As filed with the Securities and Exchange Commission on June 28, 2004
Registration No. 333-115974
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------
ASTRALIS LTD.
(Name of small business issuer in its charter)
Delaware 6531 84-1508866
--------------------------------- --------------------------- ----------------------
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
75 Passaic Avenue
Fairfield, New Jersey 07004
(973) 227-7168
(Address and telephone number of principal executive offices and principal place
of business)
Mike Ajnsztajn
Chief Executive Officer
Astralis Ltd.
75 Passaic Avenue
Fairfield, New Jersey 07004
(973) 227-7168
(Name, address and telephone number of agent for service)
--------------------------
Copies of Communications to:
Jeffrey A. Baumel, Esq.
McCarter & English, LLP
Four Gateway Center
100 Mulberry Street
Newark, New Jersey 07102
(973) 622-4444
--------------------------
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the effective date of this Registration
Statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEES
-------------------------------------------------------------------------------------------------------------------------
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Price Per Aggregate Offering Amount of Registration
Securities to be Registered Registered (1) Unit (2) Price (2) Fee (3)
-------------------------------------------------------------------------------------------------------------------------
Common Stock, par value
$0.0001 per share 47,056,520 $1.10 $51,762,172 $6,558
-------------------------------------------------------------------------------------------------------------------------
(1) Includes 11,446,654 shares of common stock issuable upon the exercise of
common stock purchase warrants.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) under the Securities Act of 1933.
(3) $6,813 was previously paid to the Securities and Exchange Commission in
conncection with the original filing of this Registration Statement on May
28, 2004.
-----------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
Subject to Completion, dated June 28, 2004
PRELIMINARY PROSPECTUS
ASTRALIS LTD.
47,056,520 Shares of Common Stock
The stockholders named in this prospectus are selling up to 47,056,520
shares of our common stock. 11,446,654 of the shares we are registering are
issuable upon the exercise of outstanding warrants. The selling stockholders may
offer and sell their shares on a continuous or delayed basis in the future.
These sales may be conducted in the open market or in privately negotiated
transactions and at market prices, fixed prices or negotiated prices. We will
not receive any of the proceeds from the sale of shares by the selling
stockholders, but we will receive funds from the exercise of their warrants.
Our common stock is currently listed on the OTC Bulletin Board under the
symbol "ASTR." On June 25, 2004, the last reported sale price of our common
stock on the OTC Bulletin Board was $1.10 per share.
Investing in our common stock involves risks. Please read the "Risk
Factors" section beginning on page 4 to read about certain risks that you should
consider before purchasing shares of our common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is , 2004
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No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
prospectus, and if given or made, such information or representations must not
be relied upon as having been authorized by us, the selling stockholders or any
underwriter. You should rely only on the information contained in this
prospectus. This prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any security other than the common stock offered
by this prospectus, or an offer to sell or a solicitation of an offer to buy any
security by any person in any jurisdiction in which such offer or solicitation
would be unlawful. Neither the delivery of this prospectus nor any sale made
hereunder shall, under any circumstances, imply that the information in this
prospectus is correct as of any time subsequent to the date of this prospectus.
--------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
SUMMARY........................................................................2
RISK FACTORS...................................................................4
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS..........................10
USE OF PROCEEDS...............................................................11
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................11
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS....................12
BUSINESS......................................................................16
MANAGEMENT....................................................................24
EXECUTIVE COMPENSATION........................................................28
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................30
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................32
SELLING STOCKHOLDERS..........................................................34
PLAN OF DISTRIBUTION..........................................................37
DESCRIPTION OF CAPITAL STOCK..................................................39
LEGAL MATTERS.................................................................42
EXPERTS.......................................................................42
WHERE YOU CAN FIND ADDITIONAL INFORMATION.....................................42
INDEX TO FINANCIAL STATEMENTS................................................F-1
-i-
SUMMARY
You should read this summary together with the more detailed information,
including our financial statements and related notes, appearing elsewhere in
this prospectus.
Our Company
We are a development-stage biotechnology company, which primarily engages
in research and development of treatments for immune system disorders and skin
diseases. Our current activities focus on the development of a product candidate
named Psoraxine(R) for the treatment of the skin disease psoriasis. Currently,
we are engaged in ongoing research and development of Psoraxine. We are also
engaged in research on the possible development of the technology underlying
Psoraxine for the treatment of other indications, such as eczema, seborrheic
dermatitis and psoriatic arthritis.
We are incorporated under the laws of the State of Delaware. Our principal
executive offices are located at 75 Passaic Avenue, Fairfield, New Jersey 07004
and our telephone number is (973) 227-7168. Our Internet address is
www.astralisltd.com. The information on our web site is not incorporated by
reference into, and does not constitute part of, this prospectus.
The Offering
Shares of common stock offered 47,056,520
Use of Proceeds We will not receive any proceeds from
the sale of the common stock offered
by the selling stockholders. However,
we may receive an aggregate of
approximately $8,259,827 upon the
exercise of all the warrants held by
selling stockholders, if such warrants
are exercised for cash. We will use
such funds, if any, to fund clinical
trials and for working capital and
general corporate purposes.
OTC Bulletin Board Symbol ASTR
2
Summary Financial Information
The summary financial data is derived from the historical financial
statements of Astralis Ltd. This summary financial data should be read in
conjunction with "Management's Discussion and Analysis or Plan of Operations" as
well as our historical financial statements and the related notes thereto,
included elsewhere in this prospectus.
Statement of operations data:
Three Months Ended March 31, Year Ended December 31,
----------------------------- -----------------------------
2004 2003 2003 2002
------------ ------------ ------------ ------------
Revenues $ -- $ $ -- $ --
------------ ------------ ------------ ------------
Operating Expenses
Research and development - related party 430,447 430,447 1,721,788 6,834,399
Research and development 900,694 731,058 2,323,885 927,143
Depreciation and amortization 7,510 31,549 26,062 15,728
General and administrative 421,898 318,769 1,290,346 1,374,251
------------ ------------ ------------ ------------
Total Operating Expenses 1,760,549 1,511,823 5,362,081 9,151,521
------------ ------------ ------------ ------------
Loss From Operations (1,760,549) (1,511,823) (5,362,081) (9,151,521)
Investment Income 12,576 37,109 60,018 111,273
------------ ------------ ------------ ------------
Loss before income tax benefit (1,747,973) (1,474,714) (5,302,063) (9,040,248)
Income tax benefit -- -- 221,636 --
Net Loss (1,747,973) (1,474,714) (5,080,427) (9,040,248)
Preferred Stock Dividends (10,750,000) -- -- (9,348,750)
------------ ------------ ------------ ------------
Net Loss to Common Stockholders (12,497,973) (1,474,714) $ (5,080,427) $(18,388,998)
============ ============ ============ ============
Basic and Diluted Loss per Common Share $ (0.19) $ (0.04) $ (0.14) $ (0.49)
============ ============ ============ ============
Basic and Diluted Weighted Average
Common Shares Outstanding 64,861,411 37,575,404 37,538,189 37,541,339
============ ============ ============ ============
Balance sheet data:
Three Months Ended Year Ended
March 31, 2004 December 31, 2003
------------------ -------------------
Total current assets 6,358,323 2,564,273
Total assets 10,093,467 6,493,815
Total current liabilities 633,760 279,506
Deficit accumulated in the development stage (42,162,762) (29,664,789)
Total stockholders' equity 9,459,707 6,214,309
3
RISK FACTORS
Prospective investors should carefully consider the following factors, in
addition to the other information contained in this prospectus, in connection
with an investment in our common stock. This prospectus contains certain
forward-looking statements, which involve risks and uncertainties. Our actual
results could differ materially from those anticipated in the forward-looking
statements as a result of certain factors, including those set forth below and
elsewhere in this prospectus. An investment in our common stock involves a high
degree of risk and is suitable only for investors who can afford to lose their
entire investment.
We have no sales; we will not have sales in the foreseeable future; we are
in an early stage of development and we may never sell products or become
profitable.
We commenced our current operations in 2001 and such operations remain in
an early stage of development. We have no products approved for sale and
therefore, no means to generate revenue. We have not commercialized any
products, have no revenues and have incurred a cumulative net loss of
$42,162,762 through March 31, 2004 which has increased to date. The cumulative
net loss through March 31, 2004 includes 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
U.S. Food and Drug Administration ("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.
4
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:
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.
5
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
6
outsourcing arrangements the capability to manufacture, market and sell
products. We have an agreement with SkyePharma PLC ("SkyePharma") under which
SkyePharma will provide development, pre-clinical and clinical development
services for Psoraxine until December 31, 2004. However, we do not currently
have a written agreement covering any period after December 31, 2004 and we may
not be able to enter into such an agreement on commercially reasonable terms, or
at all. In addition, we currently do not have any agreements for the marketing
or sale of any of our products and we may not be able to enter into such
agreements on commercially reasonable terms, or at all.
We license and do not own our intellectual property. Any inability to
protect our proprietary technologies adequately could harm our competitive
position.
We license, and do not own, the intellectual property rights to Psoraxine.
Dr. Jose Antonio O'Daly is the owner of the patent for Psoraxine. Under the
terms of a license agreement and assignment of license agreement, we have the
right to use any patent issued pursuant to Dr. O'Daly's patent application. We
also have rights to other patents filed by Dr. O'Daly under the terms of our
employment agreement with him. Our success will depend in part on our ability to
obtain patents and maintain adequate protection of other intellectual property
for our technologies and products in the United States and other countries. If
we do not adequately protect our intellectual property, competitors may be able
to use our technologies and erode or negate our competitive advantage. The laws
of some foreign countries do not protect our proprietary rights to the same
extent as the laws of the United States, and we may encounter significant
problems in protecting our proprietary rights in these foreign countries.
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
7
entering into confidentiality agreements with employees, collaborators and
consultants. Nevertheless, employees, collaborators or consultants may still
disclose our proprietary information, and we may not be able to meaningfully
protect our trade secrets. In addition, others may independently develop
substantially equivalent proprietary information or techniques or otherwise gain
access to our trade secrets.
Many potential competitors which have greater resources and experience
than we do may develop products and technologies that could make ours obsolete.
Companies in the biotechnology industry face rapid technological change in
a rapidly evolving field. Our future success will depend on our ability to
maintain a competitive position with respect to technological advances. Rapid
technological development by others may result in our products and technologies
becoming obsolete.
We face, and will continue to face, intense competition from organizations
such as large biotechnology and pharmaceutical companies, as well as academic
and research institutions and government agencies. Our competitors may include
Biogen, Genentech/Xoma, 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. We
do not currently have sufficient executive management personnel to execute our
business plan fully. In addition, recruiting and retaining qualified scientific
personnel to perform future research and development work will be critical to
our success. Although we believe we can successfully attract and retain
qualified personnel, we face intense competition for experienced scientists.
Failure to attract and retain skilled personnel would prevent us from pursuing
collaborations and developing our products and core technologies to the extent
otherwise possible.
Our planned activities will require additional expertise. These activities
will require the addition of new personnel, including management, and the
development of additional expertise by existing management personnel. The
inability to acquire or develop this expertise could impair the growth, if any,
of our business.
8
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
June 25, 2004, the range of our stock price has been between $0.22 and $7.15.
Factors including announcements of technological innovations by us or other
companies, regulatory matters, new or existing products or procedures, concerns
about our financial position, operating results, government regulation,
developments or disputes relating to agreements, patents or proprietary rights
may have a significant impact on the market price of our stock. In addition,
potential dilutive effects of future sales of shares of common stock by us or
our stockholders, 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
9
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 91,514,946 shares of common stock outstanding. Of
the outstanding shares, up to 37,538,189 shares are freely tradable without
restriction or further registration under the Securities Act, unless the shares
are held by one of our "affiliates" as such term is defined in Rule 144 of the
Securities Act and we are registering an additional 47,056,520 shares with this
Registration Statement. 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.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus 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 in the importance of communicating 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" and
"Management's Discussion and Analysis or Plan of Operations," as well as any
other cautionary language in this prospectus, 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.
10
USE OF PROCEEDS
We will not receive any proceeds from the sale of common stock by the
selling stockholders. We will receive proceeds upon the exercise of any
warrants. If all of the selling stockholders exercise all of their warrants for
cash, we will receive an aggregate of approximately $8,259,827. We will use such
funds, if any, to fund clinical trials and for working capital and general
corporate purposes.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the OTC Bulletin Board under the symbol
ASTR. The closing price for our common stock on June 25, 2004 was $1.10.
The following table sets forth, for the periods indicated, the range of
high and low bid quotations for shares of our common stock as quoted on the OTC
Bulletin Board. The reported bid quotations reflect inter-dealer prices, without
retail markup, markdown or commissions, and may not necessarily represent actual
transactions.
High Low
2002
First Quarter $2.75 $1.50
Second Quarter $3.35 $0.91
Third Quarter $1.06 $0.32
Fourth Quarter $0.66 $0.22
2003
First Quarter $0.72 $0.34
Second Quarter $1.01 $0.40
Third Quarter $1.41 $0.36
Fourth Quarter $0.87 $0.42
2004
First Quarter $1.66 $0.80
Second Quarter through June 25, 2004 $1.46 $1.05
11
Holders of common stock
As of June 25, 2004, there were approximately 2,385 holders of record of
our common stock.
Dividends
We have never paid or declared a cash dividend on our common stock. We
intend, for the foreseeable future, to retain all future earnings for use in our
business. The amount of dividends we pay in the future, if any, will be at the
discretion of our board of directors and will depend upon our earnings, capital
requirements, financial condition and other relevant factors.
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 prospectus. This prospectus 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 prospectus,
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; and
o Development of the technology underlying Psoraxine for the treatment of
indications other than psoriasis, such as eczema, seborrheic dermatitis
and psoriatic arthritis.
Three months ended March 31, 2004 compared to three months ended March 31, 2003
For three months ended March 31, 2004:
On January 20, 2004, we completed the first closing of a private placement
of our securities from which we received gross proceeds of approximately $4.08
12
million. The transaction consisted of the sale to accredited investors of units
consisting of 8,159,964 shares of common stock and warrants to purchase
8,159,964 shares of common stock. Concurrently with this transaction, SkyePharma
PLC ("SkyePharma") converted all of its outstanding shares of our Series A
Preferred Stock into 25,000,000 shares of common stock at a reduced conversion
price of $0.80 per share. SkyePharma has agreed that 12,500,000 shares of the
common stock issued upon conversion of the Series A Preferred Stock will be
subject to a right of repurchase by us under certain circumstances at a premium
to the conversion price. In connection with this transaction and in accordance
with Statement of Financial Accounting Standard 84, "Induced Conversions of
Convertible Debt, an Amendment of APB Opinion No. 26" we have recorded a
non-cash preferred stock dividend in January 2004 amounting to $10,750,000.
On February 19, 2004, we held a second closing for the private placement
from which we received gross proceeds of approximately $1.15 million. The
transaction consisted of the sale to accredited investors of units consisting of
2,299,902 shares of common stock and warrants to purchase 2,299,902 shares of
common stock.
For the three months ended March 31, 2004, we had no revenue from
operations and incurred operating expenses of $1,760,549 which consisted
primarily of:
o Research and development costs of $1,331,141, including $430,447
that we incurred in connection with services provided by SkyePharma
under our Service Agreement with them and amortization of
approximately $178,572 under our technology option license which is
being amortized over a seven year period.
o General and administrative costs of approximately $421,898,
including professional fees and our general corporate expenditures.
As a result, during the three months ended March 31, 2004, we incurred a
net loss of $12,497,973.
For the three months ended March 31, 2003:
On January 31, 2003, we sold to SkyePharma pursuant to a Purchase
Agreement dated December 10, 2001, 250,000 shares of our Series A Preferred
Stock for an aggregate purchase price of $2,500,000. We received net proceeds of
approximately $2,480,000 after we netted out from the proceeds $20,000 due to
SkyePharma for services they provided under our Service Agreement with them
which was treated as an expense at the time of payment.
For the three months ended March 31, 2003, we had no revenue and incurred
operating expenses of $1,511,823 which consisted primarily of:
o Research and development costs of $1,161,505, including $430,447
that was paid to SkyePharma for services provided under our Service
Agreement with them and amortization of approximately $178,572 under
our technology option license which is being amortized over a seven
year period.
13
o General and administrative costs of approximately $318,769,
including professional fees and our general corporate expenditures.
As a result, during the three months ended March 31, 2003, we incurred a
net loss of $1,474,714.
Fiscal year ended December 31, 2003 compared to fiscal year ended December 31,
2002
For fiscal year ended December 31, 2003:
In January 2003, pursuant to a Purchase Agreement dated as of December 10,
2001, we sold 250,000 shares of our Series A Convertible Preferred Stock to
SkyePharma for an aggregate purchase price of $2,500,000. We received proceeds
of $2,480,000 after we netted out from the proceeds $20,000 due to SkyePharma in
connection with the Service Agreement.
During the fiscal year ended December 31, 2003, we received $825,000
outstanding under subscription notes. In April 2003, we entered into an Amended
Investor Relation Agreement with a stockholder who had outstanding subscription
notes. In exchange for services rendered, we reduced the outstanding amount by
$36,000. In 2004, the stockholder will provide services valued at $24,000 in
lieu of payment of the outstanding subscription receivable balance.
For the fiscal year ended December 31, 2003, we had no revenue from
operations and incurred operating expenses of $5,362,081 which consisted
primarily of:
o Research and development costs of $4,045,673, including $1,007,500
that we incurred in connection with services provided by SkyePharma
under our Service Agreement with them and amortization of
approximately $714,288 under our technology option license which is
being amortized over a seven year period.
o General and administrative costs of approximately $1,290,346,
including professional fees and our general corporate expenditures.
As a result, during the fiscal year ended December 31, 2003, we incurred a
net loss of $5,080,427.
In December 2003, we received $221,636 in cash from the sale of a portion
of our tax related net operating losses ("NOLS") under the State of New Jersey's
Technology Business Tax Certificate Transfer Program. The program is an
initiative passed by the New Jersey State legislature that allows qualified
technology and biotechnology businesses in New Jersey to sell unused amounts of
NOLS and defined research and development tax credits for cash.
For the fiscal year ended December 31, 2002:
In 2002, we sold to SkyePharma pursuant to the Purchase Agreement dated as
of December 10, 2001, an aggregate of 750,000 shares of our Series A Convertible
Preferred Stock for an aggregate purchase price of $7,500,000. We received net
14
proceeds of approximately $5,505,000 from this placement after we netted out
from the proceeds $1,995,000 due to SkyePharma for services they provided under
our Service Agreement with them which were treated as an expense at the time of
payment.
For the fiscal year ended December 31, 2002, we had no revenue and
incurred operating expenses of $9,151,521 which consisted primarily of:
o Research and development costs of $7,761,542, including $5,985,000
that was paid to SkyePharma for services provided under our Service
Agreement with them and amortization of approximately $714,288 under
our technology option license which is being amortized over a seven
year period.
o General and administrative costs of approximately $1,374,251,
including professional fees and our general corporate expenditures.
We also had a non-cash preferred stock dividend in April 2002 in the
amount of $270,000. The April 30, 2002 sale of convertible preferred stock to
SkyePharma had a conversion rate to our common stock which was lower than the
market price of our common stock on that date. Therefore, under the requirements
of Emerging Issues Task Force No. 98-5 "Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios", the issuance of this preferred stock with a beneficial conversion
feature resulted in a preferred stock dividend.
We recorded an additional preferred stock dividend in December 2002 in the
amount of $9,078,750. The contingent beneficial conversion feature arose because
of the reset of the conversion price of our preferred stock on December 10, 2002
from $2.50 per share of preferred stock to $1.60 per share. EITF No. 98-5 and
EITF No. 00-27 "Application of Issue No. 98-5 to Certain Convertible
Instruments" required that we record this preferred stock dividend.
As a result, during the fiscal year ended December 31, 2002, we incurred a
net loss of $18,388,998.
In March 2003, we amended our Service Agreement with SkyePharma, effective
as of January 1, 2003, to extend the term of the agreement and modify the
services to be provided by SkyePharma. The amended service agreement provides
that, in consideration for payments we previously made to SkyePharma, it will
continue to provide services to us through December 31, 2004. Consequently, as
of December 31, 2002, we recorded a prepaid expense in the amount of $1,995,000
which was a portion of what we paid to SkyePharma during 2002 in connection with
the Service Agreement. This prepaid amount will be incurred during the remaining
period of the amended service agreement.
The Next Twelve Months
At March 31, 2004 we had cash balances of $708,223 and marketable
securities of $4,709,681.
15
Based on our current operating plan, we anticipate conducting the
following activities and using our cash over the course of the next twelve
months as follows:
o Our primary focus is to further our development efforts of our
initial product candidate, Psoraxine. We expect to spend $2,753,000
on research and development, of which we expect to pay approximately
$1,645,000 to third parties in connection with our Phase II clinical
trials.
o We intend to implement our business plan and facilitate the
operations of our company. We will spend approximately $945,000 to
pay management salaries and salaries of employees, a portion of
which is treated as research and development expense.
o We also expect to expend approximately $960,000 for our general
administrative and working capital requirements.
We will need to raise additional funds to continue our operations for the
period following the second quarter of 2005. Furthermore, substantial additional
funds will be needed in order to fund our continued efforts to attempt to obtain
FDA approval for the marketing of Psoraxine. No assurance can be given that we
will be able to obtain financing, or successfully sell assets or stock, or, even
if such transactions are possible, that they will be on terms reasonable to us
or that they will enable us to satisfy our cash requirements. In addition,
raising additional funds by selling additional shares of our capital stock will
dilute the ownership interest of our stockholders. If we do not obtain
additional funds, we will likely be required to eliminate programs, delay
development of our products, or in the extreme situation, cease operations.
BUSINESS
You should read the following description of our business in conjunction
with the information included elsewhere in this prospectus. This description
contains certain forward-looking statements that involve risk and uncertainties.
Our actual results could differ significantly from the results discussed in the
forward-looking statements as a result of certain of the factors set forth in
the "Risk Factors" section and elsewhere in this prospectus.
General
We are a development-stage biotechnology company primarily engaged in
research and development of treatments for immune system disorders and skin
diseases. Our current activities focus on the development of a product candidate
named Psoraxine(R) for the treatment of the skin disease psoriasis. Currently,
we are engaged in ongoing research and development of Psoraxine. We are also
engaged in research on the possible development of the technology underlying
Psoraxine for the treatment of other indications, such as eczema, seborrheic
dermatitis and psoriatic arthritis.
16
We were originally incorporated under the laws of the State of Colorado in
1999 under the name Hercules Development Group, Inc. We subsequently changed our
name to Astralis Pharmaceuticals Ltd. and, in November 2001, reincorporated
under the laws of the State of Delaware under our present name.
Psoriasis
Psoriasis is a chronic inflammatory skin disorder of currently unknown
origins that generally lasts a lifetime and for which there is presently no
known cure. Researchers believe that psoriasis may be caused by the immune
system sending faulty signals that affect the growth cycle of skin cells. As a
result, skin cells accumulate on the surface of the body faster than normal. In
people without psoriasis, skin cells mature and are shed approximately every 28
days. In psoriatic skin, the skin cells mature over a period of approximately
three to six days.
The symptoms of psoriasis include scaly skin and inflammation occurring on
a cyclical basis, with periods of remission and relapse. There are five types of
psoriasis. The most common form, appearing in approximately 80% of individuals
suffering from the disease, is plaque psoriasis. The other forms are guttate,
inverse, erythrodermic and pustular psoriasis. Psoriasis typically does not
prevent individuals with the condition from functioning normally. However, the
pain, discomfort and emotional effects may be extensive.
Market Opportunity
According to the National Psoriasis Foundation, psoriasis affects
approximately 2.1% of the United States population, or more than 4.5 million
people in the United States. Psoriasis also affects approximately 1% to 3% of
the world's population. Approximately 150,000 to 260,000 new cases of psoriasis
are diagnosed each year. In addition, each year approximately 350 people in the
United States die due to complications caused by psoriasis. Primarily, such
complications occur in relation to severe, extensive forms of psoriasis such as
erythrodermic or pustular psoriasis, where large areas of skin are shed. Because
the skin plays an important role in regulating body temperature and serving as a
barrier to infection, when a person's skin is severely compromised, secondary
infections may occur. These serious forms of psoriasis may also cause
complicating factors, such as fluid loss and strain on the circulatory system.
The National Psoriasis Foundation also indicates that between 10% and 30%
of people who have psoriasis will also develop psoriatic arthritis, which is
similar to rheumatoid arthritis, but generally milder. Psoriatic arthritis
causes inflammation and stiffness in the soft tissue around joints, and
frequently affects the fingers and toes. Psoriatic arthritis may also affect
other areas of the body such as the wrists, neck, lower back, knees and ankles.
Psoriasis is a chronic illness that, in many cases, requires continuous
treatment. Patients with psoriasis often pay for costly medications and face
ongoing visits with physicians. Severe cases may require periods of
hospitalization. The National Psoriasis Foundation estimates that the costs of
treating psoriasis may exceed $3.0 billion annually.
17
Psoraxine
Psoraxine was developed by Dr. Jose Antonio O'Daly, our chairman of the
board and president of research and development. In 1991, Dr. O'Daly was
conducting trials for a vaccine for leishmaniasis in Caracas, Venezuela. One
patient involved in the leishmaniasis vaccine trials, who also suffered from
psoriasis for 12 years, experienced complete remission of psoriasis after
receiving the vaccine. As a result of this discovery, Dr. O'Daly focused his
efforts on developing a product for the treatment of psoriasis. From 1992
through 2001, Dr. O'Daly developed Psoraxine, an improved version of the
original product that is an immunotherapeutic agent presented in liquid form and
packed in 0.5 miligram ampules for intra-muscular injection. Dr. O'Daly tested
the original product that was a precursor of Psoraxine in approximately 2,900
patients in several clinical trials in Venezuela. The results from the studies
provided evidence of remission of psoriasis lesions as a result of treatment
with the product. In addition, individuals in the studies did not present severe
side effects as a result of treatment. In one clinical study, of the 2,770
patients, 648, or 28%, experienced complete remission of psoriasis. In addition,
almost half of the patients experienced psoriasis reduction of between 70% to
99% as measured by the Psoriasis Area and Severity Index ("PASI"). Additional
studies yielded average PASI reductions of between 73% and 92%.
Dr. O'Daly licensed Psoraxine to us in 2001 and moved to the United States
in 2002. We made capital investments to our research and development facility of
approximately $500,000 in 2002 and we filed an Investigational New Drug
application with the FDA for Psoraxine in March 2003. On August 4, 2003 the FDA
allowed us to commence our Phase I clinical trials for Psoraxine.
The purpose of Phase I studies is to test the safety of a drug. We have
completed our Phase I studies, which involved the administration by
intramuscular injection of a single dose of 50, 150 or 300 micrograms of
Psoraxine or a placebo in a controlled setting to groups of psoriatic patients.
We spent approximately $130,000 on our Phase I studies in 2003 and anticipate
spending an additional $150,000 on Phase I studies in 2004. We have commenced
Phase II studies. The purpose of Phase II studies is to test the safety and
efficacy of a drug. We anticipate that it will take at least one year to
complete the Phase II studies at a cost of not less than $2,500,000. For the
year ended December 31, 2003, we incurred $4,045,673 in research and development
expenses, including $1,721,788 related to SkyePharma. For the year ended
December 31, 2002, we incurred $7,761,542 in research and development expenses,
including $6,699,288 related to SkyePharma.
Current Psoriasis Therapies
The topical treatment for psoriasis has been based on the use of
emollients, keratolytic agents, coal tar, anthralin, corticosteroids of medium
to strong potency and calcipotriene. UVB phototherapy has been used in the
treatment of moderate cases of psoriasis. For severe cases, systemic treatments
include methotextrate, cyclosporine and oral retinoids. Each of these treatments
has variable efficacy, with side effects and cosmetic problems in addition to
the failure to prevent frequent relapses.
18
Competition and Psoriasis Treatments in Development
The pharmaceutical and biotechnology industries are intensely competitive.
Many companies, including biotechnology, chemical and pharmaceutical companies,
are actively engaged in activities similar to ours, including research and
development of drugs for the treatment of the same disease as Psoraxine. The FDA
has approved Amevive, manufactured by Biogen, Raptiva, manufactured by
Genentech/Xoma, and Embrel, manufactured by Amgen and Wyeth, for the treatment
of moderate-to-severe chronic plaque psoriasis in adult patients. If we succeed
in obtaining FDA approval of Psoraxine, Amevive, Raptiva and Embrel may compete
directly with our product. In addition to Biogen, Genentech/Xoma, Amgen and
Wyeth, our competitors may include Centocor, Abbott Laboratories and Novartis.
Many of these companies have substantially greater financial and other
resources, larger research and development staffs, and more extensive marketing
and manufacturing organizations than we have. In addition, some of these
companies have considerable experience in preclinical testing, clinical trials
and other regulatory approval procedures. There are also academic institutions,
governmental agencies and other research organizations that are conducting
research in areas in which we are working. They may also market commercial
products, either on their own or through collaborative efforts.
We expect to encounter significant competition for any of the
pharmaceutical products we develop. Companies that complete clinical trials,
obtain required regulatory approvals and commence commercial sales of their
products before their competitors may achieve a significant competitive
advantage.
Developments by others may render our product obsolete or noncompetitive.
We will face intense competition from other companies for collaborative
arrangements with pharmaceutical and biotechnology companies, for establishing
relationships with academic and research institutions and for licenses to
additional technologies. These competitors may succeed in developing
technologies or products that are more effective than Psoraxine.
Government Regulation
The FDA and comparable regulatory agencies in state and local
jurisdictions and in foreign countries impose substantial requirements upon the
clinical development, manufacture and marketing of pharmaceutical products.
These agencies and other federal, state and local entities regulate research and
development activities and testing, manufacture, quality control, safety,
effectiveness, labeling, storage, record keeping, approval, advertising and
promotion of our potential products.
The process required by the FDA before our product candidate, Psoraxine,
may be marketed in the United States generally involves the following:
o preclinical laboratory and animal tests;
o submission of an Investigational New Drug application, which must become
effective before clinical trials may begin;
19
o adequate and well controlled human clinical trials to establish the safety
and efficacy of the proposed drug for its intended use; and
o FDA approval of a new drug application or biologics license application.
The testing and approval process requires substantial time, effort and
financial resources, and there can be no assurance that any approvals for
Psoraxine or any other potential products will be granted on a timely basis, if
at all.
Prior to commencing clinical trials, which are typically conducted in
three sequential phases, a company must submit an Investigational New Drug
application to the FDA. In March 2003, we filed our Investigational New Drug
application for Psoraxine with the FDA. In August 2003, the FDA informed us that
we could commence our clinical trials of Psoraxine. We have completed Phase I
clinical trials and have commenced Phase II clinical trials.
We may not successfully complete clinical trials of Psoraxine within any
specific time period, if at all. Furthermore, the FDA or an institutional review
board or the sponsor may suspend a clinical trial at any time on various
grounds, including a finding that the subjects or patients are being exposed to
an unacceptable health risk.
The results of product development, pre-clinical studies and clinical
studies are submitted to the FDA as part of a new drug application or biologics
license application. The FDA may deny a new drug application or biologics
license application if the applicable regulatory criteria are not satisfied or
may require additional clinical data. Even if such data is submitted, the FDA
may ultimately decide that the new drug application or biologics license
application does not satisfy the criteria for approval. Once issued, the FDA may
withdraw product approval if compliance with regulatory standards is not
maintained or if problems occur after the product reaches market. In addition,
the FDA may require testing and surveillance programs to monitor the effect of
approved products which have been commercialized, and the FDA has the power to
prevent or limit further marketing of a product based on the results of these
post-marketing programs.
Satisfaction of FDA requirements or similar requirements of state, local
and foreign regulatory agencies typically takes several years and the actual
time required may vary substantially based upon the type, complexity and novelty
of the product or indication. Government regulation may delay or prevent
marketing of potential products or new indications for a considerable period of
time and impose costly procedures upon our activities. Success in early stage
clinical trials does not assure success in later stage clinical trials.
Data obtained from clinical activities is not always conclusive and may be
susceptible to varying interpretations which could delay, limit or prevent
regulatory approval. Even if a product receives regulatory approval, the
approval may be significantly limited to specific indications and dosages.
Further, even after regulatory approval is obtained, later discovery of
previously unknown problems with a product may result in restrictions on the
product or even complete withdrawal of the product from the market. Delays in
obtaining, or failures to obtain, additional regulatory approvals for any of our
product candidates would have a material adverse effect on our business.
20
Any products manufactured or distributed by us pursuant to FDA approvals
are subject to continuing regulation by the FDA, including record-keeping
requirements and reporting of adverse experiences with the drug. Drug
manufacturers and their subcontractors are required to register their
establishments with the FDA and certain state agencies, and are subject to
periodic unannounced inspections by the FDA and certain state agencies for
compliance with good manufacturing practices, which impose certain procedural
and documentation requirements upon us and any third party manufacturers we may
utilize. We cannot be certain that our present or future suppliers will be able
to comply with the good manufacturing practices, regulations and other FDA
regulatory requirements.
Outside the United States, our ability to market a product is contingent
upon receiving a marketing authorization from the appropriate regulatory
authorities. The requirements governing the conduct of clinical trials,
marketing authorization, pricing and reimbursement vary widely from country to
country. At present, foreign marketing authorizations are applied for at a
national level, although within the European Union, registration procedures are
available to companies wishing to market a product in more than one EU Member
State. If the regulatory authority is satisfied that adequate evidence of
safety, quality and efficacy has been presented, a marketing authorization will
be granted. This foreign regulatory approval process involves all of the risks
associated with FDA clearance. To date, we have obtained regulatory approval for
clinical testing of Psoraxine in Venezuela, but we have not obtained final
regulatory approval for commercial distribution of Psoraxine in Venezuela
because 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.
Intellectual Property
In January 2004 the United States Patent and Trademark Office ("PTO")
issued a patent to Dr. Jose O'Daly for the "Compositions and Methods for the
Treatment and Clinical Remission of Psoriasis." Under the terms of a license
agreement and assignment of license agreement, we have the exclusive right and
license to use and exploit this patent. Dr. O'Daly will continue to maintain
ownership rights with respect to the patent and patent application. However, Dr.
O'Daly has granted us a perpetual, royalty free license to his patent under the
agreements, which will terminate only upon the expiration of the patent, or upon
the commencement of a bankruptcy or insolvency proceeding involving our company
or upon our dissolution or liquidation.
In March 2002, Akiva LLC, an entity controlled by Dr. O'Daly, also filed
an application to obtain patent protection internationally under the Patent
Cooperation Treaty. In addition, in August 2003, Akiva LLC filed patent
applications in the European Union, Australia, Brazil, Canada, Mexico and Japan.
We have rights to these applications, which are currently pending, pursuant to
the license and assignment of license agreements described above.
In January 2004, Dr.O'Daly filed a patent application with the PTO
focusing on the mechanism of action of Psoraxine, expanding the claims to
include medical indications other than psoriasis, such as Atopic Dermatitis,
Psoriatic Arthritis and Rheumatoid Arthritis. In addition, the patent elaborates
21
further on the mechanism of action of leishmania extracts, which are believed to
induce T-cell activation. In January 2004, Dr. O'Daly also filed a second patent
relating to a culture medium for parasitic organisms, which is part of our
technology platform. Dr. O'Daly has assigned to us the rights in the patent
applications. Also, in January 2004, the PTO granted us a federal trademark
registration for the mark Psoraxine.
Agreements with SkyePharma
We entered into a Purchase Agreement dated as of December 10, 2001 with
SkyePharma pursuant to which SkyePharma purchased an aggregate of 2,000,000
shares of our Series A Preferred Stock for an aggregate purchase price of $20.0
million. On January 20, 2004, pursuant to an Omnibus Conversion Agreement dated
January 12, 2004 between us and SkyePharma ("Omnibus Conversion Agreement"),
SkyePharma converted all of its outstanding shares of Series A Preferred Stock
into 25,000,0000 shares of common stock at a conversion price of $0.80 per
share. As a result of its conversion, SkyePharma beneficially owns 34.52% of our
common stock.
On January 20, 2004, we and SkyePharma entered into a Call Option
Agreement pursuant to which we received the right to repurchase some or all of
12,500,000 shares of our common stock from SkyePharma at a premium to the $0.80
conversion price. In the event we exercise the call option, the exercise price
will be between $1.28 and $1.52 per share, depending on the date of exercise.
The call option will be exercisable by us for a period commencing upon our
achievement of a certain milestone event and ending on January 20, 2007. In June
2004, we assigned the right to purchase 1,250,000 shares under the Call Option
Agreement to FPP Capital Advisors as consideration for services it provided in
negotiating the Omnibus Conversion Agreement. FPP Capital Advisors is controlled
by Fabien Pictet, a member of our board of directors.
On January 20, 2004, we, SkyePharma and other stockholders who are parties
to a Stockholders Agreement dated December 10, 2001, entered into an amendment
to the Stockholders Agreement to provide for, among other things, the
termination of the agreement on the later of (1) January 20, 2007 or (2) the
date on which SkyePharma no longer beneficially owns 20% of our outstanding
common stock. The amended Stockholders Agreement provides that each party
thereto will vote all shares held by such parties for one director designated by
Mike Ajnsztajn, one director designated by Jose O'Daly, one director designated
by Gaston Liebhaber, one director designated by Gina Tedesco, one director
designated by SkyePharma and two independent directors. In addition, SkyePharma
is required to vote its shares of our common stock in favor of certain
enumerated transactions, where those transactions have been approved by our
board of directors and all of the independent directors. These transactions
include (i) the amendment of our certificate of incorporation solely to increase
authorized capital stock, (ii) the adoption or amendment of an employee benefit
plan applicable to all employees, (iii) the issuance of additional securities
for cash and (iv) the sale of all of our outstanding capital stock, sale of all
or substantially all of our assets or merger with another entity provided that
SkyePharma will receive the same consideration for its shares as other holders
of common stock and will be able to participate in the transaction on the same
terms as Messrs. O'Daly, Ajnsztajn and Liebhaber and Ms. Tedesco and the total
consideration for the transaction is greater than $135 million.
We also entered into two agreements concerning the formulation and
development of our initial injectable product candidate, Psoraxine, with
SkyePharma. Under the terms of the Technology Access Option Agreement, dated
December 10, 2001, we paid to SkyePharma a $5 million fee for the option to
22
acquire a license for DepoFoam and other relevant drug delivery technologies
owned by SkyePharma. Under the terms of the Technology Access Option Agreement,
if we exercise our option, we must pay a royalty of 5% of net sales of all
products manufactured or sold that use or exploit the drug delivery technologies
that we license from SkyePharma. In addition, if we exercise our option,
SkyePharma retains the right during the term of the Technology Access Option
Agreement to undertake the manufacture of all of our products that incorporate
or utilize the drug delivery technologies. The option we received under the
Technology Access Option Agreement expires on December 10, 2008. The Technology
Access Option Agreement may be terminated by either party if (i) the other party
commits any irremediable breach of the agreement, (ii) the other party commits
any remediable breach and fails to remedy such breach within sixty days of
service of notice of the breach, (iii) a court makes an administration order
with respect to the other party or any composition in satisfaction of the debts
of, or scheme of arrangement of the affairs of, the other party, or (iv) the
other party becomes insolvent, has a receiver appointed over any of its assets,
enters into any composition with creditors generally or has an order made or
resolution passed for it to be wound up. SkyePharma has the right of first
negotiation to acquire the worldwide marketing rights to Psoraxine.
In addition, we entered into a Service Agreement, dated December 10, 2001,
pursuant to which SkyePharma will provide us with development, manufacturing,
pre-clinical and clinical development services in consideration of $11 million
of which $3 million was paid in 2001 with the remaining $8 million paid
primarily during 2002 for second generation Psoraxine. The Service Agreement
terminated on December 31, 2002. We have entered into an Amendment to the
Service Agreement with SkyePharma, effective as of January 1, 2003, to extend
the term of the Service Agreement and modify the services to be provided by
SkyePharma such that SkyePharma will continue to provide certain services to us
through December 31, 2004 in consideration for payments made during 2002. In
addition, the amendment sets forth milestones expected to be reached during the
24 month period following January 1, 2003.
Other Research and Development Efforts
In addition to our development of Psoraxine for the treatment of
psoriasis, we are researching its possible application for the treatment of
other conditions, such as eczema, seborrheic dermatitis and psoriatic arthritis.
We are also developing a second product for the treatment of leishmaniasis.
Since leishmaniasis is not prevalent in the United States, we intend to market
this product primarily in other countries. We have not named this product yet
and we do not have any approvals from, nor has any application been filed with,
the FDA or any foreign governmental regulatory authority for this product.
Currently, we do not have any collaborators for this product. However, our
Technology Access Option Agreement permits us to use the technology we may
license from SkyePharma for our leishmaniasis treatment. We are also engaged in
preliminary research of a treatment for transplant rejection.
Employees and Consultants
As of June 25, 2004, we employed nine full-time employees, including four
scientists and a laboratory technician. We also have 14 consultants. We have no
part-time employees. None of our employees are covered by a collective
bargaining agreement and we believe that our employee relations are good.
23
Legal Proceedings
We are not currently a party to any material legal proceedings.
Property
We lease our executive offices and research laboratory located at 75
Passaic Avenue, Fairfield, New Jersey 07004. The yearly rent for such office and
laboratory space is $77,500.
MANAGEMENT
Executive Officers and Directors
The names, ages and positions of our current directors and executive
officers are as follows:
Name Age Position
Jose Antonio O'Daly, M.D., Ph.D. 62 Chairman of the Board of Directors;
President of Research and Development
Mike Ajnsztajn 39 Chief Executive Officer; Director
Gaston Liebhaber 69 Director
Gina Tedesco 41 Chief Financial Officer; Director
Michael Ashton 58 Director
Steven Fulda 71 Director
Fabien Pictet 46 Director
Sam Barnett, Ed.D. 57 Director
Phillipe Magistretti, M.D., Ph.D. 47 Director
With the exception of Mr. Ajnsztajn and Ms. Tedesco who are husband and
wife, and Mr. Liebhaber who is Mr. Ajnsztajn's uncle, there are no familial
relationships among our directors and/or officers. Directors hold office until
the next annual meeting of our stockholders or until their respective successors
have been elected and qualified. Officers serve at the pleasure of the board of
directors.
24
Jose Antonio O'Daly, M.D., Ph.D. Dr. O'Daly has served as our Chairman of the
Board of Directors and President of Research and Development since November 13,
2001. Dr. O'Daly is the sole founder of Center for Research and Treatment for
Psoriasis in Caracas, Venezuela and has served as its president since 1998. From
1972 to 1998, Dr. O'Daly served as Director and Head of Research of the
Microbiology Center of the Venezuelan Institute of Scientific Investigations.
Dr. O'Daly attended the Central University of Venezuela, Caracas receiving his
Doctorate of Medical Sciences in 1968. In 1971, Dr. O'Daly earned a Doctorate of
Philosophy from the Johns Hopkins University in Baltimore, Maryland. Dr. O'Daly
is an honorary member of the Venezuelan Medical Academy.
Mike Ajnsztajn. Mr. Ajnsztajn has served as our Chief Executive Officer and as a
director since November 13, 2001. From 1986 to 1992, Mr. Ajnsztajn worked for
Rhone Poulenc as both an Export Manager for the Far East based in France, and as
the Marketing Director in China. From 1992 to 2001, Mr. Ajnsztajn was the
president of Blowtex, a Brazilian condom manufacturer. Mr. Ajnsztajn is also
co-founder of Opus International, a New Jersey based import/export company that
distributes hospital examination gloves and raw materials for the latex
industry. Opus International also provides business-consulting services.
Gaston Liebhaber. Mr. Liebhaber has served as our Director of International
Affairs since November 13, 2001 and as a director since January 31, 2002. Mr.
Liebhaber has 35 years of experience in the pharmaceutical industry. Mr.
Liebhaber founded Fundafarmacia in Caracas, Venezuela, a non-profit organization
that distributes medicine, at discounted prices, to the poor and homeless. Since
1982, Mr. Liebhaber has served as the Managing Director of Latin America of
Sankyo Pharmaceutical. Since 1987, Mr. Liebhaber also has served on the Board of
Directors of the Venezuelan Association of Pharmaceutical Companies.
Gina Tedesco. Ms. Tedesco has served as our Chief Financial Officer since
November 13, 2001 and as a director since January 31, 2002. Ms. Tedesco is a
co-founder of Opus International and has served as its President since 1997. Ms.
Tedesco has extensive experience in the pharmaceutical industry and in finance
and business planning. From 1989 to 1996, Ms. Tedesco held various positions
with Rhone Poulenc ranging from controller for the European pharmaceutical
subsidiaries to Director of Finance and Investor Relations for a Brazilian
subsidiary. Ms. Tedesco earned a MBA from George Washington University in
International Business.
Michael Ashton. Mr. Ashton has served as one of our directors since January 31,
2002. Since 1977, Mr. Ashton has been employed by SkyePharma PLC, a London based
drug delivery technology provider. Since 1999, Mr. Ashton has served as the
Chief Executive Officer of SkyePharma PLC. Mr. Ashton is a member of the board
of directors of Transition Inc. Mr. Ashton has thirty years of experience in the
pharmaceutical industry. Mr. Ashton has a Bachelor of Pharmacy Degree from
Sydney University and a MBA Degree from Rutgers University.
25
Steven Fulda. Mr. Fulda has served as one of our directors since February 6,
2002. Since 1989, Mr. Fulda has served as Managing Director of Fulda Business
Planners. Mr. Fulda has forty years of management and consulting experience
including business strategy, planning, development and financing. Since 1992,
Mr. Fulda has been an Adjunct Professor of Entrepreneurship and Director of the
Small Business Institute at Fairleigh Dickinson University. Mr. Fulda holds a
Master's Degree in Quantitative Business Analysis from New York University and a
Master's Degree in Systems Engineering from Bell Laboratories' New York
University Graduate Program.
Fabien Pictet. Mr. Pictet has served as one of our directors since February 6,
2002. Since 1998, Mr. Pictet has served as Chairman of Fabien Pictet and
Partners, a London based firm which invests in the emerging markets arena. Mr.
Pictet has twenty years of experience in investing in emerging markets. During
his eleven year tenure with Pictet and Cie, from 1986 to 1997, Mr. Pictet held
various positions ranging from Manager responsible for U.S. equity investments
to Partner responsible for all of the firm's institutional activities in Geneva,
Zurich and London. Mr. Pictet has a Master's Degree in International Management
from American Graduate School of International Management and a Bachelor's
Degree in Economics from the University of San Francisco.
Sam Barnett. Mr. Barnett has served as one of our directors since June 2004. In
1979, Mr. Barnett founded Barnett International, a consulting firm where he
served as chief consultant. Mr. Barnett subsequently served as head of the
Americas Pharmaceutical Practice of PricewaterhouseCoopers Consulting and head
of the Americas Life Sciences Consulting Practice for IBM, Business Consulting
Services. Mr. Barnett received his Bachelor's Degree from Wesleyan University
and received both his Master's and Doctorate Degrees from Temple University.
Phillipe Magistretti, M.D., Ph.D. Dr. Magistretti has served as one of our
directors since June 2004. He is currently the Chief Executive Officer of
Translion Inc., a company focused on technology transfer in the life sciences
industry. He previously served as Chief Executive Officer of Credit Agricole
Lazard Financial Products Bank and as Managing Director of Lazard & Co., Ltd. He
has previously served as President of Bank AIG and as a Vice President of Credit
Suisse First Boston. Dr. Magistretti received his M.D. and Ph.D. from the
University of Genova.
Advisors
Scientific Advisory Board
James Leyden, MD. Dr. Leyden has served as the Chairman of our Medical Advisory
Board since November 31, 2001. Dr. Leyden has been a Professor of Dermatology at
the Hospital of the University of Pennsylvania in Philadelphia since 1983. He
has served on the boards of many of the nation's key dermatological committees,
including those of the American Academy of Dermatology and the Dermatology
Foundation. Dr. Leyden has also served as a consultant to the U.S. Food and Drug
Administration and the Federal Trade Commission, and to drug regulation agencies
in England, Germany and Austria. Dr. Leyden has also assisted in the
development, testing and commercialization of Accutane, Bactroban, Nizoral,
Cleocin, Benzamycin, Benzaclin, Minocin and the use of bicarbonate to control
body odor. Dr. Leyden has a Bachelor's Degree from Saint Joseph's College and a
MD for the University of Pennsylvania School of Medicine.
Gerald Krueger, MD. Dr. Krueger has served on our Medical Advisory Board since
December 2, 2003. Dr. Krueger is a professor of dermatology at the University of
Utah School of Medicine. Dr. Krueger consults for the U.S. Food and Drug
Administration on psoriasis and serves on the executive committee of the
Dermatology Foundation. In addition, he recently completed a ten year term as
chairman of the Medical Advisory Board of the National Psoriasis Foundation. Dr.
Krueger has been elected into the Alpha Omega Honor Society of Medicine. He has
received the Taub International Award for psoriasis research, the American Skin
Association Award for psoriasis research and the National Psoriasis Foundation's
Lifetime Achievement Award and Founders Award.
26
Our Scientific Advisory Board does not hold any formal meetings. However,
management consults with the Scientific Advisory Board from time to time.
Marketing Advisor
Bruce Epstein. Mr. Epstein has served as our Marketing Affairs Advisor since
November 13, 2001. Since 2000, Mr. Epstein has served as the General Manager of
Noesis Healthcare Interactions, a full-service healthcare communications company
managing a creative and support staff focused on the marketing and advertising
of multiple pharmaceutical brands with leading pharmaceutical companies. Mr.
Epstein specializes in strategic planning and tactical implementation of
pharmaceutical products. From 1996 to 2000, Mr. Epstein worked at Klemtner
Advertising, the healthcare division of Saatchi and Saatchi. From 1986 to 1996,
Mr. Epstein worked for Roche Laboratories, a Swiss pharmaceutical company with a
U.S. division based in Nutley, New Jersey. Mr. Epstein obtained a MBA from New
York University, Stern School of Business, and a Registered Pharmacist Degree
from Rutgers, College of Pharmacy.
Board Composition
We currently have nine directors, each serving a term until the next
annual meeting of stockholders. Pursuant to an Amendment to Stockholders'
Agreement dated January 20, 2004 between us, SkyePharma, Jose O'Daly, Mike
Ajnsztajn, Gina Tedesco and Gaston Liebhaber, the parties agreed to vote all
shares held by such parties for (i) one director designated byJose O'Daly, (ii)
one director designated by Mike Ajnsztajn, (iii) one director designated by
Gaston Liebhaber, (iv) one director designated by Gina Tedesco, (v) one director
designated by SkyePharma and (vi) two independent directors. The agreement
terminates on the later of (i) January 20, 2007 or (ii) the date on which
SkyePharma no longer beneficially owns 20% of our outstanding common stock.
Compensation of Directors
Our directors do not receive compensation pursuant to any standard
arrangement for their services as directors. We reimburse all outside directors
for travel and lodging expenses related to scheduled board meetings. During the
fiscal year ended December 31, 2003, we paid $1,000 to each outside director for
each board meeting attended and paid an additional $4,500 to the chairman of our
audit committee.
Indemnification Matters
Our Certificate of Incorporation eliminates the personal liability of
directors to the fullest extent permitted by the provisions of paragraph (7) of
subsection (b) of Section 102 of the General Corporation Law of Delaware. In
addition, our Certificate of Incorporation includes provisions to indemnify our
officers and directors and other persons against expenses, judgments, fines and
amounts paid in settlement in connection with threatened, pending or completed
suits or proceedings against those persons by reason of serving or having served
as officers, directors or in other capacities to the fullest extent permitted by
Section 145 of the General Corporation Law of Delaware.
27
Our bylaws provide the power to indemnify our officers, directors,
employees and agents or any person serving at our request as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise to the fullest extent permitted by Delaware law.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid by us and our predecessors during each of the last three fiscal years to
our Chief Executive Officer and any other executive officer who received
compensation greater than $100,000 during any of the last three fiscal years.
Summary Compensation Table
Annual Compensation
Other Annual
Name and Principal Position Year Salary ($) Compensation ($)
--------------------------- ---- ---------- ----------------
Mike Ajnsztajn, 2003 154,375 4,613 (3)
Chief Executive Officer (1) 2002 150,000 4,613
2001 81,164 --
Jose Antonio O'Daly, 2003 158,750 73,740 (4)
Chairman of the Board of Directors and 2002 150,000 56,671
President of Research and Development (2) 2001 63,500 --
------------
(1) Mr. Ajnsztajn became our Chief Executive Officer on November 13, 2001.
(2) Dr. O'Daly became one of our employees on July 1, 2002. Prior to July 1,
2002, Dr. O'Daly provided services as a consultant to the company.
(3) For the fiscal year ended December 31, 2003, this amount includes $4,613
in health insurance premiums paid by us for Mr. Ajnsztajn's benefit.
(4) For the fiscal year ended December 31, 2003, this amount includes $9,929
in health insurance premiums paid by us for Dr. O'Daly's benefit, an
automobile allowance of $6,317, $37,494 for a furnished apartment and
$20,000 for tax payments.
28
Employment Agreement
Pursuant to an Employment Agreement dated December 10, 2001, Dr. O'Daly
receives a salary of $150,000 per year for his services as Chairman of the Board
and President of Research and Development. The agreement has a term of three
years and requires Dr. O'Daly to refrain from competing with us for a period of
one year following termination of his employment. The agreement does not contain
any change of control provisions. None of our other executive officers receive
compensation pursuant to any standard arrangement for their services as
executive officers.
2001 Stock Option Plan
Our 2001 Stock Option Plan ("2001 Plan") was unanimously adopted by the
board of directors on November 1, 2001 and approved by our stockholders at a
special meeting held on November 1, 2001. The 2001 Plan provides for the
issuance of 5,000,000 shares of common stock underlying stock options available
for grant thereunder. The purpose of the 2001 Plan is to provide additional
incentive to our directors, officers, employees and consultants who are
primarily responsible for our management and growth. Each option will be
designated at the time of grant as either an incentive stock option (an "ISO")
or as a non-qualified stock option (a "NQSO"). As of December 31, 2003, options
to purchase 365,000 shares of common stock have been granted under the 2001
Plan.
The 2001 Plan will be administered by our board of directors, or by any
committee that we may in the future form and to which the board of directors may
delegate the authority to perform such functions (in either case, the
"Administrator").
Every person who at the date of grant of an option is an employee of ours
or any affiliate of ours is eligible to receive NQSOs or ISOs under the 2001
Plan. Every person who at the date of grant is a consultant to, or non-employee
director of, ours or any affiliate of ours is eligible to receive NQSOs under
the 2001 Plan.
The exercise price of a NQSO will be not less than 85% of the fair market
value of the stock subject to the option on the date of grant. To the extent
required by applicable laws, rules and regulations, the exercise price of a NQSO
granted to any person who owns, directly or by attribution under the Code
(currently Section 424(d)), stock possessing more than 10% of the total combined
voting power of all classes of our stock or stock of any of our affiliates (a
"10% Shareholder") will not be less than 110% of the fair market value of the
stock covered by the option at the time the option is granted. The exercise
price of an ISO will be determined in accordance with the applicable provisions
of the Code and will not be less than the fair market value of the stock covered
by the option at the time the option is granted. The exercise price of an ISO
granted to any 10% Shareholder will not be less than 110% of the fair market
value of the stock covered by the option at the time the option is granted.
The Administrator, in its sole discretion, will fix the term of each
option, provided that the maximum term of an option will be ten years. ISOs
granted to a 10% Shareholder will expire not more than five years after the date
of grant. The 2001 Plan provides for the earlier expiration of options in the
event of certain terminations of employment of the holder.
29
Options may be granted and exercised under the 2001 Plan only after there
has been compliance with all applicable federal and state securities laws. The
2001 Plan will terminate within ten years from the date of its adoption by the
board of directors.
If for any reason other than death or permanent and total disability, an
optionee ceases to be employed by us or any of our affiliates (such event being
called a "Termination"), options held at the date of Termination (to the extent
then exercisable) may be exercised in whole or in part at any time within three
months of the date of such Termination, or such other period of not less than
thirty days after the date of such Termination as is specified in the Option
Agreement or by amendment thereof (but in no event after the expiration date of
the option (the "Expiration Date")); provided, however, that if such exercise of
the option would result in liability for the optionee under Section 16(b) of the
Exchange Act, then such three-month period automatically will be extended until
the tenth day following the last date upon which the optionee has any liability
under Section 16(b) (but in no event after the Expiration Date).
The board of directors may at any time amend, alter, suspend or
discontinue the 2001 Plan. Without the consent of an optionee, no amendment,
alteration, suspension or discontinuance may adversely affect outstanding
options except to conform the 2001 Plan and ISOs granted under the 2001 Plan to
the requirements of federal or other tax laws relating to ISOs. No amendment,
alteration, suspension or discontinuance will require shareholder approval
unless (i) shareholder approval is required to preserve incentive stock option
treatment for federal income tax purposes or (ii) the board of directors
otherwise concludes that shareholder approval is advisable.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
General
Centro Para La Investigacion y Tratmiento De La Psoriasis ("CITP"), a
research entity owned by Helen O'Daly, the spouse of Dr. Jose Antonio O'Daly,
provided assistance in the research and development of Psoraxine in Venezuela
commencing in November 2001 and terminating in May 2002. We paid approximately
$275,000 to CITP for the services it provided.
Relationship with SkyePharma
We entered into a Purchase Agreement dated as of December 10, 2001 with
SkyePharma pursuant to which SkyePharma purchased an aggregate of 2,000,000
shares of our Series A Preferred Stock, for an aggregate purchase price of $20.0
million. On January 20, 2004, pursuant to an Omnibus Conversion Agreement dated
30
January 12, 2004 between us and SkyePharma ("Omnibus Conversion Agreement"),
SkyePharma converted all of its outstanding shares of Series A Preferred Stock
into 25,000,000 shares of our common stock at a conversion price of $0.80 per
share. As a result of its conversion, SkyePharma beneficially owns 34.54% of our
common stock on a fully diluted basis.
On January 20, 2004, we and SkyePharma entered into a Call Option
Agreement ("Call Option Agreement") pursuant to which we received the right to
repurchase some or all of 12,500,000 shares of our common stock from SkyePharma
at a premium to the conversion price. The call option will be exercisable by us
upon our achievement of a certain milestone event and ending on January 20,
2007.
On January 20, 2004, we, SkyePharma and other stockholders who are parties
to the Stockholders Agreement dated December 10, 2001, entered into an amendment
of the Stockholders Agreement to provide for, among other things, the
termination of the agreement on the later of (1) January 20, 2007 or (2) the
date on which SkyePharma no longer beneficially owns 20% of our outstanding
common stock. The amended Stockholders Agreement requires the parties to agree
to vote all shares held by such parties for one director designated by Mike
Ajnsztajn, one director designated by Jose O'Daly, one director designated by
Gaston Liebhaber, one director designated by Gina Tedesco, one director
designated by SkyePharma and two independent directors. In addition, SkyePharma
is required to vote its shares of our common stock in favor of certain
enumerated transactions, where those transactions have been approved by our
board of directors and all of the independent directors.
On December 10, 2001, we entered into a Technology Access Option Agreement
and a Service Agreement with SkyePharma. Also, effective as of January 1, 2003,
we entered into an Amendment to the Service Agreement with SkyePharma. These
agreements are described under "Business - Agreements with SkyePharma."
Relationship with FPP Capital Advisors
In connection with private placements of units consisting of common stock
and warrants that occurred in 2004, FPP Capital Advisors, an entity controlled
by our board member, Fabien Pictet, received a consulting fee of $261,496. In
addition, for consulting services provided in connection with the private
placement, FPP Capital Advisors and certain other selling stockholders received
warrants to purchase an aggregate of 418,394 shares of our common stock at $0.50
per share and warrants to purchase an aggregate of 418,394 shares of our common
stock at $0.73 per share. Upon exercise of the warrants issued in the private
placement, we will pay a cash commission equal to 5% of the amounts raised
through the exercise of the warrants.
In additiion, in consideration for services provided in negotiating the
Omnibus Conversion Agreement, we issued to FPP Capital Advisors units consisting
of 150,000 shares of common stock and warrants to purchase 150,000 shares of
common stock at an exercise price of $0.73 per share. We also assigned the right
to purchase 1,250,000 shares under the Call Option Agreement to FPP Capital
Advisors.
31
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth the names and beneficial ownership of our
common stock owned as of June 25, 2004, by (i) each of our directors, (ii) each
person named in the Summary Compensation Table, (iii) all our directors and
executive officers as a group, and, to the best of our knowledge, (iv) all
holders of 5% or more of the outstanding shares of our common stock. Unless
otherwise noted, the address of all the individuals and entities named below is
care of Astralis Ltd. at 75 Passaic Avenue, Fairfield, NJ 07004.
Number of Shares of common stock Percentage of Common
Name and Address Beneficially Stock Owned
Owned (1)
Dr. Jose Antonio O'Daly (2) 13,640,000 18.64%
Mike Ajnsztajn (2)(3) 8,680,000 11.86%
Gina Tedesco (2)(3) 8,680,000 11.86%
Gaston Liebhaber (2) 2,480,000 3.39%
Michael Ashton (4) 25,220,000 34.45%
Fabien Pictet (5) 4,211,794 5.59%
Steven Fulda (6) 29,700 *
SkyePharma PLC (2)(7) 25,220,000 34.45%
105 Piccadilly
London W1J 7NJ
England
All Officers and Directors 54,261,494 71.94%
as a Group
------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with Rule 13d-3(a) of the
Securities Exchange Act of 1934 and generally includes voting or investment
power with respect to securities. Except as indicated by footnotes and subject
to community property laws, where applicable, the person named above has sole
voting and investment power with respect to all shares of the common stock shown
as beneficially owned by him. The beneficial ownership percentage is based on
73,173,055 shares of our common stock outstanding as of June 25, 2004.
32
(2) Under the terms of Amendment No. 1 to the Stockholders' Agreement dated as
of January 20, 2004 by and among SkyePharma, Jose O'Daly, Mike Ajnsztajn, Gaston
Liebhaber, Gina Tedesco and us, the parties agreed to vote all shares held by
such parties for (i) one director designated by Mike Ajnsztajn, (ii) one
director designated by Jose O'Daly, (iii) one director designated by Gaston
Liebhaber, (iv) one director designated by Gina Tedesco, (v) one director
designated by SkyePharma and (vi) two independent directors. No party to the
agreement has the right to dispose (or direct the disposition of) any shares of
common stock held by any of the other parties to the agreement. Accordingly,
each party disclaims beneficial ownership of the shares held by the other
parties.
(3) Ms. Tedesco, our Chief Financial Officer, may be deemed to be the beneficial
owner of the 8,680,000 shares of common stock owned as of June 25, 2004 by her
husband, Mike Ajnsztajn. Ms. Tedesco disclaims beneficial ownership of such
shares.
(4) Includes 25,200,000 shares of common stock beneficially owned by SkyePharma
and warrants to purchase 20,000 shares of common stock beneficially owned by
SkyePharma. Mr. Ashton is Chief Executive Officer of SkyePharma. Under the terms
of a Call Option Agreement dated January 20, 2004, we have the right to
repurchase some or all of 12,500,000 shares of our common stock from SkyePharma.
The call option will be exercisable by us for a period commencing upon our
achievement of a certain milestone event and ending on January 20, 2007.
(5) Includes 1,260,000 shares of common stock owned by FPP Emerging Hedge Fund
and warrants to purchase an aggregate of 1,176,000 shares of common stock owned
by FPP Emerging Hedge Fund. Includes 390,000 shares of common stock and warrants
to purchase 500,000 shares of common stock owned by Perly International Ltd.
Includes 180,000 shares of common stock owned by Pictet Private Equity Investors
and warrants to purchase 36,000 shares held by Pictet Private Equity Investors.
Also includes 150,000 shares of common stock owned by FPP Capital Advisors and
warrants to purchase 519,794 shares held by FPP Capital Advisors. Does not
include 1,250,000 shares of common stock held by SkyePharma which FPP Capital
Advisors has the right to purchase under the term of (i) the Call Option
Agreement dated January 20, 2004 between us and SkyePharma and (ii) the
Assignment and Assumption Agreement dated as of June 24, 2004 between us and FPP
Capital Advisors.
(6) Includes 4,700 shares of common stock owned as of June 25, 2004 by Mr.
Fulda's spouse. Mr. Fulda disclaims beneficial ownership of such shares.
(7) Includes 25,200,000 shares of common stock and warrants to purchase 20,000
shares of common stock held by SkyePharma. Michael Ashton, Chief Executive
Officer of SkyePharma and a member of our board of directors, exercises voting
control over the shares held by SkyePharma. Under the terms of a Call Option
Agreement dated January 20, 2004, we have the right to repurchase some or all of
12,500,000 shares of our common stock from SkyePharma. In June 2004, we assigned
the right to purchase 1,250,000 shares under the Call Option Agreement to FPP
Capital Advisors, an entity controlled by Fabien Pictet. The call option will be
exercisable for a period commencing upon our achievement of a certain milestone
event and ending on January 20, 2007.
33
SELLING STOCKHOLDERS
An aggregate of up to 47,056,520 shares of our common stock may be offered
and sold pursuant to this prospectus by the selling stockholders. SkyePharma
acquired its shares of common stock through the conversion of our outstanding
Series A Preferred Stock. The other selling stockholders acquired common stock
and warrants to purchase common stock by (i) purchasing units consisting of
common stock and warrants in a private placement, consummated in January and
February 2004, (ii) receiving warrants as consideration for consulting services
provided in connection with such private placement or (iii) receiving units as
consideration for negotiating the Omnibus Conversion Agreement dated January 12,
2004 between us and SkyePharma.
In the private placement, we issued an aggregate of 10,459,866 shares of
our common stock and warrants to purchase an aggregate of 10,459,866 shares of
our common stock at an exercise price of $0.73 per share. We received gross
proceeds of $5,229,933 from the private placement.
In the event all selling stockholders exercise their warrants to purchase
shares of our common stock, we will receive additional gross proceeds of
$8,259,827.
Relationship with Certain Selling Stockholders
In connection with the private placement, FPP Capital Advisors received a
consulting fee of $261,496. In addition, FPP Capital Advisors and certain other
selling stockholders who assisted FPP Capital Advisors in providing consulting
services to us, received warrants to purchase an aggregate of 418,394 shares of
our common stock at $0.50 per share and warrants to purchase an aggregate of
418,394 shares of our common stock at $0.73 per share. Further, in consideration
for services rendered in negotiating the Omnibus Conversion Agreement dated
January 12, 2004 between us and SkyePharma, we issued units consisting of
150,000 shares of common stock and warrants to purchase 150,000 shares of common
stock at an exercise price of $0.73 per share to FPP Capital Advisors. We also
assigned to FPP Capital Advisors the right to purchase 1,250,000 shares of our
common stock from SkyePharma under the Call Option Agreement discussed below.
FPP Capital Advisors is controlled by Fabien Pictet, a member of our board of
directors.
In addition to FPP Capital Advisors, Fabien Pictet controls FPP Emerging
Hedge Fund I and Pictet & Cie, both of which were investors in the private
placement and are selling stockholders.
Under the terms of the Omnibus Conversion Agreement between us and
SkyePharma, on January 20, 2004, SkyePharma converted all of its outstanding
shares of our Series A Preferred Stock into 25,000,0000 shares of common stock
at a conversion price of $0.80 per share. As a result of its conversion,
SkyePharma beneficially owns 34.54% of our common stock. On January 20, 2004, we
and SkyePharma entered into a Call Option Agreement pursuant to which we
received the right to repurchase some or all of 12,500,000 shares of our common
stock from SkyePharma at a premium to the conversion price. We assigned to FPP
Capital Advisors the right to purchase 1,250,000 of these shares. The call
option will be exercisable for a period commencing upon our achievement of a
certain milestone event and ending on January 20, 2007.
On January 20, 2004, we, SkyePharma and other stockholders who are parties
to a Stockholders Agreement dated December 10, 2001, entered into an amendment
to the Stockholders Agreement to provide for, among other things, the
termination of the agreement on the later of (1) January 20, 2007 or (2) the
date on which SkyePharma no longer beneficially owns 20% of our outstanding
common stock. The amended Stockholders Agreement provides that each party
thereto will vote all shares held by such parties for one director designated by
34
Mike Ajnsztajn, one director designated by Jose O'Daly, one director designated
by Gaston Liebhaber, one director designated by Gina Tedesco, one director
designated by SkyePharma and two independent directors. In addition, SkyePharma
is required to vote its shares of our common stock in favor of certain
enumerated transactions, where those transactions have been approved by our
board of directors and all of the independent directors.
Further, on December 10, 2001, we entered into a Technology Access Option
Agreement and a Service Agreement with SkyePharma. Also, effective as of January
1, 2003, we entered into an Amendment to the Service Agreement with SkyePharma.
These agreements are described under "Business -- Agreements with SkyePharma."
No other selling stockholders has held any position or office or had a
material relationship with us within the past three years other than as a result
of the ownership of our common stock and other securities.
The following table sets forth certain information as of June 25, 2004
regarding the sale by the selling stockholders of 47,056,520 shares of common
stock in this offering.
Shares
Currently Shares
Shares Outstanding and Warrant Total Beneficially Ownership
Beneficially Being Shares Being Shares Being Owned Percent
Owned Before the Registered in Registered in Registered in After the After the
Selling Stockholder Offering (1) the Offering (1) the Offering the Offering Offering Offering
-------------------- ---------------- ---------------- ------------- ------------- ------------ ---------
Vieri Bracco 305,200 (2) 140,000 165,200 (2) 305,200 (2) -- --
ACE Fund Sicav 1,600,000 800,000 800,000 1,600,000 -- --
Pictet & Cie 1,700,000 850,000 850,000 1,700,000 -- --
Fidulex Management, 3,600,000 1,800,000 1,800,000 3,600,000 -- --
Inc.
Gesico International 800,000 400,000 400,000 800,000 -- --
S.A.
Epalinges Limited 599,928 299,964 299,964 599,928 -- --
Bank Morgan Stanley AG 3,600,000 1,800,000 1,800,000 3,600,000 -- --
S.A.M. Master Fund 1,200,000 600,000 600,000 1,200,000 -- --
L.P.
Mirabaud & Cie 200,000 100,000 100,000 200,000 -- --
Bank Julius Baer & 200,000 100,000 100,000 200,000 -- --
Co., Ltd.
UBS Private Banking 1,000,000 500,000 500,000 1,000,000 -- --
Nominees Ltd.
B.I. Lipworth & Co. 200,000 100,000 100,000 200,000 -- --
Limited
Deborah Jones 300,000 150,000 150,000 300,000 -- --
FPP Emerging Hedge 1,200,000 600,000 600,000 1,200,000 -- --
Fund I
Vistal International 200,000 100,000 100,000 200,000
Ltd.
Marcelo M. Fleury 200,000 100,000 100,000 200,000
Maran Limited 300,000 150,000 150,000 300,000 -- --
Newbridge Advisors 80,000 40,000 40,000 80,000 -- --
Donvale Investments 400,000 200,000 200,000 400,000 -- --
Ltd.
Greenwood Nominees 200,000 100,000 100,000 200,000 -- --
Ltd.
Serica Bank 100,000 50,000 50,000 100,000 -- --
Bernard Rapoport 100,000 50,000 50,000 100,000 -- --
35
Larry Jaynes 100,000 50,000 50,000 100,000 -- --
Maurice Sydney 200,000 100,000 100,000 200,000 -- --
Lipworth
Graeme Gordon 400,000 200,000 200,000 400,000
Nick Wentworth Stanley 199,920 99,960 99,960 199,920 -- --
Carla Maria Orsi 160,000 80,000 80,000 160,000 -- --
Carbone
Alexandre Stakhovitch 769,794 (3) 200,000 569,794 (3) 769,794 (3) -- --
Raffaele Ricci 199,884 99,942 99,942 199,884 -- --
Marcos M. Carvalhal 200,000 100,000 100,000 200,000 -- --
and Scott Starkey
Joint Tenants
B.I. Lipworth & Co. 200,000 100,000 100,000 200,000 -- --
Limited as Nominee
for BrandNew Group
Limited
I.S. Twersky 400,000 200,000 200,000 400,000 -- --
Rhonda Limited 400,000 200,000 200,000 400,000 -- --
SkyePharma PLC 25,220,000 (4)(5) 25,000,000 (2) -- 25,000,000 (4)(5) 220,000 *
FPP Capital Advisors 669,794 (6) 150,000 519,794 519,794 -- --
Manuel Tarabay 722,000 (7)(8) -- 72,000 (8) 72,000 650,000 1.9%
------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with rules and regulations
of the Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person, shares of common stock subject to options or
warrants held by that person that are currently exercisable or exercisable
within 60 days of the date of this prospectus are deemed outstanding. Except as
indicated in the footnotes to this table and pursuant to applicable community
property laws, each stockholder named in the table has sole voting and
investment power with respect to the shares beneficially owned by him. Selling
stockholders are deemed to beneficially own the shares of common stock issuable
upon the exercise of their warrants.
(2) Includes warrants to purchase 12,600 shares of common stock at an exercise
price of $0.50 per share and warrants to purchase 12,600 shares of common stock
at an exercise price of $0.73 per share. Such warrants were issued for
consulting services provided in connection with our 2004 private placement.
(3) Includes warrants to purchase 184,897 shares of common stock at an exercise
price of $0.50 per share and warrants to purchase 184,897 shares of common stock
at an exercise price of $0.73 per share. Such warrants were issued for
consulting services provided in connection with our 2004 private placement and
in connection with the conversion of our Series A Preferred Stock by SkyePharma.
(4) Includes 25,200,000 shares of common stock and warrants to purchase 20,000
shares of common stock. Michael Ashton, Chief Executive Officer of SkyePharma
and a member of our board of directors, exercises voting control over the shares
held by SkyePharma.
(5) Under the terms of a Call Option Agreement dated January 20, 2004, we have
the right to repurchase some or all of 12,500,000 shares of our common stock
from SkyePharma. In June 2004, we assigned the right to purchase 1,250,000
shares under the Call Option Agreement to FPP Capital Advisors, an entity
controlled by Fabien Pictet. The call option will be exercisable for a period
commencing upon our achievement of a certain milestone event and ending on
January 20, 2007.
36
(6) Includes warrants to purchase 184,897 shares of common stock at an exercise
price of $0.50 per share and warrants to purchase 184,897 shares of common stock
at an exercise price of $0.73 per share. Such warrants were issued for
consulting services provided in connection with our 2004 private placement and
in connection with negotiating the Omnibus Conversion Agreement dated January
12, 2004 between us and SkyePharma.
(7) Includes 650,000 shares of common stock beneficially owned by Mr. Tarabay
which he acquired prior to our 2004 private placement.
(8) Includes warrants to purchase 36,000 shares of common stock at an exercise
price of $0.50 per share and warrants to purchase 36,000 shares of common stock
at an exercise price of $0.73 per share. Such warrants were issued for
consulting services provided in connection with our 2004 private placement.
PLAN OF DISTRIBUTION
The selling stockholders and any of their pledgees, donees, transferees,
assignees or other successors-in-interest may, from time to time, sell any or
all of the shares of common stock offered hereby on any stock exchange, market
or trading facility on which the shares are traded or in private transactions.
Our common stock currently trades on the OTC Bulletin Board. Any sales by the
selling stockholders may be at fixed or negotiated prices. The selling
stockholders may use any one or more of the following methods when selling
shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
37
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
Broker-dealers engaged by the selling stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The selling stockholders may from time to time pledge or grant a security
interest in any of their warrants or common stock issuable upon conversion of
their warrants and, if they default in the performance of their secured
obligations, the pledgees or secured parties may offer and sell the shares
underlying the warrants from time to time under this prospectus.
The selling stockholders also may transfer their warrants or shares of
common stock issuable upon conversion of their warrants in other circumstances,
in which case the pledgees, donees, transferees, assignees or other
successors-in-interest will be "selling stockholders" for purposes of this
prospectus.
The selling stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. The selling stockholders have
informed us that they do not have any agreement or understanding, directly or
indirectly, with any person to distribute the common stock.
We will not receive any proceeds from sales of any shares by the selling
stockholders. However, we may receive an aggregate of $8,259,827 upon the
exercise of all the warrants held by selling stockholders, if such warrants are
exercised for cash. We will use such funds, if any, to fund clinical trials and
for working capital and general corporate purposes.
38
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue 153,000,000 shares of capital stock divided
into (i) 150,000,000 shares of common stock, par value $0.0001 per share and
(ii) 1,000,000 shares of preferred stock. As of June 25, 2004, there are
73,173,055 shares of our common stock outstanding, held of record by
approximately 2,385 stockholders. We do not have any shares of preferred stock
outstanding.
Common Stock
The holders of our common stock are entitled to one vote for each share
held of record in the election of directors and in all other matters to be voted
on by the stockholders. There is no cumulative voting with respect to the
election of directors. As a result, the holders of more than 50% of the shares
voting for the election of directors can elect all of the directors. Holders of
common stock are entitled:
o to receive any dividends as may be declared by the board of
directors out of funds legally available for such purpose after
payment of accrued dividends on the outstanding shares of preferred
stock; and
o in the event of our liquidation, dissolution, or winding up, to
share ratably in all assets remaining after payment of liabilities
and after provision has been made for each class of stock having
preference over the common stock.
All of the outstanding shares of common stock are validly issued, fully
paid and nonassessable. Holders of our common stock have no preemptive right to
subscribe for or to purchase additional shares of any class of our capital
stock.
Pursuant to an Amendment to Stockholders' Agreement dated January 20, 2004
between us, SkyePharma, Jose O'Daly, Mike Ajnsztajn, Gina Tedesco and Gaston
Liebhaber, the parties agreed to vote all shares held by such parties for (i)
one director designated by Jose O'Daly, (ii) one director designated by Mike
Ajnsztajn, (iii) one director designated by Gaston Liebhaber, (iv) one director
designated by Gina Tedesco, (v) one director designated by SkyePharma and (vi)
two independent directors. The agreement terminates on the later of (i) January
20, 2007 or (ii) the date on which SkyePharma no longer beneficially owns 20% of
our outstanding common stock.
Preferred Stock
Our board of directors has the authority, within the limitations set forth
in our certificate of designations and certificate of incorporation to provide
by resolution for the issuance of preferred stock, in one or more classes or
series, and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences and the number of shares constituting any
series or the designation of such series.
39
Warrants
As of June 25, 2004, we have outstanding warrants to purchase 18,011,891
shares of our common stock. We issued warrants to purchase 6,300,000 shares of
our common stock at an exercise price of $1.60 per share pursuant to a private
placement that occurred in September 2001. We issued warrants to purchase
415,237 shares of our common stock at an exercise price of $4.00 per share
pursuant to a private placement that occurred in November 2001. We issued
warrants to purchase 10,459,866 shares of our common stock at an exercise price
of $0.73 per share pursuant to a private placement that occurred in January and
February 2004. In connection with our most recent private placement, we also
issued to FPP Capital Advisors and certain other selling stockholders who
assisted FPP Capital Advisors in providing consulting services to us warrants to
purchase an aggregate of 418,394 shares of our common stock at $0.50 per share
and warrants to purchase an aggregate of 418,394 shares of our common stock at
$0.73 per share. In consideration for services rendered in negotiating the
Omnibus Conversion Agreement dated January 12, 2004 between us and SkyePharma,
we issued units consisting of 150,000 shares of common stock and warrants to
purchase 150,000 shares of common stock to FPP Capital Advisors. FPP Capital
Advisors is controlled by Fabien Pictet, a member of our board of directors.
Market for Common Stock
Shares of our common stock are listed on the OTC Bulletin Board under the
symbol ASTR.
Transfer Agent and Registrar
Our transfer agent and registrar is American Stock Transfer and Trust
Company, 59 Maiden Lane, Plaza Level, New York, New York 10038.
Shares Eligible for Future Sale
We currently have 73,173,055 shares of common stock outstanding. Of the
73,173,055 shares of common stock outstanding, up to 37,538,189 shares are
freely tradable without restriction or further registration under the Securities
Act, except for any shares purchased by an "affiliate", which will be subject to
the resale limitations of Rule 144 promulgated under the Securities Act.
All of the remaining shares of common stock currently outstanding are
"restricted securities" or owned by "affiliates", as those terms are defined in
Rule 144, and may not be sold publicly unless they are registered under the
Securities Act or are sold pursuant to Rule 144 or another exemption from
registration. The restricted securities are not eligible for sale without
registration under Rule 144. As of June 25, 2004, there were outstanding options
and warrants to purchase 18,566,891 shares of our common stock.
Lock-Up Agreements
None of the currently outstanding shares of common stock are subject to
lock-up agreements.
40
Rule 144
Generally, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including any of our
affiliates or persons whose shares are aggregated with an affiliate, who has
owned restricted shares of common stock beneficially for at least one year, is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of:
o 1% of our then outstanding shares of common stock; or
o the average weekly trading volume of shares of our common stock
during the four calendar weeks preceding such sale.
A person who is not an affiliate, has not been an affiliate within three
months prior to sale, and has beneficially owned the restricted shares for at
least two years is entitled to sell such shares under Rule 144(k) without regard
to any of the limitations described above.
Charter and Bylaws Provisions and Delaware Anti-Takeover Statute
We are subject to Section 203 of the Delaware General Corporation Law
regulating corporate takeovers. This section prevents Delaware corporations from
engaging under certain circumstances, in a "business combination", which
includes a merger or sale of more than 10% of the corporation's assets, with any
"interested stockholder", or a stockholder who owns 15% or more of the
corporation's outstanding voting stock, as well as affiliates and associates of
any such persons, for three years following the date such stockholder became an
"interested stockholder", unless (i) the business combination or the transaction
in which such stockholder became an "interested stockholder" is approved by the
board of directors prior to the date the "interested stockholder" attained such
status; (ii) upon consummation of the transaction that resulted in the
stockholder becoming an "interested stockholder", the "interested stockholder"
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining the number
of shares outstanding those shares owned by (x) persons who are directors and
also officers and (y) employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or after the
date the "interested stockholder" attained such status the business combination
is approved by the board of directors and authorized at an annual or special
meeting of stockholders by the affirmative vote of at least two-thirds of the
outstanding voting stock that is not owned by the "interested stockholder."
Our certificate of incorporation and bylaws do not provide for cumulative
voting in the election of directors. Our bylaws eliminate the right of
stockholders to call special meetings of stockholders. The authorization of one
million shares of undesignated preferred stock makes it possible for the board
of directors to issue a class of preferred stock with voting or other rights or
preferences that could impede the success of any attempt to effect a change in
our control. These and other provisions may have the effect of delaying,
deferring or preventing hostile takeovers or changes in the control or
management of Astralis even if doing so would be beneficial to our stockholders.
41
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon by McCarter & English, LLP.
EXPERTS
L J Soldinger Associates, LLC, independent certified public accountants,
have audited our financial statements as of December 31, 2003 and 2002, and for
the years then ended and the period March 12, 2001 (date of inception) through
December 31, 2003, as set forth in their report. We have included our financial
statements in the prospectus and elsewhere in this registration statement in
reliance on the L J Soldinger Associates, LLC reports, given on their respective
authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, a Registration
Statement on Form SB-2 under the Securities Act of 1933 with respect to the
common stock offered by this prospectus. This prospectus does not contain all of
the information set forth in the registration statement and the exhibits and
schedules to the registration statement. For further information with respect to
us and the common stock offered by this prospectus, reference is made to the
registration statement and the exhibits and schedules filed as a part of the
registration statement. Additionally, we file annual, quarterly and current
reports, proxy statements and other documents with the Securities and Exchange
Commission. You may read and copy any materials we file with the Securities and
Exchange Commission at the Securities and Exchange Commission's Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information on the operation of the Public Reference Room by calling the
Securities and Exchange Commission at 1-800-SEC-0330. The Securities and
Exchange Commission also maintains a World Wide Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Securities and Exchange Commission. The
address of the Securities and Exchange Commission's Web site is
http://www.sec.gov.
42
ASTRALIS LTD.
(A Development Stage Entity)
INDEX TO FINANCIAL STATEMENTS
Financial Statements as of and for the Years Ended
December 31, 2003 and 2002 Page
------------------------------------------------------------------------- ----
Report of Independent Registered Public Accounting Firm F-2
Balance Sheets F-3
Statements of Operations F-4
Statements of Stockholders' Equity F-5
Statements of Cash Flows F-11
Notes to Financial Statements F-12
Interim Financial Statements as of March 31, 2004 and
December 31, 2003 and for the Quarters Ended
March 31, 2004 and 2003
-------------------------------------------------------------------------
Condensed Balance Sheets (Unaudited) F-29
Condensed Statements of Operations (Unaudited) F-30
Condensed Statements of Cash Flows (Unaudited) F-31
Notes to Condensed Financial Statements (Unaudited) F-32
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Astralis Ltd.
Fairfield, New Jersey
We have audited the accompanying balance sheets of Astralis Ltd. (a development
stage entity) as of December 31, 2003 and 2002, and the related statements of
operations, stockholders' equity, and cash flows for the years then ended and
the period March 12, 2001 (date of inception) through December 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statements presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Astralis Ltd. as of December
31, 2003 and 2002, and the results of operations, changes in stockholders'
equity and its cash flows for the years then ended and the period March 12, 2001
(date of inception) through December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has incurred net losses since inception. Also,
the Company does not have sufficient funds to execute its business plan. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans regarding those matters are also described in
Note 3. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
L J SOLDINGER ASSOCIATES
Deer Park, Illinois
March 2, 2004
F-2
ASTRALIS LTD.
(A Development Stage Entity)
Balance Sheets
ASSETS
December 31,
-----------------------------
2003 2002
------------ ------------
Current Assets
Cash and cash equivalents $ 10,660 $ 227,193
Marketable securities 1,374,174 1,207,179
Interest receivable (net of allowance for doubtful accounts of $16,088) -- 5,891
Prepaid expense - related party 1,007,500 1,995,000
Prepaid expenses 84,902 73,249
Supplies 87,037 30,239
------------ ------------
Total Current Assets 2,564,273 3,538,751
Intangible Assets, Net - Related Party 3,511,900 4,226,188
Other Intangible Assets, Net 94,640 43,833
Property and Equipment, Net 293,049 362,713
Deposits 29,953 29,953
------------ ------------
$ 6,493,815 $ 8,201,438
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 279,506 $ 263,245
------------ ------------
Total Current Liabilities 279,506 263,245
------------ ------------
Commitments and Contingencies
Stockholders' Equity
Convertible preferred stock, Series A, $.001 par value;
3,000,000 shares authorized at 2003 and 2002; 2,000,000 and
1,750,000 issued and outstanding at 2003 and 2002, respectively
(liquidation preference - $22,122,600 at 2003) 2,000 1,750
Common stock; $.0001 par value; 150,000,000 shares authorized at
2003; 37,538,189 issued and outstanding at 2003 and 2002 3,754 3,754
Additional paid-in capital 35,929,864 33,429,396
Deferred compensation (4,822) (12,164)
Common stock subscriptions receivable (24,000) (885,000)
Accumulated other comprehensive loss (27,698) (15,181)
Deficit accumulated in the development stage (29,664,789) (24,584,362)
------------ ------------
Total Stockholders' Equity 6,214,309 7,938,193
------------ ------------
$ 6,493,815 $ 8,201,438
============ ============
See independent auditors' report and the accompanying notes to financial
statements
F-3
ASTRALIS LTD.
(A Development Stage Entity)
Statements of Operations
March 12, 2001
Year Ended December 31, (Inception) to
----------------------------- December 31,
2003 2002 2003
------------ ------------ ------------
Revenues $ -- $ -- $ --
------------ ------------ ------------
Operating Expenses
Research and development - related party 1,721,788 6,834,399 11,759,422
Research and development 2,323,885 927,143 3,279,568
Depreciation and amortization 26,062 15,728 42,621
General and administrative 1,290,346 1,374,251 3,516,610
------------ ------------ ------------
Total Operating Expenses 5,362,081 9,151,521 18,598,221
------------ ------------ ------------
Loss From Operations (5,362,081) (9,151,521) (18,598,221)
Investment Income 60,018 111,273 180,546
------------ ------------ ------------
Loss before income tax benefit (5,302,063) (9,040,248) (18,417,675)
Income tax benefit 221,636 -- 221,636
------------ ------------ ------------
Net Loss (5,080,427) (9,040,248) (18,196,039)
Preferred Stock Dividends -- (9,348,750) (11,468,750)
------------ ------------ ------------
Net Loss to Common Stockholders $ (5,080,427) $(18,388,998) $(29,664,789)
============ ============ ============
Basic and Diluted Loss per Common Share $ (0.14) $ (0.49)
============ ============
Basic and Diluted Weighted Average
Common Shares Outstanding 37,538,189 37,541,339
============ ============
See independent auditors' report and the accompanying notes to financial
statements.
F-4
ASTRALIS LTD.
(A Development Stage Entity)
Statements of Stockholders' Equity
Preferred Stock Common Stock Additional
---------------------------- ---------------------------- Paid-In
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------
Balances, March 12, 2001
(Date of Inception) -- $ -- -- $ -- $ --
Members' capital contributions,
3/15/2001 -- -- 25,300,000 2,530 30,653
Capital contributions received,
3/1 - 8/13/2001 -- -- -- -- --
Members' contributed services,
3/15 - 6/30/2001 -- -- -- -- 12,986
Members' capital contributions,
9/1/2001 -- -- 2,700,000 270 1,349,730
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
Options to purchase 100,000 shares of
common stock at $1.77 (based on
valuation) issued for consulting
services, 12/31/2001 -- -- -- -- 177,000
Amortization of deferred compensation -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2001 1,000,000 $ 1,000 37,588,179 $ 3,759 $ 17,013,223
------------ ------------ ------------ ------------ ------------
See independent auditors' report and the accompanying notes to financial
statements.
F-5
ASTRALIS LTD.
(A Development Stage Entity)
Statements of Stockholders' Equity
Deficit
Accumulated Accumulated
Other During the Total
Subscription Deferred Comprehensive Development Comprehensive
Receivable Compensation Loss Stage Total Loss
------------ ------------ ------------- ----------- ----------- -------------
Balances, March 12, 2001
(Date of Inception) $ -- $ -- $ -- $ -- $ --
Members' capital contributions, (33,183) -- -- -- --
3/15/2001
Capital contributions received,
3/1 - 8/13/2001 33,183 -- -- -- 33,183
Members' contributed services,
3/15 - 6/30/2001 -- -- -- -- 12,986
Members' capital contributions,
9/1/2001 (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 -- -- -- -- 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 -- (354,000) -- -- --
Options to purchase 100,000 shares of
common stock at $1.77 (based on
valuation) issued for consulting services, -- (177,000) -- -- --
12/31/2001
Amortization of deferred compensation -- 132,750 -- -- 132,750
Net loss -- -- -- (4,075,364) (4,075,364) $ (4,075,364)
----------- ----------- --------- ----------- ----------- ------------
Balance, December 31, 2001 $(1,350,000) $ (398,250) $ -- $(6,195,364) $ 9,074,368 $ (4,075,364)
----------- ----------- --------- ----------- ----------- ============
See independent auditors' report and the accompanying notes to financial
statements.
F-6
ASTRALIS LTD.
(A Development Stage Entity)
Statements of Stockholders' Equity
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; 250,000
shares at $10.00 per share 250,000 250 -- -- 2,499,750
Preferred stock issue, net of
issuance costs, 4/30/2002; 250,000
shares at $10.00 per share 250,000 250 -- -- 2,499,750
Preferred stock dividend, April 30, 2002 -- -- -- -- 270,000
Preferred stock issue, net of
issuance costs, 7/31/2002; 250,000 shares
at $10.00 per share 250,000 250 -- -- 2,499,750
Collection of subscription receivable -- -- -- -- --
Options issued for consulting
services, 9/10/2002; 15,000 options at $0.38
per option, based on valuation -- -- -- -- 5,700
Preferred stock dividend, 12/10/2002 -- -- -- -- 9,078,750
Amortization of deferred compensation -- -- -- -- --
Fair value adjustment on deferred
compensation -- -- -- -- (357,532)
COMPREHENSIVE LOSS
Net loss -- -- -- -- --
Other comprehensive loss:
Unrealized gain (loss) on
available-for-sale securities -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total Comprehensive Loss
Balance, December 31, 2002 1,750,000 $ 1,750 37,538,189 $ 3,754 $ 33,429,396
============ ============ ============ ============ ============
See independent auditors' report and the accompanying notes to financial
statements.
F-7
ASTRALIS LTD.
(A Development Stage Entity)
Statements of Stockholders' Equity
Deficit
Accumulated Accumulated
Other During the Total
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; 250,000
shares at $10.00 per share -- -- -- -- 2,500,000
Preferred stock issue, net of
issuance costs, 4/30/2002; 250,000
shares at $10.00 per share -- -- -- -- 2,500,000
Preferred stock dividend, April 30,
2002 -- -- -- (270,000) --
Preferred stock issue, net of
issuance costs, 7/31/2002; 250,000
shares at $10.00 per share -- -- -- -- 2,500,000
Collection of subscription receivable 465,000 -- -- -- 465,000
Options issued for consulting
services, 9/10/2002; 15,000 options
at $0.38 per option, based on valuation -- (5,700) -- -- --
Preferred stock dividend, 12/10/2002 -- -- -- (9,078,750) --
Amortization of deferred compensation -- 34,254 -- -- 34,254
Fair value adjustment on deferred
compensation -- 357,532 -- -- --
COMPREHENSIVE LOSS
Net loss -- -- -- (9,040,248) (9,040,248) $ (9,040,248)
Other comprehensive loss:
Unrealized loss on
available-for-sale
securities -- -- (15,181) -- (15,181) (15,181)
------------ ------------ ------------ ------------ ------------ ------------
Total Comprehensive Loss $ (9,055,429)
============
Balance, December 31, 2002 $ (885,000) $ (12,164) $ (15,181) $(24,584,362) $ 7,938,193
============ ============ ============ ============ ============
See independent auditors' report and the accompanying notes to financial
statements.
F-8
ASTRALIS LTD.
(A Development Stage Entity)
Statements of Stockholders' Equity
Preferred Stock Common Stock Additional
------------------------------ --------------------------- Paid-In
Shares Amount Shares Amount Capital
-------------- --------------- ------------- ------------- ------------------
Balances Brought Forward 1,750,000 $ 1,750 37,538,189 $ 3,754 $ 33,429,396
Preferred stock issue, net of
issuance costs, 1/31/2003; 250,000
shares at $10.00 per share 250,000 250 -- -- 2,499,750
Collection of subscription receivable -- -- -- -- --
Reduction of subscription receivable,
in lieu of payment for services -- -- -- -- --
Amortization of deferred compensation -- -- -- -- --
Fair value adjustment on deferred
compensation -- -- -- -- 18,321
Offering cost for January 2004
private placement -- -- -- -- (17,603)
COMPREHENSIVE LOSS
Net loss -- -- -- -- --
Other comprehensive loss:
Unrealized gain (loss) on
available-for-sale securities -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total Comprehensive Loss
Balance, December 31, 2003 2,000,000 $ 2,000 37,538,189 $ 3,754 $ 35,929,864
============ ============ ============ ============ ============
See independent auditors' report and the accompanying notes to financial
statements.
F-9
ASTRALIS LTD.
(A Development Stage Entity)
Statements of Stockholders' Equity
Deficit
Accumulated Accumulated
Other During the Total
Subscription Deferred Comprehensive Development Comprehensive
Receivable Compensation Loss Stage Total Loss
------------ ------------ ------------- ------------- ------------ -------------
Balances Brought Forward $(885,000) $(12,164) $ (15,181) $(24,584,362) $ 7,938,193
Preferred stock issue, net of
issuance costs, 1/31/2003;
250,000 shares at $10.00 per share -- -- -- -- 2,500,000
Collection of subscription
receivable 825,000 -- -- -- 825,000
Reduction of subscription receivable,
in lieu of payment for services 36,000 -- -- -- 36,000
Amortization of deferred compensation -- 25,663 -- -- 25,663
Fair value adjustment on deferred
compensation -- (18,321) -- -- --
Offering cost for January 2004,
private placement -- -- -- -- (17,603)
COMPREHENSIVE LOSS
Net loss -- -- -- (5,080,427) (5,080,427) $ (5,080,427)
Other comprehensive loss:
Unrealized gain (loss) on
available-for-sale Securities, net -- -- (12,517) -- (12,517) (12,517)
--------- -------- ------------ ------------ ------------ ------------
Total Comprehensive Loss $ (5,092,944)
============
Balance, December 31, 2003 $ (24,000) $ (4,822) $ (27,698) $(29,664,789) $ 6,214,309
========= ======== ============ ============ ============
See independent auditors' report and the accompanying notes to financial
statements.
F-10
ASTRALIS LTD.
(A Development Stage Entity)
Statements of Cash Flows
Year Ended December 31 March 12, 2001
----------------------------- (Inception) to
2003 2002 December 31, 2003
------------ ------------ -----------------
Cash Flows from Operating Activities
Net loss $ (5,080,427) $ (9,040,248) $(18,196,039)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 847,754 786,740 1,694,849
Amortization of net premium paid on investments 5,737 48,814 54,551
Dividend income reinvested (72,308) (9,796) (82,104)
Members' contributed salaries -- 12,986
Research and development service fee netted against
proceeds received from preferred stock issuance 20,000 1,995,000 5,015,000
Operating expenses paid by related parties on behalf of
Company -- -- 17,587
Amortization of deferred compensation 25,663 34,254 192,667
Investor relation fees netted against subscription
receivable 36,000 -- 36,000
Compensatory common stock -- -- 135,000
Loss on sale of available-for-sale securities 23,759 7,145 30,904
Changes in assets and liabilities
Prepaid expenses 975,847 (2,029,788) (1,092,402)
Interest receivable 5,891 (5,891) --
Supplies (56,798) (30,239) (87,037)
Deposits -- (29,953) (29,953)
Accounts payable and accrued expenses (1,169) (119,838) 262,076
------------ ------------ ------------
Net Cash Used in Operating Activities (3,270,051) (8,393,800) (12,035,915)
------------ ------------ ------------
Cash Flows from Investing Activities
Purchases of available-for-sale securities (1,919,734) (7,638,437) (9,558,171)
Proceeds from sale of available-for-sale securities 1,783,032 6,369,914 8,152,946
Expenditures related to patent (36,267) (20,914) (67,436)
Purchases of property and equipment (60,910) (431,444) (493,974)
------------ ------------ ------------
Net Cash Used in Investing Activities (233,879) (1,720,881) (1,966,635)
------------ ------------ ------------
Cash Flows from Financing Activities
Repurchase of common stock -- (80,000) (80,000)
Collection of subscription receivable 825,000 465,000 1,290,000
Issuance of common stock, net of offering and
transaction costs -- -- 2,888,317
Issuance of preferred stock 2,480,000 5,505,000 9,932,496
Private placement offering costs (17,603) -- (17,603)
------------ ------------ ------------
Net Cash Provided by Financing Activities 3,287,397 5,890,000 14,013,210
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (216,533) (4,224,681) 10,660
Cash and Cash Equivalents, Beginning of Period 227,193 4,451,874 --
------------ ------------ ------------
Cash and Cash Equivalents, End of Period $ 10,660 $ 227,193 $ 10,660
============ ============ ============
See independent auditors' report and the accompanying notes to financial
statements.
F-11
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 1 - DESCRIPTION OF BUSINESS
Nature of Operations
Astralis, Ltd. (the "Company") is an emerging stage biotechnology company, based
in New Jersey and incorporated under the laws of the State of Delaware, which
primarily engages in research and development of treatments for immune system
disorders and skin diseases. The Company is currently developing two products.
Psoraxine(R), administered by intramuscular injection, is a protein based
therapy for the treatment of psoriasis. The Company's second product is for the
treatment of leishmaniasis. The Company is also engaged in research on the
possible development of the technology underlying Psoraxine(R) for the treatment
of other indications, such as eczema, and psoriatic arthritis.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company's financial statements are prepared on the accrual basis of
accounting in accordance with United States generally accepted accounting
principles ("US GAAP").
Development Stage Enterprise
The Company is a Development Stage Enterprise, as defined in Statement of
Financial Accounting Standards No. 7 "Accounting and Reporting for Development
Stage Enterprises" ("SFAS No. 7"). Under SFAS No. 7, certain additional
financial information is required to be included in the financial statements for
the period from inception of the Company to the current balance sheet date.
Since the inception of the Company, management has been in the process of
performing research and development activities, fulfilling FDA requirements in
order to enter human clinical trials in the US with Psoraxine(R), initiating
Phase I clinical studies and the raising of capital through private placement
stock offerings.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and investments in money market
funds. The Company considers all highly liquid instruments with an original
maturity of 90 days or less at the time of purchase to be cash equivalents.
Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash deposits at financial institutions. To
mitigate this risk, the Company places its cash deposits only with high credit
quality institutions.
F-12
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment
Furniture and equipment are recorded at cost, less accumulated depreciation
computed on a straight-line basis over the estimated useful lives of the
respective assets. Depreciation is computed using a four-year life for computer
and office equipment, three to four years for lab equipment, five-year for
automobile, seven-year for furniture and fixtures and three-year for leasehold
improvements.
Income Taxes
Income taxes are recorded in the period in which the related transactions are
recognized in the financial statements, net of the valuation allowances, which
have been recorded against deferred tax assets. Deferred tax assets and
liabilities are recorded for the expected future tax consequences of temporary
differences between the tax basis and the financial reporting of assets and
liabilities. Net deferred tax assets and liabilities, relating primarily to
federal and state net operating loss carryforwards and research and development
credits that have been deferred for tax purposes have also been recorded. A
valuation reserve has been recorded to offset a portion of the deferred tax
benefit (except for amount realized through the sale of a portion of the
Company's New Jersey net operating loss) because management has determined it is
more likely than not that the deferred tax assets will not be realized. See Note
7.
Fair Value of Financial Instruments
The Company's financial instruments, including cash and cash equivalents,
accounts payable and accrued expenses, are carried at cost, which approximates
fair value.
Stock-Based Compensation Arrangements
The Company applies the intrinsic value method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting For Stock Issued To
Employees," and related interpretations, in accounting for its stock-based
grants to employees and directors. Under the intrinsic value method of
accounting, compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeds the exercise price. The
Company applies the disclosure provisions specified in SFAS No. 148, "Accounting
For Stock Based Compensation - Transition and Disclosure - an Amendment of SFAS
123." The Company applies SFAS No. 123, "Accounting for Stock-Based
Compensation," in accounting for stock-based grants to non-employees.
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.
F-13
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Year Ended December 31,
------------------------------
2003 2002
----------- --------------
Net loss, as reported $(5,080,427) $ (18,388,998)
Add:
Stock-based compensation expense included in reported net
loss determined under APB No. 25, net of related tax effects -- --
Deduct:
Total stock-based director compensation expense determined
under fair-value-based method for all awards, net of related
tax effects 11,589 --
----------- --------------
Pro forma net loss $(5,092,016) $ (18,388,998)
=========== ==============
Loss per share:
Basic - as reported $ (0.14) $ (0.49)
Basic - pro forma $ (0.14) $ (0.49)
These pro forma amounts may not be representative of future disclosures since
the estimated fair value of stock options is amortized to expense over the
vesting period and additional options may be issued in future years. The
estimated fair value of each option granted was calculated using the
Black-Scholes option-pricing model. The following summarizes the weighted
average of the assumptions used in the model.
2003 2002
----- -----
Risk free rate 2.1% --
Expected years until exercise 3.0 --
Expected stock volatility 100.0% --
Dividend yield -- --
===== =====
Loss Per Share
Loss per common share is calculated in accordance with Statement of Financial
Accounting Standards No. 128, Earnings Per Share ("FAS 128"). Basic loss per
common share is computed based upon the weighted average number of shares of
common stock outstanding for the period and excludes any potential dilution.
Shares associated with stock options, warrants and convertible preferred stock
are not included because their inclusion would be antidilutive (i.e., reduce the
net loss per share).
The common shares potentially issuable arising from these instruments, which
were outstanding during the periods presented in the financial statements,
consisted of:
2003 2002
----------- -----------
Options $ 365,000 $ 315,000
Warrants 6,780,237 6,780,237
Convertible preferred stock 12,500,000 10,937,500
----------- -----------
$19,645,237 $18,032,737
=========== ===========
F-14
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Segment Information
The Company has determined it has one reportable operating segment as defined by
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information."
Research and Development Costs
The cost of research, development and product improvement expenditures, which
includes depreciation of the Company's laboratory and amortization of the
technology access option, are charged to expense as they are incurred. Research,
development and product improvement costs included in operating expenses
amounted to $4,045,673 and $7,761,542 for the years ending December 31, 2003 and
2002, respectively; and $15,038,990 for the period from March 12, 2001 (date of
inception) to December 31, 2003.
Included in this amount were payments to related parties (see Note 11).
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Financial Interpretation No. 46, "Consolidation of Variable Interest Entities -
An Interpretation of ARB No. 51" (FIN 46 or Interpretation). FIN 46 is an
interpretation of Accounting Research Bulletin 51, "Consolidated Financial
Statements," and addresses consolidation by business enterprises of variable
interest entities (VIEs). The primary objective of the Interpretation is to
provide guidance on the identification of, and financial reporting for, entities
over which control is achieved through means other than voting rights; such
entities are known as VIEs. The Interpretation requires an enterprise to
consolidate a VIE if that enterprise has a variable interest that will absorb a
majority of the entity's expected losses if they occur, receive a majority of
the entity's expected residual returns if they occur or both. An enterprise is
required to consider the rights and obligations conveyed by its variable
interests in making this determination. On October 9, 2003, the FASB issued
Staff Position No. 46-6 which deferred the effective date for applying the
provisions of FIN 46 for interests held by public entities in variable interest
entities or potential variable interest entities created before February 1,
2003. On December 24, 2003, the FASB issued a revision to FIN 46. Under the
revised interpretation, the effective date was delayed to periods ending after
March 15, 2004 for all variable interest entities, other than SPEs. The adoption
of FIN 46 is not expected to have an impact on the Company's financial
condition, results of operations or cash flows.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 149 requires that contracts with comparable
characteristics be accounted for similarly. The statement is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The provisions of SFAS No. 149
generally are to be applied prospectively only. The adoption of SFAS No. 149 did
not have a material impact on the Company's results of operations or financial
position.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
establishes standards for classification and measurement by an issuer of certain
financial instruments with characteristics of both liabilities and equity. The
statement requires that an issuer classify a financial instrument that is within
its scope as a liability (or asset in some circumstances). Many of those
instruments were previously classified as equity. This Statement also addresses
questions about the classification of certain financial instruments that embody
obligations to issue equity shares. This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003, except as it relates to consolidated limited-life subsidiaries. The FASB
F-15
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
indefinitely deferred the effective date of this statement as it relates to
certain mandatorily redeemable non-controlling interests in consolidated
limited-life subsidiaries. The adoption of the effective provisions of SFAS No.
150 did not have a material impact on the Company's results of operations or
financial position.
On December 17, 2003, the Staff of the Securities and Exchange Commission (or
SEC) issued Staff Accounting Bulletin No. 104 ("SAB 104"), Revenue Recognition,
which supersedes Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements ("SAB 101"). SAB 104's primary purpose is to rescind the
accounting guidance contained in SAB 101 related to multiple-element revenue
arrangements that was superseded as a result of the issuance of EITF
00-21,Accounting for Revenue Arrangements with Multiple Deliverables.
Additionally, SAB 104 rescinds the SEC's related Revenue Recognition in
Financial Statements Frequently Asked Questions and Answers issued with SAB 101
that had been codified in SEC Topic 13, Revenue Recognition. While the wording
of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue
recognition principles of SAB 101 remain largely unchanged by the issuance of
SAB 104, which was effective upon issuance. The adoption of SAB 104 did not have
a material effect on the Company's financial position or results of operations.
NOTE 3 - GOING CONCERN
The Company incurred net losses to common stockholders of $5,080,427 and
$29,664,789 for the year ended December 31, 2003 and for the period March 12,
2001 (date of inception) to December 31, 2003, respectively. Included in these
net losses were non-cash preferred stock dividends generated from beneficial
conversion features of preferred stock in the amounts of $0 for the year ended
December 31, 2003 and $11,468,750 in the cumulative net loss (see Note 8).
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 a multiple number of years. The Company expects to
continue clinical testing of Psoraxine in 2004. 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.
Consequently, the aforementioned items raise substantial doubt about the
Company's ability to continue as a going concern.
Management plans to raise additional capital through private placement equity
offerings in 2004 (see Note 16). These funds, in addition to its cash and
marketable securities held at December 31, 2003, will be needed in order to
finance the Company's currently anticipated needs for operating and capital
expenditures for 2004, 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 continue as a going concern 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 financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
F-16
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 4 - MARKETABLE SECURITIES
The Company's marketable equity securities consisted of certificates of deposit,
fixed income funds that have a readily determinable fair market value.
Management determines the appropriate classifications 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 Stockholder's 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 specification
method.
As of December 31, 2002, available-for-sale securities consist of the following:
Gross Gross
Amortized Unrealized Unrealized
Due Cost Loss Gains Fair Value
----------------- ---------- --------- ----------- ----------
Certificates of Deposit 1/2003 to 11/2014 $ 512,584 $ (8,294) $ 24 $ 504,314
Fixed Income Fund current 709,776 (6,911) -- 702,865
---------- --------- ----------- ----------
$1,222,360 $ (15,205) $ 24 $1,207,179
========== ========= =========== ==========
As of December 31, 2003, available-for-sale securities consist of the following:
Gross Gross
Amortized Unrealized Unrealized
Due Cost Loss Gains Fair Value
----------------- ---------- --------- ----------- ----------
Fixed Income Fund Current $1,401,872 $ (27,740) $ 42 $1,374,174
---------- --------- ----------- ----------
$1,401,872 $ (27,740) $ 42 $1,374,174
========== ========= =========== ==========
NOTE 5 - INTANGIBLE ASSETS
The Company's policy is to capitalize the costs of purchased and internally
developed patents and those expenses in connection with patent rights licensed
to the Company. The life of the patent is 20 years from the date the patent is
applied for or 17 years from when it is granted, whichever is longer. The
Company's policy is to capitalize direct costs related to the rights it has
licensed, and amortize them on a straight-line basis over the remaining portion
of the 20-year period, which commenced on March 16, 2001, the date the
application was filed for the patent the Company has licensed
The Company paid $5,000,000 for a technology access option from SkyePharma PLC
("SkyePharma"). This option gives the Company the right, until December 10,
2008, to enter into a non-exclusive license agreement to utilize any of three
drug delivery systems of SkyePharma in connection with any drugs it develops to
treat two specific immunotherapies. Upon exercise of the option, the Company
will be required to pay a license fee of 5% of net sales of any product
utilizing the drug delivery systems. All other terms of the license agreement
will be determined upon exercise of the option.
F-17
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 5 - INTANGIBLE ASSETS (Continued)
Management has taken the position that the technology access option fee is a
license fee which allows the Company, prior to commercialization of its drugs,
to utilize the established delivery system technologies of SkyePharma to test
for viability and enhancement of the Company's Psoraxine vaccine. In accordance
with Financial Accounting Standard No. 2 - Research and Development Costs ("SFAS
No. 2"), the Company has capitalized the technology access option as a research
and development intangible asset and is amortizing it over its seven-year life.
The Company will evaluate this intangible annually for impairment under FAS 144
"Accounting For The Impairment or disposal of Long-Lived Assets."
The Company has amortized $2,892 and $2,135 of patent costs and $714,288 of the
cost of the technology option license in 2003 and 2002, respectively. The
amortization related to the technology option license is recorded as research
and development cost as required by SFAS No. 2.
Intangible assets consisted of the following at December 31,
2003 2002
----------- -----------
Patent $ 100,464 $ 46,765
Technology access fee 5,000,000 5,000,000
Less accumulated amortization (1,493,924) (776,744)
----------- -----------
$ 3,606,540 $ 4,270,021
=========== ===========
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31,
2003 2002
--------- ---------
Furniture and Fixtures $ 28,281 $ 27,813
Computer Equipment 21,803 17,120
Leasehold Improvements 196,544 181,604
Lab Equipment 236,781 195,962
Automobiles 8,945 8,945
--------- ---------
$ 492,354 $ 431,444
Accumulated depreciation and amortization (199,305) (68,731)
--------- ---------
$ 293,049 $ 362,713
========= =========
Depreciation expense amounted to $130,574 and $68,697 for the years ended
December 31, 2003 and 2002, respectively. The depreciation related to the
Company's laboratory and related equipment is recorded as research and
development as required by SFAS No. 2.
F-18
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 7 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary timing
differences between the carrying amounts of assets and liabilities reflected on
the financial statements and the amounts used for income tax purposes. The tax
effects of temporary differences and net operating loss carryforwards and tax
credits that give rise to significant portions of the deferred tax assets
recognized are presented below:
December 31,
2003 2002
----------- -----------
Deferred tax assets :
Prepaid research and development $ 798,800 $ 1,062,100
Deferred compensation 77,000 --
Accumulated depreciation and amortization 332,000 173,100
Research and development credits carryforward 1,125,400 437,200
Federal and state deferred tax benefit arising from
net operating loss carryforwards 5,612,500 3,838,000
----------- -----------
7,945,700 5,510,400
Less valuation allowance (7,945,700) (5,510,400)
----------- -----------
Total deferred tax assets $ -- $ --
=========== ===========
As of December 31, 2003, the Company had losses, which resulted in net operating
loss carryforwards for tax purposes amounting to approximately $14,500,000 that
may be offset against future taxable income. These carryforwards start to expire
in 2021. The Company generated federal research and development credits of
$784,400 that will expire in 2021 and state credits of $341,000 that will expire
in 2008. However, these carryforwards and credits may be significantly limited
due to changes in the ownership of the Company as a result of future equity
offerings.
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 generates any earnings or any specific level of
earnings in future years. Therefore, the Company has established a valuation
allowance for deferred tax assets (net of liabilities) of approximately
$7,945,700 and $5,510,400 as of December 31, 2003 and 2002.
In 2003, the Company sold $2,863,511 of its gross New Jersey net operating loss
carryforwards under the State of New Jersey's Technology Business Tax
Certificate Transfer Program (the "Program"). The Program allows qualified
technology and biotechnology businesses in New Jersey to sell unused amounts of
net operating loss carryforwards and defined research and development tax
credits for cash. The proceeds from the sale of the Company's carryforwards was
$221,600 (net of fees) and the amount was recorded as a tax benefit in the
statements of operations. The State of New Jersey renews the Program annually
and limits the aggregate proceeds of the program to $10,000,000. Due to the
uncertainty at any time as to the Company's ability to effectuate the sale of
available New Jersey net operating losses, and since the Company has no control
or influence over the Program, the benefits are recorded once the agreement with
the counterpart is signed and the sale is approved by the State.
In accordance with federal income tax regulations, the net loss incurred by
Astralis, LLC from inception to the date of its merger with the Company has been
excluded from the benefits of the net operating loss carryforwards reflected in
this footnote.
The following table presents the principal reasons for the difference between
the Company's effective tax rates and the United States federal statutory income
tax rate of 34%.
F-19
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 7 - INCOME TAXES (Continued)
December 31,
2003 2002
----------- -----------
Federal income tax benefit at statutory rate $ 1,727,300 $ 3,165,000
State income tax benefit (net of effect of federal benefit) 296,300 600,800
Non-deductible expenses (54,900) (142,700)
Research and development credit 688,200 232,500
Valuation allowance (2,435,300) (3,855,600)
----------- -----------
Income Tax Benefit $ 221,600 $ --
=========== ===========
Effective Income Tax Rate (13%) 0%
=========== ===========
NOTE 8 - CAPITAL STOCK ACTIVITY
On December 15, 2003, the Company amended it's Articles of Incorporation to
authorize the issuance of 150,000,000 shares of common stock, $0.0001 par value
per share, and 3,000,000 shares of Series A preferred stock, $0.001 par value of
which 37,538,189 shares of common and 2,000,000 shares of Series A preferred
were outstanding as of December 31, 2003.
In 2001 Astralis LLC and the Company merged and this transaction was treated as
a recapitalization of the Company, whereby the Company issued to the members of
Astralis, LLC, 28,000,000 shares of common stock and warrants to purchase
6,300,000 shares of Company common stock for $1.60 per share in a one-for-one
exchange for all of the outstanding 28,000,000 Astralis, LLC member units of
ownership and 6,300,000 options to purchase member units.
Astralis LLC issued 25,300,000 units on April 25, 2001 to various members for an
aggregate subscription receivable amount of $33,183. During 2001, the members
paid $33,183 on behalf of the Company to satisfy their subscription receivable.
On September 1, 2001, five new members were admitted as members of the LLC
through the execution of a subscription agreement. These new members subscribed
to units ("Units") from Astralis LLC consisting of an aggregate of 2,700,000
membership interests (the "Membership Interests") in Astralis LLC and 6,300,000
options to purchase additional Membership Interests in Astralis LLC for an
exercise price of $1.60 per Membership Interest. On November 13, 2001, 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 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. Warrants to purchase
3,150,000 shares of common stock, as amended, expire on December 13, 2004 and
3,150,000 expire November 13, 2006.
In 2002 and 2003, the Company collected $465,000 and $825,000 in cash of the
subscription receivables, respectively. In April 2003, the Company entered into
the Amended Investor Relation Agreement with one of the stockholders who has
outstanding subscription receivable with the Company. The Company reduced the
stockholder's subscription receivable for services received, valued at $36,000,
that the stockholder provided to the Company. The Company will receive services
valued at $24,000 in 2004 in lieu of payment of the outstanding subscription
receivable balance.
F-20
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 8 - CAPITAL STOCK ACTIVITY (Continued)
Common Stock
In September 2001, Astralis, LLC granted 500,000 membership units to a
consultant in return for services rendered. The membership units were
subsequently exchanged for shares of common stock of the Company. The cost of
the services, based on an independent valuation of the units granted, which
amounted to $135,000, were recorded at the time the services were rendered in
2001.
In November 2001, the Company completed a $3,321,887 private placement offering
pursuant to which it sold 103.81 units at $32,000 per unit for an aggregate
amount of $3,321,887. Each unit consisted of 20,000 shares of common stock and
warrants to purchase 4,000 shares of the Company's common stock at $4.00 per
share. The warrants expire on November 13, 2006. The holders of these shares of
common stock and warrants received registration rights. The Company was required
to file a registration statement by March 13, 2002 to register the sale of these
shares and the shares underlying the warrants. Upon consummation of the private
placement, the Company paid a $100,000 investment banking fee and entered into
an agreement for future investment banking services amounting to $144,000,
payable in 24 equal monthly installments of $6,000.
In April 2001, the Company issued warrants to purchase 75,000 shares of common
stock at an exercise price of $1.75 per share. These warrants expire in April
2004.
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 13, 2001, the Company authorized 2,000,000 shares of preferred stock
to be designated as "Series A Convertible Preferred Stock" ("Series A
Preferred") with a $0.001 par value per share. If the Company declares a
dividend, holders of each share of Series A Preferred are entitled to
non-cumulative cash dividends which will be the greater of i) 6% of the
preferred share purchase price; or ii) the amount such holders would have
received had the holders converted to common stock immediately prior to record
date for payment of a dividend to holders of common stock. No dividend can be
declared or paid on common stock without an equal or greater dividend being paid
or declared on the Series A Preferred. Holders of each share of Series A
Preferred were entitled to vote on all matters at stockholder meetings. Holders
of each share of the Series A Preferred could convert their shares to common
stock at an initial conversion price of $2.50. The conversion price could be
adjusted and reset as set forth in the purchase agreement for the Series A
Preferred.
On December 10, 2001, the Company and SkyePharma entered into a purchase
agreement whereby SkyePharma agreed to purchase 2,000,000 shares of 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 received 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, third and fourth closing occurred in January 2002, April 2002, and
July 2002. On each closing, the Company sold 250,000 shares of Series A
Preferred for a purchase price of $2,500,000. The final 250,000 shares of Series
A Preferred totaling $2,500,000 closed on January 31, 2003.
The Company's stock price on December 10, 2001 was $3.03; consequently, pursuant
to the requirements of EITF 98-5 "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios", as
amended by EITF 00-27, the issuance of the Series A Preferred, which was
convertible initially at $2.50 per share at any time, resulted in a beneficial
conversion feature recorded as a preferred stock dividend in the amount of
$2,120,000.
F-21
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 8 - CAPITAL STOCK ACTIVITY (Continued)
The Company's stock price on April 30, 2002 was $2.77; consequently, the
issuance of the Series A Preferred, which was convertible initially at $2.50 per
share at any time, resulted in a beneficial conversion feature recorded as a
preferred stock dividend in the amount of $270,000.
Since the conversion price of the Series A Preferred was subject to reset
provisions as described above, there was a beneficial conversion feature
applicable to the Series A Preferred. Using the potential conversion price of
$1.60 for the first anniversary date as specified in the purchase agreement, the
beneficial conversion feature resulted in an additional preferred stock dividend
of $9,078,750 in December 2002.
On January 20 ,2004, SkyePharma converted 2,000,000 shares of Series A Preferred
into 25,000,000 shares of common stock at a reduced conversion price of $0.80
per share (see Note 16).
Stock Warrants
At December 31, 2003, the Company had the following outstanding common stock
warrants to purchase its securities:
Number of Warrants Exercise Price
Issued Per Share
------------------ ------------------
6,780,237 $1.60 - $4.00
================== ==================
These warrants were primarily issued in connection with the exchange with
Astralis, LLC and the private placement offering.
NOTE 9 - STOCK OPTION PLAN
On September 10, 2001, the Company adopted its 2001 Stock Option Plan that
provides for the granting of options to officers, directors, employees, and
consultants. The number of shares of common stock that can be purchased under
this plan is limited to 5,000,000 shares, adjustable for changes in the capital
structure of the Company. No options can be granted under this plan after
September 10, 2011. Options granted under this plan may be either incentive
stock options or non-qualified stock options. Options terms are not to exceed 10
years. The options have limited transferability, and will be subject to various
vesting provisions as determined at the date of grant. The Board of Directors or
a committee thereof will determine the exercise price of options granted in
accordance with the provisions of this plan. The Board has the ability to amend,
suspend or terminate this plan at any time, subject to restrictions imposed by
applicable law.
On December 31, 2001, the Company granted two consultants options to purchase an
aggregate 300,000 shares of the Company's common stock in exchange for their
services. These options vest ratably, at 75,000 per year, over a four-year
period commencing in 2001. The expiration terms of these options are 4 years, 3
years, 2 years and 1 year, for options vesting in 2001, 2002, 2003 and 2004,
respectively. The strike price for all of these options is $2.75.
During July 2002, the Company granted 15,000 stock options with a strike price
of $2.50, as compensation to a consultant.
F-22
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 9 - STOCK OPTION PLAN (Continued)
The Company records deferred compensation when it makes compensatory stock
option grants to employees, members of the Board of Directors, consultants or
advisory board members. For the options granted to consultants, the amount of
deferred compensation recorded is the fair value of the stock options on the
grant date as determined using a Black-Scholes option-pricing model. The Company
records deferred compensation as a reduction to shareholders' equity with an
offsetting increase to additional paid-in capital. The Company then amortizes
deferred compensation into stock-based compensation expense over the performance
period, which typically coincides with the vesting period of the stock-based
award.
During April 2003, the Company granted options to purchase 50,000 shares of
common stock at an exercise price of $0.45 per share to one of its directors.
Options to purchase 12,500 shares of common stock vested on April 4, 2003, and
options to purchase an additional 12,500 shares will vest each year thereafter
for the following three years.
NOTE 10 - DEFERRED COMPENSATION
The components of deferred compensation for the options granted are as follows
at December 31,
2003 2002
--------- ---------
Balance at January 1 $ 12,164 $ 398,250
Deferred compensation recorded -- 5,700
Fair value adjustments 18,321 (357,532)
Amortization to stock-based compensation (25,663) (34,254)
--------- ---------
Balance at December 31 $ 4,822 $ 12,164
========= =========
Exercise prices for stock options outstanding as of December 31, 2003 and the
weighted average remaining contractual life are as follows:
Weighted Average Weighted
Remaining Number Average
Exercise Prices Options Outstanding Contractual Life Exercisable Exercise Price
--------------- ------------------- ---------------- ----------- --------------
$ 0.45 50,000 2.25 years 12,500 $ 0.45
$ 2.50 - 2.75 315,000 1.0 years 232,500 $ 2.74
In accordance with FAS 123 the fair value of the options were estimated as of
the date of the grant or subsequent vesting date, or December 31, 2003 if not
vested, using a Black-Scholes option-pricing model. The assumptions used in
estimating the fair value of the options ranged as follows:
Volatility 100% - 130%
Risk-free interest rate 2.0% - 4.1%
Expected life 1 - 5 years
Dividend yield -
F-23
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 11 - RELATED PARTY - TRANSACTIONS/COMMITMENTS/INDEMNIFICATIONS
Patent
A founding member of the Company is the owner of a patent application, filed
March 16, 2001 with the United States Patent and Trademark Office, entitled
"Compositions and Methods for the Treatment and Clinical Remission of Psoriasis"
(the "Invention"). On April 26, 2001, the Company, in exchange for $10, entered
into an exclusive license agreement to use and exploit the Invention, the
technology related thereto, and the related patent rights, including the ability
to license foreign patent rights. The term of the license agreement expires on
the last date of expiration of the patent or earlier date as specified in the
license agreement.
During the term of the license agreement, the Company is required to pay all
fees and costs relating to the filing, prosecution, and maintenance of the
patent and associated rights. In addition, the Company is required to pay all
reasonable attorneys' fees of the Company, or patent owner, in the pursuit of
any patent infringement litigation.
SkyePharma PLC Agreements
On December 10, 2001, the Company executed three agreements with SkyePharma, a
pharmaceutical company located in England.
The Company entered into a stock purchase agreement whereby SkyePharma agreed to
purchase 2,000,000 shares of Series A Preferred at a price of $10 per share in
five separate closings over a 13-month period commencing in December 2001 (see
Note 8).
The Company entered into a technology option agreement whereby it agreed to pay
SkyePharma $5,000,000 in return for the right, for 7 years, to enter into a
non-exclusive license agreement with SkyePharma to utilize three drug delivery
systems ($2,000,000, $2,000,000, and $1,000,000, respectively per delivery
system). The royalty fee in this license agreement is specified to be 5% of the
net sales of any product the Company sells utilizing a SkyePharma drug delivery
system. All other terms of this license agreement would need to be determined
upon exercise of the option. The Company can transfer this option to another
party, subject to approval by SkyePharma. This license would only allow the
Company to use these delivery systems for drugs that treat two particular
immunotherapies - psoriasis and leishmaniasis. The $5,000,000 fee was required
to be paid on December 10, 2001 and was netted (for convenience purposes) out of
the first $10,000,000 installment purchase of preferred stock by SkyePharma.
The Company entered into a services agreement whereby it paid $11,000,000 to
SkyePharma in return for SkyePharma providing all development, manufacturing,
pre-clinical and clinical development services for the Company's primary -
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 and 2003. The payment terms for the
services agreement are fixed. The Company paid $3,000,000 in 2001, $7,980,000 in
2002 and $20,000 in 2003.
The service agreement terminated on December 31, 2002. In March 2003, the
Company and SkyePharma amended the original service agreement, effective January
1, 2003, to extend the term of the agreement and modify the services to be
provided by SkyePharma. SkyePharma will continue to provide certain services to
the Company through December 31, 2004 in consideration for payments it received
from the Company during 2002 in connection with this agreement, as a prepaid
expense. This prepaid amount will be expensed during the remaining period of the
amended service agreement. In 2003 and 2002, the Company expensed $1,007,500 and
$5,985,000, respectively, in connection with the services agreement.
SkyePharma has the right of first negotiation to acquire the worldwide licensing
and distribution rights to Psoraxine up to the completion of the Phase II
studies. On completion of Phase II studies, Astralis will offer SkyePharma the
option to acquire the worldwide licensing and distribution rights to Psoraxine.
If SkyePharma does not take the option, Astralis will seek a marketing partner
to fund Phase III clinical studies and to provide a sales and marketing
infrastructure.
F-24
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 11 - RELATED PARTY - TRANSACTIONS/COMMITMENTS/INDEMNIFICATIONS (Continued)
Indemnification
The Company has agreed, subject to specific provisions in the Technology Access
Agreement, to indemnify SkyePharma, its directors and employees against any and
all losses, claims, demands, proceedings, actions, etc. which may be brought or
established against them as a result of, among other items, i) negligence of
Company personnel or contractors or ii) death, personal injury or property
damage or loss caused by the Company selling a product containing a SkyePharma
delivery system which is defective or not merchantable. However, this
indemnification does not apply to any death or personal injury arising from
defects inherent in the delivery systems or technical know-how of SkyePharma
licenses with the delivery system technology.
Other
A research entity owned by the spouse of the majority shareholder provided
research and development services to the Company totaling $0 and $135,111 for
the years ended December 31, 2003 and 2002, respectively.
NOTE 12 - 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 is $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.
During 2002 and 2003, the Company leased two apartments and an automobile for
two different key employees, one of whom is an officer.
The Company incurred rent expense in the amount of $137,070 and $80,071 for 2003
and 2002, respectively.
The following is a schedule by year of future minimum rental payments required
under operating leases that have initial or remaining lease terms of one year or
greater, as of December 31, 2003:
Year Ending December 31:
2004 $ 83,224
2005 19,454
-----------
$ 102,678
===========
F-25
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 13 - 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:
Year Ended December 31,
---------------------------
2003 2002
----------- -----------
Net loss $(5,080,427) $(9,040,248)
----------- -----------
Unrealized gain (loss) on securities:
Unrealized gain arising during period (26,245) (15,181)
Reclassification adjustment for loss
realized in net loss 13,728 --
----------- -----------
Unrealized gain (loss), net (12,517) (15,181)
----------- -----------
Comprehensive loss $(5,092,944) $(9,055,429)
=========== ===========
NOTE 14 - 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.
NOTE 15 - SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
The Company did not pay any interest or taxes in 2003 or 2002.
Payment of the 2002 service fees totaling $1,330,000 were netted against the
SkyePharma 2002 installment purchases of the Company's Series A Preferred stock.
The Company recorded an unrealized loss on its securities available-for-sale in
the amount of $27,698 and $15,181 for the years ended December 31, 2003 and
2002, respectively.
NOTE 16 - SUBSEQUENT EVENTS
On January 20, 2004, the Company closed a private placement from which it
received gross proceeds of approximately $4,080,000. The transaction consisted
of the sale to accredited investors of units consisting of 8,159,964 shares of
common stock and warrants to purchase 8,159,964 shares of common stock. The
warrants have an exercise price of $.73 and expire in four years.
F-26
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 16 - SUBSEQUENT EVENTS (Continued)
Concurrently with the closing of the private placement, Skyepharma converted all
of its outstanding shares of Series A Preferred Stock of the Company into
25,000,000 shares of common stock at a reduced conversion price of $0.80 per
share. Skyepharma agreed that up to 12,500,000 shares of its common stock issued
upon conversion of the Series A Preferred Stock will be subject to a call option
at the discretion of the Company upon completion of an agreed upon milestone at
a premium in excess of the conversion price. The call option can be exercised on
or after July 21, 2004. In connection with this transaction and in accordance
with SFAS 84, "Induced Conversions of Convertible Debt, an Amendment of APB
Opinion No. 26" the Company will record 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. After the date of that Amendment, the Board of Directors is required
to be comprised of at least seven directors and include at least two independent
directors. Per the Amendment, SkyePharma shall have the right to nominate one
director, who shall initially be Michael Ashton. From the date of the Amendment
until the third anniversary, Jose Antonio O'Daly, Mike Ajnsztajn, Gaston
Liebhaber and Gina Tedesco (the "Founders"), each has the right to nominate one
director. The Founders will initially be directors. The Agreement will terminate
upon the later of (i) the SkyePharma Termination Date or (ii) the third
anniversary of this Amendment, which is January 20, 2007. Further, this
agreement may be terminated by the mutual written consent. "The SkyePharma
Termination Date" is the date on which SkyePharma no longer beneficially owns,
in the aggregate, at least 20% of the outstanding common stock of the Company.
On February 19, 2004, the Company closed the second round of its private
placement from which it received $1,150,000. The transaction consisted of the
sale to accredited investors of units consisting of 2,299,902 shares of common
stock and warrants to purchase 2,299,902 shares of common stock.
The Company paid a 5% commission in the amount of $261,496 to a related party in
February 2004 for the consulting services related to two private placements
completed in 2004. In addition, he, or his assignees, received warrants to
purchase 418,394 shares of the Company's common stock at $0.50 per share and
warrants to purchase 418,394 shares of the Company's common stock at $0.73 per
share. An additional cash commission will be paid upon exercise of the warrants.
On February 19, 2004, after including the effects of the above transactions, the
Company had approximately 73 million shares of common stock and no shares of
preferred stock outstanding.
F-27
INTERIM FINANCIAL STATEMENTS
F-28
ASTRALIS LTD.
(A Development Stage Entity)
Condensed Balance Sheets
ASSETS
March 31, December 31,
2004 2003
------------ ------------
(Unaudited)
Current Assets
Cash and cash equivalents $ 708,223 $ 10,660
Marketable securities 4,709,681 1,374,174
Prepaid expense - related party 755,625 1,007,500
Prepaid expenses and supplies 184,794 171,939
------------ ------------
Total Current Assets 6,358,323 2,564,273
Intangible Assets, Net - Related Party 3,333,328 3,511,900
Other Intangible Assets, Net 109,973 94,640
Property and Equipment, Net 261,890 293,049
Deposits 29,953 29,953
------------ ------------
$ 10,093,467 $ 6,493,815
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 633,760 $ 279,506
------------ ------------
Total Current Liabilities 633,760 279,506
------------ ------------
Commitments and Contingencies
Stockholders' Equity
Convertible preferred stock, Series A, $.001 par value;
3,000,000 shares authorized at 2004 and 2003; 0 and 2,000,000
issued and outstanding at 2004 and 2003, respectively
(liquidation preference - $0 and $22,122,600 at 2004 and 2003) -- 2,000
Common stock; $.0001 par value; 150,000,000 shares authorized
at 2004 and 2003; 72,998,055 and 37,538,189 issued and
outstanding at 2004 and 2003, respectively 7,300 3,754
Additional paid-in capital 51,633,776 35,929,864
Deferred compensation (3,453) (4,822)
Common stock subscriptions receivable (12,000) (24,000)
Accumulated other comprehensive loss (3,154) (27,698)
Deficit accumulated in the development stage (42,162,762) (29,664,789)
------------ ------------
Total Stockholders' Equity 9,459,707 6,214,309
------------ ------------
$ 10,093,467 $ 6,493,815
============ ============
The accompanying notes are an integral part of these condensed financial
statements.
F-29
ASTRALIS LTD.
(A Development Stage Entity)
Condensed Statements of Operations
(Unaudited)
Three Months Ended March 31, March 12, 2001
----------------------------- (Inception) to
2004 2003 March 31, 2004
------------ ------------ --------------
Revenues $ -- $ -- $ --
------------ ------------ ------------
Operating Expenses
Research and development - related party 430,447 430,447 12,189,869
Research and development 900,694 731,058 4,180,262
Depreciation and amortization 7,510 31,549 50,131
General and administrative 421,898 318,769 3,938,508
------------ ------------ ------------
Total Operating Expenses 1,760,549 1,511,823 20,358,770
------------ ------------ ------------
Loss From Operations (1,760,549) (1,511,823) (20,358,770)
Investment Income 12,576 37,109 193,122
------------ ------------ ------------
Loss Before Income Tax Benefit (1,747,973) (1,474,714) (20,165,648)
Income Tax Benefit -- -- 221,636
------------ ------------ ------------
Net Loss (1,747,973) (1,474,714) (19,944,012)
Preferred Stock Dividends (10,750,000) -- (22,218,750)
------------ ------------ ------------
Net Loss to Common Stockholders $(12,497,973) $ (1,474,714) $(42,162,762)
============ ============ ============
Basic and Diluted Loss per Common Share $ (0.19) $ (0.04) $ (1.13)
============ ============ ============
Basic and Diluted Weighted Average Common Shares
Outstanding 64,861,411 37,575,404 37,335,293
============ ============ ============
The accompanying notes are an integral part of these condensed financial
statements
F-30
ASTRALIS LTD.
(A Development Stage Entity)
Condensed Statements of Cash Flows
(Unaudited)
Three Months Ended March 31, March 12, 2001
----------------------------- (Inception) to
2004 2003 March 31, 2004
------------ ------------ --------------
Cash Flows from Operating Activities
Net loss $ (1,747,973) $ (1,474,714) $(19,944,012)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 214,792 210,121 1,909,641
Amortization of net premium paid on investments -- 2,978 54,551
Dividends reinvested (25,489) (11,586) (107,593)
Members' contributed salaries -- -- 12,986
Research and development service fee netted against
proceeds received from preferred stock issuance -- -- 5,015,000
Operating expenses paid by related parties on
behalf of Company -- -- 17,587
Amortization of deferred compensation 1,369 3,345 194,036
Investor relations fee netted against subscription receivable 12,000 -- 48,000
Compensatory common stock -- -- 135,000
Loss on sale of marketable securities 14,336 -- 45,240
Changes in assets and liabilities
Prepaid expenses 276,135 250,246 (816,267)
Interest receivable -- (3,263) --
Supplies (37,115) (5,802) (124,152)
Deposits -- -- (29,953)
Accounts payable and accrued expenses 339,377 (5,799) 601,453
------------ ------------ ------------
Net Cash Used in Operating Activities (952,568) (1,034,474) (12,988,483)
------------ ------------ ------------
Cash Flows from Investing Activities
Purchases of marketable securities (3,800,010) (1,665,997) (13,358,181)
Proceeds from sale of marketable securities 500,200 160,000 8,653,146
Expenditures related to patent (1,868) (1,113) (69,304)
Purchases of property and equipment (3,647) (27,147) (497,621)
------------ ------------ ------------
Net Cash Used in Investing Activities (3,305,325) (1,534,257) (5,271,960)
------------ ------------ ------------
Cash Flows from Financing Activities
Repurchase of common stock -- -- (80,000)
Proceeds from stock subscription receivable -- 232,315 1,290,000
Issuance of common stock, net of offering and transaction costs 4,955,456 -- 7,826,170
Issuance of preferred stock, net of research and development
service fee, technology option and costs of offering -- 2,480,000 9,932,496
------------ ------------ ------------
Net Cash Provided by Financing Activities 4,955,456 2,712,315 18,968,666
------------ ------------ ------------
Net Increase in Cash and Cash Equivalents 697,563 143,584 708,223
Cash and Cash Equivalents, Beginning of Period 10,660 227,193 --
------------ ------------ ------------
Cash and Cash Equivalents, End of Period $ 708,223 $ 370,777 $ 708,223
============ ============ ============
The accompanying notes are an integral part of these condensed financial
statements.
F-31
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements
NOTE 1 - BASIS OF PRESENTATION
The unaudited condensed financial statements included herein have been prepared
by Astralis, Ltd. (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. The financial statements
reflect all adjustments that are, in the opinion of management, necessary to
fairly present such information. All such adjustments are of a normal recurring
nature. Although the Company believes that the disclosures are adequate to make
the information presented not misleading, certain information and footnote
disclosures, including a description of significant accounting policies normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America, have been
condensed or omitted pursuant to such rules and regulations.
These financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's 2003 Annual Report on
Form 10-KSB filed with the Securities and Exchange Commission. The results of
operations for interim periods are not necessarily indicative of the results for
any subsequent quarter or the entire fiscal year ending December 31, 2004.
Stock Based Compensation
On April 4, 2003, the Company granted stock-based director compensation options
to one member of the Board of Directors. The Company accounts for those options
under the recognition and measurement principles of Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. No stock-based director compensation cost is included in net
loss, as all the options granted had an exercise price equal to the market value
of the stock on the date of grant. The following table illustrates the effect on
net loss and earnings per share if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," to stock-based compensation.
Three Months Ended March 31,
-----------------------------
2004 2003
------------ ------------
Net loss to common stockholders, as reported $(12,497,973) $ (1,474,714)
Add: Stock-based employee/ director compensation
included in reported net loss -- --
Deduct: Total stock-based employee/director compensation
expense under the fair value based method for all awards,
net of tax (3,914) --
------------ ------------
Pro forma net loss $(12,501,887) $ (1,474,714)
============ ============
Loss per share basic and diluted - as reported (.19) (.04)
Loss per share basic and diluted - pro forma (.19) (.04)
Shares used in basic and diluted loss per share amounts 64,861,411 37,575,404
============ ============
F-32
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements
NOTE 2 - DESCRIPTION OF BUSINESS
Nature of Operations
Astralis Ltd. is an emerging biotechnology company based in New Jersey and
engaged primarily in the research and development of novel treatments for immune
system disorders and skin diseases. The Company is currently developing two
products. Its primary product, Psoraxine, is an innovative vaccine 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
March 31, 2004, will be needed in order to finance the Company's currently
anticipated needs for operating and capital expenditures through the second
quarter of 2005, including the cost to complete Phase II of the FDA testing
process for Psoraxine. The Company will also need to raise significant
additional funds from outside sources in future years in order to complete
future phases of FDA required testing.
The Company's ability to adhere to its current business plan is dependent upon
raising capital through debt and equity financing. There can be no assurance
that the Company will successfully raise the required future financing on terms
desirable to the Company or that the FDA will approve Psoraxine for use in the
United States. If the Company does not obtain the needed funds, it will likely
be required to delay development of its products, alter its business plan, or in
the extreme situation, cease operations.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. Continuing as a going concern is dependent
upon successfully obtaining additional working capital as described above. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets and amounts
and classifications of liabilities that might result from the outcome of this
uncertainty.
NOTE 4 - MARKETABLE SECURITIES
The Company's marketable equity securities consisted of certificates of deposit
and mutual funds that have a readily determinable fair market value. Management
determines the appropriate classification of its investments using Statement of
Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" at the time of purchase, and
re-evaluates such determinations at each balance sheet date.
The securities reflected in these financial statements are deemed by management
to be "available-for-sale" and, accordingly, are reported at fair value, with
unrealized gains and losses reported in other comprehensive income and reflected
as a separate component within the Stockholders' Equity section of the balance
sheets. Realized gains and losses on securities available-for-sale are included
in other income/expense and, when applicable, are reported as a reclassification
adjustment, net of tax, in other comprehensive income. Gains and losses on the
sale of available-for-sale securities are determined using the
specific-identification method.
F-33
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements
NOTE 4 - MARKETABLE SECURITIES (Continued)
As of March 31, 2004, available-for-sale securities consist of the following:
Gross Gross
Amortized Unrealized Unrealized
Due Cost Loss Gains Fair Value
------- ------------ ---------- ---------- -----------
Fixed Income Funds Current $ 4,712,835 $ (13,081) $ 9,927 $ 4,709,681
------------ ---------- -------- -----------
$ 4,712,835 $ (13,081) $ 9,927 $ 4,709,681
============ ========== ======== ===========
NOTE 5 - CAPITAL STOCK ACTIVITY
On January 20, 2004, the Company closed a private placement from which it
received gross proceeds of approximately $4,080,000. The transaction consisted
of the sale to accredited investors of units consisting of 8,159,964 shares of
common stock and warrants to purchase 8,159,964 shares of common stock. The
warrants have an exercise price of $.73 and expire in four years.
Concurrently with the closing of the private placement, Skyepharma PLC
("Skyepharma") converted all of its outstanding shares of Series A Preferred
Stock of the Company into 25,000,000 shares of common stock at a reduced
conversion price of $0.80 per share. Skyepharma agreed that up to 12,500,000
shares of its common stock issued upon conversion of the Series A Preferred
Stock will be subject to a call option at the discretion of the Company upon
completion of an agreed upon milestone at a premium in excess of the conversion
price. The call option can be exercised on or after July 21, 2004. In connection
with this transaction and in accordance with SFAS 84, "Induced Conversions of
Convertible Debt, an Amendment of APB Opinion No. 26" the Company recorded a
non-cash preferred stock dividend in January 2004 amounting to $10,750,000.
On the closing date of conversion, January 20, 2004, the Company and other
original stockholders amended the stockholders agreement dated as of December
10, 2001. The board of directors is now required to be comprised of at least
seven directors and include at least two independent directors. The agreement
will terminate upon the later of the SkyePharma Termination Date or the third
anniversary of the amendment, which is January 20, 2007. Further, this agreement
may be terminated by mutual written consent. "The SkyePharma Termination Date"
is the date on which SkyePharma no longer beneficially owns, in the aggregate,
at least 20% of the outstanding common stock of the Company.
On February 19, 2004, the Company closed the second round of its private
placement from which it received $1,150,000. The transaction consisted of the
sale to accredited investors of units consisting of 2,299,902 shares of common
stock and warrants to purchase 2,299,902 shares of common stock at $0.73 per
share.
In connection with the private placement the Company issued warrants to a
related party to purchase 418,394 shares of the Company's common stock at $0.50
per share and warrants to purchase an aggregate of 418,394 shares of the
Company's common stock at $0.73 per share.
F-34
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements
NOTE 6 - COMPREHENSIVE LOSS
Excluding net loss, the Company's source of comprehensive loss is from the net
unrealized loss on its marketable debt securities, which are classified as
available-for-sale. The following summarizes the components of comprehensive
loss:
Three Months Ended March 31,
----------------------------
2004 2003
----------- -----------
Net loss $(1,747,973) $(1,474,714)
Unrealized gain (loss) arising during period 9,671 (1,676)
Reclassification adjustment for loss realized in net loss 14,873 --
----------- -----------
Unrealized gain (loss), net 24,544 (1,676)
----------- -----------
Comprehensive loss $(1,723,429) $(1,476,390)
=========== ===========
NOTE 7 - NET LOSS PER SHARE
Basic and diluted net loss per common share are presented in accordance with
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("FAS
128"), for all periods presented. In accordance with FAS 128, basic and diluted
net loss per common share have been computed using the weighted-average number
of shares of common stock outstanding during the period. Shares associated with
stock options, stock warrants, and convertible preferred stock are not included
because the inclusion would be anti-dilutive (i.e., reduce the net loss per
share). The total numbers of such shares excluded from diluted net loss per
common share 18,441,891 and 19,595,237 at March 31, 2004 and 2003, respectively.
NOTE 8 - RELATED PARTY TRANSACTIONS
An entity whose sole shareholder is a director of the Company was paid a 5%
commission in the amount of $261,496 in February 2004 for the consulting
services related to the two private placements completed in 2004. In addition,
the related party and his assignees received warrants to purchase an aggregate
of 418,394 shares of the Company's common stock at $0.50 per share and warrants
to purchase an aggregate of 418,394 shares of the Company's common stock at
$0.73 per share. An additional cash commission will be paid upon exercise of the
warrants.
NOTE 9 - RECLASSIFICATION
For comparability purposes, certain figures for the prior periods have been
reclassified where appropriate to conform with the financial statement
presentation used in 2004. These reclassifications had no effect on the reported
net los
F-35
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Our Certificate of Incorporation eliminates the personal liability of
directors to the fullest extent permitted by the provisions of paragraph (7) of
subsection (b) of Section 102 of the General Corporation Law of Delaware. In
addition, our Certificate of Incorporation includes provisions to indemnify our
officers and directors and other persons against expenses, judgments, fines and
amounts paid in settlement in connection with threatened, pending or completed
suits or proceedings against those persons by reason of serving or having served
as officers, directors or in other capacities to the fullest extent permitted by
Section 145 of the General Corporation Law of Delaware.
Our bylaws provide the power to indemnify our officers, directors,
employees and agents or any person serving at our request as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise to the fullest extent permitted by Delaware law.
Item 25. Other Expenses of Issuance and Distribution
Expenses payable in connection with the issuance and distribution of the
securities being registered (estimated except in the case of the registration
fee) are as follows:
Amount
------
Registration Fee $ 6,813
Printing $ 7,500
Legal Fees and Expenses $ 25,000
Accounting Fees and Expenses $ 17,000
Miscellaneous $ 687
TOTAL $ 57,000
The above fees will be paid by us and not by the selling stockholders.
II-1
Item 26. Recent Sales of Unregistered Securities
In June 2004, we issued units consisting of 150,000 shares of common stock
and warrants to purchase 150,000 shares of common stock to FPP Capital Advisors
in consideration for services rendered in negotiating the Call Option Agreement
dated January 12, 2004 between us and SkyePharma. In addition, we assigned to
FPP Capital Advisors the right to purchase 1,250,000 shares of our common stock
pursuant to the Call Option Agreement dated January 12, 2004 between us and
SkyePharma. 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.
On January 20, 2004 and February 19, 2004, we sold to accredited investors
units consisting of an aggregate of 10,459,866 shares of common stock and
warrants to purchase 10,459,866 shares of common stock for an aggregate purchase
price of approximately $5.23 million. In connection with this transaction, FPP
Capital Advisors and certain other persons who assisted FPP Capital Advisors in
providing consulting services to us received a consulting fee of $261,496,
warrants to purchase an aggregate of 418,394 shares of our common stock at $0.50
per share and warrants to purchase an aggregate of 418,394 shares of our common
stock at $0.73 per share. We relied on the exemption from registration with the
Securities and Exchange Commission provided under Section 4(2) of the Securities
Act of 1933 and Rule 506 of Regulation D under the Securities Act of 1933.
We entered into a Purchase Agreement dated as of December 10, 2001 with
SkyePharma PLC, a company incorporated under the laws of England and Wales.
Pursuant to the Purchase Agreement, SkyePharma purchased, during a thirteen
month period ending January 31, 2003, 2,000,000 shares of our Series A
Convertible Preferred Stock, par value $.001 per share, at a purchase price of
$10.00 per share, or an aggregate purchase price of $20.0 million. 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. On January 20, 2004, pursuant to an Omnibus Conversion Agreement
dated January 12, 2004 between us and SkyePharma, SkyePharma converted all of
its shares of our Series A Preferred Stock into 25,000,000 shares of our common
stock at a conversion price of $0.80 per share. 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.
During November of 2001, we completed a private placement offering to
accredited investors 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, for an
aggregate purchase price of $3,321,887. We relied on the exemption from
registration with the Securities and Exchange Commission provided under Section
4(2) of the Securities Act of 1933 and Rule 506 of Regulation D under the
Securities Act of 1933.
On November 13, 2001, pursuant to the Contribution Agreement, dated as of
September 10, 2001, by and among us and the members of Astralis, LLC, a New
Jersey limited liability company, the members of Astralis, LLC transferred all
of their respective membership interests in Astralis, LLC to us in exchange for
28,000,000 shares of our common stock and 6,300,000 warrants to purchase common
stock at an exercise price of $1.60 per share. Pursuant to the Contribution
Agreement, we cancelled 23,800,000 of the 23,820,000 shares of common stock
owned by Mr. Shai Stern who served as our Chief Executive Officer and sole
director until his resignation, pursuant to the Contribution Agreement, on
November 13, 2001. We relied on the exemption from registration afforded by
Section 4(2) of the Securities Act of 1933.
During October of 2001, we issued a promissory note of $50,000 to Michael
Garnick. The promissory note had a maturity date of November 13, 2001. We also
issued to the lender 12,000 shares of common stock. The promissory note was
repaid out of the proceeds of the private placement. We relied on the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933.
II-2
On September 1, 2001, Richard Genovese, David Stevenson, Grizzly
Consulting Ltd., Wolver Limited and Logarithmic, Inc. purchased units from
Astralis, LLC consisting of an aggregate of 2,700,000 membership interests in
Astralis, LLC and 6,300,000 options to purchase additional membership interests
for a purchase price of $1.60 per membership interest. The aggregate purchase
price for such units was $1,350,000. Pursuant to the Contribution Agreement, on
November 13, 2001 the units were exchanged for an aggregate of 2,700,000 shares
of common stock and 6,300,000 warrants to purchase common stock at an exercise
price of $1.60 per share. Astralis, LLC relied on the exemption from
registration with the Securities and Exchange Commission provided under Section
3(b) of the Securities Act of 1933 and Rule 505 of Regulation D under the
Securities Act of 1933.
During May of 2001, we issued warrants to purchase 75,000 shares of our
common stock at an exercise price of $1.75 per share in connection with a loan.
We relied on the exemption from registration afforded by Section 4(2) of the
Securities Act of 1933.
Item 27. Exhibits
Exhibit Number Description
-------------- -----------
3.1 * Certificate of Incorporation of Astralis Ltd.
3.2 ** Bylaws of Astralis Ltd.
4.1 +++ Specimen Stock Certificate
5.1 Opinion of McCarter & English, LLP
10.1 ** Agreement and Plan of Merger
10.2 # Contribution Agreement dated September 10, 2001
10.3 ## Purchase Agreement dated December 10, 2001
10.4 ## Stockholder Agreement dated December 10, 2001
10.5 + 2001 Stock Option Plan
10.6 *** Sub-Lease Agreement
10.7 *** License Agreement dated April 26, 2001 between
Jose Antonio O'Daly and Astralis LLC
10.8 *** Assignment of License
10.9 *** Form of Warrant
10.10 ++ Agreement for Services dated December 10, 2001
between SkyePharma Inc. and Astralis Ltd.
10.11 ++ Technology Access Option Agreement dated December
10, 2001 by and among SkyePharma Inc., SkyePharma
Holding AG and Astralis Ltd.
10.12 ### Employment Agreement dated December 10, 2001,
between Dr. Jose Antonio O'Daly and Astralis Ltd.
10.13 ### Amendment #1 to Agreement for Services dated
March 18, 2003 between SkyePharma Inc. and
Astralis Ltd.
10.14 + Omnibus Conversion Agreement dated January 12,
2004 between Astralis Ltd. and SkyePharma PLC
10.15 + Call Option Agreement dated January 20, 2004
between Astralis Ltd. and SkyePharma PLC
10.16 + Amendment No. 1 to Stockholders Agreement dated
January 20, 2004 by and among Astralis Ltd.,
SkyePharma PLC, Jose Antonio O'Daly, Mike
Ajnsztajn, Gaston Liebhaber and Gina Tedesco
II-3
23.1 Consent of McCarter & English, LLP (included in
Exhibit 5.1)
23.2 Consent of L J Soldinger & Associates, LLC
24.1 +++ Powers of Attorney (included on the signature
page)
----------
* Previously filed with the Securities and Exchange Commission as an Exhibit to
the Annual Report on Form 10-KSB on March 30, 2004.
** Previously filed with the Securities and Exchange Commission as an Exhibit to
the Preliminary Proxy Statement for Astralis Pharmaceuticals Ltd. on November
16, 2001.
*** Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registration Statement on Form SB-2 for Astralis Ltd. on March 14, 2002.
# Previously filed with the Securities and Exchange Commission as an Exhibit to
the Current Report on Form 8-K for Astralis Pharmaceuticals Ltd. on November 14,
2001.
## Previously filed with the Securities and Exchange Commission as an Exhibit to
the Current Report on Form 8-K for Astralis Ltd. on December 14, 2001.
### Previously filed with the Securities and Exchange Commission as an Exhibit
to the Annual Report on Form 10-KSB on March 31, 2003.
+ 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 Amendment to the Registration Statement on Form SB-2 for Astralis Ltd. on
July 23, 2002.
+++ Previously filed.
Item 28. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
II-4
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, to treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) To file a post-effective amendment to remove from registration any of
the securities which remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-5
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Fairfield, State of New Jersey, on June 28, 2004.
ASTRALIS LTD.
By: /s/ Mike Ajnsztajn
------------------
Mike Ajnsztajn
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
Signature Title Date
--------- ----- ----
* Chairman of the Board June 28, 2004
---------------------------
Dr. Jose Antonio O'Daly
/s/ Mike Ajnsztajn Chief Executive Officer and June 28, 2004
--------------------------- Director
Mike Ajnsztajn (principal executive officer)
/s/ Gina Tedesco Chief Financial Officer and June 28, 2004
--------------------------- Director
Gina Tedesco (principal financial and
accounting officer)
* Director June 28, 2004
---------------------------
Steven Fulda
* Director June 28, 2004
---------------------------
Gaston Liebhaber
* Director June 28, 2004
---------------------------
Fabien Pictet
* Director June 28, 2004
---------------------------
Michael Ashton
* By /s/ Mike Ajnsztajn
-------------------------------
Mike Ajnsztajn
Attoney-in-Fact