SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2006
|_| 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.
(Name of Small Business Issuer in its Charter)
Delaware 84-1508866
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
75 Passaic Avenue, Fairfield, New Jersey 07004
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 227-7168
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange
on Which Registered
None. None.
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Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.0001 per share
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(Title of Class)
Check whether the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Exchange Act. Yes |_| No |X|
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 ("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 |_|
Check mark if there is no disclosure of delinquent filers pursuant to Item 405
of Regulations S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in a definitive proxy or information
statement incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |_|
Indicate by check mark whether the registrant is a shell company as defined in
Rule 12b-2 of the Exchange Act. |_|
Issuer's revenue for the year ended December 31, 2006: $ 0
As of March 31, 2007, the aggregate market value of the voting and nonvoting
common stock held by nonaffiliates of the registrant was approximately
$5,030,018.
As of March 31, 2007, there were 91,454,873 shares of the issuer's common stock
outstanding.
Transitional Small Business Disclosure format. Yes |_| No |X|
PART I
Item 1. Description of Business
General
Astralis, Ltd. ("Astralis", "we", "us", "our", or the "Company") is a
development stage biotechnology company that was engaged primarily in the
research and development of treatments for immune system disorders and skin
diseases, such as psoriasis and psoriatic and rheumatoid arthritis. The
Company's initial product candidate, Psoraxine(R), is a protein extract used for
the treatment of the skin disease psoriasis.
As of the date of this filing Astralis' liabilities exceed its assets.
Consequently all drug development efforts have ceased until sufficient funding
may be raised. Furthermore, substantial additional funds will be needed in order
to fund continued efforts to obtain FDA approval of Psoraxine(R), especially
given the failure of our Phase II study to meet its primary endpoint. We could
be forced to seek protection under Federal bankruptcy laws at any time. We have
only one employee remaining, being Dr. Jose Antonio O'Daly, our Chairman. We are
seeking funds to:
o Continue ongoing research and development of Psoraxine(R);
o Recommence clinical trials to obtain the approval of the United
States Food and Drug Administration for the marketing of
Psoraxine(R); and
o Develop technology underlying Psoraxine(R) for the treatment of
indications other than psoriasis, such as psoriatic arthritis,
eczema, seborrheic dermatitis, rheumatoid arthritis, multiple
sclerosis and leishmaniasis.
Because we have not been able to secure sufficient funding to continue the
development of Psoraxine(R) on a timely basis, the market introduction of
Psoraxine(R) has been delayed at least one year. If sufficient funding is not
obtained soon, the development program will likely never reach commercial
markets. During the last year, all of the Company's independent Board members
have resigned. There is no audit committee, no compensation committee and there
are only two members of the Board remaining, neither of whom has substantial
business experience in the United States or in the biotechnology industry.
The Company was 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.
Our main office is located at 75 Passaic Avenue, Fairfield, New Jersey 07004.
Recent Developments
The Company announced it is reviewing strategic alternatives.
On October 6, 2006, the Board of Directors of Astralis, Ltd. announced
that it has determined Astralis is unable to continue drug development
activities until additional funds are found and is considering strategic
alternatives including a sale of the assets or the stock of the Company. On
August 21, 2006 the Company announced that "As of the date of this press
release, the Company's liabilities exceed its cash. If the Company does not
acquire additional cash within days, it will be forced to cease operations."
During the last fifteen months, the Company has been unable to identify
sufficient funds to finance its continuing operations. The Company is actively
seeking potential new investors, a potential development partner(s) or offers to
acquire all or part of the Company.
-1-
Since the August 2006 and September 2006 private placements discussed
below, the Company raised only $150,000 of new capital from Blue Cedar Limited,
an existing investor. In December 2006, our stockholder Blue Cedar Limited
indicated to us that it would make an additional investment in the Company. In
December 2006, the Company received from Blue Cedar Limited a partial investment
of $150,000. The Company and Blue Cedar Limited have not yet determined the
terms of this $150,000 partial investment or the terms of and total amount to be
invested by Blue Cedar Limited. Additionally, the Company received $466,168
during December 2006 from the sale of New Jersey State research and development
tax credits.
Departure of Directors and Principal Officers
On March 16, 2007, Gordon L. Schooley, Ph.D., a member of the Board of
Directors of Astralis, announced his resignation from the Board, effective March
16, 2007. Mr. Schooley's announcement did not refer to any disagreement with the
Company on any matter relating to the Company's operations.
On March 7, 2007, Samuel T. Barnett, a member of the Board of Directors of
Astralis, announced his resignation from the Board, effective March 7, 2007. Mr.
Barnett's announcement did not refer to any disagreement with the Company on any
matter relating to the Company's operations. Mr. Barnett was the sole
independent director on the Board of Directors of the Company and the sole
member of the Audit Committee prior to his resignation.
On October 6, 2006, Michael Garone resigned as the Company's interim Chief
Executive Officer and Chief Financial Officer. Simultaneously, Gar-1 Business
Advisory Services, an entity owned by Mr. Garone, was appointed by the Board as
a consultant and financial advisor to assist in the analysis and development of
the Company's strategic plan. Mr. Garone's announcement did not reference a
disagreement with Astralis on any matter relating to Astralis' operations.
On July 16, 2006, Michael Ashton, a member of the Board of Directors of
Astralis and our shareholder, SkyePharma PLC's representatitve on the Board,
announced his resignation from the Board, effective July 17, 2005. Mr. Ashton
had recently retired from the Board of SkyePharma, PLC and consequently resigned
from the Board of Astralis. Mr. Ashton's announcement did not reference a
disagreement with Astralis on any matter relating to Astralis' operations.
On May 5, 2006, Fabien Pictet, a member of the Board of Directors of
Astralis, announced his resignation from the Board. Mr. Pictet's effective date
of resignation was May 4, 2006. Mr. Pictet's resignation did not reference a
disagreement with the Company on any matter relating to the Company's
operations.
On January 25, 2006, James Sharpe resigned as a member of the Board of
Directors, Chief Executive Officer and President of the Company, pursuant to a
Separation Agreement and General Release by and between the Company and Mr.
Sharpe. Mr. Sharpe, whose resignation was effective as of December 31, 2005, did
not resign due to a disagreement with the Company on any matter relating to the
Company's operations.
On December 11, 2005, Steven Fulda, a member of the Board of Directors and
Audit Committee of the Company, announced his resignation from the Board and
Audit Committee, effective December 30, 2005. Mr. Fulda's announcement did not
reference a disagreement with the Company on any matter relating to the
Company's operations In addition,
-2-
Limited Working Capital
As of the date of this filing Astralis' liabilities exceed its cash. As of
April 14, 2007, the Company has $35,586 in available cash and accounts payable
of $91,267. If Astralis does not identify additional sources of cash within days
it will be forced to cease operations. The Company will need to raise additional
funds immediately to continue our operations. Furthermore, substantial
additional funds will be needed in order to fund our continued efforts to obtain
FDA approval of Psoraxine(R), especially given the failure of our Phase II study
to meet its primary endpoint.
In December 2006, our stockholder Blue Cedar Limited indicated to us that
it would make an additional investment in the Company. In December 2006, the
Company received from Blue Cedar Limited a partial investment of $150,000. The
Company and Blue Cedar Limited have not yet determined the terms of this
$150,000 partial investment or the terms of and total amount to be invested by
Blue Cedar Limited.
September 2006 Private Placement ($12,500)
On September 29, 2006, the Company closed a private placement of
securities from which it received proceeds of $12,500. In connection therewith,
Astralis issued to Blue Cedar Limited, an accredited investor and a current
stockholder of Astralis ("Blue Cedar"); (i) a convertible promissory note in the
principal amount of $12,500, convertible into shares of Astralis' common stock
at $0.075 per share at any time prior to the redemption date (September 29,
2009), interest will be charged on the note at 6% per annum and (ii) a warrant
to purchase 166,667 shares of common stock at an exercise price of $0.113 per
share. The warrants expire five years from the date of issuance.
August 2006 Private Placement ($64,980)
On August 22, 2006, the Company closed a private placement of securities
from which it received proceeds of $64,980. In connection therewith,Astralis
issued to Blue Cedar; (i) a convertible promissory note in the principal amount
of $20,000, convertible into shares of Astralis' common stock at $0.075 per
share at any time prior to the redemption date (August 22, 2009), interest will
be charged on the note at 6% per annum and (ii) a warrant to purchase 266,667
shares of common stock at an exercise price of $0.113 per share. The warrants
expire five years from the date of issuance.
On July 27, 2006, Astralis issued to Lipworth and Company Limited
("Lipworth"), an accredited investor and a current stockholder of Astralis; (i)
a convertible promissory note in the principal amount of $9,980, convertible
into shares of Astralis' common stock at $0.075 per share at any time prior to
the redemption date (July 27, 2009), interest will be charged on the note at 6%
per annum and (ii) a warrant to purchase 133,067 shares of common stock at an
exercise price of $0.113 per share. The warrants expire five years from the date
of issuance.
On July 25, 2006, Astralis issued to SkyePharma, PLC ("Skye"), an
accredited investor and a current stockholder of Astralis; (i) a convertible
promissory note in the principal amount of $35,000, convertible into shares of
Astralis' common stock at $0.075 per share at any time prior to the redemption
date (July 25, 2009), interest will be charged on the note at 6% per annum and
(ii) a warrant to purchase 466,667 shares of common stock at an exercise price
of $0.113 per share. The warrants expire five years from the date of issuance.
On June 15, 2006, the Company closed a private placement of securities
from which it received proceeds of $100,000. In connection with such private
placement, the Company issued to Manuel Tarabay, an accredited investor and
currently a stockholder and director of the Company, (i) a convertible
promissory note in the principal amount of $100,000, convertible into shares of
the Company's Common Stock at $0.075 per share, and (ii) a warrant to purchase
1,333,333 shares of Common Stock at an exercise price of $0.113 per share.
-3-
On March 31, 2006, the Company closed a private placement of securities
from which it received proceeds of $250,000. In connection with such private
placement, the Company issued to Blue Cedar, an accredited investor and
currently a stockholder of the Company, (i) a convertible promissory note in the
principal amount of $250,000, convertible into shares of the Company's Common
Stock at $0.09 per share, and (ii) a warrant to purchase 2,777,778 shares of
Common Stock. Lipworth Capital Limited acted as the placement agent in
connection with this private placement. The securities offered and sold in this
private placement were sold in reliance on an exemption from the registration
requirements under Regulation D of the Securities Act of 1933.
Psoriasis
Psoriasis is a chronic inflammatory skin disorder, with worldwide
distribution, prevalence varying according to race and geographic location,
estimated to affect 1-3 % of the world population. It is most common in
Scandinavia and Northern Europe reaching up to 3% of the population. It has been
found in 2-2.6 % of the United States population or between 5.8 and 7.5 million
people. The disease has wide clinical spectra that range from scaly, thickened
erythematous plaques, its most common form, to generalized erythrodermia, the
malignant form of psoriasis. Also can attack joints, tendons, and ligaments as
the clinical form inflammatory psoriatic arthritis, which can be severely
disabling and occurs in up to 1 million patients with psoriasis in the United
States.
Classical treatments fail to clear the disease, are inconvenient, or
toxic. They include topical treatments as corticosteroids ointments, vitamin D3
derivatives, topical retinoids derived from vitamin A, coal tar in a bath
solution or on the scalp as shampoo, anthralin ointment, salicylic acid combined
with other topics, moisturizers, and systemic treatments as daily regular short
doses of sunlight, phototherapy (PUVA, broadband UVB), methotrexate,
cyclosporine, systemic retinoids as acitretin, hydroxyurea, antibiotics.
So far, psoriasis etiology remains unknown, the pathogenic process is
immune mediated, through binding, specific activation and co-stimulation of T
cells by antigen presenting cells. After activation, T cells proliferate and
migrate from lymph nodes to the skin by a process regulated by a cascade of
cytokines, chemokines and cell-cell interactions between the T cell and the
endothelium. Finally, induction of keratinocyte changes by T cells and
secretions of other inflammatory cells, establishes psoriasis in the skin.
Psoriasis is genetically determined, incidence is much greater among first and
second degree relatives of psoriatic patients, and is inherited as an autosomal
dominant or polygenic trait.
Market Opportunity
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 involved. 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
clinically similar to rheumatoid arthritis. 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.
-4-
Psoriasis is a chronic illness with remissions and relapses 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.
Psoraxine(R)
In the course of a Phase III trial for a vaccine against cutaneous
leishmaniasis in Caracas, Venezuela In 1991 Dr. Jose Antonio O'Daly found that
one patient after the third vaccine injection had 100% clinical remission of a
plaque Psoriasis in her legs of 12 years of evolution that received many
treatments without ever remitting completely. Psoraxine(R) was developed by Dr.
Jose Antonio O'Daly, our Chairman of the Board and Chief Scientific Officer. 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(R), a purified version of the original product that is an
immunotherapeutic agent presented in liquid form and packed in 0.5 milligram
ampules for intra-muscular injection. Dr. O'Daly tested a precursor of
Psoraxine(R) in approximately 3,000 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(R) 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(R) in March 2003. On August 4, 2003
the FDA allowed us to commence our Phase I clinical trials for Psoraxine(R).
The purpose of Phase I studies was to test the safety of a drug. We
completed our Phase I studies, which involved the administration by
intramuscular injection of a single dose of 50, 150 or 300 micrograms of
Psoraxine(R) or a placebo in a controlled setting to groups of psoriatic
patients. Our Phase I results indicate that Psoraxine(R) is safe and
well-tolerated. We spent approximately $130,000 on our Phase I studies in 2003
and approximately $210,000 on our Phase I studies in 2004.
We commenced Phase II studies in April 2004. The purpose of Phase II
studies was to test the safety and efficacy of a drug. The Phase II studies have
been completed. We spent approximately $2,150,000 on our Phase II studies in
2004. The analysis of the data from the Phase II studies indicated that
treatment with Psoraxine(R) did not provide any statistically significant
clinical improvement of psoriasis in participants of the studies. We analyzed
the data from the Phase II studies to understand why statistical significance at
its primary endpoint was not achieved and to evaluate our clinical development
options for Psoraxine(R). We have been unable to identify with certainty why the
study was unsuccessful and, primarily because we have insufficient funds, we
have been unable to conduct any additional studies or to reformulate
Psoraxine(R). We have developed an hypothesis that may explain the results of
the Phase II study and are testing the hypothesis. We spent $1,635,461 during
fiscal year 2005 to complete Phase II studies. For the year ended December 31,
2005, we reflected $2,510,521 in research and development expenses which
included $114,976 to record the impairment of an intangible asset. For the year
ended December 31, 2005, we reflected $7,689,060 in research and development
expenses, including $4,519,400 related to SkyePharma. For the year ended
December 31, 2006, $473,150 was spent on research and development efforts.
-5-
Current Psoriasis Therapies
Classical treatments fail to clear the disease, are inconvenient, or are
toxic. They include topical treatments as corticosteroids ointments, vitamin D3
derivatives, topical retinoids derived from vitamin A, coal tar in a bath
solution or on the scalp as shampoo, anthralin ointment, salicylic acid combined
with other topics, moisturizers, and systemic treatments as daily regular short
doses of sunlight, phototherapy (PUVA, broadband UVB), methotrexate,
cyclosporine, systemic retinoids as acitretin, hydroxyurea, antibiotics. Each of
these treatments has variable efficacy, with side effects and cosmetic problems
in addition to the failure to prevent frequent relapses.
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 as Psoraxine(R) for the treatment of the same psoriasis.
The FDA has approved Amevive, manufactured by Biogen, Raptiva, manufactured by
Genentech/Xoma, and Enbrel, 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(R), Amevive, Raptiva and Enbrel 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, these companies have
more experience in preclinical testing, clinical trials and other regulatory
approval procedures than we have. 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 come to develop and
market commercial products, either on their own or through collaborative
efforts.
We expect to encounter significant competition for any of the
pharmaceutical products we may 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(R). The
likelihood of increased competition increases as we experience delays in the
development of Psoraxine(R).
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.
-6-
The process required by the FDA before our product candidate,
Psoraxine(R), 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;
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(R) 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(R) with the FDA. The Investigational New Drug
application automatically becomes effective 30 days after receipt by the FDA,
unless the FDA, within the 30-day time period, raises concerns or questions
about the conduct of the trial. In such a case, the Investigational New Drug
sponsor and the FDA must resolve any outstanding concerns before the clinical
trial can begin. In August 2003, the FDA informed us that we could commence our
clinical trials of Psoraxine(R). We have completed Phase I clinical trials in
which Psoraxine(R) was found to be generally safe and well-tolerated in Phase I
test patients. In 2005, we completed a Phase II clinical trial, which did not
achieve its primary endpoint for PASI (Psoriasis Area and Severity Index)
reduction. Though we have very limited resources, our sole employee is
continuing to analyze the data collected during the Phase II study, including
biopsy data indicating cellular level changes that has not been previously
available. We have developed and are testing a hypothesis to gain a better
understanding of the results, and to direct our future efforts, if any.
Although we remain committed to the future clinical development of
Psoraxine(R), we do not hae sufficient funds to continue any additional
development efforts or clinical trials. Even if we do, there can be no assurance
that we can be successful.
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.
-7-
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.
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(R) in Venezuela, but we have not obtained final
regulatory approval for commercial distribution of Psoraxine(R) 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 Antonio O'Daly for the "Compositions and Methods for
the Treatment and Clinical Remission of Psoriasis" (the "Psoriasis Formula").
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, a company owned by Dr. O'Daly, also filed an
application to obtain patent protection internationally for the Psoriasis
Formula 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.
-8-
In January 2004, Dr. O'Daly filed a patent application with the PTO
focusing on the mechanism of action of Psoraxine(R), expanding the claims to
include medical indications other than psoriasis, such as Atopic Dermatitis,
Psoriatic Arthritis and Rheumatoid Arthritis. In addition, the patent elaborates
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(R).
All of the Company's intangible assets were fully impaired as of December
31, 2006.
Agreements with SkyePharma
We entered into a Purchase Agreement dated as of December 10, 2001 with
SkyePharma PLC ("SkyePharma") pursuant to which SkyePharma purchased an
aggregate of 2,000,000 shares of our Series A Convertible Preferred Stock, par
value $.001 per share ("Series A Preferred Stock"), for an aggregate purchase
price of $20.0 million. On January 20, 2004, pursuant to our Omnibus Conversion
Agreement with SkyePharma, dated January 12, 2004, SkyePharma converted all of
its 2,000,000 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. In March 2005,
SkyePharma also acquired an additional 11,160,000 shares of our common stock in
a privately negotiated transaction with two private holders. As a result,
SkyePharma beneficially owned 49.8% of our common stock at that time. During
August 2005, the Company closed on an investment of $2 million. Consequently
SkyePharma's share of beneficial ownership was approximately 39.7% on December
31, 2006. Additionally, during March 2006, the Company closed on an investment
of $250,000. Consequently SkyePharma's share of beneficial ownership is now
approximately 39.8%.
On January 20, 2004, the closing date of the conversion of SkyePharma's
2,000,000 shares of our Series A Preferred Stock, we, SkyePharma and our other
original shareholders amended the Stockholders' Agreement, dated as of December
10, 2001 (the "Amended SkyePharma Stockholders' Agreement"). Pursuant to the
Amended SkyePharma Stockholders' Agreement, our board of directors was required
to be comprised of at least seven directors and at least two independent
directors. Per the Amended SkyePharma Stockholders' Agreement, SkyePharma had
the right to nominate one director. No director currently serves as a SkyePharma
designee. Pursuant to the Amended SkyePharma Stockholders' Agreement, SkyePharma
was required to vote its shares of our common stock in favor of certain
enumerated transactions that have been approved by our board of directors and
all of our independent directors. These transactions included (i) the amendment
of our certificate of incorporation solely to increase our 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 or all or substantially all of our
assets, or our merger with another entity, provided that SkyePharma was to
receive the same consideration for its shares as other holders of common stock
and would be able to participate in the sale or merger on the same terms as the
most favorable terms available to any of our other stockholders and the total
consideration for the transaction was greater than $135 million. The Amended
SkyePharma Stockholders' Agreement has expired.
We also entered into two agreements concerning the formulation and
development of our initial injectable product candidate, Psoraxine(R), with
SkyePharma. Under the terms of the Technology Access Option Agreement, dated
December 10, 2001, we paid to SkyePharma a $5.0 million technology access fee
for the option to 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,
-9-
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(R). We have evaluated the technology access option fee we paid under
the Technology Access Option Agreement, which we have been capitalizing as a
research and development intangible asset over a seven-year period, and have
determined that as of December 31, 2005, the technology access option fee
exceeded its fair market value. Consequently, we recorded as additional research
and development costs in 2004 a charge of $2,797,612 to reflect an impairment of
this intangible asset.
All of the Company's intangible assets were fully impaired as of December
31, 2006.
Blue Cedar August 2005 Private Placement
On August 19, 2005, we completed a private placement of securities from
which we received gross proceeds of approximately $2,000,000. The transaction
consisted of the sale to one accredited investor, Blue Cedar, of units
consisting of: (i) 18,181,818 shares of common stock, (ii) warrants to purchase
over a 5-year period 18,181,818 shares of common stock with an exercise price of
$0.165 and (iii) warrants to purchase over a 12-month period 12,121,212 shares
of common stock with an exercise price of $0.165. We relied upon the exemption
from registration provided under Section 4(2) of the Securities Act and Rule 506
of Regulation D promulgated thereunder. The private placement was only made
available to one "accredited investor" as defined in Rule 501 of Regulation D.
Lipworth Capital Limited acted as our placement agent in connection with the
private placement. We paid an 8% fee to our placement agent and issued warrants
to purchase 1,454,545 shares of common stock with an exercise price of $0.165,
in connection with the financing in addition to other costs. Additionally, we
granted Blue Cedar certain registration rights pursuant to a registration rights
agreement, dated as of August 17, 2005, in connection with this transaction. The
registration rights agreement required us to file a registration statement
within approximately 30 days of the final closing of our private placement
covering the resale of all shares included therein, as well as the shares
underlying the warrants. Because a registration statement covering the resale of
such shares was not filed or effective by December 31, 2005, the date specified
in the agreement, we are subject to liquidated damages payments of $10,000 per
month, being 0.5% of the aggregate purchase price plus 10% interest per annum to
be paid on unpaid liquidated damages amounts until such time as a registration
statement covering the resale of securities sold to Blue Cedar is declared
effective by the Securities and Exchange Commission.
Concurrently with the closing of the private placement, we and Blue Cedar
entered into the Blue Cedar Stockholder's Agreement. Pursuant to the Blue Cedar
Stockholder's Agreement, our Board of Directors is required to be comprised of
at least eight directors and Blue Cedar may designate one director to our Board
of Directors. Manuel Tarabay is Blue Cedar's initial and current designated
director. Further, pursuant to the Blue Cedar Stockholder's Agreement, we agreed
not to enter into any service agreement, distribution arrangement or transfer of
personnel with any of our stockholders owning more than 10% of the outstanding
shares of common stock until we complete Phase II clinical trials of
Psoraxine(R), without the prior written consent of Blue Cedar, which shall not
be unreasonably withheld. Additionally, for a period of two years following the
closing date of the private placement, we granted Blue Cedar certain pre-emptive
rights, allowing Blue Cedar to participate in substantially all sales of
securities. The Blue Cedar Stockholder's Agreement will terminate upon the
earlier of the Blue Cedar Termination Date or August 15, 2008. The "Blue Cedar
Termination Date" is the date on which Blue Cedar no longer beneficially owns,
in the aggregate, at least 20% of our outstanding common stock.
-10-
Employees and Consultants
As of March 31, 2007, we have only one employee, with no significant
salary, Dr. Jose Antonio O'Daly, our Chief Scientific Officer, Interim Chief
Financial Officer, Interim Chief Executive Officer and Chairman of the Board.
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-KSB 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" and
"Management's Discussion and Analysis or Plan of Operation", as well as any
other cautionary language in this annual report, 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 the
events described in the "Risk Factors" section, the "Management's Discussion and
Analysis or Plan of Operation" section and elsewhere in this annual report could
seriously harm our business.
RISK FACTORS
You should carefully consider each of the following risk factors and all
of the other information in this report. The following risks relate principally
to the Company's business. If any of the following risks actually occur, the
business, financial condition or results of operations of the Company could be
materially adversely affected. As a result, the market price of shares of the
Company's common stock could decline significantly.
We are insolvent, we have ceased drug development efforts and we will need
to obtain additional funds immediately to support our future operation expenses.
Our auditors have expressed uncertainty regarding our ability to continue as a
going concern.
As of the date of this filing Astralis' liabilities exceed its cash: as of
April 14, 2007, the Company has $35,586 in available cash and accounts payable
of $91,267. Astralis has ceased drug development efforts, has only one employee
and may be forced to file for protection under Federal bankruptcy laws. The
Company will need to raise additional funds immediately to continue our
operations. Furthermore, substantial additional funds will be needed in order to
fund our continued efforts to obtain FDA approval of Psoraxine(R), especially
given the failure of our Phase II study to meet its primary endpoint.
-11-
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 immediately, 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.
Recent and future changes in senior management and board composition has
made it virtually impossible for us to implement our business plan. In addition
we no longer have any independent Board members, no management team and no
member of our Audit Committee.
On January 25, 2006, we accepted the resignation of James Sharpe,
effective as of December 31, 2006 with respect to his position as Chief
Executive Officer, President and member of the Board of Directors. On October 6,
2006, Michael Garone resigned as the Company's interim Chief Executive Officer
and Chief Financial Officer. Simultaneously, Gar-1 Business Advisory Services,
an entity owned by Mr. Garone, was appointed by the Board as a consultant and
financial advisor to assist in the analysis and development of the Company's
strategic plan. Currently, Dr. Jose Antonio O'Daly, our only employee, is
serving as Chairman of the Board, Chief Scientific Officer, interim Chief
Financial Officer and interim Chief Executive Officer. Dr. O'Daly, a physician
from Venezuela, does not have substantial experience running a public company or
developing pharmaceutical products for commercialization.
Additionally there have been significant changes to the composition of our
Board of Directors. Eight of the ten members of the Board that was in place
during December 2005 have resigned. Consequently, the Company has two Board
members, neither of whom is independent. The Company is not in compliance with
its bylaws in regards to Board Composition, nor does it have enough qualified
members to populate required committees. We no longer have an Audit Committee
that includes a financial "expert" as defined by Item 407(d)(5) of Regulation
S-B of the Exchange Act.
We have determined that our disclosure controls and procedures are
ineffective and our auditor has concluded that our current internal controls are
insufficient to protect our assets.
Based on his evaluation as of the end of the period covered by this Annual
Report on Form 10-KSB, our interim Chief Executive Officer and interim Chief
Financial Officer has concluded that our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act are not
effective to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.
As a result of the audit of our 2006 financial statements by our
independent auditors we have become aware of certain deficiencies that exist in
the design and operation of our internal controls over financial reporting that
our independent auditors consider to be material weaknesses under standards of
the Public Company Accounting Oversight Board (PCAOB).
-12-
Our independent auditors identified certain errors in the financial
statements in the current period that were not initially identified by the
Company's internal control over financial reporting. The errors were in the
areas of proper accrual of the registration rights penalty in connection with a
2005 private placement to the accredited investor Blue Cedar Limited, proper
discount and authorization of the beneficial conversion feature on our
convertible notes payable, accrual of expenses and recognition of option
expense. The aggregate amount of these errors was material to our financial
statements and therefore represents a material weakness in our internal control
over financial reporting. Upon being notified of these errors we corrected the
information included in the financial statements before such statements were
filed with the Securities and Exchange Commission or disclosed publicly to any
parties.
Our controls over financial reporting have been weakened as a consequence
of recent resignations by certain of our Board members and management team. Our
Board of Directors does not include any members who are independent or who would
otherwise qualify to serve on our Audit Committee as a financial "expert" as
defined by Item 407(d)(5) of Regulation S-B of the Exchange Act. Additionally,
because Dr. O'Daly is the only active employee left in the Company there are
significant changes in controls over financial administration and protection of
Company information. The independent auditor has concluded that current controls
are insufficient to insure protection of our assets.
The Company has experienced greater than one year delay in the development
program of its primary drug candidate, Psoraxine(R) due to its inability to
raise sufficient cash in a timely manner. Consequently, Psoraxine(R) may never
reach commercial markets, or if it does, it may not achieve anticipated market
milestones.
Due to the Company's inability to secure sufficient funding to continue
the development of Psoraxine(R) on a timely basis, and its initial failures in
its clinical trials, the market introduction of Psoraxine(R) has been delayed at
least one year. If sufficient funding is not obtained soon, the development
program may never reach commercial markets. Additionally, as time goes by it
becomes more likely that competitive drugs will be introduced and that may
affect the market potential of Psoraxine(R).
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 cumulative net loss to common
shareholders of (32,377,212) as of December 31, 2006 which has increased to
date. The cumulative net loss to common shareholders through December 31, 2006
includes non-cash preferred stock dividends of (22,218,750). We expect that if
we identify additional funds, substantial losses will continue for the
foreseeable future. In order to obtain revenue from the sales of our product
candidate, Psoraxine(R), 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 that if we remain in business, we will continue to incur
operating losses for the next several years as we continue our research and
development efforts for Psoraxine(R) 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.
Psoraxine(R) may never be approved by the FDA because the results of our
Phase II study failed to meet its primary study endpoint.
We have focused our development efforts to date on conducting clinical
trials for an immuno-stimulatory drug, Psoraxine(R), for the treatment of
psoriasis. During 2004 and 2005 we conducted a randomized, double-blinded,
placebo-controlled clinical study involving 120 patients with moderate to severe
psoriasis who received six (6) intramuscular injections of Psoraxine(R). The
-13-
primary endpoint of the study was a specified level of improvement of symptoms
measured in accordance with the Psoriasis Area and Severity Index, or PASI,
which is a measurement scale that ranks the severity of symptoms of patients
suffering from psoriasis. While Psoraxine(R) was found to be safe and
well-tolerated, our analysis of the data showed no statistically significant
improvement of those Phase II study patients who received six injections of
Psoraxine(R) for a twelve weeks treatment period compared to patients taking a
placebo.
The failure of our Phase II study to meet its primary endpoint makes FDA
approval of Psoraxine(R) substantially more uncertain. To continue Psoraxine(R)
's development and to obtain FDA approval to market Psoraxine(R), we must
complete our analysis of the data from the Phase II study to identify why the
Phase II study failed to meet its primary endpoint. We have developed and are
testing a hypothesis that may explain the results of our Phase II study. We must
then undertake additional Phase I or Phase II clinical trials that are adjusted
to account for the cause or causes of the initial Phase II study's failure.
Although we have already identified a number of possible reasons for the failure
to demonstrate efficacy in the recent Phase II trial, and we have also developed
a preliminary plan for new clinical studies, there can be no guarantee that we
will be able to identify with certainty why our Phase II study failed to meet
its primary endpoint and that we will be able to make the needed adjustments for
further Phase II studies to be successful. There is also no guarantee that the
FDA would approve Psoraxine(R) even if we deem additional clinical trials to be
successful.
We have devoted most of our resources to the development of Psoraxine(R)
and our business is dependent on its success. In the United States, the
marketing of Psoraxine(R) depends on FDA approval of the product. Analyzing the
Phase II study data and conducting additional Phase II clinical trials will
delay FDA approval. We may also decide to discontinue further clinical trials of
Psoraxine(R), which would prevent us from obtaining FDA approval. If we are not
able to obtain FDA approval for Psoraxine(R), we would be unable to sell the
product and we would have to identify new potential products to develop.
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(R). 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(R) 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(R).
Our initial product candidate, Psoraxine(R), will require the commitment
of substantial resources to move it towards commercialization. Before obtaining
regulatory approvals for the commercial sale of Psoraxine(R), we must
demonstrate the safety and efficacy of our product candidate through preclinical
testing and clinical trials. Conducting clinical trials involves a lengthy,
expensive and uncertain process. Completion of clinical trials may take several
years or more. The length of time generally varies substantially according to
the type, complexity, novelty and intended use of the product. If we or the U.S.
Food and Drug Administration believe that our clinical trials expose
participating patients to unacceptable health risks, we may suspend such trials.
-14-
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(R).
Because our initial product candidate, Psoraxine(R), 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(R). 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(R) in Venezuela,
we have not sought, nor have we obtained, regulatory approval for the
commercialization of Psoraxine(R) 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.
-15-
Even if product candidates emerge successfully from clinical trials, we
may not be able to successfully manufacture, market and sell them.
We have not successfully completed clinical trials of Psoraxine(R). If
Psoraxine(R) emerges successfully from clinical trials and obtains regulatory
approval, 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(R) directly, we would need
to develop or obtain through outsourcing arrangements the capability to
manufacture, market and sell products. 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. If we file for
protection under the Federal bankruptcy laws, the rights to our patents
generally revert to Dr. O'Daly. 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(R). Dr. Jose Antonio O'Daly is the owner of the patent for
Psoraxine(R). 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. If we file for protection under the Federal bankruptcy laws,
the rights to our patents generally revert to Dr. O'Daly. 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.
-16-
We rely upon trade secrets protection for our confidential and proprietary
information. We have taken measures to protect our proprietary information.
These measures may not provide adequate protection for our trade secrets or
other proprietary information. We seek to protect our proprietary information by
entering into confidentiality agreements with employees, collaborators and
consultants. Nevertheless, employees, collaborators or consultants may still
disclose our proprietary information, and we may not be able to meaningfully
protect our trade secrets. In addition, others may independently develop
substantially equivalent proprietary information or techniques or otherwise gain
access to our trade secrets.
Many potential competitors which have greater resources and experience
than we do may develop products and technologies that could make ours obsolete.
Companies in the biotechnology industry face rapid technological change in
a rapidly evolving field. Our future success will depend on our ability to
maintain a competitive position with respect to technological advances. Rapid
technological development by others may result in our products and technologies
becoming obsolete.
We face, and will continue to face, intense competition from organizations
such as large biotechnology and pharmaceutical companies, as well as academic
and research institutions and government agencies. Our competitors may include
Biogen, Genentech/Xoma, Amgen, 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 our Chief Scientific
Officer, Interim Chief Financial Officer, Interim Chief Executive Officer and
Chairman of the Board. The loss of his services would adversely impact the
achievement of our objectives. To execute our business plan fully it is
essential that we retain Dr. O'Daly. 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. The inability
to acquire or develop this expertise could impair the growth, if any, of our
business.
-17-
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(R) 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 many not
make decisions that further the best interests of all stockholders.
Our officers, directors and principal stockholders (greater that 5%
stockholders) together control approximately 77.7% 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
March 31, 2007, the range of our stock price has been between $0.02 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, or
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, our
stockholders, or 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
91,454,873 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 146,204,460 shares of our common stock outstanding.
Of the outstanding shares, up to 73,172,055 shares are freely tradable without
restriction or further registration under the Securities Act, unless the shares
are held by one of our "affiliates" as such term is defined in Rule 144 of the
Securities Act. The remaining shares may be sold only pursuant to a registration
statement under the Securities Act or an exemption from the registration
requirements of the Securities Act. The sale and distribution of these shares
may cause a decline in the market price of our common stock.
-18-
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." Rule 15g-9 under the Exchange Act imposes
additional sales practice requirements on broker-dealers that recommend the
purchase or sale of penny stocks to persons other than those who qualify as an
"established customer" or an "accredited investor." This includes the
requirement that a broker-dealer must make a determination 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.
Item 2. Description of Property
We lease our executive offices located at 75 Passaic Avenue, Fairfield,
New Jersey 07004. Our laboratory space was abandoned to control costs.
Currently, the Company's lease expires in June 2007. The Company exchanged its
laboratory equipment and supplies for the use of its executive offices through
June 2007. After June, the Company will have no offices and will have to
identify new capital to secure new office and laboratory space and equipment to
continue research and development efforts.
Item 3. Legal Proceedings
Neither we, nor any of our properties, are presently a party to any
material legal proceeding, nor, to our knowledge, is any such proceeding
threatened against us or any of our properties.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted for a vote of our shareholders during the fourth
quarter of our fiscal year 2006.
PART II
Item 5. Market For Common Equity, Related Stockholder Matters and Small Business
Issuer Purchases of Equity Securities
Market Information
Our common stock is traded on the Over-the-Counter Bulletin Board ("OTC
Bulletin Board") under the symbol ASTR.OB. 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.
-19-
High Low
---- ---
2005
----
First Quarter $0.84 $0.20
Second Quarter $0.40 $0.20
Third Quarter $0.25 $0.15
Fourth Quarter $0.16 $0.02
2006
----
First Quarter $0.22 $0.02
Second Quarter $0.18 $0.06
Third Quarter $0.08 $0.04
Fourth Quarter $0.05 $0.02
Holders of Common Stock
As of March 31, 2007, there were approximately 89 record holders of our
common stock.
Dividends
We have never paid or declared a cash dividend on our common stock and do
not anticipate that any will be paid in the future.
Equity Compensation Plan Information
The following table provides information with respect to the equity
securities that are authorized for issuance under our compensation plans
(including individual compensation arrangements) as of December 31, 2006:
Equity Compensation Plan Information at December 31, 2006
Number of securities to Weighted-average Number of securities
be issued upon the exercise price remaining available
exercise of outstanding of outstanding for future issuance
options, warrants and options, under equity
rights (a) warrants and compensation plans
rights (excluding
(b) securitiesreflected in
column (a)
Equity compensation plans approved by
securities holders 1,454,000 $0.26 -
$2.50 3,521,000
Equity compensation plans not approved by
securities holders 0 0 0
$0.26 - 3,521,000
Total 1,454,000 $2.50
-20-
Recent Sales of Unregistered Securities
On September 29, 2006, Astralis issued to Blue Cedar Limited, an
accredited investor and a current stockholder of Astralis ("Blue Cedar"); (i) a
convertible promissory note in the principal amount of $12,500, convertible into
shares of Astralis' common stock at $0.075 per share at any time prior to the
redemption date (September 29, 2009), interest will be charged on the note at 6%
per annum and (ii) a warrant to purchase 166,667 shares of common stock at an
exercise price of $0.113 per share. The warrants expire five years from the date
of issuance.
On August 22, 2006, Astralis issued to Blue Cedar; (i) a convertible
promissory note in the principal amount of $20,000, convertible into shares of
Astralis' common stock at $0.075 per share at any time prior to the redemption
date (August 22, 2009), interest will be charged on the note at 6% per annum and
(ii) a warrant to purchase 266,667 shares of common stock at an exercise price
of $0.113 per share. The warrants expire five years from the date of issuance.
On July 27, 2006, Astralis issued to Lipworth and Company Limited
("Lipworth"), an accredited investor and a current stockholder of Astralis; (i)
a convertible promissory note in the principal amount of $9,980, convertible
into shares of Astralis' common stock at $0.075 per share at any time prior to
the redemption date (July 27, 2009), interest will be charged on the note at 6%
per annum and (ii) a warrant to purchase 133,067 shares of common stock at an
exercise price of $0.113 per share. The warrants expire five years from the date
of issuance.
On July 25, 2006, Astralis issued to SkyePharma, PLC ("Skye"), an
accredited investor and a current stockholder of Astralis; (i) a convertible
promissory note in the principal amount of $35,000, convertible into shares of
Astralis' common stock at $0.075 per share at any time prior to the redemption
date (July 25, 2009), interest will be charged on the note at 6% per annum and
(ii) a warrant to purchase 466,667 shares of common stock at an exercise price
of $0.113 per share. The warrants expire five years from the date of issuance.
On June 15, 2006, the Company closed a private placement of securities
from which it received proceeds of $100,000. In connection with such private
placement, the Company issued to Manuel Tarabay, an accredited investor and
currently a stockholder of the Company, (i) a convertible promissory note in the
principal amount of $100,000, convertible into shares of the Company's Common
Stock at $0.075 per shares, and (ii) a warrant to purchase 1,333,333 shares of
Common Stock at an exercise price of $0.113 per share. The warrants expire five
years from the date of issuance.
On March 31, 2006, the Company closed a private placement of securities
from which it received proceeds of $250,000. In connection with such private
placement, the Company issued to Blue Cedar, an accredited investor and
currently a stockholder of the Company, (i) a convertible promissory note in the
principal amount of $250,000, convertible into shares of the Company's Common
Stock at $0.09 per share, and (ii) a warrant to purchase 2,777,778 shares of
Common Stock. Lipworth Capital Limited acted as the placement agent in
connection with this private placement. The securities offered and sold in this
private placement were sold in reliance on an exemption from the registration
requirements under Regulation D of the Securities Act of 1933.
On August 19, 2005, the Company closed a private placement of securities
from which they received gross proceeds of approximately $2,000,000. The
transaction consisted of the sale to one accredited investor, Blue Cedar, of
units consisting of: (i) 18,181,818 shares of Common Stock, (ii) warrants to
purchase over a 5-year period 18,181,818 shares of common stock with an exercise
price of $0.165 and (iii) warrants to purchase over a 12-month period 12,121,212
shares of common stock with an exercise price of $0.165. The Company relied upon
the exemption from registration provided under Section 4(2) of the Securities
Act and Rule 506 of Regulation D promulgated thereunder. The private placement
was only made available to one "accredited investor" as defined in Rule 501 of
-21-
Regulation D and the required number of manually executed originals and true
copies of Form D were and timely filed with the Securities and Exchange
Commission. Lipworth Capital Limited acted as the placement agent in connection
with the private placement. The Company paid an 8% fee to the placement agent
and issued warrants to purchase 1,454,545 shares of common stock with an
exercise price of $0.165, in connection with the financing in addition to other
costs. Additionally, the Company granted Blue Cedar certain registration rights
pursuant to a registration rights agreement, dated as of August 17, 2005, in
connection with this transaction. The registration rights agreement required the
Company to file a registration statement within approximately 30 days of the
final closing of the private placement covering the resale of all shares
included therein, as well as the shares underlying the warrants. Because a
registration statement covering the resale of such shares was not filed or
effective by December 31, 2005, the date specified in the agreement, the Company
is subject to liquidated damages of $10,000 per month, being 0.5% of the
aggregate purchase price plus 10% interest per annum to be paid on unpaid
liquidated damages amounts until such time as a registration statement covering
the resale of securities sold to Blue Cedar is declared effective by the
Securities and Exchange Commission.
On June 4, 2005, the Company issued 20,000 options to a director. The
options were issued with an exercise price of $0.28 and with a term of 10 years.
The options shall vest over three years, with 25% vesting on the date of the
grant and 25% vesting on the anniversary of the grant date until fully vested.
On April 11, 2005, the Company issued 50,000 options to a newly elected
director. The options were issued with an exercise price of $0.26 and with a
term of 10 years. The options shall vest over three years, with 25% vesting on
the date of the grant and 25% vesting on the anniversary of the grant date until
fully vested.
On February 2, 2005, the Company issued 20,000 options to a director. The
options were issued with an exercise price of $0.69 and with a term of 10 years.
The options shall vest over three years, with 25% vesting on the date of the
grant and 25% vesting on the anniversary of the grant date until fully vested.
In January 2005, the Company issued 100,000 shares of the Company's common
stock along with 728,000 options to James Sharpe, the Company's former Chief
Executive Officer and President. The options were issued with an exercise price
of $0.70 with a term of ten years. The options vest over three years, with 25%
vesting on the date of the grant and 25% vesting on the anniversary of the grant
date until fully vested. Mr. Sharpe resigned as Chief Executive Officer,
President and member of the Board of Directors as of January 25, 2006, with an
effective resignation date of December 31, 2006.
On December 10, 2004, we entered into an Employment Agreement with Dr.
Jose Antonio O'Daly, the Chairman of our Board of Directors, our Chief
Scientific Officer and our interim CEO and interim CFO. Pursuant to the terms of
the Employment Agreement, we granted Dr. O'Daly options to purchase 728,000
shares of our common stock at an initial exercise price of $0.70 per share. The
options were fully vested upon grant and expire in ten years.
On July 9, 2004, Steven Fulda, a former member of our Board of Directors,
exercised options to purchase 25,000 shares of our common stock at $0.45 per
share.
On July 2, 2004, we granted options to purchase 50,000 shares of our
common stock at an exercise price of $1.00 per share to Samuel Barnett, our
former Director. Twenty-five percent of the options were vested upon the date of
grant, and options to purchase an additional 12,500 shares of our common stock
will vest each year thereafter on the anniversary of the date of grant. The
options will expire in four years.
-22-
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,
which is controlled by Fabien Pictet, a former member of our Board of Directors,
in consideration for services valued at $75,000 that were rendered to us in
negotiating a Call Option Agreement, dated January 12, 2004, between us and
SkyePharma. The 150,000 warrants have an exercise price of $0.73 per share of
common stock and expire five years from the date of issue. Under the Call Option
Agreement, SkyePharma agreed that up to 12,500,000 shares of its common stock
issued upon conversion of the Series A Convertible Preferred Stock were subject
to a call option, exercisable at our discretion upon completion of agreed upon
milestones and ending on January 20, 2007. In the event we exercised the call
option, the exercise price was between $1.28 and $1.52 per share, depending on
the date of exercise. We assigned to FPP Capital Advisors the right to purchase
1,250,000 shares of our common stock pursuant to the Call Option Agreement. We
relied on the exemption from registration with the Securities and Exchange
Commission provided under Section 4(2) of the Securities Act and Rule 506 of
Regulation D under the Securities Act. The Call Option Agreement expired on
January 20, 2007.
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. The warrants have an exercise price of
$0.73 and expire in four years. We relied on the exemption from registration
under Regulation D of the Securities Act. In July 2004, we filed a registration
statement under the Securities Act covering the resale of the shares purchased
and the shares issuable upon exercise of the warrants.
In connection with the private placements on January 20, 2004 and February
19, 2004, FPP Capital Advisors received a consulting fee of $261,496, warrants
to purchase 418,394 shares of our common stock at $0.50 per share and warrants
to purchase 418,394 shares of our common stock at $0.73 per share. The warrants
expire in four years. FPP Capital Advisors will be paid an additional consulting
fee equal to 5% of the proceeds we receive upon exercise of the warrants issued
in the private placements. We relied on the exemption from registration with the
Securities and Exchange Commission provided under Section 4(2) of the Securities
Act and Rule 506 of Regulation D under the Securities Act.
On January 20, 2004, pursuant to an Omnibus Conversion Agreement, dated
January 12, 2004, between us and SkyePharma, SkyePharma converted all of its
2,000,000 outstanding shares of Series A Convertible Preferred Stock into
25,000,000 shares of our common stock at a conversion price of $0.80 per share.
As a result of this conversion, we no longer have any shares of preferred stock
outstanding and SkyePharma no longer has rights as a preferred stockholder. We
relied on the exemption from registration with the Securities and Exchange
Commission provided under Section 4(2) of the Securities Act and Rule 506 of
Regulation D under the Securities Act.
Item 6. Management's Discussion and Analysis or Plan of Operation
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 annual report on Form 10-KSB. This annual
report contains certain statements of a forward-looking nature relating to
future events or our future financial performance. We caution prospective
investors that such statements involve risks and uncertainties, and that actual
events or results may differ materially. In evaluating such statements,
prospective investors should specifically consider the various factors
identified in this annual report, including the matters set forth under the
caption "Risk Factors" which could cause actual results to differ materially
from those indicated by such forward-looking statements. We disclaim any
obligation to update information contained in any forward-looking statement.
-23-
Overview
Astralis, Ltd. is a development stage biotechnology company that was
engaged primarily in the research and development of treatments for immune
system disorders and skin diseases, such as psoriasis and psoriatic and
rheumatoid arthritis. The Company's initial product candidate, Psoraxine(R), is
a protein extract used for the treatment of the skin disease psoriasis.
As of the date of this filing Astralis' liabilities exceed its assets.
Consequently all drug development efforts have ceased until sufficient funding
may be raised. Furthermore, substantial additional funds will be needed in order
to fund continued efforts to obtain FDA approval of Psoraxine(R), especially
given the failure of our Phase II study to meet its primary endpoint. We could
be forced to seek protection under Federal bankruptcy laws at any time. We have
only one employee remaining, being Dr. Jose Antonio O'Daly, our Chairman. We are
seeking funds to:
o Continue ongoing research and development of Psoraxine(R);
o Recommence clinical trials to obtain the approval of the United
States Food and Drug Administration for the marketing of
Psoraxine(R); and
o Develop technology underlying Psoraxine(R) for the treatment of
indications other than psoriasis, such as arthritis, eczema,
seborrheic dermatitis and leishmaniasis.
Because the Company has not been able to secure sufficient funding to
continue the development of Psoraxine(R) on a timely basis, the market
introduction of Psoraxine(R) has been delayed at least one year. If sufficient
funding is not obtained soon, the development program will likely never reach
commercial markets. During the last year, all of the Company's independent Board
members have resigned. There is no audit committee, no compensation committee
and there are only two members of the Board remaining, neither of whom has
substantial business experience in the United States or in the biotechnology
industry.
Fiscal year ended December 31, 2006 compared to fiscal year ended December 31,
2005.
For fiscal year ended December 31, 2006:
For the fiscal year ended December 31, 2006, we had no revenue from
operations and incurred operating expenses of $1,377,791 which consisted
primarily of:
o Research and development costs of $473,150; and
o General and administrative costs of approximately $866,357,
including professional fees and our general corporate expenditures.
In December 2006, we received $466,168 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 adopted 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.
-24-
In the fourth quarter of 2006 we recognized $42,656 as the fair value of
the liquidated damages penalty provision payments in connection with the
Registration Rights Agreement with Blue Cedar from 2005.
As a result, during the fiscal year ended December 31, 2006, we incurred a
net loss of $ 979,446.
For fiscal year ended December 31, 2005:
On August 19, 2005, the Company closed a private placement of securities
from which it received gross proceeds of approximately $2,000,000. The
transaction consisted of the sale to one accredited investor, Blue Cedar, of
units consisting of: (i) 18,181,818 shares of common stock, (ii) warrants to
purchase over a 5-year period 18,181,818 shares of common stock with an exercise
price of $0.165 and (iii) warrants to purchase over a 12-month period 12,121,212
shares of common stock with an exercise price of $0.165. The Company relied upon
the exemption from registration provided under Section 4(2) of the Securities
Act and Rule 506 of Regulation D promulgated thereunder. The private placement
was only made available to one "accredited investor" as defined in Rule 501 of
Regulation D and the required number of manually executed originals and true
copies of Form D were and timely filed with the Securities and Exchange
Commission. Lipworth Capital Limited acted as the placement agent in connection
with the private placement. The Company paid an 8% fee to the placement agent
and issued warrants to purchase 1,454,545 shares of common stock with an
exercise price of $0.165, in connection with the financing in addition to other
costs. Additionally, the Company granted Blue Cedar certain registration rights
pursuant to a registration rights agreement, dated as of August 17, 2005, in
connection with this transaction. The registration rights agreement required the
Company to file a registration statement within approximately 30 days of the
final closing of the private placement covering the resale of all shares
included therein, as well as the shares underlying the warrants. Because a
registration statement covering the resale of such shares was not filed or
effective by December 31, 2005, the date specified in the agreement, the Company
is subject to liquidated damages of $10,000 per month, being 0.5% of the
aggregate purchase price plus 10% interest per annum to be paid on unpaid
penalty amounts until such time as a registration statement covering the resale
of securities sold to Blue Cedar is declared effective by the Securities and
Exchange Commission.
In August 2005, the Board of Directors approved a resolution, subject to
shareholder approval, to increase the authorized number of shares of common
stock by 200,000,000 shares. The Company has not yet held a stockholders meeting
to approve such amendment.
For the fiscal year ended December 31, 2005, we had no revenue from
operations and incurred operating expenses of $4,166,145 which consisted
primarily of:
o Research and development costs of $2,395,545, including $1,635,461
that we incurred to complete our Phase II clinical study.
o General and administrative costs of approximately $1,630,279,
including professional fees and our general corporate expenditures.
In December 2005, we received $306,921 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 adopted 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.
-25-
In the fourth quarter of 2005 we recognized $83,000 as the fair value of
the liquidated damages penalty provision payments in connection with the
Registration Rights Agreement with Blue Cedar.
As a result, during the fiscal year ended December 31, 2005, we incurred a
net loss of $3,914,159.
The Next Twelve Months
At December 31, 2006 we had cash balances of $211,495, which as of April
14, 2007 was substantially depleted to $35,586. Currently, the Company has
$91,267 outstanding obligations. If the Company cannot raise additional funding
immediately, it will be forced to cease operations.
Although the Company has no funding to continue any operating activities,
if sufficient funding is raised it will be used over the course of the next
twelve months as follows:
o Our primary focus would be to further development efforts of our
initial product candidate, Psoraxine(R). In March 2005, the Company
announced that the Phase II study of its novel immuno-stimulatory
product for the treatment of Psoriasis did not meet the primary
study endpoint upon completion of the treatment phase of the study.
In the study, Psoraxine(R) was found to be safe and well-tolerated.
Accordingly, we analyzed the data and developed an hypothesis that
may explain why we received these unexpected results. In this
regard, we would realign development activities to focus on such
things as formulation, manufacturing, analytical protocols and
potency; and we would test the hypothesis to explain unexpected
results and determine the best course for future development.
o The business plan would be implemented in phases: during the first
phase we would test the hypothesis developed recently to assess
causes for unexpected results in the Phase II trial. During the
second phase, test results would be used to design and begin a new
Phase II trial. We expect that we would be required to incur
expenses of approximately $1,000,000 to third parties in connection
with these two phases of the continuing development of Psoraxine(R).
o We would be required to hire new employees for which we would spend
approximately $250,000 to pay management salaries and salaries of
employees, a portion of which is treated as research and development
expense.
o We would have to identify new office and laboratory space which
could cost approximately $250,000 for our general administrative and
working capital requirements.
o In connection with the August 2005 Blue Cedar private placement,
because a registration statement covering the resale of the Blue
Cedar shares was not filed or effective by December 31, 2005, we are
required to pay liquidated damages payments of $10,000 per month,
being 0.5% of the aggregate purchase price plus 10% annum interest
until such time as a registration statement covering the resale of
securities sold to Blue Cedar is declared effective by the
Securities and Exchange Commission.
o We will need to raise additional funds immediately to continue our
operations for the period following the first quarter of 2007 and to
fund any of the activities described above. Furthermore, substantial
additional funds will be needed in order to fund our continued
efforts to obtain FDA approval of Psoraxine(R). No assurance can be
given that we will be able to obtain financing on terms that we find
acceptable, 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. Presently, neither our management nor
our bankers have identified new sources of capital. If we do not
obtain additional funds, we could be required to cease operations
and to seek protection under the federal bankruptcy laws.
-26-
Item 7. Financial Statements
The financial statements required by this Item 7 begin at page F-1 of this
annual report.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On August 9, 2006 the Audit Committee of the Board of Directors of
Astralis dismissed LJ Soldinger Associates, LLC ("Soldinger"), the independent
registered public accounting firm for Astralis and retained Malone & Bailey,
P.C, as the independent registered public accounting firm for Astralis.
Soldinger was notified of this decision on August 9, 2006.
The disagreements between Astralis and Soldinger, in each instance having
been discussed and resolved between the Company and Soldinger to Soldinger's
satisfaction prior to the filing of the Company's annual reports on Form 10-KSB
or quarterly reports on Form 10-QSB, were as follows:
1. In connection with the audit of the Astralis 2004 financial statements
Soldinger and members of management informed the audit committee that under SFAS
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144") Astralis was required to recognize an impairment of its technology access
option fee, a finite lived intangible asset. The initial position of Astralis'
audit committee was that no impairment was necessary. Management reviewed,
tested and proved the audit committee's position. Subsequently, the
circumstances of the drug development program changed. In light of these changed
circumstances, management and the audit committee agreed that recognition of an
impairment was necessary and recorded an impairment in the amount of $2,797,612
as of December 31, 2004.
2. In connection with the audit of the Astralis 2005 financial statements,
Soldinger notified Astralis' management that it needed to account for its
obligation for penalties that may result from registration rights agreements
that Astralis had previously entered into with Blue Cedar Limited ("Blue
Cedar"). Management agreed with Soldinger but explained to Soldinger that the
penalty had not been recognized previously because there was a verbal agreement
between Astralis and Blue Cedar's representative to waive the penalty.
Subsequently, when the formal waiver from Blue Cedar was not received, Astralis'
management accounted for these registration rights penalties and determined a
liability value which Astralis recorded in the 2005 financial statements.
Despite management believing that it was in agreement with Soldinger and that
the Company was simply waiting for a written confirmation of a verbal agreement,
Soldinger has written in its letter that it disagreed with Astralis' initial
value of the registration rights penalty it planned to record as of March 31,
2006 and certain of the underlying assumptions used in the calculation.
3. In connection with the audit of the Astralis 2005 financial statements
and Soldinger's SAS 100 review of the Astralis financial statements for first
calendar quarter of 2006, Soldinger identified certain errors in the financial
statements that were not initially identified by Astralis' internal control over
financial reporting. Soldinger communicated these items to the audit committee
and management. Astralis' management maintained that it had effective disclosure
controls and procedures but conceded that internal controls needed to be
improved. Due to, among other things, further discussions among Astralis'
management, audit committee and Soldinger, the filing deadline was missed.
Because the SEC filing was submitted after the filing deadline, management
disclosed in its Form 10-KSB Annual Report and its Form 10-QSB Quarterly Report
for the first quarter of 2006 that Astralis' disclosure controls were
ineffective and that internal controls needed improvement.
-27-
Item 8A. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Based on his evaluation as of the end of the period covered by this Annual
Report on Form 10-KSB, our interim Chief Executive Officer and interim Chief
Financial Officer has concluded that our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act are not
effective to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.
As a result of the audit of our 2006 financial statements by our
independent auditors we have become aware of certain deficiencies that exist in
the design and operation of our internal controls over financial reporting that
our independent auditors consider to be material weaknesses under standards of
the Public Company Accounting Oversight Board (PCAOB).
Our independent auditors identified certain errors in the financial
statements in the current period that were not initially identified by the
Company's internal control over financial reporting. The errors were in the
areas of proper accrual of the registration rights penalty, proper discount and
amortization of the beneficial conversion feature on our convertible notes
payable, accrual of expenses and recognition of option expense. The aggregate
amount of these errors was material to our financial statements and therefore
represents a material weakness in our internal control over financial reporting.
Upon being notified of these errors we corrected the information included in the
financial statements before such statements were filed with the Securities and
Exchange Commission or disclosed publicly to any parties.
Management will review the system of internal controls and take steps to
insure information required to be disclosed by the Company in reports that we
file is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Committee's rules and forms.
(b) Changes in internal controls.
Controls are weakened as a consequence of recent resignations by certain
of our Board members and management team. The Board does not include any members
who are independent or who would otherwise qualify to serve on our Audit
Committee as a financial "expert" as defined by Item 407(d)(5) of Regulation S-B
of the Exchange Act. Additionally, because Dr. O'Daly is the only active
employee left in the Company there are significant changes in controls over
financial administration and protection of Company information. The independent
auditor has concluded that current controls are insufficient to insure
protection of Company assets.
Item 8B. Other Information
None.
-28-
PART III
Item 9. Directors and Executive Officers of the Registrant
Code of Business Conduct and Ethics
We have a Code of Business Conduct and Ethics that applies to all
directors, officers and employees, including our principal executive officer,
principal financial officer and principal accounting officer. You can find our
Code of Business and Ethics on our website by going to the following address:
www.astralisltd.com. We will post any amendments to the Business Code of Conduct
and Ethics as well as any waivers that are required to be disclosed by the rules
of the Securities and Exchange Commission on our website.
Our Board of Directors has adopted Corporate Governance Guidelines and
Charters for the Audit, Compensation and Nominating and Corporate Governance
Committees of the Board of Directors. You can find these documents on our
website by going to the following address: www.astralisltd.com.
You can also obtain a printed copy of any of the materials referred to
above by contacting us at the following address: 75 Passaic Avenue, Fairfield,
New Jersey 07004, Attention: Secretary.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our executive officers and directors and persons who own more than 10% of our
common stock ("Reporting Persons") to file reports of ownership and changes in
ownership of our common stock with the SEC. Reporting Persons are required by
SEC regulations to furnish us with copies of all reports they file pursuant to
Section 16(a).
Based solely on our review of the copies of such forms received or written
representations from Reporting Persons, we believe that with respect to the
fiscal year ended December 31, 2006, all the Reporting Persons complied with all
applicable filing requirements except that Fabien Pictet has failed to file
Forms 4 and Forms 5.
Directors and Executive Officers
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. 65 Chairman of the Board of Directors and Chief
Scientific Officer, interim Chief Executive Officer,
interim Chief Financial Officer
Manuel Tarabay 54 Director
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.
-29-
Jose Antonio O'Daly, M.D., Ph.D. Dr. O'Daly has served as our Chairman of the
Board of Directors since November 2001, and was appointed our Chief Scientific
Officer on December 22, 2004. Since October 2006, Dr. O'Daly has been our
interim CEO and interim CFO. From November 2001 to December 22, 2004, Dr. O'Daly
served as our President of Research and Development. Dr. O'Daly is the sole
founder of the 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 Doctor of Medicine
degree in 1964 and 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 National Academy of
Medicine of Venezuela.
Manuel Tarabay. Mr Tarabay has served as one of our Directors since August 19,
2005. Mr. Tarabay joined the Board in connection with the investment of $2
million by Blue Cedar. He serves as Blue Cedar's representative on the Board in
accordance with the terms of Blue Cedar's investment which closed on August 19,
2005. Mr.Tarabay also acts as financial advisor to several investors who reside
in the Middle East and Europe. During his 25 year career in Finance he has had
various assignments throughout the world with Merrill Lynch, JPMorgan, Bankers
Trust, Donaldson Lufkin Jenrette, and Credit Suisse First Boston. Mr. Tarabay
holds a B. A. Degree.in Mathematics (Computer Sciences) from Dartmouth College;
a M. S. Degree in Computer Electronics Engineering from the Jesuit School of
Engineering in Beirut; and an MBA Degree in Finance from Insead in
Fountainbleau.
Audit Committee
The Audit Committee of our Board of Directors was an "Audit Committee" for
the purposes of Section 3(a)(58) of the Securities Exchange Act of 1934. The
Audit Committee had in the past recommended to the Board of Directors the
independent public accountants to be selected to audit our annual financial
statements, evaluated internal accounting controls, reviewed the adequacy of the
internal audit budget, personnel and plan, and determined that all audits and
exams required by law were performed fully, properly, and in a timely fashion.
Currently, the Company does not have an Audit Committee because there are no
members of the current Board who qualify as a "financial expert" as defined by
Item 407(d)(5) of Regulation S-B of the Exchange Act and who are "independent"
under Item 7(d)(3)(iv) of Schedule 14A, promulgated under the Exchange Act.
Item 10. Executive Compensation.
The following table sets forth certain information regarding compensation
paid by us and our predecessors during the last fiscal year to our Chief
Executive Officer and any other executive officer who received compensation
greater than $100,000 during the last fiscal year.
-30-
Summary Compensation Table
-----------------------------------------------------------------------------------------------------------------------------------
Name and Principal Year Salary Bonus Stock Option Non-Equity Nonqualified All Other Total
Position ($) ($) Awards ($) Awards ($) Incentive Deferred Compen- ($)
Plan Compensation sation ($)
Compensation Earnings
($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
-----------------------------------------------------------------------------------------------------------------------------------
Current
-----------------------------------------------------------------------------------------------------------------------------------
Dr. Jose Antonio O'Daly, 2006 $69,781.25 -- -- -- -- -- -- $69,781.25
Chairman of the Board,
Chief Scientific Officer,
Interim Chief Executive
Officer, Interim Chief
Financial Officer (1)
-----------------------------------------------------------------------------------------------------------------------------------
Former
-----------------------------------------------------------------------------------------------------------------------------------
James Sharpe 2006 $ 19,250 -- -- -- -- -- $50,000(3) $69,250
Former President and
Chief Executive Officer
(2)
-----------------------------------------------------------------------------------------------------------------------------------
Michael Garone (4) 2006 $197,185 -- -- -- -- -- $50,000 $197,185
Former Chief Financial
Officer, Former Interim
Chief Executive Officer
and Former Interim
President
-----------------------------------------------------------------------------------------------------------------------------------
(1) 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.
(2) On January 25, 2006, we accepted the resignation of Mr. Sharpe, effective
December 31, 2005 with respect to his position as a member of our Board of
Directors and with respect to his position as our Chief Executive Officer and
President.
(3) This amount is the separation fee paid to Mr. Sharpe pursuant to the
Separation Agreement and General Release by and between the Company and Mr.
Sharpe.
(4) Mr. Garone became the Chief Financial Officer as of February 21, 2005. As of
January 25, 2006, Mr. Garone was appointed by the Board of Directors to serve as
interim Chief Executive Officer and interim President. On October 6, 2006, Mr.
Garone resigned as Chief Financial Officer, interim Chief Executive Officer and
interim President. Gar-1 Business Advisory Services, an entity owned by Mr.
Garone, was hired as a consultant to provide financial adv ice and various
administrative services to the Company.
-31-
Employment Agreements
On December 22, 2004, we entered into an employment agreement with Dr.
Jose Antonio O'Daly, who is currently the Chairman of our Board of Directors,
our Chief Scientific Officer and our interim CEO and interim CFO. Under the
terms of his employment agreement, Dr. O'Daly is entitled to an annual base
salary of $231,000 payable in arrears in bi-monthly installments, less statutory
deductions (the "Base Salary") and an annual bonus of up to 25% of his Base
Salary and based upon achievement of such goals and subject to such additional
terms as may be determined by the Board of Directors. As a member of our senior
management team, Dr. O'Daly has been granted the option to purchase 728,000
shares of our common stock with an initial exercise price of $0.70 per share.
The options are fully vested and have a term of ten years. In the event of a
voluntary termination for "good reason" or if Dr. O'Daly is terminated following
a change in control or without "cause," he generally will receive, among other
things, the following severance benefits: (a) an amount equal to two times his
annual Base Salary established for the fiscal year in which the date of
termination occurs and (b) an amount equal to two times his annual bonus award
established for the fiscal year in which his date of termination occurs. In the
event of a voluntary termination by Dr. O'Daly without good reason, or if Dr.
O'Daly is terminated by us for cause, he will receive the following severance
benefits: (a) an amount equal to his Base Salary for one year and (b) an amount
equal to one times his annual bonus award established for the fiscal year in
which his date of termination occurs. The employment agreement includes certain
non-competition and confidentiality provisions.
On January 27, 2005, we entered into an employment agreement with James
Sharpe, our former Chief Executive Officer and President, pursuant to which Mr.
Sharpe was entitled to (i) an annual base salary of $231,000 payable in arrears
in bi-monthly installments, less statutory deductions ("Sharpe's Base Salary");
(ii) an annual bonus of up to 25% of Sharpe's Base Salary, based upon
achievement of such goals and subject to such additional terms as were to be
determined by the Board of Directors; and (iii) 100,000 shares of fully vested
common stock issued on Mr. Sharpe's first day of employment. In addition, in
accordance with his employment agreement, Mr. Sharpe had been granted options to
purchase 728,000 shares of common stock, of which options to purchase 182,000
shares had vested at the time of his resignation. Mr. Sharpe resigned from his
positions at the Company, pursuant to the terms of the Separation Agreement,
dated January 25, 2006. Pursuant to the terms of the Separation Agreement, Mr.
Sharpe received a severance payment in the amount of $50,000. In addition, in
accordance with the terms of the Separation Agreement, Mr. Sharpe had been
granted options to purchase 182,000 shares of common stock which vested on
January 27, 2006 at the market price as of such date and additional options to
purchase 182,000 shares of common stock.
On January 25, 2006 the Company's Board of Directors appointed Mr. Garone
to serve as interim Chief Executive Officer and interim President until the
Company's Board of Directors elected a new Chief Executive Officer and President
to replace Mr. Sharpe. Mr. Garone's consultant agreement terminated when, on
October 6, 2006, he resigned as the Company's interim Chief Executive Officer
and Chief Financial Officer. Simultaneously, Gar-1 Business Advisory Services,
an entity wholly owned by Mr. Garone was appointed by the Board as a consultant
and financial advisor to assist in the analysis and development of the Company's
strategic plan. We agreed to indemnify Gar-1 Business Advisory Services against
any claims that may arise as a result of the performance of its duties as our
financial advisor and administrator under the consultant agreement and to
include Mr. Garone, at our cost, as an insured party under our current
directors' and officer' liability insurance policy. The term of the consultant
agreement can be terminated early by Gar-1 Business Advisory Services without
cause upon 10 days written notice or by either party with cause upon 10 days
written notice. The agreement was set to expire on April 6, 2007, but has been
extended until September 20, 2007.
-32-
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, 2006, options
to purchase 1,454,000 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.
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 optionee has any liability
under Section 16(b) (but in no event after the Expiration Date).
-33-
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.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth unexercised options, stock that has not
vested, and equity incentive plan awards for each named executive officer
outstanding as of the end of the Company's fiscal year ending December 31, 2006.
------------------------------------------------------------------------------------------------------------------------------------
Option Awards Stock Awards
------------------------------------------------------------------------------------------------------------------------------------
Name Number Number Equity Option Option Number Market Equity Equity
of of Incentive Exercise Expiration of Shares Value of Incentive Incentive
Securities Securities Plan Price Date or Units Shares or Plan Plan
Underlying Underlying Awards: ($) of Stock Units of Awards: Awards:
Unexercised Unexercised Number That Have Stock Number Market or
Options Options of Not That Have of Payout
(#) (#) Securities Vested Not Unearned Value
Exercisable Unexercisable Underlying (#) Vested Shares, of
Unexercised ($) Units or Unearned
Unearned Other Shares,
Options Rights Units or
(#) That Have Other
Not Rights
Vested That Have
(#) Not
Vested
($)
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
------------------------------------------------------------------------------------------------------------------------------------
Current
------------------------------------------------------------------------------------------------------------------------------------
Dr. Jose Antonio 728,000 -- -- $.70 12/10/04 -- -- -- --
O'Daly,
Chairman of the Board
of Directors, Chief
Scientific Officer,
Interim Chief
Executive Officer,
and Interim Chief
Financial Officer
------------------------------------------------------------------------------------------------------------------------------------
Former
------------------------------------------------------------------------------------------------------------------------------------
James Sharpe 364,000 -- -- $.03 - 1/27/11, -- -- -- --
Former President and $.70 2/15/15
Chief Executive
Officer
------------------------------------------------------------------------------------------------------------------------------------
Michael Garone -- -- -- -- -- -- -- -- --
Former Chief
Financial Officer,
Former Interim Chief
Executive Officer and
Former Interim
President
------------------------------------------------------------------------------------------------------------------------------------
-34-
Board Composition
Since December 2005 eight of the Company's ten directors have resigned. We
currently have two directors, each serving a term until the next annual meeting
of stockholders. Because the Company has not been able to attract new directors
to replace those who resigned, the Company is not in compliance with its bylaws
nor with the terms of the Blue Cedar Stockholder's Agreement. In addition,
neither of the two remaining directors are independent.
Pursuant to the Blue Cedar Stockholder's Agreement, our Board of Directors
is required to be comprised of at least eight directors and Blue Cedar may
designate one director to our Board of Directors. Manuel Tarabay is Blue Cedar's
initial and current designated director. The Blue Cedar Stockholder's Agreement
will terminate upon the later of the Blue Cedar Termination Date or August 15,
2008. The "Blue Cedar Termination Date" is the date on which Blue Cedar no
longer beneficially owns, in the aggregate, at least 20% of the outstanding
common stock of the Company.
The Amended SkyePharma Stockholders' Agreement gave SkyePharma the right
to nominate one director and to require that the Board contain at least two
independent directors. The Amended SkyePharma Stockholders' Agreement terminated
on January 20, 2007.
Compensation of Directors
The following table sets forth the compensation of our directors for the
Company's fiscal year ending December 31, 2006.
DIRECTOR COMPENSATION
-----------------------------------------------------------------------------------------------------------------------------------
Name Fees Stock Option Non-Equity Nonqualified All Other Total
Earned Awards Awards Incentive Plan Deferred Compensation ($)
or ($) ($) Compensation Compensation ($)
Paid in ($) Earnings
Cash
($)
(a) (b) (c) (d) (e) (f) (g) (h)
-----------------------------------------------------------------------------------------------------------------------------------
Current
-----------------------------------------------------------------------------------------------------------------------------------
Manuel Tarabay -- -- -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
Former
-----------------------------------------------------------------------------------------------------------------------------------
Michael Ashton -- -- -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
Samuel T. Barnett 14,600 -- -- -- -- -- 14,600
-----------------------------------------------------------------------------------------------------------------------------------
Fabian Pictet
-----------------------------------------------------------------------------------------------------------------------------------
Steve Fulda 1,000 -- -- -- -- -- 1,000
-----------------------------------------------------------------------------------------------------------------------------------
Gordon L. Schooley,
Ph.D. -- -- -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
-35-
We reimburse all outside directors for travel and lodging expenses related
to scheduled board meetings. Our Board of Directors authorized the following
payments for non-executive, independent directors during the fiscal year-ended
December 31, 2006: $1,000 for each board meeting attended in person and $400 for
each meeting attended by teleconference; an annual retainer of $4,000 paid to
the Chairman of the Audit Committee; $1,000 paid to each Audit Committee member
per financial filing; an annual retainer of $2,500 paid to the Chairman of the
Compensation Committee; an annual retainer of $1,500 paid to each Compensation
Committee member, other than the Chairman; an annual retainer of $3,000 paid to
the Chairman of the Strategic Planning Committee; an annual retainer of $1,000
paid to each Strategic Planning Committee member, other than the Chairman; and
$1,000 paid to each Strategic Planning Committee member for each half-day
strategic planning meeting attended in person. In addition, each non-executive
Director will receive a one-time grant upon election to the Board of stock
options to purchase 50,000 shares of our common stock, vesting over a four-year
period with the first 25% vesting on the date of grant, and an annual grant upon
the anniversary of election to the Board of stock options to purchase 20,000
shares of our common stock, vesting over a four-year period with the first 25%
vesting on the date of grant. Other than the foregoing, our directors do not
receive compensation pursuant to any standard arrangement for their services as
directors.
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.
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 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table sets forth the names and beneficial ownership of our
common stock owned as of March 31, 2007, 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.
-36-
Name and Address Number of Shares of Common Stock Percentage of Common Stock Owned
Beneficially
Owned (1)
Dr. Jose Antonio O'Daly (2) (3) 14,368,000 15.6%
Manuel Tarabay (4) 880,500 *
Blue Cedar (5)
P.O. Box 546
28-30 The Parade
St. Helier, Jersey JE4 8X9 54,040,404 42.4%
Channel Islands, United Kingdom
SkyePharma (3) (6)
105 Piccadilly
London W1J 7NJ
England 36,413,900 39.8%
All Officers and Directors 105,702,804 81.42%
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
91,454,873 shares of our common stock outstanding as of March 31, 2007.
(2) Includes 13,640,000 shares of common stock and vested options to purchase
728,000 shares of common stock.
(3) Under the terms of Amended SkyePhama Stockholders' Agreement dated as of
January 20, 2004 by and among us, SkyePharma, Dr. O'Daly and our other original
shareholders, the parties agreed to vote all shares held by such parties for (i)
one director designated by SkyePharma, (ii) one director designated by Dr.
O'Daly, (iii) one director designated by each of the other three original
shareholders and (iv) two independent directors. No party to the agreement had
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. Since
the date of such agreement, the other three original shareholders resigned their
positions with us and transferred all of their shares of common stock to
SkyePharma. As a result, none of them have any rights to designate a director
under the Agreement. The Amended SkyePharma Stockholders' Agreement expired on
January 20, 2007.
-37-
(4) Includes 796,000 shares of common stock, warrants to purchase 72,000 shares
of common stock within 60 days of March 31, 2007 and options to purchases 12,500
shares of common stock within 60 days of March 31, 2007. Mr. Tarabay is the Blue
Cedar designee to the Board of Directors but disclaims beneficial ownership of
shares owed by Blue Cedar.
(5) Includes 18,181,818 shares of common stock owned by Blue Cedar and (i)
warrants to purchase 18,181,818 shares of common stock for a period of five
years and (ii) warrants to purchase 12,121,212 shares of common stock for a
period of twelve months. The warrants may be exercised as of August 17, 2005.
Includes a promissory note that is convertible into 2,777,778 common stock and
warrants to purchase 2,777,778 common stock for a period of five years.
(6) Includes 36,393,900 shares of common stock and warrants to purchase 20,000
shares of common stock that are exercisable within 60 days of March 31, 2007.
Item 12. Certain Relationships and Related Transactions
Relationship with Dr. Jose Antonio O'Daly
In January 2004 the PTO issued a patent to Dr. Jose Antonio O'Daly for the
"Compositions and Methods for the Treatment and Clinical Remission of Psoriasis"
(the "Psoriasis Formula"). 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, a company owned by Dr. O'Daly, also filed an
application to obtain patent protection internationally for the Psoriasis
Formula 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 primarily on the mechanism of action of our initial injectable product
candidate, Psoraxine(R), expanding the claims to include medical indications
other than psoriasis, such as Atopic Dermatitis, Psoriatic Arthritis and
Rheumatoid Arthritis. 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 these patent
applications.
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 the Omnibus Conversion Agreement dated
January 12, 2004 between us and SkyePharma, SkyePharma converted all of its
2,000,000 shares of Series A Preferred Stock into 25,000,000 shares of our
common stock at a conversion price of $0.80 per share. On March 3, 2005,
SkyePharma acquired 11,160,000 additional shares of our common stock in a
privately negotiated transaction.
-38-
On January 20, 2004, we, SkyePharma, Dr. O'Daly and our other original
shareholders entered into the Amended SkyePharma Stockholders' Agreement.
Pursuant to the Amended SkyePharma Stockholders' Agreement, our Board of
Directors was required to be comprised of at least seven Directors and at least
two independent Directors. Per the Amended SkyePharma Stockholders' Agreement,
SkyePharma had the right to nominate one Director. There is currently no
director nominated by SkyePharma. The Amended SkyePharma Stockholders' Agreement
terminated on January 20, 2007. Pursuant to the Amended SkyePharma Stockholders'
Agreement, SkyePharma was 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 included (i) the amendment of our certificate of incorporation
solely to increase our 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 or all or substantially all of our assets, or our merger with
another entity, provided that SkyePharma would receive the same consideration
for its shares as other holders of common stock and would be able to participate
in the sale or merger on the same terms as the most favorable terms available to
any of our other stockholders and the total consideration for the transaction
was greater than $135 million. As indicated above, the Amended SkyePharma
Stockholders' Agreement has expired.
We also entered into two agreements concerning the formulation and
development of Psoraxine(R) with SkyePharma. Under the terms of the Technology
Access Option Agreement, dated December 10, 2001, we paid to SkyePharma a $5.0
million technology access fee for the option to acquire a license for certain
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, unless terminated sooner pursuant to the terms of the
Technology Access Option Agreement. Pursuant to the Technology Access Option
Agreement, SkyePharma also has the right of first negotiation to acquire the
worldwide marketing rights to Psoraxine(R).
Relationship with Blue Cedar and Lipworth Capital Limited
On March 31, 2006, the Company closed a private placement of securities
from which it received proceeds of $250,000. In connection with such private
placement, the Company issued to Blue Cedar Limited, an accredited investor and
currently a stockholder of the Company, (i) a convertible promissory note in the
principal amount of $250,000, convertible into shares of the Company's Common
Stock at $0.09 per share, and (ii) a warrant to purchase 2,777,778 shares of
Common Stock. Lipworth Capital Limited acted as the placement agent in
connection with this private placement. The securities offered and sold in this
private placement were sold in reliance on an exemption from the registration
requirements under Regulation D of the Securities Act of 1933.
Additionally, on August 19, 2005, we completed a private placement of
securities from which we received gross proceeds of approximately $2,000,000.
The transaction consisted of the sale to one accredited investor, Blue Cedar, of
units consisting of: (i) 18,181,818 shares of common stock, (ii) warrants to
purchase over a 5-year period 18,181,818 shares of common stock with an exercise
price of $0.165 and (iii) warrants to purchase over a 12-month period 12,121,212
shares of common stock with an exercise price of $0.165. We relied upon the
exemption from registration provided under Section 4(2) of the Securities Act
and Rule 506 of Regulation D promulgated thereunder. The private placement was
only made available to one "accredited investor" as defined in Rule 501 of
Regulation D. Lipworth Capital Limited acted as our placement agent in
connection with the private placement. We paid an 8% fee to our placement agent
and issued warrants to purchase 1,454,545 shares of common stock with an
exercise price of $0.165, in connection with the financing in addition to other
-39-
costs. Additionally, we granted Blue Cedar certain registration rights pursuant
to a registration rights agreement, dated as of August 17, 2005, in connection
with this transaction. The registration rights agreement required us to file a
registration statement within approximately 30 days of the final closing of our
private placement covering the resale of all shares included therein, as well as
the shares underlying the warrants. Because a registration statement covering
the resale of such shares was not filed or effective by December 31, 2005, the
date specified in the agreement, we are subject to liquidated damages of $10,000
per month, being 0.5% of the aggregate purchase price plus 10% interest per
annum to be paid on unpaid penalty amounts until such time as a registration
statement covering the resale of securities sold to Blue Cedar is declared
effective by the Securities and Exchange Commission.
Concurrently with the closing of the private placement, we and Blue Cedar
entered into the Blue Cedar Stockholder's Agreement. Pursuant to the Blue Cedar
Stockholder's Agreement, our Board of Directors is required to be comprised of
at least eight directors and Blue Cedar may designate one director to the Board
of Directors of the Company. Manuel Tarabay is Blue Cedar's initial and current
designated director. Further, pursuant to the Blue Cedar Stockholder's
Agreement, we agreed not to enter into any service agreement, distribution
arrangement or transfer of personnel with any of our stockholders owning more
than 10% of the outstanding shares of common stock until we complete Phase II
clinical trials of Psoraxine(R), without the prior written consent of Blue
Cedar, which shall not be unreasonably withheld. Additionally, for a period of
two years following the closing date of the private placement, we granted Blue
Cedar certain pre-emptive rights, allowing Blue Cedar to participate in
substantially all sales of securities. The Blue Cedar Stockholder's Agreement
will terminate upon the later of the Blue Cedar Termination Date or August 15,
2008. The "Blue Cedar Termination Date" is the date on which Blue Cedar no
longer beneficially owns, in the aggregate, at least 20% of our outstanding
common stock.
Item 13. Exhibits
Exhibit Number Description
-------------- -----------
3.1 (1) Certificate of Incorporation of Astralis Ltd.
3.2 (2) Bylaws of Astralis Ltd.
4.1 (9) Specimen Stock Certificate
10.1 (2) Agreement and Plan of Merger
10.2 (4) Contribution Agreement dated September 10, 2001
10.3 (5) Purchase Agreement dated December 10, 2001
10.4 (5) Stockholder Agreement dated December 10, 2001
10.5 (7) 2001 Stock Option Plan
10.6 (3) Sub-Lease Agreement
10.7 (3) License Agreement dated April 26, 2001 between Dr. Jose
Antonio O'Daly and Astralis LLC
10.8 (3) Assignment of License
10.9 (3) Form of Warrant
10.10 (8) Agreement for Services dated December 10, 2001 between
SkyePharma Inc. and Astralis Ltd.
10.11 (8) Technology Access Option Agreement dated December 10, 2001 by
and among SkyePharma Inc., SkyePharma Holding AG and Astralis
Ltd.
10.12 (6) Employment Agreement dated December 10, 2001, between Dr. Jose
Antonio O'Daly and Astralis Ltd.
10.13 (6) Amendment #1 to Agreement for Services dated March 18, 2003
between SkyePharma Inc. and Astralis Ltd.
-40-
10.14 (7) Omnibus Conversion Agreement dated January 12, 2004 between
Astralis Ltd. and SkyePharma PLC
10.15 (7) Call Option Agreement dated January 20, 2004 between Astralis
Ltd. and SkyePharma PLC
10.16 (7) Amendment No. 1 to Stockholders Agreement dated January 20,
2004 by and among Astralis Ltd., SkyePharma PLC, Dr. Jose
Antonio O'Daly, Mike Ajnsztajn, Gaston Liebhaber and Gina
Tedesco
10.17 (11) Securities Purchase Agreement, dated August 17, 2005, by and
between Astralis Ltd. and Blue Cedar Limited.
10.18 (11) Registration Rights Agreement, dated August 17, 2005, by and
between Astralis Ltd. and Blue Cedar Limited.
10.19 (11) Stockholder's Agreement, dated August 17, 2005, by and between
Astralis Ltd. and Blue Cedar Limited.
10.20 (11) Long-term Common Stock Purchase Warrant, issued to Blue Cedar
Limited by Astralis Ltd.
10.21 (11) Short-term Common Stock Purchase Warrant, issued to Blue Cedar
Limited by Astralis Ltd.
10.22 (11) Long-term Common Stock Purchase Warrant, issued to Lipworth
Capital Limited by Astralis Ltd.
10.23 (12) Separation Agreement and General Release, dated January 25, by
and between James Sharpe and the Registrant.
10.24 (13) Form of Subscription Agreement, dated March 31, 2006, by and
between Astralis Ltd. and Blue Cedar Limited.
10.25 (13) Form of Warrant, dated March 31, 2006, issued to Blue Cedar
Limited by Astralis Ltd.
10.26 (13) Form of Convertible Promissory Note in the principal amount of
$250,000, dated March 31, 2006, issued to Blue Cedar Limited
by Astralis Ltd.
10.27(14) Form of Subscription Agreement dated June 15, 2006 by and
between Astralis Ltd. And Manuel Tarabay
10.28(14) Form of Warrant dated June 15, 2006 issued to Manuel Tarabay
by Astralis Ltd.
10.29(14) Form of Convertible Promissory Note dated June 15, 2006 issued
to Manuel Tarabay by Astralis Ltd.
10.30(14) Form of Subscription Agreement used in the Registrant's August
2006 private placement
10.31(14) Form of Warrant used in the Registrant's August 2006 private
placement.
10.32(14) Form of Convertible Promissory Note used in the Registrant's
August 2006 private placement.
10.33(16) Consultant Agreement dated October 6, 2006 between Astralis
Ltd. And Gar-1 Business Advisory Services.
14.1 (1) Code of Ethics for Chief Executive Officer and Senior
Financial Officers
16.1(15) Letter dated August 22, 2006 of LJ Soldinger Associates LLC to
the Securities and Exchange Commission.
31.1 Certification by the Interim Chief Executive Officer and the
Interim Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
----------
(1) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Annual Report on Form 10-KSB on March 30, 2004.
-41-
(2) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Preliminary Proxy Statement for Astralis Pharmaceuticals Ltd. on November
16, 2001.
(3) 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.
(4) 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.
(5) 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.
(6) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Annual Report on Form 10-KSB on March 31, 2003.
(7) 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.
(8) 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.
(9) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registration Statement on Form SB-2 for Astralis Ltd. on May 28, 2004.
(10) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registration Statement on Form SB-2 for Astralis Ltd. on June 28, 2004.
(11) Previously filed with the Securities and Exchange Commission as an Exhibit
on Form 10-QSB on August 19, 2005.
(12) Previously filed with the Securities and Exchange Commission as an Exhibit
on Form 8-K on March 30, 2006.
(13) Previously filed with the Securities and Exchange Commission as an Exhibit
on Form 8-K on April 6, 2006.
(14) Previously filed with the Securities and Exchange Commission as an Exhibit
on Form 10-QSB on August 21, 2006.
(15) Previously filed with the Securities and Exchange Commission as an Exhibit
on Form 8-K on September 6, 2006.
(16) Previously filed with the Securities and Exchange Commission as an Exhibit
on Form 8-K on October 10, 2006.
Item 14. Principal Accountant Fees and Services
The following is with respect to fees billed for professional services
rendered by LJ Soldinger Associates, LLC, our independent auditors for 2005, and
Malone & Bailey, P.C., our independent auditors for 2006.
-42-
Audit-Fees
The aggregate fees due to LJ Soldinger Associates, LLC and Malone &
Bailey, P.C. for professional services in connection with the audit of our
annual financial statements, and the reviews of our quarterly financial
statements and audit services provided in connection with regulatory filings,
were approximately $100,000 and $128,000 for 2006 and 2005, respectively. Of
such aggregate fees, the fees due to LJ Soldinger Associates, LLC were $72,000
and $112,000 for 2006 and 2005, respectively, while the fees due to Malone &
Bailey, P.C were $28,000 and $16,000, respectively.
Audit-Related Fees
There were no fees billed for assurance and related services in connection
with securities registration and related matters in 2006 or 2005.
Tax Fees
There were no tax related services provided by our independent auditors in
2006 or 2005.
All Other Fees
There were no other services provided by our independent auditors in 2006
or 2005.
Pre-Approval of Audit and Permissible Non-Audit Services
During 2006 and until March 7, 2007, the Audit Committee pre-approved all
audit and permissible non-audit services provided by the independent auditors.
These services may include audit services, audit-related services, tax services
and other services. The Audit Committee had adopted a policy for the
pre-approval of services provided by the independent auditors. Under the policy,
pre-approval is generally provided for up to one year and any pre-approval is
detailed as to the particular service or category of services. In addition, the
Audit Committee may pre-approve particular services on a case-by-case basis. All
audit and permissible non-audit services provided by L J Soldinger Associates
LLC or by Malone and Bailey, PC to us for 2006 and 2005 were approved by the
Audit Committee. On March 7, 2007 the last independent member of the Board of
Directors resigned and the Audit Committee ceased to exist.
-43-
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ASTRALIS LTD
By: /s/ Jose Antonio O'Daly, M.D. April 17, 2007
---------------------------------------------------------
Jose Antonio O'Daly, M.D. Date
Chairman of the Board, Chief Scientific Officer, Interim
Chief Executive Officer and Interim Chief Financial
Officer (Principal Executive Officer)
Pursuant to the requirements the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ Jose Antonio O'Daly, M.D. April 17, 2007
---------------------------------------------------------
Jose Antonio O'Daly, M.D. Date
Chairman of the Board, Chief Scientific Officer, Interim
Chief Executive Officer and Interim Chief Financial
Officer (Principal Executive Officer)
By: /s/ Manuel Tarabay April 17, 2007
---------------------------------------------------------
Manuel Tarabay Date
Director
-44-
Astralis, Ltd.
(A Development Stage Entity)
INDEX TO THE FINANCIAL STATEMENTS
Page
----
Accountants' Report F2
Balance Sheet F3
Statements of Expenses F4
Statements of Stockholders' Equity (Deficit) F5
Statements of Cash Flows F11
Notes to Financial Statements F12
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Astralis, Ltd.
(a development stage company)
Fairfield, New Jersey
We have audited the accompanying balance sheet of Astralis, Ltd. as of December
31, 2006 and the related statements of expenses, stockholders' equity (deficit),
and cash flows for the two years ended December 31, 2006 and the period from
March 12, 2001 (inception) through December 31, 2006. These financial statements
are the responsibility of Astralis's management. Our responsibility is to
express an opinion on these financial statements based on our audit. The
financial statements for the period inception through December 31, 2004, were
audited by other auditors whose reports expressed unqualified opinions on those
statements. The financial statements for the period from inception through
December 31, 2004, include total revenues and net loss of $0 and $49,702,357,
respectively. Our opinion on the statements of expenses, stockholders' equity
(deficit), and cash flows for the period from inception through December 31,
2006, insofar as it relates to amounts for prior periods through December 31,
2004, is based solely on the report of other auditors.
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 audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide 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, 2006 and the results of operations and cash flows for the two years ended
December 31, 2006 and the period from inception through December 31, 2006, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming that Astralis,
Ltd. will continue as a going concern. As discussed in Note 3 to the financial
statements, Astralis, Ltd. suffered recurring losses from operations and has a
working capital deficiency, which raises substantial doubt about its ability to
continue as a going concern. Management's plans regarding those matters also are
described in Note 3. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Malone and Bailey, PC
www.malone-bailey.com
Houston, Texas
April 13, 2007
F-2
Astralis, LTD
(A Development Stage Entity)
BALANCE SHEET
ASSETS
December 31,
2006
------------
Current Assets
Cash and cash equivalents $ 211,495
Prepaid expenses 101,650
Total Current Assets 313,145
------------
Property and equipment - net of $88,173
accumulated depreciation 5,752
Deposits 5,000
------------
Total assets $ 323,897
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable and accrued expenses $ 313,762
Note payable advance, pending loan negotiations 150,000
------------
Total Current Liabilities 463,762
Long-Term Liabilities
Long-Term convertible debenture - net of
$357,050 of unamortized discounts 70,430
------------
Total Liabilities 534,192
------------
Stockholders' Deficit
Preferred stock, $0.001 par value; 2,000,000 shares
authorized; none issued and outstanding --
Common stock, $0.0001 par value; 150,000,000 shares
authorized; 91,454,873 shares issued and outstanding 9,145
Additional paid-in capital 32,157,772
Deficit accumulated in the development stage (32,377,212)
------------
Total Stockholders' Deficit (210,295)
------------
$ 323,897
============
See the accompanying notes to financial statements
F-3
Astralis, LTD
(A Development Stage Entity)
STATEMENTS OF EXPENSES
March 12, 2001
Year Ended December 31, (Inception) to
----------------------------- December 31,
2006 2005 2006
------------ ------------ --------------
Operating Expenses
Research and development - related party $ -- $ -- $ 16,278,822
Research and development 473,150 2,395,545 6,520,311
Depreciation and amortization (non
research and development) 9,327 25,345 107,696
Impairment of intangibles -- 114,976 2,912,588
Realized loss on asset exchange 28,957 -- 28,957
General and administrative 866,357 1,630,279 7,874,799
------------ ------------ ------------
Total Operating Expenses 1,377,791 4,166,145 33,723,173
------------ ------------ ------------
Other (income) expense
Investment income (5,325) (30,372) (215,521)
Registration rights penalty 42,656 83,000 125,656
Other income - sale of state tax credits (466,168) (306,921) (1,288,186)
Interest expense 30,492 2,307 32,090
------------ ------------ ------------
Total Other Expense (Income) (398,345) (251,986) (1,345,961)
------------ ------------ ------------
Net Loss (979,446) (3,914,159) (32,377,212)
Preferred Stock Dividends -- -- (22,218,750)
------------ ------------ ------------
Net Loss to Common Stockholders $ (979,446) $ (3,914,159) $(54,595,962)
============ ============ ============
Basic and Diluted Loss per Common Share $ (0.01) $ (0.05) $ (0.93)
============ ============ ============
Basic and Diluted Weighted Average
Common Shares Outstanding 91,454,873 79,985,782 58,709,799
============ ============ ============
See the accompanying notes to financial statements
F-4
ASTRALIS LTD.
(A Development Stage Entity)
Statements of Stockholders' Equity (Deficit)
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
Discount on preferred stock due to
beneficial conversion feature -- -- -- -- (2,120,000)
Preferred stock deemed 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 -- -- -- -- --
COMPREHENSIVE LOSS
Net loss -- -- -- -- --
Total Comprehensive Loss
Balance, December 31, 2001 1,000,000 $ 1,000 37,588,179 $ 3,759 $ 14,893,223
------------ ------------ ------------ ------------ ------------
See the accompanying notes to financial statements
F-5
ASTRALIS LTD.
(A Development Stage Entity)
Statements of Stockholders' Equity (Deficit)
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, 3/15/2001 (33,183) -- -- -- --
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
Discount on preferred stock due to
beneficial conversion feature -- -- -- -- (2,120,000)
Preferred stock deemed 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 -- 132,750 -- -- 132,750
COMPREHENSIVE LOSS
Net loss -- -- -- (4,075,364) (4,075,364) (4,075,364)
Total Comprehensive Loss $ (4,075,364)
============
Balance, December 31, 2001
$(1,350,000) $ (398,250) $ -- $(4,075,364) $ 9,074,368
----------- ----------- ----------- ----------- ------------
See the accompanying notes to financial statements
F-6
ASTRALIS LTD.
(A Development Stage Entity)
Statements of Stockholders' Equity (Deficit)
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 $ 14,893,223
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
Discount on preferred stock due to
beneficial conversion feature -- -- -- -- (270,000)
Preferred stock deemed dividend, 4/30/2002 -- -- -- -- 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
Discount on preferred stock due to
beneficial conversion feature -- -- -- -- (9,078,750)
Preferred stock deemed 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 $ 21,960,646
============ ============ ============ ============ ============
See the accompanying notes to financial statements
F-7
ASTRALIS LTD.
(A Development Stage Entity)
Statements of Stockholders' Equity (Deficit)
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) $ -- $ (4,075,364) $ 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
Discount on preferred stock due to
beneficial conversion feature -- -- -- -- (270,000)
Preferred stock deemed dividend,
4/30/2002 -- -- -- -- 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) -- -- --
Discount on preferred stock due to
beneficial conversion feature -- -- -- -- (9,078,750)
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) $(13,115,612) $ 7,938,193
============ ============ ============ ============ ============
See the accompanying notes to financial statements
F-8
ASTRALIS LTD.
(A Development Stage Entity)
Statements of Stockholders' Equity (Deficit)
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 $ 21,960,646
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 $ 24,461,114
============ ============ ============ ============ ============
See the accompanying notes to financial statements
F-9
ASTRALIS LTD.
(A Development Stage Entity)
Statements of Stockholders' Equity (Deficit)
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) $(13,115,612) $ 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) $(18,196,039) $ 6,214,309
============ ============ ============ ============ ============
See the accompanying notes to financial statements
F-10
ASTRALIS LTD.
(A Development Stage Entity)
Statements of Stockholders' Equity (Deficit)
Preferred Stock Common Stock Additional
----------------------------- ---------------------------- Paid-In
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------
Balances Brought Forward 2,000,000 $ 2,000 37,538,189 $ 3,754 $ 24,461,114
Common stock issue, net of issuance
costs, Jan -Feb 2004 at $2.00 per share -- -- 10,459,866 1,046 4,953,147
Collection of subscription receivable -- -- -- -- --
Conversion of Preferred Stock, Series A (2,000,000) (2,000) 25,000,000 2,500 (500)
Discount related to induced conversion
of preferred stock -- -- -- -- (10,750,000)
Preferred stock deemed dividend -- -- -- -- 10,750,000
Common stock issued,
in lieu of payment for services -- -- 150,000 15 74,985
Call option assigned, -- -- -- -- 376,507
in lieu of payment for services
Amortization of deferred compensation -- -- -- -- --
Fair value adjustment on deferred
compensation -- -- -- -- --
Stock options exercised -- -- 25,000 2 11,248
COMPREHENSIVE LOSS
Net loss -- -- -- -- --
Other comprehensive loss:
Unrealized gain (loss) on
available-for-sale securities -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total Comprehensive Loss
Balance, December 31, 2004 -- $ 1- 73,173,055 $ 7,317 $ 29,876,501
============ ============ ============ ============ ============
See the accompanying notes to financial statements
F-11
ASTRALIS LTD.
(A Development Stage Entity)
Statements of Stockholders' Equity (Deficit)
Deficit
Accumulated Accumulated
Other During the Total
Subscription Deferred Comprehensive Development Comprehensive
Receivable Compensation Loss Stage Total Loss
------------ ------------ ------------- ------------ ------------ -------------
Balances Brought Forward $ (24,000) $ (4,823) $ (27,698) $(18,196,039) $ 6,214,308
Common stock issue, net of issuance
costs, Jan -Feb 2004 at $2.00 per
share -- -- -- -- 4,954,193
Collection of subscription
receivable, 24,000 -- -- -- 24,000
Conversion of Preferred Stock,
Series A -- -- -- -- --
Discount related to induced
conversion of preferred stock -- -- -- -- (10,750,000)
Preferred stock deemed dividend -- -- -- -- 10,750,000
Common stock issued,
in lieu of payment for services -- -- -- -- 75,000
Call option assigned, -- -- -- -- 376,507
in lieu of payment for services
Amortization of deferred compensation -- 4,823 -- -- 4,823
Fair value adjustment on deferred
compensation -- -- -- -- --
Stock options exercised -- -- -- -- 11,250
COMPREHENSIVE LOSS
Net loss -- -- -- (9,287,568) (9,287,568) (9,287,568)
Other comprehensive loss:
Unrealized gain (loss) on
available-for-sale securities, net -- -- 27,698 -- 27,698 27,698
------------ ------------ ------------ ------------ ------------ ------------
Total Comprehensive Loss $ (9,259,870)
============
Balance, December 31, 2004 $ -- $ -- $ -- $(27,483,607) $ 2,400,211
============ ============ ============ ============ ============
See the accompanying notes to financial statements
F-12
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 -- $ -- $73,173,055 $ 7,317 $29,876,501
Common stock issued,
in lieu of payment for services -
officer at $0.65 per share -- -- 100,000 10 64,990
Common stock issue, net of issuance
costs, August 2005 at $0.11 per
share -- -- 18,181,818 1,818 1,828,182
COMPREHENSIVE LOSS
Net loss -- -- -- -- --
Other comprehensive loss:
Unrealized gain (loss) on
available-for-sale
Securities. net -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total Comprehensive Loss
Balance, December 31, 2005 -- $ -- 91,454,873 $ 9,145 $31,769,673
=========== =========== =========== =========== ===========
Discount on convertible debenture -- -- -- -- 367,080
Option compensation -- -- -- -- 21,019
COMPREHENSIVE LOSS
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total Comprehensive Loss
Balance, December 31, 2006 -- $ -- 91,454,873 $ 9,145 $32,157,772
=========== =========== =========== =========== ===========
See the accompanying notes to financial statements
F-13
ASTRALIS LTD.
(A Development Stage Entity)
Statements of Stockholders' Equity (Deficit)
Deficit
Accumulated Accumulated
Other During the Total
Subscription Deferred Comprehensive Development Comprehensive
Receivable Compensation Loss Stage Total Loss
------------ ------------ ------------- ------------ ------------ -------------
Balances Brought Forward $ -- $ -- $ -- $(27,483,607) $ 2,400,211
Common stock issued,
in lieu of payment for services
at $0.65 per share -- -- -- -- 65,000
Common stock issue, net of issuance
costs, August 2005 at $0.11 per
share -- -- -- -- 1,830,000
COMPREHENSIVE LOSS
Net loss -- -- -- (3,914,159) (3,914,159) $ (3,914,159)
Other comprehensive loss:
Unrealized gain (loss) on
available-for-sale
securities, net -- -- -- -- -- --
----------- ------------ ------------ ------------ ------------ ------------
Total Comprehensive Loss $ (3,914,159)
============
Balance, December 31, 2005 $ -- $ -- $ -- $(31,397,766) $ 381,052
=========== ============ ============ ============ ============
Discount on convertible debenture -- -- -- -- 367,080 --
Option compensation -- -- -- -- 21,019 --
COMPREHENSIVE LOSS
Net loss -- -- -- (979,446) (979,446) (979,446)
----------- ------------ ------------ ------------ ------------ ------------
Total Comprehensive Loss $ (979,446)
============
Balance, December 31, 2006 $ -- $ -- $ -- $(32,377,212) $ (210,295)
=========== ============ ============ ============ ============
See the accompanying notes to financial statements
F-14
ASTRALIS LTD.
(A Development Stage Entity)
Statements of Cash Flows
Year Ended December 31, March 12, 2001
----------------------------- (Inception) to
2006 2005 December 31, 2006
-------------------------------------------------
Cash Flows from Operating Activities
Net loss $ (979,446) $ (3,914,159) $(32,377,212)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization 51,973 122,282 2,738,706
Impairment of intangible assets -- 114,976 2,912,588
Members' contributed salaries -- -- 12,986
Research and development service fee netted against proceeds
received from preferred stock issuance -- -- 5,015,000
Amortization of deferred compensation 21,018 -- 218,507
Compensatory common stock 65,000 310,999
----------------------------------------------
Assignment of call option -- -- 376,507
Amortization of note discount 10,031 -- 10,031
Loss on assets swapped for rent 28,957 -- 28,957
Loss on sale of available-for-sale securities -- -- 213,588
Changes in assets and liabilities
Prepaid expenses 9,355 6,688
(54,850)
Supplies -- 23,743 (32,108)
Accounts payable and accrued expenses (158,884) 100,674 8,952
----------------------------------------------
Net Cash Used in Operating Activities (1,016,996) (3,480,796) (20,617,349)
----------------------------------------------
Cash Flows from Investing Activities
Purchases of available-for-sale securities -- -- (14,057,504)
Proceeds from sale of available-for-sale securities -- -- 13,843,916
Expenditures related to patent -- (4,113) (134,222)
Purchase of technology option -- -- (5,000,000)
Insurance proceeds from claim -- -- 4,113
Deposits 20,000 1,763 (5,000)
Purchases of property and equipment -- (2,453) (570,584)
----------------------------------------------
Net Cash Provided by (Used in) Investing Activities 20,000 (4,803) (5,919,281)
----------------------------------------------
Cash Flows from Financing Activities
Proceeds from convertible debt 427,480 -- 427,480
Borrowings on debt 22,349 57,700 108,329
Principal payments on debt (24,806) (81,034) (105,840)
Repurchase of common stock -- -- (80,000)
Proceeds from loan advance 150,000 -- 150,000
Issuance of common stock, net of offering and transaction costs -- 1,830,000 11,333,263
Issuance of preferred stock -- -- 14,914,893
----------------------------------------------
Net Cash Provided by Financing Activities 575,023 1,806,666 26,748,125
----------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (421,973) (1,678,933) 211,495
Cash and Cash Equivalents, Beginning of Period 633,468 2,312,401 --
----------------------------------------------
Cash and Cash Equivalents, End of Period $ 211,495 $ 633,468 $ 211,495
==============================================
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for
Interest 2,729 2,307 5,272
Income taxes -- -- --
Schedule of non-cash investing and financing activities
Discount on convertible debt 367,081 -- 367,081
Net liabilities received in Hercules merger -- -- 302,320
See the accompanying notes to financial statements
F-15
Astralis, Ltd.
(A Development Stage Entity)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS
Nature of Operations
Astralis, Ltd. is an emerging stage biotechnology company, based in New Jersey
and incorporated in Delaware, which primarily engages in research and
development of treatments for immune system disorders and skin diseases. Since
August 2006, Astralis has been trying to raise funding to continue drug
development activities. Unfortunately, Astralis has raised only enough capital
to perform administrative functions and maintain good standing with the SEC and
listing authorities. If Astralis cannot raise sufficient additional funding
immediately, it will be forced to cease operating and may not be able to
continue as a going concern. Astralis is trying to raise sufficient capital to
develop its primary product, Psoraxine(R), administered by intramuscular
injection, is an innovative immunotherapuetic product under development for the
treatment of psoriasis. Astralis's planned second product is for the treatment
of arthritis. Astralis is planning on re-starting its on-going research and
development of Psoraxine(R), and expects to recommence clinical trials to obtain
the approval of the United States Food and Drug Administration for the marketing
of Psoraxine(R), and development of the technology underlying the Psoraxine(R),
for the treatment of other indications, such as eczema, leishmaniasis and
seborrheic dermatitis. Astralis is virtually insolvent and has not engaged in
any drug development activities for several months.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Development Stage Enterprise
Astralis is a Development Stage Enterprise, as defined in Statement of Financial
Accounting Standards No. 7 "Accounting and Reporting for Development Stage
Enterprises." Under SFAS No. 7, certain additional financial information is
required to be included in the financial statements for the period from
inception of Astralis to the current balance sheet date.
Since inception, 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.
F-16
Credit Risk
Financial instruments that potentially subject Astralis to concentrations of
credit risk consist principally of cash deposits at financial institutions. To
mitigate this risk, Astralis places its cash deposits only with high credit
quality institutions.
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. Maintenance and repairs are charged to expense as incurred.
Gains and losses on dispositions of equipment are reflected in operations.
Depreciation is computed using a four-year life for computer and office
equipment, three to four years for lab equipment, seven-year for furniture and
fixtures and three-year for leasehold improvements.
Impairment of Long-Lived Assets.
Astralis reviews the carrying value of its long-lived assets annually or
whenever events or changes in circumstances indicate that the historical
cost-carrying value of an asset may no longer be appropriate. Astralis assesses
recoverability of the carrying value of the asset by estimating the future net
cash flows expected to result from the asset, including eventual disposition. If
the future net cash flows are less than the carrying value of the asset, an
impairment loss is recorded equal to the difference between the asset's carrying
value and fair value. In 2005, Astralis recognized impairment of intangible
assets of $114,976.
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 because management has determined it is more likely than not that the
deferred tax assets will not be realized.
Stock-Based Compensation
In December 2004, the FASB issued SFAS No. 123 (revised 2004) "Share-Based
Payment." This statement requires companies to record compensation expense for
all share-based awards granted subsequent to the adoption of SFAS 123R. In
addition, SFAS 123R requires the recording of compensation expense for the
unvested portion of previously granted awards that remain outstanding at the
date of adoption.
Effective January 1, 2006, Astralis adopted the provisions of SFAS No.123R
requiring that compensation cost relating to share-based payment transactions be
recognized under fair value accounting and recorded in the financial statements.
The cost is measured at the grant date, based on the calculated fair value of
the award, and is recognized as an expense over the employee's requisite service
period (generally the vesting period of the equity award). Prior to January 1,
2006, Astralis accounted for share-based compensation to employees in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations and followed the disclosure requirements
of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", as amended by Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure". Astralis adopted SFAS No. 123R using the modified prospective
method and, accordingly, financial statement amounts for prior periods presented
in this Form 10-KSB have not been restated to reflect the fair value method of
recognizing compensation cost relating to non-qualified stock options.
If Astralis had accounted for share based compensation in accordance with SFAS
No. 123R for the twelve months ended December 31, 2005, then $184,857 would have
been recorded as share based compensation expense. The following table
F-17
illustrates the effect on net loss and earnings per share if Astralis had
applied the fair value recognition provisions of Statement of Financial
Standards No. 123, Accounting for Stock-Based Compensation," to stock-based
compensation beginning with the first quarter of 2005.
Year Ended
December 31, 2005
-----------------
Net loss to common stockholders, as reported $ (3,914,159)
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 184,857
-------------
Pro forma net loss $ (4,099,016)
============
Loss per share basic and diluted - as reported $ (0.05)
Loss per share basic and diluted - pro forma $ (0.05)
Loss Per Share
Loss per common share is calculated in accordance with Statement of Financial
Accounting Standards No. 128, Earnings Per Share. 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.
Marketable securities
From time to time, Astralis invests in marketable securities which primarily
consists of common stocks of publicly traded companies. All such investments are
publicly-traded and considered liquid. Unrealized gains (losses) on securities
represents the change in the market value of the common stocks held. All
investments are classified as available-for-sale.
Comprehensive Income (Loss)
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income, requires that comprehensive income be separately reported in the
Financial Statements. Comprehensive income is defined as a measure of all
changes in equity of an enterprise that result from recognized transactions and
other economic events of the period other than net income as defined, or
transactions with owners in their capacity as owners. Astralis's only
comprehensive income (loss) item is unrealized gains or losses from securities
investments.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
Recent Accounting Pronouncements
Astralis does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on its results of operations,
financial position or cash flow.
F-18
NOTE 3 - GOING CONCERN
Astralis incurred net losses to common stockholders of $979,446 and $32,377,212
for the year ended December 31, 2006 and for the period March 12, 2001 (date of
inception) to December 31, 2006, respectively. Since August 2006, Astralis has
been trying to raise funding to continue drug development activities.
Unfortunately, Astralis has raised only enough capital to perform administrative
functions and maintain good standing with the SEC and listing authorities. If
Astralis cannot raise sufficient additional funding immediately, it will be
force to cease operating and may not be able to continue as a going concern.
Consequently, the aforementioned items raise substantial doubt about Astralis'
ability to continue as a going concern. Management is seeking to identify
additional capital immediately so that it may continue its operations. These
funds will be needed in order to finance Astralis's currently anticipated needs
for operating and capital expenditures for 2007, including the cost to continue
clinical trials of Psoraxine(R) and initiate development of pipeline products to
treat arthritis and leishmaniasis. Astralis will also need to raise significant
additional funds from outside sources in future years in order to complete
existing and future phases of FDA required testing.
Astralis's ability to continue as a going concern is dependent upon it raising
capital immediately through debt and/or equity financing. There can be no
assurance that Astralis will successfully raise the required future financing on
terms desirable to Astralis or that the FDA will approve Psoraxine for use in
the United States. If Astralis does not obtain the needed funds, it will be
required to cease operations. Astralis is actively seeking sources of financing.
Astralis is considering and will implement further dramatic cost reduction
measures to extend the availability of its capital. 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 - INTANGIBLE ASSETS
Astralis's policy is to capitalize the costs of purchased and internally
developed patents and those expenses in connection with patent rights licensed
to Astralis. 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. Astralis'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 Astralis has licensed. Astralis recorded impairment charges of
$114,976 in 2005 as a result of the patent's fair value being less than its
carrying value.
Astralis paid $5,000,000 for a technology access option from SkyePharma PLC.
This option gives Astralis 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, Astralis 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.
Management capitalized the technology access option as a research and
development intangible asset and was amortizing it over its seven-year life.
Astralis determined that as of December 31, 2004, the technology access option
fee's fair value was less than its carrying value and recognized impairment
expense of $2,797,612.
Intangible assets consisted of the following at December 31, 2006:
2006
-----------
Patent $ 134,222
Technology access fee 5,000,000
Less impairment (2,912,588)
Less accumulated amortization (2,221,634)
-----------
$ --
===========
F-19
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31,
2006
--------
Furniture and Fixtures $ 27,934
Computer Equipment & Software 4,997
Lab Equipment 60,994
--------
93,925
Accumulated depreciation and amortization (88,173)
--------
$ 5,752
========
Depreciation expense amounted to $51,973 and $115,222 for 2006 and 2005,
respectively. The depreciation related to Astralis's laboratory and related
equipment is recorded as research and development as required by SFAS No. 2. In
2006, Astralis exchanged fixed assets with net book value of $43,647 and
supplies of $32,110 for $46,800 of rent from its landlord.
NOTE 6 - 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
cumulative net operating loss carry-forward is approximately $4,872,586 at
December 31, 2006 and will expire from 2021 through 2026. Under the provisions
of Section 382 of the Internal Revenue Code, the benefit from utilization of net
operating losses incurred is significantly limited as a result of prior changes
of control. The benefit could be subject to further limitations if significant
future ownership changes occur in Astralis. 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:
2006
-----------
Deferred tax assets :
Deferred tax asset $ 1,656,679
Less valuation allowance (1,656,679)
-----------
Total deferred tax assets $ --
===========
In 2006 and 2005, Astralis sold $6,022,839 and $3,965,391, respectively, of its
gross New Jersey net operating loss carryforwards under New Jersey's Technology
Business Tax Certificate Transfer Program. This 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 these carryforwards were
$466,168 and $306,921, for 2006 and 2005, respectively (net of fees) and the
amount was recorded as other income in the statements of expenses. The State of
New Jersey renews this program annually and limits the aggregate proceeds of the
program to $10,000,000. Due to the uncertainty at any time as to Astralis's
ability to effectuate the sale of available New Jersey net operating losses, and
since Astralis has no control or influence over the program, the benefits are
recorded only when the agreement with the counterpart is signed and the sale is
approved by the State.
F-20
NOTE 7 - CONVERTIBLE NOTES - RELATED PARTY
On September 29, 2006, Astralis issued to Blue Cedar Limited, an accredited
investor and a current stockholder of Astralis; (i) a convertible promissory
note for $12,500, convertible into shares of Astralis' common stock at $0.075
per share at any time prior to the redemption date (September 29, 2009),
interest will be charged on the note at 6% per annum and (ii) a warrant to
purchase 166,667 shares of common stock at an exercise price of $0.113 per
share. The warrants expire five years from the date of issuance.
On August 22, 2006, Astralis issued to Blue Cedar; (i) a convertible promissory
note for $20,000, convertible into shares of Astralis' common stock at $0.075
per share at any time prior to the redemption date (August 22, 2009), interest
will be charged on the note at 6% per annum and (ii) a warrant to purchase
266,667 shares of common stock at an exercise price of $0.113 per share. The
warrants expire five years from the date of issuance.
On July 27, 2006, Astralis issued to Lipworth and Company Limited, an accredited
investor and a current stockholder of Astralis; (i) a convertible promissory
note for $9,980, convertible into shares of Astralis' common stock at $0.075 per
share at any time prior to the redemption date (July 27, 2009), interest will be
charged on the note at 6% per annum and (ii) a warrant to purchase 133,067
shares of common stock at an exercise price of $0.113 per share. The warrants
expire five years from the date of issuance.
On July 25, 2006, Astralis issued to SkyePharma, PLC, an accredited investor and
a current stockholder of Astralis; (i) a convertible promissory note for
$35,000, convertible into shares of Astralis' common stock at $0.075 per share
at any time prior to the redemption date (July 25, 2009), interest will be
charged on the note at 6% per annum and (ii) a warrant to purchase 466,667
shares of common stock at an exercise price of $0.113 per share. The warrants
expire five years from the date of issuance.
On June 15, 2006, Astralis issued to Mr. Manuel Tarabay, an accredited investor
and a current stockholder of Astralis; (i) a convertible promissory note in the
principal amount of $100,000, convertible into shares of Astralis' common stock
at $0.075 per share at any time prior to the redemption date (June 15, 2009),
interest will be charged on the note at 6% per annum and (ii) a warrant to
purchase 1,333,333 shares of common stock at an exercise price of $0.1125 per
share. The warrants expire five years from the date of issuance.
On March 31, 2006, Astralis issued to Blue Cedar; (i) a convertible promissory
note in the principal amount of $250,000, convertible into shares of Astralis'
common stock at $0.09 per share at any time prior to the redemption date (March
31, 2009), interest will be charged on the note at 6% per annum and (ii) a
warrant to purchase 2,777,778 shares of common stock at an exercise price of
$0.135 per share. The warrants expire five years from the date of issuance.
For a period ending four years from the date of issuance, Blue Cedar, Tarabay,
Skye, and Lipworth shall have the right to cause Astralis to register the shares
of Common Stock issuable upon conversion or exercise of the notes or warrants
subject to certain restrictions.
Astralis evaluated its convertible debt instruments and freestanding warrants
for possible application of derivative accounting under Statement of Financial
Accounting Standard No 133: Accounting for Derivative Instruments and Hedging
Activities, Emerging Issues Task Force 00-19: Accounting for Derivative
Financial Instrument Indexed to, and Potentially Settled in, a company's Own
Stock, EITF 01-6: The Meaning of "Indexed to a Company's Own Stock" and EITF
05-2: The Meaning of "Conventional Convertible Debt Instrument" in Issue No.
00-19. Astralis determined its convertible debt was deemed "conventional" and
the embedded conversion options were considered equity as were the freestanding
warrants.
F-21
Pursuant to EITF 98-5 "Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios" and EITF 00-27
"Application of Issue No. 98-5 to Certain Convertible Instruments", Astralis has
recorded a discount to these convertible notes in the amount of $367,081 related
to the relative fair value warrants and the beneficial conversion feature. The
discount will be amortized as interest expense using the effective interest
method over the life of the notes.
The carrying value of the notes as of December 31, 2006 is as follows:
Proceeds from notes payable $ 427,480
Less: discount related to warrants (229,093)
Less: discount related to beneficial
conversion feature 137,988)
Add: amortization of discounts 10,031
---------
Carrying value $ 70,430
=========
NOTE 8 - CAPITAL STOCK ACTIVITY
In the first quarter of 2005, SkyePharma purchased 11,160,000 shares of common
stock from Mike Ajnsztajn and Gaston Liebhaber. Consequently, as of March 3,
2005 SkyePharma owned approximately 49.7% of Astralis's outstanding common
stock. This transaction did not involve Astralis directly and therefore is not
reflected in Astralis's financial statements.
In January 2005, Astralis issued 100,000 shares of Astralis's common stock
valued at $65,000 to James Sharpe, former Chief Executive Officer and President,
for services. Mr. Sharpe resigned his positions on January 25, 2006. See note 9.
On August 19, 2005, Astralis closed a private placement of securities from which
they received gross proceeds of approximately $2,000,000. The transaction
consisted of the sale to one accredited investor, Blue Cedar Limited, of units
consisting of: (i) 18,181,818 shares of common stock, (ii) warrants to purchase
over a 5-year period 18,181,818 shares of common stock with an exercise price of
$0.165 and (iii) warrants to purchase over a 12-month period 12,121,212 shares
of common stock with an exercise price of $0.165. Astralis paid an 8% fee to the
placement agent and issued warrants to purchase 1,454,545 shares of common stock
with an exercise price of $0.165, in connection with the financing in addition
to other costs. Additionally, Astralis granted Blue Cedar certain registration
rights pursuant to a registration rights agreement, dated as of August 17, 2005,
in connection with this transaction. The registration rights agreement requires
Astralis to file a registration statement within approximately 30 days of the
final closing of Astralis's private placement covering the resale of all shares
included therein, as well as the shares underlying the warrants. Because a
registration statement covering the resale of such shares was not filed or
effective by December 31, 2005, the date specified in the agreement, Astralis is
subject to a penalty of $10,000 per month, being 0.5% of the aggregate purchase
price, plus interest at 10% per annum. Astralis recorded a charge of $83,000 in
2005 and $42,646 in 2006 for a total of $125,646 accrued in the balance sheet
under accrued expenses as of December 31, 2006 in regards to this registration
rights penalty.
NOTE 9 - STOCK OPTION PLAN AND STOCK WARRANTS
Stock Options
On September 10, 2001, Astralis 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.
F-22
Other than stock options covered by the Stock Incentive Plan, Astralis has no
outstanding options to purchase shares of its common stock.
In January 2005, the Company issued 728,000 options to James Sharpe, the
Company's former Chief Executive Office and President. The options were issued
with an exercise price of $0.70 with a term of 10 years. The options vest over
three years, with 25% vesting on the date of the grant and 25% vesting on the
anniversary of the grant date until fully vested. Mr. Sharpe resigned as Chief
Operating Officer, President, and Member of the Board of Directors as of January
25, 2006 with an effective resignation date of December 31, 2005. As part of the
separation agreement with James Sharp, the 546,000 non-vested stock options were
terminated. See note 9.
On February 2, 2005, the Company issued 20,000 options to a director. The
options were issued with an exercise price of $0.69 and with a term of 10 years.
The options shall vest over three years, with 25% vesting on the date of the
grant and 25% vesting on the anniversary of the grant date until fully vested.
On April 11, 2005, the Company issued 50,000 options to a newly elected
director. The options were issued with an exercise price of $0.26 and with a
term of 10 years. The options shall vest over three years, with 25% vesting on
the date of the grant and 25% vesting on the anniversary of the grant date until
fully vested.
On June 4, 2005, the Company issued 20,000 options to a director. The options
were issued with an exercise price of $0.28 and with a term of 10 years. The
options shall vest over three years, with 25% vesting on the date of the grant
and 25% vesting on the anniversary of the grant date until fully vested.
On January 27, 2006, Astralis issued 182,000 options to a former Chief Executive
Officer ("CEO"). The options were issued with an exercise price equal to the
market price on the date of issuance ($0.03 on January 27, 2006) and with a term
of 5 years and vested immediately. Additionally, on January 27, 2007 an
additional 182,000 options will become vested exercisable at the market price on
that date for a term of 5 years. The options were issued pursuant to a
Separation Agreement and General Release, by and between Astralis and the former
CEO, which was signed on January 25, 2006.
There was $21,019 and $0 of compensation cost related to non-qualified stock
options recognized in operating results for the year ended December 31, 2006 and
2005, respectively.
The fair value of each option and warrant award is estimated on the date of
grant using the Black-Scholes option-pricing model. Historical volatilities
based on the historical stock trading prices of Astralis, Ltd. are used to
calculate the expected volatility. We used the simplified method as defined
under the SEC Staff Accounting Bulletin No. 107, Topic 14: "Share-based
Payment," to derive an expected term. The expected term represents an estimate
of the time options are expected to remain outstanding. The risk-free rate for
periods within the contractual life of the option is based on the U.S. treasury
yield curve in effect at the time of grant.
The assumptions used to determine compensation cost for our stock options
consistent with the requirements of SFAS No. 123R:
Years Ended December 31,
----------------------------
2006 2005
----------- -------------
Expected stock volatility 336% 353% - 363%
Expected annual dividend yield 0% 0%
Risk free rate of return 4.87% 3.98% - 4.45%
Expected option term (years) 5 10
Weighted average grant-date fair value per share $0.63 $0.68
F-23
The following table summarizes the stock option activity for the past two
fiscal years:
Options
-------------------------------------------------------------------
Outstanding at December 31, 2004 843,000
-------------------------------------------------------------------
Granted 272,000
Exercised (25,000)
Expired (15,000)
Forfeited --
-------------------------------------------------------------------
Outstanding at December 31, 2005 1,075,000
-------------------------------------------------------------------
Granted 182,000
Exercised --
Expired --
Forfeited --
-------------------------------------------------------------------
Outstanding at December 31, 2006 1,257,000
-------------------------------------------------------------------
Exercisable at December 31, 2006 1,199,500
-------------------------------------------------------------------
For the stock options listed above, there was $5,978 of total unrecognized
compensation cost related to non-vested non-qualified stock option awards, which
is expected to be recognized over a weighted-average period of 1.00 years. The
total fair value of options vested during 2006 was $32,156.
Exercise prices for stock options outstanding as of December 31, 2006 and the
weighted average remaining contractual life are as follows:
Weighted Average
Remaining Number
Exercise Price Options Outstanding Contractual Life Exercisable
-------------- ------------------- ---------------- -----------
$ 0.03 182,000 4.08 years 182,000
$ 0.26 50,000 8.28 years 25,000
$ 0.28 20,000 8.43 years 10,000
$ 0.45 25,000 1.26 years 25,000
$ 0.69 20,000 8.10 years 10,000
$ 0.70 910,000 8.04 years 910,000
$ 1.10 50,000 7.43 years 37,500
------------ ------------
Total 1,257,000 1,199,500
============ ============
F-24
Stock Warrants
Astralis primarily issued warrants in connection with private placement
offerings. The following table summarizes the stock warrant activity for the
past two fiscal years:
Options
-------------------------------------------------------------------
Outstanding at December 31, 2004 18,226,891
-------------------------------------------------------------------
Granted 31,757,575
Exercised --
Expired (3,225,000)
Forfeited --
-------------------------------------------------------------------
Outstanding at December 31, 2005 46,759,466
-------------------------------------------------------------------
Granted 5,144,179
Exercised --
Expired (3,555,237)
Forfeited --
-------------------------------------------------------------------
Outstanding at December 31, 2006 48,348,408
-------------------------------------------------------------------
Exercisable at December 31, 2006 48,348,408
-------------------------------------------------------------------
Exercise prices for stock warrants outstanding as of December 31, 2006 and the
weighted average remaining contractual life are as follows:
Weighted Average
Remaining Number
Exercise Price Options Outstanding Contractual Life Exercisable
-------------- ------------------- ---------------- -----------
$ 0.73 11,028,260 1.00 years 11,028,260
$ 0.50 418,394 1.08 years 418,394
$ 0.165 31,757,575 3.50 years 31,757,575
$ 0.135 2,777,778 4.25 years 2,777,778
$0.1125 2,366,401 4.50 years 2,366,401
------------ ------------
Total 48,348,408 48,348,408
============ ============
NOTE 10 - RELATED PARTY-TRANSACTIONS/COMMITMENTS/INDEMNIFICATIONS
Patent
A founding member of Astralis 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." On April 26, 2001, Astralis signed 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, Astralis is required to pay all fees
and costs relating to the filing, prosecution, and maintenance of the patent and
associated rights. In addition, Astralis is required to pay all reasonable
attorneys' fees in the pursuit of any patent infringement litigation.
The patent was impaired as of December 31, 2005 and Astralis recorded an
impairment charge of $114,976 in relation to the patent (see Note 4)
F-25
SkyePharma PLC Agreements
On December 10, 2001, Astralis executed three agreements with SkyePharma, a
pharmaceutical company located in England.
Astralis sold 2,000,000 shares of Series A Preferred at a price of $10 per share
to SkyePharma in five separate closings over a 13-month period commencing in
December 2001 (see Note 7).
Astralis 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 Astralis sells utilizing a SkyePharma drug delivery
system. All other terms of this license agreement would need to be determined
upon exercise of the option. Astralis can transfer this option to another party,
subject to approval by SkyePharma. This license would only allow Astralis 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 technology option was impaired as of December 31, 2004 and Astralis recorded
an impairment charge of $2,797,612 in relation to the option (see Note 4).
Astralis 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 Astralis'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. Astralis paid $3,000,000 in 2001, $7,980,000 in
2002 and $20,000 in 2003.
The service agreement was terminated on December 31, 2002. In March 2003,
Astralis 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 continued to provide certain services to
Astralis through December 31, 2004 in consideration for payments it received
from Astralis during 2002 in connection with this agreement, as a prepaid
expense. In 2004, Astralis expensed $1,007,500 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.
As of December 31, 2006, SkyePharma owns approximately 39.7% of Astralis's
outstanding common stock.
Indemnification
Astralis 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 Astralis 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.
Related Party
On January 25, 2006, Astralis's Chief Executive Officer and President, James
Sharpe, resigned. The separation agreement calls for the following:
- $50,000 severance payment payable within 10 days of the signing of
the separation agreement;
- All non-vested stock options have been terminated;
- Astralis shall grant to Mr. Sharpe an option to purchase 182,000
shares of common stock on January 27, 2006 at the market price on
that date;
- Astralis shall grant to Mr. Sharpe an additional option to purchase
182,000 shares of common stock on January 27, 2007 at the market
price on that date;
- Astralis will pay for Mr. Sharpe's COBRA premiums for six months
after the separation date or until the date he becomes eligible for
employer-provided benefits from another employer, whichever occurs
first.
F-26
NOTE 11 - OPERATING LEASES
On March 13, 2002, Astralis leased laboratory and office space. The lease period
was for three years and rent was $77,500 annually. Astralis also entered into a
concurrent service agreement with the lessor of the laboratory space on a time
and material basis. During 2006, Astralis extended its lease through June 2007.
During 2005, Astralis leased two apartments and an automobile for two different
key employees, one of whom is an officer. During 2005, Astralis canceled its
obligation under these leases and carried no other leases for key employees.
Astralis incurred rent expense of $99,726 and $98,642 for 2006 and 2005,
respectively.
The following is a schedule by year of future minimum rental payments required
under operating leases, as of December 31, 2006:
Year Ending December 31:
2007 $ 31,200
Thereafter --
F-27