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 will 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.
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.
21
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.
22
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
consumers may stem from years of exposure to aggressive but medically
23
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 GlaxoSmithKline,
leads the over-the-counter market, and Shanghai Squibb Pharmaceuticals Products,
which is partly owned by Bristol-Myers Squibb, has been successful in both urban
24
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
25
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
26
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. Prior to the new regulatory guidelines that caused us to
temporarily cease manufacturing, selling and distributing our products on June
30, 2004, AXM Shenyang was utilizing a third-party original equipment
manufacturing pharmaceutical plant to produce all of its products and a
third-party distributor to distribute its products. 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:
Inspection planned for October 2004
Prior to closing the old plant, we had approximately 320 employees. By
utilizing third-party original equipment 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.
27
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. Our engineers have confirmed that the approval process for our factory is
moving forward as expected and to that end, our factory is currently on schedule
for an inspection for Chinese Good Manufacturing Practices in October 2004 to be
followed by inspection by the United States Food and Drug Administration at a
time to be agreed. 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 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.
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
28
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. 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. The State Food and Drug Administration has also implemented a
new guideline requiring all pharmaceutical companies to obtain Chinese Good
Manufacturing Practices certification and national approval licenses to
manufacture each of their drugs. We have applied for Chinese Good Manufacturing
Practices certification and those licenses and are waiting for approval. We have
requested accelerated approval to allow for approval of our licenses in advance
of the anticipated inspection of our new factory. Until our application is
approved, we cannot manufacture or sell any of our products.
Current Product Line
The five compounds we have recently manufactured and sold are listed
below. Of the five compounds listed, four are commercialized, Lifupeng is
available upon request from government hospitals only, as a service item. Due to
new State Food and Drug Administration guidelines, we are required to obtain
Chinese Good Manufacturing Practices certification and renew our licenses to
manufacture and sell these products at the national level, as opposed to the
state and local level as had been required in the past. Because our national
approval license applications were not submitted until April 2004, we are unable
to continue manufacturing and selling these items until we receive approval from
the State Food and Drug Administration. Under the proscribed timeline for the
approval process of national licenses (more than 100 working days from
submission thereof), we expect to receive approval of our applications in
October 2004 and to restart production of these products at that time. We have
requested accelerated approval of our application for national registration
approval number and hope that the renewal will be granted in advance of the
inspection of our new factory for Chinese Good Manufacturing Certification
scheduled for October 2004. Accordingly, the products listed below reflect the
products we manufactured or produced prior to submitting our application.
Asarone, which is manufactured in tablet form, is indicated for
bronchial infection and bronchial constriction (symptoms of upper respiratory
infection).
29
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.
Until June 2004, we sold the following five products:
REGISTRATION STATUS DISTRIBUTION CHANNEL SALES (%RX,
PRODUCT (RX OR OTC) % OTC)
------- ------------------- --------------------------------
Cafalexine, an antibiotic Rx 100%Rx
Weifukang skin cream OTC 100% OTC
Norfloxacin, an antibiotic Rx 100% Rx
Lifupeng (Rifampacin) for Rx 100% Rx
Tuberculosis
Asarone alpha (tablets) OTC/Rx 33% OTC/67%Rx
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.
New Products
In addition to the licenses for the products listed above, we acquired
the rights to Qiyao, an adjunctive therapy for Type II diabetes; Tong Yang, an
anti-fatigue functional food; Sunkist Vitamin Range; and, Whisper Feminine
Hygiene Wash. We intend to manufacture, market and sell these products in the
future, when we enter into appropriate marketing and distribution agreements.
In June 2004, we launched a new product line of chewable prescription
and Over The Counter products under the Sunkist brand in Asia that included the
acquisition of the exclusive rights to an oral drug delivery technology. In
August 2004, we signed an exclusive supply agreement for the chewable
prescription line and Over The Counter products described above.
On July 29, 2004 we entered into a distribution agreement with China
Zuellig Xinxing Pharmaceutical Company Limited. Zuellig Xinxing has the
exclusive right to distribute and sell our Whisper Feminine Hygiene Wash in
Beijing. Whisper has been approved by the National Ministry for Health and
Hygiene in China. The term of the agreement is one year, however it can be
extended for an additional year on each anniversary of the date the agreement
was entered into. We have finalized the plan with 40 promoters for the test
launch of Whisper Feminine Hygiene Wash in the top 100 pharmacies in Beijing. We
have already met with three of the largest chain retail pharmacies in Beijing,
namely, Golden elephant, Chaoyang Dispatching (Yiyuan Tang), and Beijing Medical
Group (Yibaoquanxing), all of whom are enthusiastic and eager to carry our
product in their stores. Zuellig Xinxing has also agreed to expand distribution
of our product to more pharmacies. In August 2004, we launched Whisper in the
Beijing market.
30
We are currently negotiating to import additional products under our
Sunkist Agreement. It is our intention to begin importing these products
sometime in the third or fourth quarter of this fiscal year.
Total Permitted and Licensed Products
The following table lists all of the compounds for which AXM Shenyang
has permits to manufacture and market, subject to reapproval of our licenses by
the State Food and Drug Administration as described above. We have recently only
produced and marketed the five products listed above. To date we have not
commercialized any of the other compounds listed below because our strategy has
been to focus on branding and brand development prior to introducing new product
lines. So far, our focus has been on establishing and expanding sales of the
brands we have already launched. Our focus for the latter half of 2004 and early
portion of 2005 will be to continue to establish and expand sales of our
previously launched products, but also to introduce two to three new products.
From that point forward, we expect to introduce two additional products in each
subsequent year. We plan to produce Whisper Feminine Hygiene Wash and two
Sunkist products as our new products sometime in the fourth quarter. 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
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
31
NAME
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
RECENT THIRD PARTY ORIGINAL EQUIPMENT MANUFACTURING
Qiqihaer Pharmaceutical Factory 2 of Heilong Group, which is located in
the City of Qiqihaer, Heilonjiang Province, manufactured the following products
pursuant to an original equipment manufacturing agreement. These products
constitute all of the products sold by AXM Pharma prior to submitting our
Chinese Good Manufacturing Certification and national license applications.
o Asarone Tablets
o Cefalexine Capsules
o Norfloxacin Capsules
o Weifukang Antiseptic Cream
o Lifupeng Granules.
Our agreement with Qiqihaer Pharmaceutical Factory 2, entered into in September
2002, required Qiqihaer Pharmaceutical Factory 2 to manufacture those products
that we designate. Under the agreement, Qiqihaer Pharmaceutical Factory 2 had to
manufacture our products based on quality control variables and timetables
supplied by us and we were obligated to pay Qiqihaer Pharmaceutical Factory 2
for products at the time the manufacturing process was completed. 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 Chinese 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 the products Qiqihaer
Pharmaceutical Factory 2 manufactured for us will ultimately 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. In any
event, from the time we submitted our Chinese Good Manufacturing Certification
application in June 2004 and our national license application in April 2004
until the time it is approved, neither Qiqihaer Pharmaceutical Factory 2 nor any
other manufacturer is allowed to manufacture any of our drug products.
Under the Chinese Nutritional Association and State food and Drug
Administration guidelines, several of our vitamin formulations are considered
food products. As such, as opposed to the pharmaceutical drug product
registration approval, these products can be registered using a notification
system and be launched in the market in a relatively short time period.
Furthermore, Whisper is a considered to be a hygiene product and as a result is
32
regulated by the Ministry of Hygiene. As with food products, hygiene products
may be registered using a notification system which may allow us to launch the
product in the market in a relatively short time. If we are able to manufacture
and sell such products prior to the completion of our new factory, we intend to
appoint contract manufacturers / repackers to support the launch of these
products until such time as our factory is operational. Accordingly, we may
resume the manufacture and sale of our Whisper Feminine Hygiene Wash and other
Sunkist products earlier than our drug products.
RECENT SALES AND MARKETING
Prior to submitting our Chinese Good Manufacturing Practices
Certification and national license applications, our products had been sold and
distributed through 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 granted
Liaoning Weikang Medicine Co. exclusive rights to distribute our products in
Shenyang. Due to the exclusive nature of our agreement with Liaoning Weikang
Medicine Co., we were not permitted to sell our products to other customers in
Shenyang. Liaoning Weikang Medicine Co. was required to pay for our products in
cash at the time of sale. Also, pursuant to an oral agreement, Liaoning Weikang
Medicine Co. was permitted to sell our products through sub-distributors in six
territories, including Guangdong, Heilongjiang, Jilin, Fujian, Liaoning and
Inner Mongolia.. Its sub-distributors include Shanghai Shenwei Drug Co.,
Guangzhou Kangning Drug Co., and Guangzhou Mingsheng Drug Co. Our agreement with
Liaoning Weikang Medicine. Co. expired in March 2004. Liaoning Weikang Medicine
Co. verbally agreed to continue its distribution relationship with us, although
currently they are not permitted to distribute any of our drug products due to
the pending review of our national license application. Additionally, we are
negotiating with several other distributors for distribution of our products in
additional provinces in the Peoples Republic of China.
On August 1, 2004, we entered into a Distribution Agreement with China
Zuellig Xinxing Pharmaceutical Company Limited. Under the terms of the
Agreement, Zuellig Xinxing has an exclusive right to distribute, market and sell
Whisper Feminine Hygiene Wash in Beijing and the trade channels (retail
pharmacy, hospital channel and general merchandise channels) defined by us.
However, in the event that Zuellig Xinxing cannot, under an exclusive right
basis, accomplish the target promised purchase volume or does not accomplish our
specified outlet penetration by trade channel, shelf facings, quantity in stock
in retail/end sale outlets, implementation of sales promotion programs initiated
or approved by us or reporting requirements in a consecutive 90-day term, then
Zuellig Xinxing's exclusive right shall automatically change to a non-exclusive
right after receiving written notice from us. The Agreement with Zuellig Xinxing
is effective for one (1) year, and is thereafter renewable automatically on the
anniversary of the date the agreement was entered, for additional one-year terms
so long as all orders pursuant to the Agreement are received by the last day of
the term thereof and the promised purchase volume of Zuellig Xinxing was
accomplished.
Until our Chinese Good Manufacturing Practices Certification and
national license application is approved, no one can distribute or sell any of
our pharmaceutical drug products. Under the regulatory guidelines, we expect our
application to be approved in October 2004 and intend to resume the distribution
and sale of our products at that time. Our Whisper Feminine Hygeine Wash and
Sunkist products only require food product approval, as opposed to
pharmaceutical drug approval and may therefore be eligible for manufacture and
sale earlier than our drug products. It takes approximately one month to obtain
food product approval and we intend to resume the manufacture and sale of such
products immediately thereafter. Having our agreement with Zuellig Xinxing in
place will avoid any other further delays in distributing and selling our
products in Beijing once we gain the appropriate approval.
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
33
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
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 August 26, 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.
34
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
Chinese Good Manufacturing Practices guidelines for licensing of pharmaceutical
products. Our new factory will be required to comply with these new guidelines
for production to begin at the facility. 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.
Additionally, beginning July 1, 2004, all pharmaceutical companies must
obtain Good Manufacturing Practices Certification and national approval licenses
to manufacture each of their drugs; by law, the application period for national
approval licenses can take more than 100 working days. We have submitted
applications to receive licenses for all of our drugs and for Chinese Good
Manufacturing Practices certification, however until our applications are
approved we are not permitted to manufacture or sell any of our drugs. We are
attempting to expedite the review process and we expect to receive approval by
October 2004.
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
35
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.
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 July 31, 2004. The Board of
Directors is comprised of only one class. All of the directors will serve until
the next annual meeting of shareholders, which is anticipated to be held in
April of 2005, 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
36
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 42 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
(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
37
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 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 19 years experience speaking and reading
Mandarin Chinese. Mr. Bluer also has a BA in Business Economics and History,
from the University of California, Santa Barbara. In 1990, Mr. Bluer received
his JD from Santa Clara University School of Law and has been an active member
of the California State Bar since 1991.
MR. CHET HOWARD, CFO, Mr. Chet Howard has over 30 years of financial
management experience working with a variety of early stage and growth
companies. Since January 2000, Mr. Howard has maintained a consulting practice
that specializes in SEC reporting and Sarbanes-Oxley compliance. His clients
have included Amerimmune Pharmaceuticals, Inc., Mandalay Resorts, Inc. and Smart
Chip Technologies, Inc. From January 2001 to December 2002, Mr. Howard was
Executive Vice President and CFO of AirCard Cellular, Inc., where he organized
the finance department, implemented the accounting system and helped develop the
business plan. Prior to AirCard, he was Senior Vice President and CFO of Big
Hub.com, Inc., where he was responsible for all aspects of taking the company
public and instrumental in raising $7.5 million. Before joining Big Hub.com, he
was Executive Vice President and CFO of USA Service Systems, Inc., a marketing
and merchandising company with clients such as Sam's Club, Wal-Mart, Walgreen's
and Sears. Mr. Howard was also Executive Vice President and CFO of InterAmericas
Communication Corp (now AT&T Latin American) and Executive Vice President and
CFO of HQ Office Supplies Warehouse, Inc, where he managed the sale of the
company to Staples, Inc. Previously, he helped develop the business plan and
manage venture capital investment as Senior Vice President, CFO and a co-founder
of the Sports Authority, Inc. In addition to these corporate positions, Mr.
Howard has eight years of experience as a consultant where he has prepared
IPO's, several secondary offering documents and assisted company executives with
SEC filings on a regular basis. Mr. Howard holds both an MBA and BS degree
(Accounting Major) from California State Poly University and has attended
numerous seminars to maintain current expertise in SEC reporting and other
corporate goverence matters.
MR. MONTGOMERY FRANK SIMUS, DIRECTOR. Mr. Simus has more than nine
years of experience working in Central and Southeast Asia, including a unique
combination of information and communications technology expertise and
international development and team-building experience. Since August 2002, he
has been President, CEO and founder of Golden Asia Ventures, a management
consultancy that focuses on strategic business and technology investments
partnerships between Asian and North American organizations. From 2001 to 2002,
Mr. Simus was a Vice President at CEM Investments, where he focused on
early-stage commercial and residential real estate and mezzanine financing
opportunities. Prior to CEM Investments, he worked as an Alliance Manager in the
Institutional Business Development Group at Financial Engines, Inc. from
September 1999 to January 2001. Before joining Financial Engines, Inc., Mr.
Simus held a variety of technology and finance related positions with various
international firms, including AES Corporation, Lehman Brothers Asia Limited
(Hong Kong), Hong Kong and Shanghai Banking Corporation Limited (Hong Kong),
Oracle Corporation and EDS Limited. Mr. Simus also previously managed the
implementation of a multi-million dollar international aid project portfolio
38
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:
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 (#) ($) ($)
39
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
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 Mark Bluer, which
have an exercise price of $5.70 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. Montgomery Simus received
40
an additional $5,000.00 in May, June and July for his role as Chairman of the
Executive Committee of AXM Shenyang; he stepped down from that position at the
end of July. Charles (Chaoying) Li receives an additional $2,500.00 per month as
a member of our Executive Committee of AXM Shenyang.
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
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.
41
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 August 26, 2004, we had a total of 15,913,530 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 August 26, 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) 32.10%
46 Wen An Road
Building 4, 5th Floor
Shenyang, Liaoning, The Peoples Republic of
China 110003
Douglas C. MacLellan 933,672(3) 4.74%
8324 Delgany Avenue
Playa Del Rey, California 90293
Byrle Lerner 950,000 4.82%
2904 Via Campesina
Palo Verdes Estates, CA 90274
Peter W. Cunningham 555,001(4) 2.82%
755 Promontory Point Drive West
Newport Beach, California 92660
Mark Elenowitz 385,160 (5) 1.95%
400 Professional Drive, Suite 310
Gaithersburg, MD 20879
Gryphon Master Fund, L.P. 1,969,469 9.99%
500 Crescent Court
Suite 270
Dallas, Texas 75201
SF Capital Partners Ltd. 983,748 4.99%
c/o Staro Asset Management, LLC
3600 South Lake Drive
St. Francis, Wisconsin 53235
42
Amount and Nature of Beneficial Ownership Percentage
Name and Address Of Voting of
Securities (1)
Mark J. Bluer 65,000(6) 0.33%
945 Magnolia Avenue, #77
Larkspur, CA 94939
Mr. Chet Howard 100,000 0.51%
11792 Lily Rubin Ave.
Las Vegas, NV 89138
Montgomery Simus 40,000(7) 0.20%
33 Haight Street, #8
San Francisco, CA 94102
Chaoying (Charles) Li 210,000(8) 1.07%
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 8,615,833 43.70%
(8 persons)(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.
(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 125,001 shares owned by Mr. Cunningham directly and 30,000 shares
owned by Rabelaisian Resources, Plc., a company owned by Mr. Cunningham.
Also includes 41,667 shares Mr. Cunningham is entitled to receive through
his employment agreement with AXM Pharma. 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, 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.
43
(7) Includes the 40,000 stock options granted to Mr. Simus on April 29, 2004,
under the 2004 Qualified and Nonstatutory Stock Option Plan.
(8) Includes the 100,000 stock options granted to Mr. Li on April 29, 2004,
under the 2004 Qualified and Nonstatutory Stock Option Plan.
44
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
45
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.
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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 pursuant to a consulting agreement and amendment thereto.
20,000 shares were released when the April 20, 2004 amendment was signed. 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 will be $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 30.425shares of our preferred stock, at a
47
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 obtained by dividing the face
value of $100,000 per share by the 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 for issuances not involving a public offering 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 for issuances
not involving a public offering 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 August 26, 2004, there were outstanding 15,913,530 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.
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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
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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
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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
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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.
Exercisable until June 2007
Each warrant allows its holder to purchase one share of common stock
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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
53
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
Quarter Ended June 30, 2004 ............................. 5.49 3.70
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 August 26, 2004 there were 15,913,530 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 August 26, 2004, there were approximately 109
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.
54
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
financial statements and the notes thereto which appear elsewhere in this
report. The results shown herein are not necessarily indicative of the results
to be expected in any future periods. This discussion contains forward-looking
statements based on current expectations, which involve uncertainties. Actual
results and the timing of events could differ materially from the
forward-looking statements as a result of a number of factors. Readers should
also carefully review factors set forth in other reports or documents that we
file from time to time with the Securities and Exchange Commission.
Overview
On March 14, 2003, we completed a share exchange with Werke Pharmaceuticals,
Inc., a Delaware corporation, formed to develop and finance the growth of
Chinese based pharmaceutical companies. As a result of the share exchange, Werke
became our wholly owned subsidiary. Werke's wholly owned operating subsidiary is
AXM Shenyang Inc., a northern China-based pharmaceutical company. The
comparables discussed below relate to the operations of Werke and its wholly
owned subsidiary, AXM Shenyang, for the periods discussed.
During the fiscal quarter ended June 30, 2004, our products were 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 Guangzhou
and Shenyang. Beginning July 1, 2004, all pharmaceutical companies must obtain
Good Manufacturing Practices certification and national approval licenses to
manufacture each of their pharmaceutical products. The application period can
take more than 100 working days. In April 2004, in accordance with guidelines
provided by the Liaoning sFDA, we submitted applications to renew licenses for
all of our pharmaceutical products. The guidelines provided to AXM Pharma are
organized to accommodate companies that are building new manufacturing
facilities and / or have other reasons for filing past December 2003. We are
attempting to expedite the review process. Under these timelines, we expect to
receive approval by October 2004. In June 2004, we submitted applications for
Good Manufacturing Practices certification pursuant to the requirements of State
Food and Drug Administration, which we are required to obtain prior to December
31, 2004. Until we receive these regulatory approvals and our products are ready
for sale, we will not receive any revenues from the sale of our pharmaceutical
products. However, certain of our new products, such as Whisper Feminine hygiene
product and certain vitamin products that we intend to produce under our license
agreement with Sunkist, do not require approval as pharmaceutical products and
may therefore be produced and sold earlier. We expect to commence sales of a new
feminine hygiene product brand named Whisper in August 2004, on a trial basis.
We also anticipate that we will commence sales of certain of the Sunkist
products in the third quarter, which will likely require approval as food
products, which approval takes approximately one month to obtain.
We are currently seeking to license various branded OTC products from
identifiable North American pharmaceutical and supplement companies for
distribution and manufacturing in China and Asia-Pacific. We are currently party
to a licensing agreement to manufacture market and sell certain vitamin and
vitamin supplements in The Peoples Republic of China under the Sunkist brand
name and trademark and other products under AXM Pharma owned brand names. The
Sunkist trademark agreement grants AXM Pharma exclusive rights in The Peoples
Republic of China, excluding Macao and Hong Kong, for use of the Sunkist brand
name for AXM Pharma's range of vitamin and vitamin supplements (excluding
vitamin-fortified confections). The agreement also grants AXM Pharma a right of
first refusal for any territory in the rest of Asia where Sunkist does not
currently license the product categories covered by their agreement with AXM
56
Pharma. Under the terms of the agreement, we are required to achieve certain
sales targets each year, for each category of product licensed under the
agreement. If we fail to achieve the agreed upon sales targets for any two
consecutive years, the agreement may be terminated with regard to such product
category by Sunkist in its discretion.
Recent events have led us to examine closely the management performance at our
wholly owned operating subsidiary, AXM Shenyang. There are clear indications
that deficiencies have arisen at the senior level. These deficiencies may have
contributed to the delays in the process to obtain national approval licenses
and the lower than expected sales in the second quarter. We have instituted a
senior management executive search process in order to attract additional senior
management and advisors to AXM Shenyang in order to support the significant
company activities taking place in China during the second half of 2004 and
beyond. This process is not unusual particularly in companies with international
cross-cultural businesses. The typical results of this type of initiative is to
add strong industry experienced executives to the management team and to
reorganize various roles and responsibilities within the group in order to
enhance productivity and reduce conflicts. We hope that these initiatives will
lead to more effective integration of our U.S. and Chinese management teams and
enhance our ability to conduct our business in an effective manner in future
periods.
LIQUIDITY AND CAPITAL RESOURCES
Total assets increased from $11,024,738 at December 31, 2003 to $11,555,467 at
June 30, 2004. This increase is attributable to the increase of $1,219,656 in
cash and an increase of $ 732,259 in receivables, offset by a decrease of
$2,703,597 in advances to suppliers.
On June 24, 2004, we completed a private equity financing of $3,042,500 with 11
accredited investors. After payment of costs and expenses, including fees of the
placement agent, we received net proceeds of approximately $2,773,800. We issued
30.425 shares of our Series C Preferred Stock, $.001 par value per share, at a
price per share of $100,000 and 357,936 common stock purchase warrants, each of
which entitles the holder to purchase one share of our common stock, $.001 par
value, for a period of three years from the date of issuance at an exercise
price equal to $5.50 per share. Each share of the preferred stock is convertible
into a number of fully paid and nonassessable shares of our common stock
obtained by dividing the face value of $100,000 per share by at the fixed
conversion price of $4.25 per share. The warrants are redeemable by AXM Pharma
under certain circumstances.
Our total outstanding current liabilities decreased to approximately $1,010,783
at June 30, 2004, as compared to approximately $3,441,990 at March 31, 2003.
This reduction of $2,431,207 is mostly attributable to a reduction in Value
Added Tax liabilities of $2,239,162.
From December 31, 2003, to June 30, 2004, our cash and cash equivalents
increased by approximately $1,209,404 million as a result of receipt of net
proceeds in the private placement offering of approximately $6,492,963. This was
offset by cash used for factory and equipment of $1,326,954 and reductions in
current liabilities of $2,431,207. Approximately $1,666,800 of non-cash general,
administrative and selling expenses were incurred in the period ended June 30,
2004. The non-cash expenses for the six months ended June 30, 2004 was
$3,331,800. Non-cash expense is where we pay for services (e.g. financial
consulting and investor relations services) using shares of our common stock. In
the past the Company took advantage of these opportunities to conserve cash.
We currently have sufficient cash to maintain operations at their present level
through the end of the current year. Capital used to date in activities
associated with the building and certification of the new facilities in Shenyang
is approximately US$4 million. We anticipate requiring additional investment of
approximately US$ 4.2 million primarily during the 3rd quarter of 2004 in order
to complete the new production facilities, laboratory and administration
buildings. However, to fulfill our planned expansion in sales territory,
57
complete the factory, implement the required systems and fund our working
capital needs, we will need to raise approximately $9 million in additional
funds. We are currently seeking to raise this additional capital through either
sales of our equity securities or debt financing of our factory and equipment in
Shenyang, but there cannot be any guarantees that we will be able to raise this
additional capital on terms acceptable to management or at all. We are not
currently in a position to call any of our outstanding warrants. However, should
our common stock trade at a price of $4.00, based on the closing sales price,
for 30 consecutive calendar days, assuming an effective registration statement
is in place with regard to the underlying shares of our common stock, we would
be in a position to call a significant portion of the outstanding warrants. In
the event that these warrants were called and converted we would receive gross
proceeds of approximately $10.5 million. If we are not able to raise this
additional capital through warrant exercises or additional fund raising
activities we could be forced to curtail some of the currently anticipated
expenditures in the above mentioned areas. Should we be forced to do this it
could have an impact on the anticipated future sales and earnings.
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 additional debt
or equity financing or the exercise of the warrants, we will still be able to
complete the Shenyang plant but we will then have to seek alternative
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 collectability of our receivables at least quarterly. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. The differences could be material and could significantly impact cash
flows from operating activities.
INVENTORY
We write down our inventory for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the estimated market
value based upon assumptions about future demand, future pricing and market
conditions. If actual future demands, future pricing or market conditions are
less favorable than those projected by management, additional inventory
write-downs may be required and the differences could be material. Such
differences might significantly impact cash flows from operating activities.
58
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.
59
VALUATION OF INTANGIBLES
From time to time, we acquire intangible assets that are beneficial to our
product development processes. We periodically evaluate the carrying value of
intangibles, including the related amortization periods. In evaluating acquired
intangible assets, we determine whether there has been impairment by comparing
the anticipated undiscounted cash flows from the operation and eventual
disposition of the product line with its carrying value. If the undiscounted
cash flows are less than the carrying value, the amount of the impairment, if
any, will be determined by comparing the carrying value of each intangible asset
with its fair value. Fair value is generally based on either a discounted cash
flows analysis or market analysis. Future operating income is based on various
assumptions, including regulatory approvals, patents being granted, and the type
and nature of competing products. If regulatory approvals or patents are not
obtained or are substantially delayed, or other competing technologies are
developed and obtain general market acceptance or market conditions otherwise
change, our intangibles may have a substantially reduced value, which could be
material.
DEFERRED TAXES
We record a valuation allowance to reduce the deferred tax assets to the amount
that is more likely than not to be realized. We have considered estimated future
taxable income and ongoing tax planning strategies in assessing the amount
needed for the valuation allowance. Based on these estimates, all of our
deferred tax assets have been reserved. If actual results differ favorably from
those estimates used, we may be able to realize all or part of our net deferred
tax assets. Such realization could positively impact our operating results and
cash flows from operating activities.
VALUE ADDED TAX
Value added tax payable is reported as a significant liability. The accounting
policies adopted by management include full disclosure of the Value Added Tax
liability calculated at 17% of the difference between ex factory price and the
cost of raw materials, less the cost of the fees paid to the third-party
original equipment manufacturing company.
LITIGATION
We account for litigation losses in accordance with Statement of Financial
Accounting Standards (SFAS) No. 5, "Accounting for Contingencies." Under SFAS
No. 5, loss contingency provisions are recorded for probable losses at
management's best estimate of a loss, or when a best estimate cannot be made, a
minimum loss contingency amount is recorded. These estimates are often initially
developed substantially earlier than the ultimate loss is known, and the
estimates are refined each accounting period, as additional information is
known. Accordingly, we are often initially unable to develop a best estimate of
loss; therefore, the minimum amount, which could be zero, is recorded. As
information becomes known, either the minimum loss amount is increased or a best
estimate can be made, resulting in additional loss provisions. Occasionally, a
best estimate amount is changed to a lower amount when events result in an
expectation of a more favorable outcome than previously expected. Due to the
nature of current litigation matters, the factors that could lead to changes in
loss reserves might change quickly and the range of actual losses could be
significant, which could materially impact our results of operations and cash
flows from operating activities.
RESULTS OF OPERATIONS
COMPARISON OF RESULTS FOR THE 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
60
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.
GROSS PROFIT. Gross profit on product sales for the fiscal year ended
December 31, 2003, was $3,497,325 compared to $621,579 for the fiscal year ended
December 31, 2002, an increase of $2,875,746 or approximately 462%. The increase
in gross profits during 2003 was due primarily to the $6.9 million increase in
sales. More efficient third party product manufacturing accounted for the
remainder of the increase in our gross profits. Assuming the product sales mix
remains the same, management anticipates future gross profit margins to increase
by as much as another 5% in 2004. This gross profit margin increase is due to
higher pricing of our products and slightly lower production and distribution
costs. We plan to achieve higher average unit prices through the introduction of
new high value products and the revision of marketing and pricing programs to
reflect the Wholly Foreign Owned Entity status of the Company. The State Food
and Drug Administration allows for higher prices to be charged in the hospital
tendering process by foreign owned enterprises as compared to locally owned
companies. We believe that lower production and distribution costs will result
from the opening of the new manufacturing facility, which will enable us to
reduce processing costs through the use of high speed equipment. Further, with
our own factory operating, we eliminate the need to pay the processing fees to
the third-party original equipment manufacturer. We also believe that the
increased unit production and sales volume being achieved will enable us to
negotiate improved raw material supply prices. Despite the views of management,
the statement concerning future gross profit margins is a forward-looking
statement that involves certain risks and uncertainties, which could result in a
fluctuation of gross margins below those achieved for the three months ended
September 30, 2003. Pricing of our products and gross profit on product sales
could change due to competitive forces that could negatively impact future sales
and or operating profits.
SALES, GENERAL AND ADMINISTRATIVE EXPENSES. We incurred Sales, General
and Administrative expenses of $7,205,392 for fiscal year ended December 31,
2003, compared to $673,936 for the fiscal year ended December 31, 2002, an
increase of $6,531,456. There were $3,522,085 in non-cash expenses in
recognition of stock issued to cover administrative services provided by
consultants in lieu of cash. The cash Selling, General and Administrative
expense was $3,683,307 for the same period, or an increase of $3,009,371 and was
the result of the increased personnel and outside services required to prepare
the Company for the increase in sales, marketing of our products, expenses
associated with our public reporting status and increased activities associated
with the proposed construction of a new plant in Shenyang.
NON-CASH CONSULTING ACTIVITIES. During the year ended December 31,
2003, our Board of Directors authorized the issuance of shares of our restricted
common stock to various consultants in lieu of cash payments. Based upon the
common stock trading price at the times of issuance, and FASB rules, we were
required to incur non-cash consulting expenses of $3,522,085 for the issuance of
these shares during the year ended December 31, 2003.
NET LOSS. We recorded a Net Loss applicable to common shareholders for
the fiscal year ended December 31, 2003, of $6,771,556 compared to a Net Loss of
$52,357 for the fiscal year ended December 31, 2002. The increase is the result
of the aforementioned increase in Selling, General and Administrative expenses
and approximately $3.1 million charged to the deemed dividend from beneficial
conversion feature embedded in the preferred stock. The net loss per share for
the year ended December 31, 2003 was $0.52 per share calculated on weighted
average shares outstanding of 12,927,956. This was compared to a net loss per
share for the year ended December 31, 2002 of $0.01 for weighted average shares
outstanding of 10,000,000.
61
RESULTS OF OPERATIONS
COMPARISON OF RESULTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 TO THREE
AND SIX MONTHS ENDED JUNE 30, 2003
REVENUE
During the three-month period ended June 30, 2004 we generated $978,663 from
product sales compared to revenues from product sales for the three-month period
ended June 30, 2003 of $1,848,057. This represents a sales decrease of $869,394
from the three-month period ended June 30, 2003. For the six months ended June
30, 2004 sales were $2,097,628 versus sales of $3,215,216 for the comparable
period ended June 30, 2003.
The lower sales were due in part 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. Sales also decreased in part
due to the fact that we have not yet received national approval for our
pharmaceutical licenses or Chinese Good Manufacturing certification, which
caused us to cease manufacturer of our pharmaceutical products as of July 1,
2004, and also disqualified us and any distributors we use from certain
competitive bidding processes prior to that date. For example, we were
disqualified from a competitive bidding process for the sale of Asarone direct
to hospitals in Shanghai because we could not provide the documentation of Good
Manufacturing Practices certification required by the local government to
participate in such process. Management estimates that the approvals from the
regulatory body for these items will be obtained in October 2004. Management
further estimates that the Company will lose approximately in sales for the
remainder of the year related to these items.
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 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 Hygiene
Product, Xin Shu, which we are marketing under the name Whisper Feminine Hygiene
Wash, and had appointed ZZAD and the Ogilvy Group to provide marketing and
branding service support for the various new products. In July 2004, we entered
into an exclusive distribution agreement with China Zuellig Xin Xing to
distribute Whisper in Beijing. Also in July 2004, we acquired the exclusive
rights to oral drug delivery technology drug delivery technology for chewable
tablets, capsules and lozenges including the transfer of intellectual property
and technical support for formulation and manufacturing processes, as well as,
distribution rights throughout Asia from WN Pharmaceuticals, Ltd. We plan to
market these products will be marketed under the Sunkist brand, in accordance
with our agreement with Sunkist. In August 2004, we entered into an exclusive
supply agreement with WN Pharmaceuticals for the same products so that we can
begin production and sales of these products prior to the completion and
certification of our new factory. 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 remainder 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,
62
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 June 30, 2004,
was $513,228 compared to $810,692 for the three-month period ended March 31,
2003, a decrease of $297,464. For the six months ended June 30, 2004 the gross
profit was $1,051,856 compared to $1,250,442 for the comparable period in 2003.
In both instances the decrease in gross profit is attributable to the decrease
in sales.
While gross profit decreased due to decreased sales the gross margin actually
improved from 43.6% for the three months ended June 30, 2003 to 52.4% for the
three months ended June 30, 2004. Likewise the gross margin for the six months
ended June 30, 2004 was 50.1% compared to 38.9% for the six months ended June
30, 2003. This increase in gross margin was achieved through a planned
elimination of the sales of our ultra-low margin antibiotic products. During the
remainder of FY 2004, we anticipate continuing to increase our gross profit
margin with the sales of our new and re-licensed products particularly during
the 4th quarter. We continue to anticipate a significant increase in gross
profit margin through the introduction of our various new products, which are
anticipated to have an average gross margin of 75%, the re-branding of our
products under the AXM Pharma Shenyang and Sunkist brands, signing new
distribution contracts at margins that are equivalent or better than the
agreements in force in 2003, and the opening of our new state of the art
manufacturing plant in Shenyang scheduled for October 2004.
Despite the views of management, the statement concerning future gross profit
margins is a forward-looking statement that involves certain risks and
uncertainties, which could result in a fluctuation of gross margins below those
anticipated to be achieved. Pricing of our products and gross profit on product
sales could change due to competitive forces that could negatively impact future
sales and or operating profits.
SALES, GENERAL AND ADMINISTRATIVE EXPENSES
The cash portion of this expense category for the three months ended June 30,
2004 was $3,199,679 compared to $488,069 for the same period last year. The
non-cash portion of this expense for the six months ended June 30, 2004 was
$3,331,800 compared to $787,500 for the comparable period in 2003. This increase
in cash expenditures on general, administrative and selling expense for this
quarter compared to the same quarter last year is due primarily to the expansion
of administrative staff in the US and China to provide for financial reporting,
capital raising efforts and maintaining our public relations at a level
consistent with a public company. We also added staff in setting up the
information technology function for reviewing possible software and hardware
solutions. The expenditures in the information technology area are necessary in
order to proceed with the actual implementation and role our of our new
manufacturing, marketing and accounting software modules in step with the
completion of our new manufacturing facility in Shenyang and meeting US GMP and
China GMP standards.
In addition to the aforementioned cash expenses in the general, administrative
and selling expense category there were $1,666,800 in non-cash expenses relating
to stock issued for professional services rendered in the public relations area
for the three months ended June 30, 2004. For the six months ended June 30, 2004
there was $3,331,800 in non-cash expenditures for professional services
rendered.
63
NON-CASH CONSULTING ACTIVITIES
During the three-month period ended June 30, 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 $1,660,800 for the issuance of these shares during the
three-month period ended June 30, 2004. For the six month period ended June 30,
2004 the Company incurred $3,331,800 in non-cash expense for compensation to
various consultants.
NET LOSS AND LOSS PER SHARE
The net loss the three months ended June 30, 2004, was $4,353,251 including
$1,660,800 in non-cash stock issuance. The net loss in the period applicable to
common shareholders was $5,265,140 or $(0.35) per share compared to $467,877
loss the same period during 2003. The Net Loss for the three months ended June
30, 2004 was primarily the result of increased expenses related to our public
reporting status and increased activities associated with the construction of
our new plant in Shenyang. The net loss for the six months ended June 30, 2004
was $6,848,637 as compared to $392,587 for the comparable period in 2003. The
same reasons attributable to the three month loss increase are applicable to the
six month results. The net loss applicable to the common shareholders for the
six month period ended June 30, 2004 was $8,845,543 as compared to $440,905 for
the comparable period in 2003.
Delays in regulatory approval have caused delays in the implementation of new
sales and marketing initiatives until later in the third and fourth quarters of
2004. Management remains confident that the activities currently being completed
in China will position us to be able to execute a solid growth plan of increased
sales and earnings during the 4th quarter of 2004 and on into 2005. Management
recognizes that 2004 is a significant transition year, where we are transforming
a localized privately owned pharmaceutical company into an international company
with state of the art manufacturing facilities, nation-wide distribution reach
and new globally recognized branded products. Delays in the actual launch of our
new products, which is the culmination of our efforts over the past year, is
typical within emerging markets and the pharmaceutical industry as a whole.
The net loss and loss per share results for the three months ended June 30,
2004, were higher than internal management estimates. We had previously
forecasted $33 million in gross sales and earnings per share for FY2004 at $0.42
cents per share, excluding non-cash expenses, on a fully diluted basis of
approximately 21 million shares outstanding at year-end. Management now
estimates that we will incur a loss of approximately $ 2.7 million or_ ($0.13)
per share on FY 2004 sales of approximately $12 million and gross profits of
$6.1 million, excluding non-cash expenses, on a fully diluted basis of
approximately 21 million shares outstanding at year-end. The primary reasons for
these revised estimates are the delays in bringing certain products to market,
as well as lost sales due to the particular regulations, which require us to
receive national approval of licenses for the manufacture and sale of our
pharmaceutical products and the need to receive Chinese Good Manufacturing
Practices certification.
Despite the views of management, the statement concerning future loss or
earnings per share is a forward-looking statement that involves certain risks
and uncertainties, which could result in a fluctuation of earnings below those
anticipated to be achieved. Pricing of our products and gross profit on product
sales could change due to competitive forces which could negatively impacted
future earnings.
64
ASSETS AND LIABILITIES
At June 30, 2004, we had total assets of $11,555,467 compared to total assets
of $11,024,738 at December 31, 2003. Cash was $4,160,186 as of June 30, 2004, an
increase of $1,209,404 from the $2,950,782 cash on hand as of December 31, 2003.
Cash used in operations was $3,956,605 and cash provided by financing activities
from the sale of common and preferred stock was $6,492,963.
Accounts receivable was $828,902 at June 30, 2004, a decrease of $1,786,077 from
the $2,614,979 at December 31, 2003. Inventories increased $732,259 to
$2,976,013 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 June 30, 2004 were $1,010,783, a decrease of $2,431,207
from the $3,441,990 at December 31, 2003. Accounts payable and accrued
liabilities were $332,120 at June 30, 2004, a decrease of $192,044 from the
$524,164 at December 31, 2003.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
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.
65
FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
AXM Pharma, Inc.
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheet of AXM Pharma, Inc.
as of December 31, 2003 and the related statements of operations, stockholders'
equity, and cash flows for each of the two years then ended. These financial
statements are the responsibility of AXM Pharma's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AXM Pharma, Inc. as of December
31, 2003 and the results of its operations and its cash flows for each of the
two years then ended, in conformity with accounting principles generally
accepted in the United States of America.
AXM PHARMA, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2003
ASSETS
Current assets
Cash $ 2,950,782
Accounts receivable, net of allowance of $0 2,614,979
Inventories 2,243,754
Advances - supplier 1,465,699
------------
Total current assets 9,275,214
Property and equipment, net 299,776
Licenses 1,449,748
------------
TOTAL ASSETS $ 11,024,738
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Value added tax payable $ 2,917,826
Accounts payable and accrued expenses 524,164
------------
Total current liabilities 3,441,990
------------
Commitments
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 10,000,000 shares authorized,
2,750,000 shares issued and outstanding 2,750
Common stock, $.001 par value, 50,000,000 shares authorized,
13,728,347 shares issued and outstanding 13,728
Additional paid-in capital 12,844,354
Accumulated deficit (5,278,084)
------------
Total Stockholders' Equity 7,582,748
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,024,738
============
See accompanying summary of accounting policies
and notes to financial statements.
F-2
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.
F-3
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.
F-4
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.
F-5
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
F-6
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.
F-7
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.
F-8
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.
F-9
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
F-10
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.
F-11
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
F-12
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.
F-13
NOTE 11 - SUBSEQUENT EVENTS
Stock Option Plans
In January of 2004, our Board of Directors approved the "2004 Qualified and
Nonstatutory Stock Option Plan." The Board of Directors reserved 3,000,000
shares of AXM Pharma's common stock to be issued in the form of incentive and/or
non-qualified stock options for employees, directors and consultants to AXM
Pharma. As of January 2004, our Board of Directors, authorized the issuance of
2,040,000 options to employees, directors and consultants. The stock option plan
and the options authorized there under are subject to ratification of the stock
option plan by our Shareholders at our next annual meeting.
Private Equity Financings
In January 2004, AXM Pharma, Inc. completed a private equity financing of
$1,935,000 with two accredited investors. Net proceeds from the offering after
estimated costs and expenses, including fees of the placement agent, are
approximately $1,740,000. We issued 860,000 shares of our Series B Preferred
Stock, $.001 par value per share, at a price per share of $2.25 and 1,000,000
Common Stock Purchase Warrants (the "Warrants"), each of which entitles the
holder to purchase one share of our common stock, $.001 par value, for a period
of five years from the date of issuance at a price of $3.00 per share. Each
share of Series B Preferred Stock is convertible, at the option of the holder,
into one share of common stock, subject to adjustment for certain occurrences.
In addition to its fees and expenses, the placement agent, or its assigns,
received a five-year warrant to purchase up to 86,000 shares of AXM Pharma's
Series B Preferred Stock at a price of $2.25 per share and up to 100,000
Warrants on a pro-rata basis to the number of shares of Preferred Stock
purchased upon exercise. AXM Pharma is obligated to file a registration
statement within six months the closing covering the shares of common stock
issuable upon conversion of the Series B Preferred Stock and exercise of the
Warrants.
On June 24, 2004, we completed a private equity financing of $3,042,500 with 11
accredited investors. After payment of costs and expenses, including fees of the
placement agent, we received net proceeds of approximately $2,773,800. We issued
30.425 shares of our Series C Preferred Stock, $.001 par value per share, at a
price per share of $100,000 and 357,936 common stock purchase warrants, each of
which entitles the holder to purchase one share of our common stock, $.001 par
value, for a period of three years from the date of issuance at an exercise
price equal to $5.50 per share. Each share of the preferred stock is convertible
into a number of fully paid and non-assessable shares of our common stock
obtained by dividing the face value of $100,000 per share by the fixed
conversion price of $4.25 per share. The warrants are redeemable by AXM Pharma
under certain circumstances.
Common Stock for Services
On May 10, 2004, we issued 300,000 shares of restricted common shares valued at
$1,176,000 pursuant to an agreement with Madden Consulting to provide investor
relations services. The shares were issued pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act for issuances not
involving a public offering. The shares were valued at $3.92 per share, the
market price for shares of our common stock at the time of issuance.
F-14
On May 7, 2004, we issued 120,000 shares of restricted common to XCL Partners
valued at $490,800 pursuant to an agreement with XCL Partners to provide
investor relations services. The shares were issued pursuant to the exemption
from registration provided by Section 4(2) of the Securities Act for issuances
not involving a public offering. The shares were valued at $4.09 per share, the
market price for shares of our common stock at the time of issuance.
On March 12, 2004, we issued 100,000 shares of restricted common 50,000 warrants
to Great Eastern Securities, Inc. pursuant to an investment banking agreement.
The shares are to be released quarterly based upon a vesting schedule of 25,000
shares per quarter during the term of the agreement. Investor relation services
are to be provided under the agreement, which was executed on December 18, 2003.
The warrants are for a term of five years and have an exercise price equal to
$4.74 per share. The services to be provided under the agreement are to assist
AXM Pharma with broker relations for our stock. The shares were issued pursuant
to the exemption from registration provided by Section 4(2) of the Securities
Act for issuances not involving a public offering. The shares were valued at
$5.65 per share, the market price for shares of our common stock at the time of
issuance. Therefore, the total aggregate value of the consideration paid to
Great Eastern Securities, Inc. was $565,000.
Conversions of Preferred Stock and Warrant Exercises
During the third quarter, AXM Pharma issued shares of common stock in connection
with the following conversions of its Series A Preferred Stock and exercise of
Common Stock purchase warrants. AXM Pharma issued 200,000 shares of common stock
for the conversion of 200,000 shares of Series A Preferred Stock. AXM Pharma
issued 20,000 shares of common stock for the exercise of warrants for proceeds
of $40,000.
Product Licenses
Due to new State Food and Drug Administration guidelines, we are now required to
obtain Chinese Good Manufacturing Practices certification and renew our licenses
to manufacture and sell our existing products at the national level, as opposed
to the state and local level as had been required in the past. Because our
national approval license applications were not submitted until April 2004, we
have been unable to continue manufacturing and selling these items until we
receive approval from the State Food and Drug Administration. Under the
proscribed timeline for the approval process of national licenses (more than 100
working days from submission thereof), we expect to receive approval of our
applications in October 2004 and to restart production of these products at that
time. We have requested accelerated approval of our application for national
registration approval number and hope that the renewal will be granted in
advance of the inspection of our new factory for Chinese Good Manufacturing
Certification scheduled for the fourth quarter of 2004.
In addition to the licenses for the products listed above, we acquired the
rights to Qiyao, an adjunctive therapy for Type II diabetes; Tong Yang, an
F-15
anti-fatigue functional food; Sunkist Vitamin Range; and, Whisper Feminine
Hygiene Wash. We intend to manufacture, market and sell these products in the
future, when we enter into appropriate marketing and distribution agreements. On
July 29, 2004 we entered into a distribution agreement with China Zuellig
Xinxing Pharmaceutical Company Limited. Zuellig Xinxing has the exclusive right
to distribute and sell our Whisper Feminine Hygiene Wash in Beijing. The term of
the agreement is one year, however it can be extended for an additional year on
each anniversary of the date the agreement was entered into. We have finalized
the plan with 40 product promoters for the test launch of Whisper Feminine
Hygiene Wash in the top 100 pharmacies in Beijing. We have already met with
three of the largest chain retail pharmacies in Beijing, namely, Golden
Elephant, Chaoyang Dispatching (Yiyuan Tang), and Beijing Medical Group
(Yibaoquanxing), all of whom we believe are enthusiastic and eager to carry our
product in their stores. Zuellig Xinxing has also agreed to try to expand
distribution of our product to more pharmacies. We are currently negotiating to
import additional products under our Sunkist Agreement. It is our intention to
begin importing these products sometime in the third or fourth quarter of this
fiscal year.
Although our new sales and marketing initiatives have been delayed until later
in the third and fourth quarters of 2004, management remains confident that the
activities currently being completed in China will position us to be able to
execute a solid growth plan of increased sales and earnings during the 4th
quarter of 2004 and on into 2005. Management recognizes that 2004 is a
significant transition year, where we are transforming a localized
privately-owned pharmaceutical company into an international company with state
of the art manufacturing facilities, nation-wide distribution reach and new
globally recognized branded products. Delays in the actual launch of our new
products, which is the culmination of our efforts over the past year, is typical
within emerging markets and the pharmaceutical industry as a whole.
F-16
AXM Pharma, Inc.
CONSOLIDATED BALANCE SHEET
JUNE 30, 2004
(UNAUDITED)
ASSETS
Current assets
Cash $ 4,160,186
Accounts Receivable, net of allowance of 0 828,902
Inventories 2,976,013
Advances, Suppliers 548,179
------------
Total current assets 8,513,280
Property and equipment, net 1,592,316
Licenses 1,449,871
------------
TOTAL ASSETS $ 11,555,467
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Value added tax payable $ 678,664
Accounts payable and accrued expenses 332,119
------------
Total current liabilities 1,010,783
Stockholders' Equity
Series A Preferred stock, $.001 par value, 4,050,000 shares authorized,
2,255,000 shares issued and outstanding 2,255
Series B Preferred stock, $.001 par value, 2,000,000 shares authorized,
860,000 shares issued and outstanding 860
Series C Preferred stock, $.001 par value, 100 shares authorized,
30.425 shares issued and outstanding 1
Common stock, $.001 par value, 50,000,000 shares authorized,
15,642,280 issued and outstanding 15,642
Additional paid-in-capital 22,652,647
Accumulated deficit (12,126,721)
------------
Stockholders' Equity 10,544,684
------------
LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,555,467
============
F-15
AXM PHARMA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues $ 978,663 $ 1,848,057 $ 2,097,628 $ 3,215,216
Cost of revenues 465,435 1,037,365 1,045,772 1,964,774
------------ ------------ ------------ ------------
Gross profit 513,228 810,692 1,051,856 1,250,442
General, administrative and selling:
Cash 3,199,679 488,069 4,568,693 855,529
Non-cash 1,666,800 787,500 3,331,800 787,500
------------ ------------ ------------ ------------
Net income (loss) $ (4,353,251) $ (467,877) $ (6,848,637) $ (392,587)
Net income (loss) applicable common shareholders:
Net income (loss) $ (4,353,251) $ (467,877) $ (6,848,637) $ (392,587)
Beneficial conversion features of preferred
stock (827,838) 0 (1,775,466) 0
Deemed dividend from beneficial
conversion feature of warrants (84,051) 0 (221,440) 0
------------ ------------ ------------ ------------
Net income (loss) applicable to common
shareholders $ (5,265,140) $ (467,877 $ (8,845,543) $ (392,587)
============ ============ ============ ============
Net income (loss) per share:
Basic and diluted $ (0.35) $ 0.01 $ (0.60) $ (0.03)
Weighted averaged shares outstanding:
Basic and diluted 15,221,836 11,420,000 14,708,684 12,984,828
F-16
AXM PHARMA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2004 and 2003
(Unaudited)
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(6,848,637) $ (392,587)
Adjustments to reconcile net loss to cash used in
operating activities:
Common stock issued for services 3,331,800 787,500
Depreciation and amortization 20,100 32,796
Changes in assets and liabilities:
Cash held in trust 0 8,074
Accounts receivable 1,786,077 (644,051)
Advances 917,520 291,597
Inventories (732,259) (921,573)
Accounts payable and accrued expenses (192,044) 193,627
Value added tax payable (2,239,162) 552,664
----------- -----------
CASH FLOWS USED IN OPERATING ACTIVITIES (3,956,605) (91,953)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,326,954) (27,235)
----------- -----------
Cash Received in reverse merger 169
-----------
CASH FROM FINANCING ACTIVITIES
Proceeds from sale of stock 6,492,963 0
----------- -----------
NET INCREASE IN CASH 1,209,404 (83,672)
Cash, beginning of period 2,950,782 106,027
----------- -----------
Cash, end of period $ 4,160,186 $ 22,355
=========== ===========
SUPPLEMENTAL NON-CASH TRANSACTIONS
Net liabilities assumed in reverse merger
F-17
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 June 30, 2004 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2004. It is suggested that the financial statements be read in conjunction with
the audited financial statements and notes for the fiscal year ended December
31, 2003 included in our Annual Report on Form 10-KSB.
The balance sheet of AXM Pharma, Inc. as of June, 2004, the related consolidated
statement of operations for the three and six months ended June 30, 2004, and
the consolidated statement of cash flows for the six months ended June 30, 2004
included in the consolidated financial statements have been prepared by us
without audit. In the opinion of management, the accompanying consolidated
financial statements include all adjustments (consisting of normal, recurring
adjustments) necessary to summarize fairly our consolidated financial position
and results of operations. The consolidated results of operations for the three
and six months ended June 30, 2004, are not necessarily indicative of the
results of operations for the full year or any other interim period. Notes to
the financial statements which would substantially duplicate the disclosure
contained in the audited financial statements for the most recent fiscal year
ended December 31, 2003 and reported in our most recent Form 10-KSB, have been
omitted.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OUR BUSINESS
AXM Pharma, Inc., a Nevada corporation, is a pharmaceutical company based in The
People's Republic of China. We are a publicly listed company trading under the
symbol (AMEX: AXJ). Our business is the sale of over-the-counter and
prescription pharmaceutical products in the People's Republic of China. Our
business in the People's Republic of China is conducted by our wholly-owned
subsidiary, AXM Pharma Shenyang, Inc., located in the city of Shenyang in the
Northeastern Portion of the People's Republic of China. AXM Shenyang and its
predecessor company, Shenyang Tiawei Pharmaceutical Factory, Ltd., have an
operating history of approximately 10 years. AXM Shenyang has historically been
a manufacturer and distributor of proprietary and generic pharmaceutical
products, which include injectables, capsules, tablets, liquids and medicated
skin products for export and domestic Chinese sales. AXM Shenyang's plant was
decommissioned in 2002 due to significant growth of the population of Shenyang
that caused the surrounding area to change from a city-edge industrial area to a
city-center, non-industrial, residential neighborhood. 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.
F-18
Our subsidiary, AXM Shenyang, is classified under Chinese Company Law as a
Wholly Foreign Owned Enterprise. Wholly Foreign Owned Enterprises have recently
become the investment vehicle of choice for foreign investors who wish to
manufacture, process, or assemble products in China. Wholly Foreign Owned
Enterprises are limited liability companies established under Chinese Company
Law, which are owned exclusively by one or more foreign investors and thus offer
controls over the company's management, technology, and finances that the
typical foreign investor requires. From a foreign investors' point of view, the
advantages of establishing a WFOE include:
o Independence and freedom to implement the worldwide strategies of its
parent company without having to consider the involvement of a Chinese
partner;
o Ability to carry on business rather than just a representative office
function;
o Ability to issue invoices to their customers in Renminbi (Chinese
Currency) and receive Renminbi revenues;
o Ability to convert Renminbi profits to US dollars for remittance to
their parent company outside China;
o Ability to employ staff directly within China;
o Protection of intellectual know-how technology;
o Greater efficiency in its operations, management and future
development; and
o No requirement to share profits with another party; and
In summary, the key differences between a WFOE and an equity or cooperative
joint venture are that the joint venture business structure requires profit
sharing between the stake holders, significant involvement in operational and
business matters by the Chinese stake holders, indirect representation in
business matters and much less effective and efficient cooperation between the
stake holders. Typically, the foreign party to a Chinese joint venture
experiences significantly less control over the business structure than if the
foreign party forms a Wholly Foreign Owned Enterprise or converts an existing
joint venture into a Wholly Foreign Owned Enterprise. Because the Wholly Foreign
Owned Enterprise business structure is relatively new compared to the joint
venture structure, fewer than 5% of foreign firms currently operate as Wholly
Foreign Owned Enterprises. It is anticipated that newly formed businesses will
likely choose the use of the Wholly Foreign Owned Enterprise structure over the
joint venture structure. It is also anticipated that existing joint ventures are
likely to migrate their corporate structures to Wholly Foreign Owned Enterprises
over the next five years.
FINANCIAL CONDITION
On June 24, 2004, we completed a private equity financing of $3,042,500 with 11
accredited investors. After payment of costs and expenses, including fees of the
placement agent, we received net proceeds of approximately $2,773,800. We issued
30.425 shares of our Series C Preferred Stock, $.001 par value per share, at a
price per share of $100,000 and 357,936 common stock purchase warrants, each of
which entitles the holder to purchase one share of our common stock, $.001 par
value, for a period of three years from the date of issuance at an exercise
price equal to $5.50 per share. Each share of the preferred stock is convertible
into a number of fully paid and non-assessable shares of our common stock
obtained by dividing the face value of $100,000 per share by the fixed
conversion price of $4.25 per share. The warrants are redeemable by AXM Pharma
under certain circumstances.
During the three-month period ended June 30., 2004 we generated $978,663 from
product sales compared to revenues from product sales for the three-month period
F-19
ended March 31, 2003 of $1,848,057. This represents a sales decrease of $869,394
from the three-month period ended March 31, 2003.
The lower sales were specifically due to the changing government regulations
regarding the sales and marketing of pharmaceutical products in China. Due to
new State Food and Drug Administration guidelines, we are now required to obtain
Chinese Good Manufacturing Practices certification and renew our licenses to
manufacture and sell our existing products at the national level, as opposed to
the state and local level as had been required in the past. Because our national
approval license applications were not submitted until April 2004, we have been
unable to continue manufacturing and selling these items until we receive
approval from the State Food and Drug Administration. Under the proscribed
timeline for the approval process of national licenses (more than 100 working
days from submission thereof), we expect to receive approval of our applications
in October 2004 and to restart production of these products at that time. We
have requested accelerated approval of our application for national registration
approval number and hope that the renewal will be granted in advance of the
inspection of our new factory for Chinese Good Manufacturing Certification
scheduled for the fourth quarter of 2004.
In addition to the licenses for the products listed above, we acquired the
rights to Qiyao, an adjunctive therapy for Type II diabetes; Tong Yang, an
anti-fatigue functional food; Sunkist Vitamin Range; and, Whisper Feminine
Hygiene Wash. We intend to manufacture, market and sell these products in the
future, when we enter into appropriate marketing and distribution agreements. On
July 29, 2004 we entered into a distribution agreement with China Zuellig
Xinxing Pharmaceutical Company Limited. Zuellig Xinxing has the exclusive right
to distribute and sell our Whisper Feminine Hygiene Wash in Beijing. The term of
the agreement is one year, however it can be extended for an additional year on
each anniversary of the date the agreement was entered into. We have finalized
the plan with 40 product promoters for the test launch of Whisper Feminine
Hygiene Wash in the top 100 pharmacies in Beijing. We have already met with
three of the largest chain retail pharmacies in Beijing, namely, Golden
Elephant, Chaoyang Dispatching (Yiyuan Tang), and Beijing Medical Group
(Yibaoquanxing), all of whom we believe are enthusiastic and eager to carry our
product in their stores. Zuellig Xinxing has also agreed to try to expand
distribution of our product to more pharmacies. We are currently negotiating to
import additional products under our Sunkist Agreement. It is our intention to
begin importing these products sometime in the third or fourth quarter of this
fiscal year.
Although our new sales and marketing initiatives have been delayed until later
in the third and fourth quarters of 2004, management remains confident that the
activities currently being completed in China will position us to be able to
execute a solid growth plan of increased sales and earnings during the 4th
quarter of 2004 and on into 2005. Management recognizes that 2004 is a
significant transition year, where we are transforming a localized
privately-owned pharmaceutical company into an international company with state
of the art manufacturing facilities, nation-wide distribution reach and new
globally recognized branded products. Delays in the actual launch of our new
products, which is the culmination of our efforts over the past year, is typical
within emerging markets and the pharmaceutical industry as a whole.
Gross profit on product sales for the three-month period ended June 30, 2004,
was $513,228 compared to $810,692 for the three-month period ended March 31,
2003, a decrease of $297,464. During the remainder of FY 2004, we anticipate
continuing to increase our gross profit margin with the sales of our new and
re-licensed products particularly during the 4th quarter. We continue to
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anticipate a significant increase in gross profit margin through the
introduction of our various new products, which are anticipated to have an
average gross margin of 75%, the re-branding of our products under the AXM
Pharma Shenyang and Sunkist brands, signing new distribution contracts at
margins that are equivalent or better than the agreements in force in 2003, and
the opening of our new state of the art manufacturing plant in Shenyang
scheduled for October 2004.
At June 30, 2004, we had total assets of $11,555,467 compared to total assets of
$11,024,738 at December 31, 2003. Cash was $4,160,186 as of June 30 2004, an
increase of $1,209,404 from the $2,950,782 cash on hand as of December 31, 2003.
Cash used in operations was $3,956,605 and cash provided by financing activities
from the sale of Series C Preferred Stock was $2,773,800 and $40,000 was
provided by the sale of common stock. Accounts receivable was $828,902 at June
30, 2004, a decrease of $1,786,077 from the $2,614,979 at December 31, 2003.
Inventories increased $732,259 to $2,976,013 from the $2,243,754 at December 31,
2003. The increase in inventories is attributable to preparations for increased
sales in the fourth quarter. Products. Total liabilities at June 30, 2004 were
$1,010,783, a decrease of $2,431,207 from the $3,441,990 at December 31, 2003.
Accounts payable and accrued liabilities were $332,120 at June 30, 2004, a
decrease of $192,044 from the $524,164 at December 31, 2003.
Despite the views of management, the statements concerning future gross revenues
and gross profits are forward-looking statement that involves certain risks and
uncertainties, which could result in a fluctuation of total sales below those
anticipated to be achieved. Pricing of our products and gross profit on product
sales could change due to competitive forces, which could negatively impact
future sales and or operating profits.
RECENT DEVELOPMENTS
In August 2004, we signed an exclusive supply agreement for line of chewable
prescription and OTC products under the Sunkist brand In Asia. We signed a
distribution contract with China Zuellig Xin Xing, a subsidiary of largest
pharmaceutical distributor in Asia and this new distributor, began purchasing
our Whisper feminine hygiene product for an initial product launch in Beijing.
In June 2004, we filed for Chinese GMP approval of our plant in Shenyang with an
anticipated construction completion in October 2004. We also appointed as our
key advertising advisor the Ogilvy Group public relations firm to assist us in
our product launch strategy focused on the second half of 2004. We also acquired
an anti-depression and anti-fatigue compound for OTC distribution in China. We
also, launched a new product line of chewable prescription and OTC products
under the Sunkist brand in Asia that included the acquisition of the exclusive
rights to an oral drug delivery technology.
In June 2004, we completed a $3,042,500 financing led by HC Wainwright and the
Shemano Group. We received a key drug manufacturing license and appointed
Saatchi & Saatchi to advise on certain advertising and marketing issues related
to new product launches.
In May 2004, we were approved to use the name AXM Pharma in China. We also
appointed the Alliance of ZZAD and Ogilvy Group to advise on various product
packaging and marketing issues. Also, our feminine hygiene product was approved
by the National Ministry for Health and Hygiene in China.
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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 by third parties
pending the completion and certification of new production facility. This 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 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
industries, including: biotechnology, pharmaceuticals, software, digital
technology, robots, nano-materials and a distribution center for IT products.
Currently, over 480 foreign enterprises including General Motors, Toshiba and LG
that have set up offices or manufacturing facilities in the High-Tech Industrial
Development District.
In order to create unique incentives for companies to locate in the High-Tech
Industrial Development District, favorable corporate income rates have been
established. The income tax rate for those companies that have chosen to locate
in the High-Tech Industrial Development District will be levied at 15 percent
annually. Newly founded high-tech enterprises, including AXM Shenyang, will
enjoy exemption from income tax for 2 years from the first year of operation.
RISKS AND UNCERTAINTIES
All of the following risks may impair our business operations. If any of the
following risks actually occurs, our business, financial condition or results of
operations could be materially adversely affected. In such case, the trading
price of our common stock could decline, and one may lose all or part of your
investment. Additional risks include: We may not be able to adequately protect
and maintain our intellectual property. We may not be able to obtain regulatory
approvals for our products or reimbursement from the sale of our products. Our
dependence on certain local third parties may impact our ability to control
certain aspects of our operations. We 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
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and taxes may have an adverse affect on our business and operations. There can
be no guarantee that The Peoples Republic of China will comply with the
membership requirements of the World Trade Organization. A future outbreak of
Severe Acute Respiratory Syndrome (SARS) or similar virus may adversely impact
our operations and the operations of our contract manufacturers and
distributors. There may not be sufficient liquidity in the market for our
securities in order for investors to sell their securities. The fact that our
directors and officers own over 45% of our capital stock may decrease the
influence on shareholder decisions. The outstanding warrants may adversely
affect us in the future and cause dilution to existing shareholders.
INVENTORIES
Inventories, which consist primarily of raw materials and related materials, are
stated at the lower of cost or market with cost determined on a first-in,
first-out (FIFO) basis. We regularly monitor inventories for excess or obsolete
items and make any valuation corrections when such adjustments are needed.
NOTE 3 - STOCK ISSUANCES
COMMON STOCK ISSUED FOR STOCK-BASED COMPENSATION
We periodically issue common stock for services rendered. Common stock issued is
valued at the estimated fair market value, as determined by management and the
board of directors of the Company. Management and the board of directors
consider market price quotations, recent stock offering prices and other factors
in determining fair market value for purposes of valuing the common stock.
During the three months ending June 30, 2004, we issued 420,000 shares of common
stock for services valued at $1,666,800.
On May 10, 2004, we issued 300,000 shares of restricted common shares valued at
$1,176,000 pursuant to an agreement with Madden Consulting to provide investor
relations services. The shares were issued pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act for issuances not
involving a public offering. The shares were valued at $3.92 per share, the
market price for shares of our common stock at the time of issuance.
On May 7, 2004, we issued 120,000 shares of restricted common to XCL Partners
valued at $490,800 pursuant to an agreement with XCL Partners to provide
investor relations services. The shares were issued pursuant to the exemption
from registration provided by Section 4(2) of the Securities Act for issuances
not involving a public offering. The shares were valued at $4.09 per share, the
market price for shares of our common stock at the time of issuance.
Conversions of Preferred Stock and Warrant Exercises
During the third quarter, AXM Pharma issued shares of common stock in connection
with the following conversions of its Series A Preferred Stock and exercise of
Common Stock purchase warrants. AXM Pharma issued 200,000 shares of common stock
for the conversion of 200,000 shares of Series A Preferred Stock. AXM Pharma
issued 20,000 shares of common stock for the exercise of warrants for proceeds
of $40,000.
F-23
ACCOUNTING FOR STOCK-BASED COMPENSATION
We account for stock-based compensation issued to employees and advisors of the
Company using the intrinsic value based method as prescribed by APB Opinion No.
25 "Accounting for Stock Issued to Employees" ("APB 25"). Under the intrinsic
value based method, compensation is the excess, if any, of the fair value of the
stock at the grant date or other measurement date over the amount an employee
must pay to acquire the stock. Compensation, if any, is recognized over the
applicable service period, which is usually the vesting period.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). This standard, if fully adopted, changes the method
of accounting for employee stock-based compensation plans to the fair value
based method. For stock options and warrants, fair value is determined using an
option pricing model that takes into account the stock price at the grant date,
the exercise price, the expected life of the option or warrant and the annual
rate of quarterly dividends. Compensation expense, if any, is recognized over
the applicable service period, which is usually the vesting period.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation, an
interpretation of APB Opinion 25." FIN 44 clarifies the application of APB 25
for (a) the definition of employee for purposes of applying APB 25, (b) the
criteria for determining whether a plan qualifies as a non-compensatory plan,
(c) the accounting consequence for various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. FIN 44 is effective July
1, 2000, but certain provisions cover specific events that occur after either
December 15, 1998, or January 12, 2000. The adoption of FIN 44 did not have a
material effect on the financial statements.
The adoption of the accounting methodology of SFAS 123 is optional and we have
elected to continue accounting for stock-based compensation issued to employees
using APB 25, as amended by FIN 44; however, pro forma disclosures, as if we
adopted the cost recognition requirements under SFAS 123, are required to be
presented (see below). For stock-based compensation issued to non-employees, the
Company values these grants at fair value as defined in SFAS 123, FIN 44 and
EITF 96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling Goods or Services."
CASH FINANCING ACTIVITIES
On June 24, 2004, we completed a private equity financing of $3,042,500 with 11
accredited investors. After payment of costs and expenses, including fees of the
placement agent, we received net proceeds of approximately $2,773,800. We issued
30.425 shares of our Series C Preferred Stock, $.001 par value per share, at a
price per share of $100,000 and 357,936 common stock purchase warrants, each of
which entitles the holder to purchase one share of our common stock, $.001 par
value, for a period of three years from the date of issuance at an exercise
price equal to $5.50 per share. Each share of the preferred stock is convertible
into a number of fully paid and nonassessable shares of our common stock
obtained by dividing the face value of $100,000 per share by the fixed
conversion price of $4.25 per share. The warrants are redeemable by AXM Pharma
under certain circumstances.
F-24
In addition to its fees and expenses, the placement agent received a three-year
warrant to purchase up to 3 shares of our Series C Preferred Stock at a price of
$100,000 per share and up to 35,793 warrants.
Also in connection with the issuance of the shares of preferred stock and
warrants issued on June 24, 2004, we agreed to file 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 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 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. We are required to keep this registration
statement continuously effective under the Securities Act until such date as is
the earlier of (x) the date when all of the securities covered by such
registration statement have been sold or (y) the date on which such securities
may be sold without any restriction pursuant to Rule 144 as determined by the
counsel to AXM Pharma pursuant to a written opinion letter, addressed to our
transfer agent to such effect. We also agreed to provide the same penalty
provisions to our Series B Shareholders whose stock is also being registered as
part of this prospectus.
STOCK OPTION PLANS
In April of 2004, our Shareholders approved the "2004 Qualified and Nonstatutory
Stock Option Plan." The Board of Directors reserved 3,000,000 shares of our
common stock to be issued in the form of incentive and/or non-qualified stock
options for employees, directors and consultants to AXM. On April 29, 2004, our
shareholders approved and ratified the issuance of 2,040,000 options to
employees, directors and consultants.
REVENUE RECOGNITION
Product sales revenue is recognized upon passage of title to customers,
typically upon shipment of product. Any provision for discounts and estimated
returns are accounted for in the period the related sales are recorded.
F-25
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 $ 2,711.37
Transfer Agent Fees 500
Legal Fees 3,000
Accounting Fees 1,000
Printing and Engraving Costs 1,500
Miscellaneous 1,000
-----------
Total $9,711.37
===========
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 pursuant to a consulting agreement and amendment thereto.
20,000 shares were released when the April 20, 2004 amendment was signed. . 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 200,000 shares of restricted common stock,
and 200,000 warrants at $6.00 per warrant, to XCL Partners, Inc. 20,000 shares
will be released when the agreement is signed. The remaining 180,000 shares are
to be released monthly based upon a vesting schedule of 15,000 shares per month
for eleven (11) months. 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 $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 will be
$818,000.
iv
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 obtained by dividing the face
value of $100,000 per share by the 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 for issuances not involving a public offering 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 for issuances
not involving a public offering 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
v
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.
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 Lopez, Blevins, Bork & Associates, LLP
99.1 Form of lock-up agreement by officers, directors and 5%
or greater shareholders
4.1* Securities Purchase Agreement dated as of June 24, 2004
4.2* Registration Rights Agreement dated as of June 24, 2004
4.3* Designation of Rights and Preferences of Series C
Preferred Stock dated as of June 24, 2004
10.11 Distribution Agreement with China Zuellig Xinxing
Pharmaceutical Company Ltd. and AXM Pharma (Shenyang)
Ltd.
* 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.
vi
** 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;
(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
vii
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
By: /s/ Chet Howard
---------------
Name: Chet Howard
Title: Principal Accounting Officer
Dated: August 24, 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: August 24, 2004
-----------------------
Peter W. Cunningham
President and Chief Executive Officer
/s/ Chet Howard Dated: August 24, 2004
--------------
Chet Howard
Chief Financial Officer
Dated: August 24, 2004
------------------------
Wang Wei Shi
Chairman of the Board
/s/ Douglas C. MacLellan Dated: August 24, 2004
------------------------
Douglas C. MacLellan
Vice-chairman of the Board
/s/ Mark H. Elenowitz Dated: August 24, 2004
---------------------
Mark H. Elenowitz
Director
viii
/s/ Montgomery F. Simus Dated: August 24, 2004
-----------------------
Montgomery F. Simus
Director
/s/ Mark J. Bluer Dated: August 24, 2004
-----------------
Mark J. Bluer
Director
/s/ Chaoying (Charles) Li Dated: August 24, 2004
-------------------------
Chaoying (Charles) Li
ix
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 10.1
Employment Agreement
AGREEMENT dated as of the 1st day of August, 2003 between Axiom
Pharmaceutical, Inc., a Delaware corporation having its principal executive
offices at 8324 Delgany Avenue Playa del Rey, California 90293 (the "Company"),
and Peter W. Cunningham (the "Employee").
WITNESSETH:
WHEREAS, the Company and the Employee wish to enter into an Employment
Agreement in its entirety;
NOW, THEREFORE, the Company and the Employee hereby agree that, effective
as of August 1, 2003, the Employment Agreement is stated in its entirety to read
as follows:
1. Employment.
The Company agrees to employ the Employee, and the Employee agrees to remain in
the employ of the Company, during the term of this Agreement and on the other
terms and conditions hereafter set forth.
2. Term.
The term of this Agreement shall commence on August 1, 2003 (the "Commencement
Date") and shall terminate at the close of business on the first anniversary of
the Commencement Date unless sooner terminated in accordance with the terms of
this Agreement. Notwithstanding the foregoing, this agreement shall
automatically renew for additional one year terms on the second and third
anniversaries of the Commencement date, unless either party provides written
notice not less than 60 days prior to the renewal date that it does not intend
to renew the term of the Agreement. In the case of any such notice of
non-renewal, this Agreement shall expire on the day prior to the anniversary of
the Commencement Date.
3. Positions and Responsibilities; Place of Performance.
(a) Throughout the term of this Agreement, the Employee agrees to
remain in the employ of the Company, and the Company agrees to employ the
Employee, as the Chief Operating Officer of the Company, reporting to the
President, Chief Executive Officer and Board of Directors of the Company. As the
Chief Operating Officer of the Company, the Employee shall be a senior officer
of the Company and its subsidiaries, shall have effective participation in
supervision, control and policy-making authority over, and responsibility for,
the strategic direction and general leadership and management of the business
and affairs of the Company and its subsidiaries, subject only to the authority
of the President, CEO and Board, and shall have all of the powers, authority,
duties and responsibilities usually incident to the position and role of Chief
Operating Officer in public companies that are comparable in size, character and
performance to the Company. The Company agrees to use its best efforts to secure
the employee's election as a member of the Board during the term of this
Agreement, and the Employee agrees to serve as such without additional
compensation beyond that provided in this Agreement, or for additional
compensation as may be proposed by the Board.
(b) In connection with his employment by the Company, the Employee
shall be based at Orange County, California or at any other Company location, as
may be determined to be appropriate for the performance of Employee's duties,
and Employee agrees to travel, to the extent reasonably necessary to perform
Employee's duties and obligations under this Agreement, to Company facilities
and other destinations elsewhere. It is envisioned that the Chief Operating
Officer shall spend a significant portion of his time in China, managing the
Company's operations there
During the term of this agreement the employee shall serve the company and shall
devote such time attention as may be reasonably required to perform the
responsibilities
(c) During the term of this Agreement, the Employee shall serve the
Company as his primary responsibility and shall devote his business time,
attention, skill and efforts to the faithful performance of his duties
hereunder; provided that the Employee may engage in commercial consulting
services in the healthcare industries, with the provision that if perceived or
potential conflicts arise, the Employee will notify the company in writing, and
the Employee and the Company will determine an effective way forward, so as to
not interfere with the with the objects, operations and benefits of the Company.
(d)It is envisioned that the commercial consulting activities of the
Employee may contribute relationships that will be beneficial to the Company.
Further, the Employee may serve as a member of the board of directors of other
companies (and retain remuneration for such service) if such activities and
service do not materially interfere with the performance of his duties and
responsibilities hereunder.
4. Compensation.
For all services rendered by the Employee in any capacity during the term of
this Agreement, and for his undertakings with respect to confidential
information, non-solicitation and disparaging remarks set forth in sections 6
and 7 below, the Employee shall be entitled to the following:
(a) a salary, payable in installments not less frequent than
monthly, at the annual rate of one hundred twenty thousand dollars (US$120,000
(in the lawful currency of the United States of America)), with such increases
in such rate, if any, as the Compensation Committee of the Board may approve
from time to time during the term of this Agreement. It is envisioned that the
increases will be based on achievement of targets agreed with the Board; (the
annual salary rate as increased from time to time during the term of this
Agreement being hereafter referred to as the "Base Salary", and the objective is
to bring the base salary in line with industry standards);
(b) participation in the Company's annual executive incentive or
bonus plan as in effect from time to time, with the opportunity to receive an
award in accordance with the terms and conditions of such plan, for each fiscal
year of the Company that commences or terminates during the term of this
Agreement, of up to 50% of the Base Salary earned during such year (or such
higher percentage as the Board or a committee of the Board may allow from time
to time during the term of this Agreement, the objective is to bring
compensation in line with industry standards), it being understood that any
award for the fiscal year of the Company in which the term of this Agreement
terminates pursuant to the terms hereof shall be prorated based on the portion
of such fiscal year that coincides with the term of this Agreement and shall be
made at the same time as awards (if any) are made to other participants with
respect to such fiscal year. This award will be given solely at the discretion
of the Board working in consultation with the compensation committee.
(c) participation in the Company's stock incentive plan / stock
grant plan as from time to time in effect, subject to the terms and conditions
of such plan. The Company shall provide a stock grant for the Employee of
250,000 shares deliverable in six equal installments, the first installment of
41,667 shares of stock will be delivered on August 1, 2003, the second
installment of 41,667 shares of the stock will be delivered on February 1, 2004,
third installment of 41,667 shares of the stock will be delivered on August 1,
2004, the forth installment of 41,667 shares of the stock will be delivered on
February 1, 2005, the fifth installment of 41,667 shares of the stock will be
delivered on August 1, 2005, the sixth installment of 41,667 shares of the stock
will be delivered on February 1, 2006 The shares should become fully registered
and unrestricted as soon as practical. Stock incentives/grants/warrants shall
2
be awarded in accordance with the Company's stock incentive/grant/warrant plans
applicable to senior officers in the Company.
(d) for business use in China of an automobile and housing /
furnished accommodation at Company expense will be provided. Such accommodation
and transportation shall be reasonable and in line with industry standards for
companies similarly situated to the Company, with respect to foreign employees
in China.
(e) participation in all Company health plan, or reimbursement of
health insurance expenses paid by the Employee. Participation in all Company
welfare, savings and other employee benefit and fringe benefit plans (including
vacation pay plans or policies and life and disability insurance plans) in which
other senior officers of the Company participate during the term of this
Agreement, subject in all events to the terms and conditions of such plans as in
effect from time to time. Nothing in this paragraph (e) shall preclude the
Company from amending or terminating any such plan at any time. The plans
covered by this paragraph (e) shall not include the annual incentive or stock
incentive plans, which are covered by paragraphs (b) and (c) above.
5. Termination of Employment.
(a) Termination by the Company without Good Cause. (i) If the
Employee's employment with the Company is terminated by the Company without Good
Cause the employee will be paid three month of his base salary, bonus accrued to
that time, unrestricted stock deliverable as of the date of termination, all
expenses due, retirement benefits and other compensation and benefits earned up
to that time
(b) Termination by the Company for Good Cause or by the Employee
without Good Reason. If, during the term of this Agreement, the Employee's
employment by the Company is terminated by the Company for Good Cause or by the
Employee without Good Reason, the Employee shall not be entitled to receive any
compensation under section 4 above accruing after the date of such termination
or any payment under paragraph 5(a) above, but he shall be entitled to receive
deliverable as of such date, expenses and relocation to Los Angeles, California,
USA. . However, the Company's obligations under sections 8, 9 and 10 shall not
be affected by such termination of employment. The provisions of this paragraph
6(b) shall be in addition to, and not in lieu of, any other rights and remedies
the Company may have at law or in equity or under any other provision of this
Agreement in respect of such termination of employment. However, if during the
term of this Agreement the Employee's employment is terminated by the Employee
without Good Reason and the Employee gives the Company at least 120 days'
advance notice of such termination, then the Employee shall not have any
obligation or liability to the Company under this Agreement in respect of such
termination of employment, but his obligations under Section 6 and 7 hereof
shall not be affected by such termination of employment.
(c) Good Cause Defined. For purposes of this Agreement, the Company
shall have "Good Cause" to terminate the Employee's employment during the term
of this Agreement only if:
(i) the Employee fails to substantially perform his duties
hereunder for any reason or fails to devote substantially all of his business
time to the affairs of the Company;
(ii) the Employee commits an act of dishonesty resulting or
intended to result directly or indirectly in gain or personal enrichment at the
expense of the Company;
(iii) the Employee is grossly negligent or engages in willful
misconduct or insubordination in the performance of his duties hereunder; or
(iv) the Employee materially breaches his obligations under
section 6 or paragraph 7(a) below, relating to confidential information and
non-solicitation.
Any foregoing provision of this paragraph 5(c) to the contrary notwithstanding,
the Company shall not have "Good Cause" to terminate the Employee's employment
during the term of his employment after a Change in Control or Potential Change
in Control (as such terms are defined in section 11 below) unless (A) the
Employee's act or omission is willful and has a material adverse effect upon the
3
Company, (B) the Board of Directors gives the Employee (I) written notice
warning of its intention to terminate the Employee for Good Cause if the
specified act or omission alleged to constitute Good Cause is not discontinued
and, if curable, cured, and (II) a reasonable opportunity after receipt of such
written notice, but in no event less than eight weeks, to discontinue and, if
curable, cure the conduct alleged to constitute Good Cause, and (C) the Employee
fails to discontinue and, if curable, cure the act or omission in question;
provided that clauses (B) and (C) of this sentence shall not apply with respect
to misconduct on the part of the Employee that constitutes a felony in the
jurisdiction in which the Employee engages in such misconduct, and, provided
further, that this sentence shall not apply to conduct involving moral
turpitude. For all purposes of this Agreement, no act, or failure to act, on the
Employee's part shall be deemed "willful" unless done, or omitted to be done, by
him intentionally and in bad faith (i.e., without reasonable belief that his
action or omission was in furtherance of the interests of the Company or a
subsidiary of the Company).
(d) Good Reason Defined. For purposes of this Agreement, the Employee
shall have "Good Reason" to terminate his employment during the term of this
Agreement only if:
(i) the Company fails to pay or provide any amount or benefit that
the Company is obligated to pay or provide under section 4 above or section 8, 9
or 10 below and the failure is not remedied within 30 days after the Company
receives written notice from the Employee of such failure; or
(ii) the Company assigns the Employee duties, responsibilities or
reporting relationships not contemplated by section 3 above without his consent,
or limits his duties or responsibilities or power or authority contemplated by
section 3 above in any respect materially detrimental to him, and in either case
the situation is not remedied within 30 days after the Company receives written
notice from the Employee of the situation; or
(iii) a Change in Control occurs and as a result thereof either (A)
equity securities of the Company cease to be publicly-traded, or (B) the
Employee is not elected or designated to serve as the sole Chief Operating
Officer of the surviving company; or
(vi) a Change in Control or Potential Change in Control occurs and
(A) the dollar value of the stock optioned to the Employee annually thereafter
is less than the average annual dollar value of the stock that was optioned to
the Employee during the one year prior to the Change in Control or Potential
Change in Control, or (B) the material terms of such options (including without
limitation vesting schedules) are less favorable to the Employee than the
material terms of the options that were granted to the Employee during the one
year prior to the Change in Control or Potential Change in Control, and in
either case (A) or (B) the situation is not remedied within 30 days after the
Company receives written notice from the Employee of the situation.
In no event shall the Employee's continued employment after any of the foregoing
constitute his consent to the act or omission in question, or a waiver of his
right to terminate his employment for Good Reason hereunder on account of such
act or omission.
6. Confidential Information.
The Employee agrees not to disclose, either while in the Company's employ or at
any time thereafter, to any person not employed by the Company, or not engaged
to render services to the Company, except with the prior written consent of an
authorized officer of the Company or as necessary or appropriate for the
performance of his duties hereunder, any confidential information obtained by
him while in the employ of the Company, including, without limitation,
information relating to any of the inventions, processes, formulae, plans,
devices, compilations of information, research, methods of distribution,
suppliers, customers, client relationships, marketing strategies or trade
4
secrets of the Company or any subsidiary thereof; provided, however, that this
provision shall not preclude the Employee from use or disclosure of information
known generally to the public or of information not generally considered
confidential by persons regularly engaged in the business conducted by the
Company or any subsidiary thereof, or from disclosure required by law or court
order. The Employee also agrees that upon leaving the Company's employ he will
not take with him, without the prior written consent of an authorized officer of
the Company, and he will surrender to the Company, any record, list, drawing,
blueprint, specification or other document or property of the Company or any
subsidiary thereof, together with any copy or reproduction thereof, mechanical
or otherwise, which is of a confidential nature relating to the Company or any
subsidiary thereof, or without limitation, relating to its or their methods of
distribution, suppliers, customers, client relationships, marketing strategies
or any description of any formulae or secret processes, or which was obtained by
him or entrusted to him during the course of his employment with the Company.
7. Restrictive Covenants
(a) Non-Solicitation. Employee covenants and agrees that, during his
employment by the Company and during the one year period immediately following
the termination of his employment with the Company for any reason (including,
without limitation, a termination of employment by the Company without cause and
a voluntary termination of employment by the Employee with Good Reason), he will
not solicit or attempt to persuade any employee of the Company, its subsidiaries
or affiliates (except the Employee's personal secretary or administrative
assistant), or any other person who performs services for the Company, its
subsidiaries or affiliates at the time the Employee's employment terminates or
at any time within one year thereafter, to terminate or reduce or refrain from
engaging in his or her employment or other service relationship with the
Company, its subsidiaries or affiliates; provided, however, that responding to
inquiries from any such employees or other persons that are not initiated by the
Employee, and subsequently hiring such employees or other persons following the
termination of their employment with the Company, its subsidiaries and
affiliates shall be permitted.
(b) Specific Enforcement. Employee recognizes and agrees that, by
reason of his knowledge, experience, skill and abilities, his services are
extraordinary and unique, that the breach or attempted breach of any of the
restrictions set forth above in this section 7 will result in immediate and
irreparable injury for which the Company will not have an adequate remedy at
law, and that the Company shall be entitled to a decree of specific performance
of those restrictions and to a temporary and permanent injunction enjoining the
breach thereof, and to seek any and all other remedies to which the Company may
be entitled, including, without limitation, monetary damages, without posting
bond or furnishing security of any kind.
(c) Restrictions Reasonable. Employee specifically and expressly
represents and warrants that (i) he has reviewed and agreed to the restrictive
covenants contained in this section 7 and their contemplated operation after
receiving the advice of counsel of his choosing; (ii) he believes, after
receiving such advice, that the restrictive covenants and their contemplated
operation are fair and reasonable; (iii) he will not seek or attempt to seek to
have the restrictive covenants declared invalid, and, after receiving the advice
of counsel, expressly waives any right to do so; and (iv) if the full breadth of
any restrictive covenant and/or its contemplated operation shall be held in any
fashion to be too broad, such covenant or its contemplated operation, as the
case may be, shall be interpreted in a manner as broadly in favor of the
beneficiary of such covenant as is legally permissible. Employee recognizes and
agrees that the restrictions on his activities contained in this section 7 are
required for the reasonable protection of the Company and its investments; and
that the restriction on his activities set forth in paragraph 7(a) will not
deprive the Employee of the ability to earn a livelihood.
(d) Non-Disparagement. Employee covenants and agrees that, during
the one year period immediately following the termination of his employment with
the Company for any reason (including, without limitation, a termination of
employment by the Company without cause and a voluntary termination of
employment by the Employee with Good Reason), he will not make disparaging
5
remarks about the Company, its subsidiaries or affiliates or any of their
officers, directors or employees, unless required by law or reasonably necessary
to assert or defend his position in a bona fide dispute arising out of or
relating to this Agreement or the breach thereof.
(e) Effect on Termination Payments. The Employee recognizes and
agrees that the Company shall not be obligated to make any payments provided for
in paragraph 5(a) above if the Employee violates the provisions of section 6 or
paragraph 7(a) or 7(d) above during the one year period immediately following
the termination for any reason of his employment with the Company. In addition,
the Employee recognizes and agrees that, if the Employee violates such
provisions, the Company may recoup any payments the Company may have theretofore
made pursuant to paragraph 5(a) above and any payments the Company may
thereafter make under paragraph 5(a). The foregoing provisions of this paragraph
7(e) shall be in addition to and not by way of limitation of any other rights
and remedies the Company may have in respect of the violation in question.
8. Indemnification
To the fullest extent permitted by applicable law, the Company shall indemnify,
defend and hold harmless the Employee from and against any and all claims,
demands, actions, causes of action, liabilities, losses, judgments, fines, costs
and expenses (including reasonable attorneys' fees and settlement expenses)
arising from or relating to his service or status as an officer, director,
employee, agent or representative of the Company or any subsidiary of the
Company or in any other capacity in which the Employee serves or has served at
the request of, or for the benefit of, the Company or its subsidiaries. The
Company's obligations under this section 8 shall be in addition to, and not in
derogation of, any other rights the Employee may have against the Company to
indemnification or advancement of expenses, whether by statute, contract or
otherwise. Director's insurance shall be provided by the company and Errors and
Omissions insurance shall be provided by the company.
9. Certain Additional Payments by the Company, Excise Tax and or
Additional Income Tax or Other
(a) Anything in this Agreement (other than the second sentence of
this paragraph 9(a)) to the contrary notwithstanding, in the event it shall be
determined that any payment or distribution by the Company to or for the benefit
of the Employee (whether paid or payable or distributed or distributable
pursuant to the terms of this Agreement or otherwise, but determined without
regard to any additional payments required under this section 9) (a "Payment"),
would be subject to the excise tax imposed by Section 4999 of the United States
Internal Revenue Code (the "Code") or any other such tax in any jurisdiction,
including additional income tax, and interest or penalties are incurred by the
Employee with respect to such excise tax (such excise tax, together with any
such interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), or any other such tax in any jurisdiction, then the Employee
shall be entitled to receive an additional payment (an "Gross-Up Payment") in an
amount such that after payment by the Employee of all taxes and any benefits
that result from the deductibility by the Employee of such taxes (including, in
each case, any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and Excise Tax, Additional Income Tax, or any
other such tax imposed upon the Gross-Up Payment, the Employee retains an amount
of the Gross-Up Payment equal to the Excise Tax or Additional Income Tas imposed
upon the Payments. However, if it shall be determined that none of the Payments
would be subject to the Excise Tax if the total Payments were reduced in the
aggregate by $50,000 or less, then in that event the total Payments shall be
reduced by the smallest amount (in no event to exceed $50,000 in the aggregate)
necessary to ensure that none of the Payments will be subject to the Excise Tax.
The decision as to which Payments shall be so reduced shall be made by the
Employee.
(b) Subject to the provisions of paragraph 9(a) above and 9(c)below,
all determinations required to be made under this section 9, including whether
and when a Gross-Up Payment is required and the amount of such Gross-Up Payment
and the assumptions to be utilized in arriving at such determination, and
whether Payments are to be reduced pursuant to the second sentence of paragraph
6
9(a) above, shall be made by Deloitte & Touche or such other certified public
accounting firm as may be designated by the Employee (the "Accounting Firm")
which shall provide detailed supporting calculations both to the Company and the
Employee within 15 business days of the receipt of notice from the Employee that
there has been a Payment, or such earlier time as is requested by the Company.
In the event that the Accounting Firm is serving as accountant or auditor for
the individual, entity or group effecting the "change in ownership or effective
control" or "change in the ownership of a substantial portion of assets" (within
the meaning of Code section 280G(b)(2)(A)) that gives rise to the Excise Tax, or
Additional Income Tax, the Employee shall appoint another nationally recognized
accounting firm to make the determinations required hereunder (which accounting
firm shall then be referred to as the Accounting Firm hereunder). All fees and
expenses of the Accounting Firm shall be borne solely by the Company. Any
Gross-Up Payment, as determined pursuant to this section 9, shall be paid by the
Company to the Employee within five days of the receipt of the Accounting Firm's
determination. Any determination by the Accounting Firm shall be binding upon
the Company and the Employee. As a result of the uncertainty in the application
of Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will not
have been made by the Company should have been made (an "Underpayment"),
consistent with the calculations required to be made hereunder. In the event
that the Company exhausts its remedies pursuant to paragraph 9(c) and the
Employee thereafter is required to make a payment of any Excise Tax, or
Additional Income Tax, the Accounting Firm shall determine the amount of the
Underpayment that has occurred and any such Underpayment, along with any penalty
and interest imposed with respect to such Underpayment, shall be promptly paid
by the Company to or for the benefit of the Employee.
(c) The Employee shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require either the
payment by the Company of the Gross-Up Payment or the reduction of Payments
pursuant to the second sentence of paragraph 9(a) above. Such notification shall
be given as soon as practicable but no later than ten business days after the
Employee is informed in writing of such claim and shall apprise the Company of
the nature of such claim and the date on which such claim is requested to be
paid. The Employee shall not pay such claim prior to the expiration of the
30-day period following the date on which it gives such notice to the Company
(or such shorter period ending on the date that any payment of taxes with
respect to such claim is due). If the Company notifies the Employee in writing
prior to the expiration of such period that it desires to contest such claim,
the Employee shall:
(i) give the Company any information reasonably requested by
the Company relating to such claim,
(ii) take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim by
an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order
effectively to contest such claim, and
(iv) permit the Company to participate in any proceedings
relating to such claim; provided, however, that the Company shall bear and pay
directly all costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold the
Employee harmless, on an after-tax basis, for any Excise Tax or income tax
(including interest and penalties with respect thereto) imposed as a result of
such representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this paragraph 9(c), the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forgo any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct the Employee to pay the tax claimed and sue for a
refund or contest the claim in any permissible manner, and the Employee agrees
to prosecute such contest to a determination before any administrative tribunal,
in a court of initial jurisdiction and in one or more appellate courts, as the
Company shall determine, provided, however, that if the Company directs the
Employee to pay such claim and sue for a refund, the Company shall advance the
7
amount of such payment to the Employee, on an interest-free basis and shall
indemnify and hold the Employee harmless, on an after-tax basis, from any Excise
Tax or income tax (including interest or penalties with respect thereto) imposed
with respect to such advance; and further provided that any extension of the
statute of limitations relating to payment of taxes for the taxable year of the
Employee with respect to which such contested amount is claimed to be due is
limited solely to such contested amount. Furthermore, the Company's control of
the contest shall be limited to issues with respect to which a Gross-Up Payment
would be payable hereunder and the Employee shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
(d) If, after the receipt by the Employee of an amount advanced by
the Company pursuant to paragraph 9(a) or 9(c), the Employee becomes entitled to
receive any refund with respect to such claim, the Employee shall (subject to
the Company's complying with the requirements of paragraph 9(c)) promptly pay to
the Company the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto). If, after the receipt by the
Employee of an amount advanced by the Company pursuant to paragraph 9(c), a
determination is made that the Employee shall not be entitled to any refund with
respect to such claim and the Company does not notify the Employee in writing of
its intent to contest such denial of refund prior to the expiration of 30 days
after such determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.
10. Certain Enforcement Matters
(a) If, after a Change in Control or Potential Change in Control, a
dispute arises (i) with respect to this Agreement or the breach thereof, or (ii)
with respect to the Employee's or the Company's rights or obligations under this
Agreement, including but not limited to any such dispute between the Employee
and the Company, the Company shall pay or reimburse the Employee for all
reasonable costs and expenses (including court costs, arbitrators' fees and
reasonable attorneys' fees and disbursements) the Employee incurs in connection
with such dispute, including without limitation costs and expenses he incurs to
obtain payment or otherwise enforce his rights under this Agreement, or to
obtain payment of costs and expenses due under this paragraph 10(a). In
addition, the Company shall pay the Employee such additional amount (a "Gross
Up") as will be sufficient, after the Employee pays his tax liability with
respect to the Gross Up from the Gross Up, to pay all of his federal, state and
local tax liability with respect to any costs and expenses that are paid by the
Company pursuant to this paragraph 10(a). The Company shall promptly pay or
reimburse the Employee for all such costs and expenses as he incurs them, upon
presentation of reasonable documentation of such costs and expenses, and shall
promptly pay the related Gross Up as and when it pays or reimburses costs and
expenses. The Employee shall not be obligated to repay any such costs, expenses
or Gross Up unless it is finally determined by the trier of fact in a
non-appealable judicial or arbitral decision or ruling (as applicable) that the
Employee's principal positions with respect to the principal matter(s) in
dispute were unreasonable and pursued in bad faith.
(b) Any payments to which the Employee may be entitled under this
Agreement, including, without limitation, under section 5, 8, 9 or 10 hereof,
shall be made forthwith on the applicable date(s) for payment specified in this
Agreement. If for any reason the amount of any payment due to the Employee
cannot be finally determined on that date, such amount shall be estimated on a
good faith basis by the Company and the estimated amount shall be paid no later
than within 10 days after such date. As soon as practicable thereafter, the
final determination of the amount due shall be made and any adjustment requiring
a payment to or from the Employee shall be made as promptly as practicable.
(c) Any controversy or claim arising, after a Change in Control or
Potential Change in Control, out of or related to this Agreement or the breach
thereof, shall be settled by binding arbitration in the City of Los Angeles, in
accordance with the employment dispute arbitration rules of the American
Arbitration Association then in effect, and the arbitrator's decision shall be
binding and final and judgment upon the award rendered may be entered in any
court having jurisdiction thereof, except that the Employee may elect to have
any such controversy or claim settled by judicial determination in lieu of
8
arbitration by bringing a court action, if he is the plaintiff or, if he is not
the plaintiff, demanding such judicial determination within the time to answer
any complaint in any arbitration action that may be commenced.
11. Change in Control
(a) The term "Change in Control" as used in this Agreement means a
change of control of a nature that would be required to be
reported in response to Item 6(e) of Schedule 14A of Regulation
14A promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), whether or not the Company is then
subject to such reporting requirement; provided that, whether or
not any of the following events would constitute a change of
control of such a nature, a Change in Control shall be deemed to
occur for purposes of this Agreement if and when any of the
following events occur:
(i) any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the Exchange Act), other than--
(A) the Company,
(B) a Subsidiary,
(C) a trustee or other fiduciary holding securities under
an employee benefit plan of the
Company or a Subsidiary, or
(D) an underwriter engaged in a distribution of Company
stock to the public with the Company's written consent, becomes the beneficial
owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly,
of Voting Securities that meet two tests: (I) they represent more than thirty
percent (30%) (this seems low to me, how about 40%) of the combined voting power
of the then outstanding Voting Securities, and (II) they also represent more
than the percentage of the combined voting power of the then outstanding Voting
Securities beneficially owned, directly or indirectly, at that time by Douglas
MacLellan and his associates (as defined in Rule 12b-2 under the Exchange Act)
(this definition is not very broad and would not include Madame Wang, That or
TriPoint). However, the second test stated in clause (II) above shall not apply
if the "person" in question is Douglas MacLellan and/or his associates (as
defined in Rule 12b-2 under the Exchange Act). In addition, if the "person" in
question is an institutional investor whose investment in Voting Securities is
purely passive when such person becomes the beneficial owner of Voting
Securities that meet the tests set forth in clause (I) and, if applicable, (II)
above, then such event (i.e., such person's becoming the beneficial owner of
such Voting Securities) shall not be deemed to constitute a Change in Control
under this subparagraph 11(a)(i) for so long as (and only for so long as) such
person's investment in Voting Securities remains purely passive;
(ii) the stockholders of the Company approve a merger,
consolidation, recapitalization or reorganization of the Company or a
Subsidiary, reverse split of any class of Voting Securities, or an acquisition
of securities or assets by the Company or a Subsidiary, or consummation of any
such transaction if stockholder approval is not obtained, other than (A) any
such transaction in which the holders of outstanding Voting Securities
immediately prior to the transaction receive, with respect to such Voting
Securities (or, in the case of a transaction in which the Company is the
surviving corporation or a transaction involving a Subsidiary, retain), voting
securities of the surviving or transferee entity representing more than fifty
percent (50%) of the total voting power outstanding immediately after such
transaction, with the voting power of each such continuing holder relative to
other such continuing holders not substantially altered in the transaction, or
(B) any such transaction which would result in a Related Party beneficially
owning more than 50 percent of the voting securities of the surviving entity
outstanding immediately after such transaction;
(iii) the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or disposition
9
by the Company of all or substantially all of the Company's assets other than
any such transaction which would result in a Related Party owning or acquiring
more than 50 percent of the assets owned by the Company immediately prior to the
transaction; or
(iv) the persons who were members of the Board of Directors of
the Company immediately before a tender or exchange offer for shares of Common
Stock by any person other than the Company or a Related Party, or before a
merger or consolidation of the Company or a Subsidiary, or contested election of
the Board of Directors of the Company, or before any combination of such
transactions, cease to constitute a majority of the Board of Directors of the
Company as a result of such transaction or transactions.
(b) For purposes of paragraph 11(a) above:
(i) the term "Related Party" shall mean (A) a Subsidiary, (B)
an employee or group of employees of the Company or any Subsidiary, (C) a
trustee or other fiduciary holding securities under an employee benefit plan of
the Company or any Subsidiary, or (D) a corporation or other form of business
entity owned directly or indirectly by the stockholders of the Company in
substantially the same proportion as their ownership of Voting Securities;
(ii) the term "Subsidiary means a corporation or other form of
business association of which shares (or other ownership interests) having more
than 50% of the voting power are, or in the future become, owned or controlled,
directly or indirectly, by the Company; and
(iii) the term "Voting Securities" shall mean any securities
of the Company which carry the right to vote generally in the election of
directors.
(c) For purposes of this Agreement, a "Potential Change in Control"
means that (i) the Company enters into an agreement, the consummation of which
would result in the occurrence of a Change of Control; or (ii) the Board adopts
a resolution to the effect that, for purposes of this Agreement, a potential
change in control of the Company has occurred.
12. Severability; Survival
(a) In the event that any provision of this Agreement shall be
determined to be invalid or unenforceable for any reason, the remaining
provisions of this Agreement not so invalid or unenforceable shall be unaffected
thereby and shall remain in full force and effect to the fullest extent
permitted by law; and
(b) Any provision of this Agreement which may for any reason be
invalid or unenforceable in any jurisdiction shall remain in effect and be
enforceable in any jurisdiction in which such provision shall be valid and
enforceable.
(c) The provisions of sections 6, 7, 8, 9 and 10 of this
Agreement, and any other provision of this Agreement which is intended to apply,
operate or have effect after the expiration or termination of the term of this
Agreement, or at a time when the term of this Agreement may have expired or
terminated, shall survive the expiration or termination of the term of this
Agreement for any reason.
13. General Provisions
(a) No right or interest to or in any payments to be made under
this Agreement shall be subject to anticipation, alienation, sale, encumbrance,
pledge, charge or hypothecation or to execution, attachment, levy or similar
process, or assignment by operation of law. All payments to be made by the
Company hereunder shall be subject to the withholding of such amounts as the
10
Company may determine it is required to withhold under the laws or regulations
of any governmental authority, whether foreign, federal, state or local.
(b) The Employee has the right to assign payments at his sole
discretion in part or in full to his personal retirement account, as the company
has not established a retirement or pension plan. The tax benefits or
liabilities of these assigned payments if any will accrue to the Employee.
(c) To the extent that the Employee acquires a right to receive
payments from the Company under this Agreement, such right shall be no greater
than the right of an unsecured general creditor of the Company. All payments to
be made hereunder shall be paid from the general funds of the Company and no
special or separate fund shall be established to assure payment of any amount
hereunder.
(d) This Agreement shall be governed by and construed and enforced
in accordance with the laws of the State of California, without giving effect to
the principles of conflicts of laws of that State.
(e) This Agreement shall be binding upon and inure to the benefit of
the Company, its successors and assigns, and the Employee, his heirs, devisees,
distributees and legal representatives.
(f) Any notice or other communication to the Company pursuant to any
provision of this Agreement shall be given in writing and will be deemed to have
been delivered:
(i) when delivered in person to the Corporate Secretary or
General Counsel of the Company; or
(ii) one week after it is deposited in the United States
certified or registered mail, postage prepaid, addressed to the Corporate
Secretary of the Company at 8324 Delgany Avenue Playa del Rey, California 90293
or at such other address of which the Company may from time to time give the
Employee written notice in accordance with paragraph 13(g) below.
(g) Any notice or other communication to the Employee pursuant to
any provision of the Agreement shall be given in writing and will be deemed to
have been delivered:
(i) when delivered to the Employee in person, or
(ii) one week after it is deposited in the United States
certified or registered mail, postage prepaid, addressed to the Employee at his
address as it appears on the records of the Company or at such other address of
which the Employee may from time to time give the Company written notice in
accordance with paragraph 13(e) above.
(h) No provision of this Agreement may be amended, modified or
waived unless such amendment, modification or waiver shall be agreed to in a
writing signed by the Employee and an authorized officer of the Company.
(i) This instrument contains the entire agreement of the parties
relating to the subject matter of this Agreement and supersedes and replaces all
prior agreements and understandings with respect to such subject matter, and the
parties have made no agreements, representations or warranties relating to the
subject matter of this Agreement which are not set forth herein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
AXIOM PHARMACEUTICALS, INC.
By: /s/ That Ngo
-------------
That Ngo,
President
/s/ Peter Cunningham
--------------------
Employee
11
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
This employment agreement (the "Agreement") is made and entered into as of
September 18, 2003 by and between Axiom Pharmaceuticals, Inc., a Nevada
corporation (the "Company") and Lan Hao (the "Employee").
Recitals
A. The Company desires to employ the Employee from the date set forth above (the
"Effective Date") until expiration of the term of this Agreement, and Employee
is willing to be employed by the Company during that period, on the terms and
subject to the conditions set forth in this Agreement.
In consideration of the mutual covenants and promises of the parties, the
Company and the Employee covenant and agree as follows:
1. DUTIES
During the term of this Agreement, Employee will be employed by the Company to
serve as the Chief Financial Officer of the company. The Employee will devote
such amount of his/her business time to the conduct of the business of the
Company as may be reasonably required to effectively discharge Employee's duties
under this Agreement and, subject to the supervision and direction of the
Company's Chief Executive and the Board of Directors (the "Board"), shall be
principally responsible for the management of the Company's financial and
accounting operations. Unless the parties agree otherwise in writing, during the
term of this Agreement, Employee will perform the services contemplated by this
Agreement at the Company's corporate headquarters located in Newport Beach,
California; provided, however, that Company may, from time to time, require
Employee to travel temporarily to other locations on the Company's business.
Notwithstanding the foregoing, nothing in this Agreement is to be construed as
prohibiting Employee from continuing to serve as a director of other entities
whether or not for profit, so long as his service as such does not substantially
prevent or prohibit Employee from effectively discharging his duties hereunder
and such positions are disclosed to the Board.
2. TERM OF EMPLOYMENT
2.1 Definitions
For purposes of this Agreement the following terms have the following meanings:
(a) "Termination for Cause" means termination by Company of Employee's
employment (i) by reason of Employee's willful dishonesty towards, fraud upon,
or deliberate injury or attempted injury to, the Company, (ii) by reason of
Employee's material breach of this Agreement or (iii) by reason of Employee's
gross negligence or intentional misconduct with respect to the performance of
Employee's duties under this Agreement; provided, however, that no such
termination will be deemed to be a Termination for Cause unless the Company has
provided Employee with written notice of what it reasonably believes are the
grounds for any Termination for Cause and Employee fails to take appropriate
remedial actions during the thirty day period following receipt of such written
notice.
(b) "Termination Other than For Cause" means termination by the Company of
Employee's employment by the Company for reasons other than those which
constitute Termination for Cause.
(c) "Voluntary Termination" means termination by the Employee of the Employee's
employment with the Company, excluding termination by reason of Employee's death
or disability as described in Sections 2.5 and 2.6.
2.2 Basic Term
1
(a) The term of employment of Employee by the Company will commence on the
Effective Date and will extend through the period ending on September 18, 2004,
(the "Termination Date"). Company and Employee may extend the term of this
Agreement by mutual written agreement.
(b) Notwithstanding the foregoing paragraph 2.2(a), during the first 120 days of
the term of this Agreement the Company shall have the right to terminate the
Employee for any reason or no reason at all and such termination shall be
treated as a Voluntary Termination other than for Good Cause, as set forth in
paragraph 2.7(a).
2.3 Termination for Cause
Termination for Cause may be effected by the Board of Directors at any time
during the term of this Agreement and may be effected by written notification to
Employee; provided, however, that no Termination for Cause will be effective
unless Employee has been provided with the prior written notice and opportunity
for remedial action described in Section 2.1. Upon Termination for Cause,
Employee is to be immediately paid all accrued salary, incentive compensation to
the extent earned, vested deferred compensation (other than pension plan or
profit sharing plan benefits, which will be paid in accordance with the
applicable plan), and accrued vacation pay, all to the date of termination, but
Employee will not be paid any severance compensation.
2.4 Termination Other Than for Cause
Notwithstanding anything else in this Agreement, the Board of Directors may
effect a Termination Other Than for Cause at any time upon giving notice to
Employee of such Termination Other Than for Cause. Upon any Termination Other
Than for Cause, Employee will immediately be paid all accrued salary, all
incentive compensation to the extent earned, severance compensation as provided
in Section 4, vested deferred compensation (other than pension plan or profit
sharing plan benefits, which will be paid in accordance with the applicable
plan), and accrued vacation pay, all to the date of termination.
2.5 Termination Due to Disability
In the event that, during the term of this Agreement, Employee should, in the
reasonable judgment of the Board, fail to perform Employee's duties under this
Agreement because of illness or physical or mental incapacity ("Disability"),
and such Disability continues for a period of more than six (6) consecutive
months, Company will have the right to terminate Employee's employment under
this Agreement by written notification to Employee and payment to Employee of
all accrued salary and incentive compensation to the extent earned, severance
compensation as provided in Section 4, vested deferred compensation (other than
pension plan or profit sharing plan benefits, which will be paid in accordance
with the applicable plan), and all accrued vacation pay, all to the date of
termination. Any determination by the Board with respect to Employee's
Disability must be based on a determination of competent medical authority or
authorities, a copy of which determination must be delivered to the Employee at
the time it is delivered to the Board. In the event the Employee disagrees with
the determination described in the previous sentence, Employee will have the
right to submit to the Board a determination by a competent medical authority or
authorities of Employee's own choosing to the effect that the aforesaid
determination is incorrect and that Employee is capable of performing Employee's
duties under this Agreement. If, upon receipt of such determination, the Board
wishes to continue to seek to terminate this Agreement under the provisions of
this section, the parties will submit the issue of Employee's Disability to
arbitration in accordance with the provisions of this Agreement.
2.6 Death
In the event of Employee's death during the term of this Agreement, Employee's
employment is to be deemed to have terminated as of the last day of the month
during which Employee's death occurred, and Company will pay to Employee's
estate accrued salary, incentive compensation to the extent earned, vested
deferred compensation (other than pension plan or profit sharing plan benefits,
which will be paid in accordance with the applicable plan), and accrued vacation
pay, all to the date of termination.
2.7 Voluntary Termination
2
(a) In the event of a Voluntary Termination, other than for "Good Reason," as
defined below, the Company will immediately pay to Employee all accrued salary,
all incentive compensation to the extent earned, vested deferred compensation
(other than pension plan or profit sharing plan benefits, which will be paid in
accordance with the applicable plan), and accrued vacation pay, all to the date
of termination, but Employee will not be paid any severance compensation.
(b) The Employee may voluntarily terminate his/her employment hereunder at any
time with or without Good Reason. For purposes of this Agreement, "Good Reason"
shall mean, so long as the Employee has not been guilty of conduct set forth in
Section 2.1(a), a failure by the Company to comply with any material provision
of this Agreement that has not been cured within thirty (30) days after written
notice of such noncompliance has been given by the Employee to the Company or
(b) the assignment to the Employee by the Company of duties inconsistent with
the Employee's position, duties or responsibilities as in effect immediately
prior to the Effective Date, including, but not limited to, any material
reduction in such position, duties, or responsibilities or material change in
his/her title or (c) a relocation by the Company of the Employee's office to a
location outside a 60 mile radius of Newport Beach, California, in each case of
clauses (b) or (c), without the consent of the Employee. The Employee's election
to terminate his/her employment with Good Reason shall be considered in material
respects to be a Termination for Other Than Cause. Upon a voluntary Termination
for Good Reason, Employee will be paid immediately for all accrued salary, all
incentive compensation to the extent earned, severance compensation as provided
in Section 4, vested deferred compensation (other than pension plan or profit
sharing plan benefits, which will be paid in accordance with the applicable
plan) and accrued vacation pay, all to the date of termination.
3. SALARY, BENEFITS AND OTHER COMPENSATION
3.1 Base Salary
As payment for the services to be rendered by Employee as provided in Section 1
and subject to the terms and conditions of Section 2, Company agrees to pay to
Employee a "Base Salary," payable in equal monthly installments. The Base Salary
payable to Employee under this Section will initially be $120,000 per annum.
The payment of Base Salary hereunder shall not in any way limit or reduce any
other obligation of the Company hereunder, and no other compensation, benefit or
payment hereunder shall in any way limit or reduce the obligation of the Company
to pay the Employee's Base Salary hereunder. The Board, at any time and from
time to time, may increase (but not reduce) the Base Salary payable under this
Agreement, and increase in the Base Salary shall become effective at the time
indicated by the Board without the need for an amendment to this Agreement.
3.2 Incentive Bonus Plans
During the term of his employment under this Agreement, the Employee will be
eligible to participate in all bonus and incentive plans established by the
Board.
3.3 Benefit Plans
During the term of Employee's employment under this Agreement, the Employee is
to be eligible to participate in all employee benefit plans to the extent
maintained by the Company, including (without limitation) any life, disability,
health, accident and other insurance programs, paid vacations, and similar plans
or programs, subject in each case to the generally applicable terms and
conditions of the plan or program in question and to the determinations of any
committee administering such plan or program. On termination of the Employee for
any reason, the Employee will retain all of Employee's rights to benefits that
have vested under such plan, but the Employee's rights to participate in those
plans will cease on the Employee's termination unless the termination is a
Termination Other Than for Cause, in which case Employee's rights of
participation will continue for a period of six months following Employee's
termination.
3.4 Withholding of Taxes
3
The Employee understands that the services to be rendered by Employee under this
Agreement will cause the Employee to recognize taxable income, which is
considered under the Internal Revenue Code of 1986, as amended, and applicable
regulations thereunder as compensation income subject to the withholding of
income tax (and Social Security or other employment taxes). The Employee hereby
consents to the withholding of such taxes as are required by the Company.
3.5 Vacation
During the term of this Agreement, Employee will be entitled to three weeks paid
vacation time per year. To the extent that Employee does not use the full three
weeks of vacation time in any given year, Employee may accrue and carry forward
such unused time up to a maximum accrual of six weeks.
3.6 Expenses
During the term of this Agreement, Company will reimburse Employee for
Employee's reasonable out-of-pocket expenses incurred in connection with
Company's business, including travel expenses, food, and lodging while away from
home, subject to such policies as Company may from time to time reasonably
establish for its employees.
4. SEVERANCE COMPENSATION
4.1 Termination Other Than for Cause or Voluntary Termination; Payment in
Lieu of Notice
In the event Employee's employment is terminated in a Termination Other Than for
Cause or a Voluntary Termination other than for Good Reason, Employee will be
paid as severance pay Employee's Base Salary, as defined in Section 3.1, for the
period commencing on the date that Employee's employment is terminated and
ending on the later of the end of Employee's term of employment or the date
which is three months from the date of termination.
4.2 Termination for Disability
In the event Employee's employment is terminated because of Employee's
disability pursuant to Section 2.5, Employee will be paid as severance pay
Employee's Base Salary, as defined in Section 3.1, for the period commencing on
the date that Employee's employment is terminated and ending on the date which
is three months thereafter.
4.3 Change in Control
In the event that Employee's employment is terminated because of a change in
control (as defined herein) of the Company prior to the Termination Date,
Employee will be paid as severance pay Employee's Base Salary, as defined in
Section 3.1, for the period commencing on the date that Employee's employment is
terminated and ending on the date which is three months thereafter. For purposes
of this Agreement, a "change in control" shall be defined as the sale of more
than fifty (50%) of the Company's outstanding capital stock, other than in
connection with an underwritten public offering of the Company's securities or a
merger (or similar transaction) in which the Company is not the surviving entity
or following which the Company's shareholders immediately prior to such
transaction no longer control a majority of the Company's voting stock.
4.4 Other Termination
In the event of a Voluntary Termination, Termination for Cause or Death,
Employee or Employee's estate will not be entitled to any severance pay.
5. MISCELLANEOUS
5.1 Waiver
4
The waiver of any breach of any provision of this Agreement will not operate or
be construed as a waiver of any subsequent breach of the same or other provision
of this Agreement.
5.2 Entire Agreement; Modification
Except as otherwise provided in the Agreement and in the Option Agreement, this
Agreement represents the entire understanding among the parties with respect to
the subject matter of this Agreement, and this Agreement supersedes any and all
prior understandings, agreements, plans, and negotiations, whether written or
oral, with respect to the subject matter hereof, including without limitation,
any understandings, agreements, or obligations respecting any past or future
compensation, bonuses, reimbursements, or other payments to Employee from
Company. All modifications to the Agreement must be in writing and signed by the
party against whom enforcement of such modification is sought.
5.3 Notice
All notices and other communications under this Agreement must be in writing and
must be given by personal delivery, telecopier or telegram, or first class mail,
certified or registered with return receipt requested, and will be deemed to
have been duly given upon receipt if personally delivered, three (3) days after
mailing, if mailed, or twenty-four (24) hours after transmission, if delivered
by telecopies or telegram, to the respective persons named below:
If to Company: Axiom Pharmaceuticals, Inc.
4695 Macarthur Court, 11th Floor
Newport Beach, CA 92660
Telecopier: (310) 301-7748
Telephone: (310) 301-7728
Attn: President
If to Employee: Lan Hao
3 Laurelwood Drive
Irvine, CA 92620
Telecopier: (714) 508-5934
Telephone: (714) 508-5934
Any party may change such party's address for notices by notice duly given
pursuant to this Section.
5.4 Headings
The Section headings of this Agreement are intended for reference and may not by
themselves determine the construction or interpretation of this Agreement.
5.5 Governing Law
This Agreement is to be governed by and construed in accordance with the laws of
the State of California applicable to contracts entered into and wholly to be
performed within the State of California by California residents. Any
controversy or claim arising out of or relating to this Agreement, or breach of
this Agreement (except any controversy or claim with respect to Section 5 or 6),
is to be settled by arbitration in Newport Beach, California in accordance with
the Commercial Arbitration Rules of the American Arbitration Association, and
judgment on the award rendered by the arbitrators may be entered in any court
having jurisdiction. There must be three arbitrators, one to be chosen directly
by each party at will, and the third arbitrator to be selected by the two
arbitrators so chosen. Each party will pay the fees of the arbitrator he or she
selects and his or her own attorneys, and the expenses of his or her witnesses
and all other expenses connected with presenting his or her case. Other costs of
5
the arbitration, including the cost of any record or transcripts of the
arbitration, administrative fees, the fee of the third arbitrator, and all other
fees and costs, will be borne equally by the parties.
5.6 Survival of Company's Obligations
This Agreement will be binding on, and inure to the benefit of, the executors,
administrators, heirs, successors, and assigns of the parties; provided,
however, that except as expressly provided in this Agreement, this Agreement may
not be assigned either by Company or by Employee.
5.7 Counterparts
This Agreement may be executed in one or more counterparts, all of which taken
together will constitute one and the same Agreement.
5.8 Enforcement
If any portion of this Agreement is determined to be invalid or unenforceable,
that portion of this Agreement will be adjusted, rather than voided, to achieve
the intent of the parties under this Agreement.
5.9 Indemnification
The Company agrees that it will indemnify and hold the Employee harmless to the
fullest extent permitted by applicable law from and against any loss, cost,
expense or liability resulting from or by reason of the fact of the Employee's
employment hereunder, whether as an officer, employee, agent, fiduciary,
director or other official of the Company, except to the extent of any expenses,
costs, judgments, fines or settlement amounts which result from conduct which is
determined by a court of competent jurisdiction to be knowingly fraudulent or
deliberately dishonest or to constitute some other type of willful misconduct.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
AXIOM PHARMACEUTICALS, INC.
By /s/ Peter Cunningham
------------------------
Peter Cunningham,
President
EMPLOYEE
/s/ Lan Hao
------------------------
Lan Hao
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EXHIBIT 10.3
AGREEMENT FOR PROCESSING (OEM)
(English Translation)
PARTY A: SHENYANG TIANWEI WERKE PHARMACEUTICAL CO., LTD.
PARTY B: QIQIHAER NO. 2 PHARMACEUTICAL FACTORY
Whereas Party A needs to build a new factory in light of GMP Standard because of
the City government's policy regarding the Tiexi District Reconstruction and the
establishment of joint venture with American party. Under the principle of
mutual benefit, Party A and Party B through friendly consultation agree that
Party A will entrust Party B to manufacture the pharmaceutical products whose
license are owned by Party A. Both parties hereby enter into the following
agreements:
I. Party A shall provide the raw & supplementary materials, and package.
II. Party A shall notify Party B the specific products for manufacture
based on its own sale plan each month.
III. Party B shall provide Party A with certified products in both quality
and quantity in time according to Party A's requirement.
IV. Party B shall not sell or market the products appointed to process by
Party A.
V. The detailed prices are listed as below:
1. Cephalothin: one bottle contains 15 granules. The price per bottle is
RMB0.30, and the price may rise by RMB0.10 seasonally.
2. Weifukang Cream: the price per tube is RMB1.65, and the price may rise
by RMB0.10 seasonally.
3. Asarone: one box contains 18 tablets. The price per box is RMB1.20, and
the price may rise by RMB0.10--RMB0.60 seasonally.
4. Norfloxacin: the price per bottle is RMB0.95.
5. Rifampicin: one bottle contains 100 granules. The price per bottle is
not more than RMB1.80.
6. Other specific products: the price may be
discussed seasonally.
VI. If any change occurs to any party, the other party shall be notified within
one month.
VII. Payment: the payment shall be made upon delivery.
VIII. All other matters shall be negotiated by both parties.
IX. The valid term of this Agreement is two years effective from the date of
signature by both parties.
PARTY A: SHENYANG TIANWEI WERKE PHARMACEUTICAL CO., LTD.
Sept. 19, 2002
PARTY B: QIQIHAER NO. 2 PHARMACEUTICAL FACTORY
Sept. 19, 2002
1
EXHIBIT 10.4
Agreement on Agency for Sale (Distribution)
(English Translation)
PARTY A: SHENYANG TIANWEI PHARMACEUTICAL FACTORY
PARTY B: LIAONING WEIKANG MEDICINE CO., LTD.
In light of the principles of amicable consultation, mutual benefit, and joint
development, Party A and Party B enter into the following agreement.
I. Both Party A and Party B agree to establish the stable and fixed sale
relationship.
II. Party B shall be the sole agency reseller in the territory of Shenyang
for all pharmaceutical products manufactured by Party A.
III. The pharmaceutical products manufactured by Party A cannot be sold to
other clients in the territory of Shenyang.
IV. The price of Party A for supply cannot be higher than other equivalent
suppliers' price.
V. Party A agrees to prepare some products in stock for Party B.
VI. Party A shall provide Party A with the marketing information for the
products.
VII. The payment shall be made in cash; both parties agree to adopt the
triptich as the invoice for settlement, and the time of settlement
shall based on the batch of the products or month by month.
VIII. Other matter unresolved herein shall be negotiated by both parties.
IX. This agreement is made in two copies with one copy for each party.
X. The valid term of this agreement shall be five years, effective from
the date of this agreement to March 30, 2004.
Party A: Shenyang Tianwei PARTY B: LIAONING WEIKANG MEDICINE
Pharmaceutical Factory CO., LTD.
/s /s
MARCH 29, 1999
1
EXHIBIT 10.5
CONSULTING AGREEMENT
This Agreement is made as of August 25, 2003, by and between Axiom
Pharmaceuticals, Inc. ("Company"), a China Pharmaceutical company with its
principal offices at No. F.3004 Sankei Torch Bldg, 262A Shifu Road, Shenyang
City, Lianing Province, Peoples Republic of China and US Representative Offices
at 8324 Delgany Avenue, Playa del Rey, California, 90293 and Tripoint Capital
Advisors, LLC ("Consultant"), a Maryland limited liability company, with its
principal offices at 15245 Shady Grove Road, Suite 400, Rockville, Maryland
20850.
Witnesseth
WHEREAS, the Company requires expertise in the area of business development to
support it's business and growth and desires to engage Consultant to provide
such business development services and specifically to assist the Company with
structuring of capital transactions; business development; corporate
development; and
WHEREAS, Consultant, through its principals, agents and employees, has certain
expertise in the evaluation of potential business opportunities and the
implementation of various projects of the nature and type contemplated by the
Company in its future expansion and development which Consultant has agreed to
provide to the Company;
NOW, THEREFORE, in consideration of the premise and the mutual promises and
covenants contained herein and subject specifically to the conditions hereof,
and intending to be legally bound thereby, the parties agree as follows:
1. Appointment of Consultant
The Company hereby appoints Consultant, and Consultant agrees to represent the
Company, as a non-exclusive consultant to assist the Company in its business and
corporate development, in structuring its capital transactions and to assist in
the contemplated marketing and development of the Company in the United States.
Consultant shall have the right during the term of this agreement to represent
to the public that it is a consultant to the Company.
2. Consultant's Rights and Duties
Consultant shall use its best efforts to assist the Company in its business and
corporate development, including but not limited to:
(ii) Assist in the development and implementation of the Company's
business plan.
(iii) Work with the Company's Auditors in order to assist the Company to
comply with US accounting standards ("GAAP")
(iv) Assist the Company in creating a corporate image.
(v) Assist the Company in maintaining proper US corporate compliance and
governance.
(vi) Review any private placements.
3. Company Obligations
(a) The Company will be required to sign separate retention agreements with
outside professionals. Fees specified under this Agreement include all legal
work relating to SEC filings (excluding any litigation) through the entire
period of the engagement provided the Company employs counsel recommended by
Consultant. Such counsel may require that the Company sign a separate retainer
agreement.
1
(b) The Company's officers, attorneys and accountants will have to be ready to
answer questions from the SEC, NASDAQ and/or other regulatory agencies, markets
or exchanges. For NASDAQ applications, expect several rounds of comments. If the
Company desires an American Stock Exchange Listing, the Company will need to
follow a similar application process.
(c) The Company will need to have audited financial statements for at least the
last two fiscal years prepared in accordance with US GAAP. In addition, the
Company will need to prepare and present quarterly information that has been
reviewed by an independent auditor for the previous two years and on a
"go-forward basis".
4. Company Information
In connection with Consultant's performance of its duties hereunder, the Company
shall (i) provide Consultant, on a timely basis, all information reasonably
requested by Consultant, and (ii) make its officers and professionals available
to Consultant and such third parties as Consultant shall designate at reasonable
times and upon reasonable notice.
5. Confidential Information
Consultant acknowledges that, in the course of performing its duties hereunder,
it may obtain information relating to the Company, which the Company has marked
as confidential ("Confidential Information"). Consultant shall hold at all
times, both during the term of this agreement and at all times thereafter, such
Confidential Information in the strictest confidence, and shall not use such
Confidential Information for any purpose, other than as may be reasonably
necessary for the performance of its duties pursuant to this agreement, without
the Company's prior written consent. Consultant shall not disclose any
Confidential Information to any person or entity, other than to Consultant's
employees or consultants as may be reasonably necessary for purposes of
performing its duties hereunder, without the Company's prior written consent.
The foregoing notwithstanding, the term "Confidential Information" shall not
include information which (i) becomes generally available to the public, other
than as a result of a breach hereof, (ii) was available on a non-confidential
basis prior to its disclosure to Consultant by the Company, or (iii) becomes
available to Consultant on a non-confidential basis from a source other than the
Company, provided that such source is not bound by a confidentiality agreement
with respect to such information. The foregoing notwithstanding, Consultant may
disclose Confidential Information to the extent required by law or regulation,
including but not limited to court orders, subpoenas, civil investigative
demands and interrogatories.
6. Compensation
As compensation for Consultant's services, the Company shall pay Consultant
$10,000 upon the execution of this agreement and thereafter $10,000 per month,
payable on the 1st day of each month. In addition, the Company shall pay the
Consultant's nominee for the Board of Directors a monthly of $2500.00 and any
other expense reimbursement or fee, which is consistent with any other outside
members of the Board.
7. Expense Reimbursement
The Company shall reimburse Consultant periodically for its reasonable
out-of-pocket expenses (excluding compensation to Consultant's employees)
arising from Consultant's performance hereunder.
8. Indemnification
The Company agrees to indemnify and hold harmless Consultant (including each of
its directors, officers, employees, partners and agents) with respect to any
liability (and actions in respect thereof) incurred by Consultant by virtue of
its retention hereunder and shall reimburse Consultant for any legal or other
expenses reasonably incurred in connection with investigating or defending any
such liability or action, provided that the Company shall have the right to
control the defense of any claim giving rise to such liability and no such claim
shall be settled without the consent of the Company. The foregoing provisions
shall survive termination of this Agreement and any investigation with respect
thereto by any party hereto.
2
Furthermore, the Company understands and agrees that its financial statements,
any filings which the Company makes with the SEC, NASD, state regulators or any
market or exchange and the contents thereof are ultimately the responsibility of
the Company and its officers and directors. Consultant can assist and advise you
in the preparation of such filings but the Company must approve and is
responsible for the contents of all filings.
9. Other Engagements
The Company acknowledges that Consultant is and will be acting as a consultant
to other business enterprises seeking business development, investment banking
and/or other services normally provided by Consultant and agrees that
Consultant's provision of services to such enterprises shall not constitute a
breach hereof or of any duty owed to the Company by virtue of this agreement.
10. Term
This agreement is effective upon execution by the Company as provided below and
shall continue in effect for 12 months or until terminated by either party
pursuant to Section 11.
11. Termination
Either party may terminate this agreement at any time and for any reason, with
or without cause, upon the giving 30 days written notice of termination to the
other party; provided, however, that Consultant shall be entitled to full
compensation, as set forth in Section 6, up to the date of termination,
regardless of the reason for the termination and shall be paid all expenses
incurred in connection with its acting as a consultant to the Company pursuant
to Section 7.
12. General Provisions
(a) This agreement shall be governed by and under the laws of the State of
Maryland without giving effect to conflicts of law principles. If any provision
hereof is found invalid or unenforceable, that part shall be amended to achieve
as nearly as possible the same effect as the original provision and the
remainder of this agreement shall remain in full force and effect.
(b) Any dispute arising under or in any way related to this agreement shall be
submitted to binding arbitration by the American Arbitration Association in
accordance with the Association's commercial rules then in effect. The
arbitration shall be conducted in Rockville, Maryland. The arbitration shall be
binding on the parties and the arbitration award may be confirmed by any court
of competent jurisdiction.
(c) This agreement constitutes the entire agreement and final understanding of
the parties with respect to the subject matter hereof and supersedes and
terminates all prior and/or contemporaneous understandings and/or discussions
between the parties, whether written or verbal, express or implied, relating in
any way to the subject matter hereof. This agreement may not be altered,
amended, modified or otherwise changed in any way except by a written agreement,
signed by both parties.
(d) Any notice or other communication pursuant hereto shall be given to a party
at its address first set forth above by (i) personal delivery, (ii) commercial
overnight courier with written verification of receipt, or (iii) registered or
certified mail. If so mailed or delivered, a notice shall be deemed given on the
earlier of the date of actual receipt or three (3) days after the date of
authorized delivery.
(e) This agreement may be executed in counterparts, each one of which shall
constitute an original and all of which taken together shall constitute one
document. The Company shall confirm that the foregoing is in accordance with its
understanding by signing and returning to Consultant the enclosed copy of this
agreement, which shall become a binding agreement upon Consultant's receipt.
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
duly executed as of the date first written above.
3
TRIPOINT CAPITAL ADVISORS, LLC
By: /s/ Mark Elenowitz
--------------------------
Mark Elenowitz
Axiom Pharmaceuticals, Inc.
By: /s/ That Ngo
---------------------------
That Ngo
President, CEO
4
EXHIBIT 10.6
CONSULTING AGREEMENT
RECITALS
This Consulting Agreement (hereinafter referred to as "Agreement" or "Consulting
Agreement") is made on the 1st day of May 2003, between Axiom Pharmaceuticals,
Inc., whose address is 8324 Delgany Avenue, Playa del Rey, CA 90293,
(hereinafter referred to as "Axiom" or "Company") and Amaroq Capital LLC, of 2
Wolf Road, Bourne, MA 02532 (hereinafter referred to as "Consultant") with
reference to the following facts:
I. Axiom has asked to retain Consultant to provide various services to
Axiom as agreed to by both parties and outlined in Article 3.
II.The Consultant has advised Axiom of its willingness, ability and desire
to provide such services as outlined in Article 3 and on the terms and
conditions as set forth in this Agreement.
NOW, therefore, in consideration of the foregoing recitals and the terms,
conditions and covenants contained herein, it is hereby agreed as follows:
ART. 1 APPOINTMENT
Axiom hereby appoints Consultant and Consultant hereby agrees to hold themselves
available to render, and to render at the request of Axiom and to render
non-exclusive, independent advisory and consulting services, set forth in "I"
and "II" above, to the best of its ability, in compliance with all applicable
laws, Axiom's Articles of Incorporation and By-Laws and the terms and conditions
set forth herein. Consultant further agrees to render such services
conscientiously and to devote its best reasonable efforts and abilities thereto.
Consultant further agrees to observe all policies and guidelines that have been
promulgated by Axiom's Board of Directors or its Officers.
ART. 2 TERMS AND TERMINATION
The term of this Agreement shall be six (6) months and commence on 1 May 2003
and up to 1 November 2003, thereafter, this Agreement shall automatically
terminate. Neither party has the right to terminate this Agreement anytime prior
to its conclusion unless by mutual agreement and in writing.
ART. 3 SCOPE OF CONSULTANCY
The Consultant will perform such financial and operational consulting for and on
behalf of Axiom in relation to Axiom's on-going business and financial
development. The Consultant will be available, by mutual agreement, on an
as-needed basis, to provide consulting services to Axiom, including, without
limitation:
3.1 Undertake the development of a business plan for Axiom. Such
business plan will include an Annual Operating Plan and a Strategic
Plan for the Company.
3.2 Carry out such merchant banking activities as may be required and
mutually agreed. Such activities may include identifying and
approaching financial partners, valuations, and financial and
business modeling.
3.3 Commence certain business development activities, as mutually
agreed, which may include lease financing and other vendor
negotiations.
3.4 Undertake and assist Axiom with corporate development program
development and implementation. Such activities may include work in
1
various disciplines including partnering, licensing, joint ventures
and other such strategic planning and development activities.
ART. 4 REMUNERATION
Consultant will be remunerated for such services rendered under Art. 3 as
follows:
4.1 $5,000.00, payable 30 days from the effective date of this
Agreement. Payment shall be made via wire transfer or check.
Consultant is entitled to a 5% late fee should monies due fail to be
paid as of the effective payment date.
4.2 40,000 restricted shares of Axiom Pharmaceutical (OTB BB AXIM) with
piggy-back registration rights at next registration.
ART. 5 EXPENSES
In addition to the fees paid under the previous Article, Consultant shall be
reimbursed for all reasonable expenses incurred by Consultant during the term of
this Agreement including but not limited to fax, telephone, transportation,
translation, and incidental travel expenses. All non-incidental travel expenses
(over US$300) shall be arranged and prepaid by Axiom including airfare and
suitable hotel accommodation. The Consultant shall submit itemized reimbursement
requests supported by sufficient documentation of the expenditures and
explanation of their purposes. All expenses must be reimbursed by Axiom to
Consultant, not later than ten (10) business days, subsequent to Consultants
expense reimbursement request.
ART. 6 INDEPENDENT CONTRACTOR
It is expressly agreed that Consultant is acting as an independent contractor in
performing the services hereunder. Axiom shall carry no worker's compensation
insurance or any health or accident insurance to cover Consultant or any of
Consultant's employees. Axiom shall not pay any contribution to social security,
unemployment insurance, state and federal income taxes.
ART. 7 CONFLICT OF INTEREST
Should there occur any conflict of interest, Consultant will advise Axiom
thereof immediately and both Axiom and Consultant will then determine the
appropriate approach to be followed.
ART. 8 LIABILITY
Axiom will indemnify and hold Consultant harmless from and against any and all
liabilities incurred, brought or threatened to be brought or entered or enforced
or conducted against Axiom or any of its Connected Persons which arise out of
matters or transactions contemplated by or consequent upon Consultant or its
engagement under the terms of this Agreement, except to the extent that those
liabilities arise out of the willful default or gross negligence of Consultant,
or, as the case may be, such connected persons. The Consultant shall not bind or
commit Axiom to any third party agreements or arrangements or obligations
without the explicit written consent of Axiom. The Consultant, if party to any
Axiom agreement shall have the written signature of two (2) Officers or
Directors at Axiom upon any such occasion or event or a written wavier from
two(2) Officers or Directors at Axiom thereof.
ART. 9 CONFIDENTIALITY
Consultant shall not disclose or appropriate to his own use, or to the use of
any third party, at any time during or subsequent to the term of this Agreement,
any secret or confidential information of Axiom or any of Axiom's affiliates or
subsidiaries of which Consultant becomes aware during such period. Upon
termination of this Agreement, Consultant shall promptly deliver to Axiom all
manuals, letters, notes, data and all other materials of a secret or
confidential nature that are under the control of the Consultant.
ART. 10 NO ASSIGNMENT
2
This Agreement is between Axiom and Consultant and neither Axiom nor Consultant
may sell, assign, transfer or hypothecate any rights or interests created under
this Agreement or delegate any of their duties without the prior written consent
of the other. Any such assignment or delegation of either party without such
consent shall be void.
ART. 11 SEVERABILITY
If any provision of this Agreement is held to be unenforceable, invalid or
illegal by any court of competent jurisdiction, or arbitration, such
unenforceable, invalid or illegal provision shall not effect the remainder of
this Agreement.
ART. 12 ENTIRE AGREEMENT
This Agreement represents the entire agreement between the parties. It may not
be changed orally, but only in writing, signed by the party against whom
enforcement of any waiver, charge, modification, extension or discharge is
sought.
ART. 13 APPLICABLE LAWS
The validity of this Agreement and the interpretation and performance of all of
its terms shall be governed by the laws of Barnstable County, the Commonwealth
of Massachusetts, USA. The prevailing party in any legal action brought by one
party against the other arising out of this Agreement shall be entitled, in
addition to other rights and remedies it may have, to reimbursement for its
expenses, including court costs and reasonable attorney's fees.
AGREED TO AND ACKNOWLEDGED:
"CONSULTANT"
/s/ Joseph T. Cunningham Date: 5/1/03
------------------------------ ------
Joseph T. Cunningham
President, Amaroq Capital LLC
AXIOM PHARMACEUTICALS, INC.
/s/ Douglas Maclellan Date: 5/1/03
------------------------------ ------
Douglas Maclellan
3
EXHIBIT 10.7
Corporate Consulting Services
This AGREEMENT shall be effective on this 27th day of June 2003 and is made
between Woodbridge Management, Ltd ("Consultant") and Axiom Pharmaceuticals,
Inc., a Nevada Corporation having offices at No. F.3004 Sankei Torch Bldg, 262A
Shifu Road, Shenyang City, Liaoning Province ("Client").
1.0 PREMISES
WHEREAS, the Consultant has expertise in the area of business
development, corporate strategy, joint ventures, mergers and acquisitions; and
WHEREAS, having reviewed the Consultant's background and experience,
the Client has made a determination as to the competency of Consultant to assist
the Company with such matters;
NOW THEREFORE, in consideration of the premises, covenants and
conditions contained in this AGREEMENT, and intending to be legally bound, the
parties mutually agree as follows:
2.0 AUTHORITY AND RESPONSIBILITY OF CONSULTANT
2.1 Woodbridge will be the consultant of record and will perform the
services listed in Section 2.2 below. No other individual will be substituted
without the express written permission of the Client.
2.2 The Consultant will use his best efforts to assist with the following:
a) Aiding in Client's corporate strategy and business planning, and
arranging meetings when appropriate;
b) Attending key meetings for Client for the purpose of business
development;
c) Providing assistance with regard to structuring of proposed mergers
and acquisitions by Client;
d) Liaising with Client's accountants and legal advisors when necessary
to assist with Client's business development;
e) All other services which the Consultant sees fit to render under
this AGREEMENT; and
f) Consultant shall not be responsible for any fundraising on behalf of
Client, unless otherwise agreed to in writing by Consultant.
3.0 AUTHORITY AND DUTIES OF CLIENT.
3.1 Client shall provide Consultant with all necessary information about the
company and will provide a representative to act as a liaison to the Consultant.
4.0 LEVEL OF EFFORT; TERM OF AGREEMENT
4.1 The term of this AGREEMENT is one year.
4.2 This AGREEMENT may be terminated by either party with 30 days written
notice.
4.3 The Consultant will use his best efforts throughout the term of the
AGREEMENT.
1
5.0 FEES AND TERMS OF SALE
5.1 At the time of the signing of this AGREEMENT, the Consultant shall receive
80,000 restricted shares of Common Stock of Axiom Pharmaceuticals, Inc.
5.2 In addition, the Consultant shall receive reimbursement for all reasonable
out-of-pocket expenses incurred as a result of performing the services described
in Section 2.
6.0 PROPRIETARY INFORMATION
6.1 The Consultant agrees to safeguard confidential information of Client and
will not disclose or permit the use or disclosure of any such information,
except as authorized in advance by Client in writing. The Consultant further
agrees to surrender all confidential data to Client either on request,
cancellation, or termination of this AGREEMENT and will not retain copies,
notes, or memoranda of such data. The obligations specified in this section
shall be deemed to survive the termination of this AGREEMENT.
7.0 RELATIONSHIP OF PARTIES
7.1 This AGREEMENT does not create an employer-employee or agent-servant
relationship between the parties. At all times under this AGREEMENT the
Consultant shall be considered an independent contractor.
7.2 Consultant shall not be responsible for any obligation or liability incurred
or assumed by the Client or its employees, affiliates, representatives, agents,
or subcontractors and the Client hereby indemnifies and holds Consultant
harmless from any claim arising from the acts or omissions of such persons.
8.0 MODIFICATIONS; ENTIRE AGREEMENT
8.1 This writing contains the entire AGREEMENT of the parties. No
representations were made or relied upon by any party other than those expressly
set forth herein. No agent, employee, or representative of a party is empowered
to alter or modify any of the terms in this AGREEMENT unless such modification
is done in writing and signed by the signatories below, or other authorized
representatives designated, in writing, by the respective parties.
9.0 SEVERABILITY
9.1 Any provision of this AGREEMENT that is invalid, illegal or unenforceable in
any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of
such invalidity, illegality, or unenforceability, without affecting in any way
the remaining provisions hereof in such jurisdiction or rendering that or any
other provision of this AGREEMENT invalid, illegal, or unenforceable in any
other jurisdiction.
10.0 WAIVERS
10.1 Any waiver by a party to any term or condition of this AGREEMENT by the
other party shall not affect or impair the waiving party's right with respect to
any subsequent act or omission of the same type, nor shall it be deemed to waive
any other right under this AGREEMENT; nor shall any delay or omission of a party
to exercise any right arising under this AGREEMENT affect or impair such party's
rights as to the same or any future delay or omission; nor shall the failure of
a party to this AGREEMENT to require or exact full and complete compliance with
any one or more of the provisions of this AGREEMENT be construed as in any
manner changing such provision or provisions.
11.0 AUTHORITY TO ACT
2
11.1 The parties hereto warrant and represent that they have the full power and
authority to enter into this AGREEMENT and to consummate the transactions
contemplated hereby and have been duly authorized to execute this AGREEMENT.
12.0 NOTICES
12.1 All notices, purchase orders, and other communications contemplated under
this AGREEMENT shall be in writing and shall be either personally delivered, or
transmitted by certified mail, facsimile transmission, wire, or other device
reasonably calculated to effect delivery of documents within five (5) business
days. Unless otherwise agreed to by all the parties, such notices, orders, and
communications shall be sent, as appropriate, to the parties at the addresses
noted below:
3
If to Consultant:
Woodbridge Management, Ltd.
Linda Veri - President
192 Blue Hill Road South
P.O. Box N-7101
Nassau, Bahamas
709-B West Rusk #580
Rockwall, Texas 75087
If to the Client:
Axiom Pharmaceuticals, Inc.
8324 Delgany Avenue
Playa Del Rey, CA 90293
13.0 CONROLLING LAW AND DISPUTE RESOLUTION
13.1 This AGREEMENT shall be interpreted, controlled, and enforced in accordance
with the substantive laws of the State of New York.
13.2 Each party shall bear its own expenses in any litigation conducted under
this section.
13.2 Any controversy or claim arising out of or relating to this AGREEMENT, or
breach of this AGREEMENT is to be settled by arbitration in New York, NY in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association, and judgment on the award rendered by the arbitrators may be
entered in any court having jurisdiction. There must be three arbitrators, one
to be chosen directly by each party at will and the third arbitrator to be
selected by the two arbitrators so chosen. Each party will pay the fees of the
arbitrator he or she selects and his or her own attorneys, and the expenses of
his or her witnesses and all other expenses connected with presenting his or her
case. Other costs of the arbitration, including the cost of any record or
transcripts of the arbitration, administrative fees, the fee of the third
arbitrator, and all other fees and costs, will be borne equally by the parties.
14.0 TERMINATION
14.1 This AGREEMENT shall be deemed terminated upon the occurrence of any
one or more of the following events:
(a) A party commits a breach of one or more material terms and
conditions of this AGREEMENT and the nonbreaching party elects to terminate this
AGREEMENT;
(b) In the Opinion of the Client, the Consultant fails to put forth a
satisfactory level of effort in performing the duties described in Section 2.0;
(c) A party becomes insolvent, or subject to a petition in bankruptcy,
or is placed under the control of a receiver, liquidator, or committee of
creditors; or
(d) Upon mutual consent of the parties.
14.2 Termination of this Agreement for any reason shall not effect the
compensation to be paid to consultant pursuant to Section 5.
IN WITNESS WHEREFORE, the parties hereto have duly executed this Contract for
Consulting Services.
4
Consultant
BY: /s/ Charlie Smith
------------------------------
Printed Name: Charlie Smith
Title: President
Date: 6/27/03
Axiom Pharmaceuticals, Inc.
BY: /s/ Douglas MacLellan
------------------------------
Printed Name: Douglas MacLellan
Title:
Date: 6/27/03
5
EXHIBIT 10.8
CONSULTING AGREEMENT
This is an agreement dated and effective this 3rd day of April, 2003 by
and between Madden Consulting, Inc (hereinafter referred to as The Company), and
Axiom Pharmaceuticals, Inc. (OTCBB: AXIM), whose address is 8324 Delgany Avenue,
Playa del Rey, CA 90293 (hereinafter referred to as The Client).
RECITALS
I. The Client desires to obtain consulting services from The Company as
more particularly described herein ("Scope of Services and Manner of
Performance").
II. The Company is in the business of providing such consulting
services and has agreed to provide the services on the services on the terms and
conditions set forth in this agreement.
Now, therefore, in consideration of the faithful performance of the
obligations set forth herein and other good and valuable consideration the
receipt and sufficiency of which are hereby acknowledged, The Company and The
Client hereby agree as follows.
TERMS
1. Scope of Services. The Company will perform financial consulting for and on
behalf of The Client in relation to interactions with broker-dealers,
shareholders and members of the public and will consult with and advise The
Client on matters pertaining to corporate exposure/investor awareness, business
modeling and development and the release of press materials, and can perform
services including:
A. Telephone marketing/advertising campaigns
B. Internet marketing/advertising campaigns
C. Road-show presentations
D. Investor conference calls
E. Media submissions
2. Manner of performance. It is intended that The Company will provide research
on AXIM and distribute company materials to institutions, portfolio managers,
broker-dealers, financial advisors and other persons whom The Company determines
in its sole discretion, are capable of disseminating such information to the
general public. The Company will also advice The Client concerning marketing and
promotional matters relating to its business. The Company will act upon The
Client's behalf in the investment community, with existing shareholders, and the
public. It is expressly agreed and acknowledged that The Company will not be
expected to provide investment advice or recommendations regarding AXIM to
anyone. The Company will focus on contacting with information concerning AXIM.
Additionally, The Company shall be available for advice and counsel to the
officers and directors of AXIM at such reasonable and convenient times and
places as may be mutually agreed upon. Except as aforesaid, the time, place and
manner of performance of the services hereunder, including the amount of time
allocated by The Company, shall be determined athe sole discretion of The
Company.
3. Status of Consultant. The Company shall act as an independent Consultant and
not as an agent or employee of The Client and The Company shall make no
representation as an agent or employee of The Client. The Company shall furnish
insurance and be responsible for all taxes as an independent Consultant. The
Company shall have no authority to bind The Client or incur other obligations on
behalf of the client. Likewise, The Client shall have no authority to bind on
incur obligations on behalf of The Company.
4. Disclosure of Material Events. The Client agrees to promptly disclose to The
Company those events/discoveries which are known and/or anticipated that may or
conceivably may have an impact on the stock, business operations, future
1
business, or public perception of AXIM, as this has material impact on the
ability and effectiveness of The Company and service rendered. It shall be
understood that excluded from this disclosure shall be information deemed to be
non-public or "inside" information.
The Company that The Client considers to be secret, proprietary or non-public
and so notifies The Company. The Company agrees to hold said information in
confidence. Proprietary information shall be used by The Company only in
connection with services rendered under this Agreement. Proprietary information
shall not be deemed to include information that a) is in or becomes in the
public domain without violation of this Agreement by The Client, or b) is
rightfully received from a third entity having no obligation to The Client and
without violation of this Agreement. In reciprocal, The Client agrees to hold
confidential all trade secrets of and methods employed by The Company in
fulfillment of services rendered.
6. Indemnification. The Client agrees to indemnify and hold harmless The Company
against any losses, claims, damages, liabilities and/or expenses (including any
legal or other expenses reasonably incurred in investigating or defending any
action or claim in respect thereof) to which The Company may become subject,
because of the actions of The Client or its agents. Likewise, The Company agrees
to indemnify and hold harmless The Client against any losses, claims, damages,
liabilities and/or expenses (including any legal or other expenses reasonably
incurred in investigating or defending any action or claim in respect thereof)
to which The Client may become subject, because of the actions of The Company or
its agents. The Company is willing and capable of providing services on a "Best
Efforts" basis. Payment by The Client to The Company is irrevocable and
7. Conflict of Interest. The Company shall be free to perform services for other
persons. The Company will notify The Client of its performance of consulting
services for any other Client that could conflict with its obligations under
this agreement.
8. Term. Refer to Schedule A.
9. Payment. Refer to Schedule B.
10. Payment Instructions. Refer to Schedule C.
11. Severability. This agreement may be dissolved at any time at the express
consent of both parties. In the event any part of this agreement shall be held
to be invalid by any competent court or arbitration panel, this agreement shall
be interpreted as if only that part is invalid and that the parties to this
agreement will continue to execute the rest of this agreement to the best of
their abilities unless both parties mutually consent to the dissolution of this
agreement.
This agreement shall be interpreted in accordance with the laws of the
State of Washington. This agreement and attached schedules constitutes the
entire contract of the parties with respect to the matters addressed herein and
no modifications of this agreement shall be enforceable unless in writing signed
by both The Company and The Client. This agreement is not assignable by either
party without the consent of the other.
In witness whereof The Company and The Client have caused this
agreement to be executed on the date indicated in Schedule A.
SCHEDULE A
Term of Commitment
The Company shall perform consulting services for The Client for 6 months, which
shall begin upon execution, by all parties, of this agreement.
2
SCHEDULE B
Payment
$10,000.000 USD- and 150,000 restricted shares of Axiom Pharmaceutical (OTCBB:
AXIM) with piggy-back registration rights at next registration.
SCHEDULE C
Payment shall be made via wire or check sent to:
Madden Consulting, Inc.
37323 17 Ave S
Federal Way, WA 98003
Wire instructions: Omitted in Filing
Axiom Pharmaceutical, Inc.
Authorized person /S/ Douglas MacLellan Title VICE CHARMAN Date 4-20-2003
----------------------- ------------------ ---------
I hereby certify that I agree to the terms of the contact above and am
authorized to enter into a binding contract.
Madden Consulting, Inc.
Authorized person /s/ Tom Madden Title Date
----------------------- -------------- --------
I hereby certify that I agree to the terms of the contract above and am
authorized to enter into a binding contract.
3
EXHIBIT 10.9
GREAT EASTERN SECURITIES, INC.
2 Seaview Blvd.
Port Washington, NY 11050
1-866-258-5200
Tel: 516-484-5111
Fax: 516-484-5335
www.getrader.com
December 18, 2003
Mr. Peter Cunningham
President and CEO
Axm Pharma, Inc.
4695 Macarthur Court, 11th Floor
Newport Beach, California 92660
Dear Mr. Cunningham:
This will confirm the arrangements, terms and conditions pursuant to
which Great Eastern Securities Corporation ("Advisor") has been retained to
serve as an investment banker to Axm Pharma, Inc.(the "Company") for a twelve
(12) month period, with a mutual extension clause for an additional twelve (12)
months, commencing on the date hereof, subject to the termination provisions set
forth in Paragraph 2 hereof. For good and valuable consideration, the
sufficiency of which is hereby acknowledged, the undersigned hereby agree to the
following terms and conditions:
1. Duties of Advisor. Advisor shall, as more fully set forth
below in this Paragraph 1, assist the Company in broker
relations and distribution channels for the Company's stock,
Advisor agrees to:
(a) assist the Company in its presentation to the
brokerage community and the introduction to security
firms and brokers;
(b) assist the Company in identifying analysts in the
brokerage community to initiate coverage on the
Company;
(c) sponsor the Company to at least two small cap or
investment conferences;
1
(d) coordinate a comprehensive Investor Relations
campaign including featured profiles by several
reputable groups, Internet advertising, lead
generation, print advertising, among other
activities;
(e) be available on request, on appropriate notice, to
meet with the Company's Management and/or Board of
Directors for quarterly management meetings; and
(f) market intelligence
The services described in Paragraph 1 may be rendered by Advisor
without any direct supervision by the Company and at such time and place in such
manner (whether by conference, telephone, letter or otherwise) as Advisor may
reasonably determine.
2. Term. The term of Advisor's engagement hereunder shall be for
twelve (12) months and may be extended for an additional
twelve (12) months upon mutual written consent, commencing on
the date hereof (the "Term"). Notwithstanding the foregoing,
however, this Agreement can be terminated by either party upon
45 days written notice.
3. Compensation and Expense Reimbursement.
(a) $10,000.00 non-refundable retainer payable upon
execution of this Agreement;
(b) 50,000 Warrants, expiring 5 years from the date of
this Agreement, with piggy-back registration rights
exercisable at 120% of the closing bid price on the
date of execution of this Agreement; and
(c) 100,000 Restricted Shares that will vest in equal
installments of 25,000 shares quarterly from the date
of this Agreement
Company will be responsible for any expenses incurred
in connection with this Agreement, i.e. road shows,
travel, marketing materials to name a few and shall
promptly reimburse Advisor for all reasonable
out-of-pocket expenses incurred in connection with
its engagement hereunder. All expenses incurred by
Advisor on behalf of Company over $500 shall be borne
by the Company only after it has authorized such
expenses in writing.
4. No Agency Authority. The Advisor shall not have and shall not
hold itself out as having any authority to act as agent for
the Company or bind it in any way.
5. Company's Responsibilities, Representations and Warranties.
2
In connection with Advisor's engagement, the Company will
furnish Advisor with any information concerning the Company
that Advisor deems reasonable and appropriate and will provide
Advisor with access to the Company's officers, directors,
accountants, counsel and other advisors. The Company
represents and warrants to Advisor that all such information
concerning the Company, does not and will not contain any
untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements
therein not misleading in light of the circumstances under
which such statements are made. The Company represents and
warrants to Advisor that any financial projections or
forecasts provided to Advisor are "forward looking statements"
as that term is used in Section 21E of the Securities Exchange
Commission Act of 1934 and represent the best currently
available estimates by the management of the Company of the
future financial performance by the Company (or its business)
and are based upon reasonable assumptions. The Company
acknowledges and agrees that Advisor will be using and relying
upon such information supplied by the Company and its
officers, agents and others and upon any other publicly
available information concerning the Company without any
independent investigation or verification thereof or
independent appraisal by Advisor of the Company or its
business or assets; and
6. Available Time. Advisor shall make available such time as it,
in its reasonable discretion, shall deem appropriate for the
performance of its obligations under this Agreement.
7. Relationship. Nothing herein shall constitute Advisor as an
employee or agent of the Company, except to such extent as
might hereinafter be agreed upon in writing for a particular
purpose. Except as might hereinafter be expressly agreed,
Advisor shall not have the authority to obligate or commit the
Company in any manner whatsoever.
8. Confidentiality Relating to this Agreement. Neither the
Company nor Advisor shall disclose (except to its partners,
accountants and attorneys), without specific consent from the
other party, any information relating to this Agreement or any
Transactions contemplated hereby, including without
limitation, the existence of this Agreement.
9. Assignment. This Agreement shall not be assignable by any
party except to successors to all or substantially all of the
business of either party for any reason whatsoever without the
prior written consent of the other party, which consent may
not be unreasonably withheld by the party whose consent is
required.
10. Amendment. This Agreement may not be amended or modified
except in writing signed by both parties.
11. Governing Law. This Agreement shall be deemed to have been
made and delivered in New York, and this Agreement shall be
governed as to validity, interpretation, construction, effect,
and in all other respects by the internal laws of the State of
New York.
3
Advisor is delighted to accept this engagement and looks forward to
working with you on this assignment. Please confirm that the foregoing correctly
sets forth our agreement by signing this enclosed duplicate of this letter in
the space provided and returning it, whereupon this letter shall constitute a
binding agreement as of the date first above written.
Very truly yours,
GREAT EASTERN SECURITIES, INC.
By: /s/ Jeffrey S. Ramson
---------------------
Jeffrey S. Ramson
CEO
AGREED AND ACCEPTED AS OF
THE DATE FIRST ABOVE WRITTEN:
AXM PHARMA, INC.
By: /s/ Peter Cunningham
--------------------
Peter Cunningham
President and CEO
4
EXHIBIT 10.10
ASTON ORGANIZATION
417 ORCHID AVE. CORONA DEL MAR, CA 92625
PH 800-715-9999 FAX 815-328-0698
February 2, 2004
Mr. Peter Cunningham
President and CEO
Axm Pharma, Inc.
4695 Macarthur Court, 11th Floor
Newport Beach, California 92660
Dear Mr. Cunningham:
This will confirm the arrangements, terms and conditions pursuant to
which Aston Organization ("Advisor") has been retained to serve as a consultant
to Axm Pharma, Inc. (the "Company") for a twelve (12) month period, with a
mutual extension clause for an additional twelve (12) months, commencing on the
date hereof, subject to the term-ination provisions set forth in Paragraph 2
hereof. For good and valuable consideration, the sufficiency of which is hereby
acknowledged, the undersigned, hereby agree to the following terms and
conditions:
1. Duties of Advisor. Advisor shall, as more fully set forth
below in this Paragraph 1, assist the Company in broker
relations. Advisor agrees to:
(a) assist the Company in its presentation to the
brokerage community and seek to introduce the Company
to security firms and brokers;
(b) assist the Company in identifying analysts in the
brokerage community to initiate coverage on the
Company;
(c) coordinate a comprehensive Investor Relations
campaign including featured profiles by several
reputable groups lead generation, among other
activities; and
(d) be available on request, on appropriate notice, to
meet with the Company's Management and/or Board of
Directors for quarterly management meetings.
The services described in Paragraph 1 may be rendered by Advisor
without any direct supervision by the Company and at such time and place in such
manner (whether by conference, telephone, letter or otherwise) as Advisor may
reasonably determine.
2. Term. The term of Advisor's engagement hereunder shall be for
twelve (12) months and may be extended for an additional
twelve (12) months upon mutual written consent, commencing on
the date hereof (the "Term"). Notwithstanding the foregoing,
however, this Agreement can be terminated by either party upon
30 days written notice. The Company shall only deliver shares
to Advisor that have vested.
3. Compensation and Expense Reimbursement.
200,000 Shares of AXM Pharma, Inc. restricted common stock
with piggy-back registration rights at next registration,
which rights shall inure to the benefit of Aston and its
1
assignees or transferees issued to "Aston Organization" and
delivered to Aston Organization. 20,000 shares shall vest and
be issued immediately, The remaining 180,000 shares shall be
issued immediately but shall vest in Aston Organization, or
its designated assignees, ratably (15,000 shares per month)
over the twelve (12) month period commencing thirty (30) days
after the Effective Date and be delivered to Aston
Organization promptly following the date on which they vest.
4. No Agency Authority. The Advisor shall not have and shall not
hold itself out as having any authority to act as agent for
the Company or bind it in any way.
5. All expenses incurred by Advisor on behalf of the Company
shall be borne by Company after it has authorized such
expenses in writing
6. Responsibilities, Representations and Warranties.
(a) Company's Responsibilities, Representations and
Warranties. In connection with Advisor's engagement,
the Company will furnish Advisor with any information
concerning the Company that Advisor deems reasonable
and appropriate and will provide Advisor with access
to the Company's officers, directors, accountants,
counsel and other advisors. The Company represents
and warrants to Advisor that all such information
concerning the Company, does not and will not contain
any untrue statement of a material fact or omit to
state a material fact necessary in order to make the
statements therein not misleading in light of the
circumstances under which such statements are made.
The Company represents and warrants to Advisor that
any financial projections or forecasts provided to
Advisor are "forward looking statements" as that term
is used in Section 21E of the Securities Exchange
Commission Act of 1934 and represent the best
currently available estimates by the management of
the Company of the future financial performance by
the Company (or its business) and are based upon
reasonable assumption. The Company acknowledges and
agrees that Advisor will be using and relying upon
such information supplied by the Company and its
officers, agent and others and upon any other
publicly available information concerning the Company
without any independent investigation or verification
thereof or independent appraisal by Advisor of the
Company or its business or assets.
(b) Advisor's Responsibilities, Representations and
Warranties. Advisor agrees that it will only
communicate regarding the Company to licensed
brokerage professionals and will not engage in any
solicitation of the public with regard to the Company
or its securities. Notwithstanding the foregoing,
Advisor may provide approved information regarding
the Company (i) in response to unsolicited inquiries
by the Company's shareholders; (ii) to valid trade
and industry publications, newspapers and
periodicals; and (iii) otherwise engage in
communications which are normal and customary for an
investor relations firm and which do not involve
solicitation of investors in connection with its role
as an investor relations firm for the Company.
Advisor further agrees that it will only disclose
information specifically provided to it by the
Company for dissemination and will keep confidential
any information marked as such by the Company.
Advisor agrees that it will not make any undisclosed
payments to brokers or others and will generally act
within the letter and the spirit of U.S. securities
laws, rules and regulations at all times.
Advisor shall provide a detailed written report
regarding its activities to the Company on a
quarterly basis. Such written report shall contain a
written affirmation from the Advisor that it is in
compliance with the terms of this Agreement on the
date of such report.
6. Available Time. Advisor shall make available such time as it,
in its reasonable discretion, shall deem appropriate for the
performance of its obligations under this Agreement.
7. Relationship. Nothing herein shall constitute Advisor as an
employee or agent of the Company, except to such extent as
might hereinafter be agreed upon in writing for a particular
purpose. Except as might hereinafter be expressly agreed,
Advisor shall not have the authority to obligate or commit the
Company in any manner whatsoever.
2
8. Confidentiality Relating to this Agreement. Neither the
Company nor Advisor shall disclose,except to its partners,
accountants and attorneys or as required by applicable law,
rule or regulation (including but not limited to periodic and
other reports required by the Securities Exchange Act of 1934,
as amended and the Securities Act of 1933, as amended, without
specific consent from the other party, any information
relating to the Agreement or any Transactions contemplated
hereby, including without limitation, the existence of this
Agreement.
9. Assignment. This Agreement shall not be assignable by any
party except to successors to all or substantially all of the
business of either party for any reason whatsoever without the
prior written consent of the other party, which consent may
not be unreasonably withheld by the party whose consent is
required.
10. Amendment. This Agreement may not be amended or modified
except in writing signed by both parties.
11. Governing Law. This Agreement shall be deemed to have been
made and delivered in California State and this Agreement
shall be governed as to validity, interpretation,
construction, effect, and in all other respects by the
internal laws of the State of California.
Advisor is delighted to accept this engagement and looks forward to
working with you on this assignment. Please confirm that the foregoing correctly
sets forth our agreement by signing this enclosed duplicate of this letter in
the space provided and returning it, whereupon this letter shall constitute a
binding agreement as of the date first above written.
Very Truly Yours,
Aston Organization
By: /s/ Thomas C. Ronk
------------------
Thomas C Ronk
President
AGREED AND ACCEPTED AS OF
THE DATE FIRST ABOVE WRITTEN:
AXM PHARMA, INC.
By: /s/ Peter Cunningham
--------------------
Peter Cunningham
President and CEO
3
EXHIBIT 23.1
LOPEZ, BLEVINS, BORK & ASSOCIATES, LLP
Certified Public Accountants
Three Riverway, Suite 1400, Houston, Texas 77056
We consent to the use of our report dated August 26, 2004, on the consolidated
financial statements of AXM Pharma, Inc. as of December 31, 2003, and the
related statements of operations, stockholders' equity and cash flows for each
of the two years then ended, and the inclusion of our name under the heading
"Experts" in the Form SB-2 Registration Statement filed with the Securities and
Exchange Commission.
Board of Directors
AXM Pharma, Inc.
4695 Macarthur Court, 11th Floor
Newport Beach, CA 92660
Ladies and Gentlemen:
The undersigned is the beneficial owner of common shares of beneficial
interest, $.001 par value per share ("Common Shares"), of AXM Pharma, Inc. (the
"Company"). The undersigned understands that the Company proposes to issue
1,750,000 shares (the "Shares") of the Company's Series A Preferred Stock, $.001
par value per share (the "Preferred Stock"), and 1,750,000 Common Stock Purchase
Warrants, placed by TN Capital Equities (the "Placement Agent") to certain
purchasers (the "Purchasers") pursuant to that certain Placement Agency
Agreement dated July 8, 2003, and in accordance with the terms of that certain
Securities Purchase Agreement, dated as of September 12, 2003 (the "Purchase
Agreement"). Capitalized terms used in this letter agreement but not otherwise
defined herein shall have the meanings ascribed to such terms in the Purchase
Agreement.
In order to induce the Company, the Placement Agent and the Purchasers
to proceed with the issuance of the Shares, the undersigned hereby agrees, for
the benefit of the Company, the Placement Agent and the Purchasers, that should
the issuance of the Shares be effected, not to sell, in each calendar month
during the one-year period beginning on the Closing Date, more than 1/12 of the
aggregate number of Common Shares owned by the undersigned on the date hereof or
hereafter acquired by the undersigned, during the one-year period beginning on
the Closing Date; provided, however, that the number of such Common Shares that
can be sold shall be cumulative and shall begin to accumulate on the day
following the Closing Date; and, provided further that the number of such Common
Shares that may be sold in any calendar month shall increase to 1/6 of such
aggregate number of Common Shares in the event that the average daily trading
volume in the Company's Common Stock is equal to or greater than 200,000 shares
per day in the previous 20 trading days.
ii
Furthermore, the undersigned hereby agrees and consents to the entry of
stop transfer instructions with the Company's transfer agent against the
transfer of the Common Shares held by the undersigned except in compliance with
this agreement.
Very truly yours,
Name:
Address:
Accepted as of the date
first set forth above:
AXM PHARMA, INC.
By:
Name:
Title:
iii
EXHIBIT 10.11
DISTRIBUTION AGREEMENT
AGREEMENT NO.:
Date of signature: August 1st, 2004
Place of signature: ShenyangShenyang
DISTRIBUTION AGREEMENT
This Distribution Agreement (the "Agreement") is made effective as of the 1st
day of August, 2004 ("Effective Date") in Shenyang by and between:
AXM Pharma (Shenyang) Ltd., a company organized and existing under the laws of
the People's Republic of China ("PRC" or "China"), and having its principal
office at No. F3004 Sankei Torch Bldg., 262A Shifu Road, Shenyang City, Liaoning
Province, P.R. China 110013 (hereinafter referred to as "AXM");
and
China Zuellig Xinxing Pharmaceutical Company Limited, a company organized and
existing under the laws of China, and having its principal place of business at
East Ocean Center 8th Floor, No 24A Jianguomen Wai Street, Beijing, P.R.China
10004 (hereinafter referred to as "ZPXX").
The following are included herein by reference as integral parts of this
Agreement:
Exhibit A List of Products Distributed and Price Structure in the distribution
channels
Exhibit B Description of Products
Exhibit C Purchase Order
Exhibit D Territory of Distribution
Exhibit E Account Information of AXM:
Distribution Agreement - 2004 Page i
DEFINITIONS
1.1 "Description" shall include but not limited to the Drug Name, Approval
No., Functions & Indications, Dosage & Administration, Specification,
Property, Adverse Reaction, Contra-indications, Precautions, Shelf-life
and other items relating to Products.
1.2 "Products" shall mean the pharmaceutical products for distribution as
listed in Exhibit A.
1.3 "Territory" shall mean the geographic area in which ZPXX is authorized to
sell or distribute the Products. The Territory for this Agreement is
defined in Exhibit D.
Other capitalized expressions used in this Agreement shall have the meanings
respectively assigned to them.
2. DISTRBUTION
2.1 Upon execution of this Agreement, AXM grants ZPXX an exclusive right to
distribute, market and sell the Products in the Territory defined by AXM
and the trade channels (retail pharmacy and hospital channel) defined by
AXM; however, in case of that ZPXX with an exclusive right cannot
accomplish the target promised purchase volume (as specified in Section
3.2.1) or does not accomplish AXM's specified outlet penetration by trade
channel, shelf facings, quantity in stock in retail / end sale outlets,
implementation of sales promotion programs initiated or approved by AXM
or reporting requirements, in a consecutive term of 90 days, from then on
ZPXX's exclusive right shall be changed to a non-exclusive right
automatically with a written notice from AXM. The written notice has
immediate effect.
2.2 AXM retains ownership and all rights of trademark, patents rights, trade
secrets rights and other intellectual property rights with respect to the
Products and all promotional materials supplied by AXM to ZPXX for use in
the trade channels and at the Point of Sale. AXM may choose to request
return of the materials or otherwise, at its sole discretion.
Page ii
2.3 ZPXX shall not advertise or market the Products outside the Territory to
solicit orders from outside the Territory without the advance written
consent of AXM.
2.4 ZPXX shall not participate in any enterprise or entity competitive with
AXM or benefit from it directly or indirectly.
3. OBLIGATIONS OF BOTH PARTIES
3.1 Statements and Representations of ZPXX
3.1.1 ZPXX promises to have been established and existing legally with the
sufficient and legitimate power, rights and authorization to execute and
carry out this Agreement as well as the obligations under it. ZPXX
ensures that there is no legal or actual obstacle in the implementation
of such obligations.
3.1.2 ZPXX shall strictly comply with all relevant laws and regulations, and
properly describe the performance, function, contra-indications and other
items, which shall be noted, of the Products. AXM shall not bear any
liability for the breach by ZPXX; if the breach in distribution has
infringed upon the reputation, intellectual property and commercial
interests, ZPXX shall indemnify AXM's loss thereof, and shall immediately
take all necessary measures to stop the improper deeds and eliminate the
adverse influence to AXM without prejudice to any other rights of AXM.
3.2 Obligations of ZPXX
Page iii
3.2.1 The target purchase volume for ZPXX guarantees that the purchase volume
during the Initial Term (one year) is foreseen asshall be the following
(To be provided as a attachment):
3.2.1.1 For the first 90 days: RMB ;
3.2.1.2 For the second 90 days: RMB ;
3.2.1.3 For the third 90 days: RMB ;
3.2.1.4 For the fourth 90 days: RMB .
3.2.2 ZPXX shall provide AXM with a business implementation plan describing
ZPXX's business, the market channels served by ZPXX, staffing and
technical resources, compliance with AXM's reporting requirement for
product and promotional materials provided by AXM for use in trade
channels and at the point of sale (See Exhibit F) and revenue forecast
of the Products.
3.2.3 ZPXX shall establish at its own expense distribution channels in
accordance with AXM marketing and trade channel programs. It shall
supply the Products to the customers with agreed price structure and
delivery time. This includes the optimization of stocks, the regular
and - whenever requested - frequent deliveries to Customers as well as
establishing effective means for the money collection for customers.
It shall make full use of its resources to implement its distribution
responsibility to improve the sales at their best efforts. It shall
fully assist AXM toshall at its own expense, apply its best reasonable
efforts to implement AXM's marketing and trade channel programs,
including but not limited to Trade Channel Promotion, Point of Sale
activities and Point of Sale Display (including approved display
materials), pricing and discount programs, sales contests and other
incentive programs for the trade channels., distribute and support the
Products successfully within the Territory to accomplish the
Distribution sale goal promised. ZPXX shall introduce the Products in
good faith without falsity, exaggeration and misdirection to
consumers.
Page iv
3.2.4 ZPXX shall provide AXM with an annual rolling, non-binding quarterly
forecast of sales, monthly inventory, delivery schedules, trade
channel activity and promotion schedule and other information of the
Products upon request of AXM from time to time.
3.2.5 ZPXX shall maintain adequate staffs and facilities to ensure prompt
handling of inquiries, orders, shipments for Products, and payment to
AXM and collection from trade channels.
3.2.6 ZPXX shall make efforts to resolve problems encountered with the
Products for its customers by itself firstly upon the request of the
customers, and shall keep AXM informed as to any problems which
involve the Products and require AXM's support, and assist AXM in the
resolution of such problems.
3.2.7 ZPXX shall obey the provision of price structure in Exhibit A and
engage in the resale and distribution solely in the territory of
Exhibit D.
3.2.8 ZPXX shall discuss with AXM and obtain written approval for any
appointment of second level distributors in ZPXX's assigned territory.
3.2.9 ZPXX shall provide monthly report to AXM before 5th of each month with
information about the product stock and sales data, including customer
name, purchased quantity, sales price and sales amount, of last month.
The report shall include ZPXX's second level distributors. ZPXX shall
do his best to cooperate with AXM for product sales tracking subject
to AXM's requirements.
Page v
3.2.10 In any case, the invoice price of the product sold by ZPXX to hospital
or other clients shall follow the pricing regulations issued by State
Planning Committee and municipal government,and shall not be lower
than AXM's ex-factory price.
3.2.11 ZPXX shall responsible for the hospital tendering in the assigned
territory.
3.3 Obligations of AXM
3.3.1 AXM shall develop and maintain market demand for the Products by
training and promotion activities towards the hospital physicians,
pharmacists and other hospital and retail pharmacy representatives,
and the consumer as applicable.
3.3.2 AXM shall develop and implement marketing and trade channel programs,
including but not limited to Trade Channel Promotion, Point of Sale
activities and Point of Sale Display, pricing and discount programs,
sales contests and other incentive programs for the trade channels.
3.3.3 AXM provide the Description of Products (as listed in Exhibit B) to
ZPXX and guarantee the quality of the Products. AXM warrants that in
the period of validity, the Products will perform substantially in
accordance with the Description provided.
3.3.4 AXM will provide ZPXX access to marketing literature packs, printed
materials promotional materials, POS materials and other materials to
be used for promotion and sales of Products.
Page vi
3.3.5 Unless out of the defect in respect of quality, the request of revoke
or exchange the Products shall not be permitted.
3.3.6 Promotional materials and promotional packagings shall be exchanged at
the discretion of AXM
3.3.7 AXM shall do its best to assist ZPXX for hospital tendering.
4 ORDERING AND PURCHASE OF PRODUCTS
ZPXX18 months
returns
6 month near exp.
4.1 shall purchase the Products by issuing a written Purchase Order (as
specified in Exhibit C) signed by its authorized representative at any
time during the term of this Agreement as long as ZPXX complies with
the terms and conditions of this Agreement.
4.2 All Purchase Orders are subject to approval and acceptance by AXM. AXM
reserves the right to refuse all or any order. AXM shall use
commercially reasonable efforts to provide information regarding
acceptance or rejection of such Purchase Orders within 2 days from
receipt thereof.
4.3 Each Order shall be governed by the prices, delivery schedules, and
terms and conditions of sale in effect at the time the order is
accepted.
4.4 For each sale, ZPXX shall submit a Purchase Order to AXM specifying
the customer's company name, contact name, phone/fax/email numbers,
shipping address, and any other information reasonably requested by
AXM in order to fulfill the order. AXM will either ship the Products
directly to the customer or to ZPXX, as specified in the order.
Page vii
4.5 Under no circumstances shall AXM be responsible to ZPXX for failure to
fulfill accepted orders, or for its delay in fulfilling accepted
orders, when such failure is due to any cause beyond AXM's reasonable
control.
4.6 AXM shall supply the Products to the ZPXX in accordance with the
ZPXX's order as under section 4. AXM shall deliver the products to the
ZPXX's delivery address as specified in ZPXX's order. can assist
Distributor in fulfilling the procedures of delivery and
Transportation Insurance. The delivery shall be carried out by truck
or train. If air-ferry is required, Distributor shall burden all the
fees resulted in. AXM will deliver only according to the location
designated by Distributor (provincial cities of China). If the
location is unclearly indicated, AXM shall deliver the targeted
Products at Distributor's place of business at the time when the
Agreement is made. The ownership and all risk of loss and damage to
any such Products shall pass to ZPXX upon delivery by AXM at the
ZPXX's delivery addressto a carrier designated by AXM.
4.7 ZPXX shall inspect all Products within 7 working days of delivery in
order to ascertain whether or not the Products comply with the
acceptance requirements. In the event that any of the Products does
not comply with the acceptance requirements below, ZPXX may reject in
full or in part the consignment in which such Products are included,
provided that a written notice is given to AXM specifying reasons for
the rejection in full or in part in which case AXM shall, at its own
cost and expense, collect the Products so rejected and reimburse to
ZPXX any costs or expenses suffered by ZPXX in respect thereof. If no
written notice is received by AXM within such seven 7-working-day
period, ZPXX shall be deemed to have accepted the Products.
Acceptance requirements:
- The Products must have a remaining shelf life of more than 18 months
upon delivery at the Delivery Address.
- The Products must meet all the quality standards required by the
Ministry of Public Health and/or any other relevant authorities.
- The Products must have been approved for sale and distribution by the
Ministry of Public Health and/or any other relevant authorities.
viii
- There is no shipping damages or packaging default with the Products
upon delivery at the Delivery Address.
4.8 ZPXX and AXM shall jointly discuss and agree to the terms and
conditions of ZPXX's returns policy (the "Returns Policy") in respect
of the Products in relation to its customers based on ZPXX's standard
returns policy. ZPXX shall be entitled to replacement or reimbursement
of any Products returned by any customer in accordance with the
Returns Policy from AXM and AXM shall replace all such returned
Products at its own cost. Provided however that ZPXX shall not be
entitled to any replacement or reimbursement of any Products returned
by any customer outside the Returns Policy, unless ZPXX has obtained
the prior written consent of AXM to such return (such consent not to
be unreasonably withheld). AXM shall accept all such returns that AXM
has consented to and shall replace the returned Products at its own
cost.
4.9 The Parties will discuss any stocks held by ZPXX with 6 months or less
shelf life, and agree on an action plan of either put these stocks for
promotion or return to AXM. In the event that any stocks of the
Products held by ZPXX expires, ZPXX shall be entitled to return such
expired stocks to AXM and AXM shall replace all such returned expired
Products at its own cost. Provided however that the replacement of any
stocks of the Products which has expired as a result of ZPXX's failure
to adhere to the "First Expiry - First Out" rule formulated by ZPXX
(and notified to AXM) as part of ZPXX's inventory management policy
shall be at ZPXX's own cost.
All sales are final. AXM will, at its option, replace or refund the
purchase price of defective or damaged Products if the defect or
damage has been asserted by Distributor or customer.
Page ix
4.10 Distributor may reschedule orders for up to ten (10) days without
charge by giving written notice to AXM at least five (5) business days
before the scheduled delivery date. If Distributor reschedules an
order by more than five (5) business days, then for the purpose of
calculating when payment of the order is due and the date on which
interest accrues thereon, the order shall be deemed to have been
shipped on the tenth day after the scheduled delivery date. Multiple
rescheduling of the same order shall be deemed a single rescheduling.
4.11 Distributor shall not have the right to cancel any order less than
five (5) business days before the schedule shipment date. If
Distributor otherwise cancels or delays an order on less than five (5)
business days notice or refuses to accept delivery of an order not
canceled as provided above, Distributor shall pay AXM a cancellation
fee of ten percent (10%) of the amount of the order. Provided that
Distributor promptly pays such cancellation fees, Distributor shall
have no other liability to AXM with respect to canceled orders.
5 PAYMENT OF PRICE AND ADDRESS OF DELIVERY
ZPXX shall pay AXM by Telegraphic Transfer within 65 days from the date the
ordered Products arrive at the Delivery
5.1 Distributor shall pay AXM eighty percent (80%) of each Purchase Order
within ten days after the purchase order issued. AXM shall offer the
invoice on the same amount upon the payment..
5.2 Distributor shall pay AXM twenty percent (20%) of such Purchase Order
within ten days after the date of delivery. AXM shall offer the
invoice on the same amount upon the payment.
5.3 Prices for Products shall be the prices set forth in AXM's price list
for ZPXX's Territory in effect from time to time. AXM's current price
list for the Territory is set forth as Exhibit A. AXM anmd ZPXX agree
that ZPXX shall earn the Specified Margin as specified in the Exhibit
Page x
A. In the event that ZPXX is unable to obtain the Specified Margin
from the distribution and sales of any of the Products as a result of
any price discounts and/or free goods given to customers, ZPXX shall
be entitled to claim for an amount equivalent to the reduction of the
Specified Margin and AXM shall pay or otherwise credit such amount to
ZPXX, provided that such price discounts and/or free goods are
approved by AXM in advance. If necessary, the Parties shall further
undertake a review of the Product Prices. If any of the Products is
sold at a higher price, any such additional amount other than the
Specified Margin shall be returned to AXM.
5.4 AXM may change prices for the Products at any time by issuance of a
revised price list or other announcement of price change. Price
changes shall be effective upon delivery to ZPXX of a revised price
list or an announcement of price change. 5.4
5.5 Products prices are inexclusive of any taxes, fees or other amounts,
however designated or levied. Unless Distributor provides AXM with a
valid tax exemption certificate, AXM may invoice Distributor for all
such taxes based upon this Agreement or on Products provided under
this Agreement, together with any interest payable to the taxing
agency with respect thereto
5.6 Premium and penalty will be implemented by AXM based on ZPXX's
performance. Details to be found in Attachment F.
6 CONFIDENTIAL OBLIGATION
6.1 Both parties understand and acknowledge that by reason of the
relationship, each party will have access to certain information and
materials concerning the other's business, plans, customers,
technology and Products, including but not limited to, all customer
lists, potential customer lists, marketing and financial information,
business plans, technical information, the Products and all
inventions, know how and ideas, that are confidential and of
Page xi
substantial value to the other and the value of such would be impaired
if such information were disclosed to third parties. Each party agrees
that it shall not disclose to any third party, or use in any way for
its own account or the account of any third party, any such
confidential information revealed to it by the other, other than to
fulfill its express obligations under this Agreement. Each party will
take every reasonable precaution to protect the confidentiality of
such information. The party shall be liable for damages accrued to
other party as a result of a breach of this obligation to keep
confidential by such party; the payment of damages by such party to
other party shall be without prejudice to any right or litigation
rights or other remedy owing to such party at the time of such breach.
6.2 ZPXX shall at all times, both during the term of this Agreement and
for a period of at least three (3) years after its expiration or
termination, keep in trust and confidence all such confidential
information.
7 INTELLECTUAL PROPERTY
7.1 AXM shall defend any claim, suit or proceeding brought against ZPXX so
far as it is based on a claim that any Products supplied hereunder
infringes any third party intellectual property issued as of the
Effective Date, and shall pay resulting costs, damages, and attorney's
fees finally awarded or otherwise agreed by AXM in settlement,
provided that (a) ZPXX notifies AXM in writing of the claim within ten
(10) days after the claim is made; (b) AXM has sole control of the
defense and all related settlement negotiations; and (c) ZPXX provides
AXM, at AXM's expense, with all reasonably necessary assistance,
information, and authority to perform the above.
Page xii
7.2 If such claim has occurred, or in the opinion of AXM might occur, AXM
may at its option and expense: (a) procure for ZPXX and its customer
the right to continue using the Products, (b) replace or modify the
Products so that it becomes non-infringing or (c) grant ZPXX a refund
for such Products based the price originally paid by ZPXX. AXM shall
not be liable for any cost or expenses incurred without its prior
written authorization.
THE FOREGOING STATES THE ENTIRE OBLIGATION OF AXM, WITH RESPECT TO INFRINGEMENT
OF INTELLECTUAL PROPERTY OR PROPRIETARY RIGHTS.
8 INDEMNITY
ZPXX shall indemnify and hold AXM and its affiliates, and their respective
officers, directors, agents and employees, harmless from and against all claims,
loss, expense (including but not limited, fees and disbursements of attorney
incurred in any action or proceeding relating to this Agreement), damage,
liability and lawsuits arising from breach by ZPXX of any of its representations
or warranties in this Agreement.
9 TERM AND TERMINATION
9.1 Unless terminated earlier as provided herein, this Agreement is
effective for one (1) year from the Effective Date of this Agreement
("Initial Term"), and thereafter, renewable automatically on the
anniversary of the Effective Date for additional one-year terms so
long as AXM receives all orders pursuant to this Agreement by the last
day of the Term hereof and promised purchase volume of ZPXX will have
been accomplished.
9.2 Either party may at any time terminate this Agreement for convenience
upon sixty (60) days prior written notice, for any reason or no
reason.
9.3 This Agreement may at any time be terminated immediately by either
party providing the other party with written notice if the other party
Page xiii
(a) breaches any payment obligation hereunder and fails to cure same
within ten (10) days after receipt of written notice hereunder, (b)
breaches any other material term or condition of this Agreement and
fails to remedy the breach within thirty (30) days after being given
notice thereof, (c) shall become insolvent or file or have filed
against it a petition for bankruptcy (which is not dismissed within
thirty (30) days after it is filed), (d) make an assignment for the
benefit of creditors or (e) cease to be actively engaged in business.
In addition, AXM may terminate this Agreement immediately in the event
that ZPXX has not achieved sales of Products for a period of one
hundred and eighty (180) days, or has significantly missed its
forecast and sales goals.
9.4 Upon termination or expiration of this Agreement, ZPXX shall
immediately return to AXM all Confidential Information and data
(including all copies thereof) then in ZPXX's possession or custody or
control.
10 LIABILITY FOR BREACH OF AGREEMENT
In the event either party breaches this Agreement rendering this Agreement
impossible to perform in part or in whole, said Party shall bear the liability
and compensate the other Party for all damages occurred; in the event that the
both Parties breach this Agreement, each Party shall, according to the actual of
default circumstances bear its respective liability.
11 FORCE MAJEURE
Except for the obligation to pay monies due and owing, neither party shall be
liable for any delay or failure in performance due to events outside the
defaulting party's reasonable control, including but not limited to acts of God,
earthquake, labour disputes, shortages of supplies, actions of governmental
entities, riots, war, fire, epidemics, or delays of common carriers, or other
circumstances beyond its reasonable control. The obligations and rights of the
excused party shall be extended on a day-to-day basis for the time period equal
to the period of the excusable delay.
Page xiv
12 DISPUTE RESOLUTION
12.1 Any Disputes arising in connection with this Agreement shall be
submitted to Shenyang Arbitration Commission ("SAC") for arbitration
according to SAC arbitration rules at the time of applying for
arbitration if the dispute cannot be settled through amicable
consultation.
12.2 The arbitration award shall be final and binding on the Parties hereto
and enforceable in any court of competent jurisdiction.
12.3 Unless otherwise ruled in the arbitration award, all expenses incurred
shall be born by the non-prevailing Party.
12.4 When any dispute occurs and when any dispute is under arbitration,
except for the items under dispute, the Parties shall continue to
exercise their remaining respective rights, and to perform their
remaining respective obligations under this Agreement.
13 OTHERS
13.1 This Agreement is the entire agreement between the parties hereto
concerning the subject matter of this Agreement and replaces any prior
oral or written communications between the parties. The omission and
the ambiguity can be solved through consultation with each other.
There are no conditions, understandings, agreements, representations,
or warranties, expressed or implied, which are not specified herein.
This Agreement may only be modified by a written document executed by
parties hereto.
13.2 Each party hereto is an independent party. This Agreement does not
create any agency, partnership, joint venture, or franchise
relationship. No employee of either party shall be or become, or shall
Page xv
be deemed to be or become, an employee of the other party by virtue of
the existence or implementation of this Agreement. AXM has not
liability to ZPXX for its employment of employee, agent, independent
contractor, or otherwise to implement the obligations under the
Agreement. Neither party has the right or authority to, and shall not,
assume or create any obligation of any nature whatsoever for or on
behalf of the other party or bind the other party in any respect
whatsoever.
13.3 Neither this Agreement nor any rights under this Agreement, other than
the right to receive monies due or to become due, shall be assigned or
otherwise transferred by ZPXX without the prior written consent of
AXM. AXM shall have the right to assign all or part of this Agreement
without ZPXX's approval. This Agreement shall bind and inure to the
benefit of the successors and permitted assigns of the parties.
13.4 No waiver of rights under this Agreement by either party shall
constitute a subsequent waiver of this or any other right under this
Agreement.
13.5 All notices and invoices and sales orders shall be in writing and
delivered by hand, by facsimile or sent by first class prepaid mail
and shall be deemed received on the earlier of actual receipt or ten
(10) days after posting.
13.6 Headings of sections have been added only for convenience and shall
not be deemed part of this Agreement.
13.7 This Agreement is written in Chinese and English. In case there is any
conflict between Chinese version and English version, Chinese version
shall prevail.
13.8 All Exhibits of the Agreement have the same legal effectiveness to this
Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed
as of the Effective Date set forth above.
------------------------------------------------ -------------------------
TO: AXM PHARMA (SHENYANG), LTD. CUSTOMER INFO.
Name:
No. F3004 Sankei Torch Bldg., 262A Shifu Road, Address:
Shenyang City, Liaoning Province, P. R. China
110013
Tel:
FROM: CHINA ZUELLIG XINXING PHARMA CO., LTD.
Fax:
East Ocean Center 8th Floor, No 24A Jianguomen Email:
Wai Street, Beijing, P.R.China 10004
Attn:
THIS order hereby is affined by the following terms or qualification and the
terms or qualification of the AGREEMENT.
Distribution Agreement Number:
Issued date:
--------------------------------------------------------------------------------
------------------------------- --------------- -------------- ----------
Designation of PRODUCTS Serial Quantity Others
Number
--------------------------------------------------------------------------------
Total amount:
Page xxi
1. Terms of payment:
2. Date of delivery:
3. Others::
PAYER OF ZPXX: CONSIGNEE OF ZPXX:
------------- -------------------
Name: Name:
Contact person: Contact person:
Tel: Tel:
Address: Address:
Zip code: Zip code:
--------------------------------------------------------------------------------
CHINA ZUELLIG XINXING PHARMA CO., LTD. AXM PHARMA (SHENYANG) LTD.
By: By:
Name: Name:
Title: Title:
Date: Date:
Page xxii
EXHIBIT D: TERRITORY OF DISTRIBUTION
- Beijing
Page xxiii
EXHIBIT E:ACCOUNT INFORMATION OF AXM:
Bank:
Account Name:
Account No.:
Page xxiv
EXHIBIT F: REPORTING REQUIREMENTS FOR PRODUCT AND PROMOTIONAL MATERIALS SUPPLIED
BY AXM
Product (units and value reported on a monthly basis)
Purchase from ZPXX by wholesaler, and inventory held by wholesaler using FIFO
inventory rotation and reporting of expiry dates by stock item
Purchase from wholesaler by end sale or retail outlet and inventory held by end
sale or retail outlet using FIFO inventory rotation and reporting of expiry
dates by stock item
Purchase from the end sale or the retail outlet by the consumer
Price per unit in the trade channel from ZPXX to wholesaler and from wholesaler
to retail outlet and price to end user
Schedule and materials required for implementation of AXM trade and consumer
promotion programs (for selected outlets)
Measurement of unit sales impact achieved at the end sale or retail outlet from
AXM trade and consumer promotion programs (for selected outlets)
Other as defined by AXM management from time to time.
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