with the following conversions of its Series C Preferred Stock. AXM Pharma
issued 141,175 shares of common stock for the conversion of 6 shares of Series C
Preferred Stock.
ACCOUNTING FOR STOCK-BASED COMPENSATION
We account for stock-based compensation issued to employees and advisors of the
Company using the intrinsic value based method as prescribed by APB Opinion No.
25 "Accounting for Stock Issued to Employees" ("APB 25"). Under the intrinsic
value based method, compensation is the excess, if any, of the fair value of the
stock at the grant date or other measurement date over the amount an employee
must pay to acquire the stock. Compensation, if any, is recognized over the
applicable service period, which is usually the vesting period.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). This standard, if fully adopted, changes the method
of accounting for employee stock-based compensation plans to the fair value
based method. For stock options and warrants, fair value is determined using an
option pricing model that takes into account the stock price at the grant date,
the exercise price, the expected life of the option or warrant and the annual
rate of quarterly dividends. Compensation expense, if any, is recognized over
the applicable service period, which is usually the vesting period.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation, an
interpretation of APB Opinion 25." FIN 44 clarifies the application of APB 25
for (a) the definition of employee for purposes of applying APB 25, (b) the
criteria for determining whether a plan qualifies as a non-compensatory plan,
(c) the accounting consequence for various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. FIN 44 is effective July
1, 2000, but certain provisions cover specific events that occur after either
December 15, 1998, or January 12, 2000. The adoption of FIN 44 did not have a
material effect on the financial statements.
The adoption of the accounting methodology of SFAS 123 is optional and we have
elected to continue accounting for stock-based compensation issued to employees
using APB 25, as amended by FIN 44; however, pro forma disclosures, as if we
adopted the cost recognition requirements under SFAS 123, are required to be
presented (see below). For stock-based compensation issued to non-employees, the
Company values these grants at fair value as defined in SFAS 123, FIN 44 and
EITF 96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling Goods or Services."
CASH FINANCING ACTIVITIES
On June 24, 2004, we completed a private equity financing of $3,042,500 with 11
accredited investors. After payment of costs and expenses, including fees of the
placement agent, we received net proceeds of approximately $2,773,800. We issued
30.425 shares of our Series C Preferred Stock, $.001 par value per share, at a
price per share of $100,000 and 357,936 common stock purchase warrants, each of
which entitles the holder to purchase one share of our common stock, $.001 par
value, for a period of three years from the date of issuance at an exercise
price equal to $5.50 per share. Each share of the preferred stock is convertible
into a number of fully paid and nonassessable shares of our common stock
obtained by dividing the face value of $100,000 per share by the fixed
conversion price of $4.25 per share. The warrants are redeemable by AXM Pharma
under certain circumstances.
In addition to its fees and expenses, the placement agent received a three-year
warrant to purchase up to 3 shares of our Series C Preferred Stock at a price of
$100,000 per share and up to 35,793 warrants.
Also in connection with the issuance of the shares of preferred stock and
warrants issued on June 24, 2004, we agreed to file a registration statement
with the Securities and Exchange Commission to register for resale the shares of
our common stock into which the shares of our preferred stock may be converted
and the shares of common stock issuable upon the exercise of the warrants. We
are required to keep this registration statement continuously effective under
the Securities Act until such date as is the earlier of (x) the date when all of
the securities covered by such registration statement have been sold or (y) the
date on which such securities may be sold without any restriction pursuant to
Rule 144 as determined by the counsel to AXM Pharma pursuant to a written
opinion letter, addressed to our transfer agent to such effect. We also agreed
to provide the same penalty provisions to our Series B Shareholders whose stock
is also being registered as part of this prospectus.
STOCK OPTION PLANS
In April of 2004, our Shareholders approved the "2004 Qualified and Nonstatutory
Stock Option Plan." The Board of Directors reserved 3,000,000 shares of our
common stock to be issued in the form of incentive and/or non-qualified stock
options for employees, directors and consultants to AXM. On April 29, 2004, our
shareholders approved and ratified the issuance of 2,040,000 options to
employees, directors and consultants.
REVENUE RECOGNITION
Product sales revenue is recognized upon passage of title to customers,
typically upon shipment of product. Any provision for discounts and estimated
returns are accounted for in the period the related sales are recorded.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and the notes thereto which appear elsewhere in this report. The
results shown herein are not necessarily indicative of the results to be
expected in any future periods. This discussion contains forward-looking
statements based on current expectations, which involve uncertainties. Actual
results and the timing of events could differ materially from the
forward-looking statements as a result of a number of factors. Readers should
also carefully review factors set forth in other reports or documents that we
file from time to time with the Securities and Exchange Commission.
Overview
On March 14, 2003, we completed a share exchange with Werke Pharmaceuticals,
Inc., a Delaware corporation, formed to develop and finance the growth of
Chinese based pharmaceutical companies. As a result of the share exchange, Werke
became our wholly owned subsidiary. Werke's wholly owned operating subsidiary is
AXM Shenyang Inc., a northern China-based pharmaceutical company. The
comparables discussed below relate to the operations of Werke and its wholly
owned subsidiary, AXM Shenyang, for the periods discussed.
During the fiscal quarter ended September 30, 2004, our products were not
available for sale due to new licensing requirements at the national level in
China. Beginning July 1, 2004, all pharmaceutical companies must obtain Good
Manufacturing Practices certification and national approval licenses to
manufacture each of their pharmaceutical products. The application period can
take more than 100 working days. In April 2004, in accordance with guidelines
provided by the Liaoning sFDA, we submitted applications to renew licenses for
all of our pharmaceutical products. We have received confirmation that 42 of 43
of our licenses, including those that we have historically commercialized, have
been approved for renewal at the national level. In June 2004, we submitted
applications for Good Manufacturing Practices certification pursuant to the
requirements of State Food and Drug Administration, which we are required to
obtain prior to December 31, 2004. We have currently completed construction on
several of the key facilities at our new factory. We have completed training and
established standard operating procedures for the facilities that have been
completed and upon receipt of certain equipment, which has been ordered and is
expected to arrive shortly, we believe that we will be ready for our Chinese
Good Manufacturing Practices certification review. We anticipate that our review
will occur in late November 2004 and believe that we will receive Chinese Good
Manufacturing Practices certification in December 2004.
After our factory is Chinese Good Manufacturing Practices approved, we intend to
immediately reintroduce Asarone Tablets and the Wefukang Cream with new
packaging and to market these products much more broadly. We expect that we will
launch the Qiyao Diabetes product and the Sunkist line of imported products
during the first quarter of 2005. We expect to commence sales of the Whisper
Feminine Hygiene Product in November 2004 in Shenzhen, followed by launches in
Shanghai and Beijing shortly thereafter.
We are currently seeking to license various branded OTC products from
identifiable North American pharmaceutical and supplement companies for
distribution and manufacturing in China and Asia-Pacific. We are currently party
to a licensing agreement to manufacture market and sell certain vitamin and
vitamin supplements in The Peoples Republic of China under the Sunkist brand
name and trademark and other products under AXM Pharma owned brand names. The
Sunkist trademark agreement grants AXM Pharma exclusive rights in The Peoples
Republic of China, excluding Macao and Hong Kong, for use of the Sunkist brand
name for AXM Pharma's range of vitamin and vitamin supplements (excluding
vitamin-fortified confections). The agreement also grants AXM Pharma a right of
first refusal for any territory in the rest of Asia where Sunkist does not
currently license the product categories covered by their agreement with AXM
Pharma. Under the terms of the agreement, we are required to achieve certain
sales targets each year, for each category of product licensed under the
agreement. If we fail to achieve the agreed upon sales targets for any two
consecutive years, the agreement may be terminated with regard to such product
category by Sunkist in its discretion.
Recent events have led us to examine closely the management performance at our
wholly owned operating subsidiary, AXM Shenyang. There are clear indications
that deficiencies have arisen at the senior level. These deficiencies may have
contributed to the delays in the process to obtain national approval licenses,
the lower than expected sales in the second quarter and the absence of sales in
the third quarter. In order to address these deficiencies in August and
September 2004 we retained several senior level advisors to assist with the
renewal of our national approval licenses and the completion and certification
of our new manufacturing facility. We believe that these changes are beginning
to yield positive results in that we have recently received confirmation that
the national State Food and Drug Administration has approved our application to
renew 42 of 43 of our pharmaceutical licenses and we have completed construction
of several key phases of our new factory and believe that we will be ready for
Chinese Good Manufacturing Practices certification in November 2004, with an
anticipated approval in December 2004. We anticipate adding several strong
industry experienced executives to our management team and reorganizing various
roles and responsibilities within senior management in the fourth quarter and
early 2005. We hope that these changes in senior management will enhance
productivity, reduce conflicts and lead to more effective integration of our
U.S. and Chinese management teams in order to enhance our ability to conduct our
business in an effective manner in future periods.
LIQUIDITY AND CAPITAL RESOURCES
Total assets decreased from $11,024,738 at December 31, 2003 to $9,659,676 at
September 30, 2004. This decrease is attributable to the increase of Losses from
operating activities and the expensing of over $560,000 in factory United States
Good Manufacturing Practices and China Good Manufacturing Practices
certification processes for the new factory.
Our total outstanding current liabilities decreased to approximately $1,019,531
at September 30, 2004, as compared to approximately $3,441,990 at March 31,
2003. This reduction of $2,422,459 is mostly attributable primarily to a
reduction in Value Added Tax liabilities of $2,239,162.
From December 31, 2003, to September 30, 2004, our cash and cash equivalents
decreased by approximately $2,009,159 million as a result of receipt of net
proceeds in the private placement offering of approximately $6,492,963. This was
offset by cash used for factory and equipment of $3,906,707 and reductions in
current liabilities of $2,422,459. Approximately $1,240,118 of non-cash general,
administrative and selling expenses were incurred in the period ended September
30, 2004. The non-cash expenses for the nine months ended September 30, 2004 was
$4,571,918. Non-cash expense is where we pay for services (e.g. financial
consulting and investor relations services) using shares of our common stock. In
the past the Company took advantage of these opportunities to conserve cash.
We currently have sufficient cash to maintain operations at their present level
through the end of the current year. Capital used to date in activities
associated with the building and certification of the new facilities in Shenyang
is approximately US$4 million. We anticipate requiring additional investment of
approximately US$ 4.2 million primarily during the fourth quarter of 2004 in
order to complete the new production facilities, laboratory and administration
buildings. However, to fulfill our planned expansion in sales territory,
complete the factory, implement the required systems and fund our working
capital needs, we will need to raise approximately $8 million in additional
funds. We are currently seeking to raise this additional capital through either
sales of our equity securities or debt financing of our factory and equipment in
Shenyang, but there cannot be any guarantees that we will be able to raise this
additional capital on terms acceptable to management or at all. We are not
currently in a position to call any of our outstanding warrants. However, should
our common stock trade at a price of $4.00, based on the closing sales price,
for 30 consecutive calendar days, assuming an effective registration statement
is in place with regard to the underlying shares of our common stock, we would
be in a position to call a significant portion of the outstanding warrants. In
the event that these warrants were called and converted we would receive gross
proceeds of approximately $10.5 million. If we are not able to raise this
additional capital through warrant exercises or additional fund raising
activities we could be forced to curtail some of the currently anticipated
expenditures in the above mentioned areas. Should we be forced to do this it
could have an impact on the anticipated future sales and earnings.
CRITICAL ACCOUNTING POLICIES
We believe the following critical accounting policies, among others, affect our
more significant judgments and estimates used in the preparation of our
financial statements:
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. The allowance for
doubtful accounts is based on specific identification of customer accounts and
our best estimate of the likelihood of potential loss, taking into account such
factors as the financial condition and payment history of major customers. We
evaluate the collectability of our receivables at least quarterly. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. The differences could be material and could significantly impact cash
flows from operating activities.
INVENTORY
We write down our inventory for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the estimated market
value based upon assumptions about future demand, future pricing and market
conditions. If actual future demands, future pricing or market conditions are
less favorable than those projected by management, additional inventory
write-downs may be required and the differences could be material. Such
differences might significantly impact cash flows from operating activities.
ACCOUNTING FOR STOCK-BASED COMPENSATION
We account for stock-based compensation based on the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," as
amended by the Financial Accounting Standards Board Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation." Accounting
Principles Board Opinion No. 25 and Financial Accounting Standards Board
Interpretation No. 44 state that no compensation expense is recorded for stock
options or other stock-based awards to employees that are granted with an
exercise price equal to or above the estimated fair value per share of the
company's common stock on the grant date. We adopted the disclosure requirements
of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," which requires compensation expense to be disclosed
based on the fair value of the options granted at the date of the grant.
In December 2002, the Financial Accounting Standards Board issued its Statement
No. 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure--an amendment of Financial Accounting Standards Board Statement No.
123." This Statement amends Statement of Financial Accounting Standards No. 123,
to provide alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of Statement of Financial
Accounting Standards No. 123 to require prominent disclosure about the effects
on reported net income of an entity's accounting policy decisions with respect
to stock-based employee compensation. The transition and annual disclosure
provisions of Statement of Financial Accounting Standards No. 148 are effective
for fiscal years ending after December 15, 2002, and the interim disclosure
provisions were effective for the first interim period beginning after December
15, 2002. We did not voluntarily change to the fair value based method of
accounting for stock-based employee compensation, therefore, the adoption of
Statement of Financial Accounting Standards No. 148 did not have a material
impact on our operations and/or financial position.
We did not issue any stock options to employees during the period ended March
31, 2004, therefore pro forma disclosures are not required for the three months
ended March 31, 2004.
CONVERTIBLE PREFERRED STOCK
Convertible Preferred Sock issued by AXM Pharma is initially offset by a
discount representing the relative fair value of the beneficial conversion
feature and warrants. This beneficial conversion for the preferred stock is
recorded as a dividend over the period the preferred stock is convertible and
accelerated pro-rata as the preferred stock are converted. The beneficial
conversion feature allocated to warrants is recognized over the life of the
warrants and accelerated as warrants are exercised. The fair value of the
warrants and beneficial conversion discount are calculated based on available
market data using appropriate valuation models. The beneficial conversion
feature is limited to the total proceeds received.
SALES ALLOWANCES
A portion of our business is to sell products to distributors who resell the
products to the end customers. In certain instances, these distributors obtain
discounts based on the contractual terms of these arrangements. Sales discounts
are usually based upon the volume of purchases or by reference to a specific
price in the related distribution agreement. We recognize the amount of these
discounts at the time the sale is recognized. Additionally, sales returns
allowances are estimated based on historical return data, and recorded at the
time of sale. If the quality or efficacy of our products deteriorates or market
conditions otherwise change, actual discounts and returns could be significantly
higher than estimated, resulting in potentially material differences in cash
flows from operating activities.
VALUATION OF INTANGIBLES
From time to time, we acquire intangible assets that are beneficial to our
product development processes. We periodically evaluate the carrying value of
intangibles, including the related amortization periods. In evaluating acquired
intangible assets, we determine whether there has been impairment by comparing
the anticipated undiscounted cash flows from the operation and eventual
disposition of the product line with its carrying value. If the undiscounted
cash flows are less than the carrying value, the amount of the impairment, if
any, will be determined by comparing the carrying value of each intangible asset
with its fair value. Fair value is generally based on either a discounted cash
flows analysis or market analysis. Future operating income is based on various
assumptions, including regulatory approvals, patents being granted, and the type
and nature of competing products. If regulatory approvals or patents are not
obtained or are substantially delayed, or other competing technologies are
developed and obtain general market acceptance or market conditions otherwise
change, our intangibles may have a substantially reduced value, which could be
material.
DEFERRED TAXES
We record a valuation allowance to reduce the deferred tax assets to the amount
that is more likely than not to be realized. We have considered estimated future
taxable income and ongoing tax planning strategies in assessing the amount
needed for the valuation allowance. Based on these estimates, all of our
deferred tax assets have been reserved. If actual results differ favorably from
those estimates used, we may be able to realize all or part of our net deferred
tax assets. Such realization could positively impact our operating results and
cash flows from operating activities.
VALUE ADDED TAX
Value added tax payable is reported as a significant liability. The accounting
policies adopted by management include full disclosure of the Value Added Tax
liability calculated at 17% of the difference between ex factory price and the
cost of raw materials, less the cost of the fees paid to the third-party
original equipment manufacturing company.
LITIGATION
We account for litigation losses in accordance with Statement of Financial
Accounting Standards (SFAS) No. 5, "Accounting for Contingencies." Under SFAS
No. 5, loss contingency provisions are recorded for probable losses at
management's best estimate of a loss, or when a best estimate cannot be made, a
minimum loss contingency amount is recorded. These estimates are often initially
developed substantially earlier than the ultimate loss is known, and the
estimates are refined each accounting period, as additional information is
known. Accordingly, we are often initially unable to develop a best estimate of
loss; therefore, the minimum amount, which could be zero, is recorded. As
information becomes known, either the minimum loss amount is increased or a best
estimate can be made, resulting in additional loss provisions. Occasionally, a
best estimate amount is changed to a lower amount when events result in an
expectation of a more favorable outcome than previously expected. Due to the
nature of current litigation matters, the factors that could lead to changes in
loss reserves might change quickly and the range of actual losses could be
significant, which could materially impact our results of operations and cash
flows from operating activities.
RESULTS OF OPERATIONS
COMPARISON OF RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 TO
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003
REVENUE
During the three-month period ended September 30, 2004 we did not generate any
sales from product sales compared to revenues from product sales for the
three-month period ended September 30, 2003 of $3,123,441. This represents a
sales decrease of $3,123,441 from the three-month period ended September 30,
2003. For the nine months ended September 30, 2004 sales were $2,097,628 versus
sales of $6,338,657 for the comparable period ended September 30, 2003.
The absence of sales for the three months period ended September 30, 2004 is due
to the fact that we have not yet received national approval for our
pharmaceutical licenses or Chinese Good Manufacturing certification, which
caused us to cease manufacturer of our pharmaceutical products as of July 1,
2004, and also disqualified us and any distributors we use from certain
competitive bidding processes prior to that date. For example, we were
disqualified from a competitive bidding process for the sale of Asarone direct
to hospitals in Shanghai because we could not provide the documentation of Good
Manufacturing Practices certification required by the local government to
participate in such process. Management estimates that the approvals from the
regulatory body for these items will be obtained in December 2004. Management
further estimates that the Company will not be able to achieve our original
sales plan for the remainder of the year related to these items.
Despite these setbacks, we have now received confirmation that the State Food
and Drug Administration has now renewed 42 of our licenses, including all of
those that we have historically commercialized. Additionally, we have completed
construction of key phases of our new factory, as well as training of our
personnel and we are awaiting Chinese Good Manufacturing Practices certification
review in November 2004. We expect to receive Good Manufacturing Practices
certification in December 2004. Once the plant is Good Manufacturing Practices
certified, we will immediately commence the reintroduction of Asarone Tablets
and the Wefukang Cream. Both products will have updated packaging, and will be
distributed in additional territories in China. We also anticipate launching the
Qiyao Diabetes product and the Sunkist line of imported products during the
first quarter of 2005. We plan to launch our Whisper Feminine Hygiene Wash in
Shenzhen in November 2004, followed by Shanghai in December 2004 and Beijing in
January 2005.
Despite the views of management, the statement concerning future gross revenues
is a forward-looking statement that involves certain risks and uncertainties,
which could result in a fluctuation of total sales below those anticipated to be
achieved. Pricing of our products and gross profit on product sales could change
due to competitive forces, which could negatively impact future sales and or
operating profits.
GROSS PROFIT
There was not any gross profit on product sales for the three-month period ended
September 30, 2004 due to the absence of sales as discussed above. This is
compared to $936,922 for the three-month period ended September 30, 2003, a
decrease of $936,922. For the nine months ended September 30, 2004 the gross
profit was $1,051,856 compared to $2,187,364 for the comparable period in 2003.
In both instances the decrease in gross profit is attributable to the decrease
in sales.
The gross margin for the nine months ended September 30, 2004 was 50.1% compared
to 34.5% for the nine months ended September 30, 2003. This increase in gross
margin was achieved through a planned elimination of the sales of our ultra-low
margin antibiotic products. During the fourth quarter of FY 2004, we anticipate
continuing to increase our gross profit margin with the sales of our new and
re-licensed products. We continue to anticipate a significant increase in gross
profit margin through the introduction of our various new products, which are
anticipated to have an average gross margin of 75%, the re-branding of our
products under the AXM Pharma Shenyang and Sunkist brands, signing new
distribution contracts at margins that are equivalent or better than the
agreements in force in 2003, and the opening of our new state of the art
manufacturing plant in Shenyang scheduled for December 2004.
Despite the views of management, the statement concerning future gross profit
margins is a forward-looking statement that involves certain risks and
uncertainties, which could result in a fluctuation of gross margins below those
anticipated to be achieved. Pricing of our products and gross profit on product
sales could change due to competitive forces that could negatively impact future
sales and or operating profits.
SALES, GENERAL AND ADMINISTRATIVE EXPENSES
The cash portion of this expense category for the three months ended September
30, 2004 was $1,908,627 compared to $1,258,517 for the same period last year.
The cash portion of this expense for the nine months ended September 30, 2004
was $6,477,320 compared to $2,114,046 for the comparable period in 2003. This
increase in cash expenditures on general, administrative and selling expense for
this quarter compared to the same quarter last year is due primarily to the
expansion of administrative staff in the US and China to provide for financial
reporting, capital raising efforts and maintaining our public relations at a
level consistent with a public company. We also added staff in setting up the
information technology function for reviewing possible software and hardware
solutions. The expenditures in the information technology area are necessary in
order to proceed with the actual implementation and role our of our new
manufacturing, marketing and accounting software modules in step with the
completion of our new manufacturing facility in Shenyang and meeting US Good
Manufacturing Practices and China Good Manufacturing Practices standards.
In addition to the aforementioned cash expenses in the general, administrative
and selling expense category there were $1,240,118 in non-cash expenses relating
to stock issued for professional services rendered for the three months ended
September 30, 2004. For the nine months ended September 30, 2004 there was
$4,571,918 in non-cash expenditures for professional services rendered as
compared to $3,495,835 for the comparable period in 2003.
NON-CASH CONSULTING ACTIVITIES
During the three-month period ended September 30, 2004, our Board of Directors
authorized the issuance of shares of restricted common stock to various Company
officers in lieu of cash payments. Based upon the common stock trading price at
the times of issuance, and FASB rules, we were required to incur non-cash
administrative expenses of $1,240,118 for the issuance of these shares during
the three-month period ended September 30, 2004. For the nine month period ended
September 30, 2004 the Company incurred $4,571,918 in non-cash expense for
compensation to various consultants and Company officers.
NET LOSS AND LOSS PER SHARE
The net loss for the three months ended September 30, 2004, was
$3,148,745 including $1,240,118 in non-cash stock issuance. The net loss in the
period applicable to common shareholders was $3,244,499 or $(0.20) per share
compared to a $6,003,810 loss the same period during 2003. The Net Loss for the
three months ended September 30, 2004 was primarily the result of increased
expenses related to our public reporting status and increased activities
associated with the construction of our new plant in Shenyang. Also included in
this loss was approximately $803,185 for write off of receivables that were no
longer collectible due to expiration of licensing on products covered by those
receivables. The net loss for the nine months ended September 30, 2004 was
$9,997,382 per share as compared to a loss of $3,422,517 for the comparable
period in 2003. The same reasons attributable to the three month loss increase
are applicable to the nine month results. The net loss applicable to the common
shareholders for the nine month period ended September 30, 2004 was $13,020,397
or $(0.81) per share as compared to a loss of $6,396,397 or $(.51) per share for
the comparable period in 2003.
Delays in regulatory approval have caused delays in the implementation of new
sales and marketing initiatives until later in the fourth quarter of 2004.
Management remains confident that the activities currently being completed in
China will position us to be able to execute a solid growth plan of increased
sales and earnings during the 4th quarter of 2004 and on into 2005. Management
recognizes that 2004 is a significant transition year, where we are transforming
a localized privately owned pharmaceutical company into an international company
with state of the art manufacturing facilities, nation-wide distribution reach
and new globally recognized branded products. Delays in the actual launch of our
new products, which is the culmination of our efforts over the past year, is
typical within emerging markets and the pharmaceutical industry as a whole.
The net loss and loss per share results for the three months ended September 30,
2004, were higher than internal management estimates. We had previously
forecasted $33 million in gross sales and earnings per share for FY2004 at $0.42
cents per share, excluding non-cash expenses, on a fully diluted basis of
approximately 21 million shares outstanding at year-end. Management now
estimates that we will incur a loss of approximately $13.4 million or ($0.63.8)
per share on FY 2004 sales of approximately $4 million and gross profits of $2.2
million, excluding non-cash expenses, on a fully diluted basis of approximately
21 million shares outstanding at year-end. The primary reasons for these revised
estimates are the delays in bringing certain products to market, as well as lost
sales due to the particular regulations, which require us to receive national
approval of licenses for the manufacture and sale of our pharmaceutical products
and the need to receive Chinese Good Manufacturing Practices certification.
Despite the views of management, the statement concerning future loss or
earnings per share is a forward-looking statement that involves certain risks
and uncertainties, which could result in a fluctuation of earnings below those
anticipated to be achieved. Pricing of our products and gross profit on product
sales could change due to competitive forces which could negatively impacted
future earnings.
ASSETS AND LIABILITIES
At September 30, 2004, we had total assets of $9,659,676compared to total assets
of $11,024,738 at December 31, 2003. Cash was $941,623 as of September 30, 2004,
a decrease of $2,009,159 from the $2,950,782 cash on hand as of December 31,
2003. Cash used in operations was $5,038,269 and cash provided by financing
activities from the sale of common and preferred stock was $6,980,218.
Accounts receivable was $25,717 at September 30, 2004, a decrease of $2,589,262
from the $2,614,979 at December 31, 2003. This decrease reflects the lack of new
sales in the previous quarter and the write-off of approximately $803,185 due to
Chinese regulations on product registration expiration as they relate to
purchased but unsold items by distributors. Inventories increased $732,258 to
$2,976,012 from the $2,243,754 at December 31, 2003.
Total liabilities at September 30, 2004 were $1,019,531, a decrease of
$2,422,459 from the $3,441,990 at December 31, 2003. Accounts payable and
accrued liabilities were $340,785 at September 30, 2004, a decrease of $183,379
from the $524,164 at December 31, 2003.
RISK FACTORS
You should carefully consider the risks described below before making an
investment in AXM Pharma. All of these risks may impair our business operations.
If any of the following risks actually occurs our business, financial condition
or results of operations could be materially adversely affected. In such case,
the trading price of our common stock could decline, and you may lose all or
part of your investment.
RISKS RELATING TO OUR BUSINESS
We may not be able to adequately protect and maintain our intellectual property.
Our success will depend in part on our ability to protect and maintain
intellectual property rights and licensing arrangements for our products. No
assurance can be given that licenses or rights used by AXM Pharma will not be
challenged, invalidated, infringed or circumvented, or that the rights granted
thereunder will provide competitive advantages to us. There can be no assurance
that we will be able to obtain a license to any third-party technology that we
may require to conduct our business or that such technology can be licensed at a
reasonable cost. There is no certainty that we will not be challenged by our
partners for non-compliance with our licensing arrangements. Furthermore, there
can be no assurance that we will be able to remain in compliance with our
existing or future licensing arrangements. Consequently, there may be a risk
that licensing arrangements are withdrawn with no penalties to the licensor or
compensation to AXM Pharma.
We may not be able to obtain regulatory approvals for our products or
reimbursement from the sale of our products.
The manufacture and sale of pharmaceutical products in The Peoples Republic of
China is highly regulated by a number of state, regional and local authorities.
These regulations significantly increase the difficulty and costs involved in
obtaining and maintaining regulatory approval and reimbursement listings for
marketing new and existing products. In addition, our future growth and
profitability are, to a significant extent, dependent upon our ability to obtain
timely regulatory approvals and reimbursement from the relevant authorities.
The State Food and Drug Administration of The Peoples Republic of China recently
implemented new guidelines for licensing of pharmaceutical products. All
existing manufacturers with licenses, which are currently valid under the
previous guidelines, are required to apply for Good Manufacturing Practices
certification by June 30, 2004, and to receive approval by December 31, 2004. We
believe that our new factory, which is currently under construction in Shenyang
and being constructed to meet more stringent U.S. Good Manufacturing Practices
requirements, will pass the certification process and that our current licenses
will be renewed under the new guidelines. However, should we fail to receive
certification under the new guidelines promulgated by the State Food and Drug
Administration, our business would be impacted in a materially adverse manner.
Our dependence on certain local parties may impact our ability to control
certain aspects of our operations.
Our operations may become substantially dependent on local Chinese partners to
provide marketing expertise and knowledge of the local regulatory environment in
order to facilitate the acquisition of necessary licenses and permits. Any
failure to form or maintain alliances with local partners, or the preemption or
disruption of such alliances by our competitors or otherwise, could adversely
affect our ability to penetrate and compete successfully in the Chinese
marketplace. In addition, in the uncertain legal environments in The Peoples
Republic of China, our business may be vulnerable to local government agencies
or other parties who wish to renegotiate the terms and conditions of, or
terminate their agreements or other understandings with AXM Pharma.
Our ability to successfully integrate management of our U.S. parent company and
our Chinese operating subsidiary will have a material impact on our ability to
successfully operate our business.
At AXM Shenyang, there are clear indications that management deficiencies have
arisen at the senior level, which result, in many cases, from the difficulty to
successfully implement U.S. style management at a Chinese operating company and
the difficulty faced by U.S. trained managers operating in China. These
deficiencies may have contributed to the delays in the process to obtain
national approval licenses and the lower than expected sales in the 2nd quarter.
We and AXM Shenyang are actively seeking solutions to these issues. Such
solutions may include, among other actions, the hiring of senior level managers
who are familiar with both U.S. management methods and Chinese language and
culture. In the event that we are unable to implement such solutions in a timely
manner it could have a material adverse effect on our business and operations,
including but not limited to, further delays in future anticipated national
approval licensing activities and the ramp-up of the sales of new and existing
products.
We rely on third parties for the supply, manufacture and distribution of our
products.
Third parties have manufactured and distributed all of our products. We have
not, and do not have manufacturing facilities, personnel or access to raw
materials to independently manufacture our products. Prior to the interruption
in the manufacture and sale of our drugs for regulatory reasons and because our
factory is still under construction, our products were manufactured by Qiqihaer
Pharmaceutical Factory 2 and distributed by Liaoning Weikang Medicine Co. Ltd.
Except for any contractual rights and remedies that we may have had with our
manufacturer and our distributor, we did not have any control over the
availability of our products, their quality or cost or the actual distribution
of our products. Our current distribution agreement with Liaoning Weikang
Medicine Co. Ltd. expired at the end of March 2004. Although Liaoning Weikang
Medicine Co. Ltd. verbally agreed to continue as our distributor, we have not
signed a definitive written agreement for distribution of our products with
Liaoning Weikang Medicine Co. Ltd. or any other distributor. Our manufacturing
agreement with Qiqihaer Pharmaceutical Factory 2 expired in September 2004.
Depending upon when our national license application and Good Manufacturing
Practices certification are approved, our new factory may be operational and
therefore we may no longer require the services of Quiqihaer Pharmaceutical. If
however, construction of our new factory is not complete and we are unable to
obtain or retain third-party manufacturers and distributors on commercially
acceptable terms we may not be able to produce and distribute our products as
planned. If we encounter delays or difficulties with our contract manufacturer
in producing or packaging our products or with our distributor in distributing
our products, the production, distribution, marketing and subsequent sales of
these products would be adversely affected, and we may have to seek alternative
sources of supply or distribution or abandon or sell product lines on
unsatisfactory terms. We may not be able to enter into alternative supply,
production or distribution arrangements on commercially acceptable terms, if at
all. There can be no assurance that the manufacturer we engage will be able to
provide sufficient quantities of these products or that the products supplied
will meet with our specifications or that our distributor will be able to
distribute our products in accordance with our requirements. In addition,
production of our products may require raw materials for which the sources and
quantities are limited. An inability to obtain adequate supplies of raw
materials could significantly delay development, regulatory approval and
marketing of our products.
We may have difficulty competing with larger and better financed companies in
our sector.
The ethical and over-the-counter drug markets in The Peoples Republic of China
are very competitive and competition may increase. Products compete on the basis
of efficacy, safety, side effect profiles, price and brand differentiation. Some
of our competitors may have greater technical and financial resources than AXM
Pharma and may use these resources to pursue a competitive position that
threatens our products. Our products could be rendered obsolete, or uneconomical
by the development of new pharmaceuticals to treat conditions addressed by our
products, as a result of technological advances affecting the cost of
production, or as a result of marketing or pricing action by one or more of our
competitors.
We are dependant on certain key existing and future personnel.
Our success will depend, to a large degree, upon the efforts and abilities of
our officers and key management employees such as Peter Cunningham, our Chief
Executive Officer; Chet Howard, our Chief Financial Officer; and Wang Wei Shi,
Chief Executive Officer of AXM Shenyang, Inc. The loss of the services of one or
more of our key employees could have a material adverse effect on our
operations. We currently only have an employment agreement with Peter
Cunningham. We do not currently maintain key man life insurance on any of our
key employees. In addition, as our business plan is implemented, we will need to
recruit and retain additional management and key employees in virtually all
phases of our operations. Key employees will require not only a strong
background in the pharmaceutical industry, but a familiarity with language and
culture in the markets in which we compete. We cannot assure that we will be
able to successfully attract and retain key personnel.
Our growth is dependent on our ability to successfully develop, acquire or
license new products and on our ability to successfully introduce such products
to the market.
We must invest substantial time, resources and capital in identifying and
developing new drugs, dosage and delivery systems, either on our own or by
acquiring and licensing such products from third parties. Our growth depends, in
part, on our success in such process. Our planned expansion over time is founded
on a simple principal of introducing two new products or line extensions each
year and to expand distribution into two new territories each year. This
strategy has the advantage of building brands through geographic expansion and
line extensions, and establishing incremental capabilities for new product
introductions. We believe that our planned expansion will require $5.0 million
in total over three years, which we intend to fund out of our future revenues
and, if necessary, additional financing. If we are unable to either develop new
products on our own or acquire licenses for new products from third parties, our
ability to grow revenues and market share will be adversely affected. In
addition, we may not be able to recover our investment in the development or
acquisition of new products, given that projects may be interrupted,
unsuccessful, not as profitable as initially contemplated or we may not be able
to obtain necessary financing for such development if we are unable to fund such
development or acquisition from our future revenues. Even if we are able to
develop acquire or license new products, our growth could be materially
adversely impacted if we are unable to successfully market and sell such new
products once they are available to us.
We may be subject to product liability claims in the future.
We face an inherent business risk of exposure to product liability claims in the
event that the uses of our technologies or products are alleged to have resulted
in adverse side effects. Side effects or marketing or manufacturing problems
pertaining to any of our products could result in product liability claims or
adverse publicity. These risks will exist for those products in clinical
development and with respect to those products that receive regulatory approval
for commercial sale. Furthermore, although we have not historically experienced
any problems associated with claims by users of our products, we do not
currently maintain product liability insurance. We plan to have a product
liability insurance plan in place by the second quarter of fiscal 2004; however,
there can be no assurance that we will be able to acquire product liability
insurance with terms that are commercially feasible.
RISKS RELATING TO THE PHARMACEUTICAL INDUSTRY IN THE PEOPLE'S REPUBLIC OF CHINA
Changes in the laws and regulations in The Peoples Republic of China may
adversely affect our ability to conduct our business.
The pharmaceutical industry is relatively new in the emerging markets of The
Peoples Republic of China that we are targeting, and the manner and extent to
which it is regulated in these geographical areas is evolving. As a Chinese
corporation, AXM Pharma is subject to the Company Law of The Peoples Republic of
China and more specifically to the Foreign Company provisions of the Company Law
and the Law on Foreign Capital Enterprises of the People's Republic of China.
Additionally, as a pharmaceutical company, we are subject to the Pharmaceutical
Administrative Law. Changes in existing laws or new interpretations of such laws
may have a significant impact on our methods and costs of doing business. For
example, new legislative proposals for pharmaceutical product pricing,
reimbursement levels, approval criteria and manufacturing requirements may be
proposed and adopted. Such new legislation or regulatory requirements may have a
material adverse effect on our financial condition, results of operations or
cash flows. In addition, we will be subject to varying degrees of regulation and
licensing by governmental agencies in The Peoples Republic of China. There can
be no assurance that the future regulatory, judicial and legislative changes
will not have a material adverse effect on AXM Pharma, that regulators or third
parties will not raise material issues with regard to AXM Pharma or our
compliance or non-compliance with applicable laws or regulations or that any
changes in applicable laws or regulations will not have a material adverse
effect on AXM Pharma or our operations.
We may experience barriers to conducting business due to governmental policy.
The State Food and Drug Administration of The Peoples Republic of China set up a
classification administrative system in 1999 for prescription and
over-the-counter drugs. Since then, the State Food and Drug Administration has
issued a series of guidelines for interpretation of the new classification
system for labeling, usage instructions and packaging of over-the-counter
products. The State Food and Drug Administration currently requires that
pharmaceutical manufacturers clearly label drugs for over-the-counter sales and
distinguish them from those to be sold in hospitals as ethical drugs. We have
instituted this policy as required by the State Food and Drug Administration. To
date, we have never experienced any problems with compliance with the
regulations of the State Food and Drug Administration. We have never been
investigated for noncompliance by this agency nor have we violated any
regulations of the State Food and Drug Administration.
Our business may be adversely affected by government plans to consolidate state
owned pharmaceutical companies in the Peoples Republic of China.
The Ministry of Commerce announced plans to consolidate nearly 5,000 state owned
pharmaceutical companies into approximately 12 to 15 companies. The Ministry of
Commerce has stated that it targets the size of these remaining firms to be at
least U.S.$ 10.0 billion revenue per annum in the future (U.S.$ 5.0 billion by
the year 2010). Their primary business will be to make generic pharmaceutical
products for sale to state owned hospitals. The planned consolidation has
already commenced and is anticipated to continue until the goals of the Ministry
of Commerce have been realized. The Ministry of Commerce has set a near term
goal of having 10 large companies with annual sales of over RMB 5 billion by
2005. We are not aware, however, at this time of how many companies have been
consolidated or when the planned consolidation will be completed. A recent
example of the consolidation amongst state owned pharmaceutical companies is the
acquisition by the conglomerate Huayuan Group of a 40% stake in Shanghai
Pharmaceutical Group. This new company will be involved in manufacture,
distribution and research and development. An objective of the consolidation is
to establish a manufacturing standard consistent with U.S. Good Manufacturing
Practices. It is planned that all products manufactured in The Peoples Republic
of China will meet U.S. Good Manufacturing Practices standard in the future.
AXM Pharma has initiated several programs to mitigate any potential negative
impact that this consolidation may have. These steps include commencing
construction of a U.S. Good Manufacturing Practices qualified facility that will
comply with both Chinese and U.S. requirements; seeking to license original
molecules from multi national pharmaceutical firms and specialist drug discovery
firms to participate in the patented prescription product segment of the market
which provides certain protections and pricing multiples not available in other
segments;; and pursuing expansion into the distribution segment of the
pharmaceutical business which is being opened for foreign companies at this
time. This access is supported by new government regulation. Despite these
steps, however, should The Ministry of Commerce follow through with its plans to
consolidate the many fragmented Chinese pharmaceutical companies into a smaller
number of large firms, we will face increased competition from large, well
funded, government supported companies. Our business could be adversely affected
by this increased competition.
RISKS RELATING TO THE PEOPLE'S REPUBLIC OF CHINA
Capital outflow policies in The Peoples Republic of China may hamper our ability
to remit income to the United States.
The Peoples Republic of China has adopted currency and capital transfer
regulations. These regulations may require that we comply with complex
regulations for the movement of capital. In order to comply with these
regulations we may have to revise or change the banking structure of our company
or its subsidiaries Although we believe that we are currently in compliance with
these regulations, should these regulations or the interpretation of them by
courts or regulatory agencies change we may not be able to remit all income
earned and proceeds received in connection with our operations to the U.S.
Fluctuation of the Renminbi could materially affect our financial condition and
results of operations.
The value of the Renminbi fluctuates and is subject to changes in The Peoples
Republic of China's political and economic conditions. Since 1994, the
conversion of Renminbi into foreign currencies, including United States dollars,
has been based on rates set by the People's Bank of China, which are set daily
based upon the previous day's interbank foreign exchange market rates and
current exchange rates on the world financial markets. Since 1994, the official
exchange rate for the conversion of Renminbi to United States dollars has
generally been stable. As of November 15, 2003, the exchange rate between the
Renminbi and the United States dollar was 8.26 Renminbi to every one United
States dollar.
We may face obstacles from the communist system in The Peoples Republic of
China.
Foreign companies conducting operations in The Peoples Republic of China face
significant political, economic and legal risks. The Communist regime in The
Peoples Republic of China, including a stifling bureaucracy, may hinder Western
investment. Another obstacle to foreign investment is corruption. There is no
assurance that we will be able to obtain recourse, if desired, through The
Peoples Republic of China's poorly developed and often corrupt judicial systems.
We may have difficulty establishing adequate management, legal and financial
controls in The Peoples Republic of China.
The Peoples Republic of China historically has been deficient in Western style
management and financial reporting concepts and practices, as well as in modern
banking, computer and other control systems. We may have difficulty in hiring
and retaining a sufficient number of qualified employees to work in The Peoples
Republic of China. As a result of these factors, we may experience difficulty in
establishing management, legal and financial controls, collecting financial data
and preparing financial statements, books of account and corporate records and
instituting business practices that meet Western standards.
Trade barriers and taxes may have an adverse effect on our business and
operations.
We may experience barriers to conducting business and trade in our targeted
emerging markets in the form of delayed customs clearances, customs duties and
tariffs. In addition, we may be subject to repatriation taxes levied upon the
exchange of income from local currency into foreign currency, substantial taxes
of profits, revenues, assets and payroll, as well as value-added tax. The
markets in which we plan to operate may impose onerous and unpredictable duties,
tariffs and taxes on our business and products, and there can be no assurance
that this will not have an adverse effect on our finances and operations.
It will be extremely difficult to acquire jurisdiction and enforce liabilities
against our officers, directors and assets based in The Peoples Republic of
China.
Because several of our directors, including Wei Shi Wang, the chairman of our
Board of Directors, are Chinese citizens it may be difficult, if not impossible,
to acquire jurisdiction over these persons in the event a lawsuit is initiated
against AXM Pharma and/or its officers and directors by a shareholder or group
of shareholders in the U.S. Also, although our executive officers are U.S.
citizens, because they may be residing in The Peoples Republic of China at the
time such a suit is initiated achieving service of process against such persons
would be extremely difficult. Furthermore, because the majority of our assets
are located in The Peoples Republic of China it would also be extremely
difficult to access those assets to satisfy an award entered against us in U.S.
court.
There can be no guarantee that The Peoples Republic of China will comply with
the membership requirements of the World Trade Organization.
Due in part to the relaxation of trade barriers following World Trade
Organization accession in January 2002, we believe The Peoples Republic of China
will become one of the world's largest pharmaceutical markets by the middle of
the twenty-first century. As a result, we believe the Chinese market presents a
significant opportunity for both domestic and foreign drug manufacturers. With
the Chinese accession to the World Trade Organization, the Chinese
pharmaceutical industry is gearing up to face the new patent regime that is
required by World Trade Organization regulation. The Chinese government has
begun to reduce its average tariff on pharmaceuticals. The Peoples Republic of
China has also agreed that foreign companies will be allowed to import most
products, including pharmaceuticals, into any part of The Peoples Republic of
China. Current trading rights and distribution restrictions are to be phased out
over a three-year period. In the sensitive area of intellectual property rights,
The Peoples Republic of China has agreed to implement the trade-related
intellectual property agreement of the Uruguay Round. There can be no assurances
that The Peoples Republic of China will implement any or all of the requirements
of its membership in the World Trade Organization in a timely manner, if at all.
The recent outbreak of Severe Acute Respiratory Syndrome (SARS) may adversely
impact our operations and the operations of our contract manufacturers and
distributors.
The SARS outbreak has been most notable in Asia, in particular The Peoples
Republic of China, Singapore and Vietnam. Our principal administrative, sales,
marketing and production development facilities are located in the Northern
portion of The Peoples Republic of China and the operations of all of our
contract manufacturers and distributors are located in The Peoples Republic of
China, as well. The development, manufacture, marketing and distribution of our
pharmaceutical products could suffer if a significant number of our employees or
the employees of our contract manufacturers or distributors contract SARS or
otherwise are unable to fulfill their responsibilities. In addition, while we
possess technology that would allow us to develop and market products with
minimal travel to or from Asia, our business could also be harmed if travel to
or from Asia and the United States is restricted or inadvisable. Because of our
relatively small size, many of our competitors may be better able to withstand
the adverse impact to their businesses resulting from the SARS outbreak.
RISKS RELATING TO OWNERSHIP OF COMMON STOCK
There may not be sufficient liquidity in the market for our securities in order
for investors to sell their securities.
There is currently only a limited public market for our common stock, which is
listed on the American Stock Exchange, and there can be no assurance that a
trading market will develop further or be maintained in the future. During the
month of October 2004, our common stock traded an average of approximately
52,000 shares per day. As of November 17, 2004, the closing bid price of our
common stock on the American Stock Exchange was $2.35 per share. As of November
17, 2004, we had approximately 105 shareholders of record not including shares
held in street name. In addition, during the past two years our common stock has
had a trading range with a low price of $.09 per share and a high price of $7.30
per share.
The fact that our directors and officers own approximately 43.70% of our capital
stock may decrease your influence on shareholder decisions.
Our executive officers and directors, in the aggregate, beneficially own
approximately 43.70% of our capital stock. As a result, our officers and
directors, will have the ability to influence our management and affairs and the
outcome of matters submitted to shareholders for approval, including the
election and removal of directors, amendments to our bylaws and any merger,
consolidation or sale of all or substantially all of our assets.
The outstanding warrants may adversely affect AXM Pharma in the future and cause
dilution to existing Shareholders.
The holders of the warrants have until August 21, 2008, September 12, 2008,
December 31, 2008, and June 24, 2007 respectively, to exercise their warrants.
There are currently 3,683,689 warrants outstanding, which are exercisable at a
price of $3.00 per share, with the exception of those warrants which expire on
June 24, 2007, which are exercisable at a price of $5.50 per share, subject to
adjustment in certain circumstances. Exercise of the warrants may cause dilution
in the interests of other shareholders as a result of the additional common
stock that would be issued upon exercise. In addition, sales of the shares of
our common stock issuable upon exercise of the warrants could have a depressive
effect on the price of our stock, particularly if there is not a coinciding
increase in demand by purchasers of our common stock. Further, the terms on
which we may obtain additional financing during the period any of the warrants
remain outstanding may be adversely affected by the existence of these warrants
as well.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
We maintain controls and procedures designed to ensure that information
required to be disclosed in the reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission. Based upon their evaluation of those
controls and procedures performed as of the end of the period covered by
this report, our chief executive officer and principal financial officer
concluded that our disclosure controls and procedures were adequate.
(b) Changes in internal controls
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the
date of the evaluation of those controls by the chief executive officer and
principal financial officer.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not involved in any lawsuits and are not aware of any pending litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not Applicable.
(b) Not Applicable.
(c) On July 21, 2004, we issued 83,334 shares of restricted common shares valued
at $319,169 pursuant to an agreement with Peter Cunningham, our Chief Executive
Officer. The shares were issued pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act for issuances not involving a
public offering. The shares were valued at $3.83 per share, the market price for
shares of our common stock at the time of issuance.
On July 21, 2004, we issued 100,000 shares of restricted common to Chet Howard,
our Chief Financial Officer and Chief Accounting Officer, valued at $383,00. The
shares were issued pursuant to the exemption from registration provided by
Section 4(2) of the Securities Act for issuances not involving a public
offering. The shares were valued at $3.83 per share, the market price for shares
of our common stock at the time of issuance.
On July 21, 2004, we issued 100,000 shares of restricted common to Harry Zhang,
Chief Accounting Officer of AXM Shenyang, our wholly owned subsidiary, valued at
$383,00. The shares were issued pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act for issuances not involving a
public offering. The shares were valued at $3.83 per share, the market price for
shares of our common stock at the time of issuance
On August 27, 2004 we issued 35,000 stock options to each of Montgomery Simus
and Mark Bluer, both of whom are members of our Board of Directors, valued at a
total of $190,400. The shares were issued pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act for issuances not
involving a public offering. The shares were valued at $2.72 per share, the
market price for shares of our common stock at the time of issuance.
On September 1, 2004 we issued stock options, for an aggregate of 100,000 shares
valued at $269,000 pursuant to an agreement with Dreamvest, LLC. The shares were
issued pursuant to the exemption from registration provided by Section 4(2) of
the Securities Act for issuances not involving a public offering. The shares
were valued at $2.69 per share, the market price for shares of our common stock
at the time of issuance.
On September 8, 2004 we issued stock options, for an aggregate of 80,000 shares
valued at $312,000 pursuant to an agreement with RCG Capital Markets Group, Inc.
The shares were issued pursuant to the exemption from registration provided by
Section 4(2) of the Securities Act for issuances not involving a public
offering. The shares were valued at $3.90 per share, the market price for shares
of our common stock at the time of issuance.
(d) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
The Company recently moved its U.S. corporate headquarters from 3960 Howard
Hughes Parkway, Suite 500, Las Vegas, Nevada 89109 to 7251 West Lake Mead Blvd.,
Suite 300, Las Vegas, Nevada 89128.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report.
Exhibit No. Document
31.1 Certification of Chief Executive Officer required by Rule
13a-14/15d-14(a) under the Exchange Act.
31.2 Certification of Chief Financial Officer required by Rule
13a-14/15d-14(a) under the Exchange Act.
32.1 Certification of 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 Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports of Form 8-K
1. On August 18, 2004, we filed a Current Report on Form 8-K reporting that on
August 18, 2004, we held a conference call discussing our fiscal 2004,
second quarter results and current events of AXM Pharma. (Item 12).
2. On August 18, 2004, we filed a Current Report on Form 8-K reporting that on
August 13, 2004, we dismissed Malone & Bailey, PLLC, as our independent
auditors and hired Batemen & Co., Inc. as our independent auditors. (Items
4 and 7).
3. On August 27, 2004, we filed a Current Report on Form 8-K reporting that on
August 25, 2004, we dismissed Batemen & Co., Inc., as our independent
auditors and hired Lopez, Blevins, Bork & Associates, LLP, as our
independent auditors. (Items 4.01 and 9.01).
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: November 18, 2004 AXM PHARMA, INC.
By: /s/ Peter Cunningham
----------------------------
Peter Cunningham,
President and CEO
/s/ Chet Howard
----------------------------
Chet Howard,
Chief Financial Officer
Principle Accounting Officer
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Peter Cunningham, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of AXM Pharma, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The small business issuer's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the small business issuer and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the small
business issuer, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the
period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused
such internal control to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.
c. Evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
d. Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter (the small business
issuer's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect,
the small business issuer's internal control over financial reporting;
and
5. The small business issuer's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the small business issuer's auditors and the audit committee of
the small business issuer's board of directors (or persons performing the
equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer's
internal control over financial reporting.
Date: November 18, 2004
/s/ Peter Cunningham
---------------------------
Peter Cunningham
Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Chet Howard, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of AXM Pharma, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The small business issuer's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the small business issuer and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the small
business issuer, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the
period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused
such internal control to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.
c. Evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
d. Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter (the small business
issuer's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect,
the small business issuer's internal control over financial reporting;
and
5. The small business issuer's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the small business issuer's auditors and the audit committee of
the small business issuer's board of directors (or persons performing the
equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer's
internal control over financial reporting.
Date: November 18, 2004
/s/ Chet Howard
--------------------------------
Chet Howard,
Chief Financial Officer
Principle Accounting Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of AXM Pharma, Inc. (the "Company") on
Form 10-QSB for the period ending September 30, 2004, as filed with the
Securities and Exchange Commission on the date hereof (the "Report'), I, Peter
W. Cunningham, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company at the dates and for the periods indicated.
/s/ Peter W. Cunningham
----------------------------
Peter W. Cunningham,
Chief Executive Officer
November 18, 2004
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of AXM Pharma, Inc. (the "Company") on
Form 10-QSB for the period ending September 30, 2004, as filed with the
Securities and Exchange Commission on the date hereof (the "Report'), I, Chet
Howard, Chief Financial Officer and Principle Accounting Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company at the dates and for the periods indicated.
/s/ Chet Howard
--------------------------------
Chet Howard,
Chief Financial Officer
Principle Accounting Officer
November 18, 2004
Next Section
Previous Section