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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-QSB
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended September 30,
2003.
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _____ to _____
Commission file number: 000-30997
Astralis Ltd.
(Exact name of small business issuer as specified in its charter)
Delaware 84-1508866
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
75 Passaic Avenue
Fairfield, New Jersey 07004
(Address of principal executive offices)
(973) 227-7168
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes |X| No |_|
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 37,538,189 shares of Common Stock
outstanding as of November 14, 2003.
Transitional Small Business Disclosure Format (check one):
Yes |_| No |X|
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ASTRALIS LTD.
INDEX
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
Part I. Financial Information 2
Item 1. Condensed Balance Sheets as of September 30, 2003
(unaudited) and December 31, 2002 2
Condensed Statements of Operations (unaudited) 3
Condensed Statements of Cash Flows (unaudited) 4
Notes to Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis or Plan of Operations 10
Item 3. Controls and Procedures 11
Risk Factors 12
Part II. Other Information 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASTRALIS LTD.
(A Development Stage Entity)
Condensed Balance Sheet
ASSETS
September 30, December 31,
2003 2002
------------ ------------
(Unaudited) (Audited)
Current Assets
Cash and cash equivalents $ 26,491 $ 227,193
Marketable securities 1,972,534 1,207,179
Interest receivable, net -- 5,891
Prepaid expense - related party 1,259,375 1,995,000
Prepaid expenses and supplies 168,412 103,488
------------ ------------
Total Current Assets 3,426,812 3,538,751
Intangible Assets, Net - Related Party 3,690,472 4,226,188
Other Intangible Assets, Net 54,914 43,833
Property and Equipment, Net 314,202 362,713
Deposits 29,953 29,953
------------ ------------
$ 7,516,353 $ 8,201,438
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 165,197 $ 263,245
------------ ------------
Total Current Liabilities 165,197 263,245
------------ ------------
Commitments and Contingencies
Stockholders' Equity
Convertible preferred stock, Series A, $.001 par value;
2,000,000 shares authorized at 2003 and 2002; 2,000,000 and
1,750,000 issued and outstanding at 2003 and 2002, respectively
(liquidation preference - $21,820,137 at September 30, 2003) 2,000 1,750
Common stock; $.0001 par value; 75,000,000 shares authorized at
2003; 37,538,189 issued and outstanding at
2003 and 2002 3,754 3,754
Additional paid-in capital 35,982,442 33,429,396
Deferred compensation (17,557) (12,164)
Common stock subscriptions receivable (36,000) (885,000)
Accumulated other comprehensive loss (36,586) (15,181)
Deficit accumulated in the development stage (28,546,897) (24,584,362)
------------ ------------
Total Stockholders' Equity 7,351,156 7,938,193
------------ ------------
$ 7,516,353 $ 8,201,438
============ ============
The accompanying notes are an integral part of these
condensed financial statements.
2
ASTRALIS LTD.
(A Development Stage Entity)
Condensed Statements of Operations
(Unaudited)
Three Months Nine Months March 12, 2001
Ended September 30, Ended September 30, (Inception) to
----------------------------- ----------------------------- September 30,
2003 2002 2003 2002 2003
------------ ------------ ------------ ------------ ------------
Revenues $ -- $ -- $ -- $ -- $ --
------------ ------------ ------------ ------------ ------------
Operating Expenses
Research and development - related party 430,447 2,173,761 1,291,341 6,653,542 11,328,975
Research and development 429,244 263,739 1,722,216 482,108 2,810,314
Depreciation and amortization 33,523 30,648 98,066 46,273 114,625
General and administrative 322,741 384,971 956,019 1,165,266 3,049,868
------------ ------------ ------------ ------------ ------------
Total Operating Expenses 1,215,955 2,853,119 4,067,642 8,347,189 17,303,782
------------ ------------ ------------ ------------ ------------
Loss From Operations (1,215,955) (2,853,119) (4,067,642) (8,347,189) (17,303,782)
Investment Income 20,080 30,506 105,107 94,889 225,635
------------ ------------ ------------ ------------ ------------
Net Loss (1,195,875) (2,822,613) (3,962,535) (8,252,300) (17,078,147)
Preferred Stock Dividends -- -- -- (270,000) (11,468,750)
------------ ------------ ------------ ------------ ------------
Net Loss to Common Stockholders $ (1,195,875) $ (2,822,613) $ (3,962,535) $ (8,522,300) $(28,546,897)
============ ============ ============ ============ ============
Basic and Diluted Loss per Common Share $ (0.03) $ (0.08) $ (0.11) $ (0.23)
============ ============ ============ ============
Basic and Diluted Weighted Average
Common Shares Outstanding 37,538,189 37,538,189 37,538,189 37,542,401
============ ============ ============ ============
The accompanying notes are an integral part of these
condensed financial statements.
3
ASTRALIS LTD.
(A Development Stage Entity)
Condensed Statement of Cash Flows
(Unaudited)
Nine Months Nine Months March 12, 2001
Ended Ended (Inception) to
September 30, September 30, September 30,
2003 2002 2003
------------ ------------ ------------
Cash Flows from Operating Activities
Net loss $ (3,962,535) $ (8,252,300) $(17,078,147)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 633,782 581,988 1,480,877
Amortization of net premium paid on investments 5,737 44,900 54,551
Dividends reinvested (49,298) (1,998) (59,094)
Members' contributed salaries -- -- 12,986
Research and development service fee netted against
proceeds received from preferred stock issuance -- 1,995,000 4,995,000
Operating expenses paid by related parties on
behalf of Company -- -- 17,587
Amortization of deferred compensation 47,903 99,802 214,907
Investor relations fee netted against subscription receivable 24,000 -- 24,000
Compensatory common stock -- -- 135,000
(Gain) loss on sale of marketable securities (11,874) 737 (4,729)
Changes in assets and liabilities
Prepaid expenses - related party 755,625 -- (1,239,375)
Prepaid expenses 11,531 24,713 (61,718)
Interest receivable 5,891 (18,832) --
Supplies (96,455) -- (126,694)
Deposits -- (29,953) (29,953)
Accounts payable - related party -- (145,003) --
Accounts payable and accrued expenses (83,806) (142,446) 179,439
------------ ------------ ------------
Net Cash Used in Operating Activities (2,719,499) (5,843,392) (11,485,363)
------------ ------------ ------------
Cash Flows from Investing Activities
Purchases of marketable securities (1,915,369) (7,213,234) (9,553,806)
Proceeds from sale of marketable securities 1,184,046 4,941,313 7,553,960
Expenditures related to patent (7,203) (18,192) (38,372)
Purchases of property and equipment (47,677) (460,848) (480,741)
------------ ------------ ------------
Net Cash Used in Investing Activities (786,203) (2,750,961) (2,518,959)
------------ ------------ ------------
Cash Flows from Financing Activities
Repurchase of common stock -- (80,000) (80,000)
Proceeds from stock subscription receivable 825,000 393,000 1,290,000
Issuance of common stock, net of offering and transaction costs -- -- 2,888,317
Issuance of preferred stock, net of research and development
service fee, technology option and costs of offering 2,480,000 5,505,000 9,932,496
------------ ------------ ------------
Net Cash Provided by Financing Activities 3,305,000 5,818,000 14,030,813
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (200,702) (2,776,353) 26,491
Cash and Cash Equivalents, Beginning of Period 227,193 4,451,874 --
------------ ------------ ------------
Cash and Cash Equivalents, End of Period $ 26,491 $ 1,675,521 $ 26,491
============ ============ ============
The accompanying notes are an integral part of these
condensed financial statements.
4
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 2002 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, 2003.
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 Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net loss, as reported $ (1,195,875) $ (2,822,613) $ (3,962,535) $ (8,522,300)
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 (7,000) -- (13,063) --
Pro forma net loss $ (1,202,875) $ (2,822,613) $ (3,975,598) $ (8,522,300)
Basic and diluted net loss per
share - as reported (.03) (.08) (.11) (.23)
Basic and diluted net loss per
share - pro forma (.03) (.08) (.11) (.23)
Shares used in basic and diluted
loss per share amounts 37,538,189 37,538,189 37,538,189 37,542,401
5
ASTRALIS LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements
NOTE 2 - DESCRIPTION OF BUSINESS
Nature of Operations
Astralis Ltd. is an emerging biotechnology company based in New Jersey and
engaged primarily in the research and development of novel treatments for immune
system disorders and skin diseases. The Company is currently developing two
products. Its primary product, Psoraxine, is an innovative immunotherapeutic
agent under development for the treatment of psoriasis. 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 is pursuing opportunities to sell equity securities privately to
limited investors in 2003. These funds, in addition to its cash and marketable
securities held at September 30, 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 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 deposits
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.
6
ASTRALIS LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements
NOTE 4 - MARKETABLE SECURITIES (Continued)
As of September 30, 2003, available-for-sale securities consist of the
following:
Gross Gross
Unrealized Unrealized
Due Amortized Cost Loss Gains Fair Value
----------- -------------- ------------- ------------- ------------
Fixed Income Funds Current $ 2,009,120 $ (36,628) $ 42 $ 1,972,534
----------- ---------- --------- ------------
$ 2,009,120 $ (36,628) $ 42 $ 1,972,534
=========== ========== ========= ============
NOTE 5 - STOCK SUBSCRIPTION RECEVIABLE
As of September 30, 2003, a subscription receivable in the amount of $36,000
will be satisfied via services provided to the Company. For the nine months
ended September 30, 2003, $24,000 of prior year subscription receivable was
satisfied with services.
NOTE 6 - CAPITAL STOCK ACTIVITY
Under the terms of a purchase agreement dated December 10, 2001, SkyePharma PLC
("SkyePharma") agreed to purchase 2,000,000 shares of Series A Convertible
Preferred Stock of the Company at a price of $10 per share. On January 31, 2003,
the Company sold 250,000 shares of Series A Convertible Preferred Stock to
SkyePharma for a purchase price of $2,500,000, which represented the final
installment under the purchase agreement. The Company owed SkyePharma $20,000
related to the final payment of a service agreement. That amount was deducted
from the proceeds of the January 2003 issuance of the preferred stock.
Options
On March 24, 2003, the Board of Directors approved, effective on April 4, 2003,
the grant of options to a director to purchase 50,000 shares of common stock at
an exercise price of $0.45 per share. 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.
7
ASTRALIS LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements
NOTE 7 - 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 Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net loss $(1,195,875) $(2,822,613) $(3,962,535) $(8,252,300)
Unrealized loss on
securities:
Unrealized loss arising
during period (18,506) 4,522 (27,062) 962
----------- ----------- ----------- -----------
Reclassification
adjustment for (gain) loss
realized in net loss above (42) (16,976) 5,657 (10,098)
----------- ----------- ----------- -----------
Unrealized loss, net (18,548) (12,454) (21,405) (9,136)
----------- ----------- ----------- -----------
Comprehensive loss $(1,214,423) $(2,835,067) $(3,983,940) $(8,261,436)
=========== =========== =========== ===========
NOTE 8 - 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 19,645,237 and 14,095,237 at September 30, 2003 and 2002,
respectively.
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 2003. These reclassifications had no effect on the reported
net loss.
8
ASTRALIS LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements
NOTE 10 - SUBSEQUENT EVENTS
The Company intends to raise additional capital through the sale of equity
securities under a private placement offering. In order to have a sufficient
number of shares of common stock and common stock underlying the warrants that
will be issued in the private placement, the Company is in the process of
amending its Certificate of Incorporation in order to increase the number of
authorized shares.
In November 2003 the Company signed a non-binding term sheet with SkyePharma PLC
("SkyePharma") pursuant to which (upon the execution of a binding agreement)
SkyePharma will convert its outstanding shares of the Astralis Series A
Preferred Stock into shares of common stock immediately following the closing of
a planned private placement. In consideration of the agreement of SkyePharma to
convert its shares of Series A Preferred Stock, the Company will adjust the
conversion price of the shares of Series A Preferred Stock upon the closing of
the private placement. The conversion price will be $0.80 per share, subject to
adjustment based on the price of securities offered in the private placement.
The term sheet also provides that the Company will receive a call option on the
additional shares of common stock issued to SkyePharma resulting from the
conversion price adjustment, subject to certain conditions. The term sheet also
contains provisions relating to a voting agreement and the Company having a
minimum of two independent members on the board of directors. The term sheet is
non-binding and is subject to the negotiation by the Company and SkyePharma of
definitive agreements.
9
SPECIAL CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This filing contains many forward-looking statements that involve
substantial risks and uncertainties. You can identify these statements by
forward-looking words such as "may," "will," "expect," "anticipate," "believe,"
"estimate" and "continue" or similar words. You should read statements that
contain these words carefully because they discuss our future expectations,
contain projections of our future operating results or of our financial
condition or state other "forward-looking" information.
We believe that it is important to communicate our future expectations to
our investors. However, we may be unable to accurately predict or control events
in the future. The factors listed in the sections captioned Risk Factors, as
well as any other cautionary language in this filing, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements. Before you
invest in our common stock, you should be aware that the occurrence of certain
of the events described in the Risk Factors section could seriously harm our
business.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion of our financial condition and plan of operation
should be read in conjunction with our financial statements and the related
notes included elsewhere in this quarterly report on Form 10-QSB. This quarterly
report contains certain statements of a forward-looking nature relating to
future events or our future financial performance. We caution prospective
investors that such statements involve risks and uncertainties, and that actual
events or results may differ materially. In evaluating such statements,
prospective investors should specifically consider the various factors
identified in this quarterly report, including the matters set forth under the
caption "Risk Factors" which could cause actual results to differ materially
from those indicated by such forward-looking statements. We disclaim any
obligation to update information contained in any forward-looking statement.
Overview
We are a development stage biotechnology company engaged primarily in the
research and development of treatments for immune system disorders and skin
diseases. Our initial product candidate, Psoraxine, is a protein extract used
for the treatment of the skin disease psoriasis.
Currently, we are engaged in the following activities to further our
development efforts of our initial product candidate:
o Ongoing Phase I clinical trials in the United States, which includes
enrolling and treating patients to evaluate the safety of Psoraxine;
o Review and discussion with the FDA of Phase II clinical trial protocol;
and
o Identification of potential investigators for Phase II clinical trials in
the United States.
Results of Operations
Comparison of the nine months and three months ended September 30, 2003 and
September 30, 2002.
Revenues. We did not record any revenues during the nine months or three
months ended September 30, 2003 and September 30, 2002.
Operating Expenses. Operating expenses primarily consist of research and
development costs and general and administrative expenses. Research and
development costs decreased $4,122,093 and $1,577,809, or 58% and 65%, to
$3,013,557 and $859,691, respectively, for the nine and three months ended
September 30, 2003 from $7,135,650 and $2,437,500, respectively, for the nine
10
and three months ended September 30, 2002. Research and development expenditures
were higher in the prior period as we incurred the majority of our costs under
the terms of our Service Agreement with SkyePharma in 2002. General and
administrative expenses decreased $209,247 and $62,230, or 18% and 16%, to
$956,019 and $322,741, respectively, for the nine and three months ended
September 30, 2003 from $1,165,266 and $384,971, respectively, for the nine and
three months ended September 30, 2002. The decrease in general and
administrative expenses was primarily due to a significant reduction in investor
relation costs and other reductions resulting from cost containment measures
implemented by management.
The Next Twelve Months
At September 30, 2003 we had cash balances of $26,491 and marketable
securities of $1,972,534.
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 have commenced Phase I
clinical trials of Psoraxine. We intend to conduct additional
clinical trials in the process of obtaining FDA approval of
Psoraxine and will also maintain ongoing research and development.
We will expend approximately $3,000,000 in connection with these
activities.
o We intend to implement our business plan and facilitate the
operations of our company. We will spend approximately $1,000,000 to
pay management salaries and salaries of employees.
o We also expect to expend approximately $1,000,000 for our public
relations, general administrative and working capital requirements.
We will need to raise additional funds to continue our operations in 2004.
Furthermore, substantial additional funds will be needed in order to fund our
continued efforts to obtain FDA approval of Psoraxine. No assurance can be given
that we will be able to obtain financing, or successfully sell assets or stock,
or, even if such transactions are possible, that they will be on terms
reasonable to us or that they will enable us to satisfy our cash requirements.
In addition, raising additional funds by selling additional shares of our
capital stock will dilute the ownership interest of our stockholders. If we do
not obtain additional funds, we will likely be required to eliminate programs,
delay development of our products, or in the extreme situation, cease
operations.
ITEM 3. CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of our disclosure
controls and procedures as of September 30, 2003. Based on this evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective for recording, processing,
summarizing and reporting the information the company is required to disclose in
the reports it files under the Securities Exchange Act of 1934, within the time
periods specified in the SEC's rules and forms. Such evaluation did not identify
any change in our internal control over financial reporting that occurred during
the quarter ended September 30, 2003 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
11
RISK FACTORS
We have no sales; we will not have sales in the foreseeable future; we are
in an early stage of development and we may never sell products or become
profitable.
We commenced our current operations in 2001 and such operations remain in
an early stage of development. We have no products approved for sale and
therefore, no means to generate revenue. We have not commercialized any
products, had no revenues and had incurred a net loss of approximately
$28,546,897 as of September 30, 2003 which has increased to date. We expect that
substantial losses will continue for the foreseeable future. In order to obtain
revenue from the sales of our product candidate, Psoraxine, we must successfully
develop, test, obtain regulatory approval for, manufacture, market and
eventually sell such product candidate. Our expenses have consisted principally
of costs incurred in research and development and from general and
administrative costs associated with our operations. We expect our expenses to
increase and to continue to incur operating losses for the next several years as
we continue our research and development efforts for Psoraxine and any
subsequent product candidates. Commercialization of any of our products will
take a significant amount of time and successful commercialization may not occur
at all. As a result, we may never become profitable.
We will need to obtain additional funds to support our future operation
expenses. Our auditors have expressed uncertainty regarding our ability to
continue as a going concern.
Based on our current plans, we believe that we currently have sufficient
funds to meet our operating expenses and capital requirements through
approximately the first quarter of 2004. We will need additional funds to
continue our operations following that period. Furthermore, substantial
additional funds will be needed in order to fund our continued efforts to obtain
FDA approval of Psoraxine. No assurance can be given that we will be able to
obtain financing, or successfully sell assets or stock, or, even if such
transactions are possible, that they will be on terms reasonable to us or that
they will enable us to satisfy our cash requirements. In addition, raising
additional funds by selling additional shares of our capital stock will dilute
the ownership interest of our stockholders. If we do not obtain additional
funds, we will likely be required to eliminate programs, delay development of
our products, alter our business plans, or in the extreme situation, cease
operations.
As a result of our losses and the matters described in the preceding
paragraph, the Independent Auditors' Report on our financial statements includes
a paragraph indicating doubt about our ability to continue as a going concern.
The financial statements that accompany this report do not include any
adjustments that might be necessary if we are unable to continue as a going
concern.
We may not be successful in the development and commercialization of
products.
We may not develop products that prove to be safe and effective, that meet
applicable regulatory standards or that we can manufacture at reasonable costs
or market successfully. Successful products will require significant development
and investment, including testing, to demonstrate their safety and efficacy
prior to their commercialization. We have not proven our ability to develop and
commercialize products. We must conduct a substantial amount of additional
research and development before any regulatory authority will approve our
initial product candidate, Psoraxine. Our research and development and clinical
trials may not confirm the safety and efficacy of our products, in which case
regulatory authorities may not approve them. In addition, even if we
successfully complete our research and development efforts, our initial product
candidate, 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
12
uncertain process. Completion of clinical trials may take several years or more.
The length of time generally varies substantially according to the type,
complexity, novelty and intended use of the product. If we or the U.S. Food and
Drug Administration believe that our clinical trials, when commenced, expose
participating patients to unacceptable health risks, we may suspend such trials.
We may encounter problems in our studies which will cause us or the FDA to delay
or suspend the studies. Some of the factors that may delay our commencement and
rate of completion of clinical trials include:
o ineffectiveness of the study compound, or perceptions by physicians that
the compound will not successfully treat a particular indication;
o inability to manufacture sufficient quantities of compounds for use in
clinical trials;
o failure of the FDA to approve our clinical trial protocols;
o slower than expected rate of patient recruitment;
o unforeseen safety issues; or
o government or regulatory delays.
The failure of future clinical trials may harm our business, financial
condition and results of operations.
Our potential therapeutic products face a lengthy and uncertain regulatory
process. If we do not obtain regulatory approval of our potential products, we
will not be able to commercialize these products.
The FDA must approve any therapeutic product before it can be marketed in
the United States. Before we obtain FDA approval of a new drug application or
biologics license application, the product must undergo extensive testing,
including animal and human clinical trials, which can take many years and
requires substantial expenditure. Data obtained from such testing may be
susceptible to varying interpretations, which could delay, limit or prevent
regulatory approval. In addition, changes in regulatory policy for product
approval during the period of product development and regulatory agency review
of each submitted new drug application may cause delays or rejections. We must
devote a substantial amount of time and resources in the regulatory process in
order to obtain regulatory approval of our initial product candidate, Psoraxine.
Because our initial product candidate, Psoraxine, involves the application
of new technologies and may be used upon new therapeutic approaches, government
regulatory authorities may subject this product to more rigorous review and may
grant regulatory approvals more slowly for this product than for products using
more conventional technologies. We have not 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.
13
Even if product candidates emerge successfully from clinical trials, we
may not be able to successfully manufacture, market and sell them.
We have not completed clinical trials of Psoraxine. If Psoraxine emerges
successfully from clinical trials, we will either commercialize products
resulting from our proprietary programs directly or through licensing
arrangements with other companies. We have no experience in manufacturing and
marketing, and we currently do not have the resources or capability to
manufacture, market or sell our products on a commercial scale. In order to
commercialize Psoraxine directly, we would need to develop or obtain through
outsourcing arrangements the capability to manufacture, market and sell
products. We have an agreement with SkyePharma PLC ("SkyePharma") under which
SkyePharma will provide development, pre-clinical and clinical development
services for Psoraxine until December 31, 2004. However, we do not currently
have a written agreement covering any period after December 31, 2004 and we may
not be able to enter into such an agreement on commercially reasonable terms, or
at all. In addition, we currently do not have any agreements for the marketing
or sale of any of our products and we may not be able to enter into such
agreements on commercially reasonable terms, or at all.
We license and do not own our intellectual property. Any inability to
protect our proprietary technologies adequately could harm our competitive
position.
Dr. Jose Antonio O'Daly has filed a patent application for Psoraxine and
has received a notice of allowance in connection with such patent application.
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 license, and do not own, the intellectual property rights to
Psoraxine. Our success will depend in part on our ability to obtain patents and
maintain adequate protection of other intellectual property for our technologies
and products in the United States and other countries. If we do not adequately
protect our intellectual property, competitors may be able to use our
technologies and erode or negate our competitive advantage. The laws of some
foreign countries do not protect our proprietary rights to the same extent as
the laws of the United States, and we may encounter significant problems in
protecting our proprietary rights in these foreign countries.
The patent positions of biotechnology companies, including our patent
positions, involve complex legal and factual questions and, therefore, validity
and enforceability cannot be predicted with certainty. Patents may be
challenged, deemed unenforceable, invalidated or circumvented. We will be able
to protect our proprietary rights from unauthorized use by third parties only to
the extent that we cover our proprietary technologies with valid and enforceable
patents or we effectively maintain such proprietary technologies as trade
secrets. We will apply for patents covering both our technologies and product
candidates as we deem appropriate. However, we may fail to apply for patents on
important technologies or products in a timely fashion, or at all, and in any
event, the applications we do file may be challenged and may not result in
issued patents. Any future patents we obtain may not be sufficiently broad to
prevent others from practicing our technologies or from developing competing
products. Furthermore, others may independently develop similar or alternative
technologies or design around our patented technologies. In addition, others may
challenge or invalidate our patents, or our patents may fail to provide us with
any competitive advantages. If we encounter challenges to the use or validity of
any of our patents, resulting in litigation or administrative proceedings, we
would incur substantial costs and the diversion of management in defending the
patent. In addition, we do not control the patent prosecution of technology that
we license from others. Accordingly, we cannot exercise the same degree of
control over this intellectual property as we would over technology we own.
We rely upon trade secrets protection for our confidential and proprietary
information. We have taken measures to protect our proprietary information.
These measures may not provide adequate protection for our trade secrets or
other proprietary information. We seek to protect our proprietary information by
entering into confidentiality agreements with employees, collaborators and
consultants. Nevertheless, employees, collaborators or consultants may still
disclose our proprietary information, and we may not be able to meaningfully
protect our trade secrets. In addition, others may independently develop
substantially equivalent proprietary information or techniques or otherwise gain
access to our trade secrets.
14
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, Amgen, Genentech, SmithKline Beecham, Protein Design Labs, Ligand
Pharmaceuticals, Schering-Plough, Pfizer and Novartis. These organizations may
develop technologies that provide superior alternatives to our technologies.
Further, our competitors may be more effective at implementing their
technologies to develop commercial products.
Any products that we develop through our technologies will compete in
multiple, highly competitive markets. Many of the organizations competing with
us in the markets for such products have greater capital resources, research and
development and marketing staffs, facilities and capabilities, and greater
experience in obtaining regulatory approvals, product manufacturing and
marketing. Accordingly, our competitors may be able to develop technologies and
products more easily, which would render our technologies and products obsolete
and noncompetitive.
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.
If we face claims in clinical trials of a drug candidate, these claims
will divert our management's time and we will incur litigation costs.
We face an inherent business risk of clinical trial liability claims in
the event that the use or misuse of our initial product candidate, Psoraxine,
results in personal injury or death. We may experience clinical trial liability
claims if our drug candidates are misused or cause harm before regulatory
authorities approve them for marketing. 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 (greater that 5%
stockholders) together control approximately 75.75% 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
15
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. In the event of a merger or acquisition resulting
in a change in control, SkyePharma also has a right to a premium equal to its
purchase price for our preferred stock plus an amount equal to 30% of such
purchase price per annum (or proportional part thereof if a portion of a year)
commencing on the date of issuance of the preferred stock until the change in
control.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
We held an Annual Meeting of Shareholders on July 16, 2003. At that
meeting, our shareholders elected seven directors for a term that will expire at
our Annual Meeting in 2004, or until their successors are duly elected and
qualified. In addition, our shareholders ratified the appointment of L J
Soldinger Associates Ltd. as our independent auditors for the fiscal year ending
December 31, 2003. The voting results were as follows:
Votes For Votes Withheld
--------- --------------
Election of Director
Jose Antonio O'Daly 29,809,003 27,929
Mike Ajnsztajn 29,809,003 27,929
Gaston Liebhaber 29,809,003 27,929
Gina Tedesco 29,809,003 27,929
Michael Ashton 29,809,003 27,929
Steven Fulda 29,809,003 27,929
Fabien Pictet 29,809,003 27,929
Votes For Votes Against Abstentions
--------- ------------- -----------
Ratification of Auditors 29,809,254 18,403 9,275
In addition, there were 671,536 broker non-votes on the above matters.
Item 5. Other Information
Private Placement
Our current cash is expected to be sufficient to fund operations through
the fourth quarter of 2003. As a result of discussions regarding our capital
requirements, our board of directors and our management determined that we
should raise additional capital through the sale of equity securities. Upon the
terms and conditions of the private placement, we will offer units consisting of
shares of our common stock and warrants to purchase shares of our common stock
(the "Units"). We intend to sell an aggregate of up to $10 million of our
securities in connection with the private placement. In order to have a
sufficient number of shares of common stock and common stock underlying the
warrants that we will issue in the private placement, we must amend our
Certificate of Incorporation in order to increase the number of authorized
shares. Although we anticipate that the Units will be offered at a discount to
the market price of our common stock, the offering price has not yet been
determined and once determined may be changed as market conditions and the
market price of our common stock fluctuate. As a result, we cannot know with
certainty how many shares of common stock we will issue in the private
placement. The securities offered in the private placement may not be offered or
sold in the United States absent registration or an applicable exemption from
registration requirements. There can be no assurance that the private placement
will close or, in the event the private placement closes, that proceeds of the
private placement will be adequate to sustain our operations.
16
SkyePharma
We have signed a non-binding term sheet with SkyePharma PLC ("SkyePharma")
pursuant to which, upon the execution of a binding agreement, SkyePharma will
agree to convert its outstanding shares of our Series A Preferred Stock into
shares of our common stock immediately following the closing of our private
placement. In consideration of the agreement of SkyePharma to convert its shares
of Series A Preferred Stock, we will adjust the conversion price of the shares
of Series A Preferred Stock upon the closing of the private placement. The
conversion price will be $0.80 per share, subject to adjustment based on the
price of securities offered in the private placement. The term sheet also
provides that in connection with the conversion of the Series A Preferred Stock
by SkyePharma, SkyePharma would enter into an agreement with us whereby we
would, upon the attainment of certain future milestones, obtain the right to
repurchase 12,500,000 shares of our common stock from SkyePharma based on the
conversion price. As part of this transaction, we will also amend our
Stockholders Agreement dated December 10, 2001 to extend the terms of the
agreement to expire three years from the date of such transaction. The amended
Stockholders Agreement would require the parties to vote all shares held by such
parties for four directors designated by Jose Antonio O'Daly, Mike Ajnsztajn,
Gaston Liebhaber and Gina Tedesco, one director designated by SkyePharma and two
independent directors. Further, SkyePharma would be required to vote its shares
of common stock in favor of certain enumerated transactions approved by the
board of directors, including all independent directors. The term sheet is
non-binding and is subject to the negotiation by us and SkyePharma of definitive
agreements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index.
(b) Reports on Form 8-K
On August 13, 2003, we filed a current report on Form 8-K reporting that
we issued a press release regarding our earnings for the quarter ended September
30, 2003.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, as amended, the Registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ASTRALIS LTD.
(Registrant)
Dated: November 14, 2003 By: /s/ Mike Ajnsztajn
--------------------------------------------
Mike Ajnsztajn
Chief Executive Officer
(Principal Executive Officer; Authorized
Signatory on behalf of Registrant)
Dated: November 14, 2003 By: /s/ Gina Tedesco
--------------------------------------------
Gina Tedesco
Chief Financial Officer
(Principal Financial and Accounting Officer)
18
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
31.1 Certification of Mike Ajnsztajn required by Rule 13a-14(a) or Rule
15d-14(a)
31.2 Certification of Gina Tedesco required by Rule 13a-14(a) or Rule
15d-14(a)
32.1 Certification of Mike Ajnsztajn and Gina Tedesco required by Rule
13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley
Act of 2002, 18 U.S.C. Section 1350