================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended June 30, 2004
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _____ to _____
Commission file number: 000-30997
ASTRALIS LTD.
(Exact name of small business issuer as specified in its charter)
Delaware 84-1508866
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
75 Passaic Avenue
Fairfield, New Jersey 07004
(Address of principal executive offices)
(973) 227-7168
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 72,998,055 shares of Common
Stock outstanding as of June 13, 2004.
Transitional Small Business Disclosure Format (check one):
Yes |_| No |X|
================================================================================
ASTRALIS LTD.
INDEX
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
Part I Financial Information............................................ 2
Item 1 Condensed Balance Sheets......................................... 2
Condensed Statements of Operations (unaudited)................... 3
Condensed Statements of Cash Flows (unaudited)................... 4
Notes to Condensed Financial Statements (unaudited).............. 5
Item 2 Management's Discussion and Analysis or Plan of Operations....... 10
Item 3 Controls and Procedures.......................................... 11
Risk Factors..................................................... 11
Part II Others Information............................................... 16
Item 6 Exhibits and Reports on Form 8-K................................. 18
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASTRALIS LTD.
(A Development Stage Entity)
Condensed Balance Sheets
ASSETS
June 30, December 31,
2004 2003
------------ ------------
(Unaudited) (Audited)
Current Assets
Cash and cash equivalents $ 241,372 $ 10,660
Marketable securities 3,741,247 1,374,174
Prepaid expense - related party 503,750 1,007,500
Prepaid expenses and supplies 139,131 171,939
------------ ------------
Total Current Assets 4,625,500 2,564,273
Intangible Assets, Net - Related Party 3,154,756 3,511,900
Other Intangible Assets, Net 113,462 94,640
Property and Equipment, Net 257,909 293,049
Deposits 29,953 29,953
------------ ------------
$ 8,181,580 $ 6,493,815
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 213,897 $ 279,506
------------ ------------
Total Current Liabilities 213,897 279,506
------------ ------------
Commitments and Contingencies
Stockholders' Equity
Convertible preferred stock, Series A, $.001 par value;
(authorized - 3,000,000 shares authorized at 2004 and 2003;
issued and outstanding - 0 and 2,000,000 at 2004 and 2003)
liquidation preference - $0 and $22,122,600 at 2004 and 2003 -- 2,000
Common stock; $.0001 par value (authorized - 150,000,000 shares
at 2004 and 2003; issued and outstanding - 72,998,055 and
37,538,189 at 2004 and 2003 and 150,000 shares issuable at 2004) 7,315 3,754
Additional paid-in capital 52,084,002 35,929,864
Deferred compensation (2,246) (4,822)
Stock subscriptions receivable -- (24,000)
Accumulated other comprehensive loss (83,881) (27,698)
Deficit accumulated in the development stage (44,037,507) (29,664,789)
------------ ------------
Total Stockholders' Equity 7,967,683 6,214,309
------------ ------------
$ 8,181,580 $ 6,493,815
============ ============
The accompanying notes are an integral part of these condensed financial
statements.
2
ASTRALIS LTD.
(A Development Stage Entity)
Condensed Statements of Operations
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30, March 12, 2001
----------------------------- ----------------------------- (Inception) to
2004 2003 2004 2003 June 30, 2004
------------ ------------ ------------ ------------ --------------
Revenues $ -- $ -- $ -- $ -- $ --
------------ ------------ ------------ ------------ ------------
Operating Expenses
Research and development - related party 430,447 430,447 860,894 860,894 12,620,316
Research and development 689,800 552,042 1,590,494 1,335,220 4,870,062
Depreciation and amortization 7,530 32,994 15,040 12,423 57,661
General and administrative 762,317 324,381 1,184,215 643,150 4,700,825
------------ ------------ ------------ ------------ ------------
Total Operating Expenses 1,890,094 1,339,864 3,650,643 2,851,687 22,248,864
------------ ------------ ------------ ------------ ------------
Loss From Operations (1,890,094) (1,339,864) (3,650,643) (2,851,687) (22,248,864)
Investment Income 15,349 47,918 27,925 85,027 208,471
------------ ------------ ------------ ------------ ------------
Loss Before Income Tax Benefit (1,874,745) (1,291,946) (3,622,718) (2,766,660) (22,040,393)
Income Tax Benefit -- -- -- -- 221,636
------------ ------------ ------------ ------------ ------------
Net Loss (1,874,745) (1,291,946) (3,622,718) (2,766,660) (21,818,757)
Preferred Stock Dividends -- -- (10,750,000) -- (22,218,750)
------------ ------------ ------------ ------------ ------------
Net Loss to Common Stockholders $ (1,874,745) $ (1,291,946) $(14,372,718) $ (2,766,660) $(44,037,507)
============ ============ ============ ============ ============
Basic and Diluted Loss per Common Share $ (0.03) $ (0.03) $ (0.21) $ (0.07) $ (1.10)
============ ============ ============ ============ ============
Basic and Diluted Weighted Average Common
Shares Common Shares Outstanding 73,042,560 37,538,189 68,951,986 37,538,189 40,057,020
============ ============ ============ ============ ============
The accompanying notes are an integral part of these condensed financial
statements.
3
ASTRALIS LTD.
(A Development Stage Entity)
Condensed Statements of Cash Flows
(Unaudited)
Six Months Ended March 12, 2001
------------------------------- (Inception) to
June 30, 2004 June 30, 2003 June 30, 2004
------------- ------------- --------------
Cash Flows from Operating Activities
Net loss $ (3,622,718) $ (2,766,660) $(21,818,757)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 430,716 421,691 2,125,565
Amortization of net premium paid on investments -- 4,962 54,551
Dividends reinvested (75,970) (30,061) (158,074)
Members' contributed salaries -- -- 12,986
Research and development service fee netted against
proceeds received from preferred stock issuance -- -- 5,015,000
Operating expenses paid by related parties on
behalf of Company -- -- 17,587
Amortization of deferred compensation 2,576 6,888 195,243
Investor relations fee netted against subscription
receivable 24,000 12,000 60,000
Compensatory common stock 75,000 -- 210,000
Assignment of call options as compensation 376,508 -- 376,508
(Gain) loss on sale of available-for-sale securities 50,317 (10,280) 81,221
Changes in assets and liabilities
Prepaid expenses 518,071 512,862 (574,331)
Interest receivable -- 4,843 --
Supplies 18,487 (9,478) (68,550)
Deposits -- -- (29,953)
Accounts payable and accrued expenses (68,303) (121,344) 193,773
------------ ------------ ------------
Net Cash Used in Operating Activities (2,271,316) (1,974,577) (14,307,231)
------------ ------------ ------------
Cash Flows from Investing Activities
Purchases of available-for-sale securities (4,300,010) (1,915,369) (13,858,181)
Proceeds from sale of available-for-sale securities 1,902,407 1,045,847 10,055,353
Expenditures related to patent (19,135) (4,416) (86,571)
Purchases of property and equipment (35,425) (33,395) (529,399)
------------ ------------ ------------
Net Cash Used in Investing Activities (2,452,163) (907,333) (4,418,798)
------------ ------------ ------------
Cash Flows from Financing Activities
Repurchase of common stock -- -- (80,000)
Proceeds from stock subscription receivable -- 575,000 1,290,000
Issuance of common stock, net of offering and transaction
costs 4,954,191 -- 7,824,905
Issuance of preferred stock, net of research and development
service fee, technology option and costs of offering -- 2,480,000 9,932,496
------------ ------------ ------------
Net Cash Provided by Financing Activities 4,954,191 3,055,000 18,967,401
------------ ------------ ------------
Net Increase in Cash and Cash Equivalents 230,712 173,090 241,372
Cash and Cash Equivalents, Beginning of Period 10,660 227,193 --
------------ ------------ ------------
Cash and Cash Equivalents, End of Period $ 241,372 $ 400,283 $ 241,372
============ ============ ============
The accompanying notes are an integral part of these condensed financial
statements.
4
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements - (Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The unaudited condensed financial statements included herein have been prepared
by Astralis, Ltd. (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. The financial statements
reflect all adjustments that are, in the opinion of management, necessary to
fairly present such information. All such adjustments are of a normal recurring
nature. Although the Company believes that the disclosures are adequate to make
the information presented not misleading, certain information and footnote
disclosures, including a description of significant accounting policies normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America, have been
condensed or omitted pursuant to such rules and regulations.
These financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's 2003 Annual Report on
Form 10-KSB filed with the Securities and Exchange Commission. The results of
operations for interim periods are not necessarily indicative of the results for
any subsequent quarter or the entire fiscal year ending December 31, 2004.
Stock Based Compensation
On April 4, 2003, the Company granted stock-based director compensation options
to one member of the Board of Directors. The Company accounts for those options
under the recognition and measurement principles of Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. No stock-based director compensation cost is included in net
loss, as all the options granted had an exercise price equal to the market value
of the stock on the date of grant. The following table illustrates the effect on
net loss and earnings per share if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," to stock-based compensation.
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net loss to common stockholders, as reported $ (1,874,745) $ (1,291,946) $(14,372,718) $ (2,766,660)
Add: Stock-based employee/ director compensation
included in reported net loss -- -- -- --
Deduct: Total stock-based employee/director
compensation expense under the fair value based
method for all awards, net of tax (1,014) (6,063) (3,197) (6,063)
------------ ------------ ------------ ------------
Pro forma net loss $ (1,875,759) $ (1,298,009) $(14,375,915) $ (2,772,723)
============ ============ ============ ============
Loss per share basic and diluted - as reported (0.03) (0.03) (0.21) (0.07)
Loss per share basic and diluted - pro forma (0.03) (0.03) (0.21) (0.07)
Shares used in basic and diluted loss per share amounts 73,042,560 37,538,189 68,951,986 37,538,189
============ ============ ============ ============
5
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements - (Unaudited)
NOTE 2 - DESCRIPTION OF BUSINESS
Nature of Operations
Astralis Ltd. is an emerging biotechnology company based in New Jersey and
engaged primarily in the research and development of novel treatments for immune
system disorders and skin diseases. The Company is currently developing two
products. Its primary product, Psoraxine, is an innovative immunotherapeutic
product under development for the treatment of psoriasis. The Company's second
product is for the treatment of leishmaniasis.
NOTE 3 - GOING CONCERN
Pharmaceutical products must undergo an extensive process, including testing in
compliance with U.S. Food and Drug Administration ("FDA") regulations, before
they can be commercially sold and distributed in the United States. FDA testing
occurs in various phases over several years. The Company commenced clinical
testing of Psoraxine in the third quarter of 2003. The Company will need
significant additional funds to complete all of the testing required by the FDA.
Currently, the Company has no products approved for commercial sale and
therefore no means to generate revenue. These conditions raise substantial doubt
about the Company's ability to continue as a going concern.
Management estimates that its current cash and marketable securities held at
June 30, 2004, will be needed in order to finance the Company's currently
anticipated needs for operating and capital expenditures through the second
quarter of 2005, including the cost to complete Phase II of the FDA testing
process for Psoraxine. The Company will also need to raise significant
additional funds from outside sources in future years in order to complete
future phases of FDA required testing.
The Company's ability to adhere to its current business plan is dependent upon
raising capital through debt and equity financing. There can be no assurance
that the Company will successfully raise the required future financing on terms
desirable to the Company or that the FDA will approve Psoraxine for use in the
United States. If the Company does not obtain the needed funds, it will likely
be required to delay development of its products, alter its business plan, or in
the extreme situation, cease operations.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. Continuing as a going concern is dependent
upon successfully obtaining additional working capital as described above. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets and amounts
and classifications of liabilities that might result from the outcome of this
uncertainty.
NOTE 4 - MARKETABLE SECURITIES
The Company's marketable equity securities consisted of certificates of deposit
and mutual funds that have a readily determinable fair market value. Management
determines the appropriate classification of its investments using Statement of
Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" at the time of purchase, and
re-evaluates such determinations at each balance sheet date.
6
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements - (Unaudited)
NOTE 4 - MARKETABLE SECURITIES (Continued)
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 loss 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 investment income and 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 June 30, 2004, available-for-sale securities consist of the following:
Gross Gross
Amortized Unrealized Unrealized
Due Cost Loss Gains Fair Value
------- ----------- ----------- ----------- -----------
Fixed Income Funds Current $ 3,825,128 $ (86,556) $ 2,675 $ 3,741,247
----------- ----------- ----------- -----------
$ 3,825,128 $ (86,556) $ 2,675 $ 3,741,247
=========== =========== =========== ===========
NOTE 5 - CAPITAL STOCK ACTIVITY
On January 20, 2004, the Company closed a private placement from which it
received gross proceeds of approximately $4,080,000. The transaction consisted
of the sale to accredited investors of units consisting of 8,159,964 shares of
common stock and warrants to purchase 8,159,964 shares of common stock. The
warrants have an exercise price of $0.73 and expire in four years.
Concurrently with the closing of the private placement, Skyepharma PLC
("Skyepharma") converted all of its outstanding shares of Series A Preferred
Stock of the Company into 25,000,000 shares of common stock at a reduced
conversion price of $0.80 per share. Skyepharma agreed that up to 12,500,000
shares of its common stock issued upon conversion of the Series A Preferred
Stock will be subject to a call option at the discretion of the Company upon
completion of an agreed upon milestone at a premium in excess of the conversion
price. The call option can be exercised on or after the later of July 21, 2004
or the achievement of the milestone. In connection with this transaction and in
accordance with SFAS 84, "Induced Conversions of Convertible Debt, an Amendment
of APB Opinion No. 26" the Company recorded a non-cash preferred stock dividend
in January 2004 amounting to $10,750,000.
On the closing date of conversion, January 20, 2004, the Company and other
original stockholders amended the stockholders agreement dated as of December
10, 2001. The board of directors is now required to be comprised of at least
seven directors and include at least two independent directors. The agreement
will terminate upon the later of (i) the date on which SkyePharma no longer
beneficially owns, in the aggregate, at least 20% of the outstanding common
stock of the Company or (ii) January 20, 2007. Further, this agreement may be
terminated by mutual written consent of the Company and SkyePharma.
On February 19, 2004, the Company closed the second round of its private
placement from which it received $1,150,000. The transaction consisted of sales
to accredited investors of units consisting of 2,299,902 shares of common stock
and warrants to purchase 2,299,902 shares of common stock. The warrants have an
exercise price of $0.73 and expire in four years.
7
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements - (Unaudited)
NOTE 5 - CAPITAL STOCK ACTIVITY (Continued)
An entity whose sole shareholder is a director of the Company was paid a
consulting fee in the amount of $261,496 in February 2004 for the consulting
services related to the private placement completed in 2004. In addition, the
related party and his assignees received warrants to purchase an aggregate of
418,394 shares of the Company's common stock at $0.50 per share and warrants to
purchase an aggregate of 418,394 shares of the Company's common stock at $0.73
per share. An additional consulting fee equal to 5% of proceeds received will be
paid upon exercise of the warrants issued in the private placements. The
warrants expire in four years.
The Company agreed to issue to FPP Capital Advisors (a related party) 150,000
shares of common stock and warrants to purchase 150,000 shares of common stock.
The warrants have an exercise price of $0.73 and expire in four years. In
addition, in connection with the conversion by SkyePharma of its shares of the
Company's Series A Preferred Stock, the Company assigned to FPP Capital
Advisors, as compensation, 10% of the call option provided to the Company under
the call option agreement dated January 20, 2004 between the Company and
SkyePharma. Accordingly, the Company recorded a non-cash charge of $376,508 in
June 2004.
Warrants issued in April 2001 to purchase 75,000 shares of the Company's common
stock expired in April 2004.
On July 9, 2004 a director of the Company exercised options to purchase 25,000
shares of common stock at $0.45 a share. The shares issued remain restricted.
NOTE 6 - COMPREHENSIVE LOSS
Excluding net loss, the Company's source of comprehensive loss is from the net
unrealized loss on its marketable debt securities, which are classified as
available-for-sale. The following summarizes the components of comprehensive
loss:
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net loss $ (1,874,745) $ (1,291,946) $(14,372,718) $ (2,766,660)
Unrealized (loss) arising
during period (85,207) (1,181) (80,579) (2,857)
Reclassification adjustment for
loss realized in net loss 4,480 -- 24,396 --
------------ ------------ ------------ ------------
Unrealized loss (80,727) (1,181) (56,183) (2,857)
------------ ------------ ------------ ------------
Comprehensive loss $ (1,955,472) $ (1,293,127) $(14,428,901) $ (2,769,517)
============ ============ ============ ============
8
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements - (Unaudited)
NOTE 7 - NET LOSS PER SHARE
Basic and diluted net loss per common share are presented in accordance with
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("FAS
128"), for all periods presented. In accordance with FAS 128, basic and diluted
net loss per common share have been computed using the weighted-average number
of shares of common stock outstanding during the period. Shares associated with
stock options, stock warrants, and convertible preferred stock are not included
because the inclusion would be anti-dilutive (i.e., reduce the net loss per
share). The total numbers of such shares excluded from diluted net loss per
common share 18,151,891 and 19,645,237 at June 30, 2004 and 2003, respectively.
NOTE 8 - RECLASSIFICATION
For comparability purposes, certain figures for the prior periods have been
reclassified where appropriate to conform with the financial statement
presentation used in 2004. These reclassifications had no effect on the reported
net loss.
9
SPECIAL CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This filing contains many forward-looking statements that involve
substantial risks and uncertainties. You can identify these statements by
forward-looking words such as "may," "will," "expect," "anticipate," "believe,"
"estimate" and "continue" or similar words. You should read statements that
contain these words carefully because they discuss our future expectations,
contain projections of our future operating results or of our financial
condition or state other "forward-looking" information.
We believe that it is important to communicate our future expectations to
our investors. However, we may be unable to accurately predict or control events
in the future. The factors listed in the sections captioned Risk Factors, as
well as any other cautionary language in this filing, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements. Before you
invest in our common stock, you should be aware that the occurrence of certain
of the events described in the Risk Factors section could seriously harm our
business.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion of our financial condition and plan of operation
should be read in conjunction with our financial statements and the related
notes included elsewhere in this quarterly report on Form 10-QSB. This quarterly
report contains certain statements of a forward-looking nature relating to
future events or our future financial performance. We caution prospective
investors that such statements involve risks and uncertainties, and that actual
events or results may differ materially. In evaluating such statements,
prospective investors should specifically consider the various factors
identified in this quarterly report, including the matters set forth under the
caption "Risk Factors" which could cause actual results to differ materially
from those indicated by such forward-looking statements. We disclaim any
obligation to update information contained in any forward-looking statement.
Overview
We are a development stage biotechnology company engaged primarily in the
research and development of treatments for immune system disorders and skin
diseases. Our initial product candidate, Psoraxine, is a protein extract used
for the treatment of the skin disease psoriasis.
Currently, we are engaged in the following activities to further our
development efforts of our initial product candidate:
o Ongoing research and development of Psoraxine, including conducting Phase
II clinical trials in the U.S.; and
o Development of the technology underlying Psoraxine for the treatment of
indications other that psoriasis, such as eczema, seborrheic dermatitis
and psoriatic arthritis.
Comparison of the three months and six months ended June 30, 2004 and June 30,
2003.
Revenues. We did not record any revenues during the three months or six
months ended June 30, 2004 and June 30, 2003.
Operating Expenses. Operating expenses primarily consist of research and
development costs and general and administrative expenses. Research and
development costs increased $137,758 and $255,274, or 14% and 12%, to $1,120,247
and $2,451,388, respectively, for the three and six months ended June 30, 2004
from $982,489 and $2,196,114, respectively, for the three and six months ended
June 30, 2003. Research and development expenditures increased because due to
the costs associated with the commencement of Phase II clinical trials. General
and administrative expenses increased $437,936 and $541,065, or 135% and 84%, to
$762,317 and $1,184,215, respectively, for the three and six months ended June
30, 2004 from $324,381and $643,150, respectively, for the three and six months
ended June 30, 2003. The increase in general and administrative expenses was
primarily due to a noncash expense related to our assignment to FPP Capital
10
Advisors of 10% of the call option provided to us under the Call Option
Agreement dated January 20, 2004 between us and SkyePharma. We assigned 10% of
the call option to FPP Capital Advisors for consulting services. FPP Capital
Advisors is an entity whose sole shareholder is Fabien Pictet, one of our
directors. As a result of the assignment, we recorded in general and
administrative expenses a non-cash charge of $376,508. Without this non-cash
charge, general and administrative expenses would have been $385,809 and
$807,707, an increase of 19% and 26% over comparable periods in 2003,
respectively, for the three and six months ended June 30, 2004. The remaining
increase in general and administrative expenses is attributable to increased
legal and accounting costs associated with the preparation and filing of a
registration statement on Form SB-2 for shares issued in a private placement
offering during the first quarter of 2004.
The Next Twelve Months
At June 30, 2004 we had cash balances of $241,372 and marketable
securities of $3,741,174.
Based on our current operating plan, we anticipate conducting the
following activities and using our cash through the second quarter of 2005 as
follows:
o Our primary focus is to further our development efforts of our initial
product candidate, Psoraxine. We expect to spend $1,700,000 on research
and development, of which we expect to pay approximately $1,200,000 to
third parties in connection with our Phase II clinical trials.
o We intend to implement our business plan and facilitate the operations of
our company. We will spend approximately $850,000 to pay management
salaries and salaries of employees, a portion of which is treated as
research and development expense.
o We also expect to expend approximately $900,000 for our general
administrative and working capital requirements.
We will need to raise additional funds to continue our operations for the
period following the second quarter of 2005. Furthermore, substantial additional
funds will be needed in order to fund our continued efforts to attempt to obtain
U.S. Food and Drug Administration ("FDA") approval for the marketing of
Psoraxine. No assurance can be given that we will be able to obtain financing,
or successfully sell assets or stock, or, even if such transactions are
possible, that they will be on terms reasonable to us or that they will enable
us to satisfy our cash requirements. In addition, raising additional funds by
selling additional shares of our capital stock will dilute the ownership
interest of our stockholders. If we do not obtain additional funds, we will
likely be required to eliminate programs, delay development of our products, or
in the extreme situation, cease operations.
ITEM 3. CONTROLS AND PROCEDURES
Our management, with the participation of our acting Chief Executive
Officer and acting Chief Financial Officer, has evaluated the effectiveness of
our disclosure controls and procedures as of June 30, 2004. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective for recording,
processing, summarizing and reporting the information we are required to
disclose in the reports we file under the Securities Exchange Act of 1934,
within the time periods specified in the SEC's rules and forms. Such evaluation
did not identify any change in our internal control over financial reporting
that occurred during the quarter ended June 30, 2004 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
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
11
products, have no revenues and have incurred a cumulative net loss of
$44,037,507 through June 30, 2004 which has increased to date. The cumulative
net loss through June 30, 2004 includes non-cash preferred stock dividends of
$22,218,750. We expect that substantial losses will continue for the foreseeable
future. In order to obtain revenue from the sales of our product candidate,
Psoraxine, we must successfully develop, test, obtain regulatory approval for,
manufacture, market and eventually sell such product candidate. Our expenses
have consisted principally of costs incurred in research and development and
from general and administrative costs associated with our operations. We expect
our expenses to increase and to continue to incur operating losses for the next
several years as we continue our research and development efforts for Psoraxine
and any subsequent product candidates. Commercialization of any of our products
will take a significant amount of time and successful commercialization may not
occur at all. As a result, we may never become profitable.
We will need to obtain additional funds to support our future operation
expenses. Our auditors have expressed uncertainty regarding our ability to
continue as a going concern.
Based on our current plans, we believe that we currently have sufficient
funds to meet our operating expenses and capital requirements through
approximately the second quarter of 2005. We will need additional funds to
continue our operations following that period. Furthermore, substantial
additional funds will be needed in order to fund our continued efforts to obtain
FDA approval of Psoraxine. No assurance can be given that we will be able to
obtain financing, or successfully sell assets or stock, or, even if such
transactions are possible, that they will be on terms reasonable to us or that
they will enable us to satisfy our cash requirements. In addition, raising
additional funds by selling additional shares of our capital stock will dilute
the ownership interest of our stockholders. If we do not obtain additional
funds, we will likely be required to eliminate programs, delay development of
our products, alter our business plans, or in the extreme situation, cease
operations.
In addition, the Independent Auditors' Report on our annual financial
statements includes a paragraph indicating doubt about our ability to continue
as a going concern. Our financial statements do not include any adjustments that
might be necessary if we are unable to continue as a going concern.
Our Chief Executive Officer and Chief Financial Officer have resigned.
On July 28, 2004, we accepted the resignations of Mike Ajnsztajn and Gina
Tedesco, effective immediately with respect to their positions as members of our
Board of Directors and effective as of August 26, 2004 with respect to their
positions as our Chief Executive Officer and Chief Financial Officer,
respectively. Jose O'Daly, Chairman of our Board of Directors and President of
Research and Development, will act as interim Chief Executive Officer after
August 26, 2004. In light of these resignations, we have experienced a
substantial change in management. No assurance can be given that out current or
future members of management will be able to operate our business effectively.
We may not be successful in the development and commercialization of
products.
We may not develop products that prove to be safe and effective, that meet
applicable regulatory standards or that we can manufacture at reasonable costs
or market successfully. Successful products will require significant development
and investment, including testing, to demonstrate their safety and efficacy
prior to their commercialization. We have not proven our ability to develop and
commercialize products. We must conduct a substantial amount of additional
research and development before any regulatory authority will approve our
initial product candidate, Psoraxine. Our research and development and clinical
trials may not confirm the safety and efficacy of our products, in which case
regulatory authorities may not approve them. In addition, even if we
successfully complete our research and development efforts, Psoraxine may not
perform in the manner we anticipate, and may not be accepted for use by the
public.
Substantial additional funds and effort will be necessary for further
development and commercialization of Psoraxine.
Our initial product candidate, Psoraxine, will require the commitment of
substantial resources to move it towards commercialization. Before obtaining
regulatory approvals for the commercial sale of Psoraxine, we must demonstrate
the safety and efficacy of our product candidate through preclinical testing and
clinical trials. Conducting clinical trials involves a lengthy, expensive and
uncertain process. Completion of clinical trials may take several years or more.
The length of time generally varies substantially according to the type,
complexity, novelty and intended use of the product. If we or the FDA believe
that our clinical trials expose participating patients to unacceptable health
risks, we may suspend such trials. We may encounter problems in our studies
which will cause us or the FDA to delay or suspend the studies. Some of the
factors that may delay our commencement and rate of completion of clinical
trials include:
12
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 Psoraxine involves the application of new technologies and may be
used upon new therapeutic approaches, government regulatory authorities may
subject this product to more rigorous review and may grant regulatory approvals
more slowly for this product than for products using more conventional
technologies. We have not received approval from the FDA to market or
commercialize Psoraxine. The regulatory agencies of foreign governments must
also approve any therapeutic product we may develop before the product can be
sold in those countries. To date, although we have obtained regulatory approval
for clinical testing of Psoraxine in Venezuela, we have not sought, nor have we
obtained, regulatory approval for the commercialization of Psoraxine in
Venezuela because, among other things, we do not have manufacturing facilities
in that country and such facilities are required by regulatory authorities in
Venezuela before granting commercial approval for a proposed drug.
Even after investing significant time and resources, we may not obtain
regulatory approval for our product. If we do not receive regulatory approval,
we cannot sell the product. Even if we receive regulatory approval, this
approval may place limitations on the indicated uses for which we can market the
product. Further, after granting regulatory approval, regulatory authorities
subject a marketed product and its manufacturer to continual review, and
discovery of previously unknown problems with a product or manufacturer may
result in restrictions on the product, manufacturer and manufacturing facility,
including withdrawal of the product from the market. In certain countries,
regulatory agencies also set or approve prices.
Even if product candidates emerge successfully from clinical trials, we
may not be able to successfully manufacture, market and sell them.
We have not completed clinical trials of Psoraxine. If Psoraxine emerges
successfully from clinical trials, we will either commercialize products
resulting from our proprietary programs directly or through licensing
arrangements with other companies. We have no experience in manufacturing and
marketing, and we currently do not have the resources or capability to
manufacture, market or sell our products on a commercial scale. In order to
commercialize Psoraxine directly, we would need to develop or obtain through
outsourcing arrangements the capability to manufacture, market and sell
13
products. We have an agreement with SkyePharma PLC ("SkyePharma") under which
SkyePharma will provide development, pre-clinical and clinical development
services for Psoraxine until December 31, 2004. However, we do not currently
have a written agreement covering any period after December 31, 2004 and we may
not be able to enter into such an agreement on commercially reasonable terms, or
at all. In addition, we currently do not have any agreements for the marketing
or sale of any of our products and we may not be able to enter into such
agreements on commercially reasonable terms, or at all.
We license and do not own our intellectual property. Any inability to
protect our proprietary technologies adequately could harm our competitive
position.
We license, and do not own, the intellectual property rights to Psoraxine.
Dr. Jose Antonio O'Daly is the owner of the patent for Psoraxine. Under the
terms of a license agreement and assignment of license agreement, we have the
right to use any patent issued pursuant to Dr. O'Daly's patent application. We
also have rights to other patents filed by Dr. O'Daly under the terms of our
employment agreement with him. Our success will depend in part on our ability to
obtain patents and maintain adequate protection of other intellectual property
for our technologies and products in the United States and other countries. If
we do not adequately protect our intellectual property, competitors may be able
to use our technologies and erode or negate our competitive advantage. The laws
of some foreign countries do not protect our proprietary rights to the same
extent as the laws of the United States, and we may encounter significant
problems in protecting our proprietary rights in these foreign countries.
The patent positions of biotechnology companies, including our patent
positions, involve complex legal and factual questions and, therefore, validity
and enforceability cannot be predicted with certainty. Patents may be
challenged, deemed unenforceable, invalidated or circumvented. We will be able
to protect our proprietary rights from unauthorized use by third parties only to
the extent that we cover our proprietary technologies with valid and enforceable
patents or we effectively maintain such proprietary technologies as trade
secrets. We will apply for patents covering both our technologies and product
candidates as we deem appropriate. However, we may fail to apply for patents on
important technologies or products in a timely fashion, or at all, and in any
event, the applications we do file may be challenged and may not result in
issued patents. Any future patents we obtain may not be sufficiently broad to
prevent others from practicing our technologies or from developing competing
products. Furthermore, others may independently develop similar or alternative
technologies or design around our patented technologies. In addition, others may
challenge or invalidate our patents, or our patents may fail to provide us with
any competitive advantages. If we encounter challenges to the use or validity of
any of our patents, resulting in litigation or administrative proceedings, we
would incur substantial costs and the diversion of management in defending the
patent. In addition, we do not control the patent prosecution of technology that
we license from others. Accordingly, we cannot exercise the same degree of
control over this intellectual property as we would over technology we own.
We rely upon trade secrets protection for our confidential and proprietary
information. We have taken measures to protect our proprietary information.
These measures may not provide adequate protection for our trade secrets or
other proprietary information. We seek to protect our proprietary information by
entering into confidentiality agreements with employees, collaborators and
consultants. Nevertheless, employees, collaborators or consultants may still
disclose our proprietary information, and we may not be able to meaningfully
protect our trade secrets. In addition, others may independently develop
substantially equivalent proprietary information or techniques or otherwise gain
access to our trade secrets.
Many potential competitors which have greater resources and experience
than we do may develop products and technologies that could make ours obsolete.
Companies in the biotechnology industry face rapid technological change in
a rapidly evolving field. Our future success will depend on our ability to
maintain a competitive position with respect to technological advances. Rapid
technological development by others may result in our products and technologies
becoming obsolete.
We face, and will continue to face, intense competition from organizations
such as large biotechnology and pharmaceutical companies, as well as academic
and research institutions and government agencies. Our competitors may include
14
Biogen, Genentech/Xoma, Amgen and Wyeth, Abbott Laboratories and Novartis. These
organizations may develop technologies that provide superior alternatives to our
technologies. Further, our competitors may be more effective at implementing
their technologies to develop commercial products.
Any products that we develop through our technologies will compete in
multiple, highly competitive markets. Many of the organizations competing with
us in the markets for such products have greater capital resources, research and
development and marketing staffs, facilities and capabilities, and greater
experience in obtaining regulatory approvals, product manufacturing and
marketing. Accordingly, our competitors may be able to develop technologies and
products more easily, which would render our technologies and products obsolete
and noncompetitive.
If we lose our key personnel or fail to attract and retain additional
personnel, we may be unable to discover and develop our products.
We depend on the services of Dr. Jose Antonio O'Daly, the loss of whose
services would adversely impact the achievement of our objectives. Our key
personnel have no prior experience managing a start-up biotechnology company. In
addition, our Chief Executive Officer and Chief Financial Officer have resigned
effective as of August 26, 2004. We do not currently have sufficient executive
management personnel to execute our business plan fully and are in the process
of searching for a new Chief Executive Officer and Chief Financial Officer. 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 qualified personnel, we face
intense competition for experienced executive officers and 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 and the development of additional
expertise by existing management personnel. The inability to acquire or develop
this expertise could impair the growth, if any, of our business.
If we face claims in clinical trials of a drug candidate, these claims
will divert our management's time and we will incur litigation costs.
We face an inherent business risk of clinical trial liability claims in
the event that the use or misuse of Psoraxine results in personal injury or
death. We may experience clinical trial liability claims if our drug candidates
are misused or cause harm before regulatory authorities approve them for
marketing. Although we currently maintain clinical liability insurance coverage,
it may not sufficiently cover any claims made against us and may not be
available in the future on acceptable terms, if at all. Any claims against us,
regardless of their merit, could strain our financial resources in addition to
consuming the time and attention of our management. Law suits for any injuries
caused by our products may result in liabilities that exceed our total assets.
Some of our existing stockholders can exert control over us and may not
make decisions that further the best interests of all stockholders.
Our officers, directors and principal stockholders owning at least 5% of
our common stock together control approximately 71.94% of our outstanding common
stock. As a result, these stockholders, if they act individually or together,
may exert a significant degree of influence over our management and affairs and
over matters requiring stockholder approval, including the election of directors
and approval of significant corporate transactions. Furthermore, the interests
of this concentration of ownership may not always coincide with our interests or
the interests of other stockholders and accordingly, they could cause us to
enter into transactions or agreements which we would not otherwise consider. In
addition, this concentration of ownership may delay or prevent a merger or
acquisition resulting in a change in control of us and might affect the market
price of our common stock, even when such a change in control may be in the best
interest of all stockholders.
The market price of our common stock may be highly volatile.
The market price of our common stock has been and will likely continue to
be highly volatile. From the date trading of our common stock commenced until
August 10, 2004, the range of our stock price has been between $0.22 and $7.15.
Factors including announcements of technological innovations by us or other
15
companies, regulatory matters, new or existing products or procedures, concerns
about our financial position, operating results, government regulation,
developments or disputes relating to agreements, patents or proprietary rights
may have a significant impact on the market price of our stock. In addition,
potential dilutive effects of future sales of shares of common stock by us or
our stockholders, including the selling stockholders pursuant to this
prospectus, 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
73,173,055 shares of our common stock outstanding. If all options and warrants
currently outstanding to purchase shares of our common stock are exercised,
there will be approximately 91,664,946 shares of common stock outstanding. Of
the outstanding shares, up to 73,148,055 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 OTC Bulletin Board. As a result, the
holders of our common stock may find it more difficult to obtain accurate
quotations concerning the market value of the stock. Stockholders also may
experience greater difficulties in attempting to sell the stock than if it were
listed on a stock exchange or quoted on the Nasdaq National Market or the Nasdaq
Small-Cap Market. Because our common stock does not trade on a stock exchange or
on the Nasdaq National Market or the Nasdaq Small-Cap Market, and the market
price of the common stock is less than $5.00 per share, the common stock
qualifies as a "penny stock." SEC Rule 15g-9 under the Securities Exchange Act
of 1934 imposes additional sales practice requirements on broker-dealers that
recommend the purchase or sale of penny stocks to persons other than those who
qualify as an "established customer" or an "accredited investor." This includes
the requirement that a broker-dealer must make a determination on the
appropriateness of investments in penny stocks for the customer and must make
special disclosures to the customer concerning the risks of penny stocks.
Application of the penny stock rules to our common stock could adversely affect
the market liquidity of the shares, which in turn may affect the ability of
holders of our common stock to resell the stock.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index.
(b) Reports on Form 8-K
On April 1, 2004, we filed a current report on Form 8-K reporting that we
issued a press release regarding our earnings for the year ended December 31,
2003.
On May 18, 2004, we filed a current report on Form 8-K reporting that we
issued a press release regarding our earnings for the quarter ended March 31,
2004.
On July 29, 2004, we filed a current report on Form 8-K reporting that we
issued a press release regarding the resignation of our Chief Executive Officer
and our Chief Financial Officer.
16
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: August 16, 2004 By: /s/ Jose O'Daly
------------------------------
Jose O'Daly
Chairman of the Board of
Directors and President of
Research and Development
(Principal Executive Officer;
Authorized Signatory
on behalf of Registrant)
Dated: August 16, 2004 By: /s/ Mike Ajnsztajn
------------------------------
Mike Ajnsztajn
Chief Executive Officer
Dated: August 16, 2004 By: /s/ Gina Tedesco
------------------------------
Gina Tedesco
Chief Financial Officer
(Principal Financial and
Accounting Officer)
17
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
31.1 Certification of Mike Ajnsztajn required by Rule 13a-14(a)
or Rule 15d-14(a)
31.2 Certification of Gina Tedesco required by Rule 13a-14(a) or
Rule 15d-14(a)
31.3 Certification of Jose O'Daly required by Rule 13a-14(a) or
Rule 15d-14(a)
32.1 Certification of Jose O'Daly, Mike Ajnsztajn and Gina Tedesco
required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906
of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
18