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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-QSB
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2004.
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____ to _____
Commission file number: 000-30997
Astralis Ltd.
(Exact name of small business issuer as specified in its charter)
Delaware 84-1508866
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
75 Passaic Avenue
Fairfield, New Jersey 07004
(Address of principal executive offices)
(973) 227-7168
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 72,998,055 shares of Common
Stock outstanding as of May 13, 2004.
Transitional Small Business Disclosure Format (check one):
Yes |_| No |X|
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ASTRALIS LTD.
INDEX
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
Part I. Financial Information 3
Item 1. Condensed Balance Sheets 3
Condensed Statements of Operations (unaudited) 4
Condensed Statements of Cash Flows (unaudited) 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of Operations 10
Item 3. Controls and Procedures 12
Risk Factors 12
Part II. Other Information 16
Item 2. Changes in Securities and Small Business Issuer Purchases of
Equity Securities 17
Item 6. Exhibits and Reports on Form 8-K 17
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASTRALIS LTD.
(A Development Stage Entity)
Condensed Balance Sheets
ASSETS
March 31, December 31,
2004 2003
------------ ------------
(Unaudited)
Current Assets
Cash and cash equivalents $ 708,223 $ 10,660
Marketable securities 4,709,681 1,374,174
Prepaid expense - related party 755,625 1,007,500
Prepaid expenses and supplies 184,794 171,939
------------ ------------
Total Current Assets 6,358,323 2,564,273
Intangible Assets, Net - Related Party 3,333,328 3,511,900
Other Intangible Assets, Net 109,973 94,640
Property and Equipment, Net 261,890 293,049
Deposits 29,953 29,953
------------ ------------
$ 10,093,467 $ 6,493,815
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 633,760 $ 279,506
------------ ------------
Total Current Liabilities 633,760 279,506
------------ ------------
Commitments and Contingencies
Stockholders' Equity
Convertible preferred stock, Series A, $.001 par value;
3,000,000 shares authorized at 2004 and 2003; 0 and 2,000,000
issued and outstanding at 2004 and 2003, respectively
(liquidation preference - $0 and $22,122,600 at 2004 and 2003) -- 2,000
Common stock; $.0001 par value; 150,000,000 shares authorized
at 2004 and 2003; 72,998,055 and 37,538,189 issued and
outstanding at 2004 and 2003, respectively 7,300 3,754
Additional paid-in capital 51,633,776 35,929,864
Deferred compensation (3,453) (4,822)
Common stock subscriptions receivable (12,000) (24,000)
Accumulated other comprehensive loss (3,154) (27,698)
Deficit accumulated in the development stage (42,162,762) (29,664,789)
------------ ------------
Total Stockholders' Equity 9,459,707 6,214,309
------------ ------------
$ 10,093,467 $ 6,493,815
============ ============
The accompanying notes are an integral part of these condensed financial
statements.
3
ASTRALIS LTD.
(A Development Stage Entity)
Condensed Statements of Operations
(Unaudited)
Three Months Ended March 31, March 12, 2001
----------------------------- (Inception) to
2004 2003 March 31, 2004
------------ ------------ --------------
Revenues $ -- $ -- $ --
------------ ------------ ------------
Operating Expenses
Research and development - related party 430,447 430,447 12,189,869
Research and development 900,694 731,058 4,180,262
Depreciation and amortization 7,510 31,549 50,131
General and administrative 421,898 318,769 3,938,508
------------ ------------ ------------
Total Operating Expenses 1,760,549 1,511,823 20,358,770
------------ ------------ ------------
Loss From Operations (1,760,549) (1,511,823) (20,358,770)
Investment Income 12,576 37,109 193,122
------------ ------------ ------------
Loss Before Income Tax Benefit (1,747,973) (1,474,714) (20,165,648)
Income Tax Benefit -- -- 221,636
------------ ------------ ------------
Net Loss (1,747,973) (1,474,714) (19,944,012)
Preferred Stock Dividends (10,750,000) -- (22,218,750)
------------ ------------ ------------
Net Loss to Common Stockholders $(12,497,973) $ (1,474,714) $(42,162,762)
============ ============ ============
Basic and Diluted Loss per Common Share $ (0.19) $ (0.04) $ (1.13)
============ ============ ============
Basic and Diluted Weighted Average Common Shares
Outstanding 64,861,411 37,575,404 37,335,293
============ ============ ============
The accompanying notes are an integral part of these condensed financial
statements.
4
ASTRALIS LTD.
(A Development Stage Entity)
Condensed Statements of Cash Flows
(Unaudited)
Three Months Ended March 31, March 12, 2001
----------------------------- (Inception) to
2004 2003 March 31, 2004
------------ ------------ --------------
Cash Flows from Operating Activities
Net loss $ (1,747,973) $ (1,474,714) $(19,944,012)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 214,792 210,121 1,909,641
Amortization of net premium paid on investments -- 2,978 54,551
Dividends reinvested (25,489) (11,586) (107,593)
Members' contributed salaries -- -- 12,986
Research and development service fee netted against
proceeds received from preferred stock issuance -- -- 5,015,000
Operating expenses paid by related parties on
behalf of Company -- -- 17,587
Amortization of deferred compensation 1,369 3,345 194,036
Investor relations fee netted against subscription receivable 12,000 -- 48,000
Compensatory common stock -- -- 135,000
Loss on sale of marketable securities 14,336 -- 45,240
Changes in assets and liabilities
Prepaid expenses 276,135 250,246 (816,267)
Interest receivable -- (3,263) --
Supplies (37,115) (5,802) (124,152)
Deposits -- -- (29,953)
Accounts payable and accrued expenses 339,377 (5,799) 601,453
------------ ------------ ------------
Net Cash Used in Operating Activities (952,568) (1,034,474) (12,988,483)
------------ ------------ ------------
Cash Flows from Investing Activities
Purchases of marketable securities (3,800,010) (1,665,997) (13,358,181)
Proceeds from sale of marketable securities 500,200 160,000 8,653,146
Expenditures related to patent (1,868) (1,113) (69,304)
Purchases of property and equipment (3,647) (27,147) (497,621)
------------ ------------ ------------
Net Cash Used in Investing Activities (3,305,325) (1,534,257) (5,271,960)
------------ ------------ ------------
Cash Flows from Financing Activities
Repurchase of common stock -- -- (80,000)
Proceeds from stock subscription receivable -- 232,315 1,290,000
Issuance of common stock, net of offering and transaction costs 4,955,456 -- 7,826,170
Issuance of preferred stock, net of research and development
service fee, technology option and costs of offering -- 2,480,000 9,932,496
------------ ------------ ------------
Net Cash Provided by Financing Activities 4,955,456 2,712,315 18,968,666
------------ ------------ ------------
Net Increase in Cash and Cash Equivalents 697,563 143,584 708,223
Cash and Cash Equivalents, Beginning of Period 10,660 227,193 --
------------ ------------ ------------
Cash and Cash Equivalents, End of Period $ 708,223 $ 370,777 $ 708,223
============ ============ ============
The accompanying notes are an integral part of these condensed financial
statements.
5
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements
NOTE 1 - BASIS OF PRESENTATION
The unaudited condensed financial statements included herein have been prepared
by Astralis, Ltd. (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. The financial statements
reflect all adjustments that are, in the opinion of management, necessary to
fairly present such information. All such adjustments are of a normal recurring
nature. Although the Company believes that the disclosures are adequate to make
the information presented not misleading, certain information and footnote
disclosures, including a description of significant accounting policies normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America, have been
condensed or omitted pursuant to such rules and regulations.
These financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's 2003 Annual Report on
Form 10-KSB filed with the Securities and Exchange Commission. The results of
operations for interim periods are not necessarily indicative of the results for
any subsequent quarter or the entire fiscal year ending December 31, 2004.
Stock Based Compensation
On April 4, 2003, the Company granted stock-based director compensation options
to one member of the Board of Directors. The Company accounts for those options
under the recognition and measurement principles of Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. No stock-based director compensation cost is included in net
loss, as all the options granted had an exercise price equal to the market value
of the stock on the date of grant. The following table illustrates the effect on
net loss and earnings per share if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," to stock-based compensation.
Three Months Ended March 31,
-----------------------------
2004 2003
------------ ------------
Net loss to common stockholders, as reported $(12,497,973) $ (1,474,714)
Add: Stock-based employee/ director compensation
included in reported net loss -- --
Deduct: Total stock-based employee/director compensation
expense under the fair value based method for all awards,
net of tax (3,914) --
------------ ------------
Pro forma net loss $(12,501,887) $ (1,474,714)
============ ============
Loss per share basic and diluted - as reported (.19) (.04)
Loss per share basic and diluted - pro forma (.19) (.04)
Shares used in basic and diluted loss per share amounts 64,861,411 37,575,404
============ ============
6
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements
NOTE 2 - DESCRIPTION OF BUSINESS
Nature of Operations
Astralis Ltd. is an emerging biotechnology company based in New Jersey and
engaged primarily in the research and development of novel treatments for immune
system disorders and skin diseases. The Company is currently developing two
products. Its primary product, Psoraxine, is an innovative immunotherapeutic
agent under development for the treatment of psoriasis. This product is in Phase
II clinical trials in the U.S. The Company's second product is for the treatment
of leishmaniasis.
NOTE 3 - GOING CONCERN
Pharmaceutical products must undergo an extensive process, including testing in
compliance with U.S. Food and Drug Administration ("FDA") regulations, before
they can be commercially sold and distributed in the United States. FDA testing
occurs in various phases over several years. The Company commenced clinical
testing of Psoraxine in the third quarter of 2003. The Company will need
significant additional funds to complete all of the testing required by the FDA.
Currently, the Company has no products approved for commercial sale and
therefore no means to generate revenue. These conditions raise substantial doubt
about the Company's ability to continue as a going concern.
Management estimates that its current cash and marketable securities held at
March 31, 2004, will be needed in order to finance the Company's currently
anticipated needs for operating and capital expenditures through the second
quarter of 2005, including the cost to complete Phase II of the FDA testing
process for Psoraxine. The Company will also need to raise significant
additional funds from outside sources in future years in order to complete
future phases of FDA required testing.
The Company's ability to adhere to its current business plan is dependent upon
raising capital through debt and equity financing. There can be no assurance
that the Company will successfully raise the required future financing on terms
desirable to the Company or that the FDA will approve Psoraxine for use in the
United States. If the Company does not obtain the needed funds, it will likely
be required to delay development of its products, alter its business plan, or in
the extreme situation, cease operations.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. Continuing as a going concern is dependent
upon successfully obtaining additional working capital as described above. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets and amounts
and classifications of liabilities that might result from the outcome of this
uncertainty.
NOTE 4 - MARKETABLE SECURITIES
The Company's marketable equity securities consisted of certificates of deposit
and mutual funds that have a readily determinable fair market value. Management
determines the appropriate classification of its investments using Statement of
Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" at the time of purchase, and
re-evaluates such determinations at each balance sheet date.
The securities reflected in these financial statements are deemed by management
to be "available-for-sale" and, accordingly, are reported at fair value, with
unrealized gains and losses reported in other comprehensive income and reflected
as a separate component within the Stockholders' Equity section of the balance
sheets. Realized gains and losses on securities available-for-sale are included
in other income/expense and, when applicable, are reported as a reclassification
adjustment, net of tax, in other comprehensive income. Gains and losses on the
sale of available-for-sale securities are determined using the
specific-identification method.
7
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements
NOTE 4 - MARKETABLE SECURITIES (Continued)
As of March 31, 2004, available-for-sale securities consist of the following:
Gross Gross
Amortized Unrealized Unrealized
Due Cost Loss Gains Fair Value
----------- ----------- ----------- ----------- -----------
Fixed Income Funds Current $ 4,712,835 $ (13,081) $ 9,927 $ 4,709,681
----------- ----------- ----------- -----------
$ 4,712,835 $ (13,081) $ 9,927 $ 4,709,681
=========== =========== =========== ===========
NOTE 5 - CAPITAL STOCK ACTIVITY
On January 20, 2004, the Company closed a private placement from which it
received gross proceeds of approximately $4,080,000. The transaction consisted
of the sale to accredited investors of units consisting of 8,159,964 shares of
common stock and warrants to purchase 8,159,964 shares of common stock. The
warrants have an exercise price of $.73 and expire in four years.
Concurrently with the closing of the private placement, Skyepharma PLC
("Skyepharma") converted all of its outstanding shares of Series A Preferred
Stock of the Company into 25,000,000 shares of common stock at a reduced
conversion price of $0.80 per share. Skyepharma agreed that up to 12,500,000
shares of its common stock issued upon conversion of the Series A Preferred
Stock will be subject to a call option at the discretion of the Company upon
completion of an agreed upon milestone at a premium in excess of the conversion
price. The call option can be exercised on or after July 21, 2004. In connection
with this transaction and in accordance with SFAS 84, "Induced Conversions of
Convertible Debt, an Amendment of APB Opinion No. 26" the Company recorded a
non-cash preferred stock dividend in January 2004 amounting to $10,750,000.
On the closing date of conversion, January 20, 2004, the Company and other
original stockholders amended the stockholders agreement dated as of December
10, 2001. The board of directors is now required to be comprised of at least
seven directors and include at least two independent directors. The agreement
will terminate upon the later of the SkyePharma Termination Date or the third
anniversary of the amendment, which is January 20, 2007. Further, this agreement
may be terminated by mutual written consent. "The SkyePharma Termination Date"
is the date on which SkyePharma no longer beneficially owns, in the aggregate,
at least 20% of the outstanding common stock of the Company.
On February 19, 2004, the Company closed the second round of its private
placement from which it received $1,150,000. The transaction consisted of the
sale to accredited investors of units consisting of 2,299,902 shares of common
stock and warrants to purchase 2,299,902 shares of common stock at $0.73 per
share.
In connection with the private placement the Company issued warrants to a
related party to purchase 418,394 shares of the Company's common stock at $0.50
per share and warrants to purchase an aggregate of 418,394 shares of the
Company's common stock at $0.73 per share.
8
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements
NOTE 6 - COMPREHENSIVE LOSS
Excluding net loss, the Company's source of comprehensive loss is from the net
unrealized loss on its marketable debt securities, which are classified as
available-for-sale. The following summarizes the components of comprehensive
loss:
Three Months Ended March 31,
----------------------------
2004 2003
----------- -----------
Net loss $(1,747,973) $(1,474,714)
Unrealized gain (loss) arising during period 9,671 (1,676)
Reclassification adjustment for loss realized in net loss 14,873 --
----------- -----------
Unrealized gain (loss), net 24,544 (1,676)
----------- -----------
Comprehensive loss $(1,723,429) $(1,476,390)
=========== ===========
NOTE 7 - NET LOSS PER SHARE
Basic and diluted net loss per common share are presented in accordance with
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("FAS
128"), for all periods presented. In accordance with FAS 128, basic and diluted
net loss per common share have been computed using the weighted-average number
of shares of common stock outstanding during the period. Shares associated with
stock options, stock warrants, and convertible preferred stock are not included
because the inclusion would be anti-dilutive (i.e., reduce the net loss per
share). The total numbers of such shares excluded from diluted net loss per
common share 18,441,891 and 19,595,237 at March 31, 2004 and 2003, respectively.
NOTE 8 - RELATED PARTY TRANSACTIONS
An entity whose sole shareholder is a director of the Company was paid a 5%
commission in the amount of $261,496 in February 2004 for the consulting
services related to the two private placements completed in 2004. In addition,
the related party and his assignees received warrants to purchase an aggregate
of 418,394 shares of the Company's common stock at $0.50 per share and warrants
to purchase an aggregate of 418,394 shares of the Company's common stock at
$0.73 per share. An additional cash commission will be paid upon exercise of the
warrants.
NOTE 9 - RECLASSIFICATION
For comparability purposes, certain figures for the prior periods have been
reclassified where appropriate to conform with the financial statement
presentation used in 2004. These reclassifications had no effect on the reported
net loss.
9
SPECIAL CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This filing contains many forward-looking statements that involve
substantial risks and uncertainties. You can identify these statements by
forward-looking words such as "may," "will," "expect," "anticipate," "believe,"
"estimate" and "continue" or similar words. You should read statements that
contain these words carefully because they discuss our future expectations,
contain projections of our future operating results or of our financial
condition or state other "forward-looking" information.
We believe that it is important to communicate our future expectations to
our investors. However, we may be unable to accurately predict or control events
in the future. The factors listed in the sections captioned Risk Factors, as
well as any other cautionary language in this filing, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements. Before you
invest in our common stock, you should be aware that the occurrence of certain
of the events described in the Risk Factors section could seriously harm our
business.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion of our financial condition and plan of operation
should be read in conjunction with our financial statements and the related
notes included elsewhere in this quarterly report on Form 10-QSB. This quarterly
report contains certain statements of a forward-looking nature relating to
future events or our future financial performance. We caution prospective
investors that such statements involve risks and uncertainties, and that actual
events or results may differ materially. In evaluating such statements,
prospective investors should specifically consider the various factors
identified in this quarterly report, including the matters set forth under the
caption "Risk Factors" which could cause actual results to differ materially
from those indicated by such forward-looking statements. We disclaim any
obligation to update information contained in any forward-looking statement.
Overview
We are a development stage biotechnology company engaged primarily in the
research and development of treatments for immune system disorders and skin
diseases. Our initial product candidate, Psoraxine, is a protein extract used
for the treatment of the skin disease psoriasis.
Currently, we are engaged in the following activities to further our
development efforts of our initial product candidate:
o Ongoing research and development of Psoraxine, including conducting Phase
II clinical trials in the U.S.; and
o Development of the technology underlying Psoraxine for the treatment of
indications other that psoriasis, such as eczema, seborrheic dermatitis
and psoriatic arthritis.
Three months ended March 31, 2004 compared to three months ended March 31, 2003
For three months ended March 31, 2004:
On January 20, 2004 we completed the first closing of a private placement
of our securities from which we received gross proceeds of approximately $4.08
million. The transaction consisted of the sale to accredited investors of units
consisting of 8,159,964 shares of common stock and warrants to purchase
8,159,964 shares of common stock. Concurrently with this transaction, SkyePharma
PLC ("SkyePharma") converted all of its outstanding shares of our Series A
Preferred Stock into 25,000,000 shares of common stock at a reduced conversion
price of $0.80 per share. SkyePharma has agreed that 12,500,000 shares of the
common stock issued upon conversion of the Series A Preferred Stock will be
subject to a right of repurchase by us under certain
10
circumstances at a premium to the conversion price. In connection with this
transaction and in accordance with Statement of Financial Auditing Standard 84,
"Induced Conversions of Convertible Debt, an Amendment of APB Opinion No. 26" we
have recorded a non-cash preferred stock dividend in January 2004 amounting to
$10,750,000.
On February 19, 2004, we held a second closing for the private placement
from which we received gross proceeds of approximately $1.15 million. The
transaction consisted of the sale to accredited investors of units consisting of
2,299,902 shares of common stock and warrants to purchase 2,299,902 shares of
common stock.
For the three months ended March 31, 2004, we had no revenue from
operations and incurred operating expenses of $1,760,549 which consisted
primarily of:
o Research and development costs of $1,331,141, including $430,447
that we incurred in connection with services provided by SkyePharma
under our Service Agreement with them and amortization of
approximately $178,572 under our technology option license which is
being amortized over a seven year period.
o General and administrative costs of approximately $421,898,
including professional fees and our general corporate expenditures.
As a result, during the three months ended March 31, 2004, we incurred a
net loss of $12,497,973.
For the three months ended March 31, 2003:
On January 31, 2003, we sold to SkyePharma pursuant to a Purchase
Agreement dated December 10, 2001, 250,000 shares of our Series A Preferred
Stock for an aggregate purchase price of $2,500,000. We received net proceeds of
approximately $2,480,000 after we netted out from the proceeds $20,000 due to
SkyePharma for services they provided under our Service Agreement with them
which was treated as an expense at the time of payment.
For the three months ended March 31, 2003, we had no revenue and incurred
operating expenses of $1,511,823 which consisted primarily of:
o Research and development costs of $1,161,505, including $430,447
that was paid to SkyePharma for services provided under our Service
Agreement with them and amortization of approximately $178,572 under
our technology option license which is being amortized over a seven
year period.
o General and administrative costs of approximately $318,769,
including professional fees and our general corporate expenditures.
As a result, during the three months ended March 31, 2003, we incurred a
net loss of $1,474,714.
The Next Twelve Months
At March 31, 2004 we had cash balances of $708,223 and marketable
securities of $4,709,681.
Based on our current operating plan, we anticipate conducting the
following activities and using our cash over the course of the next twelve
months as follows:
o Our primary focus is to further our development efforts of our initial
product candidate, Psoraxine. We expect to spend $2,753,000 on research
and development, of which we expect to pay approximately $1,645,000 to
third parties in connection with our Phase II clinical trials.
o We intend to implement our business plan and facilitate the operations of
our company. We will spend approximately $945,000 to pay management
salaries and salaries of employees, a portion of which is treated as
research and development expense.
11
o We also expect to expend approximately $960,000 for our general
administrative and working capital requirements.
We will need to raise additional funds to continue our operations for the
period following the second quarter of 2005. Furthermore, substantial additional
funds will be needed in order to fund our continued efforts to attempt to obtain
FDA approval for the marketing of Psoraxine. No assurance can be given that we
will be able to obtain financing, or successfully sell assets or stock, or, even
if such transactions are possible, that they will be on terms reasonable to us
or that they will enable us to satisfy our cash requirements. In addition,
raising additional funds by selling additional shares of our capital stock will
dilute the ownership interest of our stockholders. If we do not obtain
additional funds, we will likely be required to eliminate programs, delay
development of our products, or in the extreme situation, cease operations.
ITEM 3. CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of our disclosure
controls and procedures as of March 31, 2004. Based on this evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective for recording, processing,
summarizing and reporting the information the company is required to disclose in
the reports it files under the Securities Exchange Act of 1934, within the time
periods specified in the SEC's rules and forms. Such evaluation did not identify
any change in our internal control over financial reporting that occurred during
the quarter ended March 31, 2004 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
RISK FACTORS
Prospective investors should carefully consider the following factors, in
addition to the other information contained in this prospectus, in connection
with an investment in our common stock. This prospectus contains certain
forward-looking statements, which involve risks and uncertainties. Our actual
results could differ materially from those anticipated in the forward-looking
statements as a result of certain factors, including those set forth below and
elsewhere in this prospectus. An investment in our common stock involves a high
degree of risk and is suitable only for investors who can afford to lose their
entire investment.
We have no sales; we will not have sales in the foreseeable future; we are
in an early stage of development and we may never sell products or become
profitable.
We commenced our current operations in 2001 and such operations remain in
an early stage of development. We have no products approved for sale and
therefore, no means to generate revenue. We have not commercialized any
products, had no revenues and had incurred a cumulative net loss of $42,162,762
as of March 31, 2004 which has increased to date. We expect that substantial
losses will continue for the foreseeable future. In order to obtain revenue from
the sales of our product candidate, Psoraxine, we must successfully develop,
test, obtain regulatory approval for, manufacture, market and eventually sell
such product candidate. Our expenses have consisted principally of costs
incurred in research and development and from general and administrative costs
associated with our operations. We expect our expenses to increase and to
continue to incur operating losses for the next several years as we continue our
research and development efforts for Psoraxine and any subsequent product
candidates. Commercialization of any of our products will take a significant
amount of time and successful commercialization may not occur at all. As a
result, we may never become profitable.
We will need to obtain additional funds to support our future operation
expenses. Our auditors have expressed uncertainty regarding our ability to
continue as a going concern.
Based on our current plans, we believe that we currently have sufficient
funds to meet our operating expenses and capital requirements through
approximately the second quarter of 2005. We will need additional funds to
continue our operations following that period. Furthermore, substantial
additional funds will be needed in order to fund our continued efforts to obtain
FDA approval of Psoraxine. No assurance can be given that we will be able to
obtain financing, or successfully sell assets or stock, or, even if such
12
transactions are possible, that they will be on terms reasonable to us or that
they will enable us to satisfy our cash requirements. In addition, raising
additional funds by selling additional shares of our capital stock will dilute
the ownership interest of our stockholders. If we do not obtain additional
funds, we will likely be required to eliminate programs, delay development of
our products, alter our business plans, or in the extreme situation, cease
operations.
In addition, the Independent Auditors' Report on our annual financial
statements includes a paragraph indicating doubt about our ability to continue
as a going concern. Our financial statements do not include any adjustments that
might be necessary if we are unable to continue as a going concern.
We may not be successful in the development and commercialization of
products.
We may not develop products that prove to be safe and effective, that meet
applicable regulatory standards or that we can manufacture at reasonable costs
or market successfully. Successful products will require significant development
and investment, including testing, to demonstrate their safety and efficacy
prior to their commercialization. We have not proven our ability to develop and
commercialize products. We must conduct a substantial amount of additional
research and development before any regulatory authority will approve our
initial product candidate, Psoraxine. Our research and development and clinical
trials may not confirm the safety and efficacy of our products, in which case
regulatory authorities may not approve them. In addition, even if we
successfully complete our research and development efforts, Psoraxine may not
perform in the manner we anticipate, and may not be accepted for use by the
public.
Substantial additional funds and effort will be necessary for further
development and commercialization of Psoraxine.
Our initial product candidate, Psoraxine, will require the commitment of
substantial resources to move it towards commercialization. Before obtaining
regulatory approvals for the commercial sale of Psoraxine, we must demonstrate
the safety and efficacy of our product candidate through preclinical testing and
clinical trials. Conducting clinical trials involves a lengthy, expensive and
uncertain process. Completion of clinical trials may take several years or more.
The length of time generally varies substantially according to the type,
complexity, novelty and intended use of the product. If we or the U.S. Food and
Drug Administration believe that our clinical trials expose participating
patients to unacceptable health risks, we may suspend such trials. We may
encounter problems in our studies which will cause us or the FDA to delay or
suspend the studies. Some of the factors that may delay our commencement and
rate of completion of clinical trials include:
o ineffectiveness of the study compound, or perceptions by physicians that
the compound will not successfully treat a particular indication;
o inability to manufacture sufficient quantities of compounds for use in
clinical trials;
o failure of the FDA to approve our clinical trial protocols;
o slower than expected rate of patient recruitment;
o unforeseen safety issues; or
o government or regulatory delays.
The failure of future clinical trials may harm our business, financial
condition and results of operations.
Our potential therapeutic products face a lengthy and uncertain regulatory
process. If we do not obtain regulatory approval of our potential products, we
will not be able to commercialize these products.
13
The FDA must approve any therapeutic product before it can be marketed in
the United States. Before we obtain FDA approval of a new drug application or
biologics license application, the product must undergo extensive testing,
including animal and human clinical trials, which can take many years and
requires substantial expenditure. Data obtained from such testing may be
susceptible to varying interpretations, which could delay, limit or prevent
regulatory approval. In addition, changes in regulatory policy for product
approval during the period of product development and regulatory agency review
of each submitted new drug application may cause delays or rejections. We must
devote a substantial amount of time and resources in the regulatory process in
order to obtain regulatory approval of our initial product candidate, Psoraxine.
Because Psoraxine involves the application of new technologies and may be
used upon new therapeutic approaches, government regulatory authorities may
subject this product to more rigorous review and may grant regulatory approvals
more slowly for this product than for products using more conventional
technologies. We have not received approval from the FDA to market or
commercialize Psoraxine. The regulatory agencies of foreign governments must
also approve any therapeutic product we may develop before the product can be
sold in those countries. To date, although we have obtained regulatory approval
for clinical testing of Psoraxine in Venezuela, we have not sought, nor have we
obtained, regulatory approval for the commercialization of Psoraxine in
Venezuela because, among other things, we do not have manufacturing facilities
in that country and such facilities are required by regulatory authorities in
Venezuela before granting commercial approval for a proposed drug.
Even after investing significant time and resources, we may not obtain
regulatory approval for our product. If we do not receive regulatory approval,
we cannot sell the product. Even if we receive regulatory approval, this
approval may place limitations on the indicated uses for which we can market the
product. Further, after granting regulatory approval, regulatory authorities
subject a marketed product and its manufacturer to continual review, and
discovery of previously unknown problems with a product or manufacturer may
result in restrictions on the product, manufacturer and manufacturing facility,
including withdrawal of the product from the market. In certain countries,
regulatory agencies also set or approve prices.
Even if product candidates emerge successfully from clinical trials, we
may not be able to successfully manufacture, market and sell them.
We have not completed clinical trials of Psoraxine. If Psoraxine emerges
successfully from clinical trials, we will either commercialize products
resulting from our proprietary programs directly or through licensing
arrangements with other companies. We have no experience in manufacturing and
marketing, and we currently do not have the resources or capability to
manufacture, market or sell our products on a commercial scale. In order to
commercialize Psoraxine directly, we would need to develop or obtain through
outsourcing arrangements the capability to manufacture, market and sell
products. We have an agreement with SkyePharma PLC ("SkyePharma") under which
SkyePharma will provide development, pre-clinical and clinical development
services for Psoraxine until December 31, 2004. However, we do not currently
have a written agreement covering any period after December 31, 2004 and we may
not be able to enter into such an agreement on commercially reasonable terms, or
at all. In addition, we currently do not have any agreements for the marketing
or sale of any of our products and we may not be able to enter into such
agreements on commercially reasonable terms, or at all.
We license and do not own our intellectual property. Any inability to
protect our proprietary technologies adequately could harm our competitive
position.
We license, and do not own, the intellectual property rights to Psoraxine.
Dr. Jose Antonio O'Daly is the owner of the patent for Psoraxine. Under the
terms of a license agreement and assignment of license agreement, we have the
right to use any patent issued pursuant to Dr. O'Daly's patent application. We
also have rights to other patents filed by Dr. O'Daly under the terms of our
employment agreement with him. Our success will depend in part on our ability to
obtain patents and maintain adequate protection of other intellectual property
for our technologies and products in the United States and other countries. If
we do not adequately protect our intellectual property, competitors may be able
to use our technologies and erode or negate our competitive advantage. The laws
of some foreign countries do not protect our proprietary rights to the same
extent as the laws of the United States, and we may encounter significant
problems in protecting our proprietary rights in these foreign countries.
14
The patent positions of biotechnology companies, including our patent
positions, involve complex legal and factual questions and, therefore, validity
and enforceability cannot be predicted with certainty. Patents may be
challenged, deemed unenforceable, invalidated or circumvented. We will be able
to protect our proprietary rights from unauthorized use by third parties only to
the extent that we cover our proprietary technologies with valid and enforceable
patents or we effectively maintain such proprietary technologies as trade
secrets. We will apply for patents covering both our technologies and product
candidates as we deem appropriate. However, we may fail to apply for patents on
important technologies or products in a timely fashion, or at all, and in any
event, the applications we do file may be challenged and may not result in
issued patents. Any future patents we obtain may not be sufficiently broad to
prevent others from practicing our technologies or from developing competing
products. Furthermore, others may independently develop similar or alternative
technologies or design around our patented technologies. In addition, others may
challenge or invalidate our patents, or our patents may fail to provide us with
any competitive advantages. If we encounter challenges to the use or validity of
any of our patents, resulting in litigation or administrative proceedings, we
would incur substantial costs and the diversion of management in defending the
patent. In addition, we do not control the patent prosecution of technology that
we license from others. Accordingly, we cannot exercise the same degree of
control over this intellectual property as we would over technology we own.
We rely upon trade secrets protection for our confidential and proprietary
information. We have taken measures to protect our proprietary information.
These measures may not provide adequate protection for our trade secrets or
other proprietary information. We seek to protect our proprietary information by
entering into confidentiality agreements with employees, collaborators and
consultants. Nevertheless, employees, collaborators or consultants may still
disclose our proprietary information, and we may not be able to meaningfully
protect our trade secrets. In addition, others may independently develop
substantially equivalent proprietary information or techniques or otherwise gain
access to our trade secrets.
Many potential competitors which have greater resources and experience
than we do may develop products and technologies that could make ours obsolete.
Companies in the biotechnology industry face rapid technological change in
a rapidly evolving field. Our future success will depend on our ability to
maintain a competitive position with respect to technological advances. Rapid
technological development by others may result in our products and technologies
becoming obsolete.
We face, and will continue to face, intense competition from organizations
such as large biotechnology and pharmaceutical companies, as well as academic
and research institutions and government agencies. Our competitors may include
Biogen, Genentech/Xoma, Abbott Laboratories and Novartis. These organizations
may develop technologies that provide superior alternatives to our technologies.
Further, our competitors may be more effective at implementing their
technologies to develop commercial products.
Any products that we develop through our technologies will compete in
multiple, highly competitive markets. Many of the organizations competing with
us in the markets for such products have greater capital resources, research and
development and marketing staffs, facilities and capabilities, and greater
experience in obtaining regulatory approvals, product manufacturing and
marketing. Accordingly, our competitors may be able to develop technologies and
products more easily, which would render our technologies and products obsolete
and noncompetitive.
If we lose our key personnel or fail to attract and retain additional
personnel, we may be unable to discover and develop our products.
We depend on the services of Dr. Jose Antonio O'Daly, the loss of whose
services would adversely impact the achievement of our objectives. Our key
personnel have no prior experience managing a start-up biotechnology company. We
do not currently have sufficient executive management personnel to execute our
business plan fully. In addition, recruiting and retaining qualified scientific
personnel to perform future research and development work will be critical to
15
our success. Although we believe we can successfully attract and retain
qualified personnel, we face intense competition for experienced scientists.
Failure to attract and retain skilled personnel would prevent us from pursuing
collaborations and developing our products and core technologies to the extent
otherwise possible.
Our planned activities will require additional expertise. These activities
will require the addition of new personnel, including management, and the
development of additional expertise by existing management personnel. The
inability to acquire or develop this expertise could impair the growth, if any,
of our business.
If we face claims in clinical trials of a drug candidate, these claims
will divert our management's time and we will incur litigation costs.
We face an inherent business risk of clinical trial liability claims in
the event that the use or misuse of Psoraxine results in personal injury or
death. We may experience clinical trial liability claims if our drug candidates
are misused or cause harm before regulatory authorities approve them for
marketing. Although, we currently maintain clinical liability insurance
coverage, it may not sufficiently cover any claims made against us and may not
be available in the future on acceptable terms, if at all. Any claims against
us, regardless of their merit, could strain our financial resources in addition
to consuming the time and attention of our management. Law suits for any
injuries caused by our products may result in liabilities that exceed our total
assets.
Some of our existing stockholders can exert control over us and may not
make decisions that further the best interests of all stockholders.
Our officers, directors and principal stockholders owning at least 5% of
our common stock together control approximately 71.85% of our outstanding common
stock. As a result, these stockholders, if they act individually or together,
may exert a significant degree of influence over our management and affairs and
over matters requiring stockholder approval, including the election of directors
and approval of significant corporate transactions. Furthermore, the interests
of this concentration of ownership may not always coincide with our interests or
the interests of other stockholders and accordingly, they could cause us to
enter into transactions or agreements which we would not otherwise consider. In
addition, this concentration of ownership may delay or prevent a merger or
acquisition resulting in a change in control of us and might affect the market
price of our common stock, even when such a change in control may be in the best
interest of all stockholders.
The market price of our common stock may be highly volatile.
The market price of our common stock has been and will likely continue to
be highly volatile. From the date trading of our common stock commenced until
May 13, 2004, the range of our stock price has been between $0.22 and $7.15.
Factors including announcements of technological innovations by us or other
companies, regulatory matters, new or existing products or procedures, concerns
about our financial position, operating results, government regulation,
developments or disputes relating to agreements, patents or proprietary rights
may have a significant impact on the market price of our stock. In addition,
potential dilutive effects of future sales of shares of common stock by us or
our stockholders and the holders of warrants and options, could have an adverse
effect on the price of our common stock.
A large number of shares of our common stock may be sold in the market,
which may depress the market price of our common stock.
Sales of substantial amounts of our common stock in the public market, or
the perception that these sales might occur, could materially and adversely
affect the market price of our common stock or our future ability to raise
capital through an offering of our equity securities. We have an aggregate of
72,998,055 shares of our common stock outstanding. If all options and warrants
currently outstanding to purchase shares of our common stock are exercised,
there will be approximately 91,439,946 shares of common stock outstanding. Of
the outstanding shares, up to 37,538,189 shares are freely tradable without
restriction or further registration under the Securities Act, unless the shares
are held by one of our "affiliates" as such term is defined in Rule 144 of the
Securities Act. The remaining shares may be sold only pursuant to a registration
statement under the Securities Act or an exemption from the registration
requirements of the Securities Act. The sale and distribution of these shares
may cause a decline in the market price of our common stock.
16
Our common stock qualifies as a "penny stock" under SEC rules which may
make it more difficult for our stockholders to resell their shares of our common
stock.
Our common stock trades on the OTC Bulletin Board. As a result, the
holders of our common stock may find it more difficult to obtain accurate
quotations concerning the market value of the stock. Stockholders also may
experience greater difficulties in attempting to sell the stock than if it were
listed on a stock exchange or quoted on the Nasdaq National Market or the Nasdaq
Small-Cap Market. Because our common stock does not trade on a stock exchange or
on the Nasdaq National Market or the Nasdaq Small-Cap Market, and the market
price of the common stock is less than $5.00 per share, the common stock
qualifies as a "penny stock." SEC Rule 15g-9 under the Securities Exchange Act
of 1934 imposes additional sales practice requirements on broker-dealers that
recommend the purchase or sale of penny stocks to persons other than those who
qualify as an "established customer" or an "accredited investor." This includes
the requirement that a broker-dealer must make a determination on the
appropriateness of investments in penny stocks for the customer and must make
special disclosures to the customer concerning the risks of penny stocks.
Application of the penny stock rules to our common stock could adversely affect
the market liquidity of the shares, which in turn may affect the ability of
holders of our common stock to resell the stock.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Small Business Issuer Purchases of Equity
Securities
On January 20, 2004 we closed a private placement from which we received
gross proceeds of approximately $4.08 million. The transaction consisted of the
sale to accredited investors of units consisting of 8,159,964 shares of common
stock and warrants to purchase 8,159,964 shares of common stock at an exercise
price of $0.73 per share. Concurrently with this transaction, SkyePharma
converted all of its outstanding shares of our Series A Preferred Stock into
25,000,000 shares of common stock at a reduced conversion price of $0.80 per
share. SkyePharma has agreed that 12,500,000 shares of the common stock issued
upon conversion of the Series A Preferred Stock will be subject to a right of
repurchase by us under certain circumstances at a premium to the conversion
price.
On February 19, 2004, we held a second closing for the private placement
from which we received gross proceeds of approximately $1.15 million. The
transaction consisted of the sale to accredited investors of units consisting of
2,299,902 shares of common stock and warrants to purchase 2,299,902 shares of
common stock at an exercise price of $0.73 per share.
No underwriters were involved in the issuance of securities disclosed
above. Such securities were issued in reliance upon the exemption from the
registration requirements of the Securities Act, as set forth in Section 4(2)
under the Securities Act and Rule 506 of Regulation D promulgated thereunder
relative to sales by an issuer not involving any public offering, to the extent
an exemption from such registration was required. All purchasers of shares of
our securities in the private placement represented to us in connection with
their purchase that they were accredited investors and were acquiring the shares
for investment and not distribution, that they could bear the risks of the
investment and could hold the securities for an indefinite period of time. The
purchasers received written disclosures that the securities had not been
registered under the Securities Act and that any resale must be made pursuant to
a registration or an available exemption from such registration.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index.
(b) Reports on Form 8-K
17
On January 21, 2004, we filed a current report on Form 8-K reporting that
we issued a press release regarding (i) the closing of our private placement and
(ii) the conversion by SkyePharma of its shares of our Series A Preferred Stock.
On January 21, 2004, we also filed a current report on Form 8-K reporting
(i) the conversion by SkyePharma of its shares of our Series A Preferred Stock
and (ii) that on January 20, 2004 we entered into a Call Option Agreement with
SkyePharma and an Amendment to Stockholders' Agreement with SkyePharma and
certain of our stockholders.
18
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, as amended, the Registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ASTRALIS LTD.
(Registrant)
Dated: May 13, 2004 By: /s/ Mike Ajnsztajn
---------------------------------
Mike Ajnsztajn
Chief Executive Officer
(Principal Executive Officer;
Authorized Signatory on behalf of
Registrant)
Dated: May 13, 2004 By: /s/ Gina Tedesco
---------------------------------
Gina Tedesco
Chief Financial Officer
(Principal Financial and
Accounting Officer)
19
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
31.1 Certification of Mike Ajnsztajn required by Rule 13a-14(a) or Rule
15d-14(a)
31.2 Certification of Gina Tedesco required by Rule 13a-14(a) or Rule
15d-14(a)
32.1 Certification of Mike Ajnsztajn and Gina Tedesco required by Rule
13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley
Act of 2002, 18 U.S.C. Section 1350