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 March 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)
Astralis Pharmaceuticals Ltd.
135 Columbia Turnpike, Suite 301
Florham Park, New Jersey 07932
(Former name and former address, if changed since last report)
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 March
31, 2002 was 37,538,179.
ASTRALIS LTD.
INDEX
FOR QUARTERLY PERIOD ENDED MARCH 30, 2002
Part I. Financial Information 3
Item 1. Condensed Balance Sheets as of March 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 of Financial Condition and
Results of Operations -- Plan of Operation 16
Risk Factors 20
Part II. Other Information 26
Item 2. Changes in Securities and Use of Proceeds 26
Item 6. Exhibits and Reports on Form 8-K 26
2
PART I.
ITEM 1. FINANCIAL STATEMENTS
ASTRALIS LTD.
(A Development Stage Entity)
Condensed Balance Sheet
ASSETS
March 31, December 31,
2002 2001
---------- ------------
(Unaudited) (Audited)
Current Assets
Cash and cash equivalents $ 157,853 $4,451,874
Marketable securities - current 1,000,000 --
Interest receivable 54,992 --
Prepaid expenses 28,429 38,461
---------- ----------
Total Current Assets 1,241,274 4,490,335
Marketable securities - noncurrent 2,694,424 --
Intangible Assets, Net - Related Party 4,761,904 4,940,476
Other Intangible Assets, Net 38,304 25,054
Property and Equipment, Net 61,736 1,586
Deposits 28,190 --
---------- ----------
$8,825,832 $9,457,451
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable - related party $ -- $ 142,446
Accounts payable and accrued expenses 150,363 240,637
---------- ----------
Total Current Liabilities 150,363 383,083
---------- ----------
Commitments and Contingencies
Stockholders' Equity
Convertible preferred stock, Series A,
$.001 par value; 2,000,000 shares
authorized; 1,250,000 and
1,000,000 issued and outstanding at
2002 and 2001, respectively
(liquidation preference - $12,706,713 at 2002) 1,250 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 19,432,978 17,013,223
Deferred compensation (365,062) (398,250)
Common stock subscriptions receivable (1,350,000) (1,350,000)
Accumulated other comprehensive gain (loss) (56,158) --
Deficit accumulated in the development stage (8,991,293) (6,195,364)
---------- ----------
Total Stockholders' Equity 8,675,469 9,074,368
---------- ----------
$8,825,832 $9,457,451
========== ==========
See notes to condensed financial statements.
3
ASTRALIS LTD.
(A Development Stage Entity)
Condensed Statements of Operations
(Unaudited)
Three Months March 12, 2001 March 12, 2001
Ended (Inception) to (Inception) to
March 31, March 31, March 31,
2002 2001 2002
----------- -------------- --------------
Revenues $ -- $ -- $ --
----------- ----------- ------------
Operating Expenses
Research and development - related party 2,295,534 -- 5,498,769
Research and development -- 3,000 28,540
Depreciation and amortization 1,235 -- 2,066
General and administrative 529,585 220 1,381,598
----------- ----------- ------------
Total Operating Expenses 2,826,354 3,220 6,910,973
----------- ----------- ------------
Loss From Operations (2,826,354) (3,220) (6,910,973)
Interest Income 30,425 -- 39,680
----------- ----------- ------------
Net Loss (2,795,929) (3,220) (6,871,293)
Preferred Stock Dividends -- -- (2,120,000)
----------- ----------- ------------
Net Loss to Common Stockholders $(2,795,929) $ (3,220) $ (8,991,293)
=========== =========== ============
Pro Forma Information
Net loss $ (3,220)
Pro forma tax provision --
-----------
Pro forma net loss $ (3,220)
===========
Basic and Diluted Loss per Common Share $ (0.07) $ --
=========== ===========
Basic and Diluted Weighted Average Common
Shares Outstanding 37,551,373 21,505,000
=========== ===========
See notes to condensed financial statements.
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
ASTRALIS LTD.
(A Development Stage Entity)
Condensed Statements of Stockholders' Eqtity
(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 $ -- $(6,195,364) $ 9,074,368 $ --
====== =========== =========== ======
See notes to condensed financial statements.
6
ASTRALIS LTD.
(A Development Stage Entity)
Condensed Statements of Stockholders' Equity
(Unaudited)
Preferred Stock Common Stock Additional
------------------- --------------------- Paid-In
Shares Amount Shares Amount Capital
--------- -------- ---------- -------- -----------
Balances Brought Forward 1,000,000 $1,000 37,588,179 $3,759 $17,013,223
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; 1,000,000 shares
at $10.00 per share 250,000 250 -- -- 2,499,750
Amortization of deferred compensation -- -- -- -- --
COMPREHENSIVE LOSS
Net loss -- -- -- -- --
Other comprehensive loss:
Unrealized gain (loss) on
available-for-sale securities -- -- -- -- --
--------- ------ ---------- ------ -----------
Total Comprehensive Loss
Balance, March 31, 2002 (unaudited) 1,250,000 $1,250 37,538,189 $3,754 $19,432,978
========= ====== ========== ====== ===========
See notes to condensed financial statements.
7
ASTRALIS LTD.
(A Development Stage Entity)
Condensed Statements of Stockholders' Equity
(Unaudited)
Deficit
Accumulated Accumulated
Other During the
Subscription Deferred Comprehensive Development Comprehensive
Receivable Compensation Loss Stage Total Loss
------------ ------------ -------------- ------------ ----------- -------------
Balances Brought Forward $(1,350,000) $(398,250) $ -- $(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;
1,000,000 shares at $10.00
per share -- -- -- -- 2,500,000
Amortization of deferred -- 33,188 -- -- 33,188
compensation
COMPREHENSIVE LOSS
Net loss -- -- -- (2,795,929) (2,795,929) $(2,795,929)
Other comprehensive loss:
Unrealized gain (loss) on
available-for-sale securities -- -- (56,158) -- (56,158) (56,158)
----------- --------- -------- ----------- ----------- -----------
Total Comprehensive Loss $(2,852,087)
===========
Balance, March 31, 2002 (unaudited) $(1,350,000) $(365,062) $(56,158) $(8,991,293) $ 8,675,469
=========== ========= ======== =========== ===========
See notes to condensed financial statements.
8
ASTRALIS LTD.
(A Development Stage Entity)
Condensed Statement of Cash Flows
(Unaudited)
Three Months March 12, 2001 March 12, 2001
Ended (Inception) to (Inception) to
March 31, 2002 March 31, 2001 March 31, 2002
-------------- -------------- ---------------
Cash Flows from Operating Activities
Net loss $(2,795,929) $(3,220) $(6,871,293)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 179,807 -- 240,162
Amortization of net premium paid on investments 14,375 -- 14,375
Members' contributed salaries -- 11,936 12,986
Research and development service fee netted against
proceeds received from preferred stock issuance 665,000 -- 3,665,000
Operating expenses paid by related parties on
behalf of Company -- (5,000) 17,587
Amortization of deferred compensation 33,188 (3,716) 165,938
Compensatory common stock -- -- 135,000
Changes in assets and liabilities
Prepaid expenses 10,032 -- (28,429)
Interest receivable (54,992) -- (54,992)
Deposits (28,190) -- (28,190)
Accounts payable - related party (142,446) -- --
Accounts payable and accrued expenses (90,274) -- 150,363
----------- ------- -----------
Net Cash Used in Operating Activities (2,209,429) -- (2,581,493)
----------- ------- -----------
Cash Flows from Investing Activities
Purchases of marketable securities (4,520,957) -- (4,520,957)
Proceeds from sale of marketable securities 756,000 -- 756,000
Expenditures related to patent (13,745) -- (24,000)
Purchases of property and equipment (60,890) -- (62,510)
----------- ------- -----------
Net Cash Used in Investing Activities (3,839,592) -- (3,851,467)
----------- ------- -----------
Cash Flows from Financing Activities
Repurchase of common stock (80,000) -- (80,000)
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 1,835,000 -- 3,782,496
----------- ------- -----------
Net Cash Provided by Financing Activities 1,755,000 -- 6,590,813
----------- ------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (4,294,021) -- 157,853
Cash and Cash Equivalents, Beginning of Period 4,451,874 -- --
----------- ------- -----------
Cash and Cash Equivalents, End of Period $ 157,853 $ -- $ 157,853
=========== ======= ===========
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 Company's Annual Report on Form
10-KSB for the year ended December 31, 2001, for an expanded discussion of the
Company's financial disclosures and accounting policies. 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.
NOTE 2 - DESCRIPTION OF BUSINESS
Nature of Operations
Astralis, Ltd. (the "Company") 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 Company is the surviving legal entity.
As a result of the transaction, the former members of Astralis, LLC
acquired a majority interest in the Company.
The combination of the Company and Astralis, LLC has been treated as a
recapitalization of the Company. The Company was the legal acquirer in the
merger. Astralis, LLC was the accounting acquirer since its members 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.
10
ASTRALIS LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements
NOTE 2 - DESCRIPTION OF BUSINESS (Continued)
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 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.
NOTE 3 - MARKETABLE SECURITIES
The Company's marketable equity securities consisted of certificates of
deposits and government securities 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 March 31, 2002, available-for-sale securities consist of the
following:
Gross Gross
Amortized Unrealized Unrealized
Due Cost Loss Gains Fair Value
--------- ----------- ---------- ---------- ------------
Certificate of 4/2002 to
Deposits 2/2003 $ 2,390,336 $ (2,152) $ 546 $ 2,388,730
Government 4/2006 to
Securities 11/2011 1,360,246 (54,552) -- 1,305,694
----------- -------- ----- -----------
$ 3,750,582 $(56,704) $ 546 $ 3,694,424
----------- -------- ----- -----------
Less Current
Portion (1,000,000) -- -- (1,000,000)
----------- -------- ----- -----------
Non-Current
Portion $ 2,750,582 $(56,704) $ 546 $ 2,694,424
=========== ======== ===== ===========
11
ASTRALIS LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements
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).
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.
Preferred Stock
On December 10, 2002, 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 remaining 500,000 shares of Series A
Preferred totaling $5,000,000 are contracted to be sold in two equal
installments, which are scheduled to close on July 31, 2002 and January 31,
2003.
NOTE 6 - DEFERRED COMPENSATION
The components of deferred compensation are as follows:
Consultants
-----------
Balance at December 31, 2001 $ 398,250
Deferred compensation recorded --
Amortization to stock-based compensation (33,188)
---------
Balance at March 31, 2002 $ 365,062
=========
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.
12
ASTRALIS LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements
On March 15, 2002, the Company leased an apartment for one majority
shareholder for one year. The lease will start from April 15, 2002 and end on
April 14, 2003. Monthly rent will be $2,865, which will be paid by the Company.
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 March 12, 2001
Ended (Inception) to
March 31, 2002 March 31, 2001
-------------- --------------
Net loss $(2,795,929) $(3,220)
Other comprehensive loss
Unrealized loss, net (56,158) --
----------- -------
Comprehensive loss $(2,852,087) $(3,220)
=========== =======
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, 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 12,080,239 and 0 at March 31, 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 $121,962.
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, up to
the completion of Phase II clinical studies. 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.
13
ASTRALIS LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements
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 three
months ended March 31, 2002, the Company expensed $1,995,000 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 sole source of funding is expected to be generated
from sales of its Series A Preferred shares under a purchase agreement with
SkyePharma. 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 multiple number of years.
The Company anticipates that their current liquid resources, together with
the $5,000,000 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 vaccine. 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 INFOMRATION
Supplemental Disclosures
Cash Paid for Interest and Taxes $300
====
Payment of the January 2002 service fee in the amount of $665,000 was
netted against the SkyePharma January 31, 2002 installment purchase of Company
Series A Preferred.
14
ASTRALIS LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements
The Company recorded an unrealized loss on its securities
available-for-sale in the amount of $56,158.
NOTE 14 - SUBSEQUENT EVENTS
On April 30, 2002, the Company and SkyePharma completed the third closing
of the purchase agreement whereby the Company sold 250,000 shares of Series A
Preferred Stock for a purchase price of $2,500,000.
As of May 14, 2002, the Company had not received payment on the
subscription notes receivable, which were due February 13, 2002 and May 13,
2002.
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Following Discussion Of Our Financial Condition And Results Of Operations
Should Be Read In Conjunction With Our Financial Statements And The Related
Notes Included In Item 1 Above And Our Audited Financial Statements And Related
Notes Thereto Included In Our 2001 Annual Report Filed On Form 10-KSB For Such
Period. 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 Annual 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 were formerly named Astralis Pharmaceuticals, Ltd. and Hercules
Development Group, Inc. ("Hercules"), 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 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.
16
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 acquiror, 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.
We are primarily engaged in:
o identifying a treatment for psoriasis,
o developing the second generation drug,
o applying for the patent at the United States Patent and Trademark
Office,
o discussing clinical trial design with the FDA and preparing an
Investigation of New Drug application ("IND Application") for the
FDA which we anticipate filing in the second half of 2002.
Results of Operations
For the three months ended March 31, 2002:
Our current operations began in March 2001 and therefore, we have no prior
period with which to compare our results of operations for the three months
ended March 31, 2002.
On January 31 2002, we sold to SkyePharma pursuant to a purchase agreement
dated December 10, 2001 (the "Purchase Agreement"), 250,000 shares of our Series
A Convertible Preferred Stock, par value $.001 per share ("Preferred Stock") 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 a $665,000 payment due to
SkyePharma for services they provided under our services agreement with them
which was expensed at the time of payment.
For the three months ended March 31, 2002 we had no revenue and we
incurred operating expenses of $2,826,354 which consisted primarily of:
o Research and development costs of $2,295,534, including $1,995,000
that was paid to SkyePharma for services provided under our services
agreement with them and amortization of approximately $178,000 of
our technology option license which is being amortized over a seven
year period.
o General and administrative costs of approximately $529,585,
including professional fees related to our merger with Astralis LLC
and the related investor relations and marketing expenses and our
general corporate expenditures.
For the period March 12, 2001 (date of inception) through December 31, 2001:
Our current operations began on March 2001 and therefore, we have no prior
period with which to compare our results of operations.
For the period from March 12, 2001, which was the date of our inception,
through December 31, 2001 we had no revenue and incurred a net loss of
$6,195,364.
17
During 2001 we raised funds from the following private placement offerings
and agreements:
o Under a contribution agreement dated September 10, 2001, five
investors purchased units ("Units") from Astralis LLC consisting of
an aggregate of 2,700,000 membership interests (the "Membership
Interests") in Astralis LLC and options to purchase 6,300,000
additional Membership Interests in Astralis LLC for an exercise
price of $1.60 per Membership Interest. On November 13, 2001 at the
closing of the transaction under the Contribution Agreement, the
aforementioned Units were exchanged for an aggregate of 2,700,000
shares of our Common Stock and warrants to purchase 6,300,000 shares
of our Common Stock at an exercise price of $1.60 per share. The
aggregate purchase price for such Units was $1,350,000 and was paid
with subscription notes. These subscription notes receivable are due
in two installments with $850,000 having been due on February 13,
2002 and the remaining $500,000 due on May 13, 2002.
o During November of 2001 we engaged in a private placement pursuant
to which we sold an aggregate of 2,076,179 shares of our Common
Stock and issued warrants to purchase an aggregate of 415,237 shares
of our Common Stock at an exercise price of $4.00 per share. We
received proceeds, net of offering costs and payments of pre-merger
shell costs, in the amount of $2,752,495.
o In December of 2001, we sold to SkyePharma under the Purchase
Agreement 1,000,000 shares of our Series A Convertible Preferred
Stock, par value $.001 per share ("Preferred Stock") at a purchase
price of $10.00 per share, or an aggregate purchase price of
$10,000,000. We received net proceeds of approximately $1,950,000
from this placement after the following expenditures were netted out
from the proceeds:
o $5 million payment due to SkyePharma in connection with our
purchase of the technology option license from SkyePharma,
o $3 million payment due to SkyePharma for services they
provided under our services agreement with them which was
expensed at the time of payment, and
o offering costs of approximately $50,000.
During 2001 we incurred operating expenses of $4,084,619 which consisted
primarily of:
o Research and development costs of $3,231,775, including $3 million
that was paid to SkyePharma for services provided under our services
agreement with them and amortization of approximately $60,000 of our
technology option license which is being amortized over a seven year
period.
o General and administrative costs of approximately $850,000,
including professional fees related to our merger with Astralis LLC
and the related investor relations and marketing expenses and our
general corporate expenditures.
We also had a non-cash preferred stock dividend in 2001 in the amount of
$2.12 million. This resulted from our December 10, 2001 sale of convertible
preferred stock to SkyePharma which had a conversion rate to our Common Stock
which was lower than the market price of our Common Stock on that date.
Therefore, we were required to record a preferred dividend calculated by
multiplying the number of preferred shares sold on that date by the difference
between the conversion price and the market price.
18
Plan of Operation
At March 31, 2002 we had cash balances of $157,853, current marketable
securities of $1,000,000 and non-current marketable securities of $2,700,000.
On April 30, 2002 we sold 250,000 shares of our Preferred Stock to
SkyePharma 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 a $665,000 payment due to
SkyePharma for services they provided under our services agreement with them
which was expensed at the time of payment.
SkyePharma has agreed to purchase for $5,000,000 an additional 500,000
shares of Preferred Stock, in two equal installments on July 31, 2002 and
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.
However, as of May 14, 2002 we have not received payment on the initial notes
due.
We anticipate using our cash, marketable securities and expected net
proceeds of the Purchase Agreement over the course of the next 12 months as
follows:
o Approximately $8 million to conduct clinical trials to obtain FDA
approval of Psoraxine and transfer the research and development to
the United States, which includes leasing appropriate laboratory and
corporate office facilities. Included in this amount are payments
required under our services agreement with SkyePharma which will
amount to $6 million for the last three quarters of 2002 and are
required to be paid in equal monthly amounts;
o Approximately $1.5 million to pay management salaries and those of
two new employees;
o Approximately $1.5 million for public relations and 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 next 12
months.
Financial Condition
As of March 31, 2002, we had total current assets in the amount of
$1,241,274, total liabilities of $150,363 and working capital of $1,090,911. We
had a deficit accumulated during the development stage of $8,991,293 as of March
31, 2002; however, our total shareholders' equity as of March 31, 2002, was
$8,675,469. We expect to continue to operate at a deficit until such time, if
ever, our operations generate
19
sufficient revenues to cover our costs. There can be no assurance that our
financial condition will improve.
Net cash used in operating activities was $2,209,429 for the three months
ended March 31, 2002. During this same period net cash provided by financing
activities was $1,775,000. Cash decreased by $4,294,021, of which approximately
$3,700,000 was invested in marketable securities, from $4,451,874 at the
beginning of the period to $157,853 as of March 31, 2002.
Inflation
We do not believe that inflation has had a material impact on our
business.
Seasonality
We do not believe that our business is seasonal.
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 are still
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 $8,991,293 as of March
31, 2002 which has increased to date. We expect that substantial losses will
continue for the foreseeable future. If we are ever 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. The
amount of time necessary to successfully commercialize any of our product
candidates is long and uncertain 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.
Our technologies are new and our sole product candidate to date,
Psoraxine, is in an early stage of development. We may not develop products that
prove to be safe and effective, meet applicable regulatory standards, are
capable of being manufactured at reasonable costs, or can be marketed
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 sole
product candidate, Psoraxine. Our research and development and clinical trials
may not indicate that our products are safe and effective, in which case
regulatory authorities are not likely to approve them. In addition, even if our
research and development efforts are successfully completed, our initial product
candidate, Psoraxine, may not perform in the manner we anticipate, and may not
be accepted for use by the public.
Our Initial Product Is In An Early Stage Of Development And Substantial
Additional Funds And Effort Will Be Necessary For Development And
Commercialization.
20
Our initial product candidate, Psoraxine, is 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 through preclinical testing and clinical trials that our
product candidate is safe and effective in humans. Conducting clinical trials is
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. Our
clinical trials, when commenced, may be suspended at any time if we or the U.S.
Food and Drug Administration ("FDA") believe the patients participating in our
studies are exposed to unacceptable health risks. We may encounter problems in
our studies which will cause us or the FDA to delay or suspend the studies. Our
commencement and rate of completion of clinical trials may be delayed by many
factors, including:
o ineffectiveness of the study compound, or perceptions by physicians
that the compound is not effective for 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.
If any future clinical trials are not successful, our business, financial
condition and results of operations will be harmed.
Our Potential Therapeutic Products Are Subject To A Lengthy And Uncertain
Regulatory Process. If Our Potential Products Are Not Approved, 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 can file a new drug application license with the
FDA, the product must undergo extensive testing, including animal and human
clinical trials, which can take many years and require substantial expenditure.
Data obtained from such testing are 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. The regulatory process is expensive and time consuming.
Because our initial product candidate, Psoraxine, involves the application
of new technologies and may be used upon new therapeutic approaches, it may be
subject to more rigorous review by government regulatory authorities, and
government regulatory authorities 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 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, we have
obtained regulatory approval for clinical testing of Psoraxine in
21
Venezuela, but we have not obtained final regulatory approval for the
manufacture and sale 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 a
product. Further, once regulatory approval is obtained, a marketed product and
its manufacturer are subject 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.
Our initial product candidate, Psoraxine, has not been developed
sufficiently or been approved for clinical trials. 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 and sell our products on a commercial scale. For us 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 all development, manufacturing, pre-clinical and clinical development
services for Psoraxine for a period lasting until the completion of our Phase II
clinical studies; however, we do not currently have a similar agreement covering
the period following the completion of our Phase II clinical studies 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.
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 our proprietary technologies are covered by valid and
enforceable patents or are effectively maintained 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
22
competitive advantages. If the use or validity of any of our patents is ever
challenged, 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 are unable to 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.
The biotechnology industry is characterized by rapid technological change
and is 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 include
SmithKline Beecham, Protein Design Labs, Ligand Pharmaceuticals,
Schering-Plough, Pfizer and Novartis. These organizations may develop
technologies that are 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 fund 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 for our product candidate. When additional funds are required and we are
unable to obtain them on terms favorable to us, we may be required to delay,
scale back or eliminate some or all or 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. If we raise additional
funds by selling additional shares of our capital stock, the ownership interest
of our stockholders will be diluted.
If We Lose Our Key Personnel Or Are Unable To Attract And Retain
Additional Personnel, We May Be Unable to Discover And Develop Our Products.
23
We are highly dependent 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 will be successful in attracting
and retaining qualified personnel, competition may be intense 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 be sufficient to cover claims that may be made against us. Clinical trial
liability insurance is 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. If we are sued for any injuries caused
by our products, our liability could exceed our total assets.
Some Of Our Existing Stockholders Can Exert Control Over Us, And May Not
Make Decisions That Are In The Best Interests Of All Stockholders.
Our officers, directors and principal stockholders (greater that 5%
stockholders) together control approximately 84.58% of our outstanding Common
Stock. As a result, these stockholders, if they act together, will be able to
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 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 is expected to continue
to be highly volatile. As of May 14, 2002, the price range of our common stock
was between $1.47 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 any 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.
24
There Is A Large Number Of Shares That 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
37,538,179 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,
there will be approximately 52,618,416 shares of Common Stock outstanding. Of
the outstanding shares, up to 9,931,415 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. If the sale and distribution of our shares
were to occur, the market price of our Common Stock could decline as a result of
the introduction of these shares into the public market.
Our Common Stock Is Classified 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 is traded 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 is not traded 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 is classified as a "penny stock." SEC Rule 15g-9 under the Securities and
Exchange Act of 1934, as amended ("Exchange Act") 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 that investments in penny stocks are
suitable 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.
25
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 April 31, 2002, pursuant to the Purchase
Agreement, SkyePharma purchased 1,500,000 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 $15,000,000.
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 $5,000,000 an additional 500,000 shares of Preferred Stock in two
equal installments on July 31, 2002 and January 31, 2003. Each share of
Preferred Stock issued pursuant to the Purchase Agreement is 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. 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 was only made available to "Accredited
Investors" as defined in Rule 501 of Regulation D, the offering of Preferred
Stock pursuant to the Purchase Agreement was made available to less than 35
purchasers as required by Rule 506(a)(2) 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 Astarlis 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
----------
* Previously filed with the Securities and Exchange Commission as an Exhibit
to the Preliminary Proxy Statement for Astralis Pharmaceuticals Ltd. on
November 16, 2001.
** To be filed by amendment.
# 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.
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## 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.
+ 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.
(b) Reports on Form 8-K
Not applicable.
27
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)
By: /s/ Mike Ajnsztajn
----------------------------
Mike Ajnsztajn
Chief Executive Officer
In accordance with the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons in the capacities and
on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Dr. Jose Antonio O'Daly Chairman of the Board May 15, 2002
---------------------------
Dr. Jose Antonio O'Daly
/s/ Mike Ajnsztajn Chief Executive Officer and May 15, 2002
---------------------------
Mike Ajnsztajn Director
(principal executive officer)
/s/ Gina Tedesco Chief Financial Officer and May 15, 2002
---------------------------
Gina Tedesco Director
(principal financial and
accounting officer)
Director May __, 2002
---------------------------
Steven Fulda
/s/ Gaston Liebhaber Director May 15, 2002
---------------------------
Gaston Liebhaber
Director May __, 2002
---------------------------
Fabien Pictet
Director May __, 2002
---------------------------
Michael Ashton
28