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 w
Next Section
Previous Section