We are registering the shares of common stock on behalf of the selling
shareholders. The shares of common stock may be sold in one or more transactions
at fixed prices, at prevailing market prices at the time of sale, at prices
related to the prevailing market prices, at varying prices determined at the
time of sale, or at negotiated prices. These sales may be affected at various
times in one or more of the following transactions, or in other kinds of
transactions:
o transactions on any national securities exchange or U.S. inter-dealer
system of a registered national securities association on which the
common stock may be listed or quoted at the time of sale;
o in the over-the-counter market;
o in private transactions and transactions otherwise than on these
exchanges or systems or in the over-the-counter market;
o in connection with short sales of the shares;
o by pledge to secure or in payment of debt and other obligations;
o through the writing of options, whether the options are listed on an
options exchange or otherwise;
o in connection with the writing of non-traded and exchange-traded call
options, in hedge transactions and in settlement of other transactions
in standardized or over-the-counter options; or
o through a combination of any of the above transactions.
Each selling shareholder and its successors, including its transferees,
pledgees or donees or their successors, may sell the common stock directly to
the purchaser or through underwriters, broker-dealers or agents, who may receive
compensation in the form of discounts, concessions or commissions from the
selling stockholder or the purchaser. These discounts, concessions or
commissions as to any particular underwriter, broker-dealer or agent may be in
excess of those customary in the types of transactions involved.
The selling security holders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with these sales. In that event, any
commissions received by these broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
In addition, any securities covered by this prospectus which qualify
for sale pursuant to Rule 144 of the Securities Act may be sold under Rule 144
rather than pursuant to this prospectus.
13
We have entered into registration rights agreements for the benefit of
the selling shareholders to register the common stock under applicable federal
and state securities laws. The registration rights agreements provide for
cross-indemnification of the selling shareholders and us and our respective
directors, officers and controlling persons against specific liabilities in
connection with the offer and sale of the common stock, including liabilities
under the Securities Act. We will pay substantially all of the expenses incurred
by the selling shareholders incident to the registration of the offering and
sale of the common stock.
14
THE PHARMACEUTICAL MARKET
IN THE PEOPLE'S REPUBLIC OF CHINA
The Peoples Republic of China is one of the world's major producers of
pharmaceuticals. According to IMS Market Research Consulting (Shanghai)
currently there are approximately 6,000 pharmaceutical manufacturers operating
in The Peoples Republic of China, with the capacity to produce 1,350 ethical
drugs and more than 8,000 traditional Chinese medicines. In 2000, the The
Peoples Republic of China's pharmaceutical industry had aggregate sales of
US$28.2 billion, which represented a 22% increase over aggregate sales in
1999.(1)
Impact of Accession to World Trade Organization. Due in part to the
relaxation of trade barriers following The Peoples Republic of China's accession
to the World Trade Organization 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, and 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 Peoples Republic of China's pharmaceutical industry was opened to
outside markets earlier than other industrial sectors. With the reduction of
tariffs, The Peoples Republic of China will not only be able to import advanced
drugs, but many small and medium-sized foreign companies with independent
patents will also be able to enter the market. Since The Peoples Republic of
China's entry into the World Trade Organization, international pharmaceutical
companies are now able to acquire a large share of the Chinese pharmaceutical
market. These companies may be able to gain total control over their
distribution networks and not have to rely on the complex and costly Chinese
supply network. An open market will give international companies a better
opportunity of having their products included on The Peoples Republic of
China's provincial and municipal lists of drugs that are subject to state
reimbursement. In addition, the intellectual property rights of foreign
manufacturers may be better protected.
Traditional Chinese medicines are likely to be less affected by The
Peoples Republic of China's World Trade Organization accession. However, it is
expected that The Peoples Republic of China will have to develop and utilize
modern laboratory methods to demonstrate the efficacy of Traditional Chinese
medicines. In addition, The Peoples Republic of China is requiring manufacturers
of Western prescription and over-the-counter medicines that conform to new
international standards of quality and efficacy. The Chinese government is
determined to nurture its own large pharmaceutical companies, while reducing the
number of small companies. It is anticipated that this government determination
will boost the quality of Chinese medicine and enhance The Peoples Republic of
China's ability to compete in world markets.
Foreign drug companies are expected to benefit from The Peoples
Republic of China's World Trade Organization accession in three significant
areas: First, they will be able to acquire a larger share of the Chinese market;
open competition will give foreign drug companies a better chance of having
their products included on The Peoples Republic of China's provincial and
municipal lists of drugs that are subject to state reimbursement. Second, they
may be able to gain increased control over their distribution networks and may
not have to rely on the complex and costly Chinese supply network. Finally, the
intellectual property rights of foreign drug companies will be accorded enhanced
protection. However, given The Peoples Republic of China's past performance in
adhering to international agreements, there can be no assurance that any or all
of these benefits will be achieved.
Regional Industry Development. The eastern coastal areas of
The Peoples Republic of China are still the source of the greatest sales growth
of The Peoples Republic of China's pharmaceutical industry. The value added of
(1) The statistics and market data regarding the Pharmaceutical Market in the
Peoples Republic of China was based upon the report titled "IMS Market Research
Consulting (Shanghai), Market Prognosis Asia, 2003-2007, China Report," prepared
by IMS Market Research Consulting (Shanghai) is a subsidiary IMS Health (NYSE:
RX) ("IMS"), a global pharmaceutical market research company, operating in
China.
15
the 12 coastal economically-developed provinces and municipalities, including
Jiangsu, Zhejiang, Shandong, Guangdong, Liaoning, Shanghai and Beijing,
comprised approximately 64% of the total sales growth over the period from 2000
to 2002. Seven of the 16 Chinese provinces, municipalities and autonomous
regions reported a 20% or more growth rate from 2000 to 2002.
THE PEOPLES REPUBLIC OF CHINA'S OVER-THE-COUNTER MARKET DRIVERS
We believe the following factors are the key market-driving forces in
the projected growth of The Peoples Republic of China's over-the-counter
pharmaceutical industry:
Government Policy. The State Food and Drug Administration of The
Peoples Republic of China set up an administrative system in 1999 for the
classification of pharmaceutical products into the categories of prescription
and over-the-counter drugs. Since then, the State Food and Drug Administration
has issued a series of guidelines on the interpretation of the new
classification system on labeling, usage instructions and packaging of
over-the-counter products. . At present, there are approximately 700
over-the-counter drugs classified by the State Food and Drug Administration. A
second group of over-the-counter drugs is under consideration by the State Food
and Drug Administration in consultation with the Chinese pharmaceutical
industry. According to the State Food and Drug Administration's plan, it is
estimated that approximately 70% of registered drugs will be classified as
over-the-counter.
Economic and Social Development. In The Peoples Republic of China,
awareness is increasing about health care and the importance of self-medication.
The rapid rise in living standards and disposable income has made possible
self-medication on a continued basis for a large number of people. We believe
achievement of satisfactory results through such easy self-health management is
winning over an increasingly large number of people across age groups. The
domestic over-the-counter market is also expanding as a result of rapid growth
in target urban consumer populations. Currently, the total number of
non-state-owned-enterprise workers (workers who are not covered by state health
insurance) has overtaken that of state-owned-enterprise employees. Increased
levels of international exchange and commercial activity have greatly added to
the number of tourists and mobile populations, which, compared with other
populations, tend to have higher incomes. The ongoing and proposed future
reforms to the healthcare insurance system should divert more of the population
to self-medication and over-the-counter consumption. Rural areas likely will
become large potential markets for over-the-counter drugs. We believe the
relative safety, low toxicity, efficacy, ease of use, and reasonable pricing of
most over-the-counter drugs will make many over-the-counter drugs a preferred
choice for the rural healthcare market in which medical services are scarce and
virtually non-existent in remote locations.
Technical Development. Adjustment in drug usage patterns should also
push the over-the-counter market forward. In recent years, the conversion from
prescription to over-the-counter drugs has become more frequent, which has
resulted in a widening range of diseases and symptoms for which over-the-counter
drugs are available. Consumption of nutritional supplements and medicated
cosmetics in the over-the-counter sector is increasing, which should further
enlarge the scope of over-the-counter application.
The Peoples Republic of China's Drugstore Development. The development
of the retail drugstore sector in The Peoples Republic of China since the most
recent round of healthcare reforms began in 1998 has been rapid. Chain
drugstores soon followed; since the promulgation of Chain Drugstores Regulations
in 1998, more than 260 companies have been approved by the State Food and Drug
Administration as chain drugstores. Of the roughly 120,000 Chinese retail
pharmacies as of December 2002, 260 were chain drugstore enterprises that
managed in the aggregate 5,096 retail outlets. According to recent industry
figures, there are an average of 26 retail drugstores for each chain; and the
largest chain had a total of 231 interregional retail outlets. As of December
2002, the largest retail sales of a chain drugstore in The Peoples Republic of
China amounted to RMB300.0 million, or US$36.59 million.
Chinese Consumers Trends. Recent consumer studies indicate that 86% of
drug stores in Beijing carry promotional advertising inside the retail outlet,
while another 59% use advertisements for external window displays. Seventy-one
of the 100 drug stores surveyed also hosted on-site promotional events conducted
by drug manufacturers. Television and radio commercials, pamphlets, journal and
newsletter advertising, billboards and medical information hotlines are also
used by manufacturers to promote their drug products to the public. Although
more than half of the average urban consumers in The Peoples Republic of China
know the brand names of commonly advertised over-the-counter products, only 16%
are influenced by advertising to buy these products. The caution of Chinese
16
consumers may stem from years of exposure to aggressive but medically
unsubstantiated claims of efficacy advertised by some Chinese manufacturers,
especially those dealing with herbal medicines. Although the State Food and Drug
Administration's "truth in advertising" regulations have sought to curtail the
advertising of cure-all products, the tendency of medically unsubstantiated
claims persists among some Chinese manufacturers and the State Food and Drug
Administration is unable to police all violations. In addition, recent studies
show that the drug store sales clerks play a major role in influencing the
consumer in his or her drug purchases. Sales clerk input and on-site educational
promotion of products accounted for 58% of consumer selection, while counter
displays attracted another 25.8%. We believe retail drug store outlets should
play a powerful role in the development of The Peoples Republic of China's
pharmaceutical market for prescription and non-prescription pharmaceutical
products. Barring radical changes in The Peoples Republic of China's medical
reform policies, the average consumer will increasingly be buying medication at
retail drug stores.
THE PEOPLES REPUBLIC OF CHINA'S OVER-THE-COUNTER MARKET CHARACTERISTICS
The following are the three key market characteristics of the Chinese
over-the-counter pharmaceutical marketplace.
Production and Price. Relatively simple off-patent technology makes
entry barriers low. Brand sensitivity is much stronger than price sensitivity
due to low price elasticity. It is very important to build branding and consumer
awareness because of the fragmentation of production and low price elasticity.
Promotion and Advertising. Typically, promotion and advertising
expenditure account for approximately 20-25% of the total sales turnover of
over-the-counter drugs. Advertising expenditure on television dominates. Other
promotional tools include point-of-purchase displays and medical magazines.
Distribution Channels. Distribution channels for over-the-counter drugs
include chain pharmacies, hospitals, direct sales, department stores and
supermarkets. For decades, the government has controlled The Peoples Republic of
China's drug distribution industry, and chain pharmacies have appeared only in
the past five years. The increase in over-the-counter sales has led to the rapid
development of chain pharmacies in Chinese cities. In 2000, there were over 200
intra-province chain pharmacies, with approximately 5,000 stores nation-wide.
GENERAL CHINESE MARKET STATISTICS
The Peoples Republic of China is one of the largest markets in the
world and we believe the growth potential is significant. The country has a
massive population of approximately 1.4 billion people. According to the Chinese
Statistics Bureau, at December 31, 2000, the Chinese market had the following
growth factors:
a. Gross Domestic Product ("GDP") growth rate: 9.6%;
b. Urban growth rate: 10% - 30%;
c. Urban per capital income: RMB 8,596 (US$1,036);
d. Retail sales: RMB 2,098 billion (US$253 billion);
e. Population: 1.4 billion;
f. Area: 9.6 million square km;
g. Key cities: 1,000; and
h. Urban dwellers: 27% (329 million).
FOREIGN INVESTMENT IN THE PEOPLES REPUBLIC OF CHINA'S PHARMACEUTICAL INDUSTRY
Pharmaceuticals produced by Sino-foreign joint ventures in The Peoples
Republic of China and imported drugs account for one third of the Chinese
market. As of December 2000, approximately 1,700 pharmaceutical joint ventures
had been established in The Peoples Republic of China, with investment totaling
approximately US$2 billion and 40% of all Chinese pharmaceutical enterprises
having utilized overseas capital. Of the 25 largest multinational pharmaceutical
companies, 20 had established a presence in The Peoples Republic of China, with
40 of the 50 most popular branded drugs in The Peoples Republic of China
produced by Sino-foreign joint ventures. In terms of sales volume, the leading
joint venture is Xi'an-Janssen Pharmaceutical, a collaboration between Johnson &
Johnson and the Shanxi Provincial Corporation of Pharmaceutical Industries.
Tanjin Smith Kline & French Laboratories, which is owned 55% by SmithKline
Beecham, leads the over-the-counter market, and Shanghai Squibb Pharmaceuticals
Products, which is partly owned by Bristol-Myers Squibb, has been successful in
17
both urban hospitals and the over-the-counter market. A recent joint venture
includes Shanghai Sankyo Pharmaceutical, a joint venture between Sankyo Seiyaku,
a Japanese company that is the 95% owner, and Shanghai Zhangjiang Science and
Technology Park Development, which markets six of Sankyo's products.
The rate at which foreign companies are establishing joint ventures
with Chinese enterprises and increasing their financial investment has
significantly increased in the last two years. In 2000, Celera Genomics, a U.S.
company, acquired a 47.5% stake in Shanghai GeneCore BioTechnologies, with a
view to expanding globally and gaining access to new sources of genetic
information. Nutricia, a Dutch company, has invested US$20 million to form a
wholly-owned subsidiary, Nutricia Pharmaceutical (Wuxi), to produce proprietary
nutritional products.
The Chinese market is highly fragmented with a large number of
manufacturers and distributors. There are over 6,000 pharmaceutical firms in The
Peoples Republic of China, many of which are small local enterprises. In a move
to improve the competitive edge of The Peoples Republic of China's
pharmaceutical industry in the international market, in 2000, the Ministry of
Commerce announced plans to consolidate nearly 5,000 state owned firms into 12
large pharmaceutical firms to compete with the world's leading drug producers.
During the next five years, the Ministry of Commerce expects these 12 large
pharmaceutical firms to play a significant role in the domestic and
international arena, and they will be granted priority for technical renovation
and research and development. The Peoples Republic of China has set up over 200
research institutes for biotechnology and more than 140 enterprises are engaged
in related development and production. The Ministry of Commerce also supports
foreign pharmaceutical companies in expanding their businesses and in setting up
research centers to develop new products. Foreign-funded research centers would
be exempt from import tariff and custom taxes; business taxes would also be
exempt if foreign companies transfer technology to Chinese-based entities.
Difficulties faced by foreign firms entering the Chinese market include
the lack of protection of intellectual property rights, drug counterfeiting,
price controls, limited social security, medical insurance and prescription
coverage. See "Risk Factors - Risks Relating to the Pharmaceutical Industry in
The People's Republic of China."
BUSINESS
OVERVIEW
We are a China-based pharmaceutical company that, through our
wholly-owned subsidiary, Werke Pharmaceuticals, Inc. owns 100% of AXM Shenyang,
a Wholly Foreign Owned Enterprise organized under the laws of The Peoples
Republic of China.
Werke Pharmaceuticals was organized on November 29, 2000, in order to
enter the Chinese Pharmaeutical Industry. Werke had the capability to organize
and expand an existing China-based Pharmaceutical company, as the Chinese
industry accelerated the process of privatization of State Owned Pharmaceutical
Companies. Toward that end, on January 26, 2001, Werke Pharmaceuticals entered
into an equity joint venture with Shenyang Tianwei Pharmaceutical Factory, Ltd.,
a Chinese company that manufactured and marketed pharmaceuticals in The Peoples
Republic of China, which contributed its assets and operations to the joint
venture. The equity joint venture was organized under the name Shenyang Tianwei
Werke Pharmaceuticals Co., Ltd., which was changed to AXM Pharma Shenyang, Inc.
in April 2004. The shareholders of Shenyang Tianwei Pharmaceutical Factory later
converted their interest in the equity joint venture into shares of Werke
Pharmaceuticals in anticipation of Werke Pharmaceuticals' reverse acquisition of
Wickliffe International Corporation. Upon the conversion of the interest of the
shareholders of Shenyang Tianwei Pharmaceutical Factory into shares of Werke
Pharmaceuticals, the joint venture was granted permission and rights to become a
Wholly Foreign Owned Enterprise. As a result of the change of status of Shenyang
Tiawei Werke Pharmaceutical Factory from an equity joint venture to a Wholly
Foreign Owned Enterprise, AXM Shenyang became the wholly owned operating
subsidiary of Werke. Immediately prior to its reverse acquisition of Wickliffe
International, Werke's sole business was conducted through its wholly owned
subsidiary Shenyang Tianwei Werke Pharmaceuticals. Wickliffe International had
no operations immediately prior to its business combination with Werke.
Following the reverse acquisition of Wickliffe International, Wickliffe
International became the parent of Werke Pharmaceuticals and AXM Shenyang. Also
following the reverse acquisition Wickliffe International Corporation changed
its name to Axiom Pharmaceuticals, Inc., and subsequently to AXM Pharma, Inc.
Our subsidiary, AXM Shenyang, is classified under Chinese Company Law as a
18
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 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.
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.
There may of course be disadvantages to operating as a Wholly Foreign
Owned Enterprise. For example, should we become subject to liabilities that
arise from our operations in The Peoples Republic of China, we would be wholly
responsible for such liabilities. In a joint venture, the foreign investor would
only be liable for that portion of the liability, which corresponds to its
ownership in the joint venture. Also, as a result of our wholly foreign
ownership, we may receive less favorable treatment from governmental agencies in
The Peoples Republic of China and other Chinese companies than we would receive
if we had a Chinese Partner. To date we have not experienced any such
disadvantages in operating our business as a Wholly Foreign Owned Enterprise.
Despite the possible disadvantages to operating as a Wholly Foreign
Owned Enterprise, we feel that the advantages outweigh the disadvantages. With
regard to AXM Pharma, the advantage of being able to own 100% of our Chinese
operating subsidiary is particularly important because of our status as a U.S.
public company. We believe that newly formed businesses will also see the
advantages to operating as a Wholly Foreign Owned Enterprise and that most such
businesses will, if permitted by the Chinese government, choose the use of the
Wholly Foreign Owned Enterprise structure over the joint venture structure. It
is also anticipated that many existing joint ventures are likely to migrate
their corporate structures to Wholly Foreign Owned Enterprises over the next
five years.
AXM Shenyang is located in the City of Shenyang, which is in the
Province of Liaoning in the Northeastern section of The Peoples Republic of
China. AXM Shenyang and its predecessor company, Shenyang Tianwei Pharmaceutical
Factory, Ltd. have an operating history of approximately 10 years. AXM Shenyang
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. The products
produced by AXM Shenyang in the past three years have focused on relief of
selective symptoms of upper respiratory infection, skin irritation and rash,
infectious disease. We currently own 43 product permits, of which only four
permits are currently commercialized. AXM Shenyang's Shenyang plant was
decommissioned in 2002 due to the significant growth of the population of
Shenyang that caused the surrounding area to change from a city-edge industrial
19
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. However, since we did not own the land upon which the old factory
was located, we do not anticipate receiving any material reimbursement for our
contribution of the plant. Furthermore, the compensation we may receive, if any,
is not expected to have a material affect on our results of operations or
financial condition. AXM Shenyang currently utilizes a third-party original
equipment manufacturing pharmaceutical plant to produce all of its products and
distributes its products only through third-party distributors. AXM Pharma has a
marketing field force of 22 persons.
We are utilizing a portion of the net proceeds from our sale of the
Preferred Stock to build a modern production and distribution facility, which we
plan to qualify under United States Good Manufacturing Practice regulations. The
site of our new plant is located in a special economic zone located several
kilometers from the old plant. We have engaged Liaoning Pharmaceutical Design &
Engineering Company as our design company. Liaoning Pharmaceutical Design &
Engineering Company has provided us with the following estimates in its report
to us titled the " Basis for Design":
o Construction and installation of equipment: December 2003-July 2004
o Trial batch production: August 2004-September 2004
o Chinese Good Manufacturing Practices licensing: October 2004-November
2004
o US Food and Drug and Administration inspection and certification: to
be scheduled
Prior to closing the old plant, we had approximately 320 employees. By
utilizing third-party original equipment manufacturing manufacturing
relationships, our head count has dropped to approximately 35 employees. We
anticipate that when the new facility is certified and becomes operational our
total headcount will likely approach the former number of employees and selected
third-party original equipment manufacturing production will be discontinued.
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. We expect to
complete the construction and governmental approval process for the new facility
by the fourth quarter of fiscal 2004. We believe construction of the new
facility will provide us with the ability to meet current demand within The
Peoples Republic of China and with the flexibility to add production capacity to
meet future product requirements both within The Peoples Republic of China and
for potential export markets. We believe construction of the new facility will
provide significant operational and financial benefits as a result of our
ability to implement operational effectiveness as well as offer greater control
over quality assurance and production scheduling and capacity.
The new Shenyang facility is designed to meet stringent U.S. Good
Manufacturing Practice protocols. By meeting such protocols, we believe we will
be in a position to expand our marketing and sales activities to include exports
to neighboring Asia-Pacific countries, as well as North America, Europe and
Africa. In addition, we believe we will be better positioned to actively seek
and engage foreign ethical and over-the-counter drug manufacturers that are
searching for high-quality, low-cost manufacturing capabilities for their high
demand medications.
The High-Tech Industrial Development District was established in May of
1988 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.
20
GROWTH STRATEGY
We believe we have a low risk corporate development strategy in that we
intend to organically grow our operational revenue using currently profitable
products commercializing products for which permits are issued. Our strategy
includes a focus on branding and marketing. We plan to attract unique molecules
from large pharmaceutical and drug discovery companies through license
agreements. We will continue to sell in the Peoples Republic of China. The
addition of revenues through international sales of our products and/or
acquisitions will only be considered if they are deemed to enhance our revenue
and profitability. Utilizing our low risk growth strategy, however, we believe
that we can become a leading China-based, current Good Manufacturing
Practice-qualified pharmaceutical manufacturer and distributor, with
certification from the U.S. Food and Drug Administration and the Chinese State
Food and Drug Administration. To reach our goals, we intend to implement the
following strategy:
Construction of US Good Manufacturing Practice-qualified Manufacturing
Facility. We began construction in January 2004 of a new U.S. Good Manufacturing
Practice-qualified pharmaceutical manufacturing facility in the special economic
zone in Shenyang. The Good Manufacturing Practice Regulations are promulgated by
the United States Food and Drug Administration under the authority of the
Federal Food, Drug and Cosmetic Act. These regulations, which have the force of
law, require that manufacturers, processors and packagers of drugs, medical
devices, some foods, and blood take proactive steps to ensure their products are
safe, pure and effective. Good Manufacturing Practices regulations require a
quality approach to manufacturing, enabling companies to minimize or eliminate
instances of contamination, mix-ups and errors. Failure of firms to comply with
Good Manufacturing Practices regulations can result in serious penalties,
including recall, seizure, fine and imprisonment. We expect to complete the
construction and governmental approval process by the fourth quarter of fiscal
2004. We believe construction of the new plant will provide us with the ability
to meet current demand within The Peoples Republic of China and with the
flexibility to add production capacity to meet future product requirements both
within The Peoples Republic of China and for potential export markets. We
believe construction of the new plant will provide significant operational and
financial benefits as a result of our ability to implement operational
effectiveness as well as offer greater control over quality assurance and
production scheduling and capacity.
The new Shenyang facility has been designed to meet stringent U.S. Good
Manufacturing Practice protocols. By meeting such protocols, we believe we will
be in a position to expand our marketing and sales activities to include exports
to neighboring Asia-Pacific countries, as well as North America, Europe and
Africa. In addition, we believe we will be better positioned to actively seek
and engage foreign ethical and over-the-counter drug manufacturers that are
searching for high-quality, low-cost manufacturing capabilities for their high
demand medications.
Product Range Expansion. Anticipating completion of our new
manufacturing facility, we are undertaking to expand our existing product line
by exploiting our existing base of licensed products, internal research and
development of new formulas, as well as acquiring new ethical and
over-the-counter pharmaceutical products licensed from drug manufacturers based
in North America, Europe and Japan. Initially, selection of new products will be
determined by criteria such as: (a) molecules that can achieve a unique or
competitive positioning in the market relative to the competition in selected
therapeutic categories, (b) the size of the market, (c) the price premium
available based on the government's pricing mechanism in force at the time and
the projected profit margins, and (d) The opportunity available at the time to
market the products and have the product purchased through channels other than
government hospital tender purchasing. Our objective will be to maximize return
on investment and still benefit from proposed collaborative partners. We believe
cancer, respiratory disease, diabetes, cardiovascular and infectious diseases
represent significant therapeutic opportunities. In addition, we intend to focus
on products developed from original molecules that work in unique ways compared
to the competition, that have large potential markets and can be further
differentiated through effective branding strategies. This strategy should
greatly limit the number of potential competitors and help us maintain higher
profit margins. We anticipate attempting to develop a portfolio of molecules and
brands in selected therapeutic categories and introduce new products each year,
that have significant intellectual property protection. Toward this end, in
January 2004, we entered into 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. The 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
21
sales targets for any two consecutive years, the agreement may be terminated
with regard to such product category by Sunkist in its discretion. Supporting
the license, we are entering into agreements to secure the transfer of new
manufacturing methods for traditional product forms and for product forms that
will be new in China. Additionally, advances in manufacturing methods will be
deployed in the manufacture of the product Qiyao, an adjunctive therapy for the
treatment of type II diabetes, the rights to which we recently acquired.
Expand Marketing and Sales. As we build and commission a factory
achieving current Good Manufacturing Practice standards, we intend to expand our
marketing and sales capabilities, first in The Peoples Republic of China, then
internationally. We anticipate that initially we will seek to expand our current
domestic distribution capabilities beyond the regions in which we currently
sell. To achieve this goal, we expect to expand the current successful in-house
marketing and sales capacity, as well as to engage additional domestic
third-party distributors to penetrate new markets. We are also developing more
extensive educational programs for hospitals, doctors, clinics and distributors
with respect to our product lines. We expect these educational programs to
significantly improve the sell through and promotion of our products.
PRODUCTS
Licensing and Intellectual Property
The State Food and Drug Administration of the Government of The Peoples
Republic of China issues the licenses and permits for permission to market and
manufacture pharmaceutical products in The Peoples Republic of China. Generally,
licenses and permits issued by the State Food and Drug Administration are
revocable by the State Food and Drug Administration at any time, with or without
cause. AXM Shenyang has been granted 43 product licenses and permits, of which
only four licenses currently are commercialized. AXM Shenyang will likely
undertake a selection process to decide which of its remaining licenses, if any,
will be commercialized, and to determine the timeframe for such
commercialization over the next 10 years. AXM Shenyang operates in both the
over-the-counter and the prescription pharmaceutical product market segments.
None of our registered products are currently patented nor do we have any
patents pending before the government of The Peoples Republic of China or any
other government.
Current Product Line
The five compounds we currently manufacture are listed below. Note of
the five compounds listed, four are commercialized, Lifupeng is available upon
request from government hospitals only, as a service item.
Asarone, which is manufactured in tablet form, is indicated for
bronchial infection and bronchial constriction (symptoms of upper respiratory
infection).
Weifukang is an antiseptic cream for cleansing acne and for relieving
the symptoms of eczema, psoriasis and other skin irritations, such as contact
dermatitis.
Cefalexine, Cefalexine is a broad-spectrum antibiotic. It has high
sensitivity to staphylococcus, streptococcus, pneumococcus, gonococcus,
diplococcus meningitis and others. Cephalexine is approved for and registered
for the treatment of respiratory infections; genitourinary tract infections;
skin and soft tissue infections; abdominal (gastric) infections; and oral
infections.
Norfloxacin is a medium spectrum antibiotic that is primarily
positioned for gastric and urinary infection.
Lifupeng, Rifampicin is used for treatment of tuberculosis.
We currently manufacture five products, which include:
REGISTRATION STATUS DISTRIBUTION CHANNEL SALES (%RX,
PRODUCT (RX OR OTC) % OTC)
------- ------------------- --------------------------------
Cafalexine, an antibiotic Rx 100%Rx
22
We recently made a strategic decision to cease sales of our Cefalexin
and Norflexin antibiotic products due to their significantly decreasing gross
profit margins. Antibiotic pricing is under significant pressure from government
hospital purchasers who are reducing the price they are willing to pay for
antibiotics by up to 20% per year.
Total Permitted and Licensed Products
The following table lists all of the compounds for which AXM Shenyang
has permits to manufacture and market. We currently only produce and market the
five products listed above. To date we have not commercialized any of the other
compounds listed below because our strategy is to focus on branding and brand
development prior to introducing new product lines. At present our focus is on
establishing and expanding sales of the brands which we have already launched.
However, we plan to introduce two new products in 2004 and two additional
products in each subsequent year. We have not yet determined which products we
will introduce in 2004. The State Food and Drug Administration has recently
ordered pharmaceutical companies in The Peoples Republic of China to stop
producing two of the 43 products listed below, Meleumcyin Tablets and Arsoer
Tabellae for Common Cold. As a result, the State Food and Drug Administration
will not renew these licenses in the future. However, we do not feel that this
will have an adverse effect on our business since we are not currently
commercializing these two products.
Tabellae Acetamidopyrrolidoni
Vitamin C
Cyproheptadine Hydrochloride
Arsoer Tabellae for Common Cold
Atenolol
23
NAME
Lid Tabellae for Stomach-Regulating
Glucosum Pro Orale
Norfloxacin
Norflaxacin
Ke Kuai Hao for treating Cough
Fu Pai Shuan
Nifedipine
Tolperisoni Hydrochloridi
Cefalexini Compositum
Rifampicin
Indometacin
Acetamidopyrrolidoni
Pipemidic Acid
Paracetamoli Compositae
Capsules for Removing Erethism
Albendazol
Xiaoling for Common Cold
Weifukang Cream
Weifukang Cream
Anti-Chap Skin Cream
Unguentum Griseofulrini Compositum
Unguentum Methylis Salicylatis Compositum
Compound Zinc Undecylenate, Ointment
Cremor Crotamitoni
Clycerol
In addition to the licenses for the products listed above, we acquired the
rights to Qiyao, an adjunctive therapy for Type II diabetes, Sunkist Vitamin
Range and Whisper Feminine Hygiene Wash. We intend to manufacture, market and
sell these products.
CURRENT THIRD PARTY ORIGINAL EQUIPMENT MANUFACTURING
Qiqihaer Pharmaceutical Factory 2 of Heilong Group, which is located in
the City of Qiqihaer, Heilonjiang Province, manufactures the following products
pursuant to an original equipment manufacturing agreement. These products
constitute all of the products sold by AXM Pharma at this time.
o Asarone Tablets
o Cefalexine Capsules
o Norfloxacin Capsules
o Weifukang Antiseptic Cream
o Lifupeng Granules.
Our agreement with Qiqihaer Pharmaceutical Factory 2, which we entered
into in September 2002, requires Qiqihaer Pharmaceutical Factory 2 to
manufacture those products that we designate. Under the agreement, Qiqihaer
Pharmaceutical Factory 2 must manufacture our products based on quality control
variables and timetables supplied by us. We are obligated to pay Qiqihaer
Pharmaceutical Factory 2 for product at the time of the completion of the
manufacturing process. Qiqihaer Pharmaceutical Factory 2 is prohibited from
selling any of our products. Qiqihaer Pharmaceutical Factory 2 is a medium-sized
pharmaceutical factory with approximately 600 employees and over 34 years of
operating history. It manufactures injectables, tablets, capsules and other
pharmaceutical products for itself and unaffiliated third parties. In 2000
Qiqihaer Pharmaceutical Factory 2 received a Certificate of Good Manufacturing
Practices for Human Drugs from the State Food and Drug Administration. The
certification remains valid until 2008. Our agreement with Qiqihaer
Pharmaceutical Factory 2 expires in September 2004. We anticipate that most of
24
the products that are currently manufactured for us by Qiqihaer Pharmaceutical
Factory 2 will be manufactured in our new factory in Shenyang, which is
currently under construction. We have, however, begun discussions with other
third-party manufacturers whom we may employ if our new facility is not complete
prior to the expiration of our agreement with Qiqihaer Pharmaceutical Factory 2
or in the event that it is more cost-effective to continue third-party
production of certain products. Until the opening of our new manufacturing
facility, we willsupport the launch of the new product ranges by entering into a
repackaging agreement to increase manufacturing capacity.
CURRENT SALES AND MARKETING
Our products are currently sold and distributed through only one
third-party pharmaceutical distributor, Liaoning Weikang Medicine Co. Pursuant
to an agreement between our predecessor company, Shenyang Tianwei Pharmaceutical
Factory and Liaoning Weikang Medicine Co., we have granted Liaoning Weikang
Medicine Co. exclusive rights to distribute our products in Shenyang. Under
terms of our agreement with Liaoning Weikang Medicine Co., our prices must be
competitive with other suppliers. Due to the exclusive nature of our agreement
with Liaoning Weikang Medicine Co., we are not permitted to sell our products to
other customers in Shenyang. Liaoning Weikang Medicine Co. is required to pay
for our products in cash at the time of sale. Also, pursuant to an oral
agreement, we permit Liaoning Weikang Medicine. Co. to sell our products through
sub-distributors in seven territories, including Guangdong, Heilongjiang, Jilin,
Fujian, Liaoning and Inner Mongolia and the city of Shanghai. Its
sub-distributors include Shanghai Shenwei Drug Co., Guangzhou Kangning Drug Co.,
and Guangzhou Mingsheng Drug Co. We believe other distributor relationships will
be available on comparable terms should any of our existing sales and marketing
relationships be terminated. Our agreement with Liaoning Weikang Medicine. Co.
expires in March 2004. Liaoning Weikang Medicine. Co. has verbally agreed to
continue its distribution relationship with us and we anticipate renewing our
relationship with Liaoning Weikang Medicine. Co. for distribution in Liaoning
Province. Additionally, we are currently negotiating with several other
distributors for distribution of our products in additional provinces in the
Peoples Republic of China.
COMPETITION
At present, we do not have a single main competitor. Rather, we compete
with different companies in different therapeutic categories. For example, with
regard to Asarone Tablets, the product from which we derive the most revenue, we
compete with Liuzhou Pharmaceutical Factory, located in Liuzhou City, Guang Xi
Autonomous Region. AXM and Liuzhou are the only two companies approved by the
State Food and Drug Administration to manufacture Asarone Tablets. However
because Liuzhou distributes its Asarone tablets mainly in Southern China and AXM
distributes its products mainly in Northern China, the two companies do not
really compete head to head in their respective markets. We compete with two
companies for distribution of our product Weifukang herbal antiseptic skin
cream, Zhejiang Wenzhou Pharmaceutical Factory and Ying Kou Biochemical
Pharmaceutical Factory. However, one of these competitors, Zhejiang Wenzhou,
targets its product to pubic bath houses, and does not compete in the
pharmaeutical distribution segments in which AXM sells Weifukang. Ying Kou
Biochemical Pharmaceutical Factory's main business focus is its bulk
bioprocessing business. Their herbal antiseptic product is a minor line. Our
largest competitor for both Cefaxlin Capsules and Norfloxacin Capsules is
Yanfeng Pharmaceutical in Shenyang. As a company in the same city, they are
considered to be a direct competitor. Yanfeng Pharmaceutical Company is a
recently privatized State Owned Enterprise They employ approximately 400
persons. Their sales territory focus is in Shenyang city and although market
share information is not available we consider Yanfeng Pharmaceutical Company to
be a major competitor.
INDUSTRY TAXES AND COSTS
The Chinese government currently imposes a sales tariff of
approximately 9.6% on imported pharmaceuticals, plus a 17% value-added tax
charge, customs clearing charges and drug inspection costs. The prices of
imported pharmaceuticals are further inflated by high distribution costs and
hospital mark-ups. The retail prices paid by hospitals can be as much as 10
times higher than the manufacturer's price. In addition, only those drugs that
appear on the provincial and municipal reimbursement lists are covered by the
national medical insurance system, which naturally favors locally-manufactured
products. Since according to IMS Market Research Consulting (Shanghai) in its
report titled "IMS Market Research Consulting (Shanghai), Market Prognosis Asia,
2003-2007, China Report" approximately 80% of all drugs sold in The Peoples
Republic of China are sold through hospital pharmacies, exclusion from these
lists may result in huge losses in sales. We believe Chinese industry regulators
are concerned about the surging drug costs for the national health care system,
which accounts for about 70% of the total healthcare expenditure. Consequently,
the government has initiated new plans to separate medical consulting from
25
medical prescription. The State Development Planning Commission of The Peoples
Republic of China has announced its intention to re-examine the pricing of drugs
in The Peoples Republic of China, as well as to decrease the cost of
"over-supplied drugs," according to the IMS Market Prognosis Asia 2003-2004,
China Report.
RESEARCH AND DEVELOPMENT
Our research and development activities have focused on quality and
laboratory testing of compounds developed by others, and administration of the
testing process and the negotiations for rights to the compounds. In this
effort, we have developed working relationships with Shenyang Medical University
and the Liaoning Research Institute for Traditional Chinese Medicine and Beijing
Shiehe Medical University. As a result of our cooperative work with our research
partners, we have expended only a nominal amount (relating only to analytical
testing, travel and meeting expenses) on research and development during the
year ended December 31, 2002.
EMPLOYEES
At June 25, 2004, we had two employees in our U.S.-based headquarters
and 35 full-time employees at our facilities located in The Peoples Republic of
China. Until our new factory is completed we intend to hire additional employees
on a part-time or independent contractor basis in connection with certain
projects in The Peoples Republic of China. We also intend to hire up to two
additional employees to serve in administrative positions at our U.S.-based
headquarters in the near future.
Once our new factory is completed, our forecast for staffing includes:
o approximately 200 full time employees in manufacturing, management
administration and marketing/sales
o approximately 10 independent contractors assigned to market research
and market analysis
o approximately 90 sales persons assigned to in-store promotion at the
retail pharmacy level
o approximately 10 medical doctors employed part time to write technical
briefs for products and diseases of interest
None of our current employees is represented by a labor union and we
consider our relationships with our employees to be good.
REGULATORY ENVIRONMENT
Effect of Government Regulation
The modernization of regulations for the pharmaceutical industry is
relatively new in the The Peoples Republic of China and the manner and extent to
which it is regulated will continue to evolve. As a pharmaceutical company, we
are subject to the Pharmaceutical Administrative Law, which governs the
licensing, manufacture, marketing and distribution of pharmaceutical products in
the Peoples Republic China for the and sets penalty provisions for violations of
provisions of the Pharmaceutical Administrative Law. In addition as a Wholly
Foreign Owned Enterprise we are subject to the Foreign Company provisions of the
Company Law of the Peoples Republic of China, which governs the conduct of our
wholly owned subsidiary, AXM Shenyang and its officers and directors. Changes in
these laws or new interpretations of existing laws may have a significant impact
on our methods and our costs of doing business.
Additionally, we will be subject to varying degrees of regulation and
permitting by governmental agencies in The Peoples Republic of China. For
example, in 1999, the State Food and Drug Administration of The Peoples Republic
of China set up an administrative system for the classification of prescription
and over-the-counter drugs. Since then, the State Food and Drug Administration
has issued a series of guidelines on interpretation of the new classification
system in such areas as labeling, usage instructions and packaging of
over-the-counter products.
Recently, the State Food and Drug Administration implemented new Good
Manufacturing Practices guidelines for licensing of pharmaceutical products. We
will be required to comply with these new guidelines by December 31, 2004, in
order for our current licenses to be renewed. Since we are constructing our new
factory in Shenyang to meet more stringent U.S. Good Manufacturing Practices
requirements, we believe that we will satisfy the new guidelines and that our
current licenses will be renewed. Failure to satisfy these new guidelines would
have a material adverse effect our business.
26
In 2003, the government implemented a new regulatory regime for
registration of prescription and over the counter pharmaceutical products. The
legislation requires a change in registration status from provincial government
approval to national government approval. We do not anticipate difficulties with
this transition, however any delays in government review as a result of the
recent changes, could impact our ability to gain approval for new or existing
products.
There can be no assurance that future regulatory, judicial and
legislative changes will not have a material adverse effect on our business,
that regulators or third parties will not raise material issues with regard to
our business and operations or our compliance or non-compliance with applicable
regulations or that any changes in applicable laws or regulations will not have
a material adverse effect on AXM Pharma.
Compliance With Environmental Laws
We are subject to the environmental laws of The Peoples Republic of
China and its local governments. However, because we currently outsource
manufacturing of our proprietary licensed products, we do not incur significant
expense related to compliance with such laws nor do we expect to be affected
significantly by compliance with such laws.
Compliance with Registered Capital Requirements
Pursuant to the Company Law of The Peoples Republic of China, we are
required to contribute a certain amount of "registered capital" to our wholly
owned subsidiary, AXM Shenyang. AXM Shenyang's current registered capital
requirement is US $10,000,000, of which we have contributed $8,579,181. Since
AXM Shenyang is classified as a Wholly Foreign Owned Enterprise, pursuant to the
Law on Foreign Capital Enterprises of The Peoples Republic of China, as well as
its implementation rules (also known of the "Wholly Foreign Owned Enterprise
Law"), we were not required to contribute all of our registered capital at the
time AXM Shenyang was issued its business license. We are, however, expected to
fully satisfy this registered capital requirement within a reasonable time
period. We plan to satisfy this requirement through the completion of our new
factory in Shenyang, the value of which will exceed the current shortfall in
registered capital. Since we have been informed by our legal counsel in The
Peoples Republic of China that they are not aware of any instance where the
business license of a Wholly Foreign Owned Enterprise has been revoked due to
failure to satisfy the registered capital requirement within a stipulated time
period when most of its registered capital has been contributed, we do not
believe that the current shortfall presents material risk to our business in The
Peoples Republic of China. Moreover, we currently have sufficient funds
available to satisfy the registered capital requirement if necessary. However,
our management has determined that we will only contribute the funds to AXM
Shenyang as they are needed to accomplish construction of the new factory or for
other valid corporate purposes in The Peoples Republic of China. In February and
March 2004, we transferred an additional $1,500,000 to AXM Shenyang, which, once
the appropriate regulatory authorities accept it, will fully satisfy AXM
Shenyang's registered capital requirement.
CORPORATE HISTORY
We were incorporated under the laws of the State of Nevada on June 30,
1999, with the name Wholesale on the Net, Inc. Our original business purpose was
to develop and sell business products over the Internet. In April 2001, we
entered into a stock purchase agreement to acquire certain trademarks and
control of a hotel and changed our named to Wickliffe International Corporation.
We planned to operate hotels and resorts under the mark "Wickliffe." We never
completed the planned stock purchase agreement.
In April 2001, we began searching for hospitality properties to
acquire. However, because of the deteriorating market, in January 2002, we
determined that we would search for an ongoing business that we could purchase
solely for stock rather than having to raise capital to offer cash for an
existing business enterprise. On December 12, 2002, we entered into a share
exchange agreement to acquire Werke Pharmaceuticals, Inc., together with its
wholly-owned subsidiary AXM Shenyang. The transaction contemplated by our share
exchange agreement with the shareholders of Werke Pharmaceuticals, Inc. closed
on March 14, 2003, at which time Werke Pharmaceuticals, Inc. became our
wholly-owned subsidiary and the shareholders of Werke Pharmaceuticals, Inc.
27
acquired approximately 88.89% of our voting stock. In connection with such
acquisition , we commenced operations in our current line of business and
changed our name to AXM Pharma
DESCRIPTION OF PROPERTY
Our corporate and United States offices are located at 3960 Howard
Hughes Parkway, Suite 500, Las Vegas, Nevada. The current rent for these
premises is $200.00 per month. Our lease expires on February 28, 2005. Our
United States marketing office is located at 4695 McArthur Court, 11th Floor,
Newport Beach, California 92660. The current rent for these premises is
$2,647.94 per month. Our lease expires in September 30, 2004.
Our principal administrative, sales and marketing facilities are
located at No. F.3004 Sankei Torch Bldg, 262A Shifu Road, Shenyang City,
Liaoning Province, The People's Republic of The Peoples Republic of China. The
current rent for these facilities is US$2,916.66 per month and our lease expires
in October 2007.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table and text set forth the names and ages of all
directors and executive officers of AXM Pharma as of December 31, 2003. 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
Chet Howard 61 Chief Financial Officer
Montgomery F. Simus 36 Director
Mark Bluer 41 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 AXM Shenyang 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 AXM Shenyang.
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 AXM Shenyang 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
28
(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 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
from 1983 to 1985, where he was the youngest General Manager in the company's
history. He has held regional management positions with Rhone Poulenc Rorer from
1987 to 1990, and Becton Dickinson 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 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 Bachelor of Science in
Finance.
MR. MARK 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.
29
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 recived a Master of Laws in August 2003 from the University of Ottawa 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 received a BS in
Mathematics in July 1995 from Peking University. Charles 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.
COMMITTEES OF THE BOARD OF DIRECTORS
Our Board of Directors currently has five committees. The committees and
committee members are listed below:
30
o Audit Committee: Douglas MacLellan (chairman), Mark Bluer, and
Montgomery Simus.
o Nominating Committee: Montgomery Simus (chairman), Mark Bluer, and
Douglas MacLellan.
o Compensation Committee: Mark Bluer (chairman), Douglas MacLellan, and
Montgomery Simus.
o Disclosure Committee: Douglas MacLellan (chairman), Chet Howard, and
Peter Cunningham.
o Executive Committee: Douglas MacLellan (chairman), Peter Cunningham,
and Madam Wei Shi Wang.
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 $500,000 100,000 0 0
CFO, Director, 2002 0 0 0
2001 0 0 0
Option/SAR in Last Fiscal Year(1)
(Individual Grants)
--------------------------------------------------------------------------------------------------------------
Name Number of Percent of total Exercise or Expiration
Securities options/SARs base price date
Underlying granted to ($/Sh)
Options/SARs employees in
Granted (#) fiscal year
--------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Peter W. Cunningham(1), 0 0 0 N/A
President, CEO
31
Lan S. Hao 0 0 0 N/A
CFO, Director
(1) Does not include the following options, which were ratified at our
Shareholders' Annual Meeting on April 29, 2004: 40,000 options to Montgomery F.
Simus; 300,000 options to Ms. Wang Wei Shi; 400,000 options to Douglas
MacLellan; 160,000 options to Mark Elenowitz; and 100,000 options to Chaoying
(Charles) Li; 400,000 options to Peter Cunningham; 25,000 to Lan Hao, our former
CFO; and 40,000 options to Mark Bluer. All of the foregoing options have an
exercise price of $3.90 per share, except for the options granted to to Mark
Bluer, which have an exercise price of $7.50 per share.
BOARD OF DIRECTORS
Our directors who are employees do not receive any compensation from
AXM Pharma for services rendered as directors. The Board has created three
classes of fees for outside directors: (1) outside directors who are
"independent," as defined in the Exchange Act will be paid $4,500.00 per month;
(2) outside directors who are not "independent" will receive $3,000.00 per
month; and, (3) the Vice Chairman will receive a flat fee of $18,000.00 per
month, inclusive of committee fees and the Chairwoman will receive a flat fee of
$20,000.00 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. Our shareholders ratified the foregoing options
and the Company's 2004 Incentive and NonStatutory Stock Option Plan at our
Annual Meeting, which was held in April 2004. Also in April 2004, our Board
authorized an additional 40,000 options exercisable at $4.14 per share to
Montgomery Simus, a member of our Board of Directors.
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 is 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
32
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 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 May 1, 2004, our Board of Directors has authorized the issuance of
2,080,000 options to employees, directors and consultants. The Company's
Shareholders ratified the stock option plan and the options authorized
thereunder at our Annual Meeting in April 2004.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
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 June 25, 2004, we had a total of 15,338,530 shares of common
stock and 3,085,030.425 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 Prospectus, each share of Preferred Stock is convertible into
one share of common stock.
The following table sets forth, as of June 25, 2004: (a) 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, 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; and
(b) the names and addresses of each director and executive officer, the number
of shares our common stock and Preferred Stock beneficially owned, and the
percentage of our common stock and Preferred Stock so owned, by each such
person, and by all of our directors and executive officers as a group. 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 Beneficial Ownership Percentage
Name and Address Of Voting of
Securities (1)
Ms. Wang Wei Shi 6,327,000 (2) 33.057%
46 Wen An Road
Building 4, 5th Floor
Shenyang, Liaoning, The Peoples Republic of
China 110003
Douglas C. MacLellan 933,672(3) 4.88%
8324 Delgany Avenue
Playa Del Rey, California 90293
Byrle Lerner 950,000 4.96%
2904 Via Campesina
Palo Verdes Estates, CA 90274
33
Peter W. Cunningham 513,334(4) 2.68%
755 Promontory Point Drive West
Newport Beach, California 92660
Mark Elenowitz 385,160 (5) 2.01%
400 Professional Drive, Suite 310
Gaithersburg, MD 20879
Gryphon Master Fund, L.P. 1,894,801 9.99%
500 Crescent Court
Suite 270
Dallas, Texas 75201
SF Capital Partners Ltd. 955,056 4.99%
c/o Staro Asset Management, LLC
3600 South Lake Drive
St. Francis, Wisconsin 53235
Mark J. Bluer 65,000(6) 0.34%
945 Magnolia Avenue, #77
Larkspur, CA 94939
Mr. Chet Howard 0 0%
11792 Lily Rubin Ave.
Las Vegas, NV 89138
Montgomery Simus 40,000(7) 0.21%
33 Haight Street, #8
San Francisco, CA 94102
Chaoying (Charles) Li 210,000(8) 1.10%
14/F, Building A, Huixium Plaza, No.8
Beisihuan Zhong Road
Chaoyang District, Beijing 100101,
P.R. China
All directors and officers as a group 8,474,166 44.28%
(8persons)(6)
(1) All Percentages have been rounded up to the nearest one hundredth of one
percent.
(2) Includes 3,117,000 shares owned by Ms. Wang directly and 2,910,000 shares
owned by members of her immediate family. Also includes 300,000 stock options
granted to Ms. Wang on April 29, 2004, under the 2004 Qualified and Nonstatutory
Stock Option Plan.
34
(3) 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. Also includes 400,000 stock options granted
to Mr. MacLellan on April 29, 2004, under the 2004 Qualified and Nonstatutory
Stock Option Plan.
(4) Includes 83,334 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. Also includes 400,000 stock
options granted to Mr. Cunningham on April 29, 2004, under the 2004 Qualified
and Nonstatutory Stock Option Plan.
(5) 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. Also includes 160,000 stock options granted to Mr. Elenowitz
on April 29, 2004, under the 2004 Qualified and Nonstatutory Stock Option Plan.
(6) Includes the 40,000 stock options, at an exercise price of $5.70 per share,
granted to Mr. Bluer on April 29, 2004, under the 2004 Qualified and
Nonstatutory Stock Option Plan .
(7) Includes the 100,000 stock options granted to Mr. Li on April 29, 2004,
under the 2004 Qualified and Nonstatutory Stock Option Plan.
(8) Includes the 40,000 stock options granted to Mr. Simus on April 29, 2004,
under the 2004 Qualified and Nonstatutory Stock Option Plan.
35
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AND RECENT SALES OF UNREGISTERED SECURITIES
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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. On April 29, 2004, the Board authorized Peter
Cunningham to sign a new agreement with Tripoint Capital Advisors for their
consulting services. 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.
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
36
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.
37
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
$639,828, including a $104,828 charge for black shoals valuation of the warrants
issued.
On February 2, 2004 and April 20, 2004, we issued 200,000 shares of
restricted common and 100,000 shares of restricted common, respectively 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 and $4.27 per share
respectively, 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 $1,557,000.
On May 7, 2004, we issued 120,000 shares of restricted common stock,
and 200,000 warrants at $6.00 per warrant, to XCL Partners, Inc. 20,000 shares
were released when the agreement was signed on June 24, 2004. The remaining
100,000 shares are to be released monthly based upon a vesting schedule of
10,000 shares per month for ten (1 0 ) months , beginning 30 days after
effective date of the agreement The services to be provided under the agreement
are investor relations. 20,000 warrants shall vest immediately. The remaining
180,000 warrants shall be released monthly based on a vesting schedule of 15,000
warrants per month for eleven (11) months. 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. Therefore, the total aggregate value of the consideration paid to the
XCL Partners was $ 490,800.
On May 10, 2004 we issued 300,000 shares to Madden Consulting, Inc.
pursuant to a consulting agreement. The services to be provided under the
consulting agreement were investor and public 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 $3.92 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 Madden Consulting was $1,176,000.
On June 24, 2004, we issued 30.425 shares of our preferred stock, 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 a price equal to
$5.50 per share to accredited investors pursuant to a private equity financing.
Each share of the preferred stock shall be convertible into a number of fully
paid and nonassessable shares of our common stock at a fixed conversion price of
38
$4.25 per share. In addition, we issued to HC Wainwright, our placement agent, a
three-year warrant to purchase up to 3shares of our Series C Preferred Stock at
a price of $4.25per share and up to 35,793 warrants. 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. The securities issued
have not been registered under the Act and may not be offered or sold in the
United States absent registration or an applicable exemption from registration
requirements.
On June 24, 2004, we issued 100,000 warrants to each of SF Capital
Partners Ltd., Gryphon Master Fund, L.P., Banyon Asia Limited and Banyon Mac 24,
Ltd. in consideration for services provided related to our recent 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. The
securities issued have not been registered under the Act and may not be offered
or sold in the United States absent registration or an applicable exemption from
registration requirements.
DESCRIPTION OF SECURITIES
Our authorized capital consists of 50,000,000 shares of common stock,
$.001 par value per share, and 10,000,000 shares of preferred stock, $.001 par
value per share. As of June 25, 2004, there were outstanding 15,338,530 shares
of our common stock outstanding and 3,085,030.425 shares of our preferred stock.
COMMON STOCK
The holders of common stock are entitled to one vote for each share
held of record on all matters to be voted on by stockholders. The holders of
common stock are entitled to receive such dividends, if any, as may be declared
from time to time by the Board of Directors, in its discretion, from funds
legally available therefore. Upon liquidation or dissolution of AXM Pharma, the
holders of common stock are entitled to receive, pro rata, assets remaining
available for distribution to stockholders. The common stock has no cumulative
voting, preemptive or subscription rights and is not subject to any future
calls. There are no conversion rights or redemption or sinking fund provisions
applicable to the shares of common stock. All the outstanding shares of common
stock are fully paid and nonassessable. Other than the possible effects of the
issuance of preferred stock described below, there are no provisions in our
Articles of Organization or Bylaws that would delay, defer or prevent a change
in control.
PREFERRED STOCK
Our Board of Directors is authorized, without further action by the
shareholders, to issue, from time to time, up to 10,000,000 shares of preferred
stock in one or more classes or series. Similarly, our Board of Directors is
authorized to fix or alter the designations, powers, preferences, and the number
of shares which constitute each such class or series of preferred stock. Such
designations, powers or preferences may include, without limitation, dividend
rights (and whether dividends are cumulative), conversion rights, if any, voting
rights (including the number of votes, if any, per share), redemption rights
(including sinking fund provisions, if any), and liquidation preferences of any
unissued shares or wholly unissued series of preferred stock. As of the date of
this prospectus, we have issued 2,225,000 shares of our Series A Preferred
Stock, 860,000 shares of our Series B Preferred Stock and 30.425 shares of our
Series C Preferred Stock.
39
It is not possible to state the actual effect of any authorization of
preferred stock upon the rights of holders of common stock until our Board
determines the specific rights of the holders of any series of preferred stock,
other than the Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock described herein. Our Board of Director's authority to issue
preferred stock also provides a convenient vehicle in connection with possible
acquisitions and other corporate purposes, but could have the effect of making
it more difficult for a third party to acquire a majority of our outstanding
voting stock. Accordingly, the issuance of preferred stock may be used as an
"anti-takeover" device without further action on the part of our stockholders,
and may adversely affect the holders of our common stock.
SERIES A PREFERRED STOCK
Our Board of Directors has designated 4,050,000 shares of our
authorized preferred stock as Series A Convertible Preferred Stock. The
principal terms of the preferred stock are as follows:
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 preferred stock could be converted into for purposes of
determining the shares entitled to vote at any regular, annual, or special
meeting of our shareholders. The Series A Preferred Stock has voting rights and
powers equal to the voting rights and powers of the common stock and votes
together with the common stock as a single class. Holders are entitled to notice
of any shareholders' meeting in accordance with our Bylaws.
Dividends. The holders of the Series A Preferred Stock shall be
entitled to receive, when and as declared by our Board of Directors,
non-cumulative dividends in such amounts as may be determined by the Board of
Directors from time to time out of funds legally available therefor. No
dividends (other than those payable solely in common stock) shall be paid on the
common stock or the Series B Preferred Stock during any fiscal year until there
shall have been paid or declared and set apart during that fiscal year for the
holders of the preferred stock a dividend in an amount per share equal to (i)
the number of shares of common stock issuable upon conversion of the preferred
stock times (ii) the amount per share of the dividend to be paid on the common
stock.
Conversion. Each share of Series A Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share, into such number of fully paid and nonassessable shares
of common stock as is determined by dividing $2.00 by the Conversion Price
applicable to such share in effect on the date the certificate is surrendered
for conversion. The price at which shares of common stock shall be deliverable
upon conversion of shares of the Series A Preferred Stock shall initially be
$2.00 per share of common stock. Such initial Series A Conversion Price shall be
adjusted in the event of (i) combination, subdivision or reclassification of the
common stock, and (ii) the sale of common stock at a price, or the issuance of
options, warrants or convertible securities with an exercise or conversion price
per share, less than $2.00.
Liquidation. In the event of any liquidation, dissolution or winding up
of AXM Pharma, either voluntary and involuntary, the holders of each share of
the Series A Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any of the assets or surplus funds of AXM
Pharma to the common stock holders or the Series B Preferred Stock holders, a
preferred distribution. This distribution shall be an amount equal to (i) all
declared and unpaid dividends on each such share; plus (ii) an amount per share
equal to greater of (A) the original issue price ($2.00) per share of preferred
stock, as adjusted for any stock splits, stock dividends, recapitalizations or
similar occurrences, plus 8% per annum on such original issue price (as
adjusted) accumulated, but not compounded, from the date of issuance to the date
on which the liquidation preference is paid or (B) the amount that would be
receivable if the preferred stock had been converted into common stock
immediately prior to such liquidation distribution. In the event the assets and
funds of AXM Pharma are insufficient to pay the entire liquidation preference of
the preferred stock, the holders thereof will share ratably in the assets and
funds of AXM Pharma in proportion to the preferential amount each such holder is
otherwise entitled to receive.
SERIES B PREFERRED STOCK
Our Board of Directors of has designated 2,000,000 shares of our
authorized preferred stock as Series B Convertible Preferred Stock. The
principal terms of the preferred stock are as follows:
Voting. The holder of each share of the Series B Preferred Stock shall
be entitled to the number of votes equal to the number of shares of common stock
into which such share of preferred stock could be converted into for purposes of
40
determining the shares entitled to vote at any regular, annual, or special
meeting of our shareholders. The Series B Preferred Stock has voting rights and
powers equal to the voting rights and powers of the common stock and votes
together with the common stock as a single class. Holders are entitled to notice
of any shareholders' meeting in accordance with our Bylaws.
Dividends. The holders of the Series B Preferred Stock shall be
entitled to receive, when and as declared by our Board of Directors,
non-cumulative dividends in such amounts as may be determined by the Board of
Directors from time to time out of funds legally available therefor. No
dividends (other than those payable solely in common stock) shall be paid on the
common stock during any fiscal year until there shall have been paid or declared
and set apart during that fiscal year for the holders of the preferred stock a
dividend in an amount per share equal to (i) the number of shares of common
stock issuable upon conversion of the preferred stock times (ii) the amount per
share of the dividend to be paid on the common stock. The holders of Series B
Preferred Stock shall not, however, be entitled to paid any dividends (other
than those payable solely in Common Stock) until such time as 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 Series B Preferred Stock.
Conversion. Each share of Series B Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share, into such number of fully paid and nonassessable shares
of common stock as is determined by dividing $2.25 by the Conversion Price
applicable to such share in effect on the date the certificate is surrendered
for conversion. The price at which shares of common stock shall be deliverable
upon conversion of shares of the preferred stock shall initially be $2.25 per
share of common stock. Such initial Series A Conversion Price shall be adjusted
in the event of (i) combination, subdivision or reclassification of the common
stock, and (ii) the sale of common stock at a price, or the issuance of options,
warrants or convertible securities with an exercise or conversion price per
share, less than $2.25.
Liquidation. In the event of any liquidation, dissolution or winding up
of AXM Pharma, either voluntary and involuntary, the holders of each share of
the preferred stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of AXM Pharma to the common
stock holders but after any distribution of the assets or surplus funds of AXM
Pharma to the Series A Preferred Stock holders, a preferred distribution. This
distribution shall be an amount equal to (i) all declared and unpaid dividends
on each such share; plus (ii) an amount per share equal to greater of (A) the
original issue price ($2.25) per share of preferred stock, as adjusted for any
stock splits, stock dividends, recapitalizations or similar occurrences, plus 8%
per annum on such original issue price (as adjusted) accumulated, but not
compounded, from the date of issuance to the date on which the liquidation
preference is paid or (B) the amount that would be receivable if the preferred
stock had been converted into common stock immediately prior to such liquidation
distribution. In the event the assets and funds of AXM Pharma are insufficient
to pay the entire liquidation preference of the preferred stock, the holders
thereof will share ratably in the assets and funds of AXM Pharma in proportion
to the preferential amount each such holder is otherwise entitled to receive.
SERIES C PREFERRED STOCK
Our Board of Directors of has designated 150 shares of our authorized
preferred stock as Series C Convertible Preferred Stock. The principal terms of
the preferred stock are as follows:
Voting. The holder of each share of Series C Preferred Stock shall be
entitled to the number of votes equal to the number of shares of common stock
into which such share of preferred stock could be converted for purposes of
determining the shares entitled to vote at any regular, annual or special
meeting of our shareholders. The Series C Preferred Stock has voting rights and
powers equal to the voting rights and powers of the common stock and votes
together with the common stock as a single class. Holders are entitled to notice
of any shareholders' meeting in accordance with our Bylaws.
Dividends. The holders of record of shares of Series C Preferred Stock
shall be entitled to receive, out of any assets at the time legally available
therefor and when and as declared by the Board of Directors, dividends at the
rate of six percent (6%) per annum. If we elect to pay any dividend in shares of
common stock, the number of shares of common stock to be issued to the holder
shall be an amount equal to the quotient of (i) the dividend payment divided by
(ii) the average of the volume weighted average prices of the common stock for
the five (5) trading days prior to the date such dividend payment is due.
Dividends on the Series C Preferred Stock shall be cumulative, shall accrue and
be payable semi-annually. Dividends on the Series C Preferred Stock are prior
41
and in preference to any declaration or payment of any distribution on any
outstanding shares of junior stock. So long as any shares of Series C Preferred
Stock are outstanding, we shall not declare, pay or set apart for payment any
dividend or make any distribution on any junior stock (other than dividends or
distributions payable in additional shares of junior stock), unless at the time
of such dividend or distribution we shall have paid all accrued and unpaid
dividends on the outstanding shares of Series C Preferred Stock.
Conversion
Voluntary Conversion: At any time on or after the Issuance Date, the
holder of the any such shares of Series C Preferred Stock may, at the holder's
option, elect to convert all or any portion of the shares of the preferred stock
held by such person into a number of fully paid and nonassessable shares of
common stock at the fixed conversion price of $4.25 per share.
If within three (3) business days of our receipt of an executed copy of
a conversion notice the transfer agent shall fail to issue and deliver to a
holder the number of shares of common stock to which such holder is entitled
upon such holder's conversion of the Series C Preferred Stock or to issue a new
preferred stock certificate representing the number of shares of Series C
Preferred Stock to which such holder is entitled, we shall pay additional
damages to such holder on each business day after such third (3rd) business day
that such conversion is not timely effected in an amount equal 0.5% of the
product of (A) the sum of the number of shares of common stock not issued to the
holder on a timely basis and to which such holder is entitled and, in the event
hawse have failed to deliver a preferred stock certificate to the holder on a
timely basis, the number of shares of common stock issuable upon conversion of
the shares of Series C Preferred Stock represented by such preferred stock
certificate, as of the last possible date which we could have issued such
preferred stock certificate, and (B) the closing bid price of the common stock
on the last possible date which we could have issued such common stock and such
preferred stock certificate. If we fail to pay the additional damages within
five (5) business days of the date incurred, then such payment shall bear
interest at the rate of 2.0% per month (pro rated for partial months) until such
payments are made.
Mandatory Conversion: Each share of Series C Preferred Stock
outstanding on the mandatory conversion date of June 24, 2007, shall,
automatically and without any action on the part of the holder thereof, convert
into a number of fully paid and nonassessable shares of common stock equal to
the quotient of (i) the liquidation preference amount of $100,000 per share of
preferred stock outstanding on the mandatory conversion date divided by (ii) the
fixed conversion price of $4.25 per share. The mandatory conversion date shall
be June 24, 2007; provided, that, that on the mandatory conversion date, the
registration statement covering the resale of the shares of common stock
underlying the preferred stock is effective and has been effective, without
lapse or suspension of any kind, for a period sixty (60) consecutive calendar
days, or the shares of common stock underlying the preferred stock can be
converted may be offered for sale to the public pursuant to Rule 144(k) under
the Securities Act.
The fixed conversion price may be adjusted in the event of (i)
combination, stock split, or reclassification of the common stock; (ii) capital
reorganization; (iii) distribution of dividends; or (iv) the issuance or sale of
additional shares of common stock or common stock equivalents.
Liquidation. In the event of the liquidation, dissolution or winding up
of the affairs of AXM Pharma, whether voluntary or involuntary, the holders of
each share of the Series C Preferred Stock then outstanding shall be entitled to
receive, out of our assets available for distribution to our stockholders, a
liquidation preference amount in an amount equal to $100,000 per share of the
Series C Preferred Stock plus any accrued and unpaid dividends before any
payment shall be made or any assets distributed to the holders of the common
stock or any other junior stock; provided, however, that the then outstanding
shares of Series A and B Preferred Stock shall be deemed to be senior to the
Series C Preferred Stock. In the event our assets and funds are insufficient to
pay the entire liquidation preference of the preferred stock, the holders
thereof then all of said assets will be distributed among the holders of the
Series C Preferred Stock and the other classes of stock on a parity with the
Series C Preferred Stock, if any, ratably in accordance with the respective
amounts that would be payable on such shares if all amounts payable thereon were
paid in full. No cash shall be paid to holders of junior stock unless each
holder of the outstanding shares of Series C Preferred Stock has been paid in
cash the full Liquidation Preference Amount plus any accrued and unpaid
dividends to which such holder is entitled as provided herein and that no
distribution shall be paid to the holders of Series C stock until such time as
the holders of Series A and B Preferred Stock have been paid any liquidation
preference with respect to the terms of such stock currently in effect. After
42
payment of the full liquidation preference amount plus any accrued and unpaid
dividends to which each holder is entitled, such holders of shares of Series C
Preferred Stock will not be entitled to any further participation as such in any
distribution of the assets of AXM Pharma.
WARRANTS
Exercisable until August, September and December 2008, respectively
Each warrant allows its holder to purchase one share of common stock
for $3.00, subject to adjustment, until five years after the date of issuance.
Holders may also exercise the warrants through a cashless exercise using the
following formula:
X = Y(A-B)
A
where:
X = the number of shares of common stock to be issued to the
Holder upon exercise of the Warrant;
Y = the number of Warrant Shares identified in the Exercise
Form as being applied to the subject exercise;
A = the Current Market Price on such date; and
B = the Exercise Price on such date
The warrants are redeemable, commencing 60 days from the date of their
issuance, by us at a price of $.05 per warrant at any time prior to their
exercise or expiration upon 30 days' prior written notice. However, we may only
redeem the warrants if (i) the closing sales price for the common stock has been
at least $4.00 per share for 30 consecutive calendar days; (ii) a registration
statement is effective and is available for resale of such Warrant Shares during
the entire 30-day notice period; and (iii) the holder would not be prevented
from selling the shares issuable upon exercise of the warrants as a result of
any lock-up or dribble-out provisions The warrants remain exercisable during the
30-day notice period. Any holder who does not exercise that holder's warrants
prior to their expiration or redemption, as the case may be, forfeits that
holder's right to purchase the shares of common stock underlying the warrants.
The exercise price of the warrants and the number of shares of common
stock purchasable upon exercise of the warrants are subject to adjustment upon
the occurrence of certain events. Such events include split-ups or combinations
of our common stock, dividends payable in our common stock, and the issuance of
rights to purchase additional shares of our common stock or to receive other
securities convertible into additional shares of common stock.
Pursuant to the terms of the warrants, AXM Pharma shall not effect the
exercise of any warrants, and no person who is a holder of any warrant shall
have the right to exercise their warrants, to the extent that after giving
effect to such exercise, such person would beneficially own in excess of 9.99%
of the shares of our common stock outstanding immediately after giving effect to
such exercise. Additionally, the warrants issued to SF Capital Partners Ltd.,
contain an additional cap on exercise, which prevents the holder from exercising
and AXM Pharma from effecting any exercise of the warrants issued to SF Capital
Partners if after giving effect to such exercise, such person would beneficially
own in excess of 4.99% of the shares of our common stock outstanding immediately
after giving effect to such exercise. This 4.99% is waivable by the holder on 61
days written notice to AXM Pharma. The 1,000,000 warrants issued on December 31,
2003, also contain 4.99% cap on exercise that is identical to the cap on the
warrants issued to SF Capital Partners, except that it is waivable by the holder
on 65 days written notice to us.
No fractional shares will be issued upon the exercise of the warrants,
but we will pay cash for the value of any fractional shares or warrants
otherwise issuable.
Each Investor Warrant will expire at the close of business on the fifth
anniversary of the date of issuance.
43
Exercisable until June 2007
Each warrant allows its holder to purchase one share of common stock
for $5.50, subject to adjustment, until three years after the date of issuance.
The exercise price of the warrants and the number of shares of common
stock purchasable upon exercise of the warrants are subject to adjustment upon
the occurrence of certain events. Such events include split-ups or combinations
of our common stock, dividends payable in our common stock, and the issuance of
rights to purchase additional shares of our common stock or to receive other
securities convertible into additional shares of common stock.
Pursuant to the terms of the warrants, AXM Pharma shall not effect the
exercise of any warrants, and no person who is a holder of any warrant shall
have the right to exercise their warrants, to the extent that after giving
effect to such exercise, such person would beneficially own in excess of9.99% of
the then outstanding shares of our common stock. Also, the holders of the
warrants are subject to an additional 4.99% cap on exercise of the warrants,
which limit may be waived by the holder on 65 days written notice to AXM Pharma.
No fractional shares will be issued upon the exercise of the warrants,
but we will pay cash for the value of any fractional shares or warrants
otherwise issuable.
Each Investor Warrant will expire at the close of business on the third
anniversary of the date of issuance.
DIVIDEND POLICY
It is the policy of our Board of Directors to retain our earnings for
use in our day-to-day operations and expansion of our operations. We have not
declared any dividends on our common stock, nor do we intend to declare any
dividends in the foreseeable future.
In the event that our Board of Directors determines to declare a
dividend, no dividends can be paid to the holders of our common Stock until we
have paid to the holders of our preferred stock a dividend in an amount per
share equal to (i) the number of shares of common stock issuable upon conversion
of the preferred stock times (ii) the amount per share of the dividend to be
paid on the common stock. Other than the dividend preference described herein
for holders of our preferred stock, there are no loans or other contractual
obligations that restrict our ability to pay dividends.
REGISTRATION RIGHTS
We granted purchasers of our Series A Preferred Stock certain rights
with respect to the registration under the Securities Act of the shares of
common stock issuable upon conversion of the Preferred Stock and the shares of
common stock issuable upon exercise of the warrants. We agreed to file, within
45 days of date of the purchase agreements, a registration statement on Form
SB-2 (or such other form as is applicable) registering the resales of such
shares of common stock. We granted TN Capital Equities, Ltd, the placement agent
comparable registration rights with respect to the shares of common stock
underlying the Agent's Warrants.
In addition to the registration rights granted to the purchasers of the
preferred stock, we granted piggy-back registration rights to certain persons in
connection with shares of our common stock issued in consideration for services
performed our behalf.
We also agreed to file a registration statement covering the resale of
the shares of common stock issuable upon conversion of our Series B Preferred
Stock and the exercise of the warrants we issued on December 31, 2003. We are
required to file such registration statement on or before June 30, 2004. If the
registration statement is not declared effective by October 15, 2004, we will
pay liquidated damages equal to 1.0% of the amount invested and shall pay
liquidated damages equal to 0.5% of the amount invested for each subsequent
30-day period. In no event however, shall the liquidated damages exceed 18% in
the aggregate.
In connection with the issuance of the shares of Series C Preferred
Stock and warrants issued on June 24, 2004, we agreed to file the current
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
44
stock may be converted and the shares of common stock issuable upon the exercise
of the warrants. We are required to file such registration statement on or
before July 15, 2004. If the registration statement is not declared effective by
October 15, 2004, we will be required to pay liquidated damages equal to 1.0% of
the amount invested and additional liquidated damages equal to 0.5% of the
amount invested for each subsequent 30-day period. In no event however, shall
the liquidated damages exceed 18% in the aggregate. 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.
TRANSFER AGENT
The transfer agent for the common stock is Signature Stock Transfer,
2301 Ohio Drive, Plano, Texas 75093, (972) 612-4120. AXM Pharma acts as its own
transfer agent with regard to the Preferred Stock and warrants.
MARKET FOR COMMON EQUITY
AND RELATED SHAREHOLDER 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
Quarter Ended March 31, 2004 ............................... 7.30 3.80
Starting on March 3, 2004, our common stock listed on the American
Stock Exchange, also called the AMEX, under the trading symbol "AXJ." On May 13,
2004, the closing bid for our common stock as reported on the AMEX was $4.28 per
share. As of June 25, 2004 there were 15,338,530 shares of common stock
outstanding, 2,225,000 shares of Series A Preferred Stock outstanding 860,000
shares of Series B Preferred Stock outstanding, and 30.425shares of Series C
Preferred Stock outstanding. At June 25, 2004, there were approximately 115
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.
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.
45
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 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.
In April 2004, we received approval from the Liaoning Province Bureau
of Industry and Commerce and the Liaoning Province Ministry of Foreign Trade and
Investment to change the name of our wholly owned subsidiary in China from
Shenyang Tianwei Werke Pharmaceuticals, Ltd. to AXM Pharma Shenyang, Inc. This
approval of our name change paves the way for us to repackage our product line
with the AXM Pharma brand. We are currently undertaking a full redesign and
reconfiguration of our packaging by our international brand consulting firm,
ZZAD and Ogilvy and Mather.
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 entered into 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. The 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.
LIQUIDITY AND CAPITAL RESOURCES
Total assets increased from $4,596,520 at March 31, 2003 to $11,411,811
at March 31, 2004. The increase is primarily attributable to the increase in
cash of approximately $5.0 million and an increase in inventories of
approximately $1.9 million.
During the first quarter, we completed a private equity financing of
$1,950,000 with two accredited investors. After payment of costs and expenses,
including fees of the placement agent, we received net proceeds of approximately
$1,734,833. Pursuant to the terms of the purchase agreement with our investors,
dated as of December 31, 2003, we issued 1,00,000 shares of our preferred stock,
$.001 par value per share, at a price per share of $2.25 and 860,000 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
46
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
$1,596,196 at March 31, 2004, as compared to approximately $1,644,062 at March
31, 2003. The current liabilities decrease was the result of additional accrued
expenses in the current period.
From March 31, 2003, to March 31, 2004, our cash and cash equivalents
increased by approximately $5.0 million as a result of receipt of net proceeds
in the private placement offering of $3,674,833. Approximately $1,769,828 of
non-cash general, administrative and selling expenses were incurred in the
period ended March 31, 2004. 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.
We currently have sufficient cash to maintain operations at their
present level through the end of the current year. 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 $12 million in additional funds. We are currently seeking to raise
this additional capital, 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 currently in a position to call a significant number of outstanding
warrants, in the event that all warrants were called and converted we would
receive gross proceeds of approximately $9 million. If we are not be able to
raise this additional capital through warrant conversions 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 our the anticipated future sales and earnings.
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.
47
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 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
48
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 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
49
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.
COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2004 TO THREE MONTHS
ENDED MARCH 31, 2003
REVENUE. During the three-month period ended March 31, 2004 we
generated $1,119,394 from product sales compared to revenues from product sales
for the three-month period ended March 31, 2003 of $1,367,159. This represents a
sales decrease of $247,765 from the three-month period ended March 31, 2003.
The lower sales were due to management's strategic decision to
eliminate the sales of the Cefalexin and Norflexin antibiotic products due to
their significantly decreasing gross profit margins. Antibiotic pricing is under
significant pressure from government hospital purchasers who are reducing the
price they are willing to pay for antibiotics by up to 20% per year. Other
product categories are not under such pressures. First quarter, sales of
Asarone, Weifukang and Lifupeng were on target rising approximately 100% over
the first quarter of 2003. Despite this lower sales figure for the period ended
March 31, 2004, we still anticipate meeting our internal projections of
approximately $33 million in sales for FY2004.
In March 2004, we announced that we had acquired the rights to
manufacture and distribute a new adjunctive therapy for Type II diabetes. In
March 2004, we also announced the signing of an exclusive agreement with Sunkist
50
Growers to manufacture and distribute various vitamin and supplement products.
In March 2004, we also announced that we had hired a former executive of
Viagra's (Pfizer) Marketing Service provider in China as Vice President of
Marketing. Following the close of the first quarter, in April 2004, we announced
that we had gained the rights to manufacture and distribute a new Feminine
Hygeine Product, Xin Shu and had appointed ZZAD and Ogilvy & Mather to provide
marketing and branding service support for the various new products. These
events, coupled with anticipated expanded distribution and marketing
relationships, have provided us with the key products and internal management
and external advisors necessary for us to increase total revenues by as much as
300% in 2004. We anticipate completing new marketing and distribution
relationships during the remainer of 2004. We are currently in negotiation with
various new distribution and marketing partners, to date no additional
distribution or marketing agreements have been executed. We will continue to
seek additional manufacturing and marketing rights to new over-the-counter
formulas and 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 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. Gross profit on product sales for the three-month period
ended March 31, 2004, was $539,064 compared to $439,750 for the three-month
period ended March 31, 2003, an increase of $99,314. These figures represent a
22% increase of our gross margin to approximately 48%.
This increase in gross profits was achieved through a planned
elimination of the sales of our ultra-low margin antibiotic products. During the
remainder of 2004, we anticipate continuing to increase our gross profit margin
in order to achieve further gains, which we anticipate will represent an
increase of more than 20% over our 2003 fiscal year. We anticipate this
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 contract that provide margins which are
equivalent or better than the agreements that were in force in 2003, and the
opening of our new state of the art manufacturing plan in Shenyang scheduled for
the second half of 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 achieived. 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 was $1,264,229 compared to $367,460 for the same period last
year. 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 office 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
necessity in order to precede 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 GMP and
China GMP standards.
In addition to the aforementioned cash expenses in the general,
administrative and selling expense category there were $1,769,828 in non-cash
expenses relating to stock issued for professional services rendered in the
public relations area.
NON-CASH CONSULTING ACTIVITIES. During the three-month period ended
March 31, 2004, our Board of Directors authorized the issuance of shares of
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 $1,769,828 for the
issuance of these shares during the three-month period ended March 31, 2004.
NET LOSS. As a result of the above, in the three months ended March 31,
2004, our net loss was $2,494,993 including $1,769,828 in non-cash stock
issuance related losses. The net loss in the period applicable to common
shareholders was $3,580,010 or $(0.25) per share compared to $72,290 profit the
same period during 2003. The Net Loss for the three months ended March 31, 2004
51
was a result of increased expenses related to our public reporting status and
increased activities associated with the construction of our new plant in
Shenyang.
The net loss and loss per share results for the three months ended
March 31, 2004 were inline with internal management estimates. We have
forecasted 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.
Despite the views of management, the statement concerning future
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 March 31, 2004, we had total assets of
$11,411,811 compared to total assets of $11,024,738 at December 31, 2003. Cash
was $5,225,323 as of March 31, 2004, an increase of $2,274,541 from the
$2,950,782 cash on hand as of December 31, 2003. Cash used in operations was
$368,750 and cash provided by financing activities from the sale of common stock
was $2,958,032.
Accounts receivable was $854,384 at March 31, 2004, a decrease of
$1,760,595 from the $2,614,979 at December 31, 2003. Inventories increased
$681,791 to $2,925,545 from the $2,243,754 at December 31, 2003. The increase in
inventories is attributable to preparing to meet the anticipated higher sales
figures.
Total liabilities at March 31, 2004 were $1,596,196, a decrease of
$1,845,794 from the $3,441,990 at December 31, 2003. Accounts payable and
accrued liabilities were $248,002 at March 31, 2004, a decrease of $98,670 from
the $346,672 at December 31, 2003.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
We have had no disagreements with our certified public accountants with
respect to accounting practices or procedures or financial disclosure.
LEGAL PROCEEDINGS
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.
EXPERTS
The financial statements included in the Prospectus have been audited
by Malone & Bailey, PLLC, independent certified public accountants to the extent
and for the periods set forth in their report appearing elsewhere herein and are
included in reliance upon such report given upon the authority of said firm as
experts in auditing and accounting.
LEGAL MATTERS
Law Offices of Louis E. Taubman, P.C., has passed upon the validity of
the securities being offered hereby.
52
FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
AXM Pharma, Inc.
Playa del Rey, California
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 auditing standards generally accepted
in the United States of America. 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.
March 11, 2004, except for Note 11,
which is as of March 24, 2004
F-1
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.
2
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.
3
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.
4
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
5
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.
6
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
7
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.
8
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 Financing
AXM Pharma, Inc. completed a private equity financing of $1,935,000 In January
2004, 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.
Common Stock for Services
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.
9
INTERIM FINANCIAL STATEMENTS
----------------------------
AXM PHARMA, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 2004
(UNAUDITED)
ASSETS
Current assets
Cash $ 5,225,323
Accounts receivable, net of allowance of 0 854,384
Inventories 2,925,545
Advances, Suppliers 351,933
------------
Total current assets 9,357,185
Property and equipment, net 604,878
Licenses 1,449,748
------------
TOTAL ASSETS $ 11,411,811
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Value added tax payable $ 1,348,194
Accounts payable and accrued expenses 248,002
------------
Total current liabilities 1,596,196
------------
STOCKHOLDERS' EQUITY:
Series A Preferred stock, $.001 par value, 4,050,000 shares authorized,
2,455,000 shares issued and outstanding 2,455
Series B Preferred stock, $.001 par value, 2,000,000 shares authorized,
860,000 shares issued and outstanding 860
Common stock, $.001 par value, 50,000,000 shares authorized,
14,850,280 shares issued and outstanding 14,850
Additional paid-in capital 17,570,527
Accumulated deficit (7,773,077)
------------
Total Stockholders' Equity 9,815,615
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,411,811
============
10
AXM PHARMA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
Three Months Ended
March 31,
----------------------------
2004 2003
------------ ------------
Revenues $ 1,119,394 $ 1,367,159
Cost of revenues 580,330 927,409
------------ ------------
Gross profit 539,064 439,750
------------ ------------
General, administrative
and selling:
Cash 1,264,229 367,460
Non-cash 1,769,828 --
------------ ------------
Net loss $ (2,494,993) $ 72,290
============ ============
Net loss applicable to
common shareholders:
Net loss $ (2,494,993) $ 72,290
Beneficial conversion feature of preferred stock (947,628) --
Deemed dividend from beneficial conversion feature of
warrants (137,389) --
------------ ------------
Net loss applicable to common shareholders $ (3,580,010) $ 72,290
============ ============
Net loss per share:
Basic and diluted $ (0.25) $ 0.01
------------ ------------
Weighted averaged shares
outstanding:
Basic and diluted 14,195,531 10,000,000
============ ============
11
AXM PHARMA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,494,993) $ 72,290
Adjustments to reconcile net loss to cash used in
operating activities:
Common stock issued for services 1,769,828 --
Depreciation and amortization 9,639 5,414
Changes in assets and liabilities:
Cash held in trust -- 149,203
Accounts receivable 1,760,595 (494,106)
Advances 1,105,766 (157,162)
Inventories (681,791) 316,687
Accounts payable and accrued expenses (268,162) --
Value added tax payable (1,569,632) 211,865
----------- -----------
CASH FLOWS USED IN OPERATING ACTIVITIES (368,750) 104,491
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (314,741) --
Cash received in reverse merger -- 169
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES (314,741) 169
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions -- --
Proceeds from the sale of stock 2,958,032 --
----------- -----------
CASH FROM FINANCING ACTIVITIES 2,958,032 --
----------- -----------
NET INCREASE IN CASH 2,274,541 104,660
Cash, beginning of period 2,950,782 106,027
----------- -----------
Cash, end of period $ 5,225,323 $ 210,687
=========== ===========
SUPPLEMENTAL NON-CASH TRANSACTIONS:
Net liabilities assumed in reverse merger $ -- $ 22,692
12
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 March 31, 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 March 31, 2004, the related
consolidated statement of operations for the three months ended March 31, 2004,
and the consolidated statement of cash flows for the three months ended March
31, 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
months ended March 31, 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 injectibles, 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. Our products are
currently produced by third-party manufacturers and sold through third-party
distributors. AXM Shenyang 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 AXM Shenyang;
acquiring additional product licenses; and by moving the manufacturing and
distribution of our products in-house. In October 2003, we commenced
construction of a new plant to be built to U.S. and Chinese Good Manufacturing
Practices requirements.
13
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
During the three-month period ended March 31, 2004 we generated $1,119,394 from
product sales compared to revenues from product sales for the three-month period
ended March 31, 2003 of $1,367,159. This represents a sales decrease of $247,765
from the three-month period ended March 31, 2003. The lower sales were due to
management's strategic decision to eliminate the sales of the Cefalexin and
Norflexin antibiotic products due to their significantly decreasing gross profit
margins. Antibiotic pricing is under significant pressure from government
hospital purchasers who are reducing the price they are willing to pay for
antibiotics by up to 20% per year. Other product categories are not under such
pressures. First quarter, sales of Asarone, Weifukang and Lifupeng were on
target rising approximately 100% over the first quarter 2003. Despite this lower
sales figure for the period ended March 31, 2004, we still anticipate meeting
our internal project of approximately $33 million in sales for FY2004.
14
Gross profit on product sales for the three-month period ended March 31, 2004,
was $539,064 compared to $439,750 for the three-month period ended March 31,
2003, an increase of $99,314. These figures represent a 22% increase of our
gross margin to approximately 48%. This increase in gross profits was achieved
through a planned elimination of the sales of our ultra-low margin antibiotic
products. During the remainder of FY 2004, we anticipate continuing to increase
our gross profit margin to achieve further gains of more than 20 percentage
points versus 2003. We anticipate this 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 plan in Shenyang scheduled for the second half of 2004.
At March 31, 2004, we had total assets of $11,411,811 compared to total assets
of $11,024,738 at December 31, 2003. Cash was $5,225,323 as of March 31, 2004,
an increase of $2,274,541 from the $2,950,782 cash on hand as of December 31,
2003. Cash used in operations was $368,750 and cash provided by financing
activities from the sale of common stock was $2,958,032. Accounts receivable was
$854,384 at March 31, 2004, a decrease of $1,760,595 from the $2,614,979 at
December 31, 2003. Inventories increased $681,791 to $2,925,545 from the
$2,243,754 at December 31, 2003. The increase in inventories is attributable to
preparing to meet the anticipated higher sales figures. Total liabilities at
March 31, 2004 were $1,596,196, a decrease of $1,845,794 from the $3,441,990 at
December 31, 2003. Accounts payable and accrued liabilities were $248,002 at
March 31, 2004, an increase of $98,670 from the $346,672 at December 31, 2003.
Despite the views of management, the statements concerning future gross revenues
and gross profits are forward-looking statements that involve 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 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. Currently our products are produced using third-party
original equipment manufacturing relationships, which allows us to operate with
approximately 35 employees. However, we anticipate that when our new facility is
certified and becomes operational, we will have approximately 320 employees and
we will cease using third-parties for the production and distribution of our
products.
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
15
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 you 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 rely on third parties for the supply,
manufacture and distribution of our products. 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. The recent outbreak of
Severe Acute Respiratory Syndrome (SARS) 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 over 37.3%
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 makes any valuation corrections when such adjustments are needed.
16
NOTE 3 - STOCK ISSUANCES
COMMON STOCK ISSUED FOR STOCK-BASED COMPENSATION
We periodically issues 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 March 31, 2004, we issued 300,000 shares of
common stock and 50,000 warrants for services valued at $1,769,828.
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 $639,828,
including a $104,828 charge for black shoals valuation of the warrants issued.
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.
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 365,000 shares of common stock for the conversion of 365,000
shares of Series A Preferred Stock.
AXM Pharma issued 448,000 shares of common stock for the exercise of warrants
for proceeds of $1,344,040.
AXM Pharma issued 8,933 shares of common stock for the cashless exercise of
13,750 warrants.
17
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 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.
Also, in connection with the issuance of the shares of our preferred stock and
warrants to our investors, we agreed to file a registration statement with the
18
Commission in order 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 If our registration
statement is not filed with the Securities and Exchange Commission by June 30,
2004, we will begin to owe penalties to our investors. We are required to keep
this registration statement effective until such time as all of the common stock
underlying the shares of our preferred stock and the warrants is freely tradable
under the Securities Act of 1933, as amended.
In the Securities Purchase Agreement, each purchaser agreed not to sell, in any
calendar month during the one-year period beginning on the date of the
Securities Purchase Agreement, more than 1/12 of the aggregate number of shares
of common stock issuable upon conversion of the preferred stock and exercise of
the warrants purchased by such purchaser; provided, however, that the number of
shares that can be sold is cumulative and begins to accumulate on the day
following the date of the Securities Purchase Agreement, and, provided that the
number of shares that can be sold in any calendar month will increase to 1/6 of
such aggregate number of shares of common stock issuable to such purchaser in
the event the average daily trading volume in the common stock is equal to or
greater than 200,000 shares per day in the previous 20 trading days.
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.
19
AXM PHARMA, INC.
PROSPECTUS
i
PART II
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Articles of Incorporation include provisions, which limit the
liability of our directors. As permitted by applicable provisions of the Nevada
Law, directors will not be liable to Axiom for monetary damages arising from a
breach of their fiduciary duty as directors in certain circumstances. This
limitation does not affect liability for any breach of a director's duty to AXM
Pharma or our shareholders (i) with respect to approval by the director of any
transaction from which he or she derives an improper personal benefit, (ii) with
respect to acts or omissions involving an absence of good faith, that the
director believes to be contrary to the best interests of AXM Pharma or our
shareholders, that involve intentional misconduct or a knowing and culpable
violation of law, that constitute an unexcused pattern or inattention that
amounts to an abdication of his or her duty to AXM Pharma or our shareholders,
or that show a reckless disregard for duty to AXM Pharma or our shareholders in
circumstances in which he or she was, or should have been aware, in the ordinary
course of performing his or her duties, of a risk of serious injury to AXM
Pharma or our shareholders, or (iii) based on transactions between AXM Pharma
and our directors or another corporation with interrelated directors or based on
improper distributions, loans or guarantees under applicable sections of Nevada
Law. This limitation of directors' liability also does not affect the
availability of equitable remedies, such as injunctive relief or rescission.
We have been advised that it is the position of the Commission that
insofar as the provision in AXM Pharma's Articles of Incorporation, as amended,
may be invoked for liabilities arising under the Securities Act, the provision
is against public policy and is therefore unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
We are issuing a new series of Preferred Stock under this Registration
Statement. All common stock registered pursuant to this Registration Statement
is being registered on behalf of selling shareholders. We have agreed to pay all
costs of this Registration Statement. The estimated expenses for the
distribution of the common stock registered hereby, other than underwriting
commissions, fees and Representative's nonaccountable expense allowance are set
forth in the following table:
ITEM AMOUNT
---- ------
SEC Registration Fee $ 2,065.62
Transfer Agent Fees 500
Legal Fees 3,000
Accounting Fees 1,000
Printing and Engraving Costs 1,500
Miscellaneous 1,000
-----------
Total $9065.62
===========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, we effected the following transactions in
reliance upon exemptions from registration under the Securities Act as amended.
Unless stated otherwise; (i) that each of the persons who received these
unregistered securities had knowledge and experience in financial and business
matters which allowed them to evaluate the merits and risk of the receipt of
these securities, and that they were knowledgeable about our operations and
financial condition; (ii) no underwriter participated in, nor did we pay any
commissions or fees to any underwriter in connection with the transactions;
(iii) the transactions did not involve a public offerings; and (iv) each
certificate issued for these unregistered securities contained a legend stating
that the securities have not been registered under the Act and setting forth the
restrictions on the transferability and the sale of the securities.
ii
In order to accomplish the March 2003 share exchange with Werke, 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. The shares issued to the
former shareholders of Werke were issued to 25 accredited investors pursuant to
an exemption from registration under Section 4(2) of the Securities Act for
issuances not involving a public offering and to 33 non-U.S. persons pursuant to
an exemption from registration under Regulation S promulgated under the
Securities Act for issuances to non-U.S. persons. The share exchange with Werke
was treated as a tax free exchange.
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 an exemption from registration under 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. 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 an
exemption from registration under 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 shares were issued
pursuant to an exemption from registration under 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 shares were issued
pursuant to an exemption from registration under 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. pursuant to a consulting agreement. 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. 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 shares were
issued pursuant to an exemption from registration under 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 (the "Units"), each Unit
consisting of 1 share of Preferred Stock and 1 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
iii
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 W. 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. 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 S. 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. 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
$639,828, including a $104,828 charge for black shoals valuation of the warrants
issued.
On February 2, 2004 and April 20, 2004, we issued 200,000 shares of
restricted common and 100,000 shares of restricted common, respectively 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 and $4.27 per share
respectively, 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 $1,557,000.
On May 7, 2004, we issued 120,000 shares of restricted common stock,
and 200,000 warrants at $6.00 per warrant, to XCL Partners, Inc. 20,000 shares
were released when the agreement was signed on June 24, 2004. The remaining
100,000 shares are to be released monthly based upon a vesting schedule of
10,000 shares per month for ten (1 0 ) months , beginning 30 days after
effective date of the agreement The services to be provided under the agreement
are investor relations. 20,000 warrants shall vest immediately. The remaining
180,000 warrants shall be released monthly based on a vesting schedule of 15,000
warrants per month for eleven (11) months. 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. Therefore, the total aggregate value of the consideration paid to the
XCL Partners was $ 490,800.
On May 10, 2004 we issued 300,000 shares to Madden Consulting, Inc.
pursuant to a consulting agreement. The services to be provided under the
consulting agreement were investor and public relations. The shares were issued
iv
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. Therefore, the total aggregate value of the consideration
paid to Madden Consulting was $1,176,000.
On June 24, 2004, we issued 30.425 shares of our preferred stock, 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 a price equal to
$5.50 per share to accredited investors pursuant to a private equity financing.
Each share of the preferred stock shall be convertible into a number of fully
paid and nonassessable shares of our common stock at a fixed conversion price of
$4.25 per share. In addition, we issued to HC Wainwright, our placement agent, a
three-year warrant to purchase up to 3shares of our Series C Preferred Stock at
a price of $4.25per share and up to 35,793 warrants. 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. The securities issued
have not been registered under the Act and may not be offered or sold in the
United States absent registration or an applicable exemption from registration
requirements.
ITEM 27. 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
5.1 Opinion and Consent of Law Offices of Louis E. Taubman,
P.C.
v
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
23.1 Consent of Malone & Bailey, PLLC
99.1 Form of lock-up agreement by officers, directors and 5%
or greater shareholders
4.13 Securities Purchase Agreement dated as of June 24, 2004
4.14 Registration Rights Agreement dated as of June 24, 2004
4.15 Designation of Rights and Preferences of Series C
Preferred Stock dated as of June 24, 2004
* 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.
ITEM 28. UNDERTAKINGS.
We hereby undertake to file, during any period in which offers or sales
are being made, a post-effective amendment to this registration statement:
(a) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
vi
(b) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement;
notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Securities and Exchange Commission pursuant to Rule 424(b) under
the Securities Act of 1933 if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
registration statement;
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement; provided,
however, that paragraphs (a) and (b) do not apply if the information required to
be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed with or furnished to the Securities and Exchange
Commission by us pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the registration
statement.
In addition, we hereby undertake:
(a) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; and
(b) To remove from registration by means of a post-effective amendment
any of the securities being registered, which remain, unsold at the termination
of the offering.
We hereby undertake that, for purposes of determining any liability
under the Securities Act of 1933, each filing of our annual report pursuant to
section 13(a) or section 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to our directors, officers, and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission this indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by us of expenses incurred or paid by a
director, officer or controlling person of ours in the successful defense of any
action, suit or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered, we will,
unless in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized. AXM
PHARMA, INC.
By: /s/ Peter W. Cunningham
-----------------------
Name: Peter W. Cunningham
Title: President & Chief Executive Officer
vii
By: /s/ Chet Howard
---------------
Name: Chet Howard
Title: Chief Financial Officer
Dated: June 28, 2004
Pursuant to the requirements of the Securities Act of 1933, 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: June 28, 2004
-----------------------
Peter W. Cunningham
President and Chief Executive Officer
/s/ Chet Howard Dated: June 28, 2004
--------------
Chet Howard
Chief Financial Officer
/s/ Wang Wei Shi Dated: June 28, 2004
-----------------
Wang Wei Shi
Chairman of the Board
/s/ Douglas C. MacLellan Dated: June 28, 2004
------------------------
Douglas C. MacLellan
Vice-chairman of the Board
/s/ Mark H. Elenowitz Dated: June 28, 2004
---------------------
Mark H. Elenowitz
Director
/s/ Montgomery F. Simus Dated: June 28, 2004
-----------------------
Montgomery F. Simus
Director
/s/ Mark J. Bluer Dated: June 28, 2004
-----------------
Mark J. Bluer
Director
/s/ Chaoying (Charles) Li Dated: June 28, 2004
-------------------------
Chaoying (Charles) Li
viii
EXHIBIT 5.1
LAW OFFICES OF LOUIS E. TAUBMAN, P.C.
225 Broadway, Suite 1200
New York, New York 10007
AXM Pharma, Inc.
Board of Directors
3960 Howard Hughes Parkway
Suite 500
Las Vegas, NV 89109
Ladies and Gentlemen:
We have acted as counsel to AXM Pharma, Inc., a Nevada company
(the "Company"), in connection with the preparation and filing with the
Securities and Exchange Commission under the Securities Act of 1933, as
amended (the "Act"), of a Registration Statement on Form SB-2 (the
"Registration Statement"), relating to the proposed sale by the selling
shareholders listed therein (the "Selling shareholders") of 7,845,000
shares of the Company's common stock (the "Common Stock").
In so acting, we have examined and relied upon the originals
or copies, certified or otherwise identified to our satisfaction, of
such Company records, documents, certificates and other instruments as
in our judgment are necessary or appropriate to enable us to render the
opinions expressed below. Based upon the foregoing and such examination
of law as we have deemed necessary, we are of the opinion that the
Common Stock to be offered by the Selling shareholders, when sold under
the circumstances contemplated in the Registration Statement, will be
legally issued, fully paid and non-assessable.
The opinions we express herein are limited to matters
involving the Nevada corporate law and the federal laws of the United
States and are further expressly limited to the matters set forth above
and we render no opinion, whether by implication or otherwise as to any
other matters relating to the Company or the Common Stock.
We consent to the use of this letter as an Exhibit to the
Registration Statement and to the use of our name under the heading
"Legal Matters" included in the Prospectus forming a part of the
Registration Statement.
Sincerely,
Law Offices of Louis E. Taubman, P.C.
By: /s/ Louis E. Taubman
----------------------
Louis E. Taubman,
President
EXHIBIT 4.13
SECURITIES PURCHASE
AGREEMENT
DATED AS OF JUNE 24, 2004
AMONG
AXM PHARMA, INC.
AND
THE PURCHASERS LISTED ON EXHIBIT A
TABLE OF CONTENTS
PAGE
ARTICLE I Purchase and Sale of Preferred Stock and Warrants..................................1
Section 1.1 Purchase and Sale of Preferred Stock and Warrants.........................1
Section 1.2 Purchase Price and Closing................................................1
Section 1.3 Warrants..................................................................2
Section 1.4 Escrow....................................................................2
Section 1.5 Conversion Shares and Warrant Shares......................................2
ARTICLE II Representations and Warranties.....................................................2
Section 2.1 Representations and Warranties of the Company.............................2
Section 2.2 Representations and Warranties of the Purchasers.........................14
ARTICLE III Covenants.......................................................................16
Section 3.1 Disclosure of Transactions and Other Material Information................16
Section 3.2 Registration and Listing.................................................16
Section 3.3 Securities Compliance....................................................17
Section 3.4 Inspection Rights........................................................17
Section 3.5 Complaince with Laws.....................................................17
Section 3.6 Keeping of Records and Books of Account..................................17
Section 3.7 Other Agreements.........................................................17
Section 3.8 Reservation of Shares....................................................17
Section 3.9 Non-public Information...................................................17
Section 3.10 Disposition of Assets....................................................18
Section 3.11 Preemptive Rights........................................................18
Section 3.12 Pledge of Securities.....................................................20
Section 3.13 Reporting Requirements...................................................20
Section 3.14 Status of Dividends......................................................21
Section 3.15 Lock-up..................................................................21
Section 3.16 Transfer Agent Instructions..............................................22
ARTICLE IV Conditions......................................................................22
Section 4.1 Conditions Precedent to the Obligation of the Company to
Close and to Sell the Shares and Warrants................................22
Section 4.2 Conditions Precedent to the Obligation of the Purchasers to
Close and to Purchase the Shares and Warrants............................23
ARTICLE V Certificate of Legend...........................................................25
Section 5.1 Legend...................................................................25
-i-
ARTICLE VI Termination.....................................................................27
Section 6.1 Termination by Mutual Consent............................................27
Section 6.2 Effect of Termination....................................................27
ARTICLE VII Indemnification.................................................................27
Section 7.1 General Indemnity........................................................27
Section 7.2 Indemnification Procedure................................................27
ARTICLE VIII Miscellaneous...................................................................24
Section 8.1 Fees and Expenses........................................................28
Section 8.2 Specific Enforcement; Consent to Jurisdiction............................29
Section 8.3 Entire Agreement; Amendment..............................................29
Section 8.4 Notices..................................................................30
Section 8.5 Waivers..................................................................31
Section 8.6 Headings.................................................................31
Section 8.7 Successors and Assigns...................................................31
Section 8.8 No Third Party Beneficiaries.............................................31
Section 8.9 Governing Law............................................................31
Section 8.10 Survival.................................................................31
Section 8.11 Counterparts.............................................................31
Section 8.12 Publicity................................................................32
Section 8.13 Severability.............................................................32
Section 8.14 Further Assurances.......................................................32
-ii-
SECURITIES PURCHASE AGREEMENT
This SECURITIES PURCHASE AGREEMENT this ("Agreement"), dated as of June
24, 2004, by and among AXM Pharma, Inc., a Nevada corporation (the "Company"),
and the entities listed on Exhibit A hereto (each a "Purchaser" and
collectively, the "Purchasers"), for the purchase and sale to the Purchasers of
shares of the Company's Series C Convertible Preferred Stock, par value $.001
per share (the "Preferred Stock"), and warrants to purchase shares of the
Company's common stock, par value $.001 per share (the "Common Stock").
The parties hereto agree as follows:
ARTICLE I
PURCHASE AND SALE OF PREFERRED STOCK AND WARRANTS
Section 1.1 Purchase and Sale of Preferred Stock and Warrants. Upon the
following terms and conditions, the Company shall issue and sell to the
Purchasers, and the Purchasers shall purchase from the Company, shares of its
Preferred Stock (the "Shares") at a price per share equal to $100,000 (the
"Stated Value") for an aggregate purchase price of up to $10,000,000 (the
"Purchase Price"), and warrants to purchase shares of Common Stock, in
substantially the form attached hereto as Exhibit B (the "Warrants"). The
Preferred Stock shall be convertible into a number of fully paid and
nonassessable shares of the Company's Common Stock equal to the quotient of (i)
the Stated Value of the shares of Series C Preferred Stock being converted
divided by (ii) $4.25 (the "Fixed Conversion Price"). The Company and the
Purchasers are executing and delivering this Agreement in accordance with and in
reliance upon the exemption from securities registration afforded by Section
4(2) of the U.S. Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder (the "Securities Act"), including Regulation
D ("Regulation D"), and/or upon such other exemption from the registration
requirements of the Securities Act as may be available with respect to any or
all of the investments to be made hereunder. The Preferred Stock shall have such
powers, preferences and rights, and the qualifications, limitations or
restrictions thereof, as set forth in the Certificate of Designation of Rights
and Preferences of Series C Preferred Stock attached hereto as Exhibit D (the
"Certificate of Designation"), subject to the applicable terms and conditions of
this Agreement and the Registration Rights Agreement (as defined below).
Section 1.2 Purchase Price and Closing. The Company agrees to issue and
sell to the Purchasers and, in consideration of and in express reliance upon the
representations, warranties, covenants, terms and conditions of this Agreement,
the Purchasers, severally but not jointly, agree to purchase the number of
Shares and Warrants set forth opposite their respective names on Exhibit A. The
closing of the purchase and sale of the Shares and Warrants to be acquired by
the Purchasers from the Company under this Agreement shall take place at the
offices of the Company located at 3960 Howard Hughes Parkway, Suite 500, Las
Vegas, Nevada 89109 (the "Closing") at 10:00 a.m., Pacific Time (i) on or before
June 18, 2004, provided, that all of the conditions set forth in Article IV
hereof and applicable to the Closing shall have been fulfilled or waived in
1
accordance herewith, or (ii) at such other time and place or on such date as the
Purchasers and the Company may agree upon (the "Closing Date").
Section 1.3 Warrants. At the Closing, the Company shall issue to the
Purchasers Warrants to purchase an aggregate of fifty percent (50%) of the
number of shares of Common Stock underlying the Preferred Stock based on the
Fixed Conversion Price. The Warrants shall be exercisable for three (3) years
from the date of issuance and shall have an exercise price equal to $5.50 per
share.
Section 1.4 Escrow. On or prior to the Closing Date, each Purchaser
shall fund its portion of the Purchase Price into an escrow account maintained
by Jenkens & Gilchrist Parker Chapin LLP as escrow agent (the "Escrow Agent").
Upon the Closing and delivery to the Escrow Agent of written instructions
executed by the Company and the placement agent, the Escrow Agent shall promptly
wire transfer the funds according to such written instructions to an account
designated by the Company.
Section 1.5 Conversion Shares and Warrant Shares. The Company has
authorized and reserved and covenants to continue to reserve, free of preemptive
rights and other similar contractual rights of stockholders, out of its
authorized but unissued Common Stock or its Common Stock held in treasury, a
number of shares of Common Stock equal to the aggregate number of shares of
Common Stock necessary to effect the conversion of the Shares and the exercise
of the Warrants. The Company shall, from time to time, in accordance with the
Nevada Corporation Law, increase the authorized amount of its Common Stock if at
any time the authorized amount of its Common Stock remaining unissued shall not
be sufficient to permit the conversion of all Shares at the time outstanding,
subject, however, to stockholder approval. If any shares of Common Stock
required to be reserved for issuance upon conversion of the Shares or exercise
of the Warrants hereunder require registration with or approval of any
governmental authority under any federal or state law before the shares may be
issued, the Company will cause the shares to be so registered and approved. All
shares of Common Stock delivered upon conversion of the Shares or exercise of
the Warrants shall, upon delivery, be duly authorized and validly issued, fully
paid and nonassessable, free from all taxes, liens and charges with respect to
the issue thereof. Any shares of Common Stock issuable upon conversion of the
Shares (and such shares when issued) are herein referred to as the "Conversion
Shares". Any shares of Common Stock issuable upon exercise of the Warrants (and
such shares when issued) are herein referred to as the "Warrant Shares". The
Shares, the Conversion Shares, the Warrants and the Warrant Shares are sometimes
collectively referred to herein as the "Securities".
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Section 2.1 Representations and Warranties of the Company. In order to
induce the Purchasers to enter into this Agreement and to purchase the Shares
and Warrants, the Company hereby makes the following representations and
warranties to the Purchasers:
2
(a) Organization, Good Standing and Power. The Company is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Nevada and has the requisite corporate power to own, lease
and operate its properties and assets and to conduct its business as it is now
being conducted. The Company does not have any Subsidiaries (as defined in
Section 2.1(g)) or own securities of any kind in any other entity, except as set
forth on Schedule 2.1(g) hereto. The Company and each such Subsidiary is duly
qualified as a foreign corporation to do business and is in good standing in
every jurisdiction in which the nature of the business conducted or property
owned by it makes such qualification necessary, except for any jurisdiction(s)
(alone or in the aggregate) in which the failure to be so qualified will not
have a Material Adverse Effect. For the purposes of this Agreement, "Material
Adverse Effect" means any adverse effect on the business, operations, assets,
prospects or financial condition of the Company or its Subsidiaries and which is
material to such entity or other entities controlling or controlled by such
entity or the Company or which is likely to materially hinder the performance by
the Company of its obligations hereunder and under the other Transaction
Documents (as defined in Section 2.1(b) hereof).
(b) Authorization; Enforcement. The Company has the requisite
corporate power and authority to enter into and perform this Agreement, the
Certificate of Designation, the Registration Rights Agreement, the Warrants, the
Irrevocable Transfer Agent Instructions (as defined in Section 3.16) attached
hereto as Exhibit F and the other agreements and documents contemplated hereby
and thereby and executed by the Company or to which the Company is party
(collectively, the "Transaction Documents"), and to issue and sell the Shares
and the Warrants in accordance with the terms hereof. The execution, delivery
and performance of the Transaction Documents by the Company and the consummation
by it of the transactions contemplated thereby have been duly and validly
authorized by all necessary corporate action, and, except as set forth in
Schedule 2.1(b), no further consent or authorization of the Company or its Board
of Directors or stockholders is required. This Agreement has been duly executed
and delivered by the Company. The other Transaction Documents will have been
duly executed and delivered by the Company at the Closing. Each of the
Transaction Documents constitutes, or shall constitute when executed and
delivered, a valid and binding obligation of the Company enforceable against the
Company in accordance with its terms, except as such enforceability may be
limited by applicable bankruptcy, reorganization, moratorium, liquidation,
conservatorship, receivership or similar laws relating to, or affecting
generally the enforcement of, creditor's rights and remedies or by equitable
principles or remedies of general application.
(c) Capitalization. The authorized capital stock of the Company and
the shares thereof currently issued and outstanding as of May 1, 2004 are set
forth on Schedule 2.1(c) hereto. All of the outstanding shares of the Company's
Common Stock and any other security of the Company have been duly and validly
authorized. Except as set forth on Schedule 2.1(c), no shares of Common Stock or
any other security of the Company are entitled to preemptive rights or
registration rights and there are no outstanding options, warrants, scrip,
rights to subscribe to, call or commitments of any character whatsoever relating
to, or securities or rights convertible into, any shares of capital stock of the
Company. Furthermore, except as set forth on Schedule 2.1(c) hereto or in any
3
Commission Documents (as defined in Section 2.1(f) below) and except for the
Transaction Documents, there are no contracts, commitments, understandings, or
arrangements by which the Company is or may become bound to issue additional
shares of the capital stock of the Company or options, securities or rights
convertible into shares of capital stock of the Company. Except for customary
transfer restrictions contained in agreements entered into by the Company in
order to sell restricted securities or as provided on Schedule 2.1(c) hereto and
except as in any Commission Documents, the Company is not a party to or bound by
any agreement or understanding granting registration or anti-dilution rights to
any person with respect to any of its equity or debt securities. Except as set
forth on Schedule 2.1(c) or disclosed in any Commission Documents, the Company
is not a party to, and it has no knowledge of, any agreement or understanding
restricting the voting or transfer of any shares of the capital stock of the
Company. Except as set forth on Schedule 2.1(c) hereto or disclosed in any
Commission Documents, the offer and sale of all capital stock, convertible
securities, rights, warrants, or options of the Company issued prior to the
Closing complied with all applicable federal and state securities laws, and to
the best knowledge of the Company, no holder of such securities has a right of
rescission or has made or threatened to make a claim for rescission or damages
with respect thereto which could have a Material Adverse Effect. The Company has
furnished or made available to the Purchasers true and correct copies of the
Company's Articles of Incorporation as in effect on the date hereof (the
"Articles"), and the Company's Bylaws as in effect on the date hereof (the
"Bylaws").
(d) Issuance of Securities. The Shares and the Warrants to be issued
at the Closing have been duly authorized by all necessary corporate action and,
when paid for or issued in accordance with the terms hereof, the Shares shall be
validly issued and outstanding, fully paid and nonassessable and free and clear
of all liens, encumbrances and rights of first refusal of any kind and the
holders shall be entitled to all rights accorded to a holder of Preferred Stock.
When the Conversion Shares are issued in accordance with the terms of the
Preferred Stock, such shares will be duly authorized by all necessary corporate
action and validly issued and outstanding, fully paid and nonassessable, free
and clear of all liens, encumbrances and rights of first refusal of any kind and
the holders shall be entitled to all rights accorded to a holder of Common
Stock. When the Warrant Shares are issued and paid for in accordance with the
terms of this Agreement and as set forth in the Warrants, such shares will be
duly authorized by all necessary corporate action and validly issued and
outstanding, fully paid and nonassessable, free and clear of all liens,
encumbrances and rights of first refusal of any kind and the holders shall be
entitled to all rights accorded to a holder of Common Stock.
(e) No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby do not and will not (i) violate any
provision of the Articles or Bylaws or any Subsidiary's comparable charter
documents, (ii) conflict with, or constitute a default (or an event which with
notice or lapse of time or both would become a default) under, or give to others
any rights of termination, amendment, acceleration or cancellation of, any
agreement, mortgage, deed of trust, indenture, note, bond, license, lease
agreement, instrument or obligation to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries'
4
respective properties or assets are bound, (iii) create or impose a lien,
mortgage, security interest, charge or encumbrance of any nature on any property
or asset of the Company or any of its Subsidiaries under any agreement or any
commitment to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound or by which any of their
respective properties or assets are bound, or (iv) result in a violation of any
federal, state, local or foreign statute, rule, regulation, order, judgment or
decree (including federal and state securities laws and regulations) applicable
to the Company or any of its Subsidiaries or by which any property or asset of
the Company or any of its Subsidiaries is bound or affected, except, in all
cases other than violations pursuant to clauses (i) or (iv) (with respect to
federal and state securities laws) above, for such conflicts, defaults,
terminations, amendments, acceleration, cancellations and violations as would
not, individually or in the aggregate, have a Material Adverse Effect. The
business of the Company and its Subsidiaries is not being conducted in violation
of any laws, ordinances or regulations of any governmental entity, except for
possible violations, which singularly or in the aggregate do not and will not
have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries
is required under federal, state, foreign or local law, rule or regulation to
obtain any consent, authorization or order of, or make any filing or
registration with, any court or governmental agency in order for it to execute,
deliver or perform any of its obligations under the Transaction Documents or
issue and sell the Shares, the Conversion Shares, the Warrants or the Warrant
Shares in accordance with the terms hereof or thereof (other than any filings
which may be required to be made by the Company with the Securities and Exchange
Commission (the "Commission") or state securities administrators subsequent to
the Closing, or any registration statement which may be filed pursuant hereto or
thereto).
(f) Commission Documents; Commission Filings; Financial Statements.
The Common Stock is currently registered pursuant to Section 12(b) and 12(g) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and,
except as disclosed on Schedule 2.1(f) hereto, the Company has timely filed all
reports, schedules, forms, statements and other documents required to be filed
by it with the Commission pursuant to the reporting requirements of the Exchange
Act, including material filed pursuant to Section 13(a) or 15(d) of the Exchange
Act (all of the foregoing, including filings incorporated by reference therein,
being referred to herein as the "Commission Documents"). The Company has not
provided to the Purchasers any material non-public information or other
information which, according to applicable law, rule or regulation, should have
been disclosed publicly by the Company but which has not been so disclosed,
other than with respect to the transactions contemplated by this Agreement. At
the time of its filing, the Company's Form 10-QSB for the fiscal year ended
March 31, 2004 (the "Form 10-Q") complied in all material respects with the
requirements of the Exchange Act and the rules and regulations of the Commission
promulgated thereunder and other federal, state and local laws, rules and
regulations applicable to such documents, and the Form 10-Q did not contain any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. As of
their respective dates, the financial statements of the Company included in the
Commission Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
5
the Commission or other applicable rules and regulations with respect thereto.
Such financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") applied on a consistent basis during the
periods involved (except (i) as may be otherwise indicated in such financial
statements or the Notes thereto, or (ii) in the case of unaudited interim
statements, to the extent they may not include footnotes or may be condensed or
summary statements), and fairly present in all material respects the financial
position of the Company and its Subsidiaries as of the dates thereof and the
results of operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments).
(g) Subsidiaries. Schedule 2.1(g) hereto sets forth each Subsidiary
of the Company, showing the jurisdiction of its incorporation or organization
and showing the percentage of each person's ownership of the outstanding stock
or other interests of such Subsidiary. For the purposes of this Agreement,
"Subsidiary" shall mean any corporation or other entity of which at least a
majority of the securities or other ownership interest having ordinary voting
power (absolutely or contingently) for the election of directors or other
persons performing similar functions are at the time owned directly or
indirectly by the Company and/or any of its other Subsidiaries. All of the
outstanding shares of capital stock of each Subsidiary have been duly authorized
and validly issued, and are fully paid and nonassessable. There are no
outstanding preemptive, conversion or other rights, options, warrants or
agreements granted or issued by or binding upon any Subsidiary for the purchase
or acquisition of any shares of capital stock of any Subsidiary or any other
securities convertible into, exchangeable for or evidencing the rights to
subscribe for any shares of such capital stock. Neither the Company nor any
Subsidiary is subject to any obligation (contingent or otherwise) to repurchase
or otherwise acquire or retire any shares of the capital stock of any Subsidiary
or any convertible securities, rights, warrants or options of the type described
in the preceding sentence except as set forth on Schedule 2.1(g) hereto. Except
as set forth on Schedule 2.1(g) hereto, neither the Company nor any Subsidiary
is party to, nor has any knowledge of, any agreement restricting the voting or
transfer of any shares of the capital stock of any Subsidiary.
(h) No Material Adverse Change. Since March 31, 2004, the Company
has not experienced or suffered any Material Adverse Effect, except as disclosed
on Schedule 2.1(h) hereto.
(i) No Undisclosed Liabilities. Except as disclosed on Schedule
2.1(i) hereto, neither the Company nor any of its Subsidiaries has any
liabilities, obligations, claims or losses (whether liquidated or unliquidated,
secured or unsecured, absolute, accrued, contingent or otherwise) other than
those set forth on the balance sheet included in the Form 10-Q or incurred in
the ordinary course of the Company's or its Subsidiaries respective businesses
since March 31, 2004, and which, individually or in the aggregate, do not or
would not have a Material Adverse Effect on the Company or its Subsidiaries.
(j) No Undisclosed Events or Circumstances. Since March 31, 2004,
except as disclosed on Schedule 2.1(j) hereto, no event or circumstance has
6
occurred or exists with respect to the Company or its Subsidiaries or their
respective businesses, properties, prospects, operations or financial condition,
which, under applicable law, rule or regulation, requires public disclosure or
announcement by the Company but which has not been so publicly announced or
disclosed.
(k) Indebtedness. Schedule 2.1(k) hereto sets forth as of the date
hereof all outstanding secured and unsecured Indebtedness of the Company or any
Subsidiary, or for which the Company or any Subsidiary has commitments, which
Indebtedness is not disclosed in any Commission Documents. For the purposes of
this Agreement, "Indebtedness" shall mean (i) any liabilities for borrowed money
in excess of $100,000 (other than trade accounts payable incurred in the
ordinary course of business), (ii) all guaranties, endorsements and other
contingent obligations in respect of Indebtedness of others in excess of
$100,000, whether or not the same are or should be reflected in the Company's
balance sheet (or the Notes thereto), except guaranties by endorsement of
negotiable instruments for deposit or collection or similar transactions in the
ordinary course of business, and (iii) the present value of any lease payments
in excess of $100,000 due under leases required to be capitalized in accordance
with GAAP. Except as disclosed on Schedule 2.1(k) or in any Commission
Documents, neither the Company nor any Subsidiary is in default with respect to
any Indebtedness.
(l) Title to Assets. Each of the Company and the Subsidiaries has
good and marketable title to all of its real and personal property, free and
clear of any mortgages, pledges, charges, liens, security interests or other
encumbrances of any nature whatsoever, except for those indicated on Schedule
2.1(l) hereto or disclosed in any Commission Documents or such that,
individually or in the aggregate, do not have a Material Adverse Effect. All
material leases of the Company and each of its Subsidiaries are valid and
subsisting and in full force and effect.
(m) Actions Pending. Except as set forth in the Commission Documents
or Schedule 2.1(m) hereto, there is no action, suit, claim, investigation,
arbitration, alternate dispute resolution proceeding or other proceeding pending
or, to the knowledge of the Company, threatened against the Company or any
Subsidiary which questions the validity of this Agreement or any of the other
Transaction Documents or any of the transactions contemplated hereby or thereby
or any action taken or to be taken pursuant hereto or thereto. Except as set
forth in any Commission Document or on Schedule 2.1(m) hereto: (i) there is no
action, suit, claim, investigation, arbitration, alternate dispute resolution
proceeding or other proceeding pending or, to the knowledge of the Company,
threatened against or involving the Company, any Subsidiary or any of their
respective properties or assets, which individually or in the aggregate, would
have a Material Adverse Effect, and (ii) there are no outstanding orders,
judgments, injunctions, awards or decrees of any court, arbitrator or
governmental or regulatory body against the Company or any Subsidiary or any
officers or directors of the Company or any Subsidiary in their capacities as
such, which individually, or in the aggregate, would have a Material Adverse
Effect.
(n) Compliance with Law. The business of the Company and the
Subsidiaries has been and is presently being conducted in accordance with all
7
applicable federal, state and local governmental laws, rules, regulations and
ordinances, except as set forth in the Commission Documents or on Schedule
2.1(n) hereto or such that, individually or in the aggregate, the noncompliance
therewith would not have a Material Adverse Effect. The Company and each of its
Subsidiaries have all franchises, permits, licenses, consents and other
governmental or regulatory authorizations and approvals necessary for the
conduct of its business as now being conducted by it unless the failure to
possess such franchises, permits, licenses, consents and other governmental or
regulatory authorizations and approvals, individually or in the aggregate, could
not reasonably be expected to have a Material Adverse Effect.
(o) Taxes. Except as set forth on Schedule 2.1(o) hereto or in the
Commission Documents, the Company and each of the Subsidiaries has accurately
prepared and filed all federal, state and other tax returns required by law to
be filed by it, has paid or made provisions for the payment of all taxes shown
to be due and all additional assessments, and adequate provisions have been and
are reflected in the financial statements of the Company and the Subsidiaries
for all current taxes and other charges to which the Company or any Subsidiary
is subject and which are not currently due and payable. Except as disclosed on
Schedule 2.1(o) hereto, none of the federal income tax returns of the Company or
any Subsidiary have been audited by the Internal Revenue Service. Except as
disclosed in the Commission Documents, the Company has no knowledge of any
additional assessments, adjustments or contingent tax liability (whether federal
or state) of any nature whatsoever, whether pending or threatened against the
Company or any Subsidiary for any period, nor of any basis for any such
assessment, adjustment or contingency.
(p) Certain Fees. Except as set forth on Schedule 2.1(p) hereto, the
Company has not employed any broker or finder or incurred any liability for any
brokerage or investment banking fees, commissions, finders' structuring fees,
financial advisory fees or other similar fees in connection with the Transaction
Documents.
(q) Disclosure. To the best of the Company's knowledge, neither this
Agreement nor any other documents, certificates or instruments furnished to the
Purchasers by or on behalf of the Company or any Subsidiary in connection with
the transactions contemplated by this Agreement contains any untrue statement of
a material fact or omits to state a material fact necessary in order to make the
statements made herein or therein, in the light of the circumstances under which
they were made herein or therein, not misleading.
(r) Intellectual Property. Schedule 2.1(r) contains a complete and
correct list of all patents, trademarks, domain names (whether or not
registered) and any patentable improvements or copyrightable derivative works
thereof, websites and intellectual property rights relating thereto, service
marks, trade names, copyrights, licenses and authorizations, and all rights with
respect to the foregoing held by the Company or any of its Subsidiaries
(collectively, the "Proprietary Rights"). The Company and each of the
Subsidiaries owns or possesses all the Proprietary Rights which are necessary
for the conduct of its business as now conducted without any conflict with the
rights of others. Except as disclosed in the Commission Documents or Schedule
2.1(r) hereto, (i) as of the date of this Agreement, neither the Company nor any
8
of its Subsidiaries has received any written notice that any Proprietary Rights
have been declared unenforceable or otherwise invalid by any court or
governmental agency, and (ii) as of the date of this Agreement, there is, to the
knowledge of the Company, no material existing infringement, misuse or
misappropriation of any Proprietary Rights by others that could have a Material
Adverse Effect. From December 31, 2003, to the date of this Agreement, neither
the Company nor any of its Subsidiaries has received any written notice alleging
that the operation of the business of the Company or any of its Subsidiaries
infringes in any material respect upon the intellectual property rights of
others.
(s) Environmental Compliance. Except as disclosed on Schedule 2.1(s)
hereto or the Commission Documents, the Company and each of its Subsidiaries
have obtained all material approvals, authorization, certificates, consents,
licenses, orders and permits or other similar authorizations of all governmental
authorities, or from any other person, that are required under any Environmental
Laws. Schedule 2.1(s) hereto sets forth all material permits, licenses and other
authorizations issued under any Environmental Laws to the Company or its
Subsidiaries. "Environmental Laws" shall mean all U.S. Federal or state laws
applicable to the Company or any of its Subsidiaries relating to the protection
of the environment including, without limitation, all requirements pertaining to
reporting, licensing, permitting, controlling, investigating or remediating
emissions, discharges, releases or threatened releases of hazardous substances,
chemical substances, pollutants, contaminants or toxic substances, materials or
wastes, whether solid, liquid or gaseous in nature, into the air, surface water,
groundwater or land, or relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of hazardous
substances, chemical substances, pollutants, contaminants or toxic substances,
material or wastes, whether solid, liquid or gaseous in nature. Except as set
forth on Schedule 2.1(s) hereto, the Company has all necessary governmental
approvals required under all Environmental Laws and used in its business or in
the business of any of its Subsidiaries, except for such instances as would not
individually or in the aggregate have a Material Adverse Effect. The Company and
each of its Subsidiaries are also in compliance with all other limitations,
restrictions, conditions, standards, requirements, schedules and timetables
required or imposed under all Environmental Laws where non-compliance could have
a Material Adverse Effect. Except for such instances as would not individually
or in the aggregate have a Material Adverse Effect or as disclosed in the
Commission Documents, there are no past or present events, conditions,
circumstances, incidents, actions or omissions relating to or in any way
affecting the Company or its Subsidiaries that violate or may violate any
Environmental Law after the Closing or that may give rise to any Environmental
Liabilities, or otherwise form the basis of any claim, action, demand, suit,
proceeding, hearing, study or investigation (i) under any Environmental Law, or
(ii) based on or related to the manufacture, processing, distribution, use,
treatment, storage (including, without limitation, underground storage tanks),
disposal, transport or handling, or the emission, discharge, release or
threatened release of any hazardous substance. "Environmental Liabilities" means
all liabilities of a person (whether such liabilities are owed by such person to
governmental authorities, third parties or otherwise) currently in existence or
arising hereafter and which arise under or relate to any Environmental Law.
9
(t) Books and Records; Internal Accounting Controls. The books,
records and documents of the Company and its Subsidiaries accurately reflect in
all material respects the information relating to the business of the Company
and the Subsidiaries, the location and collection of their assets, and the
nature of all transactions giving rise to the obligations or accounts receivable
of the Company or any Subsidiary. The Company and each of its Subsidiaries
maintain a system of internal accounting controls sufficient, in the judgment of
the Company's board of directors, to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with GAAP and to maintain
asset accountability, (iii) access to assets is permitted only in accordance
with management's general or specific authorization, and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate actions are taken with respect to any differences.
(u) Material Agreements. Except for the Transaction Documents or as
set forth on Schedule 2.1(u) hereto, or those that are included as exhibits to
the Commission Documents, neither the Company nor any Subsidiary is a party to
any written or oral contract, instrument, agreement, commitment, obligation,
plan or arrangement, a copy of which would be required to be filed with the
Commission if the Company or any Subsidiary were registering securities under
the Securities Act (collectively, "Material Agreements"). Except as set forth in
the Commission Documents or on Schedule 2.1(u) hereto, the Company and each
Subsidiary has in all material respects performed all the obligations required
to be performed by them to date under the foregoing agreements, have received no
notice of default and, to the best of the Company's knowledge, are not in
default under any Material Agreement now in effect, the result of which could
cause a Material Adverse Effect. No written or oral contract, instrument,
agreement (other than the Certificate of Designation with respect to the
Preferred Stock, this Agreement or any other Transaction Document(s)),
commitment, obligation (other than any obligation imposed by state law), plan or
arrangement of the Company or of any Subsidiary limits or shall limit the
payment of dividends on its Common Stock.
(v) Transactions with Affiliates. Except as set forth on Schedule
2.1(v) hereto or disclosed in any of the Commission Documents, there are no
loans, leases, agreements, contracts, royalty agreements, management contracts
or arrangements or other continuing transactions between (i) the Company, any
Subsidiary or any of their respective its customers or suppliers, on the one
hand, and (ii) on the other hand, any officer, employee, consultant or director
of the Company, or any of its Subsidiaries, or any person owning any capital
stock of the Company or any Subsidiary or any member of the immediate family of
such officer, employee, consultant, director or stockholder or any corporation
or other entity controlled by such officer, employee, consultant, director or
stockholder.
(w) Securities Act of 1933. Assuming the accuracy and completeness
of the representations, warranties and covenants of the Purchasers contained
herein, the Company has complied and will comply with all applicable federal and
state securities laws in connection with the offer, issuance and sale of the
Shares, the Conversion Shares, the Warrants and the Warrant Shares hereunder.
10
Neither the Company nor anyone acting on its behalf, directly or indirectly, has
or will sell, offer to sell or solicit offers to buy any of the Securities, or
similar securities to, or solicit offers with respect thereto from, or enter
into any preliminary conversations or negotiations relating thereto with, any
person, or has taken or will take any action so as to require registration of
the issuance and sale of any of the Securities under the registration provisions
of the Securities Act and applicable state securities laws. Neither the Company
nor any of its affiliates, nor any person acting on its or their behalf, has
engaged in any form of general solicitation or general advertising (within the
meaning of Regulation D under the Securities Act) in connection with the offer
or sale of any of the Securities.
(x) Governmental Approvals. Except as set forth on Schedule 2.1(x)
hereto, and except for the filing of any notice prior or subsequent to the
Closing that may be required under applicable state and/or federal securities
laws (which if required, shall be filed on a timely basis), no authorization,
consent, approval, license, exemption of, filing or registration with any court
or governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, is or will be necessary for, or in
connection with, the execution or delivery of the Shares and the Warrants, or,
except as set forth in this Agreement or any other Transaction Document, for the
performance by the Company of its obligations under the Transaction Documents.
(y) Employees. Neither the Company nor any Subsidiary has any
collective bargaining arrangements or agreements covering any of its employees.
Except as set forth in the Commission Documents or on Schedule 2.1(y) hereto,
neither the Company nor any Subsidiary has any employment contract, agreement
regarding proprietary information, non-competition agreement, non-solicitation
agreement, confidentiality agreement, or any other similar contract or
restrictive covenant, relating to the right of any officer, employee or
consultant to be employed or engaged by the Company or such Subsidiary. Since
September 30, 2003, no officer, consultant or key employee of the Company or any
Subsidiary whose termination, either individually or in the aggregate, could
have a Material Adverse Effect, has terminated or, to the knowledge of the
Company, has any present intention of terminating his or her employment or
engagement with the Company or any Subsidiary.
(z) Absence of Certain Developments. Except as set forth in the
Commission Documents or on Schedule 2.1(z) hereto, since December 31, 2003,
neither the Company nor any Subsidiary has:
(i) issued any stock, bonds or other corporate securities or
any rights, options or warrants with respect thereto;
(ii) borrowed any amount or incurred or become subject to any
liabilities (absolute or contingent) except current liabilities incurred in the
ordinary course of business which are comparable in nature and amount to the
current liabilities incurred in the ordinary course of business during the
comparable portion of its prior fiscal year, as adjusted to reflect the current
nature and volume of the Company's or such Subsidiary's business;
11
(iii) discharged or satisfied any material lien or encumbrance
or paid a material amount of any obligation or liability (absolute or
contingent), other than current liabilities paid in the ordinary course of
business;
(iv) declared or made any payment or distribution of cash or
other property to stockholders with respect to its stock, or purchased or
redeemed, or made any agreements so to purchase or redeem, any shares of its
capital stock;
(v) sold, assigned or transferred any other tangible assets, or
canceled any debts or claims, except in the ordinary course of business;
(vi) sold, assigned or transferred any patent rights,
trademarks, trade names, copyrights, trade secrets or other intangible assets or
intellectual property rights, which sale, assignment or transfer has had a
Material Adverse Effect, or disclosed any proprietary confidential information
to any person except in the ordinary course of business or to the Purchasers or
their representatives;
(vii) suffered any substantial losses or waived any rights of
material value, whether or not in the ordinary course of business, or suffered
the loss of any material amount of prospective business; (viii) made any changes
in employee compensation except in the ordinary course of business and
consistent with past practices;
(ix) made capital expenditures or commitments therefor that
aggregate in excess of $25,000; (x) entered into any other transaction other
than in the ordinary course of business, or entered into any other material
transaction, whether or not in the ordinary course of business;
(xi) made charitable contributions or pledges in excess of
$25,000; (xii) suffered any material damage, destruction or casualty loss,
whether or not covered by insurance;
(xiii) experienced any material problems with labor or
management in connection with the terms and conditions of their employment; or
(xiv) entered into an agreement, written or otherwise, to take
any of the foregoing actions.
12
(aa) Use of Proceeds. Except as set forth on Schedule 2.1(aa), the
proceeds from the sale of the Shares and the Warrants will be used by the
Company for working capital purposes and, except as set forth on Schedule
2.1(aa), shall not be used to repay any outstanding Indebtedness or any loans to
any officer, director, affiliate or insider of the Company.
(bb) Public Utility Holding Company Act and Investment Company Act
Status. The Company is not a "holding company" or a "public utility company" as
such terms are defined in the Public Utility Holding Company Act of 1935, as
amended. The Company is not, and as a result of and immediately upon Closing
will not be, an "investment company" or a company "controlled" by an "investment
company", within the meaning of the Investment Company Act of 1940, as amended.
(cc) ERISA. No liability to the Pension Benefit Guaranty
Corporation has been incurred with respect to any Plan by the Company or any of
its Subsidiaries which is or would cause a Material Adverse Effect. The
execution and delivery of this Agreement and the issue and sale of the Shares
and the Warrants will not involve any transaction which is subject to the
prohibitions of Section 406 of ERISA or in connection with which a tax could be
imposed pursuant to Section 4975 of the Internal Revenue Code of 1986, as
amended (the "Code"); provided that, if any Purchaser, or any person or entity
that owns a beneficial interest in any Purchaser, is an "employee pension
benefit plan" (within the meaning of Section 3(2) of ERISA) with respect to
which the Company is a "party in interest" (within the meaning of Section 3(14)
of ERISA), the requirements of Sections 407(d)(5) and 408(e) of ERISA, if
applicable, are met. As used in this Section 2.1(cc), the term "Plan" shall mean
an "employee pension benefit plan" (as defined in Section 3 of ERISA) which is
or has been established or maintained, or to which contributions are or have
been made, by the Company or any Subsidiary or by any trade or business, whether
or not incorporated, which, together with the Company or any Subsidiary, is
under common control, as described in Section 414(b) or (c) of the Code.
(dd) Dilutive Effect. The Company understands and acknowledges
that the number of Conversion Shares issuable upon conversion of the Shares and
the Warrant Shares issuable upon exercise of the Warrants will increase in
certain circumstances. The Company further acknowledges that its obligation to
issue Conversion Shares upon conversion of the Shares in accordance with this
Agreement and the Certificate of Designation and its obligations to issue the
Warrant Shares upon the exercise of the Warrants in accordance with this
Agreement and the Warrants, is, in each case, absolute and unconditional
regardless of the dilutive effect that such issuance may have on the ownership
interest of other stockholders of the Company.
(ee) Independent Nature of Purchasers. The Company acknowledges
that the obligations of each Purchaser under the Transaction Documents are
several and not joint with the obligations of any other Purchaser, and no
Purchaser shall be responsible in any way for the performance of the obligations
of any other Purchaser under the Transaction Documents. The Company acknowledges
that the decision of each Purchaser to purchase Securities pursuant to this
Agreement has been made by such Purchaser independently of any other purchase
and independently of any information, materials, statements or opinions as to
13
the business, affairs, operations, assets, properties, liabilities, results of
operations, condition (financial or otherwise) or prospects of the Company or of
its Subsidiaries which may have made or given by any other Purchaser or by any
agent or employee of any other Purchaser, and no Purchaser or any of its agents
or employees shall have any liability to any Purchaser (or any other person)
relating to or arising from any such information, materials, statements or
opinions. The Company acknowledges that nothing contained herein, or in any
Transaction Document, and no action taken by any Purchaser pursuant hereto or
thereto, shall be deemed to constitute the Purchasers as a partnership, an
association, a joint venture or any other kind of entity, or create a
presumption that the Purchasers are in any way acting in concert or as a group
with respect to such obligations or the transactions contemplated by the
Transaction Documents. The Company acknowledges that each Purchaser shall be
entitled to independently protect and enforce its rights, including without
limitation, the rights arising out of this Agreement or out of the other
Transaction Documents, and it shall not be necessary for any other Purchaser to
be joined as an additional party in any proceeding for such purpose. The Company
acknowledges that for reasons of administrative convenience only, the
Transaction Documents have been prepared by counsel for one of the Purchasers
and such counsel does not represent all of the Purchasers but only such
Purchaser and the other Purchasers have retained their own individual counsel
with respect to the transactions contemplated hereby. The Company acknowledges
that it has elected to provide all Purchasers with the same terms and
Transaction Documents for the convenience of the Company and not because it was
required or requested to do so by the Purchasers. The Company acknowledges that
such procedure with respect to the Transaction Documents in no way creates a
presumption that the Purchasers are in any way acting in concert or as a group
with respect to the Transaction Documents or the transactions contemplated
hereby or thereby.
(ff) No Integrated Offering. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security under circumstances that would cause the offering of the
Securities pursuant to this Agreement to be integrated with prior offerings by
the Company for purposes of the Securities Act which would prevent the Company
from selling the Shares pursuant to Rule 506 under the Securities Act, or any
applicable exchange-related stockholder approval provisions, nor will the
Company or any of its affiliates or subsidiaries take any action or steps that
would cause the offering of the Shares to be integrated with other offerings.
Other than the Company's registration statement on Form SB-2 (commission file
no. 333-109117), which is currently effective but which may be amended to report
material changes, the Company does not have any registration statement pending
before the Commission or currently under the Commission's review.
(gg) Sarbanes-Oxley Act. The Company is in substantial compliance
with the applicable provisions of the Sarbanes-Oxley Act of 2002 (the
"Sarbanes-Oxley Act"), and the rules and regulations promulgated thereunder,
that are effective and intends to comply substantially with other applicable
provisions of the Sarbanes-Oxley Act, and the rules and regulations promulgated
thereunder, upon the effectiveness of such provisions.
14
Section 2.2 Representations and Warranties of the Purchasers. Each
of the Purchasers hereby makes the following representations and warranties to
the Company with respect solely to itself and not with respect to any other
Purchaser:
(a) Organization and Standing of the Purchasers. If the Purchaser
is an entity, such Purchaser is a corporation, limited liability company or
partnership duly incorporated or organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or
organization.
(b) Authorization and Power. Each Purchaser has the requisite power
and authority to enter into and perform this Agreement, the Registration Rights
Agreement, the Warrants, and the other agreements and documents contemplated
hereby and thereby and executed by the Purchaser or to which the Purchaser is
party (collectively, the "Purchaser Transaction Documents") and to purchase the
Shares and Warrants being sold to it hereunder. The execution, delivery and
performance of the Purchaser Transaction Documents by each Purchaser and the
consummation by it of the transactions contemplated hereby have been duly
authorized by all necessary corporate or partnership action, and no further
consent or authorization of such Purchaser or its Board of Directors,
stockholders, or partners, as the case may be, is required. This Agreement has
been duly authorized, executed and delivered by each Purchaser. Each of the
Purchaser Transaction Documents constitutes, or shall constitute when executed
and delivered, valid and binding obligations of each Purchaser enforceable
against such Purchaser in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation, conservatorship, receivership or
similar laws relating to, or affecting generally the enforcement of, creditor's
rights and remedies or by equitable principles or remedies of general
application.
(c) Acquisition for Investment. Each Purchaser is purchasing the
Shares and acquiring the Warrants solely for its own account for the purpose of
investment and not with a view to or for sale in connection with any
distribution thereof. Each Purchaser does not have a present intention to sell
any of the Securities, nor a present arrangement (whether or not legally
binding) or intention to effect any distribution of any of the Securities to or
through any person or entity; provided, however, that by making the
representations herein and subject to Section 2.2(e) below, each Purchaser does
not agree to hold any of the Securities for any minimum or other specific term
and reserves the right to dispose of any of the Securities at any time in
accordance with federal and state securities laws applicable to such disposition
provided that the Company receives an opinion of its counsel to the effect that
such disposition complies with such laws. Each Purchaser acknowledges that it
(i) has such knowledge and experience in financial and business matters such
that such Purchaser is capable of evaluating the merits and risks of its
investment in the Company, (ii) is able to bear the financial risks associated
with an investment in the Securities, and (iii) has been given full access to
such records of the Company and the Subsidiaries and to the officers of the
Company and the Subsidiaries as it has deemed necessary or appropriate to
conduct its due diligence investigation.
15
(d) Rule 144. Each Purchaser understands that the Securities must
be held indefinitely unless such Securities are registered under the Securities
Act or an exemption from registration is available. Each Purchaser acknowledges
that it is familiar with Rule 144 of the rules and regulations of the
Commission, as amended, promulgated pursuant to the Securities Act ("Rule 144"),
and that such Purchaser has been advised that Rule 144 permits resales only
under certain circumstances. Each Purchaser understands that to the extent that
Rule 144 is not available, such Purchaser will be unable to sell any Securities
without either registration under the Securities Act or the existence of another
exemption from such registration requirement, provided that the Company receives
an opinion of its counsel to the effect that such sale is exempt from such
registration requirement.
(e) General. Each Purchaser understands that the Securities are
being offered and sold in reliance on a transactional exemption from the
registration requirements of federal and state securities laws and the Company
is relying upon the truth, accuracy and completeness of the representations,
warranties, agreements, acknowledgments and understandings of such Purchaser set
forth herein and in the other Purchaser Transaction Documents in order to
determine the applicability of such exemptions and the suitability of such
Purchaser to acquire the Securities. Each Purchaser understands that no United
States federal or state agency or any government or governmental agency has
passed upon or made any recommendation or endorsement with respect to any of the
Securities.
(f) Opportunities for Additional Information. Each Purchaser
acknowledges that such Purchaser has had the opportunity to ask questions of and
receive answers from, or obtain additional information from, the executive
officers of the Company concerning the financial and other affairs of the
Company, and to the extent deemed necessary by such Purchaser in light of such
Purchaser's personal knowledge of the Company's affairs, such Purchaser has
asked such questions and received answers to the full satisfaction of such
Purchaser, and such Purchaser desires to invest in the Company.
(g) No General Solicitation. Each Purchaser acknowledges that the
Securities were not offered to such Purchaser by means of any form of general or
public solicitation or general advertising, or publicly disseminated
advertisements or sales literature, including (i) any advertisement, article,
notice or other communication published in any newspaper, magazine, or similar
media, or broadcast over television or radio, or (ii) any seminar or meeting to
which such Purchaser was invited by any of the foregoing means of
communications.
(h) Accredited Investor. Each Purchaser is an accredited investor
(as defined in Rule 501 of Regulation D), and such Purchaser has such experience
in business and financial matters that it is capable of evaluating the merits
and risks of an investment in the Securities. Each Purchaser acknowledges that
an investment in the Securities is speculative and involves a high degree of
risk.
(i) Independent Investment. No Purchaser has agreed to act with any
other Purchaser for the purpose of acquiring, holding, voting or disposing of
16
the Securities purchased hereunder for purposes of Section 13(d) under the
Exchange Act, and each Purchaser is acting independently with respect to its
investment in the Securities.
ARTICLE III
COVENANTS
The parties covenant with one another as follows, which covenants are
for the benefit of each respective covenantee and its respective permitted
assignees.
Section 3.1 Disclosure of Transactions and Other Material Information.
The Company shall issue a press release describing the material terms of the
transactions contemplated hereby (the "Press Release") as soon as practicable
after the Closing but in no event later than three (3) Trading Days after the
Closing, the Company shall issue the Press Release. The Company shall also file
with the Commission a Current Report on Form 8-K (the "Form 8-K") describing the
material terms of the transactions contemplated hereby (and attaching as
exhibits thereto this Agreement, the Certificate of Designation, the
Registration Rights Agreement and the form of Warrant) as soon as practicable
following the Closing Date but in no event more than three (3) Trading Days
following the Closing Date, which Press Release and Form 8-K shall be subject to
prior review and comment by Jenkens & Gilchrist Parker Chapin LLP. The Company
shall not, and shall cause each of its Subsidiaries and its and each of their
respective officers, directors, employees and agents not to, provide the
Purchasers with any material, nonpublic information regarding the Company or any
of its Subsidiaries from and after the filing of the Form 8-K with the
Commission without the express written consent of the Purchaser. "Trading Day"
means any day during which the American Stock Exchange (or other principal
exchange on which the Common Stock is traded) shall be open for trading.
Section 3.2 Registration and Listing. The Company will cause its
Common Stock to continue to be registered under Section 12(b) or 12(g) of the
Exchange Act, will comply in all respects with its reporting and filing
obligations under the Exchange Act, will comply with all requirements related to
any registration statement filed pursuant to this Agreement, and will not take
any action or file any document (whether or not permitted by the Securities Act
or the rules promulgated thereunder) to terminate or suspend such registration
or to terminate or suspend its reporting and filing obligations under the
Exchange Act or Securities Act, except as permitted herein. The Company will
promptly file the "Listing Application" for, or in connection with, the issuance
and delivery of the Conversion Shares and the Warrant Shares.
Section 3.3 Securities Compliance. The Company shall notify the
Commission in accordance with their rules and regulations, of the transactions
contemplated by any of the Transaction Documents, including filing a Form D with
respect to the Shares, Warrants, Conversion Shares and Warrant Shares as
required under Regulation D, and shall take all other necessary action and
proceedings as may be required and permitted by applicable law, rule and
regulation, for the legal and valid issuance of the Shares, the Warrants, the
Conversion Shares and the Warrant Shares to the Purchasers or subsequent
holders.
17
Section 3.4 Inspection Rights. The Company shall permit, during
normal business hours and upon reasonable request and reasonable notice, a
Purchaser or any employees, agents or representatives thereof that are parties
to an effective confidentiality agreement with the Company of appropriate scope,
so long as a Purchaser shall be obligated hereunder to purchase the Shares or
shall beneficially own the Shares or Conversion Shares, or shall own Warrant
Shares or the Warrants which, in the aggregate, represent more than two percent
(2%) of the total combined voting power of all voting securities then
outstanding, to examine and make reasonable copies of and extracts from the
records and books of account of, and visit and inspect, during the term of the
Warrants, the properties, assets, operations and business of the Company and any
Subsidiary, and to discuss the affairs, finances and accounts of the Company and
any Subsidiary with any of its officers, consultants, directors, and key
employees.
Section 3.5 Compliance with Laws. The Company shall comply, and cause
each Subsidiary to comply, with all applicable laws, rules, regulations and
orders, the noncompliance with which could have a Material Adverse Effect.
Section 3.6 Keeping of Records and Books of Account. The Company
shall keep and cause each Subsidiary to keep adequate records and books of
account, in which complete entries will be made in accordance with GAAP
consistently applied.
Section 3.7 Other Agreements. The Company shall not enter into any
agreement containing any provision that would violate the terms of, or cause a
default under, any material term of any Transaction Document.
Section 3.8 Reservation of Shares. So long as the Shares or Warrants
remain outstanding, the Company shall take all action necessary to at all times
have authorized, and reserved for the purpose of issuance, the maximum number of
shares of Common Stock to effect the conversion of the Shares and the exercise
of the Warrants.
Section 3.9 Non-public Information. The Company covenants and agrees
that neither it nor any other person acting on its behalf has provided or will
provide any Purchaser or its agents or counsel with any information that the
Company believes constitutes material non-public information, unless prior
thereto such Purchaser shall have executed a written agreement regarding the
confidentiality and use of such information. The Company understands and
confirms that each Purchaser shall be relying on the foregoing representations
in effecting transactions in securities of the Company. Neither the Purchasers
nor any of their affiliates, officers or agents will solicit any material
non-public information from the Company.
Section 3.10 Preemptive Rights.
(a) Until the first anniversary of the Closing Date and for so long
as any Purchaser or its assigns shall own any Shares (any Purchaser, for such
purpose, an "Eligible Purchaser"), the Company hereby grants to each Eligible
18
Purchaser a right (the "Preemptive Right") to purchase all or any part of such
Eligible Purchaser's pro rata share of any "New Securities" (as defined in
Section 3.10(b)) that the Company may, from time to time, propose to sell and
issue. The pro rata share for each Eligible Purchaser, for purposes of the
Preemptive Right, is the ratio of (x) the number of shares of Series C Preferred
Stock then held by such Eligible Purchaser immediately prior to the issuance of
the New Securities (assuming the full conversion of the Shares and the full
exercise of the Warrants), to (y) the total number of shares of Series C
Preferred Stock of the Company outstanding immediately prior to the issuance of
the New Securities (after giving effect to the full conversion of the Shares and
the full exercise of the Warrants). The Preemptive Right granted herein shall be
pari pasu with the preemptive rights currently held by the Company's Series A
Stockholders.
(b) For purposes of this Section 3.10, "New Securities" shall mean
fifty percent (50%) any Common Stock or Preferred Stock of the Company, whether
or not authorized on the date hereof, and rights, options or warrants to
purchase Common Stock or Preferred Stock and securities of any type whatsoever
that are, or may become, convertible into Common Stock or Preferred Stock;
provided, however, that "New Securities" does not include the following:
(i) shares of capital stock of the Company issuable upon
conversion or exercise of any currently outstanding securities or any Shares,
Warrants or New Securities issued in accordance with this Agreement (including
the Warrant Shares);
(ii) shares or options or warrants for Common Stock granted to
officers, directors and employees of, and consultants to, the Company pursuant
to stock option or purchase plans or other compensatory agreements approved by
the Compensation Committee of the Board of Directors;
(iii) shares of Common Stock or Preferred Stock issued in
connection with any pro rata stock split or stock dividend in respect of any
series or class of capital stock of the Company or recapitalization by the
Company;
(iv) shares of capital stock, or options or warrants to
purchase capital stock, issued to a strategic investor in connection with a
strategic commercial agreement as determined by the Board of Directors;
(v) shares of capital stock, or options or warrants to purchase
capital stock, issued pursuant to commercial borrowing, secured lending or lease
financing transaction approved by the Board of Directors;
(vi) shares of capital stock, or options or warrants to
purchase capital stock, issued pursuant to the acquisition of another
corporation or entity by the Company by consolidation, merger, purchase of all
or substantially all of the assets, or other reorganization in which the Company
acquires, in a single transaction or series of related transactions, all or
substantially all of the assets of such other corporation or entity or fifty
percent (50%) or more of the voting power of such other corporation or entity or
19
fifty percent (50%) or more of the equity ownership of such other corporation or
entity;
(vii) shares of capital stock issued in a bona fide
underwritten public securities offering pursuant to a registration statement
filed under the Securities Act;
(viii) shares of capital stock, or options or warrants to
purchase capital stock, issued to current or prospective customers or suppliers
of the Company approved by the Board of Directors as compensation or
accommodation in lieu of other payment, compensation or accommodation to such
customer or supplier;
(ix) shares of capital stock, or warrants to purchase capital
stock, issued to any person or entity that provides services to the Company as
compensation therefor pursuant to an agreement approved by the Board of
Directors;
(x) shares of capital stock, or options or warrants to purchase
capital stock, offered in a transaction where purchase of such securities by any
Purchaser would cause such transaction to fail to comply with applicable federal
or state securities laws or would cause an applicable registration or
qualification exemption to fail to be available to the Company; provided,
however, that this clause (x) shall apply only to the Purchaser or Purchasers
who would cause any such failure, and not to any of the other Purchasers;
(xi) shares of capital stock, or options or warrants to
purchase capital stock, , or options or warrants to purchase capital stock,
purchased or to be purchased by the holders of the Company's Series A Preferred
Stock pursuant to existing preemptive rights.
(xii) securities issuable upon conversion or exercise of the
securities set forth in paragraphs (i) - (xi) above.
In the event that the Company proposes to undertake an issuance of New
Securities, it shall give each Eligible Purchaser written notice (the "Notice")
of its intention, describing the type of New Securities, the price, and the
general terms upon which the Company proposes to issue the same. Each Eligible
Purchaser shall have twenty (20) Business Days after receipt of such notice to
agree to purchase all or any portion of its pro rata share of such New
Securities at the price and upon the terms specified in the notice by giving
written notice to the Company and stating therein the quantity of New Securities
to be purchased. In the event that any New Securities subject to the Preemptive
Right are not purchased by the Eligible Purchaser within the twenty (20)
Business Day period specified above, the Company shall have ninety (90) days
thereafter to sell (or enter into an agreement pursuant to which the sale of New
Securities that had been subject to the Preemptive Right shall be closed, if at
all, within sixty (60) days from the date of said agreement) the New Securities
with respect to which the rights of the Purchaser were not exercised at a price
and upon terms, including manner of payment, no more favorable to the purchasers
thereof than specified in the Notice. In the event the Company has not sold all
offered New Securities within such ninety (90) day period (or sold and issued
20
New Securities in accordance with the foregoing within sixty (60) days from the
date of such agreement), the Company shall not thereafter issue or sell any New
Securities, without first complying again with the procedures set forth in this
Section 3.10.
Section 3.11 Pledge of Securities. The Company acknowledges and agrees
that the Securities may be pledged by a Purchaser in connection with a bona fide
margin agreement or other loan or financing arrangement that is secured by the
Common Stock. The pledge of Common Stock shall not be deemed to be a transfer,
sale or assignment of the Common Stock hereunder, and no Purchaser effecting a
pledge of Common Stock shall be required to provide the Company with any notice
thereof or otherwise make any delivery to the Company pursuant to this Agreement
or any other Transaction Document; provided that a Purchaser and its pledgee
shall be required to comply with the provisions of Article V hereof in order to
effect a sale, transfer or assignment of Common Stock to such pledgee. At the
Purchasers' expense, the Company hereby agrees to execute and deliver such
documentation as a pledgee of the Common Stock may reasonably request in
connection with a pledge of the Common Stock to such pledgee by a Purchaser.
Section 3.12 Reporting Requirements. If the Commission ceases making
periodic reports filed under Section 13 of the Exchange Act available via EDGAR,
then at a Purchaser's request the Company shall furnish the following to such
Purchaser so long as such Purchaser shall be obligated hereunder to purchase the
Shares or shall beneficially own any Shares, or shall own Conversion Shares
which, in the aggregate, represent more than 2% of the total combined voting
power of all voting securities then outstanding:
(b) Quarterly Reports filed with the Commission on Form 10-QSB as
soon as practical after the document is filed with the Commission, and in any
event within fifty-five (55) days after the end of each of the first three
fiscal quarters of the Company;
(c) Annual Reports filed with the Commission on Form 10-KSB as soon
as practical after the document is filed with the Commission, and in any event
within one hundred five (105) days after the end of each fiscal year of the
Company; and
(d) Copies of all notices and information, including without
limitation notices and proxy statements in connection with any meetings, that
are provided to holders of shares of Common Stock, contemporaneously with the
delivery of such notices or information to such holders of Common Stock.
Section 3.13 Distributions. So long as any Shares or Warrants remain
outstanding, the Company agrees that it shall not (i) declare or pay any
dividends or make any distributions to any holder(s) of Common Stock or (ii)
purchase or otherwise acquire for value, directly or indirectly, any Common
Stock or other equity security of the Company.
Section 3.14 Status of Dividends. The Company covenants and agrees
that (i) no Federal income tax return or claim for refund of Federal income tax
or other submission to the Internal Revenue Service will adversely affect the
21
Shares, any other series of its preferred stock, or the Common Stock, and any
deduction shall not operate to jeopardize the availability to Purchasers of the
dividends received deduction provided by Section 243(a)(1) of the Code or any
successor provision, (ii) in no report to shareholders or to any governmental
body having jurisdiction over the Company or otherwise will it treat the Shares
other than as equity capital or the dividends paid thereon other than as
dividends paid on equity capital unless required to do so by a governmental body
having jurisdiction over the accounts of the Company or by a change in generally
accepted accounting principles required as a result of action by an
authoritative accounting standards setting body, and (iii) other than pursuant
to this Agreement or the Certificate of Designation, it will take no action
which would result in the dividends paid by the Company on the Shares out of the
Company's current or accumulated earnings and profits being ineligible for the
dividends received deduction provided by Section 243(a)(1) of the Code. The
preceding sentence shall not be deemed to prevent the Company from designating
the Preferred Stock as "Convertible Preferred Stock" in its annual and quarterly
financial statements in accordance with its prior practice concerning other
series of preferred stock of the Company. Notwithstanding the foregoing, the
Company shall not be required to restate or modify its tax returns for periods
prior to the Closing Date. In the event that the Purchasers have reasonable
cause to believe that dividends paid by the Company on the Shares out of the
Company's current or accumulated earnings and profits will not be treated as
eligible for the dividends received deduction provided by Section 243(a)(1) of
the Code, or any successor provision, the Company will, at the reasonable
request of the Purchasers of 51% of the outstanding Shares, join with the
Purchasers in the submission to the Service of a request for a ruling that
dividends paid on the Shares will be so eligible for Federal income tax
purposes, at the Purchasers expense. In addition, the Company will reasonably
cooperate with the Purchasers (at Purchasers' expense) in any litigation, appeal
or other proceeding challenging or contesting any ruling, technical advice,
finding or determination that earnings and profits are not eligible for the
dividends received deduction provided by Section 243(a)(1) of the Code, or any
successor provision to the extent that the position to be taken in any such
litigation, appeal, or other proceeding is not contrary to any provision of the
Code or incurred in connection with any such submission, litigation, appeal or
other proceeding. Notwithstanding the foregoing, nothing herein contained shall
be deemed to preclude the Company from claiming a deduction with respect to such
dividends if (i) the Code shall hereafter be amended, or final Treasury
regulations thereunder are issued or modified, to provide that dividends on the
Shares or Conversion Shares should not be treated as dividends for Federal
income tax purposes or that a deduction with respect to all or a portion of the
dividends on the Shares is allowable for Federal income tax purposes, or (ii) in
the absence of such an amendment, issuance or modification and after a
submission of a request for ruling or technical advice, the service shall rule
or advise that dividends on the shares should not be treated as dividends for
Federal income tax purposes. If the Service determines that the Shares or
Conversion Shares constitute debt, the Company may file protective claims for
refund.
Section 3.15 Lock-up. Each Purchaser agrees to sell, in each calendar
month during the six-month period beginning on the Closing Date, not more than
1/6 of the aggregate number of Conversion Shares and Warrant Shares issuable to
such Purchaser pursuant to the Transaction Documents; provide, however, that the
22
number of such Conversion Shares and Warrant Shares that can be sold shall be
cumulative and shall begin to accumulate on the day following the date of the
Closing.
Section 3.16 Transfer Agent Instructions. The Company shall issue
irrevocable instructions to its transfer agent, and any subsequent transfer
agent, to issue certificates, registered in the name of each Purchaser or its
respective nominee(s), for the Conversion Shares and the Warrant Shares in such
amounts as specified from time to time by each Purchaser to the Company upon
conversion of the Shares or exercise of the Warrants in the form of Exhibit F
attached hereto (the "Irrevocable Transfer Agent Instructions"). Prior to
registration of the Conversion Shares and the Warrant Shares under the
Securities Act, all such certificates shall bear the restrictive legend
specified in Section 5.1 of this Agreement. The Company warrants that no
instruction other than the Irrevocable Transfer Agent Instructions referred to
in this Section 3.16 will be given by the Company to its transfer agent and that
the Shares shall otherwise be freely transferable on the books and records of
the Company, except as otherwise provided in this Agreement and the Registration
Rights Agreement. Nothing in this Section 3.16 shall affect in any way each
Purchaser's obligations and agreements set forth in Section 5.1 to comply with
all applicable prospectus delivery requirements, if any, upon resale of the
Shares. If a Purchaser provides the Company with an opinion of counsel, in a
generally acceptable form, to the effect that a public sale, assignment or
transfer of the Shares may be made without registration under the Securities Act
or the Purchaser provides the Company with reasonable assurances that the Shares
can be sold pursuant to Rule 144 without any restriction as to the number of
securities acquired as of a particular date that can then be immediately sold,
the Company shall, except as otherwise limited by the terms of this Agreement,
permit the transfer, and, in the case of the Conversion Shares and the Warrant
Shares, promptly instruct its transfer agent to issue one or more certificates
in such name and in such denominations as specified by such Purchaser and
without any restrictive legend. The Company acknowledges that a breach by it of
its obligations under this Section 3.16 will cause irreparable harm to the
Purchasers by vitiating the intent and purpose of the transaction contemplated
hereby. Accordingly, the Company acknowledges that the remedy at law for a
breach of its obligations under this Section 3.16 will be inadequate and agrees,
in the event of a breach or threatened breach by the Company of the provisions
of this Section 3.16, that the Purchasers shall be entitled, in addition to all
other available remedies, to an order and/or injunction restraining any breach
and requiring immediate issuance and transfer, without the necessity of showing
economic loss and without any bond or other security being required.
ARTICLE IV
CONDITIONS
Section 4.1 Conditions Precedent to the Obligation of the Company to
Close and to Sell the Shares and Warrants. The obligation hereunder of the
Company to close and issue and sell the Shares and the Warrants to the
Purchasers on the Closing Date is subject to the satisfaction or waiver, at or
before the Closing, of the conditions set forth below. These conditions are for
the Company's sole benefit and may be waived by the Company at any time in its
sole discretion.
23
(a) Accuracy of the Purchasers' Representations and Warranties. The
representations and warranties of each Purchaser Transaction Documents shall be
true and correct in all material respects as of the date when made and as of the
Closing Date as though made at that time, except for representations and
warranties that are expressly made as of a particular date, which shall be true
and correct in all material respects as of such date.
(b) Performance by the Purchasers. Each Purchaser shall have
performed, satisfied and complied in all material respects with all covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Purchasers at or prior to the Closing Date.
(c) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
(d) Delivery of Purchase Price. The Purchase Price for the Shares
and Warrants shall have been delivered to the Company at the Closing.
(e) Delivery of Purchaser Transaction Documents. The Purchaser
Transaction Documents shall have been duly executed and delivered by the
Purchasers to the Company.
Section 4.2 Conditions Precedent to the Obligation of the Purchasers
to Close and to Purchase the Shares and Warrants. The obligation hereunder of
the Purchasers to purchase the Shares and Warrants and consummate the
transactions contemplated by this Agreement is subject to the satisfaction or
waiver, at or before the Closing, of each of the conditions set forth below.
These conditions are for the Purchasers' sole benefit and may be waived by the
Purchasers at any time in their sole discretion.
(a) Accuracy of the Company's Representations and Warranties. Each
of the representations and warranties of the Company in this Agreement and in
each of the Transaction Documents shall be true and correct in all material
respects as of the Closing Date, except for representations and warranties that
are expressly made as of a particular date, which shall be true and correct in
all material respects as of such date.
(b) Performance by the Company. The Company shall have performed,
satisfied and complied in all respects with all covenants, agreements and
conditions required by this Agreement to be performed, satisfied or complied
with by the Company at or prior to the Closing Date.
(c) No Suspension, Etc. Trading in the Company's Common Stock shall
not have been suspended by the American Stock Exchange or the Commission (except
for any suspension of trading of limited duration agreed to by the Company,
24
which suspension shall be terminated prior to the Closing), and, at any time
prior to the Closing Date, trading in securities generally as reported by
Bloomberg Financial Markets ("Bloomberg") shall not have been suspended or
limited, or minimum prices shall not have been established on securities whose
trades are reported by Bloomberg, nor shall a banking moratorium have been
declared either by the United States or Nevada State authorities, nor shall
there have occurred any national or international calamity or crisis of such
magnitude in its effect on any financial market which, in each case, in the
reasonable judgment of the Purchasers, makes it impracticable or inadvisable to
purchase the Shares.
(d) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
(e) No Proceedings or Litigation. No action, suit or proceeding
before any arbitrator or any governmental authority shall have been commenced,
and no investigation by any governmental authority shall have been threatened,
against the Company or any Subsidiary, or any of the officers, directors or
affiliates of the Company or any Subsidiary, seeking to restrain, prevent or
change the transactions contemplated by this Agreement, or seeking damages in
connection with such transactions.
(f) Opinion of Counsel, Etc. The Purchasers shall have received an
opinion of counsel to the Company, dated the Closing Date, substantially in the
form of Exhibit C hereto, and such other certificates and documents as the
Purchasers or their counsel shall reasonably require incident to the Closing.
(g) Warrants and Shares. The Company shall have delivered to the
Purchasers the originally executed Warrants (in such denominations as each
Purchaser may request but in no event in denominations of less than 100) and
shall have delivered certificates representing the Shares (in such denominations
as each Purchaser may request) being acquired by the Purchasers at the Closing.
(h) Resolutions. The Board of Directors of the Company shall have
adopted resolutions consistent with Section 2.1(b) hereof in a form reasonably
acceptable to the Purchasers (the "Resolutions").
(i) Certificate of Designation. As of the Closing Date, the Company
shall have filed with the Nevada Secretary of State a Certificate of Designation
authorizing the Preferred Stock in substantially the Form of Exhibit D attached
hereto.
(j) Reservation of Shares. As of the Closing Date, the Company shall
have reserved out of its authorized and unissued Preferred Stock, solely for the
purpose of affecting the issuance of the Shares, a number of shares of Preferred
Stock equal to the aggregate number of the Shares. As of the Closing Date, the
25
Company shall have reserved out of its authorized and unissued Common Stock,
solely for the purpose of effecting the conversion of the Shares and the
exercise of the Warrants, a number of shares of Common Stock equal to the number
of Conversion Shares and the number of Warrant Shares issuable upon conversion
of the Preferred Stock and the exercise of the Warrants, respectively, assuming
the Warrants are exercised and the Shares are converted on the Closing Date
(assuming the Warrants are fully exercisable and the Shares fully convertible on
such date regardless of any limitation on the timing or amount of such exercise
or conversion).
(k) Transfer Agent Instructions. The Irrevocable Transfer Agent
Instructions, in the form of Exhibit F attached hereto, shall have been
delivered to the Company's transfer agent.
(l) Secretary's Certificate. The Company shall have delivered to
the Purchasers a secretary's certificate, dated as of the Closing Date, as to
(i) the Resolutions, (ii) the Articles, (iii) the Bylaws, each as in effect at
the Closing, and (iv) the authority and incumbency of the officers of the
Company executing the Transaction Documents and any other documents required to
be executed or delivered in connection therewith.
(m) Officer's Certificate. On the Closing Date, the Company shall
have delivered to the Purchasers a certificate of an executive officer of the
Company, dated as of the Closing Date, confirming the accuracy of the Company's
representations, warranties and covenants contained herein and in each of the
other Transaction Documents as of the Closing Date and confirming the compliance
by the Company with the conditions precedent set forth in this Section 4.2 as of
the Closing Date.
(n) Fees and Expenses. As of the Closing Date, all fees and expenses
required to be paid by the Company in connection with the transactions
contemplated by this Agreement shall have been, or authorized to be, paid by the
Company.
(o) Registration Rights Agreement. As of the Closing Date, the
parties shall have entered into the Registration Rights Agreement in the Form of
Exhibit E attached hereto.
(p) Material Adverse Effect. No Material Adverse Effect shall have
occurred.
ARTICLE V
CERTIFICATE LEGEND
Section 5.1 Legend. Each certificate representing the Shares, the
Conversion Shares, the Warrants and the Warrant Shares shall be stamped or
otherwise imprinted with a legend substantially in the following form (in
addition to any legend required by applicable state securities or "blue sky"
laws):
26
THE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE "SECURITIES") HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE
SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES LAWS OR AXM
PHARMA, INC. SHALL HAVE RECEIVED AN OPINION OF ITS COUNSEL THAT
REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE
PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.
Each certificate representing any Shares shall also be stamped or
otherwise imprinted with a legend substantially in the following form:
AXM PHARMA, INC. WILL FURNISH TO EACH HOLDER OF ITS SERIES C
CONVERTIBLE PREFERRED STOCK WHO SO REQUESTS WITHOUT CHARGE A COPY OF
THE CERTIFICATE OF DESIGNATION SETTING FORTH THE POWERS, DESIGNATIONS,
PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL
RIGHTS OF SUCH STOCK AND ANY OTHER CLASS OR SERIES THEREOF AND THE
QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR
RIGHTS.
The Company agrees to reissue certificates representing any of the
Securities, without the legend set forth above, if at such time, prior to making
any transfer of any such Securities, such holder thereof shall give written
notice to the Company describing the manner and terms of such transfer and
removal as the Company may reasonably request. Such proposed transfer and
removal will not be effected until: (a) either (i) the Company has received an
opinion of counsel reasonably satisfactory to the Company, to the effect that
the registration of the Conversion Shares or the Warrant Shares under the
Securities Act is not required in connection with such proposed transfer, (ii) a
registration statement under the Securities Act covering such proposed
disposition has been filed by the Company with the Commission and has become
effective under the Securities Act, (iii) the Company has received other
evidence reasonably satisfactory to the Company that such registration and
qualification under the Securities Act and state securities laws are not
required, or (iv) the holder provides the Company with reasonable assurances
that such security can be sold pursuant to Rule 144 under the Securities Act;
and (b) either (i) the Company has received an opinion of counsel, reasonably
satisfactory to the Company, to the effect that registration or qualification
under the securities or "blue sky" laws of any state is not required in
connection with such proposed disposition, or (ii) compliance with applicable
state securities or "blue sky" laws has been effected or a valid exemption
exists with respect thereto. The Company will respond to any such notice from a
holder within five (5) days. In the case of any proposed transfer under this
Section 5.1, the Company will use reasonable efforts to comply with any such
applicable state securities or "blue sky" laws, but shall in no event be
required, in connection therewith, to qualify to do business in any state where
27
it is not then qualified or to take any action that would subject it to tax or
to the general service of process in any state where it is not then subject. The
restrictions on transfer contained in this Section 5.1 shall be in addition to,
and not by way of limitation of, any other restrictions on transfer contained in
any other section of this Agreement. Whenever a certificate representing the
Conversion Shares or Warrant Shares is required to be issued to a Purchaser
without a legend, in lieu of delivering physical certificates representing the
Conversion Shares or Warrant Shares, provided the Company's transfer agent is
participating in the Depository Trust Company ("DTC") Fast Automated Securities
Transfer program, the Company shall use its reasonable best efforts to cause its
transfer agent to electronically transmit the Conversion Shares or Warrant
Shares to a Purchaser by crediting the account of such Purchaser's Prime Broker
with DTC through its Deposit Withdrawal Agent Commission ("DWAC") system (to the
extent not inconsistent with any provisions of this Agreement).
ARTICLE VI
TERMINATION
Section 6.1 Termination by Mutual Consent. This Agreement may be
terminated at any time prior to the Closing Date by the mutual written consent
of the Company and the Purchasers.
Section 6.2 Effect of Termination. In the event of termination by
the Company or the Purchasers, written notice thereof shall forthwith be given
to the other party and the transactions contemplated by this Agreement shall be
terminated without further action by any party. If this Agreement is terminated
as provided in Section 6.1 herein, this Agreement shall become void and of no
further force and effect, except for Sections 8.1 and 8.2, and Article VII
herein. Nothing in this Section 6.2 shall be deemed to release the Company or
any Purchaser from any liability for any breach under this Agreement, or to
impair the rights of the Company or such Purchaser to compel specific
performance by the other party of its obligations under this Agreement.
ARTICLE VII
INDEMNIFICATION
Section 7.1 General Indemnity. The Company agrees to indemnify and
hold harmless each Purchaser (and its respective directors, officers, employees,
affiliates, agents, successors and assigns) from and against any and all losses,
liabilities, deficiencies, costs, damages and expenses (including, without
limitation, reasonable attorneys' fees, charges and disbursements) incurred by
each Purchaser or any such person as a result of any inaccuracy in or breach of
the representations, warranties or covenants made by the Company herein. The
Purchasers severally but not jointly agree to indemnify and hold harmless the
Company and its directors, officers, employees, affiliates, agents, successors
and assigns from and against any and all losses, liabilities, deficiencies,
28
costs, damages and expenses (including, without limitation, reasonable
attorneys' fees, charges and disbursements) incurred by the Company as result of
any inaccuracy in or breach of the representations, warranties or covenants made
by the Purchasers herein. The maximum aggregate liability of each Purchaser
pursuant to its indemnification obligations under this Article VII shall not
exceed the portion of the Purchase Price paid by such Purchaser hereunder.
Section 7.2 Indemnification Procedure. Any party entitled to
indemnification under this Article VII (an "indemnified party") will give
written notice to the indemnifying party of any matters giving rise to a claim
for indemnification; provided, that the failure of any party entitled to
indemnification hereunder to give notice as provided herein shall not relieve
the indemnifying party of its obligations under this Article VII except to the
extent that the indemnifying party is actually prejudiced by such failure to
give notice. In case any action, proceeding or claim is brought against an
indemnified party in respect of which indemnification is sought hereunder, the
indemnifying party shall be entitled to participate in and, unless in the
reasonable judgment of the indemnified party a conflict of interest between it
and the indemnifying party may exist with respect to such action, proceeding or
claim, to assume the defense thereof with counsel reasonably satisfactory to the
indemnified party. In the event that the indemnifying party advises an
indemnified party that it will contest such a claim for indemnification
hereunder, or fails, within thirty (30) days of receipt of any indemnification
notice to notify such person in writing of the indemnifying party's election to
defend, settle or compromise, at its sole cost and expense, any action,
proceeding or claim (or discontinues its defense at any time after it commences
such defense), then the indemnified party may, at its option, defend, settle or
otherwise compromise or pay such action or claim. In any event, unless and until
the indemnifying party elects in writing to assume and does so assume the
defense of any such claim, proceeding or action, the indemnified party's costs
and expenses arising out of the defense, settlement or compromise of any such
action, claim or proceeding shall be losses subject to indemnification
hereunder. The indemnified party shall cooperate fully with the indemnifying
party in connection with any negotiation or defense of any such action or claim
by the indemnifying party and shall furnish to the indemnifying party all
information reasonably available to the indemnified party which relates to such
action or claim. The indemnifying party shall keep the indemnified party fully
apprised at all times as to the status of the defense or any settlement
negotiations with respect thereto. If the indemnifying party elects to defend
any such action or claim, then the indemnified party shall be entitled to
participate in such defense with counsel of its choice at its sole cost and
expense. The indemnifying party shall not be liable for any settlement of any
action, claim or proceeding effected without its prior written consent.
Notwithstanding anything in this Article VII to the contrary, the indemnifying
party shall not, without the indemnified party's prior written consent, which
consent may not be unreasonably withheld, settle or compromise any claim or
consent to entry of any judgment in respect thereof which imposes any future
obligation on the indemnified party or which does not include, as an
unconditional term thereof, the giving by the claimant or the plaintiff to the
indemnified party of a release from all liability in respect of such claim. If
the indemnifying party fails or refuses to promptly assume the defense of any
such claim, proceeding or action, then the indemnification required by this
Article VII shall be made by periodic payments of the amount thereof during the
29
course of investigation or defense, as and when bills are received or expense,
loss, damage or liability is incurred, so long as the indemnified party
irrevocably agrees to refund such moneys if it is ultimately determined by a
court of competent jurisdiction that such party was not entitled to
indemnification. The indemnity agreements contained herein shall be in addition
to (a) any cause of action or similar rights of the indemnified party against
the indemnifying party or others, and (b) any liabilities the indemnifying party
may be subject to pursuant to applicable law.
ARTICLE VIII
MISCELLANEOUS
Section 8.1 Fees and Expenses. Each party shall pay the fees and
expenses of its advisors, counsel, accountants and other experts, if any, and
all other expenses, incurred by such party incident to the negotiation,
preparation, execution, delivery and performance of this Agreement, providedthat
the Company shall pay all actual attorneys' fees and expenses (including
disbursements and out-of-pocket expenses) incurred by the Purchasers in
connection with (i) the preparation, negotiation, execution and delivery of this
Agreement, the Registration Rights Agreement and the transactions contemplated
thereunder, which payment shall be made at Closing and shall not exceed $25,000
(exclusive of disbursements and out-of-pocket expenses), (ii) the filing and
declaration of effectiveness by the Commission of the Registration Statement (as
defined in the Registration Rights Agreement) and (iii) any amendments,
modifications or waivers of this Agreement or any of the other Transaction
Documents or in connection with the enforcement of this Agreement or any of the
other Transaction Documents, including, without limitation, all reasonable
attorneys' fees and expenses.
Section 8.2 Specific Enforcement; Consent to Jurisdiction.
(a) The Company and the Purchasers acknowledge and agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement or the other Transaction Documents were not performed in accordance
with their specific terms or were otherwise breached. It is accordingly agreed
that the parties shall be entitled to an injunction or injunctions to prevent or
cure breaches of the provisions of this Agreement or the other Transaction
Documents and to enforce specifically the terms and provisions hereof or
thereof, this being in addition to any other remedy to which any of them may be
entitled by law or equity.
(b) The Company and each Purchaser (i) hereby irrevocably submit to
the exclusive jurisdiction of the United States District Court sitting in the
Southern District of New York and the courts of the State of New York located in
New York County for the purposes of any suit, action or proceeding arising out
of or relating to this Agreement or any of the other Transaction Documents or
the transactions contemplated hereby or thereby, and (ii) hereby waive, and
agree not to assert in any such suit, action or proceeding, any claim that it is
not personally subject to the jurisdiction of each such court, that the suit,
action or proceeding is brought in an inconvenient forum or that the venue of
the suit, action or proceeding is improper. The Company and each Purchaser
consent to process being served in any such suit, action or proceeding by
30
mailing a copy thereof to such party at the address in effect for notices to it
under this Agreement and agrees that such service shall constitute good and
sufficient service of process and notice thereof. Nothing in this Section 8.2
shall affect or limit any right to serve process in any other manner permitted
by law. The Company and the Purchasers hereby agree that the prevailing party in
any suit, action or proceeding arising out of or relating to the Shares, this
Agreement, the Registration Rights Agreement or the Warrants, shall be entitled
to reimbursement for reasonable legal fees from the non-prevailing party.
Section 8.3 Entire Agreement; Amendment. This Agreement,
the Transaction Documents and the Purchaser Transaction Documents contain the
entire understanding and agreement of the parties with respect to the matters
covered hereby and, except as specifically set forth herein or in any of the
Transaction Documents or Purchaser Transaction Documents, neither the Company
nor any Purchaser make any representation, warranty, covenant or undertaking
with respect to such matters. This Agreement, the Transaction Documents and the
Purchaser Transaction Documents supersede all prior understandings and
agreements with respect to said subject matter, all of which are merged herein.
No provision of this Agreement may be waived or amended other than by a written
instrument signed by the Company and the Purchasers and their permitted assigns
owning of record at least a majority in interest of the then-outstanding Shares,
and no provision hereof may be waived other than by a written instrument signed
by the party against whom enforcement of any such waiver is sought. No amendment
to this Agreement shall be effective to the extent that it applies to less than
all of the holders of the Shares then outstanding or violates any provision of
the Nevada Corporation Law. No consideration shall be offered or paid to any
person to amend or consent to a waiver or modification of any provision of any
of the Transaction Documents unless the same consideration is also offered to
all of the parties to the Transaction Documents or holders of Shares, as the
case may be.
Section 8.4 Notices. Any notice, demand, request, waiver or other
communication required or permitted to be given hereunder shall be in writing
and shall be deemed given and received (a) upon hand delivery or delivery by
telecopy or facsimile at the address or number designated below (if delivered on
a business day during normal business hours where such notice is to be
received), or the first business day following such delivery (if delivered other
than on a business day during normal business hours where such notice is to be
received), or (b) on the second business day following the date of mailing by
express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:
If to the Company: AXM Pharma, Inc.
3960 Howard Hughes Parkway
Suite 500
Las Vegas, Nevada 89109
Attention: Chet Howard, CFO
Telecopier: (702) 990-3501
Telephone: (702) 990-3659
31
with copies (which copies
shall not constitute notice
to the Company) to: Law Offices of Louis E. Taubman, P.C.
225 Broadway, Suite 1200
New York, New York 10007
Attention: Louis E. Taubman, Esq.
Telecopier: (212) 202-6380
Telephone: (212) 732-7184
If to any Purchaser: At the address of such Purchaser set forth
on Exhibit A to this Agreement.
with copies (which copies
shall not constitute notice
to any Purchaser to: Jenkens & Gilchrist Parker Chapin LLP
The Chrysler Building
405 Lexington Avenue
New York, NY 10174
Attention: Christopher S. Auguste, Esq.
Tel No.: (212) 704-6000
Fax No.: (212) 704-6288
Any party hereto may from time to time change its address for notices by
giving at least ten (10) days written notice of such changed address to the
other party or parties hereto in accordance with the provisions of this Section
8.4.
Section 8.5 Waivers. No waiver by any party of any default with
respect to any provision, condition or requirement of this Agreement shall be
deemed to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission of
any party to exercise any right hereunder in any manner impair the exercise of
any such right accruing to it thereafter.
Section 8.6 Headings. The article, section and subsection headings
in this Agreement are for convenience only and shall not constitute a part of
this Agreement for any other purpose and shall not be deemed to limit or affect
any of the provisions hereof.
Section 8.7 Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties and their successors and permitted
assigns. After the Closing, the assignment by a party to this Agreement of any
rights hereunder shall not affect the obligations of such party under this
Agreement.
Section 8.8 No Third Party Beneficiaries. This Agreement is intended
for the benefit of the parties hereto and their respective permitted successors
32
and assigns and is not for the benefit of, nor may any provision hereof be
enforced by, any other person (other than indemnified parties, as contemplated
by Article VII).
Section 8.9 Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York, without
giving effect to any of the conflicts of law principles which would result in
the application of the substantive law of another jurisdiction. This Agreement
shall not be interpreted or construed with any presumption against the party
causing this Agreement to be drafted.
Section 8.10 Survival. The representations and warranties of the
Company contained in Sections 2.1(o) and 2.1(s) shall survive until the
expiration of the applicable statutes of limitations, and those contained in
Article II, with the exception of Sections 2.1(o) and 2.1(s), shall survive the
execution and delivery hereof and the Closing until the date two (2) years from
the Closing Date, and the agreements and covenants set forth in Articles I, III,
V, VII and VIII of this Agreement shall survive the execution and delivery
hereof and the Closing hereunder.
Section 8.11 Counterparts. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument and shall become effective when counterparts have been signed by
each party and delivered to the other parties hereto, it being understood that
all parties need not sign the same counterpart.
Section 8.12. Publicity. The Company agrees that it will not disclose,
and will not include in any public announcement, the names of the Purchasers
without the consent of the Purchasers in accordance with Section 8.3, which
consent shall not be unreasonably withheld or delayed, or unless and until such
disclosure is required by law, rule or applicable regulation, and then only to
the extent of such requirement.
Section 8.13 Severability. The provisions of this Agreement are
severable and, in the event that any court of competent jurisdiction shall
determine that any one or more of the provisions or part of the provisions
contained in this Agreement shall, for any reason, be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision or part of a provision of
this Agreement and this Agreement shall be reformed and construed as if such
invalid or illegal or unenforceable provision, or part of such provision, had
never been contained herein, so that such provisions would be valid, legal and
enforceable to the maximum extent possible.
Section 8.14 Further Assurances. From and after the date of this
Agreement, upon the request of the Purchasers or the Company, the Company and
each Purchaser shall execute and deliver such instruments, documents and other
writings as may be reasonably necessary or desirable to confirm and carry out
and to effectuate fully the intent and purposes of this Agreement, the Warrants
and the Registration Rights Agreement.
[Remainder of page intentionally left blank.]
33
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the date first above
written.
AXM PHARMA, INC.
By:__________________________________
Name: Chet Howard
Title: Chief Financial Officer
X
By: _____________________________
X
By: _____________________________
34
EXHIBIT A
----------
LIST OF PURCHASERS
NAMES AND ADDRESSES OF NUMBER OF SHARES NUMBER OF WARRANTS DOLLAR AMOUNT
PURCHASERS PURCHASED PURCHASED OF INVESTMENT
Excalibaur Limited Partnership 3.000 35,294 $300,000
33 Prince Arthur Avenue
Toronto, ON M5R 1B2
SRG Capital, LLC 3.000 35,294 $300,000
120 Broadway, 40th Floor
New York, New York 10271
Greenwich Growth Fund Limited 1.000 11,764 $100,000
14 Par-La-Wille Road
PO Box HM
2257, Hamilton, Bermuda HM08
Whalehaven Fund Limited 1.000 11,764 $100,000
14 Par-La-Wille Road
PO Box HM 2257
Hamilton, Bermuda HM08
Cranshire Capital LP 5.000 58,823 $500,000
Iroquois Capital, LP 4.000 47,058 $400,000
Omicron Master Trust 5.000 58,823 $500,000
810 Seventh Avenue 39th Floor
New York, New York 10019
Stonestreet 4.000 47,058 $400,000
Enable Growth Partners 2.000 23,529 $200,000
One Sansome, Suite 2900
San Francisco, CA 94105
Crescent International LTD 2.000 23,529 $200,000
c/o Greenlight (Switzerland) SA
84 Av. Louis-Casai, CH 1216 Cointrin
Geneva, Switzerland
Richard Mollinsky 0.425 5,000 $42,500
A-1
EXHIBIT B
FORM OF WARRANT
B-1
EXHIBIT C
FORM OF OPINION
1. The Company is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Nevada and has the requisite
corporate power to own, lease and operate its properties and assets, and to
carry on its business as presently conducted. The Company is duly qualified as a
foreign corporation to do business and is in good standing in every jurisdiction
in which the failure to so qualify would have a Material Adverse Effect.
2. The Company has the requisite corporate power and authority to enter
into and perform its obligations under the Transaction Documents and to issue
the Shares, the Conversion Shares, the Warrants and the Warrant Shares. The
execution, delivery and performance of each of the Transaction Documents by the
Company and the consummation by it of the transactions contemplated thereby have
been duly and validly authorized by all necessary corporate action and no
further consent or authorization of the Company or its Board of Directors is
required. Each of the Transaction Documents have been duly executed and
delivered, and the Shares and the Warrants have been duly executed, issued and
delivered by the Company and each of the Transaction Documents constitutes a
legal, valid and binding obligation of the Company enforceable against the
Company in accordance with its respective terms. The Shares, the Conversion
Shares and the Warrant Shares are not subject to any preemptive rights under the
Articles or the Bylaws.
3. The Shares have been duly authorized and, when delivered against
payment in full as provided in the Purchase Agreement, will be validly issued,
fully paid and nonassessable. The Conversion Shares, have been duly authorized
and reserved for issuance, and, when delivered upon conversion of the Shares,
will be validly issued, fully paid and nonassessable. The Warrant Shares, have
been duly authorized and reserved for issuance, and, when delivered upon
exercise or against payment in full as provided in the Warrants, will be validly
issued, fully paid and nonassessable.
4. The execution, delivery and performance of and compliance with the
terms of the Transaction Documents and the issuance of the Shares, the
Conversion Shares, the Warrants and the Warrant Shares do not (a) violate any
provision of the Articles or Bylaws, (b) conflict with, or constitute a default
(or an event which with notice or lapse of time or both would become a default)
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, any material agreement, mortgage, deed of trust, indenture,
note, bond, license, lease agreement, instrument or obligation to which the
Company is a party and which is known to us, (c) create or impose a lien, charge
or encumbrance on any property of the Company under any agreement or any
commitment known to us to which the Company is a party or by which the Company
is bound or by which any of its respective properties or assets are bound, or
(d) result in a violation of any Federal, state, local or foreign statute, rule,
regulation, order, judgment, injunction or decree (including Federal and state
securities laws and regulations) applicable to the Company or by which any
property or asset of the Company is bound or affected, except, in all cases
other than violations pursuant to clauses (a) and (d) above, for such conflicts,
default, terminations, amendments, acceleration, cancellations and violations as
would not, individually or in the aggregate, have a Material Adverse Effect.
C-1
5. No consent, approval or authorization of or designation, declaration
or filing with any governmental authority on the part of the Company is required
under Federal, state or local law, rule or regulation in connection with the
valid execution, delivery and performance of the Transaction Documents, or the
offer, sale or issuance of the Shares, the Conversion Shares, the Warrants or
the Warrant Shares other than filings as may be required by applicable Federal
and state securities laws and regulations.
6. To our knowledge, there is no action, suit, claim, investigation or
proceeding pending or threatened against the Company which questions the
validity of the Agreement or the transactions contemplated thereby or any action
taken or to be taken pursuant thereto. There is no action, suit, claim,
investigation or proceeding pending, or to our knowledge, threatened, against or
involving the Company or any of its properties or assets and which, if adversely
determined, is reasonably likely to result in a Material Adverse Effect. There
are no outstanding orders, judgments, injunctions, awards or decrees of any
court, arbitrator or governmental or regulatory body against the Company or any
officers or directors of the Company in their capacities as such.
7. The offer, issuance and sale of the Shares and the Warrants and the
offer, issuance and sale of the Conversion Shares and the Warrant Shares
pursuant to the Agreement and the Warrants, as applicable, are exempt from the
registration requirements of the Securities Act of 1933, as amended.
8. The Company is not, and as a result of and immediately upon Closing
will not be, an "investment company" or a company "controlled" by an "investment
company," within the meaning of the Investment Company Act of 1940, as amended.
C-2
EXHIBIT D
FORM OF CERTIFICATE OF DESIGNATION
D-1
EXHIBIT E
FORM OF REGISTRATION RIGHTS AGREEMENT
EXHIBIT F
FORM OF IRREVOCABLE TRANSFER AGENT INSTRUCTIONS
AXM PHARMA, INC.
as of June __, 2004
[Name and address of Transfer Agent]
Attn: _____________
LADIES AND GENTLEMEN:
Reference is made to that certain Securities Purchase Agreement (the
"Purchase Agreement"), dated as of May __, 2004, by and among AXM Pharma, Inc.,
a Nevada corporation (the "COMPANY"), and the purchasers named therein
(collectively, the "PURCHASERS") pursuant to which the Company is issuing to the
Purchasers shares of its Series C Convertible Preferred Stock, par value $.001
per share, (the "SHARES") and warrants (the "WARRANTS") to purchase shares of
the Company's common stock, par value $.001 per share (the "COMMON STOCK"). This
letter shall serve as our irrevocable authorization and direction to you
(provided that you are the transfer agent of the Company at such time) to issue
shares of Common Stock upon conversion of the Shares (the "CONVERSION SHARES")
and exercise of the Warrants (the "WARRANT SHARES") to or upon the order of a
Purchaser or assignee or transferee of a Purchaser (a "HOLDER") from time to
time upon (i) surrender to you of a properly completed and duly executed
Conversion Notice or Exercise Notice, as the case may be, in the form attached
hereto as Exhibit I and Exhibit II, respectively, (ii) in the case of the
conversion of Shares, a copy of the certificates (with the original certificates
delivered to the Company) representing Shares being converted or, in the case of
Warrants being exercised, a copy of the Warrants (with the original Warrants
delivered to the Company) being exercised (or, in each case, an indemnification
undertaking with respect to such share certificates or the warrants in the case
of their loss, theft or destruction), and (iii) delivery of a treasury order or
other appropriate order duly executed by a duly authorized officer of the
Company. So long as you have previously received (x) written confirmation from
counsel to the Company that a registration statement covering resales of the
Conversion Shares or Warrant Shares, as applicable, has been declared effective
by the Securities and Exchange Commission (the "SEC") under the Securities Act
of 1933, as amended (the "1933 ACT"), and no subsequent notice by the Company or
its counsel of the suspension or termination of its effectiveness and (y) a copy
of such registration statement, and if the Holder represents in writing that the
Conversion Shares or the Warrant Shares, as the case may be, were sold pursuant
to the Registration Statement, then certificates representing the Conversion
Shares and the Warrant Shares, as the case may be, shall not bear any legend
restricting transfer of the Conversion Shares and the Warrant Shares, as the
case may be, thereby and should not be subject to any stop-transfer restriction.
Provided, however, that if you have not previously received (i) written
confirmation from counsel to the Company that a registration statement covering
resales of the Conversion Shares or Warrant Shares, as applicable, has been
declared effective by the SEC under the 1933 Act, and (ii) a copy of such
registration statement, then the certificates for the Conversion Shares and the
Warrant Shares shall bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE
"SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE
SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND
UNDER APPLICABLE STATE SECURITIES LAWS OR AXM PHARMA, INC.
SHALL HAVE RECEIVED AN OPINION OF ITS COUNSEL THAT REGISTRATION
OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE
PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT
REQUIRED."
and, provided further, that the Company may from time to time notify you to
place stop-transfer restrictions on the certificates for the Conversion Shares
and the Warrant Shares in the event a registration statement covering the
Conversion Shares and the Warrant Shares is subject to amendment for events then
current.
A form of written confirmation from counsel to the Company that a
registration statement covering resales of the Conversion Shares and the Warrant
Shares has been declared effective by the SEC under the 1933 Act is attached
hereto as Exhibit III.
Please be advised that the Purchasers are relying upon this letter as
an inducement to enter into the Securities Purchase Agreement and, accordingly,
each Purchaser is a third party beneficiary to these instructions.
Please execute this letter in the space indicated to acknowledge your
agreement to act in accordance with these instructions. Should you have any
questions concerning this matter, please contact me at ___________.
Very truly yours,
AXM PHARMA, INC.
By:
Name:
Title:
ACKNOWLEDGED AND AGREED:
[TRANSFER AGENT]
By:
Name:
Title:
Date:
EXHIBIT I
AXM PHARMA, INC.
CONVERSION NOTICE
Reference is made to the Certificate of Designation of the Relative Rights and
Preferences of the Series C Preferred Stock of AXM Pharma, Inc. (the
"Certificate of Designation"). In accordance with and pursuant to the
Certificate of Designation, the undersigned hereby elects to convert the number
of shares of Series C Preferred Stock, par value $.001 per share (the "Shares"),
of AXM Pharma, Inc., a Nevada corporation (the "Company"), indicated below into
shares of Common Stock, par value $.001 per share (the "Common Stock"), of the
Company, by tendering the stock certificate(s) representing the share(s) of
Shares specified below as of the date specified below.
Date of Conversion:
Number of Shares to be converted:
Stock certificate no(s). of Shares to be converted:
The Common Stock have been sold pursuant to the Registration Statement
(as defined in the Registration Rights Agreement): YES ____ NO____
Please confirm the following information:
Conversion Price:
Number of shares of Common Stock to be issued:
Number of shares of Common Stock beneficially owned or deemed beneficially
owned by the Holder on the Date of Conversion: _________________________
Please issue the Common Stock into which the Shares are being converted and, if
applicable, any check drawn on an account of the Company in the following name
and to the following address:
Issue to:
Facsimile Number:
Authorization:
By:
Title:
Dated:
EXHIBIT II
FORM OF EXERCISE NOTICE
EXERCISE FORM
AXM PHARMA, INC.
The undersigned _______________, pursuant to the provisions of the within
Warrant, hereby elects to purchase _____ shares of Common Stock of AXM Pharma,
Inc. covered by the within Warrant.
Number of shares of Common Stock beneficially owned or deemed beneficially owned
by the Holder on the date of Exercise: _________________________
ASSIGNMENT
FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers unto
__________________ the within Warrant and all rights evidenced thereby and does
irrevocably constitute and appoint _____________, attorney, to transfer the said
Warrant on the books of the within named corporation.
FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers unto
__________________ the right to purchase _________ shares of Warrant Stock
evidenced by the within Warrant together with all rights therein, and does
irrevocably constitute and appoint ___________________, attorney, to transfer
that part of the said Warrant on the books of the within named corporation.
This Warrant No. W-_____ canceled (or transferred or exchanged) this _____ day
of ___________, _____, shares of Common Stock issued therefor in the name of
_______________, Warrant No. W-_____ issued for ____ shares of Common Stock in
the name of _______________.
EXHIBIT III
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
[Name and address of Transfer Agent]
Attn: _____________
Re: AXM PHARMA, INC.
Ladies and Gentlemen:
We are counsel to AXM Pharma, Inc., a Nevada corporation (the
"COMPANY"), and are aware of that certain Securities Purchase Agreement (the
"PURCHASE AGREEMENT"), dated as of May __, 2004, by and among the Company and
the purchasers named therein (collectively, the "PURCHASERS") pursuant to which
the Company issued to the Purchasers shares of its Series C Convertible
Preferred Stock, par value $.001 per share, (the "SHARES") and warrants (the
"WARRANTS") to purchase shares of the Company's common stock, par value $.001
per share (the "COMMON STOCK"). Pursuant to the Purchase Agreement, the Company
has also entered into a Registration Rights Agreement with the Purchasers (the
"REGISTRATION RIGHTS AGREEMENT"), dated as of May __, 2004, pursuant to which
the Company agreed, among other things, to register the Registrable Securities
(as defined in the Registration Rights Agreement), including the shares of
Common Stock issuable upon conversion of the Shares and exercise of the
Warrants, under the Securities Act of 1933, as amended (the "1933 ACT"). In
connection with the Company's obligations under the Registration Rights
Agreement, on ________________, 2004, the Company filed a Registration Statement
on Form SB-2 (File No. 333-________) (the "REGISTRATION STATEMENT") with the
Securities and Exchange Commission (the "SEC") relating to the resale of the
Registrable Securities which names each of the present Purchasers as a selling
stockholder thereunder.
In connection with the foregoing, we advise you that a member of the
SEC's staff has advised us by telephone that the SEC has entered an order
declaring the Registration Statement effective under the 1933 Act at [ENTER TIME
OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge,
after telephonic inquiry of a member of the SEC's staff, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC and accordingly, the
Registrable Securities are available for resale under the 1933 Act pursuant to
the Registration Statement.
Very truly yours,
[COMPANY COUNSEL]
By:
cc: [LIST NAMES OF PURCHASERS]
EXHIBIT 4.14
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made
and entered into as of June 24, 2004, by and among AXM Pharma, Inc., a Nevada
corporation (the "Company"), and the purchasers listed on Schedule I hereto (the
"Purchasers").
This Agreement is being entered into pursuant to the
Securities Purchase Agreement dated as of the date hereof among the Company and
the Purchasers (the "Purchase Agreement").
The Company and the Purchasers hereby agree as follows:
1. Definitions.
Capitalized terms used and not otherwise defined herein shall
have the meanings given such terms in the Purchase Agreement. As used in this
Agreement, the following terms shall have the following meanings:
"Advice" shall have meaning set forth in Section 3(m).
"Affiliate" means, with respect to any Person, any other
Person that directly or indirectly controls or is controlled by or under common
control with such Person. For the purposes of this definition, "control," when
used with respect to any Person, means the possession, direct or indirect, of
the power to direct or cause the direction of the management and policies of
such Person, whether through the ownership of voting securities, by contract or
otherwise; and the terms of "affiliated," "controlling" and "controlled" have
meanings correlative to the foregoing.
"Board" shall have meaning set forth in Section 3(n).
"Business Day" means any day except Saturday, Sunday and any
day which shall be a legal holiday or a day on which banking institutions in the
state of New York generally are authorized or required by law or other
government actions to close.
"Closing Date" means the date of the final closing of the
purchase and sale of the Preferred Stock and Warrants pursuant to the Purchase
Agreement.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's Common Stock, par value
$.001 per share.
"Effectiveness Date" means with respect to the Registration
Statement the earlier of the ninetieth (90th) day following the Filing Date or
the date which is within five (5) days of the date on which the Commission
informs the Company that the Commission (i) will not review the Registration
Statement or (ii) that the Company may request the acceleration of the
effectiveness of the Registration Statement and the Company makes such request.
"Effectiveness Period" shall have the meaning set forth in
Section 2.
"Event" shall have the meaning set forth in Section 7(e).
"Event Date" shall have the meaning set forth in Section 7(e).
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Filing Date" means July 15, 2004.
"Holder" or "Holders" means the holder or holders, as the case
may be, from time to time of Registrable Securities.
"Indemnified Party" shall have the meaning set forth in
Section 5(c).
"Indemnifying Party" shall have the meaning set forth in
Section 5(c).
"Losses" shall have the meaning set forth in Section 5(a).
"Person" means an individual or a corporation, partnership,
trust, incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or political
subdivision thereof) or other entity of any kind.
"Preferred Stock" means the Series C Convertible Preferred
Stock, par value $.001 per share and stated value $100,000 per share, of the
Company issued to the Purchasers pursuant to the Purchase Agreement.
"Proceeding" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included in the Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by the Registration Statement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference in such Prospectus.
"Registrable Securities means the shares of Common Stock
issuable upon conversion of the Preferred Stock and the shares of Common Stock
issuable upon exercise of the Warrants.
"Registration Statement" means the registration statements and
any additional registration statements contemplated by Section 2, including (in
each case) the Prospectus, amendments and supplements to such registration
-2-
statement or Prospectus, including pre- and post-effective amendments, all
exhibits thereto, and all material incorporated by reference in such
registration statement.
"Rule 144" means Rule 144 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Rule 158" means Rule 158 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Rule 415" means Rule 415 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Rule 424" means Rule 424 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Securities Act" means the Securities Act of 1933, as amended.
"Special Counsel" means one special counsel to the Holders,
for which the Holders will be reimbursed by the Company pursuant to Section 4.
"Warrants" means the warrants to purchase shares of Common
Stock issued to the Purchasers pursuant to the Purchase Agreement.
2. Resale Registration.
On or prior to the Filing Date the Company shall prepare and
file with the Commission a "resale" Registration Statement covering all
Registrable Securities for an offering to be made on a continuous basis pursuant
to Rule 415. The Registration Statement shall be on Form SB-2 (except if the
Company is not then eligible to register for resale the Registrable Securities
on Form SB-2, in which case such registration shall be on another appropriate
form in accordance herewith). The Company shall (i) not permit any securities
other than the Registrable Securities and the securities listed on Schedule II
hereto to be included in the Registration Statement and (ii) use its best
efforts to cause the Registration Statement to be declared effective under the
Securities Act as promptly as possible after the filing thereof, but in any
event prior to the Effectiveness Date, and to keep such Registration Statement
continuously effective under the Securities Act until such date as is the
earlier of (x) the date when all Registrable Securities covered by such
Registration Statement have been sold or (y) the date on which the Registrable
Securities may be sold without any restriction pursuant to Rule 144 as
determined by the counsel to the Company pursuant to a written opinion letter,
addressed to the Company's transfer agent to such effect (the "Effectiveness
Period"). If at any time and for any reason, an additional Registration
Statement is required to be filed because at such time the actual number of
shares of Common Stock into which the Preferred Stock is convertible and the
Warrants are exercisable exceeds the number of shares of Registrable Securities
remaining under the Registration Statement, the Company shall have twenty (20)
-3-
Business Days to file such additional Registration Statement, and the Company
shall use its best efforts to cause such additional Registration Statement to be
declared effective by the Commission as soon as possible, but in no event later
than sixty (60) days after filing.
3. Registration Procedures.
In connection with the Company's registration obligations
hereunder, the Company shall:
(a) Prepare and file with the Commission, on or prior to the
Filing Date, a Registration Statement on Form SB-2 (or if the Company is not
then eligible to register for resale the Registrable Securities on Form SB-2
such registration shall be on another appropriate form in accordance herewith)
in accordance with the method or methods of distribution thereof as specified by
the Holders (except if otherwise directed by the Holders) and in accordance with
applicable law, and cause the Registration Statement to become effective and
remain effective as provided herein; provided, however, that not less than three
(3) Business Days prior to the filing of the Registration Statement or any
related Prospectus or any amendment or supplement thereto, the Company shall (i)
furnish to the Holders and any Special Counsel, copies of all such documents
proposed to be filed, which documents will be subject to the review of such
Holders and such Special Counsel, and (ii) cause its officers and directors,
counsel and independent certified public accountants to respond to such
inquiries as shall be necessary, in the reasonable opinion of Special Counsel,
to conduct a reasonable review of such documents. The Company shall not file the
Registration Statement or any such Prospectus or any amendments or supplements
thereto to which the Holders of a majority of the Registrable Securities or any
Special Counsel shall reasonably object in writing within three (3) Business
Days of their receipt thereof.
(b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to the Registration Statement as may be
necessary to keep the Registration Statement continuously effective as to the
applicable Registrable Securities for the Effectiveness Period and prepare and
file with the Commission such additional Registration Statements as necessary in
order to register for resale under the Securities Act all of the Registrable
Securities; (ii) cause the related Prospectus to be amended or supplemented by
any required Prospectus supplement, and as so supplemented or amended to be
filed pursuant to Rule 424 (or any similar provisions then in force) promulgated
under the Securities Act; (iii) respond as promptly as possible, but in no event
later than fifteen (15) business days, to any comments received from the
Commission with respect to the Registration Statement or any amendment thereto
and as promptly as possible provide the Holders true and complete copies of all
correspondence from and to the Commission relating to the Registration
Statement; and (iv) comply in all material respects with the provisions of the
Securities Act and the Exchange Act with respect to the disposition of all
Registrable Securities covered by the Registration Statement during the
applicable period in accordance with the intended methods of disposition by the
Holders thereof set forth in the Registration Statement as so amended or in such
Prospectus as so supplemented.
(c) Notify the Holders of Registrable Securities and any
Special Counsel as promptly as possible (and, in the case of (i)(A) below, not
less than three (3) days prior to such filing) and (if requested by any such
Person) confirm such notice in writing no later than two (2) Business Days
-4-
following the day (i)(A) when a Prospectus or any Prospectus supplement or
post-effective amendment to the Registration Statement is filed; (B) when the
Commission notifies the Company whether there will be a "review" of such
Registration Statement and whenever the Commission comments in writing on such
Registration Statement and (C) with respect to the Registration Statement or any
post-effective amendment, when the same has become effective; (ii) of any
request by the Commission or any other Federal or state governmental authority
for amendments or supplements to the Registration Statement or Prospectus or for
additional information; (iii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement covering any or
all of the Registrable Securities or the initiation or threatening of any
Proceedings for that purpose; (iv) if at any time any of the representations and
warranties of the Company contained in any agreement contemplated hereby ceases
to be true and correct in all material respects; (v) of the receipt by the
Company of any notification with respect to the suspension of the qualification
or exemption from qualification of any of the Registrable Securities for sale in
any jurisdiction, or the initiation of any Proceeding for such purpose; and (vi)
of the occurrence of any event that makes any statement made in the Registration
Statement or Prospectus or any document incorporated or deemed to be
incorporated therein by reference untrue in any material respect or that
requires any revisions to the Registration Statement, Prospectus or other
documents so that, in the case of the Registration Statement or the Prospectus,
as the case may be, it will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
(d) Use its best efforts to avoid the issuance of, or, if
issued, obtain the withdrawal of, as promptly as possible, (i) any order
suspending the effectiveness of the Registration Statement or (ii) any
suspension of the qualification (or exemption from qualification) of any of the
Registrable Securities for sale in any jurisdiction.
(e) If requested by the Holders of a majority in interest of
the Registrable Securities, (i) promptly incorporate in a Prospectus supplement
or post-effective amendment to the Registration Statement such information as
the Company reasonably agrees should be included therein and (ii) make all
required filings of such Prospectus supplement or such post-effective amendment
as soon as practicable after the Company has received notification of the
matters to be incorporated in such Prospectus supplement or post-effective
amendment.
(f) If requested by any Holder, furnish to such Holder and any
Special Counsel, without charge, at least one conformed copy of each
Registration Statement and each amendment thereto, including financial
statements and schedules, all documents incorporated or deemed to be
incorporated therein by reference, and all exhibits to the extent requested by
such Person (including those previously furnished or incorporated by reference)
promptly after the filing of such documents with the Commission.
(g) Promptly deliver to each Holder and any Special Counsel,
without charge, as many copies of the Prospectus or Prospectuses (including each
form of prospectus) and each amendment or supplement thereto as such Persons may
reasonably request; and subject to the provisions of Section 3(n), the Company
hereby consents to the use of such Prospectus and each amendment or supplement
thereto by each of the selling Holders in connection with the offering and sale
-5-
of the Registrable Securities covered by such Prospectus and any amendment or
supplement thereto.
(h) Prior to any public offering of Registrable Securities,
use its best efforts to register or qualify or cooperate with the selling
Holders and any Special Counsel in connection with the registration or
qualification (or exemption from such registration or qualification) of such
Registrable Securities for offer and sale under the securities or Blue Sky laws
of such jurisdictions within the United States as any Holder requests in
writing, to keep each such registration or qualification (or exemption
therefrom) effective during the Effectiveness Period and to do any and all other
acts or things necessary or advisable to enable the disposition in such
jurisdictions of the Registrable Securities covered by a Registration Statement;
provided, however, that the Company shall not be required to qualify generally
to do business in any jurisdiction where it is not then so qualified or to take
any action that would subject it to general service of process in any such
jurisdiction where it is not then so subject or subject the Company to any
material tax in any such jurisdiction where it is not then so subject.
(i) Cooperate with the Holders to facilitate the timely
preparation and delivery of certificates representing Registrable Securities to
be sold pursuant to a Registration Statement, which certificates, to the extent
permitted by the Purchase Agreement and applicable federal and state securities
laws, shall be free of all restrictive legends, and to enable such Registrable
Securities to be in such denominations and registered in such names as any
Holder may request in connection with any sale of Registrable Securities.
(j) Upon the occurrence of any event contemplated by Section
3(c)(vi), as promptly as possible, prepare a supplement or amendment, including
a post-effective amendment, to the Registration Statement or a supplement to the
related Prospectus or any document incorporated or deemed to be incorporated
therein by reference, and file any other required document so that, as
thereafter delivered, neither the Registration Statement nor such Prospectus
will contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
(k) Use its best efforts to cause all Registrable Securities
relating to the Registration Statement to be listed on the American Stock
Exchange or any other securities exchange, quotation system or market, if any,
on which similar securities issued by the Company are then listed as and when
required pursuant to the Purchase Agreement.
(l) Comply in all material respects with all applicable rules
and regulations of the Commission and make generally available to its security
holders earning statements satisfying the provisions of Section 11(a) of the
Securities Act and Rule 158 not later than 45 days after the end of any 12-month
period (or 90 days after the end of any 12-month period if such period is a
fiscal year) commencing on the first day of the first fiscal quarter of the
Company after the effective date of the Registration Statement, which statement
shall conform to the requirements of Rule 158.
(m) The Company may require each selling Holder to furnish to
the Company information regarding such Holder and the distribution of such
Registrable Securities as is required by law to be disclosed in the Registration
-6-
Statement, Prospectus, or any amendment or supplement thereto, and the Company
may exclude from such registration the Registrable Securities of any such Holder
who unreasonably fails to furnish such information within a reasonable time
after receiving such request.
Each Holder covenants and agrees that (i) it will not sell any
Registrable Securities under the Registration Statement until it has received
copies of the Prospectus as then amended or supplemented as contemplated in
Section 3(g) and notice from the Company that such Registration Statement and
any post-effective amendments thereto have become effective as contemplated by
Section 3(c) and (ii) it and its officers, directors or Affiliates, if any, will
comply with the prospectus delivery requirements of the Securities Act as
applicable to them in connection with sales of Registrable Securities pursuant
to the Registration Statement.
Each Holder agrees by its acquisition of such Registrable
Securities that, upon receipt of a notice from the Company of the occurrence of
any event of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv),
3(c)(v), 3(c)(vi) or 3(n), such Holder will forthwith discontinue disposition of
such Registrable Securities under the Registration Statement until such Holder's
receipt of the copies of the supplemented Prospectus and/or amended Registration
Statement contemplated by Section 3(j), or until it is advised in writing (the
"Advice") by the Company that the use of the applicable Prospectus may be
resumed, and, in either case, has received copies of any additional or
supplemental filings that are incorporated or deemed to be incorporated by
reference in such Prospectus or Registration Statement.
(n) If (i) there is material non-public information regarding
the Company which the Company's Board of Directors (the "Board") reasonably
determines not to be in the Company's best interest to disclose and which the
Company is not otherwise required to disclose, or (ii) there is a significant
business opportunity (including, but not limited to, the acquisition or
disposition of assets (other than in the ordinary course of business) or any
merger, consolidation, tender offer or other similar transaction) available to
the Company which the Board reasonably determines not to be in the Company's
best interest to disclose, then the Company may postpone or suspend filing or
effectiveness of a registration statement for a period not to exceed 20
consecutive days, provided that the Company may not postpone or suspend its
obligation under this Section 3(n) for more than 45 days in the aggregate during
any 360 day period; provided, however, that no such postponement or suspension
shall be permitted for consecutive 20 day periods, arising out of the same set
of facts, circumstances or transactions.
4. Registration Expenses.
All fees and expenses incident to the performance of or
compliance with this Agreement by the Company, except as and to the extent
specified in Section 4, shall be borne by the Company whether or not the
Registration Statement is filed or becomes effective and whether or not any
Registrable Securities are sold pursuant to the Registration Statement. The fees
and expenses referred to in the foregoing sentence shall include, without
limitation, (i) all registration and filing fees (including, without limitation,
fees and expenses (A) with respect to filings required to be made with each
securities exchange or market on which Registrable Securities are required
hereunder to be listed, (B) with respect to filing fees required to be paid to
the National Association of Securities Dealers, Inc. and the NASD Regulation,
Inc. and (C) in compliance with state securities or Blue Sky laws (including,
without limitation, fees and disbursements of counsel for the Holders in
connection with Blue Sky qualifications of the Registrable Securities and
-7-
determination of the eligibility of the Registrable Securities for investment
under the laws of such jurisdictions as the Holders of a majority of Registrable
Securities may designate)), (ii) printing expenses (including, without
limitation, expenses of printing certificates for Registrable Securities and of
printing prospectuses if the printing of prospectuses is requested by the
holders of a majority of the Registrable Securities included in the Registration
Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and
disbursements of counsel for the Company and Special Counsel for the Holders, in
the case of the Special Counsel, to a maximum amount of $7,500, (v) Securities
Act liability insurance, if the Company so desires such insurance, and (vi) fees
and expenses of all other Persons retained by the Company in connection with the
consummation of the transactions contemplated by this Agreement, including,
without limitation, the Company's independent public accountants (including the
expenses of any comfort letters or costs associated with the delivery by
independent public accountants of a comfort letter or comfort letters). In
addition, the Company shall be responsible for all of its internal expenses
incurred in connection with the consummation of the transactions contemplated by
this Agreement (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the expense of
any annual audit, the fees and expenses incurred in connection with the listing
of the Registrable Securities on any securities exchange as required hereunder.
5. Indemnification.
(a) Indemnification by the Company. The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Holder, the officers, directors, agents, brokers (including brokers who
offer and sell Registrable Securities as principal as a result of a pledge or
any failure to perform under a margin call of Common Stock), investment advisors
and employees of each of them, each Person who controls any such Holder (within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act) and the officers, directors, agents and employees of each such controlling
Person, to the fullest extent permitted by applicable law, from and against any
and all losses, claims, damages, liabilities, costs (including, without
limitation, costs of preparation and attorneys' fees) and expenses
(collectively, "Losses"), as incurred, arising out of or based upon any untrue
or alleged untrue statement of a material fact contained in the Registration
Statement, any Prospectus or any form of prospectus or in any amendment or
supplement thereto or in any preliminary prospectus, or arising out of or based
upon any omission or alleged omission of a material fact required to be stated
therein or necessary to make the statements therein (in the case of any
Prospectus or form of prospectus or supplement thereto), in the light of the
circumstances under which they were made, not misleading, except to the extent,
but only to the extent, that such untrue statements or omissions arise out of or
are based upon information regarding the Holders or such other Indemnified Party
furnished in writing to the Company by a Holder expressly for use therein, which
information was reasonably relied on by the Company for use therein or to the
extent that such information relates to a Holder or such Holder's proposed
method of distribution of Registrable Securities and was reviewed and expressly
approved in writing by a Holder expressly for use in the Registration Statement,
such Prospectus or such form of Prospectus or in any amendment or supplement
thereto. The Company shall notify the Holders promptly of the institution,
threat or assertion of any Proceeding of which the Company is aware in
connection with the transactions contemplated by this Agreement.
-8-
(b) Indemnification by Holders. Each Holder shall, severally
and not jointly, indemnify and hold harmless the Company, its directors,
officers, agents and employees, each Person who controls the Company (within the
meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act),
and the directors, officers, agents or employees of such controlling Persons, to
the fullest extent permitted by applicable law, from and against all Losses, as
incurred, arising out of or based upon any untrue or alleged untrue statement of
a material fact contained in the Registration Statement, any Prospectus, or any
form of prospectus, or in any amendment or supplement thereto or in any
preliminary prospectus, or arising out of or based upon any omission or alleged
omission of a material fact required to be stated therein or necessary to make
the statements therein (in the case of any Prospectus or form of prospectus or
supplement thereto), in the light of the circumstances under which they were
made, not misleading, to the extent, but only to the extent, that such untrue
statement or omission is contained in any information so furnished in writing by
such Holder or other Indemnified Party to the Company expressly for use therein
and that such information was reasonably relied upon by the Company for use
therein, or to the extent that such information relates to such Holder or such
Holder's proposed method of distribution of Registrable Securities and was
reviewed and expressly approved in writing by such Holder expressly for use in
the Registration Statement, such Prospectus or such form of Prospectus or any
amendment or supplement thereto. Notwithstanding anything to the contrary
contained herein, the Holders shall be liable under this Section 5(b) for only
that amount as does not exceed the net proceeds to such Holder as a result of
the sale of Registrable Securities pursuant to such Registration Statement.
(c) Conduct of Indemnification Proceedings. If any Proceeding
shall be brought or asserted against any Person entitled to indemnity hereunder
(an "Indemnified Party"), such Indemnified Party promptly shall notify the
Person from whom indemnity is sought (the "Indemnifying Party) in writing, and
the Indemnifying Party shall be entitled to assume the defense thereof,
including the employment of counsel reasonably satisfactory to the Indemnified
Party and the payment of all fees and expenses incurred in connection with
defense thereof; provided, that the failure of any Indemnified Party to give
such notice shall not relieve the Indemnifying Party of its obligations or
liabilities pursuant to this Agreement, except (and only) to the extent that it
shall be finally determined by a court of competent jurisdiction (which
determination is not subject to appeal or further review) that such failure
shall have proximately and materially adversely prejudiced the Indemnifying
Party.
An Indemnified Party shall have the right to employ separate
counsel in any such Proceeding and to participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such
Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in
writing to pay such fees and expenses; or (2) the Indemnifying Party shall have
failed promptly to assume the defense of such Proceeding and to employ counsel
reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3)
the named parties to any such Proceeding (including any impleaded parties)
include both such Indemnified Party and the Indemnifying Party, and such parties
shall have been advised by counsel that a conflict of interest is likely to
exist if the same counsel were to represent such Indemnified Party and the
Indemnifying Party (in which case, if such Indemnified Party notifies the
Indemnifying Party in writing that it elects to employ separate counsel at the
expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense thereof and such counsel shall be at the expense of
the Indemnifying Party). The Indemnifying Party shall not be liable for any
settlement of any such Proceeding effected without its written consent, which
-9-
consent shall not be unreasonably withheld or delayed. No Indemnifying Party
shall, without the prior written consent of the Indemnified Party, effect any
settlement of any pending or threatened Proceeding in respect of which any
Indemnified Party is a party and indemnity has been sought hereunder, unless
such settlement includes an unconditional release of such Indemnified Party from
all liability on claims that are the subject matter of such Proceeding.
All fees and expenses of the Indemnified Party (including
reasonable fees and expenses to the extent incurred in connection with
investigating or preparing to defend such Proceeding in a manner not
inconsistent with this Section) shall be paid to the Indemnified Party, as
incurred, within ten (10) Business Days of written notice thereof to the
Indemnifying Party (regardless of whether it is ultimately determined that an
Indemnified Party is not entitled to indemnification hereunder; provided, that
the Indemnified Party shall reimburse all such fees and expenses to the extent
it is finally judicially determined that such Indemnified Party is not entitled
to indemnification hereunder).
(d) Contribution. If a claim for indemnification under Section
5(a) or 5(b) is due but unavailable to an Indemnified Party because of a failure
or refusal of a governmental authority to enforce such indemnification in
accordance with its terms (by reason of public policy or otherwise), then each
Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such Losses, in such proportion as is appropriate to reflect the relative
fault of the Indemnifying Party and Indemnified Party in connection with the
actions, statements or omissions that resulted in such Losses as well as any
other relevant equitable considerations. The relative fault of such Indemnifying
Party and Indemnified Party shall be determined by reference to, among other
things, whether any action in question, including any untrue or alleged untrue
statement of a material fact or omission or alleged omission of a material fact,
has been taken or made by, or relates to information supplied by, such
Indemnifying, Party or Indemnified Party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action, statement or omission. The amount paid or payable by a party as a result
of any Losses shall be deemed to include, subject to the limitations set forth
in Section 5(c), any reasonable attorneys' or other reasonable fees or expenses
incurred by such party in connection with any Proceeding to the extent such
party would have been indemnified for such fees or expenses if the
indemnification provided for in this Section was available to such party in
accordance with its terms.
The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 5(d) were determined by pro
rata allocation or by any other method of allocation that does not take into
account the equitable considerations referred to in the immediately preceding
paragraph. No Person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any Person who was not guilty of such fraudulent misrepresentation.
The indemnity and contribution agreements contained in this
Section are in addition to any liability that the Indemnifying Parties may have
to the Indemnified Parties pursuant to the law.
6. Rule 144.
-10-
As long as any Holder owns Shares, Conversion Shares, Warrants
or Warrant Shares, the Company covenants to timely file (or obtain extensions in
respect thereof and file within the applicable grace period) all reports
required to be filed by the Company after the date hereof pursuant to Section
13(a) or 15(d) of the Exchange Act. As long as any Holder owns Shares,
Conversion Shares, Warrants or Warrant Shares, if the Company is not required to
file reports pursuant to Section 13(a) or 15(d) of the Exchange Act, it will
prepare and furnish to the Holders and make publicly available in accordance
with Rule 144(c) promulgated under the Securities Act annual and quarterly
financial statements, together with a discussion and analysis of such financial
statements in form and substance substantially similar to those that would
otherwise be required to be included in reports required by Section 13(a) or
15(d) of the Exchange Act, as well as any other information required thereby, in
the time period that such filings would have been required to have been made
under the Exchange Act. The Company further covenants that it will take such
further action as any Holder may reasonably request, all to the extent required
from time to time to enable such Person to sell Conversion Shares and Warrant
Shares without registration under the Securities Act within the limitation of
the exemptions provided by Rule 144 promulgated under the Securities Act,
including providing any legal opinions relating to such sale pursuant to Rule
144. Upon the request of any Holder, the Company shall deliver to such Holder a
written certification of a duly authorized officer as to whether it has complied
with such requirements.
7. Miscellaneous.
(a) Remedies. In the event of a breach by the Company or by a
Holder, of any of their obligations under this Agreement, such Holder or the
Company, as the case may be, in addition to being entitled to exercise all
rights granted by law and under this Agreement, including recovery of damages,
will be entitled to specific performance of its rights under this Agreement. The
Company and each Holder agree that monetary damages would not provide adequate
compensation for any losses incurred by reason of a breach by it of any of the
provisions of this Agreement and hereby further agrees that, in the event of any
action for specific performance in respect of such breach, it shall waive the
defense that a remedy at law would be adequate.
(b) No Inconsistent Agreements. Neither the Company nor any of
its subsidiaries has, as of the date hereof entered into and currently in
effect, nor shall the Company or any of its subsidiaries, on or after the date
of this Agreement, enter into any agreement with respect to its securities that
is inconsistent with the rights granted to the Holders in this Agreement or
otherwise conflicts with the provisions hereof. Except as disclosed in Schedule
2.1(c) of the Purchase Agreement, neither the Company nor any of its
subsidiaries has previously entered into any agreement currently in effect
granting any registration rights with respect to any of its securities to any
Person. Without limiting the generality of the foregoing, without the written
consent of the Holders of a majority of the then outstanding Registrable
Securities, the Company shall not grant to any Person the right to request the
Company to register any securities of the Company under the Securities Act
unless the rights so granted are subject in all respects to the prior rights in
full of the Holders set forth herein, and are not otherwise in conflict with the
provisions of this Agreement.
(c) No Piggyback on Registrations. Neither the Company nor any
of its security holders (other than the Holders in such capacity pursuant hereto
-11-
or as disclosed in Schedule 2.1(c) of the Purchase Agreement or Schedule II
attached hereto) may include securities of the Company in the Registration
Statement, and the Company shall not after the date hereof enter into any
agreement providing such right to any of its securityholders, unless the right
so granted is subject in all respects to the prior rights in full of the Holders
set forth herein, and is not otherwise in conflict with the provisions of this
Agreement.
(d) Piggy-Back Registrations. If at any time when there is not
an effective Registration Statement covering (i) Conversion Shares or (ii)
Warrant Shares, the Company shall determine to prepare and file with the
Commission a registration statement relating to an offering for its own account
or the account of others under the Securities Act of any of its equity
securities, other than on Form S-4 or Form S-8 (each as promulgated under the
Securities Act) or their then equivalents relating to equity securities to be
issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with stock option or other employee
benefit plans, the Company shall send to each holder of Registrable Securities
written notice of such determination and, if within thirty (30) days after
receipt of such notice, or within such shorter period of time as may be
specified by the Company in such written notice as may be necessary for the
Company to comply with its obligations with respect to the timing of the filing
of such registration statement, any such holder shall so request in writing,
(which request shall specify the Registrable Securities intended to be disposed
of by the Purchasers), the Company will cause the registration under the
Securities Act of all Registrable Securities which the Company has been so
requested to register by the holder, to the extent requisite to permit the
disposition of the Registrable Securities so to be registered, provided that if
at any time after giving written notice of its intention to register any
securities and prior to the effective date of the registration statement filed
in connection with such registration, the Company shall determine for any reason
not to register or to delay registration of such securities, the Company may, at
its election, give written notice of such determination to such holder and,
thereupon, (i) in the case of a determination not to register, shall be relieved
of its obligation to register any Registrable Securities in connection with such
registration (but not from its obligation to pay expenses in accordance with
Section 4 hereof), and (ii) in the case of a determination to delay registering,
shall be permitted to delay registering any Registrable Securities being
registered pursuant to this Section 7(d) for the same period as the delay in
registering such other securities. The Company shall include in such
registration statement all or any part of such Registrable Securities such
holder requests to be registered; provided, however, that the Company shall not
be required to register any Registrable Securities pursuant to this Section 7(d)
that are eligible for sale pursuant to Rule 144(k) of the Securities Act. In the
case of an underwritten public offering, if the managing underwriter(s) or
underwriter(s) should reasonably object to the inclusion of the Registrable
Securities in such registration statement, then if the Company after
consultation with the managing underwriter should reasonably determine that the
inclusion of such Registrable Securities would materially adversely affect the
offering contemplated in such registration statement, and based on such
determination recommends inclusion in such registration statement of fewer or
none of the Registrable Securities of the Holders, then (x) the number of
Registrable Securities of the Holders included in such registration statement
shall be reduced pro-rata among such Holders (based upon the number of
Registrable Securities requested to be included in the registration), if the
Company after consultation with the underwriter(s) recommends the inclusion of
fewer Registrable Securities, or (y) none of the Registrable Securities of the
Holders shall be included in such registration statement, if the Company after
consultation with the underwriter(s) recommends the inclusion of none of such
Registrable Securities; provided, however, that if Securities are being offered
for the account of other persons or entities as well as the Company, such
-12-
reduction shall not represent a greater fraction of the number of Registrable
securities intended to be offered by the Holders than the fraction of similar
reductions imposed on such other persons or entities (other than the Company).
(e) Failure to File Registration Statement and Other Events.
The Company and the Purchasers agree that the Holders will suffer damages if the
Registration Statement is not filed on or prior to the Filing Date and not
declared effective by the Commission on or prior to the Effectiveness Date and
maintained in the manner contemplated herein during the Effectiveness Time or if
certain other events occur. The Company and the Holders further agree that it
would not be feasible to ascertain the extent of such damages with precision.
Accordingly, if, except as set forth in Section 3(n), (A) the Registration
Statement is not filed on or prior to the Filing Date, or (B) the Registration
Statement is not declared effective by the Commission on or prior to October 15,
2004 (or in the event an additional Registration Statement is filed because the
actual number of shares of Common Stock into which the Preferred Stock is
convertible and the Warrants are exercisable exceeds the number of shares of
Common Stock initially registered is not filed and declared effective with the
time periods set forth in Section 2), or (C) the Company fails to file with the
Commission a request for acceleration in accordance with Rule 461 promulgated
under the Securities Act within five (5) Business Days of the date that the
Company is notified (orally or in writing, whichever is earlier) by the
Commission that a Registration Statement will not be "reviewed," or is not
subject to further review, or (D) the Registration Statement is filed with and
declared effective by the Commission but thereafter ceases to be effective as to
all Registrable Securities at any time prior to the expiration of the
Effectiveness Period, without being succeeded by a subsequent Registration
Statement filed with and declared effective by the Commission in accordance with
Section 2 hereof or (E) the Company has breached Section 3(n), or (F) trading in
the Common Stock shall be suspended or if the Common Stock is delisted from the
American Stock Exchange for any reason for more than three Business Days in the
aggregate (any such failure or breach being referred to as an "Event," and for
purposes of clauses (A) and (B) the date on which such Event occurs, or for
purposes of clause (C) the date on which such five Business Day period is
exceeded, or for purposes of clause (D) after more than twenty Business Days, or
for purposes of clause (F) the date on which such three Business Day period is
exceeded, being referred to as "Event Date"), the Company shall pay an amount as
liquidated damages to each Holder equal to 1.0% for the first calendar month or
portion thereof and 0.5% for each calendar month thereafter or portion thereof
of the Holder's initial investment in the Preferred Stock from the Event Date,
less any amount of Preferred Stock that has been converted by such Holder, until
the applicable Event is cured. Notwithstanding anything to the contrary in this
paragraph (e), if (I) any of the Events described in clauses (A), (B) or (C)
shall have occurred, (II) on or prior to the applicable Event Date, the Company
shall have exercised its rights under Section 3(n) hereof and (III) the
postponement or suspension permitted pursuant to such Section 3(n) shall remain
effective as of such applicable Event Date, then the applicable Event Date shall
be deemed instead to occur on the second Business Day following the termination
of such postponement or suspension. Notwithstanding anything contained herein to
the contrary, in no event shall the liquidated damages amount exceed eighteen
percent (18%) of the Holder's initial investment in the Preferred Stock.
(f) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
-13-
may not be given, unless the same shall be in writing and signed by the Company
and the Holders of three-fourths (3/4) of the Registrable Securities
outstanding.
(g) Notices. Any notice, demand, request, waiver or other
communication required or permitted to be given hereunder shall be in writing
and shall be effective (a) upon hand delivery by telex (with correct answer back
received), telecopy or facsimile at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be with respect to each Holder at its address set
forth under its name on Schedule I attached hereto, or with respect to the
Company, addressed to:
AXM Pharma, Inc.
3960 Howard Hughes Parkway
Suite 500
Las Vegas, Nevada 89109
Attention: Chet Howard, CFO
Tel. No.: (702) 990-3659
Fax No.: (702) 990-3501
With a copy, which shall
not constitute notice to: Law Offices of Louis E. Taubman, P.C.
225 Broadway, Suite 1200
New York, New York 10007
Attention: Louis E. Taubman, Esq.
Tel No.: (212) 732-7184
Fax No.: (212) 202-6380
or to such other address or addresses or facsimile number or numbers as any such
party may most recently have designated in writing to the other parties hereto
by such notice.
(h) Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties and their successors and permitted
assigns and shall inure to the benefit of each Holder and its successors and
assigns. The Company may not assign this Agreement or any of its rights or
obligations hereunder without the prior written consent of each Holder. Each
Purchaser may assign its rights hereunder in the manner and to the Persons as
permitted under the Purchase Agreement.
(i) Assignment of Registration Rights. The rights of each
Holder hereunder, including the right to have the Company register for resale
Registrable Securities in accordance with the terms of this Agreement, shall be
automatically assignable by each Holder to any Affiliate of such Holder or any
other Holder or Affiliate of any other Holder of all or a portion of the
Preferred Stock or the Registrable Securities if: (i) the Holder agrees in
writing with the transferee or assignee to assign such rights, and a copy of
such agreement is furnished to the Company within a reasonable time after such
assignment, (ii) the Company is, within a reasonable time after such transfer or
-14-
assignment, furnished with written notice of (a) the name and address of such
transferee or assignee, and (b) the securities with respect to which such
registration rights are being transferred or assigned, (iii) following such
transfer or assignment the further disposition of such securities by the
transferee or assignees is restricted under the Securities Act and applicable
state securities laws, (iv) at or before the time the Company receives the
written notice contemplated by clause (ii) of this Section, the transferee or
assignee agrees in writing with the Company to be bound by all of the provisions
of this Agreement, and (v) such transfer shall have been made in accordance with
the applicable requirements of the Purchase Agreement. In addition, each Holder
shall have the right to assign its rights hereunder to any other Person with the
prior written consent of the Company, which consent shall not be unreasonably
withheld provided that such assignment shall be in accordance with applicable
securities laws. The rights to assignment shall apply to the Holders (and to
subsequent) successors and assigns.
(j) Counterparts. This Agreement may be executed in any number
of counterparts, each of which when so executed shall be deemed to be an
original and, all of which taken together shall constitute one and the same
Agreement. In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid binding obligation of the
party executing (or on whose behalf such signature is executed) the same with
the same force and effect as if such facsimile signature were the original
thereof.
(k) Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York, without
giving effect to any of the conflicts of law principles which would result in
the application of the substantive law of another jurisdiction. This Agreement
shall not interpreted or construed with any presumption against the party
causing this Agreement to be drafted.
(l) Cumulative Remedies. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
(m) Severability. If any term, provision, covenant or
restriction of this Agreement is held to be invalid, illegal, void or
unenforceable in any respect, the remainder of the terms, provisions, covenants
and restrictions set forth herein shall remain in full force and effect and
shall in no way be affected, impaired or invalidated, and the parties hereto
shall use their reasonable efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such that
may be hereafter declared invalid, illegal, void or unenforceable.
(n) Headings. The headings herein are for convenience only, do
not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.
(o) Shares Held by the Company and its Affiliates. Whenever
the consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company or
its Affiliates (other than any Holder or transferees or successors or assigns
-15-
thereof if such Holder is deemed to be an Affiliate solely by reason of its
holdings of such Registrable Securities) shall not be counted in determining
whether such consent or approval was given by the Holders of such required
percentage.
(p) Independent Nature of Purchasers. The Company acknowledges
that the obligations of each Purchaser under the Transaction Documents are
several and not joint with the obligations of any other Purchaser, and no
Purchaser shall be responsible in any way for the performance of the obligations
of any other Purchaser under the Transaction Documents. The Company acknowledges
that the decision of each Purchaser to purchase securities pursuant to the
Purchase Agreement has been made by such Purchaser independently of any other
purchase and independently of any information, materials, statements or opinions
as to the business, affairs, operations, assets, properties, liabilities,
results of operations, condition (financial or otherwise) or prospects of the
Company or of its Subsidiaries which may have made or given by any other
Purchaser or by any agent or employee of any other Purchaser, and no Purchaser
or any of its agents or employees shall have any liability to any Purchaser (or
any other person) relating to or arising from any such information, materials,
statements or opinions. The Company acknowledges that nothing contained herein,
or in any Transaction Document, and no action taken by any Purchaser pursuant
hereto or thereto (including, but not limited to, the (i) inclusion of a
Purchaser in the Registration Statement and (ii) review by, and consent to, such
Registration Statement by a Purchaser) shall be deemed to constitute the
Purchasers as a partnership, an association, a joint venture or any other kind
of entity, or create a presumption that the Purchasers are in any way acting in
concert or as a group with respect to such obligations or the transactions
contemplated by the Transaction Documents. The Company acknowledges that each
Purchaser shall be entitled to independently protect and enforce its rights,
including without limitation, the rights arising out of this Agreement or out of
the other Transaction Documents, and it shall not be necessary for any other
Purchaser to be joined as an additional party in any proceeding for such
purpose. The Company acknowledges that for reasons of administrative convenience
only, the Transaction Documents have been prepared by counsel for one of the
Purchasers and such counsel does not represent all of the Purchasers but only
such Purchaser and the other Purchasers have retained their own individual
counsel with respect to the transactions contemplated hereby. The Company
acknowledges that it has elected to provide all Purchasers with the same terms
and Transaction Documents for the convenience of the Company and not because it
was required or requested to do so by the Purchasers. The Company acknowledges
that such procedure with respect to the Transaction Documents in no way creates
a presumption that the Purchasers are in any way acting in concert or as a group
with respect to the Transaction Documents or the transactions contemplated
hereby or thereby.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-16-
IN WITNESS WHEREOF, the parties hereto have caused this Registration
Rights Agreement to be duly executed by their respective authorized persons as
of the date first indicated above.
Excalibaur Limited Partnership
33 Prince Arthur Avenue
Toronto, ON M5R 1B2
SRG Capital, LLC
120 Broadway, 40th Floor
New York, New York 10271
Greenwich Growth Fund Limited
14 Par-La-Wille Road
PO Box HM
2257, Hamilton, Bermuda HM08
Whalehaven Fund Limited
14 Par-La-Wille Road
PO Box HM 2257
Hamilton, Bermuda HM08
Cranshire Capital LP
Iroquois Capital, LP
Omicron Master Trust
810 Seventh Avenue 39th Floor
New York, New York 10019
Stonestreet
Enable Growth Partners
One Sansome, Suite 2900
San Francisco, CA 94105
Crescent International LTD
c/o Greenlight (Switzerland) SA
84 Av. Louis-Casai, CH 1216 Cointrin
Geneva, Switzerland
Richard Mollinsky
-18-
Schedule II
Securities Permitted to be Included on the Registration Statement
1. Shares of Common Stock underlying warrants issued to the placement agent in
connection with the offering.
2. Shares of Common Stock underlying the Shares of Series B Preferred Stock
and Warrants held by Banyan Mac 24, Ltd., Banyan Asia Limited, Terra
Capital Partners, as placement agent of the Series B Preferred Stock and
Warrants and their heirs and assigns.
3. Aston Organization 300,000 shares of Common Stock
4. XCL Partners, Inc. 120,000 shares of Common Stock Common Stock underlying
200,000 warrants
5. Madden Consulting, Inc. 300,000 shares of Common Stock
6. Great Eastern Securities, Inc. 100,000 shares of Common Stock Common Stock
underlying 50,000 warrants
7. Gryphon Master Fund, L.P. Common Stock underlying 100,000 warrants
8. SF Capital Partners, Ltd. Common Stock underlying 100,000 warrants
9. Banyan Asia Ltd. and Mac 24 Limited Common Stock underlying 100,000
warrants (total between the two)
-19-
EXHIBIT 4.15
CERTIFICATE OF DESIGNATION OF THE RELATIVE RIGHTS AND
PREFERENCES
OF THE
SERIES C CONVERTIBLE PREFERRED STOCK
OF
AXM PHARMA, INC.
The undersigned, the Chief Executive Officer of AXM Pharma, Inc., a
Nevada corporation (the "Company"), in accordance with the provisions of the
Nevada Revised Statutes, does hereby certify that, pursuant to the authority
conferred upon the Board of Directors by the Articles of Incorporation of the
Company, the following resolution creating a series of Series C Convertible
Preferred Stock, was duly adopted on June 24, 2004:
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board of Directors of the Company by provisions of the Articles of
Incorporation of the Company (the "Articles of Incorporation"), there hereby is
created out of the shares of Preferred Stock, par value $.001 per share, of the
Company authorized in Article IV of the Articles of Incorporation (the
"Preferred Stock"), a series of Preferred Stock of the Company, to be named
"Series C Convertible Preferred Stock," consisting of One Hundred and Fifty
(150) shares, which series shall have the following designations, powers,
preferences and relative and other special rights and the following
qualifications, limitations and restrictions:
1. Designation and Rank. The designation of such series of the
Preferred Stock shall be the Series C Convertible Preferred Stock, par value
$.001 per share (the "Series C Preferred Stock"). The maximum number of shares
of Series C Preferred Stock shall be One Hundred and Fifty (150) shares. The
Series C Preferred Stock shall rank senior to the common stock, par value $.001
per share (the "Common Stock"), and to all other classes and series of equity
securities of the Company which by their terms do not rank senior to the Series
C Preferred Stock ("Junior Stock"). The Series C Preferred Stock shall be
subordinate to and rank junior to all indebtedness of the Company now or
hereafter outstanding.
2. Dividends.
(a) Payment of Dividends. Subject to Section 5(c)(ii) hereof, the
holders of record of shares of Series C Preferred Stock shall be entitled to
receive, out of any assets at the time legally available therefor and when and
as declared by the Board of Directors, dividends at the rate of six percent (6%)
of the stated Liquidation Preference Amount (as defined in Section 4 hereof) per
share per annum commencing on the date of issuance (the "Issuance Date") of the
Series C Preferred Stock (the "Dividend Payment"), and no more, payable
semi-annually at the option of the Company in cash or shares of Common Stock. If
the Company elects to pay any dividend in shares of Common Stock, the number of
shares of Common Stock to be issued to the holder shall be an amount equal to
the quotient of (i) the Dividend Payment divided by (ii) the average of the
volume weighted average prices of the Common Stock for the five (5) trading days
prior to the date such dividend payment is due. If the Company elects to pay any
dividend in Common Stock, the Company will give the holders of record of shares
of the Series C Preferred Stock ten (10) trading days notice prior to the date
of the applicable Dividend Payment. In the case of shares of Series C Preferred
Stock outstanding for less than a full year, dividends shall be pro rated based
on the portion of each year during which such shares are outstanding. Dividends
on the Series C Preferred Stock shall be cumulative, shall accrue and be payable
semi-annually. Dividends on the Series C Preferred Stock are prior and in
preference to any declaration or payment of any distribution (as defined below)
on any outstanding shares of Junior Stock. Such dividends shall accrue on each
share of Series C Preferred Stock from day to day whether or not earned or
declared so that if such dividends with respect to any previous dividend period
at the rate provided for herein have not been paid on, or declared and set apart
for, all shares of Series C Preferred Stock at the time outstanding, the
deficiency shall be fully paid on, or declared and set apart for, such shares on
a pro rata basis with all other equity securities of the Company ranking on a
parity with the Series C Preferred Stock as to the payment of dividends before
any distribution shall be paid on, or declared and set apart for Junior Stock.
(b) So long as any shares of Series C Preferred Stock are outstanding,
the Company shall not declare, pay or set apart for payment any dividend or make
any distribution on any Junior Stock (other than dividends or distributions
payable in additional shares of Junior Stock), unless at the time of such
dividend or distribution the Company shall have paid all accrued and unpaid
dividends on the outstanding shares of Series C Preferred Stock.
(c) In the event of a dissolution, liquidation or winding up of the
Company pursuant to Section 4, all accrued and unpaid dividends on the Series C
Preferred Stock shall be payable on the date of payment of the preferential
amount to the holders of Series C Preferred Stock. In the event of (i) a
mandatory redemption pursuant to Section 9 or (ii) a redemption upon the
occurrence of a Major Transaction (as defined in Section 8(b)), all accrued and
unpaid dividends on the Series C Preferred Stock shall be payable on the date of
such redemption. In the event of a voluntary conversion pursuant to Section
5(a), all accrued and unpaid dividends on the Series C Preferred Stock being
converted shall be payable on the day immediately preceding the Voluntary
Conversion Date (as defined in Section 5(b)(i)).
(d) For purposes hereof, unless the context otherwise requires,
"distribution" shall mean the transfer of cash or property without
consideration, whether by way of dividend or otherwise, payable other than in
shares of Common Stock or other equity securities of the Company, or the
purchase or redemption of shares of the Company (other than redemptions set
forth in Section 8 below or repurchases of Common Stock held by employees or
consultants of the Company upon termination of their employment or services
pursuant to agreements providing for such repurchase or upon the cashless
exercise of options held by employees or consultants) for cash or property.
3. Voting Rights.
(a) Class Voting Rights. The Series C Preferred Stock shall have the
following class voting rights (in addition to the voting rights set forth in
2
Section 3(b) hereof). So long as any shares of the Series C Preferred Stock
remain outstanding, the Company shall not, without the affirmative vote or
consent of the holders of at least three-fourths (3/4) of the shares of the
Series C Preferred Stock outstanding at the time, given in person or by proxy,
either in writing or at a meeting, in which the holders of the Series C
Preferred Stock vote separately as a class: (i) authorize, create, issue or
increase the authorized or issued amount of any class or series of stock,
including but not limited to the issuance of any more shares of previously
authorized Common Stock or Preferred Stock, ranking pari passu or senior to the
Series C Preferred Stock, with respect to the distribution of assets on
liquidation, dissolution or winding up; (ii) amend, alter or repeal the
provisions of the Series C Preferred Stock, whether by merger, consolidation or
otherwise, so as to adversely affect any right, preference, privilege or voting
power of the Series C Preferred Stock; provided, however, that any creation and
issuance of another series of Junior Stock shall not be deemed to adversely
affect such rights, preferences, privileges or voting powers; (iii) repurchase,
redeem or pay dividends on, shares of Common Stock or any other shares of the
Company's Junior Stock (other than de minimus repurchases from employees of the
Company in certain circumstances); (iv) amend the Articles of Incorporation or
By-Laws of the Company so as to affect materially and adversely any right,
preference, privilege or voting power of the Series C Preferred Stock; provided,
however, that any creation and issuance of another series of Junior Stock shall
not be deemed to adversely affect such rights, preferences, privileges or voting
powers; (v) effect any distribution with respect to Junior Stock; (vi)
reclassify the Company's outstanding securities; (vii) voluntarily file for
bankruptcy, liquidate the Company's assets or make an assignment for the benefit
of the Company's creditors; or (viii) change the nature of the Company's
business; provided, however, that the Company shall be permitted to take the
actions prohibited by subparagraphs (v) through (viii) if the Board has received
an opinion from reputable outside counsel that the failure to take such actions
could reasonably result in a claim against the Board for breach of its fiduciary
duties to the Company or its shareholders.
(b) General Voting Rights. The holder of each share of Series C
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 C Preferred Stock could
be converted for purposes of determining the shares entitled to vote at any
regular, annual or special meeting of shareholders of the Company, and shall
have voting rights and powers equal to the voting rights and powers of the
Common Stock (except as otherwise expressly provided herein or as required by
law, voting together with the Common Stock as a single class) and shall be
entitled to notice of any shareholders' meeting in accordance with the bylaws of
the Company. Fractional votes shall not, however, be permitted and any
fractional voting rights resulting from the above formula (after aggregating all
shares into which shares of Series C Preferred Stock held by each holder could
be converted) shall be rounded to the nearest whole number (with one-half being
rounded upward).
4. Liquidation Preference.
(a) In the event of the liquidation, dissolution or winding up of the
affairs of the Company, whether voluntary or involuntary, the holders of shares
of the Series C Preferred Stock then outstanding shall be entitled to receive,
out of the assets of the Company available for distribution to its stockholders,
an amount equal to $100,000 per share (the "Liquidation Preference Amount") of
3
the Series C Preferred Stock plus any accrued and unpaid dividends before any
payment shall be made or any assets distributed to the holders of the Common
Stock or any other Junior Stock; provided, however, that for purposes of this
Section 4 the now outstanding shares of Series A and B Preferred Stock shall be
deemed to be senior to the Series C Preferred Stock. If the assets of the
Company are not sufficient to pay in full the Liquidation Preference Amount plus
any accrued and unpaid dividends payable to the holders of outstanding shares of
the Series C Preferred Stock and any series of preferred stock or any other
class of stock on a parity, as to rights on liquidation, dissolution or winding
up, with the Series C Preferred Stock, then all of said assets will be
distributed among the holders of the Series C Preferred Stock and the other
classes of stock on a parity with the Series C Preferred Stock, if any, ratably
in accordance with the respective amounts that would be payable on such shares
if all amounts payable thereon were paid in full. The liquidation payment with
respect to each outstanding fractional share of Series C Preferred Stock shall
be equal to a ratably proportionate amount of the liquidation payment with
respect to each outstanding share of Series C Preferred Stock. All payments for
which this Section 4(a) provides shall be in cash, property (valued at its fair
market value as determined by an independent appraiser reasonably acceptable to
the holders of a majority of the Series C Preferred Stock) or a combination
thereof; provided, however, that no cash shall be paid to holders of Junior
Stock unless each holder of the outstanding shares of Series C Preferred Stock
has been paid in cash the full Liquidation Preference Amount plus any accrued
and unpaid dividends to which such holder is entitled as provided herein and
that no distribution shall be paid to the holders of Series C stock until such
time as the holders of Series A and B Preferred Stock have been paid any
liquidation preference with respect to the terms of such stock currently in
effect. After payment of the full Liquidation Preference Amount plus any accrued
and unpaid dividends to which each holder is entitled, such holders of shares of
Series C Preferred Stock will not be entitled to any further participation as
such in any distribution of the assets of the Company.
(b) A consolidation or merger of the Company with or into any other
corporation or corporations, or a sale of all or substantially all of the assets
of the Company, or the effectuation by the Company of a transaction or series of
related transactions in which more than 50% of the voting shares of the Company
is disposed of or conveyed, shall not be deemed to be a liquidation,
dissolution, or winding up within the meaning of this Section 4. In the event of
the merger or consolidation of the Company with or into another corporation, the
Series C Preferred Stock shall maintain its relative powers, designations and
preferences provided for herein and no merger inconsistent therewith shall
result.
(c) Written notice of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company, stating a payment date
and the place where the distributable amounts shall be payable, shall be given
by mail, postage prepaid, no less than forty-five (45) days prior to the payment
date stated therein, to the holders of record of the Series C Preferred Stock at
their respective addresses as the same shall appear on the books of the Company.
4
5. Conversion. The holder of Series C Preferred Stock shall have the
following conversion rights (the "Conversion Rights"):
(a) Right to Convert. At any time on or after the Issuance Date, the
holder of any such shares of Series C Preferred Stock may, at such holder's
option, subject to the limitations set forth in Section 7 herein, elect to
convert (a "Voluntary Conversion") all or any portion of the shares of Series C
Preferred Stock held by such person into a number of fully paid and
nonassessable shares of Common Stock equal to the quotient of (i) the
Liquidation Preference Amount of the shares of Series C Preferred Stock being
converted divided by (ii) the Conversion Price (as defined in Section 5(d)
below) then in effect as of the date of the delivery by such holder of its
notice of election to convert. In the event of a notice of redemption of any
shares of Series C Preferred Stock pursuant to Section 8 hereof, the Conversion
Rights of the shares designated for redemption shall terminate at the close of
business on the last full day preceding the date fixed for redemption, unless
the redemption price is not paid on such redemption date, in which case the
Conversion Rights for such shares shall continue until such price is paid in
full. In the event of a liquidation, dissolution or winding up of the Company,
the Conversion Rights shall terminate at the close of business on the last full
day preceding the date fixed for the payment of any such amounts distributable
on such event to the holders of Series C Preferred Stock. In the event of such a
redemption or liquidation, dissolution or winding up, the Company shall provide
to each holder of shares of Series C Preferred Stock notice of such redemption
or liquidation, dissolution or winding up, which notice shall (i) be sent at
least fifteen (15) days prior to the termination of the Conversion Rights and
(ii) state the amount per share of Series C Preferred Stock that will be paid or
distributed on such redemption or liquidation, dissolution or winding up, as the
case may be.
(b) Mechanics of Voluntary Conversion. The Voluntary Conversion of
Series C Preferred Stock shall be conducted in the following manner:
(i) Holder's Delivery Requirements. To convert Series C
Preferred Stock into full shares of Common Stock on any date (the
"Voluntary Conversion Date"), the holder thereof shall (A) transmit by
facsimile (or otherwise deliver), for receipt on or prior to 5:00 p.m.,
New York time on such date, a copy of a fully executed notice of
conversion in the form attached hereto as Exhibit I (the "Conversion
Notice"), to the Company, and (B) surrender to a common carrier for
delivery to the Company as soon as practicable following such Voluntary
Conversion Date but in no event later than three (3) business days
after such date the original certificates representing the shares of
Series C Preferred Stock being converted (or an indemnification
undertaking with respect to such shares in the case of their loss,
theft or destruction) (the "Preferred Stock Certificates") and the
originally executed Conversion Notice.
(ii)Company's Response. Upon receipt by the Company of a
facsimile copy of a Conversion Notice, the Company shall immediately
send, via facsimile, a confirmation of receipt of such Conversion
Notice to such holder. Upon receipt by the Company of a copy of the
fully executed Conversion Notice, the Company or its designated
5
transfer agent (the "Transfer Agent"), as applicable, shall, within
three (3) business days following the date of receipt by the Company of
the fully executed Conversion Notice (so long as the applicable
Preferred Stock Certificates and original Conversion Notice are
received by the Company on or before such third business day), issue
and deliver to the Depository Trust Company ("DTC") account on the
Holder's behalf via the Deposit Withdrawal Agent Commission System
("DWAC") as specified in the Conversion Notice, registered in the name
of the holder or its designee, for the number of shares of Common Stock
to which the holder shall be entitled. If the number of shares of
Preferred Stock represented by the Preferred Stock Certificate(s)
submitted for conversion is greater than the number of shares of Series
C Preferred Stock being converted, then the Company shall, as soon as
practicable and in no event later than three (3) business days after
receipt of the Preferred Stock Certificate(s) and at the Company's
expense, issue and deliver to the holder a new Preferred Stock
Certificate representing the number of shares of Series C Preferred
Stock not converted.
(iii) Dispute Resolution. In the case of a dispute as to the
arithmetic calculation of the number of shares of Common Stock to be
issued upon conversion, the Company shall cause its Transfer Agent to
promptly issue to the holder the number of shares of Common Stock that
is not disputed and shall submit the arithmetic calculations to the
holder via facsimile as soon as possible, but in no event later than
two (2) business days after receipt of such holder's Conversion Notice.
If such holder and the Company are unable to agree upon the arithmetic
calculation of the number of shares of Common Stock to be issued upon
such conversion within one (1) business day of such disputed arithmetic
calculation being submitted to the holder, then the Company shall
within one (1) business day submit via facsimile the disputed
arithmetic calculation of the number of shares of Common Stock to be
issued upon such conversion to the Company's independent, outside
accountant. The Company shall cause the accountant to perform the
calculations and notify the Company and the holder of the results no
later than three (3) business days from the time it receives the
disputed calculations. Such accountant's calculation shall be binding
upon all parties absent manifest error. The reasonable expenses of such
accountant in making such determination shall be paid by the Company in
the event the holder's calculation was correct, or by the holder in the
event the Company's calculation was correct, or equally by the Company
and the holder in the event that neither the Company's or the holder's
calculation was correct. The period of time in which the Company is
required to effect conversions or redemptions under this Certificate of
Designation shall be tolled with respect to the subject conversion or
redemption pending resolution of any dispute by the Company made in
good faith and in accordance with this Section 5(b)(iii).
(iv)Record Holder. The person or persons entitled to receive
the shares of Common Stock issuable upon a conversion of the Series C
Preferred Stock shall be treated for all purposes as the record holder
or holders of such shares of Common Stock on the Conversion Date.
6
(v) Company's Failure to Timely Convert. If within three (3)
business days of the Company's receipt of an executed copy of the
Conversion Notice (so long as the applicable Preferred Stock
Certificates and original Conversion Notice are received by the Company
on or before such third business day) (the "Share Delivery Period") the
Transfer Agent shall fail to issue and deliver to a holder the number
of shares of Common Stock to which such holder is entitled upon such
holder's conversion of the Series C Preferred Stock or to issue a new
Preferred Stock Certificate representing the number of shares of Series
C Preferred Stock to which such holder is entitled pursuant to Section
5(b)(ii) (a "Conversion Failure"), in addition to all other available
remedies which such holder may pursue hereunder and under the
Securities Purchase Agreement (the "Purchase Agreement") among the
Company and the initial holders of the Series C Preferred Stock
(including indemnification pursuant to Section 6 thereof), the Company
shall pay additional damages to such holder on each business day after
such third (3rd) business day that such conversion is not timely
effected in an amount equal 0.5% of the product of (A) the sum of the
number of shares of Common Stock not issued to the holder on a timely
basis pursuant to Section 5(b)(ii) and to which such holder is entitled
and, in the event the Company has failed to deliver a Preferred Stock
Certificate to the holder on a timely basis pursuant to Section
5(b)(ii), the number of shares of Common Stock issuable upon conversion
of the shares of Series C Preferred Stock represented by such Preferred
Stock Certificate, as of the last possible date which the Company could
have issued such Preferred Stock Certificate to such holder without
violating Section 5(b)(ii) and (B) the Closing Bid Price (as defined in
Section 5(c)(iii) below) of the Common Stock on the last possible date
which the Company could have issued such Common Stock and such
Preferred Stock Certificate, as the case may be, to such holder without
violating Section 5(b)(ii). If the Company fails to pay the additional
damages set forth in this Section 5(b)(v) within five (5) business days
of the date incurred, then such payment shall bear interest at the rate
of 2.0% per month (pro rated for partial months) until such payments
are made.
(c) Mandatory Conversion.
(i) Each share of Series C Preferred Stock outstanding on the
Mandatory Conversion Date shall, automatically and without any action
on the part of the holder thereof, convert into a number of fully paid
and nonassessable shares of Common Stock equal to the quotient of (i)
the Liquidation Preference Amount of the shares of Series C Preferred
Stock outstanding on the Mandatory Conversion Date divided by (ii) the
Conversion Price in effect on the Mandatory Conversion Date.
(ii) As used herein, "Mandatory Conversion Date" shall be the
date that is three (3) years following the Issuance Date; provided,
that, that on the Mandatory Conversion Date, the Registration Statement
is effective and has been effective, without lapse or suspension of any
kind, for a period sixty (60) consecutive calendar days, or the shares
of Common Stock into which the Series C Preferred Stock can be
converted may be offered for sale to the public pursuant to Rule 144(k)
("Rule 144(k)") under the Securities Act of 1933, as amended. The
7
Mandatory Conversion Date and the Voluntary Conversion Date
collectively are referred to in this Certificate of Designation as the
"Conversion Date."
(iii) The term "Closing Bid Price" shall mean, for any
security as of any date, the last closing bid price of such security on
the American Stock Exchange for such security as reported by Bloomberg,
or, if no closing bid price is reported for such security by Bloomberg,
the last closing trade price of such security as reported by Bloomberg,
or, if no last closing trade price is reported for such security by
Bloomberg, the average of the bid prices of any market makers for such
security as reported in the "pink sheets" by the National Quotation
Bureau, Inc. If the Closing Bid Price cannot be calculated for such
security on such date on any of the foregoing bases, the Closing Bid
Price of such security on such date shall be the fair market value as
mutually determined by the Company and the holders of a majority of the
outstanding shares of Series C Preferred Stock.
(iv)On the Mandatory Conversion Date, the outstanding shares
of Series C Preferred Stock shall be converted automatically without
any further action by the holders of such shares and whether or not the
certificates representing such shares are surrendered to the Company or
its Transfer Agent; provided, however, that the Company shall not be
obligated to issue the shares of Common Stock issuable upon conversion
of any shares of Series C Preferred Stock unless certificates
evidencing such shares of Series C Preferred Stock are either delivered
to the Company or the holder notifies the Company that such
certificates have been lost, stolen, or destroyed, and executes an
agreement satisfactory to the Company to indemnify the Company from any
loss incurred by it in connection therewith. Upon the occurrence of the
automatic conversion of the Series C Preferred Stock pursuant to this
Section 5, the holders of the Series C Preferred Stock shall surrender
the certificates representing the Series C Preferred Stock for which
the Mandatory Conversion Date has occurred to the Company and the
Company shall cause its Transfer Agent to deliver the shares of Common
Stock issuable upon such conversion (in the same manner set forth in
Section 5(b)(ii)) to the holder within three (3) business days of the
holder's delivery of the applicable Preferred Stock Certificates.
(d) Conversion Price.
(i) The term "Conversion Price" shall mean $4.25 per share,
subject to adjustment under Section 5(e) hereof; provided, however that
the Conversion Price may only be adjusted to an amount greater than
$4.25 per share to the extent that it is adjusted pursuant to Section
5(e)(i).
(ii) Notwithstanding the foregoing to the contrary, if during
any period (a "Black-out Period"), a holder of Series C Preferred Stock
is unable to trade any Common Stock issued or issuable upon conversion
of the Series C Preferred Stock immediately due to the postponement of
filing or delay or suspension of effectiveness of a registration
statement or because the Company has otherwise informed such holder of
Series C Preferred Stock that an existing prospectus cannot be used at
8
that time in the sale or transfer of such Common Stock (provided that
such postponement, delay, suspension or fact that the prospectus cannot
be used is not due to factors solely within the control of the holder
of Series C Preferred Stock or due to the Company exercising its rights
under Section 3(n) of the Registration Rights Agreement (as defined in
the Purchase Agreement)), such holder of Series C Preferred Stock shall
have the option but not the obligation on any Conversion Date occurring
within ten (10) trading days following the expiration of the Black-out
Period of using the Conversion Price applicable on such Conversion Date
or any Conversion Price selected by such holder of Series C Preferred
Stock that would have been applicable had such Conversion Date been at
any earlier time during the Black-out Period or within the ten (10)
trading days thereafter.
(e) Adjustments of Conversion Price.
(i) Adjustments for Stock Splits and Combinations. If the
Company shall at any time or from time to time after the Issuance Date,
effect a stock split of the outstanding Common Stock, the Conversion
Price shall be proportionately decreased. If the Company shall at any
time or from time to time after the Issuance Date, combine the
outstanding shares of Common Stock, the Conversion Price shall be
proportionately increased. Any adjustments under this Section 5(e)(i)
shall be effective at the close of business on the date the stock split
or combination becomes effective.
(ii)Adjustments for Certain Dividends and Distributions. If
the Company shall at any time or from time to time after the Issuance
Date, make or issue or set a record date for the determination of
holders of Common Stock entitled to receive a dividend or other
distribution payable in shares of Common Stock, then, and in each
event, the Conversion Price shall be decreased as of the time of such
issuance or, in the event such record date shall have been fixed, as of
the close of business on such record date, by multiplying the
Conversion Price then in effect by a fraction:
(1) the numerator of which shall be the total number
of shares of Common Stock issued and outstanding immediately prior to the time
of such issuance or the close of business on such record date; and
(2) the denominator of which shall be the total
number of shares of Common Stock issued and outstanding immediately prior to the
time of such issuance or the close of business on such record date plus the
number of shares of Common Stock issuable in payment of such dividend or
distribution.
(iii) Adjustment for Other Dividends and Distributions. If the
Company shall at any time or from time to time after the Issuance Date,
make or issue or set a record date for the determination of holders of
Common Stock entitled to receive a dividend or other distribution
payable in securities of the Company other than shares of Common Stock,
then, and in each event, an appropriate revision to the applicable
Conversion Price shall be made and provision shall be made (by
adjustments of the Conversion Price or otherwise) so that the holders
of Series C Preferred Stock shall receive upon conversions thereof, in
9
addition to the number of shares of Common Stock receivable thereon,
the number of securities of the Company which they would have received
had their Series C Preferred Stock been converted into Common Stock on
the date of such event and had thereafter, during the period from the
date of such event to and including the Conversion Date, retained such
securities (together with any distributions payable thereon during such
period), giving application to all adjustments called for during such
period under this Section 5(e)(iii) with respect to the rights of the
holders of the Series C Preferred Stock; provided, however, that if
such record date shall have been fixed and such dividend is not fully
paid or if such distribution is not fully made on the date fixed
therefor, the Conversion Price shall be adjusted pursuant to this
paragraph as of the time of actual payment of such dividends or
distributions; and provided further, however, that no such adjustment
shall be made if the holders of Series C Preferred Stock simultaneously
receive (i) a dividend or other distribution of shares of Common Stock
in a number equal to the number of shares of Common Stock as they would
have received if all outstanding shares of Series C Preferred Stock had
been converted into Common Stock on the date of such event or (ii) a
dividend or other distribution of shares of Series C Preferred Stock
which are convertible, as of the date of such event, into such number
of shares of Common Stock as is equal to the number of additional
shares of Common Stock being issued with respect to each share of
Common Stock in such dividend or distribution.
(iv) Adjustments for Reclassification, Exchange or
Substitution. If the Common Stock issuable upon conversion of the
Series C Preferred Stock at any time or from time to time after the
Issuance Date shall be changed to the same or different number of
shares of any class or classes of stock, whether by reclassification,
exchange, substitution or otherwise (other than by way of a stock split
or combination of shares or stock dividends provided for in Sections
5(e)(i), (ii) and (iii), or a reorganization, merger, consolidation, or
sale of assets provided for in Section 5(e)(v)), then, and in each
event, an appropriate revision to the Conversion Price shall be made
and provisions shall be made (by adjustments of the Conversion Price or
otherwise) so that the holder of each share of Series C Preferred Stock
shall have the right thereafter to convert such share of Series C
Preferred Stock into the kind and amount of shares of stock and other
securities receivable upon reclassification, exchange, substitution or
other change, by holders of the number of shares of Common Stock into
which such share of Series C Preferred Stock might have been converted
immediately prior to such reclassification, exchange, substitution or
other change, all subject to further adjustment as provided herein.
(v) Adjustments for Reorganization, Merger, Consolidation or
Sales of Assets. If at any time or from time to time after the Issuance
Date there shall be a capital reorganization of the Company (other than
by way of a stock split or combination of shares or stock dividends or
distributions provided for in Section 5(e)(i), (ii) and (iii), or a
reclassification, exchange or substitution of shares provided for in
Section 5(e)(iv)), or a merger or consolidation of the Company with or
into another corporation where the holders of outstanding voting
securities prior to such merger or consolidation do not own over 50% of
the outstanding voting securities of the merged or consolidated entity,
immediately after such merger or consolidation, or the sale of all or
substantially all of the Company's properties or assets to any other
10
person (an "Organic Change"), then as a part of such Organic Change an
appropriate revision to the Conversion Price shall be made if necessary
so that the holder of each share of Series C Preferred Stock shall have
the right thereafter to convert such share of Series C Preferred Stock
into the kind and amount of shares of stock and other securities or
property of the Company or any successor corporation resulting from
Organic Change. In any such case, appropriate adjustment shall be made
in the application of the provisions of this Section 5(e)(v) with
respect to the rights of the holders of the Series C Preferred Stock
after the Organic Change to the end that the provisions of this Section
5(e)(v) (including any adjustment in the Conversion Price then in
effect and the number of shares of stock or other securities
deliverable upon conversion of the Series C Preferred Stock) shall be
applied after that event in as nearly an equivalent manner as may be
practicable.
(vi) Adjustments for Issuance of Additional Shares of Common
Stock.
(A) In the event the Company, shall, at any time, from time to
time, issue or sell any additional shares of Common Stock (otherwise than as
provided in the foregoing subsections (i) through (v) of this Section 5(e) or
pursuant to Common Stock Equivalents (hereafter defined) granted or issued prior
to the Issuance Date) (the "Additional Shares of Common Stock"), at a price per
share less than the Conversion Price, or without consideration, the Conversion
Price then in effect upon each such issuance shall be adjusted to that price
(rounded to the nearest cent) determined by multiplying the Conversion Price by
a fraction:
(1) the numerator of which shall be equal to the sum of (A)
the number of shares of Common Stock outstanding immediately prior to the
issuance of such Additional Shares of Common Stock plus (B) the number of shares
of Common Stock (rounded to the nearest whole share) which the aggregate
consideration for the total number of such Additional Shares of Common Stock so
issued would purchase at a price per share equal to the then Conversion Price,
and
(2) the denominator of which shall be equal to the number of
shares of Common Stock outstanding immediately after the issuance of such
Additional Shares of Common Stock.
No adjustment of the number of shares of Common Stock shall be made under
paragraph (A) of Section 5(e)(vi) upon the issuance of any Additional Shares of
Common Stock which are issued pursuant to the exercise of any warrants or other
subscription or purchase rights or pursuant to the exercise of any conversion or
exchange rights in any Common Stock Equivalents (as defined below), if any such
adjustment shall previously have been made upon the issuance of such warrants or
other rights or upon the issuance of such Common Stock Equivalents (or upon the
issuance of any warrant or other rights therefore) pursuant to Section
5(e)(vii).
(vii) Issuance of Common Stock Equivalents. If the Company, at
any time after the Issuance Date, shall issue any securities
convertible into or exchangeable for, directly or indirectly, Common
Stock ("Convertible Securities"), other than the Series C Preferred
11
Stock, or any rights or warrants or options to purchase any such Common
Stock or Convertible Securities, shall be issued or sold (collectively,
the "Common Stock Equivalents") and the aggregate of the price per
share for which Additional Shares of Common Stock may be issuable
thereafter pursuant to such Common Stock Equivalent, plus the
consideration received by the Company for issuance of such Common Stock
Equivalent divided by the number of shares of Common Stock issuable
pursuant to such Common Stock Equivalent (the "Aggregate Per Common
Share Price") shall be less than the Conversion Price, or if, after any
such issuance of Common Stock Equivalents, the price per share for
which Additional Shares of Common Stock may be issuable thereafter is
amended or adjusted, and such price as so amended or adjusted shall
make the Aggregate Per Common Share Price be less than Conversion Price
in effect at the time of such amendment or adjustment, then the
Conversion Price then in effect shall be adjusted pursuant to Section
(5)(e)(vi) above assuming that all Additional Shares of Common Stock
have been issued pursuant to the Convertible Securities or Common Stock
Equivalents for a purchase price equal to the Aggregate Per Common
Share Price. No adjustment of the Conversion Price shall be made under
this subsection (vii) upon the issuance of any Convertible Security
which is issued pursuant to the exercise of any warrants or other
subscription or purchase rights therefore, if any adjustment shall
previously have been made to the exercise price of such warrants then
in effect upon the issuance of such warrants or other rights pursuant
to this subsection (vii). No adjustment shall be made to the Conversion
Price upon the issuance of Common Stock pursuant to the exercise,
conversion or exchange of any Convertible Security or Common Stock
Equivalent where an adjustment to the Conversion Price was made as a
result of the issuance or purchase of any Convertible Security or
Common Stock Equivalent.
(viii) Consideration for Stock. In case any shares of Common
Stock or Convertible Securities other than the Series C Preferred
Stock, or any rights or warrants or options to purchase any such Common
Stock or Convertible Securities, shall be issued or sold:
(1) in connection with any merger or consolidation in
which the Company is the surviving corporation (other than any consolidation or
merger in which the previously outstanding shares of Common Stock of the Company
shall be changed to or exchanged for the stock or other securities of another
corporation), the amount of consideration therefore shall be, deemed to be the
fair value, as determined reasonably and in good faith by the Board of Directors
of the Company, of such portion of the assets and business of the nonsurviving
corporation as such Board may determine to be attributable to such shares of
Common Stock, Convertible Securities, rights or warrants or options, as the case
may be; or
(2) in the event of any consolidation or merger of
the Company in which the Company is not the surviving corporation or in which
the previously outstanding shares of Common Stock of the Company shall be
changed into or exchanged for the stock or other securities of another
12
corporation, or in the event of any sale of all or substantially all of the
assets of the Company for stock or other securities of any corporation, the
Company shall be deemed to have issued a number of shares of its Common Stock
for stock or securities or other property of the other corporation computed on
the basis of the actual exchange ratio on which the transaction was predicated,
and for a consideration equal to the fair market value on the date of such
transaction of all such stock or securities or other property of the other
corporation. If any such calculation results in adjustment of the applicable
Conversion Price, or the number of shares of Common Stock issuable upon
conversion of the Series C Preferred Stock, the determination of the applicable
Conversion Price or the number of shares of Common Stock issuable upon
conversion of the Series C Preferred Stock immediately prior to such merger,
consolidation or sale, shall be made after giving effect to such adjustment of
the number of shares of Common Stock issuable upon conversion of the Series C
Preferred Stock. In the event any consideration received by the Company for any
securities consists of property other than cash, the fair market value thereof
at the time of issuance or as otherwise applicable shall be as determined in
good faith by the Board of Directors of the Company. In the event Common Stock
is issued with other shares or securities or other assets of the Company for
consideration which covers both, the consideration computed as provided in this
Section (5)(e)(viii) shall be allocated among such securities and assets as
determined in good faith by the Board of Directors of the Company.
(ix)Record Date. In case the Company shall take record of the
holders of its Common Stock or any other Preferred Stock for the
purpose of entitling them to subscribe for or purchase Common Stock or
Convertible Securities, then the date of the issue or sale of the
shares of Common Stock shall be deemed to be such record date.
(x) Certain Issues Excepted. Anything herein to the contrary
notwithstanding, the Company shall not be required to make any
adjustment to the Conversion Price upon (i) the Company's issuance of
any Additional Shares of Common Stock (other than for cash) and
warrants therefore in connection with a merger, acquisition or
consolidation, (ii) the Company's issuance of Additional Shares of
Common Stock pursuant to a bona fide firm underwritten public offering
of the Company's securities, (iii) the Company's issuance of Additional
Shares of Common Stock or warrants therefore in connection with
strategic alliances or other partnering arrangements so long as such
issuances are not for the purpose of raising capital, (iv) the
Company's issuance of Common Stock or the issuance or grants of options
to purchase Common Stock pursuant to the Company's stock option plans
and employee stock purchase plans as they now exist, (v) any issuances
of warrants issued pursuant to the Purchase Agreement, (vi) securities
issued pursuant to the conversion or exercise of convertible or
exercisable securities issued or outstanding on or prior to the date
hereof or issued pursuant to the Purchase Agreement, (vii) any warrants
issued to the placement agent for the transactions contemplated by the
Purchase Agreement, and (viii) the payment of any dividends on the
Series C Preferred Stock.
(f) No Impairment. The Company shall not, by amendment of its
Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company, but will at all
times in good faith, assist in the carrying out of all the provisions of this
13
Section 5 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Series C Preferred Stock against impairment. In the event a holder shall elect
to convert any shares of Series C Preferred Stock as provided herein, the
Company cannot refuse conversion based on any claim that such holder or any one
associated or affiliated with such holder has been engaged in any violation of
law, unless, an injunction from a court, on notice, restraining and/or adjoining
conversion of all or of said shares of Series C Preferred Stock shall have been
issued and the Company posts a surety bond for the benefit of such holder in an
amount equal to 130% of the Liquidation Preference Amount of the Series C
Preferred Stock such holder has elected to convert, which bond shall remain in
effect until the completion of arbitration/litigation of the dispute and the
proceeds of which shall be payable to such holder in the event it obtains
judgment.
(g) Certificates as to Adjustments. Upon occurrence of each
adjustment or readjustment of the Conversion Price or number of shares of Common
Stock issuable upon conversion of the Series C Preferred Stock pursuant to this
Section 5, the Company at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
such Series C Preferred Stock a certificate setting forth such adjustment and
readjustment, showing in detail the facts upon which such adjustment or
readjustment is based. The Company shall, upon written request of the holder of
such affected Series C Preferred Stock, at any time, furnish or cause to be
furnished to such holder a like certificate setting forth such adjustments and
readjustments, the Conversion Price in effect at the time, and the number of
shares of Common Stock and the amount, if any, of other securities or property
which at the time would be received upon the conversion of a share of such
Series C Preferred Stock. Notwithstanding the foregoing, the Company shall not
be obligated to deliver a certificate unless such certificate would reflect an
increase or decrease of at least one percent of such adjusted amount.
(h) Issue Taxes. The Company shall pay any and all issue and
other taxes, excluding federal, state or local income taxes, that may be payable
in respect of any issue or delivery of shares of Common Stock on conversion of
shares of Series C Preferred Stock pursuant thereto; provided, however, that the
Company shall not be obligated to pay any transfer taxes resulting from any
transfer requested by any holder in connection with any such conversion.
(i) Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally or by
facsimile or three (3) business days following being mailed by certified or
registered mail, postage prepaid, return-receipt requested, addressed to the
holder of record at its address appearing on the books of the Company. The
Company will give written notice to each holder of Series C Preferred Stock at
least twenty (20) days prior to the date on which the Company closes its books
or sets a record date (I) with respect to any dividend or distribution upon the
Common Stock, (II) with respect to any pro rata subscription offer to holders of
Common Stock or (III) for determining rights to vote with respect to any Organic
Change, dissolution, liquidation or winding-up and in no event shall such notice
be provided to such holder prior to such information being made known to the
14
public. The Company will also give written notice to each holder of Series C
Preferred Stock at least twenty (20) days prior to the date on which any Organic
Change, dissolution, liquidation or winding-up will take place; provided,
however, no such notice shall be required to be provided to such holder prior to
such information being made known to the public.
(j) Fractional Shares. No fractional shares of Common Stock
shall be issued upon conversion of the Series C Preferred Stock. In lieu of any
fractional shares to which the holder would otherwise be entitled, the Company
shall pay cash equal to the product of such fraction multiplied by the average
of the Closing Bid Prices of the Common Stock for the five (5) consecutive
trading immediately preceding the Voluntary Conversion Date or any Mandatory
Conversion Date, as applicable.
(k) Reservation of Common Stock. The Company shall, so long as
any shares of Series C Preferred Stock are outstanding, reserve and keep
available out of its authorized and unissued Common Stock, solely for the
purpose of effecting the conversion of the Series C Preferred Stock, such number
of shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all of the Series C Preferred Stock then outstanding; provided
that the number of shares of Common Stock so reserved shall at no time be less
than the number of shares of Common Stock for which the shares of Series C
Preferred Stock are at any time convertible. The initial number of shares of
Common Stock reserved for conversions of the Series C Preferred Stock and each
increase in the number of shares so reserved shall be allocated pro rata among
the holders of the Series C Preferred Stock based on the number of shares of
Series C Preferred Stock held by each holder of record at the time of issuance
of the Series C Preferred Stock or increase in the number of reserved shares, as
the case may be. In the event a holder shall sell or otherwise transfer any of
such holder's shares of Series C Preferred Stock, each transferee shall be
allocated a pro rata portion of the number of reserved shares of Common Stock
reserved for such transferor. Any shares of Common Stock reserved and which
remain allocated to any person or entity which does not hold any shares of
Series C Preferred Stock shall be allocated to the remaining holders of Series C
Preferred Stock, pro rata based on the number of shares of Series C Preferred
Stock then held by such holder.
(l) Regulatory Compliance. If any shares of Common Stock to be
reserved for the purpose of conversion of Series C Preferred Stock require
registration or listing with or approval of any governmental authority, stock
exchange or other regulatory body under any federal or state law or regulation
or otherwise before such shares may be validly issued or delivered upon
conversion, the Company shall, at its sole cost and expense, in good faith and
as expeditiously as possible, endeavor to secure such registration, listing or
approval, as the case may be.
6. No Preemptive Rights. Except as provided in Section 5 hereof and in
the Purchase Agreement, no holder of the Series C Preferred Stock shall be
entitled to rights to subscribe for, purchase or receive any part of any new or
additional shares of any class, whether now or hereinafter authorized, or of
bonds or debentures, or other evidences of indebtedness convertible into or
exchangeable for shares of any class, but all such new or additional shares of
15
any class, or any bond, debentures or other evidences of indebtedness
convertible into or exchangeable for shares, may be issued and disposed of by
the Board of Directors on such terms and for such consideration (to the extent
permitted by law), and to such person or persons as the Board of Directors in
their absolute discretion may deem advisable.
7. Conversion Restrictions.
(a) Notwithstanding anything to the contrary set forth in Section 5 of
this Certificate of Designation, at no time may a holder of shares of Series C
Preferred Stock convert shares of the Series C Preferred Stock if the number of
shares of Common Stock to be issued pursuant to such conversion would exceed,
when aggregated with all other shares of Common Stock owned by such holder at
such time, the number of shares of Common Stock which would result in such
holder beneficially owning (as determined in accordance with Section 13(d) of
the Securities Exchange Act of 1934, as amended, and the rules thereunder) in
excess of 4.9% of the then issued and outstanding shares of Common Stock
outstanding at such time; provided, however, that upon a holder of Series C
Preferred Stock providing the Company with sixty-one (61) days notice (pursuant
to Section 5(i) hereof) (the "Waiver Notice") that such holder would like to
waive Section 7(a) of this Certificate of Designation with regard to any or all
shares of Common Stock issuable upon conversion of Series C Preferred Stock,
this Section 7(a) shall be of no force or effect with regard to those shares of
Series C Preferred Stock referenced in the Waiver Notice; provided, further,
that this provision shall be of no further force or effect during the sixty-one
(61) days immediately preceding any Mandatory Conversion Date.
(b) Notwithstanding anything to the contrary set forth in Section 5 of
this Certificate of Designation, at no time may a holder of shares of Series C
Preferred Stock convert shares of the Series C Preferred Stock if the number of
shares of Common Stock to be issued pursuant to such conversion would exceed,
when aggregated with all other shares of Common Stock owned by such holder at
such time, would result in such holder beneficially owning (as determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and the rules thereunder) in excess of 9.9% of the then issued and
outstanding shares of Common Stock outstanding at such time; provided, however,
that upon a holder of Series C Preferred Stock providing the Company with a
Waiver Notice that such holder would like to waive Section 7(b) of this
Certificate of Designation with regard to any or all shares of Common Stock
issuable upon conversion of Series C Preferred Stock, this Section 7(b) shall be
of no force or effect with regard to those shares of Series C Preferred Stock
referenced in the Waiver Notice.
8. Redemption.
(a) Redemption Option Upon Major Transaction. In addition to all other
rights of the holders of Series C Preferred Stock contained herein, simultaneous
with the occurrence of a Major Transaction (as defined below), each holder of
Series C Preferred Stock shall have the right, at such holder's option, to
require the Company to redeem all or a portion of such holder's shares of Series
C Preferred Stock at a price per share of Series C Preferred Stock equal to 100%
of the Liquidation Preference Amount, plus any accrued but unpaid dividends and
16
liquidated damages (the "Major Transaction Redemption Price"); provided that the
Company shall have the sole option to pay the Major Transaction Redemption Price
in cash or shares of Common Stock.
(b) "Major Transaction". A "Major Transaction" shall be deemed
to have occurred at such time as any of the following events:
(i) the consolidation, merger or other business
combination of the Company with or into another Person (other than (A) pursuant
to a migratory merger effected solely for the purpose of changing the
jurisdiction of incorporation of the Company or (B) a consolidation, merger or
other business combination in which holders of the Company's voting power
immediately prior to the transaction continue after the transaction to hold,
directly or indirectly, the voting power of the surviving entity or entities
necessary to elect a majority of the members of the board of directors (or their
equivalent if other than a corporation) of such entity or entities).
(ii)the sale or transfer of more than 50% of the
Company's assets other than inventory in the ordinary course of business in one
or a related series of transactions; or
(iii) closing of a purchase, tender or exchange offer
made to the holders of more than 50% of the outstanding shares of Common Stock
in which more than 50% of the outstanding shares of Common Stock were tendered
and accepted.
(c) Mechanics of Redemption at Option of Buyer Upon Major Transaction.
No sooner than fifteen (15) days nor later than ten (10) days prior to the
consummation of a Major Transaction, but not prior to the public announcement of
such Major Transaction, the Company shall deliver written notice thereof via
facsimile and overnight courier ("Notice of Major Transaction") to each holder
of Series C Preferred Stock. At any time after receipt of a Notice of Major
Transaction (or, in the event a Notice of Major Transaction is not delivered at
least ten (10) days prior to a Major Transaction, at any time within ten (10)
days prior to a Major Transaction), any holder of Series C Preferred Stock then
outstanding may require the Company to redeem, effective immediately prior to
the consummation of such Major Transaction, all of the holder's Series C
Preferred Stock then outstanding by delivering written notice thereof via
facsimile and overnight courier ("Notice of Redemption at Option of Buyer Upon
Major Transaction") to the Company, which Notice of Redemption at Option of
Buyer Upon Major Transaction shall indicate (i) the number of shares of Series C
Preferred Stock that such holder is electing to redeem and (ii) the applicable
Major Transaction Redemption Price, as calculated pursuant to Section 8(a)
above.
(d) Payment of Redemption Price. Upon the Company's receipt of a
Notice(s) of Redemption at Option of Buyer Upon Major Transaction from any
holder of Series C Preferred Stock, the Company shall immediately notify each
holder of Series C Preferred Stock by facsimile of the Company's receipt of such
17
Notice(s) of Redemption at Option of Buyer Upon of Buyer Upon Major Transaction
and each holder which has sent such a notice shall promptly submit to the
Company such holder's Preferred Stock Certificates which such holder has elected
to have redeemed. The Company shall have the sole option to pay the Redemption
Price in cash or shares of Common Stock in accordance with Section 8(a) and
Section 9 of this Certificate of Designation. The Company shall deliver the
applicable Major Transaction Redemption Price immediately prior to the
consummation of the Major Transaction; provided that a holder's Preferred Stock
Certificates shall have been so delivered to the Company; provided further that
if the Company is unable to redeem all of the Series C Preferred Stock to be
redeemed, the Company shall redeem an amount from each holder of Series C
Preferred Stock being redeemed equal to such holder's pro-rata amount (based on
the number of shares of Series C Preferred Stock held by such holder relative to
the number of shares of Series C Preferred Stock outstanding) of all Series C
Preferred Stock being redeemed. If the Company shall fail to redeem all of the
Series C Preferred Stock submitted for redemption (other than pursuant to a
dispute as to the arithmetic calculation of the Redemption Price), in addition
to any remedy such holder of Series C Preferred Stock may have under this
Certificate of Designation and the Purchase Agreement, the applicable Redemption
Price payable in respect of such unredeemed Series C Preferred Stock shall bear
interest at the rate of 1.0% per month (prorated for partial months) until paid
in full. Until the Company pays such unpaid applicable Redemption Price in full
to a holder of shares of Series C Preferred Stock submitted for redemption, such
holder shall have the option (the "Void Optional Redemption Option") to, in lieu
of redemption, require the Company to promptly return to such holder(s) all of
the shares of Series C Preferred Stock that were submitted for redemption by
such holder(s) under this Section 8 and for which the applicable Redemption
Price has not been paid, by sending written notice thereof to the Company via
facsimile (the "Void Optional Redemption Notice"). Upon the Company's receipt of
such Void Optional Redemption Notice(s) and prior to payment of the full
applicable Redemption Price to such holder, (i) the Notice(s) of Redemption at
Option of Buyer Upon Major Transaction shall be null and void with respect to
those shares of Series C Preferred Stock submitted for redemption and for which
the applicable Redemption Price has not been paid and (ii) the Company shall
immediately return any Series C Preferred Stock submitted to the Company by each
holder for redemption under this Section 8(d) and for which the applicable
Redemption Price has not been paid. A holder's delivery of a Void Optional
Redemption Notice and exercise of its rights following such notice shall not
effect the Company's obligations to make any payments which have accrued prior
to the date of such notice other than interest payments.
(e) Demand Registration Rights. If the Redemption Price upon the
occurrence of a Major Transaction is paid in shares of Common Stock and such
shares have not been previously registered on a registration statement under the
Securities Act, a holder of Series C Preferred Stock may make a written request
for registration under the Securities Act pursuant to this Section 8(e) of all
of its shares of Common Stock issued upon such Major Transaction. The Company
shall use its reasonable best efforts to cause to be filed and declared
effective as soon as reasonably practicable (but in no event later than the
ninetieth (90th) day after such holder's request is made) a registration
statement under the Securities Act, providing for the sale of all of the shares
of Common Stock issued upon such Major Transaction by such holder. The Company
18
agrees to use its reasonable best efforts to keep any such registration
statement continuously effective for resale of the Common Stock for so long as
such holder shall request, but in no event later than the date that the shares
of Common Stock issued upon such Major Transaction may be offered for resale to
the public pursuant to Rule 144(k).
9. Inability to Fully Convert.
(a) Holder's Option if Company Cannot Fully Convert. If, upon the
Company's receipt of a Conversion Notice or on a Mandatory Conversion Date, the
Company cannot issue shares of Common Stock registered for resale under the
Registration Statement for any reason (other than a limitation based upon the
Conversion Restrictions contained in Section 7 abbove), including, without
limitation, because the Company (w) does not have a sufficient number of shares
of Common Stock authorized and available, (x) is otherwise prohibited by
applicable law or by the rules or regulations of any stock exchange, interdealer
quotation system or other self-regulatory organization with jurisdiction over
the Company or its securities from issuing all of the Common Stock which is to
be issued to a holder of Series C Preferred Stock pursuant to a Conversion
Notice or (y) fails to have a sufficient number of shares of Common Stock
registered for resale under the Registration Statement, then the Company shall
issue as many shares of Common Stock as it is able to issue in accordance with
such holder's Conversion Notice and pursuant to Section 5(b)(ii) above and, with
respect to the unconverted Series C Preferred Stock, the holder, solely at such
holder's option, can elect, within five (5) business days after receipt of
notice from the Company thereof to:
(i) require the Company to redeem from such holder those
Series C Preferred Stock for which the Company is unable to issue Common Stock
in accordance with such holder's Conversion Notice ("Mandatory Redemption") at a
price per share equal to the Major Transaction Redemption Price as of such
Conversion Date (the "Mandatory Redemption Price"); provided that the Company
shall have the sole option to pay the Mandatory Redemption Price in cash or
shares of Common Stock;
(ii)if the Company's inability to fully convert Series C
Preferred Stock is pursuant to Section 9(a)(y) above, require the Company to
issue restricted shares of Common Stock in accordance with such holder's
Conversion Notice and pursuant to Section 5(b)(ii) above;
(iii) void its Conversion Notice and retain or have returned,
as the case may be, the shares of Series C Preferred Stock that were to be
converted pursuant to such holder's Conversion Notice (provided that a holder's
voiding its Conversion Notice shall not effect the Company's obligations to make
any payments which have accrued prior to the date of such notice).
(b) Mechanics of Fulfilling Holder's Election. The Company shall
immediately send via facsimile to a holder of Series C Preferred Stock, upon
receipt of a facsimile copy of a Conversion Notice from such holder which cannot
19
be fully satisfied as described in Section 9(a) above, a notice of the Company's
inability to fully satisfy such holder's Conversion Notice (the "Inability to
Fully Convert Notice"). Such Inability to Fully Convert Notice shall indicate
(i) the reason why the Company is unable to fully satisfy such holder's
Conversion Notice, (ii) the number of Series C Preferred Stock which cannot be
converted and (iii) the applicable Mandatory Redemption Price. Such holder shall
notify the Company of its election pursuant to Section 9(a) above by delivering
written notice via facsimile to the Company ("Notice in Response to Inability to
Convert").
(c) Payment of Redemption Price. If such holder shall elect to have its
shares redeemed pursuant to Section 9(a)(i) above, the Company shall pay the
Mandatory Redemption Price to such holder within thirty (30) days of the
Company's receipt of the holder's Notice in Response to Inability to Convert,
provided that prior to the Company's receipt of the holder's Notice in Response
to Inability to Convert the Company has not delivered a notice to such holder
stating, to the satisfaction of the holder, that the event or condition
resulting in the Mandatory Redemption has been cured and all Conversion Shares
issuable to such holder can and will be delivered to the holder in accordance
with the terms of Section 8(d). If the Company shall fail to pay the applicable
Mandatory Redemption Price to such holder on a timely basis as described in this
Section 9(c) (other than pursuant to a dispute as to the determination of the
arithmetic calculation of the Redemption Price), in addition to any remedy such
holder of Series C Preferred Stock may have under this Certificate of
Designation and the Purchase Agreement, such unpaid amount shall bear interest
at the rate of 1.0% per month (prorated for partial months) until paid in full.
Until the full Mandatory Redemption Price is paid in full to such holder, such
holder may (i) void the Mandatory Redemption with respect to those Series C
Preferred Stock for which the full Mandatory Redemption Price has not been paid
and (ii) receive back such Series C Preferred Stock.
(d) Pro-rata Conversion and Redemption. In the event the Company
receives a Conversion Notice from more than one holder of Series C Preferred
Stock on the same day and the Company can convert and redeem some, but not all,
of the Series C Preferred Stock pursuant to this Section 9, the Company shall
convert and redeem from each holder of Series C Preferred Stock electing to have
Series C Preferred Stock converted and redeemed at such time an amount equal to
such holder's pro-rata amount (based on the number shares of Series C Preferred
Stock held by such holder relative to the number shares of Series C Preferred
Stock outstanding) of all shares of Series C Preferred Stock being converted and
redeemed at such time.
10. Vote to Change the Terms of or Issue Preferred Stock. The
affirmative vote at a meeting duly called for such purpose or the written
consent without a meeting, of the holders of three-fourths (3/4) of the then
outstanding shares of Series C Preferred Stock, shall be required (a) for any
change to this Certificate of Designation or the Articles of Incorporation which
would amend, alter, change or repeal any of the powers, designations,
preferences and rights of the Series C Preferred Stock or (b) for the issuance
of shares of Series C Preferred Stock other than pursuant to the Purchase
Agreement.
20
11. Lost or Stolen Certificates. Upon receipt by the Company of
evidence satisfactory to the Company of the loss, theft, destruction or
mutilation of any Preferred Stock Certificates representing the shares of Series
C Preferred Stock, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the holder to the Company and, in the case of
mutilation, upon surrender and cancellation of the Preferred Stock
Certificate(s), the Company shall execute and deliver new preferred stock
certificate(s) of like tenor and date; provided, however, the Company shall not
be obligated to re-issue Preferred Stock Certificates if the holder
contemporaneously requests the Company to convert such shares of Series C
Preferred Stock into Common Stock.
12. Remedies, Characterizations, Other Obligations, Breaches and
Injunctive Relief. The remedies provided in this Certificate of Designation
shall be cumulative and in addition to all other remedies available under this
Certificate of Designation, at law or in equity (including a decree of specific
performance and/or other injunctive relief), no remedy contained herein shall be
deemed a waiver of compliance with the provisions giving rise to such remedy and
nothing herein shall limit a holder's right to pursue actual damages for any
failure by the Company to comply with the terms of this Certificate of
Designation. Amounts set forth or provided for herein with respect to payments,
conversion and the like (and the computation thereof) shall be the amounts to be
received by the holder thereof and shall not, except as expressly provided
herein, be subject to any other obligation of the Company (or the performance
thereof). The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the holders of the Series C Preferred
Stock and that the remedy at law for any such breach may be inadequate. The
Company therefore agrees that, in the event of any such breach or threatened
breach, the holders of the Series C Preferred Stock shall be entitled, in
addition to all other available remedies, to an injunction restraining any
breach, without the necessity of showing economic loss and without any bond or
other security being required.
13. Specific Shall Not Limit General; Construction. No specific
provision contained in this Certificate of Designation shall limit or modify any
more general provision contained herein. This Certificate of Designation shall
be deemed to be jointly drafted by the Company and all initial purchasers of the
Series C Preferred Stock and shall not be construed against any person as the
drafter hereof.
14. Failure or Indulgence Not Waiver. No failure or delay on the part
of a holder of Series C Preferred Stock in the exercise of any power, right or
privilege hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privilege.
21
IN WITNESS WHEREOF, the undersigned has executed and subscribed this
Certificate and does affirm the foregoing as true this 24th day of June, 2004.
AXM PHARMA, INC.
By: _________________________________
Name:
Title:
22
EXHIBIT I
AXM PHARMA, INC.
CONVERSION NOTICE
Reference is made to the Certificate of Designation of the Relative Rights and
Preferences of the Series C Preferred Stock of AXM Pharma, Inc. (the
"Certificate of Designation"). In accordance with and pursuant to the
Certificate of Designation, the undersigned hereby elects to convert the number
of shares of Series C Preferred Stock, par value $.001 per share (the "Preferred
Shares"), of AXM Pharma, Inc., a Nevada corporation (the "Company"), indicated
below into shares of Common Stock, par value $.001 per share (the "Common
Stock"), of the Company, by tendering the stock certificate(s) representing the
share(s) of Preferred Shares specified below as of the date specified below.
Date of Conversion: ____________________________
Number of Preferred Shares to be converted: __________________
Stock certificate no(s). of Preferred Shares to be converted: _________
The Common Stock have been sold pursuant to the Registration Statement
(as defined in the Purchase Agreement): YES ____ NO____
Please confirm the following information:
Conversion Price: ______________________________
Number of shares of Common Stock
to be issued: ______________________________
Number of shares of Common Stock beneficially owned or deemed
beneficially owned by the Holder on the Date of Conversion:
Please issue the Common Stock into which the Preferred Shares are being
converted and, if applicable, any check drawn on an account of the Company in
the following name and to the following address:
AGREEMENT dated as of the 1st day of August, 2003 between Axiom
Pharmaceutical, Inc., a Delaware corporation having its principal executive
offices at 8324 Delgany Avenue Playa del Rey, California 90293 (the "Company"),
and Peter W. Cunningham (the "Employee").
WITNESSETH:
WHEREAS, the Company and the Employee wish to enter into an Employment
Agreement in its entirety;
NOW, THEREFORE, the Company and the Employee hereby agree that, effective
as of August 1, 2003, the Employment Agreement is stated in its entirety to read
as follows:
1. Employment.
The Company agrees to employ the Employee, and the Employee agrees to remain in
the employ of the Company, during the term of this Agreement and on the other
terms and conditions hereafter set forth.
2. Term.
The term of this Agreement shall commence on August 1, 2003 (the "Commencement
Date") and shall terminate at the close of business on the first anniversary of
the Commencement Date unless sooner terminated in accordance with the terms of
this Agreement. Notwithstanding the foregoing, this agreement shall
automatically renew for additional one year terms on the second and third
anniversaries of the Commencement date, unless either party provides written
notice not less than 60 days prior to the renewal date that it does not intend
to renew the term of the Agreement. In the case of any such notice of
non-renewal, this Agreement shall expire on the day prior to the anniversary of
the Commencement Date.
3. Positions and Responsibilities; Place of Performance.
(a) Throughout the term of this Agreement, the Employee agrees to
remain in the employ of the Company, and the Company agrees to employ the
Employee, as the Chief Operating Officer of the Company, reporting to the
President, Chief Executive Officer and Board of Directors of the Company. As the
Chief Operating Officer of the Company, the Employee shall be a senior officer
of the Company and its subsidiaries, shall have effective participation in
supervision, control and policy-making authority over, and responsibility for,
the strategic direction and general leadership and management of the business
and affairs of the Company and its subsidiaries, subject only to the authority
of the President, CEO and Board, and shall have all of the powers, authority,
duties and responsibilities usually incident to the position and role of Chief
Operating Officer in public companies that are comparable in size, character and
performance to the Company. The Company agrees to use its best efforts to secure
the employee's election as a member of the Board during the term of this
Agreement, and the Employee agrees to serve as such without additional
compensation beyond that provided in this Agreement, or for additional
compensation as may be proposed by the Board.
(b) In connection with his employment by the Company, the Employee
shall be based at Orange County, California or at any other Company location, as
may be determined to be appropriate for the performance of Employee's duties,
and Employee agrees to travel, to the extent reasonably necessary to perform
Employee's duties and obligations under this Agreement, to Company facilities
and other destinations elsewhere. It is envisioned that the Chief Operating
Officer shall spend a significant portion of his time in China, managing the
Company's operations there
During the term of this agreement the employee shall serve the company and shall
devote such time attention as may be reasonably required to perform the
responsibilities
(c) During the term of this Agreement, the Employee shall serve the
Company as his primary responsibility and shall devote his business time,
attention, skill and efforts to the faithful performance of his duties
hereunder; provided that the Employee may engage in commercial consulting
services in the healthcare industries, with the provision that if perceived or
potential conflicts arise, the Employee will notify the company in writing, and
the Employee and the Company will determine an effective way forward, so as to
not interfere with the with the objects, operations and benefits of the Company.
(d)It is envisioned that the commercial consulting activities of the
Employee may contribute relationships that will be beneficial to the Company.
Further, the Employee may serve as a member of the board of directors of other
companies (and retain remuneration for such service) if such activities and
service do not materially interfere with the performance of his duties and
responsibilities hereunder.
4. Compensation.
For all services rendered by the Employee in any capacity during the term of
this Agreement, and for his undertakings with respect to confidential
information, non-solicitation and disparaging remarks set forth in sections 6
and 7 below, the Employee shall be entitled to the following:
(a) a salary, payable in installments not less frequent than
monthly, at the annual rate of one hundred twenty thousand dollars (US$120,000
(in the lawful currency of the United States of America)), with such increases
in such rate, if any, as the Compensation Committee of the Board may approve
from time to time during the term of this Agreement. It is envisioned that the
increases will be based on achievement of targets agreed with the Board; (the
annual salary rate as increased from time to time during the term of this
Agreement being hereafter referred to as the "Base Salary", and the objective is
to bring the base salary in line with industry standards);
(b) participation in the Company's annual executive incentive or
bonus plan as in effect from time to time, with the opportunity to receive an
award in accordance with the terms and conditions of such plan, for each fiscal
year of the Company that commences or terminates during the term of this
Agreement, of up to 50% of the Base Salary earned during such year (or such
higher percentage as the Board or a committee of the Board may allow from time
to time during the term of this Agreement, the objective is to bring
compensation in line with industry standards), it being understood that any
award for the fiscal year of the Company in which the term of this Agreement
terminates pursuant to the terms hereof shall be prorated based on the portion
of such fiscal year that coincides with the term of this Agreement and shall be
made at the same time as awards (if any) are made to other participants with
respect to such fiscal year. This award will be given solely at the discretion
of the Board working in consultation with the compensation committee.
(c) participation in the Company's stock incentive plan / stock
grant plan as from time to time in effect, subject to the terms and conditions
of such plan. The Company shall provide a stock grant for the Employee of
250,000 shares deliverable in six equal installments, the first installment of
41,667 shares of stock will be delivered on August 1, 2003, the second
installment of 41,667 shares of the stock will be delivered on February 1, 2004,
third installment of 41,667 shares of the stock will be delivered on August 1,
2004, the forth installment of 41,667 shares of the stock will be delivered on
February 1, 2005, the fifth installment of 41,667 shares of the stock will be
delivered on August 1, 2005, the sixth installment of 41,667 shares of the stock
will be delivered on February 1, 2006 The shares should become fully registered
and unrestricted as soon as practical. Stock incentives / grants / warrants
2
shall be awarded in accordance with the Company's stock incentive / grant /
warrant plans applicable to senior officers in the Company.
(d) for business use in China of an automobile and housing /
furnished accommodation at Company expense will be provided. Such accommodation
and transportation shall be reasonable and in line with industry standards for
companies similarly situated to the Company, with respect to foreign employees
in China.
(e) participation in all Company health plan, or reimbursement of
health insurance expenses paid by the Employee. Participation in all Company
welfare, savings and other employee benefit and fringe benefit plans (including
vacation pay plans or policies and life and disability insurance plans) in which
other senior officers of the Company participate during the term of this
Agreement, subject in all events to the terms and conditions of such plans as in
effect from time to time. Nothing in this paragraph (e) shall preclude the
Company from amending or terminating any such plan at any time. The plans
covered by this paragraph (e) shall not include the annual incentive or stock
incentive plans, which are covered by paragraphs (b) and (c) above.
5. Termination of Employment.
(a) Termination by the Company without Good Cause. (i) If the
Employee's employment with the Company is terminated by the Company without Good
Cause the employee will be paid three month of his base salary, bonus accrued to
that time, unrestricted stock deliverable as of the date of termination, all
expenses due, retirement benefits and other compensation and benefits earned up
to that time
(b) Termination by the Company for Good Cause or by the Employee
without Good Reason. If, during the term of this Agreement, the Employee's
employment by the Company is terminated by the Company for Good Cause or by the
Employee without Good Reason, the Employee shall not be entitled to receive any
compensation under section 4 above accruing after the date of such termination
or any payment under paragraph 5(a) above, but he shall be entitled to receive
deliverable as of such date, expenses and relocation to Los Angeles, California,
USA. . However, the Company's obligations under sections 8, 9 and 10 shall not
be affected by such termination of employment. The provisions of this paragraph
6(b) shall be in addition to, and not in lieu of, any other rights and remedies
the Company may have at law or in equity or under any other provision of this
Agreement in respect of such termination of employment. However, if during the
term of this Agreement the Employee's employment is terminated by the Employee
without Good Reason and the Employee gives the Company at least 120 days'
advance notice of such termination, then the Employee shall not have any
obligation or liability to the Company under this Agreement in respect of such
termination of employment, but his obligations under Section 6 and 7 hereof
shall not be affected by such termination of employment.
(c) Good Cause Defined. For purposes of this Agreement, the Company
shall have "Good Cause" to terminate the Employee's employment during the term
of this Agreement only if:
(i) the Employee fails to substantially perform his duties
hereunder for any reason or fails to devote substantially all of his business
time to the affairs of the Company;
(ii) the Employee commits an act of dishonesty resulting or
intended to result directly or indirectly in gain or personal enrichment at the
expense of the Company;
(iii) the Employee is grossly negligent or engages in willful
misconduct or insubordination in the performance of his duties hereunder; or
(iv) the Employee materially breaches his obligations under
section 6 or paragraph 7(a) below, relating to confidential information and
non-solicitation.
Any foregoing provision of this paragraph 5(c) to the contrary notwithstanding,
the Company shall not have "Good Cause" to terminate the Employee's employment
during the term of his employment after a Change in Control or Potential Change
in Control (as such terms are defined in section 11 below) unless (A) the
Employee's act or omission is willful and has a material adverse effect upon the
3
Company, (B) the Board of Directors gives the Employee (I) written notice
warning of its intention to terminate the Employee for Good Cause if the
specified act or omission alleged to constitute Good Cause is not discontinued
and, if curable, cured, and (II) a reasonable opportunity after receipt of such
written notice, but in no event less than eight weeks, to discontinue and, if
curable, cure the conduct alleged to constitute Good Cause, and (C) the Employee
fails to discontinue and, if curable, cure the act or omission in question;
provided that clauses (B) and (C) of this sentence shall not apply with respect
to misconduct on the part of the Employee that constitutes a felony in the
jurisdiction in which the Employee engages in such misconduct, and, provided
further, that this sentence shall not apply to conduct involving moral
turpitude. For all purposes of this Agreement, no act, or failure to act, on the
Employee's part shall be deemed "willful" unless done, or omitted to be done, by
him intentionally and in bad faith (i.e., without reasonable belief that his
action or omission was in furtherance of the interests of the Company or a
subsidiary of the Company).
(d) Good Reason Defined. For purposes of this Agreement, the Employee
shall have "Good Reason" to terminate his employment during the term of this
Agreement only if:
(i) the Company fails to pay or provide any amount or benefit that
the Company is obligated to pay or provide under section 4 above or section 8, 9
or 10 below and the failure is not remedied within 30 days after the Company
receives written notice from the Employee of such failure; or
(ii) the Company assigns the Employee duties, responsibilities or
reporting relationships not contemplated by section 3 above without his consent,
or limits his duties or responsibilities or power or authority contemplated by
section 3 above in any respect materially detrimental to him, and in either case
the situation is not remedied within 30 days after the Company receives written
notice from the Employee of the situation; or
(iii) a Change in Control occurs and as a result thereof either (A)
equity securities of the Company cease to be publicly-traded, or (B) the
Employee is not elected or designated to serve as the sole Chief Operating
Officer of the surviving company; or
(vi) a Change in Control or Potential Change in Control occurs and
(A) the dollar value of the stock optioned to the Employee annually thereafter
is less than the average annual dollar value of the stock that was optioned to
the Employee during the one year prior to the Change in Control or Potential
Change in Control, or (B) the material terms of such options (including without
limitation vesting schedules) are less favorable to the Employee than the
material terms of the options that were granted to the Employee during the one
year prior to the Change in Control or Potential Change in Control, and in
either case (A) or (B) the situation is not remedied within 30 days after the
Company receives written notice from the Employee of the situation.
In no event shall the Employee's continued employment after any of the foregoing
constitute his consent to the act or omission in question, or a waiver of his
right to terminate his employment for Good Reason hereunder on account of such
act or omission.
6. Confidential Information.
The Employee agrees not to disclose, either while in the Company's employ or at
any time thereafter, to any person not employed by the Company, or not engaged
to render services to the Company, except with the prior written consent of an
authorized officer of the Company or as necessary or appropriate for the
performance of his duties hereunder, any confidential information obtained by
him while in the employ of the Company, including, without limitation,
information relating to any of the inventions, processes, formulae, plans,
devices, compilations of information, research, methods of distribution,
suppliers, customers, client relationships, marketing strategies or trade
4
secrets of the Company or any subsidiary thereof; provided, however, that this
provision shall not preclude the Employee from use or disclosure of information
known generally to the public or of information not generally considered
confidential by persons regularly engaged in the business conducted by the
Company or any subsidiary thereof, or from disclosure required by law or court
order. The Employee also agrees that upon leaving the Company's employ he will
not take with him, without the prior written consent of an authorized officer of
the Company, and he will surrender to the Company, any record, list, drawing,
blueprint, specification or other document or property of the Company or any
subsidiary thereof, together with any copy or reproduction thereof, mechanical
or otherwise, which is of a confidential nature relating to the Company or any
subsidiary thereof, or without limitation, relating to its or their methods of
distribution, suppliers, customers, client relationships, marketing strategies
or any description of any formulae or secret processes, or which was obtained by
him or entrusted to him during the course of his employment with the Company.
7. Restrictive Covenants
(a) Non-Solicitation. Employee covenants and agrees that, during his
employment by the Company and during the one year period immediately following
the termination of his employment with the Company for any reason (including,
without limitation, a termination of employment by the Company without cause and
a voluntary termination of employment by the Employee with Good Reason), he will
not solicit or attempt to persuade any employee of the Company, its subsidiaries
or affiliates (except the Employee's personal secretary or administrative
assistant), or any other person who performs services for the Company, its
subsidiaries or affiliates at the time the Employee's employment terminates or
at any time within one year thereafter, to terminate or reduce or refrain from
engaging in his or her employment or other service relationship with the
Company, its subsidiaries or affiliates; provided, however, that responding to
inquiries from any such employees or other persons that are not initiated by the
Employee, and subsequently hiring such employees or other persons following the
termination of their employment with the Company, its subsidiaries and
affiliates shall be permitted.
(b) Specific Enforcement. Employee recognizes and agrees that, by
reason of his knowledge, experience, skill and abilities, his services are
extraordinary and unique, that the breach or attempted breach of any of the
restrictions set forth above in this section 7 will result in immediate and
irreparable injury for which the Company will not have an adequate remedy at
law, and that the Company shall be entitled to a decree of specific performance
of those restrictions and to a temporary and permanent injunction enjoining the
breach thereof, and to seek any and all other remedies to which the Company may
be entitled, including, without limitation, monetary damages, without posting
bond or furnishing security of any kind.
(c) Restrictions Reasonable. Employee specifically and expressly
represents and warrants that (i) he has reviewed and agreed to the restrictive
covenants contained in this section 7 and their contemplated operation after
receiving the advice of counsel of his choosing; (ii) he believes, after
receiving such advice, that the restrictive covenants and their contemplated
operation are fair and reasonable; (iii) he will not seek or attempt to seek to
have the restrictive covenants declared invalid, and, after receiving the advice
of counsel, expressly waives any right to do so; and (iv) if the full breadth of
any restrictive covenant and/or its contemplated operation shall be held in any
fashion to be too broad, such covenant or its contemplated operation, as the
case may be, shall be interpreted in a manner as broadly in favor of the
beneficiary of such covenant as is legally permissible. Employee recognizes and
agrees that the restrictions on his activities contained in this section 7 are
required for the reasonable protection of the Company and its investments; and
that the restriction on his activities set forth in paragraph 7(a) will not
deprive the Employee of the ability to earn a livelihood.
(d) Non-Disparagement. Employee covenants and agrees that, during
the one year period immediately following the termination of his employment with
the Company for any reason (including, without limitation, a termination of
employment by the Company without cause and a voluntary termination of
employment by the Employee with Good Reason), he will not make disparaging
5
remarks about the Company, its subsidiaries or affiliates or any of their
officers, directors or employees, unless required by law or reasonably necessary
to assert or defend his position in a bona fide dispute arising out of or
relating to this Agreement or the breach thereof.
(e) Effect on Termination Payments. The Employee recognizes and
agrees that the Company shall not be obligated to make any payments provided for
in paragraph 5(a) above if the Employee violates the provisions of section 6 or
paragraph 7(a) or 7(d) above during the one year period immediately following
the termination for any reason of his employment with the Company. In addition,
the Employee recognizes and agrees that, if the Employee violates such
provisions, the Company may recoup any payments the Company may have theretofore
made pursuant to paragraph 5(a) above and any payments the Company may
thereafter make under paragraph 5(a). The foregoing provisions of this paragraph
7(e) shall be in addition to and not by way of limitation of any other rights
and remedies the Company may have in respect of the violation in question.
8. Indemnification
To the fullest extent permitted by applicable law, the Company shall indemnify,
defend and hold harmless the Employee from and against any and all claims,
demands, actions, causes of action, liabilities, losses, judgments, fines, costs
and expenses (including reasonable attorneys' fees and settlement expenses)
arising from or relating to his service or status as an officer, director,
employee, agent or representative of the Company or any subsidiary of the
Company or in any other capacity in which the Employee serves or has served at
the request of, or for the benefit of, the Company or its subsidiaries. The
Company's obligations under this section 8 shall be in addition to, and not in
derogation of, any other rights the Employee may have against the Company to
indemnification or advancement of expenses, whether by statute, contract or
otherwise. Director's insurance shall be provided by the company and Errors and
Omissions insurance shall be provided by the company.
9. Certain Additional Payments by the Company, Excise Tax and or
Additional Income Tax or Other
(a) Anything in this Agreement (other than the second sentence of
this paragraph 9(a)) to the contrary notwithstanding, in the event it shall be
determined that any payment or distribution by the Company to or for the benefit
of the Employee (whether paid or payable or distributed or distributable
pursuant to the terms of this Agreement or otherwise, but determined without
regard to any additional payments required under this section 9) (a "Payment"),
would be subject to the excise tax imposed by Section 4999 of the United States
Internal Revenue Code (the "Code") or any other such tax in any jurisdiction,
including additional income tax, and interest or penalties are incurred by the
Employee with respect to such excise tax (such excise tax, together with any
such interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), or any other such tax in any jurisdiction, then the Employee
shall be entitled to receive an additional payment (an "Gross-Up Payment") in an
amount such that after payment by the Employee of all taxes and any benefits
that result from the deductibility by the Employee of such taxes (including, in
each case, any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and Excise Tax, Additional Income Tax, or any
other such tax imposed upon the Gross-Up Payment, the Employee retains an amount
of the Gross-Up Payment equal to the Excise Tax or Additional Income Tas imposed
upon the Payments. However, if it shall be determined that none of the Payments
would be subject to the Excise Tax if the total Payments were reduced in the
aggregate by $50,000 or less, then in that event the total Payments shall be
reduced by the smallest amount (in no event to exceed $50,000 in the aggregate)
necessary to ensure that none of the Payments will be subject to the Excise Tax.
The decision as to which Payments shall be so reduced shall be made by the
Employee.
(b) Subject to the provisions of paragraph 9(a) above and 9(c)below,
all determinations required to be made under this section 9, including whether
and when a Gross-Up Payment is required and the amount of such Gross-Up Payment
and the assumptions to be utilized in arriving at such determination, and
whether Payments are to be reduced pursuant to the second sentence of paragraph
6
9(a) above, shall be made by Deloitte & Touche or such other certified public
accounting firm as may be designated by the Employee (the "Accounting Firm")
which shall provide detailed supporting calculations both to the Company and the
Employee within 15 business days of the receipt of notice from the Employee that
there has been a Payment, or such earlier time as is requested by the Company.
In the event that the Accounting Firm is serving as accountant or auditor for
the individual, entity or group effecting the "change in ownership or effective
control" or "change in the ownership of a substantial portion of assets" (within
the meaning of Code section 280G(b)(2)(A)) that gives rise to the Excise Tax, or
Additional Income Tax, the Employee shall appoint another nationally recognized
accounting firm to make the determinations required hereunder (which accounting
firm shall then be referred to as the Accounting Firm hereunder). All fees and
expenses of the Accounting Firm shall be borne solely by the Company. Any
Gross-Up Payment, as determined pursuant to this section 9, shall be paid by the
Company to the Employee within five days of the receipt of the Accounting Firm's
determination. Any determination by the Accounting Firm shall be binding upon
the Company and the Employee. As a result of the uncertainty in the application
of Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will not
have been made by the Company should have been made (an "Underpayment"),
consistent with the calculations required to be made hereunder. In the event
that the Company exhausts its remedies pursuant to paragraph 9(c) and the
Employee thereafter is required to make a payment of any Excise Tax, or
Additional Income Tax, the Accounting Firm shall determine the amount of the
Underpayment that has occurred and any such Underpayment, along with any penalty
and interest imposed with respect to such Underpayment, shall be promptly paid
by the Company to or for the benefit of the Employee.
(c) The Employee shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require either the
payment by the Company of the Gross-Up Payment or the reduction of Payments
pursuant to the second sentence of paragraph 9(a) above. Such notification shall
be given as soon as practicable but no later than ten business days after the
Employee is informed in writing of such claim and shall apprise the Company of
the nature of such claim and the date on which such claim is requested to be
paid. The Employee shall not pay such claim prior to the expiration of the
30-day period following the date on which it gives such notice to the Company
(or such shorter period ending on the date that any payment of taxes with
respect to such claim is due). If the Company notifies the Employee in writing
prior to the expiration of such period that it desires to contest such claim,
the Employee shall:
(i) give the Company any information reasonably requested by
the Company relating to such claim,
(ii) take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim by
an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order
effectively to contest such claim, and
(iv) permit the Company to participate in any proceedings
relating to such claim; provided, however, that the Company shall bear and pay
directly all costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold the
Employee harmless, on an after-tax basis, for any Excise Tax or income tax
(including interest and penalties with respect thereto) imposed as a result of
such representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this paragraph 9(c), the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forgo any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct the Employee to pay the tax claimed and sue for a
refund or contest the claim in any permissible manner, and the Employee agrees
to prosecute such contest to a determination before any administrative tribunal,
in a court of initial jurisdiction and in one or more appellate courts, as the
Company shall determine, provided, however, that if the Company directs the
Employee to pay such claim and sue for a refund, the Company shall advance the
7
amount of such payment to the Employee, on an interest-free basis and shall
indemnify and hold the Employee harmless, on an after-tax basis, from any Excise
Tax or income tax (including interest or penalties with respect thereto) imposed
with respect to such advance; and further provided that any extension of the
statute of limitations relating to payment of taxes for the taxable year of the
Employee with respect to which such contested amount is claimed to be due is
limited solely to such contested amount. Furthermore, the Company's control of
the contest shall be limited to issues with respect to which a Gross-Up Payment
would be payable hereunder and the Employee shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
(d) If, after the receipt by the Employee of an amount advanced by
the Company pursuant to paragraph 9(a) or 9(c), the Employee becomes entitled to
receive any refund with respect to such claim, the Employee shall (subject to
the Company's complying with the requirements of paragraph 9(c)) promptly pay to
the Company the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto). If, after the receipt by the
Employee of an amount advanced by the Company pursuant to paragraph 9(c), a
determination is made that the Employee shall not be entitled to any refund with
respect to such claim and the Company does not notify the Employee in writing of
its intent to contest such denial of refund prior to the expiration of 30 days
after such determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.
10. Certain Enforcement Matters
(a) If, after a Change in Control or Potential Change in Control, a
dispute arises (i) with respect to this Agreement or the breach thereof, or (ii)
with respect to the Employee's or the Company's rights or obligations under this
Agreement, including but not limited to any such dispute between the Employee
and the Company, the Company shall pay or reimburse the Employee for all
reasonable costs and expenses (including court costs, arbitrators' fees and
reasonable attorneys' fees and disbursements) the Employee incurs in connection
with such dispute, including without limitation costs and expenses he incurs to
obtain payment or otherwise enforce his rights under this Agreement, or to
obtain payment of costs and expenses due under this paragraph 10(a). In
addition, the Company shall pay the Employee such additional amount (a "Gross
Up") as will be sufficient, after the Employee pays his tax liability with
respect to the Gross Up from the Gross Up, to pay all of his federal, state and
local tax liability with respect to any costs and expenses that are paid by the
Company pursuant to this paragraph 10(a). The Company shall promptly pay or
reimburse the Employee for all such costs and expenses as he incurs them, upon
presentation of reasonable documentation of such costs and expenses, and shall
promptly pay the related Gross Up as and when it pays or reimburses costs and
expenses. The Employee shall not be obligated to repay any such costs, expenses
or Gross Up unless it is finally determined by the trier of fact in a
non-appealable judicial or arbitral decision or ruling (as applicable) that the
Employee's principal positions with respect to the principal matter(s) in
dispute were unreasonable and pursued in bad faith.
(b) Any payments to which the Employee may be entitled under this
Agreement, including, without limitation, under section 5, 8, 9 or 10 hereof,
shall be made forthwith on the applicable date(s) for payment specified in this
Agreement. If for any reason the amount of any payment due to the Employee
cannot be finally determined on that date, such amount shall be estimated on a
good faith basis by the Company and the estimated amount shall be paid no later
than within 10 days after such date. As soon as practicable thereafter, the
final determination of the amount due shall be made and any adjustment requiring
a payment to or from the Employee shall be made as promptly as practicable.
(c) Any controversy or claim arising, after a Change in Control or
Potential Change in Control, out of or related to this Agreement or the breach
thereof, shall be settled by binding arbitration in the City of Los Angeles, in
accordance with the employment dispute arbitration rules of the American
Arbitration Association then in effect, and the arbitrator's decision shall be
binding and final and judgment upon the award rendered may be entered in any
court having jurisdiction thereof, except that the Employee may elect to have
any such controversy or claim settled by judicial determination in lieu of
8
arbitration by bringing a court action, if he is the plaintiff or, if he is not
the plaintiff, demanding such judicial determination within the time to answer
any complaint in any arbitration action that may be commenced.
11. Change in Control
(a) The term "Change in Control" as used in this Agreement means a
change of control of a nature that would be required to be
reported in response to Item 6(e) of Schedule 14A of Regulation
14A promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), whether or not the Company is then
subject to such reporting requirement; provided that, whether or
not any of the following events would constitute a change of
control of such a nature, a Change in Control shall be deemed to
occur for purposes of this Agreement if and when any of the
following events occur:
(i) any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the Exchange Act), other than--
(A) the Company,
(B) a Subsidiary,
(C) a trustee or other fiduciary holding securities under
an employee benefit plan of the
Company or a Subsidiary, or
(D) an underwriter engaged in a distribution of Company
stock to the public with the Company's written consent, becomes the beneficial
owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly,
of Voting Securities that meet two tests: (I) they represent more than thirty
percent (30%) (this seems low to me, how about 40%) of the combined voting power
of the then outstanding Voting Securities, and (II) they also represent more
than the percentage of the combined voting power of the then outstanding Voting
Securities beneficially owned, directly or indirectly, at that time by Douglas
MacLellan and his associates (as defined in Rule 12b-2 under the Exchange Act)
(this definition is not very broad and would not include Madame Wang, That or
TriPoint). However, the second test stated in clause (II) above shall not apply
if the "person" in question is Douglas MacLellan and/or his associates (as
defined in Rule 12b-2 under the Exchange Act). In addition, if the "person" in
question is an institutional investor whose investment in Voting Securities is
purely passive when such person becomes the beneficial owner of Voting
Securities that meet the tests set forth in clause (I) and, if applicable, (II)
above, then such event (i.e., such person's becoming the beneficial owner of
such Voting Securities) shall not be deemed to constitute a Change in Control
under this subparagraph 11(a)(i) for so long as (and only for so long as) such
person's investment in Voting Securities remains purely passive;
(ii) the stockholders of the Company approve a merger,
consolidation, recapitalization or reorganization of the Company or a
Subsidiary, reverse split of any class of Voting Securities, or an acquisition
of securities or assets by the Company or a Subsidiary, or consummation of any
such transaction if stockholder approval is not obtained, other than (A) any
such transaction in which the holders of outstanding Voting Securities
immediately prior to the transaction receive, with respect to such Voting
Securities (or, in the case of a transaction in which the Company is the
surviving corporation or a transaction involving a Subsidiary, retain), voting
securities of the surviving or transferee entity representing more than fifty
percent (50%) of the total voting power outstanding immediately after such
transaction, with the voting power of each such continuing holder relative to
other such continuing holders not substantially altered in the transaction, or
(B) any such transaction which would result in a Related Party beneficially
owning more than 50 percent of the voting securities of the surviving entity
outstanding immediately after such transaction;
(iii) the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or disposition
9
by the Company of all or substantially all of the Company's assets other than
any such transaction which would result in a Related Party owning or acquiring
more than 50 percent of the assets owned by the Company immediately prior to the
transaction; or
(iv) the persons who were members of the Board of Directors of
the Company immediately before a tender or exchange offer for shares of Common
Stock by any person other than the Company or a Related Party, or before a
merger or consolidation of the Company or a Subsidiary, or contested election of
the Board of Directors of the Company, or before any combination of such
transactions, cease to constitute a majority of the Board of Directors of the
Company as a result of such transaction or transactions.
(b) For purposes of paragraph 11(a) above:
(i) the term "Related Party" shall mean (A) a Subsidiary, (B)
an employee or group of employees of the Company or any Subsidiary, (C) a
trustee or other fiduciary holding securities under an employee benefit plan of
the Company or any Subsidiary, or (D) a corporation or other form of business
entity owned directly or indirectly by the stockholders of the Company in
substantially the same proportion as their ownership of Voting Securities;
(ii) the term "Subsidiary means a corporation or other form of
business association of which shares (or other ownership interests) having more
than 50% of the voting power are, or in the future become, owned or controlled,
directly or indirectly, by the Company; and
(iii) the term "Voting Securities" shall mean any securities
of the Company which carry the right to vote generally in the election of
directors.
(c) For purposes of this Agreement, a "Potential Change in Control"
means that (i) the Company enters into an agreement, the consummation of which
would result in the occurrence of a Change of Control; or (ii) the Board adopts
a resolution to the effect that, for purposes of this Agreement, a potential
change in control of the Company has occurred.
12. Severability; Survival
(a) In the event that any provision of this Agreement shall be
determined to be invalid or unenforceable for any reason, the remaining
provisions of this Agreement not so invalid or unenforceable shall be unaffected
thereby and shall remain in full force and effect to the fullest extent
permitted by law; and
(b) Any provision of this Agreement which may for any reason be
invalid or unenforceable in any jurisdiction shall remain in effect and be
enforceable in any jurisdiction in which such provision shall be valid and
enforceable.
(c) The provisions of sections 6, 7, 8, 9 and 10 of this
Agreement, and any other provision of this Agreement which is intended to apply,
operate or have effect after the expiration or termination of the term of this
Agreement, or at a time when the term of this Agreement may have expired or
terminated, shall survive the expiration or termination of the term of this
Agreement for any reason.
13. General Provisions
(a) No right or interest to or in any payments to be made under
this Agreement shall be subject to anticipation, alienation, sale, encumbrance,
pledge, charge or hypothecation or to execution, attachment, levy or similar
process, or assignment by operation of law. All payments to be made by the
Company hereunder shall be subject to the withholding of such amounts as the
10
Company may determine it is required to withhold under the laws or regulations
of any governmental authority, whether foreign, federal, state or local.
(b) The Employee has the right to assign payments at his sole
discretion in part or in full to his personal retirement account, as the company
has not established a retirement or pension plan. The tax benefits or
liabilities of these assigned payments if any will accrue to the Employee.
(c) To the extent that the Employee acquires a right to receive
payments from the Company under this Agreement, such right shall be no greater
than the right of an unsecured general creditor of the Company. All payments to
be made hereunder shall be paid from the general funds of the Company and no
special or separate fund shall be established to assure payment of any amount
hereunder.
(d) This Agreement shall be governed by and construed and enforced
in accordance with the laws of the State of California, without giving effect to
the principles of conflicts of laws of that State.
(e) This Agreement shall be binding upon and inure to the benefit of
the Company, its successors and assigns, and the Employee, his heirs, devisees,
distributees and legal representatives.
(f) Any notice or other communication to the Company pursuant to any
provision of this Agreement shall be given in writing and will be deemed to have
been delivered:
(i) when delivered in person to the Corporate Secretary or
General Counsel of the Company; or
(ii) one week after it is deposited in the United States
certified or registered mail, postage prepaid, addressed to the Corporate
Secretary of the Company at 8324 Delgany Avenue Playa del Rey, California 90293
or at such other address of which the Company may from time to time give the
Employee written notice in accordance with paragraph 13(g) below.
(g) Any notice or other communication to the Employee pursuant to
any provision of the Agreement shall be given in writing and will be deemed to
have been delivered:
(i) when delivered to the Employee in person, or
(ii) one week after it is deposited in the United States
certified or registered mail, postage prepaid, addressed to the Employee at his
address as it appears on the records of the Company or at such other address of
which the Employee may from time to time give the Company written notice in
accordance with paragraph 13(e) above.
(h) No provision of this Agreement may be amended, modified or
waived unless such amendment, modification or waiver shall be agreed to in a
writing signed by the Employee and an authorized officer of the Company.
(i) This instrument contains the entire agreement of the parties
relating to the subject matter of this Agreement and supersedes and replaces all
prior agreements and understandings with respect to such subject matter, and the
parties have made no agreements, representations or warranties relating to the
subject matter of this Agreement which are not set forth herein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
AXIOM PHARMACEUTICALS, INC.
By: /s/ That Ngo
-------------
That Ngo,
President
/s/ Peter Cunningham
--------------------
Employee
11
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
This employment agreement (the "Agreement") is made and entered into as of
September 18, 2003 by and between Axiom Pharmaceuticals, Inc., a Nevada
corporation (the "Company") and Lan Hao (the "Employee").
Recitals
A. The Company desires to employ the Employee from the date set forth above (the
"Effective Date") until expiration of the term of this Agreement, and Employee
is willing to be employed by the Company during that period, on the terms and
subject to the conditions set forth in this Agreement.
In consideration of the mutual covenants and promises of the parties, the
Company and the Employee covenant and agree as follows:
1. DUTIES
During the term of this Agreement, Employee will be employed by the Company to
serve as the Chief Financial Officer of the company. The Employee will devote
such amount of his/her business time to the conduct of the business of the
Company as may be reasonably required to effectively discharge Employee's duties
under this Agreement and, subject to the supervision and direction of the
Company's Chief Executive and the Board of Directors (the "Board"), shall be
principally responsible for the management of the Company's financial and
accounting operations. Unless the parties agree otherwise in writing, during the
term of this Agreement, Employee will perform the services contemplated by this
Agreement at the Company's corporate headquarters located in Newport Beach,
California; provided, however, that Company may, from time to time, require
Employee to travel temporarily to other locations on the Company's business.
Notwithstanding the foregoing, nothing in this Agreement is to be construed as
prohibiting Employee from continuing to serve as a director of other entities
whether or not for profit, so long as his service as such does not substantially
prevent or prohibit Employee from effectively discharging his duties hereunder
and such positions are disclosed to the Board.
2. TERM OF EMPLOYMENT
2.1 Definitions
For purposes of this Agreement the following terms have the following meanings:
(a) "Termination for Cause" means termination by Company of Employee's
employment (i) by reason of Employee's willful dishonesty towards, fraud upon,
or deliberate injury or attempted injury to, the Company, (ii) by reason of
Employee's material breach of this Agreement or (iii) by reason of Employee's
gross negligence or intentional misconduct with respect to the performance of
Employee's duties under this Agreement; provided, however, that no such
termination will be deemed to be a Termination for Cause unless the Company has
provided Employee with written notice of what it reasonably believes are the
grounds for any Termination for Cause and Employee fails to take appropriate
remedial actions during the thirty day period following receipt of such written
notice.
(b) "Termination Other than For Cause" means termination by the Company of
Employee's employment by the Company for reasons other than those which
constitute Termination for Cause.
(c) "Voluntary Termination" means termination by the Employee of the Employee's
employment with the Company, excluding termination by reason of Employee's death
or disability as described in Sections 2.5 and 2.6.
2.2 Basic Term
1
(a) The term of employment of Employee by the Company will commence on the
Effective Date and will extend through the period ending on September 18, 2004,
(the "Termination Date"). Company and Employee may extend the term of this
Agreement by mutual written agreement.
(b) Notwithstanding the foregoing paragraph 2.2(a), during the first 120 days of
the term of this Agreement the Company shall have the right to terminate the
Employee for any reason or no reason at all and such termination shall be
treated as a Voluntary Termination other than for Good Cause, as set forth in
paragraph 2.7(a).
2.3 Termination for Cause
Termination for Cause may be effected by the Board of Directors at any time
during the term of this Agreement and may be effected by written notification to
Employee; provided, however, that no Termination for Cause will be effective
unless Employee has been provided with the prior written notice and opportunity
for remedial action described in Section 2.1. Upon Termination for Cause,
Employee is to be immediately paid all accrued salary, incentive compensation to
the extent earned, vested deferred compensation (other than pension plan or
profit sharing plan benefits, which will be paid in accordance with the
applicable plan), and accrued vacation pay, all to the date of termination, but
Employee will not be paid any severance compensation.
2.4 Termination Other Than for Cause
Notwithstanding anything else in this Agreement, the Board of Directors may
effect a Termination Other Than for Cause at any time upon giving notice to
Employee of such Termination Other Than for Cause. Upon any Termination Other
Than for Cause, Employee will immediately be paid all accrued salary, all
incentive compensation to the extent earned, severance compensation as provided
in Section 4, vested deferred compensation (other than pension plan or profit
sharing plan benefits, which will be paid in accordance with the applicable
plan), and accrued vacation pay, all to the date of termination.
2.5 Termination Due to Disability
In the event that, during the term of this Agreement, Employee should, in the
reasonable judgment of the Board, fail to perform Employee's duties under this
Agreement because of illness or physical or mental incapacity ("Disability"),
and such Disability continues for a period of more than six (6) consecutive
months, Company will have the right to terminate Employee's employment under
this Agreement by written notification to Employee and payment to Employee of
all accrued salary and incentive compensation to the extent earned, severance
compensation as provided in Section 4, vested deferred compensation (other than
pension plan or profit sharing plan benefits, which will be paid in accordance
with the applicable plan), and all accrued vacation pay, all to the date of
termination. Any determination by the Board with respect to Employee's
Disability must be based on a determination of competent medical authority or
authorities, a copy of which determination must be delivered to the Employee at
the time it is delivered to the Board. In the event the Employee disagrees with
the determination described in the previous sentence, Employee will have the
right to submit to the Board a determination by a competent medical authority or
authorities of Employee's own choosing to the effect that the aforesaid
determination is incorrect and that Employee is capable of performing Employee's
duties under this Agreement. If, upon receipt of such determination, the Board
wishes to continue to seek to terminate this Agreement under the provisions of
this section, the parties will submit the issue of Employee's Disability to
arbitration in accordance with the provisions of this Agreement.
2.6 Death
In the event of Employee's death during the term of this Agreement, Employee's
employment is to be deemed to have terminated as of the last day of the month
during which Employee's death occurred, and Company will pay to Employee's
estate accrued salary, incentive compensation to the extent earned, vested
deferred compensation (other than pension plan or profit sharing plan benefits,
which will be paid in accordance with the applicable plan), and accrued vacation
pay, all to the date of termination.
2.7 Voluntary Termination
2
(a) In the event of a Voluntary Termination, other than for "Good Reason," as
defined below, the Company will immediately pay to Employee all accrued salary,
all incentive compensation to the extent earned, vested deferred compensation
(other than pension plan or profit sharing plan benefits, which will be paid in
accordance with the applicable plan), and accrued vacation pay, all to the date
of termination, but Employee will not be paid any severance compensation.
(b) The Employee may voluntarily terminate his/her employment hereunder at any
time with or without Good Reason. For purposes of this Agreement, "Good Reason"
shall mean, so long as the Employee has not been guilty of conduct set forth in
Section 2.1(a), a failure by the Company to comply with any material provision
of this Agreement that has not been cured within thirty (30) days after written
notice of such noncompliance has been given by the Employee to the Company or
(b) the assignment to the Employee by the Company of duties inconsistent with
the Employee's position, duties or responsibilities as in effect immediately
prior to the Effective Date, including, but not limited to, any material
reduction in such position, duties, or responsibilities or material change in
his/her title or (c) a relocation by the Company of the Employee's office to a
location outside a 60 mile radius of Newport Beach, California, in each case of
clauses (b) or (c), without the consent of the Employee. The Employee's election
to terminate his/her employment with Good Reason shall be considered in material
respects to be a Termination for Other Than Cause. Upon a voluntary Termination
for Good Reason, Employee will be paid immediately for all accrued salary, all
incentive compensation to the extent earned, severance compensation as provided
in Section 4, vested deferred compensation (other than pension plan or profit
sharing plan benefits, which will be paid in accordance with the applicable
plan) and accrued vacation pay, all to the date of termination.
3. SALARY, BENEFITS AND OTHER COMPENSATION
3.1 Base Salary
As payment for the services to be rendered by Employee as provided in Section 1
and subject to the terms and conditions of Section 2, Company agrees to pay to
Employee a "Base Salary," payable in equal monthly installments. The Base Salary
payable to Employee under this Section will initially be $120,000 per annum.
The payment of Base Salary hereunder shall not in any way limit or reduce any
other obligation of the Company hereunder, and no other compensation, benefit or
payment hereunder shall in any way limit or reduce the obligation of the Company
to pay the Employee's Base Salary hereunder. The Board, at any time and from
time to time, may increase (but not reduce) the Base Salary payable under this
Agreement, and increase in the Base Salary shall become effective at the time
indicated by the Board without the need for an amendment to this Agreement.
3.2 Incentive Bonus Plans
During the term of his employment under this Agreement, the Employee will be
eligible to participate in all bonus and incentive plans established by the
Board.
3.3 Benefit Plans
During the term of Employee's employment under this Agreement, the Employee is
to be eligible to participate in all employee benefit plans to the extent
maintained by the Company, including (without limitation) any life, disability,
health, accident and other insurance programs, paid vacations, and similar plans
or programs, subject in each case to the generally applicable terms and
conditions of the plan or program in question and to the determinations of any
committee administering such plan or program. On termination of the Employee for
any reason, the Employee will retain all of Employee's rights to benefits that
have vested under such plan, but the Employee's rights to participate in those
plans will cease on the Employee's termination unless the termination is a
Termination Other Than for Cause, in which case Employee's rights of
participation will continue for a period of six months following Employee's
termination.
3.4 Withholding of Taxes
3
The Employee understands that the services to be rendered by Employee under this
Agreement will cause the Employee to recognize taxable income, which is
considered under the Internal Revenue Code of 1986, as amended, and applicable
regulations thereunder as compensation income subject to the withholding of
income tax (and Social Security or other employment taxes). The Employee hereby
consents to the withholding of such taxes as are required by the Company.
3.5 Vacation
During the term of this Agreement, Employee will be entitled to three weeks paid
vacation time per year. To the extent that Employee does not use the full three
weeks of vacation time in any given year, Employee may accrue and carry forward
such unused time up to a maximum accrual of six weeks.
3.6 Expenses
During the term of this Agreement, Company will reimburse Employee for
Employee's reasonable out-of-pocket expenses incurred in connection with
Company's business, including travel expenses, food, and lodging while away from
home, subject to such policies as Company may from time to time reasonably
establish for its employees.
4. SEVERANCE COMPENSATION
4.1 Termination Other Than for Cause or Voluntary Termination; Payment in
Lieu of Notice
In the event Employee's employment is terminated in a Termination Other Than for
Cause or a Voluntary Termination other than for Good Reason, Employee will be
paid as severance pay Employee's Base Salary, as defined in Section 3.1, for the
period commencing on the date that Employee's employment is terminated and
ending on the later of the end of Employee's term of employment or the date
which is three months from the date of termination.
4.2 Termination for Disability
In the event Employee's employment is terminated because of Employee's
disability pursuant to Section 2.5, Employee will be paid as severance pay
Employee's Base Salary, as defined in Section 3.1, for the period commencing on
the date that Employee's employment is terminated and ending on the date which
is three months thereafter.
4.3 Change in Control
In the event that Employee's employment is terminated because of a change in
control (as defined herein) of the Company prior to the Termination Date,
Employee will be paid as severance pay Employee's Base Salary, as defined in
Section 3.1, for the period commencing on the date that Employee's employment is
terminated and ending on the date which is three months thereafter. For purposes
of this Agreement, a "change in control" shall be defined as the sale of more
than fifty (50%) of the Company's outstanding capital stock, other than in
connection with an underwritten public offering of the Company's securities or a
merger (or similar transaction) in which the Company is not the surviving entity
or following which the Company's shareholders immediately prior to such
transaction no longer control a majority of the Company's voting stock.
4.4 Other Termination
In the event of a Voluntary Termination, Termination for Cause or Death,
Employee or Employee's estate will not be entitled to any severance pay.
5. MISCELLANEOUS
5.1 Waiver
4
The waiver of any breach of any provision of this Agreement will not operate or
be construed as a waiver of any subsequent breach of the same or other provision
of this Agreement.
5.2 Entire Agreement; Modification
Except as otherwise provided in the Agreement and in the Option Agreement, this
Agreement represents the entire understanding among the parties with respect to
the subject matter of this Agreement, and this Agreement supersedes any and all
prior understandings, agreements, plans, and negotiations, whether written or
oral, with respect to the subject matter hereof, including without limitation,
any understandings, agreements, or obligations respecting any past or future
compensation, bonuses, reimbursements, or other payments to Employee from
Company. All modifications to the Agreement must be in writing and signed by the
party against whom enforcement of such modification is sought.
5.3 Notice
All notices and other communications under this Agreement must be in writing and
must be given by personal delivery, telecopier or telegram, or first class mail,
certified or registered with return receipt requested, and will be deemed to
have been duly given upon receipt if personally delivered, three (3) days after
mailing, if mailed, or twenty-four (24) hours after transmission, if delivered
by telecopies or telegram, to the respective persons named below:
If to Company: Axiom Pharmaceuticals, Inc.
4695 Macarthur Court, 11th Floor
Newport Beach, CA 92660
Telecopier: (310) 301-7748
Telephone: (310) 301-7728
Attn: President
If to Employee: Lan Hao
3 Laurelwood Drive
Irvine, CA 92620
Telecopier: (714) 508-5934
Telephone: (714) 508-5934
Any party may change such party's address for notices by notice duly given
pursuant to this Section.
5.4 Headings
The Section headings of this Agreement are intended for reference and may not by
themselves determine the construction or interpretation of this Agreement.
5.5 Governing Law
This Agreement is to be governed by and construed in accordance with the laws of
the State of California applicable to contracts entered into and wholly to be
performed within the State of California by California residents. Any
controversy or claim arising out of or relating to this Agreement, or breach of
this Agreement (except any controversy or claim with respect to Section 5 or 6),
is to be settled by arbitration in Newport Beach, California in accordance with
the Commercial Arbitration Rules of the American Arbitration Association, and
judgment on the award rendered by the arbitrators may be entered in any court
having jurisdiction. There must be three arbitrators, one to be chosen directly
by each party at will, and the third arbitrator to be selected by the two
arbitrators so chosen. Each party will pay the fees of the arbitrator he or she
selects and his or her own attorneys, and the expenses of his or her witnesses
and all other expenses connected with presenting his or her case. Other costs of
5
the arbitration, including the cost of any record or transcripts of the
arbitration, administrative fees, the fee of the third arbitrator, and all other
fees and costs, will be borne equally by the parties.
5.6 Survival of Company's Obligations
This Agreement will be binding on, and inure to the benefit of, the executors,
administrators, heirs, successors, and assigns of the parties; provided,
however, that except as expressly provided in this Agreement, this Agreement may
not be assigned either by Company or by Employee.
5.7 Counterparts
This Agreement may be executed in one or more counterparts, all of which taken
together will constitute one and the same Agreement.
5.8 Enforcement
If any portion of this Agreement is determined to be invalid or unenforceable,
that portion of this Agreement will be adjusted, rather than voided, to achieve
the intent of the parties under this Agreement.
5.9 Indemnification
The Company agrees that it will indemnify and hold the Employee harmless to the
fullest extent permitted by applicable law from and against any loss, cost,
expense or liability resulting from or by reason of the fact of the Employee's
employment hereunder, whether as an officer, employee, agent, fiduciary,
director or other official of the Company, except to the extent of any expenses,
costs, judgments, fines or settlement amounts which result from conduct which is
determined by a court of competent jurisdiction to be knowingly fraudulent or
deliberately dishonest or to constitute some other type of willful misconduct.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
AXIOM PHARMACEUTICALS, INC.
By /s/ Peter Cunningham
------------------------
Peter Cunningham,
President
EMPLOYEE
/s/ Lan Hao
------------------------
Lan Hao
6
EXHIBIT 10.3
AGREEMENT FOR PROCESSING (OEM)
(English Translation)
PARTY A: SHENYANG TIANWEI WERKE PHARMACEUTICAL CO., LTD.
PARTY B: QIQIHAER NO. 2 PHARMACEUTICAL FACTORY
Whereas Party A needs to build a new factory in light of GMP Standard because of
the City government's policy regarding the Tiexi District Reconstruction and the
establishment of joint venture with American party. Under the principle of
mutual benefit, Party A and Party B through friendly consultation agree that
Party A will entrust Party B to manufacture the pharmaceutical products whose
license are owned by Party A. Both parties hereby enter into the following
agreements:
I. Party A shall provide the raw & supplementary materials, and package.
II. Party A shall notify Party B the specific products for manufacture
based on its own sale plan each month.
III. Party B shall provide Party A with certified products in both quality
and quantity in time according to Party A's requirement.
IV. Party B shall not sell or market the products appointed to process by
Party A.
V. The detailed prices are listed as below:
1. Cephalothin: one bottle contains 15 granules. The price per bottle is
RMB0.30, and the price may rise by RMB0.10 seasonally.
2. Weifukang Cream: the price per tube is RMB1.65, and the price may rise
by RMB0.10 seasonally.
3. Asarone: one box contains 18 tablets. The price per box is RMB1.20, and
the price may rise by RMB0.10--RMB0.60 seasonally.
4. Norfloxacin: the price per bottle is RMB0.95.
5. Rifampicin: one bottle contains 100 granules. The price per bottle is
not more than RMB1.80.
6. Other specific products: the price may be
discussed seasonally.
VI. If any change occurs to any party, the other party shall be notified within
one month.
VII. Payment: the payment shall be made upon delivery.
VIII. All other matters shall be negotiated by both parties.
IX. The valid term of this Agreement is two years effective from the date of
signature by both parties.
PARTY A: SHENYANG TIANWEI WERKE PHARMACEUTICAL CO., LTD.
Sept. 19, 2002
PARTY B: QIQIHAER NO. 2 PHARMACEUTICAL FACTORY
Sept. 19, 2002
1
EXHIBIT 10.4
Agreement on Agency for Sale (Distribution)
(English Translation)
PARTY A: SHENYANG TIANWEI PHARMACEUTICAL FACTORY
PARTY B: LIAONING WEIKANG MEDICINE CO., LTD.
In light of the principles of amicable consultation, mutual benefit, and joint
development, Party A and Party B enter into the following agreement.
I. Both Party A and Party B agree to establish the stable and fixed sale
relationship.
II. Party B shall be the sole agency reseller in the territory of Shenyang
for all pharmaceutical products manufactured by Party A.
III. The pharmaceutical products manufactured by Party A cannot be sold to
other clients in the territory of Shenyang.
IV. The price of Party A for supply cannot be higher than other equivalent
suppliers' price.
V. Party A agrees to prepare some products in stock for Party B.
VI. Party A shall provide Party A with the marketing information for the
products.
VII. The payment shall be made in cash; both parties agree to adopt the
triptich as the invoice for settlement, and the time of settlement
shall based on the batch of the products or month by month.
VIII. Other matter unresolved herein shall be negotiated by both parties.
IX. This agreement is made in two copies with one copy for each party.
X. The valid term of this agreement shall be five years, effective from
the date of this agreement to March 30, 2004.
Party A: Shenyang Tianwei PARTY B: LIAONING WEIKANG MEDICINE
Pharmaceutical Factory CO., LTD.
/s /s
MARCH 29, 1999
1
EXHIBIT 10.5
CONSULTING AGREEMENT
This Agreement is made as of August 25, 2003, by and between Axiom
Pharmaceuticals, Inc. ("Company"), a China Pharmaceutical company with its
principal offices at No. F.3004 Sankei Torch Bldg, 262A Shifu Road, Shenyang
City, Lianing Province, Peoples Republic of China and US Representative Offices
at 8324 Delgany Avenue, Playa del Rey, California, 90293 and Tripoint Capital
Advisors, LLC ("Consultant"), a Maryland limited liability company, with its
principal offices at 15245 Shady Grove Road, Suite 400, Rockville, Maryland
20850.
Witnesseth
WHEREAS, the Company requires expertise in the area of business development to
support it's business and growth and desires to engage Consultant to provide
such business development services and specifically to assist the Company with
structuring of capital transactions; business development; corporate
development; and
WHEREAS, Consultant, through its principals, agents and employees, has certain
expertise in the evaluation of potential business opportunities and the
implementation of various projects of the nature and type contemplated by the
Company in its future expansion and development which Consultant has agreed to
provide to the Company;
NOW, THEREFORE, in consideration of the premise and the mutual promises and
covenants contained herein and subject specifically to the conditions hereof,
and intending to be legally bound thereby, the parties agree as follows:
1. Appointment of Consultant
The Company hereby appoints Consultant, and Consultant agrees to represent the
Company, as a non-exclusive consultant to assist the Company in its business and
corporate development, in structuring its capital transactions and to assist in
the contemplated marketing and development of the Company in the United States.
Consultant shall have the right during the term of this agreement to represent
to the public that it is a consultant to the Company.
2. Consultant's Rights and Duties
Consultant shall use its best efforts to assist the Company in its business and
corporate development, including but not limited to:
(ii) Assist in the development and implementation of the Company's
business plan.
(iii) Work with the Company's Auditors in order to assist the Company to
comply with US accounting standards ("GAAP")
(iv) Assist the Company in creating a corporate image.
(v) Assist the Company in maintaining proper US corporate compliance and
governance.
(vi) Review any private placements.
3. Company Obligations
(a) The Company will be required to sign separate retention agreements with
outside professionals. Fees specified under this Agreement include all legal
work relating to SEC filings (excluding any litigation) through the entire
period of the engagement provided the Company employs counsel recommended by
Consultant. Such counsel may require that the Company sign a separate retainer
agreement.
1
(b) The Company's officers, attorneys and accountants will have to be ready to
answer questions from the SEC, NASDAQ and/or other regulatory agencies, markets
or exchanges. For NASDAQ applications, expect several rounds of comments. If the
Company desires an American Stock Exchange Listing, the Company will need to
follow a similar application process.
(c) The Company will need to have audited financial statements for at least the
last two fiscal years prepared in accordance with US GAAP. In addition, the
Company will need to prepare and present quarterly information that has been
reviewed by an independent auditor for the previous two years and on a
"go-forward basis".
4. Company Information
In connection with Consultant's performance of its duties hereunder, the Company
shall (i) provide Consultant, on a timely basis, all information reasonably
requested by Consultant, and (ii) make its officers and professionals available
to Consultant and such third parties as Consultant shall designate at reasonable
times and upon reasonable notice.
5. Confidential Information
Consultant acknowledges that, in the course of performing its duties hereunder,
it may obtain information relating to the Company, which the Company has marked
as confidential ("Confidential Information"). Consultant shall hold at all
times, both during the term of this agreement and at all times thereafter, such
Confidential Information in the strictest confidence, and shall not use such
Confidential Information for any purpose, other than as may be reasonably
necessary for the performance of its duties pursuant to this agreement, without
the Company's prior written consent. Consultant shall not disclose any
Confidential Information to any person or entity, other than to Consultant's
employees or consultants as may be reasonably necessary for purposes of
performing its duties hereunder, without the Company's prior written consent.
The foregoing notwithstanding, the term "Confidential Information" shall not
include information which (i) becomes generally available to the public, other
than as a result of a breach hereof, (ii) was available on a non-confidential
basis prior to its disclosure to Consultant by the Company, or (iii) becomes
available to Consultant on a non-confidential basis from a source other than the
Company, provided that such source is not bound by a confidentiality agreement
with respect to such information. The foregoing notwithstanding, Consultant may
disclose Confidential Information to the extent required by law or regulation,
including but not limited to court orders, subpoenas, civil investigative
demands and interrogatories.
6. Compensation
As compensation for Consultant's services, the Company shall pay Consultant
$10,000 upon the execution of this agreement and thereafter $10,000 per month,
payable on the 1st day of each month. In addition, the Company shall pay the
Consultant's nominee for the Board of Directors a monthly of $2500.00 and any
other expense reimbursement or fee, which is consistent with any other outside
members of the Board.
7. Expense Reimbursement
The Company shall reimburse Consultant periodically for its reasonable
out-of-pocket expenses (excluding compensation to Consultant's employees)
arising from Consultant's performance hereunder.
8. Indemnification
The Company agrees to indemnify and hold harmless Consultant (including each of
its directors, officers, employees, partners and agents) with respect to any
liability (and actions in respect thereof) incurred by Consultant by virtue of
its retention hereunder and shall reimburse Consultant for any legal or other
expenses reasonably incurred in connection with investigating or defending any
such liability or action, provided that the Company shall have the right to
control the defense of any claim giving rise to such liability and no such claim
shall be settled without the consent of the Company. The foregoing provisions
shall survive termination of this Agreement and any investigation with respect
thereto by any party hereto.
2
Furthermore, the Company understands and agrees that its financial statements,
any filings which the Company makes with the SEC, NASD, state regulators or any
market or exchange and the contents thereof are ultimately the responsibility of
the Company and its officers and directors. Consultant can assist and advise you
in the preparation of such filings but the Company must approve and is
responsible for the contents of all filings.
9. Other Engagements
The Company acknowledges that Consultant is and will be acting as a consultant
to other business enterprises seeking business development, investment banking
and/or other services normally provided by Consultant and agrees that
Consultant's provision of services to such enterprises shall not constitute a
breach hereof or of any duty owed to the Company by virtue of this agreement.
10. Term
This agreement is effective upon execution by the Company as provided below and
shall continue in effect for 12 months or until terminated by either party
pursuant to Section 11.
11. Termination
Either party may terminate this agreement at any time and for any reason, with
or without cause, upon the giving 30 days written notice of termination to the
other party; provided, however, that Consultant shall be entitled to full
compensation, as set forth in Section 6, up to the date of termination,
regardless of the reason for the termination and shall be paid all expenses
incurred in connection with its acting as a consultant to the Company pursuant
to Section 7.
12. General Provisions
(a) This agreement shall be governed by and under the laws of the State of
Maryland without giving effect to conflicts of law principles. If any provision
hereof is found invalid or unenforceable, that part shall be amended to achieve
as nearly as possible the same effect as the original provision and the
remainder of this agreement shall remain in full force and effect.
(b) Any dispute arising under or in any way related to this agreement shall be
submitted to binding arbitration by the American Arbitration Association in
accordance with the Association's commercial rules then in effect. The
arbitration shall be conducted in Rockville, Maryland. The arbitration shall be
binding on the parties and the arbitration award may be confirmed by any court
of competent jurisdiction.
(c) This agreement constitutes the entire agreement and final understanding of
the parties with respect to the subject matter hereof and supersedes and
terminates all prior and/or contemporaneous understandings and/or discussions
between the parties, whether written or verbal, express or implied, relating in
any way to the subject matter hereof. This agreement may not be altered,
amended, modified or otherwise changed in any way except by a written agreement,
signed by both parties.
(d) Any notice or other communication pursuant hereto shall be given to a party
at its address first set forth above by (i) personal delivery, (ii) commercial
overnight courier with written verification of receipt, or (iii) registered or
certified mail. If so mailed or delivered, a notice shall be deemed given on the
earlier of the date of actual receipt or three (3) days after the date of
authorized delivery.
(e) This agreement may be executed in counterparts, each one of which shall
constitute an original and all of which taken together shall constitute one
document. The Company shall confirm that the foregoing is in accordance with its
understanding by signing and returning to Consultant the enclosed copy of this
agreement, which shall become a binding agreement upon Consultant's receipt.
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
duly executed as of the date first written above.
3
TRIPOINT CAPITAL ADVISORS, LLC
By: /s/ Mark Elenowitz
--------------------------
Mark Elenowitz
Axiom Pharmaceuticals, Inc.
By: /s/ That Ngo
---------------------------
That Ngo
President, CEO
4
EXHIBIT 10.6
CONSULTING AGREEMENT
RECITALS
This Consulting Agreement (hereinafter referred to as "Agreement" or "Consulting
Agreement") is made on the 1st day of May 2003, between Axiom Pharmaceuticals,
Inc., whose address is 8324 Delgany Avenue, Playa del Rey, CA 90293,
(hereinafter referred to as "Axiom" or "Company") and Amaroq Capital LLC, of 2
Wolf Road, Bourne, MA 02532 (hereinafter referred to as "Consultant") with
reference to the following facts:
I. Axiom has asked to retain Consultant to provide various services to
Axiom as agreed to by both parties and outlined in Article 3.
II.The Consultant has advised Axiom of its willingness, ability and desire
to provide such services as outlined in Article 3 and on the terms and
conditions as set forth in this Agreement.
NOW, therefore, in consideration of the foregoing recitals and the terms,
conditions and covenants contained herein, it is hereby agreed as follows:
ART. 1 APPOINTMENT
Axiom hereby appoints Consultant and Consultant hereby agrees to hold themselves
available to render, and to render at the request of Axiom and to render
non-exclusive, independent advisory and consulting services, set forth in "I"
and "II" above, to the best of its ability, in compliance with all applicable
laws, Axiom's Articles of Incorporation and By-Laws and the terms and conditions
set forth herein. Consultant further agrees to render such services
conscientiously and to devote its best reasonable efforts and abilities thereto.
Consultant further agrees to observe all policies and guidelines that have been
promulgated by Axiom's Board of Directors or its Officers.
ART. 2 TERMS AND TERMINATION
The term of this Agreement shall be six (6) months and commence on 1 May 2003
and up to 1 November 2003, thereafter, this Agreement shall automatically
terminate. Neither party has the right to terminate this Agreement anytime prior
to its conclusion unless by mutual agreement and in writing.
ART. 3 SCOPE OF CONSULTANCY
The Consultant will perform such financial and operational consulting for and on
behalf of Axiom in relation to Axiom's on-going business and financial
development. The Consultant will be available, by mutual agreement, on an
as-needed basis, to provide consulting services to Axiom, including, without
limitation:
3.1 Undertake the development of a business plan for Axiom. Such
business plan will include an Annual Operating Plan and a Strategic
Plan for the Company.
3.2 Carry out such merchant banking activities as may be required and
mutually agreed. Such activities may include identifying and
approaching financial partners, valuations, and financial and
business modeling.
3.3 Commence certain business development activities, as mutually
agreed, which may include lease financing and other vendor
negotiations.
3.4 Undertake and assist Axiom with corporate development program
development and implementation. Such activities may include work in
1
various disciplines including partnering, licensing, joint ventures
and other such strategic planning and development activities.
ART. 4 REMUNERATION
Consultant will be remunerated for such services rendered under Art. 3 as
follows:
4.1 $5,000.00, payable 30 days from the effective date of this
Agreement. Payment shall be made via wire transfer or check.
Consultant is entitled to a 5% late fee should monies due fail to be
paid as of the effective payment date.
4.2 40,000 restricted shares of Axiom Pharmaceutical (OTB BB AXIM) with
piggy-back registration rights at next registration.
ART. 5 EXPENSES
In addition to the fees paid under the previous Article, Consultant shall be
reimbursed for all reasonable expenses incurred by Consultant during the term of
this Agreement including but not limited to fax, telephone, transportation,
translation, and incidental travel expenses. All non-incidental travel expenses
(over US$300) shall be arranged and prepaid by Axiom including airfare and
suitable hotel accommodation. The Consultant shall submit itemized reimbursement
requests supported by sufficient documentation of the expenditures and
explanation of their purposes. All expenses must be reimbursed by Axiom to
Consultant, not later than ten (10) business days, subsequent to Consultants
expense reimbursement request.
ART. 6 INDEPENDENT CONTRACTOR
It is expressly agreed that Consultant is acting as an independent contractor in
performing the services hereunder. Axiom shall carry no worker's compensation
insurance or any health or accident insurance to cover Consultant or any of
Consultant's employees. Axiom shall not pay any contribution to social security,
unemployment insurance, state and federal income taxes.
ART. 7 CONFLICT OF INTEREST
Should there occur any conflict of interest, Consultant will advise Axiom
thereof immediately and both Axiom and Consultant will then determine the
appropriate approach to be followed.
ART. 8 LIABILITY
Axiom will indemnify and hold Consultant harmless from and against any and all
liabilities incurred, brought or threatened to be brought or entered or enforced
or conducted against Axiom or any of its Connected Persons which arise out of
matters or transactions contemplated by or consequent upon Consultant or its
engagement under the terms of this Agreement, except to the extent that those
liabilities arise out of the willful default or gross negligence of Consultant,
or, as the case may be, such connected persons. The Consultant shall not bind or
commit Axiom to any third party agreements or arrangements or obligations
without the explicit written consent of Axiom. The Consultant, if party to any
Axiom agreement shall have the written signature of two (2) Officers or
Directors at Axiom upon any such occasion or event or a written wavier from
two(2) Officers or Directors at Axiom thereof.
ART. 9 CONFIDENTIALITY
Consultant shall not disclose or appropriate to his own use, or to the use of
any third party, at any time during or subsequent to the term of this Agreement,
any secret or confidential information of Axiom or any of Axiom's affiliates or
subsidiaries of which Consultant becomes aware during such period. Upon
termination of this Agreement, Consultant shall promptly deliver to Axiom all
manuals, letters, notes, data and all other materials of a secret or
confidential nature that are under the control of the Consultant.
ART. 10 NO ASSIGNMENT
2
This Agreement is between Axiom and Consultant and neither Axiom nor Consultant
may sell, assign, transfer or hypothecate any rights or interests created under
this Agreement or delegate any of their duties without the prior written consent
of the other. Any such assignment or delegation of either party without such
consent shall be void.
ART. 11 SEVERABILITY
If any provision of this Agreement is held to be unenforceable, invalid or
illegal by any court of competent jurisdiction, or arbitration, such
unenforceable, invalid or illegal provision shall not effect the remainder of
this Agreement.
ART. 12 ENTIRE AGREEMENT
This Agreement represents the entire agreement between the parties. It may not
be changed orally, but only in writing, signed by the party against whom
enforcement of any waiver, charge, modification, extension or discharge is
sought.
ART. 13 APPLICABLE LAWS
The validity of this Agreement and the interpretation and performance of all of
its terms shall be governed by the laws of Barnstable County, the Commonwealth
of Massachusetts, USA. The prevailing party in any legal action brought by one
party against the other arising out of this Agreement shall be entitled, in
addition to other rights and remedies it may have, to reimbursement for its
expenses, including court costs and reasonable attorney's fees.
AGREED TO AND ACKNOWLEDGED:
"CONSULTANT"
/s/ Joseph T. Cunningham Date: 5/1/03
------------------------------ ------
Joseph T. Cunningham
President, Amaroq Capital LLC
AXIOM PHARMACEUTICALS, INC.
/s/ Douglas Maclellan Date: 5/1/03
------------------------------ ------
Douglas Maclellan
3
EXHIBIT 10.7
Corporate Consulting Services
This AGREEMENT shall be effective on this 27th day of June 2003 and is made
between Woodbridge Management, Ltd ("Consultant") and Axiom Pharmaceuticals,
Inc., a Nevada Corporation having offices at No. F.3004 Sankei Torch Bldg, 262A
Shifu Road, Shenyang City, Liaoning Province ("Client").
1.0 PREMISES
WHEREAS, the Consultant has expertise in the area of business
development, corporate strategy, joint ventures, mergers and acquisitions; and
WHEREAS, having reviewed the Consultant's background and experience,
the Client has made a determination as to the competency of Consultant to assist
the Company with such matters;
NOW THEREFORE, in consideration of the premises, covenants and
conditions contained in this AGREEMENT, and intending to be legally bound, the
parties mutually agree as follows:
2.0 AUTHORITY AND RESPONSIBILITY OF CONSULTANT
2.1 Woodbridge will be the consultant of record and will perform the
services listed in Section 2.2 below. No other individual will be substituted
without the express written permission of the Client.
2.2 The Consultant will use his best efforts to assist with the following:
a) Aiding in Client's corporate strategy and business planning, and
arranging meetings when appropriate;
b) Attending key meetings for Client for the purpose of business
development;
c) Providing assistance with regard to structuring of proposed mergers
and acquisitions by Client;
d) Liaising with Client's accountants and legal advisors when necessary
to assist with Client's business development;
e) All other services which the Consultant sees fit to render under
this AGREEMENT; and
f) Consultant shall not be responsible for any fundraising on behalf of
Client, unless otherwise agreed to in writing by Consultant.
3.0 AUTHORITY AND DUTIES OF CLIENT.
3.1 Client shall provide Consultant with all necessary information about the
company and will provide a representative to act as a liaison to the Consultant.
4.0 LEVEL OF EFFORT; TERM OF AGREEMENT
4.1 The term of this AGREEMENT is one year.
4.2 This AGREEMENT may be terminated by either party with 30 days written
notice.
4.3 The Consultant will use his best efforts throughout the term of the
AGREEMENT.
1
5.0 FEES AND TERMS OF SALE
5.1 At the time of the signing of this AGREEMENT, the Consultant shall receive
80,000 restricted shares of Common Stock of Axiom Pharmaceuticals, Inc.
5.2 In addition, the Consultant shall receive reimbursement for all reasonable
out-of-pocket expenses incurred as a result of performing the services described
in Section 2.
6.0 PROPRIETARY INFORMATION
6.1 The Consultant agrees to safeguard confidential information of Client and
will not disclose or permit the use or disclosure of any such information,
except as authorized in advance by Client in writing. The Consultant further
agrees to surrender all confidential data to Client either on request,
cancellation, or termination of this AGREEMENT and will not retain copies,
notes, or memoranda of such data. The obligations specified in this section
shall be deemed to survive the termination of this AGREEMENT.
7.0 RELATIONSHIP OF PARTIES
7.1 This AGREEMENT does not create an employer-employee or agent-servant
relationship between the parties. At all times under this AGREEMENT the
Consultant shall be considered an independent contractor.
7.2 Consultant shall not be responsible for any obligation or liability incurred
or assumed by the Client or its employees, affiliates, representatives, agents,
or subcontractors and the Client hereby indemnifies and holds Consultant
harmless from any claim arising from the acts or omissions of such persons.
8.0 MODIFICATIONS; ENTIRE AGREEMENT
8.1 This writing contains the entire AGREEMENT of the parties. No
representations were made or relied upon by any party other than those expressly
set forth herein. No agent, employee, or representative of a party is empowered
to alter or modify any of the terms in this AGREEMENT unless such modification
is done in writing and signed by the signatories below, or other authorized
representatives designated, in writing, by the respective parties.
9.0 SEVERABILITY
9.1 Any provision of this AGREEMENT that is invalid, illegal or unenforceable in
any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of
such invalidity, illegality, or unenforceability, without affecting in any way
the remaining provisions hereof in such jurisdiction or rendering that or any
other provision of this AGREEMENT invalid, illegal, or unenforceable in any
other jurisdiction.
10.0 WAIVERS
10.1 Any waiver by a party to any term or condition of this AGREEMENT by the
other party shall not affect or impair the waiving party's right with respect to
any subsequent act or omission of the same type, nor shall it be deemed to waive
any other right under this AGREEMENT; nor shall any delay or omission of a party
to exercise any right arising under this AGREEMENT affect or impair such party's
rights as to the same or any future delay or omission; nor shall the failure of
a party to this AGREEMENT to require or exact full and complete compliance with
any one or more of the provisions of this AGREEMENT be construed as in any
manner changing such provision or provisions.
11.0 AUTHORITY TO ACT
2
11.1 The parties hereto warrant and represent that they have the full power and
authority to enter into this AGREEMENT and to consummate the transactions
contemplated hereby and have been duly authorized to execute this AGREEMENT.
12.0 NOTICES
12.1 All notices, purchase orders, and other communications contemplated under
this AGREEMENT shall be in writing and shall be either personally delivered, or
transmitted by certified mail, facsimile transmission, wire, or other device
reasonably calculated to effect delivery of documents within five (5) business
days. Unless otherwise agreed to by all the parties, such notices, orders, and
communications shall be sent, as appropriate, to the parties at the addresses
noted below:
3
If to Consultant:
Woodbridge Management, Ltd.
Linda Veri - President
192 Blue Hill Road South
P.O. Box N-7101 Nassau, Bahamas
709-B West Rusk #580
Rockwall, Texas 75087
If to the Client:
Axiom Pharmaceuticals, Inc.
8324 Delgany Avenue
Playa Del Rey, CA 90293
13.0 CONROLLING LAW AND DISPUTE RESOLUTION
13.1 This AGREEMENT shall be interpreted, controlled, and enforced in accordance
with the substantive laws of the State of New York.
13.2 Each party shall bear its own expenses in any litigation conducted under
this section.
13.2 Any controversy or claim arising out of or relating to this AGREEMENT, or
breach of this AGREEMENT is to be settled by arbitration in New York, NY in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association, and judgment on the award rendered by the arbitrators may be
entered in any court having jurisdiction. There must be three arbitrators, one
to be chosen directly by each party at will and the third arbitrator to be
selected by the two arbitrators so chosen. Each party will pay the fees of the
arbitrator he or she selects and his or her own attorneys, and the expenses of
his or her witnesses and all other expenses connected with presenting his or her
case. Other costs of the arbitration, including the cost of any record or
transcripts of the arbitration, administrative fees, the fee of the third
arbitrator, and all other fees and costs, will be borne equally by the parties.
14.0 TERMINATION
14.1 This AGREEMENT shall be deemed terminated upon the occurrence of any
one or more of the following events:
(a) A party commits a breach of one or more material terms and
conditions of this AGREEMENT and the nonbreaching party elects to terminate this
AGREEMENT;
(b) In the Opinion of the Client, the Consultant fails to put forth a
satisfactory level of effort in performing the duties described in Section 2.0;
(c) A party becomes insolvent, or subject to a petition in bankruptcy,
or is placed under the control of a receiver, liquidator, or committee of
creditors; or
(d) Upon mutual consent of the parties.
14.2 Termination of this Agreement for any reason shall not effect the
compensation to be paid to consultant pursuant to Section 5.
IN WITNESS WHEREFORE, the parties hereto have duly executed this Contract for
Consulting Services.
4
Consultant
BY: /s/ Charlie Smith
------------------------------
Printed Name: Charlie Smith
Title: President
Date: 6/27/03
Axiom Pharmaceuticals, Inc.
BY: /s/ Douglas MacLellan
------------------------------
Printed Name: Douglas MacLellan
Title:
Date: 6/27/03
5
EXHIBIT 10.8
CONSULTING AGREEMENT
This is an agreement dated and effective this 3rd day of April, 2003 by
and between Madden Consulting, Inc (hereinafter referred to as The Company), and
Axiom Pharmaceuticals, Inc. (OTCBB: AXIM), whose address is 8324 Delgany Avenue,
Playa del Rey, CA 90293 (hereinafter referred to as The Client).
RECITALS
I. The Client desires to obtain consulting services from The Company as
more particularly described herein ("Scope of Services and Manner of
Performance").
II. The Company is in the business of providing such consulting
services and has agreed to provide the services on the services on the terms and
conditions set forth in this agreement.
Now, therefore, in consideration of the faithful performance of the
obligations set forth herein and other good and valuable consideration the
receipt and sufficiency of which are hereby acknowledged, The Company and The
Client hereby agree as follows.
TERMS
1. Scope of Services. The Company will perform financial consulting for and on
behalf of The Client in relation to interactions with broker-dealers,
shareholders and members of the public and will consult with and advise The
Client on matters pertaining to corporate exposure/investor awareness, business
modeling and development and the release of press materials, and can perform
services including:
A. Telephone marketing/advertising campaigns
B. Internet marketing/advertising campaigns
C. Road-show presentations
D. Investor conference calls
E. Media submissions
2. Manner of performance. It is intended that The Company will provide research
on AXIM and distribute company materials to institutions, portfolio managers,
broker-dealers, financial advisors and other persons whom The Company determines
in its sole discretion, are capable of disseminating such information to the
general public. The Company will also advice The Client concerning marketing and
promotional matters relating to its business. The Company will act upon The
Client's behalf in the investment community, with existing shareholders, and the
public. It is expressly agreed and acknowledged that The Company will not be
expected to provide investment advice or recommendations regarding AXIM to
anyone. The Company will focus on contacting with information concerning AXIM.
Additionally, The Company shall be available for advice and counsel to the
officers and directors of AXIM at such reasonable and convenient times and
places as may be mutually agreed upon. Except as aforesaid, the time, place and
manner of performance of the services hereunder, including the amount of time
allocated by The Company, shall be determined athe sole discretion of The
Company.
3. Status of Consultant. The Company shall act as an independent Consultant and
not as an agent or employee of The Client and The Company shall make no
representation as an agent or employee of The Client. The Company shall furnish
insurance and be responsible for all taxes as an independent Consultant. The
Company shall have no authority to bind The Client or incur other obligations on
behalf of the client. Likewise, The Client shall have no authority to bind on
incur obligations on behalf of The Company.
4. Disclosure of Material Events. The Client agrees to promptly disclose to The
Company those events/discoveries which are known and/or anticipated that may or
conceivably may have an impact on the stock, business operations, future
1
business, or public perception of AXIM, as this has material impact on the
ability and effectiveness of The Company and service rendered. It shall be
understood that excluded from this disclosure shall be information deemed to be
non-public or "inside" information.
The Company that The Client considers to be secret, proprietary or non-public
and so notifies The Company. The Company agrees to hold said information in
confidence. Proprietary information shall be used by The Company only in
connection with services rendered under this Agreement. Proprietary information
shall not be deemed to include information that a) is in or becomes in the
public domain without violation of this Agreement by The Client, or b) is
rightfully received from a third entity having no obligation to The Client and
without violation of this Agreement. In reciprocal, The Client agrees to hold
confidential all trade secrets of and methods employed by The Company in
fulfillment of services rendered.
6. Indemnification. The Client agrees to indemnify and hold harmless The Company
against any losses, claims, damages, liabilities and/or expenses (including any
legal or other expenses reasonably incurred in investigating or defending any
action or claim in respect thereof) to which The Company may become subject,
because of the actions of The Client or its agents. Likewise, The Company agrees
to indemnify and hold harmless The Client against any losses, claims, damages,
liabilities and/or expenses (including any legal or other expenses reasonably
incurred in investigating or defending any action or claim in respect thereof)
to which The Client may become subject, because of the actions of The Company or
its agents. The Company is willing and capable of providing services on a "Best
Efforts" basis. Payment by The Client to The Company is irrevocable and
7. Conflict of Interest. The Company shall be free to perform services for other
persons. The Company will notify The Client of its performance of consulting
services for any other Client that could conflict with its obligations under
this agreement.
8. Term. Refer to Schedule A.
9. Payment. Refer to Schedule B.
10. Payment Instructions. Refer to Schedule C.
11. Severability. This agreement may be dissolved at any time at the express
consent of both parties. In the event any part of this agreement shall be held
to be invalid by any competent court or arbitration panel, this agreement shall
be interpreted as if only that part is invalid and that the parties to this
agreement will continue to execute the rest of this agreement to the best of
their abilities unless both parties mutually consent to the dissolution of this
agreement.
This agreement shall be interpreted in accordance with the laws of the
State of Washington. This agreement and attached schedules constitutes the
entire contract of the parties with respect to the matters addressed herein and
no modifications of this agreement shall be enforceable unless in writing signed
by both The Company and The Client. This agreement is not assignable by either
party without the consent of the other.
In witness whereof The Company and The Client have caused this
agreement to be executed on the date indicated in Schedule A.
SCHEDULE A
Term of Commitment
The Company shall perform consulting services for The Client for 6 months, which
shall begin upon execution, by all parties, of this agreement.
2
SCHEDULE B
Payment
$10,000.000 USD- and 150,000 restricted shares of Axiom Pharmaceutical (OTCBB:
AXIM) with piggy-back registration rights at next registration.
SCHEDULE C
Payment shall be made via wire or check sent to:
Madden Consulting, Inc.
37323 17 Ave S
Federal Way, WA 98003
Wire instructions: Omitted in Filing
Axiom Pharmaceutical, Inc.
Authorized person /S/ Douglas MacLellan Title VICE CHARMAN Date 4-20-2003
----------------------- ------------------ ---------
I hereby certify that I agree to the terms of the contact above and am
authorized to enter into a binding contract.
Madden Consulting, Inc.
Authorized person /s/ Tom Madden Title Date
----------------------- -------------- --------
I hereby certify that I agree to the terms of the contract above and am
authorized to enter into a binding contract.
3
EXHIBIT 10.9
GREAT EASTERN SECURITIES, INC.
2 Seaview Blvd.
Port Washington, NY 11050
1-866-258-5200
Tel: 516-484-5111
Fax: 516-484-5335
www.getrader.com
December 18, 2003
Mr. Peter Cunningham
President and CEO
Axm Pharma, Inc.
4695 Macarthur Court, 11th Floor
Newport Beach, California 92660
Dear Mr. Cunningham:
This will confirm the arrangements, terms and conditions pursuant to
which Great Eastern Securities Corporation ("Advisor") has been retained to
serve as an investment banker to Axm Pharma, Inc.(the "Company") for a twelve
(12) month period, with a mutual extension clause for an additional twelve (12)
months, commencing on the date hereof, subject to the termination provisions set
forth in Paragraph 2 hereof. For good and valuable consideration, the
sufficiency of which is hereby acknowledged, the undersigned hereby agree to the
following terms and conditions:
1. Duties of Advisor. Advisor shall, as more fully set forth
below in this Paragraph 1, assist the Company in broker
relations and distribution channels for the Company's stock,
Advisor agrees to:
(a) assist the Company in its presentation to the
brokerage community and the introduction to security
firms and brokers;
(b) assist the Company in identifying analysts in the
brokerage community to initiate coverage on the
Company;
(c) sponsor the Company to at least two small cap or
investment conferences;
1
(d) coordinate a comprehensive Investor Relations
campaign including featured profiles by several
reputable groups, Internet advertising, lead
generation, print advertising, among other
activities;
(e) be available on request, on appropriate notice, to
meet with the Company's Management and/or Board of
Directors for quarterly management meetings; and
(f) market intelligence
The services described in Paragraph 1 may be rendered by Advisor
without any direct supervision by the Company and at such time and place in such
manner (whether by conference, telephone, letter or otherwise) as Advisor may
reasonably determine.
2. Term. The term of Advisor's engagement hereunder shall be for
twelve (12) months and may be extended for an additional
twelve (12) months upon mutual written consent, commencing on
the date hereof (the "Term"). Notwithstanding the foregoing,
however, this Agreement can be terminated by either party upon
45 days written notice.
3. Compensation and Expense Reimbursement.
(a) $10,000.00 non-refundable retainer payable upon
execution of this Agreement;
(b) 50,000 Warrants, expiring 5 years from the date of
this Agreement, with piggy-back registration rights
exercisable at 120% of the closing bid price on the
date of execution of this Agreement; and
(c) 100,000 Restricted Shares that will vest in equal
installments of 25,000 shares quarterly from the date
of this Agreement
Company will be responsible for any expenses incurred
in connection with this Agreement, i.e. road shows,
travel, marketing materials to name a few and shall
promptly reimburse Advisor for all reasonable
out-of-pocket expenses incurred in connection with
its engagement hereunder. All expenses incurred by
Advisor on behalf of Company over $500 shall be borne
by the Company only after it has authorized such
expenses in writing.
4. No Agency Authority. The Advisor shall not have and shall not
hold itself out as having any authority to act as agent for
the Company or bind it in any way.
5. Company's Responsibilities, Representations and Warranties.
2
In connection with Advisor's engagement, the Company will
furnish Advisor with any information concerning the Company
that Advisor deems reasonable and appropriate and will provide
Advisor with access to the Company's officers, directors,
accountants, counsel and other advisors. The Company
represents and warrants to Advisor that all such information
concerning the Company, does not and will not contain any
untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements
therein not misleading in light of the circumstances under
which such statements are made. The Company represents and
warrants to Advisor that any financial projections or
forecasts provided to Advisor are "forward looking statements"
as that term is used in Section 21E of the Securities Exchange
Commission Act of 1934 and represent the best currently
available estimates by the management of the Company of the
future financial performance by the Company (or its business)
and are based upon reasonable assumptions. The Company
acknowledges and agrees that Advisor will be using and relying
upon such information supplied by the Company and its
officers, agents and others and upon any other publicly
available information concerning the Company without any
independent investigation or verification thereof or
independent appraisal by Advisor of the Company or its
business or assets; and
6. Available Time. Advisor shall make available such time as it,
in its reasonable discretion, shall deem appropriate for the
performance of its obligations under this Agreement.
7. Relationship. Nothing herein shall constitute Advisor as an
employee or agent of the Company, except to such extent as
might hereinafter be agreed upon in writing for a particular
purpose. Except as might hereinafter be expressly agreed,
Advisor shall not have the authority to obligate or commit the
Company in any manner whatsoever.
8. Confidentiality Relating to this Agreement. Neither the
Company nor Advisor shall disclose (except to its partners,
accountants and attorneys), without specific consent from the
other party, any information relating to this Agreement or any
Transactions contemplated hereby, including without
limitation, the existence of this Agreement.
9. Assignment. This Agreement shall not be assignable by any
party except to successors to all or substantially all of the
business of either party for any reason whatsoever without the
prior written consent of the other party, which consent may
not be unreasonably withheld by the party whose consent is
required.
10. Amendment. This Agreement may not be amended or modified
except in writing signed by both parties.
11. Governing Law. This Agreement shall be deemed to have been
made and delivered in New York, and this Agreement shall be
governed as to validity, interpretation, construction, effect,
and in all other respects by the internal laws of the State of
New York.
3
Advisor is delighted to accept this engagement and looks forward to
working with you on this assignment. Please confirm that the foregoing correctly
sets forth our agreement by signing this enclosed duplicate of this letter in
the space provided and returning it, whereupon this letter shall constitute a
binding agreement as of the date first above written.
Very truly yours,
GREAT EASTERN SECURITIES, INC.
By: /s/ Jeffrey S. Ramson
---------------------
Jeffrey S. Ramson
CEO
AGREED AND ACCEPTED AS OF
THE DATE FIRST ABOVE WRITTEN:
AXM PHARMA, INC.
By: /s/ Peter Cunningham
--------------------
Peter Cunningham
President and CEO
4
EXHIBIT 10.10
ASTON ORGANIZATION
417 ORCHID AVE. CORONA DEL MAR, CA 92625
PH 800-715-9999 FAX 815-328-0698
February 2, 2004
Mr. Peter Cunningham
President and CEO
Axm Pharma, Inc.
4695 Macarthur Court, 11th Floor
Newport Beach, California 92660
Dear Mr. Cunningham:
This will confirm the arrangements, terms and conditions pursuant to
which Aston Organization ("Advisor") has been retained to serve as a consultant
to Axm Pharma, Inc. (the "Company") for a twelve (12) month period, with a
mutual extension clause for an additional twelve (12) months, commencing on the
date hereof, subject to the term-ination provisions set forth in Paragraph 2
hereof. For good and valuable consideration, the sufficiency of which is hereby
acknowledged, the undersigned, hereby agree to the following terms and
conditions:
1. Duties of Advisor. Advisor shall, as more fully set forth
below in this Paragraph 1, assist the Company in broker
relations. Advisor agrees to:
(a) assist the Company in its presentation to the
brokerage community and seek to introduce the Company
to security firms and brokers;
(b) assist the Company in identifying analysts in the
brokerage community to initiate coverage on the
Company;
(c) coordinate a comprehensive Investor Relations
campaign including featured profiles by several
reputable groups lead generation, among other
activities; and
(d) be available on request, on appropriate notice, to
meet with the Company's Management and/or Board of
Directors for quarterly management meetings.
The services described in Paragraph 1 may be rendered by Advisor
without any direct supervision by the Company and at such time and place in such
manner (whether by conference, telephone, letter or otherwise) as Advisor may
reasonably determine.
2. Term. The term of Advisor's engagement hereunder shall be for
twelve (12) months and may be extended for an additional
twelve (12) months upon mutual written consent, commencing on
the date hereof (the "Term"). Notwithstanding the foregoing,
however, this Agreement can be terminated by either party upon
30 days written notice. The Company shall only deliver shares
to Advisor that have vested.
3. Compensation and Expense Reimbursement.
200,000 Shares of AXM Pharma, Inc. restricted common stock
with piggy-back registration rights at next registration,
which rights shall inure to the benefit of Aston and its
1
assignees or transferees issued to "Aston Organization" and
delivered to Aston Organization. 20,000 shares shall vest and
be issued immediately, The remaining 180,000 shares shall be
issued immediately but shall vest in Aston Organization, or
its designated assignees, ratably (15,000 shares per month)
over the twelve (12) month period commencing thirty (30) days
after the Effective Date and be delivered to Aston
Organization promptly following the date on which they vest.
4. No Agency Authority. The Advisor shall not have and shall not
hold itself out as having any authority to act as agent for
the Company or bind it in any way.
5. All expenses incurred by Advisor on behalf of the Company
shall be borne by Company after it has authorized such
expenses in writing
6. Responsibilities, Representations and Warranties.
(a) Company's Responsibilities, Representations and
Warranties. In connection with Advisor's engagement,
the Company will furnish Advisor with any information
concerning the Company that Advisor deems reasonable
and appropriate and will provide Advisor with access
to the Company's officers, directors, accountants,
counsel and other advisors. The Company represents
and warrants to Advisor that all such information
concerning the Company, does not and will not contain
any untrue statement of a material fact or omit to
state a material fact necessary in order to make the
statements therein not misleading in light of the
circumstances under which such statements are made.
The Company represents and warrants to Advisor that
any financial projections or forecasts provided to
Advisor are "forward looking statements" as that term
is used in Section 21E of the Securities Exchange
Commission Act of 1934 and represent the best
currently available estimates by the management of
the Company of the future financial performance by
the Company (or its business) and are based upon
reasonable assumption. The Company acknowledges and
agrees that Advisor will be using and relying upon
such information supplied by the Company and its
officers, agent and others and upon any other
publicly available information concerning the Company
without any independent investigation or verification
thereof or independent appraisal by Advisor of the
Company or its business or assets.
(b) Advisor's Responsibilities, Representations and
Warranties. Advisor agrees that it will only
communicate regarding the Company to licensed
brokerage professionals and will not engage in any
solicitation of the public with regard to the Company
or its securities. Notwithstanding the foregoing,
Advisor may provide approved information regarding
the Company (i) in response to unsolicited inquiries
by the Company's shareholders; (ii) to valid trade
and industry publications, newspapers and
periodicals; and (iii) otherwise engage in
communications which are normal and customary for an
investor relations firm and which do not involve
solicitation of investors in connection with its role
as an investor relations firm for the Company.
Advisor further agrees that it will only disclose
information specifically provided to it by the
Company for dissemination and will keep confidential
any information marked as such by the Company.
Advisor agrees that it will not make any undisclosed
payments to brokers or others and will generally act
within the letter and the spirit of U.S. securities
laws, rules and regulations at all times.
Advisor shall provide a detailed written report
regarding its activities to the Company on a
quarterly basis. Such written report shall contain a
written affirmation from the Advisor that it is in
compliance with the terms of this Agreement on the
date of such report.
6. Available Time. Advisor shall make available such time as it,
in its reasonable discretion, shall deem appropriate for the
performance of its obligations under this Agreement.
7. Relationship. Nothing herein shall constitute Advisor as an
employee or agent of the Company, except to such extent as
might hereinafter be agreed upon in writing for a particular
purpose. Except as might hereinafter be expressly agreed,
Advisor shall not have the authority to obligate or commit the
Company in any manner whatsoever.
2
8. Confidentiality Relating to this Agreement. Neither the
Company nor Advisor shall disclose,except to its partners,
accountants and attorneys or as required by applicable law,
rule or regulation (including but not limited to periodic and
other reports required by the Securities Exchange Act of 1934,
as amended and the Securities Act of 1933, as amended, without
specific consent from the other party, any information
relating to the Agreement or any Transactions contemplated
hereby, including without limitation, the existence of this
Agreement.
9. Assignment. This Agreement shall not be assignable by any
party except to successors to all or substantially all of the
business of either party for any reason whatsoever without the
prior written consent of the other party, which consent may
not be unreasonably withheld by the party whose consent is
required.
10. Amendment. This Agreement may not be amended or modified
except in writing signed by both parties.
11. Governing Law. This Agreement shall be deemed to have been
made and delivered in California State and this Agreement
shall be governed as to validity, interpretation,
construction, effect, and in all other respects by the
internal laws of the State of California.
Advisor is delighted to accept this engagement and looks forward to
working with you on this assignment. Please confirm that the foregoing correctly
sets forth our agreement by signing this enclosed duplicate of this letter in
the space provided and returning it, whereupon this letter shall constitute a
binding agreement as of the date first above written.
Very Truly Yours,
Aston Organization
By: /s/ Thomas C. Ronk
------------------
Thomas C Ronk
President
AGREED AND ACCEPTED AS OF
THE DATE FIRST ABOVE WRITTEN:
AXM PHARMA, INC.
By: /s/ Peter Cunningham
--------------------
Peter Cunningham
President and CEO
3
EXHIBIT 23.1
MALONE & BAILEY, PLLC
Certified Public Accountants
2925 Briar Park, Suite 930, Houston, Texas 77042
We consent to the use of our report dated March 11, 2004 (except for Note 11,
which is as of March 24 2004), on the consolidated financial statements 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, and
the inclusion of our name under the heading "Experts" in the Form SB-2
Registration Statement filed with the Securities and Exchange Commission.
Board of Directors
AXM Pharma, Inc.
4695 Macarthur Court, 11th Floor
Newport Beach, CA 92660
Ladies and Gentlemen:
The undersigned is the beneficial owner of common shares of beneficial
interest, $.001 par value per share ("Common Shares"), of AXM Pharma, Inc. (the
"Company"). The undersigned understands that the Company proposes to issue
1,750,000 shares (the "Shares") of the Company's Series A Preferred Stock, $.001
par value per share (the "Preferred Stock"), and 1,750,000 Common Stock Purchase
Warrants, placed by TN Capital Equities (the "Placement Agent") to certain
purchasers (the "Purchasers") pursuant to that certain Placement Agency
Agreement dated July 8, 2003, and in accordance with the terms of that certain
Securities Purchase Agreement, dated as of September 12, 2003 (the "Purchase
Agreement"). Capitalized terms used in this letter agreement but not otherwise
defined herein shall have the meanings ascribed to such terms in the Purchase
Agreement.
In order to induce the Company, the Placement Agent and the Purchasers
to proceed with the issuance of the Shares, the undersigned hereby agrees, for
the benefit of the Company, the Placement Agent and the Purchasers, that should
the issuance of the Shares be effected, not to sell, in each calendar month
during the one-year period beginning on the Closing Date, more than 1/12 of the
aggregate number of Common Shares owned by the undersigned on the date hereof or
hereafter acquired by the undersigned, during the one-year period beginning on
the Closing Date; provided, however, that the number of such Common Shares that
can be sold shall be cumulative and shall begin to accumulate on the day
following the Closing Date; and, provided further that the number of such Common
Shares that may be sold in any calendar month shall increase to 1/6 of such
aggregate number of Common Shares in the event that the average daily trading
volume in the Company's Common Stock is equal to or greater than 200,000 shares
per day in the previous 20 trading days.
ii
Furthermore, the undersigned hereby agrees and consents to the entry of
stop transfer instructions with the Company's transfer agent against the
transfer of the Common Shares held by the undersigned except in compliance with
this agreement.
Next Section
Previous Section