Unassociated Document
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of
1934
Date
of
Report (Date of earliest event reported): September 18, 2006
(Exact
Name of Registrant as Specified in Its Charter)
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Nevada
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000-25277
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88-0353141
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(State
or Other
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(Commission
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(IRS
Employer
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Jurisdiction
of
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File
Number)
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Identification
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Incorporation)
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Number)
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3
Oak Street, Teaneck, New Jersey
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07666
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(Address
of Principal Executive Offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (888)
836-2424
Pacific
Magtron International Corp. 1600 California Circle, Milpitas, California 95035
(Former
name or former address, if changed since last report.)
Check
the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see
General
Instruction A.2. below):
o
Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
oSoliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
oPre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
oPre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
Cautionary
Statement Concerning Forward-Looking Statements
This
Current Report on Form 8-K contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, which are
subject to the safe harbors created thereby. This information may involve known
and unknown risks, uncertainties and other factors which may cause actual
results, performance or achievements of Herborium, Inc. (“Herborium”) and
Pacific Magtron International Corp. (“PMIC”) to be materially different from
future results, performance or achievements expressed or implied by any
forward-looking statements. Forward-looking statements, which involve current
assumptions and projections about future events and describe Herborium’s and
PMIC’s future plans, strategies and expectations, are generally identifiable by
use of the words "may," "will," "should," "expect," "anticipate," "estimate,"
"believe," "intend" or "project" or the negative of these words or other
variations on these words or comparable terminology. Forward-looking statements
are based on assumptions that may be incorrect, and there can be no assurance
that any projections or other expectations included in any forward-looking
statements will come to pass. Herborium’s and PMIC’s actual results could differ
materially from those expressed or implied by the forward-looking statements
as
a result of various factors, including but not limited to, adverse economic
conditions, inability to attract prospective new customers or certain existing
customers, intense competition including the entry of new competitors, adverse
federal, state or local government regulation, including limitations on our
claims relating to the benefits of our products, loss of suppliers, inadequate
capital and/or inability to raise financing, risk of litigation, adverse
publicity and news coverage of Herborium and/or the industry, inability to
hire
and/or retain key executives, inflationary factors and other specific risks
alluded to elsewhere in this Report. Your attention is directed to the Risk
Factors section in Item 2.01 of this Current Report on Form 8-K. The
forward-looking statements contained herein speak only as of the date hereof
and
except as required by applicable laws, PMIC undertakes no obligation to update
publicly any forward-looking statements for any reason, even if new information
becomes available or other events occur in the future.
Background
On
May
11, 2005, Pacific Magtron International Corp., a Nevada corporation (“PMIC”),
and its wholly-owned subsidiaries Pacific Magtron, Inc., a California
corporation (“PMI”), Pacific Magtron (GA), Inc., a Georgia corporation
(“PMIGA”), and LiveWarehouse, Inc., a California Corporation (“LW”), filed
voluntary petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code (the “Bankruptcy Proceedings”) in the United States Bankruptcy
Court for the District of Nevada (the “Bankruptcy Court”).
PMI
and
PMIGA liquidated in the Bankruptcy Proceedings pursuant to an order of the
Bankruptcy Court entered on January 30, 2006. On August 11, 2006, the Bankruptcy
Court entered an order confirming the amended plans of reorganization of PMIC
and LW. The PMIC and LW plans of reorganization contemplated that LW would
be
reorganized and remain a wholly-owned subsidiary of PMIC. The plans also
contemplated a merger involving Herborium, Inc. (“Herborium”) and permitted PMIC
and LW to delay the effective date of the plans for thirty days if necessary
to
consummate the merger. The plans further contemplated that in connection with
the merger with Herborium, all of the existing shares of common stock, par
value
$.001 per share, of PMIC, would be cancelled, and new stock would be issued.
The
plans of reorganization for PMIC and LW became effective on
September 18, 2006, as described more fully below under Item 2.01 of
this Current Report on Form 8-K.
Item
1.01. Entry
into a Material Definitive Agreement.
Merger
On
September 18, 2006, PMIC completed the acquisition of Herborium, a Delaware
corporation, pursuant to an Agreement and Plan of Merger (the “Merger
Agreement”) by and among PMIC, LW, and Herborium. A copy of the Merger Agreement
is filed as Exhibit 2.3 to this Current Report on Form 8-K. The principal terms
of the merger are disclosed below in Item 2.01, which disclosures are
incorporated by reference herein. Prior to entering into the Merger Agreement,
John E. Donahue, our sole director prior to the merger, served as a financial
consultant to Herborium without compensation.
Employment
Agreements
On
September 18, 2006, PMIC entered into an employment agreement with Dr. Agnes
P.
Olszewski to serve as our President, Chief Executive Officer and Acting Chief
Financial Officer and James P. Gilligan to serve as a consultant/executive
officer. Pursuant to the terms of Dr. Olszewski’s employment agreement, she will
not work full-time for the company until we have raised a minimum of $1,250,000.
Pursuant to the terms of his agreement, Dr. Gilligan is not required to join
us
on a full time basis as our Co-President and Chief Operating Officer until
six
months after we have raised a minimum of $2,500,000. Additional information
with
respect to our new directors and officers is provided in Item 2.01 under
Directors
and Executive Officers.
The
employment agreements of Drs. Olszewski and Gilligan are filed as Exhibits
10.2
and 10.3, respectively, to this Current Report on Form 8-K.
Item
2.01. Completion
of Acquisition or Disposition of Assets.
Principal
Terms of the Reverse Merger
Pursuant
to the Merger Agreement, on September 18, 2006, we completed the acquisition
of
Herborium through a reverse triangular merger in which Herborium was merged
with
and into LW, our wholly-owned subsidiary, with Herborium being the surviving
corporation. Herborium is now a wholly-owned subsidiary of ours, and its
business (which is described below) is now our only business. Pursuant to the
plans of reorganization, on the effective date of the merger, all of our
outstanding shares of common stock was cancelled. We have issued, or will issue,
new shares of authorized but previously unissued shares of common stock, par
value $.001 per share, as follows:
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the
former stockholders of Herborium will receive an aggregate of 92,282,018
shares of our common stock in exchange for 100% of their equity interests
in Herborium;
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the
holders of shares of common stock of PMIC into which PMIC’s Series A
Convertible Preferred Stock, par value $.001, had been converted
will
receive 800,000 shares of our common stock;
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the
stockholders of record of Advanced Communications Technologies, Inc.
(“ACT”), our 61.56% majority stockholder prior to our reorganization, will
receive an aggregate of 7,454,300 shares of our common stock in exchange
for ACT’s equity interest in us; this amount does not include 500,000
shares that will be placed in escrow for unexpired PMIC stock option
and
stock warrant grants and 1,750,000 shares that will be escrowed for
certain of PMIC’s former executives pursuant to the terms of a settlement
agreement; and
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the
stockholders of record of PMIC as of August 11, 2006 will receive
an
aggregate of 4,030,762 shares of our common stock in exchange for
their
issued and outstanding 4,030,762 shares of PMIC.
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Immediately
prior to the merger, PMIC had outstanding 10,485,062 shares of common stock,
600
shares of our Series A Convertible Preferred Stock that were converted into
800,000 shares of common stock, and 100,000 warrants to purchase common stock
and options to purchase 20,000 shares of common stock.
All
shares of the capital stock of Herborium and LW issued and outstanding
immediately prior to the effective time of the merger were converted into one
share of common stock, which we own.
Following
the merger, the ownership interest on a fully-diluted basis of our issued and
outstanding common stock will be as follows:
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the
stockholders of ACT and certain of PMIC’s former executive officers will
own 10.55%;
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the
former holders of PMIC’s Series A Convertible Preferred stock will own
0.74%;
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the
former holders of PMIC’s common stock other than ACT will own 3.71%;
and
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the
former stockholders of Herborium will own
85%.
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Effective
on the date of the merger, PMIC changed its name to Herborium Group, Inc. and
adopted the November 30 year end of Herborium for accounting purposes as
described in Item 5.03 of this Current Report on Form 8-K. In connection with
the merger, we also changed our principal executive office to those of
Herborium, which are located at 3 Oak Street, Teaneck, New Jersey
07666.
Concurrently
with the closing of the merger, the sole director of PMIC, John E. Donahue,
resigned from the Board of Directors, and Martin Nielson and Anthony Lee
resigned their respective positions as PMIC’s Chief Executive Officer and Chief
Financial Officer. Upon the closing of the merger, in accordance with the plans
of reorganization of PMIC and LW, Dr. Agnes P. Olszewski, Dr. James P. Gilligan,
Wayne I. Danson and Max G. Ansbacher became members of our Board of Directors.
Upon the closing of the merger and in accordance with the plans of
reorganization of PMIC and LW, Dr. Agnes P. Olszewski became our President,
Chief Executive Officer and Acting Chief Financial Officer until a full time
Chief Financial Officer or comptroller is appointed, and we entered into a
consulting/employment agreement with Dr. James P. Gilligan. Pursuant to the
terms of Dr. Olszewski’s employment agreement, she will not work full-time for
the company until we have raised a minimum of $1,250,000. Pursuant to the terms
of his consulting/employment agreement, Dr. Gilligan is not required to join
us
on a full time basis as our Co-President and Chief Operating Officer until
six
months after we have raised a minimum of $2,500,000. Additional information
with
respect to our new directors and officers is provided in below in this Item
2.01
under Directors
and Executive Officers.
Concurrently
with the closing of the merger, John E. Donahue and Wayne I. Danson, the
directors of LW resigned from the Board of Directors. Concurrently with the
closing of the merger, in accordance with the plans of reorganization of PMIC
and LW, Mr. Ansbacher and Mr. Danson were appointed to the Board of Directors
of
our subsidiary Herborium where they joined Drs. Olszewski and Gilligan.
Concurrently with the closing of the merger, Mr. Danson and Anthony Lee resigned
from their respective positions as the Chief Executive Officer and Chief
Financial Officer of LW. Drs. Olszewski and Gilligan are the executive officers
of Herborium and will remain the executive officers of our subsidiary following
the merger.
For
accounting purposes, the merger is being accounted for as a reverse merger,
since we were a shell company prior to the merger, the former stockholders
of
Herborium now own a majority of the issued and outstanding shares of our common
stock, and the co-founders of Herborium became our directors and have or will
become our executive officers. Accordingly, Herborium is treated as the acquiror
in the merger, which is treated as a recapitalization of Herborium, and the
pre-merger financial statements of Herborium will now be deemed to be our
historical financial statements.
Form
10 Disclosure - Description of Herborium
Prior
to
closing of the merger, PMIC was a “shell company” as such term is defined in
Rule 12b-2 under the Securities Exchange Act of 1934, as amended, (the “Exchange
Act”). Accordingly, set forth below is the information that would be required if
pre-merger Herborium were filing a general form for registration on Form 10
under the Exchange Act.
Unless
otherwise indicated or the context otherwise requires, all references below
to
“we,” “us,” “Herborium” and the “Company” are to PMIC (now known as Herborium
Group, Inc.), together with Herborium, its wholly-owned subsidiary.
Corporate
History
Herborium,
Inc. was incorporated in the State of Delaware in November 2000 and has one
wholly-owned, but dormant subsidiary, Herborium.com Inc., a Delaware
corporation. In June 2002, Herborium, Inc. merged with G.O. International,
Inc.,
a consulting firm specializing in business strategies for pharmaceutical
industry and global technology transfer that was founded by Drs. Olszewski
and
Gilligan. Drs. Olszewski and Gilligan also own a dormant UK entity, Herborium
UK, LLC. Herborium has engaged in research, development and marketing of
botanical supplements since its inception, and prior to the merger, funded
its
operations by equity investments and loans from its founders, Drs. Olszewski
and
Gilligan, of approximately $380,000, funding from friends and family of
approximately $125,500, a revolving credit facility and cash generated by gross
profit from sales.
PMIC
was
originally incorporated in the State of Nevada under the name of Wildfire
Capital Corporation (“Wildfire”) in January 1996. Wildfire closed its marketing
operations in the fall of 1997. In July 1998, the Board of Directors of Wildfire
recommended the acquisition of Pacific Magtron, Inc. ("PMI") to Wildfire's
shareholders. PMI, a California corporation incorporated on August 11, 1989,
had
established itself in the computer products wholesale distribution industry
as a
privately held company. The shareholders of Wildfire and PMI approved the
transaction, and Wildfire issued 9,000,000 shares of its common stock in
consideration for all of the outstanding shares of PMI. As a result, the former
shareholders of PMI became the controlling shareholders of Wildfire. No
securities were registered in connection with the transaction. Immediately
prior
to the transaction, Wildfire effected a two-for-three reverse stock split of
its
1,500,000 outstanding shares of common stock. Upon consummation of the
acquisition, Wildfire changed its name to Pacific Magtron International Corp.,
and PMI continued its business operations as a wholly-owned subsidiary of PMIC.
In August 2000, PMIGA was incorporated in the State of Georgia to distribute
PMI’s products in the eastern United States. In December 2001, LW was
incorporated as a wholly-owned subsidiary of PMIC, to provide consumers a
convenient way to purchase computer products via the internet.
On
December 10, 2004, Theodore S. Li and Hui “Cynthia” Lee, the holders of a
collective majority interest in PMIC, entered into a Stock Purchase Agreement
(the “Stock Purchase Agreement”) with ACT, a vertically integrated technology
services company. Pursuant to the Stock Purchase Agreement, Mr. Li and Ms.
Lee
sold ACT an aggregate of 6,454,300 shares of the common stock of PMIC,
representing 61.56% of the then issued and outstanding common stock of PMIC,
for
the aggregate purchase price of $500,000. Upon taking control of PMIC, ACT
discovered that PMIC and its subsidiaries did not have assets and cash flow
sufficient to continue operations as organized, faced reduced or possible loss
of available lines of credit from certain third party suppliers and vendors
and
were thus unable to continue their business operations.
Bankruptcy
Proceedings
On
May
11, 2005, PMIC and its wholly-owned subsidiaries, PMI, PMIGA and LW, filed
voluntary petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the District of
Nevada. PMI and PMIGA liquidated in the Bankruptcy Proceedings pursuant to
an
order of the Bankruptcy Court entered on January 30, 2006. On August 11, 2006,
the Bankruptcy Court entered an order confirming the amended plans of
reorganization of PMIC and LW. The PMIC and LW plans of reorganization
contemplated that LW would be reorganized and remain a wholly-owned subsidiary
of PMIC and contemplated the merger with Herborium.
Subject
to a permissible delay of thirty days, the effective date of the LW plan of
reorganization was to be the first business day after ten days from the
confirmation order, and the effective date of the PMIC plan of reorganization
was to be the seventh business day after the effective date of the LW plan.
In
accordance with the plans, PMIC and LW delayed the effective dates of their
respective plans for thirty days in order to consummate the merger of Herborium
with and into LW. On September 14, 2006, the Bankruptcy Court granted us an
extension to delay the effective date of the plans until September 18, 2006.
The
plans of reorganization of PMIC and LW as confirmed by the Court and the
confirmation order are filed as Exhibits 2.1 and 2.2, respectively, to PMIC’s
Current Report on Form 8-K filed on August 16, 2006 and are incorporated herein
by reference.
On
or
about the effective date of September 18, 2006, allowed priority claims and
allowed unsecured claims against LW were paid in full. LW distributed all of
its
remaining cash to PMIC. Non-insider creditors holding allowed unsecured claims
against PMIC received a fifty percent initial distribution (on a pro-rata basis)
on account of such claims. On the effective date, ACT contributed $50,000 on
behalf of PMIC’s stockholders to effectuate the plan of reorganization, and
Herborium was merged with and into LW, with Herborium as the surviving
corporation. As of the effective date, shares of PMIC’s issued and outstanding
common stock were cancelled and converted into the right to receive new shares
of our common stock. Prior to the effective time of the merger, PMIC fell within
the definition of a “shell company” under the Exchange Act.
Following
is a summary of the classification and treatment of claims and interest under
the plans of reorganization for PMIC and LW.
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PMIC
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Class
One
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Priority
claims were paid in full in cash (and held in escrow pending
settlement).
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Class
Two
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Unsecured
claims were paid in cash in an amount equal to 50% of the claim amounts.
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Class
Three
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The
claim of the Internal Revenue Service was determined to be
$0.
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Class
Four
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No
distributions were made with respect to the claims of Mr. Li and
Ms. Lee,
former executives of PMIC. Mr. Li and Ms. Lee received an aggregate
of
$325,000 in cash and will receive 1,750,000 shares of our common
stock
pursuant to a settlement agreement entered into by and among PMIC, LW, ACT
on its own behalf and as the Estate Representative of the liquidating
estates of PMI and PMIGA, Encompass Group Affiliates, Inc., Wayne
Danson,
Martin Nielson, Mr. Li and Ms. Lee. The terms and conditions of the
settlement agreement are disclosed in PMIC’s Current Report on Form 8-K
filed on August 16, 2006, which disclosures are incorporated by reference
herein.
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Class
Five
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The
claim of the Hartford Insurance Company for pre-petition workers
compensation premiums for employees of PMI was
disallowed.
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Class
Six
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These
claims represent the equity interests of the stockholders of PMIC
other
than the holders of Series A Preferred Convertible Stock. The stockholders
of PMIC will receive shares of our common stock in exchange for their
shares of existing PMIC common stock, which were cancelled. With
respect
to the claims of ACT, 7,454,300 shares of our common stock will be
issued
directly to the stockholders of ACT (including 500,000 shares will
be
placed in escrow for unexpired PMIC stock option and stock warrant
grants).
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Class
Seven
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These
claims represent the equity interest of the holders of PMIC’s Series A
Convertible Preferred Stock, which was converted into 800,000 shares
of
PMIC common stock. The 800,000 shares of PMIC common stock were cancelled,
and the holders of those shares will receive 800,000 shares of our
common
stock representing 0.74% of our issued and outstanding stock on a
fully-diluted basis.
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LW
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Class
One
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Priority
claims were paid in full in cash.
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Class
Two
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Unsecured
claims were paid in full in cash.
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General
We
provide unique, natural and complementary healthcare related products to
consumers and healthcare professionals seeking alternative answers to the
management of healthcare issues not currently met by standard Western medicine.
Our products are botanical supplements comprised of unique herbal formulations.
We select products that have a record of clinical efficacy and safety
established in China; however, these products have not been evaluated according
to standards of clinical efficacy and safety applicable to pharmaceutical
products sold in the United States and other countries, and because these
products are herbal-based, they are not recognized as pharmaceuticals by the
Federal Drug Administration (the "FDA").
Our
business model is based on:
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owning
and/or marketing unique products with established clinical history
in
their country of origin, and
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a
proactive approach to meeting the regulatory changes and challenges
of the
new healthcare marketplace.
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Product
Strategy
Our
products address healthcare issues that many consumers do not believe are
treated satisfactorily by conventional pharmaceuticals and, thus, satisfy niche
market demands resulting from the gap between consumer’s healthcare issues and
currently available treatment options. Our products are presently classified
by
the FDA as dietary supplements and are regulated by the Dietary Supplement
Health and Education Act of 1994 ("DSHEA”).
We
seek
to distinguish our company from the marketers of traditional herbal supplements
and vitamins, as well as those focused on traditional pharmaceuticals and
"over-the-counter" drugs, by offering “bridge products,” which we define as
botanical supplements with a record of clinical efficacy and safety established
in the country of origin. To date our initial products have been tested in
China. Our business model takes advantage of the newly emerging opportunities
afforded by changing FDA perspectives with respect to botanical supplements.
The
present regulatory environment now encourages the performance of clinical
studies of botanical supplements. Through clinical testing, we expect to confirm
the positive outcomes initially demonstrated in China that will enable us to
make claims about the efficacy of our products. Successful completion of
clinical studies would allow advertising claims of “clinically proven” greatly
enhancing our advertising campaigns and facilitating marketing efforts. To
pursue clinical studies with respect to our products, we have developed
preliminary collaborative relationships with proactive medical institutions,
such as Johns Hopkins University, New York University Dermatological Clinic
and
Columbia Presbyterian Hospital in the U.S. and the Traditional Chinese Medicine
Institute in Hong Kong. We will not be able to pursue any such clinical studies
without adequate financing, and we presently have no commitments or
understandings to receive such financing. We believe that if we are able to
obtain sufficient financing to conduct such clinical studies in the U.S. we
will
have the opportunity to establish and maintain a differential advantage over
our
competitors through clinical validation and a proactive regulatory strategy.
We
also
believe that if we are able to obtain sufficient financing we can further
enhance our differential advantage over our competitors by planning
pharmaceutical grade quality control and quality assurance standards for our
products.
We
believe that if we obtain sufficient financing to pursue our objectives, our
company should be poised to take advantage of the accelerating domestic and
global interest in botanical and alternative therapies. The U.S. Department
of
Health and Human Services, National Center for Health Statistics, estimates
that
U.S. public spends between $36-$47 billion on “complementary and alternative”
therapies (Complementary and Alternative Medicine Use Among Adults: United
States, 2002 by Patricia M. Bames and Eve Powel-Griner; Advance Data No. 343,
May 27, 2004). A survey conducted by the National Center For Complimentary
and
Alternative Medicine as a part of NHIS studies in 2002 reported that 49.8%
of
U.S. adults use various forms of alternative and complementary therapies, with
19% of adults using natural products including herbal medicines. In a recent
national survey, 64% of doctors reported that they have recommended
complementary therapies to their patients (New York, NY, September 7, 2005).
Finally, during the closing weeks of the 105th Congress, Senator Tom Harkin,
the
ranking member of the U.S. Senate Appropriations Subcommittee, shared with
his
colleagues a report developed by the Institute for Alternative Futures. The
document noted that at the present, complementary and alternative approaches
to
health and medicine are among the fastest growing aspects of health care, and
that while in 1990, one-third of the U.S. population used some form of
alternative approach to health care, by the year 2010 it is expected that at
least two-thirds of the population will use some form of alternative health
care
approach.
Products
on the Market
Following
is a description of our products. Applicable regulatory requirements are
described below under the caption Regulation.
AcnEase®
is
currently the only product that we have on the market. AcnEase®
is a
traditional Chinese herbal remedy composed of a proprietary blend of all natural
substances. We market AcnEase®
for
improving conditions typically associated with acne and rosacea. Based on
Chinese herbal therapy, AcnEase®
seeks to
address the cause of skin-related problems. According to traditional Chinese
medicine, the ingredients in AcnEase®
decrease
“heat” in the body which, practitioners of traditional Chinese medicine believe,
affect bodily functions, resulting in, among other things, gastrointestinal
discomfort and skin blemishes. In Western terms, the ingredients comprising
AcnEase® appear to decrease sebaceous gland secretions. AcnEase®
does not
simply address the external symptoms, as do topical solutions and antibiotics.
AcnEase®
is taken
in tablet form. Typically, 8-12 tablets per day are recommended.
AcnEase®
is
typically used by consumers suffering from acne and rosacea. Acne is a disease
of the sebaceous hair follicles. The rapid growth of bacteria in combination
with the accumulated sebum cause the follicle to enlarge and can result in
a
mild form of non-inflammatory acne, known as comedones. Acne may progress to
inflammatory lesions that are red in color called papules, pustules and nodules.
Nodules or cysts are the most advanced and severe form of acne. An estimated
50
million people (13 million adults) in the U.S. suffer from acne. Currently,
the
only FDA-approved drug to treat the causes of acne is accutane (isotretinoin).
Accutane has many serious side effects, and physicians currently require that
patients sign a consent form before prescribing this drug. People of all races
and ages get acne. It is most common in adolescents and young adults. An
estimated 80 percent of all people between the ages of 11 and 30 have acne
outbreaks at some point. For most people, acne tends to go away by the time
they
reach their thirties; however, some people in their forties and fifties continue
to have this skin problem (source: National Institute of Arthritis and
Musculoskeletal and Skin Diseases http://www.niams.nih.gov/hi/topics/
acne/acne.htm#acne_d). Many of the over-the-counter acne products are topical,
including benzoyl peroxide, and only address the overt clinical manifestation
of
acne. Side effects of topical agents may include dry and flaky skin, irritation,
and redness. Prescription pharmaceutical products include broad-spectrum
antibiotics, which non-specifically kill bacteria associated with acne. Systemic
antibiotics, such as tetracycline and minocycline, are the mainstays of acne
therapy. The use of systemic antibiotics for the treatment of acne is in
disfavor with many physicians due to the development of resistant strains of
bacteria. For severe, persistent cases of acne, Retin-A cream (tretinoin) and
Accutane are often recommended. Both products are retinoid derivatives, are
costly and have a multitude of side effects. Accutane is a known potent
teratogen and strictly contraindicated in women not practicing a proven method
of birth control. Recent information has also indicated that Accutane may induce
depression. As a result, the FDA recommends that special caution be used when
prescribing this medication to teenagers and may even consider more severe
restrictions.
Rosacea
is characterized by facial flushing due to dilatation of blood vessels that
occurs in middle-aged men and women. According to the National Rosacea Society,
approximately 14 million adults in the United States suffer from rosacea
(http://www.rosacea.org/). The cause of rosacea is unknown. It affects adults
who are typically in their 30s and 40s, especially those with fair-skin, blue
eyes and of Celtic origin
(http://www.niams.nih.gov/hi/topics/rosacea/rosacea.htm#ros_b). The standard
therapy for rosacea involves the use of a systemic oral antibiotic, such as
tetracycline, minocycline and erythromycin, in combination with a topical
antibiotic gel. Isotretinoins, also known under the brand names Accutane or
Roaccutane, are sometimes considered alternatives to oral antibiotics,
especially in cases of papopustular rosacea. In 1989, Metronidazole was the
first topical treatment approved for the treatment of rosacea and is used to
reduce rosacea flare-ups once the disease is brought under control. If rosacea
progresses to a severe stage, dilated blood vessels that become distended under
the surface of the skin, known as telangiectasis, appear. Treatment options
for
telangiectasis are limited to corrective surgery or mixed light pulse therapy,
known as Photoderm, which directs a series of light pulse to the dermal layer
of
the skin stimulating collagen synthesis and resulting in a thickening of the
skin and decreasing the visible signs of rosacea.
Our
product, AcnEase®,
is a
unique herbal supplement which has been shown in studies conducted in China
to
improve skin conditions associated with juvenile acne and adult acne and
rosacea. AcnEase®
has no
known side effects unlike antibiotics or retinoid derived products.
Clinical
trials of the efficacy of AcnEase®
in
patients with acne have been performed in China. In these trials, approximately
95% of the patients aged 15 to 30 responded to AcnEase®.
In
patients aged 31 to 45, the level of effectiveness was approximately 80%. Based
on anecdotal experience in the U.S. market, AcnEase has proven to be especially
effective in addressing skin conditions associated with cystic acne or androgen
induced acne in women. In addition, AcnEase®
has
demonstrated a high satisfaction rate among our present and past customers
in
the U.S. and U.K. who number approximately 25,000. Over the last four years
of
operations, fewer than 5% of our customers have returned AcnEase®,
which
we back with a 100% guarantee. In clinical studies performed in China and
according to customer surveys, users typically respond within 2-3 weeks of
their
first use of AcnEase®
and
become blemish-free within four to six weeks.
AcnEase®
also has
demonstrated efficacy in improving conditions associated with rosacea in studies
conducted in China. Customers with symptoms of rosacea have been using
AcnEase®
since
2001. Responses from our customers show that 85% of our customers suffering
from
rosacea have experienced improvements in facial flushing, itchy gritty eyes,
acne and gastric reflux.
In
December 2004, AcnEase®
was
featured in New
Generalist,
a
publication of the Royal College of Medicine of London. In July 2005, it was
presented in Dermatology,
an
English language European journal of Dermatology as the only all natural acne
therapeutic product.
We
selected AcnEase® as
our
business model prototype to demonstrate our ability to identify herbal-based
products and bring them to the mainstream marketplace in the U.S. and U.K.
We
launched AcnEase®
in 2001.
For the last three fiscal years, AcnEase®
contributed approximately 98% of Herborium’s revenues. Herborium’s annual
revenues in 2004 and 2005 were approximately $762,371 and $866,773,
respectively. AcnEase®
has
demonstrated high brand recognition, consistently ranking in the top three
acne
products searched on Google and Yahoo.
Since
2001, we have been the exclusive worldwide distributor of AcnEase®
under an
existing license agreement. As these agreements do not explicitly set forth
the
extent of our exclusive rights with AcnEase®,
our
exclusivity rights may be subject to limitation or termination in the
future.
Currently,
we purchase AcnEase®
manufactured on our behalf by our licensor, AH USA. Since 2004, AcnEase®
tablets
have been manufactured in the U.S.
Our
business plan contemplates our future acquisition of the intellectual property
rights related to AcnEase® including the formulation thereof, under an agreement
with AH USA. In the event that we are able to purchase the formulation and
other
intellectual property rights relating to AcnEase®,
AcnEase®
would be
manufactured in the U.S. on our behalf. In that event, all herbs for
AcnEase®
would be
sourced from China using our contacts in Beijing. Such herbs would come from
suppliers that practice cGAP (current Good Agricultural Practice) and the
quality and identity confirmed by a herbalist/pharmacognocist. Routine quality
control (QC) and identity tests would be performed on the raw materials. All
extractions would initially be performed at audited facilities in China (PRC)
or
Hong Kong. The extracts would then be shipped to the U.S. where QC analysis
and
all final product manufacturing testing and release would be performed in
contract labs. Packaging and labeling would also be performed using contract
manufacturers.
Pipeline
Products
We
have a
number of other products in varying stages of development for which we will
need
additional time and financing before introduction to the market. These products
include:
AcnEase®
Skin Management System: This
series of products will include a cleanser, toner, moisturizer, mask and topical
acne treatment product.
Sexual
Health Products: Our
sexual health series line includes all natural products that address selected
sexual disorders resulting from cardiovascular disease, use of anti-depressants,
surgical procedures and other problems.
Energy
Restoration Products: These
products will address overall depletion of energy due to competitive sports,
high-level stress, extensive sexual activities, as well as other conditions
that
are physically demanding on a long-term or temporary basis.
Additional
Products:
We have
also researched expanding our line to include additional products in the areas
of liver disease (including liver damage due to Hepatitis and Cirrhosis),
prostate health for benign prostate hyperplasia (BPH), women’s health for
perimenopausal symptoms, cardiovascular concerns and diabetes. We do not expect
to be able to develop these products and bring them to market until we have
raised substantial financing.
Marketing
and Distribution
We
pursue
a multi-channel marketing and distribution strategy using a strong
brand-building approach and information-driven strategy. We maintain a visible
Internet presence and foster partnerships with selected traditional and
non-traditional health care providers, nutraceutical and supplement sales
channels, as well as high quality consumer products and service providers in
the
U.S. and abroad.
We
sell
products in the U.S., the United Kingdom and Continental Europe. Our long term
plans include expanding into the Indian, Chinese and Australian markets after
sufficient financing is received by our company. In the U.K., we subcontract
with a firm, State of Play LLC, that handles order fulfillment, marketing and
customer services for our customers in the U.K. and European Union. We also
maintain relationships with advisors in Beijing and Shanghai, PRC.
Manufacturing
We
plan
to become a fully-integrated company by establishing our own manufacturing
and
development capabilities at such time as we receive sufficient financing. If
we
obtain the rights to begin manufacturing our products, we intend to manufacture
our products using contract manufacturing companies that are GMP compliant.
Quality Control analysis will be contracted during the initial stages of
development, though at an appropriate point in time QC may be taken in house.
Currently, we outsource our manufacturing and packaging functions to produce
and
package our products.
The
state
of the art for the processing and sourcing of many herbs still resides in Asia.
Through our network, we have contacts that can oversee the manufacturing of
select products in China. Samples and initial batches of one of our sexual
health products have been made for us in China because the product is
manufactured using proprietary process and enrichment steps, as well as raw
materials that are sourced in China. Initial batches of certain of our sexual
health and energy restoration products are currently manufactured in the United
States through several contract manufacturers and we expect will continue to
be
made in the U.S. after we begin marketing the products. AcnEase®
is also
manufactured in the United States. Sourcing of the raw materials can be from
several suppliers in either the United States or Asia.
Raw
Materials
Raw
materials for AcnEase®
and one
of our sexual health products are obtained from China. Raw materials can be
obtained from several suppliers. We have an arrangement with Botanic Century
in
Beijing to work as an agent for the procurement of herbs and in some instances
processing and testing of the raw materials. In addition, we retain CMM
consultants (Oxford UK) to perform similar services. In the case of the sexual
health product, it is not only the raw materials that are important but also
the
extraction and enrichment process that is proprietary. Final product
manufacturing and release testing (QC) can eventually be performed in the United
States following sourcing of the active ingredients in China. Raw materials
for
another of our sexual health products in the pipeline can
be
obtained from suppliers in the United States. All extractions are performed
in
the United States as is final production manufacturing packaging and labeling.
Intellectual
Property
All
of
our existing and pipeline products are presently protected by trade secrets.
Some of our products may qualify for patent protection that will involve the
ingredients, ratios of ingredients, and specific fractions for extracts of
ingredients and/or an extraction process.
The
key
method of protection for our products at the current time is through trade
secrets relating to:
| • |
ingredients
(content and amount),
|
| • |
preparation
and enrichment of ingredients, and
|
| • |
proprietary
extraction procedures.
|
We
intend
to source ingredients from different companies to make certain no single entity
has a list of all ingredients. All subsequent processing is performed at
separate factories. We believe trade secrets are the best method at this time
to
protect herbal based products.
Working
Capital Items
We
carry
varying amounts of inventory. We do not extend payment terms to customers or
provide wholesale customers any rights to return merchandise. Retail customers
in the U.S. are provided with a 100% money-back guarantee; however, the rate
of
returns is de minimus.
Major
Customers
Due
to
the fragmented market, we do not have any one customer that accounts for 10%
or
more of consolidated revenues.
Competition
Our
direct corporate competitors are primarily nutraceutical companies, including
specialty retailers, supermarkets, large chain discount retailers, drug store
chains and independent drug stores, health food stores, on-line merchants,
and
mail order companies. Indirect competition also includes healthcare-focused
online marketers. Some of our more prominent competitors include General
Nutrition Centers, Inc., NBTY, Inc., Invite Health, Vitamin World and Vitamin
Shoppe. The vast majority of products distributed by nutraceutical and herbal
supplement companies are targeted towards dieting and weight management, body
building supplementation, dietary or vitamin supplements and personal care
products. These products represent the commodity approach to satisfying the
markets needs and a selected few qualify as proprietary and unique formulations
with intellectual property value. To our knowledge, no other botanical
supplement targeting a specific health issue currently entertains national
brand
recognition. In addition, the herbaceutical sector is highly fragmented. We
believe that the rudimentary stage of development for this sector, in
conjunction with our superior products and pipeline, provides us an opportunity
for growth, including acquisitions, and the ability to assume a leadership
position in the sector in a relatively short period of time.
Regulation
We
have
determined that all of our existing and proposed products are dietary
supplements as defined under federal statutes and regulations of the FDA.
Neither nutritional supplements nor dietary supplements require FDA or other
governmental approval prior to their marketing in the United States. No
governmental agency or other third party makes a determination as to whether
our
products qualify as nutritional supplements, dietary supplements, or neither.
We
make this determination based on the ingredients contained in the products
and
the claims made for the products. The processing, formulation, packaging,
labeling and advertising of such products, however, are subject to regulation
by
one or more federal agencies including the FDA, the Federal Trade Commission,
the Consumer Products Safety Commission, the Department of Agriculture and
the
Environmental Protection Agency. Our activities also are subject to regulation
by various agencies of the states and localities in which its products are
sold.
We markets products that are covered under FDA regulations for Dietary
Supplements.
Federal
Food, Drug, and Cosmetic Act
The
FDA,
pursuant to the Federal Food, Drug, and Cosmetic Act (“FFDCA”), regulates the
formulation, manufacturing, packaging, labeling, distribution and sale of
dietary supplements. The FDA has broad authority to enforce the provisions
of
the FFDCA applicable to foods and dietary supplements, which by definition
is a
sub-category of foods. The FDA’s powers include (i) issuing a public “Warning
Letter” notifying a company that a product is not in compliance with FDA
regulations, (ii) publicizing information about an illegal product, (iii)
requesting a voluntary recall of an illegal product from the market, (iv)
requesting the Department of Justice to initiate civil seizure and/or injunction
actions, (v) seeking and receiving consumer redress, and (vi) initiating
criminal proceedings in the U.S. federal courts.
Under
the
FFDCA, all labels and labeling claims must be truthful and non-misleading.
As a
general rule, advertising for dietary supplements is regulated by the FTC.
Labeling for these products is regulated by the FDA. Nevertheless, the FDA
takes
the position that, in addition to the FTC, the FDA also has jurisdiction to
review Internet websites and mail order catalogs as it considers these forms
of
media to be labeling. Moreover, the FDA has been known to review advertising
for
dietary supplements to help it determine the intended use of the product being
advertised. Non-compliance with the FDA regulation could lead to, among other
things, injunctions, product withdrawals, recalls, and product
seizures.
Dietary
Supplement Health and Education Act of 1994
Dietary
Supplements is a classification of products resulting from the enactment of
the
Dietary Supplement Health and Education Act of 1994 ("DSHEA") in October 1994.
Our dietary supplement products are subject to DSHEA. DSHEA amended and modified
the application of certain provisions of the FFDCA as they relate to dietary
supplements, and required the FDA to promulgate regulations consistent with
DSHEA. The provisions of DSHEA are generally favorable to the dietary supplement
industry and define dietary supplements and dietary ingredients; establish
a new
framework for assuring safety; outline guidelines for literature displayed
where
dietary supplements are sold; provide for the use of claims and nutritional
support statements; require ingredient and nutrition labeling; and grant the
FDA
the authority to establish regulations concerning good manufacturing practices
(“GMPs”).
DSHEA
defines a dietary supplement to include any product (other than
tobacco):
| |
(i)
|
intended
to supplement the diet that bears or contains one or more of a vitamin,
mineral, herb or other botanical, amino acid, substance to supplement
the
diet by increasing the total dietary intake, or any concentrate,
metabolite, constituent, extract, or combination of any such ingredient,
provided that such product is either intended for ingestion in tablet,
capsule, powder, soft gel, gelcap, or liquid droplet form, or
|
| |
(ii)
|
if
not intended to be ingested in such form, is not represented for
use as a
conventional food or as a sole item of a meal or the diet,
and
|
| |
(iii)
|
is
labeled as a dietary supplement.
|
A
dietary
supplement, which contains an ingredient not on the market before October 15,
1994 (a “new dietary ingredient”) adulterates the product under the FFDCA unless
there is evidence of a history of use or other evidence of safety establishing
that it will reasonably be expected to be safe. The practical effect of such
an
expansive definition is to ensure that the new protections and requirements
of
DSHEA will apply to a wide class of products.
Under
DSHEA, companies that manufacture and distribute dietary supplements are allowed
to make any of the following four types of statements with regard to nutritional
support on labeling without FDA approval:
(i) a
statement that claims a benefit related to a classical nutrient deficiency
disease if it discloses the prevalence of such disease in the United States;
(ii) a
statement that describes the role of a nutrient or dietary ingredient intended
to affect the structure or function of the body;
(iii) a
statement that characterizes the documented mechanism by which a nutrient or
dietary ingredient acts to maintain the structure or function; or
(iv) a
statement that "describes general well-being" from consumption of a nutrient
or
dietary ingredient.
In
addition to making sure that a statement meets one of these four criteria,
a
manufacturer of the dietary supplement must have substantiation that such
statement is truthful and not misleading, must not claim to diagnose, mitigate,
treat, cure, or prevent a specific disease or class of diseases, and for
structure/function claims, must contain the following disclaimer, prominently
displayed in boldface type: "This statement has not been evaluated by the Food
and Drug Administration. This product is not intended to diagnose, treat, cure,
or prevent any disease."
Under
its
authority granted by DSHEA, the FDA has proposed GMPs specifically for dietary
supplements. These new GMPs, when finalized, will be more detailed than the
GMPs
that currently apply to dietary supplements and may, among other things, require
dietary supplements to be prepared, packaged and held in compliance with certain
rules (including quality control provisions) similar to the GMPs applicable
to
drugs. There can be no assurance that, if the FDA adopts GMPs for dietary
supplements, we and/or our suppliers will be able to comply with the new rules
without incurring substantial expenses that might have a material adverse effect
on our consolidated financial position or results of operations.
As
a
formulator, distributor and marketer of dietary supplements, we are subject
to
the risk that one or more of the ingredients in our product may become subject
to regulatory action in the future.
The
Federal Trade Commission
The
FTC
exercises jurisdiction over the advertising of dietary supplements and foods
and
has the authority over both “deceptive” and “unfair” advertising and other
marketing practices. In addition to its broad investigative powers, the FTC
has
the power to initiate administrative and judicial proceedings against a company
and may also seek a temporary restraining order or preliminary injunction
against a company pending the final determination of an action. The FTC’s
remedies also include consumer redress, civil and criminal penalties.
Our
advertising and sale of our dietary supplements is subject to regulation by
the
FTC under the Federal Trade Commission Act (the “FTCA”). The FTCA prohibits
unfair methods of competition and unfair or deceptive acts or practices in
or
affecting commerce. The FTCA provides dissemination or causing to be
disseminated any false advertisement pertaining to drugs or foods (which would
include dietary supplements) is an unfair or deceptive act or practice. Under
the FTC’s “substantiation doctrine”, an advertiser is required to have a
“reasonable basis” for all objective product claims before the claims are made.
Failure to substantiate claims adequately may be considered a deceptive or
unfair practice. Pursuant to this FTC requirement, we are required to have
adequate substantiation for all advertising claims made for our products at
the
time such claims are made.
Research
and Development
We
limit
the amount of expenditures relating to the development of new products through
the use of co-licensing and co-development. We estimate that 30-35% of our
revenues are spent annually on research and development expenditures.
Environmental
Compliance
We
are
not aware of any administrative or other costs incurred which are directly
related to compliance with environmental laws, and we have not experienced
any
other significant effect from the impact of environmental laws.
Employees
We
presently have one full-time employee. whose principal responsibility is product
order fulfillment. Dr. Olszewski, our President, Chief Executive Officer and
Acting Chief Financial Officer does not currently devote her full time to us
and
will not do so until such time as we raise at least $1,250,000 in financing.
Dr.
Gilligan will assume full-time employment with us as our Co-President and Chief
Operating Officer within six months after the date that we raise at least
$2,500,000 in financing. Prior to such time, he will serve as a consultant
to
us.
Property
Currently,
we maintain our office at the home of our President and Chief Executive Officer,
Dr. Olszewski, at 3 Oak Street, Teaneck, New Jersey 07666. Fulfillment and
customer service are performed from space at 985 Carteret Ave. in Union, New
Jersey, the home of Dr. Gilligan. We also rent warehouse space to house
inventory in New Jersey.
Financial
Information About Geographic Areas
For
last
three fiscal years, we have served the U.S. and United Kingdom/European Union
markets. The largest foreign market is the U.K., followed by the combined E.U.
Revenues from each geographic area are described below.
| |
Approximate
Percentage of Total Sales
|
|
Fiscal
Year/ Interim Period Ended:
|
U.S.
|
U.K./E.U.
|
|
November
30, 2004
|
78%
|
22%
|
|
November
30, 2005
|
80%
|
20%
|
|
6
Months Ended
May
31, 2006
|
75%
|
25%
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking
Statements
Certain
statements in the "Management’s Discussion and Analysis of Financial Condition
and Results of Operations" and elsewhere in this Current Report on Form 8-K
constitute "forward-looking statements" (within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Act")) relating to us and our
business, which represent our current expectations or beliefs including, but
not
limited to, statements concerning our operations, performance, financial
condition and growth. The Act may, in certain circumstances, limit our liability
in any lawsuit based on forward-looking statements that we have made. All
statements, other than statements of historical facts, included in this Current
Report on Form 8-K that address activities, events or developments that we
expect or anticipate will or may occur in the future, including such matters
as
our projections, future capital expenditures, business strategy, competitive
strengths, goals, expansion, market and industry developments and the growth
of
our businesses and operations are forward-looking statements. Without limiting
the generality of the foregoing, words such as "may,” “believes,” ”expects,”
"anticipates,” "could,” "estimates,” “grow,” “plan,” "continue," “will,” “seek,”
“scheduled,” “goal” or “future” or the negative or other comparable terminology
are intended to identify forward-looking statements. These statements by their
nature involve substantial risks and uncertainties, such as credit losses,
dependence on management and key personnel, variability of quarterly results,
our ability to continue our growth strategy, changes to the regulatory landscape
and competition, certain of which are beyond our control. Any or all of our
forward-looking statements may turn out to be wrong. They may be affected by
inaccurate assumptions that we might make or by known or unknown risks or
uncertainties. Should one or more of these risks or uncertainties materialize
or
should the underlying assumptions prove incorrect, actual outcomes and results
could differ materially from those indicated in the forward-looking
statements.
Because
of the risks and uncertainties associated with forward-looking statements,
you
should not place undo reliance on them. Further, any forward-looking statement
speaks only as of the date on which it is made, and we undertake no obligation
to update any forward-looking statement to reflect events or circumstances
after
the date on which the statement is made or to reflect the occurrence of
unanticipated events.
The
following discussion should be read in conjunction with the audited financial
statements and notes thereto for the fiscal years ended November 30, 2005 and
2004 filed as Exhibit 99.1 to this Current Report on Form 8-K and the risks
described under the caption “Risk Factors” immediately following below
.
FINANCIAL
CONDITION
We
had
net losses of $105,234 and $36,329 during the six months ended May 31, 2006
and
2005, respectively. As of May 31, 2006, we had cash and current assets of $5,129
and $64,763, respectively, and current liabilities of $520,031, with obligations
aggregating $99,093 for trade creditors and accrued expenses, $125,049 and
$179,818 payable for credit card and lines of credit obligations, respectively,
and $167,157 due to stockholders. We believe that our available current assets
will be sufficient for the next twelve-month period to meet our working capital
needs.
To
date
we have not obtained adequate equity and debt financing to enable us to
implement our business plan. As a result of the lack of financial resources,
a
condition unfavorably impacting us since inception, revenue and profitably
have
not increased as we believe would have otherwise been the case. Without
sufficient financing, we have not been able to (i) acquire ownership of several
products, particularly the intellectual property rights to and formulation
of,
our principal product, AcnEase®, (ii) market and promote our products, (iii)
conduct certain clinical trials that would further such marketing and
promotional activities and (iv) hire additional employees.
As
described elsewhere in this Form 8K, we have merged into PMIC and thereby became
a publicly traded corporation; however, we have not closed, nor obtained a
commitment for, the financing that was originally contemplated to close
contemporaneously with the closing of the merger. During the three and six
months ended May 31, 2006, revenue growth was adversely affected by the time
and
attention we devoted to the merger and related financing initiatives.
RELATED
PARTY TRANSACTIONS
During
the six months ended May 31, 2006, the Company's due to stockholders increased
by to $17,714.
COMPARISON
OF THE SIX MONTHS ENDED MAY 31 2006 TO THE SIX MONTHS ENDED MAY 31
2005
Overall
Results of Operations
For
the
six months ended May 31 2006, we incurred a net loss of $140,942, an increase
of
$104,613 from the net loss of $36,329 for the comparable prior year period.
The
increase in net loss in the fiscal 2006 compared to fiscal 2005 period is
attributable principally
to an increase in operating expenses, as well as a decrease in gross
profit.
Sales
Net
sales
for the six months ended May 31 2006 were $386,984 compared to $411,804 for
the
six months ended May 31 2005. The decrease of $24,820, or 6%, can be attributed
to decrease in sales of AcnEase in the United Kingdom (“UK”) due to a temporary
leave of absence on the part of our local sales representative.
Gross
Profit
Gross
profit decreased to $201,451 for the six months ended May 31 2006 compared
to
$220,039 for the six months ended May 31 2005, or $18,588 and 8.4%, with gross
margin decreasing to 52.1% from 53.4% for the period. The decrease in gross
profit is principally attributable to the decrease in sales, as well as a slight
decrease in gross margin.
Operating
Expenses
Total
operating expenses increased by $81,771, or 34.5%, to $318,931 for the six
months ended May 31 2006, from $237,160 for the six months ended May 31 2005,
principally attributable to an increase in payroll expenses of $57,948 due
principally to officer salary expense accrued but not paid, audit expense of
$35,000 and an increase in marketing and promotion expenses of $17,246, offset
by a decrease in UK-related commission and other expenses of $20,963,
principally the result of lower sales in the UK.
Other
Income (Expense)
Interest
expense increased to $21,949 from $17,257 for the six months ended May 31,
2006
as compared with the six months ended May 31, 2005, or $4,692, due principally
to increases in interest rates payable for credit card and lines of credit
debt
outstanding in the current period.
COMPARISON
OF THE FISCAL YEAR ENDED NOVEMBER 30, 2005 TO THE FISCAL YEAR ENDED NOVEMBER
30,
2004
Overall
Results of Operations
For
the
fiscal year ended November 30, 2005, we incurred a net loss of $105,234, a
decrease of $186,487 from the net loss of $291,792 for the fiscal year ended
November 30, 2004. The net loss for the fiscal year ended November 30, 2004
included a non-cash charge of $108,466 to set up a valuation allowance to offset
100% of a deferred tax asset. The decrease in net loss in fiscal 2005 compared
to fiscal 2004 is also attributable to an increase in gross profit due to
increased net sales and a decrease in operating expenses in the fiscal year
ended November 30, 2005 compared to the earlier period.
Sales
Net
sales
for the fiscal year ended November 30, 2005 were $866,773 compared to $762,371
for the fiscal year ended November 30, 2004. The increase of $104,402, or 13.7%,
can be attributed to an increase in the number of units sold of AcnEase.
Gross
Profit
Gross
profit increased to $493,743 for the fiscal year ended November 30, 2005
compared to $433,159 for the fiscal year ended November 30, 2004, or $60,584,
with gross margin increasing slightly to 57.0% in the current period from 56.8%
for the prior period.
Operating
Expenses
Total
operating expenses decreased to $554,104 for the fiscal year ended November
30,
2005, from $591,187 for the fiscal year ended November 30, 2004, or $37,083,
principally attributable to decreases in marketing and promotion expenses of
$48,787 and in product development expenses of $57,776, offset by an increase
of
$44,905 in commission, fulfillment and office expenses related to increased
sales and business activities in the UK.
Other
Income (Expense)
Interest
expense increased to $41,687 from $22,884 for the fiscal year ended November
30,
2005 as compared with the fiscal year ended November 30, 2004, or $18,794,
due
principally to an increase in interest rates payable and in the level of credit
card debt outstanding.
Seasonality
There
are
no seasonality factors that affect the Company.
Off-Balance
Sheet Arrangements
The
Company has no off-balance sheet arrangements that have or are reasonably likely
to have a current or future effect on the Company’s financial condition, changes
in financial condition, revenue or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors, and
the
Company does not have any non-consolidated special purpose
entities.
LIQUIDITY
AND CAPITAL RESOURCES
As
of May
31, 2006, we had a cash balance of $5,129 and a negative cash flow from
operations of $18,422 for the six month period then ended. We have been
operating at a loss since inception and have been funding these losses in a
number of ways, including lines of credit, credit card debt, advances from
stockholders and entering into subscription agreements with “friends and family”
for investment funds. While we are actively seeking a substantial amount of
equity or debt financing, we have received no commitments for such financing.
We
believe that our working capital at May 31, 2006, with additional anticipated
financing to be again obtained from one or more of the sources described above,
will be sufficient for the next twelve-month period to meet our working capital
needs.
The
Company has total liabilities and contractual obligations of $587,764 as of
May
31, 2006. These contractual obligations, along with the dates on which such
payments are due, are described below:
|
|
|
Contractual
Obligations
|
|
| |
|
(as
of May 31, 2006)
|
|
| |
|
Total
|
|
1
Year or Less
|
|
More
Than 1 Year
|
|
| |
|
|
|
|
|
|
|
|
Accounts
Payable and Accrued
|
|
|
|
|
|
|
|
|
Expenses
|
|
$
|
134,003
|
|
$
|
134,003
|
|
$
|
--
|
|
|
Credit
Cards payable
|
|
|
125,049
|
|
|
125,049
|
|
|
--
|
|
|
Lines
of Credit Payable
|
|
|
179,818
|
|
|
179,818
|
|
|
--
|
|
|
Due
to Stockholders
|
|
|
167,157
|
|
|
167,157
|
|
|
--
|
|
|
Other
|
|
|
16,737
|
|
|
15,754
|
|
|
983
|
|
|
Total
Contractual Obligations
|
|
$
|
622,764
|
|
$
|
621,781
|
|
$
|
983
|
|
Below
is
a discussion of our sources and uses of funds for the six months ended May
31,
2006 and 2005.
Net
Cash Used In Operating Activities
Net
cash
used in operating activities was $18,442 and $46,591 in the six months ended
May
31, 2006 and 2005, respectively. The use of cash in operating activities for
the
six months ended May 31, 2006 was principally the result of a net loss of
$140,942, partially offset by a decrease in accounts receivable of $18,184
and
an increase in accounts payable and accrued expenses of $97,151. The use of
cash
in operating activities for the six months ended May 31, 2005 was principally
the result of a net loss of $36,329 and a decrease in accounts payable of
$26,888, partially offset by a decrease in inventory of $16,100,
Net
Cash Used In Investing Activities
During
the six months ended May 31, 2006 and 2005, we used $6,640 and $1,763,
respectively, for the acquisition of other assets, and $686 and $3.933,
respectively, for the acquisition of property and equipment.
Net
Cash Provided By Financing Activities
Net
cash
provided by financing activities for the six months ended May 31, 2006 amounted
to $30,695, principally attributable to an increase of $17,714 in amount due
to
stockholders and an increase of $13,000 other loans. Net cash provided by
financing activities for the six months ended May 31, 2005 amounted to $56,065,
principally attributable to an increase of $28,520 in amount due to stockholders
and an increase of $19,053 in credit card debt payable.
RISK
FACTORS
Our
business and results of operations are subject to numerous risks, uncertainties
and other factors that you should be aware of, some of which are described
below
and in the section entitled “Cautionary Statement Concerning Forward-Looking
Statements.” The risks, uncertainties and other factors described below are not
the only ones facing our company. Additional risks, uncertainties and other
factors not presently known to us or that we currently deem immaterial may
also
impair our business operations. Any of the risks, uncertainties and other
factors could have a materially adverse effect on our business, financial
condition or results of operations and could cause the trading price of our
common stock to decline substantially.
Risks
Relating to Our Company
We
have a history of losses, and will incur additional
losses.
We
are a
development stage company with a limited history of operations, and do not
expect to significantly increase ongoing revenues from operation in the
immediately foreseeable future. To date, we have not been profitable. We had
net
losses of $140,942 during the six months ended May 31, 2006. Our losses have
resulted principally from costs incurred in product development, including
product testing, selection and from general and administrative costs associated
with our operations. While we seek to attain profitability, we cannot be sure
that we will ever achieve product and other revenue sufficient for us to attain
this objective.
With
the
exception of AcnEase®
, our
product candidates are in research or various stages of development. For some
of
these products we will want to conduct additional research, development and
clinical trials in order to improve our ability to advertise and differentiate
these products from others in the market place. We cannot be sure that we will
successfully research, develop, commercialize, manufacture and market any other
product candidates. We expect that these activities, together with future
general and administrative activities, will result in significant expenses
for
the foreseeable future.
We
need additional capital, which may not be available to us.
We
have
expended and will continue to expend substantial funds in the research,
development, marketing and clinical testing of our herbaceutical supplements.
Following the merger we will require funds in excess of our existing cash
resources to fund operating deficits, develop new products, purchase additional
rights to existing products, establish and expand our manufacturing
capabilities, and finance general and administrative and research activities.
In
particular, we will need additional capital to:
| |
|
•
|
acquire
intellectual property rights relating to AcnEase®
and other products;
|
| |
|
•
|
conduct
clinical trials and fund marketing and new product
launches;
|
| |
|
•
|
establish
U.S. manufacturing capabilities;
and
|
| |
|
•
|
fund
general working capital requirements if we continue to experience
deficits.
|
Due
to
market conditions at the time we may need additional funding, or due to our
own
financial condition at that time, it is possible that we will be unable to
obtain additional funding as and when we need it. Even if we are able to obtain
capital, it may be on unfavorable terms or terms that excessively dilute
existing shareholders or otherwise negatively affect the interests of existing
shareholders. If we are unable to obtain additional funding as and when needed,
we could be forced to delay our development, marketing and expansion efforts
and, if we continue to experience losses, potentially cease operations.
We
may not be able to obtain or sustain market acceptance for our services and
products.
Failure
to establish a brand and presence in the marketplace on a timely basis could
adversely affect our financial condition and operating results. Moreover, we
cannot be sure that we will successfully complete the development and
introduction of new products or product enhancements or that any new products
developed will achieve acceptance in the marketplace. We may also fail to
develop and deploy new products and product enhancements on a timely basis.
AcnEase®
is
currently our only product providing revenues.
Government
regulation of the processing, formulation, packaging, labeling and advertising
of our products can impact our ability to market products.
Under
the
Dietary Supplement Health and Education Act of 1994, companies that manufacture
and distribute dietary supplements are limited in the statements that they
are
permitted to make about nutritional support on the product label without FDA
approval. In addition, a manufacturer of a dietary supplement must have
substantiation for any such statement made and must not claim to diagnose,
mitigate, treat, cure or prevent a specific disease or class of disease. The
product label must also contain a prominent disclaimer. These restrictions
may
restrict our flexibility in marketing our product.
The
FDA
has proposed GMPs (Good Manufacturing Practices) specifically for dietary
supplements. These new GMPs, when finalized, will be more detailed than the
GMPs
that currently apply to dietary supplements and may, among other things, require
dietary supplements to be prepared, packaged and held in compliance with certain
rules (including quality control provisions) similar to the GMPs applicable
to
drugs. There can be no assurance that, if the FDA adopts GMPs for dietary
supplements, we and/or our suppliers will be able to comply with the new rules
without incurring substantial expenses that might have a material adverse effect
on our consolidated financial position or results of operations. As a
formulator, distributor and marketer of dietary supplements, we are subject
to
the risk that one or more of the ingredients in our product may become subject
to regulatory action in the future.
The
processing, formulizing, packaging, labeling and advertising of such products,
however, are subject to regulation by one or more federal agencies including
the
FDA, the Federal Trade Commission, the Consumer Products Safety Commission,
the
Department of Agriculture and the Environmental Protection Agency. Our
activities also are subject to regulation by various agencies of the states
and
localities in which our products are sold. Among other things, such regulation
puts a burden on our ability to bring products to market. Any changes in the
current regulatory environment could impose requirements that would make
bringing new products to market more expensive or restrict the ways we can
market our products. In addition, the adoption of new regulations or changes
in
the interpretation of existing regulation may result in significant compliance
costs or discontinuation of product sales and may adversely affect our revenue.
The FDA may implement additional regulations with which we would have to comply,
which would increase expenses.
No
governmental agency or other third party makes a determination as to whether
our
products qualify as dietary supplements or not. We make this determination
based
on the ingredients contained in the products and the claims we make for the
products and if our determination is denied by any regulatory authority we
could
face significant penalties that may require us to shut down our operations.
We
face substantial competition.
The
dietary supplement industry is growing rapidly and is highly competitive.
Competition for the sale of nutritional products comes from many sources,
including specialty retailers, supermarkets, large chain discount retailers,
drug store chains and independent drug stores, health food stores, on-line
merchants, mail order companies and a variety of other participants in the
market for nutritional products. Some of our more prominent competitors include
General Nutrition Centers, Inc., NBTY, Inc., Invite Health, Vitamin World and
Vitamin Shoppe. We compete regularly with companies selling nationally
advertised brand name products and with companies that may have more expanded
product lines with much larger volume of sales. This competition could have
a
material adverse effect on our business, results of operations and financial
condition since these companies have greater financial and other resources
available to them and may possess manufacturing, distribution and marketing
capabilities far greater than our own.
Certain
existing products may become more mainstream and thereby increase competition
for those products as more participants enter the market. We may not be able
to
compete effectively and our attempt to do so may require us to reduce our
prices, which may result in lower margins. Failure to compete effectively could
adversely affect our market share, revenues and growth prospects.
Our
competitive position will be affected by the continued acceptance of our
products, our ability to attract and retain qualified personnel, future
governmental regulations affecting nutritional products, and publication of
product safety studies by the media, government and authoritative health and
medical authorities.
We
currently have no manufacturing capabilities and we are dependent upon other
companies to manufacture our products.
We
currently have no manufacturing facilities. We are dependent upon relationships
with independent manufacturers to fulfill our product needs. We use several
manufacturers for various parts of the manufacturing processes for our products.
We believe these are small privately held firms.
Because
the manufacturing processes, which our contract manufacturers perform, are
fairly standard in the industry, we believe that there are a large number of
manufacturers who could provide us with these services if our current contract
manufacturers are unavailable for any reason or seek to impose unfavorable
terms. Our ability to market and sell our products requires that such products
be manufactured in commercial quantities and in compliance with applicable
federal and state regulatory requirements. In addition, we must be able to
manufacture our products at a cost that permits us to charge a price acceptable
to the customer while also accommodating distribution costs and third-party
sales compensation. Competitors who do own their own manufacturing may have
an
advantage over us with respect to pricing, availability of product and in other
areas through their control of the manufacturing process.
We
are dependent on key management and the loss of their services could have a
material adverse impact on us.
We
have
relied extensively on the services of Drs. Agnes P. Olszewski and James P.
Gilligan, our co-founders. Drs. Olszewski and Gilligan play key roles in
our management and the loss of their services would materially and adversely
affect us and our prospects. Until we raise substantial financing, neither
of
these key individuals will spend full-time working for us. Under her employment
agreement, Dr. Olszewski is not required to do so until we have raised
$1,250,000, and under his consulting/employment agreement, Dr. Gilligan is
not
required to do so until six months after we have raised $2,500,000 in financing.
There is no assurance that we will be able to raise such amounts and without
such financing and the full-time employment of these key executives we will
in
all likelihood not be able to further develop our business and will likely
continue to experience losses. The loss of services of any of these persons
could delay or reduce our product development and commercialization efforts
and
harm our ability to compete effectively.
We
may be subject to product liability claims and may not have adequate insurance
to cover such claims.
Like
other retailers, distributors and manufacturers of products that are designed
to
be ingested, we face an inherent risk of exposure to product liability claims
in
the event that the use of our products results in injury. We intend to obtain
general liability coverage of $3 to $5 million that will include product
liability coverage. Because our policies will be purchased on a year-to-year
basis, industry conditions or our own claims experience could make it difficult
for us to secure the necessary insurance at a reasonable cost. In addition,
we
may not be able to secure insurance that will be adequate to cover liabilities.
We generally do not obtain contractual indemnification from parties supplying
raw materials or marketing our products. In any event, any such indemnification
is limited by its terms and, as a practical matter, to the creditworthiness
of
the other party. In the event that we do not have adequate insurance or
contractual indemnification, liabilities relating to defective products could
require us to pay the injured parties’ damages which are significant compared to
our net worth or revenues.
We
may be adversely affected by unfavorable publicity relating to our product
or
similar products manufactured by our competitors.
We
believe that the dietary supplement market is affected by national media
attention regarding the consumption of these products. Future scientific
research or publicity may be unfavorable to the dietary and nutritional
supplement market generally or to any particular product and may be inconsistent
with earlier favorable research or publicity. Adverse publicity associated
with
illness or other adverse effects resulting from the consumption of products
distributed by other companies that are similar to our products could reduce
consumer demand for our products and consequently our revenues. This may occur
even if the publicity does not relate to our products. Adverse publicity
directly concerning our products could be expected to have an immediate negative
effect on the market for that product.
We
depend on trade secrets to protect our proprietary technology, which may be
inadequate to protect our position.
Our
long-term success will substantially depend upon protecting our technology
from
infringement, misappropriation, discovery and duplication. We expect that we
will apply for patent protection with respect to some of our products. Since
we
do not currently have patents on our products, a competitor could replicate
our
products. Any patents that we might obtain may not provide meaningful protection
or significant competitive advantages over competing products, due to the
complexity of the legal and scientific issues involved in patent defense and
litigation. For these reasons we have elected to protect our current products
through trade secrets.
Because
of the complexity of the legal and scientific issues involved in patent
prosecutions, we cannot be sure that any future patent applications for new
products will be granted. Nor can we be sure that any patent rights that we
do
obtain will provide meaningful protection against others duplicating our
products because of the complexity of the legal and scientific issues that
could
arise in litigation over these issues. Furthermore, patent applications are
maintained in secrecy in the United States until the patents are approved,
and
in most foreign countries for a period of time following the date from which
priority is claimed. A third party’s pending patent applications may cover any
technology that we currently are developing. Additionally, if we must resort
to
legal proceedings to enforce our intellectual property rights, the proceedings
could be burdensome and expensive and could involve a high degree of risk to
our
proprietary rights if we are unsuccessful in, or cannot afford to pursue, such
proceedings.
We
rely
at present completely on trade secrets and contract law to protect our
proprietary technology. There can be no assurance that any such contract will
not be breached, or that if breached, it will have adequate remedies. Currently,
all of our products are protected by trade secrets held by third parties. We
rely on such third parties to adequately protect such trade secrets. There
can
be no assurance that these third parties will protect and continue to hold
the
trade secrets relating to our products. Furthermore, there can be no assurance
that any of these trade secrets will not become known or independently
discovered by third parties.
There
can
be no assurance that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access
to
our trade secrets and know-how. In addition, we may be required to obtain
licenses to patents or other proprietary rights from third parties. There can
be
no assurance that any licenses required under any patents or proprietary rights
would be made available on acceptable terms, if at all. If we do not obtain
required licenses, we may encounter delays in product development or find that
the development, manufacture or sale of products requiring such licenses could
be foreclosed.
We
have limited the liability of our directors and officers for breaches of the
duty of care.
Our
articles of incorporation limit the liability of our directors for monetary
damages for breaches of directors’ fiduciary duty of care. This provision may
reduce the likelihood of derivative litigation against directors and may
discourage or deter shareholders or management from suing directors for breaches
of their duty of care, even though such an action, if successful, might
otherwise benefit our shareholders and us. In addition, our articles of
incorporation provide for the indemnification of directors and officers in
connection with civil, criminal, administrative or investigative proceedings
when acting in their capacities as agents for us.
Our
results of operations may be affected by changing market prices and requirements
for dietary supplements.
Our
results of operations may be affected by changing resale prices or market
requirements for dietary supplements, some of which are priced on a commodity
basis. The sale price, and market demand for, these materials can be volatile
due to numerous factors beyond our control, which may cause significant
variability in its period-to-period results of operations.
Our
results of operations will fluctuate.
Our
revenues and results of operations will vary from quarter to quarter in the
future. A number of factors, many of which are outside of our control, may
cause
variations in our results of operations, including:
|
|
·
|
demand
and price for our products;
|
|
|
·
|
the
timing and recognition of product sales;
|
|
|
·
|
unexpected
delays in developing and introducing products;
|
|
|
·
|
unexpected
delays in manufacturing our products;
|
|
|
·
|
increased
expenses, whether related to marketing, product development or
administration or otherwise;
|
|
|
·
|
insufficient
demand in the marketplace could cause our distributors to return
product;
|
|
|
·
|
the
mix of revenues derived from products;
|
|
|
·
|
the
hiring, retention and utilization of personnel; and
|
|
|
·
|
general
economic factors.
|
We
may not succeed in our acquisition of additional
products.
As
part
of our growth strategy, we intend to acquire and develop additional product
candidates or approved products. The success of this strategy depends upon
our
ability to identify, select and acquire bioherbaceutical products that meet
the
criteria we have established. Any product candidate we acquire or license may
require additional research and development efforts prior to commercial sale,
including extensive pre-clinical and/or clinical testing. All product candidates
are prone to the risks of failure inherent in product development, including
the
possibility that the product candidate will not be safe, non-toxic and
effective. In addition, we cannot assure that any approved products that we
develop, acquire or license will be manufactured or produced economically;
successfully commercialized; widely accepted in the marketplace or that we
will
be able to recover our significant expenditures in connection with the
development, acquisition or license of such products. In addition, proposing,
negotiating and implementing an economically viable acquisition or license
is a
lengthy and complex process. Other companies, including those with substantially
greater financial, marketing and sales resources, may compete with us for the
acquisition or license of product candidates and approved products. We may
not
be able to acquire the rights to additional product candidates and approved
products on terms that we find acceptable, or at all. In addition, if we acquire
or license product candidates from third parties, we will be dependent on third
parties to supply such products to us for sale. We could be materially adversely
affected by the failure or inability of such suppliers to meet performance,
reliability and quality standards.
Other
companies may claim that we infringed upon their proprietary
rights.
We
do not
believe that our products or processes violate third-party intellectual property
rights. Nevertheless, there is no guarantee that such rights are not being,
and
will not be, violated. If any of the products or processes are found to violate
third-party intellectual property rights, we may be required to re-engineer
or
cause to be re-engineered one or more of those products or processes or seek
to
obtain licenses from third parties to continue offering its products or
processes without substantial re-engineering, and such efforts may not be
successful.
Our
non-U.S. sales present special risks.
A
subcontractor in London handles fulfillment and coordinates market development
for our products in the U.K. and continental Europe. We anticipate that sales
outside the U.S. will continue to account for a significant percentage of our
product sales and we intend to continue to expand our presence in international
markets. Non-U.S. sales are subject to a number of special risks. For example:
| |
·
|
sales
agreements may be difficult to enforce;
|
| |
·
|
receivables
may be difficult to collect through a foreign country’s legal
system;
|
| |
·
|
foreign
countries may impose additional withholding taxes or otherwise tax
foreign
income, impose tariffs or adopt other restrictions on foreign
trade;
|
| |
·
|
intellectual
property rights may be more difficult to enforce in foreign
countries;
|
| |
·
|
terrorist
activity or the outbreak of a pandemic disease may interrupt distribution
channels or adversely impact customers or employees;
and
|
| |
·
|
regulations
may change relating to dietary supplements that may negatively impact
the
ability to market products in those geographical
regions.
|
Any
of
these events could harm our operations or operating results.
Compliance
with changing regulation of corporate governance and public disclosure will
result in additional expenses.
Changing
laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002 and new Securities and
Exchange Commission regulations, are creating uncertainty for public companies.
Our management team will be required to invest significant management time
and
financial resources to comply with both existing and evolving standards for
public companies, which may lead to increased general and administrative
expenses and a diversion of management time and attention from revenue
generating activities to compliance activities.
It
is possible that there are claims of which we are unaware that may come to
light
in the future and cost us considerable time, effort and expense to
resolve.
It
is
possible that a claim, whether colorable or not, may be asserted against us
in
the future with respect to matters arising prior to the merger. There can be
no
assurance given that some person will not devise a claim and attempt to assert
it against us in the hopes of obtaining some monetary benefit. To resolve such
a
claim, including payment, may cost us considerable time, effort and expense.
Any
of these may impair management’s implementation of the business plan with the
consequence of a loss of opportunity.
Risks
Related to Our Common Stock
Because
our common stock is traded on the OTC Bulletin Board, your ability to sell
your
shares in the secondary trading market may be limited.
Our
common stock currently is traded on the over-the-counter market on the OTC
Bulletin Board. Consequently, the liquidity of our common stock is limited,
not
only in the number of shares that are bought and sold, but also through delays
in the timing of transactions, and coverage by security analysts and the news
media, if any, of us. As a result, prices for shares of our common stock may
be
lower than might otherwise prevail if our common stock was traded on a national
securities exchange, such as The New York Stock Exchange or The Nasdaq Stock
Market, LLC.
Our
common stock may be removed from the OTC Bulletin Board, which would likely
cause the trading price of our common stock to decline and affect our ability
to
raise capital in the future.
On
April
5, 2006, we received notice from the OTC Bulletin Board that unless we cured
our
delinquency in filing the Annual Report on Form 10-K for the year ended December
31, 2005 prior to the expiration of the grace period (May 5, 2006), our common
stock would be removed from the OTC Bulletin Board effective May 9, 2006. We
have cured this delinquency with the filing of our Annual Report on Form 10-K
filed on May 1, 2006. However, under applicable NASD Rules, if we are delinquent
in our reporting obligations three times in a 24-month period and/or are
actually removed from the OTC Bulletin Board for failure to file two times
in a
24-month period, in each case, we would be ineligible for quotation on the
OTC
Bulletin Board for a period of one year. To date, we have been delinquent one
time in the past 24-month period. Should quotation of our common stock on the
OTC Bulletin Board or a similar facility cease for any reason, the liquidity
of
our common stock and our ability to raise equity capital would likely
decrease.
Because
our shares are “penny stocks,” you may have difficulty selling them in the
secondary trading market.
Federal
regulations under the Exchange Act regulate the trading of so-called “penny
stocks,” which are generally defined as any security not listed on a national
securities exchange, priced at less than $5.00 per share and offered by an
issuer with limited net tangible assets and revenues. Since our common stock
currently trades on the OTC Bulletin Board at less than $5.00 per share, our
common stock is a “penny stock” and may not be traded unless a disclosure
schedule explaining the penny stock market and the risks associated therewith
is
delivered to a potential purchaser prior to any trade.
In
addition, because our common stock is not listed on any national securities
exchange and currently trades at less than $5.00 per share, trading in our
common stock is subject to Rule 15g-9 under the Exchange Act. Under this rule,
broker-dealers must take certain steps prior to selling a “penny stock,” which
steps include:
|
|
•
|
obtaining
financial and investment information from the investor;
|
|
|
•
|
obtaining
a written suitability questionnaire and purchase agreement signed
by the
investor; and
|
|
|
•
|
providing
the investor a written identification of the shares being offered
and the
quantity of the shares.
|
If
these
penny stock rules are not followed by the broker-dealer, the investor has no
obligation to purchase the shares. The application of these comprehensive rules
will make it more difficult for broker-dealers to sell our common stock and
our
shareholders, therefore, may have difficulty in selling their shares in the
secondary trading market.
Our
stock price has been and may continue to be volatile and an investment in our
common stock could suffer a decline in value.
Trading
of our common stock has been sporadic, and the trading volume has generally
been
low. Even a small trading volume on a particular day or over a few days may
affect the market price of our common stock. The market price of our common
stock may fluctuate significantly in response to a number of factors, some
of
which are beyond our control. These factors include:
|
|
•
|
announcements
of research activities and technology innovations or new products
by us or
our competitors;
|
|
|
•
|
changes
in market valuation of companies in our industry
generally;
|
|
|
•
|
variations
in operating results;
|
|
|
•
|
changes
in governmental regulations;
|
|
|
•
|
results
of research studies of our products or our competitors’
products;
|
|
|
•
|
regulatory
action or inaction on our products or our competitors’
products;
|
|
|
•
|
changes
in our financial estimates by securities analysts;
|
|
|
•
|
general
market conditions for companies in our industry;
|
|
|
•
|
broad
market fluctuations; and
|
|
|
•
|
economic
conditions in the United States or abroad.
|
Our
directors and executive officers own a significant number of shares of our
common stock to control our company, which could discourage or prevent a
takeover, even if an acquisition would be beneficial to our stockholders.
Certain
of our directors and our current executive officer own or control approximately
80% of our outstanding voting power. Accordingly, these stockholders,
individually and as a group, will able to influence the outcome of stockholder
votes, involving votes concerning the election of directors, the adoption or
amendment of provisions in our certificate of incorporation and bylaws and
the
approval of certain mergers or other similar transactions, such as a sale of
substantially all of our assets. Such control by existing stockholders could
have the effect of delaying, deferring or preventing a change in control of
us.
We
do not pay cash dividends, so any return on an investment must come from
appreciation.
We
do not
intend to pay any cash dividends in the foreseeable future and, therefore,
any
return on an investment in our common stock must come from increases in the
fair
market value and trading price of our common stock.
We
may issue additional equity securities that will dilute our stockholders.
We
may
issue additional equity securities to raise capital and through the exercise
of
options, warrants and convertible debt that is outstanding or may be
outstanding. These additional issuances will have a dilutive effect on our
existing stockholders.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
table
on the following pages set forth information regarding the beneficial ownership
of the common stock by:
|
|
•
|
Our
executive officers and directors;
|
|
|
•
|
All
directors and executive officers as a group;
and
|
|
|
•
|
Each
person known to us to beneficially own more than five percent (5%)
of our
outstanding shares of common stock.
|
The
information contained in these tables is as of September 18, 2006, following
the
merger. At that date, we had 108,567,080 shares of common stock outstanding.
Except as indicated, the persons named have sole voting and investment power
with respect to all shares shown as being beneficially owned by them. The
percentages in the table are rounded to the nearest tenth of a percent.
| |
Common
Stock (1)
|
|
Name
and Address of Stockholder
|
Amount
and Nature
of
Beneficial Ownership(2)
|
Percent
of Class (2)
|
| |
|
Directors
and Officers
|
|
|
|
Dr.
Agnes P. Olszewski
Herborium
Group, Inc.
3
Oak Street
Teaneck,
New Jersey 07666
|
44,811,063(3)
|
41.3%
|
|
Dr.
James P. Gilligan
985
Carteret Ave
Union,
New Jersey 07083
|
42,992,563(4))
|
39.6%
|
|
Max
G. Ansbacher
515
Madison Avenue, 29th Floor
New
York, NY 10022
|
434,268
|
*
%
|
|
Wayne
I. Danson
420
Lexington Avenue, Suite 2739
New
York, NY 10170
|
347,373(5)
|
*
%
|
| |
|
|
|
All
Directors and Officers as a Group
|
88,585,267
|
81.7%
|
*
Less
than 1 percent
|
(1)
|
The
holders of common stock are entitled to one vote per share.
|
|
(2)
|
The
number of shares of common stock and the percent of the class in
the table
and these notes to the table have been calculated in accordance with
Rule
13d-3 under the Exchange Act, and assume, on a stockholder by stockholder
basis, that each stockholder has converted all securities owned by
such
stockholder that are convertible into common stock at the option
of the
holder currently or within 60 days of September 18,
2006.
|
|
(3)
|
Includes
515,693 shares of common stock held by Dr. Olszewksi’s son who resides in
the same household.
|
|
(4)
|
Includes
434,268 shares of common stock held by Dr. Gilligan’s son who resides in
the same household.
|
|
(5)
|
Mr.
Danson’s shares were received as a distribution on his ACT common
stock.
|
DIRECTORS
AND EXECUTIVE OFFICERS
The
following table sets forth the names of our directors and executive officers,
their ages and the positions they currently hold. Each such person became an
officer and/or director of the company immediately after the closing of the
merger. The positions that Drs. Olszewski and Gilligan held with Herborium
prior
to the merger are described in the biographical information set forth below.
|
Name
|
Age
|
Position
|
|
|
|
|
|
Dr.
Agnes P. Olszewski
|
49
|
President,
Chief Executive Officer, Chief Financial Officer and
Director
|
|
|
|
|
|
Dr.
James P. Gilligan
|
54
|
Consultant
and Director
|
|
|
|
|
|
Max
G. Ansbacher
|
70
|
Director
|
|
|
|
|
|
Wayne
I. Danson
|
53
|
Director
|
| |
|
|
Dr.
Agnes Olszewski. Dr.
Olszewski is a co-founder
of Herborium, Inc. and has served as co-Chief Executive Officer and President
Business Development and director of Herborium, Inc. since its inception in
2000. She was appointed as our Chief Executive Officer, Acting Chief Financial
Officer and director concurrently with the closing of the merger. In addition,
concurrently with the closing of the merger, she was appointed director of
our
subsidiary Herborium. Until such time as we receive a minimum of $1,250,000
of
financing, Dr. Olszewski will not devote her full time to our company, and
will
continue to engage in her activities as a professor. Dr. Olszewski has over
20
years experience in business strategy, strategic marketing management and
international business. She holds M.A. in Consumer Psychology and Ph.D. degrees
from Warsaw University, Poland, and an M.B.A. degree from Fordham University,
New York City. Dr. Olszewski has been a consultant and a team leader on
strategic management and competitive marketing strategies for leading American
corporations, as well as foreign companies and institutions. In her capacity
as
an international consultant, she had lead multicultural negotiations and managed
diverse teams of professionals. She has also been responsible for developing
and
implementing business and marketing strategies in the United States and foreign
markets. After the collapse of communism in Central Europe, Dr. Olszewski formed
A&T Global Marketing Inc., one of the first consulting firms in the U.S.
focusing on the transfer of western management and financial know-how into
transitional economies. A&T Global Marketing was also involved in advising
American corporations on entry strategies into the emerging markets of Europe
and Asia. Dr. Olszewski has successfully led the efforts to form Joint Ventures
in Poland, China and France. She was President and Chief Executive Officer
of
G.O. International, Inc., which she co-founded with Dr. James P. Gilligan,
a
consulting firm specializing in business strategies for pharmaceutical industry
and global technology transfer. G.O. International merged with Herborium, Inc.
in June 2002.
Dr.
James P. Gilligan. Dr.
Gilligan is a co-founder of Herborium, Inc. and has served co-Chief Executive
Officer and President Product Development and director of Herborium, Inc. since
its inception in 2000. He was appointed as our director and as a director of
our
subsidiary Herborium concurrently with the closing of the merger. He is
currently providing consulting services to us and has agreed to serve on a
full-time basis as our President and Chief Operating Officer within six months
after we receive a minimum of $2,500,000 of financing. He has over 25 years
experience in the pharmaceutical and biotechnology industry. He received his
Ph.D. in Pharmacology and Toxicology from the University of Connecticut, during
which time he completed a special research fellowship at the Cleveland Clinic
Atherosclerosis Research Unit. He performed his post-doctoral training at the
Roche Institute of Molecular Biology. Dr. Gilligan is author or co-author of
15
U.S. patents, as well as multiple PCT patents and the author of numerous
scientific publications. He also received a M.S. in International Business
from
Seton Hall University. Dr. Gilligan is Vice President of Product Development
at
Unigene Laboratories Inc. Fairfield, NJ, a biopharmaceutical company. He was
a
founding member of Unigene in 1981 and participated in the design of its R&D
facility in 1983 and the cGMP biotechnology manufacturing facility in 1993.
His
responsibilities have included coordination of all U.S. and international
pre-clinical research, toxicology, and regulatory filings as well as design
and
management of clinical studies.
Max
G. Ansbacher.
Mr.
Ansbacher was appointed as our director and as a director of our subsidiary
Herborium concurrently with the closing of the merger. He is the principal
of
Ansbacher Investment Management, a management firm concentrating in
sophisticated options strategies. The firm currently manages over $158 million.
Prior to founding his firm, Mr. Ansbacher managed options accounts for the
investment banking firm Bear Stearns. He is the author of three books on
investing and his book The
New Options Market
is one
of the all-time best selling books on exchange traded options. Mr. Ansbacher
is
a graduate of Phillips Exeter Academy, the University of Vermont and Yale law
school. He also holds an advanced degree in tax law from New York University,
and is a member of the bar in New York, Vermont and the District of Columbia.
Wayne
I. Danson.
Mr. Danson was appointed as our director and as a director of our subsidiary
Herborium concurrently with the closing of the merger. Prior to the merger,
Mr.
Danson served as Chief Executive Officer and as a director of LW. Mr. Danson
has
served as the Chief Financial Officer of Advanced Communications Technologies,
Inc. since December 1, 1999 and was appointed a director on January 3, 2000,
President on April 30, 2002 and Chief Executive Officer on June 7, 2005. Mr.
Danson is the Managing Director and Founder of Danson Partners, LLC, a financial
advisory firm specializing in middle market companies in the real estate and
technology industries. Prior to forming Danson Partners, LLC in May 1999, Mr.
Danson was Managing Director of PricewaterhouseCoopers LLP's Real Estate Capital
Markets Group. Prior to rejoining PricewaterhouseCoopers in 1996, Mr. Danson
was
a Managing Tax Partner with Kenneth Leventhal & Company in New York and
Washington D.C., where he was also Kenneth Leventhal's National Director of
its
International and Debt Restructure Tax Practices. Prior to his involvement
with
Kenneth Leventhal in 1988, Mr. Danson was a Managing Director with Wolper Ross
& Co., Ltd. in New York, a closely-held financial services company
specializing in financial tax, pension consulting, designing financial
instruments and providing venture capital and investment banking services.
Mr.
Danson graduated with honors from Bernard M. Baruch College with a B.B.A. in
Accounting and an M.B.A. in Taxation. He is a certified public accountant and
a
member of the AICPA and the New York State Society of CPAs.
Concurrently
with the closing of the merger, the sole director of PMIC, John E. Donahue,
resigned from the Board of Directors, and Martin Nielson and Anthony Lee
resigned their respective positions as PMIC’s Chief Executive Officer and Chief
Financial Officer. Upon the closing of the merger, in accordance with the plans
of reorganization of PMIC and LW, Dr. Agnes P. Olszewski, Dr. James P. Gilligan,
Wayne I. Danson and Max G. Ansbacher became members of our Board of Directors.
We
intend
to obtain an additional board member who is “independent” as determined in
accordance with the applicable requirements of The Nasdaq Stock Market LLC
and
other applicable rules and regulations of the Securities and Exchange
Commission. Although we are in discussions with prospective candidates, no
candidate has been selected at this time. All directors will hold office until
the next annual meeting of stockholders and until their successors have been
elected and qualified. Officers serve at the discretion of the Board of
Directors.
Family
Relationships
There
are
no family relationships among our directors, executive officers or persons
nominated or chosen to become our directors or executive officers.
Involvement
in Certain Legal Proceedings
No
director, person nominated to become a director, executive officer, promoter
or
control person has been involved in any legal proceeding during the past five
years that is required to be disclosed pursuant to Item 401(f) of Regulation
S-K.
Board
Committees
We
do not
have an Audit Committee, and therefore we do not have an “audit committee
financial expert,” as such term is defined in Item 401(h) of Regulation S-K. The
Board of Directors believes that it is not necessary to have a standing audit
committees at this time because the functions of such committee are adequately
performed by the entire board.
EXECUTIVE
COMPENSATION
The
following table sets forth the compensation paid by PMIC to its Chief Executive
Officer, Martin Nielson, during each of PMIC’s last three fiscal years ended
December 31, 2003, 2004 and 2005. Mr. Nielson resigned as President of PMIC
on
July 19, 2006 and resigned as Chief Executive Officer effective on September
18,
2006. At the end of PMIC’s last completed fiscal year, PMIC did not have any
executive officer whose total annual salary and bonus exceeded
$100,000.
The
following also table sets forth the compensation Herborium paid to Drs. Agnes
P.
Olszewski and James P. Gilligan, its co-Chief Executive Officers and Presidents,
during Herborium’s last three fiscal years ended November 30, 2003, 2004 and
2005. Dr. Olszewski became our Chief Executive Officer and Acting Chief
Financial Officer on September 18, 2006, following the merger. On that date,
Dr.
Gilligan entered into a consulting agreement with us. At the end of Herborium’s
last completed fiscal year, Herborium did not have any executive officer whose
total annual salary and bonus exceeded $100,000.
Summary
Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
|
|
|
Other
Annual
|
|
|
Name
and Principal Position
|
|
Year
|
|
|
Salary
|
|
|
Bonus
|
|
|
Compensation(1)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Martin
Nielson
Former
Chief Executive of PMIC
|
|
|
2005
2004
2003
|
|
|
|
$41,250
$0
$0
|
|
|
|
—
|
|
|
|
—
|
|
|
Dr.
Agnes P. Olszewski
Chief
Executive Officer
and
Acting Chief Financial Officer;
(
Former co-CEO/President of Herborium
|
|
|
2005
2004
2003
|
|
|
|
$0
$0
$0
|
|
|
|
—
|
|
|
|
—
|
|
|
Dr.
James P. Gilligan
Consultant
Former
co-CEO/President of Herborium
|
|
|
2005
2004
2003
|
|
|
|
$0
$0
$0
|
|
|
|
—
|
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
None of our executive officers received personal benefits or perquisites in
excess of the lesser of $50,000 or 10% of his aggregate salary and bonus.
Option
Grants in Last Fiscal Year
No
options were granted to any of the individuals named in the Summary Compensation
Table during fiscal year 2005.
Aggregated
Option Exercises in Fiscal 2005 and FY-End Option
Values
None
of
the individuals named in the Summary Compensation Table held any options to
purchase our common stock or the common stock of Herborium, Inc. as of November
30, 2005.
Long
Term Incentive Plans
We
have
no long-term incentive plans for our executive officers.
Equity
Compensation Plan Information
Following
the consummation of the merger, we had no equity compensation plans under which
equity securities are authorized for issuance.
Director
Compensation
Our
directors do not receive any cash compensation for their service on the Board
of
Directors. Our directors are reimbursed for actual out-of-pocket expenses
incurred by them in connection with their attendance at meetings of the Board
of
Directors.
Employment
Agreements
Agreement
with Dr. Agnes P. Olszewski
On
September 18, 2006 we entered into an employment agreement with Dr. Olszewski
who will serve as President, Chief Executive Officer and Acting Chief Financial
Officer until such time as we hire a controller or Chief Financial Officer.
Dr.
Olszewski will have the position of Chairman of the Board of Directors. The
employment agreement will provide for an initial four-year term of employment,
with an addition twelve-month extension at Dr. Olszewski’s option. Under the
agreement, Dr. Olszewski is not required to work full-time until such time
as we
have received debt or equity financing in an aggregate of amount of
$1,250,000.00 or more. Until we obtain such amount of financing, Dr. Olszewski
will receive 75% of her base salary. Her annual base salary is $200,000 with
a
bonus equal to (i) for the first three years, 5% of EBITDA (as defined in the
agreement) and (ii) thereafter 5% of Net Income before bonus (as defined in
the
agreement). She will be eligible for an additional bonus ranging from $75,000
to
$200,000 in the event that our Pre-Tax Income for a fiscal year exceeds that
of
the prior fiscal year by 150% or more. Under the employment agreement,. Dr.
Olszewski will be an eligible participant under one or more stock option plans
adopted by us. Dr. Olszewski will be subject to non-competition provisions
during the term of the agreement or until September 30, 2012 in the event that
she extends the agreement for the additional twelve month period. Dr.
Olszewski’s employment may be terminated in the event of extended disability or
incapacity or a “For Cause Event” as defined in the agreement. Dr. Olszewski may
terminate her employment voluntarily with 180 days prior written notice, upon
our material breach of the agreement with 10 days prior written notice and
upon
a “Change of Control” as defined in the agreement upon 90 days prior written
notice. In the event of her termination, Dr. Olszewski or her beneficiary,
as
the case may be, will have the right to receive all accrued but unpaid base
salary. In the event of her death, her termination based on a material breach
by
us or our termination of her for any reason other than a For Cause Event, she
will be entitled to receive $600,000. In the event of her termination for or
after a Change of Control, she will be entitled to receive an amount equal
to
the product of her base salary multiplied by 2.99. After (i) the expiration
of
the term (including an extension of one year by Dr. Olszewski) or (ii) her
voluntary termination of the employment agreement, Dr. Olszewski may, at her
or
our option in the case of clause (i) or at our option in the case of clause
(ii), act as a consultant to us for one year and receive compensation equal
to
50% of her base salary.
Agreement
with Dr. James P. Gilligan
On
September 18, 2006 we entered into a consulting and employment agreement with
Dr. Gilligan who will serve as co-President and Chief Operating Officer. The
agreement provides for an initial term of employment expiring on September
20,
2011, with an addition twelve-month extension at Dr. Gilligan’s option. Under
the agreement, Dr. Gilligan’s employment will not commence until six months
after we have received debt or equity financing in the aggregate amount of
$2,500,000.00, and until such date, Dr. Gilligan will serve as a consultant
to
us at an hourly rate of $120.00 per hour and will be permitted to continue
his
full-time employment elsewhere. Upon his full-time employment, his annual base
salary will be $200,000 with a bonus equal to (i) for the first three years,
5%
of EBITDA (as defined in the agreement) and (ii) thereafter 5% of Net Income
before bonus (as defined in the agreement. He will be eligible for an additional
bonus ranging from $75,000 to $200,000 in the event that our Pre-Tax Income
for
a fiscal year exceeds that of the prior fiscal year by 150% or more. Under
the
employment agreement, Dr. Gilligan will be an eligible participant under one
or
more stock option plans adopted by us. Dr. Gilligan will be subject to
non-competition provisions during the term of the agreement or until September
30, 2012 in the event that he extends the agreement for the additional
twelve-month period. Dr. Gilligan’s employment may be terminated in the event of
extended disability or incapacity or a “For Cause Event” as defined in the
agreement. Dr. Gilligan may terminate his employment voluntarily with 180 days
prior written notice, upon our material breach of the agreement with 10 days
prior written notice and upon a “Change of Control” as defined in the agreement
upon 90 days prior written notice. In the event of his termination, Dr. Gilligan
or his beneficiary, as the case may be, will have the right to receive all
accrued but unpaid base salary. In the event of his death, his termination
based
on a material breach by us or our termination of him for any reason other than
a
For Cause Event, he will be entitled to receive $600,000. In the event that
his
employment is terminated for or after a Change of Control, he will be entitled
to receive an amount equal to the product of his base salary multiplied by
2.99.
After (i) the expiration of the term (including an extension of one year by
Dr.
Gilligan) or (ii) his voluntary termination of the employment agreement, Dr.
Gilligan may, at his or our option in the case of clause (i) or at our option
in
the case of clause (ii), act as a consultant to us for one year and receive
compensation equal to 50% of his base salary.
Compensation
Committee Interlocks and Insider Participation
We
do not
currently have a Compensation Committee. Instead the entire Board of Directors
makes executive officer compensation decisions. Prior to the merger, Herborium,
Inc. had no compensation committee. See Certain
Relationships and Related Transactions
below
for more information about related party transactions involving Drs. Olszewski
and Gilligan.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Financing
of Herborium’s operations prior to the merger were provided by equity
investments and loans from our founders, Drs. Olszewski and Gilligan, of
approximately $380,000, funding from friends and family of approximately
$125,500, a revolving credit facility and cash generated by our gross profit
from sales.
LEGAL
PROCEEDINGS
There
are
no material pending legal proceedings, other than ordinary routine litigation
incidental to the business, to which we are party.
DESCRIPTION
OF SECURITIES
Our
total
authorized capital stock consists of 500,000,000 shares of common stock, par
value $.001 per share and 5,000,000 shares of preferred stock, par value $.001
per share. After the closing of the reverse merger, 108,567,080 shares of common
stock were to be issued and outstanding. Prior to the closing of the reverse
merger, all outstanding shares of the 4% Series A Convertible Preferred Stock
of
the Company were converted to 800,000 shares of our common stock. In conjunction
with the merger, we eliminated the designation of the 4% Series A Redeemable
Convertible Preferred Stock from our articles of incorporation as no shares
of
such series of preferred stock were issued and outstanding.
The
following description of our capital stock does not purport to be complete
and
is subject to and qualified by our Articles of Incorporation and By-laws, and
by
the provisions of applicable Nevada law.
Common
Stock
Holders
of our common stock are entitled to one vote for each share owned for all
matters to be voted on by the stockholders. Holders of the common stock are
entitled to receive dividends as may be declared from time to time by the Board
of Directors, and in the event of any liquidation, dissolution, or winding
up of
the affairs of the Company, are entitled to receive a pro rata share of any
assets of the corporation legally available for distribution after payment
of
liquidation preferences, if any, on any outstanding stock having prior rights
on
such distributions and payment of other claims of creditors. There are no
redemption or sinking fund provisions applicable to our common stock. The rights
of the holders of our common stock are subject to any rights that may be fixed
for the holders of preferred stock, if and when any preferred stock is issued.
Our common stock currently outstanding is validly issued, fully paid and
nonassessable.
Preferred
Stock
Our
Articles of Incorporation authorize the issuance of shares of preferred stock
in
one or more series. Our Board of Directors has the authority, without any vote
or action by the stockholders, to create one or more series of preferred stock
up to the limit of our authorized but unissued shares of preferred stock and
to
fix the number of shares constituting such series and the designation of such
series, the voting powers (if any) of the shares of such series and the relative
participating, option or other special rights (if any), and any qualifications,
preferences, limitations or restrictions pertaining to such series which may
be
fixed by the Board of Directors pursuant to a resolution or resolutions
providing for the issuance of such series adopted by the Board of Directors.
The
provisions of a particular series of authorized preferred stock, as designated
by the Board of Directors, may include restrictions on the payment of dividends
on common stock. Such provisions may also include restrictions on our ability
to
purchase shares of common stock or to purchase or redeem shares of a particular
series of authorized preferred stock. Depending upon the voting rights granted
to any series of authorized preferred stock, issuance thereof could result
in a
reduction in the voting power of the holders of common stock. In the event
of
our dissolution, liquidation or winding up, the holders of the preferred stock
will receive, in priority over the holders of common stock, a liquidation
preference established by the Board of Directors, together with accumulated
and
unpaid dividends. Depending upon the consideration paid for authorized preferred
stock, the liquidation preference of authorized preferred stock and other
matters, the issuance of authorized preferred stock could result in a reduction
in the assets available for distribution to the holders of common stock in
the
event of our liquidation.
MARKET
PRICE OF AND DIVIDENDS ON THE REGISTRANT’S
COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
Our
common stock is presently traded on the Over-the-Counter Bulletin Board under
the symbol PMICQ.OB. The following table shows the high and low sale prices
for
2004, 2005 and the first and second quarter of 2006 in dollars per share as
reported by the OTC Bulletin Board. These prices may not be the prices that
you
would sell or would pay to purchase a share of our common stock during the
periods shown.
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
First
Quarter
|
$
|
0.15
|
|
$
|
0.05
|
|
|
Second
Quarter
|
|
0.07
|
|
|
0.02
|
|
|
Third
Quarter
|
|
0.06
|
|
|
0.03
|
|
|
Fourth
Quarter
|
|
0.03
|
|
|
0.02
|
|
|
Fiscal
Year Ended December 31, 2004
|
|
|
|
|
|
|
|
First
Quarter
|
$
|
0.15
|
|
$
|
0.06
|
|
|
Second
Quarter
|
|
0.07
|
|
|
0.04
|
|
|
Third
Quarter
|
|
0.10
|
|
|
0.04
|
|
|
Fourth
Quarter
|
|
0.15
|
|
|
0.04
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
First
Quarter Ended March 31, 2006
|
$
|
0.03
|
|
$
|
0.02
|
|
|
Second
Quarter Ended June 30, 2006
|
|
0.05
|
|
|
0.02
|
|
|
As
of September 18, 2006
|
$
|
0.03
|
|
$
|
0.03
|
|
The
number of holders of record for our common stock immediately after giving effect
to the merger was approximately 600.
Dividend
Policy
We
have
not paid and have no plan to pay dividends on our common stock.
RECENT
SALES OF UNREGISTERED SECURITIES
In
accordance with the PMIC plan of reorganization and in connection with the
merger, we will issue 6,580,762 shares of our common stock to the holders of
PMIC common stock, including the former holders of PMIC’s 4% Series A
Convertible Preferred Stock in exchange for their respective claims as existing
shareholders of PMIC. The issuance of these shares of our common stock
constituted an offer of securities within the purview of § 1145(a) of the
Bankruptcy Code and, therefore, was not subject to the registration requirements
of the Securities Act of 1933, as amended (the “Securities Act”), or state or
local law. None of the recipients of these shares will be deemed an underwriter
as specified in Section 1145(a) of the Bankruptcy Code.
In
addition, under the PMIC plan of reorganization and in connection with the
merger, we issued 7,454,300 shares of our common stock directly to the
stockholders of ACT, partly in exchange for ACT’s claims and partly in exchange
for the payment of $50,000 in cash by ACT. Further, 2,250,000 shares of our
common stock are being held in escrow: 1,750,000 shares for Mr. Li and Ms.
Lee
pursuant to terms of a settlement agreement and 500,000 shares for certain
unexpired common stock option and warrant grants. The issuance of shares of
our
common stock to stockholders of ACT constituted an offer of securities within
the purview of § 1145(a) of the Bankruptcy Code and was not be subject to the
registration requirements of the Securities Act or state or local law. None
of
the recipients of these shares will be deemed an underwriter as specified in
Section 1145(a) of the Bankruptcy Code.
In
connection with the merger, we issued 92,282,018 shares of our common stock
to
the stockholders of Herborium in exchange for all of the issued and outstanding
common stock of Herborium. The issuance of these shares was made in reliance
upon the exemption from the registration requirements of the Securities Act
set
forth in Rule 506 of Regulation D, promulgated under the Securities Act, and
corresponding provisions of state securities laws, which exempts transactions
by
an issuer not involving any public offering. Accordingly, such shares are
“restricted securities” and may not be offered or sold in the United States
absent registration or an applicable exemption from registration requirements
under the Securities Act.
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
Our
articles of incorporation eliminate the personal liability of directors and
officers to us and our stockholders for monetary damages for breach of fiduciary
duty as a director or officer. Under our articles of incorporation, we also
will
indemnify and pay the expenses of any person who is or was made, or threatened
to be made, a party to an action or proceeding by reason of the fact that such
person is or was a director or officer of the company or is or was serving
at
the request or with the prior approval of the company as a director or officer
of another corporation, against any liability asserted against such person
and
incurred by such person in any capacity arising out of that person's status
as
such. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
company pursuant to the foregoing, or otherwise, we have been advised that
the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. If 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 the company in the successful defense of any action,
suit
or proceeding) is asserted by such director, officer or controlling person
in
connection with any securities being registered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit
to a
court of appropriate jurisdiction the question whether such indemnification
by
us is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
Item
3.02. Unregistered Sales of Equity Securities.
Reference
is made to the disclosure made under Items 1.01 and 2.01 of this Current Report
on Form 8-K, which is incorporated herein by reference.
Item
3.03 Material
Modification to Rights of Security Holders.
Reference
is made to the disclosure made under Items 1.01 and 2.01 of this Current Report
on Form 8-K, which is incorporated herein by reference.
Item
5.01 Changes
in Control of Registrant.
As
described in more detail under Item 2.01 of this Current Report on Form 8-K,
which is incorporated herein by reference, as a result of the merger, a change
in control of PMIC has occurred.
Item
5.02 Departures
of Directors or Principal Officers; Election
of Directors; Appointment of Principal Officers
Concurrently
with the closing of the merger, the sole director of PMIC, John E. Donahue,
resigned from the Board of Directors, and Martin Nielson and Anthony Lee
resigned their respective positions as PMIC’s Chief Executive Officer and Chief
Financial Officer. Upon the closing of the merger, in accordance with the plans
of reorganization of PMIC and LW, Dr. Agnes P. Olszewski, Dr. James P. Gilligan,
Wayne I. Danson and Max G. Ansbacher became members of our Board of Directors.
Upon the closing of the merger and in accordance with the plans of
reorganization of PMIC and LW, Dr. Agnes P. Olszewski became our President,
Chief Executive Officer and Acting Chief Financial Officer until a full time
Chief Financial Officer or comptroller is appointed, and we entered into a
consulting/employment agreement with Dr. James P. Gilligan. Until such time
as
we obtain financing of a minimum of $1,500,000, Dr. Olszewski will not devote
her full time to our company and will continue her activities as a professor.
Within six months after we obtain financing of $2,500,000, Dr. Gilligan has
agreed to join us as our Co-President and Chief Operating Officer.
For
certain biographical and other information regarding the newly appointed
officers and directors, see the disclosure under the heading Directors
and Executive Officers
under
Item 2.01 of this Current Report on Form 8-K, which is incorporated herein
by
reference
Item
5.03 Amendments
to Articles of Incorporation or Bylaws; Change in Fiscal
Year.
In
connection with the consummation of the merger, PMIC amended and restated its
Articles of Incorporation. The following summary of the changes to the Articles
of Incorporation is qualified in its entirety by reference to the Second Amended
and Restated Articles of Incorporation that is filed as Exhibit 3(i) to this
Current Report on Form 8-K.
|
|
•
|
|
PMIC
increased its authorized shares of common stock from 25,000,000 to
500,000,000
.
|
|
|
•
|
|
PMIC
changed its fiscal year end from December 31 to November
30.
|
|
|
•
|
|
PMIC
changed its name to Herborium Group,
Inc.
|
|
|
•
|
|
PMIC
effected the cancellation of its pre-merger issued and outstanding
shares
of common stock in exchange for the issuance of new post-merger shares
of
common stock.
|
| |
|
|
|
| |
Ÿ
|
|
PMIC
deleted references to its incorporator and the member of its Board
of
Directors initially named upon its incorporation.
|
| |
|
|
|
| |
Ÿ
|
|
PMIC
corrected the name of its resident agent in
Nevada.
|
Effective
as of the merger, PMIC adopted Amended and Restated Bylaws that update and
supersede in their entirety PMIC’s existing Bylaws. The Amended and Restated
Bylaws are filed as Exhibit 3(ii) to this Current Report on Form 8-K.
Effective
concurrently with the close of the merger, our fiscal year was changed from
December 31 to November 30. We will account for the transaction
contemplated in the Merger Agreement as a “reverse merger.” Because reverse
merger accounting dictates that the historical financial statements of Herborium
are now our financial statements, we will not file a transition report. Exhibit
99.1 to this Current Report on Form 8-K includes Herborium’s annual financial
statements for the years ended November 30, 2004 and 2005. Our next Annual
Report on Form 10-K will cover the complete 12-month period ended November
30,
2006.
Item
5.06 Change
in Shell Company Status.
Reference
is made to the disclosure set forth under Item 2.01 of this Current Report
on Form 8-K, which disclosure is incorporated herein by
reference.
Item
9.01. Financial
Statements and Exhibits.
(a)
Financial Statements of Businesses Acquired.
Filed
as
Exhibit 99.1 to this Current Report on Form 8-K are the audited financial
statements of Herborium, Inc. for the fiscal years ended November 30, 2004
and
2005.
Filed
as
Exhibit 99.2 to this Current Report on Form 8-K are the unaudited financial
statements of Herborium, Inc. for the six months ended May 31, 2006.
(b)
Pro
Form Financial Information.
Not
applicable.
(c)
Press
Release
A
copy of
the press release issued by PMIC announcing the merger is furnished with
this
Current Report as Exhibit 99.3.
(d)
Exhibits.
|
Exhibit
Number
|
|
Description
|
|
2.1
|
|
Fourth
Amended Plans of Reorganization for Pacific Magtron International
Corp.
and LiveWarehouse, Inc. (incorporated by reference to Exhibit 2.1
to
Pacific Magtron International Corp.’s Current Report on Form 8-K filed on
August 16, 2006).
|
|
2.2
|
|
Order
Approving Fourth Amended Plans of Reorganization for Pacific Magtron
International Corp. and LiveWarehouse, Inc. entered August 11, 2006
(incorporated by reference to Exhibit 2.2 to Pacific Magtron International
Corp.’s Current Report on Form 8-K filed on August 16,
2006).
|
|
2.3
|
|
Agreement
and Plan of Merger, dated as of September 18, 2006, by and among
Pacific
Magtron International Corp., LiveWarehouse, Inc. and Herborium,
Inc.
|
|
3(i)
|
|
Second
Amended and Restated Articles of Incorporation of Pacific Magtron
International Corp.
|
|
3(ii)
|
|
Amended
and Restated Bylaws of Pacific Magtron International
Corp.
|
|
10.1
|
|
Order
Approving Settlement Agreement and Mutual Settlement Agreement and
Release
(incorporated by reference to Exhibit 10.1 to Pacific Magtron
International Corp.’s Current Report on Form 8-K filed on August
16,2006).
|
|
10.2*
|
|
Employment
Agreement dated as of September 18, 2006 between Pacific Magtron
International Corp. and Dr. Agnes P. Olszewski
|
|
10.3*
|
|
Employment
Agreement dated as of September 18, 2006 between Pacific Magtron
International Corp. and Dr. James P. Gilligan
|
|
99.1
|
|
Audited
Financial Statements of Herborium, Inc. for the fiscal years ended
November 30, 2004 and 2005
|
|
99.2
|
|
Unaudited
Financial Statements of Herborium, Inc. for the six-month interim
period
ended May 31, 2006
|
|
99.3
|
|
Press
Release
|
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
| |
PACIFIC
MAGTRON INTERNATIONAL CORP.
|
| |
|
|
Dated:
September 22, 2006
|
By:/s/
Agnes P. Olszewski
|
| |
Dr.
Agnes P. Olszewski
|
| |
Chief
Executive Officer
|
EXHIBIT
INDEX
|
Exhibit
Number
|
|
Description
|
|
2.1
|
|
Fourth
Amended Plans of Reorganization for Pacific Magtron International
Corp.
and LiveWarehouse, Inc. (incorporated by reference to Exhibit 2.1
to
Pacific Magtron International Corp.’s Current Report on Form 8-K filed on
August 16, 2006).
|
|
2.2
|
|
Order
Approving Fourth Amended Plans of Reorganization for Pacific Magtron
International Corp. and LiveWarehouse, Inc. entered August 11, 2006
(incorporated by reference to Exhibit 2.2 to Pacific Magtron International
Corp.’s Current Report on Form 8-K filed on August 16,
2006).
|
|
2.3
|
|
Agreement
and Plan of Merger, dated as of September 18, 2006, by and among
Pacific
Magtron International Corp., LiveWarehouse, Inc. and Herborium,
Inc.
|
|
3(i)
|
|
Second
Amended and Restated Articles of Incorporation of Pacific Magtron
International Corp.
|
|
3(ii)
|
|
Amended
and Restated Bylaws of Pacific Magtron International
Corp.
|
|
10.1
|
|
Order
Approving Settlement Agreement and Mutual Settlement Agreement and
Release
(incorporated by reference to Exhibit 10.1 to Pacific Magtron
International Corp.’s Current Report on Form 8-K filed on August
16,2006).
|
|
10.2*
|
|
Employment
Agreement dated as of September 18, 2006 between Pacific Magtron
International Corp. and Dr. Agnes P. Olszewski
|
|
10.3*
|
|
Employment
Agreement dated as of September 18, 2006 between Pacific Magtron
International Corp. and Dr. James P. Gilligan
|
|
99.1
|
|
Audited
Financial Statements of Herborium, Inc. for the fiscal years ended
November 30, 2004 and 2005
|
|
99.2
|
|
Unaudited
Financial Statements of Herborium, Inc. for the six-month interim
period
ended May 31, 2006
|
|
99.3
|
|
Press
Release
|