UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------------------------
FORM 10-QSB
Quarterly report under section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended September 30, 2002
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 office)
(973) 227-7168
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities 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:
(1) Yes |X| No |_|
(2) Yes |X| No |_|
The number of shares of the Issuer's Common Stock outstanding as of
November 14, 2002 was 37,538,189.
Transitional Small Business Disclosure Format (check one):
Yes |_| No |X|
ASTRALIS LTD.
INDEX
FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
Part I. Financial Information 3
Item 1. Condensed Balance Sheets as of September 30, 2002 (unaudited)
and December 31, 2001 3
Condensed Statements of Operations (unaudited) 4
Condensed Statements of Stockholders' Equity (unaudited) 5
Condensed Statements of Cash Flows (unaudited) 9
Notes to Condensed Financial Statements 10
Item 2. Management's Discussion and Analysis or Plan of Operations 16
Item 3. Controls and Procedures 19
Risk Factors 19
Part II. Other Information 25
Item 2. Changes in Securities and Use of Proceeds 25
Item 6. Exhibits and Reports on Form 8-K 25
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASTRALIS LTD.
(A Development Stage Entity)
Condensed Balance Sheet
ASSETS
September 30, December 31,
2002 2001
------------ ------------
(Unaudited) (Audited)
Current Assets
Cash and cash equivalents $ 1,675,521 $ 4,451,874
Marketable securities - current 1,723,277 --
Interest receivable 18,832 --
Prepaid expenses 13,748 38,461
------------ ------------
Total Current Assets 3,431,378 4,490,335
Marketable Securities - Noncurrent 495,870 --
Intangible Assets, Net - Related Party 4,404,760 4,940,476
Other Intangible Assets, Net 41,687 25,054
Property and Equipment, Net 417,720 1,586
Deposits 29,953 --
------------ ------------
$ 8,821,368 $ 9,457,451
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable - related party $ -- $ 142,446
Accounts payable and accrued expenses 95,634 240,637
------------ ------------
Total Current Liabilities 95,634 383,083
------------ ------------
Commitments and Contingencies
Stockholders' Equity
Convertible preferred stock, Series A,
$.001 par value; 2,000,000 shares authorized; 1,750,000 and
1,000,000 issued and outstanding at 2002 and 2001, respectively
(liquidation preference - $15,418,767 at 2002) 1,750 1,000
Common stock; $.0001 par value; 75,000,000 shares authorized;
37,538,189 and 37,588,179 issued and outstanding
at 2002 and 2001, respectively 3,754 3,759
Additional paid-in capital 24,708,178 17,013,223
Deferred compensation (304,148) (398,250)
Common stock subscriptions receivable (957,000) (1,350,000)
Accumulated other comprehensive loss (9,136) --
Deficit accumulated in the development stage (14,717,664) (6,195,364)
------------ ------------
Total Stockholders' Equity 8,725,734 9,074,368
------------ ------------
$ 8,821,368 $ 9,457,451
============ ============
See notes to condensed financial statements.
3
ASTRALIS LTD.
(A Development Stage Entity)
Condensed Statements of Operations
(Unaudited)
Three Months Nine Months March 12, 2001 March 12, 2001
Ended September 30, Ended (Inception) to (Inception) to
----------------------------- September 30, September 30, September 30,
2002 2001 2002 2001 2002
------------ ------------ ------------ ------------ ------------
Revenues $ -- $ -- $ -- $ -- $ --
------------ ------------ ------------ ------------ ------------
Operating Expenses:
Research and development - related party 2,173,761 -- 6,653,542 -- 9,856,777
Research and development 211,671 17,571 341,290 23,376 369,830
Depreciation and amortization 30,648 465 46,273 647 47,104
General and administrative 437,039 160,954 1,306,084 184,299 2,158,097
------------ ------------ ------------ ------------ ------------
Total Operating Expenses 2,853,119 178,990 8,347,189 208,322 12,431,808
------------ ------------ ------------ ------------ ------------
Loss From Operations (2,853,119) (178,990) (8,347,189) (208,322) (12,431,808)
Investment Income 30,506 6 94,889 6 104,144
------------ ------------ ------------ ------------ ------------
Net Loss (2,822,613) (178,984) (8,252,300) (208,316) (12,327,664)
Preferred Stock Dividends -- -- (270,000) -- (2,390,000)
------------ ------------ ------------ ------------ ------------
Net Loss to Common Stockholders $ (2,822,613) $ (178,984) $ (8,522,300) $ (208,316) $(14,717,664)
============ ============ ============ ============ ============
Pro Forma Information
Net loss $ (178,984) $ (208,316)
Pro forma tax provision -- --
------------ ------------
Pro forma net loss $ (178,984) $ (208,316)
============ ============
Basic and Diluted Loss per Common Share $ (0.08) $ -- $ (0.23) $ --
============ ============ ============ ============
Basic and Diluted Weighted Average
Common Shares Outstanding 37,538,189 26,190,110 37,542,401 25,450,495
============ ============ ============ ============
See notes to condensed financial statements.
4
Page 1 of 4
ASTRALIS LTD.
(A Development Stage Entity)
Condensed Statements of Stockholders' Equity
(Unaudited)
Preferred Stock Common Stock Additional
---------------------- ---------------------- Paid-In Subscription Deferred
Shares Amount Shares Amount Capital Receivable Compensation
----------- --------- ----------- --------- ------------ ------------ ------------
Balances, March 12, 2001
(Date of Inception) -- $ -- -- $ -- $ -- $ -- $ --
Members' capital contributions, 3/15/2001 -- -- 25,300,000 2,530 30,653 (33,183) --
Capital contributions received,
3/1 - 8/13/2001 -- -- -- -- -- 33,183 --
Members' contributed services,
3/15 - 6/30/2001 -- -- -- -- 12,986 -- --
Members' capital contributions, 9/1/2001 -- -- 2,700,000 270 1,349,730 (1,350,000) --
Warrants to purchase 6,300,000 shares of
common stock at $1.60 per share issued
in private placement -- -- -- -- -- -- --
Common stock issuable for consulting
services, 9/1/2001; 500,000 shares -- -- -- -- 135,000 -- --
Common stock issued in private placement
net of issuance costs, 11/13/2001;
2,076,179 shares at $1.60 per share -- -- 2,076,179 208 3,190,429 -- --
Warrants to purchase 415,237 shares of
common stock at $4.00 per share issued
in private placement, 11/13/2001 -- -- -- -- -- -- --
Net assets and liabilities acquired in
merger with Hercules -- -- 7,512,000 751 (303,071) -- --
Preferred stock issued, net of issuance
costs, 12/10/2001; 1,000,000 shares
at $10.00 per share 1,000,000 1,000 -- -- 9,946,496 -- --
Preferred stock dividend, 12/10/2001 -- -- -- -- 2,120,000 -- --
Options to purchase 200,000 shares of
common stock at $1.77 (based on
valuation) issued for legal services,
12/31/2001 -- -- -- -- 354,000 -- (354,000)
Options to purchase 100,000 shares of
common stock at $1.77 (based on
valuation) issued for consulting
services, 12/31/2001 -- -- -- -- 177,000 -- (177,000)
Amortization of deferred compensation -- -- -- -- -- -- 132,750
Net loss -- -- -- -- -- -- --
----------- --------- ----------- --------- ------------ ------------ -----------
Balance, December 31, 2001 1,000,000 $ 1,000 37,588,179 $ 3,759 $ 17,013,223 $ (1,350,000) $ (398,250)
----------- --------- ----------- --------- ------------ ------------ -----------
See notes to condensed financial statements.
5
Page 2 of 4
ASTRALIS LTD.
(A Development Stage Entity)
Condensed Statements of Stockholders' Equity
(Unaudited)
Deficit
Accumulated Accumulated
Other During the Total
Comprehensive Development Comprehensive
Loss Stage Total Loss
----------- ----------- ----------- -----------
Balances, March 12, 2001
(Date of Inception) $ -- $ -- $ -- $ --
Members' capital contributions, 3/15/2001 -- -- -- --
Capital contributions received,
3/1 - 8/13/2001 -- -- 33,183 --
Members' contributed services,
3/15 - 6/30/2001 -- -- 12,986 --
Members' capital contributions, 9/1/2001 -- -- -- --
Warrants to purchase 6,300,000 shares of
common stock at $1.60 per share issued
in private placement -- -- -- --
Common stock issuable for consulting
services, 9/1/2001; 500,000 shares -- -- 135,000 --
Common stock issued in private placement
net of issuance costs, 11/13/2001;
2,076,179 shares at $1.60 per share -- -- 3,190,637 --
Warrants to purchase 415,237 shares of
common stock at $4.00 per share issued
in private placement, 11/13/2001 -- -- -- --
Net assets and liabilities acquired in
merger with Hercules -- -- (302,320) --
Preferred stock issued, net of issuance
costs, 12/10/2001; 1,000,000 shares
at $10.00 per share -- -- 9,947,496 --
Preferred stock dividend, 12/10/2001 -- (2,120,000) -- --
Options to purchase 200,000 shares of
common stock at $1.77 (based on valuation)
issued for legal services, 12/31/2001 -- -- -- --
Options to purchase 100,000 shares of
common stock at $1.77 (based on valuation)
issued for consulting services, 12/31/2001 -- -- -- --
Amortization of deferred compensation -- -- 132,750 --
Net loss -- (4,075,364) (4,075,364) --
----------- ----------- ----------- -----------
Balance, December 31, 2001 (audited) $ -- $(6,195,364) $ 9,074,368 $ --
----------- ----------- ----------- -----------
See notes to condensed financial statements.
6
Page 3 of 4
ASTRALIS LTD.
(A Development Stage Entity)
Condensed Statements of Stockholders' Equity
(Unaudited)
Preferred Stock Common Stock Additional
--------------------- ----------------------- Paid-In Subscription Deferred
Shares Amount Shares Amount Capital Receivable Compensation
---------- --------- ----------- --------- ------------ ------------ ------------
Balances Brought Forward 1,000,000 $ 1,000 37,588,179 $ 3,759 $ 17,013,223 $ (1,350,000) $ (398,250)
Oversubscription of common stock issued
in private placement, 11/13/2001;
49,990 shares cancelled at $1.60
per share, 1/24/2002 -- -- (49,990) (5) (79,995) -- --
Preferred stock issue, net of issuance
costs, 1/31/2002; 250,000 shares
at $10.00 per share 250,000 250 -- -- 2,499,750 -- --
Preferred stock issue, net of issuance
costs, 4/30/2002; 250,000 shares
at $10.00 per share 250,000 250 -- -- 2,499,750 -- --
Preferred stock dividend, April 30, 2002 -- -- -- -- 270,000 -- --
Preferred stock issue, net of issuance
costs, 7/31/2002; 250,000 shares
at $10.00 per share 250,000 250 -- -- 2,499,750 -- --
Collection of subscription receivable,
July 2002 -- -- -- -- -- 280,000 --
Collection of subscription receivable,
August 2002 -- -- -- -- -- 65,000 --
Collection of subscription receivable,
September 2002 -- -- -- -- -- 48,000 --
Options issued for consulting services,
9/10/2002; 15,000 options at $0.38 per
option, based on valuation -- -- -- -- 5,700 -- (5,700)
Amortization of deferred compensation -- -- -- -- -- -- 99,802
COMPREHENSIVE LOSS
Net loss -- -- -- -- -- -- --
Other comprehensive loss:
Unrealized gain (loss) on
available-for-sale securities -- -- -- -- -- -- --
---------- --------- ----------- --------- ------------ ------------ ------------
Total Comprehensive Loss
Balance, September 30, 2002 (unaudited) 1,750,000 $ 1,750 37,538,189 $ 3,754 $ 24,708,178 $ (957,000) $ (304,148)
========== ========= =========== ========= ============ ============ ============
See notes to condensed financial statements.
7
Page 4 of 4
ASTRALIS LTD.
(A Development Stage Entity)
Condensed Statements of Stockholders' Equity
(Unaudited)
Deficit
Accumulated Accumulated
Other During the Total
Comprehensive Development Comprehensive
Loss Stage Total Loss
------------ ------------ ------------ ------------
Balances Brought Forward $ -- $ (6,195,364) $ 9,074,368
Oversubscription of common stock issued
in private placement, 11/13/2001;
49,990 shares cancelled at $1.60
per share, 1/24/2002 -- -- (80,000)
Preferred stock issue, net of issuance
costs, 1/31/2002; 250,000 shares
at $10.00 per share -- -- 2,500,000
Preferred stock issue, net of issuance
costs, 4/30/2002; 250,000 shares
at $10.00 per share -- -- 2,500,000
Preferred stock dividend April 30, 2002 -- (270,000) --
Preferred stock issue, net of issuance
costs, 7/31/2002; 250,000 shares
at $10.00 per share -- -- 2,500,000
Collection of subscription receivable, July 2002 -- -- 280,000
Collection of subscription receivable, Aug. 2002 -- -- 65,000
Collection of subscription receivable, Sept. 2002 -- -- 48,000
Options issued for consulting services,
9/10/2002; 15,000 options at $0.38 per
option, based on valuation -- -- --
Amortization of deferred compensation -- -- 99,802
COMPREHENSIVE LOSS
Net loss -- (8,252,300) (8,252,300) $ (8,252,300)
Other comprehensive loss:
Unrealized gain (loss) on
available-for-sale securities (9,136) -- (9,136) (9,136)
------------ ------------ ------------ ------------
Total Comprehensive Loss $ (8,261,436)
============
Balance, September 30, 2002 (unaudited) $ (9,136) $(14,717,664) $ 8,725,734
============ ============ ============
See notes to condensed financial statements.
8
ASTRALIS LTD.
(A Development Stage Entity)
Condensed Statement of Cash Flows
(Unaudited)
Nine Months March 12, 2001 March 12, 2001
Ended (Inception) to (Inception) to
September 30, September 30, September 30,
2002 2001 2002
------------ ------------ ------------
Cash Flows from Operating Activities
Net loss $ (8,252,300) $ (208,316) $(12,327,664)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 581,988 646 642,343
Amortization of net premium paid on investments 44,900 -- 44,900
Dividends reinvested (1,998) -- (1,998)
Members' contributed salaries -- 12,986 12,986
Research and development service fee netted against
proceeds received from preferred stock issuance 1,995,000 -- 4,995,000
Operating expenses paid by related parties on
behalf of Company -- 23,808 17,587
Amortization of deferred compensation 99,802 -- 232,552
Compensatory common stock -- 135,000 135,000
Loss on sale of available-for-sale securities 737 -- 737
Changes in assets and liabilities
Prepaid expenses 24,713 -- (13,748)
Interest receivable (18,832) -- (18,832)
Deposits (29,953) -- (29,953)
Accounts payable - related party (145,003) -- (2,557)
Accounts payable and accrued expenses (142,446) 36,573 98,191
------------ ------------ ------------
Net Cash Used in Operating Activities (5,843,392) 697 (6,215,456)
------------ ------------ ------------
Cash Flows from Investing Activities
Purchases of marketable securities (7,213,234) -- (7,213,234)
Proceeds from sale of marketable securities 4,941,313 -- 4,941,313
Expenditures related to patent (18,192) -- (28,447)
Purchases of property and equipment (460,848) -- (462,468)
------------ ------------ ------------
Net Cash Used in Investing Activities (2,750,961) -- (2,762,836)
------------ ------------ ------------
Cash Flows from Financing Activities
Repurchase of common stock (80,000) -- (80,000)
Proceeds from stock subscription receivable 393,000 -- 393,000
Issuance of common stock, net of offering and transaction costs -- -- 2,888,317
Issuance of preferred stock, net of research and development
service fee, technology option and costs of offering 5,505,000 -- 7,452,496
------------ ------------ ------------
Net Cash Provided by Financing Activities 5,818,000 -- 10,653,813
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (2,776,353) 697 1,675,521
Cash and Cash Equivalents, Beginning of Period 4,451,874 -- --
------------ ------------ ------------
Cash and Cash Equivalents, End of Period $ 1,675,521 $ 697 $ 1,675,521
============ ============ ============
See notes to condensed financial statements.
9
ASTRALIS LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with the instructions to Form 10-QSB as prescribed by the Securities and
Exchange Commission ("SEC"). These financial statements, in the opinion of
management, include all adjustments (consisting only of normal recurring items)
necessary for their fair presentation in conformity with accounting principles
generally accepted in the United States.
These financial statements should be read in conjunction with the financial
statements and notes included in the Astralis Ltd. (the "Company") Annual Report
on Form 10-KSB for the year ended December 31, 2001, for an expanded discussion
of the financial disclosures and accounting policies of the Company. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to the SEC rules and
regulations. Interim results are not necessarily indicative of results for the
full year.
The amortization related to the technology option license is recorded as
research and development cost as required by Financial Accounting Standard No. 2
- Research and Development Costs.
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 vaccine under
development for the treatment of psoriasis. The Company's second product is for
the treatment of leishmaniasis.
History and Basis of Financial Information
In November 2001, the Company was a public shell company, defined as an
inactive, publicly quoted company with nominal assets and liabilities.
The operations and financial statements of the Company prior to November 13,
2001 are those of Astralis, LLC, ("Astralis, LLC") a New Jersey limited
liability company formed on March 12, 2001. Astralis, LLC was merged into the
Company on November 13, 2001. The combination of the Company and Astralis, LLC
has been treated as a recapitalization of the Company. The Company was the legal
acquirer and the surviving legal entity in the merger. Astralis, LLC was the
accounting acquirer since the former members of Astralis, LLC acquired a
majority ownership interest in the Company. Consequently, the historical
financial information included in the financial statements of the Company prior
to November 2001 is that of Astralis, LLC. Pro forma financial information
relating to the merger is not presented since the combination is a
recapitalization and not a business combination.
Pro Forma Financial Information
As discussed above, Astralis, LLC was originally organized in the form of a
Limited Liability Company. Upon the Merger, its capital structure changed to
that of a corporation. The change resulted in the Company retaining the tax
benefit for the portion of the losses generated subsequent to November 13, 2001,
whereas the previous losses were passed through to the Astralis, LLC members.
Pursuant to SEC Staff Accounting Bulletin Number 1B.2 "Pro Forma Financial
Statements and Earnings per Share", a pro forma income statement has been
presented which reflects the impact of the Company's change in capital structure
as if it had occurred March 12, 2001 (Astralis LLC's inception). This
presentation reflects the Company generating a tax benefit, which has been
offset with a valuation allowance, which includes the net operating losses
incurred by Astralis, LLC during the period from March 12, 2001 to November 13,
2001, the operating period prior to Astralis, LLC's termination.
10
ASTRALIS LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements
NOTE 3 - MARKETABLE SECURITIES
The Company's marketable equity securities consisted of certificates of
deposits, government securities and corporate bonds 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.
As of September 30, 2002, available-for-sale securities consist of the
following:
Gross Gross
Amortized Unrealized Unrealized
Due Cost Loss Gains Fair Value
----------------- ----------- ---------- ---------- -----------
Certificate of Deposits 10/2002 to 2/2003 $ 994,172 $ (267) $ 962 $ 994,867
Corporate Bonds 9/2005 500,000 (4,130) -- 495,870
Fixed Income Funds Current 701,803 (5,701) -- 696,102
Government Securities 11/2002 32,308 -- -- 32,308
----------- --------- -------- -----------
$ 2,228,283 $ (10,098) $ 962 $ 2,219,147
----------- --------- -------- -----------
Less Current Portion $ 1,723,277 $ -- $ -- $ 1,723,277
----------- --------- -------- -----------
Non-Current Portion $ 505,006 $ (10,098) $ 962 $ 495,870
=========== ========= ======== ===========
NOTE 4 - INCOME TAXES
Recognition of the benefits of the deferred tax assets and liabilities will
require that the Company generate future taxable income. There can be no
assurance that the Company will generate any earnings or any specific level of
earnings in future years. Therefore, the Company has established a valuation
allowance for all deferred assets (net of liabilities).
11
ASTRALIS LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements
NOTE 5 - CAPITAL STOCK ACTIVITY
Common Stock
In January 2002, the Company agreed to amend a subscription agreement with one
of the investors who participated in the November 2001 private placement
offering. The Company consented to reduce the number of shares in the
subscription agreement by 49,990 shares of common stock. The Company cancelled
the respective shares and returned the corresponding amount of funds to the
investor amounting to $80,000.
Certain stockholders owed $1,350,000 to the Company, under stock subscription
agreements, which were due February 13, and May 13, 2002. This money was not
paid to the Company causing the notes to become in default. On June 3, 2002 the
Company entered into a payment plan agreement with a representative of the
stockholders, whereby the stockholders will pay the amounts due, in
approximately equal amounts, over a nine-month period commencing in June 2002.
The stockholders will be subject to forfeiture of a percentage of their shares
if they do not make the required payments. The Company has also agreed to extend
the expiration date of warrants to purchase 3,150,000 shares of common stock
from December 13, 2003 to December 13, 2004.
As of September 30, 2002, the stockholders were late on the scheduled payments
in the amount of $257,000.
Preferred Stock
On December 10, 2001, the Company and SkyePharma PLC ("SkyePharma") entered into
a purchase agreement whereby SkyePharma agreed to purchase 2,000,000 shares of
Series A Convertible Preferred Stock ("Series A Preferred") at a price of $10
per share over a 13-month period with five separate closings. On December 10,
2002, the one-year anniversary of the agreement, SkyePharma will receive
registration rights on the common stock underlying its Series A Preferred
shares. The first closing occurred in December 2001 and the Company sold
1,000,000 shares of Series A Preferred for a purchase price of $10,000,000. The
second closing occurred in January 2002 and the Company sold 250,000 shares of
Series A Preferred for a purchase price of $2,500,000. The third closing
occurred in April 2002 and the Company sold 250,000 shares of Series A Preferred
for a purchase price of $2,500,000. The fourth closing occurred in July 2002 and
the Company sold 250,000 shares of Series A Preferred for a purchase price of
$2,500,000. The remaining 250,000 shares of Series A Preferred totaling
$2,500,000 are contracted to be sold on January 31, 2003.
The Company's stock price on April 30, 2002 was $2.77; consequently, pursuant to
the requirements of EITF 98-5 "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios",
the issuance of the Series A Preferred, which are convertible initially at $2.50
per share at any time, resulted in a beneficial conversion feature recorded as a
preferred stock dividend in the amount of $270,000.
Since the conversion price of the Series A Preferred is subject to reset
provisions as described above, there is a contingent beneficial conversion
feature applicable to the Series A Preferred. Using the potential conversion
price of $1.60 for the first anniversary date as limited in the purchase
agreement, ignoring any other price adjustments described above, the contingent
beneficial conversion feature would result in an additional preferred stock
dividend of $9,100,000 in December 2002.
12
ASTRALIS LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements
NOTE 6 - DEFERRED COMPENSATION
The components of deferred compensation are as follows:
Consultants
-----------
Balance at December 31, 2001 $ 398,250
Deferred compensation recorded 5,700
Amortization to stock-based compensation (99,802)
----------
Balance at September 30, 2002 $ 304,148
==========
In July 2002, the Company granted 15,000 stock options with a strike price of
$2.50, as compensation to a consultant.
NOTE 7 - OPERATING LEASES
On March 13, 2002, the Company entered into a lease agreement for laboratory and
office space. The lease period is for three years and rent will be $77,500
annually. The Company also entered into a concurrent service agreement with the
lessor of the laboratory space on a time and material basis.
On March 15, 2002, the Company leased an apartment for one key employee and
officer for one year. The lease commenced on April 15, 2002 and ends on April
14, 2003. Monthly rent will be $2,865, which will be paid by the Company.
On June 26, 2002, the Company leased an apartment for a key employee for one
year. The lease commenced on July 1, 2002 and ends on June 30, 2003. Monthly
rent will be $1,175, which will be paid by the Company.
On June 22, 2002, the Company leased an automobile for an officer of the Company
for 39 months. The lease commenced on June 22, 2002 and ends on September 22,
2005. Monthly payments will be $477, which will be paid by the Company.
13
ASTRALIS LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements
NOTE 8 - 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 September 30, Nine Months March 12, 2001
------------------------------- Ended (Inception) to
2002 2001 September 30, 2002 September 30, 2001
----------- ----------- ------------------ ------------------
Net loss $(2,822,613) $ (178,984) $(8,252,300) $ (208,316)
----------- ----------- ----------- -----------
Unrealized gain on securities:
Unrealized gain arising
during period 4,522 -- 962 --
Less: Reclassification
adjustment for loss
realized in net loss (16,976) -- (10,098) --
----------- ----------- ----------- -----------
Unrealized gain (loss), net (12,454) -- (9,136) --
----------- ----------- ----------- -----------
Comprehensive loss $(2,835,067) $ (178,984) $(8,261,436) $ (208,316)
=========== =========== =========== ===========
NOTE 9 - 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 are 14,095,237 and 0 at September 30, 2002 and 2001, respectively.
Such securities, had they been dilutive, would have been included in the
computations of diluted loss per share using the treasury stock method, or the
if-converted method, depending on the type of security.
NOTE 10 - RELATED PARTY TRANSACTIONS
A research entity owned by the spouse of the majority shareholder provided
research and development services to the Company totaling $132,826.
On December 10, 2001, the Company entered into a services agreement whereby it
agreed to pay $11,000,000 to SkyePharma in return for SkyePharma providing all
development, manufacturing, pre-clinical and clinical development services for
the Company's primary product, second generation Psoraxine, until December 31,
2002. The contract recognized that SkyePharma performed $3,000,000 of these
services in the fourth quarter of 2001 and that SkyePharma will perform and be
paid for the remaining $8,000,000 of services in 2002. The payment terms for the
services agreement are fixed. $3,000,000 was required to be paid on December 10,
2001 and was expensed in 2001.
14
ASTRALIS LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements
NOTE 10 - RELATED PARTY TRANSACTIONS (Continued)
The remaining $8,000,000 is required to be paid in eleven equal monthly
installments of $665,000, and a final payment of $685,000 in 2002. For the nine
months ended September 30, 2002, the Company expensed $5,985,000 in connection
with this agreement.
NOTE 11 - CONCENTRATIONS
The Company currently has two products that are under development. Lack of
product development or customer interest could have a materially adverse effect
on the Company. Further, significant changes in technology could lead to new
products or services that compete with the product to be offered by the Company.
These changes could materially affect the price of the Company's products or
render them obsolete.
In 2002, the Company's funding is expected to be generated from sales of its
Series A Preferred shares under a purchase agreement with SkyePharma and
collection of the subscription receivables. Should the remaining purchases of
shares not occur as specified by the purchase contract, the Company would need
to find alternative sources of financing, alter its business plan or curtail its
operations.
NOTE 12 - LIQUIDITY AND CONTINGENCIES NOT DESCRIBED ELSEWHERE
There are many steps to the process that pharmaceutical products must undergo
before they can be commercially sold and distributed in the United States. Drugs
must undergo testing in compliance with US Food and Drug Administration ("FDA")
regulations and ultimately receive FDA approval. The Company's Psoraxine product
is expected to enter initial FDA testing in 2002. FDA testing occurs in various
phases over a multiple number of years.
The Company anticipates that their current liquid resources at September 30,
2002, together with the $2,500,000 in proceeds, contractually to be received
from the sale of their Series A Preferred (see Note 5) will be sufficient to
finance its currently anticipated needs for operating and capital expenditures
for 2002 and through the completion of Phase II of the FDA testing process in
connection with its Psoraxine drug. However, the Company will need to raise
additional funds from outside sources in order to complete future phases of FDA
required testing.
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.
NOTE 13 - SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
Payment of the January 2002, April 2002 and July 2002 service fees totaling
$1,995,000 were netted against the SkyePharma January 31, 2002 and April 30,
2002 installment purchases of Company's Series A Preferred stock.
The Company recorded an unrealized loss on its securities available-for-sale in
the amount of $12,454 and $9,136 for the three months and nine months ended
September 30, 2002, respectively.
15
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 Plan Of Operations 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" Contained Elsewhere In This Quarterly
Report, 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.
Plan of Operations
Overview
We were formerly named Astralis Pharmaceuticals Ltd. and Hercules
Development Group, Inc., and were incorporated under the laws of the state of
Colorado on June 30, 1999. Subsequently we were reincorporated in the state of
Delaware on December 10, 2001 and changed our name to Astralis Ltd. In November
2001, we were a public shell company, defined as an inactive, publicly quoted
company with nominal assets and liabilities.
Our operations and financial statements prior to November 2001 are those
of Astralis LLC, a New Jersey limited liability company formed on March 12,
2001. Astralis LLC was merged into us on November 13, 2001 pursuant to the terms
of the Contribution Agreement.
The effect of our combination with Astralis LLC was a reverse merger. We
were the legal acquirer in the merger. Astralis LLC was the accounting acquirer
since its members acquired a majority ownership interest in us. Consequently,
the historical financial information included in our financial statements prior
to November 2001 are those of the accounting acquirer, Astralis LLC. The
stockholders' equity of the merged company was recapitalized to reflect the
capital structure of the legal entity (Astralis Ltd.) and the retained earning
of Astralis LLC. Pro forma financial information is not presented since the
combination is a recapitalization and not a business combination.
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.
16
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;
o Doctor and site enrollment for clinical trials of Psoraxine in the
United States; and
o Preparation of an Investigational New Drug application to obtain
approval from the United States Food and Drug Administration for the
commencement of clinical trials of Psoraxine in the United States.
Three months ended September 30, 2002 compared to the three months ended
September 30, 2001.
For the three months ended September 30, 2002:
On July 30, 2002, we sold to SkyePharma pursuant to a Purchase Agreement
dated December 10, 2001, an aggregate of 250,000 shares of our Series A
Convertible Preferred Stock, par value $.001 per share at a purchase price of
$10.00 per share, or an aggregate purchase price of $2,500,000. We received net
proceeds of approximately $1,835,000 from this placement after we netted out
from the proceeds $665,000 due to SkyePharma for services they provided under
our Service Agreement with them which were treated as an expense at the time of
payment.
For the three months ended September 30, 2002, we had no revenue and
incurred operating expenses of $2,853,119 which consisted primarily of:
o Research and development costs of $2,385,432, including $1,995,000
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 $437,089,
including professional fees and our general corporate expenditures.
As a result, during the three months ended September 30, 2002, we incurred
a net loss of $2,822,613.
For the three months ended September 30, 2001:
For the three months ended September 30, 2001, we had no revenue and
incurred operating expenses of $208,322 which consisted primarily of:
o Research and development costs of $17,571.
o General and administrative costs of approximately $160,954,
including professional fees and our general corporate expenditures.
As a result, during the three months ended September 30, 2001, we incurred
a net loss of $178,984.
Nine months ended September 30, 2002 compared to the period from March 12, 2001,
which was the date of our inception through September 30, 2001.
For the nine months ended September 30, 2002:
On July 30, 2002, we sold to SkyePharma pursuant to a Purchase Agreement
dated December 10, 2001, an aggregate of 250,000 shares of our Series A
Convertible Preferred Stock, par value $.001 per share at a purchase price of
$10.00 per share, or an aggregate purchase price of $2,500,000. We received net
proceeds of approximately $1,835,000 from this placement after we netted out
from the proceeds $665,000 due to SkyePharma for services they provided under
our Service Agreement with them which were treated as an expense at the time of
payment.
17
For the nine months ended September 30, 2002, we had no revenue and
incurred operating expenses of $8,347,189 which consisted primarily of:
o Research and development costs of $6,994,832, including $5,985,000
that was paid to SkyePharma for services provided under our Service
Agreement with them and amortization of approximately $535,716 under
our technology option license which is being amortized over a seven
year period.
o General and administrative costs of approximately $1,306,084,
including professional fees and our general corporate expenditures.
We also had a non-cash preferred stock dividend in 2002 in the amount of
$270,000. The April 30, 2002 sale of convertible preferred stock to SkyePharma
had a conversion rate to our common stock which was lower than the market price
of our common stock on that date. Therefore, under the requirements of Emerging
Issues Task Force No. 98-5 "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios",
the issuance of this preferred stock with a beneficial conversion feature
resulted in a preferred stock dividend.
As a result, during the nine months ended September 30, 2002, we incurred
a net loss of $8,522,300.
For the period from March 12, 2001, which was the date of our inception
through September 30, 2001, we had no revenue and incurred operating expenses of
$208,322 which consisted primarily of:
o Research and development costs of $23,376.
o General and administrative costs of approximately $184,299,
including professional fees and our general corporate expenditures.
As a result, during the period from March 12, 2001 through September 30,
2001, we incurred a net loss of $208,316.
The Next Twelve Months
At September 30, 2002 we had cash balances of $1,675,521 and marketable
securities of $2,219,147.
SkyePharma has agreed to purchase for $2,500,000 an additional 250,000
shares of preferred stock on January 31, 2003.
We anticipate collecting our subscription notes receivable. These
subscription notes receivable were due in two installments, with $850,000 having
been due on February 13, 2002 and the remaining $500,000 due on May 13, 2002. We
entered into a payment plan agreement with the note holders of the subscription
notes receivable. The note holders agreed to pay a $200,000 initial payment and
will make payments of $150,000 per month from July 2002 until January 2003 and a
payment of $100,000 in February 2003. Upon any default by a note holder, such
note holder will forfeit the number of shares equal to the remaining amount of
his note divided by $0.50. We received the initial payment of $200,000 and the
$150,000 payment due in July 2002. We have received $91,000 of the $150,000
payment due in August 2002. We have not received the $150,000 payment due in
September 2002 and the $150,000 payment due in October 2002. The total amount
outstanding as of November 14, 2002 is $909,000.
Based on our current operating plan, we anticipate conducting the
following activities and using our cash and expected net proceeds of the
Purchase Agreement 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 are preparing an
Investigational New Drug application to obtain approval from the
United States Food and Drug Administration for the commencement of
clinical trials of Psoraxine in the United States. Upon receiving
approval, we will commence doctor and site enrollment for these
clinical trials and then conduct clinical trials in the process of
obtaining FDA approval of Psoraxine. We will maintain ongoing
research and development of Psoraxine. We will expend approximately
$4,500,000 in connection with these activities. Included in this
amount are payments required under our Service Agreement with
SkyePharma which will amount to $2,015,000 for the last quarter of
2002 and are required to be paid in equal monthly amounts.
18
o We intend to implement our business plan and facilitate the
operations of our company. We will spend approximately $1.3 million
to pay for professional services, management salaries and salaries
of new employees.
o We also expect to expend approximately $700,000 for our public
relations, general administrative and working capital requirements.
Based on the current operating plan, we anticipate that our existing
capital resources, together with the net proceeds we receive from the Purchase
Agreement and the proceeds of the subscription notes receivable, will be
adequate to satisfy our capital requirements for approximately the twelve month
period ending September 30, 2003. However, our plans may change as we reach
milestones and as our circumstances may change.
We also expect to record an additional preferred stock dividend in
December 2002. We are subject to the requirements of EITF No. 00-27 "Application
of Issue No. 98-5 to Certain Convertible Instruments" and EITF 98-5. Since the
conversion price of our preferred stock is subject to reset provisions, there is
a contingent beneficial conversion feature. Using the potential conversion
price, as limited in the purchase agreement, of $1.60 for the December 2002
anniversary date and ignoring any other price adjustments, the contingent
beneficial conversion feature will result in a $9,100,000 preferred stock
dividend in December 2002. In December 2003 we may record an additional
preferred dividend of $8,510,000.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Based on their evaluation as of a date within 90 days of the filing date
of this Quarterly Report on Form 10-QSB, the Company's chief executive officer
and chief financial officer have concluded that the Company's disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934 (the "Exchange Act")) are effective to ensure
that information required to be disclosed by the Company in reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.
(b) Changes in internal controls.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
RISK FACTORS
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 net loss of approximately
$14,717,664 as of September 30, 2002 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 at least 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 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
19
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, our initial product
candidate, Psoraxine, may not perform in the manner we anticipate, and may not
be accepted for use by the public.
The Development Of Our Initial Product Remains In An Early Stage Of
Development And Substantial Additional Funds And Effort Will Be Necessary For
Further Development And Commercialization.
Our initial product candidate, Psoraxine, remains in an early stage of
development and will require the commitment of substantial resources to move it
towards commercialization. Psoraxine will require extensive preclinical and
clinical testing before we can submit any applications for regulatory approval.
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,
when commenced, 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.
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 our initial product candidate, 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 conducted any clinical trials for
Psoraxine in the United States, nor have we submitted any applications with the
FDA or any other regulatory authority to test any potential products in humans
or to market any product candidate. We may not be able to conduct clinical
testing or obtain the necessary
20
approvals from the FDA or other regulatory authorities to market our product.
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 obtained final regulatory approval for the
manufacture or commercial distribution of Psoraxine in Venezuela.
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 development of our initial product candidate,
Psoraxine, and we have not received approval for its use in clinical trials in
the United States. 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
under which SkyePharma will provide development, manufacturing, pre-clinical and
clinical development services for Psoraxine until December 31, 2002. However, we
do not currently have a written agreement covering any period after December 31,
2002 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.
Any Inability To Adequately Protect Our Proprietary Technologies Could
Harm Our Competitive Position.
Dr. Jose Antonio O'Daly has filed a patent application for Psoraxine, and
under the terms of a license agreement and assignment of license agreement, we
have the right to use any patent issued pursuant to that application. We
license, and do not own, the intellectual property rights to Psoraxine. In
addition, we do not have any protection from issued patents covering any of our
technology. 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.
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
21
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 Who Have Greater Resources And Experience Than
We Do May Develop Products And Technologies That 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, Amgen, Genentech, SmithKline Beecham, Protein Design Labs, Ligand
Pharmaceuticals, Schering-Plough, Pfizer 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.
We Will Need To Obtain Additional Funds To Support Our Future Operation
Expenses.
Based on our current plans, we believe that we currently have sufficient
funds to meet our operating expenses and capital requirements through at least
the next 12 months. However, the actual amount of funds that we will need during
or after the next 12 months will be determined by many factors, including those
discussed in this section. We will need additional funds to commence Phase III
studies, which is the final phase of clinical trials in humans. An inability to
obtain needed funds or to obtain them on terms favorable to us may cause us to
delay, scale back or eliminate some or all of our research and development
programs or to license third parties to develop or market products or
technologies that we would otherwise seek to develop or market ourselves.
Raising additional funds by selling additional shares of our capital stock will
dilute the ownership interest of our stockholders.
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
our success. Although we believe we can successfully attract and retain
22
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 our initial product candidate, 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. We currently do not maintain clinical
liability insurance coverage. Even if we obtain such an insurance policy, it may
not sufficiently cover any claims made against us. Clinical trial liability
insurance may be expensive, difficult to obtain 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 (greater that 5%
stockholders) together control approximately 73.17% 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. In addition, this
concentration of ownership may delay or prevent a change in control of us and
might affect the market price of our common stock, even when a change in control
may be in the best interest of all stockholders. 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.
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
November 12, 2002, 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
stockholders and by us, including the selling stockholders pursuant to this
prospectus and subsequent sale of common stock by SkyePharma 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
37,538,189 shares of our common stock outstanding. If all options and warrants
currently outstanding to purchase shares of our common stock are exercised and
all of the 2,000,000 shares of preferred stock are converted into common stock
at the initial conversion rate of four shares of common stock for each share of
preferred stock, there will be approximately 52,618,416 shares of common stock
outstanding. The conversion ratio for the preferred stock is subject to multiple
adjustments for three years depending on our stock price maintaining certain
levels. The ratio is also subject to anti-dilution protection. However, the
conversion ratio will not adjust to a level greater than approximately 50 shares
of common stock for each share of preferred stock. At the current stock price on
November 12, 2002 of $0.43 per share, the conversion ratio would adjust, subject
to limitations in the purchase agreement, to 6.25 shares of common stock for
each share of preferred stock. The first date for determining an adjustment
based on stock price is December 10, 2002. Subsequent adjustments may be made on
December 10, 2003 and December 10, 2004. Of the outstanding shares, up to
9,931,415
23
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.
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 Over-The-Counter 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.
24
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
We entered into a Purchase Agreement ("Purchase Agreement") dated as of
December 10, 2001 with SkyePharma PLC, a company incorporated under the laws of
England and Wales ("SkyePharma"). As of November 11, 2002, pursuant to the
Purchase Agreement, SkyePharma purchased 1,750,000 shares of our Series A
Convertible Preferred Stock, $.001 par value per share ("Preferred Stock"), at a
purchase price of $10.00 per share, or an aggregate purchase price of
$17,500,000. Pursuant to the Purchase Agreement, SkyePharma will make a total
equity investment in our company of up to $20,000,000. SkyePharma has agreed to
purchase for $2,500,000 an additional 250,000 shares of Preferred Stock on
January 31, 2003. Each share of Preferred Stock issued pursuant to the Purchase
Agreement is initially convertible into four shares of Common Stock at the
option of SkyePharma initially at a conversion rate of $2.50 per share of Common
Stock. The conversion ratio for the Preferred Stock is subject to multiple
adjustments for three years depending on our stock price maintaining certain
levels. The ratio is also subject to anti-dilution protection. However, the
conversion ratio will not adjust to a level greater than approximately 50 shares
of Common Stock for each share of Preferred Stock. At the current stock price on
November 12, 2002 of $0.43 per share, the conversion ratio would adjust, subject
to limitations in the Purchase Agreement, to 6.25 shares of Common Stock for
each share of Preferred Stock. The first date for determining an adjustment
based on stock price is December 10, 2002. Subsequent adjustments may be made on
December 10, 2003 and December 10, 2004. In connection with the sale of
Preferred Stock, we relied on the exemption from registration with the
Securities and Exchange Commission provided under Section 4(2) and Rule 506 of
Regulation D under the Securities Act of 1933. We relied on the fact that the
offering of Preferred Stock was only made available to "Accredited Investors" as
defined in Rule 501 of Regulation D and the required number of manually executed
originals and true copies of Form D were duly and timely filed with the
Securities and Exchange Commission. No underwriter was used in connection with
the offering.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
-------------- -----------
3.1 * Certificate of Incorporation of Astralis Ltd.
3.2 * Bylaws of Astralis Ltd.
10.1 * Agreement and Plan of Merger
10.2 # Contribution Agreement dated September 10, 2001
10.3 ## Purchase Agreement dated December 10, 2001
10.4 ## Stockholder Agreement dated December 10, 2001
10.5 + 2001 Stock Option Plan
10.6 ** Sub-Lease Agreement
10.7 ** License Agreement dated April 26,2001 between Jose
Antonio O'Daly and Astralis LLC
10.8 ** Assignment of License
10.9 ** Form of Warrant
10.10 ++ Agreement for Services dated December 10, 2001 between
SkyePharma Inc. and Astralis Ltd.
10.11 ++ Technology Access Option Agreement dated December 10,
2001 by and among SkyePharma Inc., SkyePharma Holding AG
and Astralis Ltd.
----------
* Previously filed with the Securities and Exchange Commission as an Exhibit to
the Preliminary Proxy Statement for Astralis Pharmaceuticals Ltd. on November
16, 2001.
# Previously filed with the Securities and Exchange Commission as an Exhibit to
the Current Report on Form 8-K for Astralis Pharmaceuticals Ltd. on November 14,
2001.
## Previously filed with the Securities and Exchange Commission as an Exhibit to
the Current Report on Form 8-K for Astralis Ltd. on December 14, 2001.
25
+ Previously filed with the Securities and Exchange Commission as an Exhibit to
the Preliminary Proxy Statement for Hercules Development Group Inc. on October
4, 2001.
** Previously filed with the Securities and Exchange Commission as an Exhibit to
the Registration Statement on Form SB-2 for Astralis Ltd. on March 14, 2002.
++ Previously filed with the Securities and Exchange Commission as an Exhibit to
the Amendment to the Registration Statement on Form SB-2 for Astralis Ltd. on
July 23, 2002.
(b) Reports on Form 8-K
On August 9, 2002, we filed a current report on Form 8-K reporting that we
submitted to the Securities and Exchange Commission the certification of our
report on Form 10-QSB for the quarter ended June 30, 2002 by our chief executive
officer and chief financial officer as required pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
26
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: November 14, 2002 By: /s/ Mike Ajnsztajn
--------------------------------------------
Mike Ajnsztajn
Chief Executive Officer
(Principal Executive Officer)
Dated: November 14, 2002 By: /s/ Gina Tedesco
--------------------------------------------
Gina Tedesco
Chief Financial Officer
(Principal Financial and Accounting Officer)
27
Certification of Quarterly Report
I, Mike Ajnsztajn, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Astralis Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Mike Ajnsztajn
----------------------------------
Name: Mike Ajnsztajn
Title: Chief Executive Officer
28
Certification of Quarterly Report
I, Gina Tedesco, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Astralis Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Gina Tedesco
----------------------------------
Name: Gina Tedesco
Title: Chief Financial Officer
29